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Newspaper shows illiteracy on understanding tax cut effects

Recall from yesterday’s post I noted how public policy debate got elevated by the excellent argumentation of two, of all people, politicians? Well, what goes up comes down on this issue courtesy of some economic illiteracy left unchallenged by the media.

The Shreveport Times decided to comment on Rep. John Fleming’s media remarks that soaking the rich to pay for bloated government constituted class warfare. It argued that tax increases on the wealthy should not be dismissed out of hand regardless of whether it constituted class warfare, and presented, but did not challenge, an assertion from the political left that it was “class warfare against the working class and poor when the [George W.] Bush administration pushed the lower [tax] rates through a decade ago.”

Leaving aside the fact that under that definition Pres. Barack Obama also has engaged in “class warfare against the working class and poor” when he succeeded in getting a Congress with a majority of Democrats in it to extend the lower rates, this conceptualization has no basis in fact.
Not only did elements such as the doubling of the child credit and lowering of capital gains taxes (benefitting those of modest incomes who invest retirement savings, among others) end up meaning most American families saw their tax burden fall, but the average marginal tax rate of income tax-filing families at the lower end of the scale also fell in the years immediately following the cuts, including a significant increase in the portion of households paying no federal income taxes at all.

Meanwhile, the tax cuts shifted even more of the income tax burden toward the rich, so if anybody should be complaining about “class warfare” about those cuts, it should be the wealthier. Analysis of those cuts also demonstrates that, if the goal is actually to raise revenue, the least effective source would be from the wealthy because they are too few such households and of them the tax code gives them far more opportunities to lower their marginal rates. The real source of funds would be from the non-wealthy, so to have any but the most miniscule effect on the revenue picture such tax increases necessarily must hit the middle and lower brackets. Thus, for The Times’ suggestion to have the intended effect, these brackets would have government declare class warfare on them.

 Nor can those cuts be blamed for deficits, as The Times muses paying for these might also serve as a cost borne disproportionately by the non-wealthy. Spending has grown much faster than revenues and inflation and the cuts stimulated a considerable amount of revenue, research shows. Of the existing deficit projected from the time of the cuts to 2011, 86 percent came through increased spending, so a reversal of the cuts would have produced only one-seventh of the revenue to compensate.

So while yesterday I applauded well-informed and reasoned explications, today it’s back to the usual filling in the gaps to counter ignorance and poor argumentation reported in the media. Which is quite enough to keep this column going for a very long time.


Anonymous said...

Statements like “lowering of capital gains taxes (benefitting those of modest incomes who invest retirement savings, among others)” are misleading. Retirement accounts like 401ks do not directly benefit from lower capital gains taxes. It is an undisputed fact that the lion’s share of capital gains tax cuts go to the very wealthy. If the 2003 capital gains tax cuts are so good for the country then why did we hit the skids just three years later?
Also it seems the author could see the fallacy of only comparing income taxes when discussing tax burden. It’s true that the poor and lower middle class pay little income tax but their share of the overall federal, state, and local tax burden as a percentage of their income is equivalent to the upper middle class and the rich.
Low tax rates on the wealthy are a leading cause of our economic malady. The wealthy have taken their oversupply of money and invested in overproduction and created bubbles. So where did the oversupply of money come from? Have the wealthy earned this oversupply of money by becoming so much more valuable in the last 30? Did the value of the middleclass stay the same over the last thirty years resulting in stagnate incomes? Clearly the relative value of the production of the middleclass and wealthy has not changed much in 30 years. One reason why the wealthy have seen significant income gains in the last thirty years is because they continuing to benefit from government services but pay much less for these services. Middleclass incomes have been stagnate because they get fewer government services but continue to pay the same relative amount.
The wealthy should pay more taxes because they benefit more from good schools, roads, airports, defense, courts, and all the other taxpayer financed activities. Those that get the bigger benefit should pay more for the greater service. In addition we will never get out of this economic mess until middleclass wages rise. Jobs are created by people spending money. We need to get an oversupply in the hands of the middleclass.

Mr. Harris Plutocrat said...

If it is “class warfare” merely for the left to push for the rich to pay more taxes, than why is it not class warfare for the right to push for the poor to pay more taxes? The reason is that Jeff is blinded by nationalism, ideology and emotion. Has he ever written a mellow, even-keeled piece about our president? Nope. It’s always a shrieky procession of scary-sounding accusations of what Obama “really” wants (in spite of all evidence to the contrary). For one thing, though, the suggestion that Obama has engaged in “class warfare against the working class and poor” is particularly funny. In Jeff’s upside down world (naturally, his food for thought is the Heritage “think” tank) borrowing mountains of money from the Chinese, then giving it to the rich, then pushing the payback responsibility on future generations and the poor, well, in Jeff’s world this is a completely pro-poor policy. Why don’t they appreciate you, Jeff?! If only the poor would cough up more of their measly salaries to the rich, why, the poor would be so much better off! Here’s a better question: why would anyone take economic lessons from the economically (and morally) embarrassing backwater of Shreveport? [Beyond that, such a disgrace to suggest that the rich pay so much in taxes when everyone knows (as suggested by the other commenter) that the rich don’t pay mounds more when all taxes are taken into account in reality.] Simpletons like you can always be relied on to tout the latest arguments suggested to you by the powers you worship (heritage, republican party, etc). So impressionable.

Jeff Sadow said...

My frequent commenter perhaps has met his match with Anonymous here, at least in terms of not understanding economics and the way the world works. Only such mistaken understanding argues for shifting a greater burden on onto fewer people and removing wealth creation ability from those who do it the best and thereby contribute the most to society. And, as a corrective, 401(k), 403(b) etc. accounts are not taxed internally, but when distributions occur, they most certainly are.

However, my frequent commenter remains king of the personal attack and avoiding any real debate of the issues. His remark about Heritage Foundation research illustrates perfectly his approach. This is because he knows he cannot counter that research, which gives him a choice of accepting alteration of his prejudices towards a more realistic appraisal of the world, or to adopt a defensive strategy of being dismissive or ridiculing and avoiding analysis. He chooses the later.