Data to Virtue

"Wisdom is to know what to do next; virtue is doing it." -- David Starr Jordan, American Naturalist -- Observation collects data from which we build knowledge. Wisdom makes sense of that knowledge. However, it is not enough to merely develop wisdom, we must act on what we know. That is virtue--and the purpose of this blog--from data to virtue.

Sunday, August 06, 2006

GDP and Taxes

THE FIGURE:
In the figure below I have plotted several effective tax rates and the per capita gross domestic product (GDP) by year going back to 1979. (Click on the figure for a larger view.)


THE TAKEAWAY:
There is absolutely NO correlation between a change in the tax rate (up or down) and the growth of the per capita GDP over this time frame.


DISCUSSION:
If there were a correlation between the tax rate and the GDP, then the wiggles in the GDP curves would either be offset by a year or two or three from the wiggles in the effective tax rate or mirrored for an inverse correlation. Let me state this another way, a reduction in the effective tax rate for everyone, or the top 10%, or the top 1% of incomes does not have any correlation to the growth of the GDP. The republican mantra that reducing taxes stimulates the economy is not based in data, but in the typical telling of a half truth. It's cherry picking the data, "Look we lowered taxes and the GDP went up." Of course it did, it always go up. They never also say, "Looked we raised taxes (or kept them the same) and the GDP went up." The GDP always goes up. It's like saying, "Every year there's a blue moon the GDP goes up." Well not only does it go up when there is a blue moon, but also in years when there is not a blue moon. Maybe the phases of the moon have nothing to do with the GDP. Similarly, the small tweaks to taxes that we make in the modern era don't have a statistically significant effect on the GDP. I guess if you say something enough times, people believe it to be true even when it is not.

Note that I'm not advocating that we increase taxes. I'm only saying the argument that lowering taxes increases the GDP is a statistically invalid myth propigated to foster an agenda of greed at worst and a half truth at best. For more discussion on tax rates, see my post on tax rates and revenues at: http://datatovirtue.blogspot.com/2006/08/tax-rates-and-revenues.html.

SO WHAT?
Point out this data to people who tell you that reducing taxes helps the economy. Don’t vote for candidates that make this a major part of their platform; they clearly don’t know how to look at data. What else are they missing?

DATA DETAILS:
I didn’t take it back further because I didn’t have the tax rate data before 1979, but I also want to stress I don’t have any interest in returning to the exceedingly high rates of 40 years ago where large change in tax rates could be made. This is the modern era, so let’s compare apple to apples. Bringing up how things worked before that time is literally ancient tax history and has no revelvance to today.

I should also say I’ve done further analysis trying to find any correlation between a change in the effective tax rate and the slope of the growth rate of the GDP and can say with confidence that there is no statistically valid correlation. I looked at this for one, three, and five years out in case there is a delayed benefit, but found no statistically valid correlation. The tax doesn’t affect the economy nearly as much as we’d like to think. The economy grows because people go to work, work hard, produce, are creative, make new products, and the masses have enough money to buy those products. Putting more and more of the GDP into the hands of a very small number of people does not make a vibrant economy. Let’s stop this political grand standing and let the government do what it should do; leading toward appropriate technologies and social responsibility.

The effective tax rates are arrived at by taking the difference between the pretax income and the post-tax income for the respective set of returns and dividing it by the pretax income. This is the tax rate that each income group actually pays, not their tax bracket. A tax cut, or tax increase, cannot be sorted out by the bracket alone due to all the possible deductions and credits. The bottom line is what people actually pay, labeled the effective tax rate on the bottom set of curves. There are three sets of data here, one for all returns filed, one for top the 10% of incomes filed, and one for the top 1% of incomes filed. This data is from http://taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=467.

The per capita GDP (the amount each individual contributes to the GDP) is in the top set of data in the figure. The blue curve is in the respective year dollars while the red curve is the same data adjusted for inflation, to 2000 dollars. The figure is similar in taking the actual GDP rather than the per capita GDP, but it makes more sense to normalize out the population growth. In otherwords, what is illustrated is the amount each person contributes to the GDP. This data is from http://www.bea.gov/bea/dn1.htm and the US Census Burbeau.


Saturday, August 05, 2006

Tax Rates and Revenues

THE FIGURE:
Below I plotted several tax related items as a function of the adjusted gross income (AGI) of individual US taxpayers. Note that the bottom axis is on a log scale to keep all the data from being squished up against the left axis. (Click on the figure for a larger view.)


