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Thursday, April 16, 2015

Income Taxes, What's a Fair Share? Federal Government and Fed Actions Fail Low Income

In 2000, workers with incomes greater than $200,000 earned 33% of the nation's income, but paid 46% of income taxes. In 2012, well after the Bush tax cuts, the same high income group earned 41% of the nation's income, but paid a higher 55% of U.S. income taxes.

In 2000, workers with incomes less than $40,000 earned 14% of the country's income but paid 9% of U.S. income taxes. By 2012, this low income group earned 7% of U.S. income, but paid only 4% of U.S. income taxes.

That is, high income workers are paying an increasing share of the nation's income tax burden. Despite the rising share of federal income taxes paid by high income workers, income inequality continues to escalate. University of California at Berkeley economist Emmanuel Saez estimates that between 2009 and 2012, the top 1% captured 95% of total income growth.

What accounts for this? Certainly not income tax rates! It is arguably that the Federal Reserve (Fed) and federal government policies since the recession of 2008 have differentially aided high income, high wealth Americans.

The Feds bond buying programs (QE1, QE2 and QE3) pushed up asset prices including stock prices, bond prices, art, and other assets at an unprecedented rate. For example, between December 2008 and March 2015, prices of S&P 500 stocks collectively increased by 131%. Additionally, the 2008-09 bailouts of AIG, GM, Bear Stearns, Goldman-Sachs, Morgan Stanley, and the Obama Administration's $830 billion stimulus program mostly stimulated the incomes of the nation's wealthiest.

Federal government and Fed market intervention appear to have widened the gap between the high and low income groups. Tackling income inequality with income tax rates, as often advanced, has not and will not work.

Ernie Goss

Thursday, March 19, 2015

Presidential Budget Deficits, 1930-2014: Both Parties Big Spenders: Democrats Big Taxers





Since 1930, the federal government has spent a total of $71.5 trillion and collected $59.9 trillion in taxes, thus adding $11.6 trillion to the national debt, not including interest. As a share of gross domestic product (GDP), the deficit was 3.3% for the full 84-year period. In terms of party affiliation, Democrats expanded the debt by an average 3.1%, while Republicans boosted the debt by a higher 3.5% average.

As a share of GDP, both Democrats and Republicans spent an average of 20.3%, but Democrats levied higher taxes at 17.2% while Republicans imposed a lower 16.8% in taxes. In all cases, it was assumed that the incoming president does not own the deficit for his first year of service.

Among the 13 presidents serving during this period, the top deficit creating presidents were Roosevelt and Obama while the top surplus generating presidents were Clinton and Truman. Clinton and Carter collected the largest percentage of taxes while Roosevelt and Obama spent the most heavily among the 13 presidents.

With no budget surpluses in sight and 10,000 baby boomers retiring each day, the 2015 national debt of $18.1 trillion, or 103% of GDP, presents a real challenge for younger generations. With current federal tax collections below average, and federal spending above the 84-year average, the nation’s debt level will continue to grow as the share of the population bearing the burden declines.

Without tax reform and spending restraint, Gen-Xers and Millenniums will face higher taxes, elevated interest rates, rising inflation, or all three of these “bads.” Former Colorado governor Richard Lamm sums it up quite well saying “Deficits are when adults tell the government what they want-and the kids pay for it.”

Ernie Goss

Wednesday, February 18, 2015

High Wage Jobs Move to Right-to-Work States, Union-Shop States Lose Manufacturing Jobs

Just last month, Mercedes-Benz announced that, in order to become more cost-competitive, it was moving its U.S. headquarters from New Jersey, a union-shop state, to Georgia, a right-to-work state.

Right-to-work laws, as authorized by the 1947 Taft-Hartley Act and passed by Georgia, prohibit unions and employers from entering into agreements that require employees to join a union and pay union dues in order to get or keep a job. Twenty-four states have enacted right-to-work laws. The remaining 26 states and DC are union-shop states that require an employee to become a member of the union in order to retain a job.

Union leaders maintain the objective of right-to-work laws is to sow dissension among workers and weaken the labor movement. Proponents of right-to-work laws assert that as a matter of economic freedom, workers should not be required to join a union and that this freedom supports greater economic growth among right-to-work states. Economic data from 2000 to 2013 show right-to-work states did expand economic growth, as measured by non-inflation-adjusted GDP, by 70.7 percent compared to 59.3 percent for union-shop states.

During this same period of time, right-to-work states expanded manufacturing wages and salaries by a median 7.7 percent, while union-shop states experienced a median 3.0 percent decline in manufacturing wages and salaries. In fact, 16 of the 26 union-shop states suffered a decline in manufacturing wages and salaries, while only 6 of the 24 right-to-work states experienced a decrease. Furthermore, the share of manufacturing jobs held by union-shop states fell from 55.1 percent to 53.9 percent over the thirteen year period. But the union-shop states' share of the nation's high-wage heavy manufacturing jobs sank by an even larger three percentage points.

