Archive for July, 2010

Washington State Income Tax (Initiative 1098): Who’s Affected?

July 31st, 2010 6 comments

Updated. See below. Again, Aug 12.

There’s been some debate going back and forth recently on how many Washington State taxpayers will be affected by the proposed income tax. The two sides have done a good job of providing the source data (you can follow their links), but the debate’s been inconclusive because:

1. Single filers would pay the tax above $200K in adjusted gross income, and married filers pay above $400K in AGI.

2. We (I) don’t really know how many filers make more than $400k

Curious as always, I decided to run the numbers assuming that 30% of >$200K filers make more than $400K (probably a generous assumption). I’m also using the percentages provided by EOI in the debate: 85% of >$200K filers file joint returns.

Here’s the arithmetic that results (and here’s the spreadsheet [XLS]):

Washington Federal Income Tax Returns Filed
Total 3,371,086
With business income 520,565
>$200K with business income 54,306
>$200K 111,258

>$200 Filers with Business Income
Income % Estimate Number % affected based on marital status Number Affected
$200-399K 0.7 38,014 15% 5,702
>$400K 0.3 16,292 100% 16,292
Total 54,306 21,994

What Percent of Filers are Affected?
% of >$200K filers with bus income 41%
% of filers with bus income 4.2%
% of >$200K filers 20%
% of filers .65%

So, with the property-tax and business excise-tax reductions in 1098:

59% of >$200K filers with business income will have lower taxes.

80% of >$200K filers will have lower taxes or no change. (Anyone care to break this out?)

95.8% of  filers with business income will have lower taxes or no change.

99.35% of  filers will have lower taxes or no change.

Update: It turns out my 30% estimate was remarkably accurate — but not generous as I suggested. The actual number is closer to 33%. I’ve updated the spreadsheet, including the source link (XLS) for these calcs.

Top 1% of filers Top 3% of filers
AGI Floor $410,096 $207,560
# of Returns 1,410,710 4,232,129
% of Returns: Top 1% as % of top 3%: 33%
This alters the bottom line results, but only slightly:

What Percent of Filers are Affected?
% of >$200K filers with bus income 43%
% of filers with bus income 4.5%
% of >$200K filers 21%
% of filers .69%

57% of >$200K filers with business income will have lower taxes.

79% of >$200K filers will have lower taxes or no change. (Anyone care to break this out?)

95.5% of  filers with business income will have lower taxes or no change.

99.31% of  filers will have lower taxes or no change.

Update August 12:

The state Office of Financial Management estimates that 38,400 filers will be affected by the income tax — significantly higher than the 22,000 I estimated.

But still: 99% of Washington’s 3.4 million filers will see lower taxes or no effect under this initiative. The lower taxes will be primarily on small businesses.

Dang Those Bush Tax Cuts Really Worked!

July 27th, 2010 Comments off

The Best Argument Against Climate Legislation — And the Best Answers

July 26th, 2010 4 comments

I’ve long lauded Jim Manzi for his cogent and convincing arguments against carbon taxes. He’s the antithesis of the “1998 was really hot! Look: it’s cooler now!” school of head-in-in-the-sand self-delusionists. Rather, he takes the 2007 IPCC report as the best available consensus scientific knowledge we have, and uses it to think through a clear-eyed, long-term cost-benefit analysis of carbon taxes/cap-and-trade. Anyone interested in this subject should read this article (and note that it’s published in the regular “In-House Critics” column of the  decidedly lefty New Republic, which speaks volumes about which side of this debate is willing to tolerate and consider — and yes, publish — strongly argued dissenting views).

When I consider arguments in favor of climate legislation, Manzi’s thinking is what I measure those arguments against. Here’s his argument in small (my emphasis for easy skimming):

• “the cost of policies designed to limit the rise in atmospheric carbon dioxide to 450 parts per million (ppm) average a little over 6 percent of global GDP by 2100 (with a very wide range of estimates). That is, we would start paying a cost today that would rise to about 6 percent of world output by 2100 in order to only partially avoid a problem that would have expected costs of about 3 percent of world output sometime later than 2100.”

• “hedging your bets and keeping your options open is almost always the right strategy. Money and technology are our raw materials for options.the loss of economic and technological development that would be required to eliminate all theorized climate change risk (or all risk from genetic technologies or, for that matter, all risk from killer asteroids) would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk.”

