Flashback – Hating the Rich

Millionaires, billionaires and highly paid executives are favorite targets for someone trying to garner support for a new program. We should hate the rich merely because they are rich. The government should take away their money to help the poor. In this stirred-up state of envy no one wants to think about how the anger is selective. Nor do they want to hear how such a move would dampen motivation at all levels while not really solving any problems. 

I pointed this out right before the 2016 election, and nothing has changed since then:

[Maybe hating is too strong a word for it. Maybe being angry or envious is a better description of those feelings, the feelings various politicians and organizations vigorously promote. But since those same organizations and advocacy groups freely use the words “hate” and “haters,” it’s probably not completely unfair. In this case the hating is not only selective, but also difficult to justify.

Here is a graphic that has been going around on social media. It shows the total compensation of health insurance company CEOs. The caption and comments imply that this is the reason for the sharp increase in Obamacare (ACA) premiums for 2017. Let’s take one example and see what’s going on.

Let's not quibble over the fact that the information is three years old or that they calculate daily pay based on 341 days in a year. If these folks have moved on, they were likely replaced by others who were equally well compensated. Instead take the first gentleman, Joseph Swedish as representative.

He is the CEO of WellPoint, which operates Blue Cross Blue Shield plans in 14 states. Here is some information from a CNBC report from 2014. “The company had 37.5 million members at the end of the quarter, up 2 million members from a year earlier.” Apparently he is doing a good job of growing the company and meeting analysts’ expectations. But is his pay driving up premiums?

Take the $17 million shown above and divide by the number of customers, 37.5 million, and get 45 cents per customer. Divide that by 12 to calculate the effect on monthly premiums and we find that if he were paid nothing, each customer might see a 3.8-cent reduction in monthly premiums – 3.8 cents!  (By saving this up for 10 years each customer could afford one trip to Starbucks.)

Maybe it’s the fact that the government forces us to buy health insurance that causes such a negative opinion of these CEOs. By contrast, we never seem to get upset about the amount paid to the Disney CEO or star athletes. We never hear people complaining that the ticket prices would be lower if their favorite quarterback made less money. We give these people our money freely, even line up to do it, in return for a limited amount of entertainment, and they also get rich.

Look at the recent Desert Trip concert in Palm Springs. Most of the 75,000 tickets were gone in less than five hours, with the good seats going for $1599 each. The promoter is expected to gross $160 million for the three-day event, while paying the headliners up to $7 million each (for showing up and playing for a few hours). The LA Times reports that these rock stars from the sixties continue to do very well for themselves. “Since 2000, the Rolling Stones have grossed more than $1.1 billion with their periodic tours, according to Pollstar, the concert-industry-tracking publication. [Paul] McCartney has racked up $761 million, [Pink Floyd’s Roger] Waters has pulled in $592 million, followed by [Bob] Dylan ($293 million), the Who ($200 million) and [Neil] Young ($153 million).”

We love to hate those one-percenters, the people making a lot more money than we do, but the outrage is selective. When it’s Mick Jagger, Bob Dylan, Lady Gaga, Peyton Manning, Rory McIlroy, George Clooney, Tom Cruise, or Oprah, then it’s OK. Making almost $50,000 a day is very impressive, but it pales in comparison to $500,000 - $750,000 for a single speech or an advance on a book in the millions. We love the ones who perform for us and hate the ones who help us pay our doctor bills. Objections to the rich being rich are both selective and difficult to justify.]

National Debt – What, Me Worry?

If you care about the country going bankrupt, it doesn’t matter who you vote for. Both parties seem to be indifferent to it. There's only a small difference in the size of their trillion-dollar spending bills.

 

Below are two graphs. The first shows, from the best source I could find, the spending and revenue of the United States over the last 30 years. We actually had a small surplus in the last two years of the Clinton Administration. Then things went south. Bush started a couple of unnecessary wars and added Medicare Part D. Obama continued those wars, failed to take ISIS seriously and threw in some stimulus. Trump wanted to build up the military, already the largest in the world, but the democrats would only agree if they got a proportional boost to their favorite domestic programs. The lines clearly show what happened. 

