Φ Joins the 47%

I did my taxes this week.

As my loyal readers know, I spent the first five months of 2011 in Southwest Asia, for which trouble I was reasonably well compensated.  But did you know that, subject to certain limits which never applied in my case, money earned in a war zone is free of federal income tax?

It gets better than that.  Between my tax-free earnings and 2 1/2 months unemployment, my adjusted gross income only barely covered my itemized deductions and exemptions.  Which left me with a taxable income of:  less than $2k.  Needless to say, I'm getting every dime of the income taxes I did pay refunded.

It gets better yet.  It turns out that, with two children and a taxable income of $2k, TaxAct.com qualified us for the poverty programs.  That’s right:  you, my good tax-paying readers, actually subsidized my refund by an additional $3k under the Earned Income Tax Credit, over and above the refund of the income taxes I actually paid!

Thank you, 53%!

Suckers.

Percentiles

Trumwill and Web go back and forth on what counts as taxation.  The question comes up in the context of the response to the OWS slogan – “We are the 99%” – from the Right:  “We are the 53%,” i.e., the 53% of the population that pays federal income taxes, specifically those that have a positive number on line 60 of the IRS Form 1040.*

This number, of course, excludes payroll taxes:  social security, Medicare, and Medicaid “contributions”, as well as taxes on corporations from which a given taxpayer may receive dividends (which the government taxes again as income).  Not to mention state, local, sales and property taxes.  National Review’s Kevin Williamson makes this point in a bloggingheads.tv debate below:

On the other hand, social security, while technically a welfare program, is under current law a government pension:  paying social security taxes to the government creates a government liability payable directly to the individual taxpayer.  Likewise, Medicare taxes.

And state and local taxes are just that:  state and local.  Granted, some nonzero percentage of sub-national fiscal liabilities are created by federal fiat, and that is a shame irrespective of the particular spending on the merits.  But by and large, state and local spending of state and local taxes are spent on state and local priorities at the behest of state and local electorates .  Federal spending is a different question.

Corporate taxes are a little trickier:  they fall on the rich and poor alike in proportion, not to their overall income, but to the measure in which they own the companies being taxed.  For this reason, among others, corporate taxes should be abolished in favor of raising marginal rates.  But really:  given that wages and salaries are paid pre-tax, how much of the income of the 47% comes from already taxed dividends?  I’m thinking, not so much.

So really, federal discretionary spending is funded (not counting Red Chinese loans) by only 53% of the population.  National Review’s Rich Lowry (if you can put up with his interlocutor’s screeching interruptions) gives the best explanation yet for why this matters:

Rich is at pains to disagree with the application of this principle – that enlarging the class of non-federal-income-tax-paying citizens correspondingly enlarges the constituency for all-upside increases in federal spending – but he never gets to explain why.  He hints that his reasoning is similar to Kevin’s:  it’s a lousy way to build a political coalition.  I would add that this is especially true now that the relationship between spending and taxes is attenuated at best – remember those Red Chinese loans.

Actually closing the gap in the long term will requires painful cuts in federal spending and substantial income taxes running all the way through that 53%.  Unfortunately, the bulk of federal spending is supported by political coalitions sufficiently powerful that, with a few exceptions like Paul Ryan, neither political party has made any serious proposals to meaningfully cut it.  Similarly, neither political party has made any serious proposals to raise revenue, and of course both parties actively collaborate against shaping America’s population and economy into ones that would actually generate the wealth necessary to close this gap. 

* It could be even more technical than that.  I observe from my own 1040 that an additional $800, the “Making Work Pay” credit, was added to my return on line 63 as if it were tax that had been withheld.  (It was not.)

Taxing Status

Megan McArdle and a liberal professor (I assume) at UCLA named Mark Kleiman have a bloggingheads discussion about a couple of issues. They began by discussing crime, and crime prevention. This appears to be Kleiman's field of expertise, and he shares a number of statistics and anecdotes about ways of reducing crime that are well worth the 86 minutes you spend listing to, especially if you're looking for an excuse to avoid working on your thesis, like, um, other people (yeah, that's it . . .).

