Paul L. Caron

Thursday, April 14, 2011

Johnston: 9 Things the Rich Don't Want You to Know About Taxes

David Cay Johnston has published 9 Things The Rich Don't Want You To Know About Taxes:

For three decades we have conducted a massive economic experiment, testing a theory known as supply-side economics. The theory goes like this: Lower tax rates will encourage more investment, which in turn will mean more jobs and greater prosperity—so much so that tax revenues will go up, despite lower rates. The late Milton Friedman, the libertarian economist who wanted to shut down public parks because he considered them socialism, promoted this strategy. Ronald Reagan embraced Friedman’s ideas and made them into policy when he was elected president in 1980.

For the past decade, we have doubled down on this theory of supply-side economics with the tax cuts sponsored by President George W. Bush in 2001 and 2003, which President Obama has agreed to continue for two years.

You would think that whether this grand experiment worked would be settled after three decades. You would think the practitioners of the dismal science of economics would look at their demand curves and the data on incomes and taxes and pronounce a verdict, the way Galileo and Copernicus did when they showed that geocentrism was a fantasy because Earth revolves around the sun (known as heliocentrism). But economics is not like that. It is not like physics with its laws and arithmetic with its absolute values. 

Tax policy is something the framers left to politics. And in politics, the facts often matter less than who has the biggest bullhorn.

The Mad Men who once ran campaigns featuring doctors extolling the health benefits of smoking are now busy marketing the dogma that tax cuts mean broad prosperity, no matter what the facts show. 

As millions of Americans prepare to file their annual taxes, they do so in an environment of media-perpetuated tax myths. Here are a few points about taxes and the economy that you may not know, to consider as you prepare to file your taxes. (All figures are inflation-adjusted.)

  1. Poor Americans do pay taxes
  2. The wealthiest Americans don’t carry the burden
  3. In fact, the wealthy are paying less taxes
  4. Many of the very richest pay no current income taxes at all
  5. And (surprise!) since Reagan, only the wealthy have gained significant income
  6. When it comes to corporations, the story is much the same—less taxes
  7. Some corporate tax breaks destroy jobs
  8. Republicans like taxes too
  9. Other countries do it better

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tax guy said "Income has a lower limit -- zero -- that is significant in the range. And income has no upper limit. The lowest cohort cannot run backwards from the starting point."
In fact they do run backwards. What little they had is now worth even less. It's called inflation.

Posted by: Rick | Apr 18, 2011 2:45:20 PM

While some of the criticisms of the Professor's analysis may be correct, the evidence in total supports the overall conclusion that "Trickle down" economics does not work.

Posted by: Joe | Apr 17, 2011 11:51:46 AM

Mr. Johnson's first point is that "Poor Americans do pay taxes", later saying "Actually, they pay lots of taxes - just not lots of federal income taxes". I wonder what his response would be to the same points, but substituing General Electric for the poor.

Posted by: Yooper | Apr 15, 2011 6:34:11 AM

Sandy P, you only did multiple valid statistical analyses if your populations were both randomly drawn and normally distributed. I am sure your's were, bu the columns of data above were neither. The statistical result that says "confident to 95%" or that gives one a "statisically valid difference" means nothing if those first two requirements are not met.

Better than a joke: "How many people are killed every year in Texas living along streams that average six inches deep?" Was the average a useful measure of central tendency?

Posted by: glenlyon | Apr 14, 2011 3:44:03 PM

Weird article. The claim that Paulson pays no income tax is particularly odd, as is the claim that Congress did nothing to prevent it. In fact, Congress passed 409A in 2004 and 457A in 2008, both of which effectively eliminated the ability of hedgies to defer fees and carried interest.

Posted by: jpe | Apr 14, 2011 10:04:26 AM

The basic premise pushed by DCJ that we have really tried supply-side economic policy seems pretty questionable. Maybe if government hadn't been running deficits during most of this period and manipulating currency with Fed policy? We haven't really lowered taxes, we've just deferred them.

Posted by: ruralcounsel | Apr 14, 2011 9:51:33 AM

The comments ignore the central point of this article; that tax cuts have not delivered the economic paradise that was promised by Arthur Laffer. Instead, we have run enormous deficits on the national credit card. Soon, the bills are coming in the mail and we will all have a national headache.

The point is that supply-side economics has been a massive failure. The rich have gotten richer, and have not delivered on the promised jobs, the corporations have offshored and failed to invest here. In short, the tax cuts have benefited an already overprivileged and already connected class, while the middle class is in the process of shattering. When the social safety nets completely fray, it will be interesting to watch the results -- less so if you are part of the affluent one tenth of one percent. Just ask Cardinal Prince Rohan what his thoughts were of the events of 1789.

