Its Friday, after what was for me a long and annoying 17 days. But the shutdown is over, US markets are at all time highs, and Bob Shiller got his Nobel (more on this tomorrow).

You might think that I would be at peace with the current state of the world, but life is never that simple. You see, I have assumed the task of explaining things which require explaining. By some quirk of fate and an odd academic background, I find myself with skills in simplifying complex matters. Whether OCD or over-compensation for some other defect, this is my lot in life. (I made peace with it long ago).

As we discussed yesterday, amongst all of the background nonsense since October 1, the noise about the deficits was not really about budget deficits at all. Rather, it was about a decidedly narrow ideology held by a small percentage of Americans. Their belief is that government should be much smaller. This is a legitimate political ideology, one that has persisted over the centuries.

Their approach to this philosophy, however, is far less intellectually honest. Rather than having a full on debate on that subject — a debate they are likely to lose — they have chosen a very different approach. This time around, they made the deficit a proxy.

Because of what I do for a living, I found this offensive. Deficits impact fixed income, an important part of portfolio planning. They impact available credit, capital for investment, in a broad and varied way. Hence, the deficit is a genuine issue, a real problem that should be addressed in a mature and responsible way. It can be easily solved using intelligent solutions, but for the ideologues in Washington DC (and elsewhere) who refuse to treat it as the basic mathematics and accounting problem it actually is. The way the Tea Party and others have treated the deficit reminds me of the approach Meredith Whitney took to Municipal Debt. Both groups are stunningly ignorant about their subjects, while possessing the skills to allow them to exploit the topic, hog the spotlight for themselves and other tangential pet issues.

The Tea Party, like Whitney, turned an important question of debt and credit and solvency into one giant PR clusterfuck.

Back to our issue of taxes (next week, I will address spending). Amongst Industrialized Nations, the United States has amongst the lowest tax rates in the world, especially for those folks (like myself) who reside at the top of the income scale.

To demonstrate this, I want to point to the IMF’s World Economic and Financial Surveys: Taxing Times. It is chock full f great charts and data and other interesting results of the IMF survey.

The two below caught my eye. They are rather instructive for our discussion of taxes and deficits in the US.

The first looks at major industrial nations, and compares what the IMF calls their Revenue-Maximizing Tax Rates (blue line) versus their actual top rate (red dot).

As you can see, some countries — Denmark and Sweden — are at the top of the revenue maximizing ranges. Other countries — Canada and Germany — are at the bottom of their revenue maximizing ranges.

Then there is the United States, which is simply far off the scale, way below the bottom of its revenue maximizing range.

If your concern is deficits, than you must take notice of how much money the USA is leaving on the table. I am not suggesting that the role of government should be to maximize their tax revenues, but rather to suggest that if you want to close the deficit, you need to at least be in a defendable range. The US is not.

 
click for ginormous charts
Top Marginal Rates
Source: IMF

 

Not coincidentally, when we look at shares of Net Wealth held by the bottom 50% of he population versus the top 10%, the United States is off the scale. We are the most unequal nation in the world.

 

Shares of Net Wealth
Source: IMF

 

The inescapable conclusion presented to us by this data is that our tax policy is responsible for both the world’s greatest inequality among developed nations, and our ongoing deficits.

If you have a better explanation for our current conditions, or the net results of our tax policies, I would love to hear it.

 

 

Source:
Fiscal Monitor Taxing Times
World Economic and Financial Surveys
IMF October 2013
http://www.imf.org/external/pubs/ft/fm/2013/02/fmindex.htm

Category: Economy, Mathematics, Philosophy, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

71 Responses to “Tax Rates, Inequality, and US Deficits”

  1. stonedwino says:

    Duh!? US taxes on wealthy are wayyyy to low and hence the inequality. Some of us have been saying this for years; raise taxes! The only way to fix the inequality is to institute much higher tax rates for the wealthy. We must create new millionaire and billionaire rates that are way higher than the rest or we will really become a banana republic.

    • willid3 says:

      could be i am wrong (and i hope so) but i think we already have been on the road to being a banana republic. seems like many want to go back to the old days. of the late 18th century.. or at least what they think it was like then.

  2. scone says:

    I don’t know about “better,” but I’d add in some stuff. Basically the lack of a coherent industrial policy, shipping many industries overseas, and the growth of the “military industrial complex” as a substitute for civilian industries. When the only good jobs with benefits are in United Technologies or down at the local recruiting station, then that’s a problem. I guess Rome proved you can make a lot of money off war, for a long, long time, but it’s not my idea of an optimal solution.

  3. rd says:

    It was a very bizarre experience to observe a massive hysterical “debate” about deficits that had zero discussion of military spending, Medicare spending, Social Security spending, or taxes. Probably because the “debaters” voters depend on the three spending items and their campaign donors rely on military spending and cutting taxes.

    It has baffled me over the years that the Laffer Curve still has any traction at all with the public at the current tax levels since the two major rounds of tax cutting in the 1980s and 2000s both resulted in immediate and ongoing massive deficits.

    Also, it has been very bizarre that Americans distinguish between “income taxes” as being real taxes while payroll and other taxes are not real taxes. Otherwise, the whole 47% of the population as “takers” notion would never have gained any traction.

