Sunday, March 30, 2008

Do Only The Rich Pay Taxes?

In about September 2005, the IRS released statistics on income drawn from tax returns through 2003 (an updated version of the statistics can be found at http://www.irs.gov/pub/irs-soi/05in05tr.xls). In October 2003, Rush Limbaugh posted an article on his website titled "The Top 50% pay 96.54% of All Income Taxes" which addressed these statistics. This was an update of an article titled "Only the Rich Pay Taxes" which dates back to at least 2002.


Rush begins the article as follows:


This is the data for calendar year 2003 just released in October 2005 by the Internal Revenue Service. The share of total income taxes paid by the top 1% of wage earners rose to 34.27% from 33.71% in 2002. Their income share (not just wages) rose from 16.12% to 16.77%. However, their average tax rate actually dropped from 27.25% down to 24.31%


Think of it this way: less than 3-1/2 dollars out of every $100 paid in income taxes in the United States is paid by someone in the bottom 50% of wage earners. Are the top half millionaires? Noooo, more like "thousandaires." The top 50% were those individuals or couples filing jointly who earned $29,019 and up in 2003. (The top 1% earned $295,495-plus.) Americans who want to are continuing to improve their lives, and those who don't want to, aren't.


The above statistics could well have the effect of angering anyone who makes more than $29,019 since it implies that they are helping to pay for the lower 50 percent of wage-earners. In fact, this is an example of the misleading use of averages. Following is a summary of the IRS data being cited by Rush:


PERCENT OF INCOME EARNED AND TAXES PAID BY SELECTED CUMULATIVE PERCENTILES

Top 50 Top 25 Top 10 Top 5 Top 1
Percent share of... Total Percent Percent Percent Percent Percent
----------------------------------------------------------------------------
Adjusted gross income 100.00 86.01 64.86 42.36 31.18 16.77
Total income tax..... 100.00 96.54 83.88 65.84 54.36 34.27
Population........... 100.00 50.00 25.00 10.00 5.00 1.00
AGI floor ($thousand) N/A 29.02 57.34 94.89 130.08 295.50

As can be seen, the upper 50 percent of wage earners, who earn about $29 thousand and above, did pay 96.54% of all income taxes. Now, following are the same numbers, divided up into distinct percentile groups:

PERCENT OF INCOME EARNED AND TAXES PAID OF SELECTED DISTINCT PERCENTILES

0-50 50-75 75-90 90-95 95-99 Top 1
Percent share of... Percent Percent Percent Percent Percent Percent
----------------------------------------------------------------------------
Adjusted gross income 13.99 21.15 22.50 11.18 14.41 16.77
Total income tax..... 3.46 12.65 18.04 11.48 20.09 34.27
Population........... 50.00 25.00 15.00 5.00 4.00 1.00
AGI floor ($thousand) N/A 29.02 57.34 94.89 130.08 295.50

As can be seen, the lower half of this "oppressed group", the 50 to 75 percentile, actually pays only 12.65 percent of all income taxes despite the fact that they make up 25 percent of the population. The next group, the 75 to 90 percentile, pays about 18 percent of all income taxes, slightly more than their 15 percent share of the population. However, the 18 percent is still less than their 22.5 percent share of income and is therefore less than they would pay under a flat tax. The next group, the 90 to 95 percentile, pays 11.48 percent of all income taxes, slightly more than their 11.18 percent share of income. Hence, it is primarily the top five percent of taxpayers, those making over $130 thousand, who pay more than they would under a flat tax, making up for the lower 90 percent, who pay less. This is a far cry from the upper half of taxpayers, those making over $29 thousand, referred to by Rush.


Rush goes on to list the share of income taxes paid and adjusted gross income earned by each cumulative percentile listed in the first table above. He also gives the prior year's figures in parentheses. As mentioned above, the cumulative percentiles do not give any information about what is going on in the distinct percentiles since every cumulative percentile contains the top one percent. In addition, it is a somewhat laborious task to then compare the share of income taxes paid and income earned by each distinct percentile as I did in the last paragraph. An easier method is to look at the average tax rate, also given in the IRS statistics. This is computed by dividing the total income tax paid by the total income earned of each percentile and hence takes both numbers into account. One can then compare these the average tax rate of each percentile to the average tax rate of all taxpayers to see which percentiles are paying more and which are paying less than the average.


