Reality Bites (And Performs Simple Arithmetic)

Ezra Klein writes on relative tax burdens and demonstrates that his real flair is with words, not numbers:

Income taxes do tilt upward. But they're the progressive bit of the federal tax wedge. Other federal taxes, like the payroll tax and the excise tax, are not progressive. (And we're not even going to get into state income, which are frequently regressive) That's why CBO calculates something called the "effective federal tax rate." The EFTR is simply a households’ federal tax liability divided by its income. The four taxes that are included in the measure are the income, payroll, excise, and corporate taxes. And they give us a pretty good idea of whether the rich really are overpaying.

After presenting a graph showing that the top quintile pays the top effective tax rate of 25.8% (the next highest quintile is at 17.6%), Mr. Klein goes on:

When you look at percentage of total tax liabilities, the rich do in fact bear a heavier burden. But it's because they have so much more money. They are not bearing a heavier burden as a percentage of their incomes.

Huh?  25.8% does not exceed the other tax rates presented?  There is a reader revolt in the comments, but no correction as yet.  Just another day in the reality-based community.

And while on this topic, why include the gross Social Security tax in the tax burden?  In other contexts libs routinely defend Social Security as progressive and redistributive over its lifetime.  Surely some sort of estimated net lifetime tax burden or benefit belongs there, or no number at all.

Mr. Klein tackled this head on with his blithe assurance that "Other federal taxes, like the payroll tax ..., are not progressive".  Yes, the payroll tax is not progressive when viewed in isolation, but the overall Social Security program is.  Or does Mr. Klein think the whole program should go?  I doubt it.

The CBO figures are here.  Taking out Social Security, the lowest quintile has an effective tax rate of -5.8% for individual, corporate, and excise taxes; the second is at 1.0%; the third at 4.8%; the fourth at 8.0%; and the top quintile is at 20.0%.  Viewed that way, one can see why a near-majority are not unhappy with their current federal income tax.

Mr. Klein also demonstrates his number-phobia with this:

People hear that the top 20 percent pay almost 70 percent of the country's income taxes and nod their head. That's unfair!

Yup, that is unfair - per the chart to which Mr. Klein points (p. 4), the top quintile pays 69.3% of all Federal taxes; they pay 86.3% of all Federal income taxes, 87.2% of corporate taxes, and get off easy by paying a mere 43% of all Social insurance taxes (Soc Sec and Medicare, I presume).

Yup, it was a fine day over in reality.

[end of math homework]

Comments

[cathyf]

TaxProf blogged about the statistics. I registered my skepticism in the comments -- I am suspicious of the "social insurance" taxes having a rising rate through the first four quintiles. While total taxes are certainly progressive, when you break them out like that Social Security taxes are certainly regressive and Medicare taxes are certainly flat. That the numbers don't show that means that they are doing something not-obvious.

[Uncle BigBad]

I don't suppose we're ever going to get a thread to talk about the most worrisome development since the inauguration: the Homeland Security report on right-wing radicals. Its publication shows that the socialist rot is not just confined to the One and his closest minions, but has spread throughout at least one federal agency, Homeland Security.

[glasater]

Hannity yesterday was making a big deal out of April 14th was Tax Freedom Day--when we start working for ourselves instead of local, state and federal government.

Years ago when I was more involved in local politics via college and Young Republicans--Tax Freedom Day was in June.

I think the reason for that was the left overs that flowed from the Great Society via Nixon, Ford and Carter.

[clarice]

I liked the way HS noted that those who support CAIR or oppose the war might be people to watch--Whoa! You say they didn't.Just people who , for example, oppose abortion?

Must have been an editorial oversight.

You can't possibly mean the Dept thinks the only dangerous folks are their political opponents. do you?

[bad]

Ezra has no flair except in his pants, if he's lucky...

[Charlie (Colorado)]

I don't suppose we're ever going to get a thread to talk about the most worrisome development since the inauguration: the Homeland Security report on right-wing radicals.

www.blogger.com

[Charlie (Colorado)]

Speaking of singing, by the way, here's what I plan to sing at the Tea Party tomorrow.

[Charlie (Colorado)]

Goddamnit, typepad. Try LUN

[matt]

very funny, and charming, Charlie. These flashmobs are great. Another amazing product of fertile imaginations and the internet.

