Thursday, August 12, 2010

Tax Cuts Relative to Tax Payments

So this graph from Ezra Klein is making the rounds. In a nutshell, it shows that the proposed GOP tax cut (really an extension of the Bush tax cut) gives lots of money back to the very rich, whereas the Democratic tax cut (really a partial repeal of the Bush tax cut, meaning a tax increase) is not so generous with the rich.

The graph speaks for itself. Or does it? What the graph doesn’t show is how much each income group pays in taxes to begin with. The real question is how much each group is getting back relative to how much they put in.

Think of a tax cut as a kind of rebate: the government took some of your money, and now it’s giving some back. So how big is the rebate per dollar of tax paid? Using IRS data and the numbers in Klein’s graph, I’ve broken it down:

The chart shows that under both plans, the highest-income groups get a much smaller rebate per dollar, while the lowest-income groups get a much larger rebate per dollar. The difference is that the Democratic plan gives the rich almost no rebate at all -- about 1 cent per dollar -- whereas the GOP plan does give the rich a rebate of about 13 cents per dollar. Meanwhile, everyone earning less than $200K gets a rebate of at least 22 cents per dollar, with some groups getting much larger rebates (reaching as high as 73 cents per dollar for households earning $10-$20K).

The fact is that the rich pay a whole lot more in taxes than everyone else. It should be no surprise that their tax cuts are larger as well; the only way to avoid this is to give a disproportionate tax cut to people with lower incomes. For more, see this post from a few years ago.


Kevin Carson said...

Well, to start with there's the question of focus in limiting the question to taxes on income. There's been a tendency over the past thirty years to shift taxation off of returns on accumulated capital and land and onto returns on labor.

I know, I know, "double taxation is unfair," and all that. But as Ruben Bolling's "Lucky Ducky" cartoons point out, there are lots and lots of cases where the same dollar of income is taxed multiple times (like when po folks pay sales tax on purchases made on already-taxed incomes). So why is it only "double taxation" when the burden falls mainly on the rich?

But even stipulating that the rich pay most taxes, you ignore the larger question of justice, insofar as you take the distribution of incomes itself at face value as just what the "free market" happened to cough up, in terms of how it values different people's "productive services."

And that's the elephant in the living room. Most of the incomes of the very rich are unjust returns, rents on assorted monopoly privileges and artificial property rights, etc. I mean, seriously: if it weren't for patents and copyrights, Bill Gates' fortune from Windows would probably be about three orders of magnitude smaller (at most).

And given the destabilizing effects of the maldistribution of purchasing power that results from such state-enforced privilege, some degree of progressive taxation isn't even a matter of choice for the ruling elite. If they had a genuinely flat income tax and no government redistribution to prevent even bigger piles of savings with no profitable outlet to invest in, we'd have been in a depression for decades. Given the primary function of the state as enforcer of monopoly rents for the privileged, the state -- the capitalists' state -- simply has no choice about taking "progressive" measures to prevent the maldistribution of purchasing power and chronic overaccumulation/ overproduction from destabilizing the system. The capitalists' state, in order to prevent depression, taxes back a small portion of what the capitalists take in the first place through state-enforced unequal exchange.

There are only two choices, given the existence of artificial scarcity, artificial property rights, and monopoly privilege: One, remove those elements from the system and let free market competition equalize incomes to a considerable extent and break up the great fortunes. Or, two, secondary interventions by the state (progressive taxation, welfare, deficit spending, direct government purchase of industrial output, etc.) to correct the destabilizing effects of its primary intervention in creating privilege in the first place.

I would much prefer the first alternative: eliminate all subsidies and cartelizing regulations for big business, eliminate "intellectual property" [sic] law, eliminate barriers to free competition in the supply of credit, and cease enforcement of absentee titles to vacant and unimproved land. But if you don't take that alternative, then Keynesian fiscal policy and the welfare state are the price you pay for state capitalism.

Blar said...

What do you think of Ezra's latest chart, which shows percent change in after tax income? According to that chart, the GOP plan would give the largest increase in after tax income to the richest .1%.

Anonymous said...

Most of the incomes of the very rich are unjust returns, rents on assorted monopoly privileges and artificial property rights, etc. I mean, seriously: if it weren't for patents and copyrights, Bill Gates' fortune from Windows would probably be about three orders of magnitude smaller (at most).


Jungle or Zoo, the difference bein'.....guards, iron bars and _________

ruralcounsel said...

And I think it horribly unjust that I never win the lottery, even though I never buy a ticket.

Believe it or not, the purpose of government taxation (at least in the USofA) is not supposed to be social engineering by redistribution of wealth because of snarky socialist concepts such as "artificial property rights."

Face it, the purpose of patents is to give a time limited incentive for inventors to disclose the secrets of their invention for the infinite benefit of all. If I had a good idea and couldn't get patent protection, I'd either withhold it or boobytrap it so no one would be likely to discover it. Screw the public good. I'm not vying for philanthropist of the year. Your life isn't my problem, and my life isn't any of your business.