Data show high wage manufacturing industries, normally dominated by unions, such as steel and automobile, are moving to and expanding in right-to-work states. With manufacturing firms becoming increasingly mobile, the pressure to pass right-to-work laws will grow in the years ahead. I expect Missouri to be the next state to leave the union-shop coalition.

Ernie Goss

Tuesday, January 06, 2015

Taxing the Sick?


Yesterday’s online version of the New York Times includes an article by Robert Pear, “Health Care Fixes Backed By Harvard’s Experts Now Roil Its Faculty” (January 5, 2015), http://www.nytimes.com/2015/01/06/us/health-care-fixes-backed-by-harvards-experts-now-roil-its-faculty.html?_r=0 . It seems that Harvard faculty are miffed that the Affordable Care Act is starting to adversely affect them.  Like other employers, Harvard is passing costs on to its employees in the form of additional cost-sharing requirements for medical treatment.  Some of those employees think those extra costs are tantamount to a pay cut.  Indeed!  (And how do employers feel if they don't pass those costs along?  A profit cut!?!  I think they are starting to get it.) 

Jerry Green, a professor of economics and former provost, is quoted as saying that the higher out-of-pocket costs “[Are] equivalent to taxing the sick[.]”  Further, he opined, “I don’t think there’s any government in the world that would tax the sick.”  This takes me back to my law school days with the late Professor Francis Allen.  One of my really smart classmates said something like this once.  I cannot remember the content, but I remember the response.  Professor Allen smiled and said, “Oh, really, Mr. Fishman?  Now you don’t mean that.”  (I have lost track of Mr. Fishman, but he is probably an investment banker or ruling a small island somewhere.) 

One expects students, who are unlearned and inexperienced, to make rookie mistakes.  But an economics professor at Harvard?  I don’t think Professor Green has been paying attention to the content of the ACA.  Among other things, it includes an excise tax imposed on medical devices, which became effective in 2013.  If you make and sell a medical device (like a hip implant used to treat degenerative disease), you must pay 2.3 percent of the selling price to the federal government.  (If you don’t believe me, see  http://www.irs.gov/uac/Newsroom/Medical-Device-Excise-Tax ). Given the inelastic demand for such devices, it is highly likely that at least some of those taxes are passed on through higher costs to the sick people (perhaps indirectly through their insurers) who need those devices. Taxing the sick is indeed part of the ACA in other ways, too.  It makes it more difficult to deduct health care costs you incur (arguably another form of taxing the sick).  And try not buying insurance -- you will likely pay a penalty tax for not doing this, and this tax applies whether or not you are sick.

The excise tax on medical devices could be among the provisions targeted by the new Congress.  Even Democrats like Al Franken are not so sure about this tax, perhaps because some of the medical device manufacturers affected by the tax are located in Minnesota.  (For a mainstream editorial pointing out that ironic opposition, but persisting in supporting this tax purely for revenue reasons, see http://www.usatoday.com/story/opinion/2015/01/04/obamacare-medical-device-tax-repeal-congress-editorials-debates/21261737/ .)  Apparently, the industry may not be able to pass on all of those costs to the sick, but must bear some of them on its own.  (Innovation may be an unintended casualty of this kind of incremental cost burden - but that is a subject for another discussion.)

William F. Buckley once famously stated that he “would sooner be governed by the first two thousand names in the Boston telephone directory than by the two thousand members of the faculty of Harvard.”  And that probably goes for other faculties, too, including my own.  Idealism can cloud one’s judgment, though we should expect more from the learned souls entrusted to educating our young people.  It is puzzling why that expectation is so often unrealized from the academic world.  And sadly, even our elected officials are prone to make similar mistakes.  Only an informed citizenry can bring them back to reality.

Grand statements that healthcare is a human right or a free good sound utopian and so affirming, but the rest of us understand the harsh reality that it is another service for which payment is necessary.  Despite its many flaws, the Affordable Care Act was also not entirely wrong when it incentivized insurance products in which personal responsibility for costs bears an increasingly greater role.  For those who take that responsibility seriously and can afford to bear those costs, financial tools like HSAs can help.  I explore this (and other tax dimensions of the ACA) in my recent article, “Health Accounts/Arrangements:  An Expanding Role Under the Affordable Care Act?” (available at  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2519268).  

Remember, if there is a cost incurred, someone will pay it, and it might even be you.  Bear that in mind as our new Congress and state legislatures get underway in 2015.  Happy 2015.

