Tax rate hike and increased unemployment payments on the same day

According to this White House press release, the federal government is ringing in the new year by simultaneously raising tax rates (i.e., penalizing people for working) and extending payments to two million people who do not work (i.e., rewarding people for playing Xbox). Has this ever happened before at any time in the history of the U.S. (or anywhere else in the world for that matter)?

[Separately, this might be a good time to look at Gregory Mankiw's October 2010 calculation of his total marginal tax rate as 90 percent (nytimes).  Mankiw had already budgeted for the 39.6 percent federal tax rate. He also had budgeted for the 3.8 percent Obamacare supplemental income tax. Mankiw estimated that estate taxes would be 40 percent at the time of his demise, but with the federal estate tax increase to 40 percent and the Massachusetts estate tax rate being 11.2 percent, Mankiw's 2010 estimate overstates the amount that his children will receive. Instead of $1,000 it will be closer to $830 and the overall tax rate will be 92 percent rather than 90 percent. Mankiw did not say what his children will do with the money. If they spend it here in the U.S., they will likely be subject to a European-style value-added tax (the U.S. can't run a European-style welfare state forever without European taxes) of around 20 percent. So the $830 will really be $664 and Mankiw's marginal tax rate is 93.3 percent.]

20 Comments

  1. Mike Scott

    January 2, 2013 @ 10:11 am

    1

    They’re cutting taxes, not raising them Taxes went up at midnight on 1 January, as previously agreed, and Congress has now voted to cut taxes back from that level and increase benefits.

  2. philg

    January 2, 2013 @ 11:53 am

    2

    Mike: You’ve raised an interesting way of spinning a situation in which 2013 rates are higher than 2012 (and the nytimes says that “about 77 percent of households will pay a larger share of income to the federal government this year” (source)).

    We could schedule tax rates to go up to 99 percent every January 1 and have Congress meet every January 2 to give us a tax cut down to something less. Then we could enjoy a “tax cut” every year, regardless of what the rate was relative to the previous year’s rate.

  3. Senorpablo

    January 2, 2013 @ 5:39 pm

    3

    Perhaps then, the 2% of Americans who’s taxes went up a few percent(still some of the lowest rates in history) will trade in their lifestyles of earning at least 7 times the national median income for a comfy couch, an X-box, and unemployment–if it’s so wonderful?

    Taxes are still very near the lowest they’ve ever been! Reagan began the era of consistently declining, massive tax cuts for the wealthy. It’s not coincidental that he also pioneered mega deficit spending. This trend has continued from the 80′s when it began and the correlation is crystal clear. The people with political power want to have their cake and eat it too. It’s comical that most folks who complain about tax rates also complain about the deficit.

    People have turned a blind eye to the mega deficit for decades now. Most Americans are finally starting to realize that they’re getting screwed. The 99% are taking the hit for the deficit, while the 1% are making out like bandits with the lowest tax rates in history.

    The tide has turned.

  4. Christopher Cilley

    January 2, 2013 @ 6:18 pm

    4

    The 2001 and 2003 tax cuts were, by law and by definition, temporary tax cuts. The shenanigans of the republicans back then to get them passed using reconciliation are responsible for the “raising” and then “lowering” of our taxes at the start of this year.

    Interestingly, people would be heralding Obama for cutting taxes if, as was likely at the time, the Bush tax cuts hadn’t passed in the first place. Oh, and we’d have a much lower debt…

  5. Mark Lutton

    January 2, 2013 @ 6:40 pm

    5

    It’s all in how you look at it, I suppose.

    Would you be happier if Congress took a whole bunch of the Bush temporary tax cuts and made them permanent?

    Well, they did.

    As for penalizing people for working and paying them for not working, we’re probably going to have to do that sooner or later. Productivity has increased so that each person is doing the work of 3, 5, 20, or even 50 people compared to 100 years ago, and in many cases consumers are doing the work formerly done by producers — using an ATM, dialing a telephone, printing out an owner’s manual, downloading a book or movie. My 1973 job as a keypunch operator is obsolete. Everyone has to do his or her own key data entry now. Newspaper reporters do their own typesetting.

    There is not enough work to go around.

  6. philg

    January 2, 2013 @ 7:01 pm

    6

    Senorpablo: The “2% of Americans whose taxes went up”? I linked to a New York Times article that says it is 77%. “Taxes are still very near the lowest they’ve ever been”. http://online.wsj.com/article/SB10001424052748703514904575602943209741952.html points out that federal tax revenues have been about 19 percent of GDP for six decades, while top rates have fluctuated between 28% and 92%. State and local taxes, meanwhile, have been climbing and must continue to climb in order to pay pensions to retired public employees.

