Saturday, May 17, 2008

The Economic Ass-Kicking of Wunelle

Here's another in my famous line of posts wherein I, blinking like a fish, contemplate as though it were a new idea something I'm supposed to have assimilated by, say, high school (or certainly college). It's long and meandering and doesn't lead anywhere.

Feel free to skip it.


I've often enough talked about the very conservative nature of many of my coworkers. A body of (almost all) men who come in high proportions from military backgrounds, working in a profession that does not demand creativity or liberal education; this makes for a core demographic from the very marrow of the Republican Party. These are the guys who keep the Party's coffers full. This circumstance most often deprives me of much chance of gratifying conversation while I'm locked in a broom-closet-sized room for hours, or it restricts our interaction to aviation-related things. Honestly, I don't chafe at this too much; I've flown an airplane now for 15 years, and it is what it is. I'm the odd man out here, and I've long ago learned to be happy doing my own thing and making the best of it.

But sometimes it's hard to keep my mouth shut. I know my speaking up is unlikely to lead to anything positive, but I get tired of these guys automatically assuming that their (sometimes highly offensive) views are shared and welcome. And once in a blue moon this inauspicious beginning leads to an actual conversation. And it's unsettling to find that I'm not always able to mount much of a defense for my positions, at least on political matters.

I've noted many times that I'm not historically very political: I don't give money to the parties, I don't employ their yard signs or bumper stickers, I don't attend conventions or rallies. I'm mostly cynical--or at least highly skeptical--about strongly-held opinions from either party line. My strong-ish convictions present-day (which have led to a flurry of angry political posts) are more an instinctive recoil from the disastrous course of the Bush Administration, rather than a fervor for politics generally. I don't necessarily know how things OUGHT to be, but it's clear that our current state of affairs is shamefully wrong.

Not surprisingly, this is not the most effective bunker from which to launch an ideological offensive--or to defend against one.

My most recent pass through the Conservative's Gauntlet has (rightly) challenged me to support my thinking about economic and tax policy. This is a subject of which I'm pretty sketchily informed, but (again) I find my despair at the damage done by George W. Bush causes me to reactively espouse the polar opposite of anything I even think he advocates. So amid Republican talk of excessive taxation and the burdensome welfare state, I rush headlong to the other camp: the view that the rich in this country are living high on the hog at the expense of the economic lower and middle classes, and that W's tax cuts--promised for all but generally only delivered to the very rich--have disastrously deprived the country of revenue while lining the pockets of those whose pockets least needed lining. But I simply don't know enough to have come to all these conclusions on my own. And my defense of this view when challenged is correspondingly pathetic.

At least part of it: I think the fact that we have embarked on a multi-trillion-dollar war without raising any revenue, and that our national debt and budget deficits are in a perilous state, is indisputable. But what of the idea that the rich are being taxed to death?

Well, what does the data say? I did a little digging around the web and found several sites which corroborate some facts about American tax distribution which I might otherwise have been inclined to dispute. (This page at Wikipedia is a good summary.)
This is for income tax:

The top 0.1% pay 17% of the total income tax (from 9% of the earned income).
The top 1.0% pay 37% of the total income tax (from 19% of the earned income).
The top 5.0% pay 57% of the total income tax (from 33% of the earned income).
The top 10% pay 68% of the total tax.
The top 25% pay 85% of the total tax.
---and this surprising figure---
The bottom 50% pay 3.3% of the total income tax (from 13.4% of the income).

(These tax burden figures obviously do not demonstrate an even distribution across the population; nor do they correspond directly to the percentage of earned income for each group. However, they do mirror pretty closely the actual distribution of wealth in the country. Food for thought.)

This is quite a bit more progressive than I realized. And to look at only this one (admittedly large) tax, the top tiers are getting hit pretty good. (I suspect Jeffy will have some good perspective on these numbers.) It's the final figures in the above list--that 50% of the population pays almost no income tax, and that 75% of the population pays only about 15% of the total income taxes--that get raised again and again in taxation discussions with my conservative coworkers.

