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Another Red vs. Blue Post: Does Blueness Cause High Income?

Earlier I showed that, on balance, the Blue states (Gore) subsidize the Red states (Bush). For every dollar that a Red state pays in taxes, they get back an average of $1.12; on the other had, for every dollar a Blue state pays in taxes, they get back an average of only $.87. That’s a -13% rate of return! And Bush said that the 2% rate of return on Social Security is bad! (See the postscript). Observing this disparity, I said this in passing:

“Factually, this [subsidy of Red states by Blue ones] doesn’t bother me. The Blue states are generally wealthier than the Red states, and this is a natural consequence of progressive taxes.”

But this leads naturally to an interesting question: Does liberalism cause higher income? Or does high income cause people to be more liberal? Or is there some third variable–education is a natural candidate–that causes both higher income and more liberal attitudes?

First, the facts: raw income-by-state data are available here, and population data are here. You can see them conveniently combined into one table here. Here are the highlights:


# States
(Includes
D.C.)
Total Income Total Population Average Median Household Income
Red 30 $5,628,131,171,397 140,626,203 $40,021.92
Blue 21 $6,501,454,021,776 140,795,703 $46,176.51
National 51 $12,129,585,193,173 281,421,906 $43,101.07


Clearly, while the population of the Blue states roughly equals that of the Red states, the Blue states earn nearly $900 billion (7% of GDP) more than the Red states. This means that because the tax system, even after factoring in all possible deductions and shelters, is moderately progressive, the Blue/Democratic states pay no less than 7% more of the nation’s tax bill than do Red/Republican states.

What’s the point of all this? In a future post, I’ll make some grand generalizations about progressive societies, the Dark Ages, and the connections between liberalism and wealth creation. I may even make the case that liberalism does in fact cause wealth. In the meantime, I offer this you this quip to use when debating Republicans who complain about the dire need for more tax cuts: It’s our money, we can promote the common weal by giving it away via a progressive tax system if we want to. If you don’t like it, lower the average Blue state tax bill by $3,000 and raise the average Red state tax bill by $3,000. I think that’s a great answer to some moron saying “move to Cuba”.

AB

P.S. An exact Bush quote, from an October 2000 debate between Bush and Gore: “I want to get a better rate of return for your own money than the paltry 2 percent that the current Social Security trust gets today.” In that debate, Bush made the same point in slightly varying ways a number of times (Entire transcript here).

P.P.S. Note to math geeks: yes, I used median income as the average, because that’s what I found easiest on the census.gov page. In general, the median of the income distribution is below the average, so take this as a back, or perhaps two sides, of the napkin post. “Average Median Household Income” is computed as SUM(median incomes*populations)/SUM(populations), separately for Red and Blue states.

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Ingenious Republicans

My last post made me think about how clever the Republicans are. That 5% tax rate on dividend and capital gains income for lower income families is tactically brilliant. First, it makes a great sound byte:

Intrepid Reporter: Senator X, isn’t the new tax bill you just voted for a big give away to the wealthy?

Senator X: Not at all, my young friend. In fact, while we did cut the rate for the wealthy to 15%, we cut the rate on poor and middle income families down to 5%.Thats one-third as much.

Intrepid Reporter: Isn’t that essentially meaningless, given that only a handful of poor and middle income familes earn any income at all from dividends and capital gains. Virtually all of their disposable income is spent on day care, the mortgage, health care, maybe college savings. How many families with children making $41k have, outside of retirement accounts, more than $1,000 in stocks, Senator?

Intrepid Reporter: Oh, neat. I’ll write that up.

Second, it’s close to free: since the large majority of the people to whom the 5% rate will apply don’t have any dividend or stock income, the actual cost of this 5% provision is probably quite low (the costly part is lowering the rate on the wealthy from 35% to 15%). Third, insofar as the 5% rate does in fact apply to some people, who are they? Seniors! What’s so special about seniors? Well, of course we love each and every one of them. But in politics, what they are really known for is voting in large numbers. It’s a trifecta!