[jimmyk]

Social Security taxes are certainly regressive and Medicare taxes are certainly flat

But as TM points out, with SS and Medicare you can't separate out the taxes from the benefits. Take Medicare: the benefit is largely the same for all, but higher income people pay much more for it. How can that be anything but progressive?

But I'd love to know how CBO figures that the top quintile pays 87.2% of corporate taxes. Economists have argued for years that the identity of who pays corporate taxes is shrouded in mystery. The incidence is likely borne by some combination of labor and shareholders, but it's hard to know what that mix is. One thing for sure is that the person writing the check isn't generally the one who really pays the tax.

[bad]

Charlie, everytime I hear that song I'm ready to grab the rifle and go to war, or throw myself on a grenade, or battle whomever needs battled.

Yet it's about France... go figure.

[bad]

When our children were little, we had a kitchen floor which only looked good after being scrubbed on hands and knees.

I always listened to and sang (badly) the music of Les Miserables while scrubbing.

My family still teases me about my love for that music.

[Chris]

corporate taxes are paid by consumers. It's pretty simple, or so I thougt.

[Chris]

thought. jeez. Really simple?

[PeterUK]

Charlie,
I hope you are going sing it in all seventeen languages.The union rates on that performance would be a killer.

[sbw]

I had stopped going to Broadway shows for decades... until the Tony's showed "One Day More" by the Broadway cast. Breathtaking!

I've seen it with my family some half-dozen times since then. Many individual songs give pause.

What is striking to me is that I bought the French album, thinking it would be nice to hear it in the original... and, hearing it, I think the lyrics were initially written in English. It flows better.

[sylvia]

Yes I've heard about this often but somehow those figures never made sense to me. They don't seem to add up. If 90% make on average say $30,000 and pay only 30% of the taxes, then plugging it in, the top %10 would have to make over about $600,000 a year. But there aren't THAT many rich people making that amount around. So I don't think that can be true. So I don't know where all these richie rich people are, and why is it that they end up paying so much. I would have to see more figures on this before I don't completely believe this could be a myth propagated by the rich to play the violins for themselves.

[peter]

Inroads of Muslim Brotherhood into the Obama Administration.

[sbw]

I'm a simple kind of guy. I figure if someone earns a buck from me because I like his song, good for him. And good for him if 999,999 others feel the same.

He'll take that million and buy things, putting people to work, or put some in the bank, where it is loaned to others who rent it to start businesses or buy homes.

I figure envy doesn't empower some other person to steal it because he wants to feel charitable with the other person's money. Besides, the person who steals is selfish, just wanting to get the poor person out of sight, because welfare as designed, doesn't put people to productive work.

Cut the crap. This is about power, not doing good. And the lefties who take power this way, will lose that power soon enough and their kids will hurt for their efforts.

Stupid fools.

[Jane]

My favorite Les Mis story: The cast was in rehearsal and they debuted a new song called - "The Prayer". Everyone was shuffling around as the rehearsal started and Jean Valjean tried out the song. And as he went on the cast got very silent and simply stayed still and watched.

At the end of the song the cast was speechless and director said: "I told you the song is called the prayer". One of the cast members replied:

"Yes but you didn't tell us God was going to sing it."

I pretty much cried thru the whole play the first time I saw it.

[Porchlight]

I've never seen Les Mis nor heard a note from it until I saw the Susan Boyle video today! I just told my husband that and he was shocked. I think a viewing will be in our future. (Assuming there's a movie out there...)

[Elliott]

I ♥ Javert.

[Rick Ballard]

From the CBO PDF:

The impact of the corporate income tax also rises with income, as CBO assumes in this analysis that the tax is borne by capital income, and capital income is a larger share of income at the top of the distribution.

[centralcal]

I have always loved the play and the music of Les Miz. For many years I would frequently watch a VHS of the 10th Anniversary concert. But, then came DVD's. So today I went to Amazon hoping to find a DVD of that production.

Alas, there is one, but the reviews were just horrible. Apparently, bits of songs omitted, grainy video, etc., etc. I was so depressed!

