Minor Thoughts from me to you

Archives for Income (page 1 / 1)

Egregious Minimum Wage Doubling

I’ve become a lot more progressive during the past year. I still think that raising the minimum wage is a bad idea. I don’t agree with everything in this piece, but I do agree with this bit about the minimum wage. If “we” want to support low income workers, I think we should do it through income supports, a negative income tax (the Earned Income Tax Credit), or something else that doesn’t pass the entire cost onto employers and businesses.

Biden Proposal Hijacks Recession for Liberal Wishlist

Brian Riedl, writing for The Dispatch.

Perhaps most egregious is a proposal to more than double the federal minimum wage to $15 per hour—including for employees who regularly receive additional tips, for which the current minimum wage is $2.13. The nonpartisan Congressional Budget Office estimates that even gradually raising the minimum wage to $15 by 2025 in a growing economy would likely kill 1.3 million jobs, and perhaps as many as 3.7 million. Imposing a drastic minimum wage increase on small businesses that are already struggling to stay afloat during a recession is especially absurd. Moreover, forcing restaurants, which are failing at record rates, to raise their own tipped minimum wage by 600 percent is economic malpractice. Perhaps high-cost cities like New York City and San Francisco can afford a much higher minimum wage, but other parts of America with lower incomes and prices will not be able to absorb this policy. It has no business in a relief package.

This entry was tagged. Economics Income Jobs Joe Biden Minimum Wage

A Parade of Flawed Arguments for Minimum-Wage Legislation

A Parade of Flawed Arguments for Minimum-Wage Legislation →

Don Boudreaux on one of my bête noires, the minimum wage.

Finally, when Ms. Kim writes that “The minimum wage isn’t a pathway to the middle class; it is a safety net to prevent destitution,” she reveals that she doesn’t understand the key problem with the minimum wage – namely, that it causes some workers’ earnings to fall to $0. However economically precarious one’s life might be when paid a positive market wage of less than $15 per hour, that life is far more precarious when paid $0 per hour.

Minimum-wage legislation isn’t a safety net; it’s a knife that shreds the safety net of employment opportunities in the market.

I think there are already people who want work and can't find it, at the current minimum wage. A policy that makes them more expensive to employ, a policy that increases the minimum wage, makes it harder for them to get a job. That seems counterproductive to me.

My View on Unions and the Middle Class

This morning, a friend linked to an article on Salon.com, "The conservative plot to destroy the middle class: Scott Walker, 'right-to-work' and America’s new Gilded Age". I read it and I had some issues with how it portrayed the labor history of the last 100 years. In order to agree with Thom Hartmann's polemic, you have to agree with his assumptions about what happened and his implications about what caused various changes.

Allow me to summarize. Pre-unions, Americans were split into the super poor and the super rich. Then FDR passed the Wagner Act, giving unions the strength to fight for workers. From that time forward, the US middle class sprang into being and grew into a strong backbone of society. The forces of evil fought back and worked to weaken unions. The American middle class began to stagnate and to fall behind. If we don't fight to keep unions strong, the American middle class may disappear forever.

I disagree with Hartmann's history of labor and the middle class. I think unions helped some, but also caught the pre-existing wave of economic growth. The growth before WWII was caused by technological innovation, aided by the Harding and Coolidge efforts to cut government spending and debt.

The tremendous economic growth after WWII came out because the European economies had been literally bombed into oblivion. American factories grew explosively, producing all of the goods that European citizens were demanding. American workers were the beneficiaries of this flood of wealth.

Over time, the European economies recovered and the Europeans rebuilt their manufacturing base. The Japanese began to emerge and fight for their own slice of the global market. As worldwide competition increased, American businesses had to economize and cut costs, including labor costs. This eroded the wage premiums that unions had previously demanded for their members.

As American businesses were facing competition from abroad, American workers faced increased competition at home. During the 70's and 80's, more and more American women entered the workforce. This increase in the labor supply had its own impact, helping to hold down wages and benefits.

The American family also began to change, with more single parent households and more single (working) women. This increased the number of households in the country and decreased the average number of wage earners per household. This, in turn, caused the measured statistics of "income per household" to decline. The net change was that, even as the economy continued to grow, the statistical picture looked as though the middle class was stagnating.

That's my story and, given enough time, I can conjure up links to various charts and graphs that explain why I believe this story.

Right now, I'd rather point out why I don't like Hartmann's story. I'll list out the points of disagreement and give a thumbnail capsule of why I disagree with each point.

From the Gilded Age to the Great Depression to today, the economic agenda of conservatives has been easily summarized in two words: “cheap labor.”

