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Friday, July 29, 2011

More on The Two-Income Tax Trap

Book I previously blogged (here and here) the charge by Todd J. Zywicki (George Mason) that Elizabeth Warren (Harvard) misrepresented tax data in her 2003 book, The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke (with Amelia Warren Tyagi).  Todd revisited the issue yesterday in connection with Christopher Caldwell's article in the Weekly Standard, Elizabeth Warren, Closet Conservative: The Most Misunderstood Woman in Washington:

[N]ote his list of increased expenses for household “big necessities: mortgages (up 76%), cars (up 52%), taxes (up 25%), and health insurance (up 74%).”  The problem is that while it is an accurate representation for mortgages, cars, and health insurance, that the expenses increase by that percentage, it is not for taxes.  For the other expenses it is the percentage increase in dollars spent on those expenses.  For taxes, however, the 25% increase is actually the percentage increase in the percentage of income spent on taxes.  So the 25% is not how many more dollars go to paying taxes, it represents the household’s change from paying 24% of its income in taxes to 33% of its income in taxes–a change of 25% in the percentage of income dedicated to taxes, not a change of 25% in spending on taxes.  I swear I am not making this up: I have attached to the bottom of this post the full excerpt from this book where this is done.  And, again, I have laid this out in considerable detail previously here.

What this means is that once taxes are converted to an apples-to-apples comparison–percentage change in dollars instead of percentage change in percentage–household spending on taxes actually increased 140%, not 25%.  The entire two-income trap, therefore, is actually a two-income tax trap, as I noted in my Wall Street Journal commentary on this awhile back. ...

In fact, based on their data once the math is done the real conclusions of Warren and Tyagi are inescapable and in fact (as Caldwell will be pleased to know) extremely conservative: the financial problems of the middle class are caused by an astonishing rise in the tax burden on middle class families over the past three decades.  Nowhere, however, will one read Professor Warren advocating income and property tax cuts as the obvious policy implication of their book–although that is unambiguously the logical inference.

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Comments

As was pointed out in the prior posts, Warren's tax calculations are not correct. The income tax on $38.7K AGI in 1973 using the standard deduction and 4 exemptions was $9,374 and a 42% marginal rate. The income tax on $67.8K in 2000 with standard deduction and 4 exemptions was $8,057 at 28% *before* child, child care etc. credits. The income tax actually went *down*.(With itemizing, the tax in both years would be a bit less.)

What increased was the payroll tax on those earnings: from $632 in 1973 to $5,829 in 2000.

So Zywicki's conclusion, that the progressive income tax is to blame, simply shows that he doesn't understand tax arithmetic. His assertions are the product of ideology unblemished by facts.

Posted by: Gwailo | Jul 30, 2011 12:55:45 AM

The problem with this analysis is that it doesn't seem to make a lot of vertical comparisons. My wife and I struggle financially on two incomes, but it's partly because we do things (private schools, summer camps, meals at restaurants, etc.) that poorer and even working class people wouldn't dream of doing. There's no question our taxes have increased--the AMT is a particular example--but are we really being treated "unfairly?"

Posted by: mike livingston | Jul 30, 2011 6:21:05 AM

Thank you, Gwailo, for pointing out that payroll taxes have risen, not US income tax, but you are falsely accusing Zywicki when you say he blames the US income tax for the tax increase. In the excerpt above, at least, he just blames taxes generally. Note, too, that your calculations exclude state taxes, which will be very important at this income level.

Posted by: Eric Rasmusen | Jul 30, 2011 8:50:46 AM