Conservative economists try to argue against Keynesian policies by resorting to several strategies. The most common is to feign ignorance: "There's no such thing as a liquidity trap and even if there were, we're not in one now." They tend to invent all sorts of strange definitions for what a liquidity trap must be. In fact it's quite simple. Normally the Fed manipulates the economy by manipulating the money supply through interest rates: if inflation is high or they think there's a bubble forming in some sector, they raise interest rates, reducing the money supply. If the economy is struggling, they lower interest rates, increasing the money supply, called "adding liquidity". But when rates become zero, these lose effectiveness: if there's no profit in it, folks would rather keep it in a shoebox than lend it to the Fed. Or pay to lend it, which is what a negative rate would be. Zero lower bound. Keynes argued that when this happened, the government should take advantage of the low rates and borrow money to spend on infrastructure. This will put people to work, and they'll buy groceries and cars and pay rent, which will put other people back to work, which will expedite the economy getting back onto its feet. During the liquidity trap, there's necessarily very low or even sometimes negative inflation, but once it has ended, inflation will quickly pop up. At that point, the Fed can raise rates and slow inflation down. But it has a strong incentive not to: The new debt gets smaller if there's inflation. So the Fed must play a balancing act.
Conservatives argue that recessions and depressions are just the result of business cycles and these can no more be manipulated than the weather. Well, no. Paul Volcker saw the stagflation of the late 70s and early 80s and discovered that half-measures weren't stopping it. So he raised interest rates very high and intentionally threw the economy into recession. This brought inflation down but it killed a lot of jobs. Despite the conservatives constant harping about business cycles, most of the theory behind the deregulation that took place in the late 90s was based on the Fed's proven historical ability to keep the swings within bound. But deregulation created banking that was outside of the Fed (or any regulator's) purview and no amount of raising of interest rates could have stopped the bubble. If there's shadow banking that will lend for less than the Fed and borrow for more, the Fed no longer can control the money supply through rates. Shadow banking nearly always leads to bubbles and collapses, and in most cases liquidity traps. Nobody can really make money by undercutting the Fed this way, but in nearly all cases where there is shadow banking, there is also fraud.
The next false meme from the conservatives is that much of the current unemployment is "structural". By this they mean there is a mismatch between the skills of workers and available jobs. There clearly is some structural unemployment going on, but the data makes it clear this is a minority. First of all if there's demand for a product, but not enough supply, this will drive the price up until the employer can afford to do whatever it takes to get the product made: retrain workers, lure the skilled workers they need from other employers with higher wages, buy new machinery, etc. This clearly isn't happening. There are certainly a lot of cases where an employer would happily pay skilled workers at less than market rates so they can sell their product for a lower price, but that's not the same thing as "demand". Structural unemployment is necessarily "sticky": it takes a while to retrain workers when requirements change. As the slow recovery progresses, some workers do get retrained, some old workers retire, and some new workers enter the market with new skills.
There are lots of roads needing to be repaired, kids to be educated, fires to be put out, etc., and there's plenty of money in the economy to do it.
"I like to pay taxes. With them, I buy civilization" -Oliver Wendell Holmes
24 April 2012
Average incomes
I've been looking again at IRS's sources of income data for 2007,
There was a total income AGI for all filers and payers of $8.688T, which works out to an average income of about $29K for all 300M Americans, including
children, pensioners, etc., while average income among people who actually paid taxes was
$90K. Median income among filers was $15K, while median income among
taxpayers was about $20K. (the difference is that there were 46.7M people who filed a tax return but were not taxable. Mostly this means they had too little income to tax, or that somehow this income was excluded. It may also mean that someone else filed on the same income for some reason)
That $60K discrepancy is significant. That means the top 50% of people who actually paid tax is making $60K a year more than the bottom 50%. Realistically, nobody making less than about $25K per person can afford to pay more than a nominal tax. But the point is, there's a /lot/ of money in the economy for doing things that will help the great numbers of Americans.
That $60K discrepancy is significant. That means the top 50% of people who actually paid tax is making $60K a year more than the bottom 50%. Realistically, nobody making less than about $25K per person can afford to pay more than a nominal tax. But the point is, there's a /lot/ of money in the economy for doing things that will help the great numbers of Americans.
