The Rich Really Are Different - They Pay Lower Taxes

November 13, 2013
Posted by Jay Livingston

Two weeks ago, I posted a graph showing the income tax rates paid by the very wealthy. The official tax rate for that bracket is over 35%, but the rate actually paid was less than half that. In the recent presidential campaign, Mitt Romney insisted that he had always paid at least 13%, as though using loopholes in order to pay barely more than a third of the official rate were an honorable act deserving of great admiration.*

The loophole most at issue then was “carried interest” – a magic word that takes the huge fees paid to hedge fund managers and transforms  them into capital gains, which are taxed at a lower rate. This trick is available to a very few – the aforementioned hedge fundies and private equity operators like Romney. 

But wait, there’s more.  That is, there’s less – less taxable income – at least if you’re filthy rich. In a recent interview (here), David Cay Johnston, the premiere tax  journalist, outlines another scheme available only to the very rich.

Very, very wealthy people — Warren Buffett, hedge fund managers, Mitt Romney when he ran a private equity fund — are not required to report most of their economic gains and legally they can literally live tax-free or nearly tax-free by borrowing against their assets. You can borrow these days, if you’re very wealthy, against your assets for less than 2 percent interest and the lowest tax rate you could pay is 15 percent. So no wealthy person with any sense of good economics will pay taxes if they can borrow against their assets.

Genius. If your money is borrowed rather than earned, it’s not income. That’s even better than the preferential low tax rate on capital gains. Unfortunately, most of us can’t try this at home.

Now you and I can’t do that because our assets aren’t worth that much, but if you’re a billionaire and you borrow, let’s say, $10 million dollars a year to live on, you pay $200,000 interest, but your fortune through investing grows by $50 million. At the end of the year you pay no taxes, your wealth is up almost $40 million dollars and your cost was just the interest of $200,000.

If the $10 million were earned income taxed at the official rate, you’d pay more than $3.5 million in taxes. This way you pay only $200,000 in interest. And if Johnston’s estimate is right, your investments bring you 20 times what you paid in interest.

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* Romney made public only one or two years of his tax returns. For his claims about the other years, he asked us to take his word for it – much like W.C. Fields’s “gentleman’s game” in My Little Chickadee, as I blogged (here) at the time. Demands for actual evidence were, in the Romneyside view, ungentlemanly. What ever happened to “trust but verify”?

HT: Andrew Gelman

Unseparating Church and State

November 3, 2013
Posted by Jay Livingston

Republicans tend to be Second Amendment absolutists.  The NRA and their representatives in Congress haven’t yet weighed in on the specific issue of, say, banning assault rifles in airports, but they just might argue that such a law would be an unconstitutional infringement of the right to bear arms. “Shall not be infringed” means no infringement, even of AK-47s in LAX.

Then there’s First Amendment. It begins, “Congress shall make no law respecting an establishment of religion,” but when it comes to the Establishment Clause, Republican ideas become a bit less absolutist, a bit more nuanced.  Here are the results of a recent YouGov survey (pdf  here).  The question was , “Would you favor or oppose establishing Christianity as the official state religion in your state?”

Democrats and Independents oppose the establishment of Christianity – “strongly oppose” is their modal response.  But a majority of Republicans favor making their state a Christian state, and of those, most (two-thirds) are in the “strongly favor” pew. 

This is not to say that Republicans are unaware of the Establishment Clause.  “Based on what you know, would you think that states are permitted by the constitution to establish official state religions, or not?”

Republicans are slightly more likely than Democrats to say that the Constitution does not permit state religions.  They just think that on this one, the framers of the Constitution got it wrong. 

When the question was about the nation rather than just “your state,” Republicans were nearly as enthusiastic about establishing Christianity for the nation as for their state.  “Would you favor or oppose a Constitutional amendment which would make Christianity the official religion of the United States?”