Posted by: Anonymous | Apr 14, 2011 9:30:20 AM

It's been a long time since I took statistics and a while since I looked at the Census, but isn't 1/100th approximately 30,000 people? I did multiple valid statistical problems with a significantly smaller sample that 1/100th of a percent of the people in the U.S.

But I've always been a believer in statistics can demonstrate whatever you want to believe or wish to prove.

There's an old joke: Two men go to a judge to settle a dispute. After hearing the first man's arguments the judge says "you're right." Then the second man makes his argument and the judge says "you're right." The judge's wife, who had been listening to the proceeding says to her husband, "each party's argument is the opposite of the other, so they both can't be right." and the judge says "you're right too."

Posted by: tax guy | Apr 14, 2011 9:16:22 AM

I'm certainly richer than I was in 1980.


Lower tax rates will encourage more investment, which in turn will mean more jobs and greater prosperity—so much so that tax revenues will go up, despite lower rates.

Did tax revenues go up locally?

Just because the fed didn't get it, doesn't mean it didn't go up.

Where did the money go?

Well, I'm on my 3rd home. My property taxes certainly increased, since I bought a larger home. Which means more money to my schools, 2/3 of my bill is 4 our schools, more furniture, higher energy prices and surcharges to my community.


As to Buffet - he found his inner charity. Finally decided to give some away which avoided a few billion to the treasury.

Posted by: Sandy P | Apr 14, 2011 8:50:59 AM

Yes, glenlyon, but all of that would require DCJ to question his beliefs.

Posted by: S | Apr 14, 2011 8:41:04 AM

Looking at point-in-time income distribution is fallacious. Over time young, low paid workers move up while rich entrepreneurs sell their business, generate very large once-in-a-lifetime capital gains and retire. If the rewards for innovation and entrepreneurship have increased, we should celebrate. It will encourage more risk to gain those rewards, more economic growth and more jobs.

Does David Cay Johnson understand this fallacy? Absolutely! Is there any doubt what David Cay Johnson's real agenda is?

Posted by: DLN | Apr 14, 2011 8:35:06 AM

No. We don't work for Patrick Fox. We were there long before him and will be here after.

With regard to this statistical hit piece, it is interesting to note the author has only worked for left wing causes, having been birthed by the San Jose Mercury News and weaned by the NY Times. Of course, his conclusions are going to be hit pieces on capitalism as his literary parents hate this system.

Posted by: Jerry | Apr 14, 2011 7:54:33 AM

The problem with this, again, is the lack of a rigorous definition of "the rich," the conservatives, and so forth. President Obama got some of his largest margins in high income areas. Without demonstrating a convincing link between wealth and attitudes on tax policy, this is simply rhetoric.

Posted by: Michael A. Livingston | Apr 14, 2011 7:29:52 AM

Paul, with all due respect, why continually run David Cay Johnston articles, as they are not objective and are so easy to invalidate? It would be different if DCJ published fewer articles, but with quality, rather than trying for a numerical record with articles that are flawed and not thought through...if he can.

Posted by: Woody | Apr 14, 2011 7:26:07 AM

Interesting chart, but it is a statistical fallacy. ANY population of data with an important barrier in the range of continuous data in one direction and no limit in the other direction will produce this result. Income has a lower limit -- zero -- that is significant in the range. And income has no upper limit. Just like rats running in a maze from a starting point, some rats will always run farther and quicker than others in a given measure of time. The highest cohort will always have outsized rates of growth. The lowest cohort cannot run backwards from the starting point and it's scores will always be stagnant. So what?

But a second fallacy is to use cohort statistics to generate populations upon which you THEN measure each of their central tendencies. Central tendency, to be meaningful in the sense statisticians want, requires a normally distributed population. How can a cohort sliced out of a population BECAUSE OF ITS SCORE be normal? Or representative of anything?

And a third fallacy is confusing a look at descriptive statistics with just looking at the "universe" of data itself. Four of the seven columns are one one-hundredth of the population, with the very smallest size and the very lowest degree of integrity as normal distributions. An average or mean score is meaningless for such a population. Why not list out the members of the group and tell us what they pay and let us judge if it fair or foul? Or, to put it another way, just have Warren Buffet pay the larger tax that he feels he wants to. He, and a few others, ARE the right hand column of the table. Or conversely, bring out a billionaire that doesn't want to pay taxes and we can villify him. Why have a haze of trivial statisics to see through instead?

Posted by: glenlyon | Apr 14, 2011 6:40:13 AM

Supply side economics does work. (This remark was not intended to be a factual statement)

Posted by: tax guy | Apr 14, 2011 6:27:07 AM