Author: Derek Thompson

Forty-five percent of Americans think their taxes are “about right.” according to a new Gallup Poll. An even higher number 62% think that their level of income tax is “fair” according to a New York Times poll, also released today. The difference between 45% and 62% is large, and indicative of why policy makers shouldn’t try to divine marginal tax rates from polling data, exclusively.

It’s also interesting to see how falling negativity toward the federal income tax aligns with falling effective income tax rates. Compare the following two graphs, via Economix and the Center on Budget and Policy Priorities:

1.

2.
Total tax rates (if you include income, capital gains, payroll,
corporate, excise) have declined for every income quintile, and
especially the top percentiles, in the last 30 years. It’s no wonder more Americans are feeling OK about their federal income tax burden. Forty-seven percent of US households now pay zero or (more likely) negative income tax. Same goes for fifty-five percent of elderly households, 54% of households with children, and 38% of married couples filing jointly.

There’s good reason to like your tax burden today, and good reason to believe you won’t have it this good for very long. The total federal tax burden on the country has hovered around 22% for the last 30 years. This year, it’s closer to 18%. President Obama’s 2012 tax plan would raise it to around 20%. Historically, that is low. Too low, in fact, if federal spending approaches a quarter of GDP in 2020.

Public opinion polling is something between a dark art and a Rorschach test. Sometimes it can reveal significant and real trends. But too often the questions are leading, offer false choices or ask respondents to make enormous statements while withholding information or context. Consider that disclosure for this and all public polling analysis.

This New York Times poll comparing the Tea Party movement to the general public is timed for Tax Day, but the main lessons have little to do with taxes. They have to do with spending, and how Americans — all of us — understand and misunderstand spending. Here are three takeaways from the poll.

1. The Tea Partiers don’t appear to be as uniformly anti-tax as I painted them yesterday. Despite the “Taxed Enough Already” signs and the many vague and often contradictory allusions to their gratuitous tax burden, the poll suggests that half of Tea Party supporters thinks that their taxes are fair. Their insistence on reform falls mostly on the spending side: they’re against the stimulus, against the bailouts, against more packages aimed at job creation. Ninety-two percent call for a smaller government with fewer services.

2. The whole country (but the Tea Party, in particular) struggles and will increasingly struggle to reconcile our desire for small government with our affection for entitlement programs. Three-fourths of the country and 62% of Tea Partiers think that Medicare and Social Security are “worth the costs.” In 2010, those programs will account for about 40% of government spending. Defense is 20%. Almost another 10% percent is mandatory interest on the debt. You tag 70% of the budget as untouchable and suddenly the prospect of delivering a smaller government becomes a lot more challenging.

3. Is the stimulus failing, politically? Forget the tea partiers. More than 60% of the general public thinks the stimulus did nothing, or hurt. This is extraordinary. In the quarter when the stimulus passed, the economy was falling by 6% annualized and analysts were worried the stock market could hit 5000. In the last quarter of 2009, GDP was growing by 5.6%, and the stock market recently topped 11,000. So why do six out of ten Americans think the stimulus did nothing? It’s got to be the jobs.

This highlights an important point that Marc Ambinder made. It’s interesting that Americans feel so down the economy while journalists feel so high on the recovery. Substantively, it’s up for debate. Politically, it just is. Americans think that the central tenant of the Obama administration’s economic policy is not working or worse. Democrats can’t debate that feeling. They just need to fix it, or hope the economy fixes it for them.

It’s easy to get sidetracked over the 47% of Americans who don’t pay taxes. Don’t lose sight of the bigger picture. When that 47% figure gets chucked into the dustbin of cable news statistics, we will be back to the old familiar debate about taxes. Conservatives will complain the wealthy pay an ever-higher share of taxes. Liberals will complain that the wealthy pay taxes at ever-lower rates.

Both sides are right. The top 10 percent of earners pay a higher percent of the government’s taxes than any time in the last 30 years, but at historically low tax rates. This is possible for one, simple reason: rich people are making more money. Much more money. In fact, in 2007 the top one percent of Americans held its highest share of income than at any time since 1928.

Total federal tax rates (including income taxes, capital gains taxes, payroll taxes, estate taxes, and corporate income taxes) have fallen dramatically for the rich and remained flat for low- and middle-income earners in the last 50 years (via NYT).



In the last 40 years, the top 10 percent’s tax rates went down, but
their tax burden went up, because their household income grew faster
than the rest of the country. To get a better sense of how taxes have changed since 1979, let’s look at tax rates (the percentage of your income you give the government based on your tax bracket), tax share (the percentage of total taxes that each income bracket pays) and share of total income (the percentage of total US income earned by households in each bracket).*

Tax Rates
Big picture: the United States is still big, it’s the tax rates that got small.

In 1979 the overall tax rate was above 22 percent. In 2009 it is closer to 18 percent. Every quintile paid a lower effective tax rate in 2006 than in 1979. Since 1979, total tax rates have fallen across the spectrum, including for the top 10, 5 and 1% of taxpayers.

Tax Share
Big picture: the cost of paying for the US government falls increasingly on the rich.

In 1979 the top quintile contributed 56% of all federal taxes. In 2006 they contributed nearly 70%. The share of federal taxes paid by the top 1% nearly doubled in that time from 15% to 29%. Tax shares declined for every group except the top 20 percent, as the tax burden shifted from the bottom 80% to the top 20%. But again, this was not the result of rising tax rates. It was the result of rising household income at the top…

Share of Total Income
Big picture: the rich are get richer, faster.

