charts can be deceiving
I’m not a huge fan of charts because I think they’re usually just used to create illusions and sales pitches. James Joyner points to this chart from Conor Clarke, illustrating the drop in effective income tax rates for the top 1% of Americans from the Clinton to the Bush years. He writes:
I’d note that the curve is wildly exaggerated because the Y axis starts at 28 percent. All the variation is between 31.5 percent and 36.1 percent or so; the drop has hardly been precipitous. In addition to the Bush tax cuts, most of the difference is lowered capital gains taxes.
To better illustrate this point I give you Conor’s chart and one I made. Numbers don’t lie, but how we present them can make all the difference in the world.
Here’s Conor’s chart:
Now here’s mine.
The numbers, of course, are exactly the same.
I agree with James, though – this cuts both ways. Going back to Clinton level tax-rates is not the doomsday scenario so many tax-hawks claim it is. Then again, it’s also important to remember that the rich already pay a great deal more than any other demographic, and there’s only so much revenue that can be raised by taxing them while doling out services to the rest of the population. At some point, taxes will simply have to go up across the board.
That’s the sad fact about free lunches. They are never, ever actually free.
I guess it’s a good thing Obama and D’s don’t talk about free lunches. One of the biggest struggles with health care has been working out how to pay for it. It’s the critics who somehow talk about free lunches.Report
I don’t know. I hear the word “free” in this debate a lot. Free health care gets kind of interchangeable with universal health care. Now, I agree a lot of people aren’t arguing that. Hell, I link to a Matt Yglesias article in this post. My point is, that at some point people who now enjoy paying, effectively, no taxes will start to have to pay for this too. What about a similar deduction from paychecks that we see now for Social Security that went directly into the public health fund? It would sit there right next to your Social Security deduction on your pay stub, whether you were in the lowest tax bracket or the highest.Report
Speaking of Yglesias, he’s got an interesting post on how to pay for health care reform here.Report
When folks talk about coverage for those who can’t afford it, they’re talking about free coverage for those who can’t afford it, right?
Or are you specifically talking about making people who, now, have chosen to forego coverage to start ponying up for it?Report
Maybe this just makes me a populist a**hole, but I wouldn’t mind taxing these folks a bit more to help poor SOBs stay healthy, or to keep middle classers from being crushed financially by medical bills.
Now it’s true all the money for government services can’t come solely from the super rich, but they can certainly afford to pay more than they are now. We should start by adding in some more tax brackets at $500k, $1 mill, etc.Report
Chris – I agree with more tax brackets. I think you can have a much smarter taxation discussion if you can break it down better. The top 1% is composed of people making $350,000 a year. But it’s also composed of people who are netting billions of dollars. There’s a pretty wide gap from the bottom tier of the 1% and the top tier.
Still, I think that broader taxes for broader benefits also makes sense. People should have a visual aid when they take in state services. I have the visual aid that is my social security deduction each paycheck. I really think that if we go this route, we need some sort of similar visual aid for our public option benefits.Report
Yes, we should be made aware of where our tax dollars are going each month. Then at the end of the year the government should send us an easily digestible annual report (or put a version online) which shows exactly where are money is going. That might spur an interest in the breadth, quality and efficiency of government services.
One of the biggest factors that has kept our current health care system in place for so long is that we don’t easily see how employer contributions to health care are sapping our salaries. The average employer contribution to health insurance is something like $9,000 (vs. $4,000 a mere 10 years ago). How many people realize that money could be going to them instead of some HMO?Report
Don’t get me started on this one.
Imagine what would happen if withholding was abandoned altogether.
Seriously, we should hold elections the day after the full individual tax bill for each individual comes due.Report
Its not that hard to find simple info on where the federal budget goes, allthough it would be better to send it to everybody every year.Report
Greginak:
“I guess it’s a good thing Obama and D’s don’t talk about free lunches.”
Well, I do think that a central part of his campaign was a pledge of no new taxes on people earning less than such and such a year. Right? It was a while ago, so I might be wrong. But I thought that’s what he said. So, we are going to have new enntitlements. But people who earn less than a certain amount won’t have to pay more. So to them… it’s free. Right?
Speaking of which, the graph left out a whole lot. If you pick the starting point somewhere in the Reagan years, you can make it show an increase. If you pick the starting point as 50 years ago, you see a decrease. So ED is right. The chart shows what you want it to show.
And as for what “the regular folks pay,” it might be interesting to include a chart of the bottom 10 percent of taxpayers. Or the bottom 20 percent.Report
Ok. Wait. The graphs (both) purport to give history of effective (rather than marginal) rates. Effective tax rates are, for each person, the weighted avg of bracket income and bracket rate. So … let’s take this slow… in years that the top 1% are spiking in income, doing real well, the portion of their income in the high bracket rises, and so the graph will show a high effective tax rate. And correspondingly when they are not doing as well, the effective tax rate will drop. So this is a misleading stat the way Conor is using it, right? It’s at least a compromised stat.Report
“In addition to the Bush tax cuts, most of the difference is lowered capital gains taxes”
I’m willing to accept that your statement may be true, but the above seems to suggest that there are other factors at work here as well.Report
“in years that the top 1% are spiking in income, doing real well, the portion of their income in the high bracket rises, and so the graph will show a high effective tax rate. And correspondingly when they are not doing as well, the effective tax rate will drop.”
