Archive for October, 2012

Inconvenient Facts

A week ago, I promised (threatened?) to share a few inconvenient facts.  Here they are, and they’re all about taxes.  They were sent to me by my friend, wealth manager Kris Garlewicz.  (Note – this data is from 2009, which I guess is the most recent available.)

Taxpayer             Share of                Share of                  Effective Income

Segment              Income              Income Tax                     Tax Rate

Top 0.1%                7.8%                   17.0%                           24.8%

Top 1.0%              16.9%                   37.0%                          24.0%

Top 5.0%              31.7%                  59.0%                           20.5%

I’m sure you can look at those numbers and find any story you like.  Here are a couple of stories they told me.

First, the argument that high income taxpayers aren’t paying their fair share is utterly disingenuous and flatly wrong.   Imagine that a comfortably upper middle class family in your neighborhood – a family making about $150,000 a year– announced that in addition to paying for their household, they were going to pick up the tax bill for 15 other families.  Now imagine the family next door to that one.  Earning $350,000 a year, they are distinctly wealthier, although not ostentatious about it.  They announce that in addition to paying for their household, they will pick up the tab for 40 other families.  And now think of the house at the end of the block.  These folks are truly affluent, bringing in $1.4 million a year.  They announce that they are going to pick up the tab for 325 other families.

If they did this voluntarily, we would lionize them for their generosity.  Yet, a little arithmetic shows that, in reverse order, this is exactly what the top 0.1%, the next 0.9%, and the remainder of the top 5% do.  I would respectfully ask my Democratic friends, in what world does this not constitute doing their fair share?  Said differently, how many households would each of these taxpayers have to support in order for you to feel that fairness had been achieved?

The sword of disingenuousness cuts both ways, however.

As you can see above, the actual tax rate paid by these households averages only 20.5%, and is below 25% for the very highest earners.  These figures are based on Adjusted Gross Income, not Gross Income, so the actual effective tax rates these households pay are even lower than what’s shown here.

So I would respectfully ask my Republican friends, in what world is a 20%, or even 25%, tax rate offensively and employment-crushingly high?  There is plenty of theory that raising 20% to, say, 23% would have a dampening impact, but not a shred of actual evidence, at least that I’ve seen, to prove it.  Neither is there anything to prove that reducing it to 17% would unleash a flurry of investment and job creation.

The biggest problem with those tax rates is how little resemblance they bear to the rates everyone is talking about.  The top stated rate is 35%.  An enormous amount of energy, as well as an entire industry of tax lawyers and tax accountants (and, God help us, a few who are both) is devoted solely to the task of converting 35% to 24%.  I count a few of those tax lawyers and accountants as friends (at least I did – they will disown me now), but this activity adds no value.  They collude with a tax code that meets my favorite definition of a Russian novel – thick enough that the author could commit suicide by jumping off of it.

My guess, and that’s all it is, is that if those tax rates were transparent and the top 1% were asked to simply pay 27% instead of 24%, they would shrug and write the check.  The corollary, of course, is that we could tax the daylights out of these people and it would make only a small dent in the deficit.

We have hard choices to make.  We should be talking about them, but that would be much less fun than railing about imagined unfairness or championing attractive but unproven theory.

I’m glad the election is near.  I’ve been writing more about politics than I ever intended but it seems important.  I have one more left in me.  Later this week, I will share a perspective on the question of “Who Dealt this Mess.”



A week ago, I described hearing an economist put the cart before the horse.  I happened to see his name in yesterday’s newspaper, right next to the phrase “Nobel Prize winner.”  Oops.

Undeterred, however, I’d like to describe another case of an economist getting it, if not backward, then at least sideways.

A few weeks ago, the Wall Street Journal published an op-ed by Arthur Laffer, creator of the Laffer Curve, which became the fountainhead of Reagonomics.  Laffer argued that stimulus spending makes recessions worse.  His evidence for this was a table comparing the change in government spending to the change in GDP for the 34 OECD countries from 2007–2009.  (See the op-ed, including the data, here.)

I must have too much time on my hands, because I put the numbers into a spreadsheet and did the math.  The correlation that Laffer described is there, but is not impressively strong.  It also turns out to be heavily influenced by Ireland and the economic powerhouse that is Estonia.  Both are outliers in the data.  Removing them cuts the correlation in half, reducing it to a level of significance that doesn’t merit space in the Journal.

Moreover, Laffer was confusing correlation with causality.  This is a rookie mistake – not exactly Nobel Prize material.  It is, for example, at least equally plausible that countries which were more severely affected by the recession felt compelled to spend more in order to try and counteract it.

Of course, Laffer might well be right.  Around the time his article appeared, I heard on CNN that the $2.4 trillion Ben Bernanke injected into the US economy created 2 million jobs.  That works out to $1.2 million per job.  It would have been much cheaper to simply pay people not to work.  But the data Laffer used don’t prove his point.  He was speaking from theory, not from fact.  Disingenuous is the word that comes to mind.