Just as the share of total taxes declined for the bottom 80% and increased for the top 20%, so did the share of total income fall in every quintile and concentrate in the top 20% since the early 1970s.

The numbers are even more dramatic for the top percentile. Between 1979 and 2004, after-tax income increased 20% for the middle 20% and jumped 176% for the top 1%. Wealth in the top one percent has accelerated over the last three decades so fast that income concentration in the top percentile is the highest since the late 1920s.**

Sometimes it takes a lot of numbers to say something very simple. When critics say the rich are shouldering an undue and historically unique tax burden, the correct response is that this has much more to do with their rising income than the rate at which it is taxed.

_________________

*If you want to dive into the numbers and swim around yourself, you can find historical tax rates here, historical tax burdens here, and historical aggregate income data here. All data up to 2006.

** Update: From the Center on Budget and Policy Priorities:

Republicans in the Senate used a procedural vote to delay extending unemployment insurance to some of the 6 million Americans who rely on these benefits for day-to-day expenses.

Republicans didn’t mount much of a substantive fight against the measure — only Sen. Tom Coburn spoke out against it. But as it so often happens, where the GOP stalwarts balked, the Wall Street Journal’s editors squawked, preening their fiscal hawk feathers and claiming that jobless benefits were lifting the unemployment rate by up to two percentage points — the equivalent of 3 million jobs.

It seems unlikely that jobless benefits stand in the way of creating 3 million jobs. Think about that figure: 3 million jobs. It is the equivalent of 18 consecutive March’s, when we added about 162,000 positions. The number of total job openings in February 2010 was not even 3 million. It was 2.7 million, according the BLS. The same as in January 2010. The same, in fact, as in February and January 2009, when GDP was busy falling by six-percentage points, annualized. The US economy is moving through a hiring crisis that has little to do with the length of the jobless benefits.

It’s true that unemployment benefits subsidize joblessness, and subsidies generally encourage behavior. But when the WSJ writes that “many unemployed workers don’t start seriously looking for a job until they are about to lose their benefits” it assumes the existence a fecund job market waiting for lazy Americans to get up and apply for jobs. To the contrary, there are five officially unemployed Americans for every hiring position. Americans don’t need unemployment benefits to discourage them from working. The job market is doing that all by itself.

Taxed Enough Already? Or not taxed at all?

One of the striking ironies of Fox News running with the statistic that 47% of Americans might not owe federal income taxes is that Fox News also moonlights as the unofficial station of the Tea Party movement, which clamors for lower taxes. You might ask: half of the country pays no income tax, how much lower do you want? Here’s a more troubling point: if the Tea Party movement has a similar share of Americans making under $50,000 as the broader population (as a recent Gallup poll suggests), then why is this movement rallying under the banner “Taxed Enough Already!” when half of them aren’t taxed at all?

Forty-five percent of self-identified “Tea Partiers” make less than $50,000 per year, according to a USA Today/Gallup poll. Similarly, 50% of the total population makes less than $50,000 in the same poll. Despite this author’s lack of direct access to the tax returns of the Tea Party movement, it seems safe to assume that if about half the country avoids federal income taxes, a similar percentage of the Tea Party movement gets away with the same even as they march and scream about their tax burden.

This is a gotcha point. But it’s a gotcha point worth making, if only to shine light on the sad intellectual bankruptcy of the Tea Party, a political movement that has taken over the news cycle like a particularly aggressive strain of ragweed. Tea Partiers want lower income taxes. But many of them probably don’t pay income taxes. If we listen to them and bring even more Americans into the zero-income tax pool, we would only concentrate more of the tax burden on wealthy earners … which conservatives are against. Tea Party apologists on TV will explain that what they’re really asking for is lower rates and a broader tax base to diffuse America’s tax responsibility. But if half the Tea Party doesn’t pay income taxes today, a broader tax base — even with minuscule rates — would raise many of their taxes!

The party’s labyrinthine position on tax policy isn’t worth untangling any further. It’s a Gordian Knot that deserves a guillotine. When liberals and conservatives in Congress and think tanks and conference rooms debate tax policy in the coming months, they should consider a wide buffet of reform options — but hold the tea.

You might have heard, if you’ve been watching cable news at any point in the last 72 hours, that 47 percent of Americans will not owe income taxes this year. Conservatives argue that this is just one more way the economy is slipping into a social-egalitarian morass in which more Americans live off the productivity of the few elite who are actually busy putting the capital into capitalism. But if the 47% figure is a monster, it is also a monster that Republicans have helped to create.

To understand why that’s true, it’s important to understand why half of Americans aren’t paying federal income taxes. Most of them receive generous tax credits —
the Earned Income Tax Credit (EITC), child-care credits, subsidies for college
and savings — worth more than their tax burden, according to the Tax Policy Center.

When Republicans rail against the 47% figure, they’re railing against features like the EITC. What is the EITC? It’s a refundable tax credit that rewards work and offsets the burden of payroll taxes for low-income payers by returning a fixed percent of income up to a maximum credit based on factors like number of children. But the EITC is a Republican creation. It was enacted in 1975 under President Ford (a Republican), and expanded numerous times over the last 35 years by Republicans. President Reagan (Republican) expanded it in 1984 and 1986. President Bush (Republican) expanded it against in 1990 and added supplemental credit for families with more than one child. President Clinton expanded it for childless claimants in 1993. President Bush (Republican) expanded it again in 2001.

