Happy Income Redistribution Day

It's the most wonderful time of the year.

I'm quite convinced that if elections were held in April instead of September, Steve Forbes would have nabbed the nomination in either '96 or '00.

In following up the last post, the more carping there is about low-skill households and low-income families being left behind in the tax debate, some new Heritage research is interesting.

if the costs of direct and means-tested benefits, education, and population-based services alone were counted, the average low-skill household had a fis­cal deficit of $22,449 (expenditures of $32,138 minus $9,689 in taxes). The net fiscal deficit of the average low-skill household actually exceeded the household's earnings. If interest and other financial obligations relating to past government activities were added as well, the average deficit per household rose to $27,301.

Quick Response

In regard to a friend's inquiry as to why I consider "tax cuts for the rich" a frivolous political slogan, I'll throw together my thoughts as briefly as possible.

To lament "tax cuts for the rich," you're looking at it in a statistically inaccurate gross numerical sense. To see the true ramifications of the cuts, we need to accept a methodology that properly looks at proportionate numbers and see where the tax burden has been shifted. Like Hoover Institute economist Dr. Thomas Sowell said of the "tax cuts for the rich" mantra, it, like most political slogans, is based on "slippery words and sloppy thinking."

A preface to my arguments below: Lower income households had their tax rates cut under the GOP's 2001 and 2003 cuts. I personally know families who have benefited greatly from these measures. The reforms to the marriage penalty tax and child tax credit were extremely pro-family and pro-low income families.

Harvard Economics Professor N. Gregory Mankiw, Ph.D., posted this popular story that explains it in layman's terms on his blog.

As we attempt to maximize revenue while providing the lowest possible marginal rates across the board, and imperative economic parameter deals with the elasticity of taxable income. A recent empirical work by Gruber and Saez in The Journal of Public Economics elucidated that, "We estimate that this overall elasticity is primarily due to a very elastic response of taxable income for taxpayers who have incomes above $100,000 per year, who have an elasticity of 0.57, while for those with incomes below $100,000 per year the elasticity is less than one-third as large....We then derive optimal income tax structures using these elasticities. Our estimates suggest that the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels."

From a purely quantitative view of raw numbers, the tax cuts disproportionately alleviated total tax revenue from higher income brackets, as it lowered all brackets, yet brought the top bracket closer to equilibrium. But when we're dealing with a progressive tax rate, the higher income earners will always have their taxes effected more than the lower income earners, as a percentage modification has higher numerical ramifications to a larger sum than a smaller sum.

However, if we examine the true impact of the tax reform, we find the tax burden was shifted more toward the high income earners. What this means is the "rich" pay for more public spending now than they did before tax rate cuts, and the low income earners pay less than they did before. According to the Congressional Budget Office, in 2000 (prior to the Bush rate cuts of 2001 and 2003), the highest 20% of income earners' tax dollars accounted for 81.2% of total federal revenues collected. Post tax cuts, in 2004, the highest 20% of income earners paid 85.3% of taxes collected. The second highest twenty percent went from paying 18.5% to 18.8%, while the middle twenty percent (the mighty middle class) dropped from contributing 5.7% to 4.7% of revenue. The second lowest twenty percent of income earners had a substantial benefit, seeing their portion of revenue go negative, meaning they receive more benefits than they pay in taxes, the change being from 1.1% to -0.9%. The lowest 20% went from -1.6% to -2.9%, an impressive number.

Cumulatively, the economic consensus and rational conclusion of the 2001 and 2003 cuts are twofold. First (and foremost), the economic stimulus provided by the cuts was substantial, and a contributing factor to the rapid economic growth of the past three years. This point wasn't contested. Second, the tax rate cuts positively impacted both the rich and the poor, modifying the elasticity to achieve maximum efficiency bracket allocation, while shifting the proportional burden farther toward the rich (even though they paid a lower dollar sum).

Recession "Hopes" Getting Thinner

For all caterwauling of a 2007 recession, the economy really isn't cooperating. While the chance of a recession over the next few years remains, the causality may be in a different ballpark than the current threats.

March reports show unemployment is down to 4.4%. The Wall Street Journal explains:

U.S. financial markets were closed Friday, which was just as well for those on Wall Street and in Washington who've been betting on a recession. The bullish employment report for March would have ruined their Easter weekend.

Everyone else, however, can rejoice that the economy created 180,000 net new jobs, along with upward revisions of 32,000 for January and February. The unemployment rate fell to 4.4%, down from 4.7% a year earlier and matching the lowest rate in six years. Since mid-2003 and the passage of the second round of the Bush tax cuts, the U.S. economy has added 7.8 million jobs.

David Malprass, Chief Economist at Bear Stearns & Co., predicted in this weeks Forbes that

The next recession--probably a ways off-- is more likely to be caused by the normal government-directed growth killers, taxes and inflation, than by a business cycle. Washington as halready put into law histories biggest tax increase, which goes into effect January 1, 2011, increases on income, capital gains, and dividend taxes scored at $4 trillion (based on Washington's silly assumption that there's no economic impact from taxes).

(See post below for more on 2011 tax hikes)

Consistent with historical precedent--most recently the economy's stability through Katrina and high gas prices-- Congress should steer clear of the protectionist policy lure, make Bush's tax cuts permanent (then seek legitimate tax reform), and avoid recessions blamed on cyclical markets.

Gingrich's Economics

As the 2001 and 2003 tax rate cuts are set to expire, and we see no move in the Democratic Leadership to drop their opposition to renewing the cuts, we're faced with some of the largest tax hikes in over a decade. Newt Gingrich summarizes the GOP's $800 million tax hike estimate thusly:

... You're a family of four earning $60,000 a year: Your income-tax bill will rise 61% in 2011, from $3,030 to $4,893.

... You're an elderly couple earning $40,000 a year: Your taxes will go up by 156% in 2011, from $583 to $1,489.

... You're a woman: You could be one of the 83 million American women who could see their taxes rise by an average of $2,068.

... You're married: You could be one of the 48 million married couples who will pay an average of $2,899 more under the liberal tax increase.

... You have kids: 42 million families with children will pay an average of $2,181 more in taxes.

... You're a small-business owner: 26 million small-business owners will get a tax bill for an average of $3,960 more than before.

• The 10% Tax Bracket Will Become 15%: More than five million families and individuals who previously owed no taxes will become subject to taxation.Marriage
• Marriage Penalty Relief Will Be Eliminated $466 in additional taxes in 2011.
• The Child Tax Credit Will Be Cut in Half: 31 million Americans will pay an average of $859 more in taxes in 2011.

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Those numbers are likely inflated to some degree, but the impact of not making the 2001 and 2003 rate cuts permanent are profound. The GOP's $800m figure should be reassessed in light of the lack of probability that Democrats will allow the AMT's impact to expand. An effectual AMT hike would have severe political backlash, in addition to the predicted tax hike, that Reid and Pelosi likely won't endure. Removing that the figure falls to $300-400m (figure used by Robert D. Novak). Still frightening and substantial.

Bush's Hysterical Speech

For five minutes of gut wrenching laughter and two minutes of thoughtful prayer acknowledgements, watch President Bush's speech to the 63rd Annual TV and Radio Correspondents' Dinner.