Monday, February 22, 2010

It Turns Out Taxes are Uncertain Too

The folks at Verum Serum decided to call out TNR's Jon Chait for supposed hypocrisy, after he flagged poll results indicating that the American people think the rich don't pay enough in taxes. You see, Jon Chait also was outraged (or Isaac Chotiner -- but probably Chait too) "threw a hissy fit" regarding Sarah Palin's "death panel" nonsense. But here, they argue, Chait is relying on those same ignorant viewpoints he previously condemned. Doesn't he know that the rich actually pay the far and away largest share of American income taxes?

Oh, boy, this is going to be good. Anytime Chait gets the chance to throw down with smug idiots who think they got game, I break out the popcorn. And he doesn't disappoint.

Chait kind of eviscerates the post on every angle, but I want to focus on one thing in particular. The VS authors seem not to understand the difference between facts and values. The death panel claim was factually incorrect. The claim "the rich don't pay enough in taxes" cannot be factually correct or incorrect -- it is a subjective value judgment. This isn't to say facts can't play a role in forming normative judgments, only that they never inherently support one side over the other. It is entirely plausible to notice that the rich (defined as they are in the studies in question) pay 70% of total federal income taxes, and still say they should pay more. It's particularly plausible when one notes that the rich make over 50% of America's total income. Let's keep repeating this for the slow folks in the class: in any society with income stratification and percentage-based income taxation (including a flat tax) the rich will pay a higher percentage of the total income tax receipts than anyone else. That's not a shortcoming in the system design, that's a product of elementary mathematics.

VS offers a remarkably weak-sauce response that, to the extent it proffers an argument, claims that Chait is advancing falsehoods because if people knew the facts about tax rates, they wouldn't hold the subjective opinions that they do. Chait says there's virtually no reason to think this is true, and I agree -- as I noted above, there is a perfectly compelling story where -- taking into account the share of wealth owned by the wealthiest 20%, a preference for a progressive tax structure, and a desire to counteract regressive state tax structures -- the wealthiest 20% paying a 70% share of taxes is perfectly sensible or, indeed, too small of a share. I'm not saying that's the only plausible inference from the facts, but the VS folks are effectively saying the opposite, and that's simply not feasible. It's almost definitely true that most Americans don't know the specifics of federal tax rates or distributions. But it is hardly the case that knowledge of these specifics would compel a change in belief, even from a ideal deliberative standpoint.

That the VS folks believe the facts to so obviously compel one normative outcome, even as other folks believe (with equal fervor) that the same facts point to a completely opposite normative stance, is explainable based on a popular misconception of how facts aid political deliberation. Generally, we believe that as people learn more facts about a given subject, their policy beliefs on the subject will begin to converge. The idea makes sense: learning more means dispelling inaccurate stereotypes and prejudices; as information is attained, people begin discarding stances that don't fit the facts and instead adopt those which do.

Unfortunately, as research by Dan Kahan and others indicates, the opposite is usually true (Professor Kahan actually delivered a lecture at Chicago today on this very topic). Providing additional facts and information doesn't cause policy convergence, it causes policy polarization. The reason is that most fact patterns contain narratives, inferences, and interpretations which plausibly can be deployed to support diverse policy positions. People accordingly interpret the information they receive in manners which support their prior dispositions, only now they feel more comfortable in these beliefs because they have "facts" to back them up. Given this latent ambiguity, there is no incentive to agree, and lots of psychological incentives to latch on to friendly fact stories in order to preserve ones preexisting beliefs.

Fundamentally, one cannot bridge the fact/value division here. It is true that I do, in fact, support higher taxes on the wealthy, and part of my reasons have to do with the above factual account I gave (wealthy earn a higher share of the income, state tax systems are often regressive), mixed with some value positions (progressive tax schemes are good). But I would never claim that the above factual account mandates the policy positions I hold, because that would be nonsense -- if you have different values than I do, the same facts will carry entirely different meaning.* Facts matter, but at bottom what really matters are subjective value preferences.

So to be clear, the reason Chait is right and the VS folks are wrong isn't because the facts prove his policy prescriptions correct. The facts don't prove anything by themselves; they are vessels for attaining our value preferences. Chait is correct because he recognizes that tax policy is a value judgment and thus opinions about it exist on a fundamentally different plane than purely factual claims like Sarah Palin's imaginary death panels.