THE TAKEAWAYS:
First, the effective tax rate is already quite progressive and doesn’t need a lot of tweaking. This is a good thing. This is seen in the red curve in frame B which represents an "average" tax rate for a given AGI.

Second, all AGI groups pay, on average, below the tax bracket for their level of AGI.

Third, the use of a flat tax, applied equally to all tax brackets clearly shifts the tax burden to lower and middle income wage earners. I believe a progressive tax, similar to what we have now, is more ideal for a civilized nation.

DISCUSSION:
While the way taxes revenues are obtained progressively is a good thing, it accomplished through an extremely sophisticated set of tax codes and regulations. Why not just have a straight progressive tax and simplify taxes. You make X, you pay the rate of the green curve in set B); no deductions for this, credit for that, etc. The way things turn out in what US individuals actually pay in taxes is not far off from a good structure, it's not completly broke. The problem is it's so cumbersome to get there.

On a slight side note, the agrument that it's so critical to the economy to lower taxes for the wealthiest 1% is a bunch of hooey. What supporters of these tax cuts would like you to believe is that it brings that money back into the economy and thus builds it. First of all, the few billion dollars lost to the treasury aren’t that significant in the big pictures of things. The 2002 Bush tax cuts resulted in a reduction of tax revenue of $64B that could boost the economy. This was in a GDP of almost $11T; that is less than a 0.6% shot in the arm. Besides, why are those billions better than somebody else’s billions? Is all that matters that rich people reinvest money into the economy? Does this imply that poor and middle income people take their money and bury it in the backyard or burn it in the fireplace? I guess when people spend their money on food, clothing, and shelter that’s bad for the economy. Secondly, it implies that if the government gets a dollar, none of it ends up back in the economy. Apparently government workers don't spend their money, nor does the government buy goods and services. Clearly is ridiculous to think that only money in the hands of the rich helps the economy. Thirdly, it’s clear that no AGI grouping pays close to what their tax bracket would require. Why not just have a true progressive tax through to the highest 1% of incomes? Why does the effective rate go down above an AGI of $1M and go down with increasing AGI the most for the most wealthy? It’s clearly a “favor” for the most wealthy sold on the premise it helps the economy. The recent move to hold an increase to minimum wage hostage to another tax break for the most wealthy is unconscionable.

SO WHAT?
Urge your representatives to approve tax simplification and a true progressive tax through all incomes (not a flat tax nor one that "turns back down" at the highest income levels). Also urge them to stop giving breaks to the wealthiest individuals. Let’s establish a set and simple tax schedule like the green curve in frame B), get rid of the linear feet of tax codes, and get on with life. People that are paying more than the average for their AGI should be in favor of such tax simplification. People that are paying less might even be able to set their own financial interests aside for making their life easier.

DATA DETAILS:

The bottom curve, A), is the number of tax returns filed in a range of AGI. As expected, it clearly shows that most returns are filed by those with low and mid incomes.


The next set of curves up, B), are three different tax rates and the tax brackets for 2003.
- The red curve is the 2003 effective tax rate for each range of AGI. This is calculated by taking the total tax revenues generated for a given range and dividing it by the cumulative AGI for that range. This makes it the rate that each particular range actually paid, not their bracket. In other words, it’s the effective tax rate, or what people actually paid in taxes, after deductions, credits, etc. for each AGI.
- The green curve is my proposed progressive tax rate. It generates the same tax revenues as the actual data.
- The blue line is the flat rate applied to everyone that would generate the same tax revenues as the actual data (11.9%).
- The black lines are the tax “brackets” (marginal tax rates) for various AGI. The range varies depending on the type of filing, single, married-jointly, married filing signally, head-of-household, etc.

The next set of curves up, C), are the distributions of the tax revenues generated by each of the tax rates described above. It shows the tax revenues generated, in billions of dollars, by each AGI range.

The top set of curves, D), are the cumulative revenues generated by each of the tax rates described from B). In other words the revenues generated, in billions of dollars, for a range of AGI added to the previous and to the previous all the way to the highest AGI range.

Actual data is from the IRS SOI Tax Stats - Individual Income Tax Returns Publication 1304, Table 1.2--2003; the most recent year available.


