Duncan Black Tries to Teach Economics to the Wall Street Journal

Like teaching a pig to sing opera, it doesn't work. You waste your time, and it annoys the pig:

Remedial economics for the WSJ editorial board ... [Media Matters for America]: The Wall Street Journal editorial argued that 'the overall tax burden grew more progressive' in the last 25 years because upper income taxpayers pay a larger share of total taxes than they did in 1979... between 1979 and 1999, the share of total taxes paid by the richest 0.1 percent of taxpayers rose from 5.06 percent to 11.05 percent, and the share paid by the top 1 to 5 percent of earners rose from 14.69 percent to 17.75 percent. But over the same 20-year period, the share of total U.S. income that these two groups earned increased much faster than their share of the tax burden, as economists Thomas Piketty and Emmanuel Saez explained in an updated version of their paper 'Income Inequality in the United States, 1913-1998' (which now includes data up to the year 2000). In 1979, the top 0.1 percent of taxpayers earned 2.01 percent of total U.S. income; in 1999, they earned 6.63 percent. This group's share of total income more than tripled, while its share of federal taxes paid only increased by a little more than double.... The relative share of total taxes paid by various income groups -- which the Journal cites -- is [not] a... measure of... progressivity.... [A] tax system is 'more progressive' if taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up... [as is explained in] the online supplement (PowerPoint exhibit for chapter 12, slide 35) to the third edition of his introductory economics textbook, Principles of Economics (Thomson South-Western, 2004), [by] N. Gregory Mankiw, who served as the chairman of President Bush's Council of Economic Advisers until late February 2005...

Well, maybe annoying the pig is worthwhile.

One of my most interesting moments in Washington was being seated at a luncheon table behind Charlie Stenholm and Judd Gregg, who began to spin more and more interesting and improbable theories about just why Dow-Jones let the Journal editorial page exist in its current form...

Comments

[SqueakyRat]

According to the WSJ, I guess, increasing income inequality is a just great way to make the tax code more progressive! Makes you wonder why liberals aren't all for it, doesn't it? Oh, I forgot, liberals can't "think," they're not into "ideas"!

[PaulB]

Kevin Drum is on it, as well: http://www.washingtonmonthly.com/archives/individual/2005_04/006194.php

[Thomas Ware]

Chuckle.

Between you, Mr. Black, Kash & Crew, and (bit of a tangent here, think about it) Nathan Newman, those laborious hours at the university are starting to make sense. I coped a kudos from the first of one of those econ profs (Tom Carroll, the only one I remember & that's only because I work with him - so it may not be a valid kudos) 'ore my observations on that which of all I had read and pondered just an hour or two (built of course upon many hours of previous pondering) before our conversation.

Thanks guys, I'm starting to dig this. Not sure that I'm ready to play The Market (mostly g'ma's admonishments agaist gambling), but I'm diggin' it!

Isn't the internets great!

Clark '08!

[trostky]

Forgive me for being a gossip, but what were their (Gregg's and Stenholm's) theories?

[scottynx]

But over the same 20-year period, the share of total U.S. income that these two groups earned increased much faster than their share of the tax burden, as economists Thomas Piketty and Emmanuel Saez explained in an updated version of their paper 'Income Inequality in the United States, 1913-1998' (which now includes data up to the year 2000).

What is wrong with the rich getting a higher and higher proportion of the national wealth if total wealth is growing? The earnings of the rich are backed by thier productivity. Economic and technological progress raise the productivity of the smartest and most skilled at a higher rate than the least skilled.

Blame mass immigration for enriching the rich before you blame the Bush Tax Cuts. Mass immigration of low skilled workers results in an income transfer from workers to the rich, since corporations get to pay lower wages to workers.

[Frank]

scottynx- There are a number of problems with the rich getting a higher and higher share of the national wealth. Here a couple: 1 Those in the first 4 quintiles, the bottom 80% of the country in income haven't gotten a raise after inflation in 30+ years, in a nation of rising wealth they have lost ground relative to other Americans. This tends to lead to social unrest. 2. It decreases the ability of the economy to grow further. Even though new technology makes new goods available 80% of the population can't afford new goods unless they are willing to give up things they always bought before.

Liberalizing trade is also a factor in why the middle and lower classes are losing ground, and the fact that they haven't been compensated for their losses erodes the consensus for free trade.