But there are other taxes, of course (though the income tax is by far the biggest single hit on my paycheck). According to this chart, income taxes were responsible for nearly half--45%--of total federal revenues in 2007. The next highest source, at 34%, was the payroll tax. And this tax is actually regressive: it's a flat tax rate for incomes up to about $100,000 and additional income above this level is exempt from the tax. The meaningful beneficiaries of the regressivity are a tiny proportion of the population, and they're the ones getting hit hardest by the income tax brackets; so this regressivity levels the field a bit. Not surprisingly from the figures above, 3/4 of Americans pay more in payroll taxes than they do in income taxes (since they're essentially not paying income tax).

(It's off track a bit, but sales taxes, which are state taxes, are arguably also regressive, since a poorer person is likely to spend virtually all their income to survive--and pay taxes on whatever they buy with that income--whereas a richer person will spend only a portion of their income to get by.)

Whatever the numbers, I find the whole subject raises a bunch of very basic questions which I've never really thought much about. Not just economic questions, but moral ones: If I object to the current structure, what do I think it should be? What is tax justice? Is the redistribution of wealth something that's in the legitimate domain of government? How much of an individual's income should go for the common good? It seems natural enough that people with higher incomes would pay more into government coffers than poorer folks, but I'm at sea about the particulars. How do we decide what proportion over and above that required to subsist is fair game for government seizure? Is it a fundamentally sound policy that the wealthy minority of a country provide a safety net for the poorer majority? What is due from those who have used the American system of personal freedoms and free enterprise to become successful? And, perhaps beneath all of this, what exactly is it the domain of government to do for its citizens?

Hell, I have only vague ideas of how I would answer many of these questions. Most discussion of these things seems to presuppose that we're settled in our views of these issues, but I'm certainly not; nor can I imagine I'm so much different from many people. For many of us, I suspect what we deem just is a function of where we are on the economic spectrum. (How many of us try to suss out what is right from what we want on these matters?) If you're poor, it only seems right that the world's richest country should lend a helping hand and provide some basic services--health care, basic nutrition, education, equal opportunity--to its needy citizens, regardless of where the money comes from; and if you're rich, it only seems right that the government not penalize you for your success, not get more of your success than you get yourself. Income tax rates as recently as the '70s ran as high as 70%! It's hard to see the justice of that. (Of course, a country's policy towards its needy--schools, housing, transportation, medical care--will have an impact on the quality of life of the rich folks who fund that policy, so it's all connected.)

It's not that this all causes me to now espouse the Angry White Republican's argument that he's being taxed to death; I can't bring myself to entertain the idea that the rich are suffering much under our current system relative to the rest of the country. But it does make me think about what I believe and why.

And my primary impression as I chew on all this is a growing conviction that government has become grossly bloated and is now beyond the control of its citizens (without even talking about the Bush Administration). While I feel comfortably laissez-faire about social issues--I think the mandating of behavior and morality is outside the legitimate purview of government--economic matters are harder, as they must involve the federal government. I have long marveled sourly at how our government gets a cut every time money changes hands: they tax my company on its earnings (and they tax the individual transactions from which those earnings accrue), they tax the wages paid to the employees, and then tax the usage of the remaining wages by the employee--and the income of the places which receive the employee's money! On and on. It results in a stupefying torrent of trillions of dollars flowing to Washington, and yet our federal budgets are in dire straits (and W has made them considerably worse). At some point the monster becomes all-consuming; the population takes on the role of iron lung for the government, which (it seems to me) inverts the natural order of things: the government should be supporting us, not vice-versa. WE are the important part of the equation, not THEM.

Lastly, it dawns on me that most of my coworkers are conservatives almost entirely on the basis of these economic and taxation issues (as befits people whose incomes put them in the high tax brackets). My own long-standing objection to the Republican Party is almost entirely based on their ideological adjacency to the church, and with the airless society they would mandate for us all. But the Republicans with whom I work don't seem to pay much attention to the church when they talk politics (though there are plenty of other things like jingoism and sexism and xenophobia and racism to keep me at arm's length). They're mostly default Christians--who would happily constrict others' freedoms, you know, "for their own good"--but their own convictions seem to stem from economics.

