Understanding Inequality and Taxes

Claims of how many households pay income taxes, or income and payroll taxes, or net tax (thanks to negative tax impacts of EITC) are common, but frequently erroneous.  Corrections looks to help put these to rest.

While it can be looked up, Corrections gives two graphs to give an idea of what households pay taxes.  Depending on our measurements (including Federal or state+federal, no deductions/deductions, etc.), 68.2% and 78.7% of households pay positive taxes.  This differs by about 17%-28% from Mitt Romney's "51%" that  "paid taxes."  About 10% of this comes from not being in the depths of the great recession, most of the rest comes from including FICA taxes (which are rarely included in these calculations), with some of the residual also coming from including state taxes.

 First, we display six different measures of the proportion of household heads or households that pay taxes.  We break things up by federal vs. federal+state taxes, and before and after tax deductions (primarily the EITC and additional child credit).  We also include two additional measurements by including SSI and TANF benefits as well as EITC (click to enlarge).  We give these graphs by age of household head.

We also display the distribution of the size of welfare payments (EITC, SSI, TANF, Additional Child Credit) conditional on being positive (click to enlarge).  

We can certainly reject claims like "60% of households don't pay taxes."  We can also note that claims with high proportions of households not paying taxes depend heavily on the use of households that are above the age of 60, or by including people in households that pay taxes but that themselves don't pay taxes, as when households file separately.  

As an aside, Corrections has heard the phrase "IQ's drop by 20 points when discussing politics."  Corrections has a mildly more amusing (tongue-in-cheek) formula with the same concept.  

1. Let IQ_P be ones IQ when discussing politics.
2. Let IQ be ones IQ under normal circumstances.
3. Let R be ones ranking of Reagan (or FDR) on a scale from 0-1.

IQ_P = IQ-2*IQ*(R-0.5)^2

An Experiment in Kansas

In mid-2012, Kansas cut personal income taxes, from 6.45% to 4.9% for those making more than $60,000 when married or $30,000 when single, and from 6.25% to 4.9% for those making between $30,000 and $60,000.  Finally, it reduce tax rates on those making between $15,000 and $30,000 from 3.5% to 3%.  These tax rates have continued to reduce incrementally in 2013 and 2014.

Did this cause an employment increase? Or a break in trend?  It looks like the answer is no.  Below, Corrections depicts total employment in Kansas and the four contiguous states.  While Colorado took off, other states look fairly similar to Kansas (click to enlarge).

Alternatively, we could see if there was a break in trend by linearly regression pre-July 2012 data on time, and then taking the difference between the linear fit and the data.  This is depicted below (click to enlarge). 

This was a "supply-side" experiment that appears to have failed to stimulate employment.  This is an important finding, but should be seen in light of both the successes and other failures of tax cuts in increasing production and employment.  

Reactions to the experiment will be a far more definitive test about the intellectual honesty of proponents than this experiment was.

Senator Rand Paul re-introduces 'Audit the Fed' bil

Reuters  article "Senator Rand Paul re-introduces 'Audit the Fed' bill" (January 28th, 2015) discusses a new bill introduced by Rand Paul, Ted Cruz, and 28 other Senators to "audit the Fed." This would expand the yearly audits taken by 1) Government Accountability Office, 2) the Office of the Inspector General, and 3) Private firms, to include monetary policy discussions, minutes of which are currently released with a three week lag.  Detailed accounts of their holdings are released each week.

The real intent of the bill seems to be to monitor Federal Reserve policy discussion in real time.  This will have two effects: first, to generate more comments for politicians like Rand to jawbone Fed officials about.  Second, it will chill discussion in times of crisis.

In the end, chipping away at the Fed's independence is a good way to get higher inflation.  From Alesina and Summers (1993), the relationship between Federal Reserve bank independence and inflation (click to enlarge).

 

Another aspect of the conservative echo chamber that has lead to insanity.  Sadly, Corrections sees little way to end it.

Edit:  Even a broken clock is right twice a day.  Senator Warren:

[...] but I oppose the current version of this bill because it promotes congressional meddling in the Fed's monetary policy decisions, which risks politicizing those decisions and may have dangerous implications for financial stability and the health of the global economy.

