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Reagan and the “Stinking Rich”

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In my last post I explained that the Bush tax cuts did not disproportionately favor the rich, as it commonly believed. The rich are paying a greater share of the total tax burden than they were before the Bush tax cuts, even when adjusting for the increase in their total share of wealth over the same period of time.

But it’s worth looking further back to see how the tax burden has shifted over time. So, I’ll do the same analysis going back to 1979. I’d go back further, but the numbers from the Congressional Budget Office only go that far. In any case, 1979 was just before the Reagan tax cuts which drastically reformed the tax code and greatly reduced the marginal tax rate on the highest income bracket. Therefore, we would expect for the Reagan tax cuts to have favored the rich by shifting more of the tax burden away from the rich to the middle and lower classes. But, before we investigate whether that’s true, it’s worth noting that there is a difference between the marginal tax rate and the effective tax rate. The effective tax rate is the portion of income that is actually paid in taxes. The amount that someone pays in taxes depends on the tax rate and brackets, but that is only part of the picture. If the tax brackets and rates were all the mattered in the tax code, it wouldn’t be several thousand pages long. I think we can agree that what really matters is what taxes people actually pay, not what taxes they theoretically would pay according to their tax bracket’s marginal rate. So, even though Reagan reduced the marginal tax rate on the rich, that doesn’t necessarily mean that the rich are paying less taxes.

I won’t go through the details of my process like I did last time. Here are some graphs representing how the tax burden and income are distributed, and how that has changed since 1979. Click on the graph to view a larger version.

Not coincidentally, the two graphs look very similar. The interesting thing to note is that the rich are paying a much greater share of the tax burden, but they also are making a greater share of the income. We have to adjust the tax share by the income share to determine if the Reagan tax cuts increased or reduced the tax burden on the rich. Here is the resulting graph:

This is a bit more interesting than the graph when looking at the Bush tax cuts that I discussed in the last post. The tax burden picture actually hasn’t changed very much, but there are some small changes. Firstly, the poor and most of the middle class (up to the 60th percentile) are paying a smaller share of taxes than before Reagan. Secondly, the upper-middle class and most of the rich (up to the 99.5th percentile) are paying a greater share of taxes. Lastly, the super-rich, those in the top half percentile, are paying a smaller share of taxes than before. These are the millionaires, or the “stinking rich” as Timothy Noah refers to them.

So, what can we conclude from this? First, that the Reagan and Bush tax cuts made the tax structure more progressive for the vast majority of the population, contrary to the prevailing wisdom that the opposite is the case. The exception, though, is that the super-rich benefited from Reagan’s cuts. With this in mind, it is interesting to note that Democrats may be backing off of the fight to let the Bush tax cuts expire on those making over $250,000, and are setting their sites on the millionares instead:

Part of the hesitancy with hiking taxes on the rich, I think, stems from the birth of this “lower upper class.” Americans do really want to soak the rich. But a household headed by a well-paid nurse and a police chief might make $250,000 a year, the income point at which President Obama wants to let taxes rise by letting the Bush tax cuts expire. My guess is that most Americans want to raise taxes on these guys, but not on that nurse and police chief, whose wealth seems reasonable and attainable.

Politically speaking, that sounds about right to me. And it also may be the right way to go in terms of “correcting” the trend that Reagan put in motion.

Again, the caveat to all of this is that “correcting” the trend is not the only way to look at the issue. We haven’t made the case, for example, that the trend needs “correcting” in the first place. There are many arguments for and against extending the tax cuts to the rich. I’m only addressing one angle of the argument: the one that argues that we should tax the rich more because they have gotten too good a deal over the past few decades. My conclusion is that this argument is overblown since the share of taxes that most families making over $250,000 has actually gone up, not down. However, the argument does make some sense when applied to the super-rich–those bringing in an income in the seven digits.

