The Fleecing of Main Street: Taxes and the Wall Street Bank

This post by Ezra Klein got me thinking back to one of the simple calculations I performed recently had to do with flat taxes on a sample population. It essentially showed to maintain our current revenue levels, we would need about a 33% tax rate, and this would reduce discretionary spending. I recently expanded this calculation to look at the standard rate, a lowered rate on the middle class, and a flat tax. It calculated income available for spending (both staples and discretionary), as well as money saved, and money put towards the wall street bank, either in the form of stocks, speculation, or angel/venture funds.

Here's the data for the current standard rates, with income in thousands, and population in millions:

These numbers mirror published data, since about 70% of our $14 trillion GDP is consumer spending. In terms of what is available to main street and small businesses, only 67% percent of the funds left after taxes are available. Also of interest is the fact that under this taxation scheme, upper middle and low upper class pay more taxes as a percent of their income than upper class, without counting the disparity that capital gains introduces.

Now let's look at a Flat Tax.

In order to achieve the same revenue level for the government, we must have a 35% tax rate. Everyone pays the same, but it's higher for almost everyone. However, this reduces consumer spending nearly $1 trillion and reduces percent of funds available to Main Street by 3%.

Finally, let's look at lowered tax rates for most income classes, with higher taxes for the upper 2%.

Same revenue level, but now, everyone up to earners of $250,000 have a lower tax rate and lower effective tax rate. Earners from $250,000 to $1 million have the same taxes as under the Bush Tax Cuts. Earners over $1 million now pay 55% and earners over $5 million pay 65%. By doing this consumer spending rises $600 billion and 79% of funding is available to Main Street. This money comes from somewhere though, and that's reducing the money in the Wall Street casino by $2 trillion. Even though there is a loss in savings, the strength of Main Street should be enough that banks put some of their excess capital to work lending to small businesses again.

It basically boils down to anyone not wanting to raise taxes on the rich is just looking to put money into the pockets of the wealthy. With high marginal rates on high income earners, we can reduce the tax burden on the majority of Americans while maintaining the same level of revenue and higher levels of consumer spending. It may even result in more money for small businesses as the majority of Americans will now have excess money they must now save, which can be packaged in loans for small businesses.

GDP Growth Under Bush and The Free Market is More Efficient

So someone sent me the following Link as proof that tax cuts spur the economy. It was immediately followed by the statement that "It is a fundamental rule of capitalism that the free market spends money for efficiently than the federal government".

First of all, trying to use the first link as proof of anything makes me wonder if all the Bush-ites failed math. The more they send me, the more I begin to think so. Makes it hard to have an intelligent discourse if they don't understand how to analyze a data set.

GDP Growth in Dollars

Looking at this graph, this isn't year over year growth, but simply growth. Inflation alone should power it upwards, unless you have a serious recession/depression. From just glancing at it, it looks fairly linear when adjusted for inflation, maybe exponential with an inflection in the 60's. Somehow, this is supposed to prove the Bush tax cuts were amazing. But, since it's such a long data set, let's look at the past 20 years to see what happens.

Adjusted GDP Growth with Trendline

And this is what happens when you actually look at the data that is presented to you. Under Bush we actually see GDP falling under the 20 year trendline, until a massive jump, just before the recession. Well that must mean the tax cuts work! Or, GDP was inflated due to massive levels of debt, which is demonstrated as GDP immediately falls off during the recession and returns to its 20 year trendline. And yes, a linear line fits with a 95% fit.

Finally, the second point. Hopefully I can find some data on the subject, but if you have any, please share. From just a simple thought experiment, it seems to me that both private industry and government should have the same level of inefficiency. At one point, private industry should easily have won out due to the bureaucracy involved in the federal government and lack of competition. However, private industry has devolved to the point where you have a few slow moving players with multiple levels of (mis)management. Every dollar they earn doesn't go to growth. They have insurance, interest on debt, taxes on property, marketing expenses, overhead expenses, employee health plans, retirement plan contributions, etc. Most importantly, how much of every dollar they make in revenue stays in the US?

I no longer think it is a fundamental rule of capitalism that private industry is more efficient. Both private industry and government are models of inefficiency. The only exceptions are hot startups through their early life, until they eventually become too large and hit the inefficiency wall (Google).

Laffer Curve and Marginal Tax Rate

Interesting article on the Laffer Curve and what the optimal tax rate should be. Most of the comments against a high marginal tax rate speak to longevity for GDP growth. Lucky for me, I found some great data today on the top marginal tax rates and GDP growth vs previous year. Year to year growth is somewhat random, and since we're talking about maintaining growth, that implied using a moving average. I examined both a 5 year moving average and a 15 year moving average. I placed the moving average on the graph both at the time it is calculated, and also offset by the length of the average. For the offset case, the marginal tax rate of 1920 would correspond to the gdp growth moving average calculated in 1935. 1940 with 1955, etc. And now for the charts.

