Saturday, August 13, 2016

Ask What You Can Do For Your Country*

*Famous Line From JFK's Inaugural Address

The last several weeks I've been puzzling over how the country might heal and what needs to be done.  We seem headed in the opposite direction.  So, for example,  I was very troubled by Thomas Edsall's column for this week, Is Trump Wrecking Both Parties?   The problem, in a nutshell, is that too many people are out of touch with how the other half lives.



Beyond this, however, I believe those liberal cosmopolitans have been co-opted by the Republican agenda on taxes and in that dimension they are now fairly conservative.  In other words, they have gotten spoiled by how low taxes have been the last 15 years or so.  To demonstrate this, I made the following table, which I think illustrates the situation clearly.  First here is a little background on how I generated it.

Historical data on marginal income tax rates by bracket can be downloaded from taxfoundation.org.  They give the data twice.  Once it is in nominal dollars, meaning as it would have appeared in that particular year.  The other time it is in inflation adjusted dollars, with the base year 2012.  The inflation adjusted numbers make tax comparisons across years easy to understand.  I took those inflation adjusted data, focused only on the category married filing jointly, which is how I do my own taxes, and then computed the tax owed at the upper end point of each bracket, along with the average tax rate at that upper end point.

When you do an exercise like this you immediately come to realize that tax brackets move over time and the number of brackets change.  This makes it hard to eyeball the rates across years to see what is going on.  So I decided it would be useful to look at a handful of focal incomes and see what tax those incomes carried over the years. In the table AGI stands for Adjusted Gross Income.  How one goes from Gross Income to AGI via exemptions, deductions, treatment of capital income, etc. also has varied over time.  That variation is not being considered here.  So the table below is only giving a partial picture, but it is nonetheless quite informative.



Note that small variation between years, for example between 2013 (which was the last year for which there were data) and 2010, can be explained by bracket boundary adjustments that are imperfect and inflation adjustments that are also imperfect.  The larger variation is due to changes in the tax laws that fundamentally changes brackets and rates.  Taxes were highest for every income category in 1980, when Jimmy Carter was President.  Except for the $50,000 category, taxes were next highest in 1985, when Reagan was President.  (This may surprise people.)  There were many tax brackets then.  The marginal tax rate was 42% (higher than the top rate now) for incomes between $133,254 and $190,098.  The top marginal rate in 1985 was 50%.  The situation remained that way in 1986.  Then, in the last two years of Reagan and throughout the Presidency of Bush 1, the rate structure was flatter, with fewer brackets.  Taxes declined in all categories except at the $50,000 level.  Under Bill Clinton rates rose back up  at the $200,000 level and above.  Then under Bush 2 rates were cut across the board.  While the top bracket(s) are not shown in the table, and under Obama, those rates were raised back to their Clinton era levels, for the categories that are shown in the table the rate structure remained intact after Obama became President.

Before I go further in my argument, let me explain why these things matter.  Yesterday the NY Times had an editorial, Hillary Clinton's Plan to Make the Economy Fairer, in which they endorse much of her proposed economic agenda.  Regarding the various components of the plan, such as infrastructure investment, one can probably get near consensus that these are sensible things to do.  The issue is the intensity at which these components are done.  The editorial says:

To help pay for the plan, initially $275 billion over five years, she has proposed several tax increases on high earners, including the “Buffett rule” for a minimum tax of 30 percent on those who make more than $1 million, a 4 percent surcharge on incomes over $5 million and a limit on deductions. 

It is my view that the $275 billion number, which is $55 billion per year, is too low by an order of magnitude.  (See my post, Hard Hats That Are Green.)   But to get the infrastructure spending to the right level, there either needs to be a lot of deficit spending, something Paul Krugman advocates, or there needs to be additional taxes collected to pay for it now.  Hillary Clinton is reluctant to engage in deficit spending, which leaves the possibility of raising taxes as the only alternative.  But in the current political environment, talking about raising taxes on the 20% or the 10% rather than on just the 0.1% might be political suicide.  Thus the Times editorial concludes:

The plan Mrs. Clinton does have, however, is a good one. It is largely paid for. It is incremental, not sweeping, which is in keeping with political reality. And in contrast to the Trump plan, which has few details, it is specific enough that the “everyday Americans” she has pledged to help can actually hold her accountable for what she has promised.
So, to get back to my argument, the issue is how to raise taxes on more of the population, in a way that people who will see their taxes rise nonetheless embrace this as the responsible thing to do.  With that question in mind, let's do a quick look at the income distribution.  There is a nice and easy to use display a the CNN/Money site, though do note that it is using 2014 data.  Based on that $150,000 puts you in the top 11 percent or households, $200,000 puts you in the top 6 percent of households, and $250,000 put you in the top 2 percent of households.   There is something like 124 million households in the U.S.

