Category Archives: Federal Revenue

Disappearing Deficit

I’ve said it before but once again…Don’t listen to the politicians. Policymakers in DC continue to fight over how to curb the deficit in spite of it being a very bad idea until unemployment is much lower. But look…it is going away by itself… without their help.

May budget report

Budget Totals from The May 7 CBO Report

Well it’s not really going away by itself. The deficit is shrinking because people are slowly getting back to work, in turn making money, both adding to the federal tax receipts and reducing outlays required for substance and unemployment. Nice how that works. Take a look at the comments from this months CBO report:

“The federal government ran a budget deficit of $489 billion in the first seven months of fiscal year 2013 (that is, from October 2012 through April 2013), according to CBO’s estimates. That amount is $231 billion less than the shortfall recorded during the same period last year

Individual income and social insurance (payroll) taxes together increased by $184 billion (or 16 percent). Taxes withheld from workers’ paychecks rose by $99 billion (or 9 percent), mainly because of higher wages and salaries, the expiration of the payroll tax cut in January 2013, and increases (beginning in January) in tax rates on income above certain thresholds.”

Outlays for unemployment benefits declined by $15 billion (or 25 percent), mostly because fewer people have been receiving benefits in recent months.”

Of course there is a lot more, but economic improvements in short order solve both the need for spending and increased revenue to offset the deficit. People working… while policy makers sit idle.

The Debt Lie

I’ve talked of spending patterns under different administrations prior to the election and several times since. The common theme is the guys hailing smaller government and lower spending keep spending more and growing government.

Two days ago Paul Krugman posted Naive Fiscal Cynicism where he again critiques the “math” or (my view lack of math) regarding austerity programs sweeping Europe, the IMF, and US. But down in the article he hits on what I call the debt lie, breaking out a nice chart of the gross debt as related to the GDP. Proof of the point we’ve explored here.

Gross Federal Debt relative to GDP

Interesting how closely it resembles some posts here like “Keep Kicking This Horse“.

Or how Kevin Phillips in American Theocracy points out how policymakers created this debt monster by repeatedly cutting taxes, but one sect wants to fix it solely by cutting the safety net. Hmm.

But here’s Krugman’s take in comparing how the debt has added up relative to the GDP since the depression. Interesting how this doesn’t correlate with what the politic is saying at all:

“Between World War II and 1980, every US president left the debt ratio lower when he left office than when he entered. Reagan/Bush I broke that pattern; Clinton brought it back; then came Bush II. And yes, debt is up under Obama, but a depressed economy in a liquidity trap is precisely when you’re supposed to do that.”

Inflation that Still Isn’t

Hearing about inflation I kept arguing there is almost none. Intellectuals kept yelling inflation, then quieter, and quieter, finally they are silent. So after a few days sailing I find even Jim Jubak agreed today in “What happened to inflation?”

First he talks about all the traditional things which used to be suspected of causing inflation. “The world’s central banks have flooded the global financial markets with cash — and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.

And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.” Finally he asked if this makes any sense?

Yes it makes lots of sense if we understand what causes inflation.

 

Inflation Examples

Inflation is caused when demand outpaces production. With the amount of US workforce out of work and idle production capacity there is no inflation, demand is far from meeting capacity let alone exceeding it.

I for one am delighted to see the price of gold falling. With many of my friends using the price of metals to point out how the value of the dollar is diminished (inflation) relative to metals, this makes my point nicely. Demand for gold went up right with the expectation of inflation increasing demand. Today with market highs and little/no inflation, demand for gold is falling…and along with it, the price.

Once again to the argument Quantitative Easing now underway for over four years, is devaluing the US dollar and causing inflation, the answer is NO. Inflation occurs when demand exceeds supply, nothing more, nothing less. But in this case more importantly I simply have to ask; what inflation?

Tax the Poor?