[Lee A. Arnold]

Scottynx: (1) The size distribution is different than the growing amounts. (2) The poorest are making less in absolute dollar amounts than they once did. (3) There is no evidence that this polarization is completely due to productivity increases among certain people. (4) There is plenty of historical evidence that progressive taxation, by funding education, health, and retirement stability, greatly increases opportunities and productivity of poor people. (5) Income and wealth are different; the size distribution of wealth is even more polarized, and less excusable. (5) Immigration and outsourcing have something to do with it, but they are not the entire source of the problem. (6) Tax cuts for the wealthiest are at the expense of the Social Security trust fund surplus, which was paid into by poorer people with a promise to secure the system. (7) The tax cuts haven't generated the promised economic growth, and a now phony crisis is claimed for Social Security.

[Movie Guy]

"What is wrong with the rich getting a higher and higher proportion of the national wealth if total wealth is growing? The earnings of the rich are backed by thier productivity. Economic and technological progress raise the productivity of the smartest and most skilled at a higher rate than the least skilled."

Where should I start?

Hmmmm...

Nah, not tonight.

[Fred Heutte]

There is a better version of the "pig":

Never wrestle with a pig. You both get muddy and the pig loves it.

[anne]

http://www.nytimes.com/2005/04/25/business/25taxes.html?ei=5070&en=2d45cb9ef0688315&ex=1115265600&adxnnl=1&adxnnlx=1114596300-FVpaAueD1paW7QzxnmD3eg&pagewanted=all&position=

A Tax Benefit for Big Donors Often Bypasses Idea of Charity
By STEPHANIE STROM

George B. Kaiser, a publicity-shy oilman who built a fortune estimated at $4 billion by snapping up busted petroleum businesses in Oklahoma, set aside roughly $1 billion for charitable endeavors from 2000 to the end of last year.

In exchange, he can now deflect taxes on much of his own income over the next several years.

But it turns out that only $3.4 million of the money he set aside has gone to charities. The rest is sitting in an obscure philanthropic entity called a supporting organization, so named because it is created to support a specific charity or charities.

Supporting organizations are attractive to donors because they offer the generous tax benefits associated with donating directly to charities and operate much like private foundations, but without a foundation's more onerous requirements.

Donors get those perks because they agree to relinquish control over the money. But since they appoint the organization's board, they can retain a great deal of influence over it.

Regulators and lawmakers suspect that many wealthy people have used these organizations more for tax planning than for any charitable aim and are pushing for tighter rules as part of a broader crackdown on charitable tax exemptions.

"I'm deeply disturbed that with a good number of supporting organizations, people are taking multimillion-dollar tax deductions for what they claim are contributions to charity, yet too often the result is a thimbleful of benefit to charity," said Senator Charles E. Grassley, the Iowa Republican who is chairman of the Senate Finance Committee.

The committee is examining several supporting organizations, including Mr. Kaiser's. An assistant to Mr. Kaiser referred calls about his supporting organization to Frederic Dorwart, his lawyer and a trustee of the organization. Mr. Dorwart said the organization had not been contacted by regulators and was operating within the law.

Regulators are going after some supporting organizations and donors that they say have violated even the current lax rules.

The Internal Revenue Service has revoked the tax exemption of one supporting organization, which is challenging the decision, and has brought two cases against people who claimed deductions for their gifts to such organizations. It is considering penalties on 15 promoters of these vehicles, examining three cases for possible criminal investigation, and is auditing about 100 supporting organizations and donors....

[Jonathan Goldberg]

Who was it who said words to the effect of "It is very difficult to make someone understand something when his salery depends on not understanding it"?

[Frans Groenendijk]

I don't think Black is trying to teach them economics: it is a little math, just beyond the most obvious.

[Carlos]

To paraphrase Kid Rock, nookie and blow? People respond to incentives.

[anne]

The American corporate and personal income tax base is being steadily eroded. We have, as a result, a structural deficit that can only worsen unless there is revenue change. Adding revenue through a gradual increase in taxes is simply not going to happen in the near future.

[chris]

thanks scottynx, frank and Lee Arnold for some honestly asked questions and to the point answers. This is going to be a clip and save for me something good just like mental coupons.

[liberal]

scottynx wrote, "What is wrong with the rich getting a higher and higher proportion of the national wealth if total wealth is growing? The earnings of the rich are backed by thier productivity."

Because there's no evidence that the rich are earning their wealth through productive activities.

Much, perhaps most, of the income earned by the rich is "economic rent".