The following graph shows the average tax rate of all taxpayers and each distinct percentile from 1986 through 2005:




The actual numbers and sources are at http://www.econdataus.com/avgtax05.html. As can be seen, the top one percent and 95-99 percentile pay a clearly higher average tax rate and the 90-95 percentile pays a slightly higher average tax rate than the average tax rate of all taxpayers. All other percentiles pay a clearly lower average tax rate. This agrees with the analysis above. However, the graph shows that this general relationship has continued since at least 1986.


There are a couple of other items of interest apparent in the graph. One is that the average tax rate paid by the top one percent dropped sharply from 1986 to 1988. This followed the Tax Reform Act of 1986 which lowered the top marginal rate from 50 to 28 percent. Another item is that the average tax rates of all percentiles except for the top one percent dropped steadily from 2000 to 2003, following the tax cut of 2001 which phased in a lowering of individual tax rates. The average tax rate of the top one percent, however, stayed fairly steady through 2002 after which it dropped sharply. The explanation for this likely is due to the fact that the top one percent get a significant amount of income from capital gains which is taxed at a lower rate than ordinary income. Income from capital gains dropped sharply following the slump in the market starting in 2001 and this caused a higher percentage of the income earned by the top one percent to be taxed at the higher rate. This appears to have offset the affect of the phased-in cut in tax rates. However, by 2003 the market had begun to recover, increasing income from capital gains. In addition, the tax cut of 2003 lowered the top tax rate on capital gains and dividends.


So do only the rich pay taxes? Of course, the question is a bit misstated as the IRS data looks at taxpayers according to their income, not their wealth, and looks only at income taxes, not all taxes. Still, the data does show that those whose incomes are in the top 5 percent (and likely about half of those in the 90 to 95 percent category) pay more than the average tax rate. This is hardly surprising, however, since we have a progressive income tax with a top marginal rate of 35 percent. Even the top one percent (who make over $364 thousand per year) pay an average tax rate of just 23.13 percent. Hence, the statement that "only the rich pay taxes" is obvious hyperbole.

Tuesday, March 18, 2008

Job Growth Under Bush and Prior Presidents


Note: The following blog entry has been updated at this link:


A March 16th New York Times editorial titled Through Bush-Colored Glasses alleged that Bush painted a false picture of the economy in a recent speech. Following is an excerpt:


Mr. Bush boasted about 52 consecutive months of job growth during his presidency. What matters is the magnitude of growth, not ticks on a calendar. The economic expansion under Mr. Bush — which it is safe to assume is now over — produced job growth of 4.2 percent. That is the worst performance over a business cycle since the government started keeping track in 1945.


I haven't calculated the job growth per business cycle but I have looked at the growth in employment over every presidential term since 1949. The following table shows the monthly average change in population, the labor force, employment according to the Household Survey, total nonfarm employment, and total private employment over every presidential term since 1949, along with the unemployment rate at the beginning of each term:


CHANGE IN POPULATION, LABOR FORCE, AND EMPLOYMENT BY PRESIDENTIAL TERM (in thousands)

Monthly Average Change (in thousands)
-------------------------------------------- Unemploy-
Popu- Labor Househld Nonfarm Private No. of ment
President Mo Year lation Force Survey Employed Employed Months Rate
----------- --- ---- -------- -------- -------- -------- -------- -------- ---------
Roosevelt Jan 1941 154.6 117.4 48
Truman Jan 1945 57.8 65.3 48
" Jan 1949 63.9 55.6 71.4 114.0 95.2 48 4.3
Eisenhower Jan 1953 104.8 62.3 42.3 57.1 39.9 48 2.9
" Jan 1957 136.0 83.7 44.7 16.6 -3.1 48 4.2
Kennedy Jan 1961 156.1 65.0 87.9 122.9 94.3 48 6.6
Johnson Jan 1965 159.9 124.0 141.8 205.3 158.0 48 4.9
Nixon Jan 1969 258.3 165.9 132.4 128.8 97.9 48 3.4
Nixon/Ford Jan 1973 249.3 202.5 141.0 105.7 77.2 48 4.9
Carter Jan 1977 237.8 225.4 208.9 215.4 188.2 48 7.5
Reagan Jan 1981 172.5 139.6 132.2 110.9 111.4 48 7.5
" Jan 1985 172.1 180.5 216.8 224.6 194.6 48 7.3
G.H. Bush Jan 1989 173.3 104.4 49.3 54.0 30.5 48 5.4
Clinton Jan 1993 173.4 147.0 192.1 239.7 225.3 48 7.3
" Jan 1997 241.7 173.8 197.5 234.1 208.3 48 5.3
G.W. Bush Jan 2001 228.1 87.1 51.0 0.1 -18.8 48 4.2
" Jan 2005 215.5 145.8 155.9 149.1 132.1 37 5.2
Feb 2008 4.8

