Relevant and even prescient commentary on news, politics and the economy.

Taxes and migration myths

Jared Bernstein writes on the same points on why people move to other states and taxes as Steve Roth and Linda Beale address in their posts today and gives us this evidence  (hat tip rjs):

  • Migration is not common.
  • The migration that’s occurring is much more likely to be driven by cheaper housing than by lower taxes.
  • Recent research shows income tax increases cause little or no interstate migration.
  • Low taxes can prevent a state from maintaining the kinds of high-quality public services that potential migrants value.
Also highlighted are the sources of several of the ‘sources’ of such claims demonstrated as bogus from media claims.  

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Guest post: Basics: How Overrepresented Are Rural and Low-Population States?

by Kenneth Thomas

Guest post: Basics: How Overrepresented Are Rural and Low-Population States?

We all kinda sorta know it: rural and small states are overrepresented in the Senate and, to a lesser extent, the Electoral College.This has deep roots in American history, of course: when the United States Constitution was drafted, small states demanded the Senate, with two votes for every state, to guarantee they would not be overwhelmed by the larger states politically. But today, when we have much greater population differences among states than in 1787, this takes on much more anti-democratic significance than it did then. Because each state has two Senators, political changes favoring the middle class are much harder to achieve than if everyone in the country were equally represented, in a mathematical sense, in Congress. Moreover, with the existence of the filibuster (recently challenged in court by Common Cause), the effect of this overrepresentation is substantially magnified. But how big is the effect after the 2010 Census?

Under the Senate’s filibuster rules, 41 Senators can block debate on Senate bills and nomination confirmations. So the first question is what percentage of the 50 states’ population do the 21 smallest states have. The 2010 Census showed the states to have 308.1 million (all quoted figures are subject to slight rounding error) population, with the smallest 21, from Wyoming’s 564,000 to Iowa’s 3 million, having a total of 34.8 million, or just 11.3% of the 50-state population. In theory, Senators representing those states could mount a successful filibuster. Of course, this is unrealistic, since some small states are heavily Democratic, such as Vermont, Rhode Island, Hawaii, and Delaware. Even Montana currently has two Democratic Senators.

Another way to look at the filibuster is to ask what percentage of the 50-state population is represented by the 41 Republican Senators from the least populous states. The answer takes the actual population of states with any Republican Senators, except Texas (Cornyn and Hutchison), Florida (Rubio), Illinois (Kirk), Pennsylvania (Toomey), and Ohio (Portman). The population of the states represented by the other 41 Republican Senators is 104.7 million, or 34.0% of the population of the 50 states. Thus, states with just a third of the country’s population can block legislation or Presidential nominations. With the recent skyrocketing use of the filibuster in the Senate, this is profoundly undemocratic.

Turning to the Electoral College, we can again see the effect of having a minimum of two Senators regardless of population, which means that each state (and the District of Columbia) has a minimum of three electors in the Electoral College. For example, the Real Clear Politics Electoral College map lists just 11 states and the District of Columbia as likely Obama, whereas 17 states are likely Romney. Even though the likely Obama states have more electoral votes than the likely Romney states (161 to 131), 6 of the Democratic states have double-digit electoral votes whereas only two of the Republican states do, underlining how Romney benefits from the overrepresentation of rural states.

Finally, remembering the 2000 election, where President Bush was awarded more electoral votes despite losing the popular vote nationally, we can ask what the minimum percentage of population for the 50 states plus DC is needed to win the Electoral College. To answer this question, I tallied from the bottom to see how many states were required to top 270 electoral votes. According to Wikipedia (as I tell my students, only a potentially reliable source for non-controversial information, like this), you have to have New Jersey to top 270, but it actually takes you to 282. So I subtracted three Democratic states (DE, VT, and DC) with 3 electoral votes as well as Montana’s 3 electoral votes (since it’s the most competitive of the remaining states with 3 EVs) to get down to 270. The 37 remaining states have only 45% of the nation’s population eligible to elect the President. Yet theoretically they could do just that.