There is no larger question of justice than that.

Kevin Carson said...

Rural counsel: I'm a market anarchist, so I'd much prefer to remove the government-enforced artificial scarcity so that tax rates become a moot point.

The size of the revenue stream you desire, and the business model it takes to support it, isn't my problem. But when you desire government welfare -- in the form of government enforcement of an IP monopoly -- to guarantee you a revenue stream, that IS my business.

You seem to think you're entitled to a revenue stream from government enforcement of a monopoly.

Whatever you might or might not do if you ever came up with a good idea, studies have found that over 80% of process and product innovations would have been introduced even without patents purely for the sake of staying competitive.

ruralcounsel said...

Mr. Carson....

"Past history is no guarantee of future performance."

Historically, most patents were for mechanical devices.

And since many patent applications these days involve complex genetics, chemical formulations and processes, micro electronics, and other things not easily discovered or reverse engineered, I think your statistics are meaningless, even if true.

Patents are not supposed to be awarded to every product improvement. They are for the 'non-obvious'.

Society doesn't have a natural right to someone elses creativity. If you feel you have the right to steal from other people (market anarchy), then you must support the right for private remedy. Time for the corporate armies and assassins to come forward! I catch you using my competitors product, who incorporated my invention, I get to blow you out of the water. Literally.

Sounds like a great sci-fi novel. But I doubt you are ready to play that game for real.

Kevin Carson said...

First, just as a basic definitional matter, copying isn't theft. Stealing a thing leaves one less of it. Copying it makes one more.

And nobody has a right to a revenue stream from an activity, if it can't be attained in a free market. We are only entitled to money returns on stuff that people buy willingly. And it's not "willing" to pay someone for something because the government has conferred a monopoly to them. Copyrights and patents are a coercive invasion of my real, tangible property rights, preventing me from doing what I want with my own stuff, by telling me I can't combine my own tangible property in certain patterns that someone else has been granted a monopoly on.

If state capitalists insist on robbing us of the use value of our property to guarantee the revenue streams of people on patent welfare, I guess we'll have to take matters into our own hands. That means The Pirate Bay or whatever successor replaces it, and will eventually include industrial CAD/CAM files distributed on Pirate Bay.

The enforceability of patents depends on low transaction costs resulting from production in large batches by a handful of oligopoly firms, and distribution of identical products nationwide in a handful of giant retail chains. When most production is on a relocalized, lean basis, using general-purpose machinery to produce in small batches and frequently switching between product runs, and the stuff is produced in neighborhood factories for a local retailer, the transaction costs of enforcing patents will be unsupportable.

As for your corporate armies, enforcing privilege is only a viable business model when the cost is externalized on taxpayers. We've got corporate armies right now--the ones run off the taxpayer teat, the only kind that will ever be profitable. The corporate armies are the police and armed forces, whose main function is to exercise muscle for big business that big business couldn't afford to pay for itself without going out of business. If your "corporate armies" want to find out how it feels to lose twenty Vietnams at once, then bring it on!

ruralcounsel said...

"Copyrights and patents are a coercive invasion of my real, tangible property rights, preventing me from doing what I want with my own stuff, by telling me I can't combine my own tangible property in certain patterns"

Were it not for the inventors' insight, intelligence, perseverence, or even luck, you would not have come up with that combination or pattern by yourself. You are thus benefitting from someone else's labor at little or no cost to yourself. A classic free rider. I call that theft, you call that copying.

It is not an "invasion" of your property rights to define a boundary around them.

What you are stealing is not the object, but the gain the inventor would have derived had you respected his effort and invention. Lost profit.

Kevin Carson said...

If any action that deprives someone of a revenue is "stealing," then the property values Nazis are correct that I'm stealing from them by using my property in ways that lowers property values in the neighborhood. They have a right to prohibit my clothesline, compost pile, etc., in order to increase the resale value of their house.

More broadly, the issue was illustrated in one of Nina Paley's cartoons:
MIMI: If you download a song for free instead of paying for it, it's stealing!
EUNICE: If I do something for myself that I could have paid you to do, it's stealing!
BOTH: Competition is theft!

Nobody is entitled to a revenue from their activity, if it can't be supported in a free market. Nobody's entitled to a government-enforced monopoly to guarantee them a revenue.

Glen Whitman said...

Rural and Kevin -- y'all have been going back and forth about this for a couple of weeks, so I thought it was about time for me to weigh in.

The question of whether intellectual property is legitimate has a long history in libertarian/free-market circles. Some, like Kevin, say it's just another form of government-granted monopoly. Others, like Rural, say it's as legitimate as other forms of property -- a way of guaranteeing that people keep the gains from their efforts. Personally, I'm ambivalent; I think some IP protection is legitimate, but I'm inclined to think it's been overextended.