Today this $50
billion program is one of the largest component of our welfare system. But rather than appear on the budget (or in the news) as a spending program, it appears as tax relief, and the headline we see is “How the Other Half Lives: No Federal Taxes!” Do you see what’s happening here? Both moderate and conservative pols are reluctant to announce new
spending programs for fear they will look like socialists. So they execute spending programs through the tax system. As a result, more and more Americans appear to be paying no federal taxes!

This is not to say that Republicans were wrong to expand tax credits for low- and middle-income families. On the contrary, wages have grown painfully slowly for many Americans since the 1970s while payroll taxes have crept higher. The EITC is an easy way to mitigate the burden of payroll taxes for low-income Americans while rewarding work. Rather, Republicans are in the strange position of having eroded the tax base with credits for decades, and now they’re complaining that not enough Americans are paying taxes.

America’s political/entertainment climate has scared politicians from announcing welfare programs as spending programs. So instead, many of them appear in the budget as tax relief. One inevitable result is that fewer Americans today appear to be paying taxes.

More on the 47% figure later today…

On April 15, taxes are due. And for almost 30 percent of Americans, TurboTax or some other online software tax program will do the deed for them. Does TurboTax’s technical mastery of the tax code cause us to avoid reforming a system that is so fundamentally complex that even experts struggle to comprehend its effects and skewed incentives?

Maybe. In a personal email, Bruce Bartlett wrote on the issue of TurboTax and tax reform. Here is his note, in full:
___
“I have no doubt that TurboTax will declare support for tax reform and deny that it favors complexity even if it is good for business. This may even be true because one of the problems we have with the tax system today is what I would call fundamental complexity, which is the inability of experts to comprehend many aspects of the system, as opposed to technical complexity of the sort that TurboTax deals with very well.
 
“The real point I was making in my comment, however, is that Washington tax-types tend to think of the income tax in discrete components or provisions. Thus they worry a great deal about things like the AMT. But average people hardly ever complain about the AMT as opposed to complaining about taxes in general. And my observation is that while people complain about complexity what really matters to them is what they pay. There’s no evidence that they are willing to pay much of anything to achieve simplicity and will tolerate a lot of complexity if it saves them taxes.
 
“I suggested that TurboTax may explain why this is the case. It calculates one’s bottom line taxes relatively easily; so easily that one really has no idea what particular provisions of the tax code are saving them taxes and which ones are particularly screwing them. All they know or care about is the bottom line: how much did they pay and will they be getting a refund.
 
“I’m not sure what this means for tax reform, but I am inclined to think that the promise of simplification is likely to have much less political support than it did in the past. I don’t think it’s a coincidence that one hardly ever hears about the flat tax any more because one of its prime selling points was simplicity (or at least the appearance of simplicity). You put that together with the fact that some 50% of filers pay nothing and it explains why Michael Graetz has never gotten any traction on his idea of replacing the income tax with a VAT. At least half of tax filers would be worse off.”
____

‘Tis the season for taxes. And for 90 percent of Americans, ’tis the season for other people to do their taxes. With all those perplexing deductions and exemptions and calculations for the average family, it’s just easier to send your stuff to H&R Block and hope the experts spot enough savings to make the outsourcing worth it.

It doesn’t have to be like this. The IRS could have access to enough information — income from the W-2 and 1099, mortgage
interest, charitable donations, 401(k)s from banks — to send Americans a one-page tax statement we could look over and sign. This wouldn’t work for everybody, especially serious investors. But for most Americans with straightforward returns, it would make the April 15 deadline a lot less stressful. It would also make companies like TurboTax and H&R Block pretty nervous.

One way to help the IRS fill out our tax returns would be to make their job easier and dramatically simplify the tax code, eliminating those byzantine deductions or raising the standard deduction to encourage millions of Americans to avoid itemizing entirely. Advocates of tax reform like Sens. Ron Wyden and Judd Gregg and Rep. Paul Ryan propose just that. But something’s happening that could block the move to simplify the tax code. It’s called technology.

The number of Americans who file taxes through online software has increased 70 percent since 2001. The software is cheap, and it’s good. Programs like TurboTax help filers sort through deductions to maximize savings and even offer premium versions to folks like sole proprietors and multi-member LLCs. At a tax event the New America Foundation last month, Bruce Bartlett, the former economic adviser to Presidents Ronald Reagan and George H. W. Bush, made a fascinating point. Tax reformers have reason to worry that programs like TurboTax might make filing taxes so painless (gulp!) that technology would undercut one of the major motivations behind tax reform.

I’ve placed three calls into the TurboTax press office in the last week and not heard back. When I do, I’ll publish an interview about whether TurboTax and its company Intuit has a position on tax reform and whether experts think technology catching up to the tax code could actually hurt the case for tax reform.

Update: Bruce Bartlett responds.

The federal deficit is running lower than the administration anticipated due to higher tax revenue and lower spending on federal bank bailouts. Is this good news? The Washington Post’s David Cho says the lower deficit is a “favorable number.” Economist Brad DeLong says it’s bad news because if unemployment is higher in 2010 than 2009, the federal government should be getting more torque behind the counter-cyclical spending levers and the deficit should be bigger.

