1:21 PM :: Stephen (contact)

A Tax Epiphany: I just realized something I should have understood four years ago. Ever since the Bush tax cuts were first discussed in the 2000 campaign, I've been persuaded by claims like the following:

CBO Report: Bush Tax Cuts Tilted to Rich
By Vicki Allen
Reuters

Saturday 14 August 2004

WASHINGTON - One-third of President Bush's tax cuts have gone to the wealthiest 1 percent of Americans, shifting more burden to middle-income taxpayers, congressional analysts said on Friday.

The report by the nonpartisan Congressional Budget Office and calculations by congressional Democrats based on the CBO findings fueled the debate over the cuts between Bush and his Democratic challenger in November, Sen. John Kerry.

 Using the CBO's figures, Democrats in Congress said the top 1 percent, with incomes averaging $1.2 million per year, will receive an average tax cut of $78,460 this year...

In contrast, the report showed that households in the middle 20 percent, with incomes averaging $57,000 per year, will receive an average cut of $1,090...

The CBO report said about two-thirds of the benefits from the cuts went to households in the top 20 percent, with an average income of $203,740...

Democrats said the CBO calculations, which they requested, confirm the view of independent tax analysts that the tax cuts enacted in 2001 and 2003 have heavily favored the wealthiest taxpayers.

Let's consider a thought experiment where the government decides to cut the income tax by 50%. In particular, it decides to cut everyone's income tax burden in half, so that everybody pays only half as much in income tax as they used to. The multi-gazillionaire who paid $4 gazillion in income taxes now pays $2 gazillion less; the working family that paid $1,000 gets a tax cut of only $500. As above, it seems like the gazillionaire gets a pretty sweet deal, and "the rich" (suitably defined) may very well receive most of the benefits.

What's important to see, however, is that the new system may be just as progressive as the old. If before the cuts, the top 1 percent of income tax payers paid as much as the bottom 20 percent, then after the cuts, they'll still pay as much as the bottom 20 percent--both tax burdens will just be half as much as before. In terms of the total tax burden, since everyone's fell by half, the proportion borne by the top 1 percent will be unchanged. In other words, a tax cut which offers disproportionate benefits to the wealthy, in absolute terms, may be perfectly equal in relative terms, and may represent a progressivity-neutral change to the tax code. The absolute benefits are disproportionate only because the wealthy's tax payments were disproportionately large to begin with.

That's why, for example, the Bush tax cuts can plausibly be described as progressive--as long as one is looking solely at the income tax. (More on this below.) The rich may receive much greater absolute amounts than the poor, but that doesn't imply anything about their share of the tax burden. And according to other analyses of the CBO figures, the share of the income tax burden borne by the wealthy in fact shifted slightly upward, and that of the poor fell.



I came to these conclusions after reading Steven Landsburg's piece in Slate, which has provoked an energetic response by John Quiggin at Crooked Timber. Quiggin, as I understand him, makes three (non-ad-hominem) arguments against Landsburg's analysis.

One argument is that Landsburg's piece is "hopelessly biased" because it employs the "presentational trick" of separating relative and absolute reductions in taxes. Suppose the wealthy pay a 40 percent income tax, and the poor pay 10 percent; these rates are then cut to 30 and 5, respectively. Quiggin notes that the high-earners have "[c]learly . . . gained twice as much, relative to pretax income"; their rate fell by 10 points, while the poor's tax rate fell by only 5 points. But that's just another way of restating the initial claim. What Quiggin doesn't accept is that the wealthy's share of the tax burden has increased; they're still paying three-fourths of their previous tax bill, while the poor are only paying half. This result is made even more clear if we cut the rates further, to 20 and 0. The wealthy have still saved twice as much as the poor, relative to pretax income--but since they now bear all of the tax burden, it's hard to describe that as deeply unfair.