But wherever you stand on that debate, doesn't it seem bizarre to have the tax code "compensate" for intellectual property? If IP laws are the problem, then IP laws should be reformed. Using the tax code to make the correction for IP laws -- and corporate welfare, for that matter -- is an incredibly blunt instrument. The top income bracket assuredly includes many beneficiaries of IP and corporate welfare, but I don't think we can say that's true of *all* members of that tax bracket. It's certainly not true of them all in the same degree. And that means "correcting" IP and corporate welfare through the tax code involves punishing some people for other aspects of the law that they may not have even benefited from.

Kevin Carson said...

Slim: It's not that I advocate using the tax code to compensate for privilege. I just think it's misleading to focus on relative tax rates in isolation to compare the relative state burden on the classes, as a matter of "justice."

And I'm extremely leery of a "small government reform" agenda whose main focus is on reducing the burden on the folks at the top.

When the government burdens placed on the top, such as they are, are compensating or ameliorating second-order corrections to prevent the privileges granted them from being too destabilizing, I don't think much of an agenda focused mainly on removing the secondary restraints and leaving the first-order privileges largely intact.

In fact that kind of agenda, to the extent that it simply removes secondary controls on a primary state grant of privilege, could be seen as an intensification of statism. A particular state action should be seen, not in isolation, but in terms of the functional role it plays in the overall system of state power.

I wrote about that in The Freeman: Free Market Reforms and the Reduction of Statism.

I think a free market reform agenda should be along the general lines of cutting taxes from the bottom up and welfare from the top down, or (as Roderick Long put it) eliminate the shackles before you eliminate the crutches. This means, in practical terms, eliminating artificial scarcities, privileges, subsidies, and artificial property rights for the corporate plutocracy, and letting free market competition break up the large fortunes and concentrations of capital. If artificial returns on land, capital and IP were removed, and the artificial cost floor under subsistence from such things as zoning and occupational licensing were also removed, I think we'd find that progressive tax rates and much of the welfare state quickly became a moot point.

ruralcounsel said...

Tax code is almost always a blunt instrument for addressing societal issues.

And while I believe IP law is rational and justifiable, what the exact details of the bargain between society and inventor/author should be are perfectly debatable.

But people who want to eradicate IP protection just because they want total freedom to do whatever they want have some serious mental pathology issues. Libertarian is all about doing what you want so long as it doesn't injure others. Taking other peoples ideas in order to increase your profit at the expense of their profit doesn't meet that test.

Now clearly this creates some inefficiencies in the marketplace. But it is for a limited time, so society eventually gets the benefit for all to use. And should, in fact, spur the competitors to try and do better than just copy. Patents can be incredibly specific and thus limited, and open up a world of workarounds to a sharp market participant. There is always a real decision whether to apply for patent protection and disclose your invention, or try to hide it and keep it a trade secret, particularly if it is difficult to perceive or reverse engineer. In the copyright world, how many novels would get published or ever make it to the free market if anyone could merely transcribe the words and resell it under their own name? Distribution of written material would be hobbled, as new and different ways of exchange by private contract evolved. Talk about economic inefficiency!

IP law gives IP producers the safety net they need to have confidence they're efforts will be properly priced in the market. Without it, it becomes a race to the bottom.

Anonymous said...

What the graph doesn’t show is how much each income group pays in taxes to begin with.

I don't see where your graph shows that either.

The real question is how much each group is getting back relative to how much they put in.

I don't know why that's "the real question." You haven't identified anything misleading about Klein's graph. I doubt he claimed his graph shows every single important thing about the tax cuts. A graph is inherently going to simplify data and focus on certain variables rather than others. I have no problem with your graph either, but it's not some devastating rebuttal to Klein. You've both given graphs to highlight the variables you each find most salient, and it's a matter of personal values (not empirical rigor) who's right.

Glen Whitman said...

Jaltcoh: "I don't see where your graph shows that [how much each income group pays in taxes] either."

True, but it shows the ratio of how much they're getting back to how much they paid. If you click through to my earlier post that I linked, you'll find a pie graph showing the fraction of all income tax receipts paid by each quintile (albeit from several years ago).

"You haven't identified anything misleading about Klein's graph. I doubt he claimed his graph shows every single important thing about the tax cuts."

Klein's blog post billed it as "The Bush tax plan vs. the Obama tax plan in one chart." In his Twitter feed, as I recall, Klein called it something like "everything you need to know about the Bush tax cuts in one graph." My point was that, actually, there was more relevant information. Showing how much taxpayers are getting back without reference to how much they paid in is, in my book, not very informative.

So maybe you didn't find my argument devastating to Klein's point. But surely it's at least relevant -- for the reasons stated in the post.

Glen Whitman said...

I've also been meaning to respond to Blar. Klein's follow-up graph was more effective, but I also just found it confusing. The figures behind it don't jive with those I've seen elsewhere, like those I used to construct my graph. I'm not accusing anyone of falsifying data; I'm just saying there's something that doesn't quite make sense to me. I spent a little while trying to figure out why the results are so different, but I wasn't successful -- and then life intervened. I hope to figure out the answer when I have more time. (I have a suspicion that different types of taxes are involved -- e.g., income taxes alone vs. income taxes + capital gains taxes.)