E.J. Dionne wrote a column today entitled “In American Politics, Stupidity Is the Name of the Game.” Before calling politics (I assume he means politicians) stupid, he should have considered the fact that he might not have been so smart to cite data in his column that in no way supports his assertion that $250,000 per year households are wealthy and under-taxed or that this is the income level that should separate the tax burdened from the tax advantaged. I do agree with Mr. Dionne that, for better or worse, tax increases are imminent given the humongous national debt we have accumulated, but the evidence he cites in no way supports the idea that $250,000 is the right place to draw the line. Maybe it’s higher and probably it’s lower, but neither study cited by Mr. Dionne can answer that question.
The first report referenced by Mr. Dionne was produced by the Congressional Budget Office and reported that the gap in after-tax income between the top 1 percent of earners and the middle and bottom 5 percent tripled between 1997 and 2007. Indeed, the widening gap may be troubling, but the top 1 percent of earners are those who make in excess of $365,000 per year, not $250,000 per year, and beyond that, the range of earners included in the top 1 percent category is quite broad. I suspect a $365,000 per year household looks somewhat different than a $300 million per year household, so perhaps more information is needed before we can make assumptions about everyone in the 1 percent category. But regardless of that, $250,000 per year households are not in the 1 percent category, so how does this study support the idea of drawing the line there?
The second data point referenced by Mr. Dionne is that the amount of tax paid by the top 400 earners was cut in half between 1997 and 2007, while their earnings (75 percent of which, according to the IRS, was capital gains and dividend earnings) increased five fold during the same period. Does Mr. Dionne not know that the top 400 earners averaged an income of $345-million per year, not $250,000 per year? Again, I would agree that $345-million earners—you know, the people who can throw billion-dollar parties and purchase luxury yachts and rent villas for all of their friends to join them on vacation … and who contribute significantly to foundations and charitable causes and even build buildings at universities—might be advantaged by current tax policy, but a $345-million per year earner is not a $365,000 earner, and is certainly not a $250,000 earner. How, then, does this study support his assertion that $250,000 is the right place to draw the line?
I am in complete agreement that we need to have a serious discussion about how we are going to pay off the paralyzing debt we have accumulated, and that the way out is likely to include tax increases as well as cuts to entitlement and other spending programs (and all need to be on the table). However, none of the data cited in Mr. Dionne’s column provide any evidence to suggest that $250,000 is the right place to draw the line. I suspect that to make a real difference, the line must be drawn well below the $250,000 per household level and may include every taxpaying citizen, which may or may not be the economically wise or politically possible thing to do given the financial stresses that most families are currently feeling.
While Mr. Dionne’s column provides no empirical evidence to support a $250,000 line in the tax-increase sand, it does illustrate that our tax code is too complex, with too many loopholes, and that it artificially selects winners and losers. He chose to cite examples of disparities that he believes favor the rich. I might highlight other disparities, including that 1 percent of earners account for only 19 percent of the income but 37 percent of the taxes. Or I might point out that a policy that would tax the individual at $200,000 but a family at $250,000 creates the greatest disparity of them all by allowing a couple that lives together to earn 60 percent more income than a married couple before suffering additional tax liabilities.
Mr. Dionne’s article, and the data he cites, does not argue for a tax line at $250,000, but it does provide pretty compelling support for a flat tax that ensures equitable treatment for all people and all forms of income under the tax code. It also highlights the need for each tax payer to determine what programs he or she values, and how much he or she is willing to pay to support those programs, as opposed to the alternative conversation which is focused on how much somebody else should pay to support the programs I favor.
20 Responses to Taxing One’s Intelligence
livefreeordie2 - July 30, 2010 at 8:53 am
Dionne has it wrong and, to some extent, so do you. The real question here is, “What is the purpose of the taxes imposed?” If the purpose is simply to “screw the rich,” then raising taxes hits the nail on the head. If the purpose is to raise more revenue, then the article itself shows that we’ve been on the right track. How so?Use a hypothetical income of $1 million and a tax rate of 10%. Using a static model (which of course is nonsense), by doubling the tax rate, instead of getting $100,000, you would get $200,000. Again, the problem is that if you did that, behavior would change and in actuality, revenue would probably decrease. But use the figures in the article. . . Income increased five-fold, so, to $5 million in my example. And the tax rate was cut in half. That means that revenues would now be $250000. Dionne is complaining about reality! He is complaining because we are taking in more revenue! Reducing taxes increases revenue, Increasing taxes decreases revenue. So, if the goal is to increase revenue, the two important things to do are a reduce taxes and provide a degree of stability so that businesses can plan for the future. On the other hand, if the goal is to show those rich bastards that we can get even with them by redistributing their wealth to people who don’t deserve it, even if it means less tax revenue, then by all means, press ahead with Obama/Democrat tax policy – but please drop the pretense that the purpose is to reduce the deficit and debt.
