Thursday, October 31, 2013

To the Editors: Victor Davis Hanson doesn't understand income taxes

My LTE published by the Mercury News:

Hanson fails to understand tax rates

Victor Davis Hanson (Opinion, Oct. 25) strips more from the credibility of his arguments than anything else when he writes of the quiet desperation of the 1 percent in Silicon Valley, beginning with his assertion that they pay well above 50 percent in aggregate income tax rates. Hanson is unaware that a marginal rate applies only to income above the rate cutoff -- the amount a person earns below a rate cutoff is taxed at lower rates. A California couple has to earn more than a half-million dollars annually to begin paying slightly over 50 percent income tax on the additional money they make. They would have to earn many millions of dollars annually before their aggregate rate exceeds 50 percent. We're discussing far fewer than 1 percent at this point, people who can afford to give back to the California economy that helped them build that wealth. The rest of his argument is no better.

Hanson's Op-Ed read "Beneath veneers of high-end living, there are lives of quiet 1-percent desperation. With new federal and California tax hikes, aggregate income-tax rates on dot.commers can easily exceed 50 percent of their gross income." And it went south from there.

I expect a couple would have to make over $4 million annually to have a chance at 50% aggregate income tax rates, but that's making the ludicrous assumption that $4m includes no capital gains and ignores deductions. If you define income the way people usually do, as salary plus commission plus all investment income, I think few people below $10m annually pay over 50% in aggregate income tax. And while Romney's 14% rate was probably an outlier, the vast majority of people making over $10m have lots of investment income and pay very little. This doesn't include payroll taxes but those become a rounding error when your annual income exceeds $4m, and other taxes are also unimportant unless you've chosen a bonfire of vanities lifestyle.

Buffett said he paid a lower tax rate than his secretary, and he seems more accurate about the wealthiest than Hanson.

In other financial news, the US budget deficit is the lowest since the 2007-2008 fiscal year, at $680 billion. Interest on the debt is $415b, so the US is effectively spending only $265b above revenues and the rest is debt turnover. We're very close to having an operating/primary surplus in the near future, probably not a good idea with a still-limping economy.

25 comments:

dbostrom said...

"...lives of quiet 1-percent desperation."

What a buffoon, to paint an enormous bulls-eye on his op-ed.

Quiet desperation: facing the awful prospect of only 24 cases of '90 Château Margaux, the grim reality sinking home in the serene quiet of your 8,500 square foot hovel, broken only by the ticking of your meagre Gabriel LeRoy table clock. Knot together a few rags-- perhaps a selection of Ferragamo, Brioni and Kiton neckties-- to form a noose, step up on your authentic Chippendale chair, cinch onto your 18th century chandelier and jump; this hard scrabble life of quiet desperation on only a few millions per year simply cannot be faced!

Andrew said...

The interesting thing is that Humans measure 'how well they are doing', and hence sense of well-being, against their peer group.

So, once you have enough money such that day-to-day expenses are covered, you don't really derive much benefit from extra money, especially if all your peers get this extra money. If a group of millionaires all get a tax cut, it makes no difference to their sense of happiness.

However, there has been a lot of propaganda to get people who have the incredible fortune to be rich in a rich country to feel sorry for themselves and aggrieved at their situation. Obviously anyone who dares to point this out is a wicked socialist.

dhogaza said...

That piece almost makes me ashamed to be part of the high tech industry. I only work nominally 30 hrs a week (generally quite a bit less, in actuality), flex schedule, make (barely but still ...) six figures, and feel extremely fortunate to live a lifestyle that allows me to travel, to spend a lot of time doing nature photography, volunteering, save for retirement and just in general enjoy life without having to work very hard at all.

Taxes are the last thing I'd think of whining about, watching my friends struggle to make ends meet while working their rear ends off ...

Anonymous said...

"Interest on the debt is $415b, so the US is effectively spending only $265b above revenues and the rest is debt turnover. We're very close to having an operating/primary surplus in the near future, probably not a good idea with a still-limping economy."

Uhmmm...

What kind of magic accounting are you wanting to invoke here?

