Tax Day Charts!

Courtesy of Dave Gilson, here's a whole bunch of handy charts for tax day to show you who's paying how much to whom. For example, the chart below shows average effective tax rates for various income levels. Note that the federal tax system as a whole (including both payroll and income taxes) is fairly progressive at the bottom half of the income scale but then flattens out. Someone making an absolutely average income pays about 16.3% of their income in taxes, and that goes up to only 19.8% for someone at the very tippy top. That's pretty damn flat for an allegedly progressive tax code. More here.

If we just left the tax code completely alone, a big chunk of our deficit problem would go away. This is not my preferred policy; I support allowing all the Bush tax cuts to expire, but allowing the Alternative Minimum Tax to blindly hit more and more families over the next couple of decades is a pretty blunt instrument for raising money. I think we can do better.

Still, it would solve a big piece of both our medium-term and long-term deficit problems. Ross Douthat, however, thinks this would be a catastrophe:

Today, for instance, a family of four making the median income — $94,900 — pays 15 percent in federal taxes. By 2035, under the C.B.O. projection, payroll and income taxes would claim 25 percent of that family’s paycheck. The marginal tax rate on labor income would rise from 29 percent to 38 percent. Federal tax revenue, which has averaged 18 percent of G.D.P. since World War II, would hit 23 percent by the 2030s and climb even higher after that.

Such unprecedented levels of taxation would throw up hurdles to entrepreneurship, family formation and upward mobility. (Or as the C.B.O. puts it, in its understated way, they would “tend to discourage some economic activity,” and “harm the economy through the impact on people’s decisions about how much to work and save.”)

There's a lot of cherry picking going on here designed to make this look as oppressive as possible. For example:

  • That 15% in federal taxes is mostly payroll taxes. Only about 3-4% is federal income taxes. That's pretty low.
  • In fact, it's historically low, as the CBPP chart on the right shows. Far from a higher level being "unprecedented," a higher level would actually do nothing more than get us back to the average rates of the Reagan and Clinton eras.
  • It's true that federal tax revenue has averaged 18% of GDP since World War II. But why stop there? If you looked at average tax revenue since World War I it would look even lower and modern rates would look even worse. But this is a silly game. Average tax revenue over the past 30 years, a far more representative period, has been 21% of GDP.
  • This means that if tax revenue goes up to 23% of GDP by 2030, it's risen above its 30-year average by only two points. That's hardly a catastrophe.

It's easy to play games with this stuff to make it look like it's the end of the world. That's especially true if we resort to blunt comparisons, rather than constructing a tax code that actually makes sense. But we don't have to do that.

The beginning of wisdom here is to accept that taxes are going up. The aughts were a nice holiday from history for us all, but they were an irresponsible one. America is aging, and that's something we knew back in 2000 just as well as we know it now. Even if we do a good job of managing spiraling healthcare costs, this means that our obligations to retirees are going to go up. That's not because of any insidious liberal plot, it's just because there are going to be more of them.

So 21% of GDP isn't going to cut it in the future. I doubt that 23% of GDP will cut it either. More likely, we're looking at 25% of GDP or even a little more by the 2030s. But the fact is that this just isn't that much. It's four points of GDP above our post-Reagan average. We can afford that fairly easily, and if we reform the tax code with common sense in mind the impact will be pretty moderate on everyone. Middle class families will pay a little more in taxes, the upper middle class will pay a little bit more, and the rich, who have been showered with tax cuts over the past 30 years that really are unprecedented, will see theirs go up more than that. But the increase won't be crushing for anyone.

I don't question for a second that we need to do more to rein in spiraling healthcare costs. There's just not enough evidence that we're getting good value for money, and President Obama's goal to keep future increases to GDP + 0.5% is a good one. But it needs to be more than just an aspiration, with seniors paying a crushing price in lost medical care if we don't meet it — as they would under Paul Ryan's flight of fancy. It needs to come with serious, detailed efforts to hold down costs and make sure we're funding medicine that provides real benefits.

But even if we do that, we need to prepare for a world in which we pay upwards of 25% of GDP in taxes. That's not the end of the American dream, as conservatives would have it, it's a modest increase that ensures all of us a decently secure retirement. Letting the Bush tax cuts expire on both the middle class and the rich is a good place to start, and a smart reform of the tax code can pretty easily get us the rest of the way there over the next couple of decades without causing anyone very much pain. It's time to grow up and face this reality.

American Exceptionalism

Europe, it turns out, wasn't really ready for the war in Libya they were so anxious to get into:

Less than a month into the Libyan conflict, NATO is running short of precision bombs, highlighting the limitations of Britain, France and other European countries in sustaining even a relatively small military action over an extended period of time, according to senior NATO and U.S. officials.