That's an opinion and it's Hartmann's opinion. As a libertarian who supports right-to-work, I'd summarize my agenda as "freedom". I believe it leads to cheaper labor for some, more expensive labor for others.

Nowhere is this more apparent than in Republican efforts to make as many states as possible “right-to-work” states—more accurately described as right-to-work-for-less states.

Sure. Let's go ahead and redefine terms to create an emotional preconception against the thing that you're arguing against. It's a fine demagogic technique, but let's not pretend that it's entirely honest. This also ignores the fact that working for less can be a good thing. If a business is struggling, would you rather work for less or be laid off because your union refused to agree to a wage cut? If you're an inexperienced worker, would you rather work for less while you gain experience or be frozen out of a job entirely, because you're not worth the high starting wage that the union negotiated?

Only two entities have the power necessary to stand up for working people against the massive control of oligarch employers: government and unions.

There are three assertions in this sentence. I don't agree with any of them.

  1. Employers are oligarchs who exert massive control over working conditions and compensation.
  2. Governments are capable of protecting all employees.
  3. Unions are capable of protecting all employees.

I'd say the first is only true if you can easily list off all of the employers in your area. If you can and the list is small, those employers may have oligarchic control. If you can't, if there are too many employers to count, it's likely that none of them have oligarchic control over employment in your area.

Governments are often captured by special interests and used by those special interests to give themselves special privileges. An especially egregious example was when white southerners, of all economic statuses, used Jim Crow laws to mandate discrimination against minorities. In that time and place, the government most emphatically did not have the power to stand up for working people of color.

Unions are the very definition of a special interest. They exist to protect the employees in specific businesses and industries. They do this by fighting for special conditions; whether in wages, working conditions, or benefits; that are not available to all employees everywhere. They make life better for employees in the union at the expense of employees outside of the union. (If they weren't able to do this, there wouldn't be a reason to freely join the union.)

Instituting right-to-work-for-less laws is a not-so-subtle plot to starve and destroy one of the only two institutions that can stand up and demand a decent living wage for American workers.

Biased assertion of motive. As a backer of right to work laws, that's absolutely not my motive, nor is it the motive of the other backers that I know.

Right-to-work-for-less laws ensure the cheap labor conservatives have sought for generations.

This is an assertion of debatable fact, without evidence.

Unions have been a bulwark of the middle class ever since the presidency of Franklin D. Roosevelt. Prior to Roosevelt’s 1935 Wagner Act, which guaranteed workers’ rights to unionize, America had been mostly either very rich or very poor.

... Following the Wagner Act’s implementation, and Roosevelt’s raising of the top marginal income tax rate on multi-millionaires to 90 percent, the first true American middle-class came into being.

This is an assertion of debatable fact, without evidence. Additionally, Hartmann commits the post-hoc fallacy, in asserting that the Wagner Act gave rise to the middle class.

[The Taft-Hartley bill] was an early domestic version of the “free trade” disaster we’re seeing now with NAFTA, GATT/WTO, CAFTA and coming soon, the TPP—a race to the cheap labor bottom that started to take root in the American south right after passage of Taft-Hartley.

As I discussed above, the downward pressure on wages is a result of the fact that America lost its manufacturing monopoly as the rest of the world's economies grew out of the post WWII era. The increased competition in producing goods and services strongly limits the prices that any one manufacturer can demand, in turn limiting the salaries that they can pay. It's not a matter of employer greed but a result of consumer demand for more affordable goods and services.

From then until the end of the Jimmy Carter presidency, unionization, and thus, average worker wages in the United States, only gradually declined.

This is a repeat of the assertion that unions were responsible for keeping average worker wages high. If I wanted to engage in my own post-hoc fallacies, I could say that this proves that Taft-Hartley didn't actually have that much of an impact on the middle class.

When Ronald Reagan came into office, a quarter of the American workforce was unionized, meaning half of Americans could raise a middle-class family on a single salary.

There's an important unstated fact here: roughly one-half of the potential American workforce was sitting on the sidelines, as unemployed (mostly married) women. I would argue that this limited supply of labor had something to do with the level of wages and that changes in the workforce had something to do with average household income falling.

But then Reagan declared war on the middle class, starting with the air traffic controller’s union (PATCO) during his first year in office.

Uhhhm... PATCO was illegally striking. It's hard to argue that opposing an illegal strike was an assault on the middle class. Hartmann gives no evidence of Reagan's war on the middle class except for this one supposed example.

While gutting the American middle-class, conservatives also launched a well-funded propaganda campaign, using right-wing “think tanks” and talk radio to convince workers that their growing economic woes were the fault of minorities (“affirmative action”) and the poor (“welfare queens”).

