Our Common Good

Nate Silver:

The coming Congressional debate over fiscal policy is sure to feature a wide array of proposals, some of which would hit certain taxpayers harder than others.

But one idea being floated by Congressional negotiators, as described in an article by The New York Times’s Jonathan Weisman on Thursday, is hard to defend from the standpoint of rational public policy making.

Its arithmetic could require that the 300,000th dollar of income was taxed at a rate of about 50 percent – even while the three millionth dollar of income, or the three billionth, was taxed at a lower 35 percent rate instead.

The math behind these calculations is not all that complicated. It’s just a matter of understanding how marginal tax rates work.

Take an American who earns $400,000 a year in taxable income. (This is roughly the threshold at which a taxpayer reaches the top 1 percent of households.)

The top marginal federal income tax rate is now 35 percent, and kicks in at earnings above $388,350.

Someone making $400,000 is above the $388,350 threshold. Does this mean that she’d be taxed at a 35 percent rate on all $400,000 of income, meaning that she’d owe the government $140,000?

Not under current law. Instead, only a small fraction of the taxpayer’s income – the $11,650 she earns after she’s already reached $388,350 – is taxed at the top 35 percent rate.

[…]

Because tax rates are applied in this way, a taxpayer making $400,000 would owe about $117,000 in federal taxes, or about 29 percent of her earnings — rather than $140,000 if all her income had been taxed at the 35 percent rate.

Under the proposal described in Mr. Weisman’s article, that would change.

“One possible change would tax the entire salary earned by those making more than a certain level — $400,000 or so — at the top rate of 35 percent rather than allowing them to pay lower rates before they reach the target, as is the standard formula,” he reports.

In other words, under this proposal, the taxpayer making $400,000 would in fact pay 35 percent in overall income taxes and would owe $140,000 — about $23,000 more than she does currently.

The question is when the government would collect the additional $23,000 of taxes.

[…]

Specifically, after the taxpayer had hit her 400,000th dollar of income, her marginal tax rate would then decline. Rather than owing 50 cents for each dollar earned, she’d be back to a 35 percent rate instead.

Suppose that the taxpayer is considering taking on a part-time job that would make her an additional $50,000 in income. If the taxpayer had already earned $3,000,000 in income from her main job, then she would be able to keep 65 percent of the additional income from her side gig, owing 35 percent or $17,500 in taxes.

But if the taxpayer had “only” made $300,000 from her main job, she would get to keep only about $25,000 of earnings from her second job, owing the other $25,000 to the government. Faced with this steep tax rate, the taxpayer might decline the second job, meaning that the government would never collect the additional revenues from her earnings.

This is what’s known as a “tax bubble”: when someone earning less income might be taxed at a higher marginal rate than someone making more.

Tax bubbles have existed at various times in the federal tax code, such as from 1986 through 1990. They also exist in some state tax codes. But the proposal described in Mr. Weisman’s article would create an especially steep one.

To be clear, the people subjected to the tax bubble would be reasonably well off. An average family making $50,000 a year would not pay any additional taxes because of it, nor would its incentives be distorted in any substantial way.

Also to be clear: many of the people writing about tax policy, from academic economists to yours truly, make incomes that are considerably above the national average.

Nonetheless, the proposal described in Mr. Weisman’s article would place its heaviest tax burden on the somewhat wealthy as opposed to the very wealthy, particularly as it is being proposed as an alternative to raising the top marginal rate.

If the tax bubble were implemented, but the tax code were otherwise unchanged, then someone making $400,000 would owe $140,000 in federal income taxes, $23,000 more than she does now, increasing her overall tax rate to 35 percent from about 29 percent.

Someone making $4 million would owe $1.4 million in taxes, also reflecting a $23,000 increase. But the increase would be minimal on a percentage basis, since it comes from a larger pool of income. Their overall tax rate would rise to 35.0 percent from 34.4 percent.

[…]

If, instead, the top two marginal tax rates were increased to 36 percent and 39.6 percent, as they were under the Clinton administration, then someone making $400,000 would owe about $124,000 in federal income taxes – or about 31 percent of her income. This would reflect a tax increase, but less than under the tax bubble proposal.

However, the government would collect more taxes from the $4 million earner. Someone making that much would owe $1.55 million if the Clinton-era rates were restored, with their tax rate rising to 38.7 percent from 34.4 percent.

Either policy would reflect a tax increase – whatever semantics the Congress might use to describe it. It’s a question of which taxpayers would bear more of the burden.

It’s also a question of whether the tax increase would make the tax code more efficient or less so. One might favor a flatter schedule of marginal tax rates or a steeper one. All taxes have the potential to discourage work. But smoother increases in marginal tax rates, as under current law, create less economic friction, and fewer deadweight losses, then those with a number of peaks and valleys. It is hard to see the economic rationale for creating a bubble in the middle of the tax code.

First of all, I think it’s odd that people who cover politics wouldn’t have any political views. The analogy I make sometimes is the O.J. Simpson or Michael Jackson trial. You know, you’re supposed to find the twelve people, for a jury, who have no impression of Michael Jackson? How can you be a normal person and not have some view of Michael Jackson? How can you cover politics and not have any sense for where you think the truth lies in the problem? That disturbs me. A lot of journalism wants to have what they call objectivity without them having a commitment to pursuing the truth, but that doesn’t work. Objectivity requires belief in and a commitment toward pursuing the truth—having an object outside of our personal point of view.

Nate Silver saying some very smart things (surprise) in an interview with Chicago Magazine.  (via thepoliticalnotebook)

Truth. Bomb. (via abaldwin360)

Barack Obama may have comfortably won re-election in the electoral college, and squeaked a victory in the popular vote. But here is the absolute, undoubted winner of this election: Nate Silver and big data.