    The US political system has created a mythological America where everybody has boundless opportunity around every corner, small businesses will soar as soon as the yoke of heavy taxation is lifted from them, guns in schools are safer than not having guns in schools, and the average person can afford healthcare when a major illness arrives. Sadly, the data reflect the exact opposite of this mythological world.

    Keep fighting the lonely battle against the propaganda machine Barry.

    • WickedGreen says:

      “It was a very bizarre experience to observe a massive hysterical “debate” about deficits that had zero discussion of military spending”

      Thank you.

      The day right-wing deficit/debt/big government shreikers take on the Pentagon – far and away the most bloated and wasteful federal agency – will be the first day I begin to take them even remotely seriously.

      I’m not holding my breath.

      … btw, Barry – great post. I agree, you’re packing more and more punch with every passing day. Cheers.

    • Romberry says:

      Medicare and Social Security shouldn’t count as “spending” because both programs are self-funding via dedicated taxes and their trust funds. (The annual surplus in the SS Trust Fund has been used for decades to offset the true size of the deficit.)

  4. ironman says:

    The IMF’s data is strange – when the U.S. had its top marginal tax rates at the top end of their indicated “revenue-maximizing” scale, the U.S. government didn’t collect any more taxes as a percent share of the nation’s GDP than it did when it cut its tax rates to half that level.

    Speaking of which, the OECD’s tax data suggests something quite different than the IMF, at least, if this Australian government study of relative marginal tax rates between nations is any indication – U.S. marginal tax rates are closer to the middle of the range for advanced nations than the IMF’s charts attempt to claim.

    • Hauser’s law codifies how most post WW2 politicos ignore the other side of Keynes general theory — when the economy is strong and expanding, that is when Governments should cut spending and raise taxes, thereby making their percentage of the economy smaller, and letting the private sector flourish. (Everyone knows the cut taxes and raise spending during downturn part).

      The Australian study is pre-crisis — 2006. I’d like to see their data updated

      • ironman says:

        I think I’ve figured out part of the IMF’s marginal rate data – they’re including more than just income taxes. All the other nations shown that are within the “revenue maximizing range” have high value added tax rates, which are what boost their top marginal rates into that zone. By contrast, the U.S. doesn’t have one at all, New Zealand’s VAT is low and broad based, as is Switzerland’s (CHE), which is why these countries would appear to fall below the IMF’s revenue maximizing level.

        In practice, since value added taxes are imposed upon consumption, they are primarily borne by near-median income earners, given how both income and corresponding consumption are distributed (it’s very well established that the vast majority of all income within an economy is earned by people with near-median income levels.)

        As for post 2006 data, we do have it for Spain, which used to fall below the “revenue maximizing range” shown in the chart (before 2012) – the Rajoy government’s VAT and income tax rate hikes wrecked Spain’s economy. We’ll also note that Hauser’s law also appears to work in Spain as well.

    • danm says:

      the U.S. government didn’t collect any more taxes as a percent share of the nation’s GDP than it did when it cut its tax rates to half that level.
      ———-
      Maybe because it actually made the economy (GDP) larger.

      There is a tipping point where workers are not interested in putting in any extra effort because tax rates are too high and one where money gets “parked” at the top reducing velocity because tax rates are too low. Both lead to less industry, thus an economy that is smaller than it could be.

      • RW says:

        “There is a tipping point where workers are not interested in putting in any extra effort because tax rates are too high …”

        At close to 100% (complete confiscation) that seems very likely but despite years of research by Laffer devotees no actual tipping point — meaning one confirmed by real-world data — much less a causal link between tax level(s) and GDP has ever been confirmed so its not much of an argument.

      • willid3 says:

        there maybe a tipping point some place maybe (but we have yet to ever see it). when the highest tax rates were much much higher (almost 3 times as high as now) it didnt seem to stop those who were in that bracket from doing more. so either we as a people have become wimps (possible I suppose. but unlikely) or its just politics. after all, for all those who got a tax cut, they actually got a pay raise for doing the exact same thing they did before. so why should they work harder?

      • danm says:

        According to my life experience, I would split people along a spectrum of givers and takers. There are people who love working so much they will work for free. At the other end, there are people who will do whatever they can to not work. So sure there will always be worker bees no matter the tax rate but those in the middle will change their behavior when rates are high.

        I call it arbitrage. Excessively high rates vs. other countries will promote lobbying for special treatment, off-shoring, investing in the wrong types of businesses, etc. All things we have witnessed over the last few decades. However, these are all outcomes that can also be due to other factors.

        Four decades ago, IMO, the largest issue facing the developed world was the discrepancy in their household wealth vs. that of households in developing countries, especially considering the population growth. A discrepancy that could only open the doors to massive arbitrage on a global scale. I don’t think Americans really ever stopped to think whether or not such a discrepancy could be maintained. I think the groupthink was that a rising tide lifts all boats. But the wealth discrepancy is being chipped away and one major policy tool for dealing with this has been tax cuts. In the beginning, tax cuts probably made sense but at some point along the way I suspect these went too far.

        So what are optimal tax rates? It’s hard to prove because you’d probably have to use quantum physics. It also depends on the goals of policymakers. If they don’t care about the general population, then wealth concentration is never high enough and taxes should only be paid by the little people.

