Debunking a few myths about the economy

[AZhitman]

I know we all see these myths (and others, to be sure) floated about whenever the conversation turns to budgetary issues.

And, rightfully, the true bottom line is that our current elected leaders are more concerned with "winning", even if it means there's nothing left after the fight.

But, this was an interesting article about four of the most oft-cited myths about the current state of the economy (it's a quick and easy read):

http://www.thefiscaltimes.com/Columns/2 ... aspx#page1

[Encryptshun]

Even though I question the objectivity of that article, it does make some very valid points. I wish it was information like this that got air time instead of mudslinging and yellow journalism.

But I guess if that were the case, there would be more channels showing "The Universe" and fewer showing "The Biggest Teen Mom Top Model Bachelorette".

[AZhitman]

Very much agreed. Unfortunately, it's the smut that sells.

[IBCoupe]

Blech.

The website doesn't like highlighting, so I'll just have to dispell some of the myths in that article in a less elegant way.

1. S&P's downgrade wasn't due to the spending. It was due to a large amount of debt (mostly not incurred under President Obama) and for the demand on the part of half the legislature that no taxes be raised. Seriously: S&P's statement called out the Republican Party by name.

2. The site is very careful about saying two magic words often left out by people who repeat Conservative talking points, and their phrasing should set off alarms in your head (emphasis mine):

Forty-seven percent of all Americans pay no federal income taxes.

why do they specifically include those words? Because they're hoping you won't notice them, and so they'll have cover when you go telling your friends, "Half of Americans pay no taxes!" Yes, our Federal Income Tax is very progressive, but that doesn't mean our tax system is. As it turn out, all the other taxes we pay are almost equally regressive, so that a chart of it looks like this:

As it stands, it looks like the rich pay their "fair" share, but that doesn't mean it doesn't make sense to tax them more, especially if we're concerned with fairness and we can see what States are having to do with their already regressive tax systems in order to adhere to their balanced budget requirements.

The rest of the article seems reasonable, but I can't help but wonder if it started out as "Two Myths," and grew once the editors got their hands on it.

[stebo0728]

But what share of your magic tax brew up there is FEDERAL, and then what portion is STATE or LOCAL? Does your brew only account for Federal? Thats the issue at question, and as far as State and Local goes, it doesnt matter in this case, its inconsequential to the issue of funding the Federal government. Having a progressive tax system at the federal level the "equalize" the burden of regressive local system seems counter-intuitive to me.

[IBCoupe]

But what share of your magic tax brew up there is FEDERAL, and then what portion is STATE or LOCAL? Does your brew only account for Federal? Thats the issue at question, and as far as State and Local goes, it doesnt matter in this case, its inconsequential to the issue of funding the Federal government. Having a progressive tax system at the federal level the "equalize" the burden of regressive local system seems counter-intuitive to me.

The share doesn't matter. When setting up taxes, Stebo, how do you define "fair?" If you're looking to ensure nobody is hurt more than anybody else, keeping an eye to all taxes is exactly what you have to do. Joe doesn't care where his tax monies are going; he just knows they're not going to his pocket.

I'm aware that Conservatives want to only look at federal taxes, but that's not the whole picture, and to frame "federal income taxes only" is dishonest. You say you want fairness, but your idea of fairness, as I've seen from coming to know you, Stebo, is that the federal government should only break one knee each. If the State taxes have the effect of only breaking the other knees of poor people, how is the system at all fair? Maybe in method or in principal, but not in practice or effect.

If your theory of governance only works if you ignore all but the facts you like, it's probably better to reevaluate your theory of governance.

[stebo0728]

There's a large part of our disagreement. The federal government is not to be the "end all be all" of everything. The federal government has an enumerated set of jobs to do (and a few trumped up jobs it shouldn't be doing) and thats all it has to be concerned about. Its not there to even out everyone, its not there to make anything more fair or less fair. The Fed needs to worry only about how to pay for its own operation, and to spread THAT burden fairly.

Joe Blow SHOULD be worried about WHERE and to WHO his taxes are going. We've made it too easy NOT to care in this nation, or either we've made it TOO HARD to care, so no one does. Thats not how it should be, people should be engaged in where 20 to 40% of their wealth goes, and why its going, and how its to be used. That some one ISNT engaged is NOT a reason to assume NO ONE cares. If people dont like how the tables are stacked at a certain level, then they engage the system AT THAT level, they dont mandate representative from a DIFFERENT level to even out the tables for them, and I'd argue that the populous in fact HAS NOT mandated the Fed to even things out.

What happens or doesnt happen at the local level is not a barometer the Fed is to use to help steer their own actions.

