The Amazon Book Jungle

Tracking the elusive book rank
in the Amazon Jungle.

My new book, Taxes in America: What Everyone Wants to Know, with Joel Slemrod, was published a couple of weeks ago and like book authors everywhere, I’ve been obsessively tracking its rank on Amazon.  At the moment, it is at 12,368, which doesn’t sound that great, but Amazon has millions of books, so Joel and I are firmly within the top 1% of book sales, at least for now.  The book is atop the tax law category, beating out such volumes as Bruce Bartlett’s excellent panegyric to tax reform, The Benefit and the Burden, and First-Time Landlord: Your Guide to Renting out a Single-Family Home.  Clearly, we are on our way to fame and fortune.  I’ve already pegged Brad Pitt to play me in the movie.

Or maybe not.  Amazon’s rankings are updated hourly based on a secret proprietary formula.  Our exalted rank reflects the fact that a bunch of people ordered our book from Amazon recently.  By a bunch, I mean like a dozen.  This is a book about taxes, after all.  However, the books are now on back-order.  The last time this happened, our ranking quickly plummeted.

Numerous web pages and blogs speculate about what is in Amazon’s secret proprietary formula.  The consensus is that it is some function of current and historical sales.  Amazon also says this on their website, although somewhat obliquely.  Chad Orzel, who wrote How to Teach Physics to Your Dog showedthat there is a statistically significant negative correlation between Amazon’s sales rank and sales.  He knows this because he has actual data on sales (available from Amazon) and the sales rank, and he knows how to plot a regression line in Excel.  Orzel’s book is, in the author’s words, “moderately successful.” This is presumably because the book includes deeper insights than the negative correlation between rank and current sales.

Authors with technical skills have derived similarly deep insights.  For example, Ben Klemens, author of Math You Can’t Use, produced time series charts of the author rank for his book and several others.  Here is is hissummary of the process:

You can see from the plot that the pattern is a sudden jump and then a slow drift downward. The clearest explanation is that the sales rank is basically a function of last sale. When a copy sells, the book jumps to a high rank, and then gets knocked down one unit every time any lower-ranked book sells.

In other words, your author rank tends to increase when you sell a book and it falls when you don’t.  Brilliant!

But it apparently doesn’t always increase with a sale.  According to Amazon, “This can happen because the rank is a comparison of your book with all other books in the catalog. Your book may have been purchased recently, but if books in the rest of the catalog have recently been purchased more often than yours, your rank may remain constant or might drop.”

What we learn from this is that some authors apparently check their Amazon ranking when friends tell them that they have bought the book, and some are deeply disappointed.

Klemens did, however, find something interesting, which is that Oprah is apparently better for book sales than endorsement by the New York Times, at least back in 2006.

Several websites offer to track Amazon’s sales rank for authors, some for a fee. This is probably a bad investment as Amazon will provide all this information for free through its AuthorCentral website.

My author ranking has fallen to 12,843 while I wrote this.  Drat!  Quick, buy the book, and let me know so I can check my author rank.  And, Oprah, your viewers would love the book.

For more about Taxes in America, Howard Gleckman has a terrific review, “What to Read While Hanging out at the Fiscal Cliff.”  And Barnes and Noble has it in stock.  That won’t help my Amazon sales rank, but I’m okay with that.

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Big Spending Republicans

Most voters seem to agree that Mitt Romney would do a better job of taming the debt. He certainly talks a lot about it. During the primary season he said that borrowing money to finance disaster relief would be “immoral” and that such activities should be left to state and local governments or the private sector (not sure how that would work). And his running mate. Paul Ryan, has garnered a reputation as a budget hawk.

But the historical record is not encouraging for deficit hawks.  Republicans have been good at cutting taxes, arguing that the problem is not inadequate revenues but too much spending. Obviously, the next step is to cut spending, but they have done a poor job on that front.

My former Urban Institute and Tax Policy Center colleague Gene Steuerle has put together a fascinating time series of spending change by presidency, measured as a share of GDP.  The chart above shows the data for domestic spending–that is, excluding defense and interest on the debt. Through the Clinton years, the top four presidents are Richard Nixon, Herbert Hoover, Dwight Eisenhower, and George H.W. Bush–all Republicans.

The most fiscally responsible president by this metric is a surprise: Franklin Delano Roosevelt.  Here is Gene’s explanation:

[T]he liberal New Dealer, Franklin D. Roosevelt, is at the bottom of the list. Domestic spending actually fell by 3.6 percentage points of GDP during his tenure. How can this be? The massive World War II defense build-up crowded out domestic spending. … Perhaps more importantly, FDR’s New Deal programs were primarily short-run or counter-cyclical in nature, and focused on unemployment compensation and jobs. Much of the spending was not intended to be permanent [and disappeared when the economy recovered from the Great Depression] … Non-cyclical programs, such as retirement and health, remained quite small. Even at the end of the Truman administration, domestic spending was 1.6 percentage points lower than it had been when FDR took office two decades earlier. Finally, much of the increase in domestic spending in response to the Depression occurred prior to Roosevelt’s presidency, under Hoover.