(For data tables and calculations used in this post, see here: incomeinequalityFrom1979)

The Bush Tax Cuts for the Middle Class

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Since my last post on chart-truth was such a hit, I thought I’d come back for more and do another spin-off of Timothy Noah’s series on income inequality. Again, from the fifth installment, he dismisses the argument that tax policy is a contributing factor in the great divergence:

Reagan lowered top marginal tax rates a lot, but he lowered top effective tax rates much less—and certainly not enough to make income-tax policy a major cause of the Great Divergence….

The larger point is that you can’t really demonstrate that U.S. tax policy had a large impact on the three-decade income inequality trend one way or the other.

With the Bush tax cuts set to expire at the end of the year and politicians scrambling to figure out how to extend some or all of them, tax policy is bound to be a central issue in the coming months. I thought it was time to examine the question a little more.

Republicans want to extend the tax cuts for everyone, while Democrats want to extend them for only households making less than $250,000 and let the rest of the cuts expire as scheduled. Democrats say that the rich don’t need a tax cut; they aren’t paying their fair share. Republicans counter that the rich are already paying more than their fair share. We can’t investigate this question objectively, since the concept of “fair share” is a matter for philosophers, not economists or statisticians.

However, we can investigate the validity of certain specific claims. The one I wish to focus on is the claim that the Bush tax cuts disproportionately favored the rich, and so we should correct this injustice by not extending the tax cuts on the rich. The epitome of this claim is when the tax cuts are referred to as the “Bush tax cuts for the rich”, which implies not only that the cuts favored the rich, but that the rich were the only ones who benefited. Of course, this is a purposeful exaggeration intended to promote the view that the tax cuts disproportionately benefited the rich.

But, hyperbole aside, the question remains: did the Bush tax cuts disproportionately favor the rich? In other words, did the Bush tax cuts make the tax code more or less progressive? (For those who aren’t up with the lingo, a “progressive” tax simply means that the rich pay a greater portion of their income in taxes than others, and a tax is more progressive if the difference between the portion that the rich pay and the portion that everyone else pays is greater.) Republicans think that the tax code has become more progressive and therefore doesn’t need correcting to make it even more progressive. To support their position they point to numbers that show that the rich are paying an increasingly greater share of the total tax burden. This is true, as this graph based on numbers from the Congressional Budget Office shows:

(Here’s a little help on reading this graph and the subsequent graphs in this post: on the left I’ve charted the share of the tax burden for each income category over time. This chart gives a good overview of how the tax-burden pie is cut. But, it can be difficult to see how each individual slice is changing over time. So, I’ve also included the graph on the right which shows exactly how much each income category’s share of the tax burden has increased or decreased over the same period of time.)

On the surface, it seems like a straight-forward rebuttal: since the Bush tax cuts took effect, the rich have been paying an increasingly greater share of the total tax burden. The share of taxes paid by those in the top 5% has increased, while the share of taxes paid by the bottom 90% has decreased. Therefore, Republicans would argue, the Bush tax cuts must not have favored the rich. In fact, it appears they favored the poor and middle class at the expense of the rich. In other words, they made the tax code more progressive, not less progressive as Democrats argue.

But there is a problem with this analysis. Tax policy is not the only thing that can cause one income group to start paying a greater share of taxes. If that income group starts to gather a greater share of income, logically they will pay a greater share of taxes also, even if tax policy stays the same. As we know from reading Noah’s series, the income of the rich is increasing faster than the income of the poor and middle class, so it makes sense that they would also be paying a greater share of the taxes than before. Therefore, we must investigate whether the increase in taxes that the rich are paying is a result of the change in tax policy known as “the Bush tax cuts”, or the change in income distribution.

First, let’s see how the income distribution has changed since 2000:

The graph shows some increase in income inequality over this period, although it’s not as large as it has been in the past. Recessions tend to hit the rich hard in terms of the percentage of income lost, since the rich tend to get more of their income from fluctuating investments. The recession of 2001 was no exception and mostly explains why the rich didn’t get much richer through this period. The average income for the top 0.01% was cut almost in half between 2000 and 2002, but then rebounded by 2005. Still, there is some widening of the gap with the top 20% gaining income and the lower 80% mostly losing income.

