Saturday, December 22, 2012

Did the Assault Weapons Ban Work?

Did the Assault Weapons Ban Work?

As noted in this article, the Sandy Hook Elementary School shooting in Newtown, Connecticut has brought calls to reinstate an assault weapons ban like the one that expired in 2004. Following is an excerpt of a round table discussion of the shooting on the December 16th edition of This Week With George Stephanopoulos:

WILL: In 1996, a man went into a gym class in Scotland, killed 16 5- and 6-year-olds and the teacher. A few years ago in Norway, a young -- deranged young man killed, what, 69 people on an island, mostly teenagers. Connecticut has among the toughest gun laws in this country. Didn't help. Scotland and Norway have very tough gun laws. Didn't help. So...

STEPHANOPOULOS: Didn't stop, but it does lessen the occasion of violence, doesn't it?

WILL: Yeah, why don't...

EDWARDS: And, George, since Columbine, there have been 181 of these school shootings.

WILL: We did -- remember, we did -- we did have a ban -- we did have a ban on assault weapons. When we put the ban in place, these incidents did not really decline in a measurable way. And when we took it off, they didn't increase in a measurable way.

Hence, George Will is saying that the ban on assault weapons did not have a measurable effect on these mass-shootings. On the December 17th edition of The PBS Newshour, David Kopel, a professor at the University of Denver, was more explicit, saying the following:

Well, I think we can look at what happened when she had her 10-year in the past. The Congress, when it enacted that ban, also ordered that a formal study be done of the results of it.

The study was performed by the Urban Institute, a very well-respected, somewhat left-leaning think tank in Washington, D.C., and the Urban Institute reported that it had no effect on homicide rates. There was no statistically significant benefit in terms of saving lives.

Kopel's statement that the study had reached such a definitive conclusion sounded a little surprising. Looking online, I found the Urban Institute study titled Impact Evaluation of the Public Safety and Recreational Firearms Use Protection Act of 1994 - Final Report. The overview of the study concludes as follows:

At best, the assault weapons ban can have only a limited effect on total gun murders, because the banned weapons and magazines were never involved in more than a modest fraction of all gun murders. Our best estimate is that the ban contributed to a 6.7 percent decrease in total gun murders between 1994 and 1995, beyond what would have been expected in view of ongoing crime, demographic, and economic trends. However, with only one year of post-ban data, we cannot rule out the possibility that this decrease reflects chance year-to-year variation rather than a true effect of the ban. Nor can we rule out effects of other features of the 1994 Crime Act or a host of state and local initiatives that took place simultaneously. Further, any short-run preventive effect observable at this time may ebb in the near future as the stock of grandfathered assault weapons and legal substitute guns leaks to secondary markets, then increase as the stock of large-capacity magazines gradually dwindles.

We were unable to detect any reduction to date in two types of gun murders that are thought to be closely associated with assault weapons, those with multiple victims in a single incident and those producing multiple bullet wounds per victim. We did find a reduction in killings of police officers since mid-1995. However, the available data are partial and preliminary, and the trends may have been influenced by law enforcement agency policies regarding bullet-proof vests.

The following pages explain these findings in more detail, and recommend future research to update and refine our results at this early post-ban stage.

This sounds very different from Kopel's definitive "no statistically significant benefit in terms of saving lives". Yes, they were "unable to detect any reduction to date in two types of gun murders that are thought to be closely associated with assault weapons" but they did detect a "6.7 percent decrease in total gun murders between 1994 and 1995" and a "reduction in killings of police officers since mid-1995". It is important to note that this study was published on March 13, 1997, just over two years after the ban took affect on September 13, 1994. Hence, the study itself recommends "future research to update and refine our results at this early post-ban stage".

In fact, two additional studies that were done are referenced at this link. Like the Urban Institute study, key authors were Christopher S. Koper and Jeffrey A. Roth. The latter of the two is titled An Updated Assessment of the Federal Assault Weapons Ban: Impacts on Gun Markets and Gun Violence, 1994-2003 and was published in June 2004. Following is an excerpt from its first chapter titled "Impacts of the Federal Assault Weapons Ban, 1994-2003: Key Findings and Conclusions":

The Ban’s Success in Reducing Criminal Use of the Banned Guns and Magazines Has Been Mixed

• Following implementation of the ban, the share of gun crimes involving AWs [assault weapons] declined by 17% to 72% across the localities examined for this study (Baltimore, Miami, Milwaukee, Boston, St. Louis, and Anchorage), based on data covering all or portions of the 1995-2003 post-ban period. This is consistent with patterns found in national data on guns recovered by police and reported to ATF.

• The decline in the use of AWs has been due primarily to a reduction in the use of assault pistols (APs), which are used in crime more commonly than assault rifles (ARs). There has not been a clear decline in the use of ARs, though assessments are complicated by the rarity of crimes with these weapons and by substitution of post-ban rifles that are very similar to the banned AR models.

• However, the decline in AW use was offset throughout at least the late 1990s by steady or rising use of other guns equipped with LCMs [large capacity magazines] in jurisdictions studied (Baltimore, Milwaukee, Louisville, and Anchorage). The failure to reduce LCM use has likely been due to the immense stock of exempted pre-ban magazines, which has been enhanced by recent imports.

It is Premature to Make Definitive Assessments of the Ban’s Impact on Gun Crime

• Because the ban has not yet reduced the use of LCMs in crime, we cannot clearly credit the ban with any of the nation’s recent drop in gun violence. However, the ban’s exemption of millions of pre-ban AWs and LCMs ensured that the effects of the law would occur only gradually. Those effects are still unfolding and may not be fully felt for several years into the future, particularly if foreign, pre-ban LCMs continue to be imported into the U.S. in large numbers.

Hence, the study states that gun crimes involving AWs [assault weapons] did decline, primarily due to a reduction in the use of APs [assault pistols]. However, this decline was offset by steady or rising use of other guns equipped with LCMs [large capacity magazines]. The study concludes that "the ban’s exemption of millions of pre-ban AWs and LCMs ensured that the effects of the law would occur only gradually". Once again, this sounds very much different that Kopel's statement that the assault weapon ban provided "no statistically significant benefit in terms of saving lives".

This points to a problem with interviews on news shows, even excellent shows like the PBS Newshour. It is very easy to make many types of erroneous statements with little risk of having the errors exposed, at least not in real time. Even though there may be one or more experts with opposing views, none of them will have all of the facts of all studies at their fingertips. It is therefore easy to slip in various erroneous numbers or conclusions with little risk of being contradicted. This suggests that it might be useful to have similar interviews online where each statement could subjected to some minimal fact-checking before the conversation continues. In any case, it shows that such statements should be treated simply as possibilities unless and until they can be verified.

Note: There is a discussion of this post at this link.

Did the Assault Weapons Ban Work? (Part 2).

Sunday, December 2, 2012

Do Any Studies Show that Tax Cuts Pay For Themselves?

I concluded a prior post with the following statement:

As I mentioned, I am yet to find a single economic study that purports to show evidence that any income tax cut has ever paid for itself. If anyone who reads this should know of one, please leave a comment with a link to that study. Thanks.

I did receive a couple of replies to that request but neither of them focused on income tax cuts in the United States. One focused on capital gains tax cuts and the other focused on countries with relatively weak tax authorities where tax cuts might increase compliance (like Russia). In any case, I replied to both. I also have not found an economic study that shows an income tax cut paying for itself from any other source. However, I am continuing to search for such a study and have posted links to any related information that I've found at this link. I believe that only one of those links is to a study that purports to show a tax cut that paid for itself. It is a paper published by Laffer Associates titled The Onslaught From The Left, Part III: The Capital Gains Tax. Following is an excerpt:

We now have at least three years of data to assess the effect of the 2003 capital gains tax rate reduction on capital gains tax receipts. Figure 6 shows that from 2002 through 2005, capital gains receipts have doubled, from $49 billion to $97 billion. The latest projection for receipts in 2006 is $110 billion. This represents a 124% increase in revenues over four years with a 25% cut in tax rates. You can’t ask for more than that.

As stated, this paper involves a capital gains tax cut and looks at just 3 years worth of data. Figure 2 on page 4 of this Congressional Research Service paper shows that capital gains tax receipts sank back toward their 2002 level in the 2009 financial crisis.