EAM

Monday, January 05, 2015

Increasing Income Inequality: No Diploma, Births to Unmarried Women, and Higher Taxes Boost Inequality


Over the past two decades, U.S. income inequality, as measured by the Gini Coefficient (GC), has risen dramatically. This has resulted in a parade of politicians calling for taxing high income workers more heavily as a remedy.

However, data from the states undermine this simplistic strategy. In 2011, states with the least income inequality were: Utah with the least, followed by Alaska, Wyoming, New Hampshire, and Iowa. The five states, including DC, with the greatest income inequality were: District of Columbia with the highest followed, by New York, Connecticut, Massachusetts and Louisiana. Importantly, three of the states with the least income inequality, Alaska, Wyoming and New Hampshire had no income tax.

Furthermore, the latest tax rankings (1=highest taxes) from the National Tax Foundation show that the states with the least inequality with (tax rankings) were: Utah (28), Alaska (49), Wyoming (50), and Iowa (29). The states with the greatest degree of income inequality had rankings of: DC (20), New York (1), Connecticut (3), Massachusetts (11) and Louisiana (46). Thus, all of the states with greatest inequality, except for Louisiana, had state and local tax burdens in the top half of all states. Additionally, all of the states with the least income inequality ranked in the bottom half of states in terms of state and local tax burdens.

In order to sort out the factors that contribute to income inequality, Gini Coefficients are statistically modeled against other state population characteristics. It was found that statistically speaking, only the percent of the state population without a high school diploma and percent of births to unmarried women contributed to income inequality. Higher state and local tax burdens did boost income inequality, but the impact was not statistically significant.

Ernie Goss



SUMMARY OUTPUT Jan-15
Dependent = Gini Coefficient
Regression Statistics
Multiple R 0.680028052
R Square 0.462438152
Adjusted R Square 0.415693644
Standard Error 0.015968877
Observations 51

ANOVA
df SS MS F Significance F
Regression 4 0.010090945 0.002522736 9.892887243 7.3394E-06
Residual 46 0.011730232 0.000255005
Total 50 0.021821176

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%
Intercept 0.3731 0.0202 18.5149 0.0000 0.3325 0.4136
No diploma 0.1822 0.0888 2.0521 0.0459 0.0035 0.3609
Non-English speaker 0.0451 0.0248 1.8164 0.0758 -0.0049 0.0951
% unmarried mothers 0.1133 0.0422 2.6885 0.0100 0.0285 0.1982
Taxes as % GDP 0.0558 0.1910 0.2922 0.7715 -0.3287 0.4403

Wednesday, December 17, 2014

Commercial Casino Gambling: Hurts Economic Growth & Increases Welfare Spending

State and local governments across the nation are becoming more and more addicted to casino gambling with the number of states permitting commercial casino wagering rising from 11 states in 2000 to 23 in 2012. Commercial casinos are founded and run by private companies on non-Indian land.

In order to win citizen approval of casino gambling, policymakers normally promise improved economic performance, lower tax burdens, and more dollars for education. With tax rates on casino revenues roughly four times the average sales tax rate, it is no surprise state and local policymakers become hooked on casinos.

Between 2000 and 2012, despite assurances from elected and non-elected officials, states with commercial casinos versus states without commercial casinos experienced lower GDP growth, 54.8% versus 62.6%, and inferior job growth, 5.5% compared to 8.7%. Furthermore in 2012, states with commercial casinos shelled out 15.2% of GDP in the form of transfer and welfare payments. This was significantly higher than states without commercial casinos of 13.8%.

And did commercial casinos produce lower tax burdens? No! For the latest year, citizens of the 23 commercial casino states suffered a state and local tax burden as a percent of GDP of 8.6%, while the 28 states and DC with no commercial casinos experienced a lower 8.1% tax burden.

Commercial casino states did, however, spend more on education. In 2012, gambling states spent 5.6% of GDP on education which was above the 5.3% of GDP spent by non-casino states.

Thus, the most recent data show that commercial casinos did not deliver on the promise of economic development and lower taxes. Instead, commercial casinos appear to restrain growth, increase overall tax burdens, and boost welfare and education spending.
Ernie Goss

Saturday, December 13, 2014

A Travelogue in Rural America


This past week I traveled to Sioux Falls, South Dakota to give a continuing education program to the South Dakota Bar Association.  South Dakota lawyers are not required to have continuing education, so those who attend are motivated by the need to provide competent services to their clients, who are often entrepreneurs.  These participants are deeply connected to the reality of doing business in a world where competitive conditions create the parameters of expected behavior.  They need to deliver value to clients who in turn deliver value to their customers.  It is a virtuous cycle.

