July 12, 2012
Data on Tax Rates, by Quintiles
Or, where have you gone, Todd Henderson?
About two years ago, law school professor Todd Henderson complained about the difficulties of making ends meet on slightly more than $250,000, as a way of arguing against the proposal to allow the Bush tax cuts expire for incomes above $250,000, since he was not "rich" in his own estimation. Given the CBO’s release of the actual (data based) estimates of tax rates , I thought it useful to revisit the debate over the plight of the top 1%. Professor Henderson took down the blog post soon after posting, and most repostings have been expunged from the Web, but fortunately one can find a repost of this gem here. The key quote:
... Our combined income exceeds the $250,000 threshold for the super rich (but not by that much), and the president plans on raising my taxes. After all, we can afford it, and the world we are now living in has that familiar Marxian tone of those who need take and those who can afford it pay. The problem is, we can’t afford it. Here is why.
The graphs based on the CBO data are quite striking, and are at variance with the beliefs held in the fevered imagination of some commentators that taxes have risen enormously under the current Administration.
Figure 1: Average Federal tax rates, by pre-tax income quintiles. Figures in parentheses are the incomes at the bottom of the respective quintiles for 4 person households. Source: CBO, The Distribution of Household Income and Federal Taxes, 2008 and 2009, supplementary Excel file.
Note that the highest quintile bottom income is $148.1K, substantially below the Todd Henderson figure (either self-reported or estimated by others). The following graph shows that the Todd Henderson household is probably at the bottom of the 96-99th percentile.
Figure 2: Average Federal tax rates, by pre-tax income quintiles. Figures in parentheses are the incomes at the bottom of the respective quintiles for 4 person households. Source: CBO, The Distribution of Household Income and Federal Taxes, 2008 and 2009, supplementary Excel file.
One last observation: I know that there will be the usual talk about the onerous burden placed on the “job creators” (a euphemism applied indiscriminately to those households with high incomes) deterring growth, should Federal tax rates rise to those prevailing during the Clinton Administration (during which time per capita income growth exceeded that during the EGTRRA/JGTRRA era). However, there is no obvious correlation between the tax rate applying to the top quintile and per capita GDP growth.
Figure 3: Scatterplot of per capita GDP growth (Ch.2005$) against tax rate on top fifth quintile, 1979-2009. Nearest neighbor fit, tricube local weighting, bandwidth = 0.7. Source: BEA, CBO, and author’s calculations.
For those interested, linear regression yields a slope coefficient of 0.35, significant at the 20% msl. Over the time period of the EGTRRA/JGTRRA experiment (2001-09), the slope coefficient is 1.32, significant at the 6% msl. This is not proof that higher tax rates cause faster growth (since one can’t impute causality without additional structure), but it surely puts the burden of proof on those who assert strong negative effects arising from higher tax rates.
Update, 8:20pm: From The Hill today:
Upper-income tax cuts ushered in by President George W. Bush are responsible for just 1/25th of the shift from projected budget surpluses to deficits over the last decade, according to Sen. Rob Portman (R-Ohio).
In his release, Portman cites a CBO study from June that laid out how a $5.6 trillion surplus over 10 years, as projected in January 2001, actually became $6.1 trillion in added debt.
In all, Portman says that the 2001 tax cuts on income, the 2003 tax cuts on capital gains and dividends, the 2010 extension of those rates and other policies from the Bush era account for roughly $1.85 trillion in red ink – or around 16 percent of the $11.7 trillion turnaround.
According to the Ohio senator, that also means that only around 4 percent of the swing was due to the tax cuts at the highest level. Around a quarter of the Bush cuts went to higher earners, Portman said.
I can partly replicate Senator Portman's calculations. Note however, he omits any of the additional net interest payments as part of the cost of the tax cuts.
The calculations regarding what share is attributable to higher income tax cuts are more difficult to assess, since Portman does not define "high income" in his press release. Using the $250K threshold, I would get a much higher proportion -- closer to 10%.
Posted by Menzie Chinn at July 12, 2012 12:00 PMdigg this | reddit
But if he only exceeds $250k by "not by much" then it's only that "not by much" that is subject to the increase, and that increase is what? 3.6%?
I don't know what "not by much" means. $5,000? Is he saying that a person who makes $255,000 a year can't handle a decrease in after-tax income of $130 a year? 50 cents a day? On a gross income of $250,000 that 50 cents a day is essentially a rounding error. He didn't even quote his own income to the nearest one hundred dollars. He didn't even quote it to the nearest thousand dollars, but this less than one-tenth of one percent of his gross income will make or break him?
The only explanation that makes sense is that he doesn't understand the concept of marginal tax rates.
That, or he's lying when he says his income doesn't exceed $250k by "not that much" (or possibly, his definition of "not that much" means tens of thousands of dollars.)
Posted by: Nylund at July 12, 2012 12:27 PM
"The graphs based on the CBO data are quite striking, and are at variance with the beliefs held in the fevered imagination of some commentators that taxes have risen enormously under the current Administration."
I’m confused. To what "current administration" are you referring? Your graphs end in 2009.
Posted by: Fonzy Shazam at July 12, 2012 12:36 PM
Fonzy Shazam: Unless I am mistaken, ARRA reduced taxes for CY2009, under the Obama Administration. You are correct that the CBO data do not cover 2010 and 2011; I suspect given the various tax measures implemented since ARRA, and the extension of the EGTRRA provisions through end-2012, the story is much unchanged relative to 2009.
Posted by: Menzie Chinn at July 12, 2012 01:19 PM
Wow, just wow. I don't remember the last time I checked out your posts in my RSS feed, but I can tell you I just unsubscribed.
Not only does your graph not show what you says it shows, but you seem to conflate the administration's policy proposals with what actually occurred. The income tax rates have not changed much since 2009, but that is not due to this administration's planning...
Posted by: brian at July 12, 2012 02:17 PM
brian: If your unsubscribing eliminates such nonsensical comments, then I thank you profusely your actions.
