What Scandinavia Can Teach Us About Taxes

While I am on something of a tax kick (and apparently a Vox.com one), the website has another article that questions the very notion that average citizens should have to worry about these details to begin with.

The IRS knows what you make. It knows if you typically take the standard deduction. For a lot of Americans, the IRS could just fill out their taxes for them. It would save billions of dollars in tax preparation fees and hundreds of millions of hours spent filling out tax forms.

This isn’t some wild idea: it was piloted in California, where citizens loved it — 97 percent of those who used it said they would do so again. It’s how taxes work in Denmark, Sweden, and Spain. “No other industrialized country asks its citizens to jump through as many hoops to calculate their taxes as ours,” writes Farhad Manjoo at the New York Times.

This idea has considerable traction across the political spectrum, though it faces powerful opposition:

Intuit, the maker of TurboTax, is a particularly powerful opponent. Such a system “minimizes the taxpayers’ voice and control over the tax process by reducing their role in filing their taxes and getting their own money back,” David Williams, the company’s chief tax officer, told the Times.

But that excuse doesn’t hold much water. Under these automatic systems, no one has to let the IRS fill out their taxes for them. They can continue to do it by hand or by TurboTax, or hire an accountant. Intuit knows, however, that many fewer Americans would do their own taxes under this scenario, and that would be a big hit to Intuit’s bottom line.

Some anti-tax conservatives also hate the idea of the IRS filling out sample returns. Grover Norquist, president of Americans for Tax Reform, warns, “Conservatives, in particular, should see this ploy for what it clearly is: a money-grab by the government.” The easier and more efficient the tax system is, the more money it will raise, and the less public anger there will be for anti-tax conservatives to harness.

For much more on this subject, ProPublica’s investigation of Intuit’s lobbying against automatic tax filing is the best look at why a policy with so much bipartisan support can’t seem to pass Congress, and the Sunlight Foundation has even more lobbying numbers here. Wonks will want to spend some time with economist Austan Goolsbee’s white paper on how automatic filing could work in practice. And you can read Intuit’s case against California’s Ready Return system here.

It seems there is no issue in American politics, however broadly supported or commonsensical, that does not face well-monied and powerful lobbyists. I wonder if the Scandinavian nations had to deal with this?

Nine Charts That Explain Taxes In America

While taxes remain on many Americans’ minds, click here to view nine charts from Vox.com that explain the vagaries and little-known facts about the U.S. tax system.

For an even more extensive guide to taxes — such as how federal income taxes work and why payroll taxes differ from taxes on investment — click here.

Some Consolation This Tax Season

Well, that depends on your point of view. While tax season has come and gone in the United States, if you are still feeling the sting and contempt wrought by taxes — as so many Americans do year-round — perhaps you will feel more fortunate following the recent findings by Pew Research Center, which found that U.S. citizens are among the least-taxed of the developed world.

Here is a quick analysis from the Washington Post

The graph above shows where Americans rank in terms of average income taxes and mandatory social insurance contributions as a percentage of gross income. It compares the 34 countries in the Organization for Economic Cooperation and Development, excluding Mexico and adding in Bulgaria, Croatia, Latvia, Lithuania Malta and Romania.

The U.S. consistently ranks toward the bottom of the group, indicating that Americans spend a smaller portion of their income on taxes than people in many advanced countries.

Only South Korea and Chile have a lower tax rate than the U.S. (Mexico, if included, would be dead-last in tax rates).

Here is the more comprehensive assessment of the data by Pew itself, which notes some caveats as well:

Much of the difference in relative tax burdens among different countries is due to the taxes that fund social-insurance programs, such as Social Security and Medicare in the U.S. These taxes tend to be higher in other developed nations than they are in the U.S. Take that married couple referred to above: In 20 of the 39 countries studied, they paid more in social-insurance taxes than in income taxes. The U.S. had the 11th-lowest social-insurance tax rate for such couples among the countries we examined.