The only Republican true to stereotype is Ronald Reagan, who cut domestic spending by 2 percent of GDP.  The other big post-World War II spending cutter was Bill Clinton, who cut domestic spending by 0.6 percent of GDP.

Gene also gave me data for George W. Bush and Barack Obama, whose spending records are complicated by the response to the Great Recession.  From beginning to end of President Bush’s term, spending increased by 5.6 percent of GDP. which would give him the all-time lead if included in the chart.  But even if we stopped the clock at the end of fiscal year 2007, before the recession hit, he increased domestic spending by 0.7 percent of GDP.

Through FY2011, President Obama actually cut domestic spending slightly from the very high levels at the end of the Bush administration, and spending has been cut further since then.  Given the slowness of economic recovery, that was probably a mistake, but it certainly suggests that the image of the President as a fiscal profligate is not entirely deserved.

Of course, the effect on the debt depends also on defense, tax revenues, and interest. The chart above shows the debt record of presidents since Eisenhower.  (I exclude FDR, who borrowed heavily to finance World War II, and Truman, who benefited from an enormous peace dividend, because they are both outliers by a wide margin.)  Four of the five biggest borrowers were Republicans.  Ronald Reagan more than made up for his domestic spending cuts with large tax cuts, a defense build-up, and large interest payments on the debt.  President Obama wins biggest debtor honors, by a small margin over his predecessor, because of the combination of large outlays to fight the recession and tax revenues at the lowest level since the Truman Administration.

What lessons can we learn from this history?  If President Obama wins reelection, his domestic spending path is likely to follow FDR’s, declining as the economy recovers. Even if he had dreams of significant new domestic spending programs, it is unlikely that the Republican-controlled House would accommodate them.  Revenues will rebound with the economy and the president has proposed some other tax increases on high-income households.

What if Governor Romney is elected president?  The fear is that he will follow the course of George W. Bush–enact significant tax cuts and then lose interest in the politically challenging work of cutting spending.  The governor has been maddeningly vague about how he’d offset the cost of his tax cuts–which he promises will not increase the deficit–and he’ll have to take on much bigger items on the spending side than Big Bird.  It’s even possible that the bipartisanship he promises will amount to trading spending increases favored by Democrats for further tax cuts, not a good deal for the government’s balance sheet.

I don’t have a crystal ball and it’s possible that Mitt Romney’s fiscal stewardship will live up to his campaign promises. But history suggests that they should be taken with a big dose of skepticism.

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Repeal the NCAA Ticket Tax Break

If you want to get good football or basketball season tickets at a top tier NCAA program, you often have to make an additional “contribution” to the school.  For the best seats at Syracuse University, the university requires a “donation” $700 per year (plus an additional donation of $10,000 over five years).  You might think that since those donations are required to get the seats, they are just part of the ticket price and certainly shouldn’t qualify for a tax subsidy, but you’d be wrong.  80 percent of the donation is allowed as a charitable deduction.  Thus, for the well-heeled sports fan sitting court-side, the federal government rebates more than one-quarter of the required donation.  (80% of the top income tax rate, 35%, equals 26%.)  Since the deduction carries over to state income taxes, most states also implicitly rebate a portion of the cost.

An excellent article at Bloomberg.com estimates that this tax break costs the Treasury at least $100 million per year, and possibly as much as $1 billion.

This is one of my least favorite tax breaks, even though I am now a beneficiary of it. (Unlike Gov. Romney, I take full advantage of the charitable deductions allowed to me.) I thought that Congress’s official scorekeeper, the Joint Committee on Taxation (JCT), must have estimated the cost of this idiotic provision, but as recently as July 25, they declined to provide an estimate. (JCX-62-12)

The provision was originally enacted as part of the Technical Corrections Act of 1988 (showing how short-lived the spirit of tax reform was after TRA86). The rationale was that “The proposal would eliminate otherwise unavoidable valuation controversies between the IRS and many individual taxpayers as to the proper treatment of payments to college athletic scholarship programs.” (JCX-15-88) That is, of course, absurd since the proper treatment is to make the payments nondeductible since there is a clear quid pro quo. To add insult to injury, the 1988 act made the tax break retroactive to 1983.

JCT at the time listed the revenue cost as negligible. (JCX-32-88) I’d be surprised if it’s as big as $1 billion per year, but it’s clearly non-negligible. And it makes no sense as policy to provide giant subsidies to rich sports fans and/or the most successful college sports programs in the nation.  As Bloomberg points out:

The 10 to 15 most powerful football programs, including LSU, probably don’t need the tax break to persuade fans to pay up for seats, Richard [president of LSU's booster organization] says.

“It’s commonly said of LSU that roughly 80 percent of the state’s business is done in a five-hour period Saturday night in the premium seating area,” Richard says.

Thanks to Paul Caron at TaxProfBlog for flagging the Bloomberg article.