These talking points coming to you courtesy of left-wing "think tanks" and Hollywood personalities. No, I don't actually think that left wing think tanks are made up of morons. But it would be offensive if I did. And it's equally offensive for Hartmann to imply that think tanks he doesn't agree with are nothing but fakes staffed by enemies of the middle class.

At the same time, they began stacking federal benches with conservative judges, and passing thousands of federal, state, and local laws, ordinances, and regulations that further weakened the powers of organized labor and their ability to unionize.

Such as? I'm not impressed by assertions without any evidence whatsoever.

The result has been an explosion in CEO and executive pay, a rush of wealth to the conservative elite (the top 10 percent of Americans now own 75 percent of the nation’s wealth), and preferential capital gains taxes continue to consolidate wealth for those who “earn their living” by sitting around the pool waiting for their dividend checks to arrive.

I have three complaints in one sentence. First, post-hoc fallacy of nebulous "federal, state, and local laws, ordinances, and regulations" that were responsible for changes in CEO and executive pay. Second, an unsubstantiated assertion that most of America's wealthy are conservative (without Googling can you name wealthy conservatives other than the Koch brothers?). Third, an implicit assumption that capital gains taxes are a good thing and that low capital gains taxes contribute to income inequality.

“fair share” union fees—money paid by workers who decline membership in their union, but receive massive benefits (in increased pay, benefits and job security) from their union that is required by law to represent them, even though they are not members and don’t pay full dues.

“Fair share” fees help curtail the problem of these “free riders.” And the Supreme Court upheld them in the 1977 case Abood v. Detroit Board of Ed.

Again, this is an assertion of opinion, not a fact. I would define "fair share" union fees (if Hartmann gives me the scare quotes, I'll use 'em) as the reward that the union gets for forcing you into a job contract that you may not agree with, negotiated by people that you may neither agree with nor like. It may be my share, but I don't agree that it's fair in all circumstances.

There are other points I could quibble with. But those are the things that bothered me the most.

This entry was tagged. Unions Income

Workers Get the Same Slice of the Pie as They Always Have

Workers Get the Same Slice of the Pie as They Always Have →

I'm always fascinated by the type of analysis that Scott Winship does here. There can be a huge difference in results, depending on how you look at things. This is one reason that I don't like to trust "common sense" all that much.

A couple of posts ago, I showed that when analyzed properly, hourly pay has risen just as much as productivity since 1947. The keys to getting the analysis right are to

  • Compare mean hourly compensation (not median compensation, and not wages net of fringe benefits or household income) to productivity,
  • Compare the same workers and sectors of the economy when computing compensation and productivity,
  • Look at the nonfarm business sector to exclude the housing sector (where imputed rent to homeowners is counted as income) and the government sector (where indirect taxes are counted as income) so that income sources that do not reflect the value of what workers produce are excluded from productivity,
  • Use net GDP to compute productivity rather than GDP, so that income taking the form of depreciation–which does not go to workers or owners but will simply affect future productivity–is excluded from productivity, and
  • Use the same inflation adjustment for both compensation and GDP.

I should have added to that list that proprietors’ income (income from one’s business) should also be excluded, as it is not at all clear how to allocate that category into income from labor and income from capital. I have updated the earlier post (and chart) to take this into account. When these guidelines are followed, the results indicate that hourly compensation is almost exactly where it should be if we expect it to rise with productivity:

Average Compensation Growth vs Productivity Growth, 1947–2012

This entry was tagged. Analysis Income

Obamacare Limits Workers' Hours

Obamacare Limits Workers' Hours →

Part-time Staples workers are furious that they could be fired for working more than 25 hours a week. 

The company implemented the policy to avoid paying benefits under the Affordable Care Act, reports Sapna Maheshwari at Buzzfeed. The healthcare law mandates that workers with more than 30 hours a week receive healthcare.

If Staples doesn't offer benefits, it could be fined $3,000 in penalties per person.

Buzzfeed spoke with several Staples workers who revealed their hours have been drastically cut over the past year. Many reported working as few as 20 hours. 

Obamacare sure has been good to low-income workers, who are struggling to get by.

The Revenue Deficit From Progressive Tax Rates

The Revenue Deficit From Progressive Tax Rates →

Michael Solon, writing in the Wall Street Journal:

Why? A more progressive tax code now leverages the negative impact of slow economic growth. The share of all individual income taxes paid by the top 1% has risen to 41.8% in 2008 from 17.4% in 1980—but almost two-thirds of the income from the top 1% comes from nonwage income, including capital gains, dividends and proprietor's profits.

