Tax Rates Are Historically Low

The  Difference Between Average and Marginal Taxes

U.S. average tax rates are at historical lows.  Yes, that’s right. Our taxes aren’t “high”, despite the Tea Party’s claim that we are “taxed enough already”.  The average family pays approximately 5% of gross income as U.S federal income tax.

How can that be you ask?  Well, the political rhetoric that quotes tax rates of 33% or 39% or 50% or the historical high of 91% are all marginal tax rates.  They tell us what percent of income above a certain threshold (typically in the $250,000 range) gets paid as tax.  For all taxpayers, even high income earners, the first money earned is taxed at the lower rates.  Indeed, the way personal exemptions work, the first thousands of dollars of income aren’t taxed at all.  In contrast the average tax rate is figured by taking the total dollars of taxes paid and dividing it by total income.  The average tax rate is the best measure of how burdensome or not-burdensome taxes really are.

In the U.S., for the median income family, the average tax rate is near 5% as shown in the graph. This is down dramatically from 12% in the late 1970’s. It’s even down significantly from the 6% we paid in 2006!  At a 5% average rate, this means that 95% of your gross income is available for other purposes. For many households, the rate is even lower if your income is below the median.

But what about the rich and the high income bracket folks?  Aren’t they being “taxed to death” with those supposedly awful, allegedly job-killing 35% marginal rates? No. Those are marginal rates.  A married filing jointly household will only pay that 35% on income after the first $379,150. (source: Tax Foundation).  Further, much of high income gets sheltered.  If the income came from capital gains, it’s taxed at a lower rate. Income paid to pay interest on mortgage doesn’t get taxed and neither do a host of other deductions.  So how much do these high-income people pay? Not as much as you think or they want you to believe.  Let’s look at another chart, also from CBPP.

So the millionaires, the folks with incomes over $1 million only pay an average rate of approx. 22%.  What’s really startling about this chart is how mere millionaires ought to be upset.  The really, really, ultra-rich, the top 400 households in America pay only 16-17% average tax rate.

So we’ve got the median household income, which is around $50,000 per year pays 5%.  A millionaire pays 22%.  And a real high multi-millionaire pays only 17%.  This is hardly highway-robbery style redistribution of income.

A Better Comparison – Let’s Add Payroll Taxes.

But if we are going to compare tax burdens by income brackets, we really need to look at more than just federal income tax.  We definitely need to add in payroll taxes – social security and medicare taxes.  These payroll taxes were payable on all income up to $106,800 in 2010.  The rate for Social Security tax and Medicare combined was 7.62% (not counting the employer’s share) (source: Payroll Experts.com).  Now it gets tricky.  The median household with an estimated $50,000 income paid 7.62% payroll tax on their entire income.  So the combined federal income and payroll tax bite on the median family income was approx. 12.6%.

Now let’s figure the millionaire.  Let’s suppose that someone with a million dollar income paid 22% in federal income tax. Actually it would likely be less since the 22% figure is from all incomes over million, many of them much over.  But for the sake of argument, we’ll say they paid 22%.  But they would have only paid the 7.62% payroll tax on the first $106,000 and none on the rest.  This means that the millionaire’s average payroll tax was 0.76%.  So the combined federal income and payroll average tax rate for the millionaire is no more than 22.76%.  The gap between the median and the millionaire is much smaller than widely believed.

For the Top 400 households, the payroll tax is insignificant, so their combined tax rate is around 16-17%.

Overall, the U.S. is not high tax burden country.  But, the tax burden is not fairly or progressively shared anymore.  The burden falls heaviest on those least able to pay.

Nuclear Power and Externalities

Externalities are one way in which markets and private enterprise can fail to reach socially desirable outcomes.  An externality exists whenever there’s a third party or parties that are affected by a transaction, yet they have no direct say in the transaction.  Typically we assume that any market transaction involves two parties, a buyer and a seller. Either is free to refuse, negotiate, or accept an offer depending on whether the total package including price is right for them.  If the two parties agree, then there’s a deal. 

But what happens if two parties agree to a deal but the decision to pursue the deal causes harm to others who don’t have the power to say no to the deal? That’s an externality. And it’s one of the justifications for having government regulation or even prohibition of some transactions.  

Supporters of nuclear power like to claim it’s a clean industry and energy source.  By that, they imply there are no externalities.  But that’s not quite true. Nuclear power as traditionally implemented has enormous externalities of two types. First, when something goes wrong, it goes really wrong.  Three-mile Island, Chernobyl, and Fukashima wrong.  All are externalities because the original designers/operators do not suffer the consequences of their mistakes.  Second, nuclear power as traditionally implemented produces enormous radioactive waste that the nuclear power plant operators are not responsible for.  Perhaps thorium is a better way, perhaps not.  We need to be very careful. And we need to remember that whenever possible corporations will attempt to manipulate the regulatory authorities so as to create the maximum externality and minimum responsibility.

