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.

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.