They’re both right. Higher tax revenue from unchanged tax rates suggests the recovery is gaining steam and Americans are spending and earning more. Lower TARP spending is also good news because it means a healthier financial sector and fewer tax dollars sunk into unsalvageable government bailouts that would have to be made up with higher taxes later on. But DeLong’s broad point holds: it’s weird to celebrate lower deficits when unemployment is stuck near 10 percent, and it’s unclear why the Obama administration would want to point and brag about lower deficits while the Senate mulls over a $150 billion stimulus package that we won’t be able to pay for with this year’s tax receipts.

This is only the latest reminder that the way policymakers talk about the deficit is a bit schizophrenic. Obama tells us that the government should tighten its belt if families are willing to tighten theirs. Then he runs up the largest nominal deficit in history precisely because too many families have had to tighten their belts. He’s reluctant to say that high deficits are bad, because in a recession, they’re actually good policy. But then the administration “points out” to the Washington Post that the deficit is running hundreds of billions of dollars low (as though low deficits are inherently good news, again), just months before they want to sign another stimulus bill that will increase the deficit. If the White House has a deficit czar in charge on managing the message on the deficit, he isn’t doing a very good job.

Spinning off a speech by AFL-CIO President Richard Trumpka at Harvard about why working people are angry,  Ezra Klein makes this point comparing the reaction to job losses in manufacturing to job losses in journalism:

Consider the way elites
have treated the decline of journalism jobs and the decline of
manufacturing jobs. Both sectors are fundamentally suffering from the
same thing: A technological revolution that has made the large,
well-paid workforces of yesteryear into a competitive disadvantage in
the modern economy. But where the decline of manufacturing was greeted
with sanguine talk about “retraining,” the decline of journalism has
been greeted with something akin to grief.

Grief from whom? Not from many publishing journalists.

Much ink spilled over the tumultuous growing pains (or “decline”) of journalism has been marked with the same breathless, excitable, often crude and always knowing style with which writers tackle just about anything in violent transformation. Look at the Clay Shirkys and Jeff Jarvis’, Slate’s Jack Shafer, or the New York Times’ David Carr, or anything or Gawker. It certainly seems like many journalists come to praise the new, rather than bury the dead trees.

Newspapers are dying! Newspapers are dying! If this is grief, it is a bizarre way to grieve. Sometimes its exuberance borders on celebration. Journalism’s breathless coverage of its own demise is one part habit (journalists like to run themselves out of breath), one part natural schadenfreude, and one part whatever psychological term is appropriate for that safe, yet thrilled feeling one gets when watching a violent thunderstorm from inside a safe house.

But it also comes from a deeper belief that the transformation within journalism — like the transformation in manufacturing — has the potential to make the industry better, smarter, faster, more efficient. It’s not just the new media gurus who think there is value in simple aggregation, or complex interactive graphs, or blogging public policy twenty times a day (Harold Pollack called the health care reform story “the best-covered news story, ever.”) There are Web sites that exist primarily to chronicle and lead the transformation because they find it interesting and important. Executives at newspaper and magazines companies consistently hail the challenges of new media as unprecedented opportunities to provide richer stories to the widest audience in history (the ones not named Rupert Murdoch, anyway).

Klein is right that creative destruction is violent. People can get angry, and sometimes they should. But it is not self-evident that journalists are cheering creative destruction in every industry except their own.

The American economy is in a period of sustained recovery. But suddenly, in Newsweek, and BusinessWeek, and the New Yorker, there are a blitz of articles predicting that the recovery will be faster, stronger, and broader than most people expect. After all, the optimists argue, look at the stock market, which is going gangbusters. Look at the March jobs report, the best in three years. Look at productivity bursts, and stabilizing home prices, and corporate confidence!

It’s true. There are a lot of good things happening in the US economy. But for every bit of good news, there are good reasons to be cautious about our optimism. Here are 7 ways the the health of the US economy is very much in a state of flux.

1. Investing. The S&P 500 is up 74% since March 2009. The Dow is also up about 70% from last year…

But among those who own stocks, bonds, or mutual funds, only 3 out of 10
say the value of their portfolio has risen since a year ago, according
to a BusinessWeek poll, suggesting that the gains have been relatively concentrated.

2. Economic Growth. We swung from negative-6% to positive-6% annualized GDP growth in 2009, and the economy has probably been growing since June of last year. Among the largest economies, only China, India, and Brazil are growing faster than the U.S. …

But consumer debt is still very high, suggesting that there is still quite a bit of deleveraging to come. Moreover, economists anticipate that the era of cheap credit is coming to an end
as interest rates on mortgages, car loans and credit cards are all set to rise. This will impede a consumer-led recovery, and with consumption making up approximately 60-70% of GDP, weak consumer spending might restrain dramatic GDP growth. And keep your eye on exogenous factors like oil prices, which continue to creep up.

3. Job Growth. We’re finally creating jobs! The economy added 162,000 in March, the best report in three years…

But job openings in February 2010 were no higher than when the
economy was plummeting in February 2009. Unemployment is at 9.7%, and
broader unemployment — including part-timers looking for more work —
is near 17%. Those are still horrific numbers. Unemployment is a lagging indicator, but crucial for
public confidence in the economy.

