Saturday, April 17, 2010

Donald Douglas Doesn't Know What a Tax Cut Is

As part of my quest to always be right, I make a point of reading people I disagree with, to see if maybe I've missed something.  And one of my favorite sources for this is the unesteemable Donald Douglas of the American Power blog, who never had an original thought he didn't get from somebody else.  And while it's pointless to ever read Donald's material for his own thoughts (as you won't find any), I find he's a good repository of cutting edge conservative thought (at least as far as that goes).

And so I happened to read his angry post President Obama's Lying About Taxes because Obama claims to have cut taxes for "95% of working Americans."  And I was interested in this, as I had heard this claim repeatedly.  But then I read Donald's basis for his debunking (which is itself a collection of other people's thoughts), and saw that I was right back where I started.

Apparently, a tax cut isn't a tax cut unless it's a cut in tax rates which goes towards rich people.  Anything else is just a "give away," and if middle-class people pay less in taxes, their taxes still weren't cut unless Donald says they were.  And sure, if the marginal tax rate for most Americans goes down, it's still a lie, because...well because...well because the WSJ told Donald that it was a lie; and that's good enough for him. 

Oddly, much of Donald's evidence comes from a WSJ article written in October 2008; many months before Obama was even president.  Donald also cites an American Spectator piece from January 7, 2009, a PolitiFact article that says Obama's telling the truth, and a Heritage Foundation piece saying that Obama will raise taxes on the rich; which was part of Obama's campaign platform.

Brilliant, Donald.  All those quotes and not one that proved your point.  Perhaps next time, Donald should look into Obama's actual tax policies.

Besides the Point

And after "debunking" Obama's claim by pointing to a ridiculously inaccurate post he had already written, Donald then moves on to items entirely unrelated to his subject; like the bogus claim of the IRS hiring "thousands" of employees to enforce health insurance mandates, bemoaning tax increases for the rich which the Bush Admin had set to expire, as well as hypothetical tax increases which might never happen.

And finally, we have Donald using other people's words to complain about Obama's dreaded deficits, without noting that the tax cuts Donald wants would only make them worse; just as they did when Bush tried that approach.  Nor were Bush's raging deficits mentioned at all.  Poor, confused Donald.  He spends two long blog posts quoting other people's words to show that Obama's lying, but fails to find any lies in what Obama said. 

And if you were wanting to learn if Obama's claim to have cut taxes for 95% of working Americans is a lie, you're just going to have to look elsewhere.  Donald just hasn't found the person to quote on that one yet.


Ace Bailey said...

It's interesting...when you cut taxes for the top 1-3%, it's called capitalism. When you cut taxes on everyone else, it's called socialism.

ex DLB said...

Came over to say thanks for the great post and for somewhat alleviating the shame of my FAIL at American PowerMad.

Unfortunately, I clicked on your stock market link and got lost in beer blogs.

Oh yeah, thanks Bio. Beautiful post.

Anonymous said...

Fabulous way of putting things Ace. I needed to read that this morning after my Fox News, WND reading, birther dad bombed my facebook wall with anti-Obama political rants. He's trying to reform me with the truth. Anyway, great post. I'm going to go watch a Daily Show rerun now.

Donald Douglas said...

Biobrain fail.

The ObamaCare legislation is packed with tax increases. Why don't you post the video of the stupid protester who claimed there were absolutley no tax increases? Go ahead, update your post. I'm sure Ex-DLB would love to see it. You've also conveniently left out the REASON taxes will have to go up, as noted by Samuelson: Out of control spending, not tax cuts. Tax cuts will stimulate the economy, but you left that part out as well.

And finally, Obama has not cut marginal tax rates. He's lying, just like I said.

Biobrain fail. Dishonest fail at that. But that's not new.

ex DLB said...

Already watched it, Don. A bunch of cherry picked tax increases that speed by so fast they can't be digested is hardly convincing. That's particularly so when it's being funded by Koch and Scaife.

It's a question of who do I trust more, Obama or a punk ass propagandist like you. There are things I disagree with Obama on, but you're a knee jerk smear merchant on every issue. Your cheap shot photoshops attest to that.

BTW, I noticed there was no link when you were spreading that BS about IRS hiring and govt hiring in general. No links when the facts come out of your backside?

Apologies to you, Bio. Feel free to delete this.

Donald Douglas said...

Ex-DLB: You talk tough when someone's got your back? What a pussy. Talk about not thinking for yourself, ROTFLMFAO!!