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Top 10 Reasons to Vote for Mitt Romney

1.             You crave the excitement of not knowing what your president will say or do next.

2.           Women can’t be trusted with their own bodies.

3.           It’s been nine years since we invaded a Middle Eastern country.

4.          Sunrise through smog is so beautiful.

5.           Rich people don’t have enough money.

6.          You’ve never experienced a Great Depression.

7.           You’d like to see steeplechase on the White House lawn.

8.           You want to protect mass murderers’ access to semi-automatic weapons.

9.          You want to see what the Supreme Court would do with a couple more Scalias on the bench.

10.      You’re afraid that if Mitt loses, Republicans will nominate someone even crazier in 2016.

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Public Service Message: Americans are Awesome

Kate Trono is cycling across country to raise money for the National Brain Tumor Society in her dad's memory

At a time when many of us are unhappy with many of the rest of us for supporting an evil socialist/selfish plutocrat (choose 1), I have a public service message: This country is full of great people.

I ran into one today while bicycling. I had stopped after a long climb to take a picture of one of my favorite vistas. Another bicyclist stopped, clearly winded from her climb up the other side of the hill. I was feeling quite superior until I noticed that she had four fully loaded packs on her bike. She told me that she’d ridden about 3,580 miles farther than I did to get to that point, having started her trip in San Francisco two months ago. Her bike and packs weighed 90 pounds. Mine totals about 25. She’s a strong woman.

More impressive is the cause that has propelled her all these miles through heat and rain and over mountains. Her dad and a close family friend were both victims of aggressive brain tumors that slowly disabled them and ultimately took their lives. Kate decided to turn her grief into something positive. Her long, hard bike ride is a fundraiser for the National Brain Tumor Society, which is funding research and awareness to try to find a cure for this terrible disease, and help patients, family, and friends cope with it in the meantime.

Meeting Kate also reminded me that Americans are among the most generous people in the world, at least when it comes to private philanthropy.  When my son Paul and I biked across country to raise money for Partners In Health, 300 people contributed an average of $360 (or 10 cents a mile) for a total of $108,000. My fundraiser achieved the kind of bipartisan support that is only a wistful memory in the corridors of power in Washington.  I learned that my friends were engaged in amazing philanthropic activities themselves. And they were so supportive. It made our cross-country bike ride a truly amazing experience.

At 25, Kate’s a lot younger than I was and has few friends able to pony up 10 cents a mile, which in her case would be about $400 since she’s taken a longer route.  But a self-supported ride across country is way harder than what Paul and I did (we went with a company that carried our clothing and provided on-road support). And she is a great person who you would like instantly. I did.

So why not take a break from the angst and rancor of the election season and help Kate honor her father’s memory by contributing to the National Brain Tumor Society.  You can find a link on Kate’s website (www.pedalingforacure.com).   And pass this on to your friends.

Imagine if something like this went viral.  Really.  It is why Al Gore invented the internet.

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PS, Yes, I did steal that line from Jon Stewart.

About Mitt Romney's $5 Trillion Tax Cut

Here’s Governor Romney at Wednesday night’s debate, responding to President Obama’s critique of his tax plan:

First of all, I don’t have a $5 trillion tax cut. I don’t have a tax cut of a scale that you’re talking about.

…

I’m not looking for a $5 trillion tax cut. What I’ve said is I won’t put in place a tax cut that adds to the deficit. That’s part one. So there’s no economist that can say Mitt Romney’s tax plan adds $5 trillion if I say I will not add to the deficit with my tax plan.

Okay.  Now we know that Gov. Romney’s tax plan does not call for a $5 trillion tax cut.  Which means that we now officially know nothing at all about Mitt Romney’s tax plan.

Previously, Governor Romney has said that his tax plan would cut all individual income tax rates by 20%, eliminate the AMT, eliminate the estate tax, and eliminate taxes on investment income for low- and middle-income taxpayers.  He would also extend all of the Bush-era tax cuts that are scheduled to expire at the end of 2012.

Those tax cuts would reduce federal revenues by $480 billion in 2015 over and above the cost of extending the Bush tax cuts.  Allow for some growth in income, and the total comes to over $5 trillion over ten years.

Gov. Romney also has a super-secret plan to close loopholes and deductions on high-income taxpayers to make up the lost revenue without raising taxes on low- and middle-income households.  Efforts by the Tax Policy Center to test whether such a plan might exist have been met with furious criticism from the Romney campaign and its allies,  Through several iterations, the critique has been: (1) that’s not our plan, and (2) we won’t tell you what the plan actually is.

On Tuesday, there was a hint of specificity.  Governor Romney floated a trial balloon:  he’d pay for his tax cuts by capping deductions at $17,000.  As Ipointed out yesterday, that plan probably doesn’t work either in the sense that it will either (a) add to the deficit, or (b) raise taxes on middle-income households, both of which the Romney camp has strenuously disavowed.  Of course, it’s hard to tell what that plan would or would not do because again there are no details.  I assume that if the TPC tried to analyze it, Romney would reply that (1) that’s not our plan, and (2) we won’t tell you what the plan actually is.

In fact, it’s pretty clear that even Gov. Romney doesn’t know what this incarnation of his secret plan is.  Last night, he said:

And I’m going to work together with Congress to say, OK, what — what are the various ways we could bring down deductions, for instance? One way, for instance, would be to have a single number. Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount. And then that number disappears for high-income people. That’s one way one could do it.

