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

Where are the Household Entrepreneurs?

Glancing through the CBO survey that only checked one side of the ledger, and therefore made Greg Mankiw happy, I came across the data on Corporate Taxes paid, by Quintile of Income.

Now, there has been a groundswell of declarations that people aren’t “leaving the job market”; instead, they are supposedly being “entrepreneurs,” starting their own businesses voluntarily (as opposed to because firms won’t contract with an individual), and reaping the benefits of the ownership society. This was the alleged basis for preferring the smaller, more subject to “population control” changes household survey to the payroll survey when measuring unemployment. (See here for a sample discussion.)

As noted in the sample discussion, the household survey doesn’t jibe with Social Security payments. So we are left with the possibility that the income of those entrepreneurs is being maintained at their corporate level, for some reason.*

Which should mean that Corporate Tax payments, as a percentage of all corporate tax payments, would have also risen among the “new entrepreneurs.”

Source: CBO, Table 1B. As usual, select the graphic to enlarge it.

It doesn’t look that way. I can’t find a single level of earnings that isn’t down at least 25% over the past ten years—and that’s the lowest quintile of earnings, not exactly the type of people you hear about being “success stories.”

So if you really think there are a lot of new S-corps out there, it appears that they’re either (1) in the group averaging more than $231,300 a year in income (see Table 1A), or (2) so poor that their tax bills are falling behind those paid by everyone else, and they’re clearly being irrational having a corporation in the first place.

Unless I’m missing something. If so, what?

*Since the highest marginal tax rate for individuals equals the corporate tax rate, that reason (especially for them levels, most of whom would not pay a marginal rate of 35%) is unlikely to be tax-related, except possibly as a matter of timing payments, which would not significantly alter a long-term trend.

Tags: , , Comments (0) | |

Taxing the Upper-Middle Class: Is That A Small Violin I Hear Playing?

by Tom Bozzo

In BusinessWeek, Jane Sasseen’s “Taxing the ‘Not-So-Rich’ Rich” tries to make me feel, uh, well, here’s the lede:

By any measure, Dr. Howard Hammer and his wife, Hope, have a comfortable life. Hammer, 40, has built a thriving practice as an ear, nose, and throat specialist, while Hope, 39, has switched to part-time work as a real estate lawyer after years at a big firm in order to spend more time with [the kids]. Home is a four-bedroom house in the Philadelphia suburbs, and between them, they bring in over $300,000 a year. “We can’t complain,” he says. “We’re certainly not struggling.”

But are they wealthy? That’s far more debatable…

Granted, income is a flow and wealth is a stock. There’s nothing much beyond self-control that would prevent a family with a 97th-percentile income a la the Hammers from spending drunken sailors under the table (if perhaps in ways the drunken sailors would find dull), seeing as the modern economy’s undeniable talent is providing an array of goods and services capable of relieving anyone of their money for arbitrary values of “their money.”

Still, a regularity of the income-and-wealth data is that households with $300,000/year incomes also tend to be in high percentiles of the wealth distribution. In the Fed’s 2004 Survey of Consumer Finances, for example, households in the 75th-90th percentile range for the wealth distribution had a median income of $77,000 (in 2004 dollars) and a mean income of $87,800. So there’s some skew to the income distribution for people in that wealth fractile, but you can conclude that there aren’t too many people making $300,000/year who aren’t also in the top 10% of the wealth distribution. At least, they’re for the most part rapidly on the way there.

And, sure enough, most people would probably be glad to have the financial stresses of the $300,000/year set:

Ever-rising prices for gas, health insurance, and other expenses are hitting hard, as are the $3,000-a-month mortgage and the $2,000 he still pays monthly to whittle down his $160,000 medical school debt. A six-year residency gave Hammer a delayed start saving for retirement, so he worries if he’s stashing enough in his 401(k). By the time the couple contributes to the children’s college fund, there’s little extra at the end of the month.

Yes, that’s the horror of only having a little bit to save after socking away money for two of the main savings motives. If they actually had to get to the point of curtailing their other savings, I’m quite sure that they could sharpen their pencils before their credit cards got maxed out.

Now you might recall that the upper-middle and upper classes did relatively well in that long national nightmare of peace and prosperity known as the Clinton (I) years. However, Dr. Hammer would have us know that he’s not really a Republican but, he tells BW:

“I don’t mind paying my fair share, but people act like they’re just talking about Bill Gates,” he says. “We would definitely feel a hit if our taxes went up.” Although a year ago he would not have considered voting Republican in November, now he’s not so sure: “Do you vote your heart, or do you vote your wallet?”

