Are you rich?

There is a class war brewing (or is it already erupting?) over the proposed extension/expiration of the bush tax cuts for the wealthiest individuals. I’ve seen dozens of articles, and had a fair share of personal conversations. The most recent was this article, talking about a professor and his doctor wife who are “having trouble making ends meet” while making $400,000/yr.

Now, I am going to avoid the merits of either side of this debate at the moment—the arguments for either side are both interesting and oftentimes flawed—and it’s not a war I have the time to wage.

However, the question I had is why?—Why is this debate taking place? A large number of people making $250,000-$500,000 are rejecting the label of ‘rich,’ and feel as if they are being “vilified” and “punished” by the proposed cancelation of the top-tier Bush tax cuts. (With great restraint I am avoiding the arguments for either side here in this post…) but my question is—who decided that at someone making $250,000-$500,000 was rich?

In previous blog posts, I did quite a bit of research crawling through tax code data from 1920 to the present, and I noticed something—there was some serious fluxuations in the total number of income tax brackets:




Now, from the 1930’s to the mid 1970s, we had over 20 tax brackets. We had a gradient tax structure. There was no threshold where the tax code decided “that guy is rich, let’s tax him more!” If you are going to have a graduated tax structure (AKA non-flat tax) then a gradient tax structure is what makes the most sense for a wide variety of reasons—not the least of which being that a gradient tax structure avoids creating a divisive threshold at which one segment of the population is taxed more or less than another.

So, what happened? Between 1978 and 1987 the total number of tax brackets plummeted from 25 to 5 and continued to sink down to just 3 in 1991. What the hell!?

First, let’s break it down. The first drop from 25 to 16 took place under Carter’s administration, and then in 1986, under Reagan, the tax code was further sliced down from 16 brackets to 5… effectively creating “tax bubbles.”

The “Tax Reform Act of 1986” which caused this, was sold as a “simplification of the tax code” and hailed as the second half off the famed “Reagan Tax Cuts,” which were based firmly in the mythology of Trickle-Down economics.

So what?

Well, here’s the thing, it created a social-bubble where there wasn’t one before. It drew a line between income rates that has created an adversarial relationship between those making over $250,000 and those making under.

Though the Tax Rates call them “top tier earners,” families who are in the $250,000-$500,000 income range self-identify as “middle class” and feel that they are being miss-categorized as “rich” and do not feel as if they should have their taxes increased. They are living the dream of the American Middle Class.

However, there is another truth which our nation is struggling to accept—the Middle Class has proven to be just as mythical as trickle-down economics. Families making $250,000-$500,000 have access all of the things we commonly associated with the middle class: mobility, money for vacations, college funds, a nice house with a picket fence… however, there is nothing “middle” about making $250,000-$500,000.

The Median Household Income in the US (as of the 2010 Census) is around $48,000. Families making around $48,000 today live lives of financial instability. They have stay-cations, college loans, and overdue mortgages. If you look at the how those who live in the median income range in the US, there is nothing “Middle Class” about them.

The Crux:

Okay, I will try to wrangle back to my topic—the division of wealth is a rant for another day. What we face today is a rising conflict in which the $250,000+ income tax bracket has become a flashpoint for the conflict. It has become an-us-versus-them cultural war about who is rich, and who is not. Both sides are being vilified.

The top earners as greedy capitalists who are out of touch with society and the other 95%+ of the country are being portrayed as an entitlement-starved proletariat.

What I want to know, is which is the cause, and which is the effect. Our country was once an economic gradient. From poor to middle to rich, we used to have a society that harbored a degree of mobility—there was a middle-class, and if you worked hard and had a bit of luck, you could obtain that life.

Today that gradient is fading, fast. So fast that those who are in the old “middle class” have yet to notice that the ground has shifted and that they are now the nouveau riche. And the rest of society has yet to realize that the conceptual “American Dream” is quickly becoming a memory.

But one thing I do know—is that Reagan’s tax structure is not, at all, helping the problem. It’s dissolving our social constructs and dissolving the concept of the American Dream—as we now see the things of the “middle class” are reserved for the top-earners—earners who often times, don’t realize how much they actually have.

Reign of Terror

As with most generic whiteys in America, I have a mixed heritage. A bit of this, a bit of that, British, French, German, if it’s white and European, I can probably claim some heritage. I don’t often think about it though. I am removed from it. I am a white male American—that IS my ethnicity—and that is the ethnic identity that I most closely identify with. I am not a German-American or any such thing.

However, it is important sometimes to remember where we came from—not for the sake of some cultural-feel-good square dance or as a means of inflating my sense of social standing and superiority. Sometimes, it’s important to look at the past and realize how you got to where you are.

One of the most interesting stories from my family history is on the French side. My French family thread came from a spool of wealth and title. The old family had been doing well for itself, huzzah! We had land, money, servants, who knows what all—it was goodtimes to be sure: cheese, wine and maids in sexy outfits.