Following is a graphical representation of the above numbers:




Additional numbers and the sources can be found at http://home.att.net/~rdavis2/employ08.html. As explained in my post of March 16, one must be careful in comparing changes in employment using the Household Survey. This extends to changes in the population and labor force, also from the Household Survey. Still, the job growth of nonfarm and private jobs (from the Payroll Survey) in Bush's first term was the worst since at least 1941. Taking both of Bush's terms together (through February 2008), the average monthly growth in household survey, nonfarm, and private employment were 96.6, 65.0, and 46.9 thousand, respectively. For nonfarm and private employment, this was the second worst since Eisenhower with Bush's father's term being the worst.


The above graph and table show at least one other interesting fact. They show 15 presidential terms since 1949. In almost every term of a Democratic president, the growth in household survey, nonfarm, and private employment was greater than the growth in the labor force. Conversely, in almost every term of a Republican president, the growth in household survey, nonfarm, and private employment was less than the growth in the labor force. The only three exceptions in the 15 terms were Carter, Reagan's second term and G.W. Bush's second term until now (except for private employment).


A related fact is that the unemployment rate went down during almost every term of a Democratic president and up during almost every term of a Republican president since 1949. This follows from the prior fact because the unemployment rate equals the unemployed (labor force minus the employed) divided by the labor force from the Household Survey. In any case, the only exceptions to this second fact was Carter (when the unemployment rate stayed about the same) and both terms of Reagan and the second term of G.W. Bush (when the unemployment rate dropped). Of course, the unemployment rate is doubtlessly affected by the majorities of both houses and many other facts. Still, this apparent relationship to the party of the current president would seem worthy of some additional study.

Sunday, March 16, 2008

Problems in Using Household Survey Data

As mentioned in my post of March 10, the February employment figures from the Household Survey are 152 thousand below where they were last March. However, one needs to be very careful in comparing changes in employment using the Household Survey. One reason is that the Household Survey, involving just 60,000 households, is subject to a relatively large sampling error. Another reason is because population control adjustments are periodically made to the survey data but past data is not revised. This can cause a sudden jump or drop in the data such as the large jump in the year 2000 in the graph in the March 10 post. The following table from page 12 of the BLS summary of recent trends in both surveys shows the effects of population control adjustments made from 2000 to 2007:

Effect on household survey employment from
population control adjustments, 2000-07
(In thousands)
--------------------
January 2000 +1,555
January 2003 +576
January 2004 -409
January 2005 -45
January 2006 -123
January 2007 +153

Page 11 of the trends report states that there was likewise an adjustment in January 2008 which would have changed the reported employed in December of 2007 from the reported 146,334 thousand to 145,736 thousand, a decrease of 598 thousand. I'm not clear why the 146,334 does not quite match the figure on the latest Household Survey (I assume that it was revised) or why there is not a more discernible drop in the data. Still, it is likely better not to compare Household Survey employment numbers over a span that includes an adjustment. The trends report does include tables of smoothed and adjusted Household Survey data. This data can be useful as a check of the Payroll Survey data. Still, to compare employment data over time spans, it is likely best to use the Payroll Survey, both for its smaller sampling error and for the lack of the adjustment problem.


Job Growth Under Bush and Prior Presidents

Monday, March 10, 2008

Employment from the BLS Household and Payroll Surveys

As reported on March 7th, employers cut 63,000 jobs in February but the unemployment rate dropped slightly from 4.9 percent to 4.8 percent. How could the unemployment rate drop at the same time that jobs are cut? The AP story gives the following explanation:


The unemployment rate actually dipped slightly from 4.9 percent to 4.8 percent, as 450,000 people left the labor force for any number of reasons. Economists thought many people probably gave up looking for work.