luther_blissett - July 30, 2010 at 11:34 am
Um, I’m not going to comment on Auer Jones’ little piece of pro-Republican propaganda, which has no place in a blog on higher education.However, livefreeordie, your example doesn’t make sense insofar as it assumes that income will not increase over time if taxes remain static or are increased. And that’s simply not true.
jimknu - July 30, 2010 at 12:50 pm
If livefreeordie2′s argument is correct, tax revenues will be maximized at a tax rate of zero, since reductions in tax rates always increase tax collections.
goxewu - July 30, 2010 at 1:24 pm
Ms. Auer Jones has, as usual, a small point that she, as frequently, tries to inflate into an argumentative deal-breaker. E.J. Dionne’s stats do not specifically concern the percentage of American personal incomes over or under $250,000 per annum.So?Experience (such as talking to one’s middle-class friends, going to the supermarket, filling the tank of one’s automobile, seeing what unemployment insurance pays, looking at the salary tables for, oh, public schoolteachers and police officers) and a little common sense (if somebody offered you a job where you live now with a salary of $250,000, would you quit your present job and take it?), tell you that a quarter of a mil a year renders one pretty well off indeed–even moderately “rich.”PS: “…allowing a couple that lives together to earn 60 percent more income than a married couple before suffering additional tax liabilities” really makes all those gay couples wanting to be married instead of merely cohabiting kind of super-patriots in terms of tax burden, doesn’t it.
trendisnotdestiny - July 30, 2010 at 3:37 pm
goxy woo,fantastic point… PS: “…allowing a couple that lives together to earn 60 percent more income than a married couple before suffering additional tax liabilities” really makes all those gay couples wanting to be married instead of merely cohabiting kind of super-patriots in terms of tax burden, doesn’t it.Also:Maybe to achieve super-patriot status, we increase the inheritance taxes for estate above 2.5 million back to orginial rates nearing 55%-60%… That way the people who have prospered from the benefits/privileges of this country can insure a meritocratic system (not based on DNA & relational convenience)…
markbauerlein - July 30, 2010 at 4:08 pm
It seems to me that Diane’s basic point about Dionne fudging data and slipping up on the facts stands. This looks like another case of lazy and lax argumentation on his part.
goxewu - July 30, 2010 at 4:47 pm
Re #6:Mr. Dionne didn’t “fudge” data; he provided (semi) irrelevant data. And even if this “looks like another case of lazy and lax argumentation on his part,” Prof. Bauerlein’s comment doesn’t address the thrust of Ms. Auer Jones’s post, which is that a $250,000 annual income isn’t indicative of being quite well off. And whatever Mr. Dionne’s sins of argumentation, they really don’t deserve the ad hominem headline, “Stupid Is As Stupid Does,” which is exactly the sort of direct insult to which Prof. Bauerlein usually objects.It’s nice (and informative) to know, however, that Prof. Bauerlein and Ms. Auer Jones are on a first-name basis.
macheath - July 30, 2010 at 10:35 pm
DAJ repeats the right-wing error:”…1 percent of earners account for only 19 percent of the income but 37 percent of the taxes.” The top one percent does have about 20.4 percent of total income, but they pay 22.1 percent of ALL taxes–state, local, sales, payroll, property, etc. So their tax burden is roughly proportional to their total income.And how does DAJ possibly reach this conclusion:”…support for a flat tax that ensures equitable treatment for all people and all forms of income under the tax code.” There’s nothing in the Dionne piece that provides any such support. But I agree with DAJ that we should get rid of those preferences that allow the very rich to hide their incomes and not pay fair taxes. The rich also then use their high incomes to influence legislators to give them those privileges. So I’m with DAJ–let’s have campaign finance reform, reduce the unfair impact the wealthy have on tax law, make the capital gains and income rates the same, cap the home mortgage deduction, and get more revenue from the truly wealthy. Oh–that isn’t what she said?