If you have or have not seen the play, this concert was wonderful . . . absolutley wonderful, with everyone in character, and some minor costuming and staging. The finale had all (11?) Valjeans from all the international productions singing a line or two of the blockbuster song.

I still have my VHS copy, but no player. How depressing is that?

[Cato]

Back to Ezra's bad math: the problem with most political punditry is that it frequently involves macroeconomics (especially these days), but most pundits have little to no understanding of economics (or math, or statistics). Journalists and other pundits are chosen for their ability to write (or speak) prettily, not for their facility with data. That's why reporting on the economy is so often wrong-headed.

[belle]

I adore this site: Taxes, Ezra Kline and Les Miz. The Susan Boyle you tube was in my email not two hours ago. I opened it and burst into tears of joy for that precious woman. I thank each and everyone of you regulars here. I am so distraught at what is happening in our country. You not only keep me incredibly informed, but anchored in a reality that every where else seems to be evaporating before my eyes. Les Miz. What a metaphor for these times.

[Porchlight]

I still have my VHS copy, but no player.

That is so funny, centralcal - not 30 seconds ago I was lamenting in an email to a friend that our VCR hadn't worked in a year and I had some VHS tapes I really wanted to watch.

VCRs are super cheap! You can pick one up on craigslist if you don't want to purchase new. That's what I plan to do.

[Porchlight]

belle, I feel just the same and I'm glad you're here, too. I like your metaphor of JOM as an anchor. Very apt.

[clarice]

You can hear the entire 10th anniversary concert here:

http://www.last.fm/music/Les+Mis%C3%A9rables/Les+Miserables+10th+Anniversary+Concert>Les Mis

[centralcal]

Thank you, Clarice. But, sadly, that is the DVD version that got really poor reviews from those who bought it (on Amazon).

Porch, you know, it is really sad when we have to go backwards with our electronics!! But, maybe you have a point. Buy a player, or lose out on every hearing old favorites again.

[clarice]

Ooops.orry cc, but they have several other versions there, too, I think.

[Jim Miller]

FWIW - Some months ago, Greg Mankiw cited a study that found that workers paid a significant share of corporate taxes, since the taxes lowered their pay.

[PD]

OT: BO on Bo:

"He's a star. He's got star quality," the president said of the black curly pup with white front feet and chest and a lion-cut tail.

Because that's what's important.

[cathyf]

with SS and Medicare you can't separate out the taxes from the benefits. Take Medicare: the benefit is largely the same for all, but higher income people pay much more for it. How can that be anything but progressive?

Bullshit.

-- The Smith family makes $100,000/year and owns a $300,000 house.

-- The Jones family makes $10,000,000/year and owns a $30,000,000 house.

-- They both pay $12,321.23/year in "social security" taxes.

All of that $24,642.46/year goes to fund military payroll, for the military whose job is (in part) to protect the Smith and Jones houses from foreign invasion. The Jones house is worth 100x what the Smith house is worth. There is no way that you can say that the Jones and Smith families are receiving the same benefits from their money.

[MayBee]

Did the government buy the Jones family their house?

[Louie723]

At the end of the song the cast was speechless and director said: "I told you the song is called the prayer".

Years ago when I was at Ft Bragg they had an annual 'safety show' (attendance required) with little skits demonstrating bad consequences of being unsafe behind the wheel or on the firing range etc. Naturally the soldiers hooted and smarted off throughout. Until an officer came out and sang The Prayer. I don't know what his MOS was, but he was a wonderful tenor. And the audience was completely silent afterwards. It was pretty amazing.

[jimmyk]

The fact that the government borrows from SS to pay for other stuff is beside the point, no matter whether you use foul language or put quotes around "social security". Money is fungible. My ss taxes determine my benefits when I retire. SS is not designed to be redistributive, but when you factor in disability and other social insurance, low income people probably get a better deal. Ask yourself this: who would lose more if ss were eliminated tomorrow, a 30-year old banker making $400k or a schoolteacher making $75k?

[Jane]

Louie,

I believe it. It is one of the most stirring songs, ever.

[Tom Maguire]

"He's a star. He's got star quality," the president said of the black curly pup with white front feet and chest and a lion-cut tail.