A second argument, which Quiggin mentions in passing, is that the rich pay less in taxes than the rates would imply, because they have more access to sharp lawyers and tax loopholes. That's true, and that's a problem, but it also doesn't imply anything at all about a change in the tax system--which may or may not increase cheating. If the wealthy only paid 2/3 of what they were supposed to before, then after a proportional change they'll still be paying 2/3 of what they're supposed to--which means their actual share of the tax burden will be unchanged. (Lowering marginal tax rates on the wealthy would, if anything, diminish this effect, since it reduces the financial incentive to cheat.)

A third argument, and ultimately the only successful one, is that the income tax doesn't tell the whole story. The taxes that have been cut in recent years--on Income, corporate income, and capital gains--are borne primarily by the rich, while the taxes that weigh most heavily on the poor, like sales taxes and the Social Security payroll tax, have largely been left unchanged. Thus, no matter how progressive your income tax cuts might be, the net result to the system might be a greater burden on the poor. In fact, if you fill in the ellipses from the Reuters report above, the Congressional Democrats found that the share of the tax burden of the top 1 percent has fallen by about 2 points to 20.1 percent, while the share of the middle quintile of taxpayers has risen from 10.4 to 10.5 percent. So the Bush tax cuts were slightly imbalanced in their effects--but not dramatically so, as Landsburg's graph shows here.

None of this is to say that equal absolute reductions, like cutting everyone an equal $300 check, would necessarily be wrong. In fact, I thought the $300 rebate was the best part (some would say the only good part) of the Bush tax cuts. But we can't pretend that equal absolute reductions are the only neutral way to cut taxes. The fallacy here is to look at the tax cut as if it were a spending program, cutting $78,000 checks to the wealthy and $1,000 checks to the poor; if we assume a completely neutral tax system beforehand, such a spending program would rightly be reviled. Under our system, though, the revulsion ignores the fact that we're starting from an already-progressive base. Since we're already extracting more money from the rich, giving everyone an equal check isn't a neutral change--it increases the redistributive aspects of the system, shifting money from rich to poor.

Again, more redistribution may be a good idea. (Under certain limits, since high marginal rates have distortionary effects.) But it's one thing to say that the tax system ought to be more progressive than it is now; it's quite another to assume that equal proportional reductions will make it worse.

 

11:32 AM :: Stephen (contact)

Two Thoughts on Art: I spent Sunday and part of Monday in New York City, where I learned two things:

1. The art in the Metropolitan Museum is really good. Giovanni Bellini is one of my favorite artists of all time. I've long been enamored of his San Zaccaria Altarpiece, which is even more impressive seen in context -- the altarpiece isn't so much in the church as part of the church, as San Zaccaria's architecture continues unbroken into the painted space. (And when you put the 50-Euro-cent coin into the slot and turn on the lights nearby, the details are extraordinary.)






In any case, after briefly getting lost in the Metropolitan Museum this weekend (reminding me of one of my favorite childhood Sesame Street specials), I noticed a Bellini Madonna and Child in the Met collection.


The focus here is clearly on the Madonna -- the child might as well have been a vase of flowers or a loaf of bread for how her hands are placed -- but the Internet image doesn't do justice to the lifelike glow of her appearance, or the humanity of her expression. It's amazing how you can walk through a room of painted figures, even some beautifully rendered, but then you suddenly stare at one of them and get the feeling that another soul is staring back.

2. The art at the U.N. is really bad. As longtime readers will know, I'm no fan of socialist realism. But the U.N. walls are covered with Symbolic Murals done largely in that style, depicting muscular Workers, women Pursuing the Arts of Peace, children Displaced By War, etc. Many of the murals require substantial explanation, which I overheard helpful U.N. tour guides providing. (Explanations are also available on the website: "The blue and gold silk tapestry on the walls and in the draperies by the East River windows features the anchor of faith, the growing wheat of hope, and the heart of charity.")