Tuesday, March 21, 2006

Laughable Laffer Legacy

BACKGROUND:
Back in the 1980's, it was popular with politicians (particularly Republicans) to refer to the Laffer Curve to paint a picture that if taxes where lowered, tax revenues would go up. This curve is represented below. It graphically displays what is intuitively obvious; there is some maximum federal income (revenue) between the two boundary conditions. If the tax rate is zero, revenues are zero. If the tax rate is 100%, nobody will bother
working entirely for the government, and revenues are again zero. Where that maximum falls however, is likely well beyond 50% (you can read more about this here http://en.wikipedia.org/wiki/Laffer_curve).

The problem with these discussions were there was never any data presented. People that wanted to lower taxes believed we were on the right side of the peak and argued strongly without ever presenting data. No body else cared. The reality is during WWII, when the top brackets were well over 75%, a few wealthy indivuals may have indeed been on the right side of the peak. This, however, is clearly not the case today where the top bracket is 35%, yet I still hear the Laffer curve as having some applicability to today's tax base.

THE FIGURE:
Let's look at the data. In the curve below, I have plotted the change in the per capita revenues collected from one year to the previous year vs. the change in the effective tax rate from one year to the previous year.
Note, the zero-zero point is in the right-center of the figure, not at the lower left-hand side. (Click on the figure to see a larger version.)


THE TAKEAWAY:
The presence of the vast majority data in the upper right and lower left quadrants show that we are clearly on the left half of the peak in the Laffer Curve. In other words, the Laffer Curve does not apply to the modern era!

DISCUSSION:

One can clearly see that every time the effective tax rate was increased, revenues increased (upper right quadrant); just as one would expect if we were on the left half of the peak in the Laffer Curve. Half the time the effective tax rate was lowered, revenues decreased (lower left quadrant); again consistent with being on the left half of the Laffer peak. To be fair, half the time the effective tax rate was lowered, revenues increased (upper left quadrant). However, the few points in the upper left quadrant are due to a significant increase in the economy that overshadowed the loss in revenues from the lower tax rate.

One final note, the three points furthest from the origin in the lower left quadrant are in 2001, 2002, and 2003 where we gave tax breaks to the most wealthy. I discuss the argument that this loss in tax revenues is important to stimulate the economy in my entry on tax rates and revenues: http://datatovirtue.blogspot.com/2006/08/tax-rates-and-revenues.html. Even if we all agree low taxes are a good thing, then the government can't both decrease it's revenues and increase it's spending. That is not a sustainable tactic.

SO WHAT?
Don't let anyone tell you the Laffer Curve, that applied after WWII, is still a justification for lowering tax rates today (i.e., to increase tax revenues); it simply isn't true any more. Urge your representatives to establish a tax rate schedule, leave it alone, and focus on more important issues.

DATA DETAILS:
The effective tax rate was aggregated across all tax brackets. In other words, it is the total revenues collected from income tax divided by the total taxable income reported; an average tax rate across all tax payers. In simpler terms, the figure shows if the taxes collected, per person, in a given year went up or down from the previous year based on whether the effective tax rate went up or down from the previous year.

These data are from http://taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=467, starting in 1979.

Saturday, March 04, 2006

Minimum Wage

THE FIRST FIGURE:
In this figure you can see how minimum wage has changed with time. The green line is in the value of the year and the black line is the minimum wage adjusted to 2000 $'s, aka adjusted for inflation. For an explaination of the business at the bottom of the figure see the data detail. (Click on the figure for a larger version.)
THE TAKEAWAYS:
There are several things to take away from this figure.

- We are in the longest stretch where minimum wage has not increased.
- There seems to be little advantage to democrats over republicans in raising minimum wage.
- Since 1950, once minimum wage is adjusted for inflation, there are clearly two periods, the pre-Reagan days and the post-Reagan days. In almost every year minimum wage was
effectively higher pre-Reagan than every year post-Reagan and the minimum wage currently has the lowest "buying power" in 50+ years.

THE SECOND FIGURE:
In the figure below I have taken minimum wage and divided it by the average of the top 20% of incomes (red line) and by the rank and file congressional salary (dotted black line). Note to compare an hourly wage to a yearly salary, I assumed a 2,000 hour work year. For an explaination of the business at the bottom of the figure see the data detail. (Click on the figure for a larger version.)
THE TAKEAWAYS:
Again these two periods emerge. Pre-1980, minimum wage as fraction of a congressional salary oscillated around 10% and has steadily declined since to it's lowest level in 60+ years.

DISCUSSION:
In this current 10-year stretch where minimum wage has not increased, congress has had 7 salary increases. Note,
coincidentally the congressional salary is representative of a salary in the top 20% of incomes. It doesn't matter who's in the house, senate, or is president. Neither party seems to be a true champion for minimum wage.

