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New Evidence on Taxes and Income

Old 09-15-08, 11:34 PM
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New Evidence on Taxes and Income

http://online.wsj.com/article/SB1221...n_commentaries
New Evidence on Taxes and Income
By ARTHUR B. LAFFER and STEPHEN MOORE
September 15, 2008; Page A23

The new Census Bureau data on income and poverty reveal that many of the economic trends in this country are a lot more favorable than America's detractors seems to think. In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families -- mother and father in the home -- rose to $78,000, an all-time high.

Although incomes fell sharply in the U.S. after the dot-com bubble burst in 2000 (and still haven't fully recovered), these latest statistics reflect a 25-year trend of upward economic mobility.
More important, Barack Obama is wrong when he states on his campaign Web site that the economic policies started by Ronald Reagan have rewarded "wealth not work." Based on this false claim -- that the rich have benefited by economic growth while others have not -- he intends to raise tax rates on high-income individuals.


To be sure, there has been a massive amount of wealth created in America over the last 25 years. But tax rates were cut dramatically across the income spectrum, for rich and poor alike. The results?

When all sources of income are included -- wages, salaries, realized capital gains, dividends, business income and government benefits -- and taxes paid are deducted, households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005. (See chart nearby; the data is from the Congressional Budget Office's "Comprehensive Household Income.") This fact alone refutes the notion that the poor are getting poorer. They are not.

Looking at the last two business cycles (first year of recovery to first year of recovery), this low-income group experienced a 10% rise in their inflation-adjusted after-tax incomes from 1983 to 1992 and then another 11% rise from 1992 to 2002). Roughly speaking, the Reagan and Clinton presidencies were equally good for them. Income gains over the last 30 years have been systematically understated due to several factors. These include:

- Fall in people per household. The gains in household income undercount the actual gains per person, because the average number of people living in low-income households has been shrinking. On a per capita basis, the real income gain for low-income households was 44% from 1983 to 2005, about 22% from 1983 to 1992 and about 18% from 1992 to 2002. These are excellent numbers by any measure.

- Earned income tax credit effect. The Earned Income Tax Credit (EITC) is a government payment to low income people who work. It was instituted on a small scale in 1975. In 1986, 1990, 1993 and 2001, Congress expanded the program.

Over time the EITC has multiplied the number of poor households that fill out tax forms each year and are thus counted in government income statistics. That's because to be eligible to receive the refundable EITC, a tax return must be filed.

Official tax return data show that in 1983, 19% of returns had zero tax liability; that percentage has climbed steadily, reaching 33% in 2005. (The Tax Policy Center estimates that in 2008 nearly 40% of filers will have no income tax liability.) Thus, we are now statistically counting more poorer families today than we used to. This is a major reason that median and poor household income gains appear to be a lot smaller than they have been in reality.

- Income mobility. In the U.S., people who had low incomes in 1983 didn't necessarily have incomes as low a decade later. People in this country have long moved up over time, and this income mobility continues to be true. While some people do remain in the lowest income group, they are the exception.

One way to quantify income mobility is to examine how many people remain in the same tax bracket over time. We compared the returns of tax filers in the lowest tax rate bracket (zero) in 1987 with their returns in 1996. Only one third of the tax filers were still in the zero tax bracket, but 25% were now in the 10% bracket, 32% had moved up to the 15% bracket and 9% were in the 25%, 28%, 33% or 35% brackets. And that was following them for a decade, not a generation.

From 1996 to 2005, we have the income mobility data for income quintiles. Of those filers who were in the lowest 20% in 1996 and who also filed in 2005, 42.4% remained in the bottom 20%, 28.6% were in the next highest quintile, 13.9% were in the middle quintile, 9.9% were in the second highest quintile, and 5.3% were in the highest quintile.

What is also striking about the data is that the poor today are, in general, not the same people who were poor even a few years ago. For example, the new Census data find that only 3% of Americans are "chronically" poor, which the Census Bureau defines as being in poverty for three years or more. Many of the people in the bottom quintile of income earners in any one year are new entrants to the labor force or those who are leaving the labor force. Obviously, there is also a significant core of truly poor people in this group, but that core is drastically less than 100%.