Like pretty much anything about taxes, there are caveats with the OECD data. The biggest caveat, of course, is that our comparisons don’t take into account what citizens receive from their governments in either direct or indirect benefits as a result of these different tax structures. We’re only looking at what citizens pay into the system – and even then, just a portion.

For instance, these figures don’t include taxes paid at the state, provincial or local level (such as sales and property taxes in the U.S.), nor do they include other national taxes, such as gasoline and cigarette taxes in the U.S. or value-added taxes in dozens of other countries. And they include only the individual portion of social-insurance taxes, not anything paid by employers. (In the U.S., for instance, employers and workers both pay Social Security and Medicare taxes.)

Granted, all this is only consoling when you ignore the fact that while Americans are under-taxed by global standards, the system is nonetheless widely perceived to be unfair and unequal.

None of this is likely to shift Americans’ opinions about the fairness, or lack thereof, of their own tax system. In the Pew Research Center report, for instance, some six-in-ten Americans said they were bothered a lot by the feeling that “some wealthy people” and “some corporations” don’t pay their fair share. And in a prior Fact Tank post we discussed the data behind the U.S.’s progressive income tax system: A small number of high earners pay the most income tax. According to IRS data, taxpayers with $250,000 or more in adjusted gross income (AGI) accounted for 2.4% of all individual tax returns, 25.9% of total AGI, 32.2% of total taxable income, and 48.9% of total individual tax receipts.

Indeed, this perception is grounded in reality: once one factors in state and local taxes, the system overall is quite regressive (that is, it disproportionately impacts the poor and middle class).

Needless to say, this is hardly comforting in a country facing high inequality, growing poverty, soaring tuition and healthcare costs, and numerous other socioeconomic ills resulting, in part, from a lack of public investment in such services.

A Vivid Visualization of Inequality in America

The rise of wealth and income inequality is a (thankfully) widespread topic in media and public discourse, so by now most readers will no doubt be familiar with the various charts, videos, and graphs that translate it for our viewing pleasure.

But the Washington Post, citing an NPR column, presents an even more dramatic approach to showing the growth of inequality in the United States:

Source: Quoctrung Bui/NPR

Columnist Matt O’Brien breaks down what the data mean and the context of this sobering development:

It compares how much, in inflation-adjusted 2012 dollars, average households in the bottom 90 and top 1 percent have made each year. Now, it’s hard to tell because everyone was making less back then, but inequality really was high during the 1920s. The bottom 90 didn’t make much progress then, while the top 1 rode the, well, roaring stock market to even higher highs. All that was erased, though, during the Great Depression. The top 1 got wiped out when stocks fell almost 90 percent, and the bottom 90 did too when unemployment shot up to 25 percent. It was a bad time to be rich or poor, but mostly poor.

But the New Deal set the stage for a new society. FDR made it easier for workers to unionize, and started taxing the rich at confiscatory levels. It didn’t hurt that first the war and later the baby boom put everyone back to work. The result, as you can see above, was the creation of the American middle class. Between 1940 and 1970, the bottom 90 percent went from making, on average, $12,000 to $33,000. The top 1 percent, meanwhile, were stuck making “only” $300,000 this whole time. It’s what economists call the “Great Compression,” and it was a story about workers having the bargaining power to ask for higher wages and the rich not having much reason to ask for higher wages themselves. That’s because top marginal tax rates were so high—at their peak, 94 percent—that it wasn’t worth it for CEOs to pay themselves that much more. Besides, that was just something executives didn’t do back then. George Romney, for example, turned down a $100,000 bonus in 1960—and those are unadjusted dollars—because he didn’t think anyone needed to make that much more.

This didn’t last. It all started to unravel in the 1970s. Inflation ate up everyone’s pay, so that incomes for the top 1 and bottom 90 percent both stagnated. But it wasn’t just a monetary problem. It was an educational one, too. Starting in the 1930s, America had led the way with universal high school, but by the 1970s this progress had petered out. Making matters worse was that the rest of the world was already catching up—especially Germany and Japan—and forcing our workers to compete against theirs.