This post has merely scratched the surface of the deep historical and constitutional questions that have led to Wyoming’s 564,000 people having as many Senators as California’s 37.7 million. The rural bias of the Senate and Electoral College make major political changes difficult to achieve, yet it is even more difficult to imagine that they could possibly be fundamentally altered, especially the Senate. Still, it is worth reflecting on these imbalances in order to understand the shortcomings that exist in American democracy.

crossposted with Middle Class Political Economist

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Health Care Thoughts: Small Business, Obamacare, Tax Credits

by Tom aka Rusty Rustbelt

Health Care Thoughts: Small Business, Obamacare, Tax Credits

I am still struggling to get my arms around whether or not small businesses will dump employees into health exchanges rather than continue health care coverage. And still looking at related issues.
So what to make of the AP tax credit story today?
There are arguments about design, about complexity, about the tilt toward low wage employers, but whatever arguments we like or dislike, the program isn’t working very well.
CPAs may well be baffled on how to advise clients, and may find themselves doing a lot of calculations that are for nought.
Any thoughts welcome. Reference materials follow:
AP Story:
IRS Form:
IRS Form Instructions:

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One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009

by Linda Beale

One in 189 of those with $200,000 or more in AGI paid no federal taxes in 2009

[edited 5/30 to correct “one in four” goof]

The IRS recently released another “statistics of income” report. This one has news that should make most ordinary Americans think twice about the GOP agenda of reducing taxes for the rich while cutting back on all kinds of programs that serve ordinary Americans–the fact that a large percentage of the upper crust–one out of every 189 Americans with $200,000 or more in income –pay no federal income taxes whatsoever. See Rubin, IRS Finds One in 189 High Earners Paid No U.S. Taxes in 2009, (May 29, 2012).

How does someone with $200,000 or more in income pay no taxes, when ordinary folk with jobs who make $50,000 to $75,000 pay 15% to 25% of their income in taxes?

  • As I’ve often discussed here (see items under charitable contribution deduction), rich folk can easily afford to give away more to charity and they get a tax bonus that is much more than that available to poorer folk when they do so. They get an especially big break if what they give away is appreciated stock that they bought a while ago–and rich folks own most of these financial assets, so they are the ones that get almost exclusive enjoyment of this lucrative loophole: they get to deduct the full value of the stock they donate, without having ever paid taxes on the appreciation. That’s one of the boondoggles in the Code that Congress can and should get rid of, no matter what else it does about taxes.
  • Another way rich folk pay less in taxes is by ensuring that the income they earn is of a type that isn’t subject to tax. Big CEOs generally have rich pension plans and other forms of deferred tax compensation that facilitate lowering their tax bills. Rich folk are the buyers of municipal bonds, which again enjoy a specific tax break in section 103 of the Code that excludes the interest income from the owners’ tax returns. This is supposed to help municipalities, since the tax break gives the wealthy an incentive to buy the bonds even though they pay lower rates, since all the interest is tax free. But it is a costly break that provides an advantage only for the rich. Wouldn’t it be better to eliminate it and tax wealthy people on all of their interest income at ordinary income rates? Maybe the tax money could also fund programs for important municipal projects–like intracity rail transportation in Detroit, a much needed idea whose time has come…..
  • A third way that rich people avoid taxes is by having so many deductions–high-end medical “equipment” (like swimming pools for arthritic patients), lots of interest on mortgages on high-end homes, and other deductions of special value to those who would otherwise pay tax at a higher rate.

As the Rubin article notes, the IRS announced that for 2009 there were 10,080 households with “adjusted gross income” of $200,000 or more who paid no US or foreign income taxes. Adjusted gross income is not economic income–AGI does not reflect items that are excluded from the calculation of income for tax purposes and is reduced by certain “above the line” deductions that are especially beneficial to the wealthy. “Using an expanded concept of income that includes some nontaxable items and looking only at U.S. income taxes, there were 35,061 households, or 0.88 percent, that paid nothing.” Id.

