Sunday, September 07, 2008

The Bush Economy Part 1 - Taxes

We hear quite a bit about the failures of the Bush economic policies. But what are those policies, and to what extent are they responsible for the current economic troubles? What might be some of the other sources of economic stress?

The most frequent complaint I hear is about the "Bush tax cuts" and how the rich don't pay their "fair share" - a term that is rarely defined.

Here's a graphic shamelessly pilfered from the Sept 15 issue of National Review:

US Tax Distribution

The top line represents the share of the total income tax burden paid by the top 10% of income earners, and the bottom line is the remaining 90%.

Of course, that's the income tax, not the payroll tax. Many like to point out that those on the lower end pay a greater percentage of their income in total tax outlays.

What exactly does this show? First it should be pointed out that the FICA payroll tax goes to Social Security and Medicare. These pillars of the New Deal and the Great Society are crumbling before our eyes. The actuarial gamble has not worked out.

What is the Left's solution to the financial instability of these programs? Sharpen the redistribution!

These programs are already inherently redistributive even though the rhetoric about Social Security has historically obfuscated this by referring to it as a plan to which one has contributed and is therefore due some return. The solution offered by Obama is to enhance the redistributive aspects of these programs by lowering the payroll tax on lower earners and raising the cap on taxed income.

Raising the base salary cap from $108k would be targeted at the top quintile, but would fail to significantly impact the very richest of the rich whose income would be in excess of the new higher cap. In other words, the income range most likely to reinvest in the economy would be hardest hit without even addressing the Democrats complaint about income inequality, and in fact making it more pronounced.

Conclusion:
There are two main taxes paid by individuals, the income tax and the payroll tax. The rich already account for an historically high percentage and overwhelming majority of the revenues collected from the income tax. It's hard to see how the Left could possibly complain about the trajectory of the lines shown in the above chart.

Regarding the payroll tax, the Progressive scheme of "social insurance" was never meant to impact the rich. Social insurance has turned out to be grand failure, though a very popular one. Demanding that the rich pay their "fair share" is little more than demanding to be bailed out of a profound failure of democratic socialism without acknowledging said failure.

How does cutting taxes across the board make the economy worse?

9 comments:

Anonymous said...

Take a look @ http://en.wikipedia.org/wiki/Image:United_States_Income_Distribution_1967-2003.svg

Reviewing that demonstrates that the income of the top quintiles has risen in real dollars while the bottom quartiles have not. Even if tax rate remained constant, a disproportionate increase in total earnings would mean that top quintiles would pay a larger share of total taxes. How would the distribution change if sales tax were included (which Palin increased as mayor - how do they typically impact growth).

As for Medicare - what is your solution? Overhead for medicare is ~8%. For private insurance ~20%. Seems like privatizing medicare is akin to the Medicare D boondoggle.

Also - whatever happened to fiscal conservatism? From the Right's perspective - what the hell happened - Medicare D; TSA; War in Iraq (really - why are we there again?). I'm fine with the War in Afghanistan because it actually involved core natural interests (there were actually clear links between Taliban and Al Qaeda). How many billions of dollars have the neocons blown on the mother of all boondoggles? How does the right reconcile the tax cut with war time - I mean it basically requires the US to assume more debt right?

As for the discussion of fair share (getting back to that) - I would argue that fairness is predicated on burden rather than percentage. The "fair" and "equal" are not the same thing. I would say that fair share would place the same burden on all payors. I'm not necessarily arguing for a "fair" tax system under this definition.

Matt

Sockless Joe said...

First, the basic point I probably could have made more explicit is that if taxes are lower for every bracket than they were under Clinton, how has that devastated the economy to such a degree as to earn the number one gripe spot?

Income distribution is an interesting but different debate. I'd also point out that historical household data should not be confused with individual data because there are so many more households of one wage earner (divorce, non-marriage) than there were decades ago.

Sales tax is important, but is not a federal issue and therefore impossible to blame on Bush. Palin's half percent sales tax was overwhelmingly approved by Wasilla for ... I dunno, some damned project.

The distribution of sales tax... PA exempts food and clothing from its 6% sales tax. Some states have two tiers (I think VA does), and others don't.

I've heard you cite those private/single-payer stats before, and I have no particular reason to doubt them, but perhaps we should ask why that is the case. Because government is inherently so damned efficient? Not buying it. Assuming a wide disparity in efficiencies, there must be some other way to remedy that besides nationalizing/socializing healthcare. I hear a lot about eliminating barriers in the inter-state insurance market. Perhaps there is a standardized billing format that could be imposed, which would address a pure collective action problem.

I think you're right that fair and equal are different concepts. But you lost me with burden.

Anonymous said...

My question is: the chart was supposed to demonstrate that the top 10% were paying a greater portion of overall taxes than ever before, but isn't it more illustrative of the growing wealth gap? I know you mention that the top 10% or top 5% are likely to reinvest, but if that were the case, then wouldn't the two lines be getting closer together? Instead, this seems more indicative of wealth hoarding than anything else. Especially given that the income tax for top earners has dropped nearly 5% in the past 8 years alone.

Sadly, it looks like MPV has already touched on this topic. So hooray for me for being unoriginal.

~MJA

Sockless Joe said...

Mike, I strongly dislike the phrase "wealth hoarding". Obviously people want to keep their wealth, but it is not hoarded in the same way a commodity or other finite resource would be and the dynamics are very different.

Anonymous said...

