An Obama ad running now belies logic…
“But chances are you pay a higher tax rate than him.”
“Mitt Romney made twenty million dollars in two thousand ten but paid only fourteen percent in taxes…probably less than you.”
The implication here is that the viewer of this commercial is *likely*
to pay more than 14% in federal income taxes. On some forums, I'd have
to explain the difference between "chances are" vs "there's a chance" as
well as "probably" vs "perhaps" (not to mention the difference between
"imply" vs "infer"), but I think most people understand the
distinctions.
Knowing something about the distribution of taxes, I was incredulous. So
I hopped onto the IRS website to check the most recent data (2009).
According to the IRS, the average effective tax rate paid by the lower
99% of the nearly 140 million tax returns was only 8.43%.
But funny things happen to number when you average in cumulative blocks
like that. For example, if there are ten people in a room, where nine
have $1 in their pocket and one has $100, it is accurate but
uninformative to say that the average is $10.90. So I checked the CBO
site too.
The CBO reports the data differently than the IRS, breaking down tax
returns by income quintiles (and a few sub groups). According to the
CBO, the lower four quintiles have effective income tax rates of -6.6%,
-0.8%, 3.0% and 6.0%, respectively. That is, 80% of all tax returns have
effective tax rates below 6%. According to the CBO data, you'd need to
be in the top 10% by income before your effective tax rate hits 15%.
It seems to me that the odds of a viewer of that ad paying more than
Romney's 14% is about 1 in 10 or thereabouts--hardly rising to the level
of "chances are" or “probably” when comparing Romney’s 14% effective
rate to the effective rates of the a random person watching the ad.
If you think what Romney paid was too little, argue that point. But stop making false statements.
My family's effective income tax rate last year was 21.36%. That's about
5% higher than the Obama's tax rate, and we made less than half of what
the Obama's reported. It would be wrong for me to put out an ad saying
"Chances are you paid a higher rate than Pres. Obama." even if it
happened to be true for me.
Saturday, August 18, 2012
Food stamps vs Corporate Welfare
A common question lately has been juxtaposing the food stamp costs against the most recent Cato report on "corporate welfare" e.g., "$80 billion-a-year food stamp program or corporate welfare $100 billion a year?"
This is a false dichotomy, which frames the question as a an either/or issue, ignoring other alternatives. Of course, this is a common tactic of the logic-challenged.
I ask: "How about cutting or even eliminating both?"
I've long been on record here and elsewhere that I believe in the "beggars can't be choosers" school of thought. While I don't want anyone to starve, neither do I think that I should be required to effectively hand over cash so that the hungry can shop for whatever goodies they feel like--from roasted rabbit with butter, tarragon and sweet potatoes even up to fast-food! How about making food-stamp program a voucher for rice and beans and vitamins?
Then we can cut corporate welfare at the same time.
Funny, though, there's no line item here "Shovel money into Wall Street coffers." I was convinced by liberals that this was the primary use of corporate welfare.
This is a false dichotomy, which frames the question as a an either/or issue, ignoring other alternatives. Of course, this is a common tactic of the logic-challenged.
I ask: "How about cutting or even eliminating both?"
I've long been on record here and elsewhere that I believe in the "beggars can't be choosers" school of thought. While I don't want anyone to starve, neither do I think that I should be required to effectively hand over cash so that the hungry can shop for whatever goodies they feel like--from roasted rabbit with butter, tarragon and sweet potatoes even up to fast-food! How about making food-stamp program a voucher for rice and beans and vitamins?
Then we can cut corporate welfare at the same time.
- According to that Cato report the single biggest item in the corporate welfare list is FHA mortgage subsidies at $15.739B. Cut 'em.
- Second largest is National Institute of Health, Applied R&D at $13.845B. Let big pharma do their own research. Cut it.
- Third biggest is Farm Services Agency, which as far as I can read their documentation is farm loans, at $11.863B. Cut 'em.
- "Energy supply and conservation" is another big one, at $9.834B. I can only guess at what they spend their money on, but I wouldn't be surprised to find Solyndra in that pile. Cut 'em.
