Saturday, March 17, 2007

More Tax Analysis


Using the same IRS data for my recent postings on taxes, I have produced the two charts above showing the adjusted gross income (AGI) floors for the top 50% of taxpayers (top chart), and for the top 1% (the IRS also has data on the top 5%, top 10% and top 25%, those are not displayed here).

Note that these are in constant dollars, adjusted for inflation. Further, because the IRS calculates annually the threshold level of income for the top 50% of taxpayers, those threshold values are actually the median levels of income (AGI), since 50% of taxpayers have higher income than the threshold, and 50% of taxpayers have lower incomes. Therefore, although it is not the direct intention of the IRS, its tax data produce a measure of real median income using actual tax return data.

Conclusions:

1. Real median income, measured by AGI from tax returns, has remained relatively constant over the last 19 years at just under $16,000.

2. The real income of the richest 1% has increased significantly between 1986-2004, and the threshold level to be in the top 1% has increased from $108,000 to $174,000, a 60% increase.

3. The richest 1% have gotten richer over the last year 19 years, but the income of the average, or median taxpayer has remained relatively constant and stable, in real dollars. The middle class has not disappeared, and the median AGI over time has not changed much. There are more high-income taxpayers in the extreme right-hand tail of the AGI distribution, but that has not come at the expense of the median taxpayer. That is, the median income taxpayer has NOT been affected by the top 1% of taxpayers getting richer.

4. I wouldn't pay a lot of attention to the likes of Paul Krugman and his constant opining about this topic, like this recent talk "A History of America's Disappearing Middle Class." If there really was a disappearing middle class, the real median AGI should be declining, when it has actually been increasing slightly since the mid-1990s.

5. Note that the taxpayers in income groups like the top 1% or bottom 50% are not the same taxpayers from year to year, there is actually significant income mobility over a lifetime. "The rich" is not a club closed to new members. Many of the taxpayers in the top 1% in 1998 might now be retired and in the bottom 50%, and many taxpayers in the bottom 50% in 1998 (medical students, law students, business students, etc.), might now be in the top 1%.

What I've Been Listening To, Recommended

1. Big Al Anderson, legendary NRBQ guitarist's CD "After Hours," check out "Let's Get Away for the Weekend."

2. "Beverly Crawford Live: Family and Friends," some rockin' gospel, you can "get your praise on" with this CD.

3. Smooth jazz artist Eric Darius, plays sax and composes many of his songs on his new CD "Just Getting Started," check out "If I Ain't Got You. "

4. Some rockin' gospel with excellent horn arrangements on The Mighty Clouds of Joy's 2005 CD "In the House of the Lord: Live in Houston." Get your praise on some more.

American Idol Odds

Based on very active trading on Intrade, here are some of the current odds for American Idol:

1. Most likely to get sent home this week: Haley Scarnato (31%)

2. Least likely candidates to get sent home this week: Lakisha, Melinda and Stephanie (all 6%)

3. Most likely to win American Idol: Melinda Doolittle (43%) and Lakisha Jones (picture above) from Flint MI (33%)

4. American Idol winner to be female: 85%

BTW, I tried to set up an account this week on Intrade and everything went OK until I tried to deposit $100 in my account using a credit card. Thanks to the U.S. Congress, we are not allowed to use our credit cards to make deposits in foreign "gambling" companies (Intrade is based in Ireland). Unfortunately, I had to mail a check to Ireland, and it will take several weeks to activate my account. I am ready to spend $100 in tuition to learn how Intrade works, and will make postings later about my experience.


You Can't Tax Your Way to Prosperity

"With the recent announcement of Comerica's relocation to Texas, the hemorrhaging of Michigan businesses continues. Astonishingly, instead of taking bold steps to make Michigan more competitive and attract investment, Gov. Jennifer Granholm's plan to end the mass exodus of employers is to raise taxes on them. Michigan is indeed in a debilitating economic crisis, but no state has ever taxed its way into prosperity."

From a commentary in yesterday's Detroit News titled "Michigan can't tax its way to prosperity," by Jonathan Williams, a Michigan native and economist at the Tax Foundation in Washington, D.C.