livefreeordie2 - July 31, 2010 at 10:29 am
Luther #2 – You’re right, Luther! This is the Chronicle of Higher Ed! Only pro-Democrat or Socialist propaganda has a place here, right? And you missed the point. Taxes have a direct impact on income. Remember, we’re talking about the wealthy. They can move their investments overseas or simply not invest in a new plant, costing jobs and causing their own income to go down. So, you would be wrong if you think income will necessarily increase.Jimknu #3 – Welcome! I wasn’t aware that they’d opened the blogs to Kindergarteners, but since they have – welcome!Gox #4 and #7 – I don’t know where you live, but here in the northeast, $200K, while clearly a nice living, doesn’t make you even close to rich. Mid-upper middle class, maybe. And if you save enough, you’ll be comfortable in your retirement. But not rich. Not even moderately rich. A couple of college professors married to each other could easily get to $200K plus. Then consider the cost of a home, kids, taxes, etc. Perhaps where you live, that’s not the case. In the Boston metro area, $250K as a family income is barely “comfortable.” As for the marriage tax (and even the whole thing about targeting this group or that for taxes), we’re all Americans. We should all be treated the same. Fairness, isn’t that what you Libs think is important? Well, treating people differently because of ethnicity or race isn’t fair. And it’s not fair to target people because of their income. Hammering smokers (most of whom are lower income) was not fair. Hitting the valley girls with a tanning tax is not fair. And targeting the wealthy isn’t fair either. It might be satisfying for those jealous losers who, as one poster said, “don’t amount to much,” but it isn’t fair.trendisnotdestiny – Your death tax suggestion is nothing short of a desire to be able to legalize theft. . .a grave robber. Whatever is in a person’s estate – money, property, whatever – has already been taxed. The government has already taken its chunk. Your suggestion would close down hundreds of family farms when the owner dies. It would close thousands of small businesses putting tens of thousands out of work – even potentially, partners in the business. You’re not talking about a meritocracy and you never will. . .why? Like all with socialist leanings, you’d rather see wealth stolen from those who earn it rather than live in a society that expects people to accrue wealth for themselves.macheath – #8. You are again putting out false data. I’ve already pointed you to the correct information. Your nonsense about “all taxes” is just that – nonsense. Social Security is in a lock-box, right? It’s not a tax, it’s a pension fund you get at retirement age. Medicare is an insurance payment, right? Are you suggesting that sales tax be higher based on income? Property taxes higher based on income? Oh. .. I get it. In your world, you wouldn’t have to pay for anything – someone else would be forced to pay for you. Swell.
macheath - July 31, 2010 at 11:27 am
livefree opines:”macheath – #8. You are again putting out false data. I’ve already pointed you to the correct information.”Livefree then goes on to say (I think he’s trying to be sarcastic, but its hard to tell with these posts…) that payroll and medicare taxes aren’t taxes, and then drifts off into sales and property taxes as not progressive, although I guess there’s an admission that they are taxes after all. Error is endless, say the theologians. And these right wing commentators, on a regular but less profound basis, prove it every day. The facts I presented are correct. That’s why they are facts. You can argue in favor of regressive taxes, or lowering the total tax burden on the rich, if you think that’s a good idea. But those aren’t alternative facts.Here’s a dialog with one of Livefree’s soul mates:”When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.” “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master – - that’s all.” (Through the Looking Glass, Chapter 6)
livefreeordie2 - July 31, 2010 at 12:19 pm
macheath #10 – Not sarcastic at all. It’s a simple fact. The money you pay into Medicare is returned in “free” healthcare after the age of 65. Social security is the same thing – except for the fact that the government steals your money if you die before collecting it all back, it’s closer to a mandatory savings account than it is to a tax. Of course, I realize that you would prefer to turn it into welfare payments, but for now, that’s not the case. And I do make a distinction between income tax and property or sales tax. Property taxes are the same regardless of income level. So are sales (consumption) taxes. The fact that you don’t wish to consider that suggests either a. ignorance or b. a desire to ignore facts. In either case, it shows you incapable of conducting a serious discussion. My guess is that you’ve spent far too much time with the caterpillar. . .
