The income of the top 1% of the U.S. population has been growing while the income of the bottom 80% has stagnated for over a decade. Published figures claim that the top one percent garner 24% of all income (1) or 17.4% if volatile capital gains are excluded (2). Unfortunately, these figures severely underestimate the magnitude of income stratification in the U.S.
Why 29% is a Huge Underestimate.
The methodology used to determine the share of income for the top one percent of the population uses taxable income as its basis. However, not all income is taxable. Poorer taxpayers have fewer opportunities than the rich to shelter and defer income.
Some income may never be taxed (such as earnings on a 529 plan which are used to pay for qualified educational expenses or income from ROTH IRAs and ROTH 401ks). Trusts can be used to avoid estate taxes.
Income can be also be deferred with deferred compensation agreements, by not taking capital gains, increases in the value of unvested stock options, qualified retirement plans, etc.
Income can be offset with taxable losses - and those losses need not be real to be legal. For example the IRS allows you to claim that a residential building that you are renting out loses all of its value over 27.5 years (3). In the real world, we know that is not the case. Another example is that by selectively selling specific lots of stock a taxpayer can produce losses, often on investments that are actually in the black.
So, What Do the Richest 1% of Americans Really Make
If we could back out all of the tax avoidance strategies that reduce taxable income what would the real percentage of income controlled by the top 1% of the population be? It is hard to know precisely how much income is hidden in tax shelters, deferred, offset by paper losses, and so on, but changes in wealth give us a clue. Since we know that " between 1983 and 2004, in good part due to the tax cuts for the wealthy and the defeat of labor unions: Of all the new financial wealth created by the American economy in that 21-year-period, fully 42% of it went to the top 1%"(4) that sets a floor. Of course we need to add to that the percentage they consume and the percentage of assets that are depreciated for tax purposes but have real value or are otherwise hidden. Back of the envelope, I'd guess the top 1% of the U.S. population gets 45% of the nation's income.
Why it Matters
Republicans often argue that it is unfair that the top 1% of earners pay 38% of the Federal income tax (5). They conveniently ignore the fact that the overall percentage of taxes paid by the richest are much lower than that since payroll taxes are only charge on the first $106,800 of earnings (6)and that sales taxes take a far bigger share of income from the poor and middle class. However, even if we only consider income taxes it appears that the richest are not even paying their fair share.
(1) As of 2007 http://www.nytimes.com/imagepages/2009/08/20/business/21inequality.graphic.html?ref=economy
(2) As of 2005 http://www.demos.org/inequality/numbers.cfm
(3) http://www.smbiz.com/sbrl012.html
(4) http://sociology.ucsc.edu/whorulesamerica/power/wealth.html
(5) http://www.taxfoundation.org/news/show/250.html
(6) http://hubpages.com/hub/Social-Security-Payroll-Tax-Limits
Thursday, January 20, 2011
Sunday, October 3, 2010
Inflation might be good right now.
We are between a rock and a hard place. Normally, we should pay down debts when the economy is booming (this slows the economy) and increase government debt levels (which stimulates the economy) during lean times. Unfortunately, Bush squandered the Clinton surpluses on two wars and tax cuts, so now that we need the flexibility to increase deficit spending it doesn't look like we can do so without risking that the Chinese will worry that inflation will eat away the value of their US Treasury holdings and reduce the amount of our debt that they will finance. We'd end up with inflation, rising interest rates, and a weaker dollar. That might not be so bad.
My friend Eric was advocating for a payroll tax holiday, financed by debt but was worried that it would spark an inflationary spiral.
What would inflation do?
Inflation would reduce the number of homes that were underwater as real estate prices inflated and homeowners would have less trouble paying mortgages. This would strengthen banks with large mortgage holdings.
Our national debt would become more manageable since most is at a fixed interest rate.
If China reduced purchases of Treasuries the Yuan would strengthen, helping our balance of trade without a trade war. US manufacturers would become more internationally competitive. China might be forced to allow the standard of living to rise (to reduce the surplus they run and invest in treasuries). This would stimulate demand for imports and help the entire world's economy.
What about runaway inflation?
