Is Our Tax System Fair? If Not, Why? — Veronique de Rugy

I’ve published a fair amount of simple research on tax policy that cuts through the (often) baseless rhetoric from our political class, but economist Veronique de Rugy has really done a ton of good work here, the majority of which is, as far as I can tell, supported by things like “facts” and “data.”

I almost entirely agree with her when she says (emphasis mine):

Now, I wonder how the president’s constantly talking about how “unfair” the current tax system will affect people’s perceptions about that system. If one hears enough times that rich taxpayers aren’t paying their fair share, can it change our perceptions, whether it is true or not?

Obviously, there is much more to say about fairness and so much I don’t know about the issue. That being said, I am seriously bothered by the fact that most people only seem to care about the fairness of the tax system as it relates to how much taxes rich people are paying. I actually find the system unbelievably unfair because the amount of taxes one pays isn’t actually a product of how much one makes. Rather, the amount of taxes one pays depends on whether one’s income is capital interests or other forms of income, whether one owns a house or rents, whether one has children or doesn’t have children, whether one is married or single, whether one lives in a state with high or low income tax rates, etc. That to me seems very unfair.

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Dear Limousine Liberals: Fee Free To "Pay More Of Your Fair Share" Here

As I’ve said, all things equal, I think its not unfair to ask those who earn a tremendous amount of money (e.g. top 0.1%+) to pay a some more in taxes as part of a larger program to reduce the budget deficit.  Surely, increasing taxes on “the rich” is not a panacea for our fiscal shortfall – no where close – so anyone who suggests otherwise should and likely can be safely ignored.  However, these very same (almost exclusively) liberal rich folk who – like our Exalted Leader President Barack Obama – have been calling on “the rich” to pay “more of their fair share” of taxes should start a trend by voluntarily putting their “hard earned” money where their collective mouth is.

Lucky for them, the Federal Government makes so-doing incredibly easy.  In fact, its so easy that all you have to do is fill out this convenient online form, or mail in a check to the Bureau of the Public Debt et voila,  You’ve done “more of your fair share” to reduce the National Debt!  It’s really as easy as that.  While such limousine liberals are at it, they can make sure they don’t take any voluntary deductions on their Federal Income Taxes, or take less than they are entitled to claim.  Oh, what’s that?  Even our President took full deductions for things like charitable donations?  Oh, oh my, such strong Leadership from our Dear Leader In Chief… Continue reading

When Pigs Fly: Liberals Need To Practice What They Preach

I’m still trying to find some sort of research on voluntary tax payments from self-identified democrats (I expect if I can gather such data, the number will be fantastically unimpressive), but until then, let’s talk about how our Nation’s Leading Democrat files his taxes:

Though tax increases alone cannot put the country’s fiscal house in order, the president should set a better example on his own tax returns.

That $245,000 the Obamas gave to charity, for example — deducting it on their Schedule A reduced their federal tax bill by roughly $85,000, and cut their Illinois state tax bill too. But you’re not required to deduct charitable giving, or to claim any tax favor. Deductions and tax credits are options. If you think the government deserves more of your income, don’t claim them.

Obama said last year that itemized deductions for the wealthy should be phased out — then on his own tax return, claimed a huge itemized deduction. Until those who advocate higher taxes for the well-off practice what they preach, the national debt situation may only get worse.

I’ll take it one step further.  Every single person advocating higher tax rates (especially for “the rich”) should release how much they paid in excess of their legally-required minimum tax.  You think Nancy Pelosi & Co. paid a single penny more in taxes than they were required to do so.

Challenge.

Obama Is Lying To Us Right Before Our Eyes (Again)!

Obama just claimed in his speech at GW University that “tax cuts” somehow “cost” us $500 billion/year for the next decade.  I’m not sure how a lack of revenue can somehow be semantically transformed into an expense (cost), but putting logic, reason, facts, and basic accounting aside for a second, I’d just like to peel-back some of Obama’s baseless rhetoric and look at some cursory facts I was able to confirm in literally under 2 minutes.

In this same speech, Barry discussed how we need to return to the fiscal discipline of the 1990′s, you know, when we ran a balanced if not surplus budget.  Last I checked we’ve spent the past ~10 years involved in at least two wars (or “wars” depending on your definition), whereas in the 1990s, once we left the Gulf after Desert Storm, we really didn’t have any major large-scale war efforts (I don’t think Bosnia or Kosovo compare to our current wars by any financial metric).