Posted by: Menzie Chinn at July 12, 2012 02:28 PM
In addition to the income tax rate cuts under ARRA, those making earned income receive a significant tax cut in the FICA holiday. For at least half the workers that FICA tax holiday is a lot more significant than either the Bush tax cuts or the ARRA income tax cuts.
Posted by: 2slugbaits at July 12, 2012 03:15 PM
A $250k income puts you in the top 4%, not top 1% (which is around $350k).
If you have children in private school, $250k gets whittled down pretty fast.
Posted by: Steven Kopits at July 12, 2012 06:58 PM
Right on cue, Menzie has taken up the President's class warfare gambit. Menzie seems to think that Henderson's blog post is a "gem" that is so ridiculous that he need not even bother to refute it. Let's see if that's right by looking at a hypothetical example based on the original blog post.
Prof X is a professor in the University of Chicago Law school and makes $150,000 per year. Doctor Y is a doctor at UChicago Medical Center who treats childhood cancer patients. She makes $300,000 per year. They have both spent many years in school training for their current positions and have incurred $500,000 in student debt. Because Doctor Y's job is so stressful and demanding, they decide that they must live near the University to avoid commuting time. That's especially important for her since she has long hours, is often on call on the weekends and can be summoned in the middle of the night.
Because they both work, they must hire a nanny for their three children. And because they must live in Chicago they are faced with the dilemma of sending their children to a subpar if not dangerous public school or to private school. Like so many parents in that situation, they choose private school.
Houses in their neighborhood go for about $900,000 and they have a 30-year fixed mortgage on $800,000 at 5% per year. They pay $15,000 per year in real estate taxes. They pay $50,000 per year for a full time live-in nanny. The three children go to a good private school, which charges $30,000 per year per student in tuition, typical for private schools. Because they both work long hours, they have a maid come in once a week for $100 and the yard mowed once a month for $100. Their student loan rate is 3% and they have selected the maximum payback period: 30 years.
To estimate their taxes, we can enter the above data into NBER's tax sim calculator for tax year 2010, which yields $105,480 in Federal taxes
and $12,570 in Illinois state taxes. Social Security taxes are $13,242 and Medicaire is $6,525.
Let's look at this couple's annual expenses.
real estate $15,000
student loan $25,296
Because Universities consider this family rich, they will have to pay the full price for college for 3 children. So, they contribute $10,000 per year for each to a 529. They also put away $10,000 per year into their 401K/IRA. They worry how they will retire with such a small annual
Given this budget, their remaining monthly income is (450,000 - 421,048)/12 = $2412. From this they must pay all remaining expenses: utilities, car
and house insurance, phone, car payments, gas, food, clothing, and art lessons for the kids. They don't feel rich at all. They certainly won't be taking any lavish vacations or visiting the local Porsche dealer.
Now the President comes along and pronounces that this couple is rich and has not been paying their fair share. He proposes that they go back
to the 39.6 marginal tax rate that prevailed during the Clinton years. Since taxsim computes their current marginal rate to be 28%, the net tax increase is (39.6% - 28%) X (450,000 - 250,000) = $23,200 or an extra $1450 per month. After the tax hike, they will have $2412 - $1450 = $962 per month for all those expenses. That hurts.
Prof X and Doctor Y aren't quite sure what to do. Cancelling cell phones and cable won't help much. They could fire the maid and yard people but they they'd have to do the work, which is not very realistic given their work schedules. They could save nothing for retirement. Or they could put less into the 529, thus transferring the tax increase to their children. Perhaps they could cancel their child's art lessons.
Prof X sees the President on TV vilifying him as a greedy rich guy who got a tax cut that he didn't need. His friends at the Booth school tell him Menzie Chin, Brad Delong, and Paul Krugman are doing the same on their blogs and calling it economics. In frustration, Professor X tries to explain on his own blog that given his circumstances he's really not so rich. But death threats from the kook left force him to take down the post and cancel the blog.
How does this story end? Here's one plausible ending. Sitting around the table one night, Prof X and Doctor Y realize the real problem is that they pay $140,000 per year in childcare and educational expenses. Doctor Y loves her job but she thinks about what she has to sacrifice to keep it: long hours, the pain of watching children
die despite her efforts to save them, and all those school events she has been forced to miss. Both Prof X and Doctor Y feel guilty that they don't see their children enough.
A thought has been growing in Doctor Y's mind for some time and has solidified with the financial pressure of the President's tax plan. Maybe it's not really worth it.
Maybe they should move to one of the nice Chicago suburbs with a good public school district. She could set up a private practice and work part time while the kids are in school.
So they do that. The buy a bigger, newer house for the same price and Doctor Y now makes $150,000 per year. Once they arrive in the Chicago suburbs, they find out the truth of course: even the top rated public schools aren't very good. The only reason they are top rated is that average test scores are high. And the only reason that test scores are high is because the parents educate the students outside of school. But that's fine. Doctor Y has more time now
and hires tutors just like her neighbors do.
What does their financial situation look like now? Let's return to taxsim to estimate the new tax burden and expenses:
tax hike $2,300
real estate $15,000
student loan $25,296
Here I've taken taxsim's 35% marginal tax rate (AMT at work) and added the tax increase of (39.6-35)% X $50,000 = $2,300. I've also assumed that they will pay $10,000 for tutors and lessons. Note they now are contributing $30K to their retirement funds, a real improvement. And they now have (300,000 - 261,757)/12 = $3187 per
month to cover their monthly expenses, despite the tax increase.
So what are the effects of the President's policies? Here's the teachable moment you've been waiting for:
1) By raising taxes, the President reduced revenues to the Federal and state governments. According to taxsim, federal revenues reduced by $105,480 - $60,564 = $44,916
2) The nanny got fired, thus joining the President's long unemployment line
3) Although commonly seen as better on women's issues, the President encouraged a highly productive women to sidetrack her career
Posted by: Rick Stryker at July 12, 2012 11:54 PM
The main issue could more Leonine, the return on taxes as opposed to the tax return filed. It may be worth to revisit few data such as:
The evolving ratios of government expenses to GDP,in the Euro area 17, government expenditures are monopolizing an average 50% of GDP. Shall we conclude that the private sector is guilty at 50 % for the poor performances of the economies and or few governments expenditures are meeting with long lasting decreasing returns and poor management.
