Dispatches from the Creation Wars

And don't forget the Emergency Warning System exercises, all those lovely sirens & lining up in class to head down to the bomb shelter.

Ah, my days of childhood!

Posted by: Rob Jase | September 6, 2009 9:46 AM

the Kennedys and Rockefellers were not handing over 85% of their income to the federal government, I assure you

well no, that's not how our progressive tax system works. the 85% rate would only have applied to that part of their total income which exceeded the bracket cut-off, whatever that was.

of course, i agree that they likely weren't honest enough to up and pay it anyway. but even if they had been, they wouldn't have paid 85% on their total income.

Posted by: Nomen Nescio | September 6, 2009 9:57 AM

Bachmann gets facts wrong. Huh, who would have thought. We could just shorten that up to Bachmann -- wrong. Way less time and effort involved. No loss of meaning.

Posted by: MikeMa | September 6, 2009 10:17 AM

Assuming that she wasn't just making up numbers out of whole cloth, could she have been comparing apples and oranges? Might the "current" rate be referring to total taxes? My family isn't in the top tax bracket, but if you look at all of our taxes combined (federal, state, and local) it comes to about 30% of income. That's 30% total, not just marginal. Perhaps a higher earner could be paying more? Second, is there any rate that could have been 5% in 1950? Or maybe, the 5% could have been the actual "tax payments to earned income" after all deductions? While the published rates were certainly not what is being quoted, it would be interesting to know where she got her numbers, if only to see where she went wrong. While the numbers may be "true" in some sense, it's easier to quote them out of context, as compared to quoting words out of context.

Posted by: Scott | September 6, 2009 10:22 AM

To pile on Ed's point and address a pet peeve . . .

The best way to compare tax rates over time is forgo use of the nominal or marginal rate and instead look to effective federal tax rates. Effective rates consider that particular year's opportunities for rebates, credits, and deductions or lack of them for that matter. However, while effective tax rates are far superior at looking at who pays what and how much, these rates are still understated, especially for the poorest and non-savers in all quintiles. That's because we all use after-tax money to buy our goods and services, and prices for those goods and services have somewhere between 17% - 24% embedded within them to cover all taxes owed by the supply chain of the good or service procured (including state and local taxes).

The Congressional Budget Office has been tracking effective rates since 1979. The webpage linked to here has an embedded link titled "Effective Tax Rates" pdf data (data is a spreadsheet download). I downloaded the 'data' link and crunched the below numbers.

The CBO breaks these numbers down several ways, including by income quintile, in addition they also break out the top 10%, 5%, and 1% of earners.

When it comes to tax rate arguments between the two parties, the arguments tend to be much ado about nothing when considering overall rates given the variations between proposals and outcomes are small. For all tax payers the effective rate has varied from a low of 19.8% in 2003 to a high of 23% in '99 & 2000. I'd argue this is a fairly tight distribution. However, we do see significant variations between earners in their respective quintiles.

The lowest two quintiles earners did worst under Reagan, who raised the rates in order to cut the top rates, while W. Bush cut their taxes to the lowest rates during this period. The lowest quintile has seen some large gyrations as well, paying 4.3% in 2003 - 2006 (the last year reported) compared to 10.2% in 1984. Given I've tracked these rates for years, I've always been bemused by how current tea-baggers, most of whom are not high earners, revere Reagan's tax policies.

BTW, one the reasons Reagan's initial tax policies failed so spectacularly and aggravated the recession he inherited from Carter was by raising the lowest earner's tax rates, he harmed the very people who always spend, which kept aggregate demand stagnant. High earners tend to save at a higher rate during a recession, therefore cutting their tax rates, while helping somewhat, could not overcome his tax raises on the poor and working class nor did it spur an increase in capital investment since that comes more from confidence in the future (along with cheap access to financing which was a major problem during those years).

The middle quintile also did best under Bush, while paying an astonishing 50% more in 1981. Their median years of 17.4% were set by H.W. Bush and maintained under Clinton through '97 when they started realizing a steady drop in their effective rate through 2006.

The fourth highest quintile's median rate of 20.4% was in effect for the longest period of any tax rate in this period, from 1982 to 2000. It's high was also in 1981 and they too realized their lowest rates under W. Bush.

