Friday, February 22, 2013

The Times Should Know Better

You can expect the New York Times Op Ed page to be liberal but you should also have a reasonable expectation that it be factual.  Today, it published an editorial that may be the least factual thing I've ever seen.  I'm going to take the unique step of taking the major claims one by one only because it is such an awful piece.

Both are wrong. To reduce the deficit in a weak economy, new taxes on high-income Americans are a matter of necessity and fairness; they are also a necessary precondition to what in time will have to be tax increases on the middle class. Contrary to Mr. Boehner’s “spending problem” claim, much of the deficit in the next 10 years can be chalked up to chronic revenue shortfalls from the Bush-era tax cuts, which were only partly undone in the fiscal-cliff deal earlier this year.

OK.  As a starting point, this is ridiculous.  The CBPP link in the quote is obvious hokum and is completely devoid of historical context.  Tax receipts over the coming decade are planned to average 18.9% of GDP while during the 8 fiscal years of the Clinton administration (FY93 to FY01), they averaged 19.1% of GDP according to the OMB historical tables.  So, over the next 10 years, tax receipts are .2% of GDP lower than they were during the Clinton administration (aka before the "Bush Tax Cuts.")  But you should keep this thought in mind as we move through the editorial.

It stands to reason that a deficit caused partly by inadequate revenue must be corrected in part by new taxes. And the only way to raise taxes now without harming the recovery is to impose them on high-income filers, for whom a tax increase is unlikely to cut into spending.

Two problems here.  First, it absolutely does not stand to reason that a problem caused by inadequate revenue must be corrected by new revenue.  That's the very fallacy I discussed earlier in regard to the argument that it's all a health care spending issue.  But even more shocking is the Times inability to understand the GDP accounting identity.  In the view of the editorial writers, it appears to be GDP = C+G.  That's it.  There's no such thing as I in the accounting identity.  Thus, tax increases that cut investment don't affect GDP, only those which affect spending do.  Such a fundamental misunderstanding of macroeconomics 101 really is a bit shocking.

As it happens, those taxpayers are the same ones who benefited most from Bush-era tax breaks and who continue to pay low taxes. Even with recent increases, the new top rate of 39.6 percent is historically low; investment income is still taxed at special low rates; and the heirs of multimillion-dollar estates face lower taxes than at almost any time in modern memory.

Well this point is more misdirection than outright deception or misinformation but let's take the three points in order.  Those taxpayers are the same ones who benefited most from Bush-era tax breaks.  This isn't actually true if you look at changes in effective rates but why debate this when those tax breaks are no longer in force for those people.  Wouldn't you think that's a relevant thing to mention?

 Even with recent increases, the new top rate of 39.6 percent is historically low;  Wow.  But of course, people don't pay marginal tax rates, they pay effective tax rates and based on effective tax rates, the current rates of the wealthiest Americans are quite high relative to the last 33 years of history (the only good history we have).  The only year we have on record where the top 1% paid a higher rate than they are scheduled to pay in 2013 was 1979.  For the top 0.1%, the 2013 rate is the highest on record.

...investment income is still taxed at special low rates.  Investment income has been taxed at a differential rate in almost every year since the creation of the income tax.  The Times makes it sound as if this is some new innovation in the tax code.  We can debate differential taxation for capital income but this is not the way to do it, by pretending it is some new phenomenon.  We might also choose to note that the new tax rate on capital gains (23.9% including the ACA tax) is higher than the effective income plus social security (both sides) tax rate of all Americans except those making over $1 million.

It is true that estate tax rates are low today relative to recent history.  Of course it's also true that estate tax raise very little revenue so, in the context of a debate on the US's fiscal health, they are not terribly important.

On the spending side, Republicans are resisting cuts to defense. That implies brutalizing cuts in nondefense discretionary areas, like education and environment, which are already set to fall to their lowest level as a share of the economy since the 1950s.

Frequent readers will know that I personally have no issues with defense cuts; however, the Times is taking license and not informing again.  First, the government did not track nondefense discretionary spending until the 1960s so we don't know what we spent in the 50s (although I would assume the editorial is correct).  Most substantively, including the BCA and the sequester, defense spending is forecast to fall to its smallest share of GDP since 1940 (defense spending was actually measured by the government that far back).  Again, we can have a debate on whether we should care about either of these facts but not to mention both is simply spinning.

As for entitlements, Republicans mainly want to cut those that mostly go to the middle class and the poor, while ignoring nearly $1.1 trillion in annual deductions, credits and other tax breaks that flow disproportionately to the highest income Americans and that cost more, each year, than Medicare and Medicaid combined. 

The entitlements on which Republicans are focused are Medicare and Social Security which go to the elderly regardless of income.  One would imagine the Times is aware that the elderly are the wealthiest cohort of American society.  We might also wonder what the rationale is from the editors to pay Medicare benefits to Mr. Buffet and Mr. Gates.

But ignoring the $1.1 trillion in deductions, credits and tax breaks that flow disproportionally to the highest income Americans and that cost more, each year than Medicare and Medicaid combined requires a bit of unpacking.  First, the authors conveniently exclude Social Security, which, by itself, is planned to cost $810 billion in 2013.  SS and Medicare together are a $1.4 trillion expense item.  That comparison would seem germane given the discussion that has occurred over entitlements.

But about that $1.1 trillion number.  Interestingly in an editorial with links, it's unlinked.  Here you can find a link that gets you to a number that rounds to $1.1 trillion but that includes corporate and individual tax rates and one of the tax preferences is the already mentioned differential in the treatment of capital income.  And, importantly, tax preferences are more equally distributed than tax contributions.  In other words, people who pay 40% of the taxes get less than 40% of the tax expenditures.  Thus, the total elimination of tax expenditures would make the tax code less progressive.

The editorial closes with But there will never be a consensus for more taxes from the middle class without imposing higher taxes on wealthy Americans, who have enjoyed low taxes for a long time. And I can only add to the end "but no longer do."

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