So, we can conclude that this widening of the gap in the income distribution contributed to the widening of the tax burden gap. But we don’t yet know exactly how much. To get a picture of how tax policy affected the distribution of taxes, we have to adjust for the change in the distribution of income. In other words, we want to answer this question: If the income distribution had not changed, would the rich be paying more or less of the total share of taxes as a result of the Bush tax cuts? I won’t get into the details of that calculation (see attached document at the end of this post), but here is the result:

The graph shows that the distribution of taxes, when adjusting for the distribution of income, has changed in the direction of more progressivity, as Republicans argue. The top 5% are paying a slightly greater share of taxes and the bottom 90% are paying a slightly smaller share of taxes, even when adjusting for changes to the income distribution.

So, the Republicans ultimately are right about this, even if their argument is incomplete. The argument that the Bush tax cuts disproportionately favored the rich doesn’t hold up. This will be important to remember as the tax debate rolls on, but remember that this is just one part of the debate. You can still make arguments that rich should be paying more or less, independent of how the Bush tax cuts affected the distribution.

In fact, it may be worth doing this same analysis but going all the way back to 1979, before the Reagan tax cuts, to see how the tax distribution has changed since then. Has the tax code become more or less progressive since the days of Jimmy Carter? I’ll answer that another day, but here’s a hint: it’s a trick question.

(For data tables and calculations used in this post, see here: incomeinequalityFrom2000.pdf)

Written by Mike

September 16, 2010 at 9:49 pm

How to Fix the Health Care Fix

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Now that health care reform is passed and signed into law, Republicans say they will try to repeal the law when they are back in power. Repealing isn’t going to happen, since it would take a super-majority that the Republicans won’t have for a long time. By that time the law will have become settled along side Medicare and Social Security. But, it might be feasible to adjust the reform, since even some moderate Democrats might come on board for that.

So, how would I fix the health care fix?

The way I see it, the main problem with the reform is its cost. If we could provide good insurance to all Americans without breaking the bank, I’d be all for it. The CBO scored the bill as a deficit reducer, but it also raised a number of questions about how the funds are raised, and whether the proposed savings could be realized. I won’t go into the details of that discussion since the argument has been laid out elsewhere.

We should keep the measures that seek to eliminate waste in Medicare. However, considering that Medicare is underfunded, the money saved from those measures should be used to extend Medicare’s solvency, not fund a new entitlement program. That blows a huge hole in the funding mechanism used to pay for this reform, so we’d have to scale back the bill’s spending. The bulk of the spending in the bill is for subsidies for people to buy insurance. Instead of subsidizing comprehensive health care insurance, we could pay only for catastrophic plans. For the poor who don’t qualify for Medicaid, the government would pay 100% of a catastrophic plan, which would include coverage for people with chronic illnesses. The subsidy would be on a sliding scale, with those making 400% of the poverty line not getting any subsidy. Of course, if we are only subsidizing catastrophic plans, we cannot mandate that everyone buy a comprehensive plan, so the mandate to buy insurance would have to be scaled back as well. Individuals would only be required to purchase a catastrophic plan.

Of course there are some objections that can be raised to my plan, but before I get to those, let’s look at some of the supporting points:

First, this plan maintains several of the positive aspects of the current reform, but with a lower price tag. Having everyone covered with a catastrophic plan would ensure that those who get diagnosed with serious illnesses do not get forced into bankruptcy due to their health status. We would not be paying for people to show up in the emergency room to get uncompensated care. People with chronic illnesses would not be denied supplemental insurance since care related to their condition would already be covered by their catastrophic plan.

Second, giving people the choice to buy supplemental insurance, or pay for preventive care themselves, will make them more cost conscious, thus reducing the cost of health care and reducing the demand for unproven treatment and technology, which the CBO says is a major driver of health care costs. To enhance this effect, I’d also support ending the tax exempt status of employer-based health benefits, but that can be a separate discussion.

Lastly, some people choose not to go to doctors except for in emergencies. Your or I might not agree with that lifestyle, but why should those people be forced to buy something that they will choose never to use?