In any event, I took those studies that gave actual numbers for the estimated revenue recouped following tax cuts and compiled them into a table at this link. Following is that table:

Estimates of the Percent of Revenue Cost Recouped after Tax Cut


Author (s)



17-25*   Lindsey, Lawrence  Individual Taxpayer Response to Tax Cuts 1982-1984 with Implications for the
Revenue Maximizing Tax Rate
11/86  * 1982-1984 
33*   Lindsey, Lawrence  The Growth Experiment  10/91  * according to 
17 50  Mankiw, Gregory 
Weinzierl, Matthew 
Dynamic Scoring: A Back-of-the-Envelope Guide  12/04   
-5 to 
  Congressional Budget 
Analyzing the Economic and Budgetary Effects of a 10 Percent Cut in Income Tax Rates  12/01/05  * for 2nd 5 years 
< 10*   Treasury Department  A Dynamic Analysis of Permanent Extension of the President’s Tax Relief  7/25/06  * according to 
30*   Foertsch, Tracy 
Rector, Ralph A. 
A Dynamic Analysis of the 2001 and 2003 Bush Tax Cuts: Applying an Alternative 
Technique for Calibrating Macroeconomic and Microsimulation Models
11/22/06  * 295.5 / 991.9 
39*   Auten, Gerald 
Carroll, Robert 
Gee, Geoffrey 
The 2001 and 2003 Tax Rate Reductions: An Overview and Estimate of the
Taxable Income Response
9/08  * reduction in 
top 2 rates 
32 51  Trabandt, Mathias 
Uhlig, Harald 
How Far Are We From The Slippery Slope? The Laffer Curve Revisited  4/10   

As can be seen, none of the studies projected that tax cuts would pay for themselves. At most, they projected that about a third of the cost of labor taxes and half of the cost of capital taxes would be recouped. In fact, the CBO study suggests that the feedback could actually be negative, causing the revenue loss to be larger than the static revenue loss. Following is a summary of the study given by Bruce Bartlett:

A 2005 Congressional Budget Office study during the time that Republican Doug Holtz-Eakin was CBO director concluded that a 10 percent cut in federal income tax rates would recoup at most 28 percent of the static revenue loss over 10 years. And this estimate assumes that taxpayers have unlimited foresight and know that taxes will be raised after 10 years to stabilize the debt/GDP ratio. Without foresight and no compensating tax increases or spending cuts, leading to an increase in the debt, feedback would be negative; i.e., causing the revenue loss to be larger than the static revenue loss.

This seems to agree with the study by Christina and David Romer that I mentioned in my prior post that found that "deficit-driven tax increases" have had a positive effect on economic growth. In any case, I am interested in any studies that give estimates for the revenue cost recouped following tax cuts. This especially applies to any studies that suggest that an income tax cut in the United States would pay for itself. As mentioned, I am yet to find such a study.

Note: There is a discussion of this post at this link.

Thursday, November 1, 2012

What is Meant by "Broadening the Tax Base"?

My prior post is posted and being discussed at One of the questions that came up was the following:

I have a question to which you might not know the answer, since it is a matter of a phrase used by someone you quote. Feldstein says,

The key question raised by the Romney plan’s critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals.

I don’t understand what is meant by the phrase “broadening the tax base of high-income individuals.” Do you have any idea what he meant by that?

My reply was as follows:

That's a very good question and points to one of the problems that I have with the Romney tax plan. Romney is very explicit about what goodies his plan offers. On this web site, he lists the 20 percent cut in all marginal rates, elimination of AMT and estate tax, and other items. All that he says there about broadening the tax base is "America’s individual tax code applies relatively high marginal tax rates on a narrow tax base." A document on Romney's web site states "He will pursue a conservative overhaul that applies lower and flatter rates to a broader tax base". Both of those sound like they might be talking about "broadening the tax base" to more taxpayers (not just more untaxed income) but it's not clear. Another document on his web site states the following:

In the long run, Mitt Romney will pursue a conservative overhaul of the tax system that includes lower and flatter rates on a broader tax base. The approach taken by the Bowles-Simpson Commission is a good starting point for the discussion. The goal should be a simpler, more efficient, user-friendly, and less onerous tax system. Every American would be readily able to ascertain what they owed and why they owed it, and many forms of unproductive tax gamesmanship would be brought to an end.

Here, he could be talking about untaxed income. Feldstein's study is looking just at deductions taken by upper-class workers. As I mentioned, this mainly includes home mortgage interest, state and local taxes, real estate taxes, and charitable deductions. Feldstein is explicitly excluding credits like the standard deduction, child tax credit, and earned-income tax credit (EITC). However, I'm not aware that Romney has totally ruled these out. As a result, there are concerns such as the following one expressed at this link.

But nowadays the phrase “broadening the tax base” is often used in conjunction with calls for more people to pay federal income taxes, with nearly half the population accused of paying no taxes at all. Of course, that’s not really true, as many of those who end up paying no net federal income taxes oftentimes do pay sales taxes, Social Security and Medicare payroll taxes and other forms of taxation. In a recently released video from a campaign fundraiser, Romney accuses the 47 percent of the population who pay no federal income taxes of not taking responsibility for their lives and says he can't worry about them.

However, those who qualify for refundable tax credits like the Earned Income Tax Credit are rightly fearful that the phrase “broadening the tax base” could mean ending the EITC as we now know it. The EITC actually was expanded because of the deal that President Reagan struck with Congress back in 1986 to get his landmark tax reform legislation passed. He was willing to trade lower tax rates for tax breaks like the EITC, which up to then had covered relatively few people since its introduction in 1975.

That's what I think is so irresponsible about the Romney tax plan. If he is elected, he will have to push for the specific goodies that he has promised. However, the act of "broadening the tax base" will likely become an argument between those who think we should limit deductions on the rich and those who think we should limit credits so as to tax more of those 47 percent who reportedly pay no federal income taxes. As a result - the goodies get passed, little or nothing get done on base-broadening, and the deficit goes up. If they were laying odds in Vegas and I was forced to bet on an outcome, that is the one that I would bet will occur if Romney is elected.

Sunday, October 28, 2012

Does Romney's Tax Plan Add Up?

On August 1st, the Tax Policy Center released a study of the Romney tax plan titled "On The Distributional Effects Of Base-Broadening Income Tax Reform". Following is its conclusion:

In this paper we examine the tradeoffs between rates, tax expenditures, and the progressivity of the tax schedules that are inherent in revenue-neutral tax returns. We show that plans that advance steeply lower marginal tax rate structures would require deep cuts in tax expenditures to offset the revenue losses arising from low rates. Because many of the largest tax expenditures benefit middle- and lower-income households, deep reductions tax expenditures can alter the distribution of the tax burden. To illustrate these tradeoffs, we examine as an example a set of tax rate reductions specified in Governor Romney’s tax plan. We show that given the proposed tax rates and proscription against reducing tax expenditures aimed at saving and investment, cutting tax expenditures will result in a net tax cut for high-income taxpayers and a net tax increase for lower- and/or middle-income taxpayers—even if individual income tax expenditures could be eliminated in a way designed to make the resulting tax system as progressive as possible.

The Romney campaign has disputed this conclusion. Both Romney and Ryan have pointed to "six studies" which support the Romney tax plan. A blog posting on the Romney web site states that "six independent studies have proven there are sufficient upper-income expenditures to lower individual tax rates, protect the middle class, and make the tax code more pro-growth".

There has also been a great deal written outside the Romney campaign on these six studies. Two examples are a Politifact article titled "Ryan says six studies say the math works in Romney tax plan" and an article titled "Wonkblog’s comprehensive guide to the debate over Romney’s tax plan".

Because of the large number of conflicting articles on the Tax Policy Center study and the six studies that countered it, it seems that a first step was to organize those articles in one place. I've posted links to the studies and related articles at this web page. It contains the following:

  1. The original Tax Policy Center article and some follow-up and earlier articles.
  2. The "six independent studies" critiquing the Tax Policy Center article, along with articles critiquing specific studies.
  3. Other articles favorable of Romney Tax Plan.
  4. Articles critiquing the "six independent studies".
  5. Other articles critical of Romney Tax Plan.
  6. IRS Tax Data.
The IRS Tax Data is included because the PolitiFact article states that the Feldstein and Rosen studies used 2009 tax data. More precisely, the initial Feldstein study states that it is "using the most recent IRS data, which is based on tax returns for 2009 and published in the current issue of the IRS quarterly publication" and the Rosen study states that it relies on "summary data from the IRS’s Statistics of Income (SOI) for tax year 2009, the latest year for which such published data are available". Neither give the precise sources, links to it on the web, or the work by which some of their figures were derived from this data. This makes it difficult to verify the data since there is a great deal of IRS data out there (as can be seen by the sources that I provide). Poorly sourced articles have long been a pet peeve of mine. I can't help but think that they are poorly sourced so as to make them more difficult to verify and critique.