Uh huh. Most dads would tell their kids that the dog was an annoying lamer and that they ought to face facts, clean up its mess and move on. This extraordinary empathy which allows Obama to understand that his kids want the dog to be admired is what makes him so special a leader and so right for our times.

How'm I doing? Am I off the DHS list yet?

[bad]

I reiterate my sympathy for the Obama girls who were promised a puppy and received a big dog instead.

[ErikZ]

There is no way that you can say that the Jones and Smith families are receiving the same benefits from their money.

The Jones and the Smith families are receiving the same benefits from their money.

You spelled it out. You did not show either family receiving more in benefits than the other.

I'm rather surprised you used Social Security. That's just "Take your money and hand it out to old people" tax.

[bad]

Jane, I love that song too.

[willis]

Just a note a clarification: the social security and medicare paid by the individual are not taxes. Social Security is a pension fund one pays into to fund one's pension. This parallels that paid into private pensions, which are not considered taxes either. Medicare is health insurance for one's (relative) old age. It is health insurance the same as blue cross is and not a tax. The tax is exacted upon the employer who pays into the employee's social security fund and medicare health insurance an amount equal to that paid by the employee. Unlike the employee, the employer gets nothing for its payment, hence it is a tax. Leaving the fica/medicare out of the equation is therefore only partially corrects the skewed calculation. It should be left in the calculation for the reach, for the reason just discussed.

[JM Hanes]

TM:

Did anybody really think Obama was going to go pick up a mutt from the pound? Alas, buying predigreed dogs these days can be such a politically dicey proposition in sooo many ways.

Enter the cap 'n trade maneuver.

Biden takes the purebred heat (because that's what a VP does!) and supplies the dog of Obama's dreams, which the President can hardly refuse (it's for the children!), and the Obamas (ever mindful of the less fortunate!) make a generous contribution to a local shelter or animal rights group, preferably a shelter run by an animal rights group. It's all good.

[JM Hanes]

Disappearing link for politically problematic pedigrees, if not here, then LUN.

[Chester White]

I am worried about one tax rate, and one only: my family's marginal rate, all-in (state/fed/FICA/Medicare/etc.), including sales tax when I go to spend the pitiful remnants or property tax if I buy a bigger house with it.

All this "effective average nationwide quintile" crap is nonsense.

All-in, should I start a business (since my wife already works), our marginal rate would be about 70% (39.6% FED + 15.3% FICA/Medicare + 4.5% State (coming) + 10% sales (Chicago-area) + more).

And for that privilege I would get to bust my hump 70 hours a week, borrow money (an additional cost, Ezra), endure godawful stress, and potentially risk getting my *ss sued off by some sumbitch like John Edwards.

And that's why I (and probably millions of others) WILL NOT start businesses in the present climate.

Ezra knows f-all about real-world economics. Little g.d. sniveling jokester.

[Rex]

cathyf,,

you must be remarkably ill-informed to say that social security taxes go to fund military payroll.

social security taxes (of the working population) are used to fund the retirement (social security) benefits of the retired population. SS and medicare taxes are supposedly "insurance premium" one pays while working so one can collect the benefits in retirement.

military "payroll" is funded by income taxes.

[cathyf]

I'm rather surprised you used Social Security. That's just "Take your money and hand it out to old people" tax.

Money is fungible, and in the federal budget there is not even the slightest pretense that "social security tax" money is used for one thing while "income tax" money is used for another and "excise tax" money is used for something else. (If regular accounting rules applied to the government, they'd all be in jail.) All the money that they collect in taxes and all of the money they collect selling government bonds (i.e. borrowing money) goes into one big pot, and then the bills are paid out of that pot. The bills range from paying military salaries to building buildings with Robert Byrd's name on them in WV to paying old people to paving interstates to rescuing flood victims to buying iPods for the queen of England.

My point, anyway, is that they have somehow "massaged" the data -- it doesn't pass the whiff test. Take a random 1st quintile income and stick it through any payroll program as an example:

Gross Pay: $10,896.29
FICA: $1,351.14
Medicare: $316.00
FedUnemp: $56.00
percentage: 15.81%

StateUnemp: $784.53
StateWorkersComp: $94.79
Fed&StatePercentage: 23.88%

8.5%?!?!?!? Not hardly!