Individual income taxes as well as corporate taxes are now far more rooted in the shifting sands of volatile business income and capital profits rather than in the terra firma of wage income that stabilizes payroll taxes. From 1960 to 2000, payroll taxes were never lower than in the previous year, individual income taxes dipped only twice, and corporate taxes dropped 11 times. Since 2000, individual income and corporate tax revenues dropped five times, while payroll taxes fell twice. Not only do revenues from individual tax returns drop more often now. They fall more severely, with recent collapses of 14%-20% versus the 3%-5% range before 2000.

If "the rich" pay all of the taxes (and they pay a massive share in the U.S.) than tax revenues will be directly tied to the fates of the rich. Right now, the federal government needs high income earners to continue earning high incomes. As soon as the high incomes take a hit, tax revenue takes a massive hit.

We now have a government that has a massive incentive to ensure that "the rich" never see their incomes drop. We might have a more just government if we evened out the tax code, so that income taxes were spread more broadly and more evenly over the entire country instead of being concentrated over a very small portion of the country.

Is Income Inequality Unfair?

Is Income Inequality Unfair? →

From Scott Rasmussen, at Real Clear Politics:

For most Americans, the context is very important. If a CEO gets a huge paycheck after his company received a government bailout, that’s a problem. People who get rich through corporate welfare schemes are seen as suspect. On the other hand, 86 percent believe it’s fair for people who create very successful companies to get very rich.

In other words, it’s not just the income; it’s whether the reward matched the effort. People don’t think it’s a problem that Steve Jobs got rich. After all, he created Apple Computer and the iPad generation. But there was massive outrage about the bonuses paid to AIG executives after that company was propped up by the federal government.

Income inequality isn't unjust unless the income was ill gotten gains. Our goal as a society shouldn't be to stamp out income inequality. It should be to stamp out crony capitalism that allows people to get rich through connections instead of requiring them to get rich through innovation that makes the rest of us richer.

Consumption and the Myths of Inequality

Consumption and the Myths of Inequality →

Kevin Hassett Aparna Mathur, writing in the Wall Street Journal.

Today we hear that the gains from economic growth accrue to the highest-income earners while the standard of living of the poor and middle America stagnates and the gap between the richest and the poorest grows ever wider. That portrait of the country is wrong.

In the first place, studies that measure income inequality largely focus on pretax incomes while ignoring the transfer payments and spending from unemployment insurance, food stamps, Medicaid and other safety-net programs. Politicians who rest their demands for more redistribution on studies of income inequality but leave out the existing safety net are putting their thumb on the scale.

... From 2000 to 2010, consumption has climbed 14% for individuals in the bottom fifth of households, 6% for individuals in the middle fifth, and 14.3% for individuals in the top fifth when we account for changes in U.S. population and the size of households. This despite the dire economy at the end of the decade.

The data suggest the following picture. Over time, Americans have constructed a vast safety net that has adequately served the poor and helped them—as well as the middle class—to maintain significant consumption growth despite the apparent stagnation of cash incomes. The notion that a society that has accomplished such a feat is rigged or fundamentally unjust is ludicrous.

Obama Overloads a Tale of Equal Pay

Obama Overloads a Tale of Equal Pay →

Victoria Toensing explains the Lilly Ledbetter Fair Pay Act, in the Wall Street Journal.

President Obama makes much of his concern for women's rights, particularly regarding equal pay, but he seems not to be aware that for nearly half a century we have enjoyed the protection of two laws requiring equal pay. The 1963 Equal Pay Act and Title VII of the 1964 Civil Rights Act combined to settle the matter in law.

Mr. Obama brags that the 2009 Lilly Ledbetter Fair Pay Act bestowed equal-pay rights for women. The act, he has said, "is a big step toward making sure every worker," male and female, "receives equal pay for equal work." No, it was a teensy step. It merely changed how the statute of limitations is calculated.

The Equal Pay Act of 1963 prohibits wage disparity between men and women who work in the same place and perform jobs that require substantially the same "skill, effort, and responsibility." The statute of limitations for filing suit is two or three years, depending on whether the discriminatory act is intentional.

Title VII of the 1964 Civil Rights Act covers discriminatory hiring, firing and promotions as well as pay. It requires filing a complaint with the Equal Employment Opportunity Commission within 180 days after an intentional discriminatory act.

Ms. Ledbetter didn't file suit until after her retirement, years after the discrimination ooccurred. The Supreme Court ruled against, stating the law's explicit 180-day statute of limitations.

Statutes of limitation are not technicalities. In Ledbetter, for example, the Supreme Court pointed to the dead witness, stating it is unfair to fail to put an adversary on notice within a specific time period because employers should not have to defend claims far in the past. The court reflected that it does not want to alter congressional deadlines.