* Professor Kahan related an amusing story on this. Regarding a study he published on differing interpretations of facts surrounding the HPV vaccine debate, he cited a blogger who reported the study and then said it showed why some conservatives opposed the vaccine: "they're biased -- they just interpret the facts to support a preexisting worldview!" Of course, Professor Kahan noted, the point of the study is that this is how everyone evaluates facts -- the people who support vaccination are as "guilty" of it as the opponents -- and the errant blogger was a perfect illustration of that very theory: s/he interpreted the text presented in such a way as to verify prior intuitions, even though it actually contained no such normative force.

UPDATE: At TMV, I adopted this post to focus more specifically on the inability of increased information to give us the fabled convergence towards "moderate" policies.


John VS said...

Responded to your comments on my site.

PG said...

Simply put, Palin never intended to claim that “death panels” was a provision in the bill (which is false as a matter of fact). Her statement was always intended as forward looking opinion about potential outcomes (and therefore not subject to fact checking).

Pity that this response buys Palin's claim that she wasn't actually talking about health care legislation in her Facebook post, only later possible outcomes -- even though she said on Twitter that she was in fact talking about the House and Senate bills.

If Palin wasn't talking about the existing legislation at all, only ever about later possibilities, what was she doing crowing about having gotten Congress to "remove" the death panels, and then Twittering, "...merged bill may b unrecognizable from what assumed was a done deal:R death panels back in?what's punishment 4not purchasing mandated HC?" Why did she post another Facebook note in which she refers to a specific section of the legislation?

Seriously, don't try to defend Palin by saying, "She clearly didn't mean X." She'll only undermine you with her own inconsistencies.

And of course even her claim that she was talking about Ezekiel Emanuel's writing and not about legislation misrepresented that work to a frankly disgusting extent. I knew of E. Emanuel before I'd ever heard of his brothers because I studied bioethics in college and he's famous as the secular staunch opponent of assisted suicide. The article she quoted of his was solely about radically scarce resources such as organs, where rationing is not a choice but a necessity (unless Palin has some brilliant heretofore-undisclosed method of getting enough organs for everyone who needs them): the title, which is even in the URL of the footnote on the Facebook post, is "Principles for Allocation of Scarce Medical Interventions."

But hey, why grapple with the very serious problems with the existing UNOS method of allocating organs -- why spend time on study and thought and discussion -- when she can trash a physician who has spent years of his life healing people, thinking about how to make our health care system better... oh, and helping to care for the children of his sister who has cerebral palsy?

That's what disgusts me about this process. Some of us have been trying to figure out how to deal with our overpriced, overburdened and dysfunctional health care system for years. It's really not helping to have folks like Sarah Palin lying about factual matters such as whether one of Obama's advisers wants to engage in rationing of standard medical care.

N. Friedman said...


You write: "in any society with income stratification and percentage-based income taxation (including a flat tax) the rich will pay a higher percentage of the total income tax receipts than anyone else."

While not untrue, I am not sure that what you say means as much as you think it does. Imagine, for example, two people who make the same nominal salary but one person has a health insurance perquisite and the other does not.

In that case, the person with subsidized health insurance pays a lower percentage of his true income - with reported income being reduced (i.e. by not showing on the W-2 Form as income) by as much as, if we go by the "Cadillac" plans, $25,000 per annum. In effect, the person without health insurance is subsidizing the person who receives the insurance perquisite because the uninsured pays taxes on a larger share of real income than would paid if both were taxed on all compensation.

[Note: there is now a Schedule A deduction available for health care expenses that exceed 7.5% of Form 1040 line 38 income and there is, if the person can set up as a self-employed person and purchase healthcare, a full adjustment to income, rather than a Schedule C deduction, directly on Form-1040. This latter adjustment to income, however, does not exist in the example I have given. And, if you apply for college financial aid, the self-employee benefit adjustment becomes invisible so far as most colleges are concerned. ]

One can go up and down in society and see how this works out. People who rent apartments do not get a deduction equivalent to the Schedule A interest and real estate tax deductions and, on top of that, directly subsidize the payment of taxes and interest by the landlord as part of rent. Further, there are deductions and credits and non-taxable forms of income, etc., etc., that are only available to rich people - and the greater number of such benefits, the richer you are. Again, somebody makes up the difference because the government, when it taxes, looks to collect more or less a specific amount of money, just as a business looks to take in a certain amount of money.

An article many years back in The Atlantic explored this in detail and found that, while the percentage of money in society paid to government comes mostly from the rich, the percentage per capita is exactly the other way around. It is not, in fact, a value judgment to say that the rich have taxes subsidized by the less rich. It is a pretty well established fact.