Not necessarily. It depends on what’s causing the spike in income. If I’m getting most of my spike from long-term capital gains which are taxed at a lower rate than ordinary income, then my effective tax rate will drop even though my total income went up.
Also, it’s worth noting that the wealthy did extremely well during the period covered by the cart, so the drop in the effective tax rate was not caused by any decrease in the income of the top 1%.Report
Sooo…How does this respond to Conor’s point that the important tax rate to keep in mind is the effective tax rate?
I understand that you are making a different point about charts, but it seems largely gratuitous without a stronger follow-up (i.e. even if we look at effective tax rates, and raise them to Clinton-era levels, that’s not enough money…blah blah), particularly since Conor’s chart has clearly labeled X and Y axes (and as you say,”The numbers, of course, are exactly the same”).
Do you have a larger point? You seem to concede that returning to Clinton era tax levels wouldn’t be the end of the world, then say we can’t raise taxes on the rich forever (who’s arguing that?), and never make a case for whether or not healthcare reform is a policy goal that is worth funding through additional taxes on the rich.Report
The reason we are struggling for the funding when we already pay a great deal more per captia than any other nation, is because we are protecting the private insurance gravy train. Their sweet deal reminds me of paramutuel racing. Everyone pays in, the company takes their 30% and pays out with the rest. WHAT A DEAL!Report
Words can be deceiving too:
And, my way of saying the same thing:
“The offspring of riches: Pride, vanity, ostentation, arrogance, tyranny.”
– Mark TwainReport
Well, he had another chart showing effective tax rates by income grouping, and when it gets down to how much upper income brackets actually pay, they’re not paying that much more, on a percentage of income basis, than those in the upper middle class. In fact the top 1 percent pay a lower effective tax rate than the bracket just below them. This is because a LOT of their income is taxed as capital gains (at 18.5 percent) instead of as income. Yes, the rich pay more than the poor or middle class in terms of gross dollars of revenue, but it’s primarly because their incomes or higher rather than that they are taxed at outrageously higher rates.
I tend to think of defense and law enforcement spending as an insurance against loss. If you have more to lose, you pay more for protection of your property against loss. One could make a reasonable argument that a progressive tax makes those with the most to lose pay proportionately more for the protection that national defense and legal protections provide them. It’s not a crime when an insurance company charges a guy with a $3 million home more for homeowners insurance than it chargest a guy with a $200K home. I don’t really see why it’s a crime to charge the guy with $100 million in the bank a lot more to protect his rights and property through national defense and law enforcement than we charge a guy without two pennies to rub together.Report
One graph in isolation does not tell the whole story. You need to show what percent of total income goes to the wealthy. You also need to show what percent of total wealth is controlled by the wealthy. You need to compare effective tax rates including state taxes. We have done this on my dinky blog. When you look at all the numbers, it is the group just below the top which pays the most taxes as a percentage. It is also worth looking at these numbers as most people find it pretty shocking how much of our wealth is concentrated into the hands of a very few, which has major political implications also.
SteveReport
Honestly – I am not against a progressive tax. I think it makes sense. It’s one of the only sensible ways to tax, because the nature of society is to have some redistribution of wealth. That being said, if want to provide very large, very popular entitlements, at some point the cost of those entitlements must come from the broader demographic. One problem with taxing the wealthy is that it effects investment, job creation, etc. and another is that the very wealthy can also move their wealth around. They can move it right out of the country if taxes get too high. A lot of them don’t even have enormous incomes – they have enormous investments. It all gets very tricky. Our taxes – both personal and corporate – are very high, and yet our system allows for many, many loopholes and thus our revenues are very low.
Indeed, revenue is a much more sensible way to look at all of this in the first place. We could construct a simpler tax code, lower tax rates across the board, and still increase revenue but it would require the sewing up of thousands of loopholes. No simple task when all the various special interests come into play.
Should the rich pay more? I think so. Why not? Should it be substantially higher – should the tax payments of the wealthy reach 50% after state, local, and federal taxes are added into the mix? That’s money going to the government as opposed to being spent in the market. That’s money theoretically redistributed, but one has to wonder if spending that money and creating jobs in the market would distribute it more effectively than giving it to a bunch of bureaucrats and then letting them decide.
The numbers on all of this are interesting to say the least. Social Security, for instance, barely redistributes funds from one socioeconomic class to another (I think the number is around 7% of all funds that go into the program are distributed back out into other brackets.)
Is the government best-suited to redistribute wealth? On some counts, probably the answer is yes. On others – I’d say quite definitively the answer is no.
And remember, they are very, very good at bailing out big corporations. That’s redistribution of wealth, too.Report
E.D. – a few things I don’t understand from your comments.
1) “What about a similar deduction from paychecks that we see now for Social Security that went directly into the public health fund?”