 

 

Just as a thought experiment, suppose the rate of increase of federal government spending had remained the same as it was from 1990 to 2000 under Bush (R) and Clinton (D) – not the same level of spending, but the same rate of increase. Here is what that would have looked like. 

 

Even with the two tax cuts that politicians told us would cause huge problems; many of those years would have run a surplus fed by growth in the economy over the past 8 years or so. 

 

Now this exact scenario would likely not have been possible due to the increased Social Security outlays as the Baby Boomers hit retirement age. But still, if you ask people over the age of 45 how life was during the 1990s, how well needs were being met; the majority would say that things were fine. 

 

The question is: how much of that extra spending went to real improvement, how much was pure waste, and how much went to buying your vote (using your own money to do it)?

 

We hope for responsible leaders; but when it comes to spending, politicians take the attitude of Alfred E. Newman, the fictitious mascot of Mad Magazine.

Flashback – Robbing Peter to Pay Paul

[Here, from over seven years ago, are some examples of government actions showing how failures in economic understanding lead to bad outcomes. Politicians will never change their tactics and sales pitch until voters wise up. In many cases we have to lead the people we elected  away from senseless legislation with hidden, but predictable, consequences.]

When I call for economic understanding by saying that there is no magic money tree, here is what I mean. When corporations incur added costs, whether it be shoplifting, a utility rate increase, wage increases or higher taxes, they find a way to pass the cost along to their customers, usually as higher prices. When governments decide to spend more money, they either raise taxes or borrow, leaving the taxpayers to absorb the cost directly or pay the interest now and leave the principle repayment to future generations.  No magic money tree means that the funds must come from somewhere, not out of thin air, and that somewhere is usually from our wallets, directly or indirectly.  The consumer/taxpayer is the bottom of the economic food chain.

As 2013 begins, the Affordable Care Act (ObamaCare) requires manufacturers of medical devices to pay an excise tax, 2.3% of sales. Besides the possibility of reducing costs by outsourcing to other countries and reducing development budgets, the industry also hints that the added costs will result in a price increase. As this article points out:  “Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases.” (Emphasis added) Those of us who don’t believe in a magic money tree are not at all surprised.

But look at how circular this situation becomes. The government adds a tax to help offset the cost of healthcare. The companies pay the tax by raising prices. Healthcare providers, doctors and hospitals, raise their prices to account for their now higher costs. Insurance companies raise their premiums or co-pays to account for their now higher costs. The government uses the tax money to subsidize health insurance that is now more expensive due to the tax itself! If anything, the cost of the whole system increases due to the added administration associated with paying and collecting a new tax.

In an economy such as ours, this concept of punishing greedy companies with taxes or penalties doesn’t seem to work very well, and why would we even want to punish someone who provides us with a product or service that we want or need? In general, magic-money-tree thinking leads to a host of unintended consequences.  

As citizens and voters we can solve this, but not until we stop thinking this way ourselves. This type of logic drives decisions by both parties at all levels. They tell us that most of a project will be paid for by a federal government grant, as if that's not our money too.  They try to make us believe that corporations pay taxes by just reducing their profits or paying their CEO less. They spend as if the bills will never have to be paid, as if there is some magic money tree or secret treasury to make it all right.  

Different Cultures, Different Rules

A story about an incident in 2006 is suddenly getting a lot of attention on social media. An American woman temporarily working in Iceland “went from feeling a lump in her breast to getting checked out and assured that it was benign in the space of a single day, and for $3.” She posted the story of her experience on Twitter.

This gets many people stirred up, asking: Why can’t we do this in the United States? Some politicians think we can and are promising changes, but the comparisons are not as straightforward as we’d like them to be.

Iceland is a small, island nation in the North Atlantic with a population of about 350,000. For comparison, the city of Minneapolis has a population about 425,000. The entire country is smaller than many American cities. 