Michigan currently ranks #51 for state unemployment rates, at 6.9% in January, a full 1/2 percentage point above #50 (S. Carolina and Alaska are tied at 6.4%).

Thogger Award

Tim Worstall is an English writer and blogger living in Portugal, and he has the #13th most popular business/economic blog (according to Gongol's most recent monthly rankings by daily visits). Tim has kindly nominated me for a "Thogger," which is a "Thinking Blogger Award," see his posting here.

The Thogger rules state that I am now supposed to nominate five other bloggers who make me think. Let me think about that...........


CD Hits a Nerve!

Wow, Carpe Diem hit a real nerve with the recent posting on taxes, "Rich Pay More, Poor Pay Less Taxes," as daily traffic spiked up to about 1,500 visits yesterday (see the chart above), which I think is a CD record, and about 10X the daily visit count, and that post also generated 22 comments, also a new CD record I think. The posting was linked to a number of other websites and blogs, and brought a lot of new traffic to CD.

I'll try to make some more postings on the topic of taxes, and the distribution of taxes, etc., that is obviously a popular topic. Thanks for all of the interest - I even had visits for that posting from the domain "eop.gov," which is the "Executive Office of the President."

Great Global Warming Swindle

From Thomas Sowell's latest column Global Warming Swindle:

Britain's Channel 4 has produced a devastating documentary titled "The Great Global Warming Swindle." It has apparently not been broadcast by any of the networks in the United States. But, fortunately, it is available on the Internet.

The British documentary goes into some of the many factors that have caused the earth to warm and cool for centuries, including changes in activities on the sun, 93 million miles away and wholly beyond the jurisdiction of the Kyoto treaty. According to these climate scientists, human activities have very little effect on the climate, compared to many other factors, from volcanoes to clouds.

These climate scientists likewise debunk the mathematical models that have been used to hype global warming hysteria, even though hard evidence stretching back over centuries contradicts these models.

To watch the 75-minute documentary on YouTube, go here.

Flag Discrimination

"Foreign-made American flags could soon be barred from Minnesota store shelves. The Minnesota House has passed a made-in-the-U-S-A requirement for flags sold in the state."

Read the full story from Minnesota Public Radio here, via Cafe Hayek.

The Civil Rights Act of 1964 outlawed discrimination based on race, color, religion, sex, or national origin, so wouldn't discrimination against flags made by people of foreign origin be against the law?

Secret to Success of Dollar Coin: Stop Printing Bills

"This is the government's fourth attempt to move American spenders from dollar bills to dollar coins, after three flops that satisfied nobody but coin collectors. But these quite sensible efforts are destined to fail unless the Treasury finally does what it should have done long ago: Stop printing dollar bills."

Read more of the Slate article "Scrap the Greenback."

Friday, March 16, 2007

Friday Humor



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A few blocks away from the U.S. Capitol at about 10 p.m. last night, a masked man jumped out from behind some bushes and says to an approaching gentleman "Stick 'em up and give me all of your money." The startled gentleman says "Well, how dare you attempt to rob me, sir, don't you realize that I am a distinguished member of the U.S. Congress?" The robber then says, "OK, in that case, stick 'em up and give me my money!"

Hugo Chavez on 20/20 Tonight

Tonight (Friday, 3/16/07) on ABC's "20/20" program Barbara Walters interviews Venezuelan President Hugo Chavez, the first interview of the socialist leader by an American television journalist since he was re-elected president in December, and since his visit to the U.S. last fall, when he called President Bush "the devil." He tells Walters, "Yes, I call him a devil in the United Nations. … That's true. Another time, I said that he was a donkey." Chavez also tells Walters that he would support Iran against any attack from the U.S.

In addition to the interview, Barbara Walters will include a snapshot of life in Caracas, spending time with both wealthy and poor families.

Irish Miracle: Cut Taxes, Watch the Growth

From the Cato Institute, Chris Edward's article about the Irish economy "It's Not Luck:"

"Ireland has boomed in recent years, and it now boasts the fourth highest gross domestic product per capita in the world. In the mid-1980s, Ireland was a backwater with an average income level 30 percent below that of the European Union (MP: And a 16.5% jobless rate that was more than 6.5% above the EU average, see my graph above!). Today, Irish incomes are 40 percent above the EU average."