1. It is easier to stop an inflationary spiral than a deflationary one.
2. Runaway inflation is unlikely to take hold since there is slack in the labor and real estate markets.
What about the effect on retirees and those on fixed incomes? Many benefits (social security, medicare) will adjust. 401K stock values will inflate. Retirees will be able to invest at non-zero interest rates.
The payroll tax holiday would also help redistribute wealth, reducing the lopsided distribution we now have that leads to speculative bubbles caused by the wealthy having too much to invest and retards growth because the middle class has little room to spend. Robert Riech makes a very detailed argument for this in his latest book.
My friend Eric was advocating for a payroll tax holiday, financed by debt but was worried that it would spark an inflationary spiral.
What would inflation do?
Inflation would reduce the number of homes that were underwater as real estate prices inflated and homeowners would have less trouble paying mortgages. This would strengthen banks with large mortgage holdings.
Our national debt would become more manageable since most is at a fixed interest rate.
If China reduced purchases of Treasuries the Yuan would strengthen, helping our balance of trade without a trade war. US manufacturers would become more internationally competitive. China might be forced to allow the standard of living to rise (to reduce the surplus they run and invest in treasuries). This would stimulate demand for imports and help the entire world's economy.
What about runaway inflation?
1. It is easier to stop an inflationary spiral than a deflationary one.
2. Runaway inflation is unlikely to take hold since there is slack in the labor and real estate markets.
What about the effect on retirees and those on fixed incomes? Many benefits (social security, medicare) will adjust. 401K stock values will inflate. Retirees will be able to invest at non-zero interest rates.
The payroll tax holiday would also help redistribute wealth, reducing the lopsided distribution we now have that leads to speculative bubbles caused by the wealthy having too much to invest and retards growth because the middle class has little room to spend. Robert Riech makes a very detailed argument for this in his latest book.
Thursday, November 26, 2009
Corporations Pretending to be Green: FAIL
Tomra and Schupan Recycling were so concerned that everyone do the right thing for our planet that they created large vinyl billboards which they put on the back of rented trucks that they drove around Mid-Michigan. The traffic congestion and pollution were a small price to pay to show everyone how to be green. I urge everyone to contact Tomra and Schupan to let them know how proud you are of what they are doing.
Sunday, September 6, 2009
My Response to a Republican's e-mail about Tax Evasion
This is the response that I sent to the e-mail in the previous post. I messed up one of the facts, It was Daschle, not Geithner who failed to report a car - and it was a car with a driver, but I am posting it as written.
I'm right in more than just theory. The IRS got information on 4,450 accounts with $18 Billion in them - that averages just over $4 Million per account. Undoubtedly there are many more "small" accounts than large ones, so the big ones will be in the hundreds of millions. In any case the numbers are huge.
You go on to make a case that " The IRS lost the right to go after tax evaders" You base this on two facts (1) There are politicians that have failed to pay taxes (in what you admit are far smaller amounts than the ones we are talking about here) and (2) there are corrupt, immoral democratic politicians.
Since the second fact is more peripheral I'll deal with it first. Yes, there are corrupt politicians on both sides of the aisle. Sometimes the system works they are caught, tried, and convicted. Sometimes it fails. We'll get back to this point later.
No politician should be above the law. This includes Ollie North in Iran Contra, president Nixon in Watergate and Bush with his warrant-less wiretaps. Once you start exempting politicians from having to follow the law, from checks and balances, you begin the slide from the rule of law to the rule of man and those systems end up serving only the people at the top (think North Korea, Communist China, Nazi Germany, Imperial Japan).
So, you would think I'd be as outraged at Timothy Geithner as I am at the tax evaders with the accounts in Switzerland, but I'm not.
First, there is the question of scale. For Geithner the $43,000 (including penalties and interest) is rounding error -- it was a car provided for personal use and not declared if memory serves.
Second, there is the question of intent. I know those with Swiss accounts were trying to evade taxes. I'm not sure that Geithner was. I've got an MBA, some financial sophistication, and my taxes are surely less complex than his but I'm sure if you went through my returns with a fine toothed comb you would find mistakes.
