It all started on November 18, when The New York Times published an article by Nathaniel Popper and Nelson D. Schwarz headlined, Investors Rush to Beat Threat of Higher Taxes. Much of the discussion was about tax increases that would take place in 2013 if the fiscal
cliff curb is not averted, but the article quoted a woman in McLean, VA who is deeply concerned about what will become of her business if President Obama’s tax proposal is enacted.
Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.
Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.
“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.
Either Popper and Schwartz do not understand Obama’s proposal or they simply chose not to call Ms. Collins’ attention to her error–or perhaps they’re just media hacks. A number of bloggers responded with derision. Here’s Dave Wiegel:
How do you get to be as rich as the people in this New York Times story without ever figuring out how taxes work? [....]
You see these idiots every time a tax hike becomes possible again. They have no apparent idea how marginal rates work. Right now, if her and her husband make $250,000, they pay at most a 33% tax on some of that income. If they made $251,000, they would have to pay the same rates for everything except that last $1000 — that, they’d be taxed at 35%. If the rates increase across the board that top rate becomes 39.6%.
Derek Thompson argues that the NYT journalists should have at least gently explained to Collins that she was confused about the way tax rates work.
Kevin Drum provided a handy dandy tax table to help the “innumerate rich people” who are confused about marginal rates.
Their analysis is basically sound, except for the fact that it is not quite true. They have forgotten to look at deduction phaseouts, surtaxes, and the AMT, which are not taxes on marginal income.*
No matter what you have heard on the internet, there are in fact a lot of sizeable marginal inflection points for high earners. There are the Pease deduction phaseouts, temporarily abated by the Bush tax cuts but scheduled to go back into effect in 2013, which can eliminate up to 80% of deductions for couples who make more than about $175,000 (the number is indexed for inflation, so it changes every year): your deductions are reduced by 3% of the amount by which your income exceeds the threshhold. The student loan interest deduction phases out at $150,000 ($75,000 for singles). And a lot of tax-free savings opportunities disappear: educational savings accounts and IRAs have income limits, so your ability to use them starts phasing out in the low-six-figure income range. So do various educational and child tax credits. These things obviously aren’t a huge deal for people who make $1,000,000 a year but they can be a huge tax hit for couples in the $150,000 to $300,000 range. Come 2013, they will be an even bigger hit.
And we haven’t even discussed the AMT, which virtually eliminates deductions for couples who make the mistake of doing things like buying a house, having children, or living in a high tax state.
McArdle provided this chart:
I have to be honest, I’m not going to spend a lot of time worrying about people as wealthy as the ones McArdle is freaked out about. But in any case, Kevin Drum took note of the issue McArdle raised in a follow-up to his earlier post. He agreed that there are complex issues for people in the upper income brackets.
None of this really affects our discussion of people with incomes over $250,000, but it does illustrate the fact that moving across a phaseout line can sometimes have a significant effect on your taxes:
For example, a married couple filing jointly in 2013 with two kids at home and one in college who go from making $100,000 to $125,000 loses a $2,000 child tax credit and $1800 worth of HOPE credit, an increase of almost 4% in their effective—not marginal—tax rate. The marginal tax rate on their extra earnings is 15.2% just from deduction losses; that comes on top of the 28% they’ll be paying the federal government in income taxes, and whatever state income tax they owe.
I don’t have any real point to make here. I just wanted to acknowledge that my income tax chart only showed one piece of the picture. It’s the most important piece for most people who earn under $1 million (above that, investment taxes tend to become more important), but there are still plenty of little gotchas in the tax code that can have funny effects as they phase in and out.
Democrat and former Michael Dukakis campaign manager Susan Estrich is very upset that the presidential candidate whom she supported actually is intent on raising taxes on the rich — which, lo and behold, includes her. She complains: “I did not vote for Obama because I think I am paying too little in taxes. Like many people I know, I am ‘rich’ by Obama’s standards. I pay more taxes, percentage wise, than Mitt Romney and Warren Buffett, because I earn virtually every penny of my income. I work. And yes, all those deductions that allow the truly rich to not work, or at least to not work all the jobs I do, make me angry.”
She means she earns mostly ordinary income as opposed to capital gains, but you see her point — who the heck is Obama to tell a hardworking upper-middle class gal she’s not paying enough in taxes?!
I have no idea how much Susan Estrich earns, but if it’s all ordinary income, then she’d pay the same amount as before on the first $250,000, right? And she’d pay a few percentage points more on anything she earns over that amount. Big f&cking deal!