4. Income Growth. Productivity has grown 6.9%, the best since 2002. Strong productivity growth suggests rising living standards…

But there are a number of factors weighing down income growth. Part-timers grew in the latest jobs report and the work week at 33.9
hours/per is still near its all-time low of 33.0. That means that when
demand starts coming back, employers might begin by extending the work-week and full-timing the part-timers. This would contribute to income growth for the marginally attached, but millions of officially unemployed Americans might be left out, initially.

5. Housing. Prices have stabilized and improved recently. Mortgage rates are extremely low….

But foreclosures and the federal government’s drawback of housing-support policies could send home prices into a second dip. As Megan McArdle notes, “the backlog of foreclosures is eventually going to come on the
market, further pushing down home values in many areas.”

6. Government Stimulus. Last year’s stimulus was back-loaded to inject nearly $500 billion into the economy in 2010. What’s more, the federal deficit is already running 8% lower than in FY-2009 as the bank bailouts have proved significantly less costly than we imagined…

But whereas the 1982-3 recovery was driven by significant easing of interest rates, the Federal Reserve has little room to push interest rates down in 2010-11. Instead, rates will likely rise late this year or early next year as the Fed unwinds its unprecedented monetary expansion to avert inflation. What’s more, the federal stimulus will eventually become a net drag on the US economy, and there seems to be little political will to add another $100 or $200 billion of stimulus. Now that the administration has bragged about running a lower-than-expected federal deficit, they might be unwilling to follow up with a stimulus program that would restore 2010’s deficit to its previous high estimate.

7. Business. Corporate profits were up 8% in the fourth quarter and corporate bonds are rallying. According to the Business Roundtable’s CEO Survey,
75% of executives expect sales to rise in the next six months …

But
hiring is a different story. In the coming months, half of employers
expect no change in employment, 29% expect to hire and 21% expect to
shrink payrolls. Small business confidence fell to an 8-month low in March.

Nearly 50 percent of American tax filers will pay no federal income taxes in 2009. Half of them earn too little and the other half receive tax credits — the Earned Income Tax Credit, child-care credits, subsidies for college and savings — worth more than their tax burden, according to the Tax Policy Center. Many of these people still pay federal taxes, such as payroll taxes for Social Security and Medicare and state and local taxes.

Some criticize the fact that half the country is effectively exempt from the scourge of April 15, but there is a political and economic component to this Zero-FIT (federal income tax) phenomenon. If the Zero-FITs are a political problem, they are also a political creation. When moderate and conservative pols are reluctant to announce new spending programs for fear they will look like socialists, they execute these spending programs  through the tax system. If most of these programs flipped to the spending side of the ledger, suddenly millions more Americans would owe federal income taxes. For example, the EITC — President Ford’s initiative — is now a $50 billion program, maybe the largest component of our welfare system, and yet our politicians don’t even have to call it spending. (The exemptions and deductions carved into our Swiss cheese tax regime are called tax expenditures. When the government spends a dollar, it’s an expenditure. When it leaves a dollar in the hands of private earners, it’s a tax expenditure.)

As a result, this creates an interesting civics problem. The Zero-FITs’ federal taxes are earmarked for mandatory programs Social Security and Medicare. So 50 percent of the country is not contributing to the part of the budget that electeds actually control. With half the country currently shielded from the burden of funding a defense and discretionary budget, there are serious questions to ask about how that changes the politics of taxing and spending.

The even more interesting question that spans economics and morality is whether a tax code that exempts half the country is just. The New Yorker’s John Cassidy argues from a moral perspective that wealth is a social creation whose marginal utility declines with income, which supports the philosophy of a progressive tax system.

From an economics point of view, it’s important to consider disproportionate tax burdens in light of disproportionate earnings. The top 20 percent of US tax payers account for two-thirds of all federal tax revenue, according to the Tax Policy Center’s 2009 analysis of President Obama’s budget. The top one percent accounts for 23 percent. This are extraordinary numbers, but equally extraordinary is the unbalance of wealth that has developed over the last generation. The top one percent soaked up two-thirds of the income gains of the 2000s, so that in 2007 their share of pre-tax income was the highest since the late 1920s. In 2007, the top one percent took home 23 percent of US income — the same percent as their projected share of federal taxes under current law.

Is it wrong that half of Americans pay no federal income tax? It is a difficult question. There is an interesting hazard involved with exempting half the country from paying for the discretionary programs it votes for. But that hazard exists partly because politicians have run spending programs through the tax system to shield themselves from critics of big government. The economic question is wrapped up in morality: do we think it is fair to raise the tax burden on the rich simply because they are rich? Utilitarian egalitarianism says yes. But utilitarian egalitarianism is no relief for conservatives who prefer a broader, flatter tax system that mitigates the tax punishment of earning more income.

This debate won’t be resolved today, but it’s important to juxtapose the falling tax burden on the lower 50 percent with the falling tax burden on the top 10 percent. In 1988, President Reagan’s last year in office, the top 10 percent, 5 percent and 1 percent of income-earners paid total effective tax rates of 27%, 28% and 30%, respectively. Under 2009 law, these groups will pay the feds closer to 22%, 23% and 26% of their income — across the board, an approximate difference of five percentage points. Any way you slice it, tax burdens have slid, and they will have to go up soon.