So, two these two Obama-isms, I present the following easily-obtainable data and chart:

Clearly, around the turn of the century, our Defense budget was around $350 million/year.  By 2010, that had more than doubled to $800 million/year, no thanks to the ongoing and of questionably sane military efforts in Iraq and Afghanistan.  At this rate, our 2012 Defense budget is going to be ~3 times what it was in 2000!

And Obama is blaming our current budget deficit on tax cuts?

HUH!?!?

**This is not intended to be an in-depth examination of Government spending, but simply instructive as to the sort of bogus rhetoric our Government feeds us every day.  Such rhetoric is rife with cognitive bias (quite intentionally), in this case, among others, seriously framing error.

Of The Top 0.1% For The Top 0.1%…

As I’ve been saying for quite some time, I’m bothered by all the rhetoric not just from flapping heads and politicians, but from Those Who Should Know Better (e.g. Joseph Stiglitz), who argue that the entire top 1% of earners in the U.S. should be paying more in taxes, cost of living and position within that group be damned!

I’d thus like to thank Jeffrey Gundlach of Doubline for providing us with this chart, picked up by Zerohedge (h/t Edward Harrison of Credit Writedowns), showing that, as I’ve said, lumping in those who make ~$350,000/year with those who make millions (upon millions, upon hundreds of millions…) defies all reason and logic.  That is not to say those in the top 1% can’t afford to pay slightly more in taxes – certainly a few thousand dollars out of hundreds of thousands is less pain that a few thousand out of tens thereof – but comparing incomes that differ by several orders of magnitude is not just illogical but unfair no matter how you slice it.

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Reason Mag: We Don't Have a Tax/Revenue Problem, We Have a Spending Problem

While such arguments aren’t going to get anyone elected except in the most conservative districts, they should not be throw out with the bath water.  I’ve argued that realistically speaking, slight increases in taxes (but not in the form of explicit “rich” taxes) are not only politically possible, but not terribly punitive in the grand scheme of things.  In vacuo, I’d never argue for increased taxes, quite the contrary, I support spending cuts, but there’s really no way either party is going to risk the next election by pushing the spending-cuts agenda.  After all, why do today what you can put off until tomorrow (Congressional motto, methinks)?

Taxing "The Rich:" Theory v. Practice

In 2001, Peter Orszag and Joseph Stiglitz published a short paper wherein they concluded:

…if anything, tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families.

This is all fine and dandy in the ivory tower (or the White House, as it were to be less than a decade later), but in the realm of reality, theories only get us so far, no matter how seemingly reasonable their basis and underlying assumptions.

Today’s WSJ included an essay about the state of The State of California, specifically, its incredible reliance on the very-rich (top 1% +).  Many if not most commentators/politicians/etc seem to think that taxing “the rich” at a (vastly) higher rate than everyone else – especially “the poor” – not only makes perfect sense, but is more than “fair,” given the increasingly high % of income accruing to “the rich.”  This is all fine and dandy, except:

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Wherein I Show How to Identify Baseless Political Opinion Masquerading as Economic "Analysis"

I’ve written several dozen times that I go out of my way to avoid ad hominem attacks, instead preferring to address the merits of a particular argument. Occasionally though, I read something so painfully rife with non-sequitur and logical fallacy, so absent any factual or analytical support that in crafting my reaction to it, despite my best efforts to the contrary, it’s simply impossible to respond without calling into question the author’s credibility and expertise in the topics at hand.

Earlier this week I came across one such piece, appearing in the Huffington Post entitled “Economic History Shows Clearly That Tax Cuts for Rich Hurt the Economy,” which I thought curious from the start, as the Author, Robert Creamer is cited as a “Political organizer, strategist, and author,” to say nothing of the fact that economists debate the effects of tax policy quite frequently, and consensus (if it can even be called that) is a relative word.

I’m not one to write-off an argument purely due to the apparent lack of qualifications of it’s author though, so I read the rest while trying to keep an open mind, giving Creamer the benefit of the doubt.  I sincerely hoped to encounter a well-structured, well-argued essay supporting the article’s title, unfortunately the prose which followed only served to confirm my initial skepticism.