The data also show downward mobility among the highest income earners. The top 1% in 1996 saw an average decline in their real, after-tax incomes by 52% in the next 10 years.

America is still an opportunity society where talent and hard work can (almost always) overcome one's position at birth or at any point in time. Perhaps the best piece of news in this regard is the reduction in gaps between earnings of men and women, and between blacks and whites over the last 25 years.

Census Bureau data of real income gains from 1980 to 2005 show the rise in incomes based on gender and race. White males have had the smallest gains in income (up 9%), while black females have had by far the largest increase in income (up 79%). White females were up 74% and black males were up 34%. Income gaps within groups are rising, but the gaps among groups are declining. People are being rewarded in today's economy based on what they know and what they can do, not on the basis of who their parents are or the color of their skin.

There are of course Americans who live in poverty, as there are very affluent Americans with $25 million yachts and $10 million homes who hold ostentatious $200,000 birthday parties. But the evidence is plain that all groups across the income distribution have made solid gains during the last generation.

Taking from the rich through much higher tax rates in order to help the poor and middle class makes no sense intellectually and has seldom worked in practice. Reducing rates, on the other hand, does increase the share of taxes paid by the highest income-earning group. For example, in 1981, when the highest tax rate on the rich was 70% and the top capital gains tax rate was close to 45%, the richest 1% of Americans paid 17% of total income taxes. In 2005, with a top income tax rate of 35% and capital gains at 15%, the richest 1% of Americans paid 39%.

We suspect that Mr. Obama will discover that when you put "tax fairness" ahead of economic progress, you produce neither.

Mr. Laffer is president of Laffer Associates. Mr. Moore is senior economics writer for The Wall Street Journal editorial board.


Blockbuster information that finally explodes the "rich getting richer on the backs of the poor" crap.
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Old 09-16-08, 01:24 AM
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The problem with this article is it's far from unbiased. Laffer is known staunch conservative. Apparently, he even went so far as to proclaim the housing bubble was a hoax back in 2004.

http://en.wikipedia.org/wiki/Arthur_Laffer
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Old 09-16-08, 02:42 AM
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Do you think he made up these numbers?
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Old 09-16-08, 06:33 AM
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I think it doesn't matter... the perception is the poor are getting poorer and the rich are getting richer. Promoting class warfare has worked well in the past, so why stop now.
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Old 09-16-08, 07:10 AM
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Such a timely article. I'll be sure to pin it up next to my Exxon is a victim and credit card companies want consumers to use their credit wisely articles.

In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families -- mother and father in the home -- rose to $78,000, an all-time high.

If families were making this kind of dough, we wouldn't be having the type of mortgage problems we see today. Fact is, many Americans cannot own a home, do not make the MEDIAN wage--which is simply unrealistic, and are living paycheck to paycheck.

The fact you have the McCain Campaign targeting Walmart shoppers is a rather obvious statement of where Americans are financially. If the McCain Campaign was focusing on Nordstrom shoppers, then I'd be more inclined to think median incomes were realistic.

To throw out this bullshit article in a time of economic instability is rather conspicuous and is even a slap in the face of most Americans working today who are finding their paychecks getting smaller and smaller as prices are increasing disproportionate to their pay increase.

I see so many homes with for sale signs it's sad. Just sad. It shows how naive working people are who believe this type of bullshit that they are financially able to afford things they cannot, and don't want to admit the American Dream is still a dream. A fantasy.

This is why we have the economic problems today. Denial. And large banking firms took advantage of Americans and their economic denial. Sure, RSVP with a post about Americans who shouldn't have bitten off more than they could chew, but this isn't the point. The point is, we have an economic system highly dependent on lending credit, and as time goes on, we see more Americans using credit to buy things they shouldn't. The Americans are being lied to, being told they can afford a home because it's what they deserve. Well, what Americans deserve and what their paychecks show them, are two totally different things.