jimknu - August 1, 2010 at 11:39 am
livefreeordie2I get tired of conservatives alleging that lowering tax rates always increases revenue. In my kindergarten we learned that the relationship between tax rates and tax collections had a maximum at some postive tax rate (Laffer curve). In order for tax collections to go up when tax rates decline the tax rate must be beyond the rate that maximizes tax collections. Where’s the evidence that the federal tax rate is that high?
livefreeordie2 - August 1, 2010 at 9:32 pm
Of course the Laffer curve applies. The other side of increasing tax revenue is increasing economic activity. The more people with jobs, the more people with income, the more investments and return on investments, the higher the tax revenue. Gox has been complaining about how much of a break the rich get, but truth be told, 70% of the jobs in this country come from small businesses. And Sole Proprietors and S Corps pay company taxes on their personal income tax forms. If Sam and Bob have a company and they pay themselves $100,000 in salary, and there is $2 million in profit (rough calculations) Sam and Bob must report $1,100,000 each on their personal income tax. That means they lose the money in additional taxes paid that they could use to hire more people.The point is that taxation changes behavior. In a static model, one might say that if we increase taxes by 10%, that millionaire will have to pay an additional $100K per $1M of income. The truth is, however, that someone of means can make changes in investments, etc., that reduce taxable income and revenue declines. Unemployment is nearly 10% and has been at that level for over a year. Raising income taxes and introducing uncertainty will insure that it stays at nearly 10% or higher. The choice right now is between higher taxes on a few people or increasing tax revenue by those people creating jobs that employ millions more. That’s the true multiplier theory – more and more jobs.
jimknu - August 1, 2010 at 10:31 pm
I’ll happily concede two points. One, a Laffer curve exists. Two, taxation changes behavior. As I stated in my earlier comment, the Laffer curve implies that there is some tax rate that maximizes tax revenue. It has the shape that it has because there are two conflicting effects of a tax rate increase. First, more money is raised on the economic activity that exists after the tax rate increase. Second, tax revenues are reduced because of the reduced economic activity.At low levels of tax rates, increases in the rate mean that tax revenues increase because the first effect is greater than the second. At high levels of tax rates, increasing the tax rate reduces collections because the second effect outweighs the first.livefreeordie2 alleges that the federal income tax is in the second situation–at a tax rate beyond the peak of the Laffer curve.What tax rate maximizes revenue and whether this economy is currently beyond this point is not a theoretical, logical, or philosophical question. It is an empirical question.Anyone can make up a story about fictional Sams and Bobs to support a contention; again I ask, where is the evidence?
livefreeordie2 - August 1, 2010 at 11:09 pm
jimknu #14 – The evidence? Well, since no one has raised taxes during a recession since Hoover signed the Revenue Act of 1932, cementing in place the Great Depression, I guess there isn’t a lot of precedent. I mean, do you need a peer reviewed study to know what that tax increase did to millions of Americans for the next 8 or 9 years? Kennedy decreased the marginal tax rate from 90 to 70 and revenue increased. Reagan decreased it an revenue increased. Bush decreased taxes and revenue increased. So. . . you tell me. Where is the evidence?
livefreeordie2 - August 2, 2010 at 7:12 am
jimknu #14 – Coincidentally, Arthur Laffer has an editorial in today’s Wall Street Journal that makes the same points I did and more. And he cites evidence. Perhaps you’ll believe him since you don’t believe me. http://online.wsj.com/article/SB10001424052748703977004575393882112674598.html?mod=djemEditorialPage_h
jimknu - August 2, 2010 at 12:41 pm
Mr. Laffer is not the only expert to weigh in. From the transcript of yesterday’s Meet the Press:”MR. GREGORY: You don’t agree with Republican leaders who say tax cuts pay for themselves?MR. GREENSPAN: They do not.”
macheath - August 2, 2010 at 12:54 pm
Oh, I was going to stay out of this, but I can’t resist when people cite the “Laffer Curve” as if it is a meaningful thing. Here is the best description of it, from John Kenneth Galbraith’s novel A Tenured Professor:”The economic formulation of high personal importance to the Marvins held that when no taxes are levied, no revenues accrue to the government. An undoubted truth. And if taxes are so high that they absorb all income, nothing can be collected from the distraught, starving and otherwise nonfunctional citizenry. Also almost certainly true. Between those two points a freehand curve, engagingly unsupported by evidence, showed the point where higher taxes would mean less revenue. According to the accepted legend, the original curve had been drawn on a paper napkin, possibly toilet paper, and some critics of deficient imagination held that the paper could have been better put to its intended use. ..”
