Fact-Checkers Wanted

Paul Krugman takes us from the greedy rich to the greedy, tax-cheating rich, writing on (if you can believe it!) the Bush budget deficits:

Why, then, do we face the prospect of huge deficits as far as the eye can see? Part of the answer is the surge in defense and homeland security spending. The main reason for deficits, however, is that revenues have plunged. Federal tax receipts as a share of national income are now at their lowest level since 1950.

Of course, most people don't feel that their taxes have fallen sharply. And they're right: taxes that fall mainly on middle-income Americans, like the payroll tax, are still near historic highs. The decline in revenue has come almost entirely from taxes that are mostly paid by the richest 5 percent of families: the personal income tax and the corporate profits tax. These taxes combined now take a smaller share of national income than in any year since World War II.

This decline in tax collections from the wealthy is partly the result of the Bush tax cuts, which account for more than half of this year's projected deficit. But it also probably reflects an epidemic of tax avoidance and evasion. Everyone who wants to understand what's happening to the tax system should read "Perfectly Legal," the new book by David Cay Johnston, The Times's tax reporter, who shows how ideologues have made America safe for wealthy people who don't feel like paying taxes.

Gee, I thought it reflected an epidemic of reduced capital gains receipts, attributable to the stock market swoon. [Mini-Update: Editors Wanted, Too! Is it obvious that I am contrasting my suggestion of a decline in capital gains receipts against Krugman's suggestion of increased non-compliance? Maybe not! But I figure we all agree that the recession and the tax cuts contributed to a reduction in revenue, although that may not be clear to non-psychic readers. Who slipped me the de-caf?]

I suspect the truth will out, but unfortunately, it will not be right here and right now.

MORE: Here is the CBPP press release that P. Krugman is recycling; and some US budget data, courtesy of Ricky West. The non-psychic Max Sawicky straddles the issue John Kerry style - I thought he was cuckoo for Kuchinich.

Here is a CBO study from 2002 contemplating capital gains related tax receipts; the CBO wonders, "Where Did the Revenues Go?, back in Aug 2002:

...Without detailed tax return information, the best conjecture of where the revenues went in FY 2002 is where they came from in the mid- to late 1990s, when income tax receipts in particular grew much faster than GDP did.

The Usual Suspects

The first likely factor is capital gains income. Realizations of capital gains are not part of national income or GDP. But they are taxable income to individuals and corporations. Consequently, they can grow more rapidly or fall more precipitously than national income, resulting in changes in revenue proportionately greater or smaller than changes in overall economic activity. CBO's analysis indicates that rapid growth of capital gains realizations explains about 30 percent of the growth in individual income tax receipts relative to GDP from 1995 to 1999, so they may be playing a major role in the decline in FY 2002 receipts.

The CBO Monthly Budget Review, Nov 2003:

Falling receipts from individual and corporate income taxes--the result of tax policy and weak income growth--accounted for almost all of the decline in total receipts over the past three years.

Evidently,they missed (or have been ordered to ignore!) the trend in non-compliance detected, sans data, by the Earnest Prof. And on the spending side:

Other spending has also accelerated in the past two years. After growing at an average annual rate of about 5 percent from 1991 through 2001, nondefense spending (excluding net interest on the public debt) increased by 10 percent in 2002 and by 7 percent in 2003. Outlays for activities of the Department of Homeland Security rose sharply in 2003, driven by an $8 billion increase for the Transportation Security Administration. Significant increases in spending were also recorded by the Departments of Education, Veterans Affairs, Housing and Urban Development, and Agriculture, as well as for the Public Health Service, refundable tax credits, and emergency fiscal relief for states.

Comments

[Ricky]

He couldn't even get the easy stuff right.

[Jim Glass]

"Of course, most people don't feel that their taxes have fallen sharply. And they're right..."

Federal income tax as % of income of median family's income:

one earner
1975: 7.6%
1998: 5.3% = -30%

two earners:
1975: 10.4%
1998: 8.9% =-14%
http://www.taxfoundation.org/prmedianfamily.html

And, of course, that was before the last couple rounds of tax cuts and increases in the earned income credit and child credit. Today it's possible to have as much as $75,000 of income and collect negative tax -- a refundable credit from the gov't.