....Libya “has not been a very big war. If [the Europeans] would run out of these munitions this early in such a small operation, you have to wonder what kind of war they were planning on fighting,” said John Pike, director of GlobalSecurity.org, a defense think tank. “Maybe they were just planning on using their air force for air shows.”

This kind of mockery is well deserved in one sense, but in another it just highlights the fundamental difference between the United States military and everyone else's. The reason our defense budget is ten or twenty times the size of any other country's isn't literally because our army is ten or twenty times bigger. It's because the American army is designed to project power. Most other national defense forces are designed to work only locally: either to defend against invasions or, at most, to be able to mount offensives across local borders. The only real exceptions are Britain and France, but even they have only a small ability to project power. Nobody else has much at all.

There's a quantum leap between that kind of military and the kind that the United States has. You can't get it by spending just a little more money; you have to spend a lot more money for a whole range of capabilities that local defense forces don't need. That quantum leap is the real reason the U.S. military is so much staggeringly larger than anyone else's.

So in that sense, the mockery is undeserved. Britain and France just aren't set up to project power on a large scale, and we knew that perfectly well going in. They don't have bases all over the world, they don't have heavy lift capacity, they don't have long-range bombers, they don't have a dozen supercarrier groups, they don't have huge arsenals of cruise missiles, they don't have fleets of reconnaissance satellites, and they don't have hundreds of aircraft and trained pilots at their beck and call. In fact, they're only doing as well as they are because Libya is only barely not a next door neighbor.

So sure, maybe Britain and France should have more planes and more bombs. But really, there's not a lot of point to arguing over nits like this. For them to project power effectively, even in nearby Libya, would require not just a bit of shoring up here and there, it would probably require a doubling or tripling of their defense budgets. Likewise, cutting the U.S. defense budget by bits and pieces wouldn't really change our posture. If we want to project power all over the world, it's going to continue costing us roughly what it costs us today. If we don't want to, we could cut our defense budget by two-thirds in a stroke. There's not a lot of room in between.

This is all Defense 101, but we seem to be learning it all over again in Libya. I keep wondering whether one of President Obama's goals in this operation is to somehow rub everyone's noses in this, and I suppose the answer is no. But it's a useful reminder anyway.

Czars and Signing Statements

The recently passed budget deal includes a bunch of policy riders, including one that defunds several "czar" positions in the White House. Czars have become a tea party hot button for some reason, so I guess a few of them had to get the axe. President Obama, however, thinks that Congress has no right to tell him who he can and can't consult in the Office of the President. So he signed the bill but added a signing statement telling Congress to piss off. Jake Tapper:

“The President has well-established authority to supervise and oversee the executive branch, and to obtain advice in furtherance of this supervisory authority,” he wrote. “The President also has the prerogative to obtain advice that will assist him in carrying out his constitutional responsibilities, and do so not only from executive branch officials and employees outside the White House, but also from advisers within it. Legislative efforts that significantly impede the President's ability to exercise his supervisory and coordinating authorities or to obtain the views of the appropriate senior advisers violate the separation of powers by undermining the President's ability to exercise his constitutional responsibilities and take care that the laws be faithfully executed.”

Therefore, the president wrote, “the executive branch will construe section 2262 not to abrogate these Presidential prerogatives.”

In other words: we know what you wanted that provision to do, but we don’t think it’s constitutional, so we will interpret it differently than the way you meant it.

Actually, I'm curious about something here. When Congress and the President disagree about something like this, it's up to the Supreme Court to adjudicate. But how does that usually work? Does the president abide by the law but sue in federal court to have it overturned? Or does he break the law and wait for someone to sue him? What's the usual historical precedent?

UPDATE: The aptly named John Whitehouse reviews some history and concludes that Obama is in the right. However, he also says this just isn't going to be resolved by the courts:

Under no realistic scenario is this going to go to the courts, short of someone actually depriving the czars from receiving a paycheck which they then sue for. This is not a problem for the court system. This is for Congress and the executive to work out alone.

I understand that this is a real possibility, since the Supreme Court generally doesn't take sides in purely political disputes like this. That seems pretty unsatisfactory, though.

Friday Cat Blogging - 15 April 2011

I like this picture of Inkblot a lot. So much, in fact, that I'm running it bigger than usual and turning over the entire day to him. But all is not lost for Domino lovers: if you look closely, you can see her snoozing in the background.

But that's not all! Today I have a special shoutout for Gert, a faithful reader from Minnesota and Florida who's celebrating her 80th birthday this weekend. Gert's a former librarian and technophile who, according to daughter Marie, "took to computers and the Internet like a duck to water....When we were little she used to bring us library books home to read; now she sends email links to articles collected from an astonishing variety of sources. She can't get enough news about current events; she's been a political activist from back when they were hoping the ERA would pass." Sounds like my kind of reader. Have a great 80th, Gert.