Megan makes an important point about the effect of high marginal tax rates that I hadn't heard expressed quite this way before. It has been well understood that increases in marginal tax rates change not only the investor class's risk-reward calculations, but also the point at which people make trade-offs between work and leisure. At some sufficiently high level of taxation, the heart surgeon (for instance) decides that the after-tax income of an additional dollar in revenue isn't worth the X amount of time he has to put in at the office. So he arranges his life to work a shorter day, or he heads off to Florida for the last two months of the year. This inevitably reduces the supply of heart surgery in the economy, which raises its price for everybody, including people who weren't the intended targets of the higher rates. Plus, to the extent that the surgeon's activity employed ancillary services like nursing, the economic wellbeing of these workers is depressed.

But Megan makes an additional point. Not only do the tax rates affect the surgeon's tradeoff between work and leisure, but it affects his tradeoff between work and any other non-taxable activity. She gives the example of house painting. At market prices, the surgeon might rather be doing surgery than painting his own house, but after taxes, he may decide to use his "leisure" time painting his own house. This has immediate downstream affects: not only is the surgeon shielding himself from taxation, but he is doing something that he doesn't particularly enjoy and may do it poorly and inefficiently, reducing his overall wellbeing. The professional painter, meanwhile, is hit even harder: the surgeon's choice has cost him the income for doing something he does enjoy and at which he has a competitive advantage.

Consider restaurants. People eat out because they enjoy paying people to prepare meals for them, and restaurants presumably enjoy economies of scale and efficiency in food preparation. But this, too, is all taxable activity. The heart surgeon can reduce the activity he does well (surgery) in favor of an activity he does poorly (cook), at net loss to both himself and the restaurant, and greater in-efficiency all around.

Now, it is true that many professionals (my relatives among them) enjoy the mental relaxation that working with their hands affords them. And others, like me, are constitutionally averse to paying anyone to do anything for me that I think I can do myself (with a few exceptions). And indeed, few families would choose to eat out all them time, regardless of tax policy. But before the crunchy-cons among us wax lyrical about the benefits of "nutritious, lovingly prepared meals served at home," let me point out that for many families these days, "home-cooked" means Hamburger Helper or frozen pizza.

Obviously, government expenditures have to be financed, so taxation will always be necessary. And I am officially agnostic about what level of taxation results in a net social loss. But this is an important consideration.

One more thing. It's not every day that you can catch a liberal honestly expressing their worldview in all its repulsive glory. So I have to praise Kleiman's candid admission that his enthusiasm for high marginal tax rates has less to do with raising revenue for the government and more about hurting people who make more than he does. According to Kleiman, money buys social status, and status is zero-sum. Ergo, the wealth of someone like Bill Gates allows him to acquire status at the direct expense of . . . Mark Kleiman!

I suppose I could say that, whatever you may think of Bill Gates, he acquired his money, and therefore his "status", in the free market by persuading customers to buy his operating system and manufacturers to install it on their computers. He didn't do it by using the power of the state to take other people's status and give it to himself.

More on point, though, I would say this:

Q: Which is the tenth commandment?

A: The tenth commandment is, "Thou shalt not covet thy neighbor's house. Thou shalt not covet thy neighbor's wife, nor his manservant, nor his maidservant, nor his ox, nor his ass, nor anything that is thy neighbor's."

Q: What is required in the tenth commandment?

A: The tenth commandment requires full contentment with our own condition and a right and charitable frame of spirit towards our neighbor and all that is his.

Q: What is forbidden in the tenth commandment?

A: The tenth commandment forbids all discontentment with our own estate, envying or grieving at the good of our neighbor, and all inordinate motions and affections towards anything that is his.

Ross on the Tea Parties

I missed our local Tea Party yesterday. It conflicted with dinnertime, and anyway, I'm now more content to conduct my political activism from the comfort of my laptop. But word among people at choir practice yesterday evening was that it was well-attended.

