More Wall Street Journal (and the NYT)

As it turns out if you want actual information, non-distorted even, about the likely-to-pass tax cut proposal, you have to go to the Wall Street Journal. All of the following are on Page 1, above the fold:

• Bush's Tax Cut: Victory--at a Cost
• Bill marked by gimmicks marches past glitches, toward passage
• How a $350 billion price tag could balloon as high as $810 billion
• Much of what bill gives will be taken by strapped states, cities
• Meanwhile, rising deficits force Congress to move toward raising U.S. debt ceiling
• Sunset provisions overshadow dividend tax cut

You wouldn't get all this from, for instance, the NYT. There, if you go to the national section you can at least find one story with this subheading: "A hard look at various elements of the $318 billion tax bill shows a plan that could lose $800 billion in tax revenues over 10 years." But continuing with it's slanted coverage, consider this graphic (click to enlarge):

What's wrong with this? I looked at it and I thought, "Hey, at least this works out ok for middle income families with income around $41,000, particularly if they have kids". Then I thought, "But of course the marriage credits have a two year sunset", and then I thought "Hey, what's this about 'Assumes' and 'capital gains of:' and 'dividend income of:' and then putting in $500 for each."

That's patently absurd. Families making $41,000 per year do not--outside of tax-sheltered retirement accounts--have remotely near this amount of capital gains and dividend income. If the NYT wants to make stuff up (or hire Deloitte and Touche to do so), why not just assume they get all of their income from stocks? How does this fiction affect the numbers? Well there's $1000 of fictional stock-based income that will be taxed at 15% instead of 28%, which means the savings for the $41,000 family are overstated by $130--an 11% over statement of the benefit. Similarly, though I'm less certain on this point, $30,000 per year in stock income for families in the $530,000k and over bracket seems on the low side. So this assumption understates the top-end benefits of this tax plan. One more thing: where's the row for "Annual Household Income of $18,000"?

AB

X-Posted at Angry Bear.

UPDATE: What would it take for the Times' assumption about dividend and capital gains income to be true? Click here.

UPDATE: The NYT assumption may be more biased than I thought. From the NRO: "Lower-bracket taxpayers will pay a 5 percent rate [on capital gains and dividend income] for the 2003-2007 period and zero percent in 2008". This mean that part of the savings come from the fictional $1000 in stock income being taxed at 5% instead of 28%, meaning the fake savings would be $230 (tax on $1000 is $50 instead of $280) instead of $130, if the NYT used the new 5% rate. 5%, or 50%, it doesn't matter what the rate is, since the dividend income for that bracket is way, way, below $1000. Based on a CNN story that I can't find anymore, only 28% of filers indicated some dividend income and 63% of those made more than $100k per year in income.

Is It Paradise Yet?

Democratic politicians have done a very bad job of explaining why taxes represent services we get, and not just money we pay. Conservatives have therefore been able to get the country nearly convinced that a gun in every home and the abolishment of the IRS would result in a utopian society wherein citizens would provide their own security. Where the market would solve every problem. Libertarians seem to believe that the result would be a spontaneous 'open source' self-governance, wherein the reason of the enlightened citizenry would prevail.

It might not seem like having a gun in every home was much of an economic issue, let alone one that relates to taxation, but *needing* a gun in every home certainly is. The provision of security, relatively invisible until recently in a peaceful country like the US, is a major function of governments large and small. A measure of peace is a vital component of trade. Also, it happens to have a hefty price tag.

For corporations, government policing means diminished costs for physical security mechanisms and private guards, the reasonable expectation that shipped or ordered goods will arrive at their destination, that contracts will be enforced, and an ability to be insured for unusual losses. (If losses become regular, by definition, insurability diminishes sharply.) For individuals, it means the ability of citizens to travel freely to work, decreases the risk of property loss or grievous bodily harm, centralizes the guarding of neighborhoods, and increases their willingness to engage in commercial transactions with parties unknown to them.