[IBCoupe]

The Fed needs to worry only about how to pay for its own operation, and to spread THAT burden fairly.

They are. That's my point. You can't say that it needs to be fair and then pretend there aren't other forces at play. Like I said, Stebo, if your system of governance requires you to ignore any facts that don't align with your implied theory of how the world works, then you need to reevaluate your system of governance.

State taxes are regressive. Federal payroll taxes are regressive. The Federal Income tax is not. It's not like you can count on sales taxes to account for changes in the federal income tax. The regressiveness is in the very nature of the tax, and it can't be easily countered. It's absolutely crazy to arbitrarily say that the Federal Government shouldn't take into account state taxes when setting up its tax code. States exist. They have taxes. Those taxes harm poor people more than wealthy people. This happens, regardless of federal income taxes.

You can't simultaneously be in favor of actually "fair" taxation and for the federal government to pretend certain realities do not have real effects on its citizens. Pick one.

[Encryptshun]

So, Isaac, what would be the downside of a flat tax with no loopholes? I've said many times that I'm not in favor of people abusing the code in order to pay less than their fair share, but neither am I in favor of a tax code that is punative in nature.

Where DOES the line get drawn between accounting for people paying more if they can afford to pay more and removing the financial incentive for being successful (i.e. being able to keep what you've worked to build)?

[stebo0728]

So your electric company needs to consider how much you pay for your water bill before it sets its rates? No. My point is the Federal government only needs to worry about how it spreads its own burden. It needs not worry about external forces and influences, its up to the individuals to worry about those. Move, change employment, rally your local representatives to change local tax policy, do whatever needs be to be able to meet their federal share. Do the feds worry about cost of living differences in different areas, making special exceptions for high cost areas? NO, if the cost of living is too high somewhere, the person can move, or the person can work to improve the cost of living where they are through local representation.

If the populous wants State taxes to be more progressive, let them bend the ear of their state reps about it, dont include it as factors for determining Federal policy. I'm in favor of fairness, and said fairness needs to be addressed at every level as necessary, not only at the Federal level where you gloss over problems at lower levels by enacting overly progressive measures at the top level.

[IBCoupe]

So, Isaac, what would be the downside of a flat tax with no loopholes? I've said many times that I'm not in favor of people abusing the code in order to pay less than their fair share, but neither am I in favor of a tax code that is punative in nature.

Where DOES the line get drawn between accounting for people paying more if they can afford to pay more and removing the financial incentive for being successful (i.e. being able to keep what you've worked to build)?

The downside is that it forgets what a progressive rate gets you: an acknowledgement that poor people and rich people don't need to eat any less, don't need to clothe themselves any less, don't need to live in shelter any less and don't need to incur costs to get that income any less.

The line gets drawn where reasonable people draw it. It's no more reasonable to ignore every external factor than it is to attempt to account for every external factor. The tax burden should be no higher than it needs to be in order to pay for the things society, by and large, wants to have, and it also needs to be as fair as it can be, in view of life's realities.

[AZhitman]

If the populous wants State taxes to be more progressive, let them bend the ear of their state reps about it, dont include it as factors for determining Federal policy. I'm in favor of fairness, and said fairness needs to be addressed at every level as necessary, not only at the Federal level where you gloss over problems at lower levels by enacting overly progressive measures at the top level.

As an admitted ignoramus when it comes to the topic of taxation, I've gotta say, this sounds reasonable. Can't go meddling in state affairs, especially since some states want to go the OTHER way - diminished taxes to attract business and industry.

Seems to me that all the bleating and gnashing of teeth over increased taxation of the wealthy could have probably kept CA outta the red, if only they'd done that in their state. However, I suspect there's a strong and hypocritical attitude there of "let THOSE PEOPLE pay it - not me."

[stebo0728]

So, Isaac, what would be the downside of a flat tax with no loopholes? I've said many times that I'm not in favor of people abusing the code in order to pay less than their fair share, but neither am I in favor of a tax code that is punative in nature.

Where DOES the line get drawn between accounting for people paying more if they can afford to pay more and removing the financial incentive for being successful (i.e. being able to keep what you've worked to build)?

The downside is that it forgets what a progressive rate gets you: an acknowledgement that poor people and rich people don't need to eat any less, don't need to clothe themselves any less, don't need to live in shelter any less and don't need to incur costs to get that income any less.

The line gets drawn where reasonable people draw it. It's no more reasonable to ignore every external factor than it is to attempt to account for every external factor. The tax burden should be no higher than it needs to be in order to pay for the things society, by and large, wants to have, and it also needs to be as fair as it can be, in view of life's realities.

