This animated update to the classic "I pencil" story reminds us just how amazing the interconnected world economy is. Free enterprise and voluntary transactions create a marvelous and sophisticated structure.
The Numbers Racket This is a great analysis by Steve Landsburg (using numbers from the new book Unintended Consequences by Edward Conard) explaining a seeming paradox in workers median income gain over the period 1980-2005. In total, adjusted for inflation, workers income increased only 3%. However, each category - men, women, whites, non-whites - increased from 15%-62%.
How is this possible? As Steve points out, it happens as the demographics change over time with an influx of more low-income groups - women and non-whites - into the population. This creates the illusion of no progress while in fact everyone has progressed.
It's similar to trying to compare the cost of a basket of goods over time without considering that the mix of goods has changed at the same time that both nominal and relative prices have changed.
A recent video by Robert Reich on Taxes contains copious amounts of class warfare and distortions of history but little actual fact or logical analysis to support his case for higher taxes on "the rich".
Lets take a look at each of his points.
1. We have Budget Deficits and the only way to fix this is to tax "the rich" more.
Yes, we have budget deficits. However, Reich completely ignores the key reason we have large budget deficits which is that the Federal Govt is spending much more than it is taking in. Federal spending as a % of GDP is currently at the highest rate since WWII. Current Federal spending is approximately 25% of GDP, topped only by the 48% rate during WWII, and more than 25% above the average of 18%-20% over the past 60 years. An alternative to increasing taxes is to reduce the spending.
Two alternative ways to reduce spending and therefore our deficits are:
A) Be more efficient in how the money is spent, thereby reducing the amount needed. Do we really need to argue that there is tremendous waste, duplication, inefficiency and outright fraud and theft involved in Govt spending? Only Govt strives to do less with more instead of the other way around.
B) Reduce the rate of increase of Govt spending and bring Federal expenditures in line with the historic average tax receipts for the Federal Govt. Reducing the RATE OF GROWTH (not cutting spending in an absolute sense as often characterized by proponents of more spending. Federal budgets have "automatic" year-to-year increases built into them and as a result, proposing less of an increase is often characterized as a "cut" in spending when in reality it is still an increase - just smaller) of Federal government spending over the next ten years to bring it back down to the historical average of 18%-20% of GDP will bring it in balance with the historical average of collected taxes as a percentage of GDP, which is 18%-20%.
On the revenue side, the Federal Govt is taking in more than enough. Since 1952, tax receipts to the Federal Government have averaged around 18% of GDP regardless of what the tax rates have been. Current collections (15%-16% for 2009-11) are below the average as the economy has been recovering from the recent recession at an anemic pace well below historical averages.
Reich posits that this "gap" between excessive spending and the budget deficit can be filled by additional taxes on the rich. However, even if 100% of the income (AGI) of the top 10% were confiscated by the Government it would barely make a dent in the Federal deficit. You would need to confiscate 100% of all their income for the next 10 years to cover the existing deficit. Then of course there is the deficit incurred during that 10 years to be covered.....who pays for that?
Reich also tries to make the point that the rich aren't paying their "fair share". However, "fair" is a subjective term - what is fair? Fair is in the eye of the beholder - or in the eye of those wanting more to spend.
Lets look at some data. In 2010 the top 10% of taxpayers earned 45.77% of the nation's total AGI (Adjusted Gross Income) and paid 69.9% of all Federal Income tax (Source: IRS 2010). Is that fair? Also in 2010, the bottom 50% of tax payers earned 12.75% of the nations AGI but paid only 2.7% of the Federal Income Tax. Is that fair?
Point #2) Top Tax Rates are at historical lows.
He starts out by saying the rich are paying taxes at a lower rate now than in the last half century and this means they are not paying their fair share. Right from the start he is mixing apples and oranges. Tax rates have historically had little correlation to actual tax paid. Regardless of what the highest tax rates have been or what that rate would effectively be after all "allowed" deductions (IE a top rate is 70% but becomes an "effective" rate of 56% after all allowed deductions) receipts to the federal Govt have remained very stable for more than 40 years. Income taxes collected as a % of GDP was 8.9% of GDP for the decade before 1981 - the year Reich mentions as the "tipping" point in tax rates when they were 70% or more. From 1981 through 2011, taxes collected as a % 0f GDP have been 8.2% of GDP with periods of the early 80's being over 9% and 1997-2001 approaching 10% of GDP.
And more specifically, the amount of overall taxes paid by "the rich" has actually increased as top tax rates have been reduced:
The chart above shows the relationship over time (from 1979 to 2007) between: a) the top marginal income tax rate, and b) the share of total income taxes paid by the top 1% (data). In 1979 the top marginal income tax rate was 70% and 18.3% of the total taxespaid were collected from the top 1% of taxpayers. By 2007 the top tax rate was 35% (half of the 1979 rate), and the tax share of the top 1% had more than doubled to 39.5% (from 18.3% in 1979).
The historical record shows an inverse relationship between the highest marginal income tax rate and the share of taxes collected from "the wealthy."
Hardly the precipitous change implied by Reich as a result of a change in the highest tax rates.