More from Rubin:
If you live in New York or Los Angeles and have an income of $250,000, two kids and a house in a nice but not ostentatious neighborhood, you are not living a lavish lifestyle and you already pay gobs and gobs in taxes. You didn’t inherit wealth and you worked hard in college and in your profession, only to find yourself living paycheck to paycheck. And now, you’re going to get socked with a tax hike.
Not if it’s all ordinary income (i.e., “paycheck to paycheck.”) And if a family with an income of $250,000 is living “paycheck to paycheck,” they need to work on a budget. I didn’t inherit wealth and I worked my ass off in college too. So did millions of other Americans. Big f&cking deal! If you need more, get a second job.
For years Republicans have been warning that the Obama-size of government will require much more than taxing the “rich.” That means not only the $250,000 earners (say, a white-collar professional with a mortgage, college tuition bills and a mother in long-term care) but the $80,000 earners (say a teacher in Massachusetts with a cramped condo, an old car and kids) also are going to be told they have to pay even more of their income to the federal government.
Newsflash for Rubin–you can do better than a cramped condo on $80,000 in Massachusetts–and that would be on the high end for a public school teacher. But Obama’s plan wouldn’t increase taxes on someone making $80,000 as salary income anyway.
To these whiny rich people and concern troll media hacks, I say tough shit! The average income in this country is a little over $50,000. Plenty of those people have parents in long term care–or are caring for them at home. And plenty of poor people have the same problems.
Obviously the White House needs to get busy educating the public as well as the lazy corporate media about how the tax system works and exactly what Obama’s tax proposals are. And hacks like Jennifer Rubin especially should be fired. As long as the Washington Post keeps this hack among hacks on staff, it cannot be considered a serious newspaper.
Feel free to use this as an open thread. I know most people are gearing up for Thanksgiving. I’m another one of those people who don’t really like the holidays.
Occasionally one of the villagers gets it right (h/t to Digby). Today’s Awake Villager Award goes to Kevin Drum of MoJo who expresses utter contempt for the current Republican strategy of destroying the country at any cost to take down a Democratic President while mentioning that said Democratic President and his crony congress cadre have basically given said right wingers absolutely everything they’ve wanted for over a decade without a fight. I bestow this prize because the piece also recognizes the complicity of “journalists” in this charade.
People who are making policies and people giving air time to policy makers these days exist in a state of complicity in lies. The continuation of more and more of the same damned policies are basically getting the same damned result yet real analysis of the results and the connection to the policy never occurs in the public forum. The polices of the last 12 years induced a financial crisis and are inducing another one. They created high unemployment and falling wages and they continue to perpetuate joblessness and income inequality. No one holds the policy makers or the narrators of the results accountable to hard, cold reality. How is it that this game continues to grow exponentially without riots in the streets by the 99% of the country that’s been hurt and continues to be hurt by this insanity? Are we so doped up with sports and “reality” shows that we don’t have time to take stock of what these people are doing to us?
But then, for about the thousandth time, my mind wanders over the past ten years. Republicans got the tax cuts they wanted. They got the financial deregulation they wanted. They got the wars they wanted. They got the unfunded spending increases they wanted. And the results were completely, unrelentingly disastrous. A decade of sluggish growth and near-zero wage increases. A massive housing bubble. Trillions of dollars in war spending and thousands of American lives lost. A financial collapse. A soaring long-term deficit. Sky-high unemployment. All on their watch and all due to policies they eagerly supported. And worse: ever since the predictable results of their recklessness came crashing down, they’ve rabidly and nearly unanimously opposed every single attempt to dig ourselves out of the hole they created for us.
But despite the fact that this is all recent history, it’s treated like some kind of dreamscape. No one talks about it. Republicans pretend it never happened. Fox News insists that what we need is an even bigger dose of the medicine we got in the aughts, and this is, inexplicably, treated seriously by the rest of the press corps instead of being laughed at. As a result, guys like Marco Rubio have a free hand to insist that Obama — Obama! The guy who rescued the banking system, bailed out GM, and whose worst crime against the rich is a desire to increase their income tax rate 4.6 percentage points! — is a “left-wing strong man” engaged in brutal class warfare against the wealthy. And Rubio does it without blinking. Hell, he probably even believes it.
We are well and truly down the rabbit hole. The party of class warfare for the past 30 years is fighting a war against an empty field and the result has been a rout. I wonder what would happen if the rest of us ever actually started fighting back?
There are so many little gems in this assessment it’s hard to point to them all. The Republican denial of how their policies have and continue to trash the nation’s economy is the obvious one. The next is the obvious enabling by the press that exists in some strange struggle to seem fair or be some Orwellian version of “fair and balanced” that ignores facts and data and experts in fields. The press puts party operatives and politicians on TV to lie their frigging hearts out without fact checking their statements. Some how, fair and balanced means repeatedly letting people put out “opinions” like the sky is green and dirt is blue. An opinion isn’t misstating facts last time I checked my notes on the scientific method and the rules of public debate.