How did that happen?

"The key to Ireland's success has been its excellent tax climate for business. In 1980, Ireland established a corporate tax rate for manufacturing of just 10 percent. That low rate was subsequently extended to high-technology, financial services, and other industries. More recently, Ireland established a flat 12.5 percent tax rate on all corporations -- one of the lowest rates in the world, and just one-third of the U.S. rate."

Happy St. Patrick's Day!!

What Are The Odds Gonzales Will Resign?

Current odds, based on actual trading on Intrade, that Attorney General Alberto Gonzales will announce his resignation:

By March 31, 2007: 55%
By June 30, 2007: 63%
By September 30: 90%


Economic Stagnation in Europe

What does economic stagnation in Europe look like graphically? See the graph above showing a persistent 4% gap between the jobless rate in Europe vs. the USA.

"If the European Union were a state in the USA it would belong to the poorest group of states. France, Italy, Great Britain and Germany have lower GDP per capita than all but four of the states in the United States. In fact, GDP per capita is lower in the vast majority of the EU-countries (EU 15) than in most of the individual American states. This puts Europeans at a level of prosperity on par with states such as Arkansas, Mississippi and West Virginia."

Quote is from the report "
EU vs. USA" by the Swedish think-tank Timbro.

Exception:
Ireland is booming, see posting above.


Thursday, March 15, 2007

Rich Pay More, Poor Pay Less Taxes


According to tax return data released this week by the IRS (data above are from Table 5), the share of federal income taxes paid by the top 5% of taxpayers reached a 19-year high of 57% in 2004 (see bottom graph above). During the same period, the share of income taxes paid by the bottom 50% of taxpayers reached a 19-year low of 3.3% in 2004, compared to 6.5% in 1986 (see top graph above). Note: Federal income taxes include taxes on salary and wages, dividend and interest income, and income from capital gains.

Measured by the share of federal income taxes paid, the 2003 tax reform was a "tax cut for the poor" and a "tax hike for the rich."

BTW, the Democrats on the Senate Budget Committee just muscled through a budget bill on a party-line 12-11 vote this afternoon that would pretty much guarantee the demise of Bush's tax cuts, which expire at the end of 2010.

Economic Freedom of the World

This is the economic freedom map I mentioned several days ago (click to enlarge).

Market Prices Reflect Relative Demand

Quotes from U-Haul, for a one-way truck rental (26 foot) in April:

From Flint, Michigan to Austin, Texas: $3,201

From Austin, Texas to Flint, Michigan: $540

Guess the demand is about 6X higher for one-way truck rentals TO Texas vs. TO Michigan?

Texas gained about 244,000 jobs over the last year, and Michigan lost about 67,000 jobs.

Milestone: You are reading the 700th post on Carpe Diem since it started 171 days ago in September 2006, which is an average of more than 4 posts per day! Carpe Diem!!

Economic Outlook


From today's IBD: "We continue to think the economy is a miracle. But as our chart shows (top chart above), many Americans have their doubts. This month's IBD/TIPP poll shows a sharp drop in optimism about the economy over the next six months, though they still feel good about their own financial prospects."

The bottom chart is the trading on Intrade, and the odds right now of the U.S. economy going into a recession in 2007 is about 28%, up from 16% at the beginning of March.


Wednesday, March 14, 2007

Fact of the Day

Before 1995, UPS tracked and traced all packages through a call center, and it would get as many as 600,000 calls on peak days, at a cost to UPS of about $2.10 per call. Now that customers use the Internet to track packages, it costs UPS about 5-10 cents per inquiry.

~From "The World is Flat" by Thomas Friedman

More Than 1 Billion People Now Online


According to Internet World Stats, there are now more than a billion people online worldwide. By the number of users, North America (282 million) is behind Asia (389 million) and Europe (313 million), but by penetration rate (% population online), the U.S. (69.4%) is way ahead of both Europe (38.6%) and Asia (10.5%).