A plurality, 46% – almost a majority – want to correct the Framers’ careless omission by amending the Constitution, a document, by the way, in which the words “God” and “Toyota” appear with equal frequency, but I assume that the Republicans would want to change that too and rewrite the preamble to include God and perhaps Jesus. Their model seems to be The Islamic Republic of Pakistan. We would be The Christian Republic of the United States of America. 

We can’t know specifically what the people who favor establishment have in mind by making Christianity the official religion of a state or of the nation. Republicans themselves probably differ in their ideas. Maybe only symbolic gestures, like invoking Jesus’s blessing on public events. Maybe public indoctrination – requiring Christian prayer and Bible reading in the public schools. Or maybe more tangible forms of support – turning taxpayers’ money directly over to Christian organizations for explicitly religious purposes. 

Nobody really imagines that establishment will happen, but a conservative still can dream.* And meanwhile, they can continue the indirect establishment of religion that has come with government-supported “faith-based initiatives.”

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* The Christianists have friends in places where it counts – the Supreme Court. Justice Scalia apparently thinks that the cross is a symbol of the nation rather than the emblem of a religion.  In a post four years ago (here) I compared his view to the saying “It’s Sinatra’s world, we just live in it.”  That may be funny when it’s about Ol’ Blue Eyes. But Scalia and the other Christian theocrats are telling us, “The US is  Christianity’s world; we’re just allowed to live in it.” Non-Christians are not amused.

Tax Rates and Incentives - Rich and Poor

November 2, 2013 
Posted by Jay Livingston

Taxes on the rich were a big issue in Obama’s first term. The Bush tax cuts that had lowered the top rates were set to expire, and Republican lawmakers and media voices were fighting hard on behalf of the wealthy (a category most of them belonged to). 

Under the Obama proposal, the Bush tax-cut* rate of 35% for those at the top would have returned to 39.6%.  That was on paper. In fact, the superwealthy actually paid nowhere near those rates. In the Times today (here), James B. Stewart  reports on the plight of the 400 wealthiest American in 2009.  They saw their adjusted gross income decline, on average, from $320 million to $200 million. And the percentage they paid in come taxes did go up. But not to 35%. 

(Click on an image for a larger view.)

The rate the very rich paid rose from about 16% to 20%.  The slightly less wealthy – the top .01%, average income $1.4 million – paid a rate of 24%, higher than the top 400 but still well under the official rate. That 24% rate was also the average for the poorest of the rich, the 1% with incomes of at least $344,000. 

Economists like Greg Mankiw have risen to defend the wealthy, arguing that if rich people’s taxes rise – i.e., revert back to the levels of the 1990s – the rich will become lazy. With the government taking another 4 cents out of each dollar, rich will not work so hard, and then where would we be?   (As I pointed out [here], Mankiw himself was anecdotal evidence to the contrary. He was writing articles claiming that marginal tax rates were key incentives for the rich; Mankiw is a rich economist, but he was getting paid peanuts or nothing at all for his work in writing them. That is, even with an incentive of $0, we was writing op-eds rather than playing with his kids.)

Those “high” taxes of the 90s – back before the Bush tax cuts – didn’t seem to keep the rich (or anyone else) from working. Unemployment was low, and the economy was doing just fine thank you. I find it hard to believe that if the top rate returns to pre-Bush levels, Dustin Pedroia will start heading for the dressing room after the seventh inning or that Tom Hanks will confine himself to minor parts that involve only a few days on the set or that traders at Goldman will start taking Fridays off. 

But what about the effects of increased marginal rates on people who struggle to make ends meet? 

The Congressional Budget Office has released figures showing what happens when poor and middle-income people increase their income. 

For the poor, increased income brings the loss of government benefits – Medicaid, SNAP (food stamps), and the like – and an increase in the various taxes paid.  According to a 2012 CBO report , at about $27,000 the amount paid in taxes exceeds the value of government benefits, and disposable income rises more slowly than actual earnings. 

