DeptofNumbers reports:
I’ve long wondered what median income would look like after taxes were taken into account and if the structure of Lane’s chart might change given the dynamic nature of tax policy. Bruce Bartlett’s recent post on average tax rates for four-person families pointed out the data I needed to make such a comparison. The Tax Policy Center produces annual average tax rates for four-person families at the median income level. Using their historical data I can back out the growth of after-tax median family income since 1980 (just after GDP per capita and median family income start to diverge) and add that data to the chart that Lane produced.
…The results, though not earth shattering, are interesting. Prior to 2000, both real (i.e. inflation adjusted) median family income and real median family income after taxes grew at about the same rate. Real median family income has actually declined since 2000, but when you look at after-tax dollars received by households it’s been relatively flat. In other words, the median family has been able to avoid a more substantial decline in income by paying somewhat less in taxes. [emphasis added by TC]
There are useful graphs at the link. This of course is one big reason why raising taxes — or even ceasing to cut them — is an unpopular idea with the American electorate.
And this is a surprise to you? I guess you haven’t been following the IRS statistics on the shift of the tax burden to wealthier tax payers. The Bush tax rate cuts took many lower income tax payers off the rolls, although this effect (IIRC) has been going on since the 80′s. Sort ot puts the lie to the idea that the “rich” are not paying their fair share.
BTW – the charts reflect Federal taxes only.
Wrong.
According to IRS data, the average rate of the top .1% was 28% of adjusted gross income in 2001 and 22% of AGI in 2008.
Second, income growth in the top percentage of the distribution grew, whereas the lower percentiles declined, which also accounts for higher collection from one group and lower from another.
How’s this wrong? The top earners’ percentage went down 21% and the bottom’s went down 100%. A clear shift of burden to the top earners.
That was a joke, right? You don’t need anybody to point out how utterly stupid it is, because you were joking.
Right?
On the internet when people don’t do smilies etc sometimes it isn’t completely obvious when they’re joking that they aren’t being real stupid instead.
Actually, according to polling data, the American electorate is not against raising taxes. In fact they are for raising taxes on the upper income groups because they have benefited disproportionally. You can’t get blood from a turnip.
By “turnip” do you refer to HALF of all “taxpayers” who pay no federal income taxes at all?
Is it unreasonable that the poorest 1/2 pay little to no income tax, when they have such little income (about 30k or less)? They are still paying other federal taxes, state taxes, etc, so it isn’t as bad as the headlines “Half Pay No Taxes!” make out.
I don’t know what the solution is, but I’m not sure its as simple as “half pay no income taxes, they should pay more!” or for the rich, “They have so much money, they should pay more!”
I’d like to see a per capita flat tax. Every citizen pays the same dollar amount.
And we’d all like it if you didn’t say such stupid things on an economics blog.
Jim, couldn’t have said it better myself — good to know there are some reasonable people out there who don’t deal in absolutes.
^^^^^^
Haha! Good reply.
Personally, that would be a nice raise. I think Federal revenues are about 2 trillion dollars and there are 100 million households (give or take) so you just asked forty-four million Americans who live in poverty to pony up $20,000.00.
Holding revenues constant, which they wouldn’t be.
Sounds great, Mogden. Every newborn infant’s tax burden should precisely equal that of every Gates, Buffett, Immelt, and Bush.
I propose a head tax. Bill Clinton would be busted.
How many of these non income tax paying taxpayers are retirees? Are you suggesting levying taxes on retirees?
Does taxes on traditional IRAs count as taxes?
You guys are being pretty hysterical, and not in a good way.
$2 Trillion divided by 350 million comes out to $5714. So, everyone would owe $5714 per year. Maybe we give the kids a break and we’ll call it $6500. That’s before we stop spending what we have to borrow and before we get rid of all the low return / high risk expenditures like elective wars.
Pretty soon we are down to a reasonable amount and a more reasonable government.
So you are advocating for taxing seniors. Thanks for clarifying.