Just to be clear, as I’ve said several times before – most recently just this past week – one does not need a degree or even work experience in economics in order to intelligently discuss the field, however, that does not excuse one from penning a thinly-veiled political spin piece under the guise of well-researched analysis, which is exactly what Mr. Creamer (herein “the author”) has done.  While a self-defeating practice, I don’t particularly mind people conflating politics and economics in their private views, but to do so in a public forum speaking as a subject matter expert is dishonest, at best.

To be sure, both Democrats and Republicans (and politicians of every stripe in between) are guilty of doing the same, but as the author himself insinuates in his article (discussed below), that doesn’t make it right.  If I may speak normatively for a moment, one’s understanding (not lack thereof) of economics and economic data should inform his/her politics, not vice-versa.  Alas, as I’ll discuss later, even Economics PhD’s allow their politics to influence their economics, even in the face of fairly clear evidence they’re views are suspect if not downright wrong.

That being said, follow me as I point out the flaws in each section of the article with the hope that after reading – as the title of this article says – you’ll be able to better separate uninformed political rhetoric from economic and demographic analysis rooted in facts and data.

**Just a note: this is not going to be a short article, if you haven’t already guessed.**

Let’s start here, which I think is an incredibly ironic if not downright hypocritical opening lede:

Just because you repeat something over and over doesn’t make it true. In fact, there is a body of empirical, historical evidence that proves clearly that tax cuts for the rich not only do nothing to spur economic growth — they actually do substantial damage to the prospects for economic growth.

As I mentioned earlier, the idea of consensus amongst economists (not politicians masquerading as them) on optimal tax policy and changes therein is a bit of a debate.  On one hand, you have guys like Arthur Laffer who appear in the WSJ Op-Ed pages and argue, for example, that tax cuts often increase government tax receipts (oversimplifying, for more detail, see here or read one of his papers), a claim that I, myself have questioned and one that runs contrary to both popular belief as well as the one promoted in the author’s article.  On the other, you have guys like Paul Krugman who, despite having PhD’s in Economics, promote more liberal economic policies than even the most bleeding-heart Legislators.  Instead of listing a series of academic papers or articles from either side of the debate, I’d like to share some quick number-crunching I did this summer on data from the BEA and IRS (also see this from the IRS for the data in MS Excel format) on the effects of changes in tax policy for “the rich” (which we’ll refer to for our purposes as those in the top 1% of incomes).

Over the past 20-or-so years, GDP has increased 87% and the amount of money the top 1% pays in Federal income taxes has increased 377%, while the average tax rate for that group over that period has decreased 32%!  So, to summarize: The tax rate on “the rich” has gone down, but the amount of money they pay in Federal taxes has gone up, as has GDP.  I’m curious to see what data Creamer analyzed prior to making the statement in the above quoted text.  It seems pretty clear that his claim is rather easily refuted with only a cursory examination of publicly-available data from the Government.[1]

Creamer’s article goes on to remind us of how rough the tax burden was on “the rich” (his definition, the meaning of which he fails to clarify) during earlier parts of the last century:

During World War II, the tax bite on wealthy Americans was close to punitive (the highest bracket was 91 percent). But that didn’t hurt the economy; far from it. By war’s end, Americans were rolling in cash. The average weekly pay rose 83 percent between 1940 and 1945. Many families had their first discretionary income.

In fact, this period — and the expansionary fiscal policy that helped finance the war — led to the longest sustained period of growth in American history and created the American middle class.

The main reason I want to highlight this excerpt, specifically the latter part of it – is because its exemplar of one of the biggest fallacies I see repeated day-in and day-out in the financial/economic/political media.  You cannot compare figures on tax rates, income, unemployment and the like from the post-war period, in which we (broadly) experienced the most significant technological and cultural revolution in a century, to the past generation or even the past decade.  There exist FAR too many confounding factors at play that affected data from these periods to draw any reasonable comparison (although most pundits and commentators will continue to do so, much to my chagrin).