The CBO also calculated the marginal* tax rates on people from the 10th percentile to the 90th. 

The X-axis is calculated as a percentage of the official poverty line – about $11,500 for a single person, $19,500 for a family of three.  So 300% of those figures would be about $34,500 and $58,500 respectively.  It is those earners just above the poverty line who pay the highest marginal rates.

The more recent October, 2013 update breaks down the increased costs of these higher earnings, separating the higher federal taxes from the other costs – the higher state and local taxes, federal payroll tax, and the loss of SNAP benefits.

The graph shows the marginal tax rates for people earning less than 450% of the poverty line (i.e., less than $51,700 for an individual, less than $88,000 for a family of three).  As the report concludes:

 In 2013, 37 percent of low- and moderate-income taxpayers who have earnings face total marginal tax rates—including federal and state individual income taxes, federal payroll taxes, and the phasing out of benefits from the Supplemental Nutrition Assistance Program—between 30 percent and 39 percent, and over 20 percent of that group face marginal rates of 40 percent or more.

The issue of tax rates and means-tested programs is complicated (see Nancy Folbre’s columns at the Times Ecomomix web page, for example). But it is curious that those who were prominent in their concern over the disincentive effect of an increase in marginal rates on the rich are silent or even enthusiastic when it comes to increased marginal rates on the poor.

Is That a Thing?

October 30, 2013
Posted by Jay Livingston

On Sunday, both New York tabloids put the same story on page one – the stabbing death of a woman and four children in their apartment in Sunset Park, Brooklyn.

Early word from the police was that “it’s looking a domestic violence case.” Apparently the killer knew the victims and may have been a relative. 

What caught my attention was the “related” story that the Daily News linked to on its website version of the story. What kind of story might be related? A story about the family? about difficulties faced by Chinese immigrants or conflicts within an immigrant community? about mental illness and violence? about ethnic and demographic changes in Sunset Park?  No. None of the above.

(Click on an image for a larger view.)

The story the Daily News chose as “related” concerns the “Green Gang goon who was caught on video slugging a female New England Patriots fan in the face after the Jets’ upset victory” a week earlier. It turns out that in a fight twenty years ago, when he was 17, he fatally stabbed another kid.  He served three years. 

How are these two stories related? There is no connection between the two killers or their victims. The incidents are separated by two decades.  The motives and circumstances are entirely different.  If the Jets fan had not been caught on camera punching the female Patriots fan, no journalist following the Sunday killing would have dug up information on this crime of twenty years ago in an attempt to elaborate on the Sunset Park killings.  Knowing about that “related” crime gives us no better understanding of Sunday’s stabbing. 

Instead, the two stories are related by a common theme – they are both about killing where the weapon is a knife.  The Daily News seems to be taking a page from Amazon’s marketing strategy. “Readers who liked this story also liked . . .”  or Netflix recommendations. (I wonder what the stabbing-death-story demographic is.)  Television news often groups stories thematically. A story about a commercial arson in one part of town will be followed by a story about an accidental fire in a house in a distant neighborhood. The circumstances, location, and causes of the two fires are completely different, and if the big fire had not occurred, that house fire might not have been newsworthy.  But that night, it fit with the fire theme.

Mark Fishman wrote about this thematic organization of TV news in his 1978 article “Crime Waves as Ideology.”  We’re so used to it that when we watch the local news at eleven, we barely notice it.  Now, thanks to hyperlinks, online news can do the same thematic grouping.  A possible consequence that Fishman pointed out is that the news directors can unwittingly create media crime waves – sudden increases in the number of stories while the the actual number of crimes remains unchanged.  Once the theme is established, it’s just a matter of combing the city or the entire country for incidents that fit.

Here is another screen from the Daily News website.

A stabbing at the University of Indiana. The related stories are a stabbing death of a teacher in Long Beach, California and of a teacher in a Texas high school.

So, students stabbing people at schools – is that a thing? Probably not, but it is a news theme.