Matthew Lilley on Saez and Zucman

From an email:

The eye-catching result here is they have consumption taxes being *sharply* regressive, e.g. 12% for the lowest income group. I’m not aware of any US state that has state + average local sales rates tax that high. And lots of goods are exempt from sales tax. So how do they get this? Well, suppose someone earns $1k in labor earnings and gets $9k in transfers, and consumes it all paying a 5% sales tax = $500 in tax. What sales tax rate have they paid (as a % of their income)? The method Treasury uses says 500/(1k+9k) = 5% (this is also what Auten-Splinter do). Saez-Zucman exclude transfers from the denominator, and thus say 500/1k = 50%. This is a matter of definition, so it’s hard to call it right or wrong, but it does seem misleading and yield some rather nonsensical implications. For example, it means that if welfare to the poor is increased, this will be measured as an increased tax rate.

Indeed, Saez-Zucman themselves seem to realise that this definition yields extreme numbers at the very bottom, where consumption tax rates can easily exceed >100%. In their appendix – https://eml.berkeley.edu/~saez/SZ2019Appendix.pdf  – they note “People with very low pre-tax income (below half the federal minimum wage) earn transfer income (temporary assistance, SNAP, supplemental security income, veteran benefits, etc.), which is not part of pre-tax income. They pay sales taxes on that transfer income when it is consumed. As a result, they have high (sometimes very high) tax rates as a fraction of their pre-tax income. We avoid that problem by restricting the population to adults with more than half the minimum in pre-tax income.

This is quite remarkable.  If the sensible way of defining tax rates involves excluding transfers from the denominator (as they claim), the fact that it leads to very high rates by construction at the bottom should be because this is a sensible summary of reality. Yet, in their own words, it’s a problem. Rather than switching method, they drop the people at the very bottom which conveniently covers up the problem (but leaves a less severe version of the problem in their remaining lower income sample). Of course, they could have just used the standard definition which includes transfers in the denominator, but doing this destroys the entire headline result.

It also seems noteworthy that in choosing to excluding transfers, they nonetheless retain payroll taxes. It seems pretty egregious to call payroll taxes regressive when social security is implicitly an insurance scheme with a very large degree of aggregate progressivity, but this is a minor point by comparison.

Comments

Incredible if true. What they’ve done is redefine “tax rate” in a way that actually goes up when you collect more checks from the government! Thus the rich still pay high tax rates as we’ve always thought, but now the poor pay even higher tax rates! It’s literally restating what we’ve always known, that the rich pay a lot and the poor collect a lot, in a bizarro language where we draw the reverse conclusion. Black is white, down is up, and less really is more. Someone give these geniuses the Nobel prize.

War is Peace
Freedom is Slavery
Ignorance is Strength

https://www.barnesandnoble.com/w/online-marketing-tips-and-methods-corey-cananza/1134801072

Ah, Ram, it's only the counterfeit Nobel Prize. Which, on second thoughts, would be entirely appropriate.

"Economic Sciences" indeed! Is lying a science?

But this is the logical extension to the "all taxes are evil" ideology.

By the logic of conservatives, I was much better off in 2003 than I was in 1999 because my tax bills fell from $35,000 to $8000.

1999 was high due to forced capital gains recognition due to a merger involving stock plus cash on top of $100K income with tax exempt "Cadillac" health care.

In 2003, I was selling that stock at a loss while unemployed, paying tuition, property tax, plus paying $5000 for health insurance.

According to conservatives, I was much better off thanks to Bush economic policies and tax cuts that focused high rewards on profits.

Ie, not paying workers, ie, promoting cutting wages and benefits and firing workers.

Milton Friedman argued circa 1970 that the 50% business profit tax promoted paying too many workers too much in wages and benefits because "the IRS pays 50% of all wages and benefits".

Today, the reward for cutting labor costs is 79% of every dollar not paid to workers after the IRS takes its cut, up from 50%.

Plus workers pay lower taxes, which means workers benefit from being fired. Their lower tax Bill's more than make up for the lost wages, according to conservatives who argue that taxes are far worse than low wages, or no wages.

"By the logic of conservatives"...

Well, no bias in that interpretation of the logic of conservatives. Let me make it simple: Conservatives favor smaller and less intrusive government and lower taxes. We also favor Democracy where the people and not the elite make the laws and regulations. You seem to favor higher taxes. You do know that the IRS will allow you to pay more if you wish?

Conservative loyalty to one dollar, one vote knows no bounds.

The US payroll tax cum pension payout is NOT regressive, it is proportional. Up to the income cap, you pay a fixed share of income and get whatever in return. On income above the cap, there is no tax and there are no benefits. One can call the tax by itself regressive, I suppose, but the tax plus transfer scheme is not.