Now, on to the obvious objection: subsidizing and mandating only catastrophic plans will leave some people without coverage for routine, preventive care. However, more prevention (at least the kind that you pay for) doesn’t actually lead to lower health care costs. Sure, treating someone with a serious illness is expensive, but so is testing millions of people who won’t ever get the illness. Of course, cost aside, most of us want to do what we can to avoid serious illness, but shouldn’t we be free to make that cost-benefit analysis for ourselves? However, it is true that there will be some lower-income Americans who want supplemental insurance to cover routine care, but can’t afford it. I’d love to be able to give them that coverage, but we simply can’t afford it. We support the poor in many ways through many welfare programs. In fact, we help the poor so much that the effective marginal tax rate can actually exceed 100%. We can’t afford yet another welfare program.

I doubt I’ve convinced everyone, but I hope I’ve at least helped the discussion get started. Many on the left will object to stripping out the generous subsidies, and many on the right will object to any proposition that doesn’t have the word “repeal” in it. So, it would be a tough sell, but hopefully most of us can agree that any “fix” to this health care fix has to be focussed on making it more fiscally sustainable.

Written by Mike

March 28, 2010 at 9:56 pm

How to Mislead with Graphs: Health Care Edition

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People don’t like looking at big tables of numbers, which is why people invented graphs. Looking at a graph can often make the meaning behind a large set of numbers become much clearer. However, we mustn’t confuse clarity with accuracy. A graph can make a set of numbers much more easily understood, but if those numbers don’t tell us the whole story, then the graph doesn’t either.

Recently, I came across this stunning graph. Take a few moments to absorb its beauty:

According to this graph, the measure of the goodness of the health care system correlates with the slope of the line. If the line goes up, that’s good, and the more it goes up, the better it is. If the line goes down, then… you get the picture.

Before I get to the criticism, let me say that I agree with the general point: health care costs too much in the US, and I believe we do need to do something about it. But scale matters. It matters whether we think the current system is so bad that we need to completely gut it and start over, or whether we think it just needs a few tweaks (for the record, I think it’s somewhere in between). Looking at this graph might lead you to believe that our system is entirely without merit and should be discarded immediately, so it’s worth considering whether that graph really does represent an accurate picture of the situation.

First, since we are to measure a health care system based on the slope of the line, that implies that there is some way to balance the value of lifespan against the value of dollars. The graph implies that every year of lifespan is worth about $200 a year for that person in health care spending. Is that about right? Is the relationship even linear? That’s a tough thing to measure, but that’s the implication of the graph. As a thought experiment, imagine that the average lifespan in the US was 85, putting us higher than any other nation. What would the slope look like? It would still be the most negative slope on the graph. But would our extra spending on health care be worth it then? Maybe. What if our average lifespan were 90? Would it be worth it? According to the graph, we would still be the most inefficient system, since our slope would be the most negative. To further illustrate the point, look at Mexico’s line. Their efficiency is pretty impressive. Should we be switching to their model? Thus we see the difficulty in trying to equate dollars with life-years, and we see that we can’t really judge the scale of our problem based on the slope of these lines, because the authors of the graph have arbitrarily decided how much a life-year is worth.

Second, looking only at the left side of the graph, we have to ask: why does health care cost so much in the US? Is it all just waste and inefficiency? Should we really be shooting to spend the average amount of $3,000 per person? It turns out that it may not be fair to compare countries in this way, because richer nations tend to spend more on health care. Of course that makes sense: if you have more money, you’ll spend more on everything. But the effect is even greater than that because if you have more money, you are likely to increase your health care spending by an even greater degree than other spending. The additional spending is less likely to have a major impact on life expectancy because of the principle of diminishing returns, but that doesn’t mean it isn’t worth it to the person doing the spending. In the US, we like our technology and advanced tests, even if that technology and those advanced tests only buy us a marginal gain over less expensive alternatives. Whether that is good or bad is a debate we ought to have (or better yet, let’s just let people decide for themselves), but the graph above ignores the question entirely. In addition, wealthier countries have to pay their medical professionals more, because there is more competition for high-skill labor. And the same principles applies to prices of medical supplies and pharmaceuticals, as I’ve described before. The bottom line is that you can’t just take the total spending per capita as a comparison between nations without considering all of these complicated and inconvenient factors that don’t fit so nicely into a pretty graph.