Ronald Reagan’s answer to all this was to cut taxes for the rich and deregulate the economy. The idea was to give the top 1 percent the freedom and incentive to work more and invest more, which was supposed to make the economy grow more—and, yes, trickle down to everybody else. It didn’t. Now part of that was because U.S. workers had to compete against even more low-wage workers overseas after the Berlin Wall came down and billions of people joined the global economy. Another was that new technologies like the internet helped the people at the top more than those at the bottom by creating winner-take-all markets. But a big part of it, like we said, was policy. Wall Street, in particular, went from being a relatively sleepy sector to a wheeling-and-dealing one where a couple of good bonuses could make you set for life. Indeed, more than 60 percent of the increasing share of income going to the top 1 percent came from CEOs and financiers who make most of their money in the markets.

It turns out, though, that even if a rising tide lifts all boats, most people can’t afford a boat. The bottom 90 percent, in other words, haven’t done much better the last 30 years, even as the top 1 percent have created a second Gilded Age. The only exception was the late 1990s—highlighted in yellow—when a tight labor market gave workers the bargaining power that unions used to. But other than that, it’s been a tale of two economies. There’s the financial one, where the top 1 percent have tied their fortunes to the booming stock market, and the real one, where everyone else is struggling not to fall behind. Now it’s true that the picture isn’t as bleak if you account for the fact that, as people marry later and have fewer kids, households aren’t as big as they used to be. And it’s also true that government benefits from Social Security to Medicare to food stamps and unemployment insurance help out the bottom 90 percent too. But it’s also true that even with these caveats, a growing economy hasn’t really translated into growing incomes for median households the last 15 years.

The change in fortunes between the bulk of society and a relative handful of families could not be more stark.

Innocents Marked For Death

Setting aside the wider debate about the ethics and efficacy of capital punishment, the New York Times editorial board highlights the disturbingly high incidence of innocent people ending up on death row in the U.S. justice system:

[F]ar too often, people end up on death row after being convicted of horrific crimes they did not commit. The lucky ones are exonerated while they are still alive — a macabre club that has grown to include 152 members since 1973.

The rest remain locked up for life in closet-size cells. Some die there of natural causes; in at least two documented cases, inmates who were almost certainly innocent were put to death.

How many more innocent people have met the same fate, or are awaiting it? That may never be known. But over the past 42 years, someone on death row has been exonerated, on average, every three months. According to one study, at least 4 percent of all death-row inmates in the United States have been wrongfully convicted. That is far more than often enough to conclude that the death penalty — besides being cruel, immoral, and ineffective at reducing crime — is so riddled with error that no civilized nation should tolerate its use.

Innocent people get convicted for many reasons, including bad lawyering, mistaken identifications and false confessions made under duress. But as advances in DNA analysis have accelerated the pace of exonerations, it has also become clear that prosecutorial misconduct is at the heart of an alarming number of these cases.

In the past year alone, nine people who had been sentenced to death were released — and in all but one case, prosecutors’ wrongdoing played a key role.

The all-too-common mind-set to win at all costs has facilitated the executions of people like Cameron Todd Willingham or Carlos DeLuna, whose convictions have been convincingly debunked in recent years. And that mind-set led to the wrongful conviction of people like Mr. Hinton, Mr. Ford and Henry Lee McCollum, who was exonerated last year after spending three decades on North Carolina’s death row.

How Lincoln’s Death Impacted The World

On this day 150 years ago, Abraham Lincoln was assassinated, just weeks before the U.S. Civil War would officially end. Americans were not the only ones grieving their first president to be killed in office; as The Atlantic reports, his untimely death reverberated across the ideological spectrum and the world.

Why was Lincoln’s death mourned so deeply in foreign lands? He never traveled overseas, either before or during his presidency. Except for the ministers and consuls who journeyed to Washington, few Europeans ever had the opportunity to meet him. Television and radio did not yet exist to carry his face and voice throughout the world. Foreign mourners could only know him through newspapers and word of mouth.