Ross Douthat, who defends the demonstrators against some pretty absurd criticism, also had this to say:

But they do have all of the weaknesses of the anti-war marches: Their message is intertwined with a sense of disenfranchisement and all kinds of inchoate cultural resentments, they've brought various wacky extremists out of the woodwork (you know, like Glenn Beck), and just as George W. Bush benefited from having opposition to his policies identified with peacenik marchers in Berkeley and Ann Arbor, so Barack Obama probably benefits from having the opposition (such as it is) associated with a bunch of Fox News fans marching through the streets on Tax Day, parroting talk radio tropes and shouting about socialism.

Trumwill has said something similiar about opponents of the death penalty: they conduct their protests in such a way as to make their opposition of a piece with a broader crticism of (take your pick) American foreign policy, race relations, capitalism, or what-have-you. This alienates potential allies who do not accept their seamless garment of left-wing ideology. (Trumwill: I searched for your post on this point without success; it may have disappeared down the Bobvis memory hole.)

But Ross's link above goes to a collection of photos of the protest in the Washington Independent. Take a look for yourselves, for I will comment on them one by one:

• A poster thanking Fox News. I don't watch news on TV, but from what I have seen, I haven't found anything to support the liberal syllogism, "if it was on Fox, then it must be either wrong or more wrong than if it was on CNN."

• A poster supporting the idea that America is a Christian nation. This can be interpreted in several ways, some of which make the statement indisputably true. But it's not really on topic in a protest about the doubling of the national debt in the first year of the Obama administration.

• A joke about the teleprompter. This is only interesting in the context of the media's fawning coverage of Obama's speaking ability and misleading comparisons to Bush's unscripted verbal stumblings. But also not relevant to the issue at hand.

• The birth certificate. Look, the only actual evidence for the proposition that Obama wasn't really born in Hawaii is the fact that he hasn't produced it! But then, such evidence can be wrong: people often hide their innocence for their own dark reasons. Saddam Hussein hid WMD that he didn't really have from U.N. weapons inspectors, for instance; Bill Clinton obstructed every request by Ken Starr for information regardless of its incriminatory content. Either way, questions about Obama's citizenship amount to "Trutherism", and mainstream conservatism should keep it at arm's length. Not really relevant to the issue at hand.

• A poster urging border security. Depending on the presentation, an issue directly relevant to our fiscal health. And in fact, a more popular position even than opposing the runaway spending.

• Another sign criticising the runaway debt passed on to unborn children. Again, directly relevant. Although, I suppose that a liberal could read into it a position on abortion, and it otherwise highlights America's fertility patterns in ways that give liberals hives. But the protest is aiming at the swing voters, not the far left.

• A slew of conservative media personalities. So what? I mean, even if I was in the center, you would still have to explain to me what it is that makes any of these people so disreputable that they undermine that protestors' argument.

• Obama bin-lyin. A bad move. Exactly the kind of thing that amuses the true believers at the expense of alienating the majority of the country. But, yeah, mainstream conservatives do believe in free markets, not free terrorists.

• A reference to National Socialism. The Independent has it right: this is Godwin's law in action.

• Support for Pat Toomey. Completely appropriate considering Specter's voting record on the issue at hand.

• Keynes was wrong. Pretty nerdy. And hardly comprehensive. And yet, the consensus view is that the stagflation of the 70s had undermined Keynes' simplistic models of government spending. The fact that simplistic monetarist models are now also undermined doesn't make Keynes suddenly right again.

• Illegal immigrants are a fiscal burden. Exactly.

• Some Kenyan. In my darker moments, I think this too. But the public isn't ready.

• Ayn Rand references. Pretty nerdy. But here again, the only people who do know who John Galt is tend to be fans. So I don't see how this hurts.

These are what grass-roots protests look like. Some people will have trouble staying on message; others' creativity will be over the top. I don't know if these are representative of what the Tea Parties offered, but even if they are, I don't see anything here that throws me off my lunch. As Brandon Berg points out in the comments, these protests were a model of middle-class orderliness.

