Asymmetrical Information

Jane, you ought to know better. Clark's plan adapts some published work by Jeff Liebman and was vetted by Laura d'Andrea Tyson, both economists of real reputation. So it's very unlikely that the numbers simply don't add.

Based on the fact that, by making up a bunch of data, you can "prove" to yourself that it can't add up, you decide that Clark must be lying and that Paul Krugman should denounce him. Shouldn't you at least wait for some actual evidence before you accuse someone of lying?

As I understand it, the plan transfers about $30 billion in taxes from the lower half of the income distribution to the top 1/10 of 1%.

Jane:
I'm a bit puzzled by your numbers, did you confuse millions with billions here and there?
You are right about campaign tax plans, though, and this one sounds almost too much like a really cool campaign idea, in the perfect Clinton mode: the maximum image from the minimum effect.

Rhinoman -

It appears that various total revenue numbers were reported in "millions" in the 10th paragraph ($40 million, $65 million and $20 million) were mistyped by Jane and should be "billions".

25 million low-to-mid income house households with an average tax savings of $1600 becomes a $40 billion dollar hole.

Yes, billions, not millions. There are some confusing numbers here.

On the savings side, Clark is claiming a $33 billion cut. A rough look at what he's proposing makes that sound reasonable to me. After all, that's only about 4% of total income tax paid.

As for the millionaires, his plan had virtually no detail at all. Perhaps his 5% increases applies to the AMT also? If so, even your numbers indicate a raw increase in revenue of about $20 billion. In addition, there's something about closing "corporate loopholes," which would raise some additional money. Even with income shifting, it's not really unreasonable to suppose that these things combined could raise around $30 billion.

More detail would be nice, but at first glance Clark's plan actually looks like it adds up pretty decently. And it's worth keeping in mind that with a price tag of $30 billion on both sides of the equation, it's pretty small beer.

Clark's plan adapts some published work by Jeff Liebman and was vetted by Laura d'Andrea Tyson, both economists of real reputation. So it's very unlikely that the numbers simply don't add.

Mark, Tyson was Clinton's chair of the Council of Economic Advisers. She backed the aforementioned tax increase -- the one that made unrealistic assumptions about how likely people were to hide or reposition their wealth, and which thus fell short of expected goals. In other words, she's been dramatically wrong before about exactly this sort of thing, and thus her vetting should be taken with a big grain of salt.

Yes, Tyson is an economist of "real reputation". She's also a friend of Bill Clinton's -- you know, the guy who encouraged Clark to enter the race? It's entirely possible she's being overly optimistic about Clark's tax plan, much as she was about Clinton's.

Valid theory + unrealistic assumptions + wishful political spin can easily equal disastrous tax policy. That's how Reagan got into trouble with the Laffer curve.

In any event, I think it's a safe bet that, had Bush suggested this exact same plan, Krugman would be denouncing it. :) But that pretty much goes without saying, unfortunately.

Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.
Fredric Bastiat

To paraphrase in support of Jane here...

"No tax plan ever survives contact with the taxparyers".

Krugmans hates Bush cos of the fuzzy math in his tax plan and for no other reason?

Did I read that right?

Megan, maybe you could fix para ten (per Brian above).

But don't feel bad, there are a fair number of similar errors on Clark's website. I thought this one particularly noticeable:

"Attacking poverty: 3.2 million lower-income taxpayers will be taken off the tax rolls. Professor Jeffery Liebman of Harvard's Kennedy School of Government has done estimates of the Wes Clark's Tax Reform and found that it will take 3.5 million taxpayers off the tax rolls...."

3.2 million, 3.5, what's the difference? Did anybody read this before putting it online? Or maybe Clark's campaign admires PJ O'Rourke, and has applied his Circumcision Rule: You can take 10% off the top of anything. (From Parliament of Whores)

Oh, and you can't go by AGI to calculate how much the million-plus earners will pay, because Clark says that the 5% surtax won't apply to capital gains. Look, a ready-made loophole!

Also, I note they're saying the new child tax credit only applies through age 17. Since this replaces the dependent exemption (among other things), there may be tax increases on families with dependent kids 18 and older; might be hard on families with kids in college.

You didn't read the fine print: the tax credit phases out beginning at 100,000K.

But he promises that there won't be tax increases for those making less than 200K.

Not quite what Mark's been trumpeting.

The marginal rates for those with children making close to 200,000K will be very very high.

Anyone who would lend any credence to what a Presidential candidate said about fiscal policy needs to join the crowd around the table at my next 7-card Texas hold'em gathering. Everyone would appreciate your attendence.

"The proposal calls for consolidating the child tax credit, the additional child tax credit, the Earned Income Tax Credit and the dependent exemption and converting those four into a tax credit of $2,250 per child."

Currently, the Earned Income Tax Credit gives money to low-wage workers with children, encouraging employment. Does this mean that every family with kids gets $2,250 per kid from the government? If so, what's the cost? Wouldn't people now getting the EITC lose money?

Anyone up for "progressive voting power?"

This means the more you pay in taxes, the more voting power you get. Why not? It seems fair to allow those who pay to decide who to spend it.

It's as fair as those who do not pay a single cent being allowed a say in how we spend taxes.

Also, we could discount government employee's voting power, since they have certain vested interests.

Veterans would get a bonus in voting power, fo their service.

Just think you could compare your citizenship rank! We could easily see who is actually "contributing" what to government.

Krugmans hates Bush cos of the fuzzy math in his tax plan and for no other reason?
Did I read that right?