      • DeDude says:

        “those in the middle will change their behavior when rates are high”

        Yes and the way they will change it is to work more if taxes take more of their income away. They still have the same mortgage, car etc. payments and a specific lifestyle expectation (few people can/will reduce their lifestyle if they can avoid it). So if taxes take a higher % of their incomes away then they have to increase their income to retain that lifestyle. That is why there is no data to support the idea that higher tax rates get people to work less. I wish it was true, because then we could reduce unemployment by simply increasing tax rates – but that is not how the real world works.

  5. Steve S says:

    Interesting video which helps visualize the inequality, and our perception of inequality, in the US.

    http://utrend.tv/v/9-out-of-10-americans-are-completely-wrong-about-this-mind-blowing-fact/

  6. Greg0658 says:

    seen a version of this before (probably here @TBP) – this 1 is well done …
    a graph video of income distribution perceptions
    http://www.upworthy.com/9-out-of-10-americans-are-completely-wrong-about-this-mind-blowing-fact-2?g=2

    as far as the $54T total wealth – thats on paper (computer) – and with stocks, as favor falls for a corporate paper its $$$ diminishes – but that doesn’t change who will own the corporation (on paper anyway)
    ~~
    2 good graphs up there too to share

  7. Moss says:

    Great information. Makes things crystal clear.

  8. deadmoney95 says:

    Jesus, Barry. You really are just knocking it out of the park recently. Thank you for what you do and providing not just the reasoned analysis but the kind of devastating evidence that only, well, rabid ideologues can ignore.

    • willid3 says:

      and they do. because in some cases they are too invested in their own views, and discount any contrary information.

  9. ScottK says:

    Barry,
    Without expressing an opinion on whether taxes should be higher or lower, I note the IMF marginal tax rate for the US seems to be just plain wrong. It claims to take account of “subnational” (i.e. state) income taxes but it does not come even close to actual US marginal rates.

    I’m a semi-retired lawyer with some tax experience living in PA and I recently figured out what the top marginal tax rate would be for me to go back to work in PA. Because of the ridiculous complexity of our system, everyone’s rate may be a little different, but I get:

    Self-employed – top marginal rate 60.4% (dropping to 50.4% once Soc Sec maxes out)
    Employed for someone else – top marginal rate 55.8% (dropping to 49.5% once Soc Sec maxes out).

    The above factors in the top federal rate, the limitations on personal deductions, the phase out of personal exemptions (which really increases your marginal rate if you have a lot of kids), the 3.9% Obama investment tax which getting a job may subject your investment income to=, Social Security/Medicare and self-employment taxes, and the ability to deduct state taxes against Federal taxes. It doesn’t count AMT because my head would explode to have to figure that out.

    The above numbers are for the relatively low tax state of PA. If you live in a high tax jurisdiction like NY (or NYC), NJ or CA, the numbers will be much higher (add another 400-700 basis points).

    When you factor in all of these “hidden taxes”, the US is a lot closer to the IMFs revenue maximizing range.

    • ScottK says:

      Also, the IMF numbers include account “value added taxes”. If you treat state sales taxes as equivalent to value added taxes (which I don’t think the IMF numbers for the US could possibly do given how low the IMF numbers are), then most US states are already in the revenue maximizing range.

  10. Wiggs says:

    Higher taxes or closing loopholes would clearly solve our deficit issues. But so would a more appropriate prioritization of spending by our fearless leaders in the District (smaller military for example).

    As far as inequality goes, we engender inequality through transfer payments. We encourage many to not seek to maximize their potential as intelligent beings (tea party members excluded…). Instead of more welfare programs or disability insurance, we need to provide opportunities for people to truly realize their potential and not give them an excuse to underachieve. Whether that’s through training or some other program, I don’t know, but by simply raising taxes on the top earners and transferring that money directly to others will not, in the long run, effectively solve the inequality problems our country faces. In the end, a combination of higher taxes/fewer loopholes and providing opportunities to people to succeed, whatever that means in their own personal context, will likely be most effective in narrowing inequality.

    • Thats why I beliee any serious discussion of deficits is to discuss both revenue (taxes) and Expenditures (entitlements, defense).

    • DeDude says:

      As I said to a conservative family member: “Sure I will be happy to end welfare and food stamps, as soon as we get a law that guarantee any person who want a job with a living wage, that they can get it from government if the private sector cannot give it to them”.

  11. CSF says:

    There’s certainly a strong correlation, BR, though perhaps there are other factors. The wealth of the upper 10% is concentrated at the very top, and from one of your recent posts we learned that many of America’s new super wealthy made their money in finance and technology, as well as energy. For better or worse, the U.S. has led the world in creating profits in these sectors – think hedge funds, silicone valley, and the country’s reclaiming of the top spot in world energy production this year.

    Meanwhile, the bottom 50% have been suffering from the off-shoring of labor, a shift from manufacturing towards service sector jobs, and stagnant wages. Arguably U.S. workers suffered more than most from these macro changes.

    While inequality has many causes, including globalization and automation, trade policy, innovation, weak unions, and weak financial regulations, we absolutely should use tax policy as part of the remedy. The UK suggests a good comparison. They have strong financial and technology sectors, and they face the same global pressures on their industrial base, yet they have a more equitable distribution of wealth.

