Tag: federal income tax

The ‘47 Percent’ and the Fundamental Attribution Error

There are a number of things wrong with Mitt Romney’s now infamous suggestion that the 47 percent of Americans who don’t pay federal income tax will automatically support larger government, because those “who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them” can never be persuaded to “take personal responsibility and care for their lives.” For one, as both Matt Yglesias and Ezra Klein note, the people who aren’t paying income tax are overwhelmingly either college-aged or elderly retirees who aren’t making much taxable income, not able-bodied layabouts in their 30s and 40s. In other words, they’re mostly not some distinct parasite class, but rather ordinary, hard-working people who either already have paid or will soon be paying quite substantial taxes.

The deeper mistake, however, is what social psychologists have dubbed the “fundamental attribution error”: the nigh universal human tendency to ascribe actions and outcomes to immutable personal characteristics rather than situational factors. We assume too quickly that someone behaves kindly or callously because they are a “kind person” or a “callous person”—yet research suggests that minor variations in circumstances can elicit either type of behavior from the very same people.

Presumably there are some people out there who really do just shun responsibility and think others should work to provide them with life’s necessities—but it’s hard to believe they’re more than a very tiny fraction of the millions who depend in some way on government benefits. Most of them are just responding rationally to the circumstances of the world they live in. In a society where young people know they’ll soon be taxed to support educational subsidies, of course they’ll accept the government college loans they’ll later be expected to fund. In a society where the payroll taxes that support a government pension system leave workers with 15.3 percent less in their paychecks to save and invest for old age, of course they’re going to rely heavily on the system they’ve been paying into when they retire. But to infer that this reveals something about people’s desire for big government is a little like wondering why 18th century Americans were so much fonder of agriculture than we are. People mostly live in the world that’s presented to them.

This is an equal opportunity observation, however. Progressives, after all, often make essentially the same fallacious argument as Romney, though usually not put quite as offensively: if you benefit from government largesse—whether in the form of direct supports like Social Security and Medicare, or because the state “generously” offers to spare your earnings through tax credits or deductions—then obviously you’re logically required to fall to your knees in gratitude, and you must be either confused or some kind of hypocrite if you perversely persist in supporting smaller government. Net recipients of government aid, in this view, ought to have the political commitments Romney wrongly ascribed to them.

All of this seems confused. People want goods like health care and financial security. In a social and political environment where those things are provided by government, people will accept them from government. In an environment where they’re provided by the private sector, people will acquire them privately. In the long run, the nature of the broader system will probably influence the frequency in the population of deeper character traits and dispositions like responsibility or resilience—but you can’t legitimately infer a whole lot about people’s preferences between systems from their behavior within systems.

Back to the Bad Old Days of High Marginal Tax Rates

As Mike Tanner has written, the health care bill means a big tax hike – indeed, a lot of tax hikes.  It also means a reversal of one of President Ronald Reagan’s great achievements, bringing down the top marginal income tax rate. 

Reports the Washington Times:

Small-business owners are warning that the economy would suffer under a health care bill proposed by House Democrats, which would drive tax rates for high-income taxpayers to levels not seen since before President Reagan’s tax reform of 1986.

The top federal income tax rate, which Mr. Reagan and a bipartisan Congress lowered from 50 percent to 28 percent, would reach 45 percent in 2011 if Congress and President Obama enact the surtaxes that are part of the health care reform plan that House Democrats announced Tuesday.

Small-business owners, who would take a direct hit from the surtaxes, expressed dismay over the proposal, saying it would force them to curtail hiring and reduce wages amid the worst recession in a generation.

“If they institute a 5 percent surtax on income, it will have a severe impact on small businesses that are already hurting,” said Michael Fredrich, whose Wisconsin company, MCM Composites, molds plastic parts.

“We run maybe three days a week, sometimes four days a week, sometimes zero days,” he said. “I can tell you that at some point, people … running a small business are just going to say, ‘To hell with it.’ “

Individuals tend to focus on their tax burden.  After all, our overall tax bill reflects the amount of money we lose as legislators speed about the country allegedly “serving” us while promoting their own political ends. 

Marginal tax rates more directly affect decisions on saving, investment, business formation, work effort, job creation, and more.  Even politicians not enamored of the “rich,” whatever that term means, should recognize that we all benefit from an economic system which encourages entrepreneurship.

Proponents of big tax hikes might want to recall Aesop’s Fable, The Goose that Laid the Golden Eggs.  Wreck the economy, and the health care system will crash too.

Federal Tax Rates

Conveniently timed as Tax Day approaches, the Congressional Budget Office has released new data on the taxes paid by each income group. The CBO data includes federal income taxes, payroll taxes, and excise taxes, which amounts to almost the entire federal tax grab.

The CBO calculates tax rates by quintile from the lowest-earning to the highest earning households. These tax rates are simply total federal taxes paid by the group divided by total income earned by the group.

The chart makes clear that we have a very graduated or redistributive tax system, which some people call “progressive.” President Obama doesn’t think that the 25.8% rate paid by the top quintile is progressive enough, so he plans to penalize that group with an income tax rate hike.

Piketty Tax Battle: Round Two

The Economist has posted rebuttals to first-round arguments in my tax debate with French economist Thomas Piketty. Piketty seems to think that everyone with a high income has a “grabbing hand” that comes at someone else’s expense.

The debate over tax rates on the rich is important, but Piketty is important in himself because he is widely cited in the media and elsewhere as if he were a neutral authority. For example, President Obama’s budget featured a chart showing that the top 1 percent of earners have greatly increased their share of national income over the decades, using Piketty’s numbers.

But Alan Reynolds has found serious flaws in Piketty’s calculations. Piketty bases his calculations on tax return data, but reported income under the federal income tax has changed greatly over time. 

The bottom line is to be suspicious when you see a chart on income trends that is sourced to this advocate of 80 percent tax rates.