Hayek/Kaynes Round 2!

Tax burden

A friend of mine recently argued, "raising taxes slightly on the highest income earners produces large amounts of revenue. " That seems like a reasonable argument, until you take into account how few rich people there are relative to everyone else. Here are some of my back of the envelope calculations based on numbers provided by the Tax Foundation:

• If you raised everyone's tax rate by 1% you would generate about $17 billion more from the top 1%, and about $67 billion from everyone else.

• If you raise taxes on the top 1% by 20 percentage points, (from 35-55%), you raise about $337 billion. Raise tax rates on everyone by 5 percentage points, and you raise about $421 billion.

• If you raise taxes on the top 1% by 50 percentage points, (from 35-85%) you raise about $842 billion. Raise tax rates on everyone by 10 percentage points, and you raise about $842 billion (not a typo).
  

Of course, all of this ignores behavior changes and incentive effects. If you raise rates 20 or 50 percentage points, the static analysis above would not hold, because people would go out of their way to earn less. It’s not that they would be “lazy”, the word some have used to try and disparage the supply side argument. It’s that at 85% marginal rates, people spend more time sheltering income than earning income. At 85%, the return on sheltering income would be so much higher than just about anything else you could do with your money.

Below is an amazing graph from the American Enterprise Institute. Conventional wisdom says that the payroll tax is progressive because it is capped. But maybe the proper way to measure is to take into account what everyone puts in versus what you get out. If you get more out than you put in, that is a negative tax, and if you put in more than you get out, it’s a positive tax.

The graph below from shows just who is really paying the social security tax. Hat tip to Veronique de Rugy.

Limbaugh brilliance

On today's program, he said something to the effect of:

I keep hearing about how great the 90's were, and that we need to go back to the Clinton tax rates. Well, okay, if the 90's were so great, then let's go back to the level of spending that we saw in the 90's.

I'm mad at myself for not thinking of that one.

Here is inflation adjusted per capita total government spending:


And total spending as a percent of GDP:

Columnist who accuses Douthat of not having a clue, has no clue

Yahoo finance columnist Dan Gross thinks he's really nailed Ross Douthat in his column NYTimes Columnist Douthat Needs a Clue on Taxes. He writes:

I'm not quite sure where Douthat pulled that $94,000 figure from. Perhaps from the same place where he got the notion that a family making $94,000 "pays 15 percent in federal taxes." Look at the Internal Revenue Service's 2010 tax tables and you'll see that a family filing jointly, earning $94,000, is squarely in the 25 percent tax bracket. Because the first $68,000 of their income is taxed at lower rates, their total federal income taxes would come in at about 17 percent.

But there's more to federal taxes than income taxes, especially when you're in the lower tax brackets. This fictional family would also pay payroll taxes for Social Security (4.2 percent, thanks to this year's payroll tax cut) and Medicare (1.45 percent). So a family of four making $94,000 is already paying about 22.5 percent of its income in federal taxes, and is looking at a 30.65 percent marginal rate on income earned up to the Social Security cap.

This is how the math actually works out for this family of four making $94K:

Adjusted Gross Income: $94,000
less Standard deduction: $11,400
less Exemptions: $14,600
Taxable income: $68,000

Tax $9,369

less Child tax credit: 2,000
less Making work pay credit: 800
Tax owed after credits: 6,569

Marginal tax rate: 15%
Effective tax rate: 11%

So, the tax they are paying is actually 11%. Even if you include social security and Medicare payroll taxes, which total $7,191, the effective tax rate would still come in under 15%.

Stunningly sloppy.

Practice makes perfect

I don't know if President Obama is, as Democratic Senator Bob Kerrey once said of Bill Clinton, an "unusually good liar," but he certainly works hard at it.

The impact of George Washington's ignorance of the internet on Constitutional interpretation

In Little Rock on his book tour, Supreme Court Justice Stephen Breyer argued (in the words of an AP reporter) "that judges need to apply the Constitution's values with an eye toward the changing times." The Court's job, he said, was to discern how to apply the Founders' values to the modern world "George Washington didn't really have a view about the Internet," he said, drawing laughter from the crowd of about 650 people at the Statehouse Convention Center. This is a commonly stated observation, and it's always puzzled me that liberals find it clever. I mean, George Washington did not have a view about lots of things: telegraphs, phonographs, typewriters, telephones, microphones, electrified megaphone, radios, televisions, highway billboards, walkie-talkies, and Ubbi Dubbi. So what? The point Justice Breyer is making is that the new technology sometimes raises questions about how pre-existing laws should be applied. But this does not change the judge's job, which is to apply the law as it is written to the new facts. Justice Breyer's comment that the Court "should apply the Constitution's values with a pragmatic view toward present circumstances, rather than focusing only on the document's historical meaning" is at best banal, and at worst pernicious. First, no judge disregards "present circumstances" while "focusing only on the document's historical meaning." The originalist judge does not, for example, define the First Amendment's provision that Congress shall make no law ... abridging the freedom of speech" and define "speech" to mean only those forms of speech available in 1789 such as pamphlets and books, but not radio shows and movies. (This is what Judge Breyer is suggesting his opponents do, with his joke about the internet). Rather, originalist judges are inclined to think that the free speech clause protects only speech, as that term was generally understood, regardless of method of transmission. Thus, an originalist has no doubt that statements on internet blogs qualify as "speech," even though George Washington never read one, but are skeptical about whether nude dancing does. If the judge sees his role as to apply the Constitution's "values" in a "pragmatic" way, it is very tempting for him to think that any result that seems"unpragmatic" or "impractical" must be incorrect. Bans on abortion seem impractical given the judge's views about family arrangements and sexual morality, illegitimacy rates, etc., so ipso facto the bans on abortion must be unconstitutional. "Pragmatism" becomes a synonym for "a result that I like." Honoring the Constitution's "values" can be a way to dodge the limitations of the actual text. But what better encapsulates the Constitution's genuine "values" than the Constitution's words?If the judge sees his task as applying the words of the Constitution to present circumstances, the words themselves as a tether, which can prevent him or her from straying too far from what the people actually agreed to when they approved the Constitution (which is, after all, a document made of words). This approach does not always prevent a judge from allowing his own preferences to cloud his interpretation -- not by a long shot --but it's better than the alternative, which provides no brake at all on judicial willfulness. Justice Scalia tells a joke to illustrate this. Two men are walking in the woods and come across an angry bear. They start running. The first man says, "I don't think we're going to make it." the second guy responds, "I don't need to outrun the bear, I just need to outrun you!" To Breyer's credit, he is aware of this quip and usually includes it in his speeches. Which makes it even more peculiar that he is so impressed with that crack about George Washington and the internet.

Quote of the week from Mark Steyn on the EIB

"Baseball should have a season, not taxes." - Mark Steyn