The highest quintile realized their lowest rates in '83 & '86 (23.8%), their median was 25.8% and in effect during both Bush terms. Their highest rate was during the Clinton years and matches the AMT rate of 28%.

In summary I argue this. Timing of tax raises and tax cuts, and significant changes in tax rates within a quintile, can have a major impact on the growth, stagnation, or decline of the private economy given its effects on both interest rates and consumer & producer confidence. When we hear politicians basing arguments on sound economic policy supported by both historical precedent and a nuanced argument - we should consider electing them; when we instead hear a complete dependence on shallow talking points - we should flee at all costs. That's because when it comes to taxes, it's about both competence and focus on the national interest - which I think is always true - with taxes is just easier to quantify the results.

Posted by: Michael Heath | September 6, 2009 10:43 AM

I've seen that same nutty sentiment -- ONLY SLAVES PAY TAXES -- on a billboard in northern Michigan, some years back.

Since when do slaves pay taxes? Slaves don't have any money.

Posted by: Julie Stahlhut | September 6, 2009 11:20 AM

Left_wing_fox (#9) talked about $5 million in 1940 dollars.
This was worth (in 2008 Dollars) approximately:
$76,729,508.20 using the CPI
$156,826,568.27 using the consumer bundle
$157,841,328.41 relative to the unskilled wage*
Hope that put it in perspective for us all. - DJ
___________________
*Source: Measuringworth.com (see here to do it yourself/find details).

Posted by: DingoJack | September 6, 2009 11:40 AM

In fairness, once you lump in SS and state and local taxes, the amount of your paycheck that you actually get can verge on around 50%. I think it never quite gets that bad, but it gets damn close if you are in the top bracket and live in a state with high income taxes. So that part of her statement is almost factual.

The 5% in the '50s thing? Waaaah???

Posted by: James Sweet | September 6, 2009 11:20 AM

In fairness, NO. I find my wealthiest clients pay, on average, around 25% of their income to Federal taxes. They pay an addition 7.65% to social security tax which caps at $108K.

The average single person in the highest bracket simultaneously covered by FICA would be at that tax bracket would, according the holding tables, paying an average of just over 20% on his/her FIT for the year and a 28% combined FICA/FIT.

Cherry-pick the worst of the marginal State rates and you're still looking at under 40% combined (about 38%). For a single individual. For all taxes withheld.

And that is in the worst-case scenario for an individual using cherry-picked rates.

Once you get past the FICA limit, you'll have 6.2% of your marginal tax fall off. You'll still be in the 28% bracket until you pass 173.6K. At 173.6K the MARGINAL tax rate of the next dollar earned goes to 33%. At 375K the MARGINAL tax rate of the next dollar earned goes to 35%.

At the very margins, you can have an effective MARGINAL tax rate of 45%. But you will, unless you become fantastically wealthy and refuse to avail yourself of any reasonable, legal tax reduction strategies, not pay in this 50% you asserted. Especially as the STATE TAXES become a deduction for determining your Federal as you start to accumulate enough State tax that you can itemize with no other deduction support.

Posted by: Moses | September 6, 2009 11:58 AM

Is this Bachmann's own private version of holocaust denial? Enslaved Africans endured no less of a holocaust than the victims of nazis. Enslavement does not mean living the lifestyle of a Rockefeller or a Kennedy. Bachmann is a pitiful waste of human potential.

Posted by: John Swindle | September 6, 2009 12:22 PM

@ John Swindle #18:

Is this Bachmann's own private version of holocaust denial? Enslaved Africans endured no less of a holocaust than the victims of nazis.

Exactly what I was thinking.

Posted by: Dr X | September 6, 2009 1:28 PM

Claiming that high tax rates is metaphorical slavery is nothing new. Edmund Burke did it about 235 years ago when chattel slavery was still a reality in what would become the United States.

Posted by: hedberg | September 6, 2009 1:45 PM

Micheal Heath @ 10.

I just looked at the historical income tax rates from the 1980s. Rates for the lowest income earners (in nominal dollars) were reduced under Reagan in 1982 and 1983. The lowest bracket (on income from $2300 to $3400 for a single taxpayer) went from 14% in 1981 to 11% in 1983. For tax year 1988, the bottom rate was increased to 15% but the top of the bottom bracket was increased substantially, so it's not clear to me that this change can be fairly represented as Reagan financing a tax cut for upper income earners by increasing taxes on lower income earners.