The stats cited in this article are provided from the basis of a financial vacuum. This article does not take into account many other factors which determine the true "value" of a family's income. To simply say black females had an increase of their income by 74%, you'd think they were doing just fine. Well, tell that to the massive workforce of minorities who work at places like fast food restaurants and the service industry in general, which is increasing everyday. We are losing manufacturing jobs which pay much higher, in lieu of more Taco Bell and Popeye's joints who pay shit. But yet Americans are being told they can buy homes on this wage.

This article says you are rewarded for what you know, and that's another bullshit line. I've seen people rack up $50,000 in college debt, only to find out when they get their degree, the job they wanted is now either not as demanding by the job sector or their is just too much competition and the pay has been slashed.

Fact is, we have more 4-year college degree workers in crappy low-wage jobs than ever before. The amount of education a minimum-wage earner has is staggering. It is no longer a job sector where people barely have a GED. Nope. We're talking about men and women who have great education but don't have the job to show for it.

But hey, I look around on the streets and I see a lot of people driving nice cars, so silly me, this article must be right.

The fact we had this type of article being written several years ago as well, telling us homeowners were increasing dramatically, and the Bush Administration was to be congratulated for it because they ADDED JOBS TO AMERICA!!!!...should be a wakeup call to this kind of propaganda.

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Old 09-16-08, 08:54 AM
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Originally Posted by DVD Polizei View Post
Such a timely article. I'll be sure to pin it up next to my Exxon is a victim and credit card companies want consumers to use their credit wisely articles.

In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families -- mother and father in the home -- rose to $78,000, an all-time high.

If families were making this kind of dough, we wouldn't be having the type of mortgage problems we see today. Fact is, many Americans cannot own a home, do not make the MEDIAN wage--which is simply unrealistic, and are living paycheck to paycheck.
...
The fact we had this type of article being written several years ago as well, telling us homeowners were increasing dramatically, and the Bush Administration was to be congratulated for it because they ADDED JOBS TO AMERICA!!!!...should be a wakeup call to this kind of propaganda.
I'll grant you that the "everything is great for everyone" is propaganda. However, most people live paycheck to paycheck more due to poor personal finance choices than due to crappy jobs.
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Old 09-16-08, 08:58 AM
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Originally Posted by bhk View Post
Do you think he made up these numbers?
I mistrust <i>anyone</i> who doesn't post at least a link to the data they used.
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Old 09-16-08, 09:28 AM
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Originally Posted by wendersfan View Post
I mistrust <i>anyone</i> who doesn't post at least a link to the data they used.
He used a graph. What more do you want? Citations come w/ a level 25 graphing skill. You have to give the Noobs some time to level up.
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Old 09-16-08, 10:51 AM
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Originally Posted by bhk View Post
Do you think he made up these numbers?
The median income number is meaningless. A mode income number however would be significant.
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Old 09-16-08, 10:54 AM
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Originally Posted by nemein View Post
Promoting class warfare has worked well in the past,
When?
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Old 09-16-08, 11:00 AM
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Am I correct in reading that graph that says the bottom 20% of households made $15,250 in 2005? Somehow I'm guessing that isn't enough for a family of 4 to live on.
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Old 09-16-08, 11:02 AM
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That's household. The definition of household isn't 4 people living under one roof.
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Old 09-16-08, 11:09 AM
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Originally Posted by bhk View Post
Do you think he made up these numbers?

I think he definitely fudged the numbers to suit his argument. He has somehow factored in quality of life into his calculations and disguised it as "comprehensive" real income. We can do the math ourselves.

http://www.census.gov/hhes/www/incom...inc/h01AR.html

The table lists household income (upper limits, not average) divided into quintiles from 1967 to 2007. All you have to do is factor in inflation. In 2007, households in the lowest 1/5 made $20,291. It took approximately 19 years for their income to double (back to 1986). In order for Laffer's argument to hold true (real income to increase), the increase in inflation must not increase by more than double. Do you think inflation has been less than double since 1986? Or another way to look at it, do you think a household is better off making $20K in 2007 than $10K in 1986? IMO, inflation has increased 3-4 fold....especially for necessities.