Statistical Data Warehouse (Euro area 17 (fixed composition) - Total revenue - General government (ESA95)-EUR )
Econbrowser (Detachment from Reality and Innumeracy as Impediments to Rational Discourse) “The Bush tax and the economy Congressional service Thomas L Hungerford”
The fiscal laws were designed for an optimization of capital gains as opposed to a progressive tax on incomes and revenues. Markets have rewarded real estates, equities, bonds, they did so in proportion to the wealth (note that In the USA only 50% of the working population is investing in stocks, this number is even less in Europe euro area). It may happen that the benefits are far from being widely spread and more wealth concentrated.
Financial markets were structured as welcoming platforms, they were staffed and universally watched and monitored in accordance (please read comments Econbrowser Guest Contribution: “Labor Shares and Corporate Savings”)
The Modern times,may lead towards alternative fiscal policies.They should not change the high expectations for a better understanding of taxes,the reading of an efficient return on taxes
Posted by: ppcm at July 13, 2012 05:11 AM
The claims of difficulty living on $250,000 income need to be examined in the light of other factors. A family of four living in Des Moines has a far different cost structure than a family of four living in San Francisco.
The Des Moines family is probably buying a home and receives a tax subsidy [exemption] for the interest and property taxes. The family in San Francisco is probably renting a home and receives no such subsidy. The monthly payment by the Des Moines family for housing is probably in the $1500-2000 range. An 1800 s.f. home with one car garage in San Francisco will rent for $3500-4500 in a "middle class" neighborhood.
State taxes in Iowa will chew up far less than those in California. Utility costs in Iowa may be higher for heating, but electricity will be higher in California [due to that state's aversion to generating power in-state].
Gasoline costs in California will be 15%-20% higher than Iowa. Food cost will be slightly higher in California simply because the cost of doing business in higher in that state, not because of a lack of locally produced food.
So, to mock someone who says that it is difficult to get by on $250,000 without examining the context is an unfortunate lack of analysis.
Posted by: Bruce Hall at July 13, 2012 05:28 AM
Let me admit right away that under President Obama taxes have no increased as much as under other presidents, but is that because of leadership of President Obama? In truth if he had been given everything he has asked for taxes would be through the roof.
But consider what he has been given, many are calling it "Taxmageddon."
The following could go into effect at the start of 2013:
-Every one of the existing income tax brackets will ratchet up: the lowest 10% bracket will be hiked to 15%. The 25% bracket to 28%; the 28% bracket to 31%; the 33% bracket ot 36% and the 35% to 39.6%.
-Starting next year, the maximum rate on long-term gains is scheduled to increase from 15% to 20%, and the maximum rate on dividends to 39.6%.
-Investors in the two lowest income brackets who currently pay 0% will pay 10% on long-term gains and 15% and 28% on dividends.
-Workers will lose a 2% cut on social security taxes. That means an average $1,000 tax increase come Jan. 1 for virtually all workers.
-The $5.12 million unified estate and gift tax exemption will revert to $1 million.
-An estate and gift tax rate of 55%, versus the current 35%.
Notice that none of this takes into account the massive tax increases that will be imposed by Obamacare. no one knows what this impact will be because much of Obamacare has been put into the hands of the bureaucracy an, while Slug may be able to read minds, most of us can't. But we can see trends and the bureaucracy is never kind when it comes to taxes.
Praising President Obama for low taxes before we reach the end is like praising the executioner for not killing anyone the day before the executions are to begin.
Posted by: Ricardo at July 13, 2012 05:43 AM
$250K is really very good even for a family of four. But that misses the most important point. A very large segment of those claiming income of $250K are small business owners filing as "S" corporations. If you run a business you will understand that a very good margin is 4-5%. If taxes on this group of businesses increase as will happen with the expiration of the Bush tax returns you will see huge business failures.
Those who live off of a government paycheck of $250K do not understand what that small business owner will face with a tax increase. Just another victim of the blindness of "omnicient" central planners.
Posted by: Ricardo at July 13, 2012 05:50 AM
Then perhaps Todd Henderson should choose to reduce his "tax burden" by removing his children from private school (a self-imposed 'tax' increase) and utilize the public school system like the bulk of the 99%.
Posted by: Gridlock at July 13, 2012 06:11 AM
Starting with Henderson's blog post, and all the discussion about this in the media, including today, is that all Obama is proposing to do is restore the Clinton top rate of 39.5% on each dollar above $250,000 earned from the Bush rate of 35% and eliminate the special treatment of dividends. That means for each dollar above $250,000, you will be paying 4.5 cents more in income taxes. Not really in the same league as Trotsky's and Lenin's. This is a piece of information that is never mentioned. The media is of course terrible on it, but the Obama administration is terrible at explaining it since they seem to assume the whole country knows the wonky details. The President and spokespersons could just say, "for each dollar earned under $250,000, your tax rates will cut under present law (because if the law is not change we all go back to the Clinton rates, which really would be my policy preference), and for each dollar you earn above $250,000 you will pay just 4.5 cents more in taxes. This is especially fair since people stop paying the 6.5 % payroll tax on their incomes above $110,000."
Posted by: sherparick at July 13, 2012 06:28 AM
Couple of additional points:
1. There is a tax hike in the healthcare law, extending Medicare taxes to unearned income and raising the tax .9% on incomes over, I think, $200k.
2. The really stupid part of Henderson's argument is the Joe the Plumber idiocy: he's talking gross income, not net. A plumbing business that nets $250k would be amazing, but one that grosses $250k while paying some apprentices and for equipment and supplies is not. You pay taxes on taxable, not gross income. If Henderson pays a mortgage and pays state and local taxes - which he says he does - then he benefits from those deductions. He also has deductions for his dependents, including his own. His taxable income is not $250k. If it is, then his actual gross income exceeds $300k. Put aside that the 3% extra only applies to the bit over $250k; it only applies to the bit of taxable, not gross income over $250k. He's a fool.