Our journey to Sioux Falls was so enjoyable because of encounters with people having these value commitments.  We first took a small detour to visit my sister and brother-in-law on their farm in Northwest Iowa.  We traveled off the interstate highway and the typical tourist pathways through rural America. In nearly every town, we find a Casey’s gas station and convenience store run by cheery locals and delivering the products that people need:  gasoline (at a fair price), clean restrooms, coffee, donuts, and other snacks.  I think the employees are cheery because they like being part of a successful team.  Isn’t it always better to work where people are getting their needs met and happily pay the price?  

Other signs of life are also evident in rural America.  Churches were having socials and community events.  The schools had full parking lots and signs with their activities for sports and music.  Local civic clubs were having a fundraiser or a social event around the holidays.  As Charles Murray will tell you in his book Coming Apart (and Alexis de Tocqueville before him will agree), these are signs of cultural prosperity, which have persisted over decades.  Not even televisions, computers, and mass entertainment have been able to extinguish them entirely.

My wife and I paused to imagine the early immigrants to these regions, coming from Scandinavia, Holland, or Germany and bringing their customs from the Old Country along with a willingness to work and to build something together.  They formed families and worked together on farms, which are dotted with their names with “and son” often added as a monument to their legacy of hard work and devotion to growing things from the earth.  Livestock is a big part of the farm ecosystem here, as it permits greater economic rewards through transforming crops into a value-added product (i.e., meat) using home-grown “factories” that consist of cows, sows, ewes, or hens (turkeys and chickens).  The wealth these folks are able to build (and in many cases, it is substantial), was grown little by little, usually with ma, pa, and the young-uns working together. 

And as we know, Nature can be unforgiving.  It does not notice your race, your people and connections, or whether you have “privilege”.  It delivers sun, warmth, wind, rain, hail, snow, and freezing cold equally to everyone.  And everyone has to rise to the challenge.  I admire these people and their accomplishments.  It must have taken a lot of courage to leave the old country and strike out in something new.  But the old country was probably not so great for them.  This one worked out much better.  Liberty produces such wonders.  Once you see the track record of Liberty and what it produces, it is hard to imagine wanting anything else.     

After enjoying a great meal made by my sister (who inherited cooking genes from my mother, who at 91 still dazzles us with her skills) and admiring their beautiful herd of cattle (a product of 40-plus years of excellence),  we journeyed on to Sioux Falls, reaching the city just after dark.  For those fans of “It’s a Wonderful Life”, I think of Sioux Falls as another version of Bedford Falls.  It is architecturally fascinating and at Christmas time the lights add a warm ambiance to a wintery environment. 

Before dinner at our favorite spot (Minerva’s, which I highly recommend), we shopped some of the downtown stores that were open late on Thursday night for Christmas shoppers. Mrs. Murphy’s Irish Gift Store on Phillips Street is run by expatriates (well, Mrs. Murphy is actually English, but we’ll keep that a secret).  They focus on imported goods from their mother country.  I loved everything there and managed to acquire a very fashionable hand-made Irish tweed hat as well as other gift items.  The Murphys exemplify innovation and entrepreneurial spirit in offering gifts that they select to honor the old ways of creativity and craftsmanship.  If you want your Christmas presents to come from a craftsman’s hands, not merely from some factory, call them.  They offer free shipping, too. 

But entrepreneurial challenges do not make for an easy life. The Murphys were working late to serve their customers, but the Swedish gift shop down the street was going out of business.  Not everyone who dares to offer ethnic-oriented goods will have the world beating a path to their door.  But through persistence and engagement, connecting personally with the needs of their customers and bringing something new to the marketplace, the Murphys seem to be doing just fine.  God bless them and help them to prosper (wait- isn’t there an Irish blessing for that – a plaque for sale, perhaps!?!).  And what’s not to love about hand-made Irish hats, socks, sweaters, porcelain, and such things in a mass-produced world!  What a country that embraces diversity and allows it to thrive in the marketplace! 

When the world is losing its bearings, political leaders are talking nonsense, and young people are hoodwinked into protesting without giving much thought to the parameters of what they find to be unjust, it is a relief to find a haven where people simply structure their affairs based on the realities of meeting demands through honest trade.  Political classes may pander to the interests of one group of citizens against another, corrupted by money contributed by special interests, but these folks seem to focus on what matters to their customers, which ultimately inures to the benefit of all. Have you ever noticed that where government is most active in redistributing, the claims of injustice are loudest, but where government is getting out of the way and letting people trade, they seem most happy and contented?  Perhaps there are lessons to be learned here.

As it turns out, free markets and property rights work pretty well when we give them a chance.  I wish that the rest of America could witness these truths and the beauty they can produce.  How about booking a vacation (or a field trip) to rural America? 

EAM