This is what drives me craziest. The press treats “seriously” people that get on TV to present alternate reality under the guise of looking at all sides. Misstatement of facts are not opinions. They are damned lies.
Most journalists these days peddle in access to lies and not much more. There is lots and lots of irrefutable, scientific evidence on evolution, climate change, and the results of “voodoo” economic policy. One does not get an “opinion” on appendicitis except on TV news shows. In life, a certified and trained doctor diagnoses the condition. Fair and balanced reporting should not mean getting a panel of grade school educated yokels on TV who insist that people can’t get appendicitis because the appendix doesn’t exist. It also doesn’t mean that some congressman that sits on a committee looking at health issues should be freed of the burden of proving his point that the appendix doesn’t exist because god and Ayn Rand wrote it down somewhere. There are tons of freaks these days that are funded by rich idiots–many that own said corporate media outlets–that set up “think tanks” to put out false research that basically states that the sky is green. These freaks show up on TV news constantly. Study after study shows that people that view Fox news–as an example–don’t just hold opinions. They hold completely false information. This is a huge problem because an effective democracy relies on an informed electorate. We are getting systematically fed falsehoods that are killing our country and our livelihoods. This particulary bothers me because as an economics and finance professor, I have to confront the economic and finance fairy tales daily. I hear the economic version of “the appendix doesn’t exist” from people who think they are just expressing an opinion instead of repeating a complete falsehood.
I guess what really struck me the most about Drum’s rant was that same sense of frustration and near-depression throughout that basically haunts me too. I have absolutely no idea how to stop what he’s described. What brought about the huge changes during the Great Depression was the vision of a leader and the people who surrounded him and the fear of the elite that US citizens might actually take to the streets. They feared it was the New Deal or a Communist-style revolution in which they would lose everything. The political and economically powerful no longer fear us and we no longer have leaders with vision beyond their own re-elections. Something is going to give eventually and I’m just hoping its not the 200+ year experience that’s called the United States of America. Over the last thirty years, all three branches of government and the press have been successfully infiltrated to represent only the most rich and powerful. What are we going to do about it?
Oh. The answer to the question at the top is that every one hears the Rubio Down the Rabbit Hole. That’s because we’re not only victims of crony capitalism, we’re victims of crony journalism.
So, now there’s a bunch of polls showing that the public basically approves of most of the tax cuts. yhe village chattering class (e.g Kevin Drum of Mother Jones)sees this as a sign of potential support for Obama and the Democrats.
To me, that’s about like polling on the question: Would you look a gift horse in the mouth? Of course, every one likes some change in their pockets. But at what cost? The polls aren’t asking that question. The one part of the tax deal that came out with a disapproval was the cut in payroll taxes. But, that’s the big Obama win, right? So, the villagers have to explain why EVERY one should just love that.
The explanation given by Drum is that every one is really dumb and thinks this will bankrupt social security because no one will pay into to it for a few years. He’s thinking people don’t see the promised government IOU. He’s got a list of how dumb he thinks we are about this and you’ll see it at the bottom of the post. So, now we do economic policy on polls? Can I get a witness that just because people like something doesn’t mean it’s good or wise policy? It doesn’t even mean that if they see the hamburger today, they’ll be willing to pay for its cost on Tuesday either. My guess is when the tab comes, there will be some unhappy polls then.
The major economic argument for this package is basically that you don’t raise taxes in a weak economy. That is basic Keynesian thought and it’s odd to see the entire Republican party joining hands and singing “We’re all Keynesians now”. A secondary argument is that any thing bartered away at this point is worth it because we extend long term unemployment benefits.
What you don’t see is a larger discussion of this all in terms of the economic situation and what is called for in these circumstances except in economist circles. This really worries me. Did you notice this ABC poll doesn’t ask people how they feel about giving cash subsidies to corn growers or the deal on equipment write offs? Those are also components of this tax giveaway. The poll also doesn’t ask people about what they think this will do to the deficit in the future and the cost of government borrowing. (Even Moody’s is threatening to downgrade our debt on the merits of this plan.) This poll basically asks, “Would you like more money in your pocket or not?” I can only image the naysayers like me either know their economics or they’re like me and not getting anything from this tax bill but the bill.
So, rather than listen to the failed lawyers who make up our policy decision=making class and the spoiled, rich little nitwits that write the punditry blogs in the MSM, let’s check out what some economists have to say. We’re going for three of them here. There will be four if you count me.