For many, this was enough. In both Lincoln and the American experiment writ large, many Europeans saw an idealized view of their own aspirations. Sympathy came easily in Italy, where a war for national unification had also just been completed. “Abraham Lincoln was not yours only—he was also ours”, wrote the citizens of Acireale, a small town in Sicily, “because he was a brother whose great mind and fearless conscience guided a people to union, and courageously uprooted slavery”. For the German states, whose own national unification would come within the decade, the American conflict was also their own. “You are aware that Germany has looked with pride and joy on the thousands of her sons, who in this struggle have placed themselves so resolutely on the side of law and right”, proclaimed members of the Prussian House of Deputies in their memorial for the fallen president. The U.S. consul in Berlin noted that one of the deputies had a son currently serving in the Union Army, while another had lost his only son at Petersburg.

Workers and activists in Europe’s nascent socialist movement felt they had lost a genuine ally. The International Workingmen’s Association in London had saluted Lincoln, “the single-minded son of the working classes”, upon his re-election in 1864 and its “triumphant war cry [of] ‘Death to Slavery'”. Now they lamented the murder of “one of the rare men who succeeded in becoming great without ceasing to be good”. Among the condolence letter’s signatories was the group’s secretary for Germany, Karl Marx.

Such international outpouring of grief, condolence, and concern says as much about the rising power and profile of the U.S. at the time as it does about Lincoln’s qualities and achievements. American affairs were of great and growing interest to the rest of the world, and would remain so — for better or worse — to this day. It is a fitting response to the man that helped ensure that the U.S. would remain a unified and robust country at the first place (albeit at great cost).

How Wealth Perpetuates Itself

It goes without saying that those who are born into rich families are more likely to remain rich themselves, and so on and so forth. But The Atlantic puts this in stark display with the following chart from The Wall Street Journal:

The rich spend far less on basic necessities like food and health care and far more on pensions and insurance, which can be left to children through trust funds and the like.

The article explains the relevance of this disparity:

When you have money, you spend less on the stuff that ensures you survive the day and more on the stuff that ensures that you (and your children, and your possessions, and your estate) survive and thrive for many years. Poverty is a chaos that screams in the present tense, and the anxiety of having no money forces poorer families to direct their attention to immediate concerns. As a result, the poor spend relatively more on what will keep them alive, because they must. And the rich spend more on what will keep them rich, because they can.

It’s boring to point out that having more money affords you more food, more clothes, more housing, and more cars. But the richest families actually spend less on food, clothes, housing, and cars than the poorest families as a share of their income. The real difference between the rich and the poor is that the rich spend a larger share of their much larger income on insurance, education, and, when you drill into the housing component, mortgages—all of which are directly related to building wealth, preserving wealth, and passing it down in the form of inheritance of direct investments in the lives of their children.

In other words, most people are in a paradoxical situation whereby you need wealth to have wealth, whether it is seed money for a business, money to afford an education, or valuable assets you can invest into your children. Many people are unable to realize their potential or that of their children because they simply lack the material resources, and no longer have access to the well-paying, socially mobile jobs — nor any sort of viable safety net — to help them along.

Heck, even if the wealthy did not spend a lot on education — and as the chart shows, in relative and absolute terms, they spend slightly less than the poorest Americans — they would still have the advantage by virtue of the other perks that wealth brings (and recall that wealth entails both income and assets like property, stock, etc.)

But the danger of setting inequality and immobility in opposition is that they’re not in opposition. Matthew O’Brien has written eloquently on “opportunity hoarding,” the idea that rich people are talented at doing all the right things you need to stay rich and make sure your kids get rich, too. Rich couples live in richer districts, read more to their kids, send them to better schools, hook them up with better internships, slide them into better entry-level jobs (or, better yet, into the family business), and finally pass down their insured and well invested wealth. Even education, the great American equalizer, makes for a poor equalizer. And it’s not only because wealthy teenagers are more likely to go to school. Young people born to rich families who don’t go to college are 2.5 times more likely to end up in the richest quartile than young people born to poor families who do go college. Wealth sticks, and nothing enriches like richness.