3. Average tax rate calculations depend on income so it's somewhat misleading to note how low they are without noting there's been a drop in income. The point remains, however, that federal income taxes are historically as low as they've been since the 1920's.
4. If a person chooses to put his kids in private school, that is his choice. I can choose to do a lot of things, from gambling to saving every dollar for investment. I'm responsible for my choices. If that crimps the money I have, that's because I can afford those choices. You don't have to send your kids to private school. You don't have to gamble. You don't have to invest.
Posted by: jonathan at July 13, 2012 07:09 AM
"One last observation: I know that there will be the usual talk about the onerous burden placed on the “job creators” (a euphemism applied indiscriminately to those households with high incomes) deterring growth, should Federal tax rates rise to those prevailing during the Clinton Administration (during which time per capita income growth exceeded that during the EGTRRA/JGTRRA era). However, there is no obvious correlation between the tax rate applying to the top quintile and per capita GDP growth.
For those interested, linear regression yields a slope coefficient of 0.35, significant at the 20% msl. Over the time period of the EGTRRA/JGTRRA experiment (2001-09), the slope coefficient is 1.32, significant at the 6% msl. This is not proof that higher tax rates cause faster growth (since one can’t impute causality without additional structure), but it surely puts the burden of proof on those who assert strong negative effects arising from higher tax rates."
Interestingly this finding is supported by the tax literature on small businesses and job creation:
Small Business and the Expiration of the 2001
Tax Rate Reductions: Economic Issues
Jane G. Gravelle
From the Summary:
"The claim that small businesses are the primary creators of jobs is based on research published originally in the 1980s. More recent research has revealed some methodological deficiencies in these original studies and suggests that small businesses contribute only slightly more jobs than other firms relative to their employment share. Moreover, this differential is not due to hiring by existing small firms, but rather to startups, which tend to be small."
From page 11:
"How do taxes affect small business? Given the evidence that more job growth arises from new firms, evidence on the choice of self-employment may be more important than evidence on the behavior of existing firms. An extensive empirical literature on this issue is mixed, but largely suggests that higher tax rates are more likely to encourage, rather than discourage, self-employment."
So, to summarize the empirical evidence:
1) Small businesses have a slightly larger job creation rate than large businesses, because start up firms are almost always by definition small.
2) Higher taxes are more likely to encourage than discourage firms to start up.
Posted by: Mark A. Sadowski at July 13, 2012 07:40 AM
Rick the math on your tax increases are completely off you don't even understand what tax bracket someone making 450k is already in.
The 28% bracket ends at ~217k, and you forgot to account for standard deductions etc. The jump isn't from 28% to 39% it's from 33% - 36% and 35% to 39.5%. Let's just say 4.5 points for all income over 217k.
Now take 450k and subject standard deductions for mortgage, state income tax, 401k, I think 50k is a pretty fair estimate for deductions there leaving taxable income of roughly 400k.
400k-217k = 185k * 0.045 = 8,235 /12 ~= 686 dollars a month. I make a quarter of that I can could make that much less in a month and not even blink.
Posted by: Brian Richards at July 13, 2012 07:42 AM
Ah, yes. That socialist Obama wants to let the Bush tax cuts expire and return us to those dark days of despair, economic stagnation and soaring deficits of the 90s when professors and doctors stood on Chicago street corners selling apples for a nickel just to make ends meet.
Posted by: Joseph at July 13, 2012 07:43 AM
Todd Henderson is a coward. And he is probably very stupid too. Crying publicly about the taxes is something I would expect from a person who lost everything in the last crisis. Not from a guy who is richer than all of the bloggers talking about his case together.
But greed has never had any measure. So no surprise here. The only difference between Todd Henderson and us is that he can make this money.
Maybe he could try a new strategy. Canadian islands for sale are a good offer and interesting investment. He can build there his own private university and fight against the tax system.
I have learned one thing about the world. Countries with lower taxes and bigger tax evasion have greater inequality and more crime in general. So dear Todd, maybe you would prefer to live in a gold cage (something like oil miners in Nigeria), but I certainly would´t so please PAY your taxes.
Posted by: JB at July 13, 2012 08:07 AM
In Princeton, at least, many $250k earners are not small businessmen. Rather, they are two earner families with at least one parent in a high paying professional or technical job. They might be an biotech researcher at Johnson & Johnson and an adminstrator at the University. They will both hold advanced degrees; one of them may have a doctorate.
The live in a blown-out rancher with plastic siding, but with an addition in the back that helps you to forget what a junky little house it is in its bones. They pay $20,000 in property taxes.
They have at least one nice car, a BMW say, or maybe a nice second-hand Porsche (not so common, but not so rare, either). Their other car is a minivan.
They work hard. They travel extensively for their job--you'll see them working their Blackberry waiting to pick up the kids from school. They feel a responsibility to their family and community. The education of their children is a big priority.
By and large, they're really nice, well-educated people. They don't have a lot of free time. If you saw them on the street, you wouldn't give them a second look. They dress like everyone else. They think of themselves as middle class--privileged middle class, but middle class nevertheless. They may think of themeselves as academic or intellectual elites--which they actually are. They may be prominent in their own technical professions. But in economic terms, their lives are largely middle class.
Of that $250k income, they pay about $100k net-net-net in taxes.
Now, there is a significantly wealthier layer above this, folks making $400k+. They're lives are different. They take the two weeks skiing vacations and send their kids to camp in Spain. But at $250k in Princeton, you're not special.
Posted by: Steven Kopits at July 13, 2012 09:18 AM
The top quintile's average income is 223K so the average person/family in that quintile is ~ "rich" according to Obama. That quintile pays ~95% of all income tax and ~68% of all federal tax. Why don't we just ask the top quintile to pay 100% of the federal income tax.
The top 4% of earners pay ~64% of federal income taxes and ~40% of all federal taxes.