It is so important to include all income in these calculations.

The “get whatever” part, aka the benefits, are calculated using a formula with built in progressivity (poor get a higher pct).

However poorer people generally die younger so they collect those benefits for fewer years.

Poorer people die 3 years younger than those in the high income group so that isn't a big difference.

https://www.sciencedaily.com/releases/2018/10/181029165555.htm

Odd that a non-living wage tax rate garners more attention than a living wage unemployment rate. Would "eye catching" perhaps describe the number of non-living wage earners in the August 3.7% unemployment rate?

We're getting to the time that we need to accept that Saez, Zucman and Piketty are doing politics, not economics. And treat them as such.

Take the wealth distribution numbers from an earlier paper for example. It entirely excludes all the effects of the welfare state.

Ridiculous.

Others here begin comments, "Why we can't have nice things . . . "

Cato Survey: "Young Resent Rich More Than Previous Generation."

Wonder why?

Class Envy Uber Alles.

The reaction to Saez-Zucman reminds me of the different phases of the reaction to Piketty, ranging from questioning his motives to questioning his data to questioning his methodology to questioning his thesis (r>g) to questioning the entire point of his study (that inequality is a problem that needs to be addressed). Of course, the point of the attack is self-fulfilling: it's just more fake news from liberal academics promoted by the liberal media. I prefer the honest approach: inequality is good so get over it! Why shouldn't the wealthy be rewarded for their efforts. After all, they are wealthy because they provide the fuel (capital) for economic growth and prosperity, while those without wealth have their own profligacy to blame for their relatively inferior condition.

The American public has a short attention span (to the extent the public pays any attention), making it rather easy to divert the public's attention. Besides Piketty and Saez-Zucman, there's Boeing, which has (so far) successfully diverted the public's attention away from the defective design of the 737 Max and, instead, focused the public's attention on the MCAS. Why has Boeing done this? Because if the focus is on the defective design, Boeing will have to scrap the hundreds of aircraft Boeing has already built, effectively ending Boeing's existence.

And Boeing’s CEO made $24 Million last year........he must have supplied a lot of “ fuel for economic growth and prosperity”.

When rayward reduces the article to Of course, the point of the attack is self-fulfilling: it's just more fake news from liberal academics promoted by the liberal media.,

he is showing he hasn’t read the article. The article is making the claim that their methodology is suspect and that this should cause us to have doubts about their conclusions. Do you have a rebuttal to that or is this more rayward mood affiliation posting?

There is not a defective design in the 737MAX airframe. All modern commercial transport aircraft have those flight characteristics and use a version of MCAS. The design, btw, is not unstable like fighter aircraft. Yes the Airbus 320 has MCAS too. It is not about the landing gear height. The frame in the news about the 737 was all wrong as the news increasingly appear to be today -- playing for drama and clicks not fact.

Yes, we should celebrate people who get wealthy by hard work. We should also be careful of those who get exceedingly wealthy by artificial constraints that the system confers on them.

So, for example, I'm very supportive of many tech startups rewarding the innovation of their founders. I'm less excited about awarding exceptionally long copyright or patent periods for things that don't really qualify as innovations, and just act as barriers to competition. I like incentives for companies to make new drugs, I don't like that a combination of very long clinical trial periods via the FDA and long patent periods mean exceptionally high drug prices and high profits.

So my view is that there are some legitimate concerns about inequity where that inequity isn't rewarding innovation or hard work or inspiration, but rather rewarding land grabs or privatisation of public goods of one sort or another.

Looked at that way, we should be spending time dealing with barriers (occupational licensing, patents, copyright) that have crept to be far bigger than the original concepts intended them to be, and less time just flat out complaining about wealth.

I disagree that counting wage taxes that fund the SS and Medicare trust funds, "regressive." The trust funds could and I think should be finance otherwise, say with a VAT or as part of the way in which a tax on net carbon emissions could be made revenue neutral.

.."I’m not aware of any US state that has state + average local sales rates tax that high." 12%

Clearly our California is a foreign country to Matthew Lilly.

Is there any locality (let alone the average) in CA with combined (state + local) sales tax that high? https://en.m.wikipedia.org/wiki/Sales_and_use_taxes_in_California

I wouldn't be surprised if there is slight disagreement between sources (e.g. how to weight localities and what precise population numbers are used) but no state looks close to 12%. https://taxfoundation.org/sales-tax-rates-2019/

What is "close to" 12%? Chicago, Long Beach, and Pasadena are are 10.25%. Seattle is 10.1% (and WA has no income tax).

And it isn't just a west coast thing. Montgomery is 10%, Baton Rouge 9.95% (4 of the top 5 sales tax states are red states).