With this I did some calculations about raising rates on those three categories of income (and above) back to either the rates in 1995 under Clinton or back to the rates in 1985 under Reagan, leaving things unchanged for people with household income below $150,000.  As with all my calculations of this sort, I don't mean them to be precise, just in the ballpark.  With that caveat, such a change back to the 1995 rates would produce an additional $81.75 billion, enabling the infrastructure program to more than double.  And making the change back to the rates in 1985 would generate an additional $222.2 billion.  As Everett Dirksen would say, this is real money.

Given how odd our politics are now, it would be foolhardy for Hillary Clinton to talk about raising taxes this way now.  She should not give all those discouraged Republicans who will stay away from the polls in November a reason to change their minds.  But it is not too early for others among those liberal cosmopolitans in the quote from Robert Putnam to consider the issue.  I am going to try to do this in a down to earth way, where the further calculations I suggest doing can be replicated by anyone who reads this post.

Using information from your tax return this past year, first write down your gross income.  Then consider each of these tax categories:  federal income tax, state income tax (if any), local income tax (if any), property tax, FICA, and other.  For those who work at a public University in Illinois, 8% of your salary is withheld for the retirement plan and that is mandatory.  Count that in other.  Don't count contribution to a 403B plan, as that is optional.  Add up the amounts in each of these categories to compute your total tax.  (There are small things, like car registration, that are not being counted.   Likewise, sales tax isn't counted this way.  Treat sales tax as part of the purchase price of goods.)  You can then get a sense of your total tax being paid to all sources and thus calculate your after tax income.

In the case of my household, that total tax rate is around 30%, almost surely that is lower than most people who have two income earners in the household because my retirement income is neither subject to Illinois income tax nor is it subject to FICA.  Let's say that you you do the calculation your total tax rate is 35%.   This gives after tax income respectively of $97,500; $130,000; and $162,500 at before tax income of $150,000; $200,000; and $250,000.   Moving to the 1995, Bill Clinton era rates would then put the pinch on of about $5,000; $6,500; and $10;000 respectively.  Surely people would notice that, but most could manage it, couldn't they?  Moving to the 1985, Ronald Reagan era rates, the pinch would be more and about $10,000; $18,500; and $25,000 respectively.  People might require some time to adjust their spending downward by that much.  But ultimately most could handle it, I believe.

Now let's move the argument for ability to pay to the ethical dimension.  Expressing your reluctance to pay more in taxes gives me cover to push back on having my own taxes raised.  Conversely, if you champion a tax increase on yourself it makes me seem more the ugly American to actively resist having my own taxes raised.  In this way of thinking, people in the professional class keeping their Bush Tax cuts, makes it harder to raise rates on the very rich, as that looks unfair.  Members of the professional class arguing that their own taxes should be raised, in contrast, encourages the top rates to go up as well and would put pressure on to close loopholes and other tricks the wealthy have to avoid paying taxes.  Of course, the aversion to pay taxes is so ingrained in some people that they may be immune from this sort of moral suasion.  And among this group, some are quite politically active via large campaign contributions.  This might then make those liberal cosmopolitans pessimistic that the needed tax reform can ever be politically possible.

The argument to turn this around has to focus on the ugly populism that has been given voice by the Trump candidacy.  That ugly populism will not go away, even if Trump loses.  Wishing that were so is a mistake.  Much of that ugliness would go away if there was decent economic opportunity.  Hillary Clinton's agenda, then, needs to be seen as a way to for America to get past this very trying moment.  It can do that, but it needs to be more intensive and thus of more consequence.  Liberal cosmopolitans should want to contribute to that goal.  It's what they can do for their country.  
We need to be arguing about this now, so that at the appropriate time it becomes possible to implement.

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