We just finished four days looking at income inequality and how the U.S Tax system favors the rich. Yesterday afternoon we see It’s time to ‘tax’ the ‘poor’, Anthony Mirhaydari saying “even before January’s tax hikes, the rich were carrying a greater and greater share of the burden”  It appears Mirhaydari has not done much reading lately.  While he points out how the upper classes pay a large percent of the overall tax bill, he does not recognize the logarithmic growth of wealth at the top nor acknowledge the very special treatment of income received from investments when those who work and subsequently “earn” their income have to pay heavier taxes. He also overlooks that income tax is but one form of tax, there is the highly regressive  payroll tax, FET, and many more which overwhelmingly impact low/middle class at a  greater degree. It is not surprising Americans don’t understand how the system works and what needs doing when we have a national media, MSM in in this case, perpetuating such drivel.

Effective_Payroll_Tax_rate_for_Different_Income_Percentiles_(2010)

Here’s another data point on how regressive the payroll tax already is. The poor are already paying a huge portion of the bill. Time for MSN to rid of this Mirhaydari.

 

 

Income Inequality—Day Four

If you’re only contribution to the economy is already having enough money you don’t have to work, you are golden per U.S. tax rates. Let’s look at income and taxes of some hypothetical couples to see how truly regressive the U.S Tax system is. Working folks providing a product or service are heavily penalized for having that job and earning the exact same income as those who already have enough they no longer have to work. In short the lowest taxes are paid by folks who don’t have to work.

Dick and Jane LowDick and Jane MiddleDick and Jane BetterDick and Jane HappyDick and Jane Best

Here are five couples all with two kids, no exotic deductions just the basics.

Mortgages around their annual income which is under the U.S. norm, and I’ve used the same rates etc. for comparison.

Again there are no expensive accountants working in my examples…I expect the well off would be even better off if there were. Take a look.

Now let’s compare the Betters with the Bests. The Bests made exactly four times the income but since they didn’t have to “earn” it to use the IRS terminology, they paid only 2.6 times the tax.

Dick and Jane Happy have $194,876 left after taxes in spite of not having jobs while Dick and Jane Better have $183,336.80. Of course the Happys are happy; they brought home the exact same amount as the Better’s but after taxes kept $11,539.20 more, simply because they are financially positioned to not to have to work.

There is my rub; that folks who are working hard to provide a product or service to our country and economic base are being penalized for having that job and earning income. Meanwhile “unearned” income is taxed at a significantly lower rate. Just as in the Hungerford study, we see here how the U.S. tax system is subsidizing the income inequality wedge.

Income Inequality—Day Three

A look at why such inequality of income distribution is occurring. Just why are the rich getting so much richer and the poor getting poorer? Capital gains and dividends. But don’t take my word for it.

Thomas Hungerford, leader of the Congressional Research Service study Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945 has just concluded another study addressing Income Inequality. Changes in Income Inequality Among U.S. Tax Filers between 1991 an 2006: The Role of Wages, Capital Gains, and Taxes, Thomas Hungerford, 23 January 2013 takes a look at the income distribution and elements the of influence. One important note made by Hungerford during his discussion whether it is good or bad to have this growing wedge talks about another very important issue, the potential for upward mobility. Being low/middle class isn’t really a bad thing IF I can work really hard and smart and move up…the American Dream right? Unfortunately research indicates income mobility is not very great and the degree of income mobility has either remained unchanged or decreased since the1970s (Hungerford 2011, and Bradbury 2011). It looks that if we fail to do something different, the American Dream may be on life support at best.(I really recommend a read of the Bradbury paper, she advises the Federal Reserve and her work is extensively documented)

income_inequality_contribution

A graph of the Hungerford study findings

But here are a few key points from the January research The single greatest driver of income inequality over a recent 15 year period was runaway income from capital gains and dividends.”

And direct from the report abstract: “Changes in wages had an equalizing effect over this period as did changes in taxes. Most of the equalizing effect of taxes took place after the 1993 tax hike; most of the equalizing effect, however, was reversed after the 2001 and 2003 Bush-era tax cuts. Similar results are obtained with other inequality measures.”