17 April 2012
Sources of Income for the 0.4%
I've been studying the IRS sources of income for 2007 for incomes over $1,000,000. In 2007, such people were 0.4% of all taxpayers, yet their AGI was 17.4% of all AGI. Salaries, wages, and interest for this class adds up to $445B, about 5% of AGI for all taxpayers, and about 31.7% of all income for this class. For people making less than $1M, salaries, wages and interest accounted for 78% of all income.
For the .4%, dividends and long term capital gains totaled $595B, about 42.5% of total income for this class, and accounting for 41% of all dividends and 76% of all long term capital gains. This income is taxed at 15%, irrespective of the tax bracket the payer is in.
The remaining 25.1% of income that the top 0.4% earned comes from a variety of other places, such as short term capital gains. Most of it is taxed as ordinary income. For example, business profits: the 0.4% earned $18B, approximately 1.3% of their earnings, in this category. This is only 7.8% of all income in this class.--92.2% of business income that is taxed as income comes from people who are NOT making >$1,000,000 a year. S-Corp capital gains amount to $23.5B, 1.6% of their earnings.
The republican leadership is constantly telling us that raising taxes on the wealthy will hurt the job creators. These two categories: business profits and S-corp capital gains, are the ONLY categories of business income that would actually be affected by a change in the top marginal rate for individuals. This is 2.9% of earnings in the class. It's now taxed at 35%, and it would go up to 39.6%.
The justifications for having low rates on capital gains are somewhat specious: Let's say you buy a property and hold it for ten years. If you buy a property and the price of it is carried along with inflation, you're being taxed on inflation. for example, if you buy a house for $100K, hold it for 10 years, during which time there was 5% inflation every year, and then sell it for $163K, you have exactly kept up with inflation. your capital gains are $63K though. if you're in a 25% income class, if this were taxed as ordinary income, you'd pay $16.7K tax on this, despite not really having made any ground. So the IRS instead makes a simple rule: for things held more than one year, they have a flat 15% tax rate--$9.45K for such a profit. it doesn't matter if you the asset grew $63K in one year or 50., that's the tax rate. To make this fair, we should adjust the purchase value of the house to reflect inflation when calculating capital gains. This is called "depreciation", If the house went up in value relative to inflation, you should pay higher taxes. if it lost ground, you should be able to take a loss. As it stands, it's an incentive to hold the asset for the minimum time it takes to get the long term gains tax break. (the reason it's done the way it is, is because once upon a time, people who trade a lot of stocks and bonds had to work out their taxes by hand, and every asset would have to be deprecated individually. now that we do this with a computer, it should be no big deal).
Many of the people who own stocks get a dividend. For the 99.6%, this is a 1.2% of their total income, and in fact, 84% of it comes goes to people who make over $100K--the top 20%. Most of them would never notice a change in the tax rate. But for the top .4%, it's a sizable fraction of their income, and during the GWBush administration, they managed to perpetrate a fraud that gave them a huge tax break. It's called "Imputed Corporate Taxes". The idea is that the people who get dividends own a large share of the company. The company already pays taxes on its profits, called "Corporate Taxes", before it pays the dividend to shareholders. Were all of the after-tax profits to be distributed as dividends and taxed at the top individual rate, a dollar of profits would be taxed at 35% + .35*(1-.35) = 57.75. This sounds outrageous, doesn't it? So they lowered the rate for dividends to 15%. Now that dollar is being taxed at 35% + .15*(1-.35) = 44.75. Still seems a lot, huh?
Well, the reason seems so much is because it's being counted twice. EVERY dollar flows through the economy many times, and each time the IRS or other taxing authority takes a haircut. The fact that a shareholder can directly account for two of the cycles is no more pertinent than a customer paying sales tax on an item the same corporation is selling. In fact, very few companies actually pay the full 35% and it's not relevant to the individual taxpayer anyway. Everyone is connected to some other entity that pays higher taxes than they do.
For the .4%, dividends and long term capital gains totaled $595B, about 42.5% of total income for this class, and accounting for 41% of all dividends and 76% of all long term capital gains. This income is taxed at 15%, irrespective of the tax bracket the payer is in.