I might be willing to take a tour of the libertarian wing of their gilded palace--I kinda think of libertarianism as Republicans without Jeheezus; it's something that has some resonance for me. But the quest for votes has caused the libertarian hallway to lead right to the chapel door. And this societal vision is far more odious to me than paying too much in taxes.


Fusion said...

Interesting info there, esp about who pays how much in tax, it's more balanced than I thought. Mind you I still like the idea of a flat tax, simplifing the whole system, but then we'd have all those IRS agents out of work...

Jeffy said...

The warning found on wunelle's original post applies to this comment as well - it is long and rambling and nobody (except wunelle) ought to bother reading it.

A simpler tax system as fusion desires would be great, but I wouldn't want it to be flat. If we all just paid the same simple percentage of our income as taxes most of the population would see huge tax increases. It would be interesting, though, to have a graduated scale on a simple form, where all tax payers could easily see that they are paying a tiny tax compared to those who have the very largest incomes. It might hel people be more rational about taxes to see who actually pays how much.

I am not sure what I think about the federal government running a big income redistribution system, but it never ceases to amaze me how the general population doesn't seem to understand that it is happening. The 75% of the population that is being heavily subsidized by the other 25% seems to be way too easily duped into worrying about their taxes. I don't think that all these people really understand that while it may seem that they are paying big tax bills, they are really not paying any taxes, compared to the very few at the top of the income scale. Reducing taxes just reduces the amount of income redistribution that is going on to the general benefit of this majority of the population.

The difficult part of this whole tax business for me is that while it might be nice to cut taxes for everyone, doing so means that we need to spend less. When you look at where the federal budget is spent, it does seem to be fairly hard to find easy places to cut the budget. Most of the money is spent in just a couple of categories, and those are areas that can be hard to find places to cut the budget.

The same Wikipedia page that wunelle referenced has a nice overview chart of where the money goes.

The payroll tax and its associated Social Security program are supposed to be a separate closed system - so I'll ignore that big piece of the budget.

The biggest chunk of the federal budget is spent on the dept. of Health and Human Services. I have to claim a fair amount of ignorance on how this all is spent, but my guess is that most of it is going to people who need the help. The bulk of this money goes to Medicare. While I'd like to be able to buy health care for a more reasonable price, I am happy to help pay for medical treatment for folks who can't afford it themselves.

The next biggest expense is the military. While I think we could save quite a bit by scaling back their current operations, it is always going to cost quite a lot to maintain our military. And even if I don't agree with how it has been used recently, I do think we are a big target in the world and need to spend quite a lot on protection.

After the military comes our bill for our debt. We have a huge debt that we have to pay a lot of interest on. This isn't something we can do anything about, beyond paying down the debt to minimize our interest liability. And, paying down the debt just increases what we are paying right now, so while that is a great idea, it doesn't save us money now.

The entire rest of the budget adds up to less than any of these three big expenses. While there may be plenty that could be cut from the rest of the budget, it won't add up to much.

So, I guess for me it boils down to a system where those who are doing extremely well in our society are being billed for the expense to preserve that society and for some of the basic needs of those who can't afford them. All in all not a bad system.

The only big changes I would want to see made would be a much simpler taxation system, as mentioned above, and real progress on reducing our debt, rather than the steady debt increase that we generally get. Having no debt would greatly reduce our budget, and would shave a lot off the taxes that those wealthy members of our society are paying.