So the deduction threshold is not necessarily $17,000.  It is “make up a number.”  That’s helpful.

The bottom line is that we have no idea how Gov. Romney will make up the revenue lost due to the tax cuts he has specified in some detail.  Obviously, Gov. Romney doesn’t either.  The odd thing is that he seems to think that this is irrelevant.

It sounds like some sort of confidence game.

Romney to typical millionaire:  ”Hey there.  Have I got a deal for you!  How would you like to save a quarter million bucks in 2015?  Sounds good, doesn’t it?”

Millionaire:  ”Uh, sure.  What do I have to do to get the quarter million bucks?”

Romney:  ”Hey, don’t worry about that.  Those are just details.  Sign here.”

My guess is that the Romney behind Bain Capital would never have fallen for that scam.  Why does he think the voters should?

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More Than Half a Million Farmers Didn't Pay Income Tax in 2007

DES MOINES, IA - AUGUST 08: Republican presidential candidate Mitt Romney tours a corn field with Iowa Secretary of Agriculture Bill Northey (R) and farmer Lemar Koethe on August 8, 2012 in Des Moines, Iowa. (Image credit: Getty Images via @daylife)

I suspect that when Mitt Romney made his remark about the 47% of Americans who don’t pay income tax and won’t take personal responsibility, he was thinking about the mythical welfare queen staying at home collecting government benefits, although you’d think that a numbers guy would realize that slackers on the dole could only be a fraction of the giant swath of America that he’d dismissed.  As many  have pointed out, those who don’t pay income tax include most retirees who rely primarily on Social Security and a large group of working age people who pay significant Social Security and Medicare payroll taxes (as well as state and local taxes).

It also includes more than half a million farmers, who would seem to epitomize hard work and personal responsibility.  (Yes, farmers receive various subsidies, but those are concentrated on a handful of crops according to Brian Riedl of the Heritage Institution.  Two-thirds of agricultural output, including fruits, vegetables, livestock, and poultry “receive nearly nothing.”)

All told, based on data from 2007 income tax returns, 563,000 tax returns reporting farm income owed no income tax after credits.  That is 28% of such returns.  It is probably an underestimate because it excludes farmers whose incomes are so low that they don’t have to file a tax return.  (The 47% figure includes households who do not file tax returns.)

How do so many farmers avoid income tax?  In part, it is because farming qualifies for some special tax treatment.  The Joint Committee on Taxationlists seven agricultural tax expenditures, but they are comparatively small, totaling just $2.6 billion over five years.  Small businesses also qualify for various tax breaks, such as the ability to immediately deduct many equipment purchases.  (Larger enterprises must spread the deductions over several years.)  But my guess is that most of the farmers who escape income tax do it because they just don’t earn that much money.  Despite working really hard.

My guess is that Governor Romney is aware of this.  The picture above shows him talking to a farmer in Iowa and I assume that he has spoken with others.  I hope he will think about those farmers when he addresses the question of the 47% on Wednesday night.

The best response would be, “I’m sorry.  I was wrong.  I know that a lot of Americans are working really hard, doing the best for their families.  I don’t believe that the big problem in this country is that multi-millionaires like me are over-taxed and that hard-working middle-income families pay too little.  The big problem is that the benefits of hard work have been increasingly concentrated at the top while earnings of lower- and middle-income workers have been stagnant for decades.  I hope that my policies would help rectify that gross inequity, but until they do, I certainly don’t plan to add to the challenges facing the 47% by raising their taxes.”

That would be a flip-flop I could believe in.

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PS, My friend Lauren pointed out that the farmer in the picture is probably a millionaire.  Yeah, probably.  Mitt really does need to get out of the bubble.

Thank you, Mitt Romney, for making us care about capital gains taxes

Back in 1999, I produced a chart showing the relationship between capital gains tax rates and economic growth in my book, The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed (p. 81). Some economists had made miraculous claims for the effects of lower tax rates on the economy, which I argued should be apparent in time series data.  The correlation between the two time series was basically zero.  I've updated this chart periodically (for example, here), but it never got much attention until I included it in my congressional testimony last week.  In the last two days, columnists at the Washington Post and New York Times have cited the chart and my testimony.

My wife, Missie, asked why there's been such a surge of interest.  I think it's Mitt Romney's 14 percent effective tax rate, which comes largely from the light taxation of capital gains and dividends.  So thanks, Mitt Romney, for getting Americans to care about the way we tax capital gains.

Here's the press coverage (aka shameless self-promotion):

Ruth Marcus, “Romney’s tax plan,by the numbers” (Washington Post, 9/26)

Leonard Burman of Syracuse University’s Maxwell School looked at capital-gains rates over six decades and found no correlation with economic growth. Look at his graph and you’ll see: The two lines — capital-gains rates and growth — bear no relation to each other.

Burman tried adjusting for time lags, of up to five years, and looking at moving averages of tax rates and growth. Still no correlation. “There is no apparent relationship,” Burman told the Senate Finance Committee last week. “Cutting capital gains taxes will not turbocharge the economy, and raising them would not usher in a depression.”

