Taxes and Politics

Americans have become increasingly critical of public policy as a means of addressing social problems.  Many believe that public policies do not work but the reality is that public policies are often subverted in ways that make them ineffective or even counterproductive.

Take taxes and inequality.  As Danny Vinik, writing in the New Republic explains:

The vast majority of Americans—both liberals and conservatives—believe that state and local taxes should also be progressive. That’s the finding of a new report released by WalletHub Monday. The researchers surveyed 1,050 Americans on what they thought the combined rate of state and local taxes should be at various income levels. Not surprisingly, liberals want the rate structure to be a bit more progressive than conservatives do, but their responses [as the following chart shows] were relatively similar:

2014s_most_least_fair_state_tax_systems_wallethubr

However the reality is quite different.  State and local taxes are actually quite regressive.  The Institute for Taxation and Economic Policy studied the “fairness of state and local tax systems by measuring the state and local taxes that will be paid in 2015 by different [non-elderly] income groups as a share of their incomes.”  They did this state by state and, as presented below, on an overall basis.  As we can see, the lower the income, the greater the state and local tax burden.

www.itep_.org_pdf_whopaysreport.pdf_
Here are some of the report’s key findings:

  • Virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax and overreliance on consumption taxes exacerbate this problem.
  • In the 10 states with the most regressive tax structures (the Terrible 10) the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy counterparts. Washington State is the most regressive, followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana.
  • Heavy reliance on sales and excise taxes are characteristics of the most regressive state tax systems. Six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of roughly one-third . Five of these states do not levy a broad-based personal income tax (four do not have any taxes on personal income and one state only applies its personal income tax to interest and dividends) while four have a personal income tax rate structure that is flat or virtually flat.
  • States commended as “low tax” are often high tax states for low-and middle-income families. The 10 states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington. Seven of these are also among the “terrible ten” because they are not only high tax for the poorest, but low tax for the wealthiest.

In short, we know how to construct tax policies that can boost equality or at least minimize inequality.  The reason the overwhelming majority of state and local governments preside over regressive tax systems is primarily explained by politics, and those who benefit from those systems are more than happy to have us believe that governments are incapable of serving the public interest.

Minimum Wages and Unemployment

One of the arguments against an increase in the minimum wage is that it will lead to higher unemployment.  One can make theoretical arguments for and against this proposition.  And, of course, the income gains from an increase in the minimum wage are likely to produce overall benefits for both low wage workers and the economy as a whole even if there is a rise in unemployment.

Economists have tried to estimate the employment effects of a rise in the minimum wage.  As a Vox article describes, two of them, Hristos Doucouliagos and T.D Stanley, looked at almost 1500 estimates of the effects of minimum wage increases on employment and found that the estimates “clustered right around zero effect, but with more of those estimates showing a slight downward pressure on employment.”

employment and minimum wages

They concluded, “with sixty-four studies containing approximately fifteen hundred estimates, we have reason to believe that if there is some adverse employment effect from minimum wage rises, it must be of a small and policy-irrelevant magnitude.”

US Policies Are Relatively Ineffective At Reducing Inequality

Government tax and spending programs can help reduce inequality—unfortunately US policies leave a lot to be desired.

One of the most common measures of income inequality is the gini index.  The index runs from zero to one, with higher values signifying greater inequality.  

The following two charts come from a Christian Science Monitor infographic on myths about inequality. The first shows that while income inequality, as measured by the gini coefficient, is high in the US, it is higher in nine other countries.  

inequality pre government programs

The second shows the degree to which tax and assistance programs do actually lower rates of income inequality.  It also shows that U.S. programs perform relatively poorly; using this adjusted measure, the U.S. trails only Chile for the dubious distinction of having the highest rate of income inequality.

inequality after government programs

Election Thoughts

President Obama had hoped that recent signs of economic strength would benefit Democrats in the recently completed election.  While it is true that job creation has picked up, the unemployment rate is falling, and growth is stronger, the reality is that most Americans have not enjoyed any real gains during this so-called expansionary period.

The following two charts highlight this on the national level.  The first shows how income gains made during the expansion period have been divided between the top 1% and everyone else.   There is not a lot to say except that there is not a lot of sharing going on.

income distribution

The second shows trends in real median household net worth.  While declines in median net worth are not surprising in a recession, what is noteworthy is that median net worth has continued to decline during this expansion.  Adjusted for inflation the average household is poorer now than in 1989.

Median-Net-Worth

Oregon provides a good example of state trends.  The chart below shows that the poverty rate in Oregon is actually higher now than it was during the recession.

fs20141106graphicviewofpoverty_graph1_small

The poverty rate for children is even higher. In 2013, 21.6 percent of all Oregon children lived in families in poverty.