I dare Biobrain to update this post with the video. You can always stop it and fact check, loser. And the link for the IRS is Americans for Prosperity ... Google 'em. This is a debate you are losing, and badly. Obama hiked taxes in ObamaCare, and his trillion dollar legislation is bankrupting the country. And you have some m'f***ing nerve to claim victory. Bite me, prick. Don't challenge me if you can't walk the walk. Goddamned coward.

Doctor Biobrain said...

Donald - Yes, the healthcare reform has some tax increases in it, like the 10% excise tax on tanning salons. Have I claimed otherwise? No.

As for Obama cutting taxes, please look up the meaning of "tax cut" and get back with me. He didn't say he cut tax rates, he said he cut taxes for “95% of working Americans” and that claim is true. BTW, "marginal tax rate" refers to the amount of taxes paid divided by taxable income. So if someone gets an extra tax credit, that means their marginal tax rate went down. I didn’t make up these words. I just know how to use them.

And I agree that tax cuts stimulate the economy, due to the extra money people have to spend; which is in accordance with standard demand-side economics. That’s why Obama’s stimulus bill last year included over $288 billion in tax cuts; including the ones you’re attacking. But tax cuts for the rich are considered a fairly ineffective method for stimulating the economy and aren't worth the lost revenues.

Here’s a helpful guide which shows that every dollar we let rich people keep by making Bush’s tax cuts permanent would only give us 29 cents back to the economy. Yes, we get 29 cents benefit to the economy, but we LOSE a dollar in tax revenues. Tax Rebates, on the other hand, give us $1.26 benefit for every dollar we lose in tax revenues. And apparently, the best stimulus to the economy comes from Food Stamps, which give us $1.73 to the economy for every dollar we spend. And that’s because poor people will spend every dollar we give them, while rich people won’t.

And here’s a good link explaining why tax cuts are a lousy way of stimulating the economy. As he says, businesses won’t increase production if no one’s buying their products, so if you let businesses keep more of their money, they won’t spend it until the economy improves. So it’s better to give the money to people who will spend it, which will increase demand, and make businesses want to increase production.

So yes, Bush’s tax cuts DID stimulate the economy. But they cost us more than they gained, and played a significant part in the huge deficits we now face.

Oh, and if high deficits force us to hike taxes (as you claim), does this mean you now recant your expensive American Power foreign policies? Or does the $700 billion we already spent in Iraq and Afghanistan not count?

But in any case, you don’t get to attack Obama for hiking taxes that he hasn’t hiked. That’s just stupid. And since the CBO says that Obama’s healthcare reform will decrease the deficit, I think he’s helping fix the problem.

Doctor Biobrain said...

And Donald, this is a debate, not a schoolyard. I think the "pussy" and "coward" stuff is a bit much when we're not talking about physical confrontations. It doesn't take courage to type words on a keyboard.

On the other hand, I do kind of like your friskier side and am glad you've dropped the "I don't do name calling" stuff. I found that to be a bit tedious. But all the same, I think the stronger language could perhaps wait until maybe the 200th comment. I'm still imagining we might have a friendly debate here.

Doctor Biobrain said...

Oops, I just saw that my links didn't copy-and-paste like I thought they would.

Here's the Helpful Guide on the stimulating effects of various proposals.

Here's the Good Link explaining why tax cuts for the rich aren't effective at stimulating the economy.

I really wish Blogger made it easier to do that sort of thing in comments.

ex DLB said...

Don, I apologize for going over the top in my previous comment. As far as Bio having my back, you're right. He seems to understand the nuances of taxation and economics better than I do. Maybe better than you as well. I believe that is related to his profession. I am a baker. All I can go by is faith. Being the devout Christian that you are I presume you understand faith.

I particularly like the way Bio uses words to explain the ins and outs of this. Images from people's cube and the you tube clips do seem like nothing more than propaganda to me.

So, yes I guess I am a pussy because I trust his rationally presented opinion more than I trust your emotionally delivered one.

BTW, why is it OK to call me a pussy and a prick and a goddamned coward, but put the asterisks in for fuck?

repsac3 said...

AmNeo seems awful angry for a guy who believes he has facts on his side. (Not that he posts 'em, mind you... he just claims they're out there...)

All the unnecessary bad language and "tough talk" is just false bravado from a guy who knows he's wrong... ...again.

All the attack pieces he's been posting of late make him look pathetic and sad. (though it does seem to keep the Daves happy... They're practically the only ones still commenting regularly...)

Anger attack and endless negativity are poor excuses for a coherent vision.

The Original David said...