    Still, inequality’s multiple causes suggest that taxes on the wealthy will not offer a permanent solution unless we use the revenue to help create the foundations for better paying jobs. This means resources for education and training, infrastructure, R&D, enforcement of trade standards and intellectual property rights, and business incentives to create good-paying jobs in this country.

  12. hoopsjunkie says:

    Great points Barry. But just to play devils advocate, what about tax rates in Singapore, Hong Kong, Switzerland, South Korea, Taiwan, New Zealand for example? They all have lower tax rates then the U.S. and all are dynamic economies. Especially Switzerland, Singapore and HK with very low tax rates. Many of the countries on your list with high taxation (France, Italy, Portugal, Spain) are not exactly dynamic job creating economies with low unemployment rates. They are pretty stagnant economies.

    • Apples & Oranges

      Have to compare VAT, property tax, and what we get for the cost of such services

      • rwboomtown says:

        Isn’t the real point is the lack of value we are receiving for what we pay now? Is that not the first place to look? Instead of demanding higher taxes, how about a look at the endless waste and crony capitalism our country has devolved into? Health care, education and Homeland security have to be the most inefficient wasteful sections of government.

      • No, thats a totally different discussion.

    • LeftCoastIndependent says:

      Most of the low tax countries you listed don’t have a military that is worth much and depend on the threat of the massive and expensive U.S. military for protection.

  13. hoopsjunkie says:

    I can say with direct personal experience I moved my small business out of California to WA State (Seattle) to get tax relief. I have a successful business so I was paying a high state income tax rate of 10% in CA and now I pay NO state income tax in WA State. It makes a really big difference in what I can save and put in the bank. Being in a high federal tax bracket + that huge 10% CA state income tax was just too much. I also feel I spend a little more on consumer goods now in WA State now that I have this big tax savings helping to spur the local economy. And the strange thing is, WA State has no state income tax, but I find the facilities, schools, parks, roads BETTER and in nicer shape than CA which has a massive state income tax. Also WA State has a lower unemployment rate then CA. I wonder how much that has to do with the lower state income tax.

    ~~~

    BR: Thats a different discussion — State vs State as opposed to National taxes compared with peers

  14. Concerned Neighbour says:

    Bang on BR. This Republican – and not just Tea Party wing – mantra that taxes never, ever be raised, is sheer ideology. The deficit could be eliminated tomorrow if the government coupled modest tax increases on the rich, eliminated corporate tax loopholes, and trimmed ludicrous military spending and select domestic programs. I’m not suggesting all of that be done tomorrow, though I do think that increasing taxes on the rich in the short term would be a net benefit to the overall economy. We all know that the rich *are* the government and that will never happen.

    P.S. Looks like Aunt Yellen has GOOG in her growth stock portfolio. A $330B market cap stock now trading over 6 times revenue and well over 30+ P/E. The absurd amount of liquidity has to go somewhere, I guess.

    P.P.S. S&P 2100-2200 by Christmas? If it doesn’t have a down day between here and then, which is looking decidedly possible, that range is quite likely. Clearly the stock market needs more stimulus.

  15. cbatchelor says:

    People hear “deficits” a more serious, more solvable problem than “income inequality.” And there is, as anyone knows, a lot of waste in government spending. This is why Catherine Mulbrandon presentations are so useful in talking about this.

    There is, of course, a lot of “yes, but…” we can offer. And that’s OK. But, saying, as Ritholtz does here, “…our tax policy is responsible for both the world’s greatest inequality among developed nations, and our ongoing deficits.” is the way to keep this discussion focused.

  16. ilsm says:

    Deficits are a mixed bag of: too little revenue (regressive taxes and anemic economic activity Laffer is wrong about lowering progressive tax cuts!); and too much spending on wrong things, 40% on discretionary much of it for PACs.

    Sadly, the extortionists won on two points Wednesday night: one, there are two firm dates for the next hostage crises, second who is counting another of the recurring budget conferences set up to kill the new deal and increase regressive taxes.

    The SS trust fund holds more federal debt instruments than the fed (SS has 2.6T, the fed just over 2T) the borrowed money went to waste on war and tax cuts hiding the extent of the deficits with no improvement in US productive base to ever pay back the SS Trust Fund.

    The next budget conference is a win for the anti New Deal, we will get power point blither why the deficit is going to explode because the US can only raise regressive taxes.

    It is the ancient regime of few owning the land and their immoral “divine rights” to deny resources to other human beings.

  17. seijirou says:

    Why should we assume that this inequality is necessarily a problem? How much inequality is a problem, and how much isn’t? Where is that line drawn?

    The U.S. contains the richest of the rich. 5 of the top 10 richest people in the world are in the U.S. 13 of the top 20 richest people in the world are in the U.S. There is more money in the U.S. than anywhere else in the world.

    Naturally, when the total is greater, the opportunity for spread is greater too. The “Gap” can’t be as large when there’s only $50 bucks to go around, compared to $1,000. So how about quantifying some of these metrics with some meaningful figures for a change?

    How poor are the poor in the U.S. How does the purchasing power of the bottom 50% of the U.S. compare to the bottom 50% of Japan? Are they actually poorer? Are they more poor? Are they richer?