How much more should they pay? A mere 4% of society will soon be paying half of the federal tax bill while the top 20% already pay almost all(94%) of the federal income tax.
Tax revenue rises and falls with income. The other option is to promote income growth.
Posted by: tj at July 13, 2012 09:48 AM
tj: For sure, we could afford more progressivity; and in those onerous 1960's (!!!), the tax code was. See here.
Posted by: Menzie Chinn at July 13, 2012 10:09 AM
This is just silly. People making five times the median income protest that they aren't well off. Apparently, after spending all their money on rich people stuff they barely have two nickels to rub together and they don't feel so rich anymore.
Posted by: Joseph at July 13, 2012 10:12 AM
No, people making 5x the median income are not complaining they are not well off. They're doing fine.
But in Princeton, a private school is $25-30k per student per year. So, two kids, full price, is $100k pre-tax. That leaves you $150k. A middle class house is $6000 a month (mortgage, taxes, utilities, repairs, etc.) all in. That's another $100k pre-tax. You're left with on the order of $50k for everything else, figure $3000 per month after-tax. That's food, clothing, camp, braces, cars, all that stuff. It's not really a vast amount of money. On that kind of budget, you couldn't afford to take the family on vacation to Europe, for example.
But the critical decision, to my mind, is how you prioritize your children's education. If you have no children, $250k makes you very comfortable. If your children are in public school, you're doing pretty well. If they're in private school, you're rubbing nickels together.
David Brooks makes some related points.
Posted by: Steven Kopits at July 13, 2012 10:56 AM
"They have at least one nice car, a BMW say, or maybe a nice second-hand Porsche (not so common, but not so rare, either). Their other car is a minivan."
Statements like this followed with "they're nothing special" makes me want to tear my clothes. You are special. Period. Full stop. Underlined. If you can have a house and a BMW and another car, you're special not average. People seem to have lost complete sight of what high-earner really is. Frankly I'm in this quintile and I realize just how special I am, having worked my way into it and having a nice life along the way. Another 3 to 4% on top of what I pay now won't change my lifestyle. This is not the case for someone in the lower quintiles. So use that as your comparison.
What you really should be doing the math for is the mean at each quintile and what the extra taxes would be and then asking yourself the question: "Would this change the lifestyle of the person living at this level?". For me another 500 a month changes nothing. For a family of four at 90 to 100 k a year, 250/mo is a game changer. What has happened to the general level of people in the US? It's totally unconnected from actual reality now.
Posted by: econimonium at July 13, 2012 11:01 AM
Yes, you are correct it is a 35% marginal tax rate. I somehow read 28% from the taxsim output. I think your $700/month tax increase is reasonable. That magnitude of the tax increase is consistent with Henderson's original post in which he said he could fire the cleaning people ($400 per month) and the lawn people ($100/month), get rid of cable, etc to cover it.
However, the point remains that for people at this income level, this sort of tax increase can be very significant. I didn't bother to start adding up all the other expenses of living in a renovated house with 3 children in an urban area but I could easily see how an extra $700 month could be a large hit. To get them to $2412 per month, I had to underfund their retirement fund and the 529s. Let's hope they don't have to replace their furnace during one of the bad Chicago winters.
The larger point is that many of the so-called rich are two income families who live in high cost urban areas and who have high childcare and educational costs. These tax increases may seem small, but they can be very significant for these people. The behavioral consequences can be large as well.
Posted by: Rick Stryker at July 13, 2012 11:25 AM
"If you have no children, $250k makes you very comfortable. If your children are in public school, you're doing pretty well. If they're in private school, you [couldn't afford to take the family on vacation to Europe, for example]."
That sure makes it sound like the ideal threshold at which to let the Bush tax cuts expire.
Posted by: Tudor at July 13, 2012 11:44 AM
Also, the people complaining about how underfunded your retirement must be while raising children seem to forget that children do eventually grow up.
If you're spending $100K/year on your children education from the time you're 30 to the time you're 52, you could quite reasonably expect to put a similar amount into retirement from the time you're 52 to the time you're 65.
It's possible that someone would find it difficult to retire on $1.3M, but I expect most people out there could handle it.
Posted by: Tudor at July 13, 2012 11:49 AM
Thank you for that link. Among the many things I found interesting was that when top earners were paying the highest average rate in 1960, their share of total taxes paid was less than it was in 2004 when the average tax rate is much lower. That same pattern is apparent in the CBO data linked above. The average tax rates are falling for the top 20%, but their share of total taxes paid is rising, all the way to ~68% today.
It seems that in the past, the top earners paid more of their income in tax, but it represented a much smaller piece of the tax revenue pie. Thus, it must be the case that the rest of society has become more dependent on the top earners to fund federal government services.
Does that trend ever stop? Should we ratchet up the tax rate until the top 20% pay 75% of all federal taxes? 80%? Where does it stop?
Posted by: tj at July 13, 2012 12:20 PM
Maybe if these over-$250K families found it necessary to use the public schools, due to their level of influence, the much needed improvements in our public school systems would follow.
Posted by: Ray Lapan-Love at July 13, 2012 12:38 PM
I don't know if you were replying to my post but let me repeat $250K for a family of four at Harvard is a pretty comfortable situation. But an owner of an "S" corporation at $250K is fighting for his life.
You take away 3-4% in taxes from an "S" Corp owner and he goes out of business and his income goes to zero as does the income of everyone he has to let go.
Too many people just assume that someone making $250K can easily give up 10% because anyone should be able to live on $225K. They don't understand that 10% takes away a business from a small business owner. Until you have walked in the shoes of that guy trying to make payroll you can't understand, and remember his employees are always paid first.
This is why you can't live at the macroeconomic level. We all live in a micro-world. You only play Sudoku at the macro level.
Posted by: Ricardo at July 13, 2012 12:40 PM
Steven, you are a laugh riot. $6000 a month is not a middle class house. A middle class household makes $50,000 a year. A middle class house would be $1200 a month. Can't find a house for $1200 a month? Well, welcome to the middle class. $6000 a month is a rich person's house. They spend that much so they and their kids don't have to live around middle class people.