[JRoth]

I think scottynx got the thread a little off track here. The responses have been pretty good (esp. Lee Arnold's), but, intentionally or not, scotty has obfuscated the WSJ's initial error. Look, the WSJ said that progressiity has increased. Atrios showed, quite simply and unequivocally, that it has not. The WSJ didn't want to argue the principle of progressivity; they wanted to befog the issue.

I suppose it's worth debating progressivity in the open, but it's exactly this kind of circular game that muddies the waters and helps to generate popular support for staggeringly elitist policies, like elimination of the estate tax. Claim the rich pay more taxes than they used to. When someone points out that they don't, claim that they should. When someone argues why they should, claim that they do. Repeat.

[JRoth]

Um, install a "should not" as appropriate in the spin cycle described above.

[duus]

I think the Journal's editorial page exists in its current form because it serves a valuable role for its current constiuency: the intelligent rich can know to ignore it w/r/t accuracy, and regardless it can provide a smokescreen for policies they want implemented but would be unacceptable on their face if percieved accurately by the American public. They have the same job as David Brooks: normalization of radical views to shift the political landscape and the barriers of acceptable discourse.

What do you think of that theory?

[anne]

Essentially for nearly all of us there is a flat tax system where about 20% of income is the average paid. Lower income households nonetheless pay payroll taxes and sales taxes, while higher income households are increasingly able to use important deducations, have a cap on payroll taxes, are able to rely increasingly on dividends and capital gains capped at a 15% level, and on... Almost certainly income and wealth inequality has increased these last years since the recession and series of tax reductions, and the tax system may be actually found to be shaded to regressive when the latest data are analyzed. The long term trend to increased inequality was limited from 1995 to 2000, and reverses from then.

[anne]

Remember that the Wall Street Journal Editorial Page has come to PBS as a weekly show. PBS is doing when PBS executives can provide for, to become increasingly conservative. But, at least there are still the British comedies :)

[scottynx]

JRoth wrote: I think scottynx got the thread a little off track here. The responses have been pretty good (esp. Lee Arnold's), but, intentionally or not, scotty has obfuscated the WSJ's initial error. Look, the WSJ said that progressiity has increased. Atrios showed, quite simply and unequivocally, that it has not. The WSJ didn't want to argue the principle of progressivity; they wanted to befog the issue.

I acknowledge that the WSJ is wrong in saying that widening income inequality can in any way be described as progressivity. This is a disservice to the public. If they want to praise free-market/ultra-capitalist policies then they should stick to real benefits, such as higher national economic growth.

[scottynx]

Anne Wrote: Essentially for nearly all of us there is a flat tax system where about 20% of income is the average paid. Lower income households nonetheless pay payroll taxes and sales taxes, while higher income households are increasingly able to use important deducations, have a cap on payroll taxes, are able to rely increasingly on dividends and capital gains capped at a 15% level, and on...

You just made the case for an official flat tax. We have a de-facto flat tax, but we arrive there by inefficient tax-minimizing economic decisions and tons of tax preparation time and money (thus getting less of the efficiency benefits of an official flat tax). And just to be clear and honest, a flat tax would NOT be progressive.

[ftm]

Duus: I like your theory but I think it is a bit too generous in its estimate of WSJ readers' intelligence.

A substantial majority of WSJ readers actually swallow the editorial content hook, line and sinker. If WSJ readers are out there everyday trying to squeeze just a little more juice out of employees and customers, then they need reinforcement from the editorial page so they can get up and face another day. American business leaders aren't interested in what's best for the country, they're just trying to hang on to their jobs until they've accumulated a big enough offshore account to fund an extravagant retirement and hefty inheritances for their offspring.

Dinosaur business culture is alive and well in the US and the WSJ editorial page is just its daily public pep rally.

[Uncle Jeffy]

Scottynx - the fact that our current tax code is complicated doesn't make any case for a flat tax at all. You could have a flat tax with every single one of the incredible profusion of deductions, exemptions, exclusions, etc. that are currently available. The only difference would be in the section of 1040 where you calculate your tax due - instead of looking it up in the table in the back of the book, you just multiply your taxable income by 0.20. What does that save us?

How about this: a one-page form (no "schedules," etc.) which would provide for a listing of all forms of income, including business income, dividends, interest, capital gains, Social Security, etc. Then, once you've totaled your income, you go to a moderately lengthy table and look up your income in a table providing for a progressive tax structure with rates between 1% and 35% which could easily be printed on the back of the page. Find your tax due, compare it to taxes paid, and if you owe more than was already withheld or paid via estimated tax payments, send in a check for the difference.