    Mark: Not enough work to go around because of technological innovation? That doesn’t explain why developed countries have unemployment rates ranging between 2% (Singapore) and 25% (various European countries). All of those countries have roughly the same level of technology. http://blogs.law.harvard.edu/philg/2010/08/08/unemployed-21st-century-draft-horse/ talks about how those workers with the lowest skills are no longer employable in the U.S., but much of that is a function of U.S. laws and health care costs.

  7. ank

    January 3, 2013 @ 3:05 am

    7

    Let me fix that for you:

    Raising tax rates (i.e., asking people to contribute more)
    Extending payments to two million people who do not work (i.e., helping those who need help the most)

    There. Much better, and more in line with reality.

    – ank

  8. philg

    January 3, 2013 @ 8:15 am

    8

    Ank: Unemployment insurance payments by their very definition are not “helping those who need help the most”. By definition and by law, a person collecting unemployment (1) is willing and able to work, (2) was recently working, (3) may be married to someone earning $1 million or more per year.

    “those who need help the most” would presumably include America’s poor, America’s disabled, America’s millions of adults who have not worked for a decade or more, etc. None of those people are entitled to collect unemployment insurance. If the goal is to help those who need help the most, why borrow $30 billion and then give the money to people who are comparatively well off? If a goal is to encourage Americans who can work to get back to work, but we’ve decided that we absolutely must borrow $30 billion and hand it out, why not hand it out to the disabled?

    [For stats on how many Americans of working age are officially disabled, see http://www.nationalreview.com/articles/334551/disabled-system-michael-barone points (the percentage has grown from 0.65 percent to 5.6 percent of the population aged 18-64) and http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/ (shows that about 14 million Americans receive SSDI). For stats on how many Americans are officially poor, consider the number who receive food stamps, about 15 percent of the population (http://dailycaller.com/2012/12/09/food-stamp-use-reaches-another-high-in-september-47-7-million-participants/ ) or 48 million people).]

  9. Al

    January 3, 2013 @ 8:20 am

    9

    It makes me sick every time someone says we have some of the lowest tax rates in history. When you add up Fed, State, local taxes, gas taxes, excise tax, sales tax, taxes on prescriptions (so the freeloaders can get their medicine paid for while I have to pay for mine), phone taxes, cable taxes, plus a whole lot of others, you see what a crock this argument is. It isn’t bad enough that we’re overtaxed, but then to see the money wasted by the Government makes it even more sickening.

    The problem is overspending. Until this stops the country will continue to be in a downward spiral. I don’t see it stopping though; after the last election, politicians have learned the best way to be elected is to buy the votes using money from the productive.

  10. Christopher Cilley

    January 3, 2013 @ 3:37 pm

    10

    Al : Here’s a nice interactive graphic that shows, at least going back to 1980, people’s overall tax burden *has* diminished, at least taking into account income, state, sales, property : http://www.nytimes.com/interactive/2012/11/30/us/tax-burden.html?ref=us

    And… As this graphic, http://graphics8.nytimes.com/images/2012/07/27/business/economy/economix-27shareeconomygovt/economix-27shareeconomygovt-blog480.jpg shows, government spending is below historical average. I think it is interesting to note that nice downward trendline going into the 2000 election, and the trendline since the 2008 election, as opposed to the growth in spending between 2000 and 2008…

    Do you have any data to backup what makes you sick?

    (Graph data derived from the Bureau of Economic Analysis, full new article here : http://economix.blogs.nytimes.com/2012/07/27/big-government-isnt-so-big-by-historical-standards-its-also-shrinking/)

  11. Al

    January 4, 2013 @ 7:47 am

    11

    I have the best data possible; what I pay in taxes each year. As for the charts, how is it morally right for the Government to confiscate over 40% of someones income. It’s pretty easy for people to buy into it when it’s abstract ‘dollars’, but each one of those dollars represents the time an individual spent acquiring that dollar. For a person who works 40 hours a week thatss about 18 hours of slave labor.

    Again, if the Government was spending the money wisely I would be more sympathetic, but it’s not. It’s also not sustainable having half the population being parasites while the rest of us work. The last election was run strictly on that basis.

  12. Seven

    January 4, 2013 @ 9:08 am

    12

    Christopher Cilley:

    The data you provided is an average of Federal, state and local taxes. Where does it specifically state these figures include consumer taxes, ie taxes on gasoline, our cell bill, sales tax, etc. I suspect these figures don’t reflect ALL taxes on everything the average American does.
    Also, you asked Al for data on what made him sick. Well, I can give you data on what makes me sick: see Phil’s OP here. We have increased (again) payments to those who already are eligible to do nothing for 99 weeks and simultaneously we’ve increased tax burdens on those who are trying to be productive citizen, ie those who are gainfully employed. That, in my opinion, would make anyone sick.