You don't get to just not pay interest, but even if you could,
you do realize that the largest owners of US debt are Social Security and Medicare, don't you?

Say we didn't pay interest - Social Security and Medicare would be running even bigger deficits than they currently are.

Another way of looking at the debt service is this:
Interest rates are near historic lows and still we have $415 bill in interest.
What happens when rates rise?

A sustainable deficit level is around the same rate as GDP growth ( because we'll outgrow the debt the following year ).

With GDP growing at around 2% per year, we're still in the unsustainable range.

With continued slow improvement in employment, that should continue to improve.

But with decades of graying population ahead, things will get tight again - soon.

Larry

Brian said...

Larry, it's not magic accounting. Try some thought experiments where you increase interest payments and decrease the deficit, and you'll see that when the former is bigger than the latter then you're reducing net debt (barring weird things like deferred payments).

There is an issue about a decade or more from now when the deficit as a percent of GDP is expected to get large again. I'm undecided about what we should do about it now.

dhogaza said...

Larry:

"What kind of magic accounting are you wanting to invoke here?"

Standard accounting, which admittedly seems like magic to some people.

Operating expenses don't include taxes or interest. Brian's comment is perfectly correct.

Hank Roberts said...

> lives of quiet 1-percent desperation.

As in "I'm still in the 1-percent, and can't be happy til I'm in the 0.01th percent, and I blame the government"

He just got the sign wrong.

EliRabett said...

Victor David don't understand no nuthin

cRR Kampen said...

This Hanson? -> http://en.wikipedia.org/wiki/Victor_Davis_Hanson

Can't be.
Btw he does understand some things about war & culture.

Jeffrey Davis said...

The economic problems of the very rich are sad for Victor Davis Hanson. I hope he doesn't take this the wrong way, but IMO Victor Davis Hanson is either crazy or grossly immoral.

cRR Kampen said...

It is him, the war historian. I knew he's a neocon but he's good on his subject. So there he should stay. This is like one of those guys priding on an art degree thinking they are the guru's who can tell the world about atmospheric radiation physics.

Anonymous said...

"increase interest payments and decrease the deficit, and you'll see that when the former is bigger than the latter then you're reducing net debt"

Wrong.

Debt payments are still part of the deficit. We're issuing new debts to cover old debts.


Anonymous said...

"Operating expenses don't include taxes or interest."

Right.

And how many companies do you invest in that show positive EBITDA but lose money every year on the bottom line?

I'm confident the answer is zero, because those companies go bankrupt very quickly.

Governments can always print money, of course.

But that's not good for you, me, or Jane Six-pack.

Anonymous said...

The deficit should be getting better, because there are a lot of one-off improvements going on:

1. We've been collecting Obamacare taxes for years now without incurring Obamacare expenses.
2. We jacked up rates on the high earners
3. The Cap Gains bump made cap gains realized at the lower pre-2013 level
4. The sequester furloughs didn't hit until 3Q ( when the deficit improved most )

Going forward:

1. Obamacare expenses start ( and given the numbers greatly increased Medi-caid expense )
2. Hausers law may reduce revenue from high earners
3. Cap gains will be less likely to be realized
4. Sequester may or may not continue - if it does it is further evidence of entitlements squeezing out government - if it doesn't it will be added expense.

Deficits are not evil, but if they routinely exceed GDP growth, as the still do now, they
will lead to reduced living standards for this and future generations.

Larry

Anonymous said...

Brian says "Try some thought experiments where you increase interest payments and decrease the deficit, and you'll see that when the former is bigger than the latter then you're reducing net debt"

What does that even mean?

Perhaps you can explain with an equation involving the quantities like "net debt

Brian said...

Last anon - just go read up on primary/operating surplus, or ask the most politically-conservative accountant you can find.

Larry - the sequester hitting in Q3 means FY 2014 will have even more effect from the sequester and have a still smaller deficit. You reversed the sign on that equation.

On Obamacare finances, I think I need to read more on post-2020 effects. I do know there's some evidence that cost controls are working despite the Republican efforts to increase costs to taxpayers by interfering with IPAB.