The OP was a nice piece of writing. Don doesn't have his facts straight, but when does he?

That said, there is some confusion here about taxes, rates and their consequences. The claim that Obama and the Dems have cut taxes is clearly true as you and others have documented. That he has not cut tax rates, and more importantly the marginal tax rates, is also generally true. The formula that Biobrain provides in his (10:21) post above is the formula for the average tax rate or the effective tax rate. In economics, the term "marginal" is used to refer to the next (or the last) unit. Thus, the marginal tax rate is the fraction of the next dollar of income owed in taxes. Generally, this is the rate of a payer's highest bracket. As most individuals use a third-party, a table or software to compute their taxes owed, the way that brackets are applied to arrive at the total owed is often hidden and therefore not well understood by many.

Economists are particularly concerned by marginal tax rates because they determine the level of (rational) incentive to earn or realize the next dollar of income. Especially in combination with assumed declining marginal utility to wealth, high marginal rates can decrease the incentive to produce/earn more. There is a good deal of empirical evidence to support the idea that individuals do behave at least somewhat rationally (in the economic sense) in response to such incentives.

This becomes more complex when one considers so-called "implicit marginal tax rates." When the govt provides subsidies or other transfers that phase out with rising income, the implicit marginal tax rate is a combination of the statutory marginal tax rate on income plus the effective cost of the foregone transfer. Perversely, because means-tested transfers and/or deductions are usually largest for those with low incomes, it is often the case that the highest implicit marginal rates apply to those with very low incomes. Thus, the relatively poor often face the greatest tax-based disincentives to increasing taxable income.

Also, these implicit marginal rates tend to be very "spiky" and uneven across the range of taxable income. They create disincentive hurdles. They don't have significant effects on the incentives for major changes, such as investing in a college education vs. dropping out of high school.

The recent health care insurance reform legislation does create a number of these implicit marginal tax rate incentive hurdles and they are concentrated towards the left tail of the income distribution. However, with some subsidies extending to families with household income approaching the national median, these rates are not an idle concern.

Though, the "Professor" has repeatedly demonstrated that he knows squat about economics, so I'm sure that's not what he meant. Obviously he was just repeating something that he heard or read third-hand that may have originated with an informed source.

If it's something that anyone is interested in learning more about, I'm sure that I could dredge up a link or two that would be accessible to a layman.


Doctor Biobrain said...

Wow, Dave. I thought *I* wrote a lot. And I see you are correct about the marginal tax rate. I got my definition from Wikipedia, but realize that I was dumb for ignoring the Δ in the formula. Damn, I knew that was too easy.

But all the same, I had the right formula for what I was thinking. I just didn't call it the right thing. And now that I know, I see that the marginal rate is fairly unimportant. I mean, it's not that important if my last dollar is taxed at 35% if it's only one extra dollar. The effective rate is far more important. Obama's tax rebates and other tax cuts made the effective tax rate for most people go down, and that's exactly what I was trying to say.

As for the "rational" response to one's marginal tax rate, while I understand how that CAN make a difference, I fail to see how it makes a real difference with our low tax rates. I mean, is someone REALLY going to forego extra income because their next dollar will be taxed at a rate 2% higher? I doubt it. Even an extra 10% increase on that next dollar is unlikely to make someone give up their extra income; and nobody's proposing such a tax hike. So marginal tax rates would only be of interest for academic purposes; not real world. But I'd be interested to see evidence to the contrary.

And I would definitely be interested in reading about the marginal tax rate hurdles that effect the left tail of the income distribution. And did you mean to say that the subsidies make it so these hurdles AREN'T an idle concern? Unless I misunderstood you, I think you wrote that backwards.

Oh, and have you ever considered writing this stuff in real words? I mean, it's nice to sound intelligent, I suppose, but it defeats the purpose if nobody understands what you're saying. But then again, perhaps that's your intent, I don't know.

Anyway, thanks for the correction. I hate sounding stupid when I'm trying to correct people, and I'm always happy to learn something new.

The Original David said...

Doc Bio, sorry if I sound a bit academic. More than half the time that's what I'm expected to sound like. It's not always easy to make the transition.

So briefly:

(1) Yes, for the purposes of understanding incentives it is the marginal rate that matters not the average rate.

(2) Implicit marginal rates are often *much* higher than the explicit marginal rates, especially for individuals with relatively low incomes. So you're right that changes in the highest explicit marginal from 31% to 35%, for example, probably do not have a significant effect. However, implicit marginal rates can exceed 80%, or even exceed 100% in some situations.