- Advanced Technology Vehicles Manufacturing Loan Program, $4.834B. Call those loans, then cut the program.
- Foreign Military Financing, $5.2B. Cut it.
- Small Business Administration (loans programs as far as I can tell), $3.157B. Cut em.
- NASA, Applied R&D, $2.799B. Cut it.
- Broadband Technologies Opportunity Program, $2.227B. Cut it.
- High-speed rail, $1.251B. Cut it.
Funny, though, there's no line item here "Shovel money into Wall Street coffers." I was convinced by liberals that this was the primary use of corporate welfare.
Monday, August 6, 2012
The FairTax is not regressive (part II)
A few years ago, when I first learned about the FairTax, I was curious about how ti compared to the current tax code, especially with respect to progressivity. So I did some spreadsheets...
In 2004, federal income taxes paid as percentage of
income:
Group, Income Limit, Effective Tax Rate
Top 1%
>$328,049 23.49%
Top 5%
>$137,056 20.67%
Top 10%
>$99,112 18.60%
Top 25%
>$60,041 15.53%
Top 50%
>$30,122 13.51%
Bottom 50% <$30,122
2.97%
The 2005 US Poverty Line for family of 4: $19,350, so the FairTax prebate would be $4450.50.
Using those numbers, and adding a slots for very low
income of $10,000 and a very high income of $1M, let's look at Fair-Tax, assuming all income is spent on
Fair-Taxable stuff:
Spending 100% of income: (income, net FairTax paid,
effective rate)
| Income | FairTax | Effective |
| $10,000.00 | -$2,150.50 | -21.5% |
| $19,350.00 | $0.00 | 0.0% |
| $30,122.00 | $2,477.56 | 8.2% |
| $60,441.00 | $9,450.93 | 15.6% |
| $99,112.00 | $18,345.26 | 18.5% |
| $137,056.00 | $27,072.38 | 19.8% |
| $328,049.00 | $71,000.77 | 21.6% |
| $1,000,000.00 | $225,549.50 | 22.6% |
Clearly, the really poor had negative tax rate, because the prebate is based on poverty level income, so someone earning income below the poverty line will receive prebates that are larger than the taxes they actually paid. People exactly at
poverty-line had 0% tax rate, as expected. The rich people who spend all their income pay
a pretty high rate 22.6%, approaching the 23% limit as expected.
Jacking up savings, since saving (not spending money) is
how to "manipulate" the FairTax. Note, savings rate is around 1% on average in US; experts
recommend at least 10%.
Spending 99% of income, saving 1%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,173.50 | -21.7% |
| $19,350.00 | -$44.51 | -0.2% |
| $30,122.00 | $2,408.28 | 8.0% |
| $60,441.00 | $9,311.92 | 15.4% |
| $99,112.00 | $18,117.30 | 18.3% |
| $137,056.00 | $26,757.15 | 19.5% |
| $328,049.00 | $70,246.26 | 21.4% |
| $1,000,000.00 | $223,249.50 | 22.3% |
Spending 95% of income, saving 5%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,265.50 | -22.7% |
| $19,350.00 | -$222.53 | -1.2% |
| $30,122.00 | $2,131.16 | 7.1% |
| $60,441.00 | $8,755.86 | 14.5% |
| $99,112.00 | $17,205.47 | 17.4% |
| $137,056.00 | $25,496.24 | 18.6% |
| $328,049.00 | $67,228.21 | 20.5% |
| $1,000,000.00 | $214,049.50 | 21.4% |
Spending 90% of income, saving 10%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,380.50 | -23.8% |
| $19,350.00 | -$445.05 | -2.3% |
| $30,122.00 | $1,784.75 | 5.9% |
| $60,441.00 | $8,060.79 | 13.3% |
| $99,112.00 | $16,065.68 | 16.2% |
| $137,056.00 | $23,920.09 | 17.5% |
| $328,049.00 | $63,455.64 | 19.3% |
| $1,000,000.00 | $202,549.50 | 20.3% |
Spending 75% of income, saving 25%:
| Income | FairTax | Effective |
| $10,000.00 | -$2,725.50 | -27.3% |
| $19,350.00 | -$1,112.63 | -5.8% |
| $30,122.00 | $745.55 | 2.5% |
| $60,441.00 | $5,975.57 | 9.9% |
| $99,112.00 | $12,646.32 | 12.8% |
| $137,056.00 | $19,191.66 | 14.0% |
| $328,049.00 | $52,137.95 | 15.9% |
| $1,000,000.00 | $168,049.50 | 16.8% |
If people actually saved at this rate, Social Security
would not be necessary...