Thats what your standard decuction is for, even the wealthy get it at the very least, and it insures a relief of the tax burden on the costs of necessities. Its why the Prebate is such a crucial, and sadly overlooked, part of the FairTax. If you are worried about the poor not being able to live because of taxes, exempt their necessities, but exempt the necessities of everyone or you arent being very fair.

[IBCoupe]

So your electric company needs to consider how much you pay for your water bill before it sets its rates?

my electric company isn't the federal government. It operates with a different objective and serves a different master.

Do the feds worry about cost of living differences in different areas, making special exceptions for high cost areas? NO, if the cost of living is too high somewhere, the person can move, or the person can work to improve the cost of living where they are through local representation.

It doesn't, but it should. It's possible for us to create a tax code that varies on the basis of the median cost of living (defined however you might want) of the ZIP code of your primary residence, but, as you can probably see, that creates a gaping hole through which the wealthy can simply avoid paying taxes.

Regardless, that we don't account for every variable is not a convincing argument in favor of not accounting for any. We know that state taxes are measurably regressive, to a different extent in every State. And you're right that those taxes can theoretically drive poor people from one state to another, but that ignores two realities. First, that move us not costless, and we're talking about already poor people. Second, we're talking about poor people. They'd be moving from one regressive system to another. The general rule still stands, and we can adjust for it in the federal code. There's no compelling reason not to.

If the populous wants State taxes to be more progressive, let them bend the ear of their state reps about it, dont include it as factors for determining Federal policy.

Well, as I wrote, state taxes are regressive largely due to the nature of state taxes. It's not something that can easily be accounted for. A sales tax is regressive because a larger portion of a poor person's income will be unavoidably affected. That's just the way the tax works. There's not much that can feasibly be done about it.

In the meantime, we shouldn't be pretending that the world is something it isn't.

[IBCoupe]

Thats what your standard decuction is for, even the wealthy get it at the very least, and it insures a relief of the tax burden on the costs of necessities. Its why the Prebate is such a crucial, and sadly overlooked, part of the FairTax. If you are worried about the poor not being able to live because of taxes, exempt their necessities, but exempt the necessities of everyone or you arent being very fair.

Alternatively, we could avoid a national sales tax and retain the tax system we have that is already quite balanced. You're trying to apply a crude solution to a problem that doesn't really exist.

[stebo0728]

Your electric company has a finite set of goals, and jobs that its customers expect. The Federal government is no different in this regard. The scope of its jobs may be larger, but they are still enumerated, and the burden for which should be spread fairly as it lies, not fairly as everything else lies.

Your only going to make the system worse the more you try to account for every possible variable life can throw at someone. Income tax structure is a house of cards, and the more intricate you make it, the more flimsy it becomes. For each measure you add in an effort to be "fair" you unintentionally change other aspects as well, creating loopholes here, and overbearing burdens there. The system need not be so complex, it need not account for everything and anything. The federal government costs X to run, and there are Y citizens benefiting from it, therefore everyones burden should be X / Y. Period, end of story. Instead we try to make it:


Why, so we can feel smart, like we solved some huge problem plaguing mankind? Every level should be configured regarding things pertinent only to that level, and nothing else. The States need not consider Federal tax burdens when working our their own policies, and vice versa.

You love to claim regression on the part of a national retail sales tax, but if you would stop to actually study the plan, you would realize just how NOT regressive it is. The poor stand to benefit the most, as they would actually MAKE money in some cases, if they live below the poverty level, the recieve the prebate, which alleviates ALL federal tax liability for them, and even puts a bit in their pocket as they would not have had as high of a tax liability to begin with since they are below the poverty level. But whats FAIR about the FairTax, is that everyone gets the prebate. NOONE pays tax on the bare essentials. Its only when they exceed the essentials that tax liability kicks in.