The article next leaps to – shocker – ignorant praise of tax policies put in-place by a Democrat President, Bill Clinton (as an aside, I’m Libertarian, not conservative, not by a long shot):

Or we can turn to the tax policy of the Clinton administration. In 1993, President Bill Clinton proposed a budget that raised taxes on the rich. Republicans predicted that its passage would lead to economic doom. They argued that the Clinton tax increase on the rich would lead to economic stagnation and unemployment. Instead, of course, the Clinton administration created 22.5 million jobs, of which 20.7 million — or 92 percent — were in the private sector. His economic policy eliminated the federal deficit and left his successor — George Bush — with budget surpluses projected as far as the eye could see.

So history tells us pretty clearly that increased taxes for the rich don’t hinder economic growth. Now let’s look at historical evidence that the opposite proposition is true — whether tax cuts for the rich actually promote economic growth.

To see the fallacy in that argument all you have to do is go back to the Bush administration. For eight years, George Bush and the Republicans lowered taxes for the wealthy and cut back the regulation of big corporations and Wall Street — all based on the premise that these two policies would benefit the economy.

So, instead of saying that Cisco, HP, Dell, Apple, Yahoo, etc, created commercially successful products and services that created jobs in the 90’s, the author attributes those jobs to the deft tax policy moves by the Clinton Administration.  This is yet another dishonest and spurious conclusion drawn by the author to support what seems to be a clearly liberal, anti-“wealthy” bend, nothing less.   Witness (emphasis mine):

The New York Times reported last year that, “For the first time since the Depression, the American economy has added virtually no jobs in the private sector over a 10-year period. The total number of jobs has grown a bit, but that is only because of government hiring.”

In fact, in the eight years when George Bush and the Republicans in Congress passed two massive tax cuts, we saw a massive, secular decline in the creation of private sector jobs.

Of course it won’t surprise anyone that this decline was led by the reduction of American manufacturing jobs. There was a decline of 3.7 percent in overall manufacturing jobs in the United States over the last decade ending in 2009.

Why are we losing manufacturing jobs?  One significant reason is because it costs so much more to manufacture things in the U.S. than it does in many other countries, and one of the main drivers behind this is labor costs.  Around the middle of the last decade, all of the Detroit “Big Three” were losing money on every car they sold, despite the fact that much of their manufacturing and assembly was already being done in Mexico (etc), while foreign automakers with plants in the South without union labor were profitably selling cars, trucks, and SUV’s (I distinctly remember this from an article in I believe the NY Times that I quoted for an assignment in college, apologies for not having a link).  Liberals can’t complain about the loss of manufacturing jobs without acknowledging that Unions and the high wages they demand are part of the problem.

The author continues (emphasis his):

In fact, there is absolutely no evidence in the economic history of the last century that tax cuts for the rich increase economic growth. But there is evidence that they actually hurt prospects for economic growth — both in the short and long run.

Tax cuts for the wealthy function to reduce economic growth in two specific ways:

First, they amplify the tendency of income and wealth to concentrate in a small segment of the population. Throughout the entire period of Republican rule, all of the economic growth was siphoned off to the top two percent. Real wages stagnated, and continued growth in the Gross Domestic Product was fueled — for a time — by an expanding credit bubble that ultimately burst.

The problem is that to be sustained over time, economic growth must be widely shared. Otherwise, demand for new products and services stagnates; there is no incentive for businesses to invest, and economic growth itself stalls.

As we showed above, the first sentence there is simply untrue so I’m not going to re-visit that point.  To his bolded point, I’d say that’s only one piece of the puzzle.  One of the main drivers of financial success is education; another is choosing to go down an education/career path that, with lots of hard work and some luck, is likely to make one a good amount of money.  Remember, many of the people who comprise “the rich” work a lot more than 40 hours a week, and many have graduate and doctoral degrees, not just undergraduate.  In fact, as the WSJ pointed out just this week, more of “the rich” are making more of their money from working – as opposed to collecting passive income – today than ever before.  Weird how we get different conclusions when we actually do some cursory research, huh?  As you may have noticed by the way, this is not the first time the author presents only one piece of an argument without so much as acknowledging there any other factors at play.  This will also not be the last.

In fairness though, I will agree (at least partially) with the author that unless economic growth is shared across the income spectrum, it’s largely unsustainable and not the kind of growth we should pursue, but again, there’s other factors at play, like education and other demographic/societal issues; tax policy is again only one small piece of the puzzle.