Third, there is a question of equal treatment under the law. Even for the Swiss account holders, if they voluntarily came forward and paid up the IRS said that they would not be prosecuted -- and that is for a far more egregious offense.
Fourth, there is a question of the standard of evidence. In this country, we require evidence beyond a reasonable doubt for a criminal charge to stick. You can argue that there is a reasonable doubt about forgetting to declare some income -- but not about hiding a million bucks in a tax haven.
Finally, I want to address the most troubling claim, that because you think there has been some unfairness in the system the IRS "gives up the right to collect taxes." As I'm sure you'll agree, this system -- democracy with checks and balances, is the best one tried on the planet to date. Sure it is imperfect and unfair at times -- it is designed and run by humans. If everyone decides that they need not pay their fair share until the system is as fair as they want it to be we'll end up with next to nobody paying. Then the things you value: aid to Israel, a strong defense, the police, etc. won't be possible. The things that I value: education, the FDA, the NIH won't be funded either. This particular paradox - conservatives claim that they don't want anarchy or tyranny but are unwilling to pay the price for democracy - that drives me crazy. They claim to love our country, but fight against our government - trying to starve it of the money it needs to run.
I don't like everything our government does. I hate some of the things our politicians do. There is injustice and waste in our system. I am happy to lobby for a more efficient, less corrupt system - but not at the price off vilifying the great system we have. I think that conservatives should feel the same way.
I'm right in more than just theory. The IRS got information on 4,450 accounts with $18 Billion in them - that averages just over $4 Million per account. Undoubtedly there are many more "small" accounts than large ones, so the big ones will be in the hundreds of millions. In any case the numbers are huge.
You go on to make a case that " The IRS lost the right to go after tax evaders" You base this on two facts (1) There are politicians that have failed to pay taxes (in what you admit are far smaller amounts than the ones we are talking about here) and (2) there are corrupt, immoral democratic politicians.
Since the second fact is more peripheral I'll deal with it first. Yes, there are corrupt politicians on both sides of the aisle. Sometimes the system works they are caught, tried, and convicted. Sometimes it fails. We'll get back to this point later.
No politician should be above the law. This includes Ollie North in Iran Contra, president Nixon in Watergate and Bush with his warrant-less wiretaps. Once you start exempting politicians from having to follow the law, from checks and balances, you begin the slide from the rule of law to the rule of man and those systems end up serving only the people at the top (think North Korea, Communist China, Nazi Germany, Imperial Japan).
So, you would think I'd be as outraged at Timothy Geithner as I am at the tax evaders with the accounts in Switzerland, but I'm not.
First, there is the question of scale. For Geithner the $43,000 (including penalties and interest) is rounding error -- it was a car provided for personal use and not declared if memory serves.
Second, there is the question of intent. I know those with Swiss accounts were trying to evade taxes. I'm not sure that Geithner was. I've got an MBA, some financial sophistication, and my taxes are surely less complex than his but I'm sure if you went through my returns with a fine toothed comb you would find mistakes.
Third, there is a question of equal treatment under the law. Even for the Swiss account holders, if they voluntarily came forward and paid up the IRS said that they would not be prosecuted -- and that is for a far more egregious offense.
Fourth, there is a question of the standard of evidence. In this country, we require evidence beyond a reasonable doubt for a criminal charge to stick. You can argue that there is a reasonable doubt about forgetting to declare some income -- but not about hiding a million bucks in a tax haven.
Finally, I want to address the most troubling claim, that because you think there has been some unfairness in the system the IRS "gives up the right to collect taxes." As I'm sure you'll agree, this system -- democracy with checks and balances, is the best one tried on the planet to date. Sure it is imperfect and unfair at times -- it is designed and run by humans. If everyone decides that they need not pay their fair share until the system is as fair as they want it to be we'll end up with next to nobody paying. Then the things you value: aid to Israel, a strong defense, the police, etc. won't be possible. The things that I value: education, the FDA, the NIH won't be funded either. This particular paradox - conservatives claim that they don't want anarchy or tyranny but are unwilling to pay the price for democracy - that drives me crazy. They claim to love our country, but fight against our government - trying to starve it of the money it needs to run.