There were, in the early 1980s, at least two other things going on that greatly affected the taxes paid by lower income earners. The first was the "bracket creep" that resulted from high inflation. The second was the increase in payroll taxes. I don't think that Reagan engineered either of these.

Posted by: hedberg | September 6, 2009 2:05 PM

Expertise and creditability - DJ

Posted by: DingoJack | September 6, 2009 2:19 PM

Hedberg- You let a disabled second grader do your taxes? I applaud your support for disabled workers, but that also could explain why you seem to both dislike and misunderstand the tax system.

Posted by: Robert S. | September 6, 2009 4:28 PM

I wonder what the hell kind of slavery let the slave keep 50% of whatever they made. A scheme like that certainly never existed in the United States (maybe some kind of indentured servitude might qualify, but that isn't quite the same as slavery), although I'm not quite sure about the ancient world.

Posted by: Awesome McCool | September 6, 2009 4:50 PM

I can't get Bachmann. Does she just make these things up on the spot? Does she employ completely incompetent (Lib U) graduates to do her research? Does she believe the things she says? Is she actually way smarter than the rest of us, but just really, really evil?

:( Me no understandy.

Posted by: Elyse | September 6, 2009 6:39 PM

AC- GDIAF

Hedberg- Please go take an English 099 course, you clearly need more work on reading comprehension. Read post 27, then post 28 and if you still don't understand, ask a co-worker to explain it.

Just factoring in the deduction for paying the SSA and Medicare taxes drops the rate to 44.95% for the first $106,800 the spouse makes
(35% * ($earned-($earned*15.3%)))
and 36.885, 35% * ($earned-($earned*2.9%)))
on every dollar after that. So it is, in fact NOT possible to put yourself in a 50+% rate in your scenario. Now, you could pay the government that much, but only if you have "a slow second grader's understanding" of taxes.

Posted by: Robert S. | September 6, 2009 7:42 PM

Yes, the 35% tax is not applied to the amount paid in payroll taxes, resulting in an effective rate of about 45%. I know this and understand this. For the sake of this discussion, I consider 45% (or a little less) to be sufficiently close to 50%. You don't, apparently, and are correct on the details.

Speaking of reading comprehension, post 28 does not follow from post 27.

Posted by: hedberg | September 6, 2009 7:55 PM

A slightly off-topic comment on marginal tax rates. The Brits used to have a very confiscatory top marginal rate, over 90% IIRC. The English author James Herriot (real name, Alf Wight), who was no righty (he disliked Thatcher very much), sold so many books that everyone assumed he had become very wealthy, when in fact he had not. Eventually he learned that only one other best-selling English author still lived in England, the rest having moved to escape the high marginal rates, so he called him up to get some advice. Turned out that guy had finally given up and moved out of the country, too.

So regardless of how anyone feels about the rich (and I personally can't work up much sympathy for anyone much better off than myself), going after them too vigorously can backfire. A funny thing about the rich, they've got the means and motive to avoid confiscatory tax rates, the damn sonsabitches. So if we're going to make the top tax rate confiscatory, I suggest following Nomen Nescio's advice, and setting that top rate somewhere in the millions, preferably high millions. As for me, I want Warren Buffet, T. Boone Pickens, and those other billionaires paying their taxes to the U.S. government instead of skipping out to Barbados or wherever.

Posted by: James Hanley | September 6, 2009 8:21 PM

hedberg @ 36:

the 35% tax is not applied to the amount paid in payroll taxes, resulting in an effective rate of about 45%.

While there's a lot of BS coming out of this particular poster, I'll merely stick to fisking this one item. hedberg gets it about as wrong as Bachmann's statements in spite of my providing a source on effective rates, which is really saying something given Bachmann's validated honesty and intelligence (i.e., the complete lack of either).

The CBO link I provided @ 10 shows top quintile taxpayers do not pay an effective rate anywhere near 45%, including Social Security and Medicare. In 2006 the top quintile's total effective federal income tax was 28%. The CBO defines "total" as: individual income taxes, social insurance (payroll) taxes, corporate income taxes, and excise taxes. The top 10%, 5%, and 1%'s effective rates were 27.5%, 29.0%, and 31.2% respectively.