But it’s not just a matter of scale. Taking it a step further, that population is very homogenous. About 91% of the residents of Iceland are Icelandic citizens and only 16% are foreign-born. Unlike the US, the population is concentrated. Ninety-nine percent live in urban areas and 60% live very close to the capital. Furthermore, about 72% belonged to the same religion, the state Evangelical Lutheran Church of Iceland.

Back to our comparison example – where Iceland has homogeneity, Minneapolis has diversity. Its population is approximately 64% white from various heritages, 19% African American, 10% Hispanic and 7% various other ethnicities. It is the home of more than 50 denominations and religions.

How important is this homogeneity in the smooth operation of a more socially oriented society? Denmark believes it is vital to maintain the order and necessary shared values. “Beginning at the age of 1, [mostly Muslim immigrant] ‘ghetto children’ must be separated from their ‘ghetto parents’ for 25 hours per week for mandatory instruction in so-called ‘Danish values,’ which includes learning about the language and the traditions of Christmas and Easter, The New York Times reported in July 2018.”

(Again for comparison Denmark is about 35% larger than Maryland in area with about 5% fewer people. These are much smaller countries whose people share a common background and history.)

But there is no free lunch and no $3 health service without a huge subsidy. Here is a simplified comparison to make the point.

After a $5,145 deduction, Icelanders pay 36.94% of income up to about $85,000 and 46.24% on income above that. On top of that is a value added tax (VAT) of 24% on most goods and services, but a few categories are subject to a reduced rate of 11% (e.g. food, hotels, newspapers, books, and utilities).

Everyone in Iceland pays at least at the same level as the highest tax bracket in the US, 36.94% compared to 37%. They don’t “soak the rich;” they take it from everyone. On the other hand, their corporate tax rate is among the lowest.

In Minneapolis a single taxpayer owes no more than 17% on the first $85,000 after a standard deduction of $12,200 and pays about 8% sales tax, but not on food. (Sales tax and VAT are not identical, but the economic burden of VAT falls on the final consumer.)

Using those numbers, a single taxpayer earning only $20,000 in the US pays $780, whereas for the same situation in Iceland the tax bill would be roughly $5,500. When the money is spent, it is taxed again at a rate up to 16% more.

On another point, access to doctors is slightly better. Iceland has a physician ratio of 3.62 doctors per 1000. In the US it’s 2.3 doctors per 1000.

These and many other considerations are ignored by those who want to make simplistic comparisons, comparisons that in reality are light-years away from apples to apples. It would be nice to have all the benefits and not have to make any of the sacrifices, not have to adapt to an entire new set of values and expectations, not have to live within a completely different culture. (The US cannot even agree to have one official language!) But there are no simple answers.

Opinions, Opinions…

It happened at the beginning of this week. James Holzhauer broke a 32-game winning streak on Jeopardy after winning nearly $2.5 million. 

Many people were puzzled and suspicious by his totally explainable final wager. Some thought he threw the game. Some neighbors agreed with and passed along an idea being circulated on Facebook that another win would move him into a higher tax bracket.

First, his wager in Final Jeopardy made perfect sense. Since he had not hit any of the Daily Doubles, he was unable to risk large amounts at a time, a tactic that led to insurmountable leads on previous shows. This was a bit of bad luck. His opponent was quick on the button, hit the Daily Doubles and managed to have a small lead going into the final question – 26,600 to 23,400. She only needed to risk enough to finish one dollar ahead of him in case he risked everything, which is what she did. He understood that his only chance to win was for her to get the answer wrong. If they both got it wrong, he needed to risk enough to still be ahead in case the third place contestant got it right and doubled his score of $11,000. That is exactly what he did – 23,400 minus his “conservative” wager of 1, 399 would have been 22,001. The amount he bet, conservative or not, was the best decision.

People who didn’t understand this jumped right to a subject they likewise don’t understand, tax brackets!