No, Stewart, she didn't say that. The so-called fuzzy math is one example.

Ah, so "there's no tax increase on anyone except those making over $1 million is a clever bit of spin; in fact the tax increase comes on anyone making over about $150K.

Kevin, the AMT is the AMT. It isn't progressive. So if he increases the AMT by 5%, the increase will fall on everyone. Since the AMT hits an increasing number of upper middle class taxpayers every year, I severely doubt this is his intent. I suppose he might slap on an AMT surcharge -- but in fact that's an increase of greater than 5% of the income tax rates, as the AMT allows for no deductions, not even children or mortgages. Or so I recall. That's pretty harsh. Look to see A LOT of income shifting.

Mark, the Bush tax plan was vetted by people with real PhD's like Larry Lindsay, and built on work by real economists like Art Laffer and Martin Feldstein. Shall I expect a retraction from Krugman, then . . . ?

From what I know of the reality of tax payments in this country, a 5% surcharge on the income tax will collect almost no additional revenue from the very rich, because they almost all pay the AMT. If you know of work that refutes this, I'll be happy to see it.

Dan: Tyson's vetting is way, way more reliable than Jane googling some stuff and making some jottings on the back of a cocktail napkin. When she has not even seen the full details of the plan. And Tyson, who has an academic rep to protect, faces greater incentives not to slant her position than Jane (who is a conservative activist and cheerleader) does. As for Tyson not predicting all possible tax shelters when advising on Clinton's tax increase for the rich -- not predicting all possible tax shelters isn't at the core of Jane's criticism here, she's charging a much more elemental sort of mendaciousness in the numbers. I'll also remind you that Clinton's tax increases were successful in substantially increasing Federal revenues, so most of the additional tax revenues were not manipulated away.

And it should be totally obvious that Krugman would be standing up and cheering if Bush came out with this tax plan. He has always attacked or supported people based on their policy positions -- he attacked the Clinton administration plenty during the 90s. I'm sure he would agree with many things about this plan as a matter of policy.

Joanne: That is a good point about the EITC, it would be a profound change in the nature of the program if it were not conditional on work. My guess is that the credit would be given as a percentage of taxable income up to a max, like the EITC is now, and then not phased out. But I'm sure we'll see more detail on that in the blogsphere soon.

Jane: I'm genuinely confused by what you are saying about the AMT. The AMT is pegged to the regular tax liability -- you only pay it when the AMT is higher than your regular liability. If your regular liability is higher then you pay that. So increasing the regular liability can increase the taxes you pay even if you are currently paying the AMT. Any of the standard tax simulation models take this into account. Since this package was almost certainly run through such a model (which it is true does not predict possible forms of future tax shelters, but does give revenue under the proposed law without behavior change), the AMT should not really come into the picture here. What am I not seeing?

Besides that, we all know that the AMT is going to be seriously overhauled during the next administration anyway regardless of who is elected.

As for the "they'll use tax shelters" argument -- sure, but the nature of those is impossible to predict in advance (if you could then you'd be earning a bazillion dollars as a tax lawyer) and is always the subject of low-level warfare between the IRS and the tax bar anyway. If you just want to argue that rich people can figure out ways to dodge taxes if we don't police the system properly, then you may as well give up on the idea of wealthy people paying income taxes. I think under a Clark administration more resources would be put into tax law enforcement -- that element of the IRS has (not surprisingly!) been cut back under Bush.

MQ -- the reason most of these people are paying the AMT is that their income is structured so that their regular tax liability is almost non-existant. Raising the taxes 5% on nothing is still nothing. Remember, their "official" tax rate is still 33% -- yet they pay the 28% AMT. Raising that 33% to 38% is unlikely to materially change their tax rate. I have empirical evidence for this proposition: most of them paid the AMT under the Clinton administration, when their tax rate was nominally 39.5%.

And actually, the IRS was trimmed back under Clinton; I'm aware of no major policy changes under the Bush administration about IRS enforcement.

As an aside, past errors and mistakes seem to have little or no bearing on the current reputation of experts, especially those quoted in the media or used by politicians. I'm not sure that avoiding mistakes to protect a reputation is really a big concern anymore.

Sad, but apparently true.

All this seems like a lot of noise over a fairly small amount of money shifted around. Given that poorer people pay a small percentage of their income in taxes, reducing this by a fraction just isn't going to make much difference. But it sounds good on paper, I guess.

Bolie IV

The only important thing to know about Clark's new tax plan is that there is not a snowball's chance in hell that it will ever be enacted. If Clark is elected President he will have to work with a Republican House.

My take on Clark is that like Clinton he will conclude controlling spending and reducing deficits is important and worth sacrificing some of his other domestic priorities and that also like Clinton he will be willing to compromise with Republicans. And so I am inclined to support his candidacy. At least there is some hope for fiscal restraint with Clark, I am rapidly losing all hope with Bush.

If somehow Dean is elected President on the other hand (can't see it), there will be all out partisan war in Washington. And I don't want him in my face for 4 years.

We should worry about setting up a dynamic in which the majority of the population pays no income tax, yet casts votes on how much tax should be collected.

This is the real problem with these attempts to make the tax system more progressive by taking ever-more people off the tax roles completely. Simply put, every voter should have to pay at least some portion of the bill for the things they vote for. If we disconnect too many voters from the consequences of taxing and spending, we're likely to get a lot more of it. This is not a healthy dynamic for a democracy.