In any case, I was able to verify most of Feldstein's numbers. The following table shows those numbers:

         Projected Revenue Gain/Loss from Romney Tax Plan
                      (billions of dollars)

                               2009 IRS Data         Feldstein
                          ======================= ===============
Adjusted Gross Income -->     All   100K+   200K+     All   100K+
========================= ======= ======= ======= ======= =======
Income tax before credits     976     682     449     953
Dividends & capital gains      49*                     49*
------------------------- ------- ------- ------- -------
Tax affected by rate cut      927                     904
Revenue loss of 20% cut       185                     181
Alternative minimum tax        23                      23
Investing tax cut              15*                     15*
------------------------- ------- ------- ------- -------
Static revenue loss           223                     219
Dynamic revenue loss          190*                    186*
========================= ======= ======= ======= ======= =======
Home mortgage interest        421     199      67
State and local taxes         252     184     113
Real estate taxes             168      88      36
Contributions deduction       158      99      59
Other itemized deductions     206      67      30
------------------------- ------- ------- -------
Total itemized deductions   1,204     637     305            636
Revenue gain at 30%                   191      91            191
Revenue gain at 25%|27%               159      82            159
Note: following are estimates of revenue loss not included above:
Estate tax elimination         21*
Phase in of deduction loss     15*
* estimated by Feldstein (else 2009 IRS data)

Sources: 2009 IRS Tax Data, Table 1.4, Sources of Income, Adjustments, and Tax Items
         2009 IRS Tax Data, Table 2.1, Sources of Income, Adjustments, Itemized Deductions
         Martin Feldstein's Wall Street Journal article, August 28, 2012
         Martin Feldstein's blog post, September 02, 2012
In Feldstein's Wall Street Journal article, he states the following:

The key question raised by the Romney plan's critics is whether this revenue loss can be offset by broadening the tax base of high-income individuals. It is impossible to calculate the exact effects of the future reforms since Gov. Romney hasn't specified what he would do. But refuting the Tax Policy Center's assertions doesn't require that. It only requires knowing if enough revenue could be raised from high-income taxpayers to cover the $186 billion cost.

A little later on, he states:

And what do we get when we apply a 30% marginal tax rate to the $636 billion in itemized deductions? Extra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.

So Feldstein's basic argument is that the revenue loss of $186 billion shown in the second to the rightmost column above is more than offset by the $191 billion revenue gain shown in the rightmost column. The first step in testing this contention is to verify Feldstein's numbers. I could not verify the numbers followed by asterisks in the IRS data. However, those numbers have a relatively small effect on the final numbers.

According the Feldstein, the "$49 billion was from taxing dividends and capital gains at reduced rates that would not be subject to further reductions". This reduces the estimated revenue loss by $10 billion. The $15 billion is from "eliminating the tax on interest, dividends and capital gains for married couples with incomes below $200,000, and for single taxpayers with incomes below $100,000" and increases the estimated revenue loss by that amount. Finally, the $33 billion reduction in the estimated revenue loss from $219 billion to $186 billion is due to Feldstein's assertion that "past experience shows that taxpayers do respond to lower marginal tax rates by acting in ways that increase their taxable incomes". Regarding this assertion Washington Post columnist Ezra Klein says the following:

Feldstein assumes fairly large, and very positive, growth and behavioral effects from the tax cuts. But he doesn’t assume negative effects. Most models — including, as I understand it, TPC’s — assume that as you cut deductions, taxpayers who were managing their finances to take advantage of those deductions stop doing that. That makes the deductions effectively worth less money, and makes it harder to pay for tax cuts.

In any case, Feldstein's other numbers closely match the IRS numbers except for one. He gives the "income-tax revenue in 2009 before all tax credits" as $953 billion. The IRS data gives this as $976 billion for all returns and $950 billion for all taxable returns. However, this only has an effect of $4 billion on the projected revenue loss. Even with this, the projected revenue loss of $190 billion is just covered by the projected revenue gain from base-broadening of $191 billion.

There are some issues with this projected revenue gain of $191 billion, however. First of all, Feldstein mentions in his follow-up blog post that critics have pointed out that the "30 percent marginal tax rate is too high for these taxpayers because of the 20% Romney rate reduction". He then states that "using a 25% marginal tax rate instead of 30% would reduce the revenue from eliminating deductions by 5% of $636 billion or $32 billion". This cuts the projected revenue gain to $159 billion.

Next, Feldstein's figures are based on the idea of eliminating all deductions for taxpayers whose adjusted gross income (AGI) is $100,000 or more. But when asked about the $100,000 limit in a September 14th interview with George Stephanopoulos, Romney said the following:

No, middle income is $200,000 to $250,000 and less. So number one, don’t reduce– or excuse me, don’t raise taxes on middle-income people, lower them.

Hence, it's unlikely that Romney would agree to eliminate all deductions for someone making between $100,000 and $200,000 per year. The table shows that eliminating all deductions for just those with incomes over $200,000 only provides about $82 billion in increased revenue. This is just 43 percent of the projected revenue loss of $190 billion. Hence, it would seem necessary that deductions would need to be reduced severely for workers making between $100,000 and $200,000 per year. In addition, the table above shows the key deductions that would need to be severely limited. They would be chiefly be the deductions for home mortgage interest, state and local taxes, real estate taxes, and charitable contributions.

Following are five points for Romney's tax plan as given on his web site:

  • Make permanent, across-the-board 20 percent cut in marginal rates
  • Maintain current tax rates on interest, dividends, and capital gains
  • Eliminate taxes for taxpayers with AGI below $200,000 on interest, dividends, and capital gains
  • Eliminate the Death Tax
  • Repeal the Alternative Minimum Tax (AMT)
I think that the above table strongly suggests that these goals cannot be achieved without increasing the deficit, even if deductions are severely cut for those with incomes above $100,000. Of course, this analysis is not intended to be the final word on this subject. Its chief intention is to provide links to the key analyses and the IRS data that is being used in some of those analyses so that others can judge the issues for themselves.

Note: There is a discussion of this post at this link.

Tuesday, October 9, 2012

Distribution of Family Net Worth and its Change in the Economic Crisis

Distribution of Family Net Worth and its Change in the Economic Crisis

On June, 11th, the New York Times published a story on the just-released Survey of Consumer Finances (SCF) titled "Family Net Worth Drops to Level of Early ’90s, Fed Says". The SCF is a cross-sectional survey of U.S. families which has been done every three years since 1989 and includes information on families’ balance sheets, pensions, income, and demographic characteristics. The New York Times story begins:

The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.

A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.

The tables at this link are taken from the SCF and show that these numbers are in constant 2010 dollars. The following graph shows these inflation-corrected numbers since 1989:

Net Worth by Percentile

As can be seen, the top 10 percent has such a high relative net worth that the changes in the lower percentiles are difficult to discern. Hence, following is the same graph but going only up to a net worth of 240 thousand dollars:

Net Worth by Percentile to 240K

As can be seen, median family net worth in 2010 was just about where it was in 1992, 18 years earlier. Hence, the economic crisis did erase "almost two decades of accumulated prosperity" as stated in the article for the median family. For the mean family, however, it just erased almost one decade of accumulated prosperity.

Table 4 of the 2010 SCF (from whence this data came) gives family net worth, by selected characteristics of families, from the past eight surveys (1989 through 2010). It gives both the mean and the median of the subgroups determined by these characteristics so it's important to understand the difference between these two terms. Briefly, the mean of a series of numbers is the "average", computed by dividing the sum of the numbers by the count of the numbers in the series. The median, on the other hand, is the "middle" value when the numbers are arranged in order of value. If there are an even number of values, it is the average of the two middle values. Hence, the series 1, 2, and 6 has a mean of 3 (9 divided by 3) and a median of 2 and the series 1, 2, 3, and 6 has a mean of 3 (12 divided by 4) and a median of 2.5. Note that in both of these cases, the mean is greater than the median. This is because the relatively high value of the last number in the series (the 6) pulls up the mean more than it does the median. This is important to remember in interpreting the numbers in table 4.

The first graph above shows the overall mean and median family net worth. Note that the overall mean is much higher than the median and is just below the median of the 75 to 90 percentile. This is due to the fact that, like the example above, the majority of families have a net worth less than the mean. In fact, the above graph would indicate that about 80 percent of families have a net worth that is less than the mean.

One useful thing about looking at the medians of percentiles is that the median represents the central percent of the percentile. That is, the medians of the 0 to 25, 25 to 50, 50 to 75, 75 to 90, and 90 to 100 percentiles represent the 12.5, 37.5, 62.5, 82.5, and 95 percentiles, respectively. That is because percentiles, like medians, are obtained by arranging the series by order of value. Hence, the data shows that 50 percent of families had a net worth less than $77,300 in 2010 and three-quarters of those families (37.5 percent of all families) had a net worth less than $32,200. This and the other data shown in the graphs above show that net worth is strongly skewed toward the upper percentiles.