The remaining 25.1% of income that the top 0.4% earned comes from a variety of other places, such as short term capital gains. Most of it is taxed as ordinary income. For example, business profits: the 0.4% earned $18B, approximately 1.3% of their earnings, in this category. This is only 7.8% of all income in this class.--92.2% of business income that is taxed as income comes from people who are NOT making >$1,000,000 a year. S-Corp capital gains amount to $23.5B, 1.6% of their earnings.
The republican leadership is constantly telling us that raising taxes on the wealthy will hurt the job creators. These two categories: business profits and S-corp capital gains, are the ONLY categories of business income that would actually be affected by a change in the top marginal rate for individuals. This is 2.9% of earnings in the class. It's now taxed at 35%, and it would go up to 39.6%.
The justifications for having low rates on capital gains are somewhat specious: Let's say you buy a property and hold it for ten years. If you buy a property and the price of it is carried along with inflation, you're being taxed on inflation. for example, if you buy a house for $100K, hold it for 10 years, during which time there was 5% inflation every year, and then sell it for $163K, you have exactly kept up with inflation. your capital gains are $63K though. if you're in a 25% income class, if this were taxed as ordinary income, you'd pay $16.7K tax on this, despite not really having made any ground. So the IRS instead makes a simple rule: for things held more than one year, they have a flat 15% tax rate--$9.45K for such a profit. it doesn't matter if you the asset grew $63K in one year or 50., that's the tax rate. To make this fair, we should adjust the purchase value of the house to reflect inflation when calculating capital gains. This is called "depreciation", If the house went up in value relative to inflation, you should pay higher taxes. if it lost ground, you should be able to take a loss. As it stands, it's an incentive to hold the asset for the minimum time it takes to get the long term gains tax break. (the reason it's done the way it is, is because once upon a time, people who trade a lot of stocks and bonds had to work out their taxes by hand, and every asset would have to be deprecated individually. now that we do this with a computer, it should be no big deal).
Many of the people who own stocks get a dividend. For the 99.6%, this is a 1.2% of their total income, and in fact, 84% of it comes goes to people who make over $100K--the top 20%. Most of them would never notice a change in the tax rate. But for the top .4%, it's a sizable fraction of their income, and during the GWBush administration, they managed to perpetrate a fraud that gave them a huge tax break. It's called "Imputed Corporate Taxes". The idea is that the people who get dividends own a large share of the company. The company already pays taxes on its profits, called "Corporate Taxes", before it pays the dividend to shareholders. Were all of the after-tax profits to be distributed as dividends and taxed at the top individual rate, a dollar of profits would be taxed at 35% + .35*(1-.35) = 57.75. This sounds outrageous, doesn't it? So they lowered the rate for dividends to 15%. Now that dollar is being taxed at 35% + .15*(1-.35) = 44.75. Still seems a lot, huh?
Well, the reason seems so much is because it's being counted twice. EVERY dollar flows through the economy many times, and each time the IRS or other taxing authority takes a haircut. The fact that a shareholder can directly account for two of the cycles is no more pertinent than a customer paying sales tax on an item the same corporation is selling. In fact, very few companies actually pay the full 35% and it's not relevant to the individual taxpayer anyway. Everyone is connected to some other entity that pays higher taxes than they do.
16 April 2012
Voluntary Taxation
It's a popular meme of the right that if you want to pay higher taxes, you should. The treasury actually has a department set up to handle this. It's called "Gifts to the United States" and for the last several years it's been taking in about $3M a year. Not only is this a pretty feckless way to solve our $15 Trillion debt problem, it conveys a deep, fundamental misunderstanding of elementary economics.
Economics is about entities competing with each other in the market. If you have an advantage--lower costs, better marketing, better product, etc.--you will likely win. Everything else follows from that. Price adjusts to match supply with demand because of this relationship. The problem with voluntary tax rates is that the payer of higher rates is giving themselves a disadvantage. Republicans get this part. What they don't get is that as long as everybody is paying the same rates, nobody has a disadvantage. Nobody who is actually competing in the market can afford to pay a higher rate than their competitor. It must be fair, or the market is not free.
For this same reason, higher taxes do not hurt the economy, or the individual, as long as they are the same for everybody. If there's less money in the economy, the cost of individual goods and services automatically deflate to match. That's supply and demand. It's only when they're not fair that people lose out due to taxation.
