The Sovereign Mind

Free thought on politics and real life

Posts Tagged ‘politics

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

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

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

In Defense of the Court

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As if the United States Supreme Court needs a defense from me…

The Supreme Court ruled last week that the government cannot prevent organizations, including corporations and labor unions, from weighing in on political campaigns. The reaction I’ve seen has been almost all negative, with some claiming that it is the end of democracy as we know it. While I think that’s a bit of an exaggeration, I am concerned that this will make it even easier for corporations to gain political influence. However, what strikes me about that argument is that it is completely irrelevant: if something is unconstitutional, it doesn’t matter if we like the consequences of it or not.

Glenn Greenwald starts with that point and then goes on to make several other good points in defense of the court ruling, including linking to this response to those who say that money is property, not speech, and also posting a follow-up on the subject.

As someone with a lot of opinions but not much time to write, I’ll just ask the reader to consider Glenn’s writings on this subject to be mine (in the non-plagiarism sense, I mean), because I think I agree with him entirely.

But since I can’t bring myself to write an entirely “go read this guy” kind of post, let me add this thought experiment:

Is it unconstitutional to restrict a person from expressing his political views? Of course it is unconstitutional.

Is it unconstitutional to restrict that person from gathering with like-minded people to pool their voices together? Of course it is unconstitutional.

What if that pool of people decided that they needed to engage in fundraising efforts, such as selling stuff, in order to raise money to get their message out? Would it be unconstitutional to ban that? I think it would be, and I don’t see any real difference between that and a corporation or labor union buying air time to get their political views heard.

Now, as I said, I do worry about the influence of special interest groups in politics, but the way to fight them is not to take away the rights of the people in those organizations–it’s to exercise ours. Corporations may be considered “people” in some sense (although really I think that line of reasoning is a distortion of the decision–that’s not really what it said), but clearly they are not fully “people”. They cannot vote, and as long as they can’t, they can only be as powerful as we, the voting kind of people, allow them to be. That might sound overly idealistic–to believe that the people will rise up to think and act for themselves instead of allowing themselves to become the pawns of higher powers–but it also happens to be what the founders were counting on when they went all in on this new experiment called democracy.

Written by Mike

January 24, 2010 at 11:02 pm