To further his agenda, the author continues:

Fundamentally, economic growth is about the development of processes and technologies that increase productivity. But these do not occur when wealth is concentrated and labor prices are cheap. They occur when new growth is shared and wages are high.

A high-wage economy leads to major long-term economic dividends because:

  • It incentivizes companies to invest in higher-productivity technologies that increase overall productivity and provide real economic growth.
  • It creates customers with spending power to drive economic growth. There is a natural tendency of market economies to use low-cost labor and increase profits. That’s good for each company’s bottom line, but it kills off the goose that lays the golden egg by reducing the buying power of its ultimate customers — the people who work for all the companies in the economy combined.

This is particularly amusing because the development of processes and technologies that increase productivity generally have done so by reducing the need for manual and human labor.  Automobile assembly robots, electronic funds processing, the internet and almost all of our technological achievements over the past 50 or so years have significantly increased productivity but they have done so by largely replacing humans in the supply chain, yet we still have a not-insignificant chunk of our population that for several reasons has failed to adapt their skill sets to this more automated reality.

The point is gains in productivity from technological/procedural improvements will shift “high wage” jobs away from tasks that can be automated and towards jobs that require a higher level of customization/dynamicism.  Think-tanks and academics have written at great length about higher education and labor force make-up by skill sets so I’ll leave it to the reader to explore this at their leisure as it’s a bit tangential to my main goals in writing this.  Ultimately, though, labor cannot expect to continue to be useful (employed at the same pay rate) in the midst of societal and technological change without continuously adapting it’s skill set to be useful given those changes.  Labor and tax policies that encourage the workforce to be stagnant and cling to antiquated roles/skills (ones where they have no comparative advantage) is counter to economic growth, end of story.

Interestingly enough, the author actually touches upon some of these very ideas, except he utterly fails to do so in a fair, reasonable way (italic highlights are mine, bold are his):

Second, tax cuts for the rich starve the public sector of funds that are necessary to assure long-term growth. Tax-cut activist Grover Norquist was quite explicit when he championed the Bush tax cuts that he intended to deprive government of resources so it could be “drowned in a bathtub.”

Historically, tax cuts for the rich have been used — quite intentionally — to create deficits that make it politically difficult for government to do three things that are critical to sustaining growth over the long run:

First of all, as the table I cited above shows, while tax rates on “the rich” have gone down, tax receipts from them have gone up.  Any deficits are the result of mis-matched government spending, not lower tax rates.  Any claim to the contrary is disingenuous.

He continues (emphasis mine here):

  • Tax cuts for the rich shortchange investments in education that are the major engine of most long-term increases in productivity, and hence real economic growth. Education is the major factor that makes the workforce more productive. It underlies all of the scientific discoveries and technological advancement that boost productivity. America’s commitment to universal public education is responsible — more than any other single factor — for our economic success over the last century. And more than any other factor, the massive growth of the Chinese economy is rooted in the exponential increased level of its people’s education. The Chinese are turning out more graduate engineers each year than the rest of the industrial world combined. Starving our schools and universities will do more damage to our long-term economic prospects than anything else we could do. Yet it is a direct consequence of tax cuts for the rich.

This is a massive non-sequitur, plain and simple.  Again, liberals claim that we need more money for something – in this case education – without looking at how that money is used.  A few years ago I had arguments with some young teacher friends of mine about how the teachers’ unions are bad for education and bad for the country.  Back then, my remarks were met with staunch opposition and parroting of typical liberal defense of unions.  Fast forward a few years and municipalities are short on cash and these same young, highly-educated (graduate and post graduate degrees) teachers are in danger of losing their jobs so that older, more expensive, tenured teachers with less incentive to work hard to educate our children can keep their jobs.  Teachers unions have directly contributed to higher education costs and kept the quality of education provided from rising, despite the government throwing significant chunks of money at the problem.

Tax cuts for “the rich” have had – in the author’s jaundiced eyes – further negative effects:

  • Tax cuts for the rich restrict government’s ability to invest in new public infrastructure that is another major factor in assuring long-term growth. Roads, rail lines, airports, sewer and water systems, sanitation, public health — all of these are critical foundations for economic success. Yet over the Bush years, all of them were starved for cash — both by Bush’s wars and by his tax cuts for the rich.