I linked down page on the morning reads thread to a blogger named Chevelle who was a government economist who now works at an asset management firm. She has a very good short piece up on why these tax cuts are a very “dumb” idea. Her basic analysis actually sounds a lot like Larry Summers’ parting shot in Time Magazine. Another similar voice can be read in the WSJ and comes from Nobel prize winning economist Joseph Stiglitz who calls for a second stimulus package that’s not tax cut loaded. The tax cuts may be politically popular but they don’t really take care of our problems right now. The money used for the tax cuts would be a lot more powerful and useful if it was targeted at the problem in the form of Government Expenditures. That’s what all three of them say in their commentary and that’s what I’m arguing for here. It’s your basic expenditure multipliers stuff from Economics 101.
We’ll start with Larry Summers who answers the question “what is holding the economy back?”. I’m actually beginning to think this parade of economists out of the West Wing door is ominous. This article just gives me more of those willies. Here’s the problems per LaLa.
• When unemployment has been above 9% for 19 straight months,
• When the job vacancy rate is at near record low levels,
• When 8 million houses and countless square feet of office and retail space sit empty,
• When capacity utilization in the nation’s factories and on its railways and highways is nearly as low as it has been in any period since the Second World War,
• There cannot be any question that the constraint on our economy now and for the next several years will be lack of demand.
I am under no illusion that increased demand alone is sufficient to restore America’s economic health, but it is an unquestionably necessary component of a full recovery.
Unfortunately, the approaches we have become used to over the last fifty years for supporting demand in a market economy are not open to us today.
Base interest rates cannot fall below their current level of zero.
And, in the face of excess capacity and excess debt, it is not clear that, even if they were possible, falling interest rates would be effective in convincing consumers and businesses to spend more.
“The first stimulus package had too much emphasis on tax cuts. Those were relatively ineffective and not enough aid for the states,” Stiglitz told reporters on the sidelines of a seminar in Chile’s capital.
A new stimulus package should include a revenue-sharing program to make up for a shortfall in state revenue and should pick up the states’ investments that had to be stalled. Also, there should be a special focus on human capital, in particular on education and training, he said.
“We have to believe that the economy will eventually recover…[W]hat kinds of jobs will we want to have in five years…[W]e need to have people trained for that,” Stiglitz said.
Additionally, Stiglitz argued the U.S. Federal Reserve’s quantitative easing bond-purchasing program is creating an excess of liquidity, which is flowing into emerging-market nations.
Emerging-market economies such as Chile’s are growing at a much faster pace than the U.S. and have comparatively higher interest rates, making them attractive destinations for investors looking for higher returns.
According to Stiglitz, the $600 billion bond-purchasing program has created a large amount of “liquidity looking for relatively safe high returns” that aren’t found in the U.S. but can be found in many emerging-market nations.
As many emerging markets are trying to discourage capital inflows, “the liquidity goes to the places where they haven’t yet put barriers for the inflows,” Stiglitz told reporters.
Okay, now to blogger Chevelle from Models & Agents. She begins by explaining how most people are back on their life time budgets as measured by the PCE or Personal Consumption Expenditure/per employed person. It’s back to the lackadaisical pre financial crisis level. We actually all have a life time expenditures patterm that tends to be consistent over our lifetime. Some times we borrow and over spend a little. Other times we panic and save. Eventually, we get back to the mean. Employed people are at that now. It’s the unemployed that aren’t anywhere near their usual budget. This package does nothing about that.
That the problem with the economy is not that (employed) Americans don’t consume enough; it is that we have too many unemployed people who can’t consume, not even the basics. And this is my first reason why giving a tax gift to employed Americans is a completely dumb policy: Not only is it unfair to the unemployed; it is questionable whether those Americans with jobs and with comfortable cash positions are going to spend this tax gift, if they are already close to reaching their long-term consumption growth. So much for a “targeted”, “efficient” fiscal “stimulus”.
She also argues that we do face a potential government debt problem in the intermediate future and doing more dumb tax cuts is just going to exacerbate the problem down the road. That also has disturbing implications. Then, there’s the payroll tax cut. That’s what Kevin doesn’t grok.
What does the cut in the payroll tax do? If anything, it reduces labor supply. This is because employed workers could work fewer hours and still end up with the same amount of disposable dollars as before the tax cut. So, at the margin, they would reduce the hours they offer to work. (To throw a bit of jargon, the labor supply curve shifts to the left: i.e. less labor is offered for a given wage).