There are a number of theories. One is that medicare doesn't have to market itself - it's what everyone signs up for. Private medicare plans tend to have overhead that's about 8% higher than traditional medicare plans. I haven't looked up the number since med school (2005) - possible there are some differences now, but unlikely. The ungodly number of private insurance plan also signficantly increase the cost to provider's offices as they have someone who specializes in billing. Also - as companies (as opposed to govt) there's profit to be considered - and that has to come from somewhere. There's also marketing. One of the things that happens overtime in health insurance markets is cherry picking by the private insurers. It's cheap as hell to insure healthy young people and the sickest (and poorest) get sent to government insurance - thereby defeating how a functional insurance market would work (i.e. distribute risk over large population). Without central oversigt, how do you end this practice of cherry picking. I think the other question that folds into this is how should American company's compete in a global market which almost uniformly has national healthcare when they are saddled with healthcare costs that their competitors are not.

As for distinguishing sales tax - given that this is a tax disproportionately (as a percentage of annual earning) impacting lower income people - I think it should be incorporated into any kind of consideration of "fair" tax burden. As for why it passed in Wasilla - that's easy - most spending in Wasilla comes from outside of Wasilla - so you make money by taxing folks who aren't entitled to vote on the taxes in question (wasn't there a war about that one time?)

I guess the other thing I would say is more of a thought experiment - if you reflect on healthcare - does it seem like a right? When I think about it (albeit from a very biased perspective) - it does. And people without health insurance do get healthcare - it just often leads to bankruptcy, or is incurred by the healthcare providers and either impacts their revenue stream and/or is passed on as additional costs to private insurance.
Matt

Anonymous said...

Sorry - "wealth hoarding" isn't anything I saw anywhere, it's just the phrase I used because it seemed the closest description to how I felt about what's going on. Keep in mind, this falls closely in line with my ongoing disillusionment about executive salaries and how little of that money seems to make it back into the economy. Perhaps it does in ways that I don't see - I guess these guys must be investing in something rather than pulling a Scrooge McDuck...

~MJA

Anonymous said...

Yeah Mike - I mean Cindy McCain had that $300,000 outfit for the Republican Convention...

Also - Joe - am I detracting for your blog with my Liberalism (see I capitalized it because I'm also part of the Left which is also an L, plus I voted for Gore and Kerry, which bought me two more Ls)? I don't want to undermine what you are trying to create - so if it's too much input from the bleeding hearts - let me know...
Matt

Sockless Joe said...

Sorry I've been absent - been under the weather for a few days.

Mike - That ESPN link you shared the last time this subject came up was really good. (And surprisingly so given the source.) In theory the shareholders should keep the board in check, but with the very large capitalizations and the broad class of passive mutual fund investors it is probably harder for shareholders to be activist than it ever has before. I'm very resistant to regulation of exec salary on an absolute basis, but I'd maybe be interested in something less drastic, like majority shareholder approval under certain conditions.

Matt - When I step on a medical issue I would be foolish not to expect a certain reaction from somebody with an MD perspective. Maybe lay off the "neocon" stuff a bit. I do promise to read that NEJM thing eventually.

On the broader issue of gov't healthcare, this might be an easier sell if we could point to an instance where it really worked. Where there isn't a ten month waiting list for the maternity ward.

Anecdote alert: A lady is running against my favorite State House member. Her big issue is healthcare, and she has a story about how she had to sue her insurance company in order to get a bone marrow transplant performed. There are undoubtedly people who tragically lost similar cases (or won too late for it to matter), but she won. If the gov't is in charge and denies a procedure, where is her recourse?

Anonymous said...

Fair enough - when I use neocons (although I may be thinking of neorealists - it's been a long time) it's based on the international relations course I took @ UR - which was way back - believe I'm using it as I intended, but also have less expertise in this regard then you. How do conservatives justify the staggering cost of the war in iraq with the tax cut and the rising federal deficit. When Clinton was in the whitehouse I remember the budget deficit being a conservative issue (and it was resolved in large part by the kicking economy - much as Alaska's budget deficit was not really fixed at all by Palin - but rather by the quadrupling of oil. She did renegotiate taxes on big oil - but that was because her predecessor murkowski gave them way too much.)

Re: Healthcare. What do you mean when you say "work?" The link you submitted is a conservative dude's speech in which he references a story he heard about somewhere regarding an anecdotal/singular situation. Hospitals often go on "divert" when they lack resources (people can't come down from Maine to Boston because every major ICU in Boston is full, etc) - given an acute situation like the birth of identical quads - you can't wait it out - so you go somewhere else. The premise that every neonatal ICU in canada is full is unlikely - more likely that given the size of canada, no one else was in that 300 mile radius (which is true for huge stretches of midwest as well, much of Alaska is >500 miles from health care in Anchorage).

As for the question of what works - it's difficult to say. We spend the most money per capita with poor outcomes by a variety of quality measures - that would suggest that the current system isn't working. Why that is remains a subject of active debate and many theories - and I can't begin to answer it - but it certainly can support an argument that Canadians, Brits, French, Germans, Japanese, etc are getting better health outcomes through a different health care model. I think that this is a place where we risk astonishingly large amounts of waste if it is privatized

In terms of health care and the anecdote alert. If healthcare is not a basic right - then it becomes a finite resource. Hard to say why she wanted BMT - it may be that it was an experimental indication and the health insurance didn't cover. This is an issue in some of the national systems (there was a story about 6 months ago in england and 3rd line therapy for colon cancer) and is an issue in both american public and private health insurance. The recourse process would likely be identical. It's a tough thing to say when enough is enough (there is always something MORE that can be done - it's just a question of whether it's being done to the patient or for the patient).
Matt