And, not surprisingly, communities of color experience poverty rates far higher than non-hispanic whites.

fs20141106graphicviewofpoverty_graph5_small

Electing Republicans will certainly not improve things, but it is hard to blame people for feeling that the Democratic Party has abandoned them.  

More promising is movement building to directly advance community interests.  One example: voters in five states passed measures to boost minimum wages.   Another was the successful effort in Richmond, California to elect progressives to the city council over candidates heavily supported by Chevron, which hoped to dominate the council and overcome popular opposition to its environmental and health and safety policies.

Declining Prospects For Growth

You know things are serious when leading mainstream economists and established international organizations continually revise downward their estimates for future growth.

The chart below shows successive Congressional Budget Committee estimates of the U.S. growth potential beginning in 2007 and the actual growth trend.  Every year the estimates have been reduced and actual growth remains far below the estimated potential.

US-Potential-GDP

The following chart comes from the IMF.  It shows a steady downward revision in predicted growth for so-called emerging market countries.

ems-chart-2

 As the IMF says: ” This feature of repeated downward revisions to future growth is unique to the current downturn. In the past, we expected growth to bounce back (and it did). This time seems different.”

The lack of serious policy discussions by leading political and business leaders about causes and responses is far from reassuring.

A Shorter Workweek

Iceland continues to experiment with new ways to promote majority living standards.  See here for a discussion of the country’s unorthodox response to the 2008 global financial collapse.  

According to the Icelandic Grapevine, a bill has been submitted to the Icelandic parliament that would shorten the workweek.  More specifically, it would change the definition of a full time workweek to 35 hours instead of the current 40 and the full workday to 7 hours rather than the current 8.

As the Grapevine reports:

The bill points out that other countries which have shorter full time work weeks, such as Denmark, Spain, Belgium, Holland and Norway, actually experience higher levels of productivity. At the same time, Iceland ranked poorly in a recent OECD report on the balance between work and rest, with Iceland coming out in 27th place out of 36 countries.

The bill also points out that a recent Swedish initiative to shorten the full time work day to six hours has been going well, with some Icelanders calling for the idea to be taken up here. In addition, the bill also cites gender studies expert Thomas Brorsen Smidt’s proposal to shorten it even further, to four hours.

Although it is not easy to establish a clear relationship between work hours and productivity, as noted above there is reason to believe that the relationship may be inverse.  In other words, the shorter the workweek the more productive we are.

There is certainly a significant variation among countries in the length of the workweek as the following information from the U.S. Bureau of Labor Statistics shows:

hours worked

In 2011 the average annual hours worked per employed person in the U.S. was 1758.  The number for French workers was 1476.  It was 1411 for German workers.  Assuming a 40 hour workweek, the average US worker had a work year more than two months longer than the average German worker.  It is also worth noting that while all the countries that reported data for the entire period 1979 to 2011 showed reductions in work time, the reduction was the smallest in the U.S.

It would certainly be nice, for many reasons, if someone in the U.S. Congress followed the lead of Iceland and introduced  a bill to reduce work time in the U.S.

Market Magic

An article in the New York Times highlights the following two charts which were taken from an article soon to be published in an economics journal.

 

table 1

 

table 2

 

It is pretty apparent that for some time only a small segment of the US population gains from our economic expansions, the period when our economic system is supposed to be working well.  And of course few people enjoy any benefits from periods of recessions. 

 

It kind of makes you wonder why ordinary people would want to defend our existing system. 

Immiserating Growth

Federal Reserve Board survey data on wealth certainly imply that it is getting harder and harder to succeed in our economy.

Steve Roth has created some great charts using this data, which is based on surveys done every three years beginning in 1989.  The chart below looks at the median real (or inflation adjusted) household net worth by the age of the head of household. Each line shows the real net worth of a household headed by the relevant age group.  In other words it allows us to compare the real net worth of a representative household headed by a 35-44 year old in 1989 with the real net worth of a similarly representative household headed by a person of the same age range in 2013.  We are not looking at the fortunes of the same household as its head ages, but rather at households at different periods to see how age cohorts have fared over time.

chart 1

The chart shows that households, with the exception of those headed by people 65 years and older, were worse off in 2013 than they were in 1989.  For example, the representative household headed by someone 35-44 had far less wealth in 2013 than the representative household headed by someone from the same age range had in 1989.

The following chart makes it easier to see such trends by focusing on changes over the period 1989 to 2013.

chart2

When a line falls below 100 it means that the representative household in the specific age grouping was poorer that year than it was in 1989. It is striking that many household groupings grew poorer over the decade of the 2000s, years before the 2008 crisis, when our economy was supposed to be the envy of the world.