(Nav Image Credit: Howdy I’m H. Michael Karshis/Flickr)

There is a growing consensus in Washington among policy and opinion makers (if not yet lawmakers) that taxes must rise in the next four years, and not just on the wealthy. According to a recent Quinnipiac poll, 60 percent of Americans favor rolling back the Bush tax cuts for families making more than $250,000. Apparently some very rich families agree and they’re petitioning the government to raise taxes, starting with their own.

This story brings to mind the occasional conservative argument that if rich people want to pay higher taxes so badly, why don’t they just donate their money to the government? It’s true that it is technically legal to write checks to the Treasury, but this is a weak argument. The animating motivation behind paying taxes is not the unalloyed joy of writing checks to the government but rather the knowledge that you are part of a collective system that is funding a government and its policies. One rich family’s check might cover two staffers. A higher marginal tax rate helps pay down an entire federal budget.

Or does it? According to WSJ economics editor David Wessel,
congressional estimators — correcting for people who will dodge higher rates — expect that for every percentage-point
increase in the marginal tax rate levied
above $372,950, the government would raise $73.5 billion over 10 years.
Raising the top two rates by one percentage point would raise $100
billion over 100 years. That’s serious money. But it’s about one
percent of the $9 trillion of debt we’re expected to add over the next
decade. When Obama campaigned on the promise of rolling back the Bush tax cuts — like the Democrats’ 2004 presidential nominee John Kerry — it was a keystone of his fiscal restraint platform. Today a realistic fiscal policy will require much more than raising the top marginal rate to its 2000 level.

The screaming over marginal rates is just a vocal warm-up for the tax showdown later this decade. A value-added tax, for comparison purposes, could raise hundreds of billions of dollars every year when fully enacted. A carbon tax could add a similar amount. US tax expenditures account for nearly $1 trillion of the US budget annually. There is quite of a lot of tax policy to reform. If we can’t tweak the Bush tax cuts quietly, it bodes poorly for the inevitable tax debates to come.

There is considerable evidence that the economy is steadily recovering and that the odds of a double-dip recession have shrunk to practically zilch. Unfortunately there is also considerable evidence that the recovery will not have the firepower to dramatically shrink unemployment to its pre-recession levels for years. Besides the sheer size of our unemployed ranks (27 million Americans are considered un- or under-employed today) there are at least three underlying reasons to believe in a jobless recovery:

1) Job openings are still in the doldrums — February 2010 job openings were practically equivalent to their February 2009 levels of 2.7 million.

2) Part-timers grew in the latest jobs report (although discouraged workers fell, meaning more Americans are feeling confident at least about entering the job market) and the work week at 33.9 hours/per is still near its all-time low of 33.0. That means that when demand starts coming back, employers will have a lot of slack to extend the work week and hire part-timers rather than dip into the ranks of the officially unemployed — that 9.7% figure the media focuses on.

3) The ratio of unemployed-to-new hires, a good indicator for strife in the job market, ticked up in February and is hovering around its April 2009 levels. Its three-month moving average is heading in a positive direction, but slowly.

And then this. According to the Business Roundtable’s CEO Survey, 75% of executives expect sales to rise in the next six months, but hiring is a different story. In the coming months, half of employers expect no change in employment, 29% expect to hire and 21% expect to shrink payrolls. Employment is a lagging indicator of the economy’s strength, because employers won’t hire en masse until they actually experience (as opposed to project) sustained sales increases that grow capital they can invest in compensating new workers. But this survey suggests that while employers can spot glimmers of demand’s recovery, they aren’t any more ready to expand payrolls than they were some months ago.

Some graphs from the Bureau of Labor Statistics help tell this two-part story:

1) Employers are not firing…

2) But they’re also not hiring.

Staff members for Senator Richard Shelby, ranking Republican on the Senate finance committee, have said he will support an independent consumer finance protection agency — but with limitations, including an outside commission that could override CFPA rules. There are not many more details in the Washington Post article that breaks the story this morning.

It’s surprising to hear a Republican advocating for an independent consumer agency, but it’s worth evaluating the meaning of the word independent in this case. After all, Sen. Shelby is the guy who just three weeks ago told a gathering of the American Banking Association that “safety and soundness trumps everything. It trumps the consumer finance whatever.” In a more sober moment with PBS’ Judy Woodruff, he said “I think you have got to have a balance between sound banking
regulations and sound banks, banks that are going to be here for the
consumer, and what a freestanding or an independent agency would put on
them. I think you have got to have a balance.”

To understand what Shelby means by “balance,” it’s important to back up and remember that one central conflict in the debate over consumer protection is the trade-off between banks’ safety and soundness (profitability) and consumer protection against practices that are seedy, but profitable. In the current consumer protection smorgasbord, the safety and soundness concern has the clear upper hand for at least two reasons. First, a plethora of regulators at the federal and state level encourages arbitrage among regulators jostling
for bank charters by softening their rules. Second, consumer protection is divided among a
number of alphabet soup agencies most of whose first order of business
is looking after the “safety and soundness” of banks.

That’s why consumer protection advocates say that a strong agency would both be independent and have full rule-making authority over banks and and non-bank entities, like payday and auto lenders. Shelby’s deal would give the agency nominal independence without true independence to write rules that offer simple disclosure to consumers of financial products like student loans and credit cards.

