Tfgray’s Weblog

My daddy the accountant used to say, “There are three kinds of lies: lies, damned lies, and statistics.” On September 15, 2008, the Wall Street Journal published an article titled “New Evidence on Taxes and Income” by Dr. Arthur Laffer, godfather of Neoconservative economics, and his friend Steven Moore. You can read it here:

http://online.wsj.com/public/article_print/SB122143692536934297.html

It’s chock full of, well, statistics.

Let’s start with this one:

In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families — mother and father in the home — rose to $78,000, an all-time high.

Okay, leaving aside that $600 per taxpayer kickback from the government that everybody got, which neatly accounts for the $600 increase, let’s take a look at the word median.

In probability theory and statistics, a median is described as the number separating the higher half of a sample, a population, or a probability distribution, from the lower half. The median of a finite list of numbers can be found by arranging all the observations from lowest value to highest value and picking the middle one.

Source: Wikipedia http://en.wikipedia.org/wiki/Median

Okay, that’s simple enough. You look at everybody’s income and find the number in the middle. Let’s see how that works in practice.

The village of Lafferland, where everyone is prosperous, is inhabited by 100 residents whose incomes range from $90,000 to $110,000. The average income is $100,000. However, since no one makes exactly $100,000, the median income happens to be that of Dennis the Dentist, who reported $100,001.98 on his tax return last year. He’s the guy in the middle. The median. Median, average, whatever. Right?

Now let’s just say that one of the Lafferlanders, Igor, by virtue of his superior business sense and willingness to use brass knuckles, manages to take over nearly all the town’s income. He’s now making nearly ten million dollars a year. Everybody else is making $0, except Dennis, who installs solid gold grills in Igor’s family’s teeth,  and is now at $200,001.98. Igor has scooped up the remaining $9,800K.

Dennis is still the man in the middle. The median income is now $200,001.98. The median income has gone up by $100,000!! This is, of course, an extreme example, but, here’s my point: the median tells you nothing about the distribution of income. The average income under this example remains firm at $100,000, which should be a great relief to the 98 people now living under Lafferland’s bridges.

Let’s look at the next nugget:

households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005.

True, but if you look at the chart right next to that sentence, you’ll see that about 2/3 of that rise came during the Clinton years, with a sharp drop-off under Bush 43 and a slight recovery since 2002. He then claims:

Roughly speaking, the Reagan and Clinton presidencies were equally good for them.

Except the chart right next to his words clearly shows a 9.6% income gain under twelve years of Reagan/Bush 1and a 18.2% gain under 8 years of Clinton. Ask an investment banker whether he’d prefer a 9.6% gain spread out over 12 years or a 18.2% gain in 8. (After he stops laughing and explains to you that either works out to a less than a 2% return per year, he’ll probably tell you the latter is the lesser of two evils.) Equally good? Did this renowned economist pass 4th grad math?

I’m going to skip over Laffer’s assertions about family size shrinking and how this means that the poor are getting richer, except to note that I have been reading articles lately about non-related people sharing housing in order to save money and would like you to consider the possibility that family sizes are shrinking because people realize that they can’t support as many children. Birth control is, after all, still legal. On to the next point.

Over time the [Earned Income Tax Credit] has multiplied the number of poor households that fill out tax forms each year and are thus counted in government income statistics. That’s because to be eligible to receive the refundable EITC, a tax return must be filed.

Yes, dear, but the bottom quintile (20%) is still the bottom quintile. More people at the bottom filing doesn’t increase the size of the quintile beyond 20% of the whole. It does expand the whole, and it also pushes those toward the top of that 20% into the next quintile.

Official tax return data show that in 1983, 19% of returns had zero tax liability; that percentage has climbed steadily, reaching 33% in 2005. (The Tax Policy Center estimates that in 2008 nearly 40% of filers will have no income tax liability.) Thus, we are now statistically counting more poorer families today than we used to. This is a major reason that median and poor household income gains appear to be a lot smaller than they have been in reality.

No, it shows that a greater number of people have low enough income to not owe tax. Yes, the EITC accounts for part of that, but recall that only parents with children living at home are eligible for it. The EITC argument does not apply to single/non-head of household filers or the elderly, unless they are raising their grandkids, which, come to think of it, I’ve been reading about a lot, too.

In the U.S., people who had low incomes in 1983 didn’t necessarily have incomes as low a decade later. People in this country have long moved up over time, and this income mobility continues to be true. While some people do remain in the lowest income group, they are the exception.