The objective is never to balance the budget. The objective is always to optimize the budget. Fiscal optimization at any level of public spending requires balancing tax revenues with spending while running deficits at a rate corresponding to users saving rate. Government debt of a currency issuer is the currency user’s savings as a matter of double entry accounting. It is a digital resource – a digital account corresponding to all the savings of currency users’ in banknotes, deposits, and treasuries.
Suboptimal fiscal policies lead to excess capacity, reduced throughput, poor labor utilization, and opportunity costs. The opportunity cost is the missed opportunity to spend on R&D that can subsidize next generation technology for the private sector.
Because, of course, the way to REALLY grow an economy is to make certain that government sops up any month that might be lent to businesses. (Those bastards!)
I’m sympathetic to the reasonableness of fiscal optimization and everything you wrote, but take a moment to consider that we have lawyers crafting the budget. Lawyers. Have you seen many lawyer’s personal balance sheets & P/l statements? If you have, you might prefer a less reasonable, but more useful, balanced budget amendment, like California’s (..little joke there).
Is there a book on your topic?
I don’t get the last sentence. Only the Dems want to raise taxes. And they aren’t raising them on the median income population. So, no, that isn’t why. Emotional partisanship from the ignorant is why they’re against taxes in any way, shape or form to pay for anything that might benefit anyone else.
That’s right, the only reason why someone would be against taxes is “emotional partisanship.” Right. Couldn’t possibly because they have serious, well-thought out reasons! No, they must be deluded hacks who lack your more enlightened vision.
mjw149,
I’m against taxes because our government no longer does things that benefit the general welfare, it simply takes money from one guy and gives to another guy. I can see why Democrats would think that’s okay, but we aren’t even paying for it, which is one reason why it is unsustainable.
Nate, it can be perfectly rational to oppose higher taxes on yourself. For example, you might have succeeded in sucking a whole lot of money out of the economy and you want to keep it.
It’s less rational to think, “Hey, these other guys have succeeded in sucking the money out of my pocket and into theirs, and I want them to keep it”. But if the suckers can persuade the suckees to think that way, then more power to them.
Lots of people believe that when people get paid for something it is in return for providing a valuable service or good to someone else. Not everyone believes the “sucking a whole lot of money out of the economy” fallacy.
Yes, lots of people believe that if somebody manages to get a whole lot of money they must have performed a valuable service to get it, because there’s no other way they could get money than by delivering true value for the money.
It’s amazing there are so many of them left to prey on. I almost remember a quote from David Gerrold that went something like, ” There’s no such thing as a free lunch. Unless you are unwary and fail to do due diligence. Then you’re the free lunch.”.
Oh, btw, and it is the borrowing and the “tax the rich!” illusion that lets people get away with pretending we aren’t taxing ourselves to pay ourselves with DC taking a cut. If the middle class had to pay their way, they would realize how low return most government programs are and would reduce them and push the government towards solving coordination problems such as infrastructure projects rather than cash transfers.
I’ve never trusted median income as the true measure of well being, it leaves much out. This NBER paper takes a broader, more refined approach and seems promising,
Using cross-sectional data to capture the economic resources available to individuals at the same point in the distribution over time, we find that the evidence of a middle class decline is far from clear, and that such results are highly sensitive to how available resources are measured. Thus, we will argue that the apparent failure of the median American to benefit from economic growth can largely be explained by the use of an income measure for this purpose which does not fully capture what is actually happening to the resources available to middle class individuals.
Exactly! Add to reported household income the value of employer supplied health benefits, the underground economy, the value of free K-12 education for its juvenile members and the value of consumer debt written off or discharged in bankruptcy, and a lot, if not all, of the gap that remains after the author’s admittedly useful exercise will disappear as well.
Working just with reported income is like the drunk looking for his keys under the lamppost because that’s where the light is.
Working just with reported income is like the drunk looking for his keys under the lamppost because that’s where the light is.
Yes! So, if we consider all the secret numbers we don’t have access to, and make up values, we’re almost sure to get much more pleasing results.
Like charting inflation by reference to improvement of a device that makes telephone calls, sends electronic mail, contains a rolodex and Yellow Pages, calculator, typewriter and Encyclopedia Britannica from 1960 to present?