Fun and Games on Capitol Hill

My Twitter feed was full of tweets this morning about a House vote on a budget proposal from the Republican Study Committee, but I didn't really understand what was going on and didn't tune in to C-SPAN to find out. But it turns out this was a pretty entertaining vote. The RSC budget is even more right-wing than Paul Ryan's framework, and this morning an amendment was proposed to adopt the RSC budget. Normally it would lose easily because a handful of Republicans would join the entire Democratic caucus in voting no. But Dems decided to vote "present" instead. Steve Benen picks up the story:

Most Republicans were inclined to support the truly insane RSC proposal, but with so many Dems voting "present," there was a very real chance that the RSC plan would actually pass — and it, not Paul Ryan's plan, would be the approved budget plan for the House.

And it nearly worked. Many Republicans who'd voted for the RSC plan had to scramble to switch their votes and avoid a huge embarrassment. Indeed, the result itself was still pretty embarrassing — there are 176 members of the Republican Study Committee, but only 119 Republicans voted for the RSC's plan.

For Congress watchers, this was quite a bit more drama than we're accustomed to seeing. David Kurtz noted that "chaos erupted" on the House floor, while The Hill said the final minutes of the vote "were characterized by shouting more typical of the British parliament than the U.S. Congress."

Isn't democracy wonderful?

Secrets of the Tax Prep Business

It's tax day, so you should go read Gary Rivlin's great piece in our current issue about the tax prep business and its laser-like focus on the desperate and the easily scammed:

"We recommend that you locate your office where the household income is $30,000 or less," the Instant Tax manual counsels. Each franchisee attends a week of training sessions where "unbelievable emphasis was put on poor minorities," according to former franchisee Habtom Ghebremichael, who recalls a trainer telling his group, "We cater to the 'hood." His archetypal customer, Ogbazion says, is an assistant manager at a fast-food restaurant earning $19,000 a year. "They've burned the banks," he says. "They've bounced too many checks. They've mismanaged their finances." Experience has taught him that a few amenities (a ficus tree, free coffee, TV in the reception area) go a long way in making customers feel welcome. "At the check-cashing place, they're talking to someone behind bulletproof glass," Ogbazion continues. "The welfare building—you can imagine what that's like. Here, we treat them well, and they want to come back."

The emphasis of the piece is on Refund Anticipation Loans, the high-cost loans that these places will give you as soon as they've finished your tax return and figured out how big your refund will be. To my surprise, though, that's not really where the money is. RALs are indeed lucrative, usually generating fees of over $100 on a risk-free loan of a couple thousand dollars. But this is just what gets the marks in the door. The real key to the inner city tax prep business is that they charge several hundred dollars to prepare a simple tax return that a legitimate accountant would likely do for no more than a hundred bucks — and that the IRS would do for free. All together, your average working poor schmoe probably pays upwards of $400 or more to get that instant refund.

Lately the low-end tax prep business has gotten a little tougher, as big banks have stopped providing credit lines and the IRS has stopped telling preparers which of their customers are likely to have their refunds garnished — something that actually makes RALs legitimately risky. Click here for the whole story.

Britain's Folly

Tea partiers and their Republican allies in the United States are convinced that the path to prosperity starts with budget cuts right now. That's what the Tory brain trust in Britain thought too when they swept to victory last year. So how's that working out?

Retail sales plunged 3.5 percent in March, the sharpest monthly downturn in Britain in 15 years. And a new report by the Center for Economic and Business Research, an independent research group based here, forecasts that real household income will fall by 2 percent this year. That would make Britain’s income squeeze the worst for two consecutive years since the 1930s.

All of which has challenged the view of Britain’s top economic official, George Osborne, that during a time of high deficits and economic weakness, the best approach is to aggressively attack the deficit first, through rapid-fire cuts aimed at the heart of Britain’s welfare state.

....“My view is that we are in serious danger of a double-dip recession,” said Richard Portes, an economist at the London Business School. “This is going to be a cautionary tale.”

The rest of the article makes clear that there's still a big difference between British conservatives and their American counterparts. Right or wrong, the British variety are actually serious about the deficit: they've slashed spending but they've also raised taxes and kept high marginal rates for top earners. American conservatives, of course, have no such seriousness: they just want to use the deficit as an excuse to cut social programs that they've hated for decades.

Either way, though, it's not likely to work. Britain is probably going to be paying the price for this folly for many years to come.

Where Your Money Goes

According to the White House, here's where your money went if you paid $10,000 in income tax last year. Click here if you want to get a receipt for the actual amount you paid. Fun!