Thursday, December 31, 2009

Annoying Myths on the Bailout

Since I missed my connection and I'm spending New Year's in an airport hotel, I figured I'd take this time when everyone is out celebrating to point out something I know is unpopular, but which still annoys me.

Joe Stiglitz, writing at the New Deal 2.0, echoes the conventional wisdom on the bailouts:

We are accustomed to thinking of government transferring money from the well off to the poor. Here it was the poor and average transferring money to the rich.
But was it really? It was the government transferring money to the rich, that's for sure. But where does the government get its money? Mostly from....the rich. According to the Tax Policy Center, the top income quintile pays 67.2% of all federal taxes; people who make over $100K/year pay 73% of all federal taxes. When it suits their argument, pundits like Stiglitz suddenly forget that we have a progressive tax system.



I'm not saying the bailouts weren't unfair (they were), or that the middle class hasn't suffered for the mistakes of others (they have). I'm just saying, let's stop pretending like the majority of the bailout is being financed by Sally Schoolteacher. It isn't.

27 comments:

libert said...

But isn't the share of taxes paid by any income group irrelevant without context? As a thought experiment, let's say the top 10% paid 67.2% of the taxes, but collected 90% of the income. Then that would be a regressive tax system.

Of course, the number isn't 90%, but I believe it is roughly on par with the percent of taxes paid, which would suggest that tax system isn't really progressive in practice.

Tom Lindmark said...

Isn't it still pretty much up in the air as to who will be paying for the bailout since most of it is being financed via debt at this point in time.

I don't disagree with the overall point of the post but the reality is that an enormous liability has been created to fix Wall Street and the method for liquidating the debt is still pretty much up in the air.

Bottom line, the banks were rescued on the backs of some future tax payers but we just don't know which ones yet.

Cetamua said...

It isn't? You're wrong!

Such statistics refer only to the federal income tax. When considering all of “this nation's taxes” including payroll, state and local levies, the top 5 percent pay just 38.5 percent of the taxes.

Now, before saying that this is "excessive", consider this: According to the data, the wealthiest 5 percent of America pays 38.5 percent of the total taxes precisely because they make just about that share — a whopping 36.5 percent! — of total national income.

Y=X said...

Even if we accept your statistic as being the right way to look at this situation your conclusion is still wrong. We at the bottom 99% are paying an undue amount of the bailout due to the fact that there will be less money for schools, police, firefighters, sewers, roads, etc. Our lives will be disproportionately affected and this is the real cost of the bailout. Looking merely at dollar amounts is not the right to analyze this. The top 1% will always be able to afford security, clean water, etc.

Anonymous said...

The projected cost of TARP has shrunk from a few 100 billion to 42 billion, and I believe that is an analysis of principal only. When interest income and warrant proceeds are included, it just gets better.

The Federal Reserve is likely to make a profit on its lending facilities.

The taxpayer is probably going to get his biggest bang for a buck in an emergency situation since WW2.

anne said...

We have a progressive tax system.

Which means that though the people who earn the most pay a higher percentage in taxes, Sally Schoolteacher's taxes are being used to prop up a financial sector that reaped enormous profits on the road to ruin.

And this financial sector, still utilizing all the tools and loan guarantees available to "bank holding companies," is poised to pay out some of the biggest bonuses ever in 2009, the year when employment tanked in America.

Concurrently, Sally Schoolteacher's pension fund has vanished, especially if she worked in the Kenosha, WI school district.

That's what's pissing off much of Main Street these days, EoC...

Economics of Contempt said...

Libert: A progressive tax system means the rich pay a higher tax rate, so by definition, their share of federal taxes is higher than their share of income. (The top income quintile makes something like 53% of all income.)

Tom Lindmark: Strictly speaking, you're right. I'm assuming that the makeup of federal tax revenues will remain roughly the same in the future (which I think is reasonable, since the makeup has been around this level for ~20 years now, and Obama has promised no middle class tax hike).

Cetamua: The numbers I used were for all federal taxes (including payroll taxes), not just income taxes. I didn't use state taxes because it was the federal government that put up the money for the bailout, not state governments.