Yes, he addresses the uncertainty/risk/probability issues of global warming — notably those from Harvard’s Martin Weitzman.

It’s a compelling argument: given the risk scenario painted by the IPCC in 2007 — and its uncertainty — our best response is to promote economic and technological growth and development, so we have the resources to address problems in the future, when we have a clearer picture of what the problems are.

But the counterarguments are also very strong. If Manzi incorporated them into his thinking, I think he would come to very different conclusions. Respondents at The New Republic have offered several of them; I will steal from them unabashedly, and add a few of my own.

• The 2007 IPCC report is getting long in the tooth — it’s based on the best research from four to six years ago. Recent research is (almost uniformly) far more alarming. Two examples: 1.The area of summer sea ice remaining during 2007-2009 was about 40% less than the average projection from the 2007 IPCC Fourth Assessment Report.” 2. One report posits a circa 5% chance that large portions of the planet will be rendered uninhabitable — including the eastern U.S..

• The 2007 report specifically did not make projections for sea-level rise. The modeling of ice-sheet behavior was considered too difficult at the time. The economic costs from rising seas could dwarf all others combined. A cost-benefit analysis that doesn’t include those costs doesn’t tell us much.

A 6%-of-GDP insurance policy against those eventualities starts to sound more reasonable. But even the 6% estimate has serious problems.

• Manzi assumes that carbon taxes will add to, not replace, other taxes. Economists agree that consumption taxes and “Pigovian” taxes — taxing negative externalities — are more economically efficient (they result in greater economic growth and prosperity) than many of our current taxes, like those on income, corporate profits, etc. A carbon tax is a Pigovian consumption tax. If our tax base shifts in that direction, the result is more economic efficiency, yielding the very result — faster growth and development — that Manzi champions.

• He assumes the need for a global taxing regime, ignoring the benefits to the U.S. of a unilaterally imposed carbon tax. The long-term savings in national defense and security from reduced fossil-fuel consumption are darned hard to predict, but even most righties will acknowledge that we wouldn’t have invaded Iraq if there was no oil over there. That war will cost us trillions, all told — somewhere north of 25% of U.S. GDP for a year. And that’s before even considering the fuel that it poured on the fire of global jihad. That was one damned expensive insurance policy to ensure future oil supplies.

• He ignores the threat that global warming poses to U.S. national security, as detailed by those left-wing nut jobs at the Pentagon in their Quadrennial Defense Review for 2010 (PDF): “climate change could have significant geopolitical impacts around the world, contributing to poverty, environmental degradation, and the further weakening of fragile governments. Climate change will contribute to food and water scarcity, will increase the spread of disease, and may spur or exacerbate mass migration.While climate change alone does not cause conflict, it may act as an accelerant of instability or conflict, placing a burden to respond on civilian institutions and militaries around the world.”

• He ignores the truly horrific, potentially even apocalyptic human impact of global warming, and a “mere” 3% decline in GDP, especially outside the developed world. (Quite resoundingly demonstrating Jonathan Haidt’s findings about libertarians’ lack of compassion.) As Nate Silver has pointed out (H/T Bradford Plumer) we could eliminate 43% of the world’s people and only reduce world GDP by 5%.

As I said, I greatly admire Jim Manzi’s thinking. But I have to say that his failure to include these points in that thinking gives the strong impression of confirmation bias.

Is “Starve the Beast” Finally Working? At (Almost) the Worst Possible Time?

July 21st, 2010 1 comment

Even as some vaguely sane voices on the right — notably former Reagan budget officials — are acknowledging that the thirty-year experiment in “starve the beast” has failed…it seems to be working.

The austerity principle is finally taking hold — just when the opposite should be true.

The basics of fiscal and monetary policy aren’t really rocket science: you loosen, spend, and cut taxes in the bad times to stimulate the economy, and tighten up when the economy’s going strong.

But now — thanks as usual to the deranged “theorists” on the right (they don’t care much for facts and empirics) — the whole world seems to be doing the opposite (with misguided encouragement from the IMF).

After three decades of almost nonstop Keynesian stimulus, in good times and bad — by the very people who supposedly abhor said stimulus — it’s up to the Democrats, once again (viz: Clinton), to clean up the mess that Red-Ink Republicans have left us with.

Obama’s got us on track to flatten the curve. Can he reverse those thirty years and pull it back down?