In an odd twist, though, most of that interest on the debt is being paid to the wealthy folks who hold most of the treasury securities. It is quite the circular system - the Feds borrow tons of money from the wealthy so that the taxes (which are mostly paid by the wealthy) can be lower than required for our budget. However, the budget is so huge to a large extent because of the interest we have to pay to those wealthy folks for the money that we borrowed from them to keep their taxes lower. The 25% of the budget that goes toward interest payments is essentially a tax rebate for the folks who have invested in Treasury Bills. It would be interesting to adjust the figures for the tax scale by reducing one's tax paid by the amount of federal interest they are paid, but I suspect that it would still be the case that the top few income earners pay the bulk of the federal income taxes.

To get all the way back to where this started, with the conservatives who you hang out with at work, my responses to them would be questions like: 'Given that you personally most likely receive more benefit from the federal budget than you are paying for, why would you want taxes to be reduced?' and 'A common theme among conservatives is a "fee for services" model of taxation where people are just taxed in relation to the benefits they receive from the government (the gas tax is a good model of this where the tax goes to pay for the roads used by the drivers paying the gas tax). Some of the federal expenditures can't easily be allotted on an individual basis (how much of the military protection is for you specifically?) and so those expenses maybe should just be evenly divided across everyone. Take just two of these general expenses - military and debt payments - and spread them evenly across all 117 million taxpayers. That comes to a tax of roughly $10,000, and that doesn't include all of the other things that you get from the federal government (FAA, health research, and Veterans benefits, just to name a couple) and still that $10k is much more than most folks pay in taxes. Does a "fee for services" model really work better for you? And how do you think it will work for the half of the population who has no money left after basic living expenses to pay any taxes?' and finally, 'If you want to see a sizable reduction in your taxes, say 25%, what $500 Billion do you suggest we cut out of the federal budget to reduce it by 25%? Everything other than military, interest and Medicare doesn't add up to $500B, so even a modest 25% cut isn't doable (unless you want to shift even more of your share of the costs to the very wealthy who currently pay most of the taxes).'

Your conservative coworkers need something other than taxes to bitch about, since almost all the taxes are paid by folks who don't work for a living.

Jeffy said...

One little bit I forgot to mention was a web site I found that is great for slicing and dicing the federal budget to see where the money goes (beyond the main categories shown in the nice chart on the Wikipedia page). If you want to see how all of our federal tax money is spent, check out this site (also mentioned on the Wikipedia article):

One warning: some ways of looking at the data lump all interest into one number, and this masks the amount we pay in interest on our debt. We also get a lot of interest from our investments, which does reduce the amount of taxes that need to be collected, but in most cases I don't think it is helpful to count it in the same category as our payments for interest on our debt. Doing so just offsets the amount paid on the debt with income from another source, making those debt payments appear lower than they actually are.

Malaise Inc said...

I am going to try and not write a book, but let me say that you are looking at the wrong statistic. Percent of total income tax paid by income level is the statistic that the conservatives want you to look at. For an interesting counter point, look for statistics on the taxes paid by individuals as a proportion of income. I don't have them handy (and am feeling to lazy to look for them), but what you will find is that lower income citizens pay a larger burden of their income in taxes than those in the higher income bracket. This is mainly due to the influence of taxes not graduated to income, like sales and gas taxes.

As to how to change the tax system? Our tax system is so byzantine that it is just not possible for any person to unpack it all in any coherent manner. It is obviously a means of funding necessary government operations and is certainly a means of wealth redistribution. But, it is also a means of social policy. Want to incent home ownership? Mortgage interest deduction. Want to maintain a national source of food?
Farm subsidies.

So, what to do, what to do? Damned if I have a clie

wunelle said...

I appreciate all the comments.

These guys have a tendency--I suppose we all do it--to choose an extreme case to exemplify their point. So they assume that being a Democrat is to advocate drug-addicted teen-age single mothers having their fifth kid (from five different fathers) on public assistance.

By that model, the "fee for services" model is something conservatives like, because (at least the ones I work with) believe they are availing themselves hardly at all of government largesse. Ergo: taxes would go down if we weren't floating all the ne'er do wells.

As you say, Jeffy, this aspect of stuff amounts to no expenditure at all compared to, say, interest on the debt--which is huge and growing and amounts to a lot of money for which we get absolutely nothing. Or military expenditures, which might have been reduced by a trillion dollars in the past five years...

