Wednesday, September 28, 2011

Means-Test Your Way Out of Debt

Marc Thiessen spends a column on the Republican House laundry list of spending cut wishes. Citing mostly Paul Ryan, he checks off a familiar litany of wasteful Washington:
  • Slow the growth of Social Security for the rich.
  • Reduce or remove Medicare for the rich.
  • Means-test the DC Scholarship Program, and swing the money from providing a wide choice of colleges to affluent college students to providing a wide choice of elementary schools for poor kids.
  • Remove farm subsidies for wealthy farmers.
  • Cut Freddie Mac & Fannie Mae loose from the Federal apron-strings.
  • Eliminate corporate welfare for favored corporations (like GE) or industries (like solar panels).
To these proposals, Global Review says a hearty "amen". In addition, get rid of agricultural subsidies which raise the price of foodstuffs, essentially stealing from the poor & unemployed and giving to the wealthy and landed.

Saturday, September 24, 2011

Conservative Chicanery

There are lies, damned lies, and statistics. In the current debate on the "Buffett Tax", some conservatives are perpetrating a statistic more mendacious than Mephistopheles himself. A great example is John Steele Gordon, writing a pompous editorial with the attitude of a pedant.

Mr. Gordon is playing at Mythbusters, but he's neither entertaining nor enlightening. He writes to correct five misconceptions, some of which are more germane than others. The Mephistophelean "myth" is that "Millionaires pay proportionately less income tax than poorer people." What's so insidious about this "myth" is that it is, in fact, a myth: Millionaires pay proportionately more income tax than the rest of us, and - in fact - some 50% of all taxpayers pay no Federal Income Tax. Note the qualifiers.

Left out of this narrow definition of income tax are the FICA ("payroll") taxes that supposedly fund Social Security and Medicare*. These usually amount to 15.3%** (13.3% in 2011 with the stimulus tax break) of all income earned up to $102,800. According to Gordon, families with incomes above $1 million payed 23.3% in income tax. Adding in FICA, they would have paid at most 24.8%. Families earning between $50,000 and $100,000 would see their average tax rate jump from 8.9% (if Mr. Gordon is to be trusted) to 24.2%, which is very, very similar. Those earning less than $50,000 pay substantially less.

Now, President Obama is still wrong in saying that millionaires pay "less taxes than the rest of us". He's also wrong in defining earners who make $250,000 a year or more as "millionaires", a puzzling stretch of nomenclature. A family earning $250,000 in straight earned income (say, a successful doctor) might be chipping in about 35% of their income to the Federal till. That's a lot.

Mr. Gordon goes on to perpetrate another fallacy: he says that "dividends are paid out of corporate profits that have already been taxed. So Buffet's [sic] equity earnings are doubly taxed: He pays 35 percent at the corporate level and 15 percent on his own return." This is also specious. First, it applies only to dividends, not capital gains, and the latter amount to 70% of taxed income on investments***. A back-of-the-envelope calculation tells us that the total tax on investment profits might be about 15% + 0.3*35% = 25.5%. That's a marginal difference at best. Taking into account that high-rolling investors are likely to do a lot more trading and earn from capital gains, while dividends go disproportionately to cautious folks with retirement accounts, the "dividends are taxed twice" argument is a poor defense of the very rich.

Second, few companies pay the full 35% rate; they have tax shelters, rebates, and gimmicks just like wage earners. Third, the corporate profits tax is taken into account by investors when they purchase stocks. They decrease their investment in American firms concomitantly, lowering the marginal product and thus the wage of American workers. So workers suffer (although somewhat less) from the high corporate profits tax too.

In summary, let's look at the average tax rates we've calculated.
  • Millionaires pay less than 24.8% of all income on average
  • Middle-class families pay about 24.2% of all income on average
  • Investments by the affluent are taxed at something less than 25.5%, taking corporate profits tax into account.
This tax structure looks pretty flat, but only on its surface. The myriad loopholes, breaks, progressivities and regressivities make it a moonscape of craters and ridges. More important than raising or lowering taxes on any large, average group is true tax reform: making the code transparent and boring. Whether the tax code is flat or progressive, it ought to be smooth. Could somebody in Washington pick up that phrase?

* FICA taxes were instituted to fund Medicare and Social Security, but in practice are tossed into the same Federal till out of which all the government's obligations are paid. It makes no sense to consider these separately from income taxes.
** Half of this 15.3% comes out of workers' paychecks, half comes from their employer. As my Intro to Econ students can tell you, this doesn't make a dime's worth of difference: no matter who writes the checks, relative elasticities determine who bears the cost of the tax.
*** Calculated from IRS data for tax years 1980-2005, from this IRS spreadsheet.