Anonymous said...

"Last anon - just go read up on primary/operating surplus, or ask the most politically-conservative accountant you can find."

Brian is correct with his terminology, but I think he is ignoring a big future problem with the National Debt and its interest payments. Primary deficit plus interest payments = total deficit.

The Federal debt is financed with various terms and interest rates. We could certainly turnover that $415B interest payment as new debt, finance it short term at <1% and it seems that is good. The problem is interest rates are at historic lows. They may/will change in the future and reports show that a lot of the national debt will be refinanced by 2016.

Simple thought, if interest rates double in 5 years and the Federal debt is ~$20 trillion what would the interest payment on the debt be then?

1

Brian said...

Hell freezes over, and I think Anon 1's last comment was fairly reasonable. I wish more of 1's comments were like that.

It's true that running a primary surplus doesn't guarantee that the future will be better than the present. It does, however, mean that the future based on end-of-year financial outcomes will be better than future would have been based on the financial position at the beginning of the year.

Interest rate mixes are a decent example - they may go up in the future (although even if they do, that would return them to historic levels, i.e. the same levels as the long term debt being retired - no net harm). Regardless though, the hypothetical future debt churn 20 years from now would be churn of debt incurred before now - the present is turning over a problem created in the past during a balanced primary budget. During a surplus, it's making the problem smaller.

This all ignores Keynesian arguments though where austerity today can make deficits worse in the future. I'm not really qualified to evaluate those arguments other than to see DeLong and Krugman seem to wipe the floor with austerians based on what's happened in Europe.

Anonymous said...

"austerians based on what's happened in Europe."

The history of large debts is that countries that control their own currency devalue the debt.

Countries that do not control their currency, namely those married to the Euro, default.

Europeans did not choose austerity, austerity chose them.

Since the US controls the dollar, we will likely devalue our way out, but that is a foreboding circumstance for the old and young to realize their standard of living will be devalued along with the debt.

Anonymous said...

at 31/10/13 8:12 AM dhogaza said…

That's a nice 100% CO2 based lifestyle you've got there.

I'm certain that more than 6 Billion+ others would enjoy having the opportunity.

A reliable source of inexpensive electricity will go a long way toward spreading the wealth.

Anonymous n

Anonymous said...

Anonymous n, again.


http://www.newgeography.com/content/004013-fixing-california-the-green-gentry-s-class-warfare


FIXING CALIFORNIA: THE GREEN GENTRY’S CLASS WARFARE


" Historically, progressives were seen as partisans for the people, eager to help the working and middle classes achieve upward mobility even at expense of the ultra rich. But in California, and much of the country, progressivism has morphed into a political movement that, more often than not, effectively squelches the aspirations of the majority, in large part to serve the interests of the wealthiest. "

" Primarily, this modern-day program of class warfare is carried out under the banner of green politics. The environmental movement has always been primarily dominated by the wealthy, and overwhelmingly white, donors and activists. But in the past, early progressives focused on such useful things as public parks and open space that enhance the lives of the middle and working classes. Today, green politics seem to be focused primarily on making life worse for these same people. "

[Bold by Ed.]

a_ray_in_dilbert_space said...

Anonymous n,
I am sure that if you put some sugar into an otherwise closed bottle of yeast, they too will be very appreciative...at least until they drown in their own waste.

Anonymous said...

a_ray_in_dilbert_space

It is a verified observation that those who insist on limiting the sugar are the very ones adding in the most. By orders of magnitude.

The hyper-hypocritical Environmentalists / Greens have destroyed all creditability of their "movement". It's circling the drain down into nothingness.

Your complete focus on the subject is an excellent example.

Mal Adapted said...

AT: "The hyper-hypocritical Environmentalists / Greens have destroyed all creditability of their 'movement'."

I can't say I know any of those. Want to name some names?

Thomas Lee Elifritz said...

There is no 'movement' here you idiot, there is just physics and reality. You have neither.

Money measured by dollars isn't even a recognized SI unit. It's worthless.