I know this is an eternal disconnect between the two of us. I respect your positions, and respectfully disagree, and when applicable I will press for my beliefs, as I would expect you to press for yours. But heres one thing that I think is crucial. Its agreed that the poverish are too burdened to be expected to contribute anything of any relevance to the system, that is without dying of starvation to do so. And its agreed that it would be nice to look the other way when the poverish DONT pay their fair share because they wouldn't eat otherwise. But where we break ways is when you want to enact measures that force the government to look at one person or group of people any differently than it looks at another person or group of people. Thats why now you have the standard deduction. Everyone gets it at the minimum. Thats why the prebate in the FairTax is extended to EVERYONE. You cant enact measure that treat one segment differently than another. You have to structure measures that treat everyone fairly, where those in need may "feel" the benefit more, but the benefit exists for all regardless of how much its "felt". Its this notion of treating the productive differently, almost punitively thats hurting our economy. The almighty dollar(euro,pound,lira,yen) will ALWAYS rule the day. If there is no reason to excel, people wont excel. Its that simple. You laugh or scoff at so called "trick down" economics, and though they may not exist in a nice pretty direct correlation, they DO exist. John Doe might own a business, and be struggling, pushing bills back, when a tax break comes down the line. No he may not run right out and hire 3 people with the savings. First he may have to catch up, and then when the time comes, maybe he'll only really need 2 more people, and may pocket the rest. But in those examples you are looking at it backwards. Trickle down economics come into stronger play when you consider "lost" or "non-created" jobs. Its when tax, benefit regulations, and the like cause a business to think twice before crossing certain "barriers" in its number of employees. There is where the real meat of trickle down comes in. Its in what DOESNT happen because of regulations, much more so than it is what DOES happen because of other regulations.

[IBCoupe]

Your electric company has a finite set of goals, and jobs that its customers expect. The Federal government is no different in this regard. The scope of its jobs may be larger, but they are still enumerated, and the burden for which should be spread fairly as it lies, not fairly as everything else lies.

My electric company seeks profits and doesn't have to care about whether it's efforts actually help me. My government seeks to serve me. My electric company seeks to serve its shareholders. They are not analogous.

And I stand by: you're trying to apply a crude solution to a problem that doesn't exist. Our current system is fair, if inefficient. Stop trying to change the first half, and focus on the latter. You're attempting to set up a system that is less fair because you're not looking at the system; only one part of it.

[stebo0728]

Your electric company has a finite set of goals, and jobs that its customers expect. The Federal government is no different in this regard. The scope of its jobs may be larger, but they are still enumerated, and the burden for which should be spread fairly as it lies, not fairly as everything else lies.

My electric company seeks profits and doesn't have to care about whether it's efforts actually help me. My government seeks to serve me. My electric company seeks to serve its shareholders. They are not analogous.

And I stand by: you're trying to apply a crude solution to a problem that doesn't exist. Our current system is fair, if inefficient. Stop trying to change the first half, and focus on the latter. You're attempting to set up a system that is less fair because you're not looking at the system; only one part of it.

And I'd continue to argue that you are overcomplicating the issue, and in fact exceeding the enumeration of congressional power by basing federal policy on the existence and status of local policy. To accurately "control" the game as you wish the Fed to do, they would need the power to control things on the local level as well, which just wont happen. My solution may sound crude, label it so if you like, but sometimes simpler is better. Sometimes the cost of complication outweighs the benefits gained by, if in fact any benefit is gained, sometimes its not just a net loss, but a gross loss altogether.

[R/T Hemi]

. . .
You laugh or scoff at so called "trick down" economics, and though they may not exist in a nice pretty direct correlation, they DO exist. John Doe might own a business, and be struggling, pushing bills back, when a tax break comes down the line. No he may not run right out and hire 3 people with the savings. First he may have to catch up, and then when the time comes, maybe he'll only really need 2 more people, and may pocket the rest. But in those examples you are looking at it backwards. Trickle down economics come into stronger play when you consider "lost" or "non-created" jobs. Its when tax, benefit regulations, and the like cause a business to think twice before crossing certain "barriers" in its number of employees. . . .

I'd like to see one honest cite where trickle down actually created a job. It's a great theory but it failed. Not that bubble up economics is working all that well either, but in theory, it makes sense whereas TD doesn't.

[IBCoupe]

And I'd continue to argue that you are overcomplicating the issue, and in fact exceeding the enumeration of congressional power by basing federal policy on the existence and status of local policy.

No. There's no Constitutional requirement that the federal government ignore external factors in its tax policy.

[szh]

. . .
You laugh or scoff at so called "trick down" economics, and though they may not exist in a nice pretty direct correlation, they DO exist. John Doe might own a business, and be struggling, pushing bills back, when a tax break comes down the line. No he may not run right out and hire 3 people with the savings. First he may have to catch up, and then when the time comes, maybe he'll only really need 2 more people, and may pocket the rest. But in those examples you are looking at it backwards. Trickle down economics come into stronger play when you consider "lost" or "non-created" jobs. Its when tax, benefit regulations, and the like cause a business to think twice before crossing certain "barriers" in its number of employees. . . .

I'd like to see one honest cite where trickle down actually created a job. It's a great theory but it failed. Not that bubble up economics is working all that well either, but in theory, it makes sense whereas TD doesn't.

And, like I love to point out to you all the time , economics cannot play "connect a dot" in this fashion. Lack of evidence is not really relevant here. Macro Economics "works" in statistically significant ways - not individual outcomes or single "cases".

