Economics and Taxation

Jim had written a bit lately about the framing (and the accuracy) of the debate over the expiration of the tax cuts with specific regard to the $250K limit.  I thought you might enjoy this savage takedown of a wingnut U of  Chi Law professor by Berkeley economist Brad DeLong.

The Law prof posits:

The rhetoric in Washington about taxes is about millionaires and the super rich, but the relevant dividing line between millionaires and the middle class is pegged at family income of $250,000. (I’m not a math professor, but last time I checked $250,000 is less than $1 million.) That makes me super rich and subject to a big tax hike if the president has his way.

I’m the president’s neighbor in Chicago, but we’ve never met. I wish we could, because I would introduce him to my family and our lifestyle, one he believes is capable of financing the vast expansion of government he is planning. A quick look at our family budget, which I will happily share with the White House, will show him that like many Americans, we are just getting by despite seeming to be rich. We aren’t.

According to several tax sites, my taxes will go up by thousands, not down.
and,
all this avoids the question of why we think the government will better allocate some part of whatever my income is.

DeLong responds (edited for brevity. it's long -- worth the jump):

Back in 2000, the U.S. government's long-term budget was out of balance--although not by all that much. The government had, you see, made promises--very popular promises--for Medicare, Medicaid, and Social Security without proposing sufficient funding streams to pay for those promises. So back in 2000, looking forward, we had a choice: raise taxes, or "bend the curve" by cutting the growth of spending.

Instead of doing either of these, we elected George W. Bush. Two wars. A big ... defense buildup. A huge unfunded expansion of Medicare ... instead of raising taxes George W. Bush reduced them.

This simply does not work. As Milton Friedman liked to say, to spend is to tax. If the government spends somebody will pay for it. And if you don't levy the taxes to pay for it now all that means is that the person who owes the taxes does not know it yet.

So unless Professor Henderson (or whoever) has plans for serious cuts to Medicare, Medicaid, Social Security, and National Defense--and I see none on offer--his last point about government allocation is simply moot. George W. Bush has already allocated it with his defense buildup and Medicare Part D. Taxes are going up over the next decade--barring cuts of 1/3 to Medicare, etc. They can either go up smartly or we can pretend they don't have to go up, in which case they go up stupidly. The argument for small government was lost long ago, and was lost again and anew in the past decade with Medicare Part D and the wars of George W. Bush.

This is just pointing out the obvious -- that the US has a significant structural budget problem, and that railing against the inevitability of tax increases is not going to change the ugly reality.  But Delong pivots to the whining of the pretty-rich:

the Henderson annual family budget is this:

$455,000 a year of income [...]

Now it is time for a reality check on this "most working Americans." The median household income in the United States today is $50,000. Half of all households make more than this. Half of all households make less. The big expenses in the Henderson family budget--their $60,000 a year in contributions to tax-favored retirement savings vehicles, their $25,000 a year savings building home equity, their $55,000 for housing, their $60,000 in private school costs, even their $10,000 a year for new cars--are simply out of reach for the overwhelming majority of Americans. Half of all households make less than $50,000 a year--the Hendersons make nine times that. 90% of households make less than $100,000 a year--the Henderson's make 4.5 times that. The Henderson's are solidly in the top 1% of American households, in the select 1% group that receives more than $350,000 a year.

By any standard, they are really rich.

But they don't feel rich. They have a cash flow problem. When the bills are paid at the end of the month, the money is gone--and they feel that they have to scrimp.

I know how they feel. My household income is of the same order of magnitude than theirs (although somewhat less) and we too had to juggle assets quickly when it developed that an error in Reed College's housing system had caused them not to charge us $5,000 that we owe. We too have chosen to put our income in places (tax-favored retirement savings vehicles, building equity, housing, private college costs) where we think it is better used than $200 restaurant meals, $1000 a night resort hotel rooms, or $75,000 automobiles. But I don't think that I am not rich.

Professor Henderson's problem is that he thinks that he ought to be able to pay off student loans, contribute to retirement savings vehicles, build equity, drive new cars, live in a big expensive house, send his children to private school, and still have plenty of cash at the end of the month for the $200 restaurant meals, the $1000 a night resort hotel rooms, and the $75,000 automobiles. And even half a million dollars a year cannot be you all of that.

[But] Mr. Henderson looks up. Of the 100 people richer than he is, fully ten have more than four times his income. And he knows of one person with 20 times his income. He knows who the really rich are, and they have ten times his income: They have not $450,000 a year. They have $4.5 million a year. And, to him, they are in a different world.

And so he is sad. He and his wife deserve to be successful. And he knows people who are successful. But he is not one of them--widening income inequality over the past generation has excluded him from the rich who truly have money.

And this makes him sad. And angry. But, curiously enough, not angry at the senior law firm partners who extract surplus value from their associates and their clients, or angry at the financiers, but angry at... Barack Obama, who dares to suggest that the U.S. government's funding gap should be closed partly by taxing him, and angry at the great hordes of the unwashed who will receive the Medicare, Medicaid, and Social Security payments that the government will make over the next several generations.

Do I wish that Professor Henderson had a little more self-knowledge? Yes. Is it pathetic that somebody with nine times the median household income thinks of himself as just another average Joe, just another "working American"? Yes. Do I find it embarrassing that somebody whose income is in the top 1% of American households thinks that he is not rich? Yes.

Ooof. I know exactly what he means -- being rich doesn't mean a freedom from financial constraints, from the necessity of keeping your job, from the need to budget your income.  It feels unfair -- that's what I thought being rich was all about! You get a pile of money and get to roll in it and rub the golden coins all over your naked body!

Maybe not. I suppose the moral of this story is that if you are rich, you shouldn't publicly whine about how difficult it is to make ends meet as an argument against progressive tax policies. 

However, on the level of pure policy, it's really painful that Obama and the Dems have embraced the notion of extending even some of the Bush tax cuts.  I get the politics, but even the "middle class" tax cuts are unaffordable, let alone the tax cuts for the rich.  I even get the stimulative benefit of cutting taxes and deficit spending in a recession.  But god DAMN it, we elected Obama to be responsible and to to the right thing, and whether it's pandering to the electorate or it's bowing to right-wing anti-tax hysteria, it feels really really wrong to extend them at all, even for a short time...