But, it turns out that we have a test case for the utopian dreamers: Iraq. The Big Gummint' is gone, no one is paying taxes, and everybody has guns. Must be sweet.

Yet there's the sticky problem of the need to protect hospitals from looters. A high crime rate. Growing resentment over the high crime rate. The rise of unaccountable paramilitary groups. And a dawning recognition that law and order becomes more important than democracy in the face of a need to perform nightly sentry duty outside your own home.

So I'll pay my taxes, thank you kindly. Bravely standing watch over your property with a trusty sidearm at the ready is yet another thing that's only exciting in movies and adventure novels.

x-posted at the watch

Teasers on the Front Page of [even the conservative] Wall Street Journal

• P.1: Congress Nears Deal to Cut Taxes by $350 Billion: In Bush Victory, Accord Reduces Rates on Dividends; Top-Bracket Relief Survives
• P. A2: Congress is at risk of passing the Great Tax Shelter Act
• P. A4: Bush is losing on the tax issue with Americans
• P. C1: The bill may let some rich investers avoid almost all levies

Here's a nice highlight from the A2 story:

"...a rich investor might, for instance, borrow money and deduct interest payments...then use the money to buy shares of stock on which he would earn a tax-free dividend paid from profits that have never been taxed. Bottom line: The profits are never taxed, not even once, and the economy gets no new capital or savings because the investor borrows the money that he used to buy the shares."

From the WSJ/NBC poll on A4, Bush's overall approval is at 62%; 64% think there are better ways than a tax cut to increase economic growth (7% unsure); by a 55-36 margin, money to help pay for health care beats out tax cuts; and 53% said the 2001 Bush Tax Cut had no real effect on U.S. economic performance, with 15% saying they hurt and 25% saying they helped. Also, Lieberman, Kerry, and Gephart are all 20+% behind Bush in 2004 election polls, though a generic Democrat is only behind 47% to 32%.

From the C1 story:

"I guarantee it produces very, very low [tax] rates", possibly even zero says Ronald Pearlman, a tax-law professor at Georgetown.

As Warren Buffet points out, the government can't create a free lunch. Since spending, including discretionary spending, is increasing under Republican Control of the White House, the House, and the Senate, if someone pays less, then someone else has to pay more. We know who will pay less. Guess who will pay more?

AB

P.S. As these stories make clear, there is another reason that the cost of tax cut will be over $350b. I'm guessing that the costs of cutting the dividend tax to 15% were computed as (35%-15%)*($Dividend Income), while totally ignoring the substitution effect: people with the means to do so will shift money in ways to minimize their tax bills, increasing the cost of the tax cut.

X-Posted at Angry Bear

Regressive Tax Cuts

I found some numbers at ArgMax that are taken from a Brookings report on the distribution of savings from the Senate's version of the tax cut, and figured I'd make a nice picture (click to enlarge):

The picture somewhat exaggerates the top-heaviness of the benefits because the bins widen as you move right. Still, it's quite regressive: for example, the $75k-$100k group has roughly double the income that the $40k-$50k group has but their tax savings ($1,597) are 3.6 times larger. This is what happens when you finance dividend tax cuts by shaving cuts for married couples and small businesses.

AB

X-Posted at Angry Bear.

The Economic News Sucks Today

Look for a rate cut if all this stuff keeps happening. Note to Republicans: I mean "look for an interest rate cut", not another "tax rate cut". This on top of already bad news on jobs and bankruptcies.

AB

Around the econoblogsphere

First off, please welcome Max Sawicky to the cast of regulars here at ISTE!

See the Forest wants to know what happens to the US, even the world economy, if the dollar plunges? Answer, anyone?

Brad Delong takes on the National Review for "sliming" left-wing economists like Krugman.

Nathan Neuman on GOP efforts to reform pension and investment rules..

Kevin Drum has some little known (maybe for a reason?) facts and figures from the Economist.

Consumer prices are causing deflation fears, bankruptcies and foreclosures are at an all time high, industrial capacity is at its lowest level since the Reagan recession, jobless claims are still above 400K, and retails sales slid into the negative territory just when analyst thought they were on the rebound. Did I mention all these were from this week's news?

