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Bruce’s New Book

January 9th, 2012 . by economistmom

bruce-bartlett-benefit-burden-book

Bruce Bartlett has a new book coming out in a couple weeks; you can pre-order it on Amazon here.  It looks like another great piece of work from Bruce.  Here’s a excerpt from the first review of it, by Vanessa Houlder of the Financial Times:

In Mr Bartlett’s view, higher tax revenues are needed to stabilise the US’s finances; one of the goals of tax reform should be to make the higher tax burden more bearable. But it will not happen unless there is a much better public understanding of how the tax system works. The author sets out to guide the uninitiated through the fundamentals of taxation at the simplest level. This deceptively dry approach is the basis of a powerful critique of the myths, misconceptions and inequities of the tax code.

The public misunderstands basic facts about the tax system. Polls show that most people overestimate federal tax rates. Few know that close to half of all tax filers either pay no federal taxes or get a refund. Even for the wealthiest people, the top rate of 35 per cent – half what it was as recently as 1980 – is not nearly as high as people imagine. The reason the US has one of the most progressive income tax systems in the world is that the income threshold at which the top rate takes effect is much higher than other countries.

Rates are only part of the story. Many taxpayers in the top 1 per cent of the income distribution pay less of their income in federal income taxes than those barely in the middle class. One reason is that wealthy people often own their businesses, so can pay themselves in the form of lightly-taxed dividends. Another reason – the main target of Mr Bartlett’s ire – is the plethora of credits, deductions and tax breaks that distort behaviour and subsidise special interest groups. The curtailment of these tax “expenditures” would be enough to raise the revenues the US needs.

This is not a novel suggestion. As a veteran tax reformer, Mr Bartlett has spent years fruitlessly arguing for the abolition of cherished reliefs, such as mortgage interest deduction, which costs nearly $100bn a year. He views such tax breaks as “loopholes” and laments the absence of popular outrage about the scope they provide for gaming the system.

The reason, he speculates, is the declining emphasis on a balanced budget and the oft-repeated mantra that “deficits don’t matter”: the public no longer believes that if some taxpayers do not pay their share, others will have to pay more.

Conservative opposition to higher taxes is overwhelming and probably insurmountable. But attitudes can change. The trigger could be inflation, high interest rates and economic instability ushered in by a worsening debt crisis. Mr Bartlett points out that when inflation became a problem in the 1960s, people saw budget deficits as the primary cause. This made them more sympathetic to tax increases, such as the 1968 surtax.

I guess in the end, Bruce must sound at least somewhat optimistic or hopeful for the change in fiscal course that’s needed, for the FT review concludes with:

The challenges the book describes are not insurmountable. But reform will require compromises from all sides that are currently unthinkable as the US heads into an election year. Politicians seem unable to grapple with radical change. But once their backs are against the wall, coping with a future debt crisis, perhaps they will.

24 Responses to “Bruce’s New Book”

  1. comment number 1 by: Vivian Darkbloom

    ” One reason is that wealthy people often own their businesses, so can pay themselves in the form of lightly-taxed dividends.”

    I hope this is not representative of the insights Mr. Bartlett is offering in his new book. If those wealthy people had the brains and the choice, they certainly would not subject the profits of their own businesses to double taxation. I recall reading a number of articles Mr. Bartlett has written in the past in which he argues the corporate income tax should be abolished.

  2. comment number 2 by: AMTbuff

    If Bartlett truly believes that marginal income tax rates do not exceed 35%, especially for incomes below Obama’s magic $250,000, he needs a tax education. Then he can learn even more when he tries to claim the Education Tax Credit!

  3. comment number 3 by: Patrick R. Sullivan

    I too noted the bit about ‘lightly taxed dividends’ and had the same reaction as Vivian, but I think it’s the ignorance of the reviewer showing. As is this;

    ‘Few know that close to half of all tax filers either pay no federal taxes or get a refund. ‘

    Doesn’t sound as if she understands what a tax refund is.

