Saturday, November 3, 2007

Classless Warfare

I was working last evening and had the television on in the background. I had the set tuned to CNBC and I heard parts of a debate over the poor in the United States. Some of the things I heard were stunning. For example, the poor really don’t have it so bad in this country. Even the poor have air conditioners. What? “Keep working,” I thought. Then there was tax debate, standard fair on this show, complete with the remark (paraphrased) “like the wealthy don’t already pay too high a share of the taxes.” After hearing that remark I could not continue to focus on what I was doing. The not-so-subtle class warfare was ringing in my head. Now, I must admit that I could do a lot more for those less fortunate than I, and I am not trying to claim I am any better than most who could do more than they do. But it annoys me when someone with a wide reaching public platform uses that platform to fight this kind of war against those without one. Especially when the ones fighting are among the most privileged people in the world and sound like they are complaining about it. Are they really that afraid of Congressman Rangel’s tax proposal? No class.

Before I get into the numbers, I want to be clear about things. I don’t want to leave the impression that I am against profits or high incomes or, for that matter, capitalism in general. I have worked in positions that pay very well, and I understand that there is a huge opportunity cost to get to these positions in the first place (for many of us) and that people in these positions work very hard. So if you fall into that category and you are reading this, understand I am not belittling what you have accomplished or what you do. I also understand that many, many people of means do amazing things to contribute to society and to improve the lives of the less fortunate, and I solute them and bow to their generosity. I have witnessed such acts and my heart skips a beat when I recall them. My rant is focused on those who have the audacity to sit in judgment over the adequacy of the standard of living of the least fortunate among us while at the same time complaining about their current tax burden. Now lets look at some of the numbers.

First of all, who says the 12.3% or so of the population (that’s approximately 36,500,000 people) living in poverty (see pg. 11 here: have air conditioners? I want to see that report. If anyone can find it please send me a link. How low is the income level to be living in poverty in the United States of America? Can’t be too bad if those “poor people” have air conditioning, right? Well, for a family of three, two parents and one child, the threshold level is $16,227 per year (2006 number). On average the income for a family living in poverty is, of course, substantially below this threshold (that sometimes gets lost). So, most families of three included in the poverty numbers in the US live on less than $1,352 per month. We’ll see just how little that is in a minute. Granted, people in poverty in other countries may have even less still, but so what? Are we now globalizing poverty standards as well?

Looking at these numbers prompted me to do a little research, so I went to the Bureau of Labor Statistics (BLS) here: and looked up some figures. First, the average “consumer unit” in the US is 2.5 people, and they make on average $58,712 before taxes (2005 numbers). They annually spend on average $41,548 (that’s about $800/week) per consumer unit before payroll taxes and pension savings. So, the average 2.5-person unit spends over 2.5 times the total income of the “wealthiest” 3-person unit in poverty. To get an idea what it would be like to be a rich poor person, imagine supporting three people on $314/week. If you are at 75% of the poverty threshold, then it’s about $236/week for three people. But hey, at least you would have air conditioning! (How absurd does that sound now?)

I think that’s a good place to begin a discussion of the tax issue. I went to those recently released IRS statistics here to get income and tax numbers to work with, and I used the BLS statistics on consumer spending. I know there are a lot of “adjustments” that should be made to these numbers, but who benefits most from making all the adjustments is not clear to me. You can make them if you like, but I don’t think they change the bottom line. I also assume in every case the average income as reported to the IRS represents a family of 3, which is obviously not correct. But I am consistent between the categories (and unlike some, I am pointing that out to you right now).

I assume in each case a return filed represents a consumer unit that I define to approximate a working couple in New York State with one child. Incomes and taxes are based on the 2005 IRS statistics using averages in each category, and “Average Annual Expenditures” is based on the BLS report referred to above. New York State taxes are ballpark using standard deductions without dependant deduction.

Number of Returns66,305,818 33,152,910
FilersAVG Bottom 50%AVG Top 50-25%
Income Tax Federal$432.47$3,084.37
Income Tax State$0$1,770.00
After Tax Income$13,047.32$36,443.43
Avg Annual Expend.$41,584.00$41,584.00
Times Expense Coverage0.310.88
Excess (shortfall)$(28,536.68)$(5,140.57)

My Times Expense Coverage shows how well the after tax income of each group covers the average consumer unit’s annual expenditures. If you are in the bottom 50% of all filers (that’s half of the returns filed), your after tax income covers about 31% of the average consumer unit expenditures. Now, I understand that many of these returns may be single folks, but even so you come up short because they can’t even cover one third of the average expenditures. The filers between the bottom 50% and the top 25% come up a bit short too. They cover about 88% of the average annual expenditures with their income. Those who are single in this category are doing OK. Those with families must be very budget conscious.