Most of us already pay 2.9% of our income into Medicare (including employer match.) Someone who makes $500k per year in wages pays around 0.6% of their income into Medicare. So the rich already have a very regressive tax that keeps them from having to support Medicare (and Social Security). If you made that payroll tax flat for all incomes, you could clearly pay to extend Medicare to all.
2) “Should it be substantially higher – should the tax payments of the wealthy reach 50% after state, local, and federal taxes are added into the mix?”
You admit a few sentences earlier that this is not true. No matter how much they make, people with large investment incomes don’t pay 50%. People who own their own businesses don’t pay 50%. Hell, hedge funds don’t even pay it. It is only people with high salaries and large bonuses – like my friend in finance who complains non-stop about his taxes – who reach this rate. Are they the drivers of economic growth? I’m skeptical.Report
I was under the impression that the Medicare tax was flat already. This CNN Money bit gives that impression as well. I may be wrong.
Once again, though, my larger point is that we need to think in terms of practical revenue – not merely tax rates. A broader revenue base will become necessary as entitlements grow.Report
Ok, let’s talk about revenue – and trying to increase tax revenues. Let’s use net worth for our calculations, since it’s more honest.
Top 1% in US have 34.3% of the wealth.
Next top 4% have 24.6% of the wealth.
Next top 5% have 12.3% of the wealth.
Next top 10% have 13.4% of the wealth.
Next top 20% have 11.3% of the wealth.
Next top 20% have 3.8% of the wealth.
Bottom 40% have 0.2% of the wealth.
If we increase taxes by 5% on everyone:
Top 1% increases total revenues by 1.715%
Next 4% increases total revenues by 1.23%
Next 5% increases total revenues by 0.615%
Next 10% increases total revenues by 0.67%
Next 20% increases total revenues by 0.565%
Next 20% increases total revenues by 0.19%
Next 40% increases total revenues by 0.01%
For a total increase in revenues of 4.995% (rounding errors).
If you only increased taxes by 5% on the bottom 80%, then you would only increase revenues by 0.765% (or 15.3% of the total 4.995%).
If you only increased taxes by 5% on the top 20%, then you would increase revenues by 4.23% (or 84.7% of the total 4.995%).
If you only increased taxes by 5% on the top 5%, then you would increase revenues by 2.945% (or 58.9% of the total 4.995%).
I think we could safely call the top 20% “rich”. We can definitely call the top 5% “rich”.
So, while you are correct that “there’s only so much revenue that can be raised by taxing [the rich] while doling out services to the rest of the population”, your lie comes in your omission of context about how much money the “rich” really have that could be taxed.
You’re right that we can only get “so much” from the rich, we can get pretty close to 90% from the rich. To me, saying 90% is almost identical to saying “all of it”.
And, this does not even discuss how the disparity (or inequality, if you will) in net worth has gotten worse for 80-90% of the population since Reagan was first elected.
(source: Edward N. Wolff, New York University (2007))
Yes, your thinking is ordinary, not extraordinary, gentlemen.Report
Disparity has indeed grown between the very wealthy and the rest of us. But a better question would look at the overall standards of living – have they gone up even as the wealthy have gotten more wealthy? Are we, on average, wealthier than we were in the 1970’s?Report
Using the HDI (http://hdrstats.undp.org/en/indicators/10.html), the US and Canada have the following (US first line, Canada second line):
1975 1980 1985 1990 1995 2000 2005
0.870 0.890 0.904 0.919 0.931 0.942 0.951
0.873 0.888 0.911 0.931 0.936 0.946 0.961
These look very close, and Canada hasn’t had nearly the same increase in disparity over the same time period. So, overall, I’d say that we’re wealthier, but the disparity has hurt the overall standard of living of those who have gotten the worst of the disparity.Report
You’re right. There are some loopholes for self-employed/small business owners, but Medicare tax is flat. Total FICA is regressive because of the Social Security tax. But why not simply make Social Security flat? Rich people like to complain about entitlements, but they pay no more into them than the rest of us do (and a smaller proportion of their total income at that.) A flat tax would surely be more just in this case!Report
Apart from the deficiency in measuring using Effective Tax Rate , I am hearing that the rich have made use of the lower rate on capital gains. But even if that is the reason the rate descends, these gains represent the difference in perceived after-corporate-tax value of a public company to its owner, a value fed only by public assessments of that company’s (again, after-corporate-tax) future income.
The corporation owners thus still pay the corporate tax (and then their own). It would be correct (impossible but correct) to add and attribute the implied corporate taxes to individuals, by bracket, and that would even out the historical graph (boy, would it, corporate taxes are 35%).
It is somewhat ( a little bit) analogous to the handling of tax-free investments (e.g. muni bonds). Yeah, there is “no tax” but at least you have to figure a “tax” in that the return given by the govt is lower than parellel taxable investmentsReport
.. so overall this Effective Rate graph is a tease. Better to work from the marginal rates and then make “corrections” for the effect of items you might take issue with (e.g. mortgage deductions, charitable contributions)Report