In 2009, the Democratic-controlled Congress amended Title VII, allowing a suit to be brought within 180 days of any "discriminatory compensation decision"—in other words, any too-low paycheck. In its legislative "findings," Congress proclaimed that the Ledbetter Supreme Court decision "undermines . . . protections by restricting the time period . . . contrary to the intent of Congress."

So the Lilly Ledbetter Fair Pay Act was premised on the legislators' pretending that Congress was not responsible for the precise words of its own law setting the 180-day deadline.

Pew Research calls it a ‘hollowing out of the middle class,’ but 150 Americans moved up for every 100 who moved down between 1971 and 2011

Pew Research calls it a ‘hollowing out of the middle class,’ but 150 Americans moved up for every 100 who moved down between 1971 and 2011 →

Far from being gloomy, perhaps there’s a positive story here. A story that over the last forty years there has been significant movement by income category among American adults, as would be expected in a dynamic economy, with movement going in both directions. But on net, the changing income dynamics have been positive overall, with about 150 Americans moving up for every 100 Americans who moved down.

There seems to be a lot of effort expended to paint the last 40 years as a period of bleakness and despair. That's not really that true. For a lot of people, it has been a period of upward mobility.

The Income Mobility of Millionaires

The Income Mobility of Millionaires →

Hate the rich? Don't worry, most of them won't be rich for long. Only about 6% of millionaires manage to stay millionaires for 9 years or more.

This week, Mercatus Center Research Fellow Veronique de Rugy examines the income dynamics of taxpayers with millionaire status using data calculated by the Tax Foundation that followed the same Internal Revenue Service (IRS) tax returns from 1999 through 2007. The data represent 675,000 taxpayers who were millionaires at some point during this period; this number serves as the benchmark for the percentages of millionaires who remain millionaires.

... Interestingly, things look rosier at the bottom of the income distribution. That same Tax Foundation study also shows that about 60 percent of households that were in the lowest income quintile in 1999 were in a higher quintile in 2007, and about a third of those in the lowest quintile moved to the middle quintile or higher. In other words, while it is difficult for one to rise from rags to riches, and while it may be harder now than it was in the past, there is still real upward economic mobility in the United States. (Mark Perry, over at the Enterprise Blog, reported back in March on similar data from the Federal Reserve Bank of Minneapolis.)

This entry was tagged. Income

The Buffett Rule is Unfair (and I Oppose It)

President Obama is proposing a new principle: the “Buffett rule”

President Obama on Monday will call for a new minimum tax rate for individuals making more than $1 million a year to ensure that they pay at least the same percentage of their earnings as middle-income taxpayers, according to administration officials.

Mr. Obama, in a bit of political salesmanship, will call his proposal the “Buffett Rule,” in a reference to Warren E. Buffett, the billionaire investor who has complained repeatedly that the richest Americans generally pay a smaller share of their income in federal taxes than do middle-income workers, because investment gains are taxed at a lower rate than wages.

This argument, however, ignores the entire concept of double taxation. I oppose the Buffett rule because investment income is already taxed twice: once as corporate income and once as investment income. This means that investors are actually paying higher taxes than everyone else.

I’ll illustrate this by walking through a simplified example. I’m aware that this is a very, very, very simplified example. (For instance, it ignores corporate tax deductions and other “tax breaks”. It also ignores whatever “loopholes” Mr. Buffett is currently using to reduce his own personal tax liability.) I think the general idea is correct, however.

Let’s say Berkshire Hathaway earns a profit of $18,000,000 and wants to distribute the entire amount as dividends to its shareholders. And, for the purposes of extreme simplification, let’s say that Mr. Buffett is the sole shareholder.

First, Berkshire Hathaway must pay U.S. corporate income tax on the profits. Corporate income of $18,000,000 would be taxed at a rate of 35%. The remaining balance would be distributed as investment income, to Mr. Buffet. Mr Buffet will then pay a capital gains tax of 15% on that money. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax (35%) $6,300,000.00
Income to Distribute $11,700,000.00
Capital Gains Tax (15%) $1,755,000.00
Personal Income $9,945,000.00
Total Tax Paid $8,055,000.00
Total Tax Rate 44.75%

Now, let’s imagine that we implement the “Buffett Rule” and we require Mr. Buffett to pay a 35% tax rate on his investment income. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax (35%) $6,300,000.00
Income to Distribute $11,700,000.00
Income Tax (35%) $4,095,000.00
Personal Income $7,605,000.00
Total Tax Paid $10,395,000.00
Total Tax Rate 57.75%

This rule definitely forces Mr. Buffett’s taxes up, but he’s hardly paying the same rate as the rest of us. He’s now paying a total tax rate of 58% on his income—far more than the 35% rate that “we” pay.