However, like most good things, it had to come to an end. In the late 18th century the French Revolution started brewing. The rich were getting richer and the poor were getting hungrier. The French society had been built upon a Feudal, aristocratic system powered by a strong religious segment. The common folk worked for the wealthy few, and it was, overall a symbiotic relationship—though the wealthy remained wealthy and comfortable, the poor were given enough to survive and sustain.

A pleasant Slave Morality built up among the workers. They went to church to hear that the “meek shall inherit the earth” and that they should “take joy in your toils, for all else is chasing after the wind,” and thus they created a moral justification of their place in society—and peace was kept

This wouldn’t have been so bad, if it weren’t for a series of droughts and famines in the middle-late 18th century. The French workers got hungrier, but the rich kept on as they were. The moral lessons of the nobles and the landholding church began to feel as hollow as the peasantries stomachs—and revolution followed. The rich had kept on as they were, Louis the VXI and his folk did not tighten their belts—they were the landowners, they and their families had worked hard for their station, and they were deserving of their comforts. After all, they had not caused the famine—but they were the driving force behind the country’s economy.

My family had to run. They were mid-level nobles, living a life of comfort, but not one of absurd wealth. They may not have had a great palace, but they had their land and their good, sturdy stone walls. When the desperation of the starving poor grew, so did their fury—and they started taking heads.

So my family ran to Canada. They probably weren’t the cause of the problems. I mean, surely they did not cause the drought and the famine. They, like the poor working class that fell into starvation, were victims of the system. The system concentrated the wealth in a small segment of the population, and bred a climate of entitlement—for the rich and for the poor. The poor felt entitled to having their needs provided, and the wealthy were entitled to extra comforts for working hard to keep their lands efficient and functional.

French Society was functional—in ideal conditions. However, sometimes, shit happens. Be it in the form of droughts, famines or economic collapse—sooner or later, the shit will hit the fan. And the society’s success or failure depends on their moral metaphysics.

The French Feudalism failed because neither segment (the wealthy or the poor) were willing to concede that famine is famine—the rich blame the poor, the poor blame the rich. And, when it comes down to it, the poor ALWAYS outnumber the rich.

They both forgot the symbiotic nature of their economy. The poor forgot that the economy was driven by the organization set in place by the nobility, and the nobility forgot that their prosperity was built upon the backs of the workers. The nobility kept on living their typical lifestyle of excess, Louis the XVI was famous for it. The other nobles, like my relatives, though not as ridiculously wealthy as the King, probably followed his example and kept on as they always had.

Revolution and death followed.

The Crux?

Would it have been different if the wealthy would have acted on empathy? If the king would have trimmed down his lifestyle, cut corners, shared his wealth with the people—would it have helped the nation weather the storm intact?

Who knows. Bill Gates seems to think so.

And what happened to my relatives? They once enjoyed French nobility, the remains of a family castle were once in National Geographic. In the face of the Reign of Terror they were forced to flee to Canada, some of them found their way to South Dakota and became dirt farmers.

A Conservative Estimate

I was involved in a discussion on FB with a very intelligent Fiscal Conservative who asked an interesting question. FB does not allow for the level of detail to answer her question—so I am going to bring her question—and some conjecture at a response—over here.

I'd like to see some data supporting the idea that high tax rates on the "super rich" lead to a "stimulated economy" adjusting for the obvious (and major) influences of world wars.

First, I think it worthwhile to point that that no major Democrats that I have heard of are proposing to raise tax rates on the rich for the purpose of stimulating the economy. The leftist argument (as I made in my previous post) is that the Conservative concept that using tax CUTS as a means of stimulating the economy is a truthiness (an idea believed in with no basis in fact), and that there is no data to support the idea that lowering taxes to the highest-income individuals would stimulate the economy.

However, her question is an interesting one, which I would like to take a stab at:

Our goal is to see if there is any identifiable correlation between high tax rates for the highest class of earners (my quantifiable definition of “super rich” in her quote) and a stimulated economy. For this instance I define stimulated economy as one that shows notable growth and low unemployment rates (thereby benefiting all within the market, from the workers to the managers).

In my previous post I hit some data that is relevant to the question, most notably unemployment rates and tax rates. Looking at the following Graph, we see that, for the period in our history where tax rates were at their highest (1942-1962) taxes on the highest earners were over 90% and unemployment averaged under 5%. I don’t think we will have any disagreement that the sustained low unemployment and economic growth that the country saw from 1942-1962 qualifies as a period in which the economy was “stimulated.”

However, as noted in her comment—the war was a HUGE factor. It is impossible to completely isolate the impacts that the increased spending associated with the war had on the economy, but we can make a pretty decent run at it. First—we can look at the total Federal spending from 1920-present (green line):

We can see a HUGE spike in spending from 1940-1950—which obviously would have an effect on unemployment, but after 1950 it settles down nicely. From 1950-1960, I think we may have a decent sample. The tax rates on top-tier earners were at +90%, and unemployment was averaging under 5%. This period is not affected by abnormally high war spending.