  4. comment number 4 by: SteveinCH

    I don’t know. This was my favorite line from the reviewer.

    “Many taxpayers in the top 1 per cent of the income distribution pay less of their income in federal income taxes than those barely in the middle class.”

    That would be a particularly interesting definition of “many” since the average person in the middle quintile of the income distribution pays about 3% of their income in federal income taxes.

  5. comment number 5 by: Vivian Darkbloom

    Patrick Sullivan,

    Well, Bartlett was quoted as calling tax expenditures “loopholes”. That sounds pretty loopy to me.

  6. comment number 6 by: Arne

    “close to half of all tax filers either pay no federal taxes”
    “Many taxpayers in the top 1 per cent of the income distribution pay less of their income in federal income taxes than those barely in the middle class”

    The reviewer is adding to the confusion. One statement excludes the payroll tax, the other depends on the payroll tax cap (as well as the preferential capital gains rate) to be true even for Buffet.

    Perhaps the biggest entitlement reform needed is informing the public about who pays for it and how. (I do not mean to imply that is is simple.)

  7. comment number 7 by: Brooks

    Even putting aside the question of validity (or possibly exceedingly vague use of “many”), I assume the reviewer doesn’t really mean “pay less of their income”, but rather “pay a lower percentage of their income”.

    “Pay less” is surely more inflammatory rhetoric than “Pay a lower percentage”, but if it’s wrong, it’s either quite sloppy or quite disingenous, depending on whether or not it was deliberate.

  8. comment number 8 by: Brooks

    I hope Bartlett advocates some sort of campaign finance reform that is politically and constitutionally realistic.

    In addition to what I think is intuitive, as well as personal anecdotal observations of opinions expressed, I’ve seen research strongly indicating that trust is an important factor in getting people to accept sacrifice via fiscal policy. If people suspect that they — i.e., people in their situation, whatever it is — are being made to sacrifice much more so that others with more political influence (particularly via campaign contributions) can avoid “equal” or “fair” sacrifice, they are more resistant to accepting sacrifice overall.

    I think history (and to some degree common sense) has shown that efforts to “put out the fire” by prohibiting particular methods or levels of funding political speech are unlikely to succeed. It always seems that those seeking disproportionate influence via money have the will and find a way. And I would also note that there are arguably legitimate arguments that some such restrictions (proposed or enacted) have violated First Amendment rights.

    Fighting fire with fire (public funding) seems to have a better chance at succeeding than trying again to fight fire with water (restrictions on private funding or even private independent expenditure)

    Before Arizona Free Enterprise Club’s Freedom Club PAC v. Bennett (Consolidated with McComish v. Bennett) http://www.politico.com/news/stories/0611/57851.html I thought a good solution would be voluntary public funding system that offered candidates who limited total private contributions (1) a very high matching multiple so a candidate who could prove some degree of support as evidenced by some reasonable level of small contributions could get enough matching dollars to mount a reasonable campaign, and (2) an opportunity for additional dollars if facing a well-financed opponent who opted out of the system. But at least until there is a one-justice shift in composition of the Supreme Court, that seems like at best an unreliable approach. (I’m not a lawyer, let alone a constitutional lawyer, so by all means someone correct me if I’m viewing that overly pessimistically)

    But a different “fighting fire with fire” approach seems potentially practical and on more secure in terms of constitutionality. It’s the public financing plan proposed by Yale Law School professors Bruce Ackerman and Ian Ayres: Voting with dollars. I don’t want to take up even more space with this comment, so instead of pasting I’ll link to description: http://en.wikipedia.org/wiki/Campaign_finance_reform_in_the_United_States#Voting_with_dollars

  9. comment number 9 by: SteveinCH

    Brooks,

    Both interpretations are incorrect. Pay less is more inflammatory but both, as I pointed out above, are wrong.