There's a distinction between tax simplification (always a desirable goal) and a reduced number of tax brackets (one, in a flat-tax system). The desire for simplification simply doesn't justify a flat tax.

[mds]

"Substitute 'reported' for 'earned'. In 1979 the top marginal income tax rate was 70%, and a lucrative tax-shelter industry thrived. People simply avoided reporting income back then."

Great, I'll inform the WSJ editorial page, where they failed to make this argument at all. It also bothers me when people such as the President and Patrick R. Sullivan indulge in the fatuousness of "It's pointless to tax rich people; they'll just get out of paying it." Yeah, why collect any taxes on non-wage income at all? Oh, wait, that's the point exactly.

"So, if the revenue raised has been steady, and the higher income people are paying a higher percentage of it, I'd say that's a pretty good description of a more 'progressive' tax system."

Precisely. Except for how it's less progessive based on the definition of a progressive tax. Which is addressed in the article described by this post. Too bad everything can't be defined as you would say it.

"Economists do not consider a tax system "more progressive" simply because high-income earners pay a larger share of total taxes. Rather, a tax system is "more progressive" if taxpayers pay a progressively larger share of their incomes in taxes as these incomes go up." -- Duncan Black

But thanks for playing.

[Jameson Burt]

Justice absolute rather than justice relative to past years.
1. There is no middle class in the U.S.
if we follow income taxes paid.
The top 25% pay 83.9% of income taxes,
2002 figures from IRS own website as a spreadsheet,
http://www.irs.gov/pub/irs-soi/02in01ts.xls
"Middle class" might represent the
25th percentile thru the 75th percentile
of people paying income taxes.
But these people pay no more than the bottom 75 percent
of all people paying taxes -- LESS THAN 18% OF ALL TAXES!
If we allow that some nations have no middle class,
there must be some corresponding definition of middle class
other than those 50% of people in the middle.
A mischievous definition would be those people paying
the 50% of income taxes after the top 25% dollar value
of income taxes.
But that "middle class" of income tax payers includes
less than the top 25% of income tax paying people.
So this mischievous definition leads to the conclusion
that
"THERE IS NO MIDDLE CLASS AS FAR AS INCOME IS CONCERNED".
It seems extreme that people talk of injustice for a
tax change that favors the wealthy, "who get all the breaks",
when those wealthy pay 83.9% of all income taxes.
The wealthy are supporting the US income tax system
and all the goodies we less-well-off demand from them
(when thru income tax).
This is injust.

2. Social security tax increases,
put forward to balance future social security payments
two decades ago, has now been declared a "ruse"
by George Bush.
He peeked inside a file cabinet, declaring the Social
Security Trust Fund was worthless paper
(my GAO friend had to purchase a larger calculator to handle
trillions for digits when she audited the same Parkersburg
facility, obviously duped about what paper means).
Obviously, that money should have gone to private capitalist
markets or Switzerland, where our Social Security
payments would have been used for what
we who-are-not-congressmen supposed they were meant.
We did not suppose that Social Security payments were
a "ruse" to balance the budget and keep income taxes low
for the wealthy.
This was UNJUST.

3. Other unjustices.
We seem to have entered an erra promoting injustice for all.
Twelve year old girls get charged $12,000 for downloading
mp3 files, legal until the Digital Millenium Act.
Numerous such injustices have been created
where a 0 marginal cost of production gets government
privileges.
Internet service providers almost all prevent users from
serving their own webpages, taking more action on the
internet service provider's part to deliberately restrict
almost all internet protocols from initiating to your
computer, and greatly restricting freedom of the press
thru you computer.
A Vice President who earns $160,000 a year from Halliburton
while he is Vice President, then gives contracts to that
company, unjustly using our taxes.
New tax breaks for house appreciation contributed greatly
to speculation by 30% of "house" buyers,
with doubling in housing prices, and the exclusion
of many from the housing market in larger cities.
Companies loosing government contracts, then getting
them back the next year when they check the box
"faith based organization", again representing
a larger unjust use our tax dollars.
My gunny sack isn't empty.
Much could be gained by reducing injustice
in taxes paid by both the wealthy and the poor,
and in numerous new injustices that have entered our
legal code.