Caccianli i Ciel per Non Esser Men Belli,/ Né lo Profondo Inferno Li Riceve...

A correspondent directs me to the following bizarre comment by the Economist, starring Megan McArdle, on the latest atrocity from the Wall Street Journal.

If you recall, the atrocity was this "Laffer curve":

which we talked about here.

Here's Megan:

Outlandish | Free exchange | Economist.com: The Wall Street Journal is wrong; their line is not the only, or even the obvious, one to draw through noisy data, even without omitting Norway...

Megan is trying to take a middle position between Mark Thoma's sensible criticism and Donald Luskin's idiotic defense of the clown show that is the Journal editorial page.

I see three misrepresentations by the Economist here:

1. The WSJ line is not "draw[n] through noisy data." It is drawn above noisy data.
2. To say that the WSJ line is "not... the obvious" one to draw implies that there might be some non-obvious reason to draw it. There isn't.
3. The claim that the WSJ line is "not the only... one to draw" is a statement that it is one of the lines that one might draw with some justification. It isn't.

All I can say is:

Questo misero modo/ tegnon l'anime triste di coloro/ che visser sanza 'nfamia e sanza lodo./ Mischiate sono a quel cattivo coro/ de li angeli che non furon ribelli/ né fur fedeli a Dio, ma per sé fuoro./ Caccianli i ciel per non esser men belli,/ né lo profondo inferno li riceve...

This is indeed the behavior of the banner-chasers of Dante's Inferno: those who did not have the morals to be worthy of heaven but also lacked the guts to sin enough to be worthy of hell, and who were thus rejected by both.

One more point, with respect to "omitting Norway": Personally I see no need to omit Norway. I do see a need to plot the Norway point on the graph correctly. The revenues plotted on the vertical scale include oil excise taxes levied on corporations. The tax rates plotted on the horizontal scale do not--hence the Norway "tax rate" of 28% rather than the correct 52%. Move Norway out to its proper position--with the same tax concept on both axes--and everything is fine.

Comments

[Matt]

The other thing we forget is that we should probably weight the observations according to the size of the economy. Doing this, increases the weight of the U.S. by 10 fold and places it near the center of the mass, making the U.S. no doubt, the typically accepted solution.

[anne]

Thank you, thank you:

"The tax rates plotted on the horizontal scale do not--hence the Norway 'tax rate' of 28% rather than the correct 52%. Move Norway out to its proper position--with the same tax concept on both axes--and everything is fine."

[wcw]

You don't even need to do that. Just look at a regression table. Viz http://www.bignose.org/~wcw/cptmodel.txt

The F-stat is punk, and the adjusted r-squared would be weak even if there were a relationship there.

Despite the innumeracy of our intrepid, Economist-blog-certified agitprop artist, you can defend her thus: fit the model above, ignore its manifold shortcomings, and plot: http://www.bignose.org/~wcw/CT.png

Of course, with Norway adjusted, the same addlepated technique yields: http://www.bignose.org/~wcw/CT-Norway.png
(F-stat and r-squared still punk, but better.)

Hasn't anyone run the numbers over time in a panel regression? I'd do it if Max had posted more than 2002.

[anne]

http://dante.ilt.columbia.edu/comedy/comedy_hc/dante_mandelbaum/inf03.html

And he to me: "This miserable way
is taken by the sorry souls of those
who lived without disgrace and without praise.

They now commingle with the coward angels,
the company of those who were not rebels
nor faithful to their God, but stood apart.

The heavens, that their beauty not be lessened,
have cast them out, nor will deep Hell receive them-
even the wicked cannot glory in them."

[pgl]

Love your way of addressing Norway. In my rabblings over at Angrybear, I asked why on earth is the debate limited to C corporate tax revenues rather than the taxes from all forms of capital income. Of course, figuring out the effective tax rate on capital income would be tough but statutory rates on corporate profits don't exactly capture effective rates either. In short, the WSJ graph is garbage in and garbage out.

[anne]

I have been paying attention to Norway's use of resources and resource revenue for several years, and have been thoroughly impressed by how Norway has used resource revenue to build infrastructure, encourage alternate domestic corporate investment, and build an investment portfolio for future use when resource revenue declines. The self-insuring of Norway could not be more impressive.

[andres]

To consign The Economist people to any part of Dante's Divine Comedy is to give them way too much credit. There is a special and unique hell that is reserved for dogmatists, whether they're Islamic or Marxist or liberal dogmatists of The Economist type, and it isn't in Dante, whose language is far too beautiful for them. Abandon all hope for personal redemption, ye who read these glossy magazine pages...