Or, as Hungerford put it in an interview with Greg Sargent: “The reason income inequality has been increasing has been the rising income going to the top one percent. Most of that has come in capital gains and dividends.”

In other words, wealthy beneficiaries of low tax rates on capital gains and dividends are doing extremely well — and their runaway wealth is a major driver of income inequality. A lot of that money could and should be taxed as ordinary income — as some folks in Washington want as a way to help resolve the sequester, and many believe is a way to reduce the growth of income inequality.

As a next project I hope to do up a couple tax examples to demonstrate the differences in how our current tax rates and rules affect the tax bills and percent paid by some hypothetical couples in each of low, middle, and high incomes. What I’m most interested in is how differently incomes are taxed dependent on from where the income was received. Do you work for it? Or do you already have so much you don’t need to?

Income Inequity….

Yesterday I promised to explore income inequity further and delve into impacts of tax rates. Here is the first edition but with a disclaimer, there may be some outside reading to do…I’m a little self-conscious repeating what all these really smart folks and thorough studies have already determined. But here goes.

Start with the two previous charts yesterday.  First the growing wedge between productivity and compensation. We claim increasing productivity is a path to a better standard of living. True it will help US competitiveness in the world market. But it does nothing for worker Smith if his productivity grows but he isn’t seeing a share from his increased competitiveness.  The study: The wedges between productivity and median compensation growth [1] is well done and deserves a read. Not tough, best for guys like me it includes few graphs, you know pictures for us slow readers. Anyway Mishel explains:

 “The analysis above has shown that from 1973 to 2011, the largest factor driving the gap between productivity and median compensation has been the growing inequality of wages and compensation, followed by the divergence of consumer and output prices and the shift of income from labor to capital. From 2000 to 2011, when the productivity-median compensation gap grew the fastest, the divergence of prices had only a modest impact, whereas the shift from labor to capital income was the single largest factor, accounting for roughly 45 percent of the gap.”

He goes on to discuss the three factors impacting this wedge. The one I see as most significant when looking at the capital flow relative to tax rates is:

 

“The first is the substantial gap between the growing earnings of the top 1 percent of earners and other high earners within the upper 10 percent: Between 1979 and 2007 the annual earnings of the top 1 percent grew 156 percent, while the remainder of the top 10 percent had earnings grow by 45 percent.”

 

From here lets jump to the depiction from Krugman and his short “No Trickle” blog. Most of us remember the term “Trickle Down Economics”. We believed if we allow the top tax rates to be lowered, that money would be re-invested in American business and we will all share in the wealth as the economy grew. Sure…and the economy did grow (following a huge rise in government spending and deficit growth under Reagan.) But looking back at both of these charts from yesterday, it’s pretty obvious the middle and lower class was left far behind. But let’s check in on the “Trickle Down Theory”

Gains compared to real Investment

Capital Gains Rate Changes…yet Steady Increase in Real Investment

So today’s new entries; first is a chart depicting Capital gains taxes as compared to real investment….exactly what the lower tax rates were claimed to stimulate.  A look from post depression years on shows a steady upward curve in the amount of real investment once through the first few post-depression bumps. But there just aren’t any of the peaks or valleys relative to the capital gains tax rates we’d see if there was actually a relationship between a rate change and additional investment. So like the (lost but now found) Congressional Research Service study, there just is not any direct impact of low capital gains tax rates and real investment. With no real investment, the additional findings of no increase to the GDP and no increase to the GDP are right in line.  In short, “Trickle Down” –Doesn’t.

Maximum_Federal_Tax_Rate_on_Long_Term_Capital_Gains_(1972_-_2012)

Compare this curve to the opposing curve in the “Wedge” Chart from Mishel yesterday.

Lastly today is a tighter focus on Maximum Long Term Gains Rates. I specifically chose this chart because it represents the years from when the wedge between productivity and compensation began to grow. If we overlay these two charts we see a second wedge between productivity/profitability and the lower max capital gains rates. Fall back to the worker compensation line to see where the income inequity comes into play. Don’t forget…that additional income at the top is being taxed at some of the lowest rates in history.Making more and paying less taxes = adding to income inequity.