A much better proposal would be a flat or flatter tax, with tax credits going to the poorest people. But the mass of the country (and the family of 4 with a 50K income is right in the middle) should have to pay for at least some of the costs of what they vote for.

Couple of comments:

Many of my clients make over $1 million a year. (I'm a tax accountant.) Most of them will immediately respond to a 5% surcharge on the ordinary income tax rates. What that response will be I can't say, since it will depend on the details of the law. But I've seen them do it in the past -- when Clinton raised ordinary rates, the next day one of my clients sold $7 million worth of T-bills and bought municipal bonds. So I am very confident the 5% surcharge will raise much less revenue than projected.

Having said that, I don't think Clark is telling a "lie" when he makes the claim his plan is revenue neutral, any more than I thought Bush was untruthful when he made his claims about his plan. Both were engaged in nothing more than salesmanship. Neither were "clearly" wrong. If you buy into their assumptions, each plan would work more or less as advertised.

Which is why I think Jane's parting zing at Krugman was spot on. Krugman blew a gasket over Bush's "lies", which were no more dishonest than the claims of Clark and 98.1% of past and current presidential candidates. When disputes over policy preferences are reduced to "lies", it's hard to have a productive conversation.

Having Tyson vet work on a tax model is like having Krugman peer-review work on experimental economics -- it's outside their field of expertise, irrespective of how bright they might be. Tyson's academic background is in international economics and trade; I think her dissertation was on inflation in Eastern Europe, so maybe we can expand that to include monetary theory too. But she's not the first person I think of when I think "Public Finance" or "Tax Model," and I'm sure her imprimatur was lent in service to the Clinton Legacy Programme.

If I'm reading this correctly the plan basically increases tax on the top 1% or so and decreases taxes on the bottom 40-50%? Since we have very few real details Jane's proof that this is not viable is rather suspect. Netting it with Bush's tax cut, it would seem that the difference would be equilivant to making Bush's tax cut slightly more progressive.

BTW, tax shifting behavior works in both directions. If taxes are lowered on the bottom brackets they receive positive incentives. I suspect the supply side results would basically wash themselves out to be almost negligable.

"But I've seen them do it in the past -- when Clinton raised ordinary rates, the next day one of my clients sold $7 million worth of T-bills and bought municipal bonds. So I am very confident the 5% surcharge will raise much less revenue than projected."

Yet in the 90's revenue increased and it increased from higher tax payments by the wealthy. This leaves only a few possibilities:

1. Tax shifting's ability to reduce payments was limited.

2. It was swamped by the increase in those that became wealthy.

3. Those that were wealthy already became so much more wealthy that their tax shifting was overwhelmed by their additional taxable income.

Think of it another way, Boonton:

The top .1% of taxpayers pay 8% of the taxes
The bottom 50% pay 4% of the taxes

It seems to me that it is mathematically impossible to construct a revenue-neutral tax plan that entirely eliminates the tax liability of the bottom 50% by increasing the tax liability of the top .1% by approximately 1/6.

And unfortunately, Boonton, your theory that supply side effects should be found in the bottom quintiles is empirically unfounded. The bottom half of the taxpaying distribution faces negligible marginal rates, and they have very limited power to alter their work habits or hours. IT is taxpayers in the top quintile who have a) the incentive and b) the power to alter their behavior. Their need for their marginal income also tends to be markedly less time sensitive (i.e. -- the top .1% isn't living paycheck to paycheck) and so they have dramatically enhanced ability to shift income between forms (from wages and salaries to capital gains, for example), as well as to cut back their working hours.

In general, the evidence for supply side effects on working behavior are very modest, and are most pronounced among married women in the upper income quintiles, as well as being highly skewed, overall, towards the upper quintiles. However, Martin Feldstein has mounted a pretty good argument that there are significant supply side effects on the form that income takes -- and that tax increases produce dramatic increases in income-shifting. This is why the Clinton tax increase produced only something on the order of half the expected increase in revenue.

Except the plan promises to reduce taxes on the bottom 40-50% of taxpayers. The elimination of income taxes is more neuanced (a family of 4 with 50K, for example). You may have assumed taxes would be eliminated for the bottom 50% by this:

"The majority of families will not need to file tax returns. Under Wes Clark's reform, more than half of American families will no longer need to file tax returns."

But read the next sentence

"The government will withhold the correct amount of taxes from the families paycheck or provide them with the correct tax credit."

So the bottom 50% are not going to have $0 Federal Income taxes, only their withholding will match their liability.

So is it possible structure a revenue neutral tax change increasing the top 0.1% and lowering the bottom 50%? Sure it is.

Revenue neutral, though, is at best an approximation. No one can tell us how much Clinton's tax increase 'cost'. The only way to determine this is to turn back time and see what would have happened without the tax increase and compare income taxes paid by the rich in the Alternate Universe to what they really paid under Clinton.

‘there's no tax increase on anyone except those making over $1 million’ is a clever bit of spin; in fact the tax increase comes on anyone making over about $150K

To most of us normal Americans, the 90% who make less than $100k per year, anyone making more than that is in the same big overprivileged boat.

Clark's "Families First Tax Plan" is it bit deceptive in that you also need to read his "Saving For America's Future Plan" -- the latter calls for the repeal the Bush tax cuts (or, as I like to call it, the Bush tax delays) on people making more than $200,000 per year.

Jesse, I'd say that's quite a broad brush you're carrying around with you. Two income earners at $75K per year is the same as two making $500K per year? And the lot of them "overprivileged?"

I think I'd call that seriously indiscriminate resentment, probably much of it misplaced as a result.