The most important questions are to come, as my colleague Dan Indiviglio pointed out to me. First, will Dodd agree to a CFPA that fudges the meaning of the word independent and essentially recasts Shelby’s previous counter-offers to give the CFPA glorified recommendation status? Second, will the White House — which has gone from lukewarm to crusading on the consumer protection issue — respond to Shelby’s offer with clear approval or disapproval?

We used to wonder what the iPad would look like. Then we asked what it would cost. Then what it would do, and what it would sell. Now everybody’s asking what it means.

The consensus is hardening around the interpretation that the iPad is a consumer’s device rather than a creator’s tool. Nice distinction. What’s the difference? You can’t type easily on an iPad, or multi-task on an iPad, or run Office programs on an iPad. But you can watch, read, and play with just about any interface in the universe — as long as the guardians at Apple headquarters approve. And there’s the rub. Tech critics who yearn for an open-source world are miffed Steve Jobs has put a straitjacket around his shiny all-media slate, and that publishers are playing along. Aaron Gell, in a cogent critique (“Love freedom? Kill your iPad”), writes:

Just about
every media company right now is in survival mode, so every time we
make a choice to, say, read a magazine via an iTunes app rather than
purchasing it at the newsstand, we’re forcing a publisher to play by
Apple’s arbitrary and secretive rules.

The phenomenon Gell is describing has been called the Splinternet: the rise of platform-specific content networks — iPad apps vs. Kindle apps vs. Android apps — that threaten to replace the one-Website-fits-all-laptops world where we browse today.

The last 10 years were all about walls going down. Want to read the New York Times? Here’s the whole thing online for free (plus multimedia!) on any computer with an Internet connection. This model has been disastrous for big media companies because eyeballs went where ad dollars wouldn’t follow. But with the roll-out of new hardware like the iPad, publishers are ready to embrace a world of walls.

This is neither sinister nor concerning. It’s not sinister because mainstream media publishers want to play by Apple’s secretive rules — for now. They see the iPad as a petri dish for pay models, where they can experiment with meters and bundling and paywalls with a small, elite group of consumers, and hopefully atone for a decade of throwing content onto the Web and hoping sufficient ad revenue followed. Second, it’s not concerning because Apple won’t be the only tablet in the market in two years. Here are 15 more flat computers in development, from HP’s slate to Microsoft’s two-screen booklet. If Apple’s straitjacket on content is too suffocating for consumers and publishers, we’ll flock to tablets with more liberal app rules and cheaper content and Apple will bend its rules meet market. Peace, Apple agonistes. The marketplace of ideas will survive the tablet age.

Health care reform is done. Financial reform is on its way. What’s next? Rich Gold, the head of the lobbying group at Holland and Knight, says it is only a matter of time until Washington is consumed in a major battle over tax reform. Here is a brief edited transcript of our conversation on Monday.

Whom do you represent as a lobbyist?

I work for a diverse bunch of interests. Local governments, a variety of corporate industry firms, manufacturing firms, service industry, green tech. I do a lot of climate change and budget work.

Why do you think major tax reform is inevitable?

Systemically revenues are obviously well out of balance with expenditures. With mandatory spending only getting worse, we’ll have to start fundamentally looking at entitlement reform. Sixty-five percent of the budget is mandatory, 15 percent is defense, 20 percent is discretionary. You can take defense down a little bit, but we’re fighting two wars. There’s not money there on the discretionary side to have an impact. It’s hard to know whether health care bends the cost curve up or down significantly, although I like some of the things like the review board for Medicare. But we’re way overdue for something on tax policy. We’re in the 1990-1991 tax deal moment, and I don’t think Obama wants to go into reelection year without doing something on deficit reduction.

What items are guaranteed to be on the menu for tax reform? Tax expenditure reform? Higher standard deductions? A value-added tax?

I think you’ll see corporate taxes go up first. The closing of tax loopholes (to encourage corporations from moving capital overseas) would be front and center. That would be first.

Then what?

There is only so much jimmying you can do with rates, and Obama’s painted himself in a corner by saying he won’t raise taxes on anybody under 250K. The real problem with all of this is that the Republicans used to be the party of limited government and now the Tea Party is making them the party of no government. To reform tax law you gotta have a dance partner.

Democrats like social engineering, so I think in climate change or elsewhere we’re going to see
changes to to Section 45 [the Income Tax Credit for Renewable Energy]
to encourage investment in wind and solar. I think you’re going to
continue to see social engineering in the tax code, like sin taxes
related to Americans’ diet. Democrats tend to go down that road on the
tax credit and new tax side.

Because you need to spread the blame for the pain or because Congress will be more balanced and it will be impossible to pass anything without bipartisan agreement?

Both things. It will be really hard for one party to take on raising revenues and making cuts without a grand compromise. The GOP is supposedly very interested in fundamental tax reform but the Tea Partiers have them in a box because they want to shrink the government so dramatically.

In the meantime, what do you see as the major sticking points in the financial regulation bill that’s working its way through the Senate?

Right now consumer protection must be in chains for the GOP to agree to it. They don’t want the consumer protection bureau going after the big banks. But the Democrats can’t message on this and explain to the tea party folks and the rest of the America that we’re are trying to deal with the folks who got the bailout, then we might as well just give up.

The District of Columbia’s plastic bag tax of 5-cents generated only $150,000 in January, far below analyst’s expectations. But that’s the good news.

The number of bags handed out by supermarkets and other establishments plummeted 85%, from 22 million to 3 million. The revenue will go to cleaning up the Anacostia River.