My ancient studies (took both Micro and Macro Econ in college - the teachers were Samuelson and Black) and my wife (she is an expert here - it is her field of study and work) point this out. By the way, my ultra-liberal wife (she actively supports Obama ) rolled her eyes about your comment - it simply ain't that precise.

Z

[Encryptshun]

Get your wife on the forum! We'd value her input!

[smockers83]

Are we really heading down the trickle-down theory debate again? We had this debate two or three years ago on this very forum.

Trickle-down economics doesn't exist in economic thought.

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.

Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics. Students in introductory economics courses learn that the burden of a tax does not necessarily stay where the Congress chooses to put it. That lesson is especially relevant when thinking about the corporate tax.

--Greg Mankiw (Harvard economist) in 2008 talking about cutting corporate taxes

[szh]

Get your wife on the forum! We'd value her input!

Not likely to post here unfortunately - to her, NICO is a "car forum" and she is not into cars that much.

She already dislikes the amount of time I spend here ... if she became hooked, it would be my fault!

Z

[szh]

And I'd continue to argue that you are overcomplicating the issue, and in fact exceeding the enumeration of congressional power by basing federal policy on the existence and status of local policy.

No. There's no Constitutional requirement that the federal government ignore external factors in its tax policy.

Is the opposite true ... does the Constitution require the Federal government not to ignore some external policies? If not, then the comment may be not particularly relevant ... "The Constitution is silent on the issue", no?

BTW, interpreting Amendment 16 a bit more than literally, could imply that the Federal government must ignore external local factors (which state, or size of population, for example):

Amendment 16
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

I.e., if taken further (and, yes, I am stretching the point - perhaps too far), this could imply "must ignore all external factors".

Z

[AZhitman]

Are we really heading down the trickle-down theory debate again? We had this debate two or three years ago on this very forum.

Trickle-down economics doesn't exist in economic thought.

A cut in the corporate tax as Mr. McCain proposes would initially give a boost to after-tax profits and stock prices, but the results would not end there. A stronger stock market would lead to more capital investment. More investment would lead to greater productivity. Greater productivity would lead to higher wages for workers and lower prices for customers.

Populist critics deride this train of logic as “trickle-down economics.” But it is more accurate to call it textbook economics. Students in introductory economics courses learn that the burden of a tax does not necessarily stay where the Congress chooses to put it. That lesson is especially relevant when thinking about the corporate tax.

--Greg Mankiw (Harvard economist) in 2008 talking about cutting corporate taxes

I'd like to see one honest cite where trickle down actually created a job. It's a great theory but it failed. Not that bubble up economics is working all that well either, but in theory, it makes sense whereas TD doesn't.

I'm so glad we have the highly-regarded economist from the oh-so-financially-solvent state of california gracing us with his presence, sharing his profound understanding of economic theories and how complicated things work...

Here's your "one example": I got a fat tax refund (the one year I didn't keep close tabs on my income and my witholdings). I spent it as soon as I got it in the bank, on stuff I wouldn't ordinarily have spent it on. (trickle-trickle-trickle)

Ta-da.

[IBCoupe]

Is the opposite true ... does the Constitution require the Federal government not to ignore some external policies? If not, then the comment may be not particularly relevant ... "The Constitution is silent on the issue", no?

The Constitution doesn't require that Congress ignore reality when making a tax code. That's all there is to it. If Congress wants to ignore them, Congress may, as there's no Constitutional prohibition of legislative stupidity.

[szh]

Is the opposite true ... does the Constitution require the Federal government not to ignore some external policies? If not, then the comment may be not particularly relevant ... "The Constitution is silent on the issue", no?

The Constitution doesn't require that Congress ignore reality when making a tax code. That's all there is to it. If Congress wants to ignore them, Congress may, as there's no Constitutional prohibition of legislative stupidity.

I guess then I interpret this to mean that Congress can choose to ignore, or not ignore, reality and other external policies when implementing tax codes - the Constitution does not require it either way.

And, yes, Congress can choose to be stupid - I think most of them operate in this manner anyway (with only some exceptions). Probably a requirement to be elected and hold the office.

Z

[IBCoupe]

I guess then I interpret this to mean that Congress can choose to ignore, or not ignore, reality and other external policies when implementing tax codes - the Constitution does not require it either way.

Absolument.

[AZhitman]

Didn't want to create a new thread on this, but since we're on the topic of taxation:

Not one HOUR after I somehow brought myself to agree with Howie on something ("Warren Buffett"), I read an article that makes me question that as well.

Thoughts? http://www.cnn.com/2011/OPINION/08/16/m ... index.html