"...taxes that fall mainly on middle-income Americans, like the payroll tax, are still near historic highs"

Payroll taxes are *at* all-time highs, as are state taxes, as the chart at the above link shows. But Prof K. doesn't consider these a hardship on the middle class anywhere else that I know of, and they certainly are irrelevant to the deficit, so why mention them here? A little rhetorical water muddying? Or just sloppy thinking?

"But it also probably reflects an epidemic of tax avoidance and evasion."

Yeah, "probably". Or maybe not. Unless Professor K wants to give a quantifiable number, one can hardly know. Without a number, this is an allegation of "maybe he beats his wife" credibility.

But if he's really pretending to be talking about a number large enough to affect macro fiscal conditions, darn probably *not* as change on that scale would be very dramatically visible in the IRS "evasion" and enforcement data since 1997 that I look at all the time. And nothing on anything like that scale is.

Speaking of which, the Bush IRS just announced it is hiring 2,200 more "enforcement" personnel --- specifically to offset the big drop in enforcement that occurred during the Clinton years.
http://www.irs.gov/newsroom/article/0,,id=119136,00.html

Professor K for some reason didn't mention this. He deems it not relevant? Not newsworthy? Not to fit the story line?

Or he just didn't want to point out how it was the ideologues in the Clinton/Rubin Treasury who made life safe for tax cheats by ruling over the huge drop in enforcement actions?

[IceCold]

Yikes. One almost feels sorry for Krugman when he's embarrassing himself on issues like foreign policy or politics. You'd think an econ prof would at least have clever if dishonest arguments in this area. But even without doing the legwork to get the specific numbers (hey, I could be a NYT columnist ...), the excerpts above seem counter to the facts.

Payroll taxes fall on all who work, not mostly on the middle class -- the typically non-wealthy self-employed in fact pay twice the % paid by an employee, whose employer picks up half the tab, last time I checked. What Krugman meant to say was perhaps that the payroll tax burden was higher as a % of income for the middle class, vs. the rich. Well duh. And payroll taxes fund what? Entitlements that in theory come back to you (forced savings). Whether they always will may be in dispute, but is an entirely separate issue. Unlike every cent of income tax, payroll tax is tied to a set of entitlements with strong political support and a good record of delivery (even if payroll tax surpluses currently fund non-entitlement budget elements).

But the really silly thing is the implication that the rich are getting by easy on taxes. Note how the fact that the rich pay most income tax actually slipped through. Krugman might have bothered to throw in the % of total federal income taxes paid by the top 1, 5, and 10 percent of households -- but those astounding numbers would sort of spoil the make-believe class-warfare fun at the heart of his "argument".

I believe that California and other states were looking at amending their tax codes precisely because the tax burden had shifted so much to a few (wealthy) households that state revenues had become very volatile -- for exactly the reason (variable cap gains and other income) you cite in the post.

So most unencumbered federal revenues come from income tax from the rich, and several states are so dependent on taxing the rich that it's complicating their fiscal planning, but ..... the rich are getting away with murder on taxes. I get it.

Who knows, maybe Krugman has an argument (beyond ignorance and envy) that the rich should pay 100% of all payroll and income taxes, and the rest of the population should just pay sales tax and library fines. But implying that the tax burden is not already mostly on the rich is misleading.

Wait, a columnist for a major newspaper would never do that. Sorry, I take it all back.

[Jim Glass]

"Is domestic spending really exploding? Think about it: farm subsidies aside, which domestic programs have received lavish budget increases over the last three years? Education? Don't be silly."

Education from $35 billion to $58 billion from 2001 to 2003, +65%.

Luskin quotes one of Krugman's own students on this...
http://www.poorandstupid.com/2004_01_25_chronArchive.asp#107526780197008835
... and yes one can look the numbers up for oneself in the budget. I did and they look about right to me.

general government (63%)
air transportation (52%)
community/regional development (43%)
health research (32%)
veterans' assistance (27%)
Medicaid (24%) and
income security programs (21%).

For a guy who's so fond of calling other people "liar", he's sure doesn't let facts get in the way of his own pronouncements, eh?