In the meantime, it’s worthwhile to review the full extent to which nuclear power and nuclear bomb development has made many places on the planet totally uninhabitable.  Der Speigel magazine has an excellent expose here on the fifteen no-man’s lands created by nuclear power.  It’s worth the read and viewing.  It’s sobering.

CEO’s Pay Grows, Average Worker Pay Stagnates

The top end of the income distribution has recovered from any ill effects of the Great Recession, but the average worker has not.  CEO’s in particular saw their compensation increase 27% in 2010, while the workers at the corporations these CEO’s “lead” has barely moved.  Wonkroom notes:

Households across the country are still feeling the effects of the Great Recession, with unemployment falling very slowly, while foreclosuresarestillincreasing, along with poverty rates and oil prices. Family wealth is currently down $12.8 trillion from its 2007 peak.

However, one group of Americans is doing very well — corporate CEOs, whose pay is returning to pre-recession levels:

At a time most employees can barely remember their last substantial raise, median CEO pay jumped 27% in 2010 as the executives’ compensation started working its way back to prerecession levels, a USA TODAY analysis of data from GovernanceMetrics International found. Workers in private industry, meanwhile, saw their compensation grow just 2.1%in the 12 months ended December 2010, says the Bureau of Labor Statistics.

Median CEO pay last year was $9 million, the highest since 2007. The median CEO bonuswas $2.2 million. These gains come as income inequality in the U.S. is already the worst its been since 1928. “We have the recipe for controversy over CEO pay: big increases in CEO pay that show up following run-ups in stock prices coupled with high unemployment rates,” said Kevin Murphy, professor of finance at the University of Southern California…

But raising taxes on millionaires is not, in fact, the same as raising taxes on job creators. According to a recent Wall Street Journal-NBC poll, an overwhelming majority of Americans (81 percent) say that adding a surtax on millionaires is an acceptable way to reduce the budget deficit. …

Rep. Jan Schakowsky (D-IL) recently released a bill that would implement a graduated income tax on millionaires that would raise $78 billion. Allowing the Bush tax cuts to expire for those making more than $1 million could, in one instant, reduce eight percent of the medium-term budget deficit.

If the goal is truly to reduce or eliminate the deficit (a goal I do not share), then restoring taxes on these millionaires and CEO’s must be part of the agenda.  As noted previously, if we simply do nothing and let the existing laws on the books, especially letting the Bush-era preferential tax treatments for the highest bracket taxpayers expire, we can eliminate the primary deficit.

In the past, prior to the Reagan years, we had high marginal  tax rates for the highest income brackets.   For much of the 1950’s and 1960’s and early 1970’s, the highest marginal tax rates were between 70% and often as high as 91%. (source: Tax Foundation) Now this is marginal rates, the rate paid on income above the specified level, not the average paid on all income. Nobody pays the marginal rate on all their income.  At the time, the top bracket started at $200,000 or $250,000 for a married filing jointly return.  Given inflation, these are brackets that would be comparable to a $1,000,000 or so today.  The nation did not suffer for job creation in the 1950’s and 1960’s.  Yet, once we brought the top tax rates down into the 33-36% range during the Reagan years and ever since, we have suffered from low job formation relative to the 1950’s and 1960’s.  Even if we limit ourselves to just the 30 years since Reagan radically reduced the top marginal tax rates, we see that Clinton, who raised the top rate to 39% in 1993 had the best job creation record.  Clearly, low marginal tax rates on CEO’s and millionaires does not help create jobs. But, it does make the government deficit bigger.  Just a little food for thought as you file your taxes this year.

Bankers vs. Democratic Finance at The Constitutional Convention

I’m cross-posting the following with permission from New Deal 2.0.  This should be of particular interest to students of American history. Our current struggles and political battles over the relative power and influence of banks and the monied class vs. ordinary citizens, workers, and small businesses, most of whom are dependent on sources of financial capital for their livelihoods are not new.  Indeed, they were foundational to the creation of the republic.  This piece also sheds a new light on the period of the Articles of Confederation (1776-1788) vs. the Constitution (1789 onward).

Hogeland’s article also puts the actions of today’s Tea Party movement in a new light. The forefathers weren’t universally in favor of democracy. Rather, they viewed it as an enemy of finance.  The article is long so please follow the more button.

Constitutional Convention Delegates Had Common Goal: Ending Democratic Finance

by William Hogeland

Economic struggles played a huge role in the founding of our country, despite some attempts to revise that history.