AB

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Clarification

In reference to my posts here and then here, a few people emailed to make the point that seniors with income of $41,000 could very plausibly have dividend and capital gains income totaling $1,000 per year. I comletely agree. However, the numbers in the right panel of the NYT’s figure, titled “Married, two children under 17”, are not relevant for seniors.

For seniors, the more relevant number is the $211 in the middle panel. This total savings of $211 is very close to just the savings due to reducing the tax rate on $1,000 of dividend and capital gains income from 28% to 5%! What does that mean? Well without the $1,000 assumption, Deloitte and Touche–and thus the NYT–would have had to report a benefit of roughly zero for the “Single, no children” category. (If the stock income tax rate for this bracket is only being cut from 28% to 15%, then the savings for singles without stock income would be $81).

AB

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I’m a Little Worried…

…about Kevin Drum, aka CalPundit, who seems uncharacteristically out of sorts today. What’s bringing him down? A laundry list of things gone bad, and he doesn’t even mention “massive deficits as far as the eye can see” or inane new abortion restrictions. Things would probably not seem so grim to him if there were a chance of the Democrats recapturing the House (no way), the Senate (a longshot), or the White House (?).

Still, it’s important to keep in mind that there are still 18 month before the election, and that in 1991 with 18 months until E-day, Bush the Elder looked invincible. There was even a hilarious Saturday Night Live skit from 1991 that featured the Democratic contenders each trying to get the other to accept the nomination (and the presumed crushing that was to ensue). Weren’t the Democratic candidates referred to as “The Seven Dwarves” or something like that? I vaguely recall that Clinton was polling in the low single digits in the spring of 1991 as well, and we know how that turned out. I guess my point is that anything can happen, possibly even the Democrats winning control of one of the elected branches of government in 2004.

AB

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How Silly is the Times?

In my last post, I mentioned that the NYT story has a graphic showing the savings for various income leves, incuding for a family making $41,000 in household income per year. The tax savings in that graphic assumed that the $41,000 in income family had $500/year each in dividend and capital gain income–an assumption I called “patently absurd”. Let’s see the absurdity in action. Remember that we are talking only about stocks held outside of retirement accounts. What does it take to make $500 in dividend income?

Consider Coca-Cola, a company famous for it’s dividend yield (“The Motley Fool” calls it “The National Bank of Coke”). Coke is paying out $.88/share in dividends this year, meaning you need to own 568 shares of Coke (KO) to get $500 in dividends. At the current price of $37/share, that’s $21,022 worth of stock in Coke held outside of retirement accounts. How many families making $41,000 do you know with that level of stock holdings. Some, to be sure, but it’s very unusual.

What does it take to make $500 per year in capital gains? Let’s assume the market appreciates at 10%/year (you may have heard that the historical rate of return on the S&P and Nasdaq are around 11%, which they are, but thats including dividends, so let’s say 10%). To make $500/year in capital gains, a family must on average year in and year out sell a bit over $5,000 worth of stock. Does that sound like anyone in that income range that you know?

AB

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More Wall Street Journal (and the NYT)

As it turns out if you want actual information, non-distorted even, about the likely-to-pass tax cut proposal, you have to go to the Wall Street Journal. All of the following are on Page 1, above the fold:

  • Bush’s Tax Cut: Victory–at a Cost
  • Bill marked by gimmicks marches past glitches, toward passage
  • How a $350 billion price tag could balloon as high as $810 billion
  • Much of what bill gives will be taken by strapped states, cities
  • Meanwhile, rising deficits force Congress to move toward raising U.S. debt ceiling
  • Sunset provisions overshadow dividend tax cut

You wouldn’t get all this from, for instance, the NYT. There, if you go to the national section you can at least find one story with this subheading: “A hard look at various elements of the $318 billion tax bill shows a plan that could lose $800 billion in tax revenues over 10 years.” But continuing with it’s slanted coverage, consider this graphic (click to enlarge):

Click to Enlarge

What’s wrong with this? I looked at it and I thought, “Hey, at least this works out ok for middle income families with income around $41,000, particularly if they have kids”. Then I thought, “But of course the marriage credits have a two year sunset”, and then I thought “Hey, what’s this about ‘Assumes’ and ‘capital gains of:’ and ‘dividend income of:’ and then putting in $500 for each.”

