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The Wall Street Journal needs to have its statistics license taken away. Every editorial manages to commit some sort of statistical fallacy. highest marginal t

The Wall Street Journal needs to have its statistics license taken away. Every editorial manages to commit some sort of statistical fallacy. highest marginal tax rate is charted against total revenue as a percent of GDP. Absolutely worthless. Total revenue as a percent of GDP happens to be flat, so we can take any statistic we care to blather about, chart it against this line, and say: see? You can't get money from (fuel taxes | tariffs | mandatory minimum sentencing | software piracy).

ivankirigin 18y ago
The most heavily debated tax issue is the rate that the richest pay. Progressives argue that they should pay much higher percentages than they currently do. They fail to account for the added incentive to avoid such taxes and subsequent loophole creation and usage. So the core issue of tax policy has been the marginal tax rates verses total revenue. It isn't the WSJ.
- stcredzero 18y ago
  I wonder if there's some sort of fundamental relationship between the powerful elites in every given society and the rest reflected in the graph? Is there some sort of relationship like Boyle's Law for gases?
- sdurkin 18y ago
  The argument is over what point we're at on the Laffer Curve, as well as the specific shape of the curve (i.e. is the right side so steep that we can tax at whatever rate we want up until revenues collapse entirely?), and about how tax enforcement policy can affect the shape of the curve. "They," meaning progressives, don't fail to account for anything. They just disagree with your analysis. Finally, the reason nobody knows or cares about this particular research is that most tax cuts were made with an eye toward maintaining revenue at a constant percentage of GDP. That is, the graph is a self-fulfilling prophecy. It doesn't predict what would happen with subsequent changes in the tax code. Furthermore, this isn't even in any way connected to MTRs for the rich. All that this graph reflects is that as taxes were decreased for the upper %1 over the past half century, they were increased on everybody else. It doesn't illustrate increased collection rates, just increasingly regressive tax policy. Brief mathematical analysis of what this article said: TaxRateforRich x RichEarnings + TaxRateEveryoneElse x EveryoneElseEarnings = TotalRevenue Then they told you that as TaxRateforRich dropped, total revenue remained constant, and thus concluded that the amount of earnings reported by rich people (RichEarnings) must have risen. What they ignored was a rise in TaxRateEveryoneElse.
  - ivankirigin 18y ago
    "All that this graph reflects is that as taxes were decreased for the upper %1 over the past half century, they were increased on everybody else." False. We have a dynamic system where the incentives of the top 1% have a disproportional influence on GDP. Further, tax rates of the top 10% account for the majority of revenue. So I not only deny your claim but put forth that your rhetoric is emotionally manipulative - pitting the rich ("them") versus the rest ("us poor little everybody else"). The "rich", the top 1%, are the prime drivers of wealth creation. They are the reason GDP grows faster than population growth. The incentives on the top 1% heavily influence GDP growth. Also, the percentiles used are very misleading. The top and bottom quintiles today are not the same people in the top and bottom quintiles 20 years ago. So most stats we track about poverty and wealth are fairly useless because they follow that faulty assumption. Just in case anyone isn't clear on this: if you're a founder of a tech company, you're in the top 1% - perhaps not in income today, but in wealth generators and life-time taxes paid and to-be-paid.