If we wanted to aim for equal taxation (the supposed aim of the Buffett Rule), we need to aim at more fundamental reforms. For instance, how about eliminating the corporate tax rate and then taxing investment income at the same rate as personal income? That would eliminate all of the hanky panky that goes on with the corporate tax code and would, in one fell swoop, eliminate all of its deductions and loopholes. It would simultaneously increase the taxes directly paid by Mr. Buffett. Here’s how that breaks down.

Type Amount
Corporate Income $18,000,000.00
Corporate Tax $0,000.00
Income to Distribute $18,000,000.00
Income Tax (35%) $6,300,000.00
Personal Income $11,700,000.00
Total Tax Paid $6,300,000.00
Total Tax Rate 35.00%

Mr. Buffett is now paying the same rate as “we” do. That’s fair, isn’t it?

Why 70% Tax Rates Won't Work

Why 70% Tax Rates Won't Work →

Alan Reynolds is great in explaining the income tax facts of life. Higher tax rates on the rich do not bring in nearly as much revenue as lower tax rates. It’s important to emphasize that tax rates are not the same as tax revenues. Higher rates do not automatically bring higher revenues. In fact, historically, the opposite has happened.

Moreover—and this is what Mr. Reich and his friends always fail to mention—the individual income tax actually brought in less revenue when the highest tax rate was 70% to 91% than it did when the highest tax rate was 28%.

As the nearby chart shows, however, those super-high tax rates at all income levels brought in revenue of only 7.7% of GDP, according to U.S. budget historical data.

President John F. Kennedy's across-the-board tax cuts reduced the lowest and highest tax rates to 14% and 70% respectively after 1964, yet revenues (after excluding the 5%-10% surtaxes of 1969-70) rose to 8% of GDP. President Reagan's across-the-board tax cuts further reduced the lowest and highest tax rates to 11% and 50%, yet revenues rose again to 8.3% of GDP. The 1986 tax reform slashed the top tax rate to 28%, yet revenues dipped trivially to 8.1% of GDP.

The rest of the article is chock full of interesting facts on the link between tax rates and tax revenue.

I don’t think it can be repeated nearly often enough: if you want the rich to pay a lot of taxes, you should probably keep their rates low. Ignore what Warren Buffet says in favor of watching what Warren Buffet does. If you raise his tax rates, he’ll probably just shift his money and income around, so that his effective rate of taxation remains nearly the same.

(And, if he really wants to pay more in taxes, he can cut a check to the IRS anytime he wants to.

Are Income Tax Rates the Problem?

Everyone is discussing tax cuts -- and tax hikes -- right now. The prevailing opinion seems to be that the tax cuts for "the rich" (defined as anyone making more than $500,000 a year) have to go.

The problem, as I see it, is that the income tax rate essentially doesn't matter. Income tax revenues (the actual amount of money collected) have stayed flat over the last 50 years even as income tax rates have fluctuated wildly.

Income Tax Receipts Stay Constant Even as Tax Rates Decline

Cutting taxes for the rich hasn't led to a massive drop in tax revenues. When Bill Clinton left office, in 2000, income taxes made up 12% of GDP. In 2008, income taxes made up 10% of GDP. As a percentage of GDP, the Bush tax cuts led to a very small drop in tax revenue. In actual dollar terms, the Bush tax cuts didn't create any drop in tax revenues. In 2000, the government collected $1.5 trillion of incomes taxes. In 2008, the government collected $1.8 trillion of income taxes.

In fact, federal government revenues have more than tripled since 1965.

Federal Government Revenues Have More Than Tripled Since 1965

Note the uptick in federal revenue starting in 2004, after the Bush tax cuts were passed. Taxes as a percentage of GDP stayed relatively constant (or fell slightly) even as tax revenues were increasing dramatically. That's because the economy started growing as soon as the tax rates were cut. People paid more in taxes even as their tax rates fell. From a government's perspective, that looks pretty good to me. You could argue that the growth is coincidental to the tax rates. (I don't believe that but you could choose to argue that.) But I don't see how you can argue that the tax cuts actually cut federal revenues or hurt the economy.

The real problem with the federal budget isn't tax cuts it's spending. We don't have a revenue problem, we have a spending problem. In 2000, the federal government spent $3.2 trillion. In 2008, the federal government spent $5.3 trillion. In eight years, federal spending increased by an incredible 65%. Why do we even have anyone arguing that the government needs even more money? Does the government do everything so efficiently that there is no fat anywhere in the federal budget? When was the last time you saw legislators seriously looking for money to cut out of the budget instead of looking for more ways to tax citizens? When was the last time you saw a government agency get its budget truly cut instead of just getting a cut in the rate of increase?