Another reason that the employment numbers and unemployment rate sometimes seem at odds is that they come from different surveys. The commonly referenced employment numbers are for nonfarm employment and come from the Payroll Survey whereas the labor force numbers and the unemployment rate come from the Household Survey. The Bureau of Labor Statistics give the following explanation for why there are two surveys on page 5 of the Employment Situation report:


The household survey and establishment survey both produce sample-based estimates of employment and both have strengths and limitations. The establishment survey employment series has a smaller margin of error on the measurement of month-to-month change than the household survey because of its much larger sample size. An over-the-month employment change of 104,000 is statistically significant in the establishment survey, while the threshold for a statistically significant change in the household survey is about 400,000. However, the household survey has a more expansive scope than the establishment survey because it includes the self-employed, unpaid family workers, agricultural workers, and private household workers, who are excluded by the establishment survey. The household survey also provides estimates of employment for demographic groups.


The following graph shows the employment numbers that have been reported since 1998 by the Household Survey (in purple) and the Payroll Survey (in blue):




The actual numbers and sources can be found at http://www.econdataus.com/employ08.html. There was much discussion about the merits of each survey back in 2002 and 2003. As can be seen from the graph, the Household Survey showed employment to be generally rising while the Payroll Survey showed employment continuing to drop for most of those two years. Regarding the differences between the two surveys, the Bureau of Labor Statistics puts out a report of the trends in both surveys. As shown in Chart 1 of that report, an adjustment can be made to the Household Survey to explain much of the apparent discrepancies between the surveys. On page 8, the report gives the following description of that adjustment:


This adjustment to household survey employment subtracts from total employment agriculture and related employment, nonagricultural self employed, unpaid family and private household workers, and workers on unpaid leave from their jobs, and then adds nonagricultural wage and salary multiple jobholders. It also smoothes out the effects of population control revisions to the survey in January of 2003-08.


It is possible that the payroll survey may sometimes lag the household survey. The survey trends report states the following:


The payroll survey sample does not include new firms immediately. They are incorporated with a lag. In the interim, a model-based estimate is used each month to account for employment resulting from new firm births.


Hence, the BLS does attempt to correct for this. Still, this lag effect may contribute to another discrepancy apparent in the graph above. Employment appears to be topping in the Payroll Survey with decreases occurring just the past two months. According to the Household Survey, however, employment has been relatively flat since last March. In fact, the just released February figures are 152 thousand below where they were last March according to the Household Survey. That is, no jobs have been created for nearly a full year according to that survey.


Problems in Using Household Survey Data


Job Growth Under Bush and Prior Presidents

Sunday, March 2, 2008

Effect of the Bush Tax Cuts on Revenues

There have been three major tax cuts under Bush. Briefly, the 2001 tax cut created a new 10% individual tax rate and phased in the lowering of individual tax rates. It also phased in an increase in the child tax credit, marriage penalty relief provisions, an increase of the estate tax exemption, an increase in the IRA contribution limit, and the repeal of limits on itemized deductions and personal exemptions. The 2002 tax cut was chiefly aimed at business, creating 30% expensing for certain capital asset purchases, extending the exception under Subpart F for active financing income, and increasing the carryback of net operating losses to 5 years. Finally, the 2003 tax cut lowered the top individual income tax rate on dividends and capital gains and accelerated most of the phased-in provisions of the 2001 tax cut. For a more complete description of the tax cuts, see page 14 of Revenue Effects of Major Tax Bills.


Enough time has now passed that it's possible to take a look at the effect of these tax cuts on government revenues. The growth of receipts by source, outlays, and GDP over every 6-year period since 1940 is shown in the following graph:


6-year growth


The actual numbers and sources can be found at http://www.econdataus.com/recgro6y.html. As can be seen in the second table and graph, individual income tax receipts actually declined slightly from 2001 to 2007. Even total receipts were up just 9.4% over that period. Finally, GDP growth has been no faster than usual since 2001. Hence, although it's been just about six years since the 2001 tax cut and four years since the 2003 tax cut, the evidence to this point is that the Bush tax cuts decreased revenues over what they would have been, at least over the short term.


For a look at the effect of the Reagan and Kennedy tax cuts on revenues, see the analysis at http://www.econdataus.com/taxcuts.html.

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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