    - sdurkin 18y ago
      ""All that this graph reflects is that as taxes were decreased for the upper %1 over the past half century, they were increased on everybody else." False." I have to disagree. The Tax Reform Act of 1986 (as well as the cut of 64) disproportionately affected the lower income brackets. As a matter of record, tax rates are higher for the lower income brackets, and lower for higher income brackets than at any other point in US history. To cite wikipedia: http://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986#Income_tax_rates http://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986#Income_t... "The top tax rate was lowered from 50% to 28% while the bottom rate was raised from 11% to 15% - the only time in the history of the U.S. income tax (which dates back to the passage of the Revenue Act of 1862) that the top rate was reduced and the bottom rate increased concomitantly." "The "rich", the top 1%, are the prime drivers of wealth creation. They are the reason GDP grows faster than population growth." Anyone who has capital gains from the labor of others. It is misleading to say that they are responsible for this growth themselves. Their wealth is invested in those in other income brackets, and used to drive up GDP. There's nothing morally wrong with this system. I agree that incentives for the upper %1 have a disproportionate effect on GDP. That said, from an economic perspective, I happen to believe that the Laffer curve has a very steep right side, and that we are to the left of the peak. This means that by raising rates, more revenue can be collected. For example, the 1981 tax cut did not improve revenue collection. I believe that we should raise rates in order to pay for progressive social programs. The upper %1 have benefitted from not only their skill and ability to drive wealth creation, but also a good deal of luck. Progressivism is a form of social insurance. It is an acknowledgment that perhaps, through no fault of my own, I might have been born poor, or with skills not suited to the modern economy. It is the understanding that in the richest nation on earth, no one should want for food, shelter, or healthcare, no matter what their ability to contribute. This is not rhetoric. It is a judgement of values, and an assertion of a logical argument. Think of it in terms of human capital. Those born into poverty today lack the access to crucial resources, such as education, to contribute to the economy to their full potential. It is a colossal waste of human resources to allow these conditions to continue. Imagine if Bill Gates had been born in Compton instead of Seattle.
gills 18y ago
Um...The article was pointing out that those two curves are independent. Isn't that what you're saying too? That even large fluctuations in the highest tax bracket have no material effect on the bottom line. However I agree with you that journalists should provide actual statistical analysis alongside charts, instead of adding sensational writing and letting the masses draw their own conclusions visually. I would like to see a chart that plots (/ tax-revenue GDP) to the early 1900's.
- cia_plant 18y ago
  We can't conclude from this chart that the two curves are independent - only that they have been independent historically. One explanation that leaps to mind is that the total tax level will remain constant because the government will always tax sufficiently to fund its programs, and those have stayed roughly constant as a proportion of GDP. This leads to a seeming noncorrelation between any segment of the tax code and total tax revenue. Even if the above explanation is far off-base, I hope it shows how a historical noncorrelation doesn't necessarily mean a lack of causal connection.
mattmaroon 18y ago
Yeah, hilarious. Implying causation where there is only correlation is probably the most frequent logical error in print.
- hugh 18y ago
  I don't think it's implying causation where there's only correlation. It seems to be implying non-causation due to non-correlation. I'd say the bigger flaw is that it only looks at the very top tax rate without looking at the point at which the top bracket cut in. In the 1950s the top tax rate was enormous but it only affected a tiny number of people. Now it's a lot lower but affects a larger slice of the population.
  - mattmaroon 18y ago
    Yeah, you're correct.
noonespecial 18y ago
A classic case of "lets find a graph to bolster our opinion". They may indeed be right. Raising taxes may produce a disincentive for capital to work and reduce GDP, actually reducing tax revenues. That fits in one sentence... what shall we fill the article with? Comparing this wacky correlation with Boyle's law is just shameful. There are examples in the former eastern-blok countries where low flat taxes actually cut corruption and raised revenues. They would have done better just presenting these anecdotes than this!
- learneconomics 18y ago
  Why is it shameful? It's not a "wacky correlation" - it's arguing that there is causation. It's basically saying "we have data proving the Laffer curve exists." That's not wacky. That's giving credence to a theory. Low, flat-taxes are helpful but not politically tenable in the United States.
pragmatic 18y ago
I think that's the point this article is trying to make, is it not? The point is that higher taxes lower TOTAL GDP. So that even if taxes are raised, taxes collected as a percentage of GDP remain the same. So the only way to increase the actual amount of collected taxes is to increase GDP as top marginal tax rates don't matter. Hence, if higher marginal taxes on the rich really do hurt the economy, they will effectively lower tax collection not increase it. Now, do higher marginal tax rates hurt the economy?
gojomo 18y ago
The author (David Ranson, not the WSJ board itself) is addressing the idea, implicit in Dem presidential proposals, that you can raise a meaningful amount of tax revenue with higher tax rates on high incomes. The chart is directly relevant to that question: no matter what you do to high-earners, tax revenues don't budge.