[Cecil Turner]

I know very little about economics. But, I have a degree in statistics, and every time I compare the stats to what people are saying about them, big question marks appear over my head.

The CBO study states: In the current baseline, total outlays are projected to grow at an average rate of 4.7 percent a year and remain near 20 percent of GDP through 2014 (see Table 1-2). Within that total, spending for entitlements and other mandatory programs is projected to grow by 5.5 percent annually (faster than the economy as a whole). By contrast, discretionary spending is assumed to keep pace with inflation and wage growth, as the rules that govern the baseline require. Thus, discretionary spending is projected to increase by only 2.5 percent per year (about half the projected growth rate of the economy).

That baseline predicts, over the next decade, mandatory spending rising by 71%, while discretionary spending rises by 28%. That seems to mesh with Krugman's statement, though it's based in part on a questionable assumption.

The biggest ??? in the CBO is: "The baseline reflects an assumption that real GDP growth is 4.8 percent in calendar year 2004, 4.2 percent in 2005, and averages 2.7 percent from 2006 to 2014," but allows that: "revenues tend to be overestimated in projections done just before recessions and underestimated in projections made before rapid expansions."

I don't know what crystal ball they're using, but it's obviously wrong. For one thing, it's cyclic, not a linear function. (Maybe they're trying to average it out?) Also, the growth rate will almost certainly trend upward more sharply initially.

But it illustrates why using CBO projections to evaluate tax policy is disingenuous. The CBO assumes there's no correlation between lower taxes and economic growth. (Though contrary to Krugman's assertions, they do factor in tax avoidance after a tax hike.) If you accept that lowering taxes will not grow the economy, it's a no-brainer to figure that's a bad idea for long-term deficit reduction. Using CBO numbers to make that case is a perfectly circular argument.

[Brian]

Do you people actually the stuff you type? I have this odd feeling that you don't, as it seems hard to believe that some would consider the responses above are actually legitimate.

[Brian]

Correction: "Do you people READ actually the stuff you type?"

[Brian]

Holy shit, I'm not myself today. The Grammar Nazi inside me is going nuts. Make that: "Do you people actually READ the stuff you type?"

[liberal]

Cecil Turner wrote, "But it illustrates why using CBO projections to evaluate tax policy is disingenuous."

But no one who follows federal budgeting issues thinks the CBO projections are reliable, especially in terms of the spending path for discretionary monies. The CBO is required to project based on "current law," even though for certain spending classes, it makes more sense to assume the spending will rise with GDP.

"The CBO assumes there's no correlation between lower taxes and economic growth."

IceCold wrote, "Payroll taxes fall on all who work, not mostly on the middle class -- the typically non-wealthy self-employed in fact pay twice the % paid by an employee, whose employer picks up half the tab, last time I checked."

Except that most economists think that the tax incidence of those taxes falls entirely on the employees. So while the employer *nominally* picks up half, in an economic sense, it's actually taken from the wage earner.

"And payroll taxes fund what? Entitlements that in theory come back to you (forced savings). Whether they always will may be in dispute, but is an entirely separate issue. Unlike every cent of income tax, payroll tax is tied to a set of entitlements with strong political support and a good record of delivery (even if payroll tax surpluses currently fund non-entitlement budget elements)."

So that means, if you're consistent, that you agree
(1) The better measure of the deficit is *not* net of the SS and other trust fund surpluses, in which case W's deficits are far worse than they appear;
(2) The fact that in 2016 (or so) SS will start paying out more than it's taking in from taxes---and begins to draw down its assets---is not relevant to the issue of the solvency of SS?

[liberal]

IceCold wrote, "But the really silly thing is the implication that the rich are getting by easy on taxes. Note how the fact that the rich pay most income tax actually slipped through."

Hardly.

First, you have to look at the total tax picture (i.e., including state and local).
Second, you have to consider the fact that most Ricardian rents due to ownership of the value of (unimproved) land is a gift from government to landowners of value they had no hand in creating (and this effect overall tends to favor the wealthy). Finally, tax should be proportional to wealth, because one's interest in the just order provided by government is roughly proportional to one's wealth, as the classical liberal writers appeared to know.

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