According to the report from OECD linked above, the US is overspending by $2,500 per person, when adjusting for our wealth. So, we’re still overspending, but by much less than the $4,000 depicted in the graph. To be a fairer comparison, you’d have to adjust the left-hand side of the US line down a good bit, thus decreasing the slope of the line quite a bit. Remember, scale matters.

Lastly, let’s look at the right half of the graph. I think it’s pretty obvious that health care spending is not the major factor in average lifespan. Sure, it is *a* factor, but not a major one. This graph itself is evidence of that. With lines crossing every-which-way, there appears to be almost no correlation (although of course there is some). It’s not a stretch to argue that a good portion of our lower lifespans is due to our unhealthy lifestyles and risky behavior. How much would our lifespans go up if Americans made the same lifestyle choices as Europeans or (better yet) Asians? Who knows, but it would certainly go up, thus decreasing the downward slope of the line.

So, am I arguing that we have nothing to worry about? Of course not. We need to reform our system to be more efficient and less expensive so that more Americans can afford it. But understanding the scale of the problem matters. It matters when figuring out how to fix it and what we are willing to sacrifice to do it.

Written by Mike

March 12, 2010 at 11:57 pm

Posted in politics, Uncategorized

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Old News: LDS Church Doesn’t Hate Gays

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Salt Lake City Temple

The LDS (Mormon) Church recently shocked almost everyone (except for Mormons) when they announced that they would support a Salt Lake City ordinance protecting housing and employment rights for homosexuals. After last year’s battle over Proposition 8 in California, some in the media are calling this a “huge change” and indicative of the church wanting to get Mitt Romney elected.

Let me be clear: As a member of the Church of Jesus Christ of Latter-day Saints, I support my church’s position on the matter. However, I wouldn’t necessarily be disappointed if this did really represent a change. But the truth is that this is not a change from any previous policy, and the fact that so many think it is indicates the success of the smear campaign that has been waged on the church since its involvement in Proposition 8.

At the time that the church was involved in Proposition 8, it issued a statement which included this:

The Church’s opposition to same-sex marriage neither constitutes nor condones any kind of hostility towards homosexual men and women. Protecting marriage between a man and a woman does not affect Church members’ Christian obligations of love, kindness and humanity toward all people.

In 1999, the late President of the church, Gordon B. Hinckley, said this to all the members of the church during its bi-yearly conference:

We believe that defending this sacred institution [of marriage] by working to preserve traditional marriage lies clearly within our religious and constitutional prerogatives. Indeed, we are compelled by our doctrine to speak out. Nevertheless, and I emphasize this, I wish to say that our opposition to attempts to legalize same-sex marriage should never be interpreted as justification for hatred, intolerance, or abuse of those who profess homosexual tendencies, either individually or as a group. As I said from this pulpit one year ago, our hearts reach out to those who refer to themselves as gays and lesbians.

Any opposition to gay rights expressed by the church has always been targeted specifically at gay marriage, not other protections. This has not changed. What has changed is that apparently some, swayed in some measure by the attempts to paint Mormons as the poster-children for bigotry, assumed these statements were just lip service. But they now are finding out that the church actually meant what it said. This comes as no surprise to most Mormons who were paying attention to the counsel of their church leaders.

I have to give credit to Andrew Sullivan. Although he has not been kind to the LDS Church in the past, he respects its (perceived changed) position:

They have made a distinction – and it is an admirable, intellectually honest distinction – between respecting the equal rights of other citizens in core civil respects, while insisting – with total justification – on the integrity of one’s own religious doctrines, and on a religious institution’s right to discriminate in any way with respect to its own rites and traditions….

And what I have long observed among Mormons – unlike some other denominations – is also an American decency that tends to win out in the end. I’ve never met a nasty Mormon. They put many Christians to shame in their practice of their faith and the civility and sincerity with which they live their lives. And this decision in Salt Lake City – not an easy or inevitable one – to make a clear distinction between civil marriage and other civil protections is one worthy of respect.