One thing Laffer did get right, however, was his original curve.  As it became popularized, it is understood to make the case that lowering taxes will increase tax revenues.  What Laffer actually said was that there are two tax rates that will produce no revenue – 0% and 100%.  (Laffer, by the way disclaims credit for the idea and attributes it to a 14th Century Muslim scholar.  Go figure.)

So the Laffer Curve actually looks like this (graphic shamelessly lifted from Wikipedia):

This graph is purely illustrative, which raises two questions:

1) What is the actual shape of the curve (i.e., where’s the hump)?

2) Which side of the hump are we on?

There.  I’ve done it.  I’ve achieved one my life goals.  I’ve used the word “hump” in two sentences, neither of which is about the sensuous pleasures of airport security.  I also want to ride in a limo with American flags on the fenders.  But I digress.

I would have thought that finding the high point on the curve would be relatively easy, but from what I’ve read, apparently it isn’t.  Even so, we’re left with a shallow debate.  David Frum, whose Republican credentials include having served as a speechwriter for George W. Bush, complains that his party has been reduced to one idea: cut taxes for the wealthy (note: if you want to cut taxes, you have to cut them for the wealthy because that’s who pays the taxes).  The Democrats on the other hand, have yet to meet a tax they didn’t want to hike.

There’s an empirical answer in there somewhere, not that either side seems to care.  There also are some inconvenient facts about who pays how much that neither side wants to pay attention to.

That will be the subject of another post – perhaps later this week.  Until then, I’m going to revel in the achievement of a goal and turn my attention back to thinking of all the ways I can use the word “feck” in a sentence.

Economists, Carts and Horses

In the two weeks since my last post, I’ve learned a couple of things.  Someone in Serbia likes my blog.  It’s been viewed recently in the Netherlands and Bulgaria (I think it was Bulgaria – calling my Cyrillic rusty would be an insult to rust).  Also, someone  found me by searching Google for “surplus hip waders.”  I hope it wasn’t the same person who found me by searching for images of medieval, cast-iron virtue-preservation devices because the thought of those articles occupying the same space is enough to curl my fingernails.  (If that reference seems obscure, please scroll back to “Living My Pledge.”)

I also got three pictures, all on the same day, that will make my Best-Pictures-of-the-Year post a few months from now.

And I experienced some serious stuff as well.

Two weeks ago, I got to hear Michael Porter, the Harvard Business School’s strategy guru, opine on the state of US competitiveness.  The bottom line:  It’s bad and getting worse for all the reasons you might imagine, and it’s fixable.  A classic strategy consultant’s answer.  Along the way, he slipped in an interesting observation.  The relative decline in the quality of US public education, he said, coincides with the expansion of career choices for women.  The implication is that for decades we engaged in huge social arbitrage by underpaying for the skills of highly qualified women whose career options largely were limited to teaching and nursing.  I hadn’t thought of that, but it makes sense.

And last week, I was privileged to hear a University of Chicago economist give a talk that had something to do with bank regulation.  I say “something to do with” because his talk was almost completely opaque to me.  I suspect and sincerely hope that’s because it was way over my head.

Some of his logic was based on hypothetical conditions that I’m pretty sure don’t exist.  For example, he began with this:  “Suppose you’re an entrepreneur starting a new venture; you have to decide whether to sell debt or equity.”   The entrepreneurs I work with do not understand the concept of “selling debt.”  They do understand the concept of “borrowing money,” but none of them can do it because banks don’t lend to new ventures.  (I verified this by passing a note to the woman sitting next to me , who happened to be a bank president:  “Do you lend to entrepreneurs who are starting new ventures?”  She quietly shook her head.)

The economist said one thing that was very clear:  “Deflation causes recessions.”  Call me crazy, but I really thought it was the other way around.  Carts and horses.  Of course, when economists draw graphs, they often put the independent variable on the y-axis, which is the opposite of what the rest of us are taught to do.  Or perhaps it’s like my friend Bruce Onsager, a brilliant strategist, says:  “It’s only what we think is the independent variable.  Maybe they may know something the rest of us don’t.” Or perhaps its just a secret handshake.

Many heads nodded sagely throughout the economist’s talk, which either means that he was being very smart or that no one wanted to tell the emperor he was, if not naked, perhaps just wearing jeans and geeky t-shirt.  (Not wanting to plagiarize, I owe credit for that one to my son.)

Underneath all of this, there turned out to be an interesting issue, which is whether we regulate banks in ways that are intended to reduce risk but actually cause them to make riskier decisions.  I’m confident that was the issue, but I have no idea what the answer was (or is).  The main thing I took away was a realization that this is how economists, who have influence (Ben Bernanke’s name came up a few times as a leader in the kind of research being presented), actually talk to one another.   I genuinely, truly hope it’s because they are really smart gals and guys, and not emperors who buy their clothes from Threadless.  I’m not smart enough to tell the difference.

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October 2012
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