- GavinB 18y ago
  http://www.econ.umn.edu/~tkehoe/U.S.GDP.gif http://www.econ.umn.edu/~tkehoe/U.S.GDP.gif US GDP growth hasn't changed, even as this highest marginal tax rate moved by a factor of 3. It was actually highest in the 60s and 70s, when the top rate was still in the 70% range. GDP and total revenues are just too big to be affected by the tax rate of a single group, even, the most wealthy. What this budget shows us is that total gov’t spending must never be over 19.5% of GDP. That’s the only solution. Then, we can start lowering taxes and see if revenues stay up.
  - natrius 18y ago
    For those wondering how we've been doing relative to that 19.5% of GDP, here's a graph: http://carriedaway.blogs.com/carried_away/2005/04/us_government_s.html http://carriedaway.blogs.com/carried_away/2005/04/us_governm... We probably couldn't lower taxes for a while after spending less than 19.5% of GDP so we could actually pay down the national debt, but I like your plan.
- dhimes 18y ago
  Actually, they were claiming that raising the top rates hurt revenue because it tanked the GDP (while it left revenue as a percentage of GDP intact). However, they did not present evidence of that claim.
gunderson 18y ago
You have missed the point of the article. It doesn't matter if a tax is "income tax" or "lolcats tax", economists agree that any tax creates a disincentive for productive work. The question is, how much do tax rates impact productivity. This article points to some data that suggest that as rates increase, productivity decreases or evasion increases.
- MaysonL 18y ago
  And of course, as usual, most economists are wrong. Take the case of the average American wage slave, living from paycheck to paycheck. Raise his taxes. What happens? He (or she) needs more money to pay his bills. He has to get a second job, perhaps even start a side business. Thus, in many cases, raising taxes will increase GDP, perhaps even leading to substantial wealth creation.
GavinB 18y ago
The claim: GDP moves to compensate when this tax group's rate changes. The evidence: Er, whoops, we didn't give any data for GDP.
epi0Bauqu 18y ago
It should be noted that this is an op-ed by David Ranson. Mr. Ranson is head of research at H.C. Wainwright & Co. Economics Inc.
- cia_plant 18y ago
  The fact remains that the Wall Street Journal's editorial board has an obvious agenda and few scruples about pushing it with bad statistics. Other arguments I've seen on that page: America is a classless society (evidence: if you look at people who are poor when they're 20, they're often much richer when they're 40). The poor are "lucky duckies" for having such low tax rates (evidence: tax share statistics which take account only of the income tax, ignoring the state, local, and payroll taxes which make up the majority of the burden for the poor). I'm sure there have been others. I don't know if these have been mainly by the editorial board themselves, or op-eds. I have nothing particularly against market liberalists - I respect the Economist, and Reason Magazine. The WSJ just doesn't seem honest.
  - anamax 18y ago
    Since the poor basically aren't paying federal income tax, any tax that they do pay must be, by definition, the majority of their tax burden. SS is basically a crappy retirement plan for poor people. It's even worse for rich ones. Given that, it's irrational to call it a tax.
    - Retric 18y ago
      How is federal income redistribution based on income anything other than welfare supported by tax? And how is it anything other than an income tax? PS: Given the choice I would give my SS benefits if I could avoid paying SS taxes.
      - anamax 18y ago
        SS is mildly redistributionist (for the rich) but mostly time-shifting.
learneconomics 18y ago
It's incredible to see your post get so much karma given that your argument is so wrong. You really should learn some statistics yourself - total revenue for the government happens to be a function of tax rates. Using examples such as "software piracy" just destroys your credibility. Journalists in general are terrible with statistics as is the general public because the concepts of statistical significance and correlation versus causation are lost upon them. In this case however, the article isn't making a statistical fallacy. Given the tremendous portion of government revenues collected from those in the Top 1% of income, it makes sense to analyze whether there is any sensitivity between the highest marginal rate and total revenue. Furthermore, it makes sense to ask whether things like marginal tax rates and capital gains tax rates have an impact on GDP growth which in turn effects revenue growth for the government.