The US has a progressive income tax; the tax rate increases as the taxable amount increases. The tax rate on the first taxable dollar is the same for everyone whether you make one dollar or $2.5 million. The tax on the first $100,000 is exactly the same for everyone $13,874. That is about 14%. Anyone making another dollar pays 22% of that additional dollar. Anyone who makes $110,000, for example, pays the same as everyone else on the first $100,000 and then pays 22% on the additional $10,000. That’s how it works as the brackets change. The rate goes to 24% at $165,000, to 32% at $315,000. The highest bracket under the current system is 37% from $600,000 on up. (All examples are for the status of Married Filing Jointly.)

There is no bracket issue in the $2.5 million range. Taxes would be 37% for every additional dollar.

Note how this misunderstanding lets politicians get away with something that is not quite a lie, but is at least a misrepresentation. As the system works, if they lower the rate for the middle class, it lowers the rate for everyone who makes under $100,000, but it also lowers the rate on the first $100,000 for everyone else who makes more than that – even those evil rich people. Fiddling with the lower tax rates to help the middle class, helps everybody, the rich too. It can’t be helped. It’s how the system is set up! 

Now those same politicians have the power to change the system and make it work differently, but they don’t, they just propagandize.

But the biggest takeaway from the Jeopardy story is not the wager or the tax implications. The biggest take away is how inclined people are to form an opinion, defend that opinion, post it on line and spread the word on subjects they don’t understand and apparently are too lazy to do a little bit of research to find the truth. They are so confident that their opinions are right, because they have been constantly reinforced by others with the same degree of ignorance. Bad information spreads like the plague.

Everyone pretends to understand taxes, but they are too complicated for most people to do themselves, which allows politicians to demonize opponents and tax preparation companies to stay in business. But many other more important and complex subjects fall into this same category of confidently held opinions grounded in a woeful lack of understanding: Social Security, Medicare, the healthcare system, economics in general – such as minimum wage and the comparative virtues of socialism vs. capitalism, government spending and the National Debt and the proliferation of deceptive advertising and junk science.

Many Americans can’t even figure out Jeopardy wagers, yet on issues vital to their personal and to the national success they participate in protests and demonstrations, post nasty comments and cartoons on social media and go to the polls to vote for politicians who are often equally mistaken about how the world works.

Consequences of Not Thinking Things Through

Sometimes we believe that we are backing a worthy cause or making a good decision, but it turns out (sometimes too late) not to be the case.  Two recent examples in the news are trophy hunting and tax deductibility.  Though they may seem totally unrelated, they share the common characteristic that we tend not to think them through.

They both tend to be political, which makes it all the more important that we fully understand what is going on so as not to be manipulated by the opposing forces.  In these cases I am taking a critical thinking approach rather than taking sides.

In the first case, many oppose trophy hunting as treating animals badly.  There was talk earlier this year of banning imports of trophy-hunted elephants and possibly other species for that reason.  A deeper look reveals a different story.

This article from CNN explains that the major threat facing elephants and other exotic wildlife is not the trophy hunters, but other factors such as loss of habitat, retaliatory killing by local farmers and poaching.  Poachers come at night to kill the elephants for their ivory.  Controlling poaching, reimbursing farmers for crop damage and preserving the savannah requires funding.  A major source of that funding is the license fees paid by the rich trophy hunters.  As long as the hunting is well regulated, the overall impact on wildlife can be positive.

It seems counterintuitive at first glance that shooting a few elephants or lions in a well-regulated way could benefit the larger group, but it’s true.  The writer of the CNN piece admits to being a conservationist and vegetarian who wishes for a different solution, but the revenue ensures positive outcomes for animals as a whole and jobs for local game wardens.  Other sources agree, including The University of Washington’s Conservation Magazine and the National Geographic.  Yet some want to brand these fat-cat hunters as evil men who hate animals and are destroying the planet.

The second example has to do with tax deductibility, which is the subject of a fuss in Washington over a new tax law.  Various proposals intend to double the standard deduction while eliminating different itemized deductions.  But are these deductions as valuable as their backers claim?  Here is a simplified explanation.