It's impossible to have perfectly equitable rates. My costs are likely slightly different than yours, because of where we live and who we know. But as long as we get as close as is practical, it's fair. It's even fair if we add a moderate penalty to those who have been successful. As long as the penalty is not so large as to make it worthwhile to intentionally become less successful, the free market still works. This is called "progressive taxation", incidentally.
Economics is about entities competing with each other in the market. If you have an advantage--lower costs, better marketing, better product, etc.--you will likely win. Everything else follows from that. Price adjusts to match supply with demand because of this relationship. The problem with voluntary tax rates is that the payer of higher rates is giving themselves a disadvantage. Republicans get this part. What they don't get is that as long as everybody is paying the same rates, nobody has a disadvantage. Nobody who is actually competing in the market can afford to pay a higher rate than their competitor. It must be fair, or the market is not free.
For this same reason, higher taxes do not hurt the economy, or the individual, as long as they are the same for everybody. If there's less money in the economy, the cost of individual goods and services automatically deflate to match. That's supply and demand. It's only when they're not fair that people lose out due to taxation.
It's impossible to have perfectly equitable rates. My costs are likely slightly different than yours, because of where we live and who we know. But as long as we get as close as is practical, it's fair. It's even fair if we add a moderate penalty to those who have been successful. As long as the penalty is not so large as to make it worthwhile to intentionally become less successful, the free market still works. This is called "progressive taxation", incidentally.
14 April 2012
The Laffer Curve
Arthur Laffer didn't invent the concept that bears his name, but he popularized it during the early years of the Reagan administration. The idea is that as tax levels go up, people have a reduced incentive to do things that might get taxed away. There's clearly a grain of truth to this: who would work harder for less money? But is that what any of the proposed or historical tax rates have done?
Let's take an extreme example: Suppose income less than $100K is taxed at 25% and income over $100K taxed at 90%. Someone who earned $99,999 after deductions and exemptions gets to take home $74,999.25. Another person who earned $100001, two dollars more, gets to take home $75,000.10--only 85 cents more than the other person. Is that a sufficient incentive to not earn the extra money? The higher earner only pays just over a dollar extra on their tax bill--probably not a big deal. But what if the higher earner had triple the income: A $300K earner only gets to take home $95K under such a tax structure. Clearly better income, but the consequences of the high tax rate is significant. You're only keeping $10K of each extra $100K you make. It surely reduces the incentive to work harder.
But that's clearly not what's happening, or being proposed. The highest credible proposal by anyone in the current discussion is a top marginal rate of $39.6%, and that would only be for income over $372,000 (roughly the 99%-1% threshold, b.t.w.). So you get to keep 60.4% of any income you make over that threshold. Would you work nearly as hard for that extra money? Of course you would.
We actually have quite a bit of empirical data on this. The top marginal rate went up to 63% in for 1932 and 79% in 1936 (for those making over $80M) , and from 1942 through 1963 it varied between 88% and 94%. Kennedy brought it down to 70% and Reagan to 50% in 1982 and 38% in 1987. Did people work less hard because of these extreme rates? There's not one shred of evidence supporting that. What they did do is find other ways to take their income: since capital gains are taxed at a lower rate, they found ways to take income in stock or other assets. And realistically, these extreme rates were mostly symbolic: Henry Kaiser, J Paul Getty, and Howard Hughes paid them, but they also got special business relationships with the government during the war. It's good propaganda: They could be seen to be doing their part for the war effort.
The evidence is pretty solid: Tax rates have no effect at all on how hard people work or how much they invest, etc., until the rate gets to about 70%. Above that level, some people start backing off, and over 90%, nearly everybody backs off. The Laffer Curve is a real phenomenon, and it might have been relevant to a discussion during the Eisenhower and Kennedy administrations, and even a little bit as late as Reagan. But the top marginal rate today is less than half the Laffer threshold and nobody is suggesting going much higher than half.
The math is fairly straightforward. If you increase taxes, you increase government revenue, right up to the point that the Laffer threshold is exceeded. The optimal thing, financially, is to have the highest rate that does not exceed that. This probably isn't too good politically, and of course there's always the question of what government might do with the extra money. But during a time when we're firing teachers and firemen because of severe revenue shortages, that's not really an issue.