The following table gives the data in the above graphs as displayed from the tables at this link:

                              (thousands of 2010 dollars)                               percent
Family Characteristics     1989    1992    1995    1998    2001    2004    2007    2010   07-10
-----------------------  ------  ------  ------  ------  ------  ------  ------  ------  ------
Percentile of net worth
Less than 25                0.3     0.8     1.3     0.7     1.4     2.0     1.3     0.0  -100.0
25-49.9                    35.5    35.8    40.0    43.6    50.1    50.2    56.8    32.2   -43.3
Median for All Families    79.1    75.1    81.9    95.6   106.1   107.2   126.4    77.3   -38.8
50-74.9                   146.1   132.8   134.7   160.7   193.6   196.7   230.8   157.2   -31.9
Mean for All Families     313.6   282.9   300.4   377.3   487.0   517.1   584.6   498.8   -14.7
75-89.9                   354.6   309.4   313.3   413.6   528.0   586.7   601.2   482.7   -19.7
90-100                   1161.3  1007.9   967.8  1195.6  1602.6  1645.5  1991.9  1864.1    -6.4

The last column shows the percent change net worth from 2007 to 2010. As can be seen, the greatest percent loss to net worth was to the lower percentiles. The percent loss to the lowest 25 percent, second 25 percent, third 25 percent, next 15 percent, and top 10 percent were 100, 43.8, 31.9, 19.7, and 6.4 percent, respectively. Hence, the burden of the recent economic crisis weighed most heavily on those with the lowest net worth, at least in percentage terms.

Note: There is a discussion of this post at this link.

Friday, September 21, 2012

Keynes versus Hayek

I recently listened to an interesting Planet Money podcast titled Obama, Ryan And Two Dead Economists. You can listen to the podcast at this link. The two "Dead Economists" are John Maynard Keynes and Friedrich Hayek. The podcast includes an interview with Nicholas Wapshott, author of Keynes Hayek: The Clash That Defined Modern Economics. The difference between the two is briefly summarized in the book description which states the following:

John Maynard Keynes, the mercurial Cambridge economist, believed that government had a duty to spend when others would not. He met his opposite in a little-known Austrian economics professor, Friedrich Hayek, who considered attempts to intervene both pointless and potentially dangerous.

One interesting topic explored by the podcast is how some of Hayek's ideas are contrary to what Paul Ryan and other Republicans are pushing for. A Planet Money blog about the podcast states the following:

In our conversation, Wapshott cited to two places where Hayek and Republicans disagree:

1. Taxes

Cutting taxes before you have money to do is very Keynesian ... not Hayekian. Hayek specifically said unless the government is in surplus, you shouldn't cut taxes, because that would only increase the debt.

2. Universal Health Care

Hayek also said a country should have:

A generous welfare system, a safety net for people who fall through the cracks, everyone should be provided with home, universal healthcare. This seems to be skipped over by all the people who call themselves Hayekians.

An Ezra Klein column expands on this latter point, attributing the following statement to Hayek:

There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.

The column sources Hayek's well-known book The Road to Serfdom. However, it's worth reading the actual page to get the full context since the statement above seems to leave out a few lines.

In any event, I found the podcast very interesting and a good introduction to some of the subtleties in the theories of Keynes and Hayek. I highly recommend it.

Monday, August 13, 2012

Laffer on the Ineffectiveness of Stimulus

On August 5th, the Wall Street Journal ran an editorial titled "Arthur Laffer: The Real 'Stimulus' Record". The author, Arthur Laffer, is an American economist best known for the Laffer Curve. The editorial begins as follows:

Policy makers in Washington and other capitals around the world are debating whether to implement another round of stimulus spending to combat high unemployment and sputtering growth rates. But before they leap, they should take a good hard look at how that worked the first time around.

It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.

Regarding this nearby table, monetary economist David Glasner says the following in a critique of the Laffer editorial:

So how did Laffer perform his calculation? He doesn’t say. All he does is cite the IMF as the source for his table. Thanks a lot, Art; that was really helpful, but unfortunately, not helpful enough to figure out what you are talking about.

Glasner is referring to the fact that the table gives the source of the data simply as "International Monetary Fund". It does seem that many discussions in the political arena are hamstrung (perhaps purposely) by the failure of the author to give a usable source, much less to explain his calculations. I've therefore taken the time to do what Laffer arguably should have done to begin with. I found this spreadsheet on the IMF site which appears to contain the numbers used by Laffer. The following two tables show how these numbers can be used to calculate Laffers figures:

               Gross domestic product, constant prices
                           Percent change                              (08+09)
Country             2006     2007     2008     2009     2010     2011  (06+07)
---------------- ------- -------- -------- -------- -------- -------- --------
United States      2.658    1.913   -0.337   -3.486    3.030    1.735     -8.4
Japan              1.693    2.192   -1.042   -5.527    4.435   -0.748    -10.5
Germany            3.889    3.394    0.809   -5.078    3.562    3.056    -11.6
France             2.658    2.234   -0.196   -2.631    1.382    1.715     -7.7
United Kingdom     2.607    3.466   -1.103   -4.373    2.092    0.655    -11.5
Italy              2.199    1.683   -1.156   -5.494    1.804    0.431    -10.5
Canada             2.823    2.200    0.689   -2.770    3.215    2.460     -7.1
Australia          2.682    4.676    2.500    1.373    2.544    2.035     -3.5
Spain              4.077    3.479    0.888   -3.740   -0.070    0.710    -10.4
Mexico             5.147    3.242    1.186   -6.275    5.543    3.967    -13.5
Korea              5.179    5.106    2.298    0.319    6.320    3.634     -7.7
Turkey             6.893    4.669    0.659   -4.826    9.006    8.460    -15.7
Netherlands        3.394    3.921    1.804   -3.479    1.633    1.266     -9.0
Switzerland        3.630    3.645    2.095   -1.878    2.714    1.851     -7.1
Sweden             4.557    3.431   -0.774   -4.845    5.845    3.991    -13.6
Poland             6.227    6.785    5.127    1.606    3.944    4.350     -6.3
Norway             2.443    2.652    0.009   -1.661    0.654    1.688     -6.7
Belgium            2.702    2.900    0.957   -2.841    2.266    1.893     -7.5
Austria            3.670    3.706    1.396   -3.810    2.315    3.107     -9.8
Denmark            3.395    1.583   -0.784   -5.834    1.296    1.050    -11.6
Chile              5.825    5.207    3.034   -0.860    6.137    5.924     -8.9
Greece             4.614    3.032   -0.137   -3.258   -3.507   -6.860    -11.0
Finland            4.411    5.335    0.294   -8.354    3.732    2.855    -17.8
Israel             5.594    5.497    4.028    0.837    4.846    4.707     -6.2
Portugal           1.448    2.365   -0.008   -2.908    1.383   -1.466     -6.7
Ireland            5.312    5.182   -2.972   -6.995   -0.430    0.705    -20.5
Czech Republic     7.020    5.735    3.099   -4.695    2.739    1.655    -14.4
New Zealand        0.997    2.840   -0.074   -2.071    1.215    1.441     -6.0
Hungary            3.900    0.100    0.900   -6.800    1.270    1.695     -9.9
Slovak Republic    8.345   10.494    5.751   -4.932    4.183    3.349    -18.0
Luxembourg         4.969    6.639    0.754   -5.300    2.678    1.004    -16.2
Slovenia           5.850    6.870    3.589   -8.008    1.380   -0.175    -17.1
Estonia           10.097    7.492   -3.671  -14.258    2.264    7.636    -35.5
Iceland            4.709    5.985    1.270   -6.807   -4.024    3.051    -16.2