One way to quantify income mobility is to examine how many people remain in the same tax bracket over time. We compared the returns of tax filers in the lowest tax rate bracket (zero) in 1987 with their returns in 1996. Only one third of the tax filers were still in the zero tax bracket, but 25% were now in the 10% bracket, 32% had moved up to the 15% bracket and 9% were in the 25%, 28%, 33% or 35% brackets. And that was following them for a decade, not a generation.

From 1996 to 2005, we have the income mobility data for income quintiles. Of those filers who were in the lowest 20% in 1996 and who also filed in 2005, 42.4% remained in the bottom 20%, 28.6% were in the next highest quintile, 13.9% were in the middle quintile, 9.9% were in the second highest quintile, and 5.3% were in the highest quintile.

He sort of skips over the fact that many students (those who went back to school after a stint in the big world and were not still classified as dependents on their parent’s tax forms) would hopefully be doing better nine years or so after graduation. Any person serving as enlisted below the level of sergeant, especially with a family to support, would also fit into that bottom-earner category. Hopefully, after nine years they’d have a few promotions under their belts or would be gainfully employed in the private sector. As Laffer points out, low income is a transient state for many people, still, 42% of them fail to make the jump. That’s one hell of an exception.

Many of the people in the bottom quintile of income earners in any one year are new entrants to the labor force or those who are leaving the labor force.

I really like that term, “those who are leaving the labor force.” In neat, bland language it summarizes the concepts, “retired,” “fired,” “laid off,” and “died.” On to his next point.

The data also show downward mobility among the highest income earners. The top 1% in 1996 saw an average decline in their real, after-tax incomes by 52% in the next 10 years.

This one is very interesting. He states it as though we’re looking at the top 1% in any given year, rather than following through on a case by case scenario as with the bottom quintile. Yes, in any given year a certain percentage of top income earners will die, retire, or be pushed off the corporate cliff clutching their golden parachutes. If, as he did above with the bottom 20%, he looked only at those who were in the top 1% in 1996, and compared those same people’s tax filings in 2006, you might well see a decline. The top 1% is, after all, only about 1.3 million tax returns.  

When you think about folks who won the lottery, athletic bonus babies with an average career of 4 years, one-hit wonders in publishing and on stage and screen, and high earners who quit, retired, were forced out, or perhaps passed away during that ten year span, 52% decline in income, sure. That makes sense, especially if the dead ones are counted as having zero income. However, he states this as though the income share of the top 1% (regardless of who they happen to be in a given year) has declined by half.

But if you go here,

http://www.slideshare.net/cmulbrandon/income-distribution-in-the-united-states/

a different picture emerges. Click the “full” icon in the lower right hand corner to expand the screen so you can read it. Then look at pages 8 and 9. Under Clinton, income distribution had shifted to the point where the bottom 99% of taxpayers were getting 50% of all income, up from about 48% under Reagan/Bush1. (The historic high came under Nixon, with about 55% going to the bottom 99%.) Under Bush 2, however, the percentage of income going to the bottom 99% of us slid to 47%.

Let me reverse these figures for clarity. From Clinton’s 50% of all US income going to the top 1%, now we have 53% of all income going to the top 1%. And if you look at page 9, you will see that between 1994 and 2004 the income of the top 1/1000th of Americans skyrocketed to 6.9% of the total, largely due to Dr. Laffer’s favorite medicine, lower tax rates.

How does this equal a 52% income decline for the top 1%? Only if you use Laffer math, which, dare I say it, is laughable.

But here’s the most mathematically interesting sentence in the whole piece:

…in 1981, when the highest tax rate on the rich was 70% and the top capital gains tax rate was close to 45%, the richest 1% of Americans paid 17% of total income taxes. In 2005, with a top income tax rate of 35% and capital gains at 15%, the richest 1% of Americans paid 39%.

While the equation in this sentence looks a lot like Tom Robbins’ “If a hen and a half lays an egg and a half in a day and a half, how long does it take a wooden-legged monkey to kick all the seeds out of a dill pickle?” try following my back of the envelope math.

Tax rates for the wealthiest are now half of 1981 rates for top bracket earnings and one third for capital gains. At the same time, the percentage of all tax receipts paid by the top taxpayers has more than doubled. That would suggest that top bracket incomes have gone up somewhere between four-fold and six-fold, wouldn’t it?

There’s another thing my daddy the accountant used to say.

“The figures don’t lie, but the liars really know how to figure.”