Tuesday, March 13, 2007

Quote of the Day: Socialism vs. Capitalism

"Socialism is an ideology. Capitalism is a natural phenomenon.

Socialism collapsed because it is a policy of unrestrained intervention. It tries to fix what is 'wrong' with the spontaneous, self-organizing phenomenon called capitalism. But, of course, a natural process cannot be 'fixed.' ..."

~Michael Rothschild, author of "Bionomics: The Economy as an Ecosystem" or "Bionomics: The Inevitability of Capitalism"

Post Office Fixes Long Waits By Removing Clocks

37,000 post offices around the country have removed clocks from retail areas as part of a "retail standardization program" to give the public-service areas a more "uniform appearance." "We want people to focus on postal service and not the clock," said a Dallas spokesman for the U.S. Postal Service, according to this article.

If a government monopoly responds to slow service by removing the clocks to "improve" the service, how does the profit-seeking private sector respond? One example is Papa John's Pizza, which offers the "10 Minute Carry-out Customer Guarantee" - if your pizza isn't ready in 10 minutes, it's free. Maybe the Post Office should give free stamps after 10 minutes, instead of removing the clocks?

Reminds me of this story:

Q: Do you know how many people work at the U.S. Post Office?

A: About half.

The "Tax Hike for the Rich" of 2003

The IRS just released data for tax year 2004 that includes the tax shares paid by different income groups. As the charts above show (click to enlarge), the top 1% of taxpayers paid almost 37% of all federal income taxes in 2004, an increase from 34.27% in 2003. The top 5% paid more than 57% of all taxes in 2004, up from 54.36% in 2003; and the top 10% paid 68.19% in 2004 compared to 65.84% in 2003.

Conclusions:

1. What were largely denounced as "tax cuts for the rich" in 2003, actually turned out to be "tax hikes for the rich," since their share of total taxes paid increased significantly from 2003 to 2004 in the wake of the changes in tax rates.

2. U.S. income taxes are highly progressive, and actually become more progressive after the tax reform of 2003 - "the rich" now pay even more as a share of total taxes than at almost any time during U.S. history. The share of income for the top 1% was 19% in 2004, but they pay almost 37% of all taxes.

3. For the top 5%, their share of total taxes paid is at an all-time historical high of 57.13% in 2004.

4. The top 1% paid an average of 32.75% of all taxes during the Clinton years (1993-2000), and have since paid an average of 34.69% during the Bush years (2001-2004). Therefore, the "tax burden on the rich" has been higher under Bush than Clinton.

Quote of the Day

“The smallest minority on earth is the individual. Those who deny individual rights cannot claim to be defenders of minorities.”

~Ayn Rand

Monday, March 12, 2007

Interesting Cell Phone Pricing

1. Cost of a replacement battery for a 2-year old cell phone with no camera: $40

2. Cost a new Nokia cell phone with battery and camera: $29.95

3. Cost of an automotive charging cord for the new cell phone: $25

If options #1 and #3 seem overpriced and #2 seems underpriced, it's because demand is very inelastic for #1 and #3 (no substitutes), and very elastic for #2 (lots of substitutes).

BTW, GMU economist and super-blogger Tyler Cowen (www.marginalrevolution.com) explains in this EconTalk podcast with GMU economist Russ Roberts why the subject of economics, compared to other disciplines, is so well-suited to blogs - because there are so many daily examples to apply economic thinking that have appeal to the general public (like cell phone pricing). Russ Roberts calls this the "Golden Era of Economic Education" because of blogs. Tyler predicts that more students will go to graduate school for economics because of blogs.

Economic Freedom of the World


Greap map (.pdf) of the Economic Freedom of the World, from the Fraser Institute.