A deduction is the amount we subtract from our income before calculating taxes.  If we earn $50,000 and have $15,000 in deductions, we pay tax on only $35,000.  Using a 15% tax bracket, the actual savings is not $15,000, but 15% of that, or $2,250 – still nothing to sneeze at.

But don’t forget the standard deduction!  You must spend that $15,000 to get the benefit, but we can subtract $12,000 without doing anything, which would reduce our taxes by $1,800 (15% of 12,000).  In this example, the difference between having the deduction and not is only $450, or 3% of the total deduction.

Now I don’t know many people who would go rushing to the store for a 3%-Off sale, but that’s not the way it’s presented.  When the state or local government wants to raise your taxes they explain how it won’t hurt you because “it’s all tax-deductible.”  When a charity wants your money they emphasize the tax-deductibility.  When a tax preparer charges $50 for software or over $100 for the personal touch, they don’t tell you that this money saved you only an incremental $450.  No, they stress the much larger number at the bottom of your return, remind you that their fee is also tax-deductible and then urge you to get your money today at their high interest rate.  (Note:  The CPA Practice Advisor says that you should expect to pay an average of $273 in the 2017 filing season if you want to itemize your deductions.)

Elected officials at all levels, charities, environmentalists, tax preparers, animal rights advocates, realtors and many others depend on the majority of us not to think too deeply.  Perhaps some of them aren’t thinking clearly themselves.  But when we just nod in blind agreement, allowing ourselves to be misled, we get poor outcomes and may never realize it.

Bill Gates on Taxes

The story about Bill Gate’s comment on taxing robots was featured on several news sites.  USA Today has a short audio clip and CNBC carried the full story under the headline:  “Bill Gates: Job-stealing robots should pay income taxes.”

His reasoning, which he recently shared with the editor of Quartz, is as follows:  “If a robot comes in to do the same [job as a worker], you'd think we'd tax the robot at a similar level.”  He is actually enthusiastic about robots replacing humans in some areas so the people can be deployed into the types of roles where empathy and understanding are more important, like eldercare and teaching.  But more taxes are needed for retraining and creating the new jobs.  So, the robots should be taxed at the same level as the now redeployed humans.

The first question that comes to mind is: What exactly is a robot for tax purposes? Must it have arms and legs, like the traditional idea of a robot from science fiction, or have arms only or perhaps have a single arm like some seen in the automotive assembly plants?  He seems to mean any automated tool that can do a job (or part of a job) that a human does today – any machine that puts people out of work.  Besides the obvious ones in heavy manufacturing, this could include many other machines:  self-service checkouts at the supermarket or the library, ATM machines, conveyor belts and forklifts, automated switchboards that replaced telephone operators, elevators that haven’t required a human operator for about 40 years.  Some estimate that drones could replace $127 billion worth of labor – that’s a lot of taxes.

Ironically, the most impactful labor saving device ever has been the computer.  Computers made people more efficient, reducing the overall numbers needed to accomplish the same amount or work.  And both standard computers and all the robots mentioned above require software, which is how Bill Gates became rich enough to sit around and think up these ideas.  Should Microsoft pay taxes for all the secretarial, filing, and presentation design jobs that no longer exist?  Is he proposing this out of guilt for destroying all those jobs?

When unions bargain for higher wages should the robots be taxed at a higher rate?  When workers receive cost of living increases, do the robots pay more taxes?

Everyone should know that when an entire industry faces the same cost increase, all the companies in that industry can raise prices without fear of competition.  Back in the middle of the twentieth century when the UAW bargained a new contract with the American automakers, the prices of all their cars went up to pay for the labor cost increase across the industry.  This was announced on the news.  It was only after they faced serious competition from overseas that they were no longer able to continue this practice so openly.  Surely a robot tax would drive industry-wide price increases wherever they were levied.

In this case as in so many others, the poorest among us are the ones who would endure the brunt of this ill-advised policy.  As Forbes points out at the end of a long article explaining the faulty economics of this idea, “All taxes come out of the pocketbook of some live human being.”  It’s OK for those with deep pockets like Bill Gates, but the rest struggle with each price increase.

