Sunday, April 29, 2012
Recently syndicated columnist Walter Williams noted that April 17th was Tax Day – the day until which we had to work this year to pay our combined federal, state, and local taxes.
Williams made this observation as preface to his argument that taxes are excessive and that federal budget deficits are strangling the economy. This position is also Republican Party dogma and is cited as justification for demanding tax and budget cuts.
Deficits, Williams explains, stifle economic growth because they result in government borrowing and inflation. Borrowing drives up interest rates leaving individuals and businesses with less to money to spend while inflation is “taxation by stealth” that debases the currency and takes yet more money out of our pockets.
Federal income taxes compound these problems by burdening the top 50% of earners with high marginal rates that they must endure because the other half of Americans pay little or nothing. Moreover, since non-payers have no stake in lowering tax rates, they support big-spending politicians and see tax cuts as a threat to the government’s ability to give them “handouts”.
It’s a simple and compelling narrative -- until it’s compared to reality. So, let’s do the comparison starting with Williams’ criticism of the tax system.
Williams states that “the top 1 percent of American income earners paid almost 37 percent of federal income taxes. The top 10 percent paid about 70 percent of federal income taxes, and the top 50 percent paid nearly 98 percent. Roughly 47 percent of Americans paid no federal income tax.”
This sounds grotesquely unfair and would be, if federal income taxes were the only taxes we pay. But, when pointing out that it took us 107 days to reach Tax Day, Williams included all federal, state, and local taxes. So, when complaining about uneven distribution of taxes, why does he mention only the federal income tax?
Because, had Williams included all federal and state taxes, his claim that the burden is distributed unevenly would have been destroyed.
When all federal and state taxes are included, the top 1 percent of taxpayers, who earn an average of $1.4 million annually, shoulders just 21.6 percent of the burden matching almost exactly their share of the nation’s total income – 21 percent.
Additionally, the top 1 percent’s total combined tax rate of 29 percent is almost the same as that of families making $68,000 per year whose combined rate is 28.3 percent. The only people who pay less than 20 percent of their income in taxes are the lowest earners whose average income is $13,000 per year. They pay 17.4%.
In short, the higher federal income tax rates experienced by the wealthy are almost entirely offset by Social Security and state taxes which exact a much larger share of incomes from middle and lower income earners.
As a side note, Williams’ accompanying surmise that “people who pay little or no taxes become constituents for big-spending politicians”, seems odd when most o f the income-poor states, including West Virginia, that pay comparatively little in income taxes and depend heavily on federal “handouts” voted decisively for the Republican presidential candidate in the last election.
But, what about Williams’ implication that deficits and inflation suffocate the economy?
In the late 1990’s the federal government ran budget surpluses. Then came the income tax cuts passed under President George W. Bush and increases in military spending for wars in Iraq and Afghanistan. Large deficits ensued and the national debt grew by more than half. Then came the housing bubble and the economy crashed in 2007 and 2008. Tax revenues plunged and deficits became even greater as more people required assistance from safety-net programs.
It was exactly the high borrowing, deficit spending doomsday scenario Williams described and, if his theory were correct, the result by now should have been years of high interest rates and rampant inflation. But, both continue to be at lows not seen in fifty years.
Meanwhile, Williams’ other predicted result, slow economic growth, is contradicted by history. In 1947 , after years of deficit spending during World War II and continued deficit spending on the GI Bill and other programs, the national debt reached an all-time high as a percent of GDP – even larger than today’s debt. Yet, we didn’t cut budgets and impose austerity measures. And the result wasn’t economic ruin. It was the longest and most robust economic expansion in history during which deficits shrank and the debt declined as a percent of GDP.
We could have the same result today if Williams’ Republican co-religionists in congress would support rather than fight stimulus measures. Economic text books have long taught that, instead of hewing to the dogma of always balanced budgets, deficit spending can and should be used to stimulate the economy in times of slowdown and surpluses should be run in times of growth. The wisdom of that approach was proven in the bountiful decades that followed World War II and the price of ignoring that wisdom is evident in the now years-long economic downturn of European countries that made the mistake of actually applying Williams’ preferred policies.
In summary, Williams’ fears are repudiated by our historically low interest and inflation rates and by the post-World War II boom. And his belief in the virtues of austerity is repudiated by what has become a European depression. The question is whether Williams and Republicans in congress will finally give reality its due.
Monday, April 9, 2012
"I can't believe that!" said Alice. "Can't you?" the Queen said in a pitying tone. "Try again. Draw a long breath and shut your eyes."