At 10% savings rate, the poverty-line family would put
away $2380 annually (10% of $19350 is $1935), plus get $445 in excess prebates
due to their frugality, so it's almost as if they saved $2000 and the
government (other taxpayers) "matched" them $500. If they invested
that $2380 annually at 5% each year for 40 years, they'd accrue $302,655. They
could then withdraw more than $15000 each year almost indefinitely, assuming the
remaining principle continues to earn 5%.
The FairTax is not regressive (Part I)
An oft-heard claim about the FairTax is that it is regressive. I do not believe this is the case, human nature being what it is. For most people it is true that the more they make, the more they spend. The structure of the FairTax is such that if this is true, then the FairTax is a progressive tax.
Fair-tax.org: A regressive tax is one where the rate of tax decreases as the ability to pay increases.
Wikiepedia: A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.
These definitions seem to agree.
The Fair-Tax is not regressive. Overall, the FT is progressive, in that it is designed so that as income increases so does the effective tax rate, asymptotically approaching 23% as income increase, by assuming that annual spending is proportional to annual income (setting aside Bill Gates $1 income against billions of dollars of liquid assets in his net worth).
Yes, that is an assumption, but it is an assumption that is true for the vast majority of people, including high-income people. If that assumption is violated by an individual--a high-income miser--then in that case that individual can create an instance of a "regressive" case where that individual has managed to pay less, as a percentage of income, than normal lower-income taxpayers.
But that no more makes the FT regressive than does someone who legally structures their income and assets such that they avoid paying income taxes makes the current federal income tax regressive. That is, the income tax structure we have assumes that higher incomes (wages, rents, royalties and capital gains) will result in higher income taxes, but it is possible to have high income and pay little in the way of taxes, for example by investing heavily in AMT-bypassing municipal bonds.
One recent IRS report counted 2,680 filers with incomes of $200,000 or more claiming they owed no taxes at all, up from just 85 in 1977. Those people do not make the current progressive--by presumption and design--Federal income tax regressive. Nor would high-percentage savers (i.e., people exercising avoidance of the Fair-Tax!) make the progressive--by presumption and design--Fair-Tax regressive.
However, we are unlikely to see people making $100,000 or $1M or more *not* spending money in proportion to their income (wealth). Consider this article ("DISENTANGLING THE WEALTH EFFECT:
A COHORT ANALYSIS OF HOUSEHOLD SAVING IN THE 1990s"), which is quite dense, but the charts and graphs at the end indicate that not only is America's savings rate (the difference between what is earned vs what is spent) very low across the board, it is *lowest* at higher income levels.
It therefore seems that the underlying assumption for the progressiveness of the FairTax is well-founded.
Also, note that FT would do away with several highly regressive taxes: the current Social Security/Medicare payroll deduction system is a very regressive tax, placing a heavy burden on low/middle-income taxpayers and a similar burden on the self-employed.
Exploring something else about regressive taxes: The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is one more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax is regressive.
Since the Fair-Tax is designed to tax the act of spending money on goods and services above the minimum requirements for adequate survival--the poverty line--which is an action that is, by definition, only carried out by the more well-off. That is, the poor, by definition do not have money to spend on "luxuries"; but under the FairTax, those same poor people have a net tax rate of 0% (or less!).
It certainly also seems that people who have more money, are also likelier to have a "propensity...to engage in the taxed activity relative to their income".