Yes, Jesse, that's family income . . . two spouses making $50K a year would be in that bracket. On the east coast, that's a nurse or a teacher married to a fireman or a journalist -- not "the top 10%".

Here in Arkansas the average individual income is $18k per year.

My point was, to an overwhelming majority of Americans, quibbling over how much the wealthiest pay in taxes is silly and demeaning.

Dan: Tyson's vetting is way, way more reliable than Jane googling some stuff and making some jottings on the back of a cocktail napkin

No, it isn't. Because Tyson has reason to lie, and Jane doesn't.

in the 90's revenue increased and it increased from higher tax payments by the wealthy. This leaves only a few possibilities:

1. Tax shifting's ability to reduce payments was limited.
2. It was swamped by the increase in those that became wealthy.
3. Those that were wealthy already became so much more wealthy that their tax shifting was overwhelmed by their additional taxable income.

The correct answers are "2", and (sort of) "3", since AMT-payers whose income increased naturally paid more tax.

Also note that, during the 90s bubble, employment (and, thus, the number of people paying income tax) dramatically improved, as did salaries (pushing many people into higher tax brackets).

How do you figure that the tax increase would be on anyone with $150K plus in income? The only reference I find on the site is:

"A 5 percentage point rate increase on income over $1 million annually-Only impacting the top 0.1 percent of taxpayers. The rate increase will apply to families making more than $1 million annually. In tax year 2004, an estimated 200,000 tax units or 0.1 percent of tax filers earned over $1 million annually.[7] As under current law, the rate increase will not apply to any capital gains and will not apply to the first $1 million earned."

Consolidating the child tax increase with other tax plans, and then beginning phaseout at $100K, would start to really hurt people with children somewhere around the $150K level, depending on the structure of the phaseout.

The bulk of the increase in tax revenues in the nineties seems to stem largely from a) gains in the capital market and b) one-time fiscal events, such as a big bonus or a company that went public, which temporarily pushed taxpayers into higher brackets. The revenue increases in the first few years after the Clinton tax increase, which is when we should have had the biggest gain in revenues, were distinctly disappointing.

Looking carefully at some of the previous posts, it appears the argument that Clark's proposal really increases taxes on those starting at $150K per year stems from the assumption that Clark really means to raise the AMT and since the AMT is not progressive it would hit everyone.

That's a big leap to make. The plan as published says nothing about the AMT and only speaks about raising the bracket on $1M + income. There's a host of possibilities here:

1. Make the AMT progressive.
2. Make it harder for those $1M Plus to fall back on the AMT.
3. Apply the 5% tax on $1M Plus income regardless of what the AMT would demand....
and so on....

In reality these plans are more general ideas than a blueprint. The general plan here is make the tax code more progressive in a revenue neutral fashion. Bush presented a tax cut plan when he was running which was basically make the tax code less progressive but give everyone at least a token cut.

Is Jane asserting that it is impossible to carry out such a plan? Is Jane asserting that rates above the AMT do not really matter because just about anyone effected would fall back on the AMT anyway? In that case cuts in the top tax brackets shouldn't matter because no one is paying that? What good is cutting the top rate from 39% to 33% if everyone there is paying an AMT rate of 28%?

Anyone feel they have a handle on what Clark's really proposing to do re: EITC? Apart from an expansion of the existing program (actually a pretty effective antipoverty tool for working families, certainly preferable to a super-high minimum wage) I'd hate to see it changed much.

Boonton -- that isn't what I'm saying at all. The AMT is a separate issue -- I'm arguing that this tax plan wouldn't collect much unless it altered the AMT, not that the AMT is the cause of the phase out.

Taxpayers are currently entitled (so far as I know) to the per-child deduction regardless of their income levels. Consolidating it, and then initiating a phaseout at a relatively low level of income, would cause considerable pain to moderately successful folks, particularly on the coasts -- not the "supperrich".

Jesse, I agree that Arkansas has very low incomes. But it also has a very low cost of living. A studio apartment in the New York area that's within an hour's commute of the places most people work starts around $800 here, and goes up rapidly from there if you'd like to live in a moderately safe neighborhood at a reasonable distance from work.

I'm part of one of those $50k + $50k couples in an expensive part of the country, and I feel pretty privileged compared to some of my neighbors. I don't need anyone to defend my lower-middle-class cred to the liberal skeptics, thank you.

I'm not a fireman, nurse, or steelworker, and we're gay, so I probably won't be showing up in any conservative anecdotes anytime soon anyway...

Cripes...almost 50 comments here and not ONE person has bothered to go to the IRS web site and look up the actual data? OK, maybe some of you have. Links follow.

It occurs to me that perhaps Jane ought to have done at least that before invoking the all-magic, all-powerful "he's lying" spell, usable by all sides in all political battles.

I've found reasonably complete information, in the form of spreadsheets, for the tax year 2000. It's probably fairly representative, although subject to some change.

http://www.irs.gov/taxstats/article/0,,id=96586,00.html

This link will give you an EXE file that decompresses into a series of spreadsheets. These contain plenty of data on income, distributed into fairly narrow bands.

http://www.irs.gov/pub/irs-soi/00inalcr.exe

10 minutes with Excel, and I've found the following:

The average TAXPAYER (not family) with an income under $50,000 pays an average of $2187 in federal taxes. This represents around 13.5% of his income. Since a family of four will have a lot more deductions, the $1600 tax figure seems pretty reasonable to me. According to the IRS spreadsheets, people with incomes below $50,000 pay an average of 13.5% of their income in federal income tax.