Trade Hobgoblins: Japan, Mexico and Now China

"The whole aim of practical politics is to keep the populace alarmed -- and hence clamorous to be led to safety -- by menacing it with an endless series of hobgoblins, all of them imaginary."~H.L. Mencken

When it comes to trade, politicians certainly need an endless series of imaginary hobgoblins to keep us alarmed. In the 1980s, the trade hobgoblin was Japan, which was going to: a) destroy our manufacturing sector, b) take away all of our jobs, and c) then buy up American assets, TBonds and real estate with the dollars flowing to Japan to buy its cars. In the 1990s, the trade hobgoblin was Mexico and NAFTA, and the nitwitery of a "giant sucking sound" of U.S. jobs to Mexico that never materialized.

The current trade hobgoblin of course is China, writes GMU economist Russell Roberts in today's WSJ article "Protectionists Never Learn." After tracing the history of previous trade hobgoblins Japan and Mexico, Roberts asks the question:

"So why can politicians still make China scary? Why didn't Americans learn from the previous sky-is-falling episodes? The simple answer is that if you don't understand economics, you might be convinced by a politician who says that trade with China is bad for America.

The next time you find yourself losing sleep over China, remember that you were worried about Japan and Mexico and everything turned out OK."

Amen.

Self-Correcting Mechanisms Create Uncertainty

From 1910-1959, the U.S. economy was in recession about 33% of the time. From 1960-1982, the economy was in recession only about 23% of the time, and from 1983-2007 the percentage of time the U.S. economy was in recession fell to 6% (see chart above).

Bottom Line: Economic instability has decreased significantly over time, but columnist Robert Samuelson writes in the
Washington Post that "It's curious that people seem to feel more economically insecure even though the economy has become more stable."

"Since 1982, there have been only two recessions, lasting 16 months. In the past 10 years, unemployment has averaged 4.9%; in the 1970s, the average was 6.2%. Yet in 2006, only about half of workers were satisfied with their job security, reports a poll from the Conference Board. In 1987, when unemployment was higher, about 60% were satisfied.

One explanation of the paradox is that the uncertainties and insecurities that assault workers, investors and firms actually foster overall economic stability. There are constant upsets -- business expansions and closures; greater competition from emerging technologies and foreign economies; shifting prices for stocks and bonds. These put people on edge. But many small adjustments may smooth out the business cycle, and they may minimize deep recessions, stock crashes and panics."


Bottom Line: A market economy has effective self-correcting mechanisms that result in a continual series of small minor adjustments that prevent major problems like recessions. The continual adjustments create uncertainty for some groups, but act as shock-absorbers to prevent greater problems.

Sunday, March 11, 2007

Redistribution of Leisure?

Economist Steven E. Landsburg has a new Slate column titled "The Theory of the Leisure Class." Landsburg writes:

In 1965, leisure was pretty much equally distributed across classes. People of the same age, sex, and family size tended to have about the same amount of leisure, regardless of their socioeconomic status. But since then, two things have happened. First, leisure (like income) has increased dramatically across the board. Second, though everyone's a winner, the biggest winners are at the bottom of the socioeconomic ladder.

Research shows that the biggest leisure gains have gone precisely to those with the most stagnant incomes—that is, the least skilled and the least educated. And conversely, the smallest leisure gains have been concentrated among the most educated, the same group that's had the biggest gains in income.

A certain class of pundits and politicians are quick to see any increase in income inequality as a problem that needs fixing—usually through some form of redistributive taxation. Applying the same philosophy to leisure, you could conclude that something must be done to reverse the trends of the past 40 years—say, by rounding up all those folks with extra time on their hands and putting them to (unpaid) work in the kitchens of their "less fortunate" neighbors.

Bottom Line: If you think it's OK to redistribute income but repellent to redistribute leisure, Landsburg says that you might want to ask yourself what—if anything—is the fundamental difference?

Infinite Immigration?

From IBD's editorial "Brain Barrier,"

As Bill Gates implied last week, America has it all backward. Our country's doors are open to the low-skilled while we keep out the talent that's crucial to our competitiveness.

In the near term, there's a talent gap that can be filled only by relaxing restrictions on foreign computer scientists, software engineers and other highly trained workers who want jobs in the U.S. So Gates also called for an end to limits on the number of workers, now 65,000, admitted annually on H-1B visas.

Even a cap of 115,000 would leave U.S. technology industries short of talent. Gates told the senators that applications for H-1B visas hit the 65,000 limit just eight weeks into the current federal fiscal year (which started Oct. 1). He said demand would be even greater next year.