The Alternative Minimum Tax was initially enacted to deal with the general unfairness of having extraordinarily well-to-do people be able to avoid tax entirely. As it was modified over time, it came to function as a way to ensure that those who accumulate lots of different deductions nonetheless pay tax, by treating some of those deductions as unqualified preferences for AMT purposes. But the AMT has lost a lot of its punch as Congress has eviscerated its provisions, such as the limitation on foreign tax credits. This is one of the reasons that many progressives have supported two things–elimination of the preferential rate for capital gains (a type of income especially enjoyed by the ultra rich) and adoption of a new type of minimum tax on some high level of gross income (the Buffett Rule). This new information about the number of rich people who end up paying nothing in federal income taxes should result in more people telling Congress that it’s time to pass these two proposals.

crossposted with ataxingmatter

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Do Millionaires Vote With Their Feet?

Andrew Rosenthal points us to one of the most eye-poppingly specious arguments I’ve ever seen against high-earner taxes, from Scott Hodge at the Tax Foundation (my bold).

612,520 people renounced their New York State citizenship and moved to Florida between 2000 and 2010. They took with them nearly $20 billion in adjusted gross income, after adjusting for inflation. During the same period, 208,784 Pennsylvania residents renounced their state citizenship and moved to Florida, taking $8 billion in income with them. 

Many of these New York and Pennsylvania residents no doubt moved to Florida for the warm weather, but many more may have moved their because the state does not have an individual income tax, an estate tax, nor an inheritance tax.

“May have” is certainly a strong piece of evidence. It’s hard to argue with.

But let’s try.

Back when we were trying to pass a high-earner tax in Washington State a couple of years ago (with Bill Gates Senior as the lead spokesman and cheerleader; it failed dismally), I got curious to know whether millionaires do actually congregate in low-tax states.

It turns out they don’t:

The correlation is -0.00003. Notice in particular the giant gaping hole in the upper left corner, where the millionaires should all be congregating. (Florida’s over there by the 5% mark.)

Of the 12 states with the highest concentration of millionaires, 10 (83%) have above- or at-trend (in this case, median) income tax rates.

This Hodge piece got me curious again, so I plotted the raw number of millionaires (since this doesn’t account for population, it’s just for grins):

The correlation here is somewhat negative (lower tax rates, more millionaires), but still effectively nil: -.035. Florida and Texas do stand out, but so do New York and California. Who you gonna believe?

Here it is with the X-axis scale changed, so it’s easier to see the bulk of the states:

(I just noticed a screwup here: one of the MAs should be MD for Maryland.)

So the evidence suggests that Hodge’s fond notion is nothing more than that: something he wants to believe, which is utterly contradicted by the facts on the ground.

Rosenthal quotes Michael Bloomberg, who some might consider an authoritative source on this subject:

I can only tell you, among my friends, I’ve never heard one person say I’m going to move out of the city because of the taxes. Not one. Not in all the years I’ve lived here. You know, they can complain, ‘Ugh, I got my tax bill, it’s heavy.’ But my friends all want to live here.

The Scott Hodges of this world don’t seem to have read their Adam Smith, in particular the passage containing the “invisible hand” coinage of which they are so fond:

every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry… By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

How many of them do you think actually know what Smith was talking about in that passage?

Many thanks for the effective tax rate data to Eric de Place of Sightline Daily, who did the yeoman’s work of compiling it based on…get this…Tax Foundation data (XLS).

Millionaires percentage: Phoenix Affluent Marketing (PDF).

Cross-posted at Asymptosis.