The worst thing for a party about giving up its sanity for poorly-thought-out crusades,is it cedes sanity to the opposition.

Quantitative easing: giving cash to the public would have been more effective

The Guardian article "Quantitative easing: giving cash to the public would have been more effective" (10/29/2014) offers rhetorical flourishes rather than understanding when discussing Quantitative Easing.

Central banks have always been wary of “helicopter money” on the grounds that QE is temporary while giving cash to the public is permanent. But the temporary has become permanent. What was once unconventional has now become conventional.

As with most casual commentary about monetary policy, which trades understanding for catchphrases, sophistry, and silliness, this is phenomenally foolish.

QE is temporary in the sense that the Federal Reserve traded one asset for another asset (cash for Mortgage-Backed Securities and U.S. Treasuries).  The Federal Reserve "created money" and purchased these interest-bearing assets.  As these interest-bearing assets bear fruit, they can un-create the money they created (plus some more thanks to interest, if they so desired).  It is in this sense that QE is temporary.

Simply giving money away isn't trading money for an interest-bearing asset: it's giving money away.  Not only would it be illegal for the Federal Reserve to do this (this is fiscal policy, not monetary policy, the purview of Congress), but it would be permanent because the Federal Reserve has no way to "un-do" it, absent taxes which go unspent.

The distinction between "permanent" and "temporary" is not in the timeframe, it's the net change in assets.  The writer of the Guardian's article either misunderstands this meaning of temporary and permanent or ignores it: without this distinction, the article loses coherence.

Medicare

Medicare has four parts:

1. Medicare Part A, instituted in 1965, which contributes to nursing care, inpatient hospital care, home and hospice care.  
2. Medicare Part B, instituted in 1965, which contributes to physician services, outpatient hospital care, and other medical services.
3. Medicare Part C, or "Medicare Advantage" instituted in 1997/2003, substitutes the services of Part A and Part B, but are offered through a private entity (with a part of payments made by the government).
4. Medicare Part D, or "Medicare Prescription Drug Benefit" instituted in 2003/2006 subsidizes prescription drugs supplied through a private entity.

In 2012, the U.S. spent $536 billion on Medicare expenditures, and Corrections breaks down that spending by type (click to enlarge).

Decomposition of the U.S. Federal Deficit: Receipt Shortfall & Expenditure Excess

 Below, Corrections decomposes the reasons behind the U.S. Federal deficit as a percent of GDP.  We attribute a deficit to two reasons:  a shortfall in revenue, or an excess of expenditure.  Because the U.S. Federal Government has run a historical deficit (receipts average 17% and expenditures have averaged 19.9%) we close the historical gap by blaming both receipts and expenditures equally:  the "baseline" for both is therefore 18.7%.  

Our method of decomposition is to take the deviation of each from its historical norm and attribute that portion of the deficit to its deviation, as the two deviations will always sum to the deficit that year.  For instance, if revenues ran at 18.6% while expenditures ran at 19%, then we would have a deficit of 0.4% per year:  0.1% of it would be attributed to revenues, and 0.3% would be attributed to expenditures.

Finally, we graph both the levels and the combined contribution of both (click to enlarge).  The blue and red lines represent the simple contributions of each to the deficit, and add up to the black line, which denotes the deficit.  The blue and red areas depict the stacked expenditure and receipts, and also sum up to the black line.

Our takeaway is that from 2008:Q4 to present, expenditures have been 4.62% above historical norms as a fraction of GDP, while receipts have been 2.32% below, giving the "reason" for deficits to be 33.4% receipt shortfall, and 66.5% expenditure excess.

There are, of course, other decompositions one can offer:  perhaps a more promising one would be to attribute a constant growth rate to the level of GDP, expenditures, and revenues, and decompose the shortfall into three parts:  a fall in the trend growth of GDP, a rise above trend in growth of expenditures, and a fall in the trend growth of receipts.  

Three Charts (not) to Email to Your Right-Wing Brother-In-Law

Truth-out.org suggests “Three Charts to Email to Your Right-Wing Brother-In-Law". Here are a few pictures to think about before you do so.