Number of Returns31,826,793 1,326,116
FilersAVG Top 25-1%AVG Top 1%
Income Tax Federal$13,687.84$277,601.66
Income Tax State$6,691.06$88,777.56
After Tax Income$81,024.55$820,940.78
Avg Annual Expend.$41,584.00$41,584.00
Times Expense Coverage1.9519.74
Excess (shortfall)$39,440.55$779,356.78

Moving on to those filers in the top range who do better than 75% of all filers but not as well as the top 1%, we see some real improvement. They cover the average annual expenditures by almost 2 times assuming they avoid the temptation to spend money on college (see expenditures table below). This 24% of filers may just be able to save some income for retirement. As expected, the top 1% do just fine, covering the average annual expenditures by a multiple of almost 20 times. That’s right, 20 times after tax.

Before we go any further, lets take a look at where those average expenditures are going:

Apparel & Services$1,8864.5%
Personal Care Pr.&Srv.$5411.3%
Tobacco & Suppl.$3190.8%%
Cash Contributions$1,6634.0%
Personal Insurance & SSI$5,20412.5%
Less SSI$(4,823)-11.6%

(From the BLS statistics.)

Well, I guess if everyone stopped drinking and smoking that would add a little – but not enough to cover expenses. Then again, they could forego that pricey $940/year education for three, or that extravagant $796/year/person entertainment expense (or whatever it works out to if you divide it by 2.5 instead of 3).

I ran a few other series of numbers showing how a flat tax would unduly burden the lower income levels but I decided to end my analysis of the numbers here because I believe just looking at the numbers I have already presented tells the story that needs telling. The high-income earners may pay a larger share of the income taxes collected in this country, but they do so because they can afford to. And if we need to collect any more anytime soon, I know exactly where I would go to collect it. You can be sure it would not place any further burden on the bottom 50% and it would be heavily skewed toward the top 1%. In fact, it would be skewed toward the top 1/2 % first. I don’t need elaborate models with charts and graphs to show me where the money is or how altering the tax code will shrink the pie and blah blah blah. Especially when the blended rate at the top is 23.13%. I just need a simple table showing the total after tax income per group and per filer within each group in 2005.

Number of Returns66,305,818 33,152,910
FilersAVG Bottom 50%AVG Top 50-25%
Group After Tax Income (millions)$934,459$1,373,113
Per Filer$14,093.17$41,417.57

Number of Returns31,826,793 1,326,116
FilersAVG Top 25-1%%AVG Top 1%
Group After Tax Income (millions)$3,042,104$1,223,579
Per Filer$95,583.11$922,678.71

I’m sure there are lots of interesting conclusions that can be reached using statistical analysis and assumptions, and these things should be done in order to arrive at actual tax policy. But for now it looks pretty simple to me. By the way - none of these numbers pick up all of those 36.5 million people living in poverty because they may not have filed a return with a positive adjusted gross income. Many don’t even make it to this level. They’re probably too busy playing around with those air conditioners to file a return anyway.

I think we should refrain from deriding the less fortunate by classifying them all into one giant group called “the poor” and discussing how they don’t really have it all that bad. Rather than declaring how unfair it is that the high earners pay a higher share (to support the very society that permits the attainment of such earnings in the first place), lets discuss how to improve the lot of all of those “others” whose daily toiling generates the income in the first place. I would like that conversation a whole lot better than the one I heard last evening.

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Lawrence D. Loeb said...


Poverty in this Country is, to me, unacceptable. We MUST find a way to improve the lives of the poor.

Healthcare in this Country is broken (for many many reasons) and something needs to be done to improve the health of the poor (and the middle class) - and not put them in danger of bankruptcy if a member of the family becomes seriously ill.

I wish I could tell you I know HOW to do this. I don't.

I also believe in many of the philosophies of Ayn Rand, so I'm concerned about any policy that provides uniform support based on some level of poverty.

Perhaps a program that requires some type of work together with a program offering services, to those who meet some type of standards, at a discount. There should also be some structure that would encourage them to improve their situation through incentivization.

Education should also be an important part of any such program.

Healthcare is a much more difficult nut to crack.

Now that I've said all that, I would caution you in using averages in your calculations. I doubt the poor are spending as much on housing, entertainment, or charitable contributions (as well as some of the other cited items) as the averages would indicate. A more relevant number would be the median (which would still only identify what they might aspire to), but I don't know if that's available.

Capitalism is, in my opinion, the best approach to economic policy. We need to make it more compassionate to those who fall on hard times.

Palermo's Blog said...

Larry - I think for the first time I have nothing to disagree with you about:-) Perhaps I will look further into the issues of poverty when time permits and we can expand on your views and our feelings.

Anonymous said...

I have no difficulty in going along with the notion that capitalism is good but I would ask specifically what is meant by that: no govt controls or regulations? money going to corporations and to farmers and not to the ordinary guy? tax protocls? Please tell me more specifically what you mean by capitalism. China is now capitalist--and communists run it; Many nations in Europe have social programs via govt but are capaitalist. Tell me, please.

Palermo's Blog said...

I am referring to capitalism as a free market mechanism with profit motive as opposed to a planned economy. That does not rule out social programs or income tax structures meant to expand a sector of the economy that would benefit all of society but not offer current profit motive incentives large enough to entice private sector participants. In short, I do not believe that a market economy must be all or nothing. We could debate each particular use of "public" funds, and would likely find agreement on many of them.