I understand--and in a general sense, agree with--the message of "Food Not Bombs" which the art conveys. But surely the U.N., as an organization, should be committed to the principle that sometimes you need to use the bombs, in order that others may provide the food. (Cf. the wall posters with statistics on military spending--which reminded me of something I'd seen before.) Don't get me wrong; the art at the U.S. Capitol building can be pretty terrible too. But at a certain point, the self-important allegory gets a little top-heavy, especially if the political content is questionable as well.

 

12:17 AM :: Stephen (contact)

The Benlolo Brothers: A reader points out a new development in the Domain Name Registry of America scam I wrote about in July 2003. According to the Globe and Mail (subscription required), the authors of the scam, the Benlolo brothers, have received their just deserts for a different offense:

Pair trade mansions for prison:
Brothers who stole $4-million in scams believe they did nothing wrong

The Globe and Mail
Saturday, October 2, 2004
By Gay Abbate

Alan and Elliot Benlolo were living a good life with their mansions, flashy vehicles and a seemingly endless supply of money. But yesterday, the brothers were forced to exchange their palatial homes for cells in a federal penitentiary, for running two scams that netted them about $4-million.

They were also ordered to pay $2.3-million in fines and restitution.

. . .

The Ontario Superior Court judge sentenced each brother to 42 months in prison for a stock-swap fraud and to three years for their latest venture, a phony telephone invoice venture. They will serve the two sentences concurrently and be eligible for parole after 14 months.

. . .

The stock swap offered investors around the world stock in non-existent microchip companies in 1999 and 2000. The brothers had pleaded guilty in July to being part of a fraudulent international scheme.

For their phone-invoice scheme, they enlisted their younger brother Simon and a friend, Victor Serfaty. They mailed out thousands of phony invoices in 2000, telling small businesses they owed $25.52 for advertising on their yellow-page Internet directory.

Only those reading the fine print would realize the invoice was not real.

. . .

Alan served six months in a United States jail in 1999 for mail fraud. The U.S. government is still trying to collect a $1-million judgment from a civil lawsuit.

 

1:48 PM :: Stephen (contact)

"I, For One, Welcome Our New Robot Underlings": From the Associated Press:

U.N.: Robot Use to Surge Sevenfold by 2007

GENEVA (AP) -- The use of robots around the home to mow lawns, vacuum floors, pull guard duty and perform other chores is set to surge sevenfold by 2007, says a new U.N. survey, which credits dropping prices for the robot boom.

The increase in domestic robots coincides with record orders for industrial robots, the U.N.'s annual World Robotics Survey adds.

. . .

By the end of 2007, some 4.1 million domestic robots will likely be in use, the study says. Vacuum cleaners will still make up the majority, but sales of window-washing and pool-cleaning robots are also set to take off, it predicts.

Hey, as long as they're not eating old people's medicine for food. (The URL itself is also great: "http://nytimes.com/aponline/
international/AP-Robots-Among-Us.html".)

 

1:07 PM :: Stephen (contact)

Making Apologies: Faced with pictures like this, I'm not sure what to say:



One correspondent, however, offers an apology of his own:

Dear Iraqis,

Please accept our apologies for liberating you from a murderous tyrant who gassed civilians, systematically starved his own people, started and lost two wars with neighbors, and became a pariah in the world community.

As a token of our regret, please accept these Baathist thugs and Islamic fundamentalists from Iran and Jordan.

We're so sorry that, if you must know, we're packing up and going home, so France and Germany (who your deposed leader successfully bribed) will cease to be mad at us.

Good luck building a democracy without anyone's help!

Sincerely,

People of the United States

 

10:12 AM :: Stephen (contact)

Cutting-Edge Legal Research: From the Berkeley Technology Law Journal:

"I keep hearing all this talk lately about trolls, and at first I thought, 'I do not need to pay any attention to this, I am from Iowa and we have no trolls there.'"

Mark Janis, Symposium Transcript, 19 Berkeley Tech. L.J. 1053, 1101 (2004).