A humble attempt to provide some clarity on the question of taxes

Harvard economist Greg Mankiw posts data (2005 data) on the average federal tax rates (tax liability / income). It shows that the top quintile (20%) pays an average tax rate about 6 times what the bottom quintile pays, 25.5% versus 4.3% This is all federal taxes - income, payroll, and excise taxes. This is so because we have a progressive tax system - the higher your income the greater percentage of that income is paid in taxes. But, it is only the income tax that is progressive.

Some more data though adds clarity. That same year the highest quintile (20%) of households earned about 55.1% of all income. They paid about 68.7% of all federal taxes. The lowest quintile earned about 4% of all income and paid about 1% of all taxes. Still progressive. However, if you add state and local taxes - sales and property taxes and in some cases an income tax - it is less progressive. Sales and property taxes are not progressive and only some states have a progressive income tax. (A good graph can be found here but I can't find the source and am curious to see if it is accurate) Simple interpretation, while rich folks pay a higher percentage of their income than do less affluent people on income taxes, less affluent people tend to pay higher percentage than rich people on payroll and sales taxes.

It should be noted that there is progressivity on the spending side - poorer folks benefit disproportionally from the spending - at least as measured by direct transfers.

My comment: We'll waste all kinds of energy and emotion on debating and provoking with respect to "taxes on the rich" (how progressive our income tax code should be) when the more important argument should be had on tax simplification and role and size of government. Eliminating the more distortionary taxes - capital gains and the payroll tax - in a tradeoff for higher income taxes all around would help. I'd throw in a higher gas tax too to help offset the increase in income taxes. A simple and predictable flat tax on income beyond a certain level of income (the bottom quintile pays no income tax right now anyway) would increase efficiency and clarity.

Consider for a moment the distortionary nature of the mortgage interest deduction. It is a subsidy that goes to rich and middle income alike yet the idea is to encourage home ownership. Does anyone thing that higher income people would not own a home were it not for mortgage interest deductibility? It increased home prices; that's what subsidies do. It encouraged people to buy more house - get a bigger mortgage - than they otherwise would have. It encouraged people to borrowing against their house in order to consume - so much for eliminating the deductibility of consumer loans. It is bad energy policy; bigger homes use more energy.

Race, partisanship, and self-interest

If Bobby Jindal's mom was pregnant before she came from India to the United States, does that make him an "anchor baby" in the GOP's eyes?

A local bloggger and Democratic activist (Braisted) asked that question yesterday. I challenged it by opining that the immigration debate did not break cleanly along partisan lines. The blogger insisted that his take was accurate. Another blogger and Dem activist challenged echoed the first...

The GOP can throw all of the brown faces out there it wants. That doesn’t change the fact that there’s a huge racist faction within the Republican Party. Until they acknowledge it and deal with it, it won’t be going away.

This is bizarre.

If the GOP has a large racist faction that they want to appease why would they "throw a brown face out?" Put another way, couldn't "throwing Jindal's brown face out" be interpreted as trying to attract more minorities? Is the elevation of Michael Steele a signal that the Republican party is not dealing with "a huge racist faction?"

And what of immigration and race considerations?

"Every hour sees the black man elbowed out of employment by some newly arrived emigrant."

That's Frederick Douglass. What about Booker T. Washington?

"The continual stream of well-trained European laborers flowing into the West," warned educator Booker T. Washington in an 1882 speech, "leaves Negroes no foothold."

Marcus Garvey in 1920 speaking in favor of tighter immigration...

"We will be out of jobs, and we will be starving."

My suspicion is that the districts who voted most heavily for Obama are also the districts most in favor of immigration restrictions. But the more important point is that it is often not about race but economic self-interest.

Required reading for liberals

Liberals are more optimistic about the capacity of individual reason and the government’s ability to execute transformational change. They have more faith in the power of social science, macroeconomic models and 10-point programs.

That's David Brooks in the New York Times offering a pretty darn good summary of the difference between liberals and conservatives in an age where making meaningful distinctions has become more difficult.

I disagree with his last point, that the success or failure of the Obama administration will solve the question of who has it right, liberals or conservatives. It will not be easy to make definitive judgments with respect to the success of the myriad initiatives. Besides, we'll not know how things would have turned out with an alternative approach.

The Good, the Bad, and the Ugly

Obama looked good. No surprise there. The contrast - Biden and Pelosi sitting behind him - helped.

Bad: On energy... when is a major political figure going to propose the single most important policy to improve national and economic security - a higher gas tax? A third rail? Not so. Offset it with a decrease in the payroll tax. Jindal gets points for promoting domestic energy production.

Good: On healthcare... Obama didn't use the term but what he described at one point sounded like Health Savings Accounts. Yes! Expand high deductible insurance combined with savings accounts which are tax free that can be tapped to pay for routine care.

Bad: No mention of transitioning away from employer based health care in the private sector. This stifles job creation and decreases dramatically the mobility of labor. How many people stay in jobs they otherwise hate because they depend on the health benefits?