Further from Cox News Service, "Bill Gates told Congress that the U.S. should welcome an ''infinite'' number of high-skilled foreign workers to fill engineering, computer programming and other jobs that otherwise would go vacant."

Note: The H1-B visa limit was as high as 195,000, but was reduced to 65,000 after 9-11.

Abundance Denial

In a previous post, I wrote about the significant increase in household net worth in 2006 to a record $56 trillion. IBD prepared the chart above for its Friday edition editorial "Getting Richer" and made the following points:

1. We've added as much wealth in the last decade as we did in our nation's first 220 years. It's an amazing boom — all the more so because hardly anyone talks about it.

2. $56 trillion dollars is 4 times the size of our economy, and nearly a quarter bigger than the size of the entire world economy.

3. The average household in America owns about $487,095 worth of stuff, free and clear. That's a big jump from recent years. As recently as 2001, average household wealth was $373,170. So in five years we've become a third richer — a truly amazing fact.

4. A variety of recent readings on the economy show people surprisingly glum about the future. We hear that we don't 'save enough,' that there's a widening 'income gap' and that the middle class is shrinking. But we seem to be afflicted with what author Gregg Easterbrook recently dubbed 'abundance denial.' Because the economic reality is something quite different.

5. In addition to being richer, we live longer, healthier lives than ever. Even people on the lowest rungs of the economic ladder have far more than they did a decade ago. The fact is, we've never had it so good.

MP: Psychologically, there is some kind of persistent cognitive dissonance going on, Easterbrook calls it "abundance denial," others have called it the "paradox of progress." Never in history has there been such wealth, prosperity and abundance for the AVERAGE person (Exhibit A: the typical junior high school can afford a camera cell phone AND an iPod), and yet "the media constantly dwells on minor problems without celebrating the broader, more upbeat context in which they exist," according to Easterbrook.

India's Infrastructure Problems

From the current issue of Business Week, the cover story is about India's infrastructure challenges, "The Trouble With India: Crumbling roads, jammed airports, and power blackouts could hobble growth." Here are some interesting points from the article:

1. "India has underinvested in infrastructure for 60 years, and we're behind what we need by 10 to 12 years," says T.V. Mohandas Pai, director of human resources for Infosys.

2. Government officials were shocked last year when Intel chose Vietnam over India as the site for a new chip assembly plant. Although Intel declined to comment, industry insiders say the reason was largely the lack of reliable power and water in India.

3. Jagdish N. Bhagwati, a professor at Columbia University, figures GDP growth would run 2 percentage points higher if the country had decent roads, railways, and power.

4. Up to 40% of farm produce is lost because it rots in the fields or spoils en route to consumers, which contributes to rising prices for staples such as lentils and onions.

5. Because of its authoritarian government, China gets faster results. "If you have to build a road in China, just a handful of people need to make a decision," says Daniel Vasella, chief executive of pharmaceutical giant Novartis. "If you want to build a road in India, it'll take 10 years of discussion before you get a decision."

6. Then there's rampant corruption. Nearly all sectors of officialdom are riddled with graft, from neighborhood cops to district bureaucrats to state ministers. Indian truckers pay about $5 billion a year in bribes. Corruption delays infrastructure projects and raises costs for those that move ahead.

7. Despite the infrastructure challenges, companies still see a lot of opportunities to help them meet those challenges, which explains why so many multinationals are flocking to India. Take hotel construction: In a country with only 25,000 tourist-class hotel rooms (compared with more than 140,000 in Las Vegas alone), companies including Hilton, Wyndham, and Ramada have plans for 75,000 rooms on their drawing boards.

8. In 2005, India passed a groundbreaking law permitting public officials to use public-private partnerships for infrastructre improvements - the first project to take advantage of the new law is the $430 million international airport scheduled to open next year in Bangalore. The facility is designed to handle 11.5 million passengers per year—nearly double the capacity of the overburdened existing airport. It will be owned by a private company, which will turn it over to the Karnataka state government after 60 years.