Gee thanks, Andrew.

The Next Best Thing for Health Care Reform

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As a supporter of the free market (although not a purist), I tend to prefer a solution to our country’s health care problems that enhances the advantages of the market, rather than places more government bureaucracy on top of it. But a bill that decreases government involvement in health care, rather than increases it, is about as likely to get passed as a white male was likely to have been nominated for Justice Souter’s seat on the bench. So that begs the question: if the conservative approach to health care reform is not viable politically, what is the next best thing we can hope for?

What about the much maligned status quo? Even critics of the reform proposals agree that our current system has problems, but would doing nothing be better than the current proposals? Even if some believe that to be the case, few politicians would admit it for fear of being labeled a defender of a broken system. But is the best option on the right to try to block reform and stall, in hopes of gaining political power in future elections, thus making a more conservative approach more viable? That might be tempting, but given the track record of Republicans on getting any major reform done in our health care system, I wouldn’t bet on that approach working out. A few of us are in the unfortunate circumstance of needing the liberals’ zeal to get something significant done and the conservative ideas to get the right thing done. It’s tough to have both at the same time.

What about a compromise approach? The Senate finance committee has recently come out with a bill that it believes to be more moderate than its counterparts. No public option. Less harsh mandates. Almost universal disapproval. Does compromise mean pulling in all of the best ideas from all sides, or the worst ones? In this case, we have none of the cost controls and all of the government bureaucracy. In an attempt to find common ground, it appears the finance committee has found no-man’s land. Worse still, if something along those lines passes, it is likely to give the impression that something has been done, when in reality nothing has been done except complicating the system even more. This impression is likely to cause real reform to be significantly delayed as we have an endless debate about whether the plan is really working or not (see the current debate about whether the stimulus is working).

How about this for the Next Best Thing for conservatives? Let the liberals’ plan pass. Yes, that’s what I said. Put in that strong public option and individual mandates. Punish those greedy private insurance companies and those evil employers that don’t provide insurance to their employees. Why might that be The Next Best Thing? Because when someone asks, “Why can’t I find a plan a low-premium catastrophic plan?” We can tell him that the government didn’t think that would be good for him. And when someone says, “I got laid off because my employer couldn’t afford the health insurance he’s mandated to pay for.” We can say, “Thanks for taking one for team.” Or when someone on Medicaid Advantage reports that their plan has been discontinued, and they are now forced to find another, we’ll just tell them they were part of the waste in the system that had to be jettisoned. Maybe then there would be more pressure to consider more conservative-minded approaches. (Or, maybe it would actually work. Either way, the American people win in the end.)

There was nothing like prohibition to solidify the idea that alcohol ought to be legal. Nothing like Vietnam to make the public wary of the casualties of war. Nothing like repealing Glass-Steagall to remind us of why it was there in the first place.

Does this idea sound good to me? No. I don’t want to see people in our country suffer. And it would likely take decades to undo the programs that would be put in place. I didn’t say it was The Best Thing. I suggested that maybe it is the Next Best Thing. If conservatives believe that liberal health care reform would be a harmful to our country, should they let the liberals prove it? Just a thought.

Written by Mike

October 23, 2009 at 10:03 pm

Worst Possible Sunday Interview

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What was John Boehner thinking?

Here’s the “wha-what?” quote:

George, the idea that carbon dioxide is a carcinogen, that it is harmful to our environment, is almost comical. Every time we exhale, we exhale carbon dioxide. Every cow in the world, you know, when they do what they do, you’ve got more carbon dioxide.

George was kind to interrupt him before he dug the hole any deeper, but then he goes on to answer every “what is your plan?” question with “well what we can’t do is…”. SNL could pretty much repeat this word for word and get plenty of laughs.

I do believe that there is still scientific debate to be had in regards to how much climate change is caused by man’s activities, however the argument that carbon dioxide can’t be bad because cows emit it is insulting to our intelligence.

Written by Mike

April 24, 2009 at 9:31 pm