Friday, May 02, 2008

This is Just Sad

George Will is an elite pundit. I've never really understood what pundits are paid to produce, but, as near as I can tell, the job of a pundit is to be the "smart" folks who distill massive amounts of complicated news into digestible bites for the masses. His is paid enormous sums of money to do this.

I would expect, that as part of his job, Will is supposed to understand the basics of the topics he speaks about. Given that he talks primarily about politics and policy, I would assume that he would know most of the details covered in, say, a basic course in Public Economics. This assumption is clearly unfounded.

In this piece, Will seems determined to mislead his audience about the most basic implications of some of Obama's tax policies, and I am concerned that his employers (and consumers) don't seem to mind.

What's wrong with this statement (or rather questions for Obama)?
During the ABC debate, you acknowledged that when the capital gains rate was dropped first to 20 percent, then to 15 percent, government revenues from the tax increased and they declined in the 1980s when it was increased to 28 percent. Nevertheless, you said you would consider raising the rate "for purposes of fairness." How does decreasing the government's financial resources and punishing investors promote fairness? Are you aware that 20 percent of taxpayers reporting capital gains in 2006 had incomes of less than $50,000?
First, I've already discussed (here and in class) the short run responses to changes in the capital gains rate. These responses do not imply that we were on (or are near) the "wrong" side of the Laffer Curve (i.e., lowering rates increases revenue by increasing economic efficiency).

I'll also ignore the question about "fairness" (see textbook definition of both vertical and horizontal equity if you want my response) because that's a more normative issue.

Let's focus on the last part. In this part, Will implies (although he does not state directly) that Obama will increase the capital gains tax on 20% of those who earned less than $50,000.

Three important things here. First, Will asserts that 20% of those with reporting capital gains had incomes less than $50,000. Second, Will ignores the expected magnitude the impact of any potential increase in the capital gains tax rate (essentially implying that any increase no matter how trivial on these individuals is bad). Third, (and perhaps most importantly) Will implies that Obama will, in fact, raise these individuals taxes (Here's my summary of Will's point: Obama wants to increase cap gains taxes to 28%, people with less than $50,000 pay cap gains taxes therefore Obama wants to raise these individuals taxes on capital gains to 28%).

Let's break it down.

What share of people people paying capital gains taxes have incomes of less than $50,000? (Is this even the right question to ask? Aren't we more interested in the share of people with incomes less than $50K who pay capital gains taxes?)

Here's a slightly different look at the distribution of capital gains taxes than the table I linked to a few days ago.

In 2005, 13.7 M tax units reported capital gains and 24.6M tax units reported qualifying dividend income. Thus, 28 percent (3.8M) of those reporting capital gains taxes and 32 percent (7.9M) of those reporting dividend income had cash incomes less than $50K. So Will may be understating his fact.

His fact, though, is somewhat off the mark. Why should only people who pay these taxes be in the denominator? Isn't using the whole population more informative?

There are 92 million tax units (filers) with cash incomes of less than $50,000. Of these 92 million tax units, 7.9 million had dividend income and 3.8 million had capital gains income. Thus 8.6 percent of <$50K tax units paid dividend taxes and 4.1 percent paid capital gains taxes. It's not clear how much these two groups overlap, but it is pretty clear that, for the most part, people with incomes less than $50,000 don't pay these taxes.

Ok, but some with incomes of less than $50,000 do pay dividend and capital gains taxes, how much would those individuals' taxes rise?

The table below presents the distribution of gains when the capital gains taxes were lowered:

So when the capital gains rate fell by 5 percentage points, tax filers with AGI's of less than $50,000 saw their taxes decrease, on average, by $13.

Ok, ok, but most of these people have zero capital gains, so isn't your average skewed by the fact that your not looking at the real impact on the few people with incomes less than $50K who do realize capital gains?

Fine, the total value of the tax cut to all households was $1.2B, so the average cut to people with AGI <$50K who actually realized capital gains was roughly $200.

Thus, essentially, Will is implying that out, of the 90+ million tax units with incomes less than $50,000, the few million who have dividends or capital gains might see their taxes go up by an average of maybe $500 (a decrease 5 percentage points led to a $200 decline so an increase of 13 percentage points would probably more than double that).

Of course, this assumes that these people will see a 13 percentage point increase in their dividend/capital gains tax rate.

Obama's plan (as far as I can tell) only raises the TOP dividend and capital gains tax rate!

The top dividend and tax rate is the rate that applies to people who whose ordinary income tax rate is 25% or higher! Here's the current capital gains tax schedule:
Ordinary Income Rate Long-term Capital Gain Rate Short-term Capital Gain Rate Long-term Gain on Real Estate Long-term Gain on Collectibles Long-term Gain on Certain Small Business Stock
10% 0% 10% 10% 10% 10%
15% 0% 15% 15% 15% 15%
25% 15% 25% 25% 25% 25%
28% 15% 28% 25% 28% 28%
33% 15% 33% 25% 28% 28%
35% 15% 35% 25% 28% 28%

See how people with Ordinary Tax Rates of 10% or 15% don't pay the 15% tax on Long Term Capital Gains (for these people it fell from 5% to 0% in 2008 and is scheduled to return to 5% in 2010). As far as I can tell (and I couldn't find the details easily), Obama has only mentioned raising the top rate from 15% to 28%.

Thus people in the bottom two brackets won't see an increase in their capital gains tax (or if they will it won't be to 28% like Will mentions). Who are the people in those brackets? Almost everyone with an income of less than $50,000!

Marginal Tax Rate Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 – $8,025 $0 – $16,050 $0 – $8,025 $0 – $11,450
15% $8,026 – $32,550 $16,051 – $65,100 $8,026 – $32,550 $11,451 – $43,650
25% $32,551 – $78,850 $65,101 – $131,450 $32,551 – $65,725 $43,651 – $112,650

So the only people with taxable incomes of less than $50,000 who would see an increase are singles (or married filing separately) with taxable incomes between $32,550 and $50,000 or heads of households with taxable incomes between $43,651 and $50,000 WHO ALSO REALIZE CAPITAL GAINS. I'd be curious to know how many of these people there are.

That's some really pathetic (i.e., highly misleading) journalism.

But Will's not done yet:
You favor eliminating the cap on earnings subject to the 12.4 percent Social Security tax, which now covers only the first $102,000. A Chicago police officer married to a Chicago public-school teacher, each with 20 years on the job, have a household income of $147,501, so you would take another $5,642 from them. Are they undertaxed? Are they rich?
Here's the first thing that pops up when you type "how are social security taxes calculated" into google:

How are the Social Security taxes I pay with each paycheck calculated?

Your employer withholds 6.2% of your gross pay up to $102,000 (in 2008) for Social Security tax.
That's right folks -- social security taxes are paid by individuals, not households. Will's silly example isn't even correct. This household would not see their social security taxes rise at all if this change were made.

Furthermore, yes, a household making $150,000 per year is pretty rich. They make more than approximately 95% of the households in the US. $150,000 might not go as far as they'd like it to. There may still even have financial anxiety in their lives, but that anxiety is probably waaaay less than that felt by families making half than amount.

We have some serious problems with how we provide voters information in this country. This type of stuff should never, ever get published by a supposedly respected news organization. Sadly, while searching for the information used in this post, I found dozens of other examples of people misleading their readers about the implications of this particular tax change. Yet, instead of making correcting this misinformation the goal of their news organizations, our media focuses more of its resources to the salacious and trivial. It really is sad.

Comments: Post a Comment

Subscribe to Post Comments [Atom]

<< Home

This page is powered by Blogger. Isn't yours?

Subscribe to Posts [Atom]