Joe Nocera, “Romney and theForbes 400” (New York Times, 9/25)

In 2009, according to recent Congressional testimony by Leonard E. Burman, a professor at Syracuse University, the 400 highest-income taxpayers reaped an astounding 16 percent of all capital gains.

…

In the printed copy of his Congressional testimony, Burman has a chart that plots the ups and downs of the economy since the 1950s with changes in the capital gains rate. There is no correlation between the two. The idea that a lower capital gains rate spurs economic growth is one of the enduring myths of conservative thought.

Ezra Klein, “The case for raising capital gains tax rates” (Washington Post (Wonkblog), 9/25)

Tax expert Len Burman has graphed capital gains rates and economic growth and found no relationship at all.  Burman says he also “tried lags up to five years and using moving averages, but there is never a larger or statistically significant relationship.” 

What he is sure of is that a very low capital gains rate incentivizes very complex tax avoidance. “Since ordinary income is taxed at rates up to 35 percent while long-term capital gains are taxed at a maximum rate of 15 percent, there is a 20 percent reward for every dollar that can be transformed from high-tax compensation, say, to low tax capital gains.”

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Mitt Romney's Self-Imposed Buffett (Lite) Rule and Other Observations

Governor Romney’s release of his final 2011 tax return and an affidavit from his accountant that he’d really paid tax in prior years provoked a feeding frenzy from the press and the blogosphere, despite the fact that there was almost no news.  His final return was not much different from the unfiled version posted earlier, except for this:

The Romneys voluntarily limited their deduction of charitable contributions to conform to the Governor’s statement in August, based upon the January estimate of income, that he paid at least 13% in income taxes in each of the last 10 years.  (Source:  FAQ on MittRomney.Com)

I find that part interesting.  Gov. Romney voluntarily imposed a kind of Buffett Rule on himself.  Recall that the Buffett Rule, as stated by President Obama, was the principle that millionaires should not pay lower tax rates than their secretaries.  This was codified in the Senate as a minimum effective tax rate of 30%.

Gov. Romney has apparently decided that the minimum tax should be 13%, so I guess both parties have agreed on the principle and are bickering about the rate.  (Or, perhaps, Gov. Romney misheard “thirty” as “thirteen.” Romney’sphysician’s letter, also released yesterday, makes no mention of hearing loss, although the doctor does seem confident that Gov. Romney will be the “next president of the United States.”)

Josh Barro has pointed out that the Governor can file an amended return to claim the unused charitable deductions, so he views the voluntary tax reduction as a kind of campaign donation–and one that will be paid back if the candidate loses and people lose interest in his tax returns and campaign promises.

Jacob Weisberg at Slate argued that Romney’s Buffett-Lite Rule violates another campaign promise:

“I don’t pay more than are legally due and frankly if I had paid more than are legally due I don’t think I’d be qualified to become president. I’d think people would want me to follow the law and pay only what the tax code requires.”  [emphasis added]

So, earlier in the week, the candidate writes off half of voters and a big chunk of his base.  Yesterday, he did something that he had earlier said would disqualify him for the presidency.  Do you think that, perhaps subconsciously, the Governor is deliberately trying to undermine his candidacy?  (The physician’s letter also did not comment on Romney’s mental health.)

But, if I may digress into substance for a moment, there is one point that I think most reporters have missed about Mitt Romney’s tax returns:  he pays much, much less than a 15% rate on his capital gains.   Most observers have noted that the 13 or 14% rate that the Governor pays reflects the fact that most of his income comes in the form of capital gains and dividends, both of which are taxed at a maximum rate of 15%.

However, Romney was able to avoid capital gains tax entirely on nearly $1 million of assets simply by donating them to charity.  He reported $920,573 of noncash donations to his foundation, all of which were shares of appreciated stock.  If the Romneys had sold the shares, they would have had to pay tax on any accumulated capital gain. By donating the shares directly to charity, they saved potentially tens of thousands of dollars (depending on how much the assets had appreciated in value).  And they got the charitable deduction on top of that.

An even bigger capital gains loophole is what columnist Michael Kinsley has called the “Angel of Death loophole.”  If you hold onto appreciated assets until you die, the capital gains are never taxed.  Your heirs get to pretend that they bought the asset on the day you died.  Heirs will avoid $44 billion in tax through the Angel of Death loophole in FY 2013 according to Congress’s Joint Committee on Taxation.  Presumably, the Romneys are planning to take advantage of it too.

All of these techniques are perfectly legal.  And they are one reason why wealthy taxpayers can pay much lower effective tax rates on their capital gains than the advertised rates.  And the very light taxation of capital gains is more than an issue of equity.  It surely results in much economically unproductive tax sheltering activity.

I discussed the economic issues surrounding the taxation of capital gains at ajoint hearing of the House Ways and Means and Senate Finance Committeeson Thursday.  A video link is on C-Span.

Once again, I’m grateful to Gov. Romney for creating a teachable moment on an important subject.