I don't like everything our government does. I hate some of the things our politicians do. There is injustice and waste in our system. I am happy to lobby for a more efficient, less corrupt system - but not at the price off vilifying the great system we have. I think that conservatives should feel the same way.
Friday, August 28, 2009
A Republican Response to the Rich Hiding from Taxes
I posted a link to an article about UBS handing the IRS a list of tax evaders with Swiss bank accounts on Facebook. I suggested that the IRS throw the book at these unpatriotic tax evaders and got this e-mail from a conservative whose anonymity I will preserve here. I'll post my response shortly:
David,
Theoretically you are right, I really agree that those big tax evaders
should be made to pay up. However I have a few issues:
$20 billion divided over 19,000 accounts (from the article cited by you) breaks down for about $1 million per person (not hundreds of millions). It is still true that the avoided tax is a few times larger then the tax “mistakes” Geithner and Daschle made, but consider that they are not “ingenue”s but financial experts in the highest financial positions of the country. They did get away by claiming “honest mistakes” that is totally ridiculous. And not just simply they got away, but were nominated/appointed to high offices). Everyday Jack and Joe are audited for minor mistakes and prosecuted. It is like putting the wolf to guard the sheep. There should be 1 law for everyone (that unfortunately includes those weasels with the USB accounts.) The IRS lost the right to go after tax evaders when they accepted the “honest mistake” claim from leading political figures.
Also, due to space restriction on facebook I did not even mention Charles Rangel, the Chairman of the Committee on Ways and Means, and a Deputy Whip (look it up on Google: Mr. Rangel, who has a net worth of $566,000 to $1.2 million, according to Congressional disclosure records occupies 4 rent-stabilized apartments in New York city -the very few rent-controlled and rent-stabilized apartments are for small income families.
Rangel has admitted to a no-interest loan along with $75,000 in income from a rental villa in the Dominican Republic and said that he plans on repaying the owed money for his federal tax evasion.
According to the House Ethics Committee Rangel’s use of nearly $80,000 worth of campaign funds to pay his son for a sub-par website is against House Rules
According to the House Ethics Committee Rangel failed to report 28 instances of acquiring, owning, or disposing of assets between $239,026 and $831,000. These assets appeared and disappeared from his disclosures without notice,as House rules, at the time, demanded.)
David,
Theoretically you are right, I really agree that those big tax evaders
should be made to pay up. However I have a few issues:
$20 billion divided over 19,000 accounts (from the article cited by you) breaks down for about $1 million per person (not hundreds of millions). It is still true that the avoided tax is a few times larger then the tax “mistakes” Geithner and Daschle made, but consider that they are not “ingenue”s but financial experts in the highest financial positions of the country. They did get away by claiming “honest mistakes” that is totally ridiculous. And not just simply they got away, but were nominated/appointed to high offices). Everyday Jack and Joe are audited for minor mistakes and prosecuted. It is like putting the wolf to guard the sheep. There should be 1 law for everyone (that unfortunately includes those weasels with the USB accounts.) The IRS lost the right to go after tax evaders when they accepted the “honest mistake” claim from leading political figures.
Also, due to space restriction on facebook I did not even mention Charles Rangel, the Chairman of the Committee on Ways and Means, and a Deputy Whip (look it up on Google: Mr. Rangel, who has a net worth of $566,000 to $1.2 million, according to Congressional disclosure records occupies 4 rent-stabilized apartments in New York city -the very few rent-controlled and rent-stabilized apartments are for small income families.
Rangel has admitted to a no-interest loan along with $75,000 in income from a rental villa in the Dominican Republic and said that he plans on repaying the owed money for his federal tax evasion.
According to the House Ethics Committee Rangel’s use of nearly $80,000 worth of campaign funds to pay his son for a sub-par website is against House Rules
According to the House Ethics Committee Rangel failed to report 28 instances of acquiring, owning, or disposing of assets between $239,026 and $831,000. These assets appeared and disappeared from his disclosures without notice,as House rules, at the time, demanded.)