Of course, our taxpayer is ALSO paying around 15.8% (his half and employer's half) of his income for the social security boondoggle (which is actually just a flat tax system on the poor, since the money just goes in the general fund anyway). If we adjust the 15.8% for the employer portion (by adding that to total income), it becomes 14.6%.

Add the two of them together, and our guy is paying:

14.6% + 13.5% = 28.1%

Fascinating so far, huh? Our folks under 50k are all paying around 28% of their incomes to the federal government. I'd be pissed off if I was one of them.

So that means are the wealthiest 0.1% of our population are paying more, right? Let's take a look:

In 2000 there were around 240,000 returns filed with incomes in excess of $1,000,000. The average taxpayer in this bracket paid $945,191. Wow. Taxes paid by folks in these bands averaged 30.1% of income. That is ever-so-slightly higher than that paid by our 50k guy. Note that social security payments, as a percentage of income for these taxpayers, are almost non-existent. We can fairly safely factor them out.

If anybody out there wants a flat tax system, I've got news for you: We already have one. People making multi-million dollar incomes pay the same percentage as very hard-working, low-paid folks. And don't cry "investment income" or any such bullshit. All that kind of income has ALREADY been factored out of all of these calculations...taxable vs. non-taxable income.

The bottom line: Clark's numbers are right. He gives the reduction on taxes on those below 50k as around $33 Billion. A 5% tax increase on those over $1,000,000 in income (NOT including that first million), by my numbers, comes to around $35 Billion or so. Seems in balance to me, as of 2000 numbers.

Break out your spreadsheet, and crunch the numbers yourself. You want to leave everything to frickin' pundits and goddamn politicians? Or even worse...bloggers? Like me?

;)

Was Tyson the one who suggested or was the mouth for the idea that seniors' SS should be taxed at 100%?

I might not be explaining it, but I hope you understand what I'm trying to write.

Thanks, Ross. I feel guilty for not taking the 20 minutes to put the whole thing in the proper context.

Jane: True that cuts to IRS enforcement started in the 90s, powered by the Repub congress. Under the Bush administration the IRS shifted the resources they were given to searching for EITC fraud and away from auditing wealthy taxpayers. Actually not a bad idea to look for EITC fraud, but is a bad idea not to audit the wealthy.

Larger point: everybody here knows that it is perfectly possible to squeeze American millionaires and corporations for another roughly $30 billion. May not happen if a Republican congress is energetic enough in sabotaging the effort, you may not agree with it, but it's perfectly possible as a matter of policy. And if you can do it you can massively cut income taxes for the middle of the distribution.

On the other hand, it was *not* possible back in 2000-2001 to institute tax cuts of the size Bush wanted and still preserve the surplus we needed to save for the Boomers retirement. Couldn't be done. No way. Wouldn't take in enough revenue. Had to monkey seriously with government accounting standards to even be able to claim it was possible. Bush administration had to know that. Yet he said during the campaign & afterwards that he could institute his tax cut and preserve social security, be fiscally responsible etc.

Krugman pointed that out and turned out to be dead right -- the fiscal picture today looks very close to what he said it would back in 2000-01 and close to the opposite of what the Bush administration said. Which is natural enough since Krugman was telling the truth. What more do you want from an op-ed columnist than successfully predicting the future? Yet this makes Krugman shrill and partisan? Right.

And Jane, when you look at the effects of the Clinton tax increases you have to look at the fact that the Republican congress after 94 instituted big capital gains tax cuts soon after, so that cap gains rates were now something like half the top marginal rates. Then the stock market run up created a whole bunch of capital gains income. I agree that if the Repub Congress manages to push yet another way to declare your income at a tax rate far lower than whatever rate Clark passes then his tax plan will raise less than it is projected to. But in that case the tax rate on the rich will not actually have been increased, no?

All of this is academic of course-- Clark will not manage to pass this thing anyway unless Congress swings more Democratic than it looks like it will. The point is the distributional principles that are being illustrated in the plan, and the markers they lay down for the upcoming fiscal and budgetary battles that are going to be fought.

Ross, I commented on your site, but I did, in fact, break out the numbers and cruch them myself, and though I am more than willing to admit I've made an error, you haven't found one.

You've made at least two major mistakes: you misread my post, and you erred on the tax data. My objection wasn't, as you seem to think, that $1600 is too low; it's that it's too high. Your misreading of the tax tables contributes to your misunderstanding. The tax tables you link are reported in Adjusted Gross Income, not full income, and as there was no way I could find, in looking at them, to back out the numbers to ordinary income (certainly not in ten minutese), I am presuming those are the numbers you used. But AGI even for a single person differs from ordinary income by at least 10%. Your person with an AGI of $50,000 has income of at least $60,000. The majority of families of four, who will have mortgages, child deductions, and so on, should have an AGI low enough to pay minimal taxes. That was why I proxied married people will children who pay income tax, rather than breaking them out by income -- I could find no way to generate a reliable figure for Clark's family.

MQ -- nice defense of supply side economics, but I don't think you meant that the way it came out.

Changes to the capital gains rates combined with big increases in stock prices explain gains in federal revenue during the 90's. Clinton's tax plan made relatively modest changes in top marginal rates and brought in little additional revenue. The S&P 500 tripled from '94 to 2000 while trading volume increased by an order of magnitude. The government got 20% of the action.

"Clinton's tax plan made relatively modest changes in top marginal rates and brought in little additional revenue."