  10. comment number 10 by: Brooks

    Steve,

    Yes, I saw your comment. I was just saying that, aside from the question of validity (or vagueness of “many”), my guess is that the reviewer had made an error re: “less” vs. “lower percentage” of income.

  11. comment number 11 by: SteveinCH

    Brooks,

    I can only hope you are right but there are enough errors in the review, I suspect we’ll never know.

  12. comment number 12 by: Arne

    In an interview with Tom Brokaw, Warren Buffet claims he pays 17.7 percent and his average office employee pays over 30 percent. I don’t believe Buffet did his number correct, but (per the IRS spreadsheet) the median tax return at $68K is paying 6.3 percent of total income (not to be confused with AGI). Then you need to decide whether to add 7.65 or 15.3 percent for payroll taxes. If you believe the employer portion is really due to the emplyee, then Buffet does pay a lower percentage (if 17.7 is correct).

    I do not advocate increasing the payroll cap (on SS), but I don’t think most people get how we pay for “entitlements.”

  13. comment number 13 by: Gipper

    I look forward to Bruce Bartlett’s recommendations for cutting federal spending. No tax reforms will materialize until Democrats step up to the plate and accept that Medicare and Social Security must be severely downsized. Had Bartlett produced a book with a balanced view of our problems, then maybe he (and Economistmom) could be taken more seriously.

    Obama passed on Simpson-Bowles because he made a stupid campaign promise not to raise taxes on those making less than $250,000. As much as I detest Romney’s pandering, I think he has a better chance getting us closer to a Simpson-Bowles solution than Obama.

  14. comment number 14 by: SteveinCH

    Arne,

    Buffett is way off. The median taxpayer pays 14.3% in all Federal taxes including imputed corporate taxes. Said 14.3% is even lower than the capital gains rate.

    http://www.cbo.gov/publications/collections/tax/2010/AverageFedTaxRates2007.pdf

  15. comment number 15 by: Bruce Bartlett

    It’s rather stupid to treat the words of a book reviewer as if they are my words. Preorder the book and you will get it one the 25th. Then draw your own conclusions.
    http://www.amazon.com/Benefit-Burden-Reform-Why-Need-What/dp/1451646194/ref=sr_1_1?s=books&ie=UTF8&qid=1325797451&sr=1-1.

  16. comment number 16 by: B Davis

    Bruce Bartlett wrote:

    It’s rather stupid to treat the words of a book reviewer as if they are my words.

    I agree. I noticed another case in this thread of a person’s views being misinterpreted. In comment number 12, Arne states:

    In an interview with Tom Brokaw, Warren Buffet claims he pays 17.7 percent and his average office employee pays over 30 percent. I don’t believe Buffet did his number correct, but (per the IRS spreadsheet) the median tax return at $68K is paying 6.3 percent of total income (not to be confused with AGI). Then you need to decide whether to add 7.65 or 15.3 percent for payroll taxes. If you believe the employer portion is really due to the emplyee, then Buffet does pay a lower percentage (if 17.7 is correct).

    In comment number 14, SteveinCH responds:

    Buffett is way off. The median taxpayer pays 14.3% in all Federal taxes including imputed corporate taxes. Said 14.3% is even lower than the capital gains rate.

    I was initially surprised that Buffett, who usually seems pretty precise with numbers, should be so far off. Hence, I googled for Buffett’s interview with Tom Brokaw and found it at this link. Following is an excerpt:

    Warren: That’s exactly right, Tom. And I– I think the only way to do it is with specifics, and– and - and in our office, 15 people cooperated in a survey out of 18. I didn’t make anybody do it. And my total taxes paid– payroll taxes plus income tax– and the payroll tax is an income tax. It’s based on income.

    Tom: Yeah.