Thursday, August 20, 2009
Arguing with Republicans over a public health insurance OPTION
I've been arguing with Republicans about including a public option in the current health-care reform proposals. Here's how the argument seems to go:
Republican: We can't have a public option, the government is going to ration health care. They'll decide your life isn't valuable enough, refuse to pay, and you die. I read that if Steven Hawking had lived in England the Government would have pulled the plug on him and let him die.(1)
Me: Your care is rationed now, by an insurance company that profits if you die. Walk in front of a bus and they can decide to cancel your coverage because you forgot to tell them about the doctor you visited for a wart ten years ago. If you don't like the way government rations health care, you can stick with the insurance company that rations your care now. By the way, Hawking is British and has lived there his whole life.
Republican: But it'll be the government running it. They can't do anything right.
Me: They won two world wars, the cold war, put a man on the moon, funded DARPANET (which turned into the Internet), educated a generation with the GI bill, and built the Interstate highways.
Republican: Yeah, but they will be inefficient because the government is running it.
Me: Why is that?
Republican: Because the free market always does things more efficiently.
Me: Leaving aside the recent debacle in the financial sector, the government is better at collecting debt (2) and more cost effective at delivering medical services, look at the (3)Medicare Advantage Program.
Republican: Everyone will love the Government program so much, that private insurance will be destroyed.
Me: You mean the inefficient, bureaucratic, rationing system will be so loved that by everyone the free market system won't be able to compete?
Republican: This plan doesn't address the real root of the problem.
Me: No, it get the 46 million uninsured into the insurance system, stops you from losing healthcare if you lose your job, stops you from being unable to buy insurance if you have a pre-existing condition, and makes an attempt (which I'll admit is weak) to begin to control costs.
Republican: No, the problem is run away malpractice suits make Medicine too expensive.
Me: Malpractice costs are less than 2% of total healthcare spending(4).
Republican: There aren't really 46 million uninsured. That includes illegal immigrants.
Me: Of the 46 million uninsured, only a fifth are immigrants (5). I think that we'd all agree that legal immigrants deserve the right to health insurance, but assuming that we want legal immigrants to be left out of our insurance system, that leave 37 million citizens with no health insurance. A number that is growing. We've got to do something about it.
Republican: Yeah, but whatever we do we can't have a public option, the government is going to ration health care. They'll decide your life isn't valuable enough, refuse to pay, and you die.
(1) "Hawking is British and has lived there his whole life. He’s a professor at Cambridge for crying out loud."
(2) "The study – supported by an independent review -- showed that it is reasonable to conclude that when working similar inventory, IRS collection is more cost effective than the contractors."
(3) "The plans now cost the government about 14% more per person than does regular Medicare, according to a recent analysis by the Medicare Payment Advisory Commission, which recommends reimbursement rates to Congress."
(4) "represents less than 2 percent of overall health care spending."
(5) "Mr. Rove claims that one-fifth of the uninsured are illegal aliens. I can’t find the basis for this claim (which, if the numbers in the latest Census report are correct, implies that all noncitizens are illegal immigrants)."
Republican: We can't have a public option, the government is going to ration health care. They'll decide your life isn't valuable enough, refuse to pay, and you die. I read that if Steven Hawking had lived in England the Government would have pulled the plug on him and let him die.(1)
Me: Your care is rationed now, by an insurance company that profits if you die. Walk in front of a bus and they can decide to cancel your coverage because you forgot to tell them about the doctor you visited for a wart ten years ago. If you don't like the way government rations health care, you can stick with the insurance company that rations your care now. By the way, Hawking is British and has lived there his whole life.
Republican: But it'll be the government running it. They can't do anything right.
Me: They won two world wars, the cold war, put a man on the moon, funded DARPANET (which turned into the Internet), educated a generation with the GI bill, and built the Interstate highways.
Republican: Yeah, but they will be inefficient because the government is running it.
Me: Why is that?
Republican: Because the free market always does things more efficiently.
Me: Leaving aside the recent debacle in the financial sector, the government is better at collecting debt (2) and more cost effective at delivering medical services, look at the (3)Medicare Advantage Program.
Republican: Everyone will love the Government program so much, that private insurance will be destroyed.