5 Year MA, GDP vs Marginal Tax Rate

The five year MA is relatively uninteresting. The only period with any real information is during the great depression. Increasing the marginal tax rate produced gdp growth over a 5 year period, with GDP finally collapsing around World War II (Some other day I'll post the charts that show war effect on GDP growth). Once the war end, GDP fluctuated, with increases in tax rates seeming to sustain GDP growth for about 10-15 years.

15 Year MA, GDP vs Marginal Tax Rate

Now this is where it gets interesting. Increasing the marginal tax rate produces increases in GDP growth, up to about 70% (as verified by tax theoreticians). Above that will cause GDP growth to stall out (WWII doesn't help either). A reduction from 95 to 92% along with post war efforts caused an increase in GDP growth which was sustained until the marginal tax rate was lowered to 70%. GDP growth then fell off and fluctuated around 3% until taxes were lowered. Taxes lowered boosted GDP growth for about a year. After that GDP growth continued its decline, until taxes were raised, providing a minimal boost.

The easiest conclusion to draw is that for sustained GDP growth, high marginal tax rates (50-70%) are optimal. Low marginal tax rates would boost GDP growth for short periods, but overall result in declines to GDP growth.

Let me know if you see any trends that I missed. Even with a 15 year MA, it's still a noisy data set.

Death to the Republicans! Long live the Republicans!

Some great comments from a former Reagan Insider appeared on MarketWatch. As I've spent more time on America Speaking Out, I've begun to wonder what happened to the Republican party of old. There's an absurd amount of comments on there about abolishing taxes or moving to a flat tax rate, while you see very few upvotes on the untouchables of our Federal Budget (defense, entitlements, farm subsidies). It has gotten to the point where the so called greatest Republican president may not even be considered a Republican today.

The new Republican party seems to be absolutely drunk on supply side economics, defending (attacking?) the constitution, and focusing on religious issues. They no longer seem to be the party of fiscal accountability, utilizing policies of faith rather than logic. We've seen the effect of supply side economics and the idea that free markets are somehow efficient and can be controlled without regulation. This has led to increased national debt, the explosion of the wall street casino, and nearly the death of our economy.

With the extreme partisanship that exists today, one must wonder if someone can rise through the ranks to return the Republican party to its principles or will they be ousted for not being conservative enough (Link Link). Has their been enough shift in focus, that the onus is now on Democrats to be the fiscally responsible party (Link Link)? We'll have to watch to see if Democrats truly are becoming fiscally responsible, by putting welfare and social security up for discussion. Otherwise, we can only hope that a new party appears in time, or the Republicans wake up in time, to save our country from bankruptcy or all out class warfare.

Wealth Distribution

This topic has been bugging me quite a bit lately, with Republicans wanting the tax cuts on the wealth to be preserved, and any mention of limiting compensation or increasing taxes on the wealth being shot down as promoting socialism through wealth redistribution.

I came across an interesting article that reworked the view on the issue, such that wealth will always be redistributed as long as taxes are in place. By having low taxes on the wealthy, we have redistributed income to the wealthy (Link). Similarly, if income taxes were abolished and a national sales tax were implemented, would we redistribute wealth from the spenders to the savers (usually the wealthy, since they save more of their income). Would a flat tax also redistribute wealth, since the wealthy also save more of their income, producing additional income for them?

What started me down the path towards examining wealth redistribution was the idea that asset bubbles are a result of the widening gap in earnings between the middle class and the wealthy (Link). This goes back to the idea of the wealthy being savers. As they continue to search for ways to increase their earnings potential, they move assets away from places that create jobs (banks, treasuries) with low return and risk to speculative areas with higher rates of return (stocks, tulips, houses, oil, and now even chocolate).

One simple solution is to raise taxes on people earning over $250,000. The argument presented against this one is that it will hurt small business owners similar to comment 52 here. Without seeing the books, it would seem that he is complaining about the rate he is taxed at, while recording essentially $1.8 million in personal income. Although I'm not an accountant or tax lawyer, it might be time he looked at his corporate structure, or hiring more American workers to reduce his profit levels. Most small businesses owners would be happy to have profits of $250,000 or more and be taxed on it (myself included).

The other solution I've seen recently and favor is the discretization of the income scale into finer levels. Tax rates for $250,000, $500,000, $1million, $10million, etc. (Link). This may even allow rates to be further cut for the lower and middle class. And since the lower 95% composes about 67% of the spending in our country, having more money in their hands would give our economy a nice boost.

Welcome

Welcome to the Seeking Logic blog. In case you missed what this blog is about, I'm looking for a place to discuss politics using logic. The web is great for this, since you can easily communicate data based arguments, by linking the original source. This blog is about moving from regurgitating the vitriol spewed forth by talking heads and charlatans, and instead assimilating all the data that is now available to determine a good path forward.

This blog is not about religion. Yes, politics and religion have become seemingly entwined, but since our framers provided freedom from religion, so will this blog. I will attempt to discuss topics which aren't tied to religion. Feel free to call me out if you think a topic is entrenched in religion, but likewise do not use it as a basis for argument.