                General government total expenditure
                           Percent of GDP                                 2009
Country             2006     2007     2008     2009     2010     2011     2007
---------------- ------- -------- -------- -------- -------- -------- --------
United States     35.852   36.672   39.196   43.981   42.142   41.397      7.3
Japan             34.489   33.312   35.730   39.982   39.002   40.675      6.7
Germany           45.559   43.506   44.046   48.104   47.869   45.625      4.6
France            52.934   52.595   53.329   56.725   56.668   56.321      4.1
United Kingdom    40.613   40.325   43.066   47.267   46.325   45.725      6.9
Italy             48.464   47.611   48.610   51.889   50.495   49.953      4.3
Canada            39.268   39.158   39.535   44.056   43.815   42.664      4.9
Australia         34.635   34.244   34.487   37.579   36.773   36.598      3.3
Spain             38.342   39.192   41.300   46.065   45.439   43.586      6.9
Mexico            22.818   23.148   24.606   28.314   26.928   26.211      5.2
Korea             21.535   21.886   22.387   23.030   20.999   21.658      1.1
Turkey            32.793   33.325   33.837   37.717   35.443   34.186      4.4
Netherlands       45.687   45.087   46.116   50.785   50.614   50.034      5.7
Switzerland       35.663   34.634   32.612   34.398   34.040   34.736     -0.2
Sweden            50.770   48.968   49.625   52.793   50.634   49.126      3.8
Poland            43.864   42.187   43.194   44.510   45.366   44.472      2.3
Norway            39.936   40.386   39.764   46.610   45.421   44.320      6.2
Belgium           48.603   48.320   49.900   53.828   52.942   53.450      5.5
Austria           49.141   48.602   49.335   52.893   52.603   50.449      4.3
Denmark           51.250   50.788   51.424   57.899   56.174   55.972      7.1
Chile             18.716   19.381   21.727   24.622   23.628   23.300      5.2
Greece            44.691   46.709   49.734   53.033   49.620   49.696      6.3
Finland           49.238   47.431   49.316   56.103   55.550   54.043      8.7
Israel            47.501   46.016   45.427   45.086   44.736   44.354     -0.9
Portugal          44.364   44.362   44.816   49.914   51.414   48.710      5.6
Ireland           33.406   36.194   42.301   47.937   65.637   44.143     11.7
Czech Republic    41.967   41.040   41.148   44.921   44.110   44.549      3.9
New Zealand       31.105   31.064   32.862   34.471   34.490   35.364      3.4
Hungary           52.164   50.641   49.205   51.380   49.453   48.441      0.7
Slovak Republic   36.521   34.210   35.049   41.704   41.100   38.375      7.5
Luxembourg        38.576   36.267   37.103   43.042   42.482   41.635      6.8
Slovenia          42.547   40.262   41.422   46.355   47.134   47.713      6.1
Estonia           34.573   34.853   41.037   47.654   44.713   43.123     12.8
Iceland           41.641   42.268   44.639   49.672   47.923   46.321      7.4
The numbers in the rightmost column of both tables exactly match the numbers in Laffer's table. Hence, first table shows that the change in real GDP growth in Laffer's table is equal to the annual GDP changes in 2008 and 2009 minus the annual GDP changes in 2006 and 2007. The second table shows that the change in government spending in Laffer's table is equal to the government spending in 2009 minus the government spending in 2007, both numbers taken as a percent of GDP.

Based on these numbers, Laffers editorial continues as follows:

The four nations—Estonia, Ireland, the Slovak Republic and Finland—with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).

This statement is based on Laffer's calculations for these four nations, shown in bold in the rightmost column of the above tables. Regarding Laffer's calculation of public spending as a percent of GDP, economist Lars Christensen says the following in another critique of the Laffer editorial:

One major problem with Laffer’s numbers is that he is using public spending as share of GDP to analyze the magnitude of change in fiscal policy. However, for a given level of public spending in euro (the currency today in Estonia) a drop in nominal GDP will naturally lead to an increase in public spending as share of GDP. This is obviously not fiscal stimulus. Instead it makes more sense to look at the level of public spending adjusted for inflation and this is exactly what I have done in the graph below. I also plot Estonian GDP growth in the graph. The data is yearly data and the source is IMF.

Following is a similar graph, also showing public spending adjusted for inflation (blue line) and GDP growth (red line) for Estonia. It also shows public spending as a percentage of GDP (green line), the spending values used by Laffer.

GDP Growth And Government Expenditures for Estonia: 2006-2011

The following table shows the values for real public spending as calculated from the IMF data:

                General government total expenditure
             Constant national currency* (index 2006=100)                 2009
Country             2006     2007     2008     2009     2010     2011     2007
---------------- ------- -------- -------- -------- -------- -------- --------
United States      100.0    104.3    109.4    120.1    118.0    116.7     15.8
Japan              100.0     97.7    101.0    107.7    108.2    110.1     10.0
Germany            100.0     98.0     98.3    102.9    105.6    101.9      4.9
France             100.0    102.6    103.2    107.2    107.6    108.0      4.7
United Kingdom     100.0    102.7    107.9    112.7    112.3    109.3     10.1
Italy              100.0    100.2    100.2    102.4    100.2     98.0      2.2
Canada             100.0    103.0    106.4    112.8    117.1    117.2      9.8
Australia          100.0    105.5    111.3    121.1    124.5    127.6     15.6
Spain              100.0    106.2    111.0    119.6    116.0    110.2     13.4
Mexico             100.0    106.4    115.8    123.8    124.2    128.2     17.4
Korea              100.0    106.3    109.4    113.6    110.9    115.9      7.3
Turkey             100.0    103.9    107.7    113.2    113.5    121.5      9.3
Netherlands        100.0    102.8    107.0    112.2    114.0    112.9      9.3
Switzerland        100.0    102.4     98.5    102.6    103.6    108.2      0.1
Sweden             100.0    100.7    101.3    102.4    103.3    103.8      1.7
Poland             100.0    104.2    110.9    116.4    121.9    123.3     12.2
Norway             100.0    106.2    111.8    118.1    120.3    124.5     11.9
Belgium            100.0    102.8    104.8    111.2    111.3    113.0      8.4
Austria            100.0    102.4    103.9    107.8    109.8    107.0      5.4
Denmark            100.0    101.2    102.5    108.4    108.1    106.9      7.1
Chile              100.0    109.3    116.9    134.6    145.3    151.1     25.3
Greece             100.0    109.1    116.2    121.3    106.2     97.6     12.3
Finland            100.0    102.9    106.3    110.5    112.1    112.5      7.7
Israel             100.0    102.1    101.5    103.3    105.9    108.5      1.2
Portugal           100.0    102.8    102.7    113.1    117.7    107.1     10.4
Ireland            100.0    112.2    120.6    124.0    167.5    111.7     11.7
Czech Republic     100.0    103.9    102.9    108.0    105.6    105.5      4.2
New Zealand        100.0    104.9    110.0    114.0    117.2    121.1      9.1
Hungary            100.0     94.9     92.4     89.4     85.6     85.0     -5.6
Slovak Republic    100.0    102.7    110.1    122.0    125.0    117.8     19.3
Luxembourg         100.0    101.6    105.7    115.8    120.4    118.9     14.3
Slovenia           100.0    101.7    106.8    112.2    112.4    112.4     10.6
Estonia            100.0    113.5    122.8    121.2    114.2    117.0      7.7
Iceland            100.0    108.2    115.2    115.4    108.4    107.1      7.2
A careful comparison of Christensen's graph and the graph above shows that real public spending (blue line) increases slightly faster on the former, reaching about 122 in 2011 versus 117 in the latter. This is likely because the graph above is using "Inflation, average consumer prices" as given in the IMF data whereas Christensen's data is likely using an alternate measure of inflation. However, the shapes of the line are basically the same and Christensen's following statement holds true for both:

So what happened in 2009? Inflation adjusted public spending dropped! This is what makes Estonia unique. The Estonian government did NOT implement Keynesian policies rather it did the opposite. It cut spending. This is clear from the graph (the blue line). It is also clear from the graph that the Estonian government introduced further austerity measures and cut public spending further in 2010. This is of course what Laffer calls “fiscal stimulus”.

In fact, the four countries with the most fiscal stimulus as measured by the real increase in public spending from 2007 to 2009 were Chile (25.3), the Slovak Republic (19.3), Mexico (17.4), and the United States (15.8)! That includes only one of Laffer's choice of 4 countries with the least growth in GDP rates. The other three had much lower increases in public spending of 11.7 (Ireland) and 7.7 (Estonia and Finland).

In summary, Laffer makes a number of mistakes in his editorial. The first is to compare growth in GDP rates with government spending as a percent of GDP. He is testing for a relationship between two variables but expressing one of them (spending) in terms of the other (GDP). That is, he is linking them by design! As an example of this link, suppose that spending remains constant but GDP drops. By simple arithmetic, this will cause spending as a percentage of GDP to rise and be interpreted by Laffer as stimulus. This seems like an incredibly elementary mistake for a professional economist to be making.

The second mistake is to select one span of data and look at only that data. Laffer chooses to look at GDP growth from 2006 to 2009 and government spending from 2007 to 2009. The tables at this link show calculation for these same variables going out to 2011 instead of 2009. As can be seen, this causes the results to be very different. For example, the 4 nations with the highest drop in GDP growth rates are Slovenia (-23.1), the Slovak Republic (-22.0), Greece (-21.1), and Iceland (-19.7) if the span is increased from 2009 to 2011.