[JM Hanes]

TM:

Time to open a Help Ticket, because Typepad is selectively dropping HTML tags.

BTW, Typepad does allow you to include page numbers along with the forward and back buttons for your comment threads -- which would really help with the carpal tunnel syndrome on this end.

Actually, it's probably way past time to get someone to do a major upgrade on your code, because most of the recurring problems here never crop up at other Typepad sites.

[JM Hanes]

Rex:

You must be remarkably careless with your bolding tags.

[bad]

How bold!!

[bad]

Or Not?

[cathyf]

Aaaccckk!!!! Now the tags are staying open over page boundaries?!?!?!?

[cathyf]

Nope, bad started the new page with an unclosed bold tag. THWACK!

(Ok, ok, we won't talk about the time I used four unterminated blockquote tags a couple of years back and rendered the rest of the comment section a really skinny 10 characters long!)

[bad]

cathyf, I think I may have done that.

In trying to close the tag, I must have used the wrong code. JMH's last comment on the previous page is unbolded in IE, but bold again in my first comment on this page.

I'm soooooo sorry.

[bad]

OUCH

[clarice]

Typepad just ate my last post on the other thread. It is soooo annoying.

[bad]

Clarice, what are you hearing about the "expected" Spanish indictment of six Bush administration members for torture?

Is it really likely?

[Brian G.]

The only reasons taxes are a little bit higher is because we all have to pay for all of Bush's tax cuts for the rich and Haliburton. I sent a check to the IRS and was happy to do it knowing that Obama will enact policies with our tax dollars that will ensure that our poor will get health care, our children will get education, and our elderly will be taken care of. I know it will not be used to fund any more American wars for empire. You all should grateful pay a little bit more in taxes to bring America back from the darkness of the Bush years.

[ken in sc]

In the private sector, the employee pays the employer’s portion of the SS tax indirectly. Each employee must generate enough revenue to cover all the costs related to being hired, including SS and all other benefits. Otherwise the employer must lay people off or go out of business. In the public sector, the taxpayers pay for the total cost of employment. Since the government is a monopoly, it seldom goes out of business.

[bad]

Brian G, LOL

[bad]

Fabulous parody, Brian G.

[Stephen]

Around the time I was suffering through macro & micro E. and arguing with my statist Econ prof about what did and didn't belong in the real world, I invented (I think) a game called "Follow a 10 dollar bill on its Journey."

The idea is to examine a string of normal trade transactions, beginning with your employer handing you $10 in pay. At each stage, you must factor in the tax subtractions—plain and hidden—affecting that transaction, which quickly reveals how much you really have to work with, and the economic consequences of even hidden taxes. Continue until the $10 is gone; meaning entirely swallowed by tax. These days that doesn't take long.

Use monopoly money and play the game with your kids. Then, try putting it over on them with "house & home taxes" on their allowance. The results may startle you.

[The Monster]

Will this close the bold?

[Tully]

Anyone want to explain to Cathyf the difference between a flat tax, where the same rate applies to the entirety of the taxable basis, and a regressive tax where the rate decreases as the taxable basis increases?

That the tax basis of SS is capped does not make SS a "regressive" tax. It's not. It's a basis-capped flat tax. In reality one should actually count the EITC against it, as the EITC was implemented to refund/subsidize the SS/Medicare taxes of lower-income people. Which actually makes the SS tax PROgressive in reality, if not in theory.

And let's do note that the Medicare tax is NOT capped.

[cathyf]

So, Tully, who was your 5th grade math teacher that we might excoriate him or her.

A tax scheme is progressive if tax/income rises as income rises. It is regressive if tax/income falls as income rises. A tax scheme is flat if tax/income is constant as income rises and falls.

A tax is progressive if there are at least two different tax rates, and the rate at a higher income is the same or higher than the rate at a lower income for all incomes.

A tax is regressive if there are at least two different tax rates, and the rate at a higher income is the same or lower than the rate at a lower income for all incomes.

A tax is flat if the rate is the same for all incomes.

For single people with no dependents (ineligible for the EITC), the income tax is flat for the first bracket, has a cusp (where the first derivative is discontinuous) at each bracket change, and once you have passed into the highest bracket the tax/income approaches the rate of the highest bracket asymptotically. The income tax function is flat at the low end, and progressive out to infinity. (The mathematical term is that the function is monotonically increasing.)