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In Mitt's World, My Limo Driver Is Not Trying Hard Enough

I’m on my way to the University of Michigan to participate in a forum on the presidential candidates’ tax plans.  I’m thinking about Mitt Romney’s statement that the 47 percent of Americans who do not pay income tax are lazy and dependent (and beyond the reach of his campaign).  One thought is that if Mitt is really the numbers guy that Bain legend makes him out to be and he really believes that the bottom 47 percent is lost, then he should give up now, since lots people in the top 53 percent are going to vote for Obama.  (Look at the polls.)  Or maybe he is counting on voter suppression to nullify the 47 percent’s votes.

Mitt and I disagree about whether seniors and low-income working families should pay more tax.  (I previously posted a pointed critique of Rick Perry’s assertion of dismay at the 46 percent—the correct statistic—who don’t pay income tax here.)

But what’s really galling is the implication that lower-income Americans just aren’t trying very hard.  Yes, theoretically, tax breaks can enable people to slack off, but Americans work really hard—even in difficult, poorly paying jobs.  My limo driver, Jeff, works 7 days a week to try to make ends meet.  My dad drove a taxi 6 days a week, 11 hours a day, before the advent of refundable tax credits and barely scraped by.  I’m certain that the existence of earned income tax credits would not have lessened his effort, although they would have reduced my family’s financial insecurity drastically.

Mitt, talk to the people tending one of your gardens or polishing the silver in one of your houses.  The work is hard—really much less rewarding than being a master of the universe (you) or a college professor (me), even before accounting for the discrepancy in pay.  I wouldn’t take my dad’s job even if offered 10 times my current salary.  I did it for a summer during college.  It was exhausting and often demeaning.  In my current job, I get treated with respect.  Even the occasional limo ride.

Jeff, my driver, used to work in a factory earning much more money, but was injured on the job, which is why he’s now driving back and forth to the airport seven days a week.  That’s terrible luck—something with which the governor has little experience, but a common feature among those in that 46 percent.  I’m glad a safety net exists to keep Jeff’s bad luck from jettisoning him from the middle class?

Yes, it would be wonderful if working hard were sufficient to guarantee a comfortable middle class existence, but it’s not.  Tens of millions work really hard and some of them benefit from tax breaks intended to reward work.  That’s a good thing.

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(This rant is from Tuesday, but I've been running around all week so am only just now posting it here. Sorry for the delay.)

Stephen Strasburg and the Limits of our Medical Knowledge

English: Stephen Strasburg (Photo credit: Wikipedia)

Tonight, Washington Nationals pitching phenom Stephen Strasburg will make his last start for the year in DC.  He’ll pitch one more game on the road and then become just another spectator as the Nationals make their run for the playoffs and, I hope, the World Series.

The Nationals early made the decision to limit Strasburg’s innings to protect him from a possible career threatening injury in the aftermath of his Tommy John surgery in 2011. (The procedure, named after the Dodgers pitcher who first had the surgery in 1974, repairs a damaged elbow ligament using a graft taken from somewhere else in the body. There’s a great article about it here.)  The Nationals are following the advice of Strasburg’s surgeon, Lewis Yocum, who had recommended the same course after pitcher Jordan Zimmerman’s surgery in 2010. Zimmerman has had a great year in 2012.

It’s impossible to argue with the Nats’ baseball decisions.  They’ve put together the best team in baseball through a methodical course of brilliant drafts and trades, excellent player development, strategic acquisitions, and a terrific manager (Davey Johnson).  I also don’t doubt Dr. Yocum’s proficiency as a surgeon.

But I do wonder whether the innings limit comes from careful research or simply the best guess of physicians like Dr. Yocum based on their own patients’ post-operative experiences and conventional wisdom among their peers.  The fact is that in many cases, doctors are just guessing about best practices.

The right way to test the conventional wisdom about Tommy John surgery would be to randomly assign pitchers who have undergone the surgery to two groups—one with an innings limit and one without. Watch them for many years, and see who tends to have the better outcome, presumably measured as quality games (or innings) pitched.  The relevant research question is whether pitchers can expect to gain at least as many games down the road as they sacrifice via the earnings limit.  It might well be that the innings limit will prolong careers, but it could also be that the innings forgone are simply lost forever.

As an economist, it is natural for me to think about this as a cost-benefit problem.  We know there is a cost:  the value of the starts the pitcher skips.  In the case of Jordan Zimmerman, pitching for a mediocre Nats team in 2011, the cost of his missing starts was pretty minimal.  In Strasburg’s case, the cost could be a World Series ring.  It would be nice to know the benefits as well.

Dr. Yocum has clearly convinced Mike Rizzo, the brilliant general manager of the Nats, that there are substantial benefits to shutting Strasburg down.  But the doctor might be misled by the evidence that he sees.  Even if there were no therapeutic benefit to an innings limit, pitchers who continue pitching for an entire season are obviously more likely to suffer an injury than those who pitch for part of a season since every start creates a small risk of injury.  This is true not only in the year after surgery, but every year that a pitcher plays.  So Dr. Yocum is more likely to see pitchers who exceed his recommended innings limit than those who don’t, which seems to confirm his supposition that the practice is ill-advised, but it might simply reflect the fact that pitchers can’t get hurt pitching if they’re not doing it.  The real question is whether Strasburg would be statistically more likely to suffer an injury pitching this September and October than he would be next year or the year after.