It's often a good idea to look at all of the available data in graphical format (such as the one above) to get a look over all possible time spans. Similar graphs for Finland, Ireland, and the Slovak Republic can be found at the aforementioned link.

Finally, Laffer makes the mistake of not giving a precise source that allows his calculations to be checked. This may be as much of a mistake of the Wall Street Journal as it is for Laffer. I believe that all publications should mandate that precise sources be given and, if possible, links be provided to background material that explains the author's calculations. Then, others will be able to check the author's work, especially in the case where the publications chooses not to do so or does a poor job of doing so.

Note: There is a discussion of this post at this link.

Tuesday, July 31, 2012

Laffer on Judgement versus Data

Marketplace, a public radio program, has been covering Wealth and Poverty issues on its programs for several months. On July 26th, a segment titled "Arthur Laffer on income inequality, raising taxes" was broadcast. The audio can be downloaded from this link. Following is an excerpt from the transcript:

Horwich: Many economists will say the data is extremely inconclusive in practice as to how marginal tax changes actually affect personal and business activity. What makes you so sure?

Laffer: Because basically, these economists you talk about never worked in the real world. They're just looking at the econometrics and the data there. If you ever go and look at what's being recommended from the CPA firms, from financial planners. If you actually look at how they go through, do their tax returns -- believe me, they are more focused on their taxes than you and I are on their taxes.

Horwich: But am I right that I just heard you criticize economists for actually looking at the data and making their decisions based on that?

Laffer: No, no, not looking at the data. I think it's wonderful to look at the data. But I think it's really silly to look at this accurate data and not make any judgments beyond those aggregate data

I was especially struck by this last statement about judgement versus data. It sounded to me that Laffer has made the judgement to ignore the data! The whole point of carefully measuring the data is to test your judgements. I agree that taxes likely have an effect on individual behavior, prompting less effort at working and more effort at avoidance/evasion. However, who is to say how large these effects are and whether there are any counter effects? In this post on my blog , I quote page 115 of the book "The Coming Generational Storm", co-written by economist Laurence Kotlikoff which states:

...For tax cuts to raise revenues, pretax labor earnings have to rise by a larger percentage than the tax rate falls.

There are two competing forces at play in determining whether pretax earning rise, stay the same, or fall. On the one hand, workers may say to themselves, "Boy, now that taxes are lower, I can work less and still receive the same after tax pay. I'm going to cut back my workweek." On the other hand, they may say, "Boy, now's a good time to work more and earn more because taxes are lower on every extra dollar I earn". Economists call the first of these reactions the income effect. They call the second reaction, the substitution or incentive effect.

Some of the best labor economists in the country have spent their lifetimes measuring the income and substitution effects. The broad consensus of these experts is that the two effects are roughly offsetting. This means that if wage tax rates are cut by, say 15 percent, tax revenues will fall by 15 percent.

Only by looking carefully at all of the data, can one test one's judgements and make sure that one is not misjudging an effect or missing counter effects. I did that to the best of my ability in this analysis on my web site. For years, I've asked supply-siders to tell me any specific numbers or conclusions in my analysis that they disagree with. Alternately, I've asked them to post a link to one serious economic study that purports to show evidence of any income tax cut that has ever paid for itself. None have. So, until someone can provide me with a study or arguments that counter this analysis, I'll just have to stick with the data.

Note: There is a discussion of this post at this link.

Wednesday, March 21, 2012

How to Mislead with Statistics

On March 1st, the Senate Budget Committee held a hearing on tax reform to encourage growth, reduce the deficit, and promote fairness. Three expert witnesses testified. They were Dr. Leonard E. Burman, a professor at Maxwell School of Syracuse University, Dr. Diane Lim Rogers, the chief economist of the Concord Coalition, and Dr. Daniel J. Mitchell, a senior fellow at the Cato Institute. A video of the full hearing can be seen at this link.

Senator Ron Johnson begins questioning the panel of witnesses at about minute 97 of the video (this portion of the hearing is also posted on Senator Johnson's website and on YouTube). He began by having the following chart held up:

Senator Ron Johnson chart

According to Table 1.3 in the Historical Tables and Table S-1 of the Summary Tables from the most recent U.S. Budget, the 10-year outlays for these three periods are 15.936, 27.879 and 46.959 trillion dollars, respectively. Hence, the chart is technically correct.

One of the panelists, Dr. Mitchell, posted this chart on his blog and stated the following:

When Obama released his budget, I did a post showing how annual spending was going to be $2 trillion higher in 10 years than it is today. But I think I’ll steal Senator Johnson’s chart since it makes the same point more dramatically.

I’ve already confessed to having man crushes (in the philosophical sense) on Chris Christie, Marco Rubio, and Rand Paul. If Senator Johnson continues this good work, I may have to become really promiscuous.

In response, I posted the following comment:

I wrote the following about the above chart from Senator Johnson at :

In addition, that first chart that he [Senator Johnson] had held up was highly misleading. It listed the 10-year spending for the years 1992-2001, 2002-2011 (actual) and 2013-2022 (projected) to have been 16, 28, and 47 trillion dollars, respectively. Of course, the chart should have included the title "THESE NUMBERS ARE NOT CORRECTED FOR INFLATION AND ARE THEREFORE TOTALLY USELESS". He then goes into a discussion of receipts as a percentage of GDP. This is, in fact, probably the most useful way to measure receipts and outlays. As a percentage GDP, outlays in 1992-2001, 2002-2011, and 2013-2022 averaged 19.9, 21.2, and 22.5 percent of GDP, respectively. And Summary Table S-6 from the budget projects that, from 2013 to 2022, discretionary outlays will fall from 7.7% to 5.0%, mandatory outlays will rise slightly from 14.0% to 14.4%, and net interest will rise from 1.5% to 3.3% of GDP. Hence, the big increase in spending will come from interest as rates rise from their current low rates. One other item of interest is that receipts for the three 10-year periods are 18.9%, 16.7%, and 19.2%, respectively. Hence, a part of the debt problem is the drop in receipts over the last decade.

Another odd, if not misleading, comment was made by Dr. Mitchell after Diane [Lim Rogers]. He pointed out that for much of our early history, the tax rate was zero and that zero would be the rate in his fantasyland. This would indeed be a fantasyland in that I suppose that the revenue fairy would have to pay for the armed forces and any other government services Dr. Mitchell feels are necessary. Also, he fails to mention that some taxes, like tariffs were much higher in the past.

The comments were moderated so I commend Dr. Mitchell for allowing the comment. However, I believe that Senator Johnson's chart is highly misleading and not worth the praise that Dr. Mitchell heaps on it. If one wishes to measure the "real" increase in outlays, the numbers need to be corrected for inflation (as they are in column 6 of Historical Table 1.3). And if one wishes to measure the real per-capita increase in outlays, the numbers need to be corrected for inflation and population growth. As mentioned in the comment, the most common and likely most useful way to measure receipts and outlays is as a percentage of GDP.

On the other hand, I am not overly surprised by Dr. Mitchell's admiration for Senator Johnson's chart. I first became familiar with Dr. Mitchell writings when he worked for the Heritage Foundation. The first one that I remember seeing was titled The Historical Lessons of Lower Tax Rates. Following is a chart from that article:

Dr. Daniel Mitchell Chart 10

The numbers in this chart are similarly not corrected for inflation. The simplistic argument that "tax revenues nearly doubled in the 1980s" (as stated in the title) prompted me to post an analysis titled Effect of Reagan, Kennedy, and Bush Tax Cuts on Revenues. Following is the short analysis at the beginning of the article:

The argument that the near-doubling of revenues during Reagan's two terms proves the value of tax cuts is an old argument. It's also extremely flawed. At 99.6 percent, revenues did nearly double during the 80s. However, they had likewise doubled during EVERY SINGLE DECADE SINCE THE GREAT DEPRESSION! They went up 502.4% during the 40's, 134.5% during the 50's, 108.5% during the 60's, and 168.2% during the 70's. At 96.2 percent, they nearly doubled in the 90s as well. Hence, claiming that the Reagan tax cuts caused the doubling of revenues is like a rooster claiming credit for the dawn.

Furthermore, the receipts from individual income taxes (the only receipts directly affected by the tax cuts) went up a lower 91.3 percent during the 80's. Meanwhile, receipts from Social Insurance, which are directly affected by the FICA tax rate, went up 140.8 percent. This large increase was largely due to the fact that the FICA tax rate went up 25% from 6.13 to 7.65 percent of payroll. The reference to the doubling of revenues under Reagan commonly refers to TOTAL revenues. These include the above-mentioned Social Insurance revenues for which the tax rate went UP. It seems highly hypocritical to include these revenues (which were likely bolstered by the tax hike) as proof for the effectiveness of a tax cut.