(3) The inclusion of means-tested subsidies in the health insurance reform do significantly increase implicit marginal rates for relatively low income tax payers.

This link provides some detailed examples as well as a nice graph.

That said, I'm not necessarily opposed to health insurance reform, though there are certainly "better" ways to do it. Such is always the case and everything involves trade-offs. What was enacted is certainly not socialist nor a move toward Canadian-style single payer or UK-style socialization. It's a bit closer to the Swiss model.

In plainer language, Dr. Donald Douglas is by all appearances an uninformed idiot but that doesn't mean that we can make judgments about matters of fact by referencing his opinions. He's not even a reliable negative indicator. He's all noise and no signal.


Doctor Biobrain said...

Dave - First off, the words "Cato Institute" set off immediate red flags for me, as I generally don't trust a thing they say. Not that I think they're always untrustworthy, it's just that I haven't read anything of theirs that I found trustworthy. This article only confirmed my beliefs.

Secondly, that analysis didn't address the actual bill. Researching this, I found that the Kaiser Foundation has a subsidy calculator that helps determine the numbers in the actual bill, and they show that Cato wasn’t even close.

For Cato's example of the family of four whose income goes from $30k to $45k, their actual premium would go up by $1945; leaving them with $13k of their extra income. I assume you can do the math to realize that this isn't the 80% increase Cato gave. And the family earning the extra $1100 would only pay an additional premium of $156; which again, isn’t a marginal rate over 100% like Cato claimed. The reality is that there are no abrupt cut-offs as income increases, and Cato was wrong for suggesting that.

But go ahead and play with it yourself. You’ll see that Cato’s numbers don’t approximate reality, even for the House and Senate bills. Honestly, you should have been a bit skeptical at such claims, as Cato’s numbers were ridiculous. 100% marginal rate, indeed.

Thirdly, that analysis only applies to people who don’t have employer insurance. But part of this bill was to give big tax credits to businesses to purchase insurance for low-income workers, as well as enabling small businesses to buy cheaper insurance. Ideally, very few people will need to buy insurance directly and it should mainly be for the self-employed, like myself. Yet that article didn't even address these tax credits at all.

Fourthly, another thing Cato seemed to have missed are the people and businesses who were already buying insurance, who will now receive a tax cut. The only people who might pay more are the minority of people without insurance, as well as the under-insured. But seeing as how they’ll now get decent insurance which they needed anyway, it’s a bit hard to describe this as a true problem.

And that ties into my fifth, and most important point, this isn't a tax. This is payment for a direct benefit to the purchaser, and individuals determine how much they pay; gaining more benefit the more they choose to pay. Sounds like an insurance premium to me.

Auto insurance is also mandated by law. Is my auto insurance premium also a tax? Of course not. This is only a “tax” if we change the meaning of that word. But by the normal meaning, taxes are paid to the government, while the only tax we’re talking about here is the penalty for not obtaining insurance. But as long as they buy the insurance, there’s no tax. So the entire point is bogus.

And finally, as for how to describe this system, it's just the same system we had before. The main difference is that we have a few more regulations to safeguard consumers, an individual mandate so people don't game the system, and a subsidy to help those who can’t afford the insurance.

This isn't a healthcare revolution. We just tweaked the current system. The big question is why conservatives freaked out about the whole thing, when it was really quite uncontroversial. Had Bush proposed this bill in 2003, I doubt we’d have heard much of an uproar about it from the right.

Anyway, I'm glad to have a reasonable person to discuss this stuff with. I’ve been looking for conservatives to debate online for the last sixteen years, but the best I found was Donald, who clearly wasn’t up to the task. But as a warning, I’d recommend avoiding Cato citations if you can. Trust them at your own peril.

Doctor Biobrain said...

BTW, I have no idea why I keep calling you "Dave." I'm usually pretty good about calling people by whatever name they give, including weird spellings, capitalizations, and other öddities, so I don't know why I'm doing something different with you. Not that you probably care, but I don't want to seem overly informal with you, as some people see that as rude.

I mean, I'm not going to go with "Original David" for, as cool as that is, I just can't bring myself to write that. But I should at least go with some part of your actual name. Unless, of course, your name really isn't David at all, which would make it even cooler.

The Original David said...

Doc, you may call me Dave. A long time ago I used to comment at the "Professor's" blog as David. Then some other guy also started posting as David, so I adopted the TO prefix.

