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."

The Varying Meanings of "Fair Share"

I had what may be a bit of an epiphany this morning about why I can never understand the arguments that the President and others make for the "rich" paying "their fair share."

When I hear those words, I always think of their fair share of the federal tax burden of the country.  Because I think of it that way, I tend to look at tax distribution tables as a way to think about the question of fairness.  Because of changes in income distribution, I don't look at the distribution directly but rather I look at the change in total effective tax rates over time.

Here are two views of the comparison between 1979 (the first time CBO did the analysis) and 2013 (post the ATRA).

So we can look at this two ways, either in terms of the change in effective tax rate in percentages or percentage points.  In percentage points, effective Federal tax rates have declined by 6.1 points at the bottom of the income distribution and 0.6 points at the top of the income distribution.

In percentage terms, the comparison is directionally the same but an even larger order of magnitude.  Yet, despite these numbers, many maintain that the "rich" aren't really paying their fair share.  So my thought this morning was that maybe those who make this claim are not referring to fair share of the total tax burden but instead to fair share of their income, regardless of how much others are paying.

This seems a rather odd way of discussing fair share but it's the only one that makes any sense in light of the underlying data.  Now if only they would let us in on what the magical fair share of income is....beyond "higher" I mean.

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.

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.

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.

Talking about Tax Progressivity (part 2)

Whether you soldiered through the technical stuff in part 1 or not, welcome to the fun part.[1]

In our first graph, we use the data to look at just the payroll and income taxes, that is, the taxes that can be directly attributable to households.  That the data is presented below[2]