He has not succeeded in his first year and a half in office. Obviously a failed presidency.

Trickle-Down Really, Really Works!

July 21st, 2010 Comments off

Lane Kenworthy has updated his Best Inequality Graph with the latest data (through 2007):

Hidden in the fine print, you’ll find proof positive that trickle-down works: middle-class incomes have risen by 1% a year since 1979! And poor people’s incomes have gone up by 0.4% a year.

How can you argue with that kind of rampant, precipitous prosperity growth?

(Note that these are post-tax, post-transfer incomes.)

Intel’s Andy Grove, Refugee from Communism, Champions Centralized Economic Planning: “rebuild our industrial commons”

July 6th, 2010 5 comments

If you’re like me, you hear your friends say this a lot about America: “we need to start making things again.” It seem intuitively correct, but there’s a pretty standard economic response: if we’re getting all the profits based on our knowledge and innovation, even though we’re not doing all the work, what’s the problem? Sounds kinda great, actually. Apple pulls a 60% margin on the IPhone 4, spending only $6.54 on assembly costs in China for a $600 item. (!)

It’ll all trickle down, right?

I’ve struggled with my thinking on this a lot; there are obviously lots of problems with the trickle-down idea (some of which I’ve discussed many times), but it’s hard to argue with the phenomenal prosperity (or at least profits) that the Apple model delivers.

Andy Grove’s new Bloomberg article does a lot to help me sort out that thinking, and adds another nail to the coffin to which “trickle down” is increasingly (finally!) being relegated.

His central point, cutting the Gordian knot: as the manufacturing ecosystem disappears in America — along with the jobs — we lose the ability to innovate. I think of the decades-long culture in my home town, Seattle, which has its roots in generations of Boeing machinists and engineers bringing up machinists and engineers. It’s a self-perpetuating culture from which innovation springs.

Grove’s article is brief and concise (and well worth reading in full), so rather than summarizing it I’ll just pull some choice morsels for you. All emphasis is mine.

… our own misplaced faith in the power of startups to create U.S. jobs. …

Startups … cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs. …

American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed? …

Simply put, the U.S. has become wildly inefficient at creating American tech jobs.

the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to $100,000 today.

Whoever made batteries then gained the exposure and relationships needed … U.S. companies didn’t participate in the first phase and consequently weren’t in the running for all that followed. I doubt they will ever catch up. …

a general undervaluing of manufacturing — the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. …

we broke the chain of experience that is so important in technological evolution.

Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system …  we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian countries … These countries seem to understand that job creation must be the No. 1 objective of state economic policy.

these economies turned in precedent-shattering economic performances over the 1970s and 1980s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries.

Long term, we need a job-centric economic theory — and job-centric political leadership — to guide our plans and actions….

our pursuit of our individual businesses … has hindered our ability to bring innovations to scale at home. …

Losing the ability to scale will ultimately damage our capacity to innovate.

The first task is to rebuild our industrial commons.Levy an extra tax on the product of offshored labor. … Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations.

I fled Hungary as a young man in 1956 to come to the U.S. … I witnessed first-hand the perils of both government overreach … there was a time in this country when tanks and cavalry were massed on Pennsylvania Avenue to chase away the unemployed. It was 1932; thousands of jobless veterans were demonstrating outside the White House. Soldiers with fixed bayonets and live ammunition moved in on them, and herded them away from the White House. In America! Unemployment is corrosive.

If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Grove understands what the rabid Norquistista free-marketers seem incapable of comprehending or acknowledging:  there is an invisible hand, but there is also a tragedy of the commons.

He only makes one real policy proposal: taxing offshore work and using the money to encourage onshore employment. There are many others (Robert Frank had some great suggestions in last Sunday’s Times), all rooted in central economic planning by the federal government. I’ll just mention my favorite once again, without further discussion: greatly expanding the Earned Income Tax Credit, and increasing its “salience” by delivering it on weekly paychecks.

And then there’s infrastructure, of course. I just rode the TGV from Paris to Avignon and back — at 200 mph. A great experience, and the prosperity it’s delivered to southern France is incalculable.

China is currently building 42 high-speed rail lines. We have one that we’re sort of, kind of, working on.

I’m sure this is because China is foolishly engaged in centralized economic planning.

And we — obviously far more clever than they — are not.