Income tax rates aren't the problem. Government spending is the problem. Until we start talking seriously about cutting spending, we won't make any progress on cutting the federal deficit and the federal debt.

If you want some ideas about what spending to cut, I'd start with Downsizing the Federal Government.

(Numbers from US Government Revenue and the Heritage Foundation.)

I had to cut your hours because of the minimum wage

The minimum wage isn't bad because it hurts employers. It's bad because it hurts employees.

An Entrepreneur and the Minimum-Wage

To All Team Members:

The schedule for next week has been posted. You may notice that hours have been cut back on your schedule. This is across the board, not just you. I don't want anyone to think they've done something wrong to deserve a cut in hours, so I wanted to explain why it's happening.

There are a couple of reasons for this:

1) May and September are very slow months for our business. Anyone who has worked Sundays recently has seen the drop off in traffic. Now that we're entering May, that drop off will continue on to other days as well, and it will get worse.

2) The recent increase in the minimum wage to $7.25/hour. Since we've opened, I've had a lot of people ask why they can't get more hours, and it's a great question.

I would LOVE to give everyone all the hours they want, and then some. Our customers would be happier across the board, we could accomplish much more every day, our business would grow, I could hire even more people, and on and on. However, we operate on a tight budget just like any other business, and in order to survive, we have to make money. That means our labor cost (the total amount you are all paid) must stay below a certain percentage of our total sales. If it doesn't, we go broke and everyone loses their jobs.

Our brilliant Congressmen in Washington, D.C. decided a couple years ago that it would be a good idea to raise the minimum wage by about 40% to $7.25/hour. It just took effect last year. That probably sounds like great news for everyone - more money in everyone's pockets can only be good, right?

Unfortunately, it doesn't work that way in the real world. If I'm forced to pay everyone 40% more, I can't afford to schedule as many employees for as many hours, since our sales aren't going up by 40%. Remember, I can only afford to pay you guys a certain percentage of all the money coming in the door. That means hours get cut, and everyone ends up poorer.

In a perfect world, it should work the opposite way: you should be free to choose how much you think your skills and time are worth (since you know best), and I should be free to pay you whatever that amount is if I want to hire you. Everyone wins in that case. I get as many good employees as I want that I can afford to pay, and you get valuable job training, references, and relationships to carry into the future.

To prove how bad of a deal minimum wage is for you guys as hard-working job-seekers, just look at this way:

I'm not being forced to pay $7.25/hour; YOU are being forced to accept $7.25/hour no matter what, even if you'd be willing to take less in order to get (or keep) a job.

You can thank our elected officials in Raleigh and Washington for sticking you with such a raw deal.

If you have any questions about any of this or want to talk more about it, please feel free to come see me, the door is always open.

(Obamacare delenda est)

This entry was tagged. Income Minimum Wage

Minimum Wage Hurts the Marginal Employees the Most

The minimum wage isn't bad because it hurts employers. It's bad because it hurts employees.

Armed and Dangerous » Blog Archive » Marginal Devolution

What these guys have in common is that they're only marginally employable. What borderline mental illness has done to one, mediocre skills and the unintended consequences of anti-discrimination laws have done to the other. As long as I've known both (and that would actually be most of my years, for both of them), they've worked dead-end jobs and put their passion into science fiction and wargaming. They're decent, honest, unambitious men who have never wanted anything but steady work, a normal life, and a hobby or two. They're not stupid and they have respectable work habits; in fact they're probably more conscientious and safe than average. Now they don't quite fit; too old, too geeky, too male, too quiet. The job market has discarded one and the other is hanging by a thread.

When I look at these guys, though, I can't buy the explanation most people would jump for, which is that they simply fell behind in an increasingly skill-intensive job market. Thing is, they're not uneducated; they're not the stranded fruit-picker or construction worker that narrative would fit. Nor does offshoring explain what's happened to these guys, because their jobs were the relatively hard-to-export kind.

No. What I think is: These are the people who go to the wall when the cost of employing someone gets too high. We've spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker -- which meant the minimum revenue-per-employee threshold below which hiring doesn't make sense has crept up and up and up, gradually. This effect was partly masked by credit and asset bubbles, but those have now popped. Increasingly it's not just the classic hard-core unemployables (alcoholics, criminal deviants, crazies) that can't pull enough weight to justify a paycheck; it's the marginal ones, the mediocre, and the mildly dysfunctional.

