The Sovereign Mind

Free thought on politics and real life

Posts Tagged ‘Democratic Party

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)

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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 Mislead with Charts: Who’s Responsible for the Great Divergence?

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I’ve been following with interest Timothy Noah’s series on income inequality in the United States. In the latest installment, he cites Larry Bartels’ book in which Bartels supposedly proves that Republicans are responsible for the “great divergence”:

Bartels came to this conclusion by looking at average annual pre-tax income growth (corrected for inflation) for the years 1948 to 2005, a period encompassing much of the egalitarian Great Compression and all of the inegalitarian Great Divergence (up until the time he did his research). Bartels broke down the data according to income percentile and whether the president was a Democrat or a Republican. Figuring the effects of White House policies were best measured on a one-year lag, Bartels eliminated each president’s first year in office and substituted the year following departure. Here is what he found:

That looks pretty impressive. According to the chart, not only have Democratic presidents created more equitable income growth, but they’ve created larger growth for every income category! This seems to be a slam dunk case against Republicans. But there are some problems. Firstly, is it really right to consider only a one-year lag before a president is fully responsible for the economy? President Obama might object to that! Secondly, of course the president is not the only one who affects economic growth. We don’t live in a dictatorship. What about the congress? Again, you can ask President Obama how easy it is for a president to get exactly the policy he wants, even when his own party controls congress, much less when it doesn’t. I decided to take a look at these two questions.

Firstly, I wanted to reproduce Bartels’ data. Unfortunately the Census Bureau’s historical tables that I found only go back to 1967, so I had to start from there. In any case, that’s about when the “great divergence” started, so that should be the most interesting data set anyway. I get similar results as Bartels:

But what happens when I tweak the parameters to have a two-year lag instead of a one-year lag?

Now we see a slightly different picture. Republican presidents still help the rich more, at the expense of the middle class, but the over-all economic growth picture is more fuzzy. Is a two-year lag better than a one-year lag? I don’t know. The point is that Bartels’ decision to use a one-year lag is arbitrary, and I’ve demonstrated that we get a very different result by just tweaking one arbitrary parameter. That’s not a sign of solid scientific evidence. What if I were to tell you that a climate model could be tweaked to predict global cooling instead of global warming just by tweaking one little parameter that was chosen arbitrarily to begin with?

Ok, but still even my tweaked graph doesn’t look good for Republicans: it still supports the argument that Republican presidents help the rich at the expense of the middle class. But what about congress? What if we looked at which party held the majority and ran the same analysis? I did that, dropping the years were there was a split legislature with one party controlling the senate and the other controlling the house. I’m actually left with only a handful of years with Republicans in control of both chambers, but that illustrates yet another problem with Bartels’ methodology: we’re talking about precious few data points to begin with, not to mention we’re not controlling for any other variables. In any case, here’s the result with a one-year lag:

Hmm… this graph looks very different from the first one we saw. Never fear, Democrats, using a two-year lag makes things look a little better for you:

So, which party’s policies are contributing more to income inequality? Which party is better at producing economic growth? My point is not to answer those questions. My point is to show that Bartels’ guess is no better than yours or mine. His methodology is interesting, but unfortunately fatally over-simplified.

Written by Mike

September 11, 2010 at 10:30 pm

Is Our Government Broken, or Are We?

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It seems the question of the moment is: is our government broken? Some have concluded that our elected officials in Washington have become so polarized and partisan that they can’t get anything done for the American people. Those on the left lament the fact that they can’t get their initiatives passed, despite having a majority of both houses of Congress and the President on their side. Those on the right complain that their government doesn’t seem to be interested in listening to what they have to say.

So, is it true? Is our government broken?

It is true that our representatives have been growing more polarized for some time now. This impressive chart, based on the data from these people, shows how the parties have become more polarized since the middle of the last century, and especially since 1980. While I don’t have the academic credentials to verify the correctness of their data or methodology, I trust that they are generally correct because their data is cited in a number of other academic articles I’ve run across, their conclusion coincides with the the popular consensus, and the only excuse for creating such a hideous website is if you are such a genius that spending any effort on website design is beneath you. Therefore, they must be right.

So, we can conclude that our government is becoming more polarized, and therefore more partisan. (It’s worth noting that polarization and partisanship are not necessarily the same thing, but surely they are highly correlated–if both parties had identical ideologies, of course they would not spend much effort opposing each other.)

But why has Washington become more polarized? Is it because, as many have assumed, it has lost touch with a mainly-centrist America due to district gerrymandering and voter apathy? Or is it that we, the American people, have become more polarized, and Washington is merely reflecting that shift? If it is that Washington has lost touch with mainstream America, then all we’d have to do to show that is ask mainstream America. We ought to be able to find a significant number of people who say that both parties have become too extreme. However, according to a Gallup poll from last year, that’s not what Americans are saying.

