Monday, September 24, 2012

The Meaning of Words

It's one thing when false information is presented in opinion pieces, but when it's presented in news pieces, that's a horse of a different color.  For instance, we have this from Reuters by way of yahoo news.

WASHINGTON (Reuters) - U.S. Republican presidential candidate Mitt Romney said he thinks it is "fair" that he pays a lower tax rate on his investment income of $20 million last year than someone who made $50,000 annually.

Now, I strongly suspect that most readers would read this as asserting that the average taxpayer who makes $50,000 pays a higher federal tax rate than does Mitt Romney.  But of course, this isn't true.  Courtesy of the TPC, we can see that taxpayers in the $40,000 to $50,000 range average 12.1% in total federal taxes (excluding imputed corporate taxes) while taxpayers in the $50,000 to $75,000 range average 14.5%.  Asserting that people earning $50,000 pay more than Romney simply flies in the face of the numbers.

Or maybe the authors meant to argue there is some taxpayer who makes $50,000 who pays a higher rate than Romney.  This latter statement is almost certainly true but not, I think, a reasonable inference from the quoted paragraph.

Sunday, September 23, 2012

Applying FICA tax to Mitt Romney

On another site on which I am a frequent participant, I was asked about the implications of applying the FICA tax to capital income.  It seems an interesting exercise so I did the calculations which I will repeat here.

Starting with the IRS SOI data from 2009 (the most recent year currently available), we can gather up the additional income that was reported and would be subject to a potential FICA tax on investment income.  This income totals to about $443 billion in 2009.  Were we to subject that income to the full employee side tax rate of 7.7% (6.2% for SS and 1.5% for Medicare), we'd get total taxes raised of about $34 billion.

Comparing this to total FICA taxes in 2009 of $890 billion according to the CBO suggests that applying FICA taxes to investment income would increase FICA tax receipts by a bit less than 4%.

But what of its affect on governor Romney?  Well, it would have raise his effective tax rate by 7.7 percentage points up to 21.8 percent.  So we can conclude that it would have made people feel better about governor Romney's taxes (maybe) but made little difference otherwise.

Well Worth the Read

This speech from Richard Fisher at the Dallas Fed is well worth reading in its entirety.  It speaks to both the current monetary situation and, at least in my view, the limitations of macroeconomic modeling.

It's worth remembering that a model is only good in the area in which there are historical observations.  We are no longer in that area.

Saturday, September 22, 2012

Why Romney's Tax Rate is Lower Than Yours (Maybe)

So now that Mitt Romney has released another tax return, we're going to get a rehash of stories on the fact that Mitt Romney's tax rate is lower than the average American's.  But let's take a look at whether this is true; and, to the degree it is, why it's true.

To start, we'll use the TPC estimates of 2011 tax rates.  Now Mitt Romney's tax rate was reported to be 14.1%.  So how does that compare?  Well, first we have to choose what to compare it to. One approach would be to compare Romney's rate to the sum of the income and payroll tax rates.  It's clear that neither the corporate tax nor the estate tax can be discerned from Romney's tax return.  It's also true that Romney's FICA tax is unknowable from his return but we can assume that Romney's FICA tax is pretty close to zero as a percentage of his income.

So if we look at income plus payroll taxes by income group, we find that middle income taxpayers (the middle quintile of earners) have a lower tax rate than Romney (12.1% vs 14.1%) and the second quintile has a slightly higher rate (16.0% versus 14.1%).

So what accounts for the difference?  Well, many people have claimed that the difference is driven by "preferential rates on capital gains."  But this just doesn't seem to be true.  Taxation on capital gains is different from ordinary income in two ways.  One, it's taxed at a flat 15% and two, there is no FICA tax on capital income.  So let's pull these two things apart.

To look at the effect of the rate differential, let's just look at the effective federal income tax rate.  By this measure, Romney's effective tax rate is higher than every group of taxpayers below the 96th percentile, hardly lower than most Americans.

So what's accounting for the difference is the fact that FICA taxes aren't applied to capital gains and (for most of them) are capped at an income threshold.  But these two things have been true of FICA taxes for as long as they have existed.  So, in effect, the root cause of all of this is the fact that FICA taxes don't apply to capital income.  Nobody has proposed changing this and it has always been this way.

Just thought it worth pointing out.

Friday, September 14, 2012

False Unequivalence

So I'm normally a fan of Derek Thompson over at The Atlantic.  I quite often disagree with him but I think he's normally pretty good.  But here he's pretty awful.

Let's review.  He takes Governor Romney rightly to task for saying that "middle class" should be defined as having less than $250,000 in annual income.  But here's what you can find on the White House website.

Unless the House of Representatives takes action before January 1, 2013, taxes will go up on 114 million middle-class families. Nearly everyone in Washington agrees that’s a bad idea. That’s why President Obama is calling for -- and the Senate has already passed--  legislation that will keep the middle class from paying thousands of extra dollars next year.

So the President will reduce taxes on 114 million middle class families.  As it turns out, according to the census, there are only 118 million households in the US and 79 million family households.  So the most charitable view of the WH website is that the President has the same definition of "middle class" as does Governor Romney.  Of course, a less charitable view, which is what Derek applies to Governor Romney, would suggest that the President thinks he can reduce taxes for 130 percent of all family households in the United States.

There's no reason to defend Romney's statement as it's wrong.  But, at best, it's no more wrong that what's up on the WH website.  Either way, the selective outrage here is really crazy.