Republican Presidents = Jobs, right?

Wrong.

Last week, jobless benefits, while down slightly to 417K, rang in for the 14th straight week over the benchmark 400K which indicates weakness in the employment sector. Since Republicans like to argue that they are the pro-business and thus pro-growth party, I thought it time to actually check the record.

Although not in the prettiest format, the Department of Labor provides historic statistics dating back at least 40 years, so the numbers weren't difficult to find. Just lots of number crunching, but for each of the last five presidents, three Republican, two Democrat, I was able to calculate the total number of new unemployment claims filed, at this point in their first terms as President.

Even Carter, who is still maligned under "common wisdom" as being an inept President, saw jobless claims total less than 14 million than his successor, Ronald Reagan, and fewer than both the Bushes. Only Clinton had a better record.

Not only is the Bush Administration allowing the US economy to bleed jobs faster than a head wound, its lackeys in the Republican Congress continue to show their unfortunate out-of-work constituents how much they really care by letting unemployment benefits run out for millions of long-term jobseekers.

As always, it's the Democrat who show real compassion:

U.S. Democrats urge extended unemployment benefits
Sat May 17, 2003 11:04 AM ET

WASHINGTON, May 17 (Reuters) - Democrats on Saturday urged President George W. Bush and his fellow Republicans to back a further extension of unemployment benefits for millions of Americans who could lose them at the end of the month.

"Today, there are more than three unemployed workers for every job opening," Michigan Democratic Rep. Sander Levin said in the party's weekly radio address. "It is not compassionate to repeatedly tell those looking for work that the answer is simply 'growth' or 'get a job.'"

The temporary federal program providing unemployment insurance to laid-off workers after they exhaust their state benefits expires on May 31. It has been extended once.

Democrats want to extend it again, but Republicans in the House of Representatives and Senate beat back efforts to add that to the new tax cut bills both recently approved. They say the tax cuts will help jolt the weak economy and create jobs.

Democrats counter that helping unemployed workers will boost the economy more directly than cutting taxes.

"We must stimulate the economy to replace the 2.7 million private-sector jobs lost since President Bush took office, and we must help those out of work through no fault of their own until jobs are available," Levin said.

I know Democrats like to toss around the 2.7 (or 2.6) million jobs lost number, and strictly speaking, it is true that the economy under Bush has lost that number. But I think it's more accurate to offset that number by any monthly increase in employment. Under that scenario, Bush's record on job lost is just under 2 million (1,971,000 to be more precise.) Fortunately, the BLS also provides historic data on job loss and creation back to 1939, so I was able to re-create a snapshot for the same presidents mentioned above, also to this point in their first terms.

George Bush the Younger has surpassed even his idol, Ronald Reagan in the number of jobs he's seen melt away under his watch. Reagan, however, managed to turn that deficit around to a rather wimpy 2.8 million increase by November 1984, namely by pumping billions into defense spending (and running the federal deficit into the ground at the same time.) Bush the Elder, while seeing a few more months of job loss or sluggish growth, was able to come out with 1.6 new jobs by November 1992, not enough to guarantee him another term. Both Clinton and Carter's economies were job making machines. Unfortunately for Carter, other unforeseen events, namely his mishandling of the Iranian hostage situation, sabotaged his positive job growth numbers. People only seem to care about jobs when they don't have them. Gore faced similar voter complacency in his bid for the Presidency in 2000.

The question for Bush is whether he can overcome the deficit, either with real jobs or personal charm. By this point in Reagan's tenure, the economy had stopped hemorrhaging, and was quickly adding jobs. For Bush Junior, the bleeding has barely slowed, with 48,000 jobs lost in April. Will the Bush tax cut be the Band-Aid W. claims it to be? And will Democrats ever get the credit for being the party of growth and fiscal responsibility that they obviously are? History alone will tell.

(x-posted to Wampum)