$100K a year for kids school? Middle class kids go to public school. Only rich people's kids go to rich people private schools -- so they don't have to be around middle class kids.
Camp for kids? Braces for kids? European family vacations? You are not talking middle class.
Rich people spend all their money on rich people stuff and then complain that they don't feel rich anymore. What a joke.
Posted by: Joseph at July 13, 2012 01:01 PM
My God, you guys talk about people earning $200K in such abstractions.. My wife and I will earn just a little bit less than $250K, almost all of it regular income, i.e. not coming from dividends or Capital gains. We pay less than 60K in taxes.. We are not super rich, as in we still need our jobs for medical insurance, sometimes we need to hold our noses and go to our offices.. Our concerns are not very different from those of any other normal person - good education for our kids, insecurity about our careers, fretting about the economy, the country and so on.. But these concerns would still be the same even if we were earning $100K more. These concerns dont mean we should be taxed at a rate comparable to our cooking lady or the house cleaner.. Needless to say, those earning more than us need to be taxed at an even higher rate than us!
Posted by: Sudeep at July 13, 2012 01:56 PM
In Princeton, the public schools are generally good. They have many students from the University's faculty. So the average student body quality is quite high, albeit with more variability than in the private schools. Some families use both public and private schools, depending on their children. It comes down to personality and fit.
In my experience, the teachers and staff at Princeton public schools are less responsive and less student- (and parent-) focused than those of private schools. Public schools are cost centers; private schools are profit centers. It makes a big difference. As I repeat here regularly, incentives matter.
If public school folks want the private school experience, that's easy. Let the money follow the student, and then the public schools will be client-focused, too. (But that's a different discussion.)
Posted by: Steven Kopits at July 13, 2012 02:52 PM
If life is hard at $250K, then what's it like at $25K? Apparently we're only supposed to feel sympathy for those at the very top? Is the pain of Romney's campaign donor's pedicurist less significant than the trauma of having to downsize from her chauffeur driven Range Rover? Maybe we should just let the riff raff eat cake.
Yes, $250K taxable income (and that's what Obama is talking about) doesn't go as far in Princeton as it does in Hooterville, but I don't see people leaving those $250K jobs in Princeton for other less expensive parts of the country. One of the reasons the cost of living is higher in the Princeton area is because average salaries are higher. And average salaries are higher because there is a concentration of talent that makes people more productive. In other words, it's because people live in Princeton that they make $250K. If they weren't in Princeton, then they wouldn't make $250K and they wouldn't be special in Hooterville either.
What this discussion shows is that things some people view as basic life necessities (e.g., sending kids to private schools, owning a home, taking family vacations, having a job in a comfortable air conditioned office) are luxuries to others at the bottom. Forget about an interesting job in an air conditioned office, millions of people would just like to have ANY job. The fact that people making $250 in taxable income don't have as much discretionary income as they'd like is simply because most goods are what economists call "normal" goods, meaning that demand for the good increases with income. You make more, you spend more.
tj You should spend some time reading Emmanuel Saez' work on income distribution. It's pretty clear that the main reason the top income earners are paying a larger share of the federal tax bill is because they are also taking home a larger share of income. And it's not just the top 1%. Where things have really gone off the rails is at the top 0.01% range; i.e., RomneyLand. Saez also shows that the optimal revenue raising and optimal welfare enhancing policy is to tax the hell out of those at the very top.
Posted by: 2slugbaits at July 13, 2012 02:58 PM
I'm not opposed to the Bush tax cuts expiring. I'd rather get the economy back on an even footing sooner. However, the presumption that such as adjustment will effortlessly be absorbed by people with decent incomes is just not true. It will change behavior, for example, by pushing some of their children into the public school system (and I leave the cost-benefit analysis of that to the reader).
Nor am I stating that people making $250k are poor. But take a look at this house. http://www.weichert.com/42893117/?zip=08540&minpr=700&maxpr=800&view=gallery
This will runs you $5,000 per month as an owner. Now, it's not a bad house. But on the other hand, you're not going to walk by it and think, "Boy, those guys must really be rolling in it. If only I could own a house like this!" If you live in this house, you're not going to think of yourself as something extraordinary, at least not in material terms.
There are extraordinary homes in Princeton. Here's one we refer to as Robin Hill. http://www.youtube.com/watch?v=WGlIBIvtK3c $250k won't cut the ice here, though.
Posted by: Steven Kopits at July 13, 2012 03:20 PM
If a worker drives 20 miles to work, then earns $10 per hour, but he provides the labor that earns his employer/stockholders vast fortunes, who should pay for the road the worker uses?
Or, the same worker earns $20 per hour doing the same job, but is now able to live in a better neighborhood, where his children have access to better schools, and where he now only drives 10 miles to work, should he not then be responsible for a larger share of the tax burden? But now that he makes twice as much he only uses the road half as much, so should he pay more, or not?
The point being that 'fair' might not be possible, but... without considering who benefits from the value of labor... the question of what is fair is impossible squared. Yet these conversations about taxes rarely include any mention of who benefits from what. One thing is certain though, the labor markets in this country have always been subjected to influences that benefit the employers at the expense of employees. Yet Americans allow the 'tax' conversation to be mostly about the importance of utilizing investment capital, as if banks lend from reserves? Weird!
Posted by: Ray Lapan-Love at July 13, 2012 04:40 PM
Count me among those who've already commented wondering how graphs depicting data that stops at 2009 informs us about the "variance with the beliefs held in the fevered imagination of some commentators that taxes have risen enormously under the current Administration". Especially so inasmuch as the current debate on the subject relates to prospective tax rates set to take affect in 2013.
I certainly haven't detected any popular arguments suggesting that tax rates have previously risen under the current administration, for the simple reason that they haven't risen. Rather, the public debate has been over the level of federal taxes on income of all types (including new ACA taxes, medicare taxes, new investment income surcharge, income based phase outs of deductions, etc.) that the current administration thinks and wants tax rates to increase to in 2013 and beyond. And graphs that stop at 2009 are meaningless in that context.