My belief is that technology isn’t deflation. Does anyone have an explanation on why inflating prices are better than stable prices other than supposedly providing a cushion between inflation and deflation?
Yes, how can we make an objective measure of inflation? Lots of products, some necessary for survival, some trivial and all inbetween, and the prices go up and down while some of them get replaced by new ones with different mixes of functionality. But we really want to measure something, so we try.
If the scientists who study ecology were this confused, they wouldn’t call it science.
Andrew, I can explain in layman’s terms why new technology turns into inflation in the absence of government or banks issuing new money.
I don’t think anybody can explain it in terms of real economics, because it doesn’t quite make sense. But if you’d like the layman’s explanation that kind of sounds like it makes sense, I’ll be happy to give it a shot.
You can certainly make a case for counting healh benefits? But public education has been supplied for a long time; it’s not like it’s some brand new benefit. and the actual value of a high school diploma had declined considerably.
The price of education has skyrocketed in comparison to the rest of the economy, just as health benefits have.
“This of course is one big reason why raising taxes — or even ceasing to cut them — is an unpopular idea with the American electorate.”
Really ? I thought half the electorate wants to raise them on the richest 1%. The other half would agree too, if it is framed as tax on those who outsource American jobs or take govt bailouts. Raising taxes on rich is a popular idea and with little message would be even more popular.
It seems that most people are OK with the raising of taxes on those who make comfortably more than they do.
I think the point is that if taxes actually paid for spending the folks would be PISSED!
I’ve had this same thought for awhile. I know correlation is not causation, but flat marginal income growth has occurred roughly contemporaneously with declining marginal tax rates, even for the middle class. My hunch is that, at a certain level, politicians have used tax rates to compensate for stagnant (and recently declining) wages.
Having seen nary a wage increase over the past thirty years while rich Americans became richer and richer and propagated their lifestyle to mainstream America, people started to see taxes as the easiest way to increase their income. It’s a lot easier to see how much taxes are costing you but virtually impossible to see the negative effects of weakened labor unions, Wall Street’s engorgement on debt, the ossification of Congress, revolving doors, &c. In business terms: when revenue is neutral, you cut costs to increase profits. Americans have been deluded into thinking of taxes as a cost and not what they are, a means to stable, happy life.
See more of my thoughts at: http://increaseourtaxes.com/wage-stagnation-and-income-taxes/
Increase our taxes, huh? Well, the treasury lets you make a voluntary donation to the U.S. government.
http://www.fms.treas.gov/faq/moretopics_gifts.html
Go ahead, do it! Pay your fair share!
Well, why should anyone give you the free lunch of higher taxes without you paying the higher taxes.
When the taxes were higher in each of the past eight decades, more jobs were created than in the past decade, and earning increased more in each of the previous decades. So, the tax cuts seem to drive the high unemployment and slower earnings growth.
Lower taxes result in suppressed public investment, such as in levies, roads, bridges, education, etc. That means the US becomes less competitive with Asia and Europe as they gain in efficiency and productivity and are able to increase employment and wages while forcing lower wages and employment cuts in the US.
But I have no incentive to pay higher taxes to fund investments that will benefit you. Especially as I’m older and got the benefits of the higher taxes my parents and I paid back before Norquist got good at forcing Republicans to cut taxes no matter how much it hurts the US future. I gain the benefit of lower taxes plus the benefits of past higher taxes, while younger people suffer the costs of lower taxes and will eventually end up paying higher taxes, or end up in poverty.
mulp,
This post says you have the cause and effect backwards.
“Lower taxes result in suppressed public investment, ”
I also think you have this backwards. It’s my suspicion that as the government started getting involved in paying people out of the treasury, that is when people started fighting harder to keep what was theirs and grab what was not theirs.
Think about it this way, if you give a guy a raise, does he become a better worker?
Likewise, if we just sent more money to DC, would that cause them to build bridges? I don’t think so.
So, you figure the cause and effect are reversed?
Back when people were building bridges and highways and so on, working hard to increase the common good, they created such a surplus that the government could raise taxes and they still had plenty left.
But then they quit being productive, and the government cut taxes at about the same time so they felt like they were still wealthy.