Here I’ll at least agree with the author that the dual wars in Iraq and Afghanistan are not very good uses of our limited financial resources.  Is it important to fight terrorism and ensure our national security?  Absolutely, but we have to get our own house in order before we can start ordering around others’.  Aside from the money spent on the wars, again, as we’ve shown again and again, government’s budget decisions are the primary factor infrastructure improvements have been delayed, not tax cuts for the rich.

As we near the end of the author’s piece, we encounter a bit of a straw-man argument, when he says:

And just in case you hear someone say that a dollar spent on tax cuts to the rich is a good way to stimulate the economy, here’s a fact from Mark Zandi, chief economist for Moody’s.com, who was also an economic adviser to John McCain:

For every dollar spent on making the Bush tax cuts permanent, you get $.29 of increase in the GDP. For every dollar spent to extend unemployment benefits you get $1.64 increase in the GDP. In other words, a dollar spent on unemployment compensation gets 5.6 times more boost to the GDP than a tax cut for the rich.

The reason is simple. When you’re in a recession, the problem is that demand is too low, so spending that increases demand really boosts the economy, since it creates demand that entices businesses to hire people who then spend more money and create more jobs — and so on.

But when you give tax breaks to the rich, they don’t spend most of those breaks like a family that needs unemployment. They save and invest a substantial portion. But in a recession you don’t need more savings or investment, you need more demand.

Firstly, where is that Zandi quote/figure from?  I don’t see a hyperlink to a paper, press release, or speech, so we don’t know the context and related information surrounding the numbers attributed to Zandi.  Second, the argument that increased demand for goods & services will get us out of recession is an incomplete one, one that I touched-upon last week.  To quote myself, “While Per-Capita Disposable Personal Income is down slightly from where it peaked in the 2nd quarter of 2008 (in 2005 dollars; in current-dollars  it was at it’s highest point this most recent quarter), it’s certainly still a huge part of GDP, as a matter of fact, per-capita personal spending was higher in the most recent quarter (2010q3) than it was in right before the S&P 500 peaked on October 9,  2007!”

Put simply: the disposable income is there, but the existence of disposable income does not, in and of itself, create demand for goods & services.  Perhaps the author should have considered the possibility that consumers are using their money for other purposes, like paying down debt.  Since it peaked two years ago (12/2008), revolving consumer debt outstanding has decreased 19% (-16.4%  using the seasonally adjusted data) or $187 billion through October.  I feel like this is so obvious I shouldn’t have to point it out, but to be clear: a dollar of disposable income can be spent on paying-down debt or on buying goods/services, but not both.

Finally, the author concludes:

But that’s exactly what those “deficit hawks” in the Republican Party are proposing. After running around the country for months campaigning about “runaway deficits” they propose to borrow $700 billion additional dollars to finance more tax cuts for the rich. And at the same time, last week the Republicans voted in the House to block extension of unemployment benefits that really would boost economic growth. They are happy to borrow more money to make their rich patrons richer — but they refuse to borrow any money to provide unemployment benefits that not only allow middle-class families who have lost their jobs through no fault of their own to keep their heads above water, but actually do turbocharged the economy…

The Republican proposal to make the rich richer is just plain wrong. If they succeed, the price will be paid by our children, who must pay the debt. But it will also be paid by all of us today in the form of lost goods and services that will never be created because so many people who are willing and able to work can’t find jobs.

As I mentioned towards the beginning of this article, I’m neither a Democrat nor a Republican, and as such, I don’t particularly agree with either side’s “solutions” to our economic malaise.  While unemployment benefits are important part of keeping our economy from collapsing and those out of work (and more importantly those who’ve paid unemployment taxes) from having to scavenge for basic necessities, making those benefits available as cash payments for up to two years or more is a bit much, I think.

Just walking/driving around NYC and North NJ, I see A LOT of immigrants from Central and Southern America mowing laws, doing landscaping, working construction, and making deliveries yet oddly-enough, I see very few people who appear to be U.S. citizens (anecdotal experience and conversation confirm these observations) doing these jobs.  What incentive do unemployed Americans have to get off the couch and work when the Government is paying them to sit around and “look for work” do nothing?  The answer is not much, if any.  If the government wants people to get back to work it has to make sure businesses have the proper incentives to hire and employees have the proper incentives to seek work.  Pointing fingers & complaining about tax policies isn’t going to get anything accomplished; on the contrary, the longer politicians and people who fancy themselves ones ignore economic reality the harder and more painful it’ll be when it finally comes time to pay the piper.