(The effect of higher tax rates on GDP, also discussed later in this blog, is a separate issue from the initial one mentioned regarding real vs. perceived comparative individual tax burdens at different levels of AGI and across different Presidential administrations.)
Posted by: Paly at July 13, 2012 05:38 PM
Note that high-tax, failing states like California have kept on raising state tax rates to offset the Bush tax cuts.
Hence, letting the Bush tax cuts expire will make the total burden higher than in 1999, as many states have higher tax rates than 1999.
In other words, the Bush tax cuts merely were replaced by increases in state taxes.
Posted by: Darren at July 13, 2012 06:29 PM
Paly: I don't know where you've been, but I for one have heard a lot about taxes allegedly rising under Obama (see here). Anyway, since you are so exercised about the data ending in 2009, I refer you to revenues to GDP ratio, which is related, in this post. Of course, I suspect you already knew that the tax revenue to GDP ratio was low going through 2011.
Posted by: Menzie Chinn at July 13, 2012 07:56 PM
Both sides are correct. Most people making less than a million dollars do not FEEL rich, and most of them are very conscious of what 25K more or less would do for them. At the same time, those people LOOK distinctly rich to most of those of us with household incomes under 100K. It's all relative.
For me, looking at Rick Stryker's budget, the obvious things to cut are the maid, the yard and the retirement. If you save only 20K/year for the 22 years your kids are in school, and then save 40K/year for the remaining 15 years of your working life, you will still have a couple million dollars when you retire--AND an expensive house. You will be very comfortable.
As for the public/private school issue that SK discusses, school is certainly important, and some years I have spent close to half of my after-tax income sending my own kids to private school. But it was very clear to me that the private school was a luxury that I was making extraordinary sacrifices for (my wife and I had one car, no maid, a 1200 sq ft. house, and very little in retirement savings).
Of course life is tough for the top 10%--it's tough for almost everyone. But it looks to me like the Henderson apologists don't really have any idea what it's like for the bottom 50% of the population. I am all for letting the bush cuts expire--and for raising top rates back to the level they were at in the 50s--or we could compromise and put them at the level they were at in the 60s...
Posted by: eric at July 14, 2012 04:20 AM
It's pretty clear that the main reason the top income earners are paying a larger share of the federal tax bill is because they are also taking home a larger share of income.
Thanks for making my point. Income growth increase tax revenue to a level that supports government spending PLUS it minimizes the effects of a skewed income distribution.
In other words, income growth increases income tax revenue to a level that allows the governemnt to deliver the services that people in the middle and bottom demand - AND - allows low and middle incomes to grow at a sufficiently rapid rate, so that they don't give a rip about the distribution.
The solution is a policy mix that puts more weight on increasing income growth, and less weight on redistribution of income within given income-pie.
Posted by: tj at July 14, 2012 06:43 AM
We are facing a soaring national debt combined with political inability to cut back public expenditures (mostly on entitlement programs). If you care about your children, it makes sense to pay higher taxes so they are not left with a crushing public debt when they are adults. Or if you feel strongly that your taxes are already high enough, you should be advocating for significant cuts in public spending, much less Medicare to support your health care in retirement. You can't have the same level of public services currently available and maintain your current tax rates. As reasonable people already know, taxes need to be raised and public spending needs to be reduced. I think the President and Speaker of the House had negotiated such a solution a few years ago. Unfortunately, the Speaker was unable to convince the less reasonable members of his caucus. So here we are ... facing the fiscal cliff.
Posted by: MarkOhio at July 14, 2012 07:34 AM
Steven Kopits I'm not opposed to the Bush tax cuts expiring. I'd rather get the economy back on an even footing sooner.
Allowing the Bush tax cuts to expire would not be my first choice. Allowing the Bush tax cuts to expire in their entirety would certainly set the economy back, so I don't see how you come to the conclusion that it would put the economy back on its feet sooner. Ideally we should
temporarily keep most of the tax cuts and only allow the very highest marginal tax rate to increase. Remember, the rich still get a tax cut for all of their taxable income up to the top marginal rate, so for those around $250K this would still be a net tax cut because the top rate doesn't kick in until you hit $388,350. And even if you allow the top two tax rates to revert to the Clinton era, this is still a net winner for those making less than $250K. To see why, just do the math:
35%.............39.6%........ > $388,350
And remember...these values apply to TAXABLE earned income, not gross income. (Married, joint filers.)
In fact, those making less than $250K would still be better off if we allowed the rates on the top two groupings to expire.
Of course, we don't live in an ideal world. The political reality is that we have to live with Grover Norquist types and ignorant voters. Allowing the Bust tax cuts to expire in their entirety is no better than a second best option. It stinks, but it's better than the alternative of making the Bush tax cuts permanent. Once the economy recovers all taxpayers are going to have to pay more. If you want a rational tax policy, then vote for rational politicians. In other words, kick out the know-nothing Tea Party types in Congress.
Posted by: 2slugbaits at July 14, 2012 07:59 AM
Is there any way to get graphs of the actual tax rates that are paid? Not just what they theoretically are.
Posted by: Cliff in NH at July 14, 2012 08:34 AM
Cliff in NH: I'm not sure what you mean by "actually paid". The statutory rates are clearly not the effective (marginal) rates, and the marginal rates clearly differ from the average effective rates. In order to answer your question, you'd have to define your terms more specifically. In addition, the rates would clearly depend on the deductions and credits available, so one would need to condition on many attributes of each household.
Posted by: Menzie Chinn at July 14, 2012 09:56 AM
tj That is one of the most bizarre conclusions I've ever heard. You seem to be pining for the days of the ancient late period Roman Republic when rich patricians owned all of the wealth and bought clients. No thanks.