That’s patently absurd. Families making $41,000 per year do not–outside of tax-sheltered retirement accounts–have remotely near this amount of capital gains and dividend income. If the NYT wants to make stuff up (or hire Deloitte and Touche to do so), why not just assume they get all of their income from stocks? How does this fiction affect the numbers? Well there’s $1000 of fictional stock-based income that will be taxed at 15% instead of 28%, which means the savings for the $41,000 family are overstated by $130–an 11% over statement of the benefit. Similarly, though I’m less certain on this point, $30,000 per year in stock income for families in the $530,000k and over bracket seems on the low side. So this assumption understates the top-end benefits of this tax plan. One more thing: where’s the row for “Annual Household Income of $18,000”?

AB

UPDATE: The NYT assumption may be more biased than I thought. From the NRO: “Lower-bracket taxpayers will pay a 5 percent rate [on capital gains and dividend income] for the 2003-2007 period and zero percent in 2008”. This mean that part of the savings come from the fictional $1000 in stock income being taxed at 5% instead of 28%, meaning the fake savings would be $230 (tax on $1000 is $50 instead of $280) instead of $130, if the NYT used the new 5% rate. 5%, or 50%, it doesn’t matter what the rate is, since the dividend income for that bracket is way, way, below $1000. Based on a CNN story that I can’t find anymore, only 28% of filers indicated some dividend income and 63% of those made more than $100k per year in income.

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Thanks to MB (of Wampum)

For coming up with the It’s Still the Economy Team Blog idea. Thursday, in Salon, Joe Conason had this to say:

An excellent blog aptly named “It’s Still the Economy, Stupid” provides graphic illustrations of how the GOP “jobs” tax cut will be maldistributed — and the record number of jobs Bush has lost so far.

I believe the first graphic (“maldistributed”) he refers to is by yours truly, here (and here); the second one Conason cites (“jobs Bush has lost so far”) is here, by MB.

AB

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Dammit

Blogger is really doing a number on my hit count. Even on my T1 line at work, over the last three days, my odds of successfully opening my blog are around 33%. Same goes for trying to open Atrios. Maybe it’s the Amazon links? That last part was a joke, but I commented them out and now it seems to be working much better.

AB

UPDATE: From status.blogger.com:

Thursday, May 22, 2003

BlogSpot has been especially sluggish recently and we are working hard to improve the situation. We sincerely apologize that the problem has taken longer to resolve than expected and for the frustration of having poor performance from the servers.

posted by Jason Goldman | 6:41 PM

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Teasers on the Front Page of [even the conservative] Wall Street Journal

  • P.1: Congress Nears Deal to Cut Taxes by $350 Billion: In Bush Victory, Accord Reduces Rates on Dividends; Top-Bracket Relief Survives
  • P. A2: Congress is at risk of passing the Great Tax Shelter Act
  • P. A4: Bush is losing on the tax issue with Americans
  • P. C1: The bill may let some rich investers avoid almost all levies

Here’s a nice highlight from the A2 story:

“…a rich investor might, for instance, borrow money and deduct interest payments…then use the money to buy shares of stock on which he would earn a tax-free dividend paid from profits that have never been taxed. Bottom line: The profits are never taxed, not even once, and the economy gets no new capital or savings because the investor borrows the money that he used to buy the shares.”

From the WSJ/NBC poll on A4, Bush’s overall approval is at 62%; 64% think there are better ways than a tax cut to increase economic growth (7% unsure); by a 55-36 margin, money to help pay for health care beats out tax cuts; and 53% said the 2001 Bush Tax Cut had no real effect on U.S. economic performance, with 15% saying they hurt and 25% saying they helped. Also, Lieberman, Kerry, and Gephart are all 20+% behind Bush in 2004 election polls, though a generic Democrat is only behind 47% to 32%.

From the C1 story:

“I guarantee it produces very, very low [tax] rates”, possibly even zero says Ronald Pearlman, a tax-law professor at Georgetown.