As long as economic opportunities remain scarce for the majority of the population, we can expect this cycle to continue: a small cohort of the population that becomes an entrenched neo-aristocracy (joined by the few who get lucky or somehow manage to break into higher income) and the majority that, being deprived of such access to assets, better paying jobs, and other means of sustainable wealth, remain in lower standing in relative terms.

This is not to say that everyone need to be rich to be happy and enjoy good well-being. Some of the most successful societies in the world are broadly middle-class in their makeup. The issue is when most people are unable to get beyond paying for the basics to enjoy decent healthcare, education, stimulating activities, and leisure. Then of course there is the problem of having an enduring elite class with the wealth and networks to influence government policy to serve their own interests — which often include shutting out as many opportunities for others as possible.

Why College Tuition in the U.S. is So Costly

Despite the comparatively larger public investment in higher education across most states and the federal government, American students are saddled with higher tuition costs than ever. Where is all that money going if not to reduce the costs of attending universities? To hire more qualified educators at least?

The New York Times highlights one major and often understated factor in this odd equation:

Interestingly, increased spending has not been going into the pockets of the typical professor. Salaries of full-time faculty members are, on average, barely higher than they were in 1970. Moreover, while 45 years ago 78 percent of college and university professors were full time, today half of postsecondary faculty members are lower-paid part-time employees, meaning that the average salaries of the people who do the teaching in American higher education are actually quite a bit lower than they were in 1970.

By contrast, a major factor driving increasing costs is the constant expansion of university administration. According to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which Bloomberg reported was 10 times the rate of growth of tenured faculty positions.

Even more strikingly, an analysis by a professor at California Polytechnic University, Pomona, found that, while the total number of full-time faculty members in the C.S.U. system grew from 11,614 to 12,019 between 1975 and 2008, the total number of administrators grew from 3,800 to 12,183 — a 221 percent increase.

By my understanding, this trend also contributes to high healthcare costs, as hospitals and other healthcare facilities increasingly employ, or are administered by, highly paid individuals with little to no medical background.

What are your thoughts and reactions?

Hat tip to my friend James for sharing this article.

What The U.S. Really Owes

Concerns about government deficit and debt have dominated American politics and public discourse since the turn of the century. But an article in Al Jazeera puts it all into perspective, revealing that at best the issue is overblown, and at worst it is a cynical tool of political obfuscation.

Because we’re used to dealing with everyday amounts of money, $18 trillion sounds like a huge amount of debt. But simply reciting the number again and again does nothing to help us make sense of its size. In order to do that, we need to compare it with something. Consider: Corinthian 15 debt striker Tasha Courtright‘s $96,000 for-profit college education has left her with an unmanageable debt burden, while megabank JPMorgan Chase posted more than $2 billion in outstanding liabilities (debt) at the end of last year. Objectively, Courtright has less total debt than JPMorgan. So why is the college student underwater while the bankers are on a yacht?

This apparent paradox has a simple solution. To get a sense of the real burden of someone’s debt, compare it with that person’s assets. Every economic actor — whether an individual, a business, a municipality or a country — is in principle capable of keeping an account of its assets and liabilities. If, like JPMorgan, you have a big number in your asset column, you can handle a big number in your liabilities column. If, like Courtright, your asset figure is very low because you earn little and own practically nothing, even a small number in the liabilities column can crush you.

Sounds pretty straightforward: a debt of $100 is very different for a wealthy person than a poor one. Millions of dollars in debt sounds unfathomable to the average person, but, barring unusual circumstances, is perfectly manageable for someone with billions in assets.

So how does the U.S. government fare?