Edmund Randolph of Virginia kicked off the meeting we now know as the United States constitutional convention by offering his fellow delegates a key inducement to forming a new U.S. government. America lacked “sufficient checks against the democracy,” Randolph said. A new government would provide those checks.

Randolph’s listeners in Philadelphia in the spring of 1787 knew what he meant by “the democracy.” And readers of this series probably will, too. He was talking about the 18th-century American popular finance movement, whose supporters agitated for policies to obstruct concentrated wealth and to give regular folks access to political power and economic equality. Amid depressions and foreclosures, ordinary people had long been rioting — they called it “regulating” — to pressure assemblies to restrain the merchant creditors, whose command of scarce gold and silver let them acquire immense wealth by lending at high, even predatory rates to the needier.

Then, with revolution against England, the popular finance movement turned its attention to changing the economic terms of American society. The 1776 Pennsylvania constitution, based in large part on ideas expressed by Thomas Paine in “Common Sense,” smashed the ancient property qualification for voting and holding office. In Pennsylvania, new political leaders like the preacher Herman Husband, the weaver William Findley, and the farmer Robert Whitehill entered the assembly and began passing laws shutting down elite banking and requiring government to operate, for the first meaningful time anywhere, on behalf of ordinary people.

Democracy in Pennsylvania sent chills through elites of every kind throughout the newly independent country. Rioting for popular finance was bad enough, but rioting was temporary, spasmodic, and traditional. Debtors wielding legitimate political power to equalize economic life — that was tantamount to a new kind of tyranny of the mob, hardly what Whig revolutionaries had fought England to gain. Neither Edmund Randolph nor other delegates of the Philadelphia convention, meeting in secret sessions in the Pennsylvania State House, felt any need for subtlety in seeking to suppress the political and economic equality burgeoning everywhere in America among “the democracy.”

Present at the Philadelphia convention was the fabulously wealthy Pennsylvania financier and speculator Robert Morris, America’s first central banker, no doubt licking his ample chops over the fulfillment, at long last, of his plan to wed nationhood to high finance. Yet it was the planter Randolph, not the financer Morris, who referred to “the plague of paper money,” and he meant just what Morris meant. State legislatures’ currency emissions and legal-tender laws depreciated the merchants’ income from their loans; paper, the people’s medium, built debt relief into money itself. Randolph also rued the country’s difficulty in paying the investing class its interest on federal bonds. With those bonds, Morris had made private creditors into public creditors as well, swelling the domestic U.S. debt to vast proportions in an effort to connect national purpose to high finance.

Hence the need, Randolph said, for a national government with laws acting on all the people throughout the states. It’s no coincidence that he also charged the delegates with repairing the federal government’s military weakness. A debtor uprising in western Massachusetts known as Shays’ Rebellion had marched on the state armory. That wasn’t just a riot. It showed how far ordinary people might go in rejecting regressive taxes and policies giving investors huge paydays with public money. The United States, Randolph said, must be empowered to put down insurrections anywhere in the country.

So Randolph did indeed know what he meant by “the democracy,” and his fellow delegates knew too. Why are historians typically so coy about the constitutional convention’s financial purposes?

The fight over those purposes is almost 100 years old. In 1913, the historian Charles Beard published “An Economic Interpretation of the Constitution of the United States.” There Beard argued that because delegates of the convention came overwhelmingly from the bond-holding class, the government they put into effect represents less a glorious triumph of republican philosophy than a rearguard action of money elites to assure their own payoffs. Beard’s startling contention was that the framers acted at least as much on financial self-interest as on principle.

If that contention remains startling, we can thank an immense effort, carried out over generations, to throw out not only Beard’s particular economic interpretation of the convention, but along with it any suggestion that struggles between elites and ordinary Americans over public and private finance played a role in framing our Constitution. It’s not surprising that many of the popular founding father biographers routinely avoid the issue. But entire careers in academic history — major ones, like Edmund Morgan’s — have been largely dedicated to depicting a founding generation acting with perfect intellectual consistency almost entirely on principle. Wherever self-interest did arise, Morgan suggests (in his popular book “The Birth of the Republic” and elsewhere), the nature of the founding mission was such that it enabled even greed to inspire the founders to good. In that kind of history, everyday political struggles over money between ordinary Americans and American elites just don’t play.