But now we’re feeling the effects of no productivity, and it doesn’t matter whether the government raises taxes or lowers them — there just isn’t much there to tax or to not tax.
It makes sense. So, why do you think we stopped being productive? If it wasn’t because taxes went down (which seems reasonable) and it wasn’t because taxes went up (which would be the opposite of the data) — what was it?
Here’s one possibility — in the old days, before around 1978, productivity went up and oil consumption went up at the same rate. We could just keep doing more of the same things, and production went up. With a shortage of skilled labor, we looked for ways to get more productivity from labor.
But when oil production stopped rising so fast, then we depended on innovation to increase production. And this is much harder than doing more of the same.
Rajan argues much the same in Fault Lines, only using the Fed’s suppression of interest rates as a means of stimulating credit and aggregate demand, where in this argument tax cuts are added as a means to sustain the declining fortunes of the middle and upper-middle classes. http://www.amazon.com/Fault-Lines-Fractures-Threaten-Economy/dp/0691146837
I am not sure I agree that taxes have gotten noticeably lower. What has happened is that the federal tax burden has decreased while the state and local burden has increased. Federal taxes are moderately more progressive than states and local taxes. Thus, a shift from federal taxes to state and local taxes should, all things being equal, increases the effective rate of the median taxpayer. Of course, all things are not equal, so I cannot definitely say whether or not this has occurred. What I can say is that you cannot determine the total tax burden trend using federal taxes alone, as was done here.
The largest, fastest, and most dramatic decline in taxes was for the high income wealth holders if you look at IRS data.
15% dividend rate. 15% capital gains rate. Both rates are largely innapplicable to the $46k wage income worker.
The average tax rate of persons in the top .1% of adjusted gross income declined from an average rate of 28% in 2001 to 22% in 2008 according to IRS statistics.
I guess they are not the median.
Not to be academic, but aren’t all these numbers about who “pays” what share taxes meaningless given that tax incidence were not calculated. Who really pays FICA? The employer or employee? Or in another instance, Exxon paid $6 billion in US ‘sales taxes’ in 2010. Who paid those taxes? The company or the consumers?
So, tax cuts only offset the pay cuts for many Americans? And these tax cuts were deficit-financed, so we as a nation will continue to pay interest to keep them? So the ‘job-creators’ can create almost enough jobs to keep pace with working-age population growth? Sounds great. Let’s cut those onerous, job-killing tax rates some more. /snark
“Are we using tax cuts to make up for median house income?” Interesting question and interesting data…I don’t believe directly. Lessening the tax burden I believe is making up for our declining ability to create value. What I am experiencing as a value creator myself, is a struggle to find skilled labor. In the past year i have gone from 37 employees to 53. However, throughput has not increased as fast because the new hires require a huge investment in training which makes it difficult to create value.
Hey, but thanks to not having the burden of pensions you don’t have the golden handcuffs on your employees so as soon as you get them well trained, they can jump to your competitor. Maybe some more tax cuts can offset that cost. Some more tax cuts to offset the health care costs that are twice those of your competitor in Israel, Germany, Japan, places where the government is much more involved in providing skilled workers.
mulp makes an interesting point, although pensions should not be used for indentured servitude. There could be other mechanisms to reduce or recoup the costs of training.
One thing is that the company could offer themselves or partner with a certification company and pay the employee an apprentice wage during the training period. Advertising this would let the employee know that he’s not taking a risk learning skills that are entirely non-transferrable. It also keeps the employee out of the way when he is ZMP.
I imagine this might run afoul of antidiscrimination laws if done as a formal policy, but if you’re worried about new workers absorbing your training and then jumping ship to a new job, wouldn’t one answer be to look for older workers, particularly ones with kids? Being older, settled down, with a spouse and kids and a mortgage, makes you much less willing to jump to a different job.
Advertising this would let the employee know that he’s not taking a risk learning skills that are entirely non-transferrable.
You could advertise that even if the skills were entirely non-transferrable.
Caveat emptor.
First of all, it is not true that tax increases are unpopular with the electorate. Every poll that asks about options for reducing deficits finds that increasing taxes on the wealthy is popular.