    I don’t know one way or the other, but I’d be interested to see.

    • seijirou says:

      Well I went ahead and crunched some numbers, all taken with a grain of salt because wikipedia is the source.

      Eyeballing the chart in this article for percentages this is the per-capita of the various percentages of populations
      US :
      The top 10% has $1,815,536 per capita
      The bottom 50% has $5,325
      The remaining 40% has $144,637

      Germany:
      Top 10% has $1,712,070
      Bottom 50% has $5,803
      Remaining 40% has $290,181

      Japan:
      Top 10% has $1,413,089
      Bottom 50% has $94,205 (no that’s not a typo)
      Remaining 40% has $434,796

      Now if you pull up the wikipedia article on cost of living, you’ll find that Germany is supposedly 13% more expensive (and their poor are 12% richer, which means the purchasing power of the poor in Germany is technically less than the U.S., making their poor “poorer” but only by a hair) to live in, and Japan is 20% less expensive to live in (which I find extremely suspect).

      So if you believe the wikipedia data, in the U.S. the rich are richer, and the poor are richer compared to Germany. However their middle class is better off by far.

      in Japan, well even the poor are loaded!… however, then you look at % of the population that lives below poverty, the U.S. is about 15% and Japan is about 16%. So while Japanese bottom 50% has 19 times more of their country’s wealth compared to the bottom 50% of the U.S., they have a greater percentage of their population below their poverty line.

      So, how do we rectify this with the assumption of the article, that wealth inequality is to blame for something?

      Finally, the top chart in this article shows the top U.S. rate to be something like 46% or 47%. That’s not even close, it’s more like 35%. That actually makes the U.S. look worse in that chart, if you believe that this is a chart of “badness”. So it’s curious that the chart is so inaccurate about that figure. Unfortunately that makes the accuracy of the chart in general questionable. Whether or not the data is meaningful to draw conclusions on is something else entirely.

      • LeftCoastIndependent says:

        Great stats, thx. But to show the extremes of rich vs. poor, the Walton family has more net worth than the bottom 30% of the country combined. Of course, if the bottom 30% didn’t shop at WalMart, maybe that would change.

      • flakester says:

        And if the bottom 30% didn’t shop at WalMart or equivalent, they’d be even poorer.

  18. tippet523 says:

    Too much of our Taxation is all based on income and not on wealth. I have many clients who have 5 million plus yet live a fairly modest life and pull out less than 100k out of IRA’s. They will literally pay less than 20k a year in taxes yet use so many services. IE medicare, roads etc. They end up paying more to the state through Prop taxes and state sales tax than federal income tax.

    There needs to be a happy medium between taxing income and wealth.

    • seijirou says:

      Taxing savings? That will lead to a run on the banks and insolvency of the financial system. Nobody will accept theft of money from their savings accounts or investment accounts.

      • LeftCoastIndependent says:

        Yea, the saved wealth was created with after tax dollars. Can’t tax it twice. But never die with money still in an IRA/401 account. The tax on it will kill you. Haha, that one came out pretty good.

      • DeDude says:

        There are countries that tax wealth above a certain level. Those countries have perfectly good banks and stock markets. As long as the tax is less than the investment income on the wealth nobody would take the money out and hide it under the bed (and even then they would have to lie on their tax returns to avoid the wealth tax). Taxing wealth is a perfectly viable option to make our economy sustainable.

  19. MayorQuimby says:

    Everyone in this country is great at bs’ing themselves but the USA is headed towards some severely choppy waters and if you think there are *easy* solutions, I think you need to check yourself.

    Current policies are pushing us towards 3rd-world style wealth disparity and I don’t buy the low-tax rate data at all – look at savings rates. What people have left and how much house, food, oil and healthcare it buys are what matters and I think we all know the answer is less and less and less.

    • willid3 says:

      well savings rate are loosely based on interest rates paid by bankes etc right? and since at least some time in the early 1990s, banks and others have paid almost nothing on savings accounts. probably because some time in the lat 1980s, early 1990s they changed how they operate their business. their income is based more on fees, not loans etc. has been that way a long time. and now with the news that 401ks are doing better. but not really. mainly looks like how the data was collected leaving out important data (like how much was contributed) as to whether 401ks have recovered. or ever will. and this is the new retirement plan? must be for the finance industry, cause its not working for any one else

  20. MarkKlose says:

    I think it’s worth noting that we would not have a current deficit nor long-term fiscal imbalances if our healthcare costs were in-line with the rest of the industrialized world. Medicare, Medicaid and Military Healthcare spending are now about $1 trillion annually. Our Healthcare/GDP is around 18% which is double most OECD countries and 65% above the next most expensive (Germany). It is clear that this spending does not yield a better health outcome. However the providers (Pharma, Medical Device, Hospital Management, AMA etc) have so thoroughly captured Congress that meaningful cost control is a unattainable fantasy. This isn’t theoretical, we know what is attainable from decades of experience in the EU and elsewhere. It also makes US industry much less competitive internationally.