"Little additional revenue"? How can that be? We all know that it was The Largest Tax Increase in History.

Shocking, isn't it, Brittain33, how the supply-siders turn out to have soemthing of a point?

Some important clarifications: "Gross Income" includes all forms of TAXABLE income (it excludes tax exempt interest, for example). "Adjusted Gross Income" (AGI) is Gross Income after making a few deductions (mostly for contributions to qualified retirement plans, such as IRAs). AGI is calculated BEFORE deducting the standard deduction (or itemized deductions) and personal exemptions.

Because the IRS distribution tables are based on AGI, which excludes, by definition, non-taxable income, the tables do a poor job of reflecting the true distribution of economic wealth. It's the best data we have, but the distortions can be material.

Another distortion arises from the fact the tables are based on "annual" income. That implys that what one person earned this year is a good proxy for what he or she will earn the following year -- and is part of the justification for increasing marginal rate brackets. Someone who earns $1 million a year should pay more (as a percentage of their income) than someone who earns $50,000, the argument goes. But if that $1 million of income was "earned" by selling the taxpayer's dry cleaning business (most of which would result in ordinary income because of depreciation recapture and the like), the taxpayer is unlikely to have anything close to $1 million in income the following year. This distortion makes someone who is NOT rich look like he or she is in the distribution table.

My understanding of adjusted gross income was incorrect, then, and I apologize to Ross.

The other point stands, however; That tax figure still seems far too high.

Politicians of both parties tend to hyperbolic statements on taxes. Bush's cuts are "radical", even though they're estimated to be perhaps 5% of revenues. Clinton's increases were "the biggest in history". Maximum individual income tax went from 7% to 77% under Woodrow Wilson. Clinton moved top rates from 31% to 39.6%.

As stated earlier, anybody who lends credence to what a Presidential candidate says about fiscal policy is more than welcome at most poker games.

$1600 is a *high* estimate? That enrages me. I am single, own a condo and have no children. I make in the mid $30s, and I have a hell of a time cobbling together enough deductions to get my tax under $3000. Why do I make 1/3 less and pay twice as much? And, seemingly, this plan intends to do nothing for me.

Thanks, Wes.

Shocking, isn't it, Brittain33, how the supply-siders turn out to have soemthing of a point?

Jane, are you certain you know what is being talked about here?

I was surprised that a conservative would call Clinton's tax hike modest. Not because I agree with him and supply-side economics--far from it!--but because I disagree, along with most Republican and conservative voices, who have been happy to call Clinton's tax-hike the "largest tax hike in history." As you know, many Democrats give credit to the Clinton tax hike for bringing the budget closer to balance through higher revenues. In this case, we have an issue where Democrats and Republicans mostly agree on the effects of the tax hike. It was a big tax hike!

The Republican policy committee claims that Clinton raised $241 billion (over five years) with his 1993 tax hike. They referred to it as "a record tax hike." Note that they measured this in terms of dollars recouped--the effectiveness of the tax hike.

Does this sound like a supply-side critique?

http://rpc.senate.gov/~rpc/releases/1999/tx072699.htm

The Cato institute also attributes higher revenues to Clinton's tax hike.

http://www.cato.org/research/articles/ce070201.html

Will you defend the claim that a rise in the top marginal tax rate from 31% to 39.6% is "modest"? Does that really sound right to you? Republicans seemed pretty upset when Bush's father raised the top rate from 28% to 31%.

I'll grant that you and the poster are consistent in your supply-side economics. "Having a point" is something of a higher standard.

$241 billion over 10 years is in the neighborhood of 10% of total tax revenues. Considering that Clinton enacted a 20-30% tax increase on the folks who pay about 3/4 of the income tax in this country, that's a pretty paltry haul, actually.

Using Jane's numbers:

Say A pays 75% of the taxes in a country. Say this is $75 (total tax revenue $100).

So taxes are raised 20% on A, his payment goes from $75 to $90 (1.20 * $75 = $90). That's an increase of $15. Total taxes collected would be $115. So raising taxes on the people who pay 75% of the taxes would raise revenue 15% in this very simple world.

Your saying Clinton's tax increase raised revenue 10%. WEll...

1. Not so bad considering 15% is the theoretical max. it could have raised revenue.

2. Clinton didn't really raise their taxes 20%, he raised their top tax bracket 20%. Say the top bracket starts at $1M. If I make $1.1M I don't pay that extra 20% on $1.1M but on the $0.1M in the bracket that has been increased. So even with no tax shifting behavior Clinton's '20% increase' shouldn't be expected to increase revenue 20% or even 15% because its not really a 20% increase.

Federal receipts as a percent of GDP went from 19.0% in 1994 to 19.3% in 1995. Clinton's tax policy produced only a modest increase in tax revenue.

Is taxes as a % of GDP a good measure of whether or not Clinton's tax increase boosted revenue? Especially during a period of GDP expansion.

Boonton - Is taxes as a percentage of GDP a good measure of how much revenue was raised (or lost) as a result of a change in the law? Not always, but, yes, it's a good measure. The reasons it is a good measure are the income tax and, to a lesser extent, excise taxes like duties and the federal gas tax, are based on economic activity. The higher the GDP, the higher you'd expect "income" (however it's defined) to be. If you simply compare tax receipts from one year to the next, you can't know how much of the change in receipts was due to a change in the tax law and how much was due to a change in the base.

Also the deficit as a % of GDP was 2.2% in 1995 (see http://w3.access.gpo.gov/usbudget/fy2004/sheets/b79.xls). This means 0.3% of GDP (which Ian is implying represents Clinton's tax increase) represents 14% of the deficit.