Hence, what evidence there is suggests there to be a correlation between lower taxes and LOWER revenues, not HIGHER revenues as suggested by supply-siders. There may well be valid arguments in favor of tax cuts. But higher tax revenues does not appear to be one of them.

This is followed by a much longer analysis that corrects the numbers for inflation and looks at a number of other factors. In any case, the above chart in Dr. Mitchell's paper is followed by the following chart:

Dr. Daniel Mitchell Chart 11

I wrote the following about this chart in 2005:

Chart 11 is titled "Lower Tax Rates Work: Revenues Grew Faster Under Kennedy and Reagan" and shows the average annual increase in real income tax revenues for five time spans. I believe that the time span 1962-1969 was meant to be 1962-1968 as that most closely matches the budget numbers. The table below shows the numbers from the chart and my own calculations from the 1997 U.S. Budget.

First year............... 1953 1962 1969 1977 1981 1990
Last year................ 1961 1968 1976 1980 1989 1995
Number of years in span.. 9 7 8 4 9 6
Revenue Growth (chart 11) 0.01 4.79 1.53 ---- 2.2 1.34
Revenue Growth (budget).. 0.11 4.67 1.55 7.48 2.19 1.56

In looking at Chart 11, the first glaring question is what in the world happened to the time span 1977-1980!? Is it missing because it had a 7.48% growth rate, very much confusing the issue? In addition, why are the time spans of varying lengths?

The above charts are just three examples of how data can be presented in a misleading manner. The first two present numbers that have not been corrected for inflation or population. In addition, they look at relatively short time spans. The last chart seems to be an example of cherry-picking. The data from 1977 to 1980 which goes counter to the conclusion that the author is proposing is simply deleted. In addition, the varying length of the time spans seems suspicious.

These types of charts prompted me long ago to start crunching the data myself and presenting it on my website. Of course, everyone doesn't have the time or inclination to crunch all of the numbers themselves. I only have time to crunch those that especially interest me. However, there are a couple of things that everyone can do. First of all, you can search out opposing analyses which may point out flaws in the data or the way that it's presented. Secondly, you can demand verifiable sources for any data with which you are presented and, when possible, verify it. I can't count the number of times I've come across data that is cherry-picked or just plain wrong. The only way to determine this is to ask for the source and verify the data. If the data is unsourced or sourced in a way that cannot be easily verified (such as "IRS data"), it's probably best to ignore it. It may be unsourced or badly sourced for a reason.

Note: There is a discussion of this post at this link.

Wednesday, February 22, 2012

Does the Payroll Tax Cut Affect the Social Security Trust Fund?

On February 19th, the following conversation took place between interviewer Jake Tapper and Robert Gibbs on ABC's "This Week":

TAPPER: The president got something of a political victory this week when the House and Senate came to an agreement on the payroll tax extension, but it's not paid for, the $100 billion, so that payroll tax money will not be paid into the Social Security Trust Fund. One member of the president's own party called this bill "a devil's deal" and went on the say this.


HARKIN: I'm dismayed that Democrats, including a Democratic president and a Democratic vice president, have proposed this and are willing to sign off on a deal that could begin the unraveling of Social Security.


TAPPER: That's quite an ad against the president's re-election campaign from Democratic Senator Tom Harkin. Is this the unraveling of Social Security?

GIBBS: No, I strongly disagree with that characterization. This does not in any way threaten the livelihood of Social Security.

TAPPER: A hundred billion dollars is not going into the trust fund.

GIBBS: What it does do is help our economy get stronger at a time in which middle-class families we know continue, Jake, to struggle greatly with the high cost of living these days. And I think it was an important step. And I'm glad that Republicans in Congress accepted the president's position that we can't raise taxes on the middle class right now. It was an important step. It will help continue our economic recovery. And it in no way threatens the livelihood of Social Security.

The above is excerpted from this transcript on the ABC web site. Jake Tapper appears to believe that the reduced funding caused by the extended payroll tax cut will reduce the funds flowing into the Social Security trust fund. He states "payroll tax money will not be paid into the Social Security Trust Fund" and "a hundred billion dollars is not going into the trust fund". It's unclear if Robert Gibbs believes this since he only states that this "in no way threatens the livelihood of Social Security".

In any case, the same belief is expressed in this transcript of an interview between interviewer Judy Woodruff and Nancy Pelosi that was aired on February 16th on the PBS Newshour. Following is an excerpt:

JUDY WOODRUFF: Do you worry though that this does take money out of the Social Security trust fund and that it may never be fully be refunded, repaid?

REP. NANCY PELOSI: No, I don't worry about that. I think that this should be the last year for it.

I do believe that other factors in economic growth are weighing in now and we see an improvement in our growth possibilities but I think one or two years, no, the trust fund can handle that.

In fact, the payroll tax cut will have no direct effect on the Social Security trust fund. Following is an except from an LA Times article:

To be fair, thus far the payroll tax holiday hasn't impaired Social Security's fiscal resources one bit. By law, 100% of the cut must be compensated for by transfers from the general fund; those transfers have come to about $130 billion since 2010, covering the original "temporary" one-year holiday and a two-month extension passed late last year.

The new extension will require a further transfer of about $94 billion, according to the Congressional Budget Office.

This agrees with an article on the White House web site titled Will Extending the Payroll Tax Cut Affect Social Security? No.. This article was posted on December 9th, presumably for the two-month extension. Following is an excerpt:

While more money stays in workers’ paychecks, the law specifies that Social Security receive every dollar it would have gotten even without the payroll tax cut. This happens by automatically transferring resources from the government’s general coffers to the Social Security Trust Fund. And indeed, the chief actuary of the Social Security Administration has confirmed that the payroll tax cut would have no impact on the Trust Fund.

So what was Senator Harkin talking about in the video clip excerpted on ABC's "This Week"? A Huffington Post article mentions his statement that this deal "could begin the unraveling of Social Security" but continues as follows:

Harkin argued that Social Security had always been strong and protected because it was funded by its own dedicated tax stream that ensured every American would be guaranteed a basic income in their retirements, and that the program added not "even one dime to the deficits or the national debt."

But he said now that Congress was going to pay for this cut with borrowed money from the general treasury funds, the best argument of the program's defenders was gone.

"With this bill, we can no longer say that. We can no longer say that Social Security doesn't contribute to the deficit," Harkin said.

He argued that a far better plan would have been to simply grant working Americans rebates on their income taxes, the way Presidents Obama and George W. Bush had done in recent years.

It would be true that a rebate on income taxes would likely be easier to end. As stated in the aforementioned LA Times article, "with every extension of the payroll tax holiday, which was first enacted in 2010, the prospect that Congress will ever restore the tax to its statutory 6.2% of covered income recedes a little bit further over the horizon".

That seems to be a very common problem with "temporary tax cuts". They are very difficult to end as they are invariably depicted as major tax increases. The same problem occurred when the Bush tax cuts were scheduled to expire in 2011. This would seem to be a good argument NOT to implement temporary tax cuts that we cannot afford to make permanent, at least not without a credible plan for ending them.

In any case, it does seem to be a valid concern that the payroll tax cut could weaken Social Security by bringing into question its status as a self-funded program. But it clearly does not affect the Social Security trust fund or the payment of benefits directly.

Note: There is a discussion of this post at this link.

Monday, February 13, 2012

Is the Capital Gains Tax Double Taxation?

My prior post looked at the calculations behind Warren Buffett's claim that he paid a lower tax rate than any of the other people in his office. Specifically, Buffett claims that he paid about 17% of his taxable income in tax and his office staff paid percentages somewhere in the 30s. A number of articles disputed this claim, stating that, due to the double taxation of capital gains, Buffett actually paid a much higher rate. For example, a Wall Street Journal editorial titled "The Buffett Ruse" states the following:

This is because wealthy tax filers make most of their income from investments. Such income is taxed once at the corporate rate of 35% and again when it is passed through to the individual as a capital gain or dividend at 15%, for a highest marginal tax rate of about 44.75%.

This rate of 44.75 equals the top corporate tax rate of 35% plus 15% (the capital gains rate) of the remaining 65 percent. However, the 35% figure is the top statutory corporate tax rate. The effective or average corporate tax rate is well below that. In fact, a recent story in The Business Review references another Wall Street Journal article as follows:

A business tax break meant to spur corporate investment has dropped the effective corporate tax rate to the lowest level in 40 years, The Wall Street Journal reported, citing data from the Congressional Budget Office.