    All this said, Barry is 100% right that our tax system is horribly unequal but it under-scores the point that those screaming about the deficit, when it is falling faster than at any time since the end of WWII, are not really serious about the deficit at all (yes, you too, Simpson & Bowles). You know achieving an equitable tax code faces huge hurdles when a billionaire investor like Stephen Schwarzman claims that paying income tax rates on his incentive compensation (carried interest) as opposed to the 15% capital gains rate is analogous to the Nazis marching into Poland.

  21. MayorQuimby says:

    http://4.bp.blogspot.com/-vabrpEjmUKA/ToSa3XQYK7I/AAAAAAAAPx0/onRrW0Wgr8k/s1600/economistchart.gif

    What about alcohol tax, phone tax, internet tax, gas tax, property tax, local and state tax, water tax, highway tax (tolls), bridge tax (tolls) and what are probably dozens of others?

    • willid3 says:

      do you think we are the only country that has those? in fact ever they aren’t just US inventions

  22. Big Dutch says:

    Interesting how two IMF charts create a cause and effect relationship between tax rates and income inequalitiy. This observation makes for good polical campaining but the growing problem of income inequality in America is far more complex. The research would suggest that the tax rate in America is not a significant factor. You can start by reading “The Bell Curve” and branch out into more recent books.

    As to the deficit, it seems to me that if I could legaly print money in my basement, I would be spending more money than I earn till the day I die. Even if we maximized our taxes, government will continue to spend more than it earn in taxes.

    • spooz says:

      Isn’t The Bell Curve just an excuse for fascists to create an expanding lower class based on a false meritocracy? Cronyism, nepotism, sexism, racism and class division based on generational wealth transfer and educational opportunity are just a few things that undermine the meritocracy theory.

      • No, the bell curve is a probability distribution

        Fascists, racists etc can be applied to anything

      • spooz says:

        Pretty sure Dutch was talking about Murray’s book “The Bell Curve” (got lazy about the quotes) since he spoke of reading it (and then “branching out” into more “recent” books…I’d love to see THAT list). I should have used “racist” instead of the incendiary “fascist”, but I was taking the use of such “science” to its logical conclusion.

        I read the book when it came out in 1996, and my younger self didn’t recognize the racist, eugenicist undertones that would make it a tool for racists. I should have read Stephen J. Gould’s response, “Curveball” instead.

        https://www.dartmouth.edu/~chance/course/topics/curveball.html

        Recently the Heritage Foundation was embarrassed when staffer Jason Richwine, who coauthored an immigration report for them, used the book to support his doctoral dissertation that Latino immigrants’ persistently lower IQs should remain a barrier to immigration. Richwine subsequently quit Heritage as a result.

  23. A Bjorn says:

    Mr. Ritholtz,

    Let me start out by saying thank you for providing this resource. You are at the top of a very short list of economics blogs that I check daily. I appreciate the logical, empirical, concise and informative nature of your website.

    As a US citizen I find myself worrying about the US debt/deficit issue. Politically I find myself falling along the libertarian side of things with the chief exception of economics and fiscal policy. Banks are too dangerous/powerful to be unregulated and we have a moral imperative to take care of our citizens, thereby needing the money to do so. I 100% agree that it will take a combination of tax increases and spending decreases to address the debt and deficit issues. As you stated there are fallacies being presented by both sides of the aisle concerning deficit spending. The Right with the assumption that all will be well as long as we cut programs that do not include Defense. The Left/Right with the failure to abide by the second half of Keynes theory (the raising of taxes/cutting of spending during booms), although we have not had a strong enough economy to do so in the past 5 years.

    The main reason I am writing is the following two points:

    -Again, I absolutely agree with the main point of this article, but I think you may be overstating the relationship between taxes and income inequality. Referencing Figure 17 DEU has a Tax rate that falls within the revenue maximizing range, yet still presents fairly stark income inequality. Another example would be FRA. If the correlation between tax policy and income inequality was “inescapable” than how do we explain what is going on in these two countries?

    -As a layman I find myself unable to really articulate well why a high debt, with a large deficit is an economic negative. My explanations usually revolve around the lines of don’t spend more than you take in and an unending interest payment w/o paying down the principle is a bad thing. Would you mind doing an article sometime on the dangers (if you believe that there are any) of running a long term debt/deficit and where on the scale of fiscal health you believe the US currently stands? Do you agree with the IMF medium-term guidance of a Debt-GDP of 70%? What do you think the US Corporate/Income/Property/Sales tax “picture” should look like?

    Thank you for your time.

    • DeDude says:

      Regarding your first point: All of these complicated economic and societal parameters are multifactorial. So tax rates are only one of many things that affect income inequality. It is however one factor that is clear and undeniable in its effects. You get more (after tax) income inequality if you have a flat 25% income tax, than if you have a progressive scale that leave the lowest incomes untaxed and tax 50% of the highest incomes.

      Regarding your second point: The parameter to focus on is not as much the debt/GDP ratio but the interest payment/GDP ratio. The burden of a debt of 100% GDP at 8% rates is the same as that of 200% GDP debt at 4% rates. Although the IMF guideline of 70% is reasonable as a goal in a stable growing economy, the US is in a unique situation with the world reserve currency. Since the rest of the world want to save a lot of money in $ we have to support that desire by issuing a lot of debt. If we don’t then the $ become too strong – hurting our ability to compete with products from the rest of the world.