Me: You mean the inefficient, bureaucratic, rationing system will be so loved that by everyone the free market system won't be able to compete?
Republican: This plan doesn't address the real root of the problem.
Me: No, it get the 46 million uninsured into the insurance system, stops you from losing healthcare if you lose your job, stops you from being unable to buy insurance if you have a pre-existing condition, and makes an attempt (which I'll admit is weak) to begin to control costs.
Republican: No, the problem is run away malpractice suits make Medicine too expensive.
Me: Malpractice costs are less than 2% of total healthcare spending(4).
Republican: There aren't really 46 million uninsured. That includes illegal immigrants.
Me: Of the 46 million uninsured, only a fifth are immigrants (5). I think that we'd all agree that legal immigrants deserve the right to health insurance, but assuming that we want legal immigrants to be left out of our insurance system, that leave 37 million citizens with no health insurance. A number that is growing. We've got to do something about it.
Republican: Yeah, but whatever we do we can't have a public option, the government is going to ration health care. They'll decide your life isn't valuable enough, refuse to pay, and you die.
(1) "Hawking is British and has lived there his whole life. He’s a professor at Cambridge for crying out loud."
(2) "The study – supported by an independent review -- showed that it is reasonable to conclude that when working similar inventory, IRS collection is more cost effective than the contractors."
(3) "The plans now cost the government about 14% more per person than does regular Medicare, according to a recent analysis by the Medicare Payment Advisory Commission, which recommends reimbursement rates to Congress."
(4) "represents less than 2 percent of overall health care spending."
(5) "Mr. Rove claims that one-fifth of the uninsured are illegal aliens. I can’t find the basis for this claim (which, if the numbers in the latest Census report are correct, implies that all noncitizens are illegal immigrants)."
Monday, July 20, 2009
Tea Parties: Protesting taxation with representation
I was recently approached on the street by someone who urged me to come to a "tea party" at our state capitol to protest high taxes. I told her that I resented her usurping a symbol of our history and using it to represent something that it never represented in history.
"But, the Boston tea party was about taxes," she replied. "No," I corrected "it was about taxation WITHOUT REPRESENTATION. Last I checked I got to vote."
Her argument immediately shifted. She said she'd called her congressman and he was not responsive to her concerns about the deficit. She was now just exercising her rights to peacefully protest unresponsive leaders and their lack of concern about deficit spending.
I have no problem with people making their voice heard, even though she is still misappropriating a symbol from American history. Now, however, she was protesting neither taxation nor lack of representation and I still disagreed with her. So, I explained that I believed we should have good roads, great schools, a strong military, and well funded security regulators and now was not the time to raise taxes to pay for those things.
Her argument shifted again. Suddenly she was talking about Michigan State Legislators pensions and how lavish they were. That kind of spending, she explained, was why we needed to restrain taxes. I would have pointed out to her that she'd switched to the state which could not run deficits, asked if she wanted to attract the best and brightest to the legislature, etc. but my wife dragged me away and her argument would have just shifted again.
I'm left unsatisfied. So, tea partiers, what exactly are you protesting?
"But, the Boston tea party was about taxes," she replied. "No," I corrected "it was about taxation WITHOUT REPRESENTATION. Last I checked I got to vote."
Her argument immediately shifted. She said she'd called her congressman and he was not responsive to her concerns about the deficit. She was now just exercising her rights to peacefully protest unresponsive leaders and their lack of concern about deficit spending.
I have no problem with people making their voice heard, even though she is still misappropriating a symbol from American history. Now, however, she was protesting neither taxation nor lack of representation and I still disagreed with her. So, I explained that I believed we should have good roads, great schools, a strong military, and well funded security regulators and now was not the time to raise taxes to pay for those things.
Her argument shifted again. Suddenly she was talking about Michigan State Legislators pensions and how lavish they were. That kind of spending, she explained, was why we needed to restrain taxes. I would have pointed out to her that she'd switched to the state which could not run deficits, asked if she wanted to attract the best and brightest to the legislature, etc. but my wife dragged me away and her argument would have just shifted again.
I'm left unsatisfied. So, tea partiers, what exactly are you protesting?
Subscribe to:
Posts (Atom)