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In God We Rust, All Others Pay Non-Voting Stock

We’re catching up on some DVR viewing. Tonight’s episode was Lewis Black’s In God We Rust, which was released on St. Patrick’s Day but taped back when people could still believe Michelle Bachmann was a contender for the 2012 Republican nomination. It was filmed not earlier—and probably not later—than 7 May 2011. Why do I need to specify the date? Because he discusses my favorite subject of recent times, the coming Facebook IPO. So what was the consensus a year ago about a Facebook IPO, as now immortalized in a Lewis Black routine? Paraphrasing:

Facebook is worth $50 billion dollars. Goldman Sachs tells us so. And if they can get into China, Goldman says they’re worth $200 billion

Which means, in the past year, the stock market’s best estimate of the value of Facebook doubled. In that time, the Dow, S&P500, and NASDAQ Composite Index are all basically flat.

Source: Yahoo! Finance

So the gains were all due to investor appetite, some of which may have been—what’s the word—irrational. So if you look at page 24 of today’s (Wednesday’s) FT, you’ll see a piece by “Telis Demos in New York that opens

Shares in Facebook fell below $30 for the first time yesterday, a 23 per cent fall on its $38 issue price, with options trading indicating that the stock’s extreme volatility was expected to continue.

So even now, the valuation of Facebook is more than 50% higher than it was a year ago. If this be failure, let’s have more “creative destruction.”

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Another US District Court finds no rational basis for DOMA treatment of same sex couples

by Linda Beale

Another US District Court finds no rational basis for DOMA treatment of same sex couples

In a case that will add weight to the likelihood that the Supreme Court will finally take a case to decide the constitutionality of the so-called “defense of marriage act” (DOMA), the U.S. district court for Northern California District concluded on May 24th that sections of DOMA and the internal revenue code that incorporate it (here section7702B(f), which excludes participants in same sex relationships from long-term care insurance coverage) violate the equal protection rights of same-sex couples and registered domestic partners and are therefore constitutionally invalid to the extent they exclude such state employees from enrollment in California’s insurance program. Dragovich v. United States, No. 4P10-cv-01565-CW (N.C. Cal 2012).

Because the Obama administration announced in 2011 that it had concluded that DOMA was unconstitutional and therefore it would no longer defend DOMA in court, the Bipartisan Legal Advisory Group of the United States House of Representatives (BLAG) argued in defense of the statute.

The judge concluded that BLAG failed to establish a rational relation of Section 3 of DOMA to a legitimate government interest and granted summary judgement regarding the plaintiffs’ claim for access to CalPERS long-term care insurance program.

Other cases are also wending their way up the appeals ladder.  (below the fold)

In California, a Ninth Circuit staff attorney employee proceeding for same-sex couple benefit coverage was decided in her favor by Chief Judge Kozcinski but the federal Office of Personnel Management ordered the insurer not to cover her. She took her case to court, winning in the US district court for Northern California in a decision by Judge Jeffrey White. The defendants appealed to the Ninth Circuit . See, e.g., Golinski v. Office of Personnel Management (N.D. Cal.)(order available on Lambda Legal); Karen Golinski Wins Health Care Benefits as Court Declares Defense of Marriage Act Unconstitutional, HuffingtonPost (Feb. 2012); the amicus brief by Eagle Forum opposing an initial en banc hearing (Ninth Circuit, Apr. 30, 2012).

In Boston, the First Circuit in April heard an appeal from two cases in which DOMA was also ruled unconstitutional by district court Judge Tauro. See Appeals Court Hears Arguments on Gay Marriage Law, New York Times (April 4, 2012). In one case, the judge concluded that DOMA compels states to discriminate–by denying funding if they don’t– against same sex couples who are permitted to marry under state law but whose marriage is not recognized for federal law purposes because of DOMA. The other case focussed on the issue of federal discrimination in the provision of federal benefits like Social Security, in contravention of the equal protection clause.