X=Y: I'd characterize what you're talking about as the cost of the recession. I was referring to the cost of the bailout specifically.

Anne: Sure, like I said, I'm not denying that the bailout was deeply unfair. It was. It's just the strict factual issue that annoys me. I'm also not trying to make any sort of larger point. This is just one of those random things that annoys me.

Tom Lindmark said...

"I'm assuming that the makeup of federal tax revenues will remain roughly the same in the future (which I think is reasonable, since the makeup has been around this level for ~20 years now, and Obama has promised no middle class tax hike)."

Maybe a reasonable assumption and possibly not. Since marginal revenue tends to decrease rather markedly as marginal rates approach certain levels, it's not unreasonable to assume that there isn't that much left in the golden goose of the upper quintile. They do have alternatives to forking over increasing amounts of money to the government.

That sort of calculation might be behind the talk of a VAT or something similar. It seems to me the reality is that when massive new sources of revenue are needed the only place to raise them is through a broad based levy. In that case, Sally Schoolteacher might well be in line for her share of pain.

Christopher Wheeler said...

Fun fact on taxes: 47% of American households either pay zero in Federal income taxes, or else they receive refunds that exceed the amount held back in withholding.

If Sally Schoolteacher has two kids and files as Head of Household, between Earned Income Credit, Child Tax Credit and Additional Child Tax Credit, Sally will pull several thousand dollars out of the Federal treasury.

Brett said...

Fun fact on taxes: 47% of American households either pay zero in Federal income taxes, or else they receive refunds that exceed the amount held back in withholding.

That's hardly a surprise. It's a deliberate result of many of the welfare reform efforts over the past few decades, which shifted away from direct assistance (ADFC and direct housing subsidies, for example), to manipulations of the tax system like the Earned Income Tax Credit and the Low Income Housing Tax Credit. That kept the revenue streams out of the government's administration, but had the side-effect of greatly reducing the net income tax paid by many Americans that had previously received direct assistance.

But if you'd like to reverse that trend, feel free to propose ways to do so. I can think of a few myself.

Libert: A progressive tax system means the rich pay a higher tax rate, so by definition, their share of federal taxes is higher than their share of income. (The top income quintile makes something like 53% of all income.)

In theory, at least. But usually when people are referring to the progressivity of the tax system, they aren't comparing a certain segment of society's percentage of aggregate income earned with the percentage of taxation paid on that- they're simply noting that higher income Americans tend to pay a higher tax rate.

Ritholtz said...

You can look at that way -- although its somewhat misleading.

Here is a different way to look at it: The top 10% of US citizens own 70.9% of all US assets. (Source: Ron Paul, http://bit.ly/2jygVb)
The Top 20% owns 81.6%.

So its no surprise that the bottom 40% of the population -- they own all of 0.2% of the wealth, according to the Congressman -- pay no taxes.

Libert pointed out, looking at the percentage share of taxes paid by any income group without any context is an irrelevant statistical ploy.

ClaytonLasSendas said...

Stiglitz' new book, Freefall, does a great job of explaing the past and proposing some solutions for the future in readable langauge. I find my self in agreement with the historical parts, and some of his perspectives are worth serious analysis for future. It is, however, another nail in the supply side coffin and in the oversimplified trust that industries can regulate themselves.

Anonymous said...

I saw an article in the communist Forbes magazine about the top 400 income earners of 2006, they ended up paying 17% of their earnings to federal income tax. 17%? I am sure at their income, their FICA is just a drop in the bucket. Counting my wages + FICA, I wish I only paid 17%.

Even if you go to the top 1%, they only pay less than 2% higher than the median.

The people who get soaked are those between 90K and 250K. But above that, the federal taxes get less and less progressive.

Conservatives are people too said...

Are you talking about "federal taxes" or federal "income taxes"?

Don't forget that state taxes are absurdly regressive. Fica is regressive. Medicare is regressive.

Edward Forster said...

I believe these statistics are misunderstood.