The situation is way too complex for us to identify any direct relationship. But I think that her question is, in part/as best it can be using publicly available federal databases, answered—from 1950-1962 we had normalized federal spending (non-war levels), very high taxes on top-tier earners (90%+) and low unemployment (>5% average). It was a period of economic stability and growth.

The Crux:

This is not to say raising taxes would help the economy (though I think using some basic greed-based psychology and some conjecture one COULD make that argument)--it's just addressing her question regarding of high tax rates mate well with a stimulated economy--and the available data from the mid 20th century suggests that they get it on nicely. (hot!)

Analysis of Taxes vs Unemployment, or Papa Boehner Assumes the Position

Leading into November's elections, the Republicans are looking at the prospect of a possible majority in the House--and it seems that the pundits and politicos are indicating that John Boehner (R-Ohio) would likely take the position of House Majority Leader should the switchover take place.

In the face of this new prospect, Boehner has taken the extraordinary step of putting forth a general Republican political agenda, indicating how he and his Majority would combat the economic crisis. His positions (which have been widely reported) are two-fold:

  1. Continue/Make Permanent the Bush Tax Breaks

  2. Reduce Federal Spending to 2008 Levels

For now, I am looking at his first claim, that there is a Historical Correlation between Taxes and Unemployment Levels and that lowering taxes for the wealthy helps the economy, thus lowering unemployment

I began by firing off a number of Google searches on the topic, but didn't find any meaningful historical data that would allow me to see the relationship between Taxes and Unemployment levels in a meaningful way. So, I started digging. Utilizing historical data from the IRS and several other data-mining sources (links at bottom) I started mining data from 1920 to the present, so we have a broad historical perspective.

Data:

First, I drew out the trend in unemployment rates from 1920-Present. It really doesn't look bad from out here...

Second I pulled the Individual and Corporate Tax Rates from 1920-Present. It caught me off guard:

I had no idea that personal Income Tax had ever been to 94% in the US, you learn something every day (well, every day you TRY to at least). Also, I didn't realize that there had been such a dramatic drop in personal income tax for top-tier earners in the 80s. In 1974, the Tax rate for top-tier earners was 70%. Between 1980 and 1987 it dropped to 38.5%. This is huge and unprecedented.

Also, I included corporate tax rates out of curiosity--I take the information with a grain of salt, since corporate tax avoidance is a famous American pastime, I'd be curious to see figures comparing the tax rates to the tax paid. Overall though, for this question, the Corporate Tax rates didn't seem to be terribly interesting.

Third--we get to the moneymaker--or rather, what Boehner's philosophy frames as the moneymaker. If Boehner's philosophy is right, we should see a correlation showing that drops in Individual Income Tax on top-tier earners is followed by periods of lower unemployment and general economic growth. Also, the Conservatives decry RAISING taxes (AKA not renewing the Bush Tax Cuts) because they claim it would exacerbate the current economic crisis, resulting in higher unemployment. So, we should ALSO see that unemployment goes UP following increases in taxes to the wealthy.

The first thing we see: in the 1920's we see a steep drop in the individual tax rate for top earners (green line). This is followed by a steep INCREASE in unemployment in the mid-to-late 20's. STRIKE ONE. This historical trend runs sharply counter to Boehner's assertion that lower taxes on the wealthy result in a stronger economy. The historical data from the 20's directly contradicts the Conservative assertion.

The second thing we see: in 1942 unemployment rates reached their lowest (1.2%) when individual tax rates were at their highest (94%). In 1942, tax rates for the wealthy hit 94, and stayed in the 91's until the mid 1960s. During this time, unemployment remained low and stable, averaging 4.98%. To reiterate, for 20 years the tax rates for the top-tier earners in the nation were at their highest, and unemployment was at it's lowest--the period, from 1942 to 1962, is historically seen as one of great prosperity.  STRIKE TWO.

The third thing we see is--well, it's actually something we don't see. We don't see a correlation between increased tax rates and decreased unemployment. Tax rates have been nearly flat since 1990, with a 8.6% increase between 1992 and 1993, and a 3.6% decrease between 2002 and 2003. Meanwhile, unemployment is pretty flat, fluxing normally. There is no causal correlation to be seen between tax rates and the recent (steep) rise in unemployment associated with the recent recession. I call that STRIKE THREE.

The Crux:


The heart of Boehner's Conservative position is that lowering taxes on the wealthy will spur economic growth. In the 1920s, lowering taxes for the wealthy was followed by a steep RISE in unemployment. In the middle of the 20th Century, sustained high taxes on the wealthy were coupled with historically low unemployment and a period of general prosperity and growth nationally. Recent history (20-30 years) shows a generally stable correlation between unemployment and income tax rates for the wealthy.

So what? -- Historically speaking, lower taxes for the wealthy are not associated with decreased unemployment. Economic trends from the last 90 years indicate that, in fact, lower tax rates for the wealthy tend to have either no effect, or a negative effect on unemployment.