John Cochrane on Taxes
By David Henderson
Now wait a minute here…The top graph is a tax rate, the percentage of income paid, while the bottom graph is total dollars. To say this is comparing apples and oranges is an insult to fruits.
This is one of the many nuggets in John Cochrane’s recent blog post on taxes. He titles it “How to Lie With Statistics.” There’s too much in it to summarize, but I’ll hit a few high points. If you want to understand better what I’m summarizing below, go to his post and look at the figures he’s referring to. My one criticism is that, like most people who engage in this debate, whatever side of it they’re on, Cochrane uses the word “rich” where he should use the term “high-income.” There’s a high correlation between wealth and income, of course, but it’s not 1.0. I have a multimillionaire friend, a dyed-in-the-wool Democrat, who cheered when Clinton was elected: she knew that his tax increase on high-income people would keep her in the 15% bracket.
The important point, for the Times is that graph has basically nothing to do with Federal income taxes. All of the action comes from Saez and Piketty’s assigment of corporate taxes and estate taxes. They assume all corporate taxes are paid by stockholders and bondholders. This is conceptually right — it is not true that “corporations” bear any tax burden. Someone is paying, through higher prices, lower salaries, or lower returns to investors. Saez and Piketty assume it’s all the latter.
It may be fine for Saez and Piketty’s purpose, but I doubt any New York Times reader had the faintest idea they were looking at a graph that primarily said “rich people were hurt by taxes in the 1960s because we assume corporate income taxes drove down the rates of return on their investments!”
The actual individual income tax line has not changed much at all, other than to fall slightly for all income groups. Almost all of the Times’ fabled taxes the rich were happily paying in 1960 comes from Saez and Piketty’s assignment of corporate taxes to wealthy people and their calculations of estate taxes! (Estate taxes are notorious for the games the rich pay to avoid them.)
And now a nugget I’ve NEVER seen elsewhere. I still have to think through whether he’s right, but I think he is:
It also appears to me that Saez and Piketty are a bit off here: If you charge corporate income tax against the rich, don’t you have to divide that tax by an income measure that includes corporate income?
Now, look at the nefarious pairing of the decline in (statutory) tax rate with the change in income on the right hand side of the top graph. We cut rich people’s taxes and look how they got richer!
Here, the Times got too clever by half. The cause and effect insinuation here is actually a supply sider’s dream, if you can read and add. The insinuation is, the rich got richer because they got to keep all that income that they’re not paying to the government. Even that doesn’t add up: a 528% rise is much more than (1-0.34)/(1-0.71) = 2.28 = 128% rise in after-tax income.
But the tabulated rise is in pretax income. (At least the labels are honest.) As tax rates came down, people went out and made an enormous amount more income in the first place.
71% x $100 = $71.00. 34% x $528 = $179.52. So, using the New York Times’ numbers, we would infer that lowering the tax rate on the top earners corresponded to tripling the tax revenue earned [sic] from that group! The rich are, apparently, paying much more in taxes than before.
If you take the Times’ numbers seriously, Art Laffer’s wildest dreams came true.
HT to Jeff Hummel.