Next look will be at another Hungerford study which clearly lays out various elements contributing to income inequity.

 

Old Assault Weapons—New Taxes

Are they related? Yes; both the Federal Assault Weapons Ban of 1994 and the Economic Growth and Tax Reconciliation Act of 2001 were passed by the US House and Senate, and signed into temporary laws expiring in 10 years. That was the plan, ten years and both would end barring significant positive impacts and the resulting votes necessary to make them permanent. But that’s pretty much where the relationship dies if we listen to the political banter.

But as the 10 year temporary assault weapons ban came to a close it was quietly allowed to end. No fanfare, no public pronouncements about “new” assault weapons being loosed on the public, few pros—cons kicked about of the impact to the country or the future of Americans. The discussion was so limited it was virtually nonexistent. Today as our House and Senate considers another ban we hear much about “disarming” the public, “infringement of constitutional rights” and much more, some truth and some non-truth. Were there positive or negative outcomes as a result of the temporary ban? I’m not discussing the assault weapons ban except to say it was temporary, and then it expired just as it was intended and passed in 1994 to do.

However as temporary tax reductions came near to end we’ve heard a loud outcry about “new” taxes being livied on businesses and public, claims about the impacts to the country, and how horrible it will be for free enterprise impacting the future of Americans. On allowing the tax (temporary) reductions to expire the discussion points include one-liners like “no new revenue”, “budget cuts”, “shrinking government”, and “hurting the economy”. Really they are just the old taxes, nothing new at all about them.

If we think outcomes should count and we indeed want to look at potential impacts of the temporary law, here are a few talking points: The “old” tax rates (now temporarily reduced) were in effect for the period back when GDP growth was 5%, unemployment was running at 4%, and there were federal revenue excesses of $236.2 Billion, yes actually paying down the national debt verses running an annual deficit.

Since we’ve enacted these temporary tax reductions, we have GDP growth at 2%, 3Q 2012, unemployment at 8%, a $1.3 Trillion (2011) and $1.1 Trillion (2012) annual deficit, and a major migration of wealth from lower and middle class to the top few percent. All that in spite of the Heritage Foundation report predicting the temporary cuts would result in complete elimination of the U.S. national debt by fiscal year 2010.  But hey, the Heritage Foundation has been wrong about inflation for ~5 years now too.

Taxes and the Economy

Do Low Tax Rates Help the Economy?

If we need more let’s couple that experience with the study discussed a few weeks ago analyzing the impacts of tax rates on the GDP, savings rates, and productivity. Now we have our own decade of personal experience as to what happened and a study from 1945 on telling us these past years are indeed NOT an anomaly. 

As I mentioned in Low Taxes verses Economy:

  • Lowering marginal tax rates does not increase economic activity nor impact the GDP.
  • Lowering capital gains rates does not increase economic activity nor impact the GDP.
  • Lowering marginal tax rates and/or capital gains tax rates does not increase saving and investment.
  • Lowering marginal tax rates and/or capital gains tax rates does not increase U.S productivity.
  • Lastly, lowering capital gains and/or marginal tax rates does make the wealthy wealthier and add to the significant and growing U.S income inequality.

I’m starting to like the sound of those “old” tax rates. So let the temporary tax breaks expire just like the temporary assault weapons ban. Or to be credible, we should at least call them “old” taxes. Old as in when the economy was fine, the deficit and talk of austerity nonexistent.