Jeffy said...

As malaise inc points out, there are lots of angles to view this from. I think, though, that the proportion of income spent on taxes isn't a useful measure either. For folks that are living on a small income everything they pay for amounts to a pretty large percentage of their income, as they have no extra income that doesn't get spent. Here in MN our sales tax doesn't apply to basic necessities, such as food and clothing, so for the most part people living here on a small income are not hit all that bad. If they ride public transit they pay no gas tax (they don't even pay for the cost of their ride, given the public subsidies). I think that the little chart wunelle reproduced that shows what a huge part of the total federal budget is footed by the very wealthy and what a small chunk is paid by the rest of us is very instructive.

As to the gripes of wunelle's conservative coworkers about liberals wanting to support the bums that do nothing to support themselves, I think they just don't consider the logical consequences of not helping these people out. Do they really want these kids to suffer because of the poor choices of their parents? Do they really think that they can just live happy lives isolated from all of the poor and disenfranchised who get pushed to the margins of society?

It is easy to say that folks shouldn't be enabled in making poor choices, but if people are going to make these mistakes anyway aren't we all better off if we help clean up after them?

The part of all this that appears the most absurd to me is how so many of these conservatives claim to be Christians, yet they seem to forget the whole idea of the 'haves' helping the 'have nots' that is preached by their religion. It looks like the 'godless commie liberals' have done a better job of getting that message.

Malaise Inc said...

I think, though, that the proportion of income spent on taxes isn't a useful measure either. For folks that are living on a small income everything they pay for amounts to a pretty large percentage of their income, as they have no extra income that doesn't get spent.

That is precisely my point and exactly why it is a useful measure. When viewed as a whole (beyond simple income tax), our tax system is extremely regressive.

As something of a weak libertarian, I agree with much of what has been said. But, as I said, when you use the tax code for operational funding of the government, wealth redistribution, and social policy goals, you are going to end up with exactly the type of Gordian Knot we are dealing with.

wunelle said...

And this is exactly the kind of contemplation that leaves me afloat a bit. It seems quite right for those doing well to chip in to a greater degree to fund government things--like national defense and public transportation and libraries. But I'm just not sure how far that responsibility extends.

At least with income tax, we have exactly the situation where those who are struggling are not hit at all, but it's only one piece of the puzzle. As M.I. says, when we add in sales and gas taxes (leaving payroll taxes out of the picture), things are equalized a bit.

It was contemplating W's tax cuts--something of which I've been pretty critical when the federal budget is in such disarray (and spending has gone up sharply with the war)--that got me onto this subject initially.

The common criticism of W's tax cuts is that they benefit only the wealthy (though in the tax code, technically I'm one of 'em); but it appears that the rest of the population simply isn't paying much tax to cut! So again we find that relief goes to those who don't really need it, but who are also the only ones paying (at least this particular tax). I just hadn't realized how progressive the income tax is.

So, I guess for me it boils down to a system where those who are doing extremely well in our society are being billed for the expense to preserve that society and for some of the basic needs of those who can't afford them. All in all not a bad system.

That's a sensible way to look at it. Like you, I'm not sure what to make of the income redistribution aspect of our tax system, but the overall picture seems pretty fair.

But it surely could be much simplified and still end up at the same place.

Karlo said...

I'm all for a more progressive tax scale for a number of reasons. The most basic reason is that I just don't believe that earnings really reflect people's productivity. We need everyone doing their part to keep an economy running and so there's something deeply wrong with paying someone starvation wages their entire life while giving someone else tons of cash. Another argument is that the wealthy use more government-created services and infrastructure. When a CEO's company ships stuff across the US, the company uses tax-payer built roads and bridges. When the company expands overseas, they do so with government backing that's ultimately backed up by an extremely expensive military. As for cutting taxes, if people want to cut down on government, they should start with the bloated military and defense budgets and intelligence services.