Let's take an extreme example: Suppose income less than $100K is taxed at 25% and income over $100K taxed at 90%. Someone who earned $99,999 after deductions and exemptions gets to take home $74,999.25. Another person who earned $100001, two dollars more, gets to take home $75,000.10--only 85 cents more than the other person. Is that a sufficient incentive to not earn the extra money? The higher earner only pays just over a dollar extra on their tax bill--probably not a big deal. But what if the higher earner had triple the income: A $300K earner only gets to take home $95K under such a tax structure. Clearly better income, but the consequences of the high tax rate is significant. You're only keeping $10K of each extra $100K you make. It surely reduces the incentive to work harder.
But that's clearly not what's happening, or being proposed. The highest credible proposal by anyone in the current discussion is a top marginal rate of $39.6%, and that would only be for income over $372,000 (roughly the 99%-1% threshold, b.t.w.). So you get to keep 60.4% of any income you make over that threshold. Would you work nearly as hard for that extra money? Of course you would.
We actually have quite a bit of empirical data on this. The top marginal rate went up to 63% in for 1932 and 79% in 1936 (for those making over $80M) , and from 1942 through 1963 it varied between 88% and 94%. Kennedy brought it down to 70% and Reagan to 50% in 1982 and 38% in 1987. Did people work less hard because of these extreme rates? There's not one shred of evidence supporting that. What they did do is find other ways to take their income: since capital gains are taxed at a lower rate, they found ways to take income in stock or other assets. And realistically, these extreme rates were mostly symbolic: Henry Kaiser, J Paul Getty, and Howard Hughes paid them, but they also got special business relationships with the government during the war. It's good propaganda: They could be seen to be doing their part for the war effort.
The evidence is pretty solid: Tax rates have no effect at all on how hard people work or how much they invest, etc., until the rate gets to about 70%. Above that level, some people start backing off, and over 90%, nearly everybody backs off. The Laffer Curve is a real phenomenon, and it might have been relevant to a discussion during the Eisenhower and Kennedy administrations, and even a little bit as late as Reagan. But the top marginal rate today is less than half the Laffer threshold and nobody is suggesting going much higher than half.
The math is fairly straightforward. If you increase taxes, you increase government revenue, right up to the point that the Laffer threshold is exceeded. The optimal thing, financially, is to have the highest rate that does not exceed that. This probably isn't too good politically, and of course there's always the question of what government might do with the extra money. But during a time when we're firing teachers and firemen because of severe revenue shortages, that's not really an issue.
09 April 2012
Do Teachers Unions Hurt Education?
It's become a standard position of the anti-union right that teachers unions are hurting our kids. Bad teachers are paid high wages and protected by tenure and other policies, etc. It turns out that quite a few states have gone quite far down the path of ending teachers unions. We can look at the results and find out how it's working. The top chart is from http://teachersunionexposed.com/state.cfm, a strongly anti-union group, and shows the percentage of teachers who are members of a union.
The second chart is from an article about math and science education: http://www.huffingtonpost.com/2011/07/11/state-education-rankings-_n_894528.html and is based on data from the Statistical Research Center of the American Institute of Physics.
There are a few correlations that spring to light immediately: All but one of the states that have low rates of union teachers have average or worse results in science and math education. Virginia (10.2% of teachers there are union) is the only exception. The five states with the lowest union membership: South Carolina (0% union), Texas (1.8%) Mississippi (2.2) North Carolina (2.3%) Arkansas (6.1%) are all near the bottom of the ranking.
At the other end of the spectrum, most of the union states are doing better than average. There are a few exceptions: Nevada and Hawaii (100% union) Alaska (98.3%) Iowa (98%) West Virginia (89.5%) Idaho (88.6%) and California (87.5%) have relatively high union rates and below average results. Apart from these exceptions, the states with a high percentage of teachers in the union are average or better.
What does this tell us? Well, this is a correlation, but not a strong one. None of the states that have gotten rid of the union have seen their results improve and several (notably Texas) have seen their results decline, while many of the states that have kept the union have seen their results decline too. What these data tell us is that while there are clear problems, they are not coming from the teachers unions, and by and large, the union is helping more than it's hurting. That doesn't mean that teachers unions are without fault, but it does tell us that there must be other places to look for the problems in our public education system. Getting rid of the teachers unions has not solved anything where it's been tried, and according to these data is more likely to hurt than help.
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