We could all use that advice when contemplating data purporting to describe West Virginia’s “through the looking-glass” economy. Just as Einstein described a parallel universe in which the laws of Newtonian physics break down and all sorts of absurdities are possible, West Virginia’s economy turns the laws of conventional economic understanding upside down.
If in the last few years you paid attention to the news or, better yet, to press releases from the governor’s office, you would have heard that West Virginia leads the nation in personal income growth (June 2011), economic growth (October 2008), export growth (February 2012), and home ownership (for years). Meanwhile, West Virginia has the lowest incidence of underwater mortgages in the nation (February 2012) and our unemployment rate is a full point below the national average (also February 2012).
We should be bathed in prosperity. Right?
No. We’re still the poorest, unhealthiest, and least livable state in the nation. That being the case, the question is how does West Virginia produce these glowing economic statistics and what do they mean?
Let’s start with our below-average unemployment rate. The calculation is simple. Divide the numerator – the number of people with jobs – by the denominator – the number of people working or looking for jobs. The more people who find jobs, the lower your unemployment rate – or at least that’s how it’s supposed to work.
But, creating jobs is hard. So, West Virginia discovered that it’s actually easier to decrease the denominator, the number of people in the workforce. How?
First, lots of West Virginians who look for work give up and move elsewhere. The result is that in the last sixty years, during which America’s population doubled, West Virginia’s has not changed.
Second, we disable people at a ferocious rate and, because the disabled are not counted in the workforce, West Virginia achieves the mind-bending result of having an unemployment rate that’s below the national average while the percent of adults between the ages of 22 and 65 with jobs is less than in any other state.
If that sentence leaves you a little disoriented, like Alice, take the White Queen’s advice and draw your breath and shut your eyes while we consider another statistic --West Virginia’s leadership in personal income growth between 2008 and 2009.
At that time the nation was fully in the grip of recession. All but three states saw declines in personal income, which is made up of wages, dividends and interest, and transfer payments. The latter, transfer payments, are often referred to as “entitlements” and include unemployment insurance, Supplemental Social Security Insurance, Food Stamps, and other programs.
Because of West Virginia’s historically dismal economy, wages, dividends, and interest make up a smaller share of incomes here than elsewhere. So, when the economy and those three items tanked, West Virginia was less affected than other states. Meanwhile, entitlement funding, which made up a disproportionately large share of West Virginia incomes, increased making West Virginia a winner amid a sea of losers.
In other words, West Virginia’s comparative personal income performance improved as a direct result of general economic decline.
Still feeling queasy? Well, buck up because West Virginia’s brief leadership in overall economic growth is similarly a case of addition by subtraction.
Because a disproportionate share of West Virginia’s GDP comes from government services and healthcare, which remained fairly robust during the recession, West Virginia’s GDP grew while virtually every other state’s declined.
Of course, our brief leadership in personal income and GDP growth was sure to end once the nation’s economy began recovering, as it did, and now West Virginia is duly reverting to its place near the bottom of the stack.
Meanwhile, West Virginia’s leadership in housing – a highest-in-the-nation rate of home ownership and lowest-in-the-nation incidence of underwater mortgages – is an example of the adage, when you haven’t risen far, you don’t have far to fall.
Home ownership rates have always been high in West Virginia because the state is rural, housing prices are low, and because West Virginia offers few opportunities to economic immigrants who seek jobs and who make up a large share of the nation’s rental population.At the same time, because most of West Virginia never experienced a boom in housing prices, there was no bubble to burst when the market crashed in 2008. So, few mortgages were susceptible to going underwater.
But, at least West Virginia’s leadership in export growth in 2011 is good news -- as far as it goes. Unfortunately, it doesn’t go far.
Last year West Virginia exports increased by 39%. However, the growth came entirely from the coal industry and that would be fine except for two factors.
Because the vast majority of coal exported from West Virginia is owned by out-of-state companies, the profits from increased shipments are largely repatriated elsewhere.And, because the coal industry employs only about 20,000 West Virginians, the impact on jobs and wages is small.
It’s just one more case of prosperity in the mining industry failing to translate into prosperity for West Virginians. And it’s one more way in which West Virginia’s “through the looking-glass” economy makes absurdities of standard measures of economic performance.
Or, as the White Queen might say of West Virginia’s economy, “Jam tomorrow and jam yesterday, but never jam today.”
Monday, April 2, 2012
In my recent column, "A Plea For Those of No Faith", I argued for the civic and moral virtue of those who are not religious. A new blog entry from Georgetown University's Center for Applied Research in The Apostolate suggests that, if the presidential election were held today, Barack Obama might lose BOTH the Protestant and Catholic vote and still win the popular vote.