Money Is Wasted On the Rich

At an art auction on Tuesday night, an anonymous buyer bid $43,800,000.00 (that’s 43.8 million dollars) for this painting (the blue thing with the white stripe, not the gentlemen in suits).

We could draw lots of conclusions from this latest Gilded Age moment. At a minimum, we ought to have a progressive sales tax, one that applies higher rates to more expensive purchases. For this particular purchase, I’d recommend a tax of at least 100%.

$59 in 45 Years!

In case there was any doubt about the growth of inequality in America, a new study based on IRS data shows that:

Corrected for inflation, the average annual income of the bottom 90% of workers in 2011 was $30,437. In 1966, the average was $30,378. That’s an increase of $59 in 45 years.

Meanwhile, the average income of the top 10% almost doubled, rising from $138,793 to $254,864, an increase of roughly $116,000, while the average income of the top 1% rose by $628,000. For the top 0.1%, the increase was $18 million!

More recently, since 2009, the top 1 percent received 81% of  the growth in income. The top 0.1% received more than 50% of the growth.

The wealthiest Americans are pulling away from the rest of us because income has shifted from labor to capital, and because of lower taxes on capital gains, dividends, estates, and other income that is especially important to people with a lot of money.

Policies that especially benefit people with high incomes could be changed (in theory). Yet, in the words of economist David Cay Johnston:

“It has become widely understood that we cannot balance our federal budget by raising taxes only on those at the top, because there is not enough income there, even if we taxed away everything the top makes. What is equally true is that we cannot increase tax revenue if the incomes of the vast majority keep falling [or remain stagnant]. That, however, has yet to become part of the debate on how to finance government.”

Death and Taxes

A recent article by Katherine Newman, a sociology professor at Johns Hopkins, highlights the effect of rising tax rates on the poor. She points out that for the past 30 years or so, many states in the South and the West have been raising sales taxes and fees for government services, both of which especially affect the poor. States in the Northeast and Midwest, on the other hand, have generally been more progressive in their tax policies, some even going so far as to create local versions of the federal Earned Income Tax Credit, which is specifically designed to assist people who don’t earn much money.

According to Professor Newman, the result of these policies, after correcting for other variables, like the local poverty rate, racial composition, diet and cost of living, is that there is a clear relationship between taxing the poor and “negative outcomes”, such as heart disease, infant mortality, dropping out of school, divorce, property crime and violent crime:

“The poor of the South — and increasingly the West — do worse because their states tax them more heavily. They have less money to buy medication, so their health problems get worse. High sales taxes make meals more expensive, so they shift to cheaper, unhealthy food. If people can’t make ends meet, they may turn to the underground economy or to crime.”

Partly for this reason, Southern and Western states receive more than their share of the federal budget (it’s not just because they have lots of military bases):

“Medicaid payments, food stamps, disability benefits — all of these federal programs swoop in to try to patch up a frayed safety net. Consequently, the Southern states reap more dollars in federal benefits than they pay in taxes (like Mississippi, which saw a net gain of $240 billion between 1990 and 2009), while the wealthier states — which do more to take care of their own — lose out for every dollar they pay (like New Jersey, which handed over a net of $706 billion over that same period)… We all pay for the damage done when states try to solve their fiscal problems, or score ideological points, on the backs of the poor.”

And yet the situation is getting worse, as states like Louisiana, Nebraska and North Carolina consider cutting income and corporate taxes, while raising sales taxes.


The Oxford English Dictionary defines “sophistry” as “the use of clever but false arguments, especially with the intention of deceiving”.

Consider, for example, the statement on Mitt Romney’s official website that says he wants to “make permanent, across-the-board 20 percent cut in marginal (income tax) rates”.

So if you make a lot of money and the last dollar you earn is now taxed at a rate of 35%, your new, lower rate will be 28%. That will lower your taxes by quite a large amount, especially if you earn a million dollars or more.

If you don’t make so much money, and your last dollar is taxed at a rate of 25%, your new rate will be 20%. Your marginal rate will go down by 5%. Not bad, but the high earner’s rate will go down by 7%. That’s how percentages work.