The fate of DOMA is likely ultimately to rest on the Supreme Court Justices and possibly on whether the Court applies “rational basis” or “heightened scrutiny” as the standard for consideration. Gender discrimination has ordinarily been thought to require more than a mere “rational basis” justification. Even the lower rational basis standard, however, should not be satisfied by DOMA: it is an arbitrary law put in place with the sole purpose of ensuring that the benefits of federal laws could not apply to one particular group of Americans–those who have formed same-sex couples. A purpose of discriminating among individuals based solely on their sexual orientation does not appear to be any kind of rational basis for a law.

I have always thought DOMA represented a regressive moment of legislative history and that it should be seen as violating the equal protection guarantee. Marriage is something clearly defined by law and not something inherently defined by some external authority. Hence, for a state to discriminate against its own citizens in denying them the benefits that accompany the legally sanctioned union is problematic. The arguments of the religious right to the contrary are unfounded–the state can sanction marriage between any two individuals and the churches can dictate whatever additional limitations they choose as necessary to the church’s religious doctrine. The rights of same sex couples to marry does nothing to hurt the rights of opposite sex couples or their marriages. People can avoid a church if they don’t agree with its doctrine, but they can’t so easily (in many cases not at all) avoid their state or nation. I hope that the Supreme Court, when it eventually takes one or another of these cases, reaches the correct decision to eliminate this example of blatant invidious discrimination .

crossposted with ataxingmatter

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Romney to Replace Obamacare with…Essentially Nothing

by Kenneth Thomas

Romney to Replace Obamacare with…Essentially Nothing

Tommy Christopher (via @rcooley123) at Mediaite has a good catch on Mitt Romney’s health care proposals, from an interview Romney gave to Mark Halperin of Time magazine. Asked what would happen to people with pre-existing conditions after he were to repeal Obamacare, Romney said:

If people have been continuously insured, and then they decide to change jobs or change locations, they should not be denied coverage if they go to a new place or have to get a new policy. So people continuously insured should be able to get new insurance.

As Christopher points out, people who have been continuously insured already have this right, and have since 1996, under Title 1 of HIPAA. As he puts it, Romney “is selling you something you already owned.” And lest you think maybe Romney just misspoke, you can see the very same words in his platform: “Prevent discrimination against individuals with pre-existing conditions who maintain continuous coverage.” So, on the critical question of pre-existing conditions, Romney is offering precisely nothing.

That is hardly the end of Romney’s useless ideas on health care. His platform says we should return control over health insurance to the states. In principle, this could be workable; after all, in Canada each province has its own health insurance plan. States are big enough entities to do this: if Prince Edward Island can have its own plan, so could Rhode Island. And there is diversity in the provincial plans: Quebec’s covers prescription medicine, while Ontario’s does not. But this only works because the federal government has strong conditions on what level of coverage the provinces can provide. Romney, on the other hand, says we should “Limit federal standards and requirements on both private insurance and Medicaid coverage.” This is a sure recipe for bad health insurance regulation at the state level.

Another plank in his health care platform is to “Empower individuals and small businesses to form purchasing pools.” This will not enable individuals or small businesses to have anywhere near as much bargaining power as the state insurance exchanges in the Affordable Care Act.
Romney also says we should turn Medicaid into a block grant, giving states more flexibility. As Aaron Carroll points out, states acquired a great deal of flexibility with Medicaid during the GW Bush Administration, but have not introduced any great innovations. Why Romney thinks that would change is anyone’s guess.
And of course, what would a Republican health care proposal be without the usual references to tort reform, “innovation grants to explore non-litigation alternatives to dispute resolution” (tort reform again), allowing insurance to be sold against state lines (which would weaken state’s ability to regulate; isn’t that where Romney said authority should be?) and getting rid of the tax deduction for employer-provided health care?

So, instead of the Affordable Care Act, Romney promises to give us what we already have on pre-existing conditions, plus junk to give insurance companies even more control over the health care market than ever.

Middle Class Political Economist

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