That said, the real question is whether the WSJ editorial page knew in advance about the problems in the data that they were trying to use, ie whether it's a question of ineptitude or dishonesty.

I could be wrong, but for now I'll have to go with ineptitude. In the case of the UAE at least, the UAE is considered a high-income economy according to the World Bank classification, so an inept analyst could easily pass it over. Similarly, I can easily see that inept analyst looking at OECD or WDI data and failing to notice that corporate tax revenue includes corporate excise taxes, hence the distortion of the Norway data point.

In statistics, at least half of the work is double-checking and cleaning up one's data. Any statistician who doesn't do this will generate garbage-in-garbage-out conclusions, even if his intentions were benign.

[pgl]

anne - I'm not as knowledgable re Norway as you are. And I'll bet Mark Thoma would admit the same. But for the Laffer curve crowd to hold Norway up as the shining example of what they have been trying to say is really laughable. Me thinks Brad has laid a knock out blow to this nonsense. But just in case - I followup to my ramblings yesterday by putting up a new Angrybear post with hat tip to Brad.

[anne]

Oh, I am completely agreed but want to emphasize that we need to attend to Norway as a model in resource exploitation. We have a wildly energy rich country that is as concerned with efficiency and conservation as can be. The forward-looking development pattern and diversification of income streams continually impresses me, while the Economist tells us that just wait till energy prices fall for recession in Norway.

There is a willful failure by some analysts to understand the success of alternate development models.

[anne]

Possibly, it is just walking about a Norwegian lake by the sun at midnight at midsummer. Then, there was me on a motor scooter scooting in Oslo. I so liked Norway.

[Matt (a different one)]

Dishonest and/or incompetent commentary by "Jane Galt"- I wish I could say I'm surprised, but of course I'm not. Why anyone pays her any attention is beyond me.

[Bruce Bartlett]

The data do not exist to calculate a Laffer Curve for the corporate sector. In Norway's case, oil excise taxes are improperly attributed to the corporate sector. We do the same thing by attribting the "profits" of the Federal Reserve System to gross corporate profits and the payments the Fed voluntarily makes to the Treasury as corporate taxes.

Another problem is the base of taxation. In principle, the U.S. taxes the worldwide profits of domestic corporations. Other countries don't. They have a territorial system. This encourages a lot of unnecessary tax shifting by U.S. companies to get out from under taxes they shouldn't be paying in the first place, which distorts the data.

[pgl]

Bruce - thanks for the comment about tax bases. And thanks for the email with tax rates from 2000 to 2006 even if I did not use them in a regression. Like I said, Max Sawicky was having way too much fun over at this place.

[jfaughnan]

Perhaps we can interest Mr Murdoch in adding The Economist to his collection. Someone needs to stop the disgrace of an abandoned brand.

[ogmb]

"Megan McArdle was born and raised on Manhattan's Upper West Side. She graduated from the University of Pennsylvania in 1994 with a degree in English Literature, and worked for several technology startups before getting an MBA from the University of Chicago."

Jane Galt should opt for the ineptitude defense.

[misspecification]

forget the wSJ's obvious mendacity: what about "correlation does not equal causation". anyone? anyone?

[John Evans]

One reason this matters is that the US Chamber of Commerce is targeting state income taxes on corporations. Senators Schumer and Crapo have introduced a bill(S.1726) that will have effect of limiting (and eventually eliminating) the ability of states to tax a corporation's income. California is one of many states that would find a huge hole in its budget.

[Don Meaker]

That there is a tax rate where human behavoir is changed can not really honestly questioned. Even the most liberal economist will advocate vice taxes on alcohol and tobacco as a means to reduce drinking or smoking. What is a criminal statue but an attempt to increase the cost of unacceptable behavior?

I took the data estimates provided in your comments, and used Excel to find the best fit. The best fit was a 4th order "Camel Curve". I found it didn't make any difference if I forced a fit to (0,0) or not. The exclusion of Norway, Luxemburg, or UAE didn't seem to make a difference.

I didn't know some of the countries, so used excel to hide the countries that were not identified. The R value for this "identified country data only" data was .43, rather high for one input parameter in a system that should literally have thousands of input parameters.

Why a 4th order curve? I think there are two Laffer curves. One where people (who can) start hiring accountants and lawyers rather than just paying their 10% to 15% tax rate, and another where people begin to not produce rather than pay the 25% to 30% tax rate after already hiring the accountants and lawyers. The revenue increase from increased tax rates from 15% to 25% is minimal but the demand for accountants and lawyers will greatly increase.

This would indicate that accountants and lawyers who recommend tax increases beyond 15% in their policy advice to government are being more loyal to their personal self interest, than they are to the well being of their government clients.

Hope this helps.