It certainly sounds like Romney is advocating a big tax cut for the highest earners, bigger as both a percentage of income and as a dollar amount.

At the last debate, however, Governor Romney said: “The top 5 percent will continue to pay 60 percent, as they do today. I’m not looking to cut taxes for wealthy people. I am looking to cut taxes for middle-income people.”

Well, if he’s not looking to cut taxes for wealthy people, he’s made a grievous error.

But wait — the top 5% will continue to pay 60% of all income taxes! Doesn’t that mean that the high earners aren’t getting a tax cut at all?

Of course not. Since the total amount of taxes being paid will go down, the top 5% will still pay 60% of that smaller total. At the same time, they will receive a big tax cut on their “earned” income, much bigger in fact than low earners.

As Bill Clinton said today, someone running for President thinks we’re dumb. No surprise, it’s Mitt Romney, sophist.

Big Science, Low Taxes

The physicist Steven Weinberg wrote an article in the New York Review of Books a few months ago about “big science” — the kind of science that requires large amounts of money. The two main examples of such science are particle physics and cosmology, the sciences of the very small and the very large. In each case, scientific progress has made the problems to be investigated more difficult and more expensive. One of the stories he tells is how concern over federal spending resulted in the death of the Superconducting Super Collider in the early 90s.

Instead of simply calling for the government to devote more money to particle accelerators and space-based telescopes, however, Weinberg puts spending on big science in the context of overall government spending and taxation.

In the last part of his article, he calls attention to the need for more spending on a number of important priorities (education, infrastructure, drug  treatment, patent inspectors, regulation of the financial industry, etc., etc.). Professor Weinberg concludes:

“In fact, many of these other responsibilities of government have been treated worse in the present Congress than science….It seems to me that what is really needed is not more special pleading for one or another particular public good, but for all the people who care about these things to unite in restoring higher and more progressive tax rates, especially on investment income. I am not an economist, but I talk to economists, and I gather that dollar for dollar, government spending stimulates the economy more than tax cuts. It is simply a fallacy to say that we cannot afford increased government spending. But given the anti-tax mania that seems to be gripping the public, views like these are political poison. This is the real crisis, and not just for science.”

The anti-tax mania isn’t gripping the public as a whole, but he makes an excellent point.

Yet More Background on What Romney Said

From an article by Ramesh Ponnaru in the National Review Online:

“The Tax Foundation has calculated the percentage of filers in each state who pay income tax. The ten states with the highest number of non-payers are a strongly Republican bunch: Eight of them went for John McCain in 2008, and nine of them have Republican governors.”

Obviously, some people are very confused. And some people are making stuff up. The red states below had the highest percentages of people filing Federal income tax returns but not paying any income tax. The blue states had the lowest percentages. 


The Background to What Romney Said

Ezra Klein of the Washington Post responds to Romney’s remarks:

“83 percent of those not paying federal income taxes are either working and paying payroll taxes or they’re elderly and Romney is promising to protect their benefits. The remainder, by and large, aren’t paying federal income or payroll taxes because they’re unemployed.”

And why don’t many working people end up owing Federal income tax?

“Part of the reason so many Americans don’t pay federal income taxes is that Republicans have passed a series of very large tax cuts that wiped out the income-tax liability for many Americans. That’s why, when you look at graphs of the percent of Americans who don’t pay income taxes, you see huge jumps after Ronald Reagan’s 1986 tax reform and George W. Bush’s 2001 and 2003 tax cuts. So whenever you hear that half of Americans don’t pay federal income taxes, remember: Ronald Reagan and George W. Bush helped build that.”

Klein points out that some of the tax cuts for lower income people were adopted to make tax cuts for higher income people more politically acceptable. Now, however, the Republicans are arguing that people who don’t owe federal income tax are parasites who don’t deserve government benefits:

“Republicans have become outraged over the predictable effect of tax cuts they passed and are using that outrage as the justification for an agenda that further cuts taxes on the rich and pays for it by cutting social services for the non-rich.”