ivankirigin 18y ago

The most heavily debated tax issue is the rate that the richest pay. Progressives argue that they should pay much higher percentages than they currently do. They fail to account for the added incentive to avoid such taxes and subsequent loophole creation and usage. So the core issue of tax policy has been the marginal tax rates verses total revenue. It isn't the WSJ.

stcredzero 18y ago
I wonder if there's some sort of fundamental relationship between the powerful elites in every given society and the rest reflected in the graph? Is there some sort of relationship like Boyle's Law for gases?
sdurkin 18y ago
The argument is over what point we're at on the Laffer Curve, as well as the specific shape of the curve (i.e. is the right side so steep that we can tax at whatever rate we want up until revenues collapse entirely?), and about how tax enforcement policy can affect the shape of the curve. "They," meaning progressives, don't fail to account for anything. They just disagree with your analysis. Finally, the reason nobody knows or cares about this particular research is that most tax cuts were made with an eye toward maintaining revenue at a constant percentage of GDP. That is, the graph is a self-fulfilling prophecy. It doesn't predict what would happen with subsequent changes in the tax code. Furthermore, this isn't even in any way connected to MTRs for the rich. All that this graph reflects is that as taxes were decreased for the upper %1 over the past half century, they were increased on everybody else. It doesn't illustrate increased collection rates, just increasingly regressive tax policy. Brief mathematical analysis of what this article said: TaxRateforRich x RichEarnings + TaxRateEveryoneElse x EveryoneElseEarnings = TotalRevenue Then they told you that as TaxRateforRich dropped, total revenue remained constant, and thus concluded that the amount of earnings reported by rich people (RichEarnings) must have risen. What they ignored was a rise in TaxRateEveryoneElse.
- ivankirigin 18y ago
  "All that this graph reflects is that as taxes were decreased for the upper %1 over the past half century, they were increased on everybody else." False. We have a dynamic system where the incentives of the top 1% have a disproportional influence on GDP. Further, tax rates of the top 10% account for the majority of revenue. So I not only deny your claim but put forth that your rhetoric is emotionally manipulative - pitting the rich ("them") versus the rest ("us poor little everybody else"). The "rich", the top 1%, are the prime drivers of wealth creation. They are the reason GDP grows faster than population growth. The incentives on the top 1% heavily influence GDP growth. Also, the percentiles used are very misleading. The top and bottom quintiles today are not the same people in the top and bottom quintiles 20 years ago. So most stats we track about poverty and wealth are fairly useless because they follow that faulty assumption. Just in case anyone isn't clear on this: if you're a founder of a tech company, you're in the top 1% - perhaps not in income today, but in wealth generators and life-time taxes paid and to-be-paid.
  - sdurkin 18y ago
    ""All that this graph reflects is that as taxes were decreased for the upper %1 over the past half century, they were increased on everybody else." False." I have to disagree. The Tax Reform Act of 1986 (as well as the cut of 64) disproportionately affected the lower income brackets. As a matter of record, tax rates are higher for the lower income brackets, and lower for higher income brackets than at any other point in US history. To cite wikipedia: http://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986#Income_tax_rates http://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986#Income_t... "The top tax rate was lowered from 50% to 28% while the bottom rate was raised from 11% to 15% - the only time in the history of the U.S. income tax (which dates back to the passage of the Revenue Act of 1862) that the top rate was reduced and the bottom rate increased concomitantly." "The "rich", the top 1%, are the prime drivers of wealth creation. They are the reason GDP grows faster than population growth." Anyone who has capital gains from the labor of others. It is misleading to say that they are responsible for this growth themselves. Their wealth is invested in those in other income brackets, and used to drive up GDP. There's nothing morally wrong with this system. I agree that incentives for the upper %1 have a disproportionate effect on GDP. That said, from an economic perspective, I happen to believe that the Laffer curve has a very steep right side, and that we are to the left of the peak. This means that by raising rates, more revenue can be collected. For example, the 1981 tax cut did not improve revenue collection. I believe that we should raise rates in order to pay for progressive social programs. The upper %1 have benefitted from not only their skill and ability to drive wealth creation, but also a good deal of luck. Progressivism is a form of social insurance. It is an acknowledgment that perhaps, through no fault of my own, I might have been born poor, or with