Annual pay increases in congressional salaries are linked to the general schedule of federal employees. The ethics reform act of 1989 provides for yearly cost-of-living adjustments; the increase rate not to exceed that of other federal employees. This cost of living adjustment is automatic for congress unless they vote specifically to decline it (which happened three times in the last ten years while minimum wage was not adjusted).

SO WHAT?
Write your congressmen and senators and tell them to introduce a bill to lock minimum wage (based on a 2,000 hour work year) to 10% of the salary of a rank and file congressmen. That way if congress doesn’t want to raise minimum wage, all they have to do is vote to decline their own cost of living adjustment.

DATA DETAIL:

Along the bottom, below the zero axis, shows the relative strength of a given political party (red = republican, blue = democrat). The first line is for the presidency, the second line shows the majority in the senate, and the third shows the majority in the house. A blue area (down) shows a democratic majority. A red area (up) shows a republican majority. Below the party strength lines are the periods of recessions and wars.

Congressional salary data are from http://www.congresslink.org/print_basics_pay.htm. Minimum wage data are from http://www.dol.gov/esa/aboutesa/history/whd/whdhist.htm.

Friday, March 03, 2006

Supply Side Economics

THE FIGURE:
In the figure below I have plotted how the lowest 20% (quintile) of incomes has changed as a fraction of the highest 20% of incomes (red line) and as a fraction of the congressional salary (dotted black line) over the last 25 years. (Click on the figure for a larger version.) THE TAKEAWAY:
Clearly the buying power of those within the lowest 20% of incomes has gone steadily down relative to those within the highest 20% of incomes, and relative to the rank and file congressional salary, over the last 25 years.

DISCUSSION:
The fact that those at the bottom are making less relative to those at the top is consistent with my earlier post on the US Income that shows the adjusted income of the lowest 20% stayed almost perfectly unchanged while the income of the highest 20% went up by over 50%. Congress’ salary (alone) is about in the middle of the upper 20% of incomes, however they have not increased their own salaries as rapidly as that quintile has grown.

Those that believe in supply side economics (Reaganomics, trickle down economics, etc.) say it works by the rich reinvesting their money to create jobs for the poor. This post, as well as other posts, shows that the rich do indeed get richer, but it doesn’t trickle down to the poor. In fact, the gap between the rich and the poor has been widening by all measures. The adage, "The money gushes up and trickles down," couldn't be more true.

On a philosophical level, when someone tells me they care about the poor and the best way to help the poor is indirectly, by getting richer themselves, it's like me saying "I'm a vegetarian, a second order vegetarian, the cows eat the grass and I eat the cows." It might make me a smart aleck, but it doesn't make me a vegetarian. Similarly, a rich person telling me they are compassionate, and their way of helping the poor is to get richer themselves, doesn't make them compassionate. It confirms their greed. There is a reason why all the world’s major religions consider greed a vice, not a virtue. It justifies ignoring the poor and believing in myths like supply side economics being good for the poor.

There's a saying… "If the horse has better hay to eat, the birds will eat better too." The analogy being if the rich get richer, it's also good for the poor. The story at least correctly identifies what the poor get (manure) and clearly identifies whom the horses asses are.

SO WHAT?
While the situation is getting worse in the USA, even those in with incomes in the lowest 20% are better off than millions and millions around the world. Join the One campaign to make world poverty history… http://one.org/index.html.

DATA DETAILS:
Along the bottom, below the zero axis, shows the relative strength of a given political party (red = republican, blue = democrat). The first line is for the presidency, the second line shows the majority in the senate, and the third shows the majority in the house. A blue area (down) shows a democratic majority. A red area (up) shows a republican majority. Below the party strength lines are the periods of recessions and wars.

Tax Quintile data is from http://taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=467, starting in 1979. Congressional salary data are from http://www.congresslink.org/print_basics_pay.htm.

Saturday, February 18, 2006

Unemployment and Poverty

THE FIGURE:
In the figure below I have plotted the percentage of the population that is in poverty (red line) and the percentage of the workforce that are unemployed over the last few decades. For an explaination of the business at the bottom of the figure see the data detail. (Click on the figure for a larger version.) THE TAKEAWAY(S):
The good news is unemployment and poverty rates in the USA have remained relatively unchanged for quite some time. The bad news is, both could be lower. There tends to be cycles to the poverty rate (red line) and unemployment rate (green line), but the overall median remains relatively unchanged.