Washington Post columnist Tom Boswell thinks he knows the answer. He called continuing to pitch Strasburg a “high-risk high-reward gamble” and unethical to boot.  He cited anecdotes about pitchers who threw too much after Tommy John surgery and ultimately had short careers.  Chicago Cubs pitcher Kerry Wood is the poster child, but Wood himself has pointed out that he pitched well for several years after his surgery and doesn’t think that his recovery regime led to his ultimate injuries.  The problem, though, is that neither Boswell nor Wood nor anybody else really knows whether the risks are large or small.  We need to know what would have happened to Wood if he had limited his innings after surgery; for Strasburg, we’d like to know what would happen if he didn’t sit out the last month and a half.  We will never know.

Beyond baseball, this is a poignant example of what is wrong with our healthcare system.  In so many cases, docs are flying by the seat of their pants.  We need to know which courses of treatment are effective and which aren’t.  In too many cases, we don’t know.  There are lots of examples where the conventional wisdom was exactly wrong.  It used to be that physicians thought that bed rest was the right course of treatment for back pain. It sort of makes intuitive sense—just like resting Strasburg does. Now it appears that keeping active despite the pain results in quicker healing.  Prostate surgery used to be routinely recommended for older patients with prostate cancer or even just enlarged prostates.  Now it appears that in most cases the treatment does more harm than good.  And for decades, hysterectomies were routinely prescribed for a host of “female troubles.”  Talk about a “war on women!”

Fortunately, policy is moving in the right direction.  The stimulus bill includedfunding for effectiveness research and the Affordable Care Act continued that effort.  Regardless of your favorite health reform option, having more information about what works and what doesn’t would make the health system work better for patients and those who pay the bills.  Someday, it might even work for baseball players and fans.

Go Nats!

PS, I lived in the DC area for 25 years before coming to Syracuse and still attend more Nationals games every year than 95 percent of DC-area residents.  (I just made up that statistic, but am sure that it is true. :-)

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Even if Governor Romney's Tax Plan Could be Made to Add Up, It Wouldn't Make Any Sense

Harvard Professor Martin Feldstein weighed in on the mathematical feasibility of Governor Romney’s tax plan in today’s Wall Street Journal. His bottom line: using his assumptions and his preferred dataset, the plan could raise revenue without raising taxes on the middle class.

Mitt Romney’s plan to cut taxes and offset the resulting revenue loss by limiting tax breaks has been attacked as “mathematically impossible.” He would reduce all individual income-tax rates by 20%, eliminate the Alternative Minimum Tax and the estate tax, and limit tax deductions and loopholes that allow high-income taxpayers to reduce their tax payments. All this, say critics, would require a large tax increase on the middle-class to avoid raising the deficit.

Careful analysis shows this is not the case.

Professor Feldstein’s critique basically shows that if you use different assumptions and data, you can come up with a different conclusion–possibly not the most earth-shattering finding ever.  There are substantial differences between Marty Felstein’s analysis and the earlier study that he critiques (and possibly an oversight or two).

Marty based his conclusions on published IRS tabulations of data for 2009.  The original Tax Policy Center study was based on projections for the year 2015.  Marty’s calculations were at the aggregate level whereas TPC’s were based on a tax calculator that uses data from 100,000-plus individual income tax returns. Marty does not consider the cost of repealing the high-income surtaxes enacted as part of the Affordable Care Act whereas TPC assumes that is part of the baseline.  Possibly the most significant difference is that Marty seems to have significantly narrowed the definition of middle class.  He assumes that the loophole closers would apply to people with incomes over $100,000, whereas TPC assumes that taxpayers with incomes below $200,000 would be held harmless in Romney’s plan.

Under those assumptions, Marty estimates that the Romney tax cut would have cost about $186 billion in 2009 (after accounting for taxpayers’ reporting more income when their tax rates are cut). Taxpayers with incomes over $100,000 reported itemized deductions totaling $636 billion (including the deduction for charitable contributions, which the GOP platform pledges to preserve).  Assuming an average tax rate of 30 percent (which is too high given that the Romney plan would cut top rates to 28 percent), this generates “[e]xtra revenue of $191 billion—more than enough to offset the revenue losses from the individual income tax cuts proposed by Gov. Romney.”  (Presumably, Professor Feldstein is also assuming that the standard deduction would no longer be available to people with incomes over $100,000; otherwise, the tax savings would only be the excess of itemized deductions over the standard deduction.)

I obviously have some issues with Marty’s assumptions, but will let them go for a moment.  Suppose you took seriously that this is the “tax reform” that Mitt Romney has in mind:  Your income reaches $100,000 and your itemized deductions go to zero.

I can’t imagine that Professor Feldstein, Mitt Romney, or anyone who cares about economic incentives would support such a thing. It would produce a huge toll gate on entry into the upper middle class.  Say you had $15,000 of itemized deductions and income of $99,000.  If you got a $10,000 raise, your gross income would increase by that amount, but your taxable income (gross income minus deductions) would rise by $25,000.  If you are in the 25 percent tax bracket, your effective tax rate would be 62.5 percent (2.5 times 25 percent)!