The graphs created by truth-out.org select the last year of the Bush presidency (not his entire term) to note that the recession started in 2008. Recessions actually happen very frequently in the US economy. This gives us a wealth of data with which to compare the current President’s performance. The first graph in the picture below plots the trends of many recessions. We evaluate using the same basis as truth-out.org--national employment statistics. In particular, we plot the employment as a percentage of its lowest value during a recession over time, for a number of recessions (from 1950 on). We can look at the growth of employment after the trough of a recession. Usually, the economy recovers rather quickly; in the graph, this corresponds to a steep uptick after hitting 0.

The current recession is the very bottom black line on the graph. This means that currently, we’re doing worse than any recession in the past 60 years in terms of recovery. Since Obama had been president for months before the trough, it wouldn’t seem natural to blame Bush alone for the slowest recovery that we have seen in the last 60 years. Just below the first graph, there is a comparison our recession--the blue line--with the average recovery after a recession. We are doing a poor job relative to the average.

In the second column, we look at another interesting trend: job growth before and after the passage of Obamacare. While the country seemed to be recovering at a reasonable rate and coming out of the recession before the passage of this bill, job growth slowed dramatically immediately following the passage of Obamacare in April 2010. Below this, the last graph depicts the actual stimulus rollout. The solid black line depicts funds received by organizations from the stimulus. Contrary to the deceptive picture painted by truth-out.org, the stimulus has been doled out at a fairly constant, increasing rate since the beginning of 2009. The article from truth-out.org, however, makes the ridiculous suggestion that the slowing of job growth and the constant unemployment rate is caused by the stimulus “winding down”. That is false. Just because there is no bill on the table doesn't mean that our economy isn't being "stimulated," and these are the results.

Reported Satisfaction with Life across Countries

A look into life satisfaction across countries yields interesting regional and historic patterns. In the graph below (click here to enlarge), we plot average reported life satisfaction against national GDP per capita (2006 figures). Responses to the question "are you satisfied with your life?" were on a scale from 1-10, with 10 indicating "satisfied."

From this, one trend stands out starkly--the similarity of response across formerly communist and eastern european nations as well as the similarity of response across developed western economies (in particular across largely Protestant nations). There is a great gulf, however, between the reported life satisfaction of these formerly communist nations and western nations. The graph below (click here to enlarge) gives the distribution of satisfaction with life from 8 formerly communist eastern european nations and 8 western, non-communist nations. The countries are ordered by GDP per-capita. Numbers are in terms of deviations from average reported levels, in order to make the differences more stark. A green area indicated a higher concentration of responses than a red area. We see that the concentration of reported life satisfaction is increasing with GDP and in general is fairly uniform across formerly communist nations and across western non-communist nations.

Imprisonment, Torture, Killings and Assassinations

There have been several interesting stories about the cost of imprisonment, torture, killing and assassinations in the U.S.'s War on Terror.  For example, in Afghanistan one often hears of an ineffective criminal justice system causing the U.S. military to release captured militants in the hopes that they can kill them next time.  Similarly, this news article discusses the Obama administration's increased reliance on assassination attempts in, for example, Yemen, Afghanistan, and Pakistan.

Corrections suggests that this is in accordance with the Obama administration's decreased reliance on torture and the substitutability between targeted assassinations and capture and torture.  This is depicted graphically below (click to enlarge).  The straight red line depicts the Bush administration's capability to substitute capture and torture for assassinations.  The curved line depicts their preferences, and the red dot depicts the best mix of capture and killing.  We can imagine that the Obama administration through rhetoric has decreased its capacity to capture and torture terrorists (if only due to political ramifications).  They retain the same ability to kill as the Bush administration, so their budget line is the straight blue line.  If killings and assassinations are substitutable enough (for example) then it's possible the Obama administration will not only substitute away from torture and toward assassination but will actually have more assassinations (rather than less of both), which can be seen as the blue dot.

U.S. Federalism

Below, Corrections depicts the relatively stable pie of relative U.S. government spending per year between the Federal government and State/Local governments (click to enlarge).  Since 1956, a relatively steady progression of relative expenditures back to the states, after a large Federal government expansion during the Great Depression and World War II.