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Recessions Are Matters of Life and Death

I think it’s always important for policy wonks, politicians, and tenured professors to careful when discussing recessions and unemployment.  It’s very easy from the safety of a secure income to focus on the data and the numbers.  But behind the data and numbers are real humans.  Recessions and high unemployment have real, human costs. It’s truly a matter of life and death.  This recently reported from Calculated Risk Blog shows suicides rising in connection with a poor economy:

From the CDC: CDC Study Finds Suicide Rates Rise and Fall with Economy

The overall suicide rate rises and falls in connection with the economy, according to a Centers for Disease Control and Prevention study released online today by the American Journal of Public Health. The study, “Impact of Business Cycles on the U.S. Suicide Rates, 1928–2007″ is the first to examine the relationships between age-specific suicide rates and business cycles. The study found the strongest association between business cycles and suicide among people in prime working ages, 25-64 years old.

• The overall suicide rate generally rose in recessions like the Great Depression (1929-1933), the end of the New Deal (1937-1938), the Oil Crisis (1973-1975), and the Double-Dip Recession (1980-1982) and fell in expansions like the WWII period (1939-1945) and the longest expansion period (1991-2001) in which the economy experienced fast growth and low unemployment.

• The largest increase in the overall suicide rate occurred in the Great Depression (1929-1933)—it surged from 18.0 in 1928 to 22.1 (all-time high) in 1932 (the last full year in the Great Depression)—a record increase of 22.8% in any four-year period in history. It fell to the lowest point in 2000.

• Suicide rates of two elderly groups (65-74 years and 75 years and older) and the oldest middle-age group (55-64) experienced the most significant decline from 1928 to 2007.

There is no data yet for the recent recession, but suicide rates probably increased significantly. This is another impact of the housing bubble – and there is no recovery for the families who lost someone to suicide.

The good news in this study is the long term decline in elderly suicide rates, probably because of improved access to medical care.

I agree with CR that the decline in suicide rates among the elderly from 1929 to 2007 is partly due to improved access to medical care (read Medicare), but it’s also no doubt due to Social Security.  The future seems less overwhelming when you have the confidence and security that Social Security can provide.  Unfortunately many in Washington today want to turn back the clock to an earlier era when the elderly didn’t have such security or medical care.  If that happens, we can expect suicide rates among the elderly to go back up.

I think it’s noteworthy that the connection is between suicides and recessions/higher unemployment.  It is not between suicides and inflation.  Just another reason why I think unemployment is the more serious and damaging problem of a macroeconomy.

Libya, Tunisia, Egypt – One of These Is Not Like The Other

Lately I’ve been puzzled about why NATO and the U.S. have intervened militarily in Libya, but stayed out of popular rebellions in Tunisia, Egypt, Yemen, Bahrain, and other middle east countries.  Human rights concerns doesn’t seem to fully explain it.  After all governments in Yemen and Bahrain in particular have violated human rights without so much as peep from the U.S.  Yes, there’s the oil explanation, but Libya doesn’t have that much oil (less than 2% of world exports) and besides Western firms (BP and Marathon) were involved in the production anyway.

Now comes a very interesting piece from Ellen Brown at Web Of Debt.  It’s the kind of thing that makes you go “hmmmm”:

If the Gaddafi government goes down, it will be interesting to watch whether the new central bank joins the BIS, whether the nationalized oil industry gets sold off to investors, and whether education and health care continue to be free.

Several writers have noted the odd fact that the Libyan rebels took time out from their rebellion in March to create their own central bank – this before they even had a government. Robert Wenzel wrote in the Economic Policy Journal:

I have never before heard of a central bank being created in just a matter of weeks out of a popular uprising. This suggests we have a bit more than a rag tag bunch of rebels running around and that there are some pretty sophisticated influences.

Alex Newman wrote in the New American:

In a statement released last week, the rebels reported on the results of a meeting held on March 19. Among other things, the supposed rag-tag revolutionaries announced the “[d]esignation of the Central Bank of Benghazi as a monetary authority competent in monetary policies in Libya and appointment of a Governor to the Central Bank of Libya, with a temporary headquarters in Benghazi.”

Newman quoted CNBC senior editor John Carney, who asked, “Is this the first time a revolutionary group has created a central bank while it is still in the midst of fighting the entrenched political power? It certainly seems to indicate how extraordinarily powerful central bankers have become in our era.”

Libya’s national central bank is not only not part of the BIS, the Bank of International Settlements in Switzerland, that regulates and coordinates international banking, but Gaddafi’s government has been actively promoting an alternative international currency and banking structure for African and Arab nations. The alternative currency and banking structure would greatly weaken the power of large, private international banks (largely U.S, British, and European) and facilitate popular policies in those countries.  Libya’s status as a non-member of the BIS is a status it shares with Iraq, Iran, Somalia, Sudan, and Syria.  Again, it just makes you go “hmmmm”.  I recommend following the link and reading the entire article here.