The Forbes so-called "flat tax" is also a progressive tax, in that it has two rates -- zero up to a certain income, greater then zero above that income -- with the higher rates on the higher incomes.

The FICA tax (and the FICA part of the self-employment tax) has a functional shape which is the opposite of the Forbes so-called "flat tax" (and virtually every other so-called "flat" tax scheme) in that it has the greater-than-zero bracket at the low end and the zero bracket at the high end -- by straightforward definition it is a regressive tax.

Unemployment taxes are also regressive, and far more steeply so, but they are much smaller to begin with so there are not the same behavioral effects.

If you take a simple tax case (single, standard deduction, self-employed so the taxes are all explicit) and plug incomes into TurboTax at $1000 intervals, what you see is that the function is progressive at the poverty end, and progressive at the wealthy end, but wobbles back and forth between progressive and regressive between those extremes.

As a mathematician, the thing I most hate about the tax functions is that they are all step functions. (Except for the medicare tax, which is a true flat tax.) At each backet change, there is a cusp in the rate function -- a discontinuity in the first derivative. Especially when you have multiple taxes, with steps that are not aligned -- since you pay the sum of all of the taxes, the sum function has a kink in it wherever any one of the constituent functions has a kink in it. If I were constructing a tax function, I would use 0.5*N(x-medianIncome) where N() is the cumulative normal function.

[Carl Pham]

Gee, cathyf, forgot about EIC, child tax credit, Schedule A deductions et cetera -- none of which go into your "payroll program" of course -- and just equated the tax withheld on the W-2 to what's actually paid when the 1040 is filed, huh?

I would suggest you not apply for part-time work at H&R Block any time soon.

[cathyf]

Single with no children and you are not eligible for the EITC or any child care credits. If you don't own a home then the standard deduction is way bigger then any schedule A bit. You have some pretty strange delusions about the tax situations of low-income single people -- they use the 1040-EZ.

Oh, and thanks for reminding me -- the effect of the standard deduction is to make the income tax progressive over all income levels, not just beyond the first bracket jump.

...and just equated the tax withheld on the W-2 to what's actually paid when the 1040 is filed, huh?

So in what universe do any of the FICA or Medicare taxes listed on your W-2 as paid get refunded on your 1040? In my universe, the only way you can get back any of that is if you make more than $100,000/yr and have more than one W-2 job -- certainly not anyone in the first quintile. The first 3 quintiles, for that matter! And that only proves that FICA is regressive -- if you accidentally pay FICA as a flat tax and you are rich enough, they give you back the extra money. We are discussing the CBO report in the link, and the table on page 4 which has rows: "All Federal Taxes", "Individual Income Taxes", "Social Insurance Taxes", "Corporate Income Taxes", and "Excise Taxes". Schedule A deductions, EITC, child care credits, etc. are all "Individual Income Taxes" adjustments, so they have no effect on the rates of "Social Insurance Taxes".

Only half of the FICA and Medicare taxes are shown on the W-2, and neither of the unemployment taxes or the workman's comp taxes are shown at all. Which was what this discussion was about -- the line labeled "Social Insurance Taxes" in the CBO report is hinky. It's hinky first of all because a big chunk of those taxes are state taxes and the CBO report ignores them. It's hinky because they seem to have ignored the not-on-the-W-2 social insurance taxes, even though those numbers are very explicit and available on other paperwork which is submitted to the IRS. (For 1099 workers it's right on the 1040.) The ignoring of state social insurance taxes is a design limitation of the CBO study -- they didn't count state income taxes, either. But the exclusion of half of the federal social insurance taxes looks like a mistake to me.

Ok, let's look at the numbers again: if your income is $10,000/year (well below the 1st quintile average of $17,200/yr) then you will pay $1,240 in FICA taxes, $290 in medicare taxes, and $56 in federal unemployment taxes. There is no way to wriggle out of those taxes. If you are a W-2 employee your employer will send the money directly to the government quarterly and you will never see it; if you are a 1099 worker you better get it paid on the quarterly due dates.

And in my universe, $1240+$290+$56 equals $1586. And $1586/$10000 ain't anywhere close to 8.5%