I suppose there are good arguments to use % of GDP however I'd have some issues:

Suppose Clinton's tax increase was the only change and everything else stayed exactly the same. What would we expect tax revenue as a % of GDP to have been in 1995? You can't say going from 19% to 19.3% was low unless you can say what it should be. To determine this you have to consider the Clinton didn't raise income taxes equally. Receipts from those in the tax brackets that didn't go up would not have increased. Nor would income received by corporations not distributed to shareholders. Also consider the base. GDP is made up of componants that are not directly tied to taxable income. For example, increasing exports & gov't spending increase GDP but if that doesn't translate into an equal increase in taxable income *for those whose brackets were increased* then taxable income won't increase and it will appear that the tax increase raised less revenue than it really did.

Boonton -- economically, tax receipts are expected to rise coming out of a recession because the lion's share of tax revenue comes from personal income tax revenues. Income is more variable among the wealthy than the poor and middle class -- investment bankers were taking 50% or 90% pay cuts during the down years of the recent recession.

No one's arguing that the Clinton tax increase didn't collect some extra revenue. (Or at least, no one who I want to hear from without a big mountain of evidence to back them up.) But given the point in the business cycle at which he came into office, we would have expected tax revenues to be going up, not down, so it's hard to argue that the reason revenues as a percentage of GDP didn't jump more was some countervailing economic pressure. The overall effect of the tax increase is pretty widely agreed to be pretty modest, significantly lower than what Clinton's economists were projecting (which is one reason that the argument that the magic bond-market effects of Clinton's retroactively discovered iron committment to deficit reduction has serious credibility problems).

And 20% was the lower bound -- that 31% to 39% increase was more like a 30% increase on the upper bound, where most of the taxes are paid. You've already conceded that the additional tax revenue collection was, at best, only 2/3 of what was projected, but since the expected increase on the very high end, where the action was, should have been more like $20 in your hypothetical, the effect turns out to be more modest still. This goes back to a point I've been making -- income shifting and the AMT eat much of the gains.

Actually the Clinton tax increases went into effect in 1993 (remember the hoo-ha about taxes being increased retroactively?). My recollection is that taxes as a share of GDP went from roughly 17% to roughly 19%, which is a pretty large change...

Jane,

I think we both agree that trying to measure Clinton's tax increase by looking at revenue as a % of GDP is not very productive because it will be very hard for us to figure out what the tax % should have been if no income shifting happened versus what it really was.

Telling me that Clinton raised taxes 20% or 30% on those paying 75% of the income taxes does not really say how much additional revenue should have been raised. Like I pointed out, the tax increase effects only the higher brackets. In other words, if my income is $1,100,000 and you increase the $1M + bracket 20%, my income taxes will not increase 20% even if I engage in no income shifting. Only my income taxes on $100K. So for me the '20% tax increase' will only yield a revenue increase of 20% of 9% or 1.8% ($100K over $1M is 9% of my income whose tax is increased 20%).

Boonton -- I don't think we can agree on that at all. I don't know of anyone who's trying to seriously argue that Clinton's tax increases raised anywhere nearly as much as they were projected to. Obviously, one can't quantify exactly how much revenue was raised, but one can note first, that revenue did not meet projections, and second, that the net increase in revenue was small, even though it would have been expected to increase due to cyclical effects even without a tax hike.

It's hard to get a handle on precisely what impact a change in tax policy will have on revenues because taxpayers may change their behavior to take advantage of loopholes, and because macroeconomic shifts may swamp the effects of the policy change. Another argument here is whether making the tax code more progressive should be considered to be an increase in taxes. It might be an increase for one segment of the population and a decrease for another. I would argue that if Clinton really did enact "the biggest tax increase in history", then there should be some trace of it in tax collections as a percent of GDP. In theory, such a huge tax increase would have a negative effect on the economy, implying that GDP should have shrunk, which it did not.

Careful, Jane...leaving aside the argument that the capital gains tax cut led to the stock market increase of the late 90s (as opposed to other explanations, like, say, the tech boom), a goodly share of the market increase wasn't economic growth at all. It was a bubble that led to substantial capital misallocation and economic waste. One of the better economic arguments Bush has going for him was that the groundwork for this recession was laid during the Clinton years when various institutions did not deflate the bubble and set us up for a structural recession due to disinvestment from the tech sector. If the cap gains tax cut were responsible for a share of the stock market growth of the late 90s (maybe the part that led to the NASDAQ being 150% higher four years ago than it is today?), that would be another argument against the capital gains tax cut.

Actually, what true believing supply siders generally say is that tax increases lead to revenue *declines* (not revenue growth that is supposedly less than some projection), and that tax cuts lead to revenue growth. So you do not appear to be a supply sider yourself, which is good, since it is hard to think of an economic doctrine more decisively refuted by history. Even Martin Feldstein is apparently working his way around to seeing the flaws in supply side economics -- you say he now argues that the Clinton tax cuts produced a lot of revenue growth but less than some initial projection, while I can remember in 1993 he was predicting that they would lead to no revenue growth or more likely a decline (I recall an article called "Clinton's Mirage" or something like that).

For the record, during the 6 years after the Clinton tax increases, real Federal receipts increased by 36% and we ended up with a surplus, while during the 1983-88 period, also a boom economic time emerging from a recession, real Federal receipts increased by just 28% and we ended up with a whopping deficit. (And they only increased by that much because the Democratic Congress raised some taxes early in the recovery too).