I am not sure you are suggesting otherwise. I merely thought it important to include such information. I should add: government policy seems to be, whether run by Democrats or Republicans, to provide benefits to wealthy people, with more public benefits being paid, in reality, to the rich than to the poor.

PG said...

N. Friedman,

How does any of your comment contradict the fact that a near-majority of total tax revenue received by the federal government from individuals comes from rich individuals? My mortgage interest deduction reduces the amount of tax I pay, but I'm still paying more in absolute terms (though potentially not in relative term, i.e. as a percentage of my income) than someone whose income is half of mine. I'm paying less federal income tax than someone who makes the same income I do but who chooses to rent, but a person who has the same income I do is hardly in a position to get shirty about how "people like you ought to pay more in taxes" without its affecting himself.

N. Friedman said...


I too get the mortgage deduction.

My point is that the argument that rich pay more taxes, while true - and, note, I said that upfront in my prior post that it is true - means less than meets the eye.

Consider: Suppose that you and I make the same income but you rent and I have a mortgage. Your rent, of course, does not include a deduction for either interest or taxes. While this does not impact on either of our adjusted gross income - i.e. line 38 of Form 1040 -, it does impact on how much in taxes we pay. And, on top of that, if I am your landlord, my rent includes, unless I am not very savvy, the cost of interest and taxes. In fact, savvy landlords are now starting to include real estate tax increase clauses which state that the tenant pays, as rent no less, any increases in the landlord's real estate taxes. The point being that the tenant pays the landlord's tax without having a deduction.

Now, here is how this works out in the real world, not in my simplified example. In the real world, poor people tend to rent and, as such, subsidize the taxes and interest paid by rich people who, in turn, get a deduction on the very money paid to them cover taxes and interest. So, the rich get to double dip.

And, as I noted with respect to healthcare insurance, if your employer pays but mine does not, I am subsidizing your insurance by having your real income - not your line 38 income - excludes health insurance from counting as income. Hence, you are taxed, by having health insurance paid, on a smaller percentage of your income than I am.

Again, in the real world, this means that poor people, who are less likely to have health insurance than rich people, have a higher percentage of their real income count as income while the rich, who have insurance paid by their employer far more often, have income that does not even appear on their tax form, much less as part of adjusted gross income.

So, the comparison you are making is not as simple as you think. Once, all of these benefits and perks that are associated with what counts as income and what the cost is for the real estate deduction, as it relates to tenants, are counted, among many other things, the tax system is remarkably regressive, whatever the absolute numbers are when counting only based on adjusted gross income.

PG said...

And, on top of that, if I am your landlord, my rent includes, unless I am not very savvy, the cost of interest and taxes.

I don't know what the housing market is like where you live, but where I am, rent = "however much money I can get for the property," unless you're dealing with rent control, in which case your attempts to include taxes and the like go through the relevant housing authority authorizing increases. I'm actually looking at renting out the furnished apartment I own. Ideally we'd get our mortgage payments, condo fees and property taxes covered, plus a little extra for wear and tear on the furnishings. In the "real world" of a collapsed real estate market, we're just hoping not to lose too much money while we wait for the market to rise enough so that we're no longer underwater and can sell.

Moreover, once we are renting out the property, the mortgage interest deduction no longer applies. See IRS Publication 936. It's deductible as a business expense if we used the proceeds of a loan for business expenses (because such are deductible in themselves), but then we're in the rental property business and the home mortgage interest deduction is hardly the relevant concern.

So, the comparison you are making is not as simple as you think.

Who said the comparison was a simple one? I am afraid you have a tendency to argue that someone is wrong or mistaken or ignorant because he's not making the particular point in which you are interested, even if the point he is making is in itself correct.

N. Friedman said...


You make some good points.

First, I was mistaken in noting that interest was, in the simplest sense, deductible for rental property. What you state about the tax law on that subject is correct.

You are also correct that you can get what the market allows. My point, of course, is not undermined by such point and, I should add, that the market is effected by what it costs you to operate the property just as it is impacted by what your prospective tenants can pay you. As matters now stand, you get a tax break - in the form of a deduction - because that is government policy while the renter does not get that tax break.

Why should your tenants not receive a percentage of their payment to you as a deduction when you get to deduct some of the money paid to you? Given that tenants do not get that tax break, it seems to me that your tenants are subsidizing some of the tax burden which would otherwise fall on you.