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Monday, August 30, 2004

Another Look at Economic Data

Courtesy of the Queen of Some Evil, who got it from She Who Usually Will be Obeyed, I noticed an editorial that was published in the Detroit News.  (The link is to theDonald L. Luskin Furled version, in case the DetNews pulls the article.  The link to the original is here.)  It actually wasn't written by anyone at the (conservative) Detroit News.  It was written by Donald Luskin.  He is identified as the chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm in Menlo Park, Calif.  I suppose that makes him qualified to comment on matters economic, although I wonder how impartial he can be. 

The gist of the editorial is that the <air quotes>Bush tax cuts</air quotes> are fair, in the opinion of an investment banker.  (The <air quote> tag, for those who haven't read the latest HTML standards, direct the reader to hold up both hands, with palms inclined at a 70% angle to the floor, and gesture up and down with the index and middle fingers together.)  The air quotes are used in this context because, as every high school graduate should know, a tax cut that occurs at the same time as a deficit increase is not really a tax cut.  It is a tax shift, moving taxes from today's taxpayer to the taxpayer of tomorrow. 

Anyway, Mr. Luskin tries to argue that the Democrats have made a false portrayal of the impact of the tax changes:

A report from the nonpartisan Congressional Budget Office has Democratic presidential candidate John Kerry claiming it proves that “Over the last four years, the burden of taxes has shifted from the wealthy to the middle class.”

Those are politically motivated lies that distort the findings of the report. Here’s the truth.

The report proves that what President Bush said about his tax cuts is true: “Tax relief is for everyone who pays income taxes.”

I note that Luskin uses real quotation marks, without providing the sources of the quotations.  I would not go that far, on either count, whatever the sources.  Luskin states that Mr. Kerry claims the report proves "the burden of taxes has shifted;" while Bush states “Tax relief is for everyone who pays income taxes.”  I argue that both statements are true. 

The facts are not in dispute.  The dispute arises over how one defines "middle class," "burden," and, ultimately, how one defines fairness.   

Luskin backs up his argument with this graphic:



Notice that the percentages in the "Income Group" column do not add up to 100%.  They add up to 116%.  That is because part of the top 20% are stratified in the last three rows in each section.  He takes the top 20%, then breaks that down into the 90th percentile, 95th percentile and 99th percentile.Keep that in mind when looking at the graphs, because it changes the perception one gleans from the visual representation of the data.  To be clear, I am not implying that the data are presented in a misleading way; it's just that it could be confusing at first. 

In his editorial, Luskin points out that the wealthiest 20% of American taxpayers are paying a larger percentage of the total income tax.  Of course, there are many kinds of tax.  Recall that payroll taxes are increased in proportion to income, up to about $68,000.  Then the payroll tax levels off.  Indeed, there are many ways the government extracts money from people, so many that it is difficult for anyone to figure out what is really going on with taxes.  Payroll taxes are regressive.

That is a game played on both sides of the aisle.  Taxes may go down, but fees of various sorts go up.  Fees are just regressive taxes.  There has been a shift in the way that government collects money from people, away from progressive taxes, and toward regressive taxes. 

Look at the numbers, and think about both absolute number, as well as percentages.  The bottom 20% of income tax payers get a 1.1% cut.  That gets them one extra loaf of bread per year.  The middle 20% get enough to buy a wide-screen TV.  The top 1% get enough to buy a new BMW.  Is that fair?  Clearly, fairness is a matter of opinion.  

Now, think about the statement attributed to Democrats, that the tax "burden" has been shifted.  What constitutes a burden?  If you make $125,000 a year, $10,000 is a burden.  If you make $1,000,000, it is pocket change.  According to the graph, the greatest increase in the percentage of total taxes paid falls on those in the 80th to 85th percentiles.  Are those people "middle class?"  It depends on who you ask.  To the bottom 20%, those in the 80-85% range are rich.  To those in the 80-85% range, they consider themselves upper-middle class. 

Is it fair to increase the percentage of tax paid by about 4% for those in the 80-85% range, but by only 0.6% for those in the top 1%?  It is a matter of opinion, but my opinion is that it is not fair. 

What about the 0.6% increase in the share of income tax paid by the top 1%?  Is that a "burden?"  Probably not.  But the increased share paid by the 80-85% may well be a burden. 

My main objection to Luskin's editorial is that the analysis is not so simple as he makes it out to be.  He ignores the shift in taxation methodology from progressive to regressive methods, then praises Bush because the analysis of the progressive taxes looks......progressive.   A surprising finding? ... Not. 

After roundly criticizing the Democrats for distorted portrayals of the data, Luskin adds the comment:

...the 2002 tax cuts allowed for greater deductibility of capital expenses for corporations — a deliberate (and successful) attempt to stimulate corporate capital investment after the terrorist attacks of Sept. 11, 2001. The CBO attributes those corporate tax cuts to individuals, based on the extent to which individuals receive dividends and capital gains.

Naturally, the highest-income earning taxpayers will get the bulk of this — even though all taxpayers enjoy the many benefits of a stronger economy as a result of greater capital investment by corporations.

He states that "all taxpayers enjoy the benefits of a stronger economy."  That is a damn lie.  Almost everyone who buys anything is a taxpayer.  Remember that most states have a sales tax.  Also, remember that the percentage of persons living below the poverty line has increased every year for the past three years -- with the greatest increase  occurring among children.  This simple fact demonstrates the falsity of Luskin's statement.  Not  all taxpayers are enjoying the benefit of a stronger economy.  In fact, an increasing number of taxpayers are impoverished. 


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Comments:
I sure don't see an increase in my purchasing power, though if I don't find employment soon, I won't have to pay any income tax. Is that a good thing?

I think I'd rather have an income and pay the taxes, since I'm not fortunate enough to have vasts sums of 'family money' at my disposal.
 
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