According to the poll, 50% of Americans say that the Democratic party’s views are “about right” or “too conservative”. Also, 51% of Americans think that the Republican party is “about right” or “too liberal”. In other words, 101% of Americans have views that align with one of the parties, or else they are actually more extreme than the party they are closest to. That leaves -1% of the population that have views in the middle of the two parties and feel that both parties are too extreme. Okay, Okay, math majors. Obviously there’s something wrong with those numbers: In addition to rounding error, there probably are some that say that both parties are “about right” (did they misunderstand the question?), and so those people would be counted twice in my numbers. But, even if there are some of those people, the number of people who said both parties are too extreme would have had to be even lower, so the point is still made: very few people think that both parties are too extreme. The vast majority agree with one party or the other, or are more extreme that either party.

So, it seems that Washington isn’t broken–it’s just a reflection of the people. So are we broken?

During elections, especially the general elections, we often hear politicians calling for us to come together by reminding us that “we are all Americans”. The implication is that despite our political differences, we share a lot in common. But, if we are truly becoming more polarized, as the poll suggests, then that common ground is shrinking. If the trend continues, we will have a divided nation, if we can still call it one nation at all. How can we expect one body to govern a nation that has such differing views on the direction we should take? On the other hand, will the pendulum start to swing the other way? For the sake of the country, I hope so, but honestly I don’t see any hint of hesitation on the path of continued polarization, leaving the -1% of us in the middle fearing for the future of our country.

So, what’s broken? Is it our government, or us?

Written by Mike

February 24, 2010 at 9:25 pm

Obama: Changing the Tone of Our Politics

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There were a lot of things to like about President Obama’s State of the Union address. But I’d like to focus on this part for now:

But what frustrates the American people is a Washington where every day is Election Day. We can’t wage a perpetual campaign where the only goal is to see who can get the most embarrassing headlines about the other side -– a belief that if you lose, I win. Neither party should delay or obstruct every single bill just because they can. The confirmation of — (applause) — I’m speaking to both parties now. The confirmation of well-qualified public servants shouldn’t be held hostage to the pet projects or grudges of a few individual senators. (Applause.)

Washington may think that saying anything about the other side, no matter how false, no matter how malicious, is just part of the game. But it’s precisely such politics that has stopped either party from helping the American people. Worse yet, it’s sowing further division among our citizens, further distrust in our government.

So, no, I will not give up on trying to change the tone of our politics. I know it’s an election year. And after last week, it’s clear that campaign fever has come even earlier than usual. But we still need to govern.

Right on, Mr. President. This is something I can get behind. We really do need to change the tone of our politics.

We want to debate the issues respectfully and listen to opposing views with an open mind:

And we need to stop taking cheap-shots on the opposition. Intelligent people often disagree, so we shouldn’t be belittling people’s character or intelligence:

And we certainly shouldn’t be criticizing our opponents because of their age or disabilities, particularly when those disabilities are due to war injuries. That would just downright dirty politics:

Despite all of your efforts, Mr. President, the tone of our politics hasn’t changed much. But keep up the good work. Your consistent example is appreciated and is sure to bring about the change we hoped for eventually.

Written by Mike

January 28, 2010 at 12:16 am

The Tragic Miscalculation: Where Democrats Went Wrong on Health Care

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Last August, as health care town hall protests broke out across the country, the Democratic National Committee issued a statement which included these words:

The Republicans and their allied groups – desperate after losing two consecutive elections and every major policy fight on Capitol Hill – are inciting angry mobs of a small number of rabid right wing extremists funded by K Street Lobbyists to disrupt thoughtful discussions about the future of health care in America taking place in Congressional Districts across the country.

However, much like we saw at the McCain-Palin rallies last year where crowds were baited with cries of ‘socialist,’ ‘communist,’ and where the birthers movement was born – these mobs of extremists are not interested in having a thoughtful discussion about the issues – but like some Republican leaders have said – they are interested in ‘breaking’ the President and destroying his Presidency.

Of course, hindsight is 20/20. As it turns out, that group of “right wing extremists” just won a senate seat in blue Massachusetts. Tragically, the Democrats underestimated the public discontent with health insurance reform from the beginning. Instead of downplaying and marginalizing the opposition, they should have taken it as a signal to moderate. Instead, they dug in even more, and that is tragic, not only for Democrats but also for the American people. Although I don’t support health insurance reform in its current form, I do want something productive done. Unfortunately, thanks to the Democrats’ fumble, we might have squandered our opportunity.

Written by Mike

January 19, 2010 at 10:19 pm

What’s Wrong With the Health Care Bill: How Small is Small?