  13. philg

    January 4, 2013 @ 9:43 am

    13

    Christopher: That Americans are paying less in tax does not pass the common sense test. The percentage of folks receiving disability payments has gone up by a factor of 10. Public employee unionization and its flip-side, public employee pensions that start as early as age 41 and may be 4-5X the average private sector worker’s income, are just 50 years old (see http://blogs.law.harvard.edu/philg/2009/09/07/history-of-public-employee-unions/ ). People who receive government-funded benefits, such as pensions and unlimited medical procedures (not to say “health care” because many Medicare recipients are not enjoying improved health from all of the procedures and spending!), are living longer than formerly. We’ve invaded and are trying to run two countries whose inhabitants are hostile to Americans (you could argue that we did that in Vietnam also, but we didn’t spend $1 million per year to keep a soldier in the field in Vietnam). A brilliant accountant might be able to hide these costs, but ultimately we will have to hand over tax dollars to cover them.

    I wonder if some of the stats are driven by increased participation by women in the W2 workforce. Where in 1980 a household might have had just one income subject to payroll and income tax, now there are two incomes for the government to tap. So a household of two working-age adults is in fact handing over a lot more than formerly in order that public employees can enjoy a comfortable retirement starting at age 50, but the tax rate on each of those adults is about the same as before.

  14. Mark Lutton

    January 4, 2013 @ 1:29 pm

    14

    “Not enough work to go around because of technological innovation? That doesn’t explain why developed countries have unemployment rates ranging between 2% (Singapore) and 25% (various European countries). All of those countries have roughly the same level of technology.”

    Your statement is like “Climate change? That doesn’t explain why countries have average temperatures ranging from X degrees (Sweden) to Y degrees (Sudan).”

    It’s a very complex picture. Mechanization of agriculture frees works from farm labor. Factories absorb them but only to the extent of demand for the products. Factories can be located in different countries so that labor in one country can meet demand in another. Obviously this ought to make unemployment rates equal everywhere, right?

    Cultures that were stable for thousands of years (ancient Egypt for example) developed productivity-absorbing bureaucracies and rituals. Ancient South American writing was highly stylized requiring much effort for each pair of letters on a monument or a drinking vessel.

    The liberation of productivity has many benefits. For a long time there was unfulfilled demand: everyone wanted a place to live, better food, more clothing, a car, a phone, a TV set etc. Workers were employed to make these things and in turn could buy these things. Now even most poor people have cars and TV sets, thanks to their relatives (you’ve given someone in your family an old car or a new TV set, I’m sure). But demand has to be artificially inflated (new phone every two years) to keep things going and keep those factories in China running. This uses up natural resources that cannot be replenished.

  15. Mark L

    January 4, 2013 @ 2:24 pm

    15

    Phil — I find your lack of love for public employees a bit baffling. Some taxpayer-funded public employees who made possible much of your personal success include;

    Tim Berners-Lee and Robert Cailliau — inventors of HTML and the World Wide Web while employed at the European Union’s taxpayer-funded physics institute CERN.

    Robert Kahn and Vincent Cerf — developers of TCP/IP while both were US government employees at DARPA.

    Donald Davies — inventor of packet switching while a British government employee at the UK’s National Physical Laboratory.

    Larry Roberts — who led the team that used packet switching to build ARPANET, the first version of the Internet, while a US government employee at ARPA (forerunner of DARPA).

    And one of my favorites:

    John Goodenough — whose research over a 30 year span led to the modern high energy density Li ion rechargeable battery, without which cellphones would still be the bricks and “portable” computers the suitcases they were in the 1980s. He did this work as a public employee (at Oxford in the UK and then at UT Austin) with research funding from US taxpayers via DARPA, DOE, and NSF.

    I would posit that the economic impact these public employees have had on the real economy is staggering, though I don’t know of any attempt to calculate their contribution in $$$ terms. Their work certainly laid the foundation for people like Mark Zuckerberg to become unbelievably wealthy, and for many of the rest of us (myself certainly and I would guess Phil included) to be at least financially comfortable.

  16. philg

    January 5, 2013 @ 12:17 pm

    16

    Mark: I don’t remember TimBL ever being part of the teacher’s, firefighter’s, or police union. A university or lab employee who obtains grant funding is not quite the same as the 20+ percent of American workers who are directly employed by the government and may receive a pension as high as 100 percent of their final year’s compensation from an age as low as 41 until their death at age 115+.