As Atlantic colleague Megan McArdle mentioned during the morning meeting, it would imprudent to read too much into these early returns. It’s possible that some consumers, shocked by the initial pricing of the bags, elected to carry their few groceries by hand or linen bag in the weeks after the tax debuted. Still they might eventually decide that 5-cents per plastic sack is a small price to pay for convenience. That might be right.

But if the dramatic drop-off holds, the immediate lesson for local policymakers is straightforward. Consumers react to prices, and when the price change is from zero, the impact is particularly acute. You don’t need to enact something as steep as a 20-cent bag tax, as Seattle recently tried and failed to do. The presence of a new signal can be enough to change incentives and decisions.

It’s true that this tax, like just about any tax, comes with its bizarre exemptions and complications. Bookstores that sell so much as a mint get hit with the tax (bookstore Politics and Prose stopped selling novelty mints in reaction to the measure). Establishments with food and seating are exempt, but only for paper bags. Anti-tax hawks like the Washington Examiner are making some rather silly claims about how Marylanders cannot “afford” this tax because it is “unfair, unwarranted and unreasonable.” Baloney. A five-cent Pigouvian tax to account for the negative externality of pollution — the Anacostia chokes with 200 tons of trash from plastic bags every year, according to the WSJ — is fair, warranted, reasonable and utterly affordable.

This winter, economic analysts explained that 5.6% annualized
GDP growth in the last three months of 2009 was not as good as it looked. This fall, economic analysts will explain
that 2010’s sticky, high jobless rate near 10% is not as bad as it looks.

Projecting seven months forward, monthly job additions will rise and GDP will have reached a full year of positive growth. But as more discouraged workers currently considered outside the labor force re-enter, they will inflate the unemployment ratio denominator, making it harder for economic observers to see proportional change in the official unemployment rate. This will make it look like the economy is treading water even as we’re churning out hundreds of thousands of jobs a month.

There was an interesting exchange that touched on this subject Sunday between former Labor Secretary Robert Reich and the Washington Post’s George Will on ABC’s “This Week.” Reich said:

REICH: And, look, the key point, I think — and the Democrats are hoping for this — is that, despite the high level of unemployment, which is almost inevitably going to be with us going into November and possibly also with us going into the general election, that the direction is correct and that the public is looking and will look more at the direction of the economy than at the absolute level of how bad it is. We don’t know. We don’t have data, because we haven’t been here before, as to whether that hypothesis is correct.

Exactly right. Much hay has been made of the historical correlation between unemployment and midterm losses in the House and Senate. One statistically significant conclusion is: unemployment doesn’t matter, but real income gains do. (Even that is bad news for the Democratic majorities.) The responsible answer is: we have no idea how joblessness will press the scales. Unemployment has only been over 7 percent in only one midterm election in the last 50 years. Reagan, with an approval rating of 41%, lost 26 House seats as unemployment swelled over 10 percent. That’s the thing about historic recessions: it’s difficult to find historical parallels that offer guidance.

Within the genus of deficit hawk, there is moderate species that finds the long-term deficit crisis distressing but believes the solution can involve a prudent combination of new taxes and spending constraints rather than the wholesale demolition of our entitlement program. David Brooks appears to classify as a member of this species.

The style of the column today is tongue-in-cheek (“You’re sitting there in your
West Hollywood bondage-themed strip club with party donors picking up
the tab, and, of course….you’d like to solve the country’s looming fiscal catastrophe.”) but the substance seems serious. Here’s the meat:

These days, voters want low taxes — about 19 percent of G.D.P. And
they want high spending — over 25 percent of G.D.P. by 2020. As a
result, federal debt, which stood at 41 percent of G.D.P. two years
ago, is forecast to balloon to 90 percent of G.D.P. in 2020, according
to the Congressional Budget Office. By that time, interest payments on
the debt alone would be $900 billion a year.

Dean Baker rips into Brooks for fear-mongering. He writes:

Yes, that $900 billion is really really scary. I don’t know anyone
who has $900 billion. Serious people would point out that the projected
interest burden is a bit more than 4.0 percent of GDP, about the same
as it was in the early 90s.

If $900 billion of interests were 4.0 percent of GDP in 2020, that would make 2020 GDP equal to $22.5 trillion. That means 2010 GDP, around $15 trillion, would have to grow an average of 5.2 percent in the next 10 years.* That’s a pretty rigorous growth rate, and interest payments would still be their highest in relation to GDP in 70 years.

Baker is correct that “if we paid the same amount per person for health care as people in any other country then the deficits would quickly vanish.” Nobody disagrees with that. But the recent health care debate demonstrated that bending the cost curve even a little bit, much less swapping it entirely for Singaporean medical inflation rates, is an enormous political challenge. Brooks might be wrong about his commission strategy, or his moralistic flourishes. But isn’t he right that we have to do something?

*Update: Important contribution from commenter Ernie. “CBO
has nominal 2010 GDP at $14.6 trillion and 2020 GDP at $22.5 trillion.
That would require an average annual nominal (emphasis on nominal)
growth rate of about 4.4% which is not historically extraordinary: over
the last 40 years, nominal annual GDP growth has fallen below 4.4%
exactly 7 times. And it seems even more plausible when you consider
that nominal growth tends to be brisk in the immediate aftermath of a
recession.”