A stroll down memory lane

In January of 2009, Christine Romer and Jared Bernstein predicted the effect of the coming stimulus on unemployment (full text available here). Inspired by others, we look at how well grounded these predictions turned out to be. Below is the monthly series of actual unemployment (the red dots) superimposed over the Romer and Bernstein predictions. They provided predictions of both what the world would look like with the stimulus (the dark blue line) and what it would look like without a stimulus (the light blue line). More than woefully incorrect, these predictions suggest that world we live in post-stimulus is worse than the apocalyptic outcome of the government doing nothing, as imagined by these supporters of the failed stimulus.
(click here to enlarge)

Lottery Winners

Winning a $10,000 lottery doesn't change the chance individuals declare bankruptcy.  Winning between $50,000 and $150,000 only forestalls it.  This from Hankins, Hoekstra, and Skiba (Review of Economics and Statistics, Forthcoming: "The Ticket to Easy Street? The Financial Consequences of Winning the Lottery").

Below, they produce the relative probability that an individual declares bankruptcy before and after winning the lottery in two different amounts (click to enlarge).  The probability doesn't change for individuals winning less than $10,000.  The probability dips for two years after winning more than $50,000, but the next three years make up for that deficit.

Remarkably clever paper. 

Rule of thumb: cash transfers to the poor do nothing in the long run.

Cash for Clunkers

NBER Working Paper "The Effects of Fiscal Stimulus: Evidence from the 2009 'Cash for Clunkers' Program (NBER Working Paper, 2010) (gated) by Atif Mian and Amir Sufi provides a great "economist" story.  They look at the Cash for Clunkers program and find that it caused 360,000 extra cars to be purchased, almost all of them coming from people who would have bought cars sometimes in the next seven months.  That is, it did not generate "new" car sales, only pulled them sooner from the future.  Enacted in July and August 2009, its effects were reversed by March 2010.

Their figure displays it best: a thin, sharp upward spike with a lower-than average drop-off for the next five months (click to enlarge).

Trusting Surveys

In their new paper, Manipulation of Social Program Eligibility (AEJ: Economic Policy 2011), Adriana Camacho and Emily Conover offer an analysis of Columbian census sampling on election years.  They find that sampling is likely manipulated right before election years to increase the number of beneficiaries of welfare programs.

The lines below denote elections.  One can see a large relative sampling increase of the poor before and during election years.

Rule of thumb: when surveys have consequences, their outcomes will be manipulated.

Taxation and Tax Avoidance

Corrections offers a nice figure from Emanuel Saez's "Do Taxpayers Bunch at Kink Points?" (American Economic Journal: Economic Policy 2010) (gated) (ungated).   The figure is a histogram of reported income by tax filers (married and single) in $800 categories from NBER's public use tax data.  Note the dramatic bunching for single tax filers around the first increase in marginal tax rates (click to enlarge).  See paper for table notes.

Rule of thumb: distortionary taxation is first order.  Everything else is second order. 

Student Instructional Hours

The Chicago school year is 174 days with 5.75 hours per day, for a (rounded) total of 1001 instructional hours per year.  The New York City school year is 186 days with 6.83 hours per day, for a (rounded) total of 1271 instructional hours per year.

The cumulative difference is striking, and is graphically depicted below (click to enlarge).  By the time a New York City student has graduated, while being in school for 12 years, they have effectively been educated for 16.51 Chicago school-years.  Prima facie, a remarkable disparity.  

Debt, Primary Surplus, and Inflation

Four graphs relevant to understanding the current budget situation and inflation.

Historical, real U.S. Debt (click to enlarge).

Historical real U.S. Debt as a Fraction of GDP (click to enlarge).

Historical U.S. primary surplus as a fraction of GDP (click to enlarge).

Historical U.S. inflation rate between quarters, by percent change in CPI (click to enlarge).

Give Peaceful Resistance a Chance

New York Times opinion "Give Peaceful Resistance a Chance" (March 9th, 2011) offers insight into part of an economist's raison d'être. The article by Erica Chenoweth, a Professor of Government at Wesleyan University, misunderstands heterogeneity in revolutionary starting conditions. Her claim:

Unfortunately for the Libyan rebels, research shows that nonviolent resistance is much more likely to produce results, while violent resistance runs a greater risk of backfiring.