Low Taxes verses Economy

Taxes and the Economy

Congressional Research Service Report

We heard it over and over last year how low lower taxes stimulate the economy. Not so it turns out. Interesting research here called Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945. It doesn’t matter if we look at the marginal rates or long-term capital gains rate the hard data just doesn’t add up to creating anything good.Most interesting and controversial is that this Nonpartisan Tax Report Withdrawn After G.O.P. Protest, released not far ahead of November’s election by the Congressional Research Service was pulled following GOP pressure. Yes, it was unfortunately just before the election, and yes the verbiage is a bit off so go ahead and ignore the verbal summary, ignore the timing, in fact ignore anything at all that could by either party be considered partisan. Just take a look at the data from 1945 until now and you see a some compelling realities:

  • Lowering marginal tax rates does NOT increase economic activity nor impact the GDP.
  • Lowering capital gains rates does NOT increase economic activity nor impact the GDP.
  • Lowering marginal tax rates and/or capital gains tax rates does NOT increase saving and investment.
  • Lowering marginal tax rates and/or capital gains tax rates does NOT increase U.S productivity.
  • Lastly, lowering capital gains and/or marginal tax rates DOES make the wealthy wealthier and add to the significant and growing U.S income inequality.

In hindsight it is pretty clear to economists why there was party pressure to hide this report. Nearing the end of a hard fought, expensive campaign the facts here don’t just challenge but completely destroy the central tenant of conservative economic theory being put in front of voters, that reduced tax rates increase economic growth, increase saving and investment, and boost productivity (increase the economic pie).

Look at the data, in the end, lowering taxes on the wealthy just makes them wealthier, the rest of us see no impact. Surprise!

The Fiscal Cliff that Isn’t

All this debate on the fiscal cliff. Each side blames the other for failing to achieve a resolution. Both are influenced by the big money since if a tax increase is to happen, it is more likely to affect those who make the most profit. But in the end, there is no issue. It is made up,  yes a fictional point of no return driven by congressmen struggling for greater authority than the constitution grants them. Lets break it out.

This all started when the Tea-party faction held the debt ceiling increase hostage to a vote on a balanced budget amendment. But going back we find that there is no limit to the debt. In fact the

This all started when the Tea-party faction of the US House held the debt ceiling increase hostage to a vote on a balanced budget amendment. But going back we find that there is no limit to the debt. In fact the U.S. Constitution, 14th Amendment reads the U.S. “debt shall not be questioned” so congress questioning the debt could be considered “treasonous”. In fact that’s where it all began in the first place, when House of Representatives passed a statute almost one hundred years ago, to limit total Federal spending in order to keep President Wilson from entering World War I. This statute limited the total amount of active Treasury notes and bonds that could exist at any moment in time. This so called “debt ceiling” has been raised by Congress again and again with little debate over the years and thus has not fallen to the constitutional challenge it really is.

Interestingly this faux requirement to increase the debt ceiling is in it’s application a challenge to all U.S. authority as it implies “required approval” to spend money and operate government programs that Congress itself has already passed and funded i.e. already approved by both congressional bodies and signed into law by the President per the constitution. In one financial researchers view when the ” House of Representatives decided not to vote to raise the Treasury debt issuance limit and thereby by stop the Federal government from spending and ultimately from functioning. They threatened to “shutdown” the Federal Government unless they got a special deal to get their proposed statues to cut Federal programs passed by the Senate and signed by the President. This was nothing less than a majority of one body of Congress back mailing the President and the other body of Congress.”

The fact is, though, that our national government doesn’t just borrow in its own currency – it issues that currency. And so its ability to spend is not constrained by its tax revenues. We don’t need to tax the rich – or anyone else for that matter – in order to spend. We only need taxes as a way of managing excess demand and preserving a stable currency while achieving other public purposes.

What do do now? Ignore the “cliff”. There doesn’t need to be any deal, nor should there be any deal. Congress needs to get about it’s business of passing effective bills, funding them, and cease making them additionally subject to further (unconstitutional) approval. Clearly it’s far easier for the hypocrites in the chairs to speak about a balanced budget while remaining unable to approve a plan for taxation and/or spending which might do so over the long haul. If it needs to be balanced right now, during a recession when spending is necessary, is fodder for another day. Meanwhile take the time to read the Dan Kervick piece referenced above…he offers some extraordinary yet reasonable alternatives to get out of this self-made mess.