During the Bush expansion years (2002-2007) the top 1% captured almost 65% of the gains in GDP. The bottom 99% were left with the remaining 35%. And of that remaining 35%, almost all of it went to the top quintile. And things get even worse during the latest recovery, in which 93% of the income gains have gone to the top 1%. See Table 1 of Saez's paper from March 2012:
Note, I am not talking about total income, I am talking about the income gains during those periods. You're a political conservative, so you of all people should be especially alarmed by that kind of trend. Do you honestly think that kind of skewed income distribution can just go on indefinitely without things eventually going very badly for folks at the very top? History hasn't alway been kind to the children of plutocrats. I rarely agree with George Will, but I think he was right in pointing out that the difference between civilization and barbarism is nine meals. There's a whole field on the economics of predation...you should read up on it.
Posted by: 2slugbaits at July 14, 2012 10:19 AM
Interesting to watch people as a group make bad decisions. If we don't raise taxes a little, what are the odds we'll need to raise them more in the future?
1. If we elect Romney and cut taxes, we'll need to find somewhere on the order of $400-500B to cut in a single year or the deficit goes up by that plus at least interest cost. If we close that gap by ending those "loopholes" which will not be named, then we have a tax increase of $400-500B that has to hit someone. My guess is that's going to hit this well-off but not rich group hard because the real rich will see such large tax cuts no loopholes can make it up and the other people in society just don't have the money. So my bet is Obama is probably the lesser tax increase.
2. If we don't further cut taxes we still have to improve the budget. If the GOP changes Medicare to vouchers, do you think that will be popular? I think they'd lose big in the next election cycle as people realize what that will cost them and how it will be a burden in old age. If we real the ACA, we ALS repeal the tax increase that keeps Medicare solvent well into the future. Since the GOP needs to exclude the elderly and people like from vouchers, that means the cost of the program will continue for at least a decade or more before people stop entering it. That would need financing and it means no budget savings there fo years.
3. Romney wants to increase defense spending. How is that affordable without a tax increae? The 2 departments conservatives seem to want to eliminate, education and the EPA, together are under $80B a year, with most of that by far education. Most of agriculture, the biggest by budget, is mandatory, meaning farm subsidies.
4. One can say the GOP won't actually do the tax cuts but they would still face the budget and debt problem. Who will pay? The poor? They have no money. Those who make $50k? Seriously? Even then, they don't have enough money if you took nearly all. Taxes will hit the group that is complaining about Obama ... Because they are so intent on avoiding this car they don't notice the train coming at them.
Posted by: Jonathan at July 14, 2012 11:42 AM
Gosh, this is a fun one! A little definitional clarification might help - in recognising the difference between middle class and middle income.
A lawyer or doctor who loses his job remains middle class, a description of social characteristics, not income bracket.
A middle income factory worker who loses his job becomes formerly middle income.
Middle class is used as a catch all by politicos because it sounds better but since the 19th century - read Dickens - has a distinctive meaning. The true American middle class is doing ok because good social skills and habits retain their value.
Shifts in the economy leave those who don't read so good and have no real skill apart from obesity high and dry.
Posted by: c thomson at July 14, 2012 12:01 PM
Jonathan Good points and well said. And if this week is any indication the so-called "cut big government spending" Tea Party yokels flunked one of their first big tests. They bravely slashed SNAP (a.k.a., food stamps), but cravenly dumped tens of billions into a socially destructive and economically useless income support program for BigAg in red states.
Posted by: 2slugbaits at July 14, 2012 01:17 PM
In other words, kick out the know-nothing Tea Party types in Congress.
You certainly know how to ruin a relatively good post.
Posted by: Ricardo at July 14, 2012 02:39 PM
Prof. Henderson's post reminds one of the some of the perversity in a progressive income taxation when it interacts with compensating differentials.
Outside the health care law, have people claimed Obama has raised taxes? Or just that he has proposed to raise taxes?
Not sure why simple scatterplots between tax rates and per capita GDP growth should qualify as a metric to burden shift. Economists agree that, from a theoretical perspective, tax rate changes have an ambiguous effect before you consider elasticities due to a substitution and income effect. The dispute over elasticities (micro vs macro estimated, e,g.) is still going on and yet to be settled*.
*IIRC, I think there have been at least three separate papers on this topic in the last year or so in the JEL and JEP. The most recent being Rogerson and Keane.
Posted by: Lance at July 14, 2012 03:53 PM
Cliff in NH,
Not sure what you are looking for, but the IRS may answer your question at http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133521,00.html
If you go to the section on tax rate and size of adjusted gross income, you can download spreadsheets that tell you how much taxes are paid by income bucket and tax year. From that, you can just divided taxes paid into adjusted income to get average tax rates by income bucket. You can also see what percentage of total taxes are paid by which income categories.
Posted by: Rick Stryker at July 14, 2012 06:55 PM
I think CBO (via Greg Mankiw) gives a better picture of the current situation. Taxes are only part of the effect of federal government on the income distribution. On net, the contribution of the middle income quintile is negative. http://gregmankiw.blogspot.com/2012/07/progressivity-of-taxes-and-transfers.html
Posted by: don at July 16, 2012 04:42 PM
That's powerful, we have reached the tipping point. The Utopians are leading the lemmings off the cliff.
We knew it was bad when we got to the point where half the 'taxpayers' don't pay federal income tax. However, the Big Government folks told us not to pay attention to that statistic, because, well, you know, everybody pays payroll taxes, sales tax, excise tax, state and local tax, etc.
But now the CBO reveals that government payments are net positive all the way into the middle of of the income distribution. Frightening. When will people wake up?
From you link above:
Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent
Top one percent: 28 percent
The negative 301 percent means that a typical family in the bottom quintile receives about $3 in transfer payments for every dollar earned.
Posted by: tj at July 16, 2012 06:03 PM
TJ Yes it is scary.
The top quintal has captured all the economic growth since the 70s, depriving the rest from sharing in the prosperity so that the rest are unable to earn enough to stay at the same relative place in the income ladder. Then as they monopolize that wealth and income, they have been forced to pay less taxes on it ensuring the bottom quintals pay an even higher percentage of the load of government.
It is truly the tipping point.
Posted by: steve at July 19, 2012 01:32 PM