Now, this might (temporarily) close part of the labor supply-demand gap—i.e. reduce unemployment. But that’s a reduction for the wrong reason! What we really need is for unemployment to get reduced due to an increase in labor demand (ie policies to shift the labor demand curve to the right!). So, in theory, *if* the government had cash to spare, and *if* companies’ reluctance to hire were driven by a liquidity constraint, the appropriate policy response to raise employment (and thus, consumption, GDP growth and so on) would be to give a temporary cut in the employers’ portion of the payroll tax, not the employees’.
What she’s saying here is that a payroll tax cut is likely to make employed people work less hours, but it is unlikely to cause employers to hire more people. She also continues to explain the impact on long term borrowing for the government of doing this kick-the-can-down-the-road policy.
So, while Kevin Drum is excited about is that warm tingling leg feeling he gets speculating that if people like the policy that might make people like Obama and the Democrats a bit more now. Then, he can feel good about himself again as a Progressive (TM). What he’s really missing is that it’s going to make the situation worse that’s got people peeved at Obama and the Democrats now. It’s not even robbing Peter to pay Paul. It’s borrowing money from both Peter and Paul. It’s giving money to people who will most likely put it into places where it will go stimulate the economies of emerging markets. It’s not going to do much here at all.
What we’ve got going is a long term unemployment problem with all that implies, and as Larry Summers said, a long term consumption problem. The people who get this tax cuts aren’t going to change their spending behavior at all and that’s not going to help the economy. If anything, the money going to the rich will head off overseas quicker than a credit card call center. It’s going to add to the deficit which will create long term debt problems. It does nothing to ensure the long term unemployed will maintain marketable job skills and their ability to eat and stay in their homes. It does nothing to really stimulate buying where it possibly could help. It’s an expensive gesture and that’s about it.
The one thing good that came out of the Reagan years was that we learned that the shot gun approach to tax cutting is just not that effective in doing anything but increasing the deficit. Former Congressman Jack Kemp actually showed that some targeted tax cuts and targeted expenditures could actually make a difference. This is what led to the go-zones we see now in rural and urban places that were difficult to develop in the past. It showed that if you want to kill a big beast, it’s best you get a sharp shooter and the best rifle. The targeted approach is best. So, in this sense, even the Republicans are dooming us all to repeat their past mistakes instead of the few successes they actually delivered. The Democrats have forgotten the past altogether.
I find this very worrisome that we continue to see tax cuts put out by a Democratic administration that play right into that big old VooDoo economics myth. Kevin Drum just seems to miss that point. He thinks you’ll be able to head off the Republican hand wringing in the future. He thinks every one is stupid because this is a good deal for the middle class. The problem is that it isn’t and it just sets us up for worse things in the future. This package will fail worse than the first stimulus for many of the same reasons. Two years down the road, every one will be just as discouraged. Even Larry Summers sees that.
So, here’s the promised list of why Kevin thinks were all dummies who need skooling.
Possible answers: (a) people don’t really understand that cutting payroll taxes means they’ll see an immediate increase in their take home pay, (b) people associate payroll taxes so strongly with Social Security solvency that they don’t want to cut them, (c) people fantastically overestimate how likely they are to have a $5 million estate when they die, (d) lots of people have a strong instinctive view that people should be able to pass on their wealth to their kids no matter how much it is, (e) people are just generally confused about all this stuff and it’s hopeless to try and figure out what’s really going on.
In any case, I’ll say this again to wavering lefties who have suddenly decided that the tax deal is no good because the payroll tax cut will never be undone and Social Security’s finances will be decimated: yes,
Republicans will engage in their usual Democrats are raising your taxes! demagoguery when the tax cut expires next year, but no, it won’t be very effective. There are lots of good reasons for this, and this poll provides evidence for one of them: the public isn’t all that keen on cutting the payroll tax in the first place. They want Social Security fully funded, and that argument, in the end, will carry the day. Never underestimate the power of AARP.
So, Kevin, the deal is this. You’re putting the money into the wrong hands and you’re expanding the deficit in the future and probably making it more expensive for the government to keep putting money back into social security. Afterall, it’s just another government “IOU” to the Social Security Trust Fund. People haven’t liked the idea in the past. They don’t like it when the government ‘borrows’ from the trust fund and they don’t like it now. The Social Security Trust fund is invested in Treasuries. You know, those things Moody’s wants to down grade?
It makes no sense to help out people that don’t need it, borrow a ton of money that won’t really accomplish anything, and still come out with a bad economy two year down the road during the next election season. I really don’t think people are as confused as you are. It’s voodoo economics. It doesn’t make any difference if it’s the Republican or the Democratic brand on it. No one’s going to look a gift horse in the mouth. Still, to think anything good will come of any of this is just plain foolish.