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Continuing my series I began a few days ago, here’s another little gem within the health care bill. The plan imposes a penalty on companies that don’t contribute to health care for their employees. But don’t worry, small businesses. The Democrats are fully committed to engaging in rhetoric to ensure that you don’t think this is going to affect you. From the summary, in a section ironically entitled “Assistance for small employers”:

Recognizing the special needs of small businesses, the smallest businesses (payroll that does not exceed $250,000) are exempt from the employer responsibility requirement. The payroll penalty would then phase in starting at 2% for firms with annual payrolls over $250,000 rising to the full 8 percent penalty for firms with annual payrolls above $400,000.

Democrats know that they must continue the charade of appearing to be on the side of small business. They argue that it will only be big business that will be penalized. You know those businesses with those big pockets. (On a side note, having big pockets doesn’t always mean they have anything in them, but that’s a matter for a different day.)

But now we learn that businesses with a payroll of as little as $250,000 would be hit by a tax. Now we know that Obama means it literally when he says he wants to help the “mom and pop” businesses. Just don’t hire the uncle and a few cousins–that might put you over the limit into evil big business territory. I know that isn’t a fair representation of Obama’s position–he probably does care about helping small business. But, as is common lately, his rhetoric doesn’t match the bill. Unfortunately, congress will not be voting on the president’s speeches. They will be voting on the bill before them that they (hopefully) have read.

But I’ll ask a more fundamental question: why should it be the employers’ responsibility to contribute to health care coverage? I don’t think you can argue that employers have a responsibility to do anything except fulfill the agreement they have made with the employee when he is hired. If I’m an employer looking to hire someone, and I put out the conditions of employment, and someone looking for a job agrees with those conditions, why should the government tell us we can’t make that arrangement, or punish us for doing so.

Those who support the tax on business will argue that businesses should pay for health care because they have the deep pockets. Those who make this argument don’t understand economics. The amount that the employer has to pay for health care is approximately the amount by which they will decrease their employees’ salaries. If it were not so, then I think we should mandate businesses to pay for my groceries and mortgage also. If the money that my employer pays comes out of thin air, we could easily solve our housing crisis that way. Of course that’s ridiculous. If my employer has to pay my mortgage, my salary would decrease.

There are several problems with employer-based health coverage:

1) If I lose or change jobs, I lose my coverage. Plans aren’t portable. This contributes to the problem of the uninsured, and also makes people stay in jobs they don’t like, rather than looking for greener pastures. That is detrimental to the labor market, as it means that employers don’t have to work so hard to keep their employees happy.

2) When employers offer health care plans, they offer limited choices. Choice is essential in a free market. If I don’t like my insurance provider, I ought to be able to easily switch to another. This keeps the insurance companies honest because they would know if they do not provide good service and a reasonable price, I’d go elsewhere.

So, considering those disadvantages, why is it that we have a employer-based health system?

1) Employers are offered a tax break to give health coverage to their employees. It still costs them money, of course, but it costs them less money then it would cost their employees to buy the plan themselves, since they would not qualify for the tax break. So, employers can provide something to their employees which is of high value to them, but costs the business less. This could be solved by equalizing the tax structure so that individuals who buy health insurance benefit just as much as businesses. Businesses that want to attract the best and brightest would still be able to contribute to the health care plans for their employees, but they would not get any additional benefit from the government for doing so. In addition, those who don’t have jobs or work for companies that don’t provide health care would not be disadvantaged in the insurance market.

2) Employees like the fact that when they sign up for a health care plan through their employer, they are part of a pool. That means their cost doesn’t depend on their health status, but rather the health status of the entire work force. It means that healthy employees subsidize the health care of the less healthy. Many people see this as a good thing, but a pool is just a crutch since we don’t have a better way to charge people. A better way would be to charge people based on their behavior, which eliminates the need for pools because everyone pays what they should pay, and everyone is equally able to lower their costs by making healthy choices, regardless of pre-existing conditions.

But even if the “charge on behavior” philosophy is not palatable to some who prefer the more tried-and-true mechanism of pools, we could set up such pools at the state level, instead of putting that responsibility on the employers.

But wouldn’t taking away the incentive to provide health care (or the punishment for not doing so) from businesses cause people to lose their health insurance? It might cause some businesses to drop coverage, but it would also add revenue to the system to provide tax credits to help individuals buy coverage, as well as more help for those with lower incomes.

What I’ve outlined is true change–way more than Obama wants to take on since he is determined to build on the current system. At the very least, that proves he is wrong to suggest that the only alternative to this bill is to do nothing. One alternative is to do more. But, really it’s not about less or more. It’s about what’s right. And pinning the responsibility of health care on “big” business is wrong, costs jobs, and leads to less choice in the marketplace.

Written by Mike

July 27, 2009 at 8:58 am