The U.S. federal government is the largest asset holder in the world. It owns 900,000 buildings and structures as well as 41 million acres of land, much of it rich in minerals. Its asset portfolio includes 4 million miles of public roads, 12,000 miles of commercial inland water channels and 650 dams. Estimating the full value of these assets is difficult, but Thomas Piketty and Gabriel Zucman put the figure at $17 trillion in 2010. When comparing assets and debt liabilities, it’s necessary to count only real debts. About 30 percent of the official federal debt is held by the government, with about half of that held by the Federal Reserve, which remits interest paid on its holdings right to the treasury. These intragovernmental debts help facilitate monetary policy and create accounting placeholders for programs like Social Security, but they are otherwise meaningless. When you exclude this debt that the federal government owes itself, the value of public assets in the U.S. exceeded public debt by nearly $3 trillion in 2010. In fact, since the founding of the country, the U.S. government has never had a negative net worth.

In short, the U.S. has plenty of valuable assets it can tap into to service its debt. U.S. debt is nowhere near as dire as it is for dozens of other countries around the world that lack any comparable economic and resource wealth.

Granted, this is not to suggest that America should fall back on selling off public infrastructure or lands, or that it will ever even come to that. But it is definitely food for thought, not that I will pretend to know the finer things about this complex and often arcane world of finance, debt, and the like.

The American Cities With The Most (And Fewest) L.G.B.T. People

The following chart comes from the New York Times, based on Gallup’s latest survey of where L.G.B.T. people live. (Click the image to make it larger.)

Areas With Largest and Smallest LGBT Populations

A summary of the results:

The Gallup analysis finds the largest concentrations in the West — and not just in the expected places like San Francisco and Portland, Ore. Among the nation’s 50 largest metropolitan areas, Denver and Salt Lake City are also in the top 10. How could Salt Lake be there, given its well-known social conservatism? It seems to be a kind of regional capital of gay life, attracting people from other parts of Utah and the Mormon West.

On the other hand, some of the East Coast places with famous gay neighborhoods, including in New York, Miami and Washington, have a smaller percentage of their population who identify as gay — roughly average for a big metropolitan area. The least gay urban areas are in the Midwest and South.

Significant as these differences are, the similarities are just as notable. Gay America, rather than being confined to a few places, spreads across every major region of the country. Nationwide, Gallup says, 3.6 percent of adults consider themselves gay, lesbian, bisexual or transgender. And even the parts of the country outside the 50 biggest metropolitan areas have a gay population (about 3 percent) not so different from some big metropolitan areas. It’s a reflection in part of increasing tolerance and of social connections made possible by the Internet.

Frank Newport, the editor in chief of Gallup, notes that the regional variation in sexual orientation and identity is much smaller than the variation in many other categories. The share of San Francisco’s population that’s gay is only two and a half times larger than the share outside major metro areas. The regional gaps in political attitudes, religion and ethnic makeup are often much wider.

“For a generation, they all remember the moment they walked through their first gay bar,” said Paul Boneberg, executive director of the G.L.B.T. Historical Society in San Francisco. “But now they come out for the first time online, and that changes, for some people, the need to leave.”

As with any such research, there are also some caveats to keep in mind:

Before this Gallup analysis, the most detailed portrait of gay demography was the Census Bureau estimates of same-sex couples, including an analysis by the Williams Institute at U.C.L.A. Those estimates and Gallup’s new data show broadly similar patterns: Salt Lake City ranks high on both, and San Jose ranks low, for instance. But couples are clearly an imperfect proxy for a total population, which makes these Gallup numbers the most detailed yet to be released.

Gallup previously released estimates for the country as a whole and for each state. The estimates are based on the survey question, “Do you, personally, identify as lesbian, gay, bisexual or transgender?”

As with any survey, the data comes with limitations. Respondents are asked to place themselves in a single category — L.G.B.T. or not — even though some people consider sexuality to be more of a spectrum. The data also does not distinguish between center cities and outlying areas. Manhattan most likely has a larger percentage of gay and lesbian residents than the New York region as a whole.

And the data is affected by the federal government’s definition of metropolitan areas. Earlier, we mentioned that Raleigh’s percentage is low in part because its area does not include Durham and Chapel Hill. Boston’s percentage may be higher because its metropolitan area is relatively small, with fewer outlying areas. On the whole, however, there is no clear relationship between a metropolitan area’s size and the share of its population that’s gay.

What are your thoughts?