The reality is that if rates are raised to obscene levels, people divert their investments to tax free instruments like municipal bonds, or defer their income or just decide not to earn as much until they feel rates will be more favorable. For example, during the great depression, private holdings of municipal bonds doubled in a matter of a few years as the top tax rate was raised from 25% to over 60%.
Reich then states that the top rate is now down to 35% and "because so much of their income is in the form of capital gains, the very wealthy pay far less".
Two things to note here: 1) Reich has cleverly switched from talking about - the yet to be defined - "rich" to the "very wealthy". He does this in order to have a kernal of data to help support the statement that "because so much of their income is in the form of capital gains, the very wealthy pay far less". He does this because......
2) Only the MOST wealthy derive a significant proportion of their income from capital gains, which is taxed at 15% vs the highest tax bracket of 35%. In fact, the vast majority of the top 1% of earners pay far more than the capital gains rate and significantly more than earners making less as shown in the chart below with data from 2008:
Additionally, Reich fails to mention that before anyone derives an income from capital gains, it first required an investment that was either derived from and taxed at regular income tax brackets - IE 35% being the highest at this point - or in the case of a stock, has had the businesses income taxed at rates between 15% (small business) and 35% (large business). So in effect the 15% capital gains rate is the second tax on the original dollar of earned or business income, thereby creating an overall tax rate of ((1 X .35) + (.65 x .15))/1 = 44.75% on the original dollar of income. Not exactly a "bargain" or tax cut for the wealthy.
Again, the data doesn't support the claims that Reich makes.
Point #3) They (the rich) can afford to pay more.
Now he zeros in on pure class warfare.
First he mentions that the top 1% earned 20% of total income. However, what he doesn't mention is that while they earn 20% of the income, they pay 38% of all taxes.
Second, in order to create even more class envy, he switches gears and focuses on wealth - for example capital that is accumulated over time through earnings, investment, savings, etc - and treats it in the same way as yearly income. In this way he paints an even bigger picture of "unfairness". He also tries to paint the picture that the concentration of wealth in the US has suddenly become much more "unfair".
Share of wealth held by the Bottom 99% and Top 1% in theUnited States, 1922-2007.
Source: Wealth, Income, and Power by G. William Domhoff
(updated March 2012)
However, as you can see from the above chart, the percentage share of wealth held by the top 1% has remained fairly constant over the period 1922-2007. It decreased from 1920 to 1950, increased slightly from 1950 to the mid 60's, declined significantly in the 70's, and is now back near historic averages.
Hardly the picture of a "skyrocketing" increase in wealth concentration painted by Reich.
His final basket of arguments are even weaker:
1. "The rich don't create jobs, the middle class create jobs through their spending which spurs businesses to add jobs."
First of all, consumer spending doesn't "spur businesses to add jobs". It may spur them to add capacity - and that additional capacity will take the form of the lowest cost of production - which could be additional capital equipment, further automation, additional hiring, overtime for existing workers, etc. It doesn't necessarily mean new jobs. Secondly, he completely ignores the fact that business uses the savings and investment of the wealthy in order to expand and that new businesses are formed though investment from funds such as venture capital and private investors.
2. "Unemployment remains high because most of the wealth goes to the top and not to the middle class."
This one he doesn't even try to substantiate, although presumably it rests on the first statement that only spending by the middle class spurs business to expand. I guess he believes that when rich people spend billions of dollars business just ignores them.
3. "High taxes don't slow economic growth" "In the three decades after WWII when personal tax rates were never below 70% and often over 90%, the economy grew faster on average that it has since then."
First off, we addressed the issue of whether high tax rates translate into higher actual taxes earlier and showed that it doesn't.
Second, Reich fails to inform his audience that the three decades following WWII were a time when the US was the only existing manufacturing super power in a world that needed to be rebuilt. Europe was destroyed. England was destroyed. Japan was destroyed. Pent up demand for consumer goods in the US, along with an end to the Roosevelt anti-business policies finally brought private investment back into the market. That, together with the need by the rest of the world for both consumer and capital goods to rebuild entire countries, and the US had a huge market, a clear playing field with little to no competition. It is not surprising that in that environment the growth rate of the US was well above average.
Reich makes absolutely no case for raising taxes on the wealthy. His message is nothing other than a message of class envy and a transparent distortion of history.
Reichonomics is bunk and raising taxes on top earners makes no sense.
Thursday, May 3, 2012
Elizabeth Warren defends her use of the "American Indian" racial category for herself because
of family traits of "high cheekbones, like all the Indians have". Like all Indians have? Ms. Warren must have accidentally turned off her PC filter.
Sherry Turkle addresses head on the very real effects that omnipresent digital technology and constant "connection" are having on how we behave and who we are. We are more connected and more alone. In an effort to be "everywhere" we are often nowhere. And the effort to not be alone is ironically making us more alone.
In a small way I saw the first hints of this back in 1985 when I was working at a software firm that already used email extensively. I saw how people communicated with an apparent sense of anonymity even though people clearly knew who was sending messages. At that time, what stood out to me was that people were sending messages that were devoid of the body language, of intonation, of the ability to modify or correct a message in real time based on the other person's reaction that is part of a face-to-face conversation.
Today Prof Turkle sees a stronger effect where the focus on digital communication allows for editing, deleting, enhancing - giving us the ability to shape how we are seen in a very controlled fashion.
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