I do want to add a qualifier here, these are the average rates. I've had a couple of years where I actually paid way more than these rates given the way the AMT tax considers some paper-gain-only transactions; though I was also able to reduce my liability to rates way less than these average rates in other years as well. An example of a paper-gain transaction that the AMT considers income and taxes is exercising about-to-expire stock options and holding them. They tax you on the difference between your strike price (the price you purchased the options for) and that day's closing price - in spite of your not receiving any net proceeds since there was no sale.

When looking at merely the effective federal social insurance tax rate the total effective rate for the country is 7.5%, close to the stated rate given the cap on this tax. The top quintile paid 5.8% given the cap. The top 10%, 5%, and 1% paid 4.6%, 3.4%, and 1.6% respectively.

Posted by: Michael Heath | September 6, 2009 10:06 PM

Michael,

I'd only sign on to such a tax scheme if it included a sharply progressive (and, at higher brackets, confiscatory) estate/gift tax. Otherwise, you have a strengthening oligarchy which decimates the median income. Also, the consumption tax must be source-independent (same tax for personal and business consumption); otherwise, you are unfairly favoring capital over labor.

Posted by: Shygetz | September 6, 2009 11:17 PM

Shygetz - Given our current tax scheme, I'm strongly against the current estate tax schemes, I find it overly-punitive since it taxes capital that's already been double-taxed. However, I agree with your point about income disparities and the disproportional power that accumulates by such disparities; however I worry less about an oligarchy and more about plutocracies. As I stated in my previous comment, my #2 factor is optimal after-tax median income trends - which mitigates, though not completely, trends toward higher income disparities so I'm with you on the end-goal.

I think the one concern I'd have with your wanting to keep and increase gift/estate taxes, is how it would impact keeping capital in off-shore tax havens. A consumption tax's primary advantage over business income taxes is that it would attract capital currently off-shore or in other countries and attract new or organic growth in business operations, which of course increases job opportunities for at least the well-trained or educated (which we're being forced to become anyway given the expansion of business capabilities of developing countries). Attracting capital is a key factor in supporting a consumption tax since it's more producer-centric than our current consumer-centric economy that has us selling our private assets to other countries and borrowing to finance our federal government. If we were able to mitigate my concern while creating a higher estate/gift tax, I actually think your argument would enhance a consumption tax scheme since income disparity minimization (within moderation) has proven to be a positive causal factor in the health of an economy.

In regards to your desire to tax business consumption, I'm not exactly sure what you mean by that. For example, a manufacturer like Ford or Toyota currently considers its consumption to be the goods and services it procures that do not go into the products it sells, like janitorial services and supplies. In most (all?) states they currently pay sales taxes for what they consume. I agree consumption for these items should be taxed, however, if you want to tax their 'direct material' goods, like tires or seats or other items their suppliers build that go into their end-product, than I could not support that since it fails my set of criteria. That one being it creates a hidden tax on consumers that currently averages 17% - 24% of the goods and services they pay with after-tax money. I'd rather see citizens have near-perfect transparency on how much they pay in taxes because I think they'd become more active in voicing their opinions in politics.

Current direct materials are taxed by way of taxing companies' after-tax net income, a consumption tax-only removes that liability - along with employer taxes for social insurance, which again, will attract businesses to operate here, and with them another added feature - more professional immigrants - who we really need in order to reduce the disparity between the baby boomers looking forward to their Social Security and Medicare in spite of the predicted ratio of beneficiaries sky-rocketing while workers paying those benefits decreases.

Posted by: Michael Heath | September 6, 2009 11:48 PM

Rob Jase & Budbear:
re: duck and cover

Did people in the 1950s actually believe duck-and-cover?

Posted by: nygenxer | September 7, 2009 2:49 AM

It's amazing how she blatantly makes things up and spews it out in public forums on a regular basis. How is she getting re-elected?! She could be exposed for an idiot and/or a liar by anyone with grade-6 reading comprehension.

Posted by: that_chris_guy | September 7, 2009 11:20 AM

Joseph Hertzlinger:

What? Expound on that a bit, please.

Posted by: democommie | September 8, 2009 12:03 PM