    Warren: Mine came to– 17.7 percent. That– that was the– that was line 61 I think– or, no, line 43– is the percent of taxable income, plus payroll taxes, 17.7 percent. The average for the office was 32.9 percent. There wasn’t anybody in the office from the receptionist on that paid as low a tax rate. And I have no tax planning. I don’t have an– I don’t have a– an accountant. I don’t have tax shelters. I just follow what the U.S. Congress tells me to do.

    I also came across an op-ed written by Buffett that appeared in the New York Times. Following is an excerpt:

    Last year my federal tax bill - the income tax I paid, as well as payroll taxes paid by me and on my behalf - was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income - and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

    I assume that the slight difference in numbers is because the Brokaw interview took place in 2007 but the op-ed was published in 2011. In any case, Buffett clearly identifies that he is including income tax and the payroll tax paid by both the employee and employer. Now people can debate on whether or not both the employee and employer contributions to the payroll tax should be included. But they at least need to make the effort to clearly read what is being argued before declaring that argument to be false.

    The worst case of this that I ran across in looking into this issue was an online Forbes op-ed. That op-ed contained a link to Buffett’s op-ed and still completely misinterpreted it. It seems that some people can write much better than they can read!

  17. comment number 17 by: Vivian Darkbloom

    BB,

    PT Barnum is reported to have originated the saying “There is no such thing as bad publicity”. Oscar Wilde said it rather more eloquently “The only thing worse than being talked about is not being talked about”. I guess that’s why publishers send advance copies to reviewers.

    For all the publicity given your new book here, don’t you think the least you could do would be to send everyone a free autographed copy? If you send them now, care of Econ Mom, we’re likely to get them before the 25th.

  18. comment number 18 by: SteveinCH

    B Davis,

    Before you accuse me of misrepresenting, you should read the CBO statistics. They include income taxes, payroll taxes (both employee and employer - and also count the employer part as income (as one should)), imputed corporate taxes, and excised taxes.

    The mistake Buffett is making is using AGI as the measure of income, as one would working off of the 1040 form. But the 1040 form doesn’t include payroll taxes. If Buffett is contending that his employees had an average income tax liability versus AGI of 32.9%, he must pay him employees a whole lot of money. The top marginal rate as a percentage of AGI is 35%. Getting the weighted average to 32.9 is almost mathematically impossible.

    Furthermore, using AGI is different than using income. Hence why I prefer the CBO states (which use income as opposed to AGI).

    In any event, the CBO stats that come out at 14.3% included ALL federal taxes, not just the income tax. As I pointed out above, the median for the income tax is only 3%.

    Talk about misrepresenting.

  19. comment number 19 by: SteveinCH

    To give you a further example, payroll taxes are calculated off of gross income, not off of AGI. By using AGI as the denominator and not counting the employer paid part as income, you are introducing a massive upward bias.

    Just to make the point, take someone earning, $100,000 with $10,000 in deductions meaning $90,000 in AGI. The way it sounds like Buffett did the math, he took $12,500 (employer and employee portion) and divided by $90,000 (AGI) to get a rate of payroll taxes of almost 14%. The correct math would be to take $100,000 add $6250 (the employer payroll tax payment as imputed income) and divide the same $12,500 by $106250 for a rate of 11.8%. The bias gets worse the further down the income ladder you go.

    Frankly, Buffett’s numbers are BS and non representative and yet somehow people have seized on them as if they mean something. Truly pathetic.

  20. comment number 20 by: Vivian Darkbloom

    “To give you a further example, payroll taxes are calculated off of gross income, not off of AGI. By using AGI as the denominator and not counting the employer paid part as income, you are introducing a massive upward bias.”

