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Pay no attention to the people behind the curtain

Friday, May 27, 2011

McIlheran Watch: Is he innumerate, too, or still just being deceptive?

by folkbum

(Unrelated but kind of update: Tom Foley picks liar.)

One of the most dishonest things anti-tax folk deliberately do to fuzzify the debate over tax rates is to conflate marginal tax rates with effective tax rates. For example, when long-time rich-folk defender Patrick McIlheran retweets (or whatever it is that you call the conservative tendency to "heh indeed" someone else's hard work with a slight smug comment) the Wall Street Journal's Stephen Moore's complaints that Democrats in Congress may be thinking about taking 62% of people's income in taxes.

Moore's op-ed is disingenuous in a number of ways besides blurring the lines between effective and marginal rates--which I'll get to in a moment, I promise--such as blending some Democrats' proposed federal income tax changes with actual state and local taxes to inflate his number, and comparing the cumulative effect of all taxes with the income tax rate at some cherry-picked point in the past. And McIlheran adds additional disingenuity too, which I will also get to in a moment. But let's hear from Moore first:
Media reports in recent weeks say that Senate Democrats are considering a 3% surtax on income over $1 million to raise federal revenues. This would come on top of the higher income tax rates that President Obama has already proposed through the cancellation of the Bush era tax-rate reductions.

If the Democrats' millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That's more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s.

Here's the math behind that depressing calculation. Today's top federal income tax rate is 35%. Almost all Democrats in Washington want to repeal the Bush tax cuts on those who make more than $250,000 and phase out certain deductions, so the effective income tax rate would rise to about 41.5%. The 3% millionaire surtax raises that rate to 44.5%.
Moore goes on to add additional numbers, sometimes falsely, to get to 62%. And you'll notice Moore actually uses the words effective income tax rate, which is a bald-faced lie. Let's pretend someone is a millionaire, earning, let's say, $2,000,000 a year. With no deductions except the personal deduction for the millionaire and her husband--no mortgage interest, no charitable donations, no contributions to an IRA or other tax shelter that millionaires tend to access--that couple under Moore's conditions would pay about $765,000 in federal income tax. This makes the effective tax rate, actually, 38.3%, not 41.5%.

This happens because not every dollar you earn is taxed at the same rate. The first $8,500 you earn ($17,000 as a couple) is taxed at just 10%. This is as true for you at whatever crappy low-paying job you tolerate as it is for our millionaire earning $2m. The rate at which additional income is taxed increases at intervals; every dollar from $8,501 to $34,500 is taxed at 15%, from $34,501 to $83,600 is taxed at 25%, and so on. In addition, letting the Bush tax cuts expire on upper-income earners only increases the taxes paid on income above $250,000, and the proposed millionaire surtax (which I bet you a dollar will never pass anyway) will only increase the rate paid on income over $1m.

You may say the difference between 38.3% and 41.5% is small, because either way you're talking about a whole lot of money. Well, yes, when you talk about millionaires, any one percent of their income is in fact going to be $10,000 or more. I would hate to have the kind of life where that were true! The thing is, we're talking about a very small number of earners here, about 1/10 of one percent; Moore and McIlheran want to give the impression, though, that this sort of thing will affect you, too, average taxpayer, and therefore you should be outraged. But less than 3% of all earners (and, I would be bet another dollar, none of either my or McIlheran's audience) make more than $250,000, the ones most affected by the proposed changes. And at those numbers, the difference between marginal and effect rates is huge. Someone earning $300,000 a year pays an effective rate of just 23.4%, even though they're in the 33% bracket. (If the Bush tax cuts expire on them, that $300,000 earner's effective rate would slip upward to barely over 24%.)

And conservatives need to lie to to spread this impression, as noted. Here's another bit of Moore's mess:
Now let's consider how our tax system today compares with the system that was in place in the late 1980s—when the deficit was only about one-quarter as large as a share of GDP as it is now. After the landmark Tax Reform Act of 1986, which closed special-interest loopholes in exchange for top marginal rates of 28%, the highest combined federal-state marginal tax rate was about 33%. Now we may be headed to 62%.
This is the sort of BS anyone with basic numeracy or reading comprehension skills--such as an opinion columnist at Wisconsin's largest daily newspaper--should be able to see through. Moore compares his pile-everything-on imaginary rate to a number that excludes much of what he contorts to include in his figure. His 33% rate doesn't include, as his 62% does, any payroll taxes, for example, making this a massive apples-to-binder clips comparison.

McIlheran himself, not content merely to let Moore's abuse of math slide, offers his own disingenuous comments. He rounds Moore's 62% up to "two-thirds," for example, and again drops his favorite stat: "[T]he top 10% of earners," he says, "pay about 45% of all federal taxes." Which is bad math, again, because McIlheran doesn't give you the context that these same top 10%-ers also earn more than 40% of the income in the US, so that 45% is hardly as shocking as it sounds.

All of this is ginned up to disguise a fact that explains more of the current deficit morass than almost anything else: Federal revenues are lower than they have been since Truman's days. Period. To bemoan the present day--or some imagined future when rates might nudge up slightly--as somehow hellish compared to the good old days of the Reagan years is utter crap. It is a fundamental and deliberate misreading and misrepresentation of the data. No single year of the Obama administration to date has seen more revenue than the lowest year of the Reagan administration.

At the same time as they try to convince us that we can't afford to fulfill the promises of Medicare or Social Security, they also insist that the tax burden is impossibly high already. Neither of those things is remotely true, and it frustrates the hell out of me because a bunch of these liars are, apparently, being paid to peddle those fictions to you.

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