I don't evaluate information by looking first at its source. You might not like Cato's politics, but they're not wingnuts. Many of their contributors are very well qualified. The Cato article is dated and the plans change quite a bit. Similar analyses were done by different analysts throughout the development of the program. Note that it originally appeared in a Kaiser Foundation publication. Kaiser Foundation, which is independent of Kaiser Health System, is a very credible source on matters of health care and HC policy.

Also, when doing your own analysis, you must remember that the implicit tax created by the phase-out of the means-tested transfer must be added to the explicit tax to compute the relevant implicit marginal rate.

This is a very common and well-known, well-understood feature of our tax and welfare system. It is not something unique to the recent health insurance reform. To come up with the actual implicit marginal tax rates, you must account for the effects of many programs.

I'm glad that you've taken the initiative to run down some other sources and explore this for yourself. Keep digging. It's a fascinating topic.


Doctor Biobrain said...

But David, Cato's numbers weren't even close. I'm not talking about the marginal rate percentages. I'm talking about the numbers themselves. They don't jibe at all.

And sure, maybe Cato was calculating many other other things that aren't part of the healthcare bill. But...if they're not part of the healthcare bill, then why was the healthcare bill being blamed for them? You are an intelligent person, yet wrongly believed that poor people were paying significantly higher marginal taxes because of this bill. Yet that can't possibly be the case. You were tricked. Even if the numbers are true, which I doubt, the article clearly gives the impression that the healthcare bill caused this problem. That's simply not the case.

And I've seen this sort of thing every time I read anything from Cato. They're hacks. That's their job. They're paid to find a specific point of view, whether it's true or not. And if they can't find the right numbers, they'll be replaced by someone who does. Seriously, had Michael Cannon reported the real numbers, Cato wouldn't have published it.

And then there's the issue that this isn't even a tax. It's an insurance premium, which is something that everyone needs anyway. Poor people would be gaining a benefit from this bill, yet Cato wanted to make it appear as if it had a hidden tax hike in it.

And I still call bull on the importance of the marginal tax rate. Yes, it CAN play a factor. But I think it's mainly abused because it makes taxes seem worse than they are, because it gives you a higher sounding tax rate. For example, a flat tax could make one's marginal rate lower, yet tax them at a higher rate. And they'd end up paying more in taxes, which is all anyone really cares about. The average tax rate is far more significant, and anyone who says otherwise is selling something.

But the big question: Did you learn something from this? Do you know now that Cato's numbers were bogus, or do you still hold on to the idea that poor people will somehow suffer now that we're paying their insurance? I found your claim about this to be ridiculous, which is why I asked for your proof. And now it turns out that your proof was wrong. So, do you acknowledge that the marginal tax rate hurdles that effect the left tail of the income distribution don't really exist?

I'm telling you, don't trust Cato. They're paid to lie. And if they didn't find things like this to report, they'd have to find a real job. Call me a cynic, but I tend to not trust people whose livelihood depends upon them finding what they say they found. That goes for researchers and analysts of all stripes.

The Original David said...

Doc, I really wasn't here to start a fight. I'm not a health care insurance reform opponent.

That said, I don't see any advantage in denying the shortcomings of what was ultimately passed. That strikes me as the sort of mindless partisanship for which so many rightly mock AmericaNeo.

I regret now that I provided the Cato link, even though it was just a repost of the Kaiser Foundation article. I chose it because it was written for a general audience, detailed the calculations and included the graph. If you spend a few minutes with Google you'll find equivalent analyses from a number of sources. Numbers and rates will vary depending on what version of the legislation that they were looking and the time that the analysis was conducted.

Also, you can find *many* articles, class notes, academic PowerPoints etc. explaining the importance of marginal rates. You may not find microeconomics compelling (it certainly has its critics); however, it's all about marginal effects, to put it somewhat colloquially. Economists don't claim that average rates are not important, but when it comes to (dis)incentives, it's marginal rates that count.

I agree that an insurance premium is not a tax per se. A compulsory insurance premium is more like a usage fee. Yet, a decrease in govt benefits *is* economically equivalent to a tax. Income indexed phase-outs of govt benefits always raise implicit marginal rates above the statutory marginal rates. It is a mathematical necessity. The creation of cliffs or hurdles can be avoided, but due to the extra computational complexity of the required phase out formulae, such schemes are rarely used in practice.

I was not tricked by anyone. It's not about intelligence. Performing these sorts of analyses is what I do. I realize that this can be a bit challenging and rather counterintuitive at first, but it is not the least bit controversial or ideological. It's just math and fairly basic microecon. Krugman and Zingales would have no arguments over this one.