  24. 4whatitsworth says:

    The government has used our current taxes to fence off our national parks and charge for entry, build bridges and charges use to use them, read our email and listen to our phone conversations. In addition the government has targeted those who want to reduce taxes with IRS audits. The federal government has done virtually nothing to preserve our existing safety net program like the disability fund of social security which is riddled with fraud and abuse.

    I also think if you add up all the city taxes, state taxes, government fees, now Obama care taxes and fees our marginal tax rates are significantly higher than you represent.

    In my view the only way to stop government overreach is to keep tax rates low. From experience I can tell you that if you invest in a bad institution you get a bad outcome.

  25. spooz says:

    I would like to see a citizen’s dividend become a tool for reducing inequality. It would also provide liquidity for a new monetary system which takes the banks out of the money-creation-through-debt business, end the fractional reserve lending system and make the Federal Reserve a branch of the US Treasury. Dennis Kucinich proposed this in his 2011 NEED Act, which was based on The Chicago Plan, and was recently revisited in a Mike Kumhof in an IMF working paper. But of course Kucinich was then gerrymandered out of office and the bill died in committee.

    I would love to see Switzerland’s basic income referendum pass, so the rest of the world can see the benefits of a citizens dividend. Of course, the fact that the rest of the world has figured out a better way (single payer health care) doesn’t mean it has a chance in a country where capitalists are doing everything possible to undermine social benefits of citizenship. Corporations, who like to be treated like citizens, don’t need health care.

  26. [...] Tax rates, inequality and U.S. deficits | The Big [...]

  27. DaveLee says:

    Perhaps it’s just correlation between lower tax rate and greater inequality, not causation. One possible explanation of greater inequality in the U.S. may be that US has embrace globalization in larger scale and adopted technology faster. And that may have put labor at more disadvantage compared to other nations. Or maybe the demise of labor union due to cultural and political changes may be part of causation. Just hypotheses, though. But I’m sure that US wasn’t a country with the least inequality back when the top rate was 90% in 50s and 60s.

  28. ToddMPeters says:

    Barry, we can debate all day long whether tax rates are too progressive, too regressive or just about right. What seems to get lost though is how much of the government spending is necessary. I think our total Federal expenditures last year totaled about $3.6 trillion, of which $700 billion or so went to defense. Is $700 billion year in and year out necessary? I know paying our service men and women definitely is but how many billions are spent each year on developing fancier weapons? I know you understand human nature. If a govermental department is alotted a certain budget this year you know with 100% certainty they will ask for the same (or likely more) next year. There is absolutely no incentive to be thrifty when spending other people’s money.

    • US defense spending is equal to the next 20 countries spending combined

    • seijirou says:

      ” If a govermental department is alotted a certain budget this year you know with 100% certainty they will ask for the same (or likely more) next year. There is absolutely no incentive to be thrifty when spending other people’s money.”

      Working closely with many tax-funded entities throughout my career I can affirm that you are dead on in this respect. Year after year, agencies and groups within agencies will scramble to spend every last dime at the end of their fiscal year, on anything at all. This is done because if they don’t spend it, they fear their budgets will be cut the following year. This holds true not just for federal entities, but any tax-funded entity, including school systems. Just ask a teacher about the scramble to always exhaust the budget every year.

      Now, they don’t actually need all the money they receive, this is evident by the fact that they scramble to exhaust the funds a the end of every fiscal year. What’s really saddening though is that they will, as you say, try to make the case that they need more money on the basis that they “had” to spend all of last years budget.

      Tax-funded organizations are pathologically inefficient money-sinks.

      In regards to the defense spending, it’s a reality of economies of scale. Building the mousetrap the 1st time cost $1. Building it better will cost you $3 more in research to make it better, and $2 for the final product. Repeat this enhancement and production and the costs go up every time. It always *more* than 2x as difficult and *more* than 2x as expensive, to be 2x as effective on the new version.

      Are fancier weapons necessary? Unfortunately yes. I wish military technology never advanced beyond sword and shield, but the fact is you can’t blame anybody for wanting to have the gun. Cold wars suck, but they also work. We can wish all day long that human beings won’t take the initiative to tip a potential fight in to their favor by not researching ground breaking technologies of war that give them the upper hand, but the reality is they will always do this. Because they will always do this, we must always do this or we’ll be an oppressed victim tomorrow, and cease to exist the day after. The history of all species is one of competition and violence with no reservation about genocide.

      Survival of the fittest is just that. When the rest of the world stops advancing, then we can afford to stop advancing.

      • Fancier weapons are necessary?

        Like the Osprey, which doesnt really fly (it crashes real good) the Pentagon never wanted, and was a giant make work boondoggle?
        Or the F35, now so expensive as to be unusably costly to lose?
        Do we really need a 10th, 11th or 12th carrier group?

        The military procurement process makes the rest of the government look like a paradigm of efficiency

      • seijirou says:

        In general, yes fancier weapons are necessary. For the same reasons old weapons are obsolete (sword & shield).

        Are there examples where an effort for fancier weaponry was a failure or even a bad idea from inception? Absolutely there are however that type of short coming can be found anywhere, in any discipline. Look at some of the products that came out of the “space race” several decades ago; you can absolutely look at some of those products and say “that isn’t going to work”. It is part of the learning and development process.