The growth in inequality might be one reason this immiseration has been missed.  While the representative household defined by the age of its head might be growing poorer over time, a small number of households in each group might be enjoying ever greater riches, thus possibly confusing people about the nature majority experience.

The next chart looks at changes over time in the mean: median ratio for the different household groupings.  The greater the ratio, the more inequality within the household grouping.  Inequality within all household groupings, except those headed by someone 75 years or more, has grown over time.  The real standout is the household grouping headed by those 35-44 years of age; while the income of the typical household has been falling (see the chart above), some of its members have really been hitting it rich (as illustrated in the chart below).

chart3

 In sum, while wealth does grow with age, trends strongly suggest that the American experience is moving in reverse.  Households with similar aged heads are growing poorer not richer over time.

Minimum Wage Hikes Work

As workers battle to raise the minimum wage it is nice to see more evidence that raising the minimum wage helps low wage workers and state economies.

Thirteen states raised their respective minimum wages in 2014:  AZ, CA, CT, FL, MO, MT, NJ, NY, OH, OR, RI, VT, and WA.  Elise Gould, an economist at the Economic Policy Institute, compared labor market changes in these thirteen states with changes in the rest of the states from the first half of 2013 to the first half of 2014.

Economic analyst Jared Bernstein summarizes the results as follows:

Elise compares the 10th percentile [lowest earners] wage growth among these thirteen states that increased their minimums with the rest that did not. The results are the first two bars in the figure below.

EG_minwg

Real wages for low-wage workers rose by just about 1% over the past year in the states that raised their minimum wages, and were flat (down 0.1%) in the other states.

OK, but did those increases bite into employment growth, as opponents typically insist must be the case? Not according to the other two sets of bars. They show that payroll employment growth was slightly faster in states that raised, and the decline in unemployment, slightly greater.

In short, raising the minimum wage did boost the earnings of those at the bottom of the income distribution.  Moreover, workers in states that raised the minimum wage also enjoyed greater employment growth and a greater decline in unemployment than did workers in states that did not.

No Light, No Tunnel

People are slowly but surely recognizing that there is no economic light at the end of the tunnel.  In fact, it appears that we may be looking into a cave not a tunnel.

The U.S. economy has undergone a major transformation.  Globalization, financialization, privatization, deregulation, and liberalization, to mention just a few of the developments that define this transformation, have created an economic system that rewards only a very few people.

The chart below shows these are good times for those at the top–economic profits are up and the stock market is soaring over this expansion period.  But what about for the great majority? Growth is slow and even more importantly median household (HH) income has actually fallen by 3 percent.

profits and stock gains

The following two charts highlight some of the pressures facing working people.  The first shows that the average earner, the one at the 50th percentile, has suffered a 2.7 percent real decline in hourly wages since 2007.  The decline has actually been much greater since 2009, when the recession allegedly ended and the good times began.  Even those at the 95 percentile have suffered real hourly declines since 2009.

wages

The second shows that family income has fallen for almost all income groups over the period 2007 to 2012.  We can get some idea of the transition period by comparing income trends in the three periods shown. Suppressing wages is one way to boost profits and stock prices in a period of slow growth.

Family Income

As I said above, people are beginning to recognize that current trends are no aberration.  A recent Rutgers University poll asked Americans how they viewed the Great Recession and its aftermath.  The figure below present the results.

poll

Here is what the Rugers researchers had to say:

The survey finds 71 percent saying the recession left us with “a permanent change in what are normal economic conditions in the country.”  Moreover, the belief that the economic downturn created irreversible shifts in the economy grew from 49 perent in November 2009 to 56 percent in September 2010, and to 60 percent in Janary 2013.  Now, 71 percent of Americans think the economy has changed permanently, which represents a broad consensus.

At least some people are drawing the appropriate conclusion—they are taking direct action to improve their working and living conditions.  As the Guardian reports

America’s fast food workers are planning their biggest strike to date this Thursday (September 4th), with a nationwide walkout in protest at low wages and poor healthcare.

The strike is the latest in a series of increasingly heated confrontations between fast food firms and their workers. Pressure is also mounting on McDonald’s, the largest fast food company, over its relations with its workers and franchisees. . . .

Workers from McDonald’s, Burger King, Pizza Hut and other large chains will strike on Thursday and are planning protests outside stores nationwide, in states including California, Missouri, Wisconsin and New York.

The day of disruption is being coordinated by local coalitions and Fast Food Forward and Fight for 15, union-backed pressure groups which have called for the raising of the minimum wage to $15 an hour for the nation’s four million fast-food workers.

Thursday’s strike will be the seventh since fast food workers in New York walked out on their jobs in November 2012. Each walkout has been bigger than the last and have been credited with spurring President Barack Obama to focus on an increase in the minimum wage.

USA-Global Fast Food Worker Protest