Monday, August 1, 2011

Taxes are low?

The first problem with the article is the misplaced importance of Tax Rates, as opposed to Tax Revenue. Regardless of whether tax rates go up or go down, the deficit is a result of Tax Revenue falling short of government spending.

And while Tax Rates may be at a 60 year low, Tax Revenue is up. In fact, Tax Revenue as percentage of GDP is above 20 year, 40 year and 60 year averages. Why didn't the USA Today article point out this fact?
1) Was the journalist not aware of this fact?
2) Is it because the article didn't want to highlight the point that tax rate cuts can actually increase tax revenue?
3) Is it because liberals will use the historically low rates as a means to justifying a tax rate hike?
4) Some combo of the above?

The second problem I have with the article is the loose connection between low tax rates and the Tea Party Movement's concern about high taxes. Granted, the article does state that the Tea Party is worried about excessive gov't. spending, but those on the left are jumping to the conclusion that this article is some sort of proof that the Tea Party doesn't know what it's talking about.

The third problem I have with the article is the use of average income and average tax rate. It only tells part of the picture. Why didn't the article include median income and median tax rates? May favorite sentence in this article is as follows:

“That means a $3400 annual tax savings for a household paying the average national rate and earning the average national household income of $102,000.”

The first thing that ought to jump out at you as a huge red flag (or red herring in this case) is the $102,000 average annual income.

While I have no reason to doubt the average income in the US to be $102,000, the 2009 median income in the US was roughly $50K (I’ve researched median income from several sources and the numbers range from $46.5K to $52K). Median income simply means that 50% the households in the US earn less than $50K and 50% of the households earn more than $50K. In fact, if you look at the distribution of income across the US, less than 20% of the US population makes $102K or more. So, something like 4 out of every 5 American households make less than the published average. The reason economists have always chosen to use median income instead of averaage income is to avoid the discrepancy below.

But what makes America sound wealthier?
1. An average income of $102K?
2. A median income of $50K?

The fourth problem I have with this article is that is does nothing assess government spending. To reiterate, the deficit is a result of Tax Revenue falling short of government spending.

Obama targeted tax increases for the rich, and he defined rich as households earning $250K per year or more. Are we to assume that the multi-trillion dollar deficit will be recovered by taxing the rich. Only 1.3% of the households in America earn $250K or more per year. Wake and smell the math problem. There simply is not enough of a tax base to recoup that level of spending.

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