        None of that however undermines the fact that others are making efforts and taking strides, and while they will have their bad ideas and failures, they will also have their breakthroughs. To be “on top” of the food chain is the most comfortable place to be, but because nations don’t acquire strength through natural genetic evolution like in the animal kingdom, it must be acquired and maintained through constant effort, and that carries an expense.

        The Osprey – bad idea from the start
        The F35 – A very expensive learning curve. The fact is it’s questionable if our current aircraft can hang with the latest russian and chinese jets. And as I wrote previously, under the crossed-out lines, the cost of progress will be steeper than the rate of progress.
        Carrier groups – well that’s a different subject all together. More of something isn’t fancier, it’s just more.

        I don’t really know if I agree that military procurement is any worse than other government procurement. For example from my own personal experience, Agency A acquired racks of computer equipment at the price of about 6 million per rack to support Project A. After 6 monghts, Project A was abandoned for some reason determined by some committee. Meanwhile, Agency B has a new Project B that needs the same rack loadout the expired Project A is no longer using. However because the processes the government has imposed upon itself, it is actually more expensive to transfer assets from defunct Project A over to Project B. Instead, Project B will buy all new racks. The racks previously allocated to Project A will go in to storage, until enough time has passed that they can be considered “end of life” and can be thrown away. The military may waste money on a larger scale, but the capability to waste money in the stupidest of manners is all-pervasive among tax funded entities. A lot of good could be done with the Fed’s tax revenue, but the only thing the Feds are good at is a lot of waste.

      • DeDude says:

        The “spend everything” drill is not unique to government it is seen in any large organization and for the exact same reasons.

        The military simply needs to have better weapons than our potential enemies. Until we have evidence that they have (or soon will) developed something that is better than ours, there is no reason to develop such weapons. Actually as long as we have nuclear weapons that could wipe out every city in potential enemy countries in less than an hour, we don’t need any other weapons for defense. With respect to our need to be aggressors and attack other countries we do need conventional weapons. But even the military of 2 decades ago had the ability to conduct an aggressive war to “punish” any other country that we realistically would consider attacking. All we really need for that is missiles and drones. Land attacks are stupid and useless wastes of money and lives.

  29. krice2001 says:

    rd — Very, very well stated…

  30. klctlc says:

    I tend to think the government is way too big and inefficient and that our current presidential leadership will go down in history as one of the worst in the last 100 years. However, I am not blind to the fact the president before Mr. Obama, won’t fare much better.

    Now regarding this discussion a couple points regarding taxes. 1. practically everybody should pay, if you make some minimum income ($25k or pick a number) you should pay. Too many people don’t feel the impact of the Government they think we should have from a fiscal perspective. We all want a strong military, health care for everybody and nobody to be hungry. But there is only so much to go around. 2. We should lower rates and cap deductions. THis will mean the wealthy pay more tax. I think $50,000 or somewhere near there is fair for a cap in deductions. I truly believe the biggest hurdle here is democrats. They stand in the way of a limit on deductions because of people in CT, NY, NJ, CA (and yes some purple states like FL) who get subsidized by the rest of the country. The high state taxes and home mortgage deductions are not fair, when you get to deduct them from your federal taxes.

    FInally regarding the military, we will never have a serious discussion on this because both democrats and republicans want a larger military (more lobbyist money). However, if we did the countries like Japan, Germany, France, UK, Spain, etc have been living under a US provided veil of safety. They need to increase their military spending and we need to decrease ours. Once again, this will never happen because of the money in the military. I don’t know what to about Israel, as we can’t just leave them on their own. We could downsize our presence overseas and still keep spending money on R&D

    • spooz says:

      “we all want a strong military”
      uh, count me out on the imperialist adventures in democracy spreading, please.

      “I don’t know what to [do] about Israel, as we can’t just leave them on their own.”
      why not? Places like Truthdig and Counterpunch give me a look at Israel’s warmongering and genocide and I question our relationship with them, particularly as a premise for keeping the bloated military (and NSA) budget intact.
      http://www.truthdig.com/report/item/the_desert_of_israeli_democracy_20131014

  31. DTouche says:

    Why waste time discussing useless old policies and mechanisms to fund government?

    Our nation must only create liabilities first and then use Treasury-Federal Reserve operations to fund these liabilities. The Banking Crisis recovery efforts proved back filling obligations through special interventions solves large problems. It seems that hyper-inflation only shows up after special intervention techniques make whole a liability and are not discontinued. Once the liability is completely funded the liquidity would then spill out en masse into the rest of the economy and cause harmful effects.

    We should demand that these techniques are used to fund national obligations such as Social Security, establishing a Single Payer Healthcare system (while shutting down ACA), Education, R&D, Infrastructure, Energy and anything else deemed important. Toss on transaction taxes to these sectors repatriate funds as velocity increases and the sectors could start to chip away at the special intervention costs (not to mention giving the ability to throttle sector growth when needed).

    Allowing ourselves to revert to archaic policy practices after learning that these concepts work would truly be a sad day for humanity while a gleeful day for the Zombie Banking System.

  32. [...] For a good discussion on how the issue of deficts largely masks ideological pushes to cut taxes, see Barry Ritholz — Tax Rates, Inequality, and US Deficits: [...]