Every business (and employee) owes its income to a consumer somewhere, directly or indirectly. For every dollar spent in the shops part of it is a sales tax, part is due to taxation of the relevant sales and production business, and part is due to their payroll taxation. All of these tax costs are incurred in proportion along the supply chain and the bill is handed down to the final consumer, who buys with the spending money remaining in his pocket.
Income taxpayers are led to believe that it is a tax paid by them personally, but can you see that they are really unwitting tax collectors merely forwarding money to government that is received from consumers of their work?
It should be more widely recognised that income tax is akin to a tax on your work to be paid by buyers of your work, otherwise adding up the amounts of tax paid on income and expenditure will be found to exceed that which the exchequer actually receives. Thus, net pay after tax is what we earn and it is that which is taxed when we consume. Implicitly, there is an effective flat tax on consumption of say 30% or more in the US.
So if there is an increase in aggregate taxation by taxing the rich more then on average everyone will find an increase in the tax content of his consumption. The conclusion is that income taxes are neither necessary nor do they serve any useful purpose whatever other than to hide the true level of taxation inflicted on us and to mislead the voters as to who bears their burden.

Anonymous said...

We don't have a very progressive tax system. Warren Buffett pays a lower tax rate than his secretary.

In actual practice, the superrich pay a lower percentage of their income in taxes than the upper middle class. You can look at the stats. You haven't.

So you are dead wrong, and the people you're criticizing are.... also wrong. In fact, the government routinely takes from the middle class to give to the rich.

It can't take from the poor. They have no money.

Anonymous said...

Economics of Contempt wrote:

"Cetamua: The numbers I used were for all federal taxes (including payroll taxes), not just income taxes."

You err by only looking at the top quintile. The tax system is progressive up to a *point*.

Look at the finer-grained numbers. The top 10%, the top 5%, the top 1%, the top 1/3 of 1%. You'll be shocked. The system simply stops being progressive and goes regressive when it hits the super-rich.

Anonymous said...

"Since marginal revenue tends to decrease rather markedly as marginal rates approach certain levels, it's not unreasonable to assume that there isn't that much left in the golden goose of the upper quintile."

Actually, it's extremely unreasonable. If you actually look at the allocation of wealth, there's a lot of money there. We've had much higher income tax rates, and the marginal revenue return was very high.

The marginal revenue return on high top rates starts to drop once *the society is more equal*. This is why high top rates raised a fortune during the Woodrow Wilson administration (high inequality, like today), and didn't during the Eisenhower administration (much higher equality).

Since high top rates *cause* greater inequality, this is sort of a "self-correcting" situation. However, *right now* there is a huge amount to be made by raising rates on the richest.

Anonymous said...

Um, thinko correction:

Since high top rates *cause* greater equality, this is sort of a "self-correcting" situation. However, *right now* there is a huge amount to be made by raising rates on the richest.

Anonymous said...

"All of these tax costs are incurred in proportion along the supply chain and the bill is handed down to the final consumer, who buys with the spending money remaining in his pocket."

Absolute nonsense. Why? It ignores supply and demand. In healthy markets, the price is driven by competition, so businesses *cannot* pass on all tax costs -- some of it comes straight out of profits.

Anyway, irrelevant to the progressivity of the income tax. Taxing Bill Gates personally has no meaningful effect on consumer spending whatsoever, but could be a huge boost to the federal budget.

Anonymous said...

Blogger Ritholtz said...

Here is a different way to look at it: The top 10% of US citizens own 70.9% of all US assets. (Source: Ron Paul, http://bit.ly/2jygVb)
The Top 20% owns 81.6%.

So its no surprise that the bottom 40% of the population -- they own all of 0.2% of the wealth, according to the Congressman -- pay no taxes.


Thank you. This amounts to a competent analysis for a change.

Edward Forster said...

Re: Anonymous 12:43 AM

This response is quite common. This is not a theoretical matter. Strict accounting reveals, as any business owner can confirm, that the totality of taxation of business and employees is met from the proceeds of business sales ultimately to individual consumers. If the proceeds of sales, less the accumulated costs of taxation, are insufficient to meet the costs of production and profits in the supply chain then that would indicate an unsustainable business model. That a thriving market persists is an indication that those costs of taxation are being met by consumers and that includes everyone rich or poor.

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