But then, perhaps I, too, live in the echo chamber. I'd like to know how these protests are really perceived by the swing voters. In the mean time, here is the picture that should be plastered across every t-shirt, banner, and protest sign going forward:

One more thing:

Still, here we are in the sixth year of the Iraq War, and all those anti-war protests, their excesses and stupidities notwithstanding, look a lot more prescient in hindsight than they did (to me, at least) when they were going on.

No, they don't. Virtually none of the protests to which Ross refers were offered because of their predictions about what actually happened, but for other reasons. What we saw at the anti-war rallies was third-world solidarity: in our post-Vietnam cultural moment, any tin-pot dictator that defies an American -- and especially a Republican -- president enjoys automatic support from a significant fraction of North American and European residents. That's very different from pointing out that the occupation will flunk the cost-benefit ratios.

No New Tax Cuts

I see that the cut-the-payroll-tax meme out and about.

I don't get it, for several reasons:

First, the only people who pay the payroll tax are who have jobs. That's going to be a declining number of us in this year and potentially for several years. We are not the ones who need tax relief.

Second, payroll taxes fund social security. Even if we assume that a payroll tax cut automatically cuts benefits for future retirees, it does nothing to reduce the present retirees' benefits, which is where the payroll tax revenue is actually being spent. However, it will hasten the day in which Social Security is insolvent.

I would be the first to favor a broad policy review that addresses the question of what we want Social Security to look like, and how best to transition. In the mean time, however, about the only payroll tax reform I could recommend is doing away with the fiction of the "employer share" of the tax. This would reduce labor costs, overcome the problem of wage "downward stickiness" during a deflation, and potentially limit future layoffs. The revenue could be made up by shifting the burden to the employees. Those in competitive fields could presumably renegotiate higher wages with their employers to make up the difference. Those in at-risk industries will see their take-home pay fall . . . but at least they keep their jobs!

We won't do this, of course. The Republicans wouldn't like it because it would look like a tax increase on workers. The Democrats wouldn't like it because it would look like a tax cut for business, and they like to pretend that Social Security is a good deal for workers because somebody else pays for part of it.

. . . . .

If I'm doing my math correctly, this is my 31st blog post this January -- one for each day of the month. This pace is unsustainable. I'm maybe a 12 posts a month level of writer, and my school work is suffering.

Death of the Death of the Death Tax

Half Sigma, in a rare break from PDS, alerts us to a possible compromise on the Estate Tax:

Obama plans to propose locking in the estate tax at the current year's levels: the first $3.5 million is exempt ($7 million for couples, and I'm not sure how that works), and after that there is a 45% tax.

This is far superior to the current law which has no estate tax at all in 2010, followed by a return to the 55% rate [with a $1M exemption - Φ].

To answer H.S.' question: the exemption is doubled by use of a device called a "living revocable trust". Let's consider a family with a net worth of $7M. Essentially, their common property is divided between the husband and wife by the terms of the trust. That way, both retain their separate $3.5M exemption. When the first of a couple dies, his half of the estate, $3.5M, is held in trust for the children pending the death of the other. In the mean time, she can draw on the income generated by the assets held in trust but may not directly dispose of it; this power rests with the trustees who, one hopes, are diligent in their duties.

On the substance, Obama's proposed compromise is probably close to the best possible deal. But I have to point out is that the debate thus far entirely misses the impact the estate tax structure has on large families. The exemption is constant regardless among how many heirs it is divided. If a couple has one heir, he gets the whole $7M, but if they have ten heirs, each only recieves $700K.

A viable Republican counter-offer would be to propose that each heir be exempted $7M, or some other amount perhaps. This would highlight the burden on large families, and may find in Obama a receptive consideration.

Also, why 45%? Why not tax the money at each heir's top marginal rate?

Also, can we get indexing? I predict that before this economic crisis is over, $7M will buy a lot less than it does now.

I will write my Congresscritter.