As Warren Buffet points out, the government can’t create a free lunch. Since spending, including discretionary spending, is increasing under Republican Control of the White House, the House, and the Senate, if someone pays less, then someone else has to pay more. We know who will pay less. Guess who will pay more?

AB

P.S. As these stories make clear, there is another reason that the cost of tax cut will be over $350b. I’m guessing that the costs of cutting the dividend tax to 15% were computed as (35%-15%)*($Dividend Income), while totally ignoring the substitution effect: people with the means to do so will shift money in ways to minimize their tax bills, increasing the cost of the tax cut.

X-Posted at It’s Still the Economy.

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Crazy Headlines

No, it’s not a bit from Jay Leno, it’s today’s NYT: “$318 Billion Deal Is Set in Congress for Cutting Taxes“. From the story [emphases mine]:

  • The measure would reduce the tax rate on capital gains and dividends to 15 percent for most taxpayers for five years, and then reinstate the higher existing rates in 2008. Republicans have said they hope to extend the tax cut before it expires.
  • Once it was clear that Mr. Voinovich was a swing vote on the bill, he was invited into the meeting with the vice president and asked pointedly what it would take to get his vote. The senator’s spokesman, Scott Milburn, said Mr. Voinovich told the negotiators that he would support the bill only if its final cost was no more than $350 billion over 10 years, including the aid to states and other tax credits.
  • Mr. Thomas had until recently bitterly criticized such sunset proposals as gimmicky, and he had also said he was adamantly opposed to assistance to state governments who, he said, had caused their own financial problems. [AB note: I agree with Thomas on that last point]
  • “In the long run, the bill will not cost $350 billion or $550 billion, but it will really cost a trillion dollars or more,” said Representative Charles B. Rangel of New York, the ranking Democrat on the Ways and Means Committee. “And all of it is borrowed money which increases the national debt.”
  • Mr. Grassley, among the most genial members of Congress, has said all year that he was not as concerned about the particular aspects of tax legislation this year as he was over finding a package that could get 50 votes.

Now, due respect to the reporters, David Rosenbaum and David Firestone, who write the story, not the headline. But for anyone at the Times to title this story with the phrase “$318 Billion”, when every paragraph implicitly or explicitly says that the true cost is way above that? Just because the reporters don’t write the headline shouldn’t mean that Karl Rove gets to.

And what the hell kind of logic is Grassley applying? The details don’t matter? If it’s a freaking stimulus, then nothing but the details matter. Here are some details Grassley could think about: Is it in fact stimulative, Chuck? What will massive deficits do to future tax rates? What happens when the Baby Boomers retire? Will debt service crowd out future investment? F it, who cares. Will it get 50 votes? That’s what is important. Thank God Grassley is so damn genial.

There appear to be some progressive elements in the package, though the story neither says how they got there nor gives much detail. The child credit–largely progressive because it’s a lump sum–has a two year sunset, though:

The package would also put into effect this year lower tax rates for middle- and upper-income taxpayers that were not scheduled to become effective until 2006. For the next two years, it would give a tax break to married couples, and increase the tax credit for children to $1,000 per child from $600 for all but the wealthiest families….Beginning in about six weeks, less money would be withheld from workers’ paychecks to reflect the lower tax rates, and checks worth $400 per child would be mailed to 25 million families.

I went to CNN for more details. I didn’t find any new details on the plan there, but I did get a chuckle:

“If they stay within the 350, I’m fine,” Voinovich said. “I appreciate the fact that they’ve been trying to honor my concerns and make me an honest man.”

I’m going with Matt Yglesias’ assessment on Voinovich.

In another post, Yglesias takes exception to the NYT’s assessment that this is a “substantial political victory” for Bush, contending instead that it’s a “total surrender to Senator Voinovich”. I disagree. Come next year, Bush can either say “thankfully we were able to push this plan through and enact some dividend and capital gains tax cuts” if the economy is strong, or he can say “if we had been able to pass my larger tax cut, then the economy would be better right now.” And who will refute that? The New York Times? Don’t bet your lunch money.

AB

P.S. Matt’s got another instance of misleading-at-best phrasing from today’s NYT. Much more of this and I’ll start reminiscing about the good old Jayson Blair days.

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