Total corporate federal taxes paid fell to 12.1 percent of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30. That is the lowest level since at least 1972, and well below the 25.6 percent companies paid on average from 1987 to 2008.

Also, a number of sources suggest that the burden of corporate taxes do not fall fully on shareholders. For example, a paper from the Federal Reserve Bank of Kansas City states:

Corporations are responsible for remitting corporate taxes to the state, but the actual burden of the state corporate tax falls elsewhere - on shareholders, consumers, workers, or some combination of the three.

Further on, it states:

The most recent economic research suggests that labor bears the majority of the corporate tax burden at the national level. In response to higher state corporate tax rates, corporations may lower wages, thereby passing the burden onto workers.

Another source, an American Enterprise Institute article, states the following:

In this article, we argue that neither of the agencies' assumptions--that capital bears 100 percent or that no one bears the tax--is valid. Both approaches fail to reflect recent empirical and theoretic research that finds workers bear a large portion of the burden of the CIT. In particular, the empirical studies suggest that distribution tables that allocate 50 percent or more of the burden to labor may be closer to the truth.

Following is an excerpt from an article by Dean Baker regarding the argument that paying taxes on dividends amounts to "double-taxation":

The trick in this argument is that it ignores the enormous benefits that the government is granting by allowing a corporation to exist as a free standing legal entity. The most important of these advantages is limited liability. If a corporation produces dangerous products or emits dangerous substances that result in thousands of deaths, shareholders in the corporation cannot be held personally responsible for the damage. The corporation can go bankrupt, but beyond that point, all the shareholders are off the hook, the victims of the damage are just out of luck.

This goes along with the argument that the corporation and the shareholders are separate entities receiving separate benefits and government services. The government helps create the environment in which the stock market can function, to the benefit of the shareholder. It likewise helps create the environment in which corporations can flourish and provides corporations with the benefit that Dean Baker describes above. It can be argued what level of taxation these services merit. But the above arguments suggest that the taxes on capital gains and dividends do not qualify as double taxation.

Note: There is a discussion of this post at this link.

Sunday, January 22, 2012

Does Buffett Pay a Lower Tax Rate than his Secretary?

The January 23rd issue of Time Magazine features Warren Buffett on its cover and contains a story titled "Warren Buffett Is on a Radical Track". Following is an excerpt:

Buffett paid a tax rate of only 11% on adjusted gross income of $62,855,038 in 2010. (After deductions, most of which were for charitable contributions, he paid a still low 17% rate on his $39,814,784 of taxable income; his office staff, meanwhile, paid percentages somewhere in the 30s.)

Buffett discussed this in an op-ed that he wrote titled "Stop Coddling the Super-Rich" that was published in the New York Times on August 14, 2011. He discusses the exact method by which he calculated these tax rates in a letter sent to Republican Representative Tim Huelskamp. In it, he states:

I would guess that if you would take line 60 from your 1040, plus payroll taxes paid by you and on your behalf, as a percentage of line 43 - taxable income - your number would be in the 30s just like all of the people in our office except for me. These people make between $60,000 and $1 million annually and, year after year, end in the 30s.

He gives his exact numbers later in the letter, stating:

To be specific, my adjusted gross income (line 37) was $62,855,038, my taxable income (line 43) was $39,814,784 and my federal income tax (line 60) was $6,923,494. In addition, my payroll taxes were $15,300.

The following tables combines the numbers from these articles:

Dollars Tax Item
---------- -------------------------------
62,855,038 Adjusted Gross Income (line 37)
23,040,254 Deductions
---------- -------------------------------
39,814,784 Taxable Income (line 43)

% of
% of Taxable
Dollars AGI Income Tax Item
---------- ------- ------- ----------------------------
6,923,494 11.02 17.39 Federal Income Tax (line 60)
15,300 0.02 0.04 Payroll Tax
---------- ------- ------- ----------------------------
6,938,794 11.04 17.43 Total Tax

Few people seemed to question Buffett's figures for his own tax rate. However, a number of articles questioned the tax rates estimated for his staff. For example, an online Forbes op-ed stated the following:

What stands out for me is this - either these folks in his office are making some crazy salaries, or they’re getting awful tax advice, or both. Here’s why I say this: In order to have a tax rate of 41% (which presumably includes the highest state income tax rate for Nebraska taxpayers of 7%), an individual would have to make in excess of $373,651 in taxable income, no matter whether they’re a single taxpayer or married.

At the other end of the spectrum, in order to have an effective overall tax rate of 33%, the individual’s income would have to be in the neighborhood of $209,250 if married, $171,850 if single.

$373,651 was the beginning of the 35% bracket in 2010. Hence, the author appears to be taking 41%, subtracting 7% for Nebraska state income tax, and getting 34 percent. Since this is above the next lower bracket of 33%, a taxpayer would need to have some income in the 35% bracket to reach 34 percent.

Similarly, the beginning of the 28% bracket in 2010 was $209,250 if married (filing a joint return) and $171,850 if single. Hence, the author appears to be taking 33%, subtracting 7% for Nebraska state income tax, and getting 26 percent. Since this is above the next lower bracket of 25%, a taxpayer would need to have some income in the 28% bracket to reach 26 percent.

The problem is that these calculation do not measure the federal tax rate as Buffett describes in his op-ed referenced earlier in the article. That op-ed states the following:

Last year my federal tax bill - the income tax I paid, as well as payroll taxes paid by me and on my behalf - was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income - and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

Hence, Buffett is referring to the federal tax rate which does not include the maximum Nebraska state tax of 7 percent. However, it does include payroll taxes paid by the employee and by the employer on the employee's behalf. The following tables show examples of AGI (adjusted gross income), wages, and taxable income taken from IRS data for 2009:


% of Taxable Income
Taxable Income Payroll Total Income Payroll Total
AGI Wages Income Tax Tax Tax Tax Tax Tax
--------- -------- -------- ------- ------- ------- ------ ------ ------
45,000 41,000 26,000 3,481 6,273 9,754 13.4 24.1 37.5
61,000 55,000 39,000 5,931 8,415 14,346 15.2 21.6 36.8
86,000 76,000 59,000 10,931 11,628 22,559 18.5 19.7 38.2
133,000 114,000 97,000 20,869 16,549 37,418 21.5 17.1 38.6
1,720,000 860,000 1,493,000 500,194 38,183 538,377 33.5 2.6 36.1
2,955,000 1,339,000 2,576,000 879,244 52,074 931,318 34.1 2.0 36.2


% of Taxable Income
Taxable Income Payroll Total Income Payroll Total
AGI Wages Income Tax Tax Tax Tax Tax Tax
--------- -------- -------- ------- ------- ------- ------ ------ ------
45,000 41,000 26,000 3,063 6,273 9,336 11.8 24.1 35.9
61,000 55,000 39,000 5,013 8,415 13,428 12.9 21.6 34.4
86,000 76,000 59,000 8,013 11,628 19,641 13.6 19.7 33.3
133,000 114,000 97,000 16,613 16,549 33,162 17.1 17.1 34.2
1,720,000 860,000 1,493,000 492,858 38,183 531,041 33.0 2.6 35.6
2,955,000 1,339,000 2,576,000 871,908 52,074 923,982 33.8 2.0 35.9

The values for AGI, wages, and taxable income are the averages for various brackets in the IRS data, rounded to the closest thousand dollars. The value for Income Tax is the tax on taxable income, assuming that all of that income is ordinary and using the 2010 tax tables. The value for Payroll Tax is the payroll tax paid by employee and employer on wages. As can be seen, all of the rates for total tax (income and payroll tax) as a percentage of taxable income is in the thirties for all of the examples. Hence, Buffett's claim that his staff's tax rates "ranged from 33 percent to 41 percent and averaged 36 percent" seems perfectly reasonable.

There are some other articles such as this one from the Cato Institute that claim that Buffett's numbers are flawed. However, that article looks at taxes as a percentage of AGI (adjusted gross income) whereas Buffett is looking at taxes as a percentage of taxable income. Taxable income equals the AGI minus deductions. It seems to me that deductions are a separate issue. The way to fix any perceived problem with inequitable deductions is to modify the deductions, not to tax income from labor and investments at a different rate to make up for this perceived inequity. In any event, Buffett's numbers appear to be perfectly reasonable for the measurement that he clearly defines. To argue that there are better measurements is fine. But the claim that the numbers are flatly wrong is itself flatly wrong.

Note: There is a discussion of this post at this link.

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 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.

Contact Me


Email *

Message *