Fair-tax.org: A regressive tax is one where the rate of tax decreases as the ability to pay increases.
Wikiepedia: A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases.
These definitions seem to agree.
The Fair-Tax is not regressive. Overall, the FT is progressive, in that it is designed so that as income increases so does the effective tax rate, asymptotically approaching 23% as income increase, by assuming that annual spending is proportional to annual income (setting aside Bill Gates $1 income against billions of dollars of liquid assets in his net worth).
Yes, that is an assumption, but it is an assumption that is true for the vast majority of people, including high-income people. If that assumption is violated by an individual--a high-income miser--then in that case that individual can create an instance of a "regressive" case where that individual has managed to pay less, as a percentage of income, than normal lower-income taxpayers.
But that no more makes the FT regressive than does someone who legally structures their income and assets such that they avoid paying income taxes makes the current federal income tax regressive. That is, the income tax structure we have assumes that higher incomes (wages, rents, royalties and capital gains) will result in higher income taxes, but it is possible to have high income and pay little in the way of taxes, for example by investing heavily in AMT-bypassing municipal bonds.
One recent IRS report counted 2,680 filers with incomes of $200,000 or more claiming they owed no taxes at all, up from just 85 in 1977. Those people do not make the current progressive--by presumption and design--Federal income tax regressive. Nor would high-percentage savers (i.e., people exercising avoidance of the Fair-Tax!) make the progressive--by presumption and design--Fair-Tax regressive.
However, we are unlikely to see people making $100,000 or $1M or more *not* spending money in proportion to their income (wealth). Consider this article ("DISENTANGLING THE WEALTH EFFECT:
A COHORT ANALYSIS OF HOUSEHOLD SAVING IN THE 1990s"), which is quite dense, but the charts and graphs at the end indicate that not only is America's savings rate (the difference between what is earned vs what is spent) very low across the board, it is *lowest* at higher income levels.
In the U.S., household net worth rose substantially in the latter half of the 1990s and the personal saving rate decreased rapidly. Researchers have not reached a consensus about just how these two events are linked, or how to interpret the negative correlation between wealth and the saving rate over a longer time span. The movements in net worth and the saving rate are consistent with a direct view of the wealth effect, in which an increase in wealth directly causes households to increase their consumption and decrease their saving.
Previous macroeconomic research indicates that the aggregate data on consumption, income, and wealth are consistent with a significant and direct effect of wealth on consumption, whereby consumer spending eventually rises on the order of 3 to 5 cents for every extra dollar of wealth that is recognized by households and sustained over a period of time.
We show that the groups of families whose portfolios were boosted the most by the exceptional stock market performance over the latter half of the 1990s are the same groups whose net saving flows fell the sharpest from 1995 through 2000.
In addition, our study verifies that essentially all of the increased spending apparent in the aggregate data can be attributed to an increase in the propensity to consume out of income undertaken by the richest households in the U.S.So, it seems that for higher-income, wealthier individuals, once they reach a certain level and have their nest egg--that's when they go out and buy yachts and Rolls Royces.
It therefore seems that the underlying assumption for the progressiveness of the FairTax is well-founded.
Also, note that FT would do away with several highly regressive taxes: the current Social Security/Medicare payroll deduction system is a very regressive tax, placing a heavy burden on low/middle-income taxpayers and a similar burden on the self-employed.
Exploring something else about regressive taxes: The regressivity of a particular tax often depends on the propensity of the tax payers to engage in the taxed activity relative to their income. In other words, if the activity being taxed is one more likely to be carried out by the poor and less likely to be carried out by the rich, then the tax is regressive.
Since the Fair-Tax is designed to tax the act of spending money on goods and services above the minimum requirements for adequate survival--the poverty line--which is an action that is, by definition, only carried out by the more well-off. That is, the poor, by definition do not have money to spend on "luxuries"; but under the FairTax, those same poor people have a net tax rate of 0% (or less!).
It certainly also seems that people who have more money, are also likelier to have a "propensity...to engage in the taxed activity relative to their income".
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