Wednesday, September 14, 2011

A Dish Best Served Cold

When Rep. Anthony Weiner (D-NY) was pressured to resign his house seat after tweeting a picture of his homophonic member, it was to protect his fellow Democrats. Weiner was a very national candidate. He was the "Next Mayor of New York City" in everyone's calculus. He was a "scourge" of Republicans nationally, employing social media to do battle around the country.

Now, in the wake of his embarrassing scandal, just a day or two after Obama's Don't-Call-it-Another-Stimulus Plan speech, the seat has gone Republican. The NY Post concludes:
That a Brooklyn-Queens district where Democrats outnumber Republicans 3 to 1 could swing to a GOP candidate who was outspent and outmanned -- and where unions poured in enormous resources in the final hours -- doesn't bode well for a president facing re-election in a queasy economy.

Public Policy Polling minced no words when it reported Sunday that Assemblyman David Weprin, handpicked by Democratic leaders as their so-called sure-shot candidate, was undone by a president whose approval rating in the district came in at a dismal 31 percent.

"If Obama's approval in the district was even 40 percent, Weprin would almost definitely be headed to Congress. He’s getting dragged down by something bigger than himself," the polling group declared in projecting a Turner victory.

Friday, September 9, 2011

Ponzi Schemes

The most notable exchange in the Republican debate from two nights ago was Perry standing by his characterization of Social Security as a "Ponzi Scheme". Is that a fair label? I'll give you the facts; you can decide. Is that good politics? Probably not, especially if it's ever separated from the words "... and we need to fix it now."

What is a Ponzi scheme? It's named for Charles Ponzi, an Italian-American swindler who set up a scam in Boston's North End promising to make massive profits arbitraging postal stamp markets. He signed up investors rapidly, told them (mendaciously) that they were making huge profits, and continued to sign up new clients at an astonishing rate. Most didn't withdraw their "profits"; those who did were paid out of the principle invested by new clients. The scheme continued for years.

There are many modern Ponzi schemes, most famously those of Bernie Madoff and Nevin Shapiro. The concept is simple: as long as more and more people buy in, the fund remains solvent and (very) profitable. When some hiccup interrupts the flow of new cash, however, the truth is revealed: there aren't any real investments behind those glossy statements.

Social Security, as originally proposed, was a pension fund for working Americans. They would pay in during their working lives, and - if they lived until 65 (at a time when the median lifespan was 63) - withdraw the investment later. It equalized payouts somewhat across people, so your money wasn't yours specifically, but the idea was that it would be in a Trust Fund for you when you retired.

That didn't last long. Within a few years of its creation, the accumulation of a large Social Security Trust Fund was blamed for the 1936-37 recession, and the fund was diminished in 1939. Since then, the system has principally relied on the current contributions of American workers to cover payouts to American retirees. There has been a surplus all along, but instead of saving the surplus, it has been borrowed by the Treasury. Thus, the Social Security Trust Fund largely consists of IOU's from other parts of the Federal Government.

Of course, unlike a swindler's scheme, Social Security enrolls everyone - workers can't just opt out if they realize they won't be paid later. And the process is transparent. We know that there's nothing in the Trust Fund, and we have for decades. The risk isn't that people will opt out of Social Security, or try to withdraw money early (you can't), it's that the ratio of workers to retirees will change drastically when the Baby Boomers retire.

If no reform is enacted, there are a variety of ways that Social Security could weather the storm. It could decrease benefits across the board. Congress could raise the retirement age to correct the ratio. Social Security could cash in its Treasury Bonds and force the government to drastically cut spending or raise taxes elsewhere. Social Security taxes could be increased sharply to cover the gap. Another possibility would be to sharply increase immigration of young workers from abroad.

What's sobering here is that Social Security isn't America's biggest worry. After all, the Baby Boomers will eventually die off, and the generations after them are in more normal proportions. Two other responsibilities of the Federal Government - Medicare and the National Debt - are projected to grow boundlessly. Nobody knows who's going to pay for those.

Wednesday, September 7, 2011

Republican Debate

Comments on tonight's debate at the Reagan Library.
  • Good call opening with a back-and-forth between Perry and Romney. That's what we came to see.
  • Michele Bachmann should fire her hairstylist.
  • I'm glad Ron Paul pointed out that Reagan's presidency didn't go so well. Huge deficits aren't conservative.
  • Romney shredded Perry on Social Security & electability.
  • What's Jon Huntsman's deal? I think his candidacy could be really valuable, but I still don't know what he's running on. In the same breath, he recalled how important was Ronald Reagan's optimism, how optimism is a great characteristic of Americans, and then repeated his catch-phrase line that America's "core is broken". You're running on, "The core is broken"? Fire your staff and start over! The one good point Huntsman made was that he appeals more to independents and Democrats who will be important in the general election.