This looks like rather narrow pocketbook-voting insofar as Republican policies haven’t exactly helped with stuff like education, transportation, and health insurance prices and costs. In a longer view the kids might be less than thankful for the taxes deferred to the next generation. Perhaps Dr. Hammer is persuadable.

The BW piece seems to predict a major line of attack against Obama in the fall, namely that he’s planning the biggest middle-class tax increase EVER. After all, a little rebranding (“death tax”) plus relentless marketing made a popular cause of relieving the super-rich of a tax burden nearly nobody is fortunate enough to bear, and if you’re a one-trick pony…

But many also live in high-cost areas with expenses to match — and feel burned by talk of “taxing the rich” that doesn’t recognize that $250,000 stretches a lot further in the South or the Midwest than in Manhattan or Silicon Valley. “There is a huge difference between what politicians define as rich and what many Americans would call middle class,” says Patrick Anderson, CEO of the Anderson Economic Group and co-editor of The State Economic Handbook.

The soaring deficit, along with the fact that the Bush tax cuts expire at the end of 2010, provide much of the impetus for the coming fight over high-end taxes. If Washington doesn’t act, tax rates on income, capital gains, dividends, and other areas will return to the higher rates in effect before the cuts were enacted in 2001 and 2003. Senator John McCain (R-Ariz.)… has said he would extend the cuts for everyone, while Obama says he’ll maintain them for all but the wealthiest. If Obama wins, some taxes could go up as soon as 2009.

It falls to Austan Goolsbee to remind everyone that you can get “many” by multiplying small fractions and the population of the United States, and besides the far upper tail of the income distribution is the only group that’s systematically done well under Bushonomics:

Austan Goolsbee, Obama’s top economic advisor, points out that only a relatively small number of high-end earners would be tapped, while the majority of Americans would see their taxes fall or remain the same. “Income growth in that group has been extremely rapid, while it’s been stagnant for everyone else,” says Goolsbee. “It’s hard to argue they face the same struggle to get by.”

No kidding. And the sob stories may even get a little much for Ms. Sasseen, who closes thusly:

“People think the President can just extend the cuts, but he can’t,” says Stanford Group’s [Anne] Mathias. All of which explains why Mathias has been warning her clients that the next couple of years “will be a very bad time to be rich.” Whatever, precisely, that means.

Tags: , , , Comments (0) | |

Dep’t of Who’d’a Thunk: Interests of Social Security Retirees and High-Bracket Taxpayers Align?

Both would benefit from a higher inflation index than CPI. AEI hack (and former Social Security Administration commissioner!) Andrew Biggs redefines bracket creep (*) for the W$J op-ed page:

Tax revenues would skyrocket if the tax cuts expire, due to “bracket creep.” Average incomes are higher today than in the 1990s, but income-tax brackets aren’t adjusted for the growth of earnings. As a result, Americans will shift into higher tax brackets and pay a greater share of their incomes in taxes. [emphasis added]

Via Greg Mankiw, who for inscrutable reasons calls this “reporting.”

Of course, tax brackets (with the notable exception of those of the Alternative Minimum Tax) now are indexed for growth in prices, at least to the extent that’s measured by CPI. Really, this is part of a broader attack on progressive taxation, as you can see from an earlier effort along these lines by AEI über-hack Kevin Hassett of Dow 36,000 fame. Though I suppose there may be some positive side effects for society if the AEI’s paymasters had to allow enough trickle-down to keep average wage growth ahead of CPI.

Tags: , Comments (0) | |

Capital Gains and Dividend Taxes

We keep hearing from the conservatives-libertarian that we need lower taxes on capital gains and dividends to encourage capital spending or investments. But when I look at the record of the impact of lower taxes on capital on investment I am hard pressed to see the benefits such lower taxes are suppose to deliver.

The peak was under Carter just before Reagan cut the capital gains and dividend taxes.
Clinton raises them and Bush cut them again. it sure looks like the cut in taxes lead to lower investments, not the higher investment the tax cuts were suppose to generate.

Yes, the data is nominal data. But tax rates work on decisions made on nominal dollars so looking at their impact on nominal dollars is the correct thing to do.

Tags: , Comments (0) | |