DISCUSSION:
I have spent a long time trying to get the statistical significance of any correlations of poverty and unemployment levels with political parties controlling the house, senate, or presidential office. There is absolutely no statistically valid correlation. In other words, it doesn't matter who's in office--democrats or republicans--changes in these categories are independent of political majorities and have their own cycles based on something else. If anything could be said from this additional analysis (not with statistical certainty, but appearance) it would be....
1-Unemployment seems to oscillate in five year cycles independent of politics.
2-There is a slight lowering of both unemployment and poverty if the house and senate have parity (almost equal number of republicans and democrats).
3-There are slightly more years where these levels trend down with democrats as president than with republicans.
These observations stem from analysis beyond that presented in the above figure.

To put the USA figures into perspective, here are some numbers from other countries...
country
. . .. unemp. . . poverty
- Vietnam. . . . 1.9
. . . . . 28.9
- Kuwait. . . . . 2.2
- Cuba
. . . . . . 2.5
- Taiwan
. . . . 4.5 . . . . . . 1.0
- Japan
. . . . . 4.7
- UK
. . . . . . . . 4.8 . . . . . 17.0
- Sweden
. . . 5.6
- India
. . . . . . 9.2 . . . . . 25.0
- China
. . . . . 9.8 . . . . . 10.0
- France
. . . . 10.1
- Germany. . 10.6
- Israel
. . . . . 10.7 . . . . . 18.0
- Iran
. . . . . . 11.2 . . . . . 40.0
- Iraq
. . . . . . 25.0
- Zambia
. . . 50.0
... as you can see, the USA could be better and it could be a lot worse.

SO WHAT?
Loan money to a small business in a developing country at Kiva Loans http://www.kiva.org/app.php.

Write your representatives and ask them to vote for legislation that provides opportunities to the unemployed and those in poverty and to vote against legislation that favors the "haves" over the "have nots." It is easier to amass wealth if you already have it. The "haves" don't need help getting more.
If you have any resources for groups that help with this type of legislation, contact me so I can check them out.

DATA DETAIL:
The poverty data is from the Census Bureau and the unemployment data is from the Bureau of Labor Statistics. The data on poverty and unemployment rates in other countries is from the CIA World Fact Book.

Tuesday, February 14, 2006

US Income: Who's making it?

THE FIGURE:
This figure shows the pre-tax average income for four different categories of taxpayer incomes.
1-The top 1%
2-The highest 20%
(quintile)
3-The middle 20%
4-The lowest 20%
Note the average income (vertical) axis is in 2003 dollars, so it accurately reflects the income across the years. This just means it's adjusted for inflation. For an explaination of the business at the bottom of the figure see the data detail. (Click on the figure for a larger version.)
THE TAKEAWAYS:
There are few things to take away from this figure.
First, the lower and middle-income earners have not changed in 25 years. Their earning power has remained remarkably unchanged.
Second, the top 20% of income earners has gone up by almost 50%. This is mostly due to the well over 200% increase in the average income of the top 1% of income earners.
Third, it doesn’t matter who was in power, democrats or republicans, the rich get richer and the poor make no gains. In fact, one could say that a democratic president is even better for the rich.
Fourth, if the bottom quintile has gone up only 0.6% over the last 25 years and the top 1% has gone up well over 200% over the same period, into who's pocket is that money trickling? Draw your own conclusions, these are the data. The gross domestic product has gone up virtually every year during this time, but the low income earners are not reaping the benefits of the growing economy. It is true, "The money gushes up and trickles down" (barely).

SO WHAT?
Write your representatives asking them to vote for legislation that supports fair wages for the lower earners. Tell your friends that employee people to pay them fairly. Tell your friends that don't handle their money well about resources to use their money more wisely, like http://www.operationhope.org/smdev/; think about being a supporter yourself.

DATA DETAIL:
I would have plotted this data going back further, but haven't been able to locate the data. This data comes from http://taxpolicycenter.org/TaxFacts/TFDB/TFTemplate.cfm?Docid=467.

Along the bottom, below the $0 axis, shows the relative strength of a given political party (red = republican, blue = democrat). The first line is for the presidency, the second line shows the majority in the senate, and the third shows the majority in the house. A blue area (down) shows a democratic majority. A red area (up) shows a republican majority. Below the party strength lines are the periods of recessions and wars.