No, 10.25% is not 12%, and that is an oddity in the paper, and a bit disingenuous on their part. But also disingenuous is you implying 12% is outlandish. I say disingenuous because the very thing you are linking to lists *average* sales tax rates across states: many of them are at or above 9%, and you know how averages work (e.g. the highest sales tax rate in CA is 2% points higher than the average).

From SZ Appendix...
- their source has consumption tax paid by the lowest quintile as 10.5% average across all states. The worst ten states' average is 12.6%.
- SZ scale the consumption tax by 0.7 to assign the consumer share. ("we assume that 70% of consumption taxes are paid by consumers and 30% are paid by factors of production (labor and capital).")

So it seems to me the effective consumption tax should be 7.35% by their methodology. I didn't look at the source's methodology and it's possible I'm misunderstanding to which measure their numbers correspond.

"No state looks close to 12%" (citing a source in which the highest state has a combined average rate of 9.47%).

"What is "close to" 12%? Chicago, Long Beach, and Pasadena are are 10.25%. Seattle is 10.1%...Montgomery is 10%, Baton Rouge 9.95%..."

Of course, none of those are actually states!

"But also disingenuous is you implying 12% is outlandish. I say disingenuous because the very thing you are linking to lists *average* sales tax rates across states"

So it is disingenuous to make a claim about the highest "state + average local" sales tax rates by citing data on state + average local sales tax rates? Of course some localities will have higher rates than that! The link I provided has information on that too, and from a quick eyeball nothing looks 12% or above.

The point here is relatively simple. The average sales tax rate paid by the poorest 10% of the population is going to be some weighted average of tax rates across different locations. It is exceedingly unlikely that it is higher than the average rate in the highest state. This is what makes the numbers look immediately odd. This suggests one should look at S&Z's methodology to understand what is happening. And upon doing so, it turns out that the 12% number is an artifact of a particularly questionable methodological choice. Take that choice away, and the number won't be anything near 12%.

California has many "hidden" regressive taxes. The sales tax is obvious and not hidden. The hidden taxes included, but are not limited to: gasoline tax on the most expensive gasoline in the nation (except HI, and I know all about the special formula so you can save it); carbon tax on fuels that shows up in gasoline, propane (used by people without access to natural gas and tired of CA's outrageous electricity costs), and electric bills; DMV taxes; tax on water; tax on refuse removal and waste management; tax (deposit) on containers which can no longer be redeemed, etc. Poor people, especially working people not eligible for transfers, pay many regressive taxes. Considering housing is prohibitively expensive everywhere on the state except in third world agricultural communities, it is very hard for the working poor and lower middle classes to live in CA. Like the frog in the slowly warming pot, they live in CA on borrowed time as communities become gentrified. Very soon it will be a state of the elite and the poor on welfare.

At first glance it doesn't seem logical to discount transfers when calculating tax rates to see how regressive they are but it is absolutely the only way to do it.

Looking at any particular case, the person involved can seriously only be concerned with what percentage of total available cash is taxed. However, when you look at a person moving upwards in income it becomes obvious how imbalanced we have become. You make and extra $10 k per year and you lose $5 in transfers. A couple of years ago I did the calcuations on moving from $30 k to $40 k salary for one particular case. Between income taxes, social security and loss of Obamacare subsidies it was possible to come out with slightly less disposable income after a $10 k raise. That point was something of a fluke since the Obamacare subsidy went to zero there but in general I was seeing something like a 50+ % tax rate as someone climbed off the government dole to self sufficiency.

The issue is that if you say "a fifty-percent tax rate" with no further data in your news story then people will assume you mean that fifty percent of all money goes to taxes, which is not true even a little tiny bit.

So if transfers are not included in their calculations what is the point of increasing taxes? Where will all that money go, to the military? Without some calculation of societal welfare including transfers their project is doomed as having no functon to optimize or even reflect results. One suspects that is on purpose since the argument is weaker when reasonably framed.

Take a further step back from the misleading techniques and challenge the ethics of altruism that is the foundation of class envy. Who other than Ayn Rand has been willing to attack this at its ethical root?
Only a handful of academics really care if Picketty is lying with statistics, if they feel he's lying for a higher moral truth.

Really seems like they juked the stats to get the outcome they wanted.
SSDD

The typical most-common sales tax rate in Alabama (state + city combined) is 10%.

Alabama does not exempt products from sales tax unless the buyer has an exempt number (largely, those who are buying for manufacturing or resale).

So far as I have encountered, prescription medications are the only consumer product not subject to sales tax in Alabama. Food and everything else I've ever purchased has been subject to sales tax, unless I purchase produce directly from a farmer/grower at a state sanctioned farmers market.

True. But Alabama is a rare exception in this.

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