Again, the minimum wage isn't bad because it hurts employers. It's bad because it hurts employees. It makes employees more expensive to hire, more expensive to take a risk on, and easier to fire. As soon as someone costs more in salary, benefits, and regulatory costs than they generate in revenue, they become a liability. And few businesses can afford to keep such employees just for the thrill of being charitable.

(Obamacare delenda est)

An example of private property helping the poor

I finished listening to an old EconTalk podcast, during my commute this morning. Russ Roberts was talking to Karol Boudreaux about her fieldwork on property rights and economic reforms in Rwanda and South Africa. They spent the first half of the conversation talking about Rwandan reforms and the second half talking about South African reforms. I was most fascinated by the South African portion. (It starts at about 30 minutes into the podcast.)

Karol talked about Langa township in South Africa. It was established as a place for blacks to live, but they weren't given any rights to the properties whatsoever. They had to get permission from the city government even to paint or repair their homes. By 1994, the government had started to turn over ownership to the people who lived in the homes.

I was thrilled to hear the story of Sheila, a very entrepreneurial woman in Langa township. (Her story starts about 39 minutes into the podcast.) Sheila had been a domestic helper in Capetown when she saw a receipt for two glasses of wine and a plate of cheese. She was stunned to see that that sold for more than she got paid in a month. She knew she was worth more than that. So, she decided to prove it.

After a few false starts, she hit on the right business plan. Tourists had been driving through Langa Township for years, to see the results of apartheid. But they never got out of their tourist buses. Sheila decided to give them an opportunity to start getting out. She opened up a restaurant in her house (after she'd received the title to it). She now serves meals to tourists, while telling them the story of her life and her experiences under apartheid. Her restaurant is well known for "authentic" South African food. It's primarily advertised through word of mouth and bloggers (how great is that?). The restaurant doesn't just support Sheila. She also employs five other people to keep things humming along.

Does South Africa have more economic freedom than the U.S.? In some ways, it does. Try opening a restaurant out of your home and see how long it lasts before the local authorities shut it down. But, in South Africa, Sheila was able to use her home to create a living for herself, create income for others, create something for tourists to see and do, and educate many people along the way. And it all happened because she had the economic freedom to use her property in the way she saw fit. Her tourist guests use their freedom to eat where they see fit and her desire to keep her restaurant's reputation protects her customers as they eat.

Sheila's story is a perfect example of the win-win results that come from letting people make their own economic decisions and bear both the profits and losses that they generate. It's also an example of how far you can go if you decide to change your circumstances instead of complaining about them.

Who Are the Rich?

David Bernstein talks about the rich:

My friends in this income bracket [$250-380K] tend to have have high mortgages, work 60-80 hours a week, pay 40-50K or more a year for child care (a nanny is necessary when you often work into the late evening--and even day care for two kids in the DC area costs close to 40K a year), and have six figures worth of student loans, primarily from professional school, that they are still paying off. In other words, approximately 100K of their pretax income is taken up by their student loans and child care costs, which are the equivalent of "startup costs". Their mortgage costs may seem excessive, but you don't easily make six figures in low-housing cost cities like Des Moines, and living in outer suburbs is very difficult when you work 12 hour days.

If a hypothetical couple's initial income is a total of $300K, and they work an average of 70 hours each, and assuming two weeks vacation, they are in effect getting a grand total of $28.57 an hour for their labors, and a fair percent of that is going to pay interest on the mortgage. I'm sure they are glad to know that they are rich enough to be taxed at over 50% of their marginal dollar.

I wonder how many people think about that when they think about soaking the rich?

Everyone's Getting Rich

Everywhere I turn in the media, I hear that the economy is horrible. I hear that our parents had it better than we do. I hear that my generation may be the first ever to be poorer than my parents generation.


First off, my parents never had iPods growing up. In fact, they didn't even have cassette walkmen. Surely that's a form of wealth? Second, my daughter will grow up in a home with multiple computers; flat screen high definition televisions; cars with automatic windows, doorlocks, and airbags; wired and wireless networks; video chat with grandparents; cellphones for all; and more. Isn't that also a sign of great wealth? Isn't that also far more than my parents ever had? (Yes.)

Secondly, even if new technology didn't indicate an increased standard of living, rising incomes would. Check out the the National Data Book's spreadsheets for Money Income Of Families--Distribution by Family Characteristics and Income Level.

Between 1970 and 2004, annual median income increased from $9,867 to $54,061. After adjusting for inflation, annual income increased from $41,568 to $54,061. That's quite an increase! Incomes were adjusted using the Consumer Price Index Research Series, to that even takes into account increases in the cost of healthcare.

Sounds to me like we're doing pretty good.