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Old 09-16-08, 11:12 AM
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Originally Posted by wabio View Post
All you have to do is factor in inflation.
I think they did that for you:

(Households as of March of the following year. Income in current and
2007 CPI-U-RS adjusted dollars28/)
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Old 09-16-08, 11:17 AM
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Originally Posted by Venusian View Post
I think they did that for you:

(Households as of March of the following year. Income in current and
2007 CPI-U-RS adjusted dollars28/)
Ah, good eye. So the question now becomes, what is the inflation rate being used, and how is Laffer factoring QOL? We know CPI doesn't include food and gas. I'd like to know if it contains rent, healthcare, and retirement.

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Old 09-16-08, 11:21 AM
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Originally Posted by orangecrush18 View Post
I'll grant you that the "everything is great for everyone" is propaganda. However, most people live paycheck to paycheck more due to poor personal finance choices than due to crappy jobs.

I don't know about that. Consumers seem to have been pretty careful with their spending the past couple years, yet many still live paycheck to paycheck......or might have a couple months cushion. Granted we have been in a "recession" right? But it's not like good jobs were-a-plenty during the previous boom years either. IIRC, someone stated previously........people most likely to live paycheck to paycheck usually had "children".

Last edited by wabio; 09-16-08 at 11:28 AM.
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Old 09-16-08, 11:24 AM
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Forgot to mention Laffer is also accounting for tax incentives, like the EITC. IIRC form way back in my penny pinching years, the EITC isn't all that much. Gains from tax incentives shouldn't be significant considering most don't pay taxes anyways.

What I'd really like to know is Laffer factoring in and applying monetary value to public assistance?
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Old 09-16-08, 11:25 AM
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Technically, we're not in a recession...although that doesn't mean the economy isn't weak.

It's hard to judge the economy though. Amongst my friends, everyone is employed and as single adults, almost all of us have alot of disposable income.
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Old 09-16-08, 11:27 AM
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From the same data used in the report:

Figure 1. The rich get richer and the poor get poorer.


Figure 2. The same data, but with split y-axes.


N.B.: I used the tables for households with children.
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Old 09-16-08, 11:29 AM
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how do you get those numbers? Where do you find the total income or the income of the top quintile? (i dont see if it the linked data)
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Old 09-16-08, 11:30 AM
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I found this: http://www.census.gov/hhes/www/incom...inc/h02AR.html

but that would suggest wendersfan's graph is off. the difference should be greater
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Old 09-16-08, 11:31 AM
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Originally Posted by Venusian View Post
......and as single adults, almost all of us have alot of disposable income.

Whoa, the irony. Just as you posted this I edited my previous post #16. We were both thinking the same thing from opposite perspectives.
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Old 09-16-08, 11:33 AM
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Originally Posted by Venusian View Post
how do you get those numbers? Where do you find the total income or the income of the top quintile? (i dont see if it the linked data)
http://cbo.gov/ftpdocs/88xx/doc8885/...tables_toc.xls

Originally Posted by the original article posted
See chart nearby; the data is from the Congressional Budget Office's "Comprehensive Household Income."
I searched the CBO site and found the tables.
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Old 09-16-08, 11:36 AM
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Originally Posted by Venusian View Post
I found this: http://www.census.gov/hhes/www/incom...inc/h02AR.html

but that would suggest wendersfan's graph is off. the difference should be greater

Wow. The middle 1/5 has lost 11.9% of it's aggregate income share since 1980 (2/16.8%). I wonder how much of that is due to loss of manufacturing or offshoring? That would be an interesting Masters thesis for some grad student out there.
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Old 09-16-08, 11:36 AM
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Also interesting:
http://www.census.gov/hhes/www/incom...inc/h12AR.html

in 2007 there were 24,541,000 households with no earner
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