[1] As this is not an academic paper, this data and methods of analysis are admittedly not up to the standards required for publication as such.  The fact remains, however, that the official Government #’s easily and quickly disprove a claim represented in Creamer’s article as a god-given truth based-upon some unknown and undisclosed “empirical evidence.”

This Week in Tax "Policy": Laffer Laughter? (update)

*edited from the original version *

Arthur Laffer recently penned an op-ed in the WSJ hawking his view that decreasing the tax rates on wealthy (or high-income, as it were, herein “The Rich” ) Americans will actually increase tax receipts from them.  First, this is of course not a new argument. Second, as a result of the first, I’m immediately skeptical that what follows is not Economics so much as Polinomics or what-have you.

He begins the piece with this impressive lede, which I read anxiously anticipating cold, hard data proving unequivocally that tax cuts for “the rich” are indeed beneficial for the Economy (…he said half sarcastically).

“Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.”

Alas, while he makes several good points throughout the article, I finished wanting more; more data, more facts, more proof. As-written, Laffer makes some impressive claims without providing what I’d consider sufficient support, so I’d be remiss to take his word at face-value, absent said supporting material.
We all know that there are lots of factors influencing tax revenues from the rich, but the number one factor has to be the statutory tax rates government tells the rich they have to pay.

Of course, the only real thing compelling The Rich to pay taxes is the existence of said taxes in the first place, i.e. they pay taxes because The Government tells them they have to (or else!). However, an from an alternate interpretation of this statement – which was my initial one – he doesn’t seem to share whatever data/analysis is informing his conclusions with the rest of us. I’m not doubting that such material exists – and I realize this is an op-ed in the WSJ and not a research paper in an Economics journal – but for someone of Laffer’s stature to make such a (as-written) non-sequitur just reeks of political/ideological bias. Many popular studies on the relationship between tax rates and tax receipts have came to completely opposite conclusions, even looking at similar data.
The “Laffer Curve” (yes I just linked to Wikipedia, which then cites the underlying studies) may be an elegant concept in theory, but there seems to be a dearth of proof that its underlying idea – that there are situations where tax receipts will increase after a decrease in tax rates – has much, if any real grounding in reality.

Having not looked at income tax policy much since college, I’m fairly certain the amount of money earned by those at the top of the income scale has increased at a far greater rate over the past 20-30 years than it has for those not, and this increasing income disparity has a similarly far greater effect on income tax receipts than semi-arbitrary and inconsistent shifts in tax policy (i.e. rates).

To test this guess/hypothesis, I ran some #’s from the IRS and to see how tax rates and other factors affect the % of GDP “The Rich” pay in annual Federal income taxes.  While I hardly doubt tax rates (more specifically, the changes therein) are a material factor, I’m damn skeptical that they’re THE primary one.  Again, this is a rough analysis and I used relatively simple data sets which may very-well skew the results from what they might be were I to use more granular, detailed, and nuanced data.

That being said, from 1986 through 2007 (Laffer went back to 1978 but I didn’t have time to go that far back, although a quick look suggests another 8 years wouldn’t materially skew the results) here’s what I found:

As I suspected, changes in the contribution of “the rich” to Federal income tax receipts (as measured by receipts as % of GDP) has a 3x stronger correlation with the floor (the least “rich” of “the rich” so-to-speak) of the top 1% of earners bracket as it does with the Average Tax rate levied upon those within that bracket.  As I said, if I used more detailed numbers, this result might change, but I highly doubt the outcome would reverse, that is, that the changes in the tax rate would be shown to have a greater effect on receipts than (an increasing) income disparity.

If I’m missing something here please let me know, because I’m having a hard time with this Laffer piece. If the guy could have presented his argument with solid evidence, why the heck didn’t he? If he can’t, then he’s making a spurious – at best – “Economic” argument based on nothing more than “statistics” in the Mark Twain sense of the word.