Tuesday, April 26, 2005

Fools and Knaves, Wall Street Journal Edition

I have developed a simple rule of thumb in analysing conservative policy pronouncements, the Knaves and Fools Rule. The rule is simple: Conservative policy pronouncements are made by knaves and then the pronouncements are believed and repeated by fools. It is with some sadness that I have to report that someone who is no fool, Paul Caron, got fooled by the the knaves at the Wall Street Journal.

At his justifiably well-regarded TaxProf Blog, he notes what he feels is a "interesting editorial" in today's WSJ. The editorial is available online only to subscribers, but it's thesis is that "[e]ven the most ardent class warriors have no choice but to concede that the U.S. income tax code is steeply progressive -- that is, that it soaks the rich." The article goes on to quote from a study that purports to support this conclusion. Among other things, the study shows that since 1979, the proportion of the federal income tax burden borne by the wealthiest Americans has grown. (As is shown below, the "other things" that were reported in the study and which were critical to the ultimate conclusion reached by the study's authors were conveniently omitted in the WSJ editorial.)

Caron pulls a table from the study which shows that the percentage of total taxes paid by the really wealthy and the really, really wealthy increased dramatically from 1979 to 1999, and declined thereafter. He is fooled into believing that the chart illustrates that there was a dramatic increase in progressivity in the tax system in the 1979 to 1999 period and then a slight decrease thereafter. Had Caron thought about this proposition for a moment, he would have realized that the chart did not support either his or the WSJ's conclusions. Simply because X pays a higher percentage of all taxes in 1999 than he did in 1979 does not mean that the tax structure has become more progressive with respect to X. It may mean that X is making a whole lot more money in 1999 than he did in 1979. In fact, this is precisely what the study relied on by the WSJ reports.

The study, authored by Michael Strudler and Tom Petska of the IRS and Ryan Petska of Ernst and Young, can be found here. Among the points made in the study were the following:
  • Between 1979 and 2002, the threshold for the top 0.1 percent grew from $321,679 for 1979 to $710,661 for 2002, an increase of 121 percent. Similarly, the threshold for taxpayers in the 1-percent group rose from $109,751 for 1979 to $175,618 for 2002, an increase of just over 60 percent. However, the thresholds for each lower percentile class show smaller increases in the period; the top 20-percentile threshold increased only 5.6 percent, and the 40-percent and all lower thresholds declined. In other words, over the period studied, the rich got a whole lot richer than everyone else and began to put real distance between themselves and the middle class.

  • The share of income accounted for by the top 1 percent of the income distribution has climbed steadily from a low of 9.58 percent (3.28 for the top 0.1 percent) for 1979 to a high of 21.55 (10.49 for the top 0.1 percent) for 2000. To put it another way, the rich have become real hogs with respect to the portion of the total economic pie they consume.
What is the conclusion of the paper with respect to the increase or decrease of progressivity in the federal tax system? Rather than give you my slant on this, I will just quote the paper's conclusions verbatim:
So what does this all mean? First, the high marginal tax rates prior to 1982 appear to have had a significant redistributive effect. But, beginning with the tax rate reductions for 1982, this redistributive effect began to decline up to the period immediately prior to TRA 1986. Although TRA became effective for 1987, a surge in late 1986 capital gains realizations (to take advantage of the 60-percent long-term capital gains exclusion) effectively lowered the average tax rate for the highest income groups, thereby lessening the redistributive effect.

For the post-TRA period, the redistributive effect was relatively low, and it did not begin to increase until the initiation of the 39.6-percent tax bracket for 1993. But since 1997, with continuation of the 39.6-percent rate but with a lowering of the maximum tax rate on capital gains, the redistributive effect again declined. It appears that the new tax laws will continue this trend. Analysis of panel data shows that these trends are not quite as great as seen by looking at annual cross-section data, but the trends cited above are still apparent.
Contrary to the WSJ's conclusion, overall, the various changes in the tax code since 1982 have made the federal tax system less, not more, progressive. That is, the rich are paying a lower portion of the overall tax burden relative to their income now then they did in 1982 and the system's progressivity is headed for further declines.

The Moral of the Story: Only fools rely on "facts" bruited about by knaves.


TaxProf links to the posting above and also to a previous posting of his that discussed an article, The Matthew Effect and Federal Taxation, 45 B.C. L. Rev. 993 (2004), by Martin J. McMahon, Jr., of the University of Florida, that illustrates that, over the last 25 years, the rich really are getting richer.

I would be remiss if I did not note that Brendan Nyhan was the first to call the WSJ's lie. Kevin Drum also covered the story. His posting includes a nifty illustrated chart.

One question: The WSJ editorial page lead the pack seeking to sack Dan Rather and other CBS editorial personnel when they relied on material they later discovered was false. Shouldn't the unnamed writer and his or her editor(s) responsible for yesterday's piece be cashiered? After all, the article plainly misrepresented (that is, lied about) the study that it discussed.

Just asking.


Business Lawyer said...

Nice analysis, Stuart, but no need to throw out eptithets against conservatives.

What you have done here is prove something relatively meaningless. The tax system is not more progressive than it was in 1982. Big deal. It is still very progressive and the wealthy still shoulder a disproportionate burden of the federal budget. I don't have that copy of the WSJ, but I suspect the argument didn't hinge on the one statement about progressivity compared to 1982.

As for firing them for lying, I think such a standard would have to end the careers of Krugman and Dowd before I'd support for these guys. :)

Anonymous said...

I can't believe somebody read the whole thing. More unbelieveable, they think the analysis is correct. Of course, it is deemed meaningless.