To back up this statement, she claims that:

Indeed, a study I recently conducted with Maria J. Stephan, now a strategic planner at the State Department, compared the outcomes of hundreds of violent insurgencies with those of major nonviolent resistance campaigns from 1900 to 2006; we found that over 50 percent of the nonviolent movements succeeded, compared with about 25 percent of the violent insurgencies.

Why is this bad research? Because not all revolutions have the same starting conditions. Imagine a world in which there exist dissidents who optimally choose between armed rebellion and peaceful protesting. These dissidents know the government they face and the probability of success of a given venture. Then the observed probability of failure for armed revolution may be higher than of peaceful protest even when both were always chosen optimally. To understand why Chenoweth and Stephan get the results they do, observe the following conjecture in figure form (click to enlarge).

A rational rebel will take the upper envelope of these two decisions. If this is the case, then we will see violent revolutions under oppressive regimes that generally fail, and peaceful protest under non-oppressive regimes that generally succeed. There will be no Ghandi's under Hitlers, Stalins, and Mussolini's. Ghandis can only be successful under men who are inherently peaceful when others are peaceful with them, such as Churchill. Similarly, it may often be difficult for Malcolm X's or The Weathermen to succeed in vastly less oppressive societies, where hoses and dogs rather than machine guns and concentration camps are used to control protest. They are unable to gain the sympathies of the populace. Martin Luther Kings are better suited for the United States than the Malcolm Xs or Bill Ayers of the world.

It is no coincidence that Bill Ayers changed from attempting to bring down the United States by armed rebellion to bringing it down from within--he reoptimized.

The conclusions Chenoweth attempts to draw are faulty due to sample selection.  Armed rebellion may be more likely to succeed conditional on the situation but less likely to succeed when looking at the unconditional success rate.

Autocorrelation in Presidential Approval Ratings

Corrections examined President Obama's Approval Ratings and noticed that they appeared more noisy than white noise, e.g. that they were negatively autocorrelated.  They are displayed graphically below (click to enlarge):

To check that they were too noisy, we graphed out the distribution of "up up", "up down" "down up", etc. in a contour plot, where "darker" means more density, and "lighter" means less density.  A "-1" means down, a "0" means same, and "1" means up.  Therefore, "Same Up happens 5% of the time" would correspond to "x=0 y=1 z=.05".  This is displayed graphically below (click to enlarge).  As a reader can see, most of the time approval ratings stay the same.  But the point is that we have skew--rarely do we get "up up" or "down down", the upper right and lower left corners, respectively. 

The main point here is that for reasons inexplicable to Corrections, a "down" tick is more likely to be met by an "up" tick than a noisy process would predict.  We posit this warrants further analysis.  Suggestions as to causes are welcome.

Update: Upon further reflection, Corrections suggests this is likely due to the absence of a unit root with noise.  That is, every movement we see is one of two types.  The first is a "real" movement.  The second is a "noisy" movement.  Noisy movements are transitory and likely to disappear.  Real movements are permanent, in expectation (letting opinions be a random walk, for example).  Any movement due to noise will likely go away next period--up noise will be met with down, and down will be met with up.  This explanation doesn't completely satisfy Corrections, but it seems relevant. 

A Woman. A Prostitute. A Slave.

New York Times article "A Woman. A Prostitute. A Slave." (November 27th, 2010)states that, when it comes to ending forced prostitution "There are no silver bullets, but the critical step is for the police and prosecutors to focus more on customers (to reduce demand) and, above all, on pimps."Corrections has a silver bullet: legalize prostitution. Essentially reiterating an earlier point ("Enabling prostitution" from September 3rd, 2010), it seems rather obvious that forced prostitution is an inferior input into prostitution services. Presumably, upon the legalization of prostitution, willing prostitute supply will shift out dramatically more than forced prostitutes.  This will cause forced prostitute quantity to shift down. We depict the silver bullet to severely decrease forced prostitution in the United States graphically below (click to enlarge).

The responsibility for the larger amount of unwilling prostitutes is on those that oppose legalized prostitution.