Good (Great even): Obama plugged charter schools. Do progressives now have cover to support charter schools? Can mayors start pushing them more aggressively? Will the Tennessee legislature expand the option so that kids not from "failing" schools can go to a charter school? Jindal was even better here. He talked of enabling children to go to parochial schools.

Bad: Enough with the obsession with the goal that everyone should go to college. Cite all the statistics you want on income but correlation is not causation. You can be a very productive citizen without ever stepping foot onto a college campus. Subsidies for college have enabled colleges to increase tuition far above the rate of inflation for long enough.

Really Bad: Subsidizing early education is a joke. Where does it say that putting four year olds in classrooms is the only way to educate them? Talk about a power grab. This is government reaching toward the cradle. Is it now a radical idea to think that families are more capable and better suited to raise kids? Show me one shred of evidence that suggests that kids scribbling in classrooms has any long-term positive impact.

Good: Jindal acknowledged the reality that Republicans lost credibility on fiscal discipline.

Good: Two smart guys spoke, were positive, and laid out fundamental differences. Bobby Jindal, Mark Sanford, and Tim Pawlenty impress me as worthy candidates. Nothing against Sarah Palin; she has a great story and I can relate to her on many levels but she is not in the same league.

Who cares?

The nation not only needs the injection of money, it needs to see that somebody somewhere cares about what is happening.

That from yesterday's staff editorial in the Tennessean defending the federal fiscal stimulus. Hard to argue such a point - that it is important, necessary even, for people to understand that government cares - but the argument is worthwhile nonetheless. However, it is not so much a matter of whether to care or not but rather how that caring manifests itself. Let's assume that the primary purpose of the stimulus is to alleviate suffering rather than to "jumpstart" economic growth. Seems there is a powerful argument to be made that the massive spending is not focused enough on alleviating suffering, that it is unclear how spending designed to bring alternative energy to market or weatherize government buildings does little, in the short term, to alleviate suffering.

Also noteworthy is that some folks are doing well due to the downturn. Dollar General revenue is way up, shoe repair services are doing a brisk business, and seed companies are selling more seeds (I just placed my order). Apparently Breyer's is selling more ice cream. Used car salesmen are very busy.

Defending the fiscal stimulus package is one thing but shouldn't there be some mention of the trade off? Some mention that some sectors of the economy are counter-cyclical, that the market does work and we see plenty of evidence?

The notion that people who favor and promote free markets don't care has to be challenged. At times like this it is helpful to listen to a smart Jew and a dumb Irish-Catholic.

Are you biased?

You're invited to watch this short video. Watch it and count how many times the players in white shirts pass the ball. See if you can get the right answer. Do this before reading further. Don't cheat.

Now watch the video again.


Now watch the video again. This time don't bother counting anything just try to get the big picture. See anything now that you didn't notice before? Did you see the stimulus bill, I mean animal, passing through?

The third economist

One local economist has a pretty good diagnosis but doesn't offer much in the way of a solution. Another economist offers a solution but I think it is the wrong one. The current downturn is difficult to diagnose and solve in a 500 word op-ed.

Dr. Grant from Lipscomb offers this...

There is a mistaken belief that falling home prices are the cause of the crisis in the financial industry. The real reason is the failure of many borrowers to live up to their loan agreements.

Ouch! That's true, but simplified. Increased foreclosures have driven home prices down. As soon as home prices stopped rising foreclosures increased. The initial foreclosures were primarily speculators - had little or no money down and counted on ever rising prices. As housing prices started to fall consumption decreased, the financial sector that held mortgages was rocked, and unemployment started to rise. The downturn has made it more difficult for others to pay their mortgage, people who were not speculating but maybe lost business or their job as the result of the downturn. It should be added that the distinction between a speculator and a responsible homeowner is unclear. All people who buy a home hope for appreciation and many tend to reach to buy as much home as possible, to leverage their money. The Lipscomb professor goes on to say...

Not understanding this, the Treasury Secretary wants to prop up home prices, and also wants to prevent foreclosures. To the extent that he succeeds, he will prevent the home market from adjusting to reality.

True again but simplified. It is understandable that policymakers are trying to prevent a further collapse of home prices. That will yield more foreclosures, less consumption etc. However, the housing market might still be over-priced. Generally we want rapid adjustment in markets. That's why I think we will see higher rates of inflation. With an increase in inflation we can have housing prices increase in nominal terms but continue to adjust in real terms.

Dr. Wahid from TSU wants to use all of the TARP money to buy up the toxic assets.

Thus, I suggest the government help financial institutions to clean up the toxic assets from their balance sheets with the entire $700 billion TARP fund. If the government does not do that, then to straighten out the bad balance sheets, it might take as long 10 years for the financial institutions to clean it on their own.

I prefer nationalizing the insolvent banks. Sounds bad to someone who prefers the free market but it shouldn't. It is like bankruptcy. When a firm is failing or struggling they can get bankruptcy protection. Bondholders, those who have loaned money to the firm are paid off at a steep discount. A judge often presides over the procedure. Often management is removed and the firm taken over by new owners. When it comes to banks the people who have loaned the bank money are not bondholders but depositors. Deposits are insured by the FDIC, the government. The government has an important role to play - come in, clean house, and sell it to investors in the private sector.