The Fivethirtyeight.com analyst, despite being pilloried by the pundits, outdid even his 2008 prediction. In that year, his mathematical model correctly called 49 out of 50 states, missing only Indiana (which went to Obama by 0.1%.)

This year, according to all projections, Silver’s model has correctly predicted 50 out of 50 states. A last-minute flip for Florida, which finally went blue in Silver’s prediction on Monday night, helped him to a perfect game.

A caveat: Florida has not yet been called officially, but Obama is in the lead with 98% of precincts reporting. If anything, Silver’s placing of Florida on a knife edge makes him look even more prescient. No wonder one of the night’s more popular tweets suggested that he was actually from the future, working from old newspapers.

Nate Silver:  Nov. 1: The Simple Case for Saying Obama Is the Favorite
What I find confounding about [those who believe the race is a tossup] is that the argument we’re making is exceedingly simple. Here it is: “Obama’s ahead in Ohio.”
Nate Silver, fivethirtyeight.com (via politicalprof)

Brad DeLong points me to this National Review attack on Nate Silver, which I think of as illustrating an important aspect of what’s really happening in America.

[…]

Yet the right — and we’re not talking about the fringe here, we’re talking about mainstream commentators and publications — has been screaming “bias”! They know, just know, that Nate must be cooking the books. How do they know this? Well, his results look good for Obama, so it must be a cheat. Never mind the fact that Nate tells us all exactly how he does it, and that he hasn’t changed the formula at all.

This is, of course, reminiscent of the attack on the Bureau of Labor Statistics — not to mention the attacks on climate science and much more. On the right, apparently, there is no such thing as an objective calculation. Everything must have a political motive.

This is really scary. It means that if these people triumph, science — or any kind of scholarship — will become impossible. Everything must pass a political test; if it isn’t what the right wants to hear, the messenger is subjected to a smear campaign.

underthemountainbunker:

Nate Silver: “Part of the confusion (and part of the reason behind the perception that Mr. Romney is still gaining ground in the race) may be because of the headlines that accompany polls.”
So, of course, you can see what the largest problem is for the shysters on Team Romney and their Republican cheerleaders: Nate Silver. 
The Raw Story: Nate Silver is wrong because he is ‘thin and effeminate’: “Conservative darling Dean Chambers, founder of the website unskewedpolls.com that purports to recalibrate political surveys to rid them of liberal bias, argued that New York Times polling guru Nate Silver cannot be trusted because he is a weak, little girly-man. In a post for Examiner.com, Chambers sought to discredit Silver’s recent statistical analysis that showed Romney flatlining in the presidential race. …How could Chambers tell that Silver is an untrustworthy liberal? His lack of overt masculinity, of course.”

“Nate Silver is a man of very small stature, a thin and effeminate man with a soft-sounding voice that sounds almost exactly like the “Mr. New Castrati” voice used by Rush Limbaugh on his program. In fact, Silver could easily be the poster child for the New Castrati in both image and sound. Nate Silver, like most liberal and leftist celebrities and favorites, might be of average intelligence but is surely not the genius he’s made out to be. His political analyses are average at best and his projections, at least this year, are extremely biased in favor of the Democrats.”

Team Romney Theater: All this momentum — really! Look how excited we are! Landslide!! 
(Photo: Exhibit A: Dean Chambers, un-thin manly man)

underthemountainbunker:

Nate Silver: “Part of the confusion (and part of the reason behind the perception that Mr. Romney is still gaining ground in the race) may be because of the headlines that accompany polls.”

So, of course, you can see what the largest problem is for the shysters on Team Romney and their Republican cheerleaders: Nate Silver. 

The Raw Story: Nate Silver is wrong because he is ‘thin and effeminate’: “Conservative darling Dean Chambers, founder of the website unskewedpolls.com that purports to recalibrate political surveys to rid them of liberal bias, argued that New York Times polling guru Nate Silver cannot be trusted because he is a weak, little girly-man. In a post for Examiner.com, Chambers sought to discredit Silver’s recent statistical analysis that showed Romney flatlining in the presidential race. …How could Chambers tell that Silver is an untrustworthy liberal? His lack of overt masculinity, of course.”

Nate Silver is a man of very small stature, a thin and effeminate man with a soft-sounding voice that sounds almost exactly like the “Mr. New Castrati” voice used by Rush Limbaugh on his program. In fact, Silver could easily be the poster child for the New Castrati in both image and sound. Nate Silver, like most liberal and leftist celebrities and favorites, might be of average intelligence but is surely not the genius he’s made out to be. His political analyses are average at best and his projections, at least this year, are extremely biased in favor of the Democrats.”

Team Romney Theater: All this momentum — really! Look how excited we are! Landslide!! 

(Photo: Exhibit A: Dean Chambers, un-thin manly man)

When Charles Foster Kane takes one final look back at his tumultuous life, he encapsulates it in a single, immortal word: “Rosebud”. In years to come, when Mitt Romney takes a look back at this tumultuous election campaign, I suspect he may very well do the same. Except he will not speak of a cherished object, but a person: “Poblano”.

Poblano is the pseudonym of Nate Silver, the sabermetrician and political psephologist who has done more to influence the 2012 presidential election than other political analysts and commentator. Silver is behind The New York Times’ FiveThirtyEight blog, which conducts a complex statistical analysis of the state of the race, and boils it down to daily estimate of the two candidates chances in the form of a mathematical percentage. Where most political commentators output is the product of briefings, gossip and personal perception, Silver deals in cold, hard facts. And at the moment, Silver’s facts are being fired like bullets into the heart of the Romney campaign.