For people with very high incomes, the rise in marginal tax rates would be smaller, but to the extent that itemized deductions rise with income, the loss of those itemized deductions means that the cut in marginal effective tax rates on high income people will be less than the cut in statutory rates.  That is, taxpayers currently in the 35-percent bracket don’t face an effective rate of 35 percent because they can shelter some of each dollar of additional income with additional itemized deductions.  (This is why the TPC was skeptical of claims that Gov. Romney’s plan would produce significant behavioral responses.)

So even if it were “mathematically possible” for Romney’s plan to be revenue neutral (which it’s not), such a plan would make no sense as policy.

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Note to Governor Romney: Growth by Itself is not an Anti-Poverty Program

Today is not only the start of the GOP Convention, but the start of classes at Syracuse University, where I teach a class on Social Welfare Policy to MPA students.  This semester, we’ll obviously be talking about the presidential candidates’ positions on issues such as welfare and poverty.  I looked for the Romney campaign’s position statement, though, and came up empty.  Theirissues page lists 23 topics, but those two apparently do not merit inclusion.

When asked, Mitt Romney summarized his policy this way: “I’m not concerned about the very poor. We have a safety net there. If it needs repair, I’ll fix it.” But the Ryan budget plan would slash the social safety net.  According to the Center on Budget and Policy Priorities, almost two-thirds of Mr. Ryan’s spending cuts come from programs that help lower-income Americans.  You can quibble about the details of CBPP’s analysis, but there’s little evidence to support Governor Romney’s pledge to repair the safety net if necessary.

The cornerstone of the Romney program is that his policies will fuel much more economic growth.  There are many reasons to doubt Romney’s growth projections, but even if they materialized, would they trickle down to help the poor?

The first reading for my class is from a book called Changing Poverty, Changing Policies, edited by Maria Cancian and Sheldon Danziger.  They address this issue at the outset:

It is not surprising that the severe economic downturn that began in late 2007 reduced employment and earnings and raised the official poverty rate. What many readers may find surprising, however, is that even during the long economic expansions of the 1980s and 1990s the official poverty rate remained higher than it was in 1973. … Even though gross domestic product (GDP) per capita has grown substantially since the early 1970s, the antipoverty effects of of this growth were substantially lower than they were in the quarter-century that followed the end of World War II.  Economic growth is now necessary, but not sufficient, to significantly reduce poverty. [p. 1, emphasis added]

In other words, governor, growth by itself is not an anti-poverty program.

There are smart thoughtful conservatives who are concerned about the very poor and have written volumes on the subject. You might ask them to help you craft a policy proposal, or at least a set of principles (which is what theWhite House website offers). My students will be debating different approaches.  You and President Obama should too.

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Paul Ryan's Tax Philosophy Explained

In a new paper, USC law professor, Ed Kleinbard, has pored through Paul Ryan’s “Roadmap for America’s Future,” including  100 pages of legislative language, to gain insights into the VP candidate’s tax philosophy.  The Roadmap would represent a radical change in our tax system–massively cutting taxes on people like Governor Romney because capital gains and dividends would be entirely exempt from tax, and raising taxes on middle-income households because there’s a new cash flow tax on businesses (basically, a VAT) that would translate into higher prices or lower wages.

Despite all the detail in the Ryan plan, it shares one feature with the Romney campaign proposal in that it doesn’t explain how it would offset the cost of the large tax cuts specified.  When Ryan made the proposal, he instructed the CBO to assume that the plan would keep tax revenues at 19 percent of GDP (slightly higher than the historical average) even though the pieces specified would fall far short.  Also, as Kleinbard notes, Ryan proposed the plan when he was a member of the minority and it had no chance at all of getting a hearing, much less being enacted.  It didn’t matter back then that it was politically impossible.

Nonetheless, I found Kleinbard’s analysis fascinating and worth a read.  Here is his summary:

The purest articulation of Paul Ryan’s fiscal belief system is his 2010 Roadmap for America’s Future. The tax provisions of this extensive proposal would convert the current personal and corporate income taxes into two consumption taxes, and repeal the gift and estate tax.

This report explains how the Roadmap, like Herman Cain’s 9-9-9 Plan, would operate in practice like a large new payroll tax. The Roadmap would directly immunize the highest labor income earners from this tax through a large reduction in the top rate of the Roadmap’s labor earnings tax, compared with current law or policy. Unlike the 9-9-9 Plan the Roadmap further would largely immunize “old” capital from the efficient (if arguably unfair) imposition of consumption tax when that capital was consumed, by providing a write-off of existing depreciable basis. And finally the Roadmap would reduce the tax burdens on the most affluent capital owners further by eliminating the gift and estate tax.

For these reasons, it is not surprising that the Roadmap contemplates an extraordinarily large redistribution of tax burdens from the affluent to middle-class and lower income Americans. For middle-class families, tax burdens would increase on the order of 50 percent. At the same time, the Roadmap’s reprioritization of government spending also would be regressive in its impact. Proponents of the Roadmap or plans like it must explain how any projected increase in economic growth will compensate the majority of Americans for shouldering more tax burdens while receiving smaller government benefits.

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