Second, I believe there is a case to be made that the much lower top marginal tax rates since Reagan have contributed to falling median wages in the face of increasing GDP per capita. Executives have more incentive to pay themselves rather than their employees when the marginal tax rate they face is 35% rather than the 70% paid by their predecessors in the 1970s.
Executives have more incentive to pay themselves rather than their employees when the marginal tax rate they face is 35% rather than the 70% paid by their predecessors in the 1970s.
They have more incentive to pay themselves salaries rather than take out the money some other way.
Why would they give the money to employees either way?
“If I can’t have it, why should I let you have it?”
Having lived in The Netherlands for 3 years, I have come to believe that the government structures in the US are very inefficient. Taxes are higher in NL, but they seem to enjoy a much higher level of effectiveness. That is especially true of public works projects and transit. Americans are right to distrust higher levels of taxation until we become much (and I mean MUCH) more efficient.
Having lived in the Netherlands for about 25 years I have to disagree. Public works are not efficient, it is not uncommon for them to go 3 a 4 times over budget. Health care is probably more cost “efficient” because we don’t keep track of medical errors and ration it (ie have waiting lists). I’m interested in your frame of reference though, as i would call the dutch public sector relatively inefficient. Maybe its worse in (some parts of) the United States though.
We have waiting lists too. Let’s not pretend to virtues our system does not possess.
Public works are not efficient, it is not uncommon for them to go 3 a 4 times over budget.
It could be a political thing how much the government wants contractors to lowball the estimate. The big deal isn’t how much they pay above the original estimate, but how efficiently they actually create stuff.
Health care is probably more cost “efficient” because we don’t keep track of medical errors and ration it (ie have waiting lists).
If the USA could ration medical errors I’d be tickle pink.
Haha, ration the care of course.
JSK, I am a native New Yorker, so I am comparing public works in NL to states in northeast. New York is horribly inefficient with public works, much worse than NL. 3-4 times over budget would be a good for NY. And things actually get done and work well in NL. Compare the LIRR with the dutch trains to see what I mean. In terms of health care, it seemed that it costs less than in the US, and provided better care, at least for me (I don’t have any big health issues). .
Hmmm.. my girlfriend is from Mass. and not a day goes by when she is surprised by the level of negligence in the public sector. She has a somewhat major health issue though. Do you live in Amsterdam?
JSK, I lived in Den Haag for 3 years. To be honest, I heard some Dutch people say the same thing as you, but I think they do not know how bad we have it in the US, and there is a natural desire to complain about things. Reihan Salam has had some posts about the government efficiency and quoted a study that showed the US was in 67th place in that regard. Between the Dutch water projects, trains, trams, roads, buildings, and comparing that to the US, I have a strong belief that the government in NL is more efficient and better run.
Five, Perhaps you are mistaking what we spend money on for inefficiency. What is the percentage of military spending of your budget? It is 58% of our discretionary budget, not including VA, parts of dept of energy.
This is an important point. A big chunk of our taxes (and deficit, which is unsustainable and must end up costing us and our kids in the future) go to supporting our gold-plated military and periodic wars of choice. (Are we up above a billion dollars on Libya by now?) In some sense, where many other first-world countries are getting universal medical care and a generous social safety net for their taxes, we’re getting super high-tech missiles, submarines, airplanes, etc., plus the joys of occupying and bombing a whole lot of poorly-armed foreigners.
In other words, the opportunity cost of being the world’s police is the ‘surplus liberty’ of participating in America’s vaunted free-market health care system.
This is why we should implement the millionaire or billionaire tax. All those people (middle income and lower) whose incomes have stagnated and don’t want tax hikes on themselves should go for it. The money from the taxes could be transferred to them or used to pay off the debt. If these people don’t support it, would they not be ignorant or not acting on their personal economic self-interest? Seems to me that either would be the case
What if causation goes in the other direction: namely that wages have declined because people pay less in taxes. This would be consistent with the natural forces of supply and demand.
Govt. should take tax only ones. As we see govt often get more tax by the good industrialist and common men. But the black marketer persons often has never pay any taxes .
Comments on this entry are closed.