Basic economic understanding reminds us – as it should remind Bill Gates and all those news agencies that reported on this idea implying it should be seriously considered – economies don’t grow and increase our standards of living by shifting money around.  They grow by increasing productivity.  Taxing those mechanisms that actually contribute to those productivity increases is bad for everyone.  At least Forbes had the sense to refer to the robot tax as Gates’s “latest odd idea.”

Fox included in their report that “European Union lawmakers considered a proposal to tax robots in the past. The law was rejected.”  Sounds like a smart move.  After all, robots don't pay taxes; people pay taxes either directly from their income or indirectly in the increased prices caused by ideas like this.

The World's Richest

Last time I gave a very short summary of the principles of economic understanding.  Often personal and governmental decisions arising from good intentions lead to disruption and unintended consequences, whereas economic understanding would help us to anticipate and avoid these very natural outcomes.

One important omission from last week was the idea that the “economic pie” is getting bigger.  As the economy grows everyone is better off.  It is not the case that if I get more you must get less.  It's not a zero-sum game where having winners means some must be losers.  This is not obvious to young people because progress takes time.  

Eighty years ago only about half the households in the US had a radio and flush toilet.  Only about 60% had a car and 70% had electric lights.  About 60 years ago televisions came on the scene, and in another ten years color TV.  It wasn’t until about 40 years ago that home air conditioning began to spread.  Microwave ovens and home video recorders were brand new.  Regular use of personal computers in home and office came about in the last 25 years.  Cell phones and smart phones followed.  Today we take all this for granted, but we can afford to have the lifestyle we have due to a growing economy.

The poor today have appliances that a few generations ago were limited to the rich or that no one had because they were not invented yet.  The latest information I found were 2011 Census estimates of the percentage of poor households in the US that owned the following:  clothes washer and dryer (65%), refrigerator (98%), microwave (93%) air conditioner (83%), television (96%), video recorder/DVD (83%), computer (58%), cell phone (81%).  Those numbers are higher today, and it all came about through innovation, increased productivity and a growing economy, not because someone else had to settle for less.

 But Oxfam International sees it differently.  Using the tag line: “The power of people against poverty,” their focus seems not to be on eradicating poverty directly, but on the size of the gap between the world’s haves and have-nots.  In the news this week, a press release against income inequality lists the eight richest men in the world whose combined wealth equals that of the poorest 50% of the world.  Oxfam has been releasing this type of information each year before the World Economic Forum in Davos, a private conference for the world’s richest people, apparently trying to embarrass and shame them into supporting the cause.  (Note that just 1% of the people in the bottom 50% of the world are from North America.  And using their measurement criteria, new college graduates who owe more money than they have could be counted among the world’s poor.)

If we took everything away from these eight and distributed to the 7.4 billion people in the world, each of us would get $57.70.   The following year we would get considerably less from the next eight or ten or twenty.  It doesn’t work that way.

Some of the people listed are Bill Gates, who sold software to billions; Jeff Bezos, who lets us shop for almost anything on Amazon; Warren Buffet and Mark Zuckerberg.  None of these people forced us to give them our money.  We could have used inferior software, not shopped from home and never joined Facebook.  But many people chose to support them.  That’s how they got to be the richest people in the world, by inventing something we wanted, that added value to our lives and that we were willing to buy.  Gates and Buffet have set up charitable organizations.  Amazon has just announced plans to add 100,000 jobs in the US over the next 18 months. 

Now that we have freely given them our money and the growth of their companies has provided a huge number of jobs, Oxfam thinks they should feel guilty and the government should punish them with higher taxes.  Doesn’t confiscating someone’s money through threat of force constitute punishment?  (Should we limit the number of twitter followers anyone can have so we all have an equal chance to get our message out?  Wouldn’t that be fairer, too?)

Economic growth doesn’t work that way, and the key to ending poverty is through economic growth, not artificially shuffling around a fixed amount of money.