livefreeordie2 - August 2, 2010 at 5:11 pm
jimknu #17 – Before you said you wanted evidence. The article I cited for you has data. In response, you throw an opinion at me. macheath # 18 – Same thing. You quote someone’s opinion.In my comment and in the article I cited, are the figures for the increases in tax revenue that accrued when the marginal rates were lowered. You both seem to want to laugh them off. Perhaps you would have more credibility if you would cite for me examples where dramatically increased taxes resulted in increased tax revenues. I mean, this is not that hard. The government does not create wealth, it only consumes it – only the private sector can create wealth. The more money consumed by the government, the less there is to be used by the private sector to create wealth. The more money that is available to the private sector, the greater the potential for economic growth (and more jobs). As the economy grows and there are more and more jobs, the larger the tax base and the greater the tax revenue. Why don’t you provides some examples of nations that taxed their way to prosperity. . .
jimknu - August 3, 2010 at 12:08 am
I don’t believe that Alan Greenspan’s opinion is without merit. He has spent his entire career studying the macroeconomy. That said, here’s some data.First, as to Mr. Laffer’s opinion piece in today’s Wall Street Journal. Mr. Laffer defined his piece in a very specific way. He defined it in terms of tax revenue from the top 1% of income earners and he defined the variable of interest as tax collections as a percentage of GDP. Our discussion in this thread has been more broadly defined in terms of tax rate changes in general, and in terms of tax collections in total.In terms of tax collections as a percent of GDP, Mr. Laffer’s column provides the evidence to refute his own point. Please refer to the graph in Mr. Laffer’s opinion piece. He argues in the text that the taxes paid by the top 1% of tax payers over the period 1978 to 2007 rose. He called this time period one of “ubiquitous tax cuts.” While taxes declined from the beginning of this time period to the end, tax rates varied throughout the time period. Tax rates fell from 1978 through the tax act of 1986 where they hit historically low levels. After 1986, tax rates were raised by Pres. Bush I in 1990 and by Pres. Clinton in 1993 and lowered by Pres. Bush II in 2001 and 2003.If you look at the graph, you will notice that the share paid by the top 1% increased from 1991 to 2000 to the highest point in the entire 90 year time series. This, of course, was what happened after marginal tax rate increases in the early 90′s. You’ll also notice that the the line both falls and rises after the Bush II tax cuts but never reaches the peak attained prior to the cuts.Also in Mr. Laffer’s article, he refers to the tax increasing years of 1968 to 1981. Here is where carefully choosing to use tax collections as a percent of GDP came in handy. He notes that the top 1% paid 1.9% of GDP at the beginning of the time period and only 1.5% at the end. I won’t quible with these figures, but I will note that GDP inceased over that time by 45% in real terms and 244% in nominal terms. Because of this growth in GDP, tax collections from this cohort increased in both real (14.7%) and nominal (171%) terms.Second, I conceded earlier that tax rate changes will change behavior and I will further concede that the very richest people have a greater ability to change behavior. This does not mean that Laffer’s conclusions are true or that they could be extrapolated to tax rate changes that affect a broader base.In terms of evidence about tax rate changes and tax collections for the federal income tax broadly, the evidence is mixed. In the years immediately following the 1986 tax rate reductions, tax collections increased ($349b in 1986 to $466b in 1990). Tax collections also increased in the years following the Bush I and Clinton tax increases ($467b in 1991 to $1,004b in 2000). Tax collections fell after the first tax cuts by Bush II (to $793b in 2003)but rose after the second round of cuts (to $1145b in 2008).(Note: These figures and the ones I referred to in the earlier paragraphs come from the historical, statistical tables contained in The Economic Report of the President, 2010).What’s the conclusion? Neither the evidence provided by me,nor the evidence provided by Mr. Laffer is conclusive as to the effect of tax rate changes on tax collections. As the debate over this issue here, in today’s Wall Street Journal (600+ comments last I looked) and in today’s Washington Post (over 1000 comments last I looked)shows, this is not a settled matter.There is some evidence on each side of the argument and there is no definitive evidence.What is needed is extensive, peer reviewed study of this issue so that there will be more light and less heat.At this point, it cannot be concluded that decreases in tax rates will increase tax revenue.However, I will take the opinion of Mr. Greenspan over the opinion of Mr. Laffer all day long.