    Steve, if you are referring to the income tax concept of “gross income’” (that is, what goes on line 7 of Form 1040) you are actually understating your case. Payroll taxes are also levied on items that are *excluded* from gross income. Prime examples would be contributions to 401(k) plans, employer-provided health insurance, cafeteria plans, group life insurance—most of which Berkshire employees likely have. These are probably of far greater significance than average “above-the-line” deductions. The TPC , the JCT and others often use the concept of “cash income” to determine effective tax rates; however, as they define it this seems to include only those deductions like IRA contributions that actually show up on Form 1040 as above-the-line deductions. The omission of the other items is probably due to the inability to get access to the data and not due to a conceptual difference between, say, a 401(k) contribution and an IRA contribution. So, what we likely get is that that “payroll tax” (supposedly levied on “income” per Warren Buffett) is included in the tax paid, but the “income” upon over which it is levied, is not.

    It would be interesting to know what, if any, adjustments Buffett made with respect to municipal bond interest—it’s likely he has some, if not a lot. Did he add that back into the denominator? I guess we’ll never know. That’s the problem with these anecdotes. Buffett has given the public a peak into his methodology, but failed to reveal the whole thing. You can point the finger at skeptics and say they “misrepresent” Buffett, but the criticism might more appropriately be levied at Buffett for making his critics guess. Frankly, given the importance this has had in the public debate, I think that lifting his secretary’s skirt only up to her knees was a little bit irresponsible, even though I generally have great admiration for the man.

  21. comment number 21 by: SteveinCH

    Thanks for the addition Vivian. Of course you are right which only makes the usage of Buffett’s numbers by so many passionate people even more odd.

  22. comment number 22 by: Arne

    “The mistake Buffett is making is using AGI as the measure of income”

    I wondered about that, but I could not tell from what he said in his Brokaw interview. The reference to “taxable income” in the op-ed clarifies. It is silly math.

    Even so, the CBO report is not the right math either. We are talking about workers. Unless their income includes significant capital gains, the payroll tax should be close to 14.2 percent (15.3/107.6). The CBO figure of 9.2 is low because it include non-workers (such as my parents, who are retired and have income in the middle quintile, but no payroll tax).

  23. comment number 23 by: SteveinCH

    You may be talking about workers. I’m talking about income earners. If you were really talking about workers, you should only use the portion of income that come from work in each case to make the data comparable.

    The CBO data also includes income that is not subject to the payroll tax for people who are not retired (the EITC for example)

  24. comment number 24 by: Vivian Darkbloom

    As I’ve noted above, any time one argues the payroll tax is an “income tax” and then proceeds to use the *income tax base* (whether AGI or TI) to compute the “the effective income tax rate” you are going to have serious distortions. Here, one conveniently includes payroll tax as an “income tax” and then proceeds to ignore the fact that payroll taxes are imposed on a larger, non-income tax base.

    If one is talking only about wages, the payroll tax is really a flat tax (impsed on wages up to about $106,000 with the exception of Medicare). The Buffett calculation and, to a lesser extent the CBO and other calculations, seem to ignore this fact.

    Let’s take Arne’s example, which is perfectly fine as far as it goes for “workers”. But, even that example for a “worker” is not very typical of what is being done in practice with these numbers. A more realistic example would be a person who has $90,000 of gross income (on line 7 of Form 1040) and $10,000 of items excluded from gross income for income tax purposes, but not for payroll purposes (401(k) etc—see my incomplete list above). If we are *consistent* in arguing the payroll tax is an income tax, then the base for determining the effective tax rate should be $100,00, not GI or AGI ($90,000) or even TI.

    If Buffett and others use $90,000 against the full payroll tax, then the effective rate on payroll tax would be as follows:

    15.3/97.6 = 15.68 percent

    Imagine that, higher than the actual rate! But, if lumped together with an effective income tax rate, who is going to notice?

    I can see the limitations on using IRS data for this type of analysis. The data might not be broken down in a suitable manner to do a proper analysis. But, this is not a limitation Warren Buffett would have, or should have, faced. All that data was within reach of the limited group of persons he polled and also within the Berkshire payroll records.

    I’ll bet Warren does a much more sophisticated study when he runs the numbers before making an investment or acquisition.