An interesting discussion of the Bush tax cuts and their impact on revenues.

http://www.townhall.com/columnists/GuestColumns/Bowyer20031231.shtml

Enjoy!

I found a site that breaks out individual income tax revenue as a percent of GDP. It shows 7.7% for 1992, 7.8% for both 1993 and 1994, rising subsequently to a peak of 10.2% in 2000.

http://www.taxpolicycenter.org/taxfacts/overview/source_gdp.cfm

"But I've seen them do it in the past -- when Clinton raised ordinary rates, the next day one of my clients sold $7 million worth of T-bills and bought municipal bonds. So I am very confident the 5% surcharge will raise much less revenue than projected."

But unless these actions affected the supply of new issues, the difference would have to be negligible. The Treasuries had a buyer, the munis had a seller. Bonds aren't created out of thin air.

And while we're at it, anyone have a good source on the budget effects of retiring double digit treasury debt and replacing it with the low interest rate variety of the 1990s?

Bob Dobalina - You are correct, when T-bills are sold and the proceeds reinvested in munis, someone had to buy the T-bills. But you are wrong to assume the new owner of the T-bills is necessarialy in the same tax bracket as the seller. The Treasuries were most likely purchased by a pension fund (which is tax exempt) or a person in a lower tax bracket -- which is normally what happens over time as bonds mature an the proceeds are reinvested. My client did it within days of the tax rates being raised. The timing was the only unusual part of the transaction.

I don't think anyone hit the most glaring math error in Jane's post.

She assumes that her population of "About 28m married couples filing jointly with children (this hypothetical family of four) [who] owed tax last year" would all receive $1600 to eliminate their reliability. Yet, a portion of these people must have had their liability by $1. They would get $1 (if it's non-refundable), not $1600.

Adam, if I understand you correctly, Jane already pointed that out:

Some taxpayers will pay less tax then that, and thus get less benefit. (Unless it's refundable -- meaning the government gives you the benefit whether or not you pay taxes. In which case we have to give it to every one of the 41 million families with at least two children in the US.)

A friend suggested I look at this site and I did find this string on the Clark tax plan most interesting. As the fellow who coined the phrase "supply-side economics" back in 1976, I'm happy to see the concepts addressed with such fervor. To really come to grips with these issues in a world of floating exchange rates, it is necessary to think simultaneously about changes in tax policies with changes in monetary policy and the value of the dollar. When the Clinton tax increase passed in 1993, I advised my clients that it was a drag, but that it would not slow the economy, which was benefitting more from the stable dollar/gold price. We have lively discussions at my website http://www.wanniski.com, at the TalkShop link. I hope to drop by here again, Ms. Galt, to enjoy seeing how you stir this pot. As for Clark's plan, I did not think much of it. I did, though, critique it on Wednesday on my site, pointing out that a surtax at the highest bracket is a progressive tax atop a progressive tax and would be counter-productive, as Ms. Galt points out. Clark today writes an op-ed on the WSJ editpage and if your read it carefully, he has dropped the surtax in favor of a five-percentage-point add-on to a top rate of 39.6%. So you see, these internet exchanges may have some influence on public policy. I hope so.

Interesting comment by Jude. I wonder what he thinks of the AMT idea presented here. If I've read it correctly, it seems to say that any tax bracket above the AMT is meaningless because most people will simply adjust their income to be taxed by the AMT.

""But I've seen them do it in the past -- when Clinton raised ordinary rates, the next day one of my clients sold $7 million worth of T-bills and bought municipal bonds. So I am very confident the 5% surcharge will raise much less revenue than projected.""

What is missing here is the fact that increased demand for munis would lower their rate of return (they are already typically lower due to their favorable tax position). At some point muni's return would be so low that your client's tax advantage would be swamped by the loss of return.

I don't doubt that income shifting exists, I'm suggesting that even for the very wealthy there are limits to how much income shifting can take place.

Here's what I think are the magic questions:

1. Can anyone quantify how much Clinton's tax increase should have raised if no income shifting had happened versus how much was actually raised?

2. If #1 can be answered then someone should be able to say approximately how many billions of dollars of income were 'shifted' from '94 and onwards.

3. From this it would seem some literature could be developed examining the US economy's 'ability to shift'. Certainly the wealthy do not have complete ability to shift their income otherwise they wouldn't pay any income taxes regardless of what the rates are and they would have no reason to complain about it.

4. The other supply-side argument against tax increases is deterrance. That a person will not make a profitable investment because their reward will be reduced too much by high tax rates. The classic example was given by Ronald Reagan who noted that he sometimes would turn down a movie because he had already earned so much in that taxable year that he would only be able to keep pennies on the dollar for the additional movie. Does anyone have a respectable methodology to estimate this?

Boonton - You are right when you say there are practical limits on how much income shifting can be done. Investors compare the effective yield from taxable and tax exempt bonds all the time and a raise in income tax rates tends to be reflected in an increase in the spread between taxable and tax exempt returns.

I don't think Clark's proposed surtax would have of an effect on yields, however. Very few people (only those with taxable incomes greater than $1 million) would pay the surtax. I would think that most of the demand for munis would come from people with incomes of a few hundred thousand dollars and I suspect that it would be these people who would set the market for muni yields.

Of course, I only cited my client as an example of what wealthy taxpayers would do to avoid paying the surtax. The higher you raise the tax rate, the more incentive there is for people like me to come up with lawful ways to avoid paying that tax -- while still accomplishing our clients' business and investment goals.

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