    If you want to come up with a justification for public employees being worth, in some cosmic sense, the trillions that we pay them every year, I think you’d do better to cite the folks who work for city water departments. Without clean water we would die. Therefore it would be reasonable to hand over as much as 100% of our income to the water department. I do enjoy Internet, but I need water.

  17. philg

    January 5, 2013 @ 12:21 pm

    17

    Christopher: I think the best evidence that overall taxes per worker must be going up comes from http://economix.blogs.nytimes.com/2013/01/04/four-years-later-28000-more-jobs/ ; the population has grown by about 12 million people over four years (1% per year on a base of 300 million). Many of those additional 12 million folks are receiving payments from the government, either because they are old, poor, disabled, etc. (considering the population as a whole, not just the 12 million babies/toddlers but also those who have newly turned 65). As there are 12 million additional people, a fair percentage of whom depend on checks from the government, but only 28,000 additional workers, the average worker must be paying more, either now or on a deferred basis enabled by government borrowing.

  18. Ryan

    January 6, 2013 @ 6:13 pm

    18

    To those who are “correcting” Philip, the salient fact here driving the widespread tax increase (as cited by NYT) is that worker payroll taxes were allowed to return to 6.2% from 4.2%. Obama’s budget cut the payroll tax as a stimulus measure after the financial collapse, and this new budget will raise the rate back to its original level.

    It’s easy to see, even if you’re a dedicated liberal, how this is functionally a widespread tax increase. And it’s the worst sort from a truly left wing viewpoint: Raising a hugely regressive tax (which does not apply to income ABOVE 107k) in a weak economy to extend the Bush tax cuts for those earning between 250k and 400k a year.

    Let’s not forget, please, that Obama is a CENTRIST, not an Actual Liberal. He really DID raise most people’s taxes, in a fairly hidden and poorly understood way (which you can easily learn about by clicking the link Philip provided). But it’s not like the Republicans were proposing to preserve the payroll tax cut, so leftist Obama voters swallow this sort of thing. (Or pretend it didn’t happen!)

  19. Stephen

    January 14, 2013 @ 7:09 pm

    19

    The rich in this country have been waging a successful class war for the last thirty years. If only it was framed in this way would people be able to direct their legitimate anger in the right direction: towards the 1%.

    Real incomes for most working Americans have stagnated, while productivity has increased. According to the Economic Policy Institute: “While productivity grew 80% between 1979 and 2009, the hourly wage of the median worker grew by only 10.1%, with all of this wage growth occurring from 1996 to 2002, reflecting the strong economic recovery of the late 1990s” (http://www.epi.org/publication/the_sad_but_true_story_of_wages_in_america/). Hmmm. The difference between a sharp rise in productivity (80%) and a less than modest rise (10%) in wages, results in profits for the wealthy 1%, which are enjoying incomes and real wealth not seen since the Roaring Twenties (http://www.cbpp.org/cms/index.cfm?fa=view&id=3629). In essence, we are working harder, making less, while the people at the top are absorbing this surplus.

    There are other macro-economic trends which do account for wealth concentration at the top (women entering the workforce, global expansion of workforce into poorer, more destitute and less-regulated countries), but the fact remains that the real winners here are the 1%. And perhaps one of their most impressive victories in their class war, is that they’ve convinced the entire population that the poor are to blame. Reagan’s cruel and racist narrative of the single black mother with 10 children arriving at the food stamp office in a limo (OK, I added a bit of hyperbole) and other similar narratives are increasingly common. But if we are to talk about criminals and parasites, there are more than enough examples on Wall Street. A culture that would make any mafia boss blush.
    http://www.usatoday.com/story/money/business/2012/12/11/hsbc-laundering-probe/1760351/
    http://www.bbc.co.uk/news/business-18671255
    http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=0

  20. philg

    January 14, 2013 @ 7:54 pm

    20

    Stephen: Certainly the question of wage levels is an interesting one, at least to the folks who receive wages. But it is unclear what it has to do with my original posting. An able-bodied person who receives 99 weeks of unemployment checks represents a shrinkage of a country’s productive capacity and output, regardless of what wages he or she might have been receiving prior to the switch from work to Xbox. Similarly one could argue that top corporate managers are overpaid (as a shareholder I certainly don’t want the short-term CEO running off with 5 percent of the value in a 100-year-old company) but whatever their earnings are we know from basic economics that they will work less after tax rates are raised. A government raising tax rates and ladling on extra payments to the unemployed on the same day would be a notable phenomenon even if, by law, all workers received exactly the same hourly wage.

    [Separately, to understand that wage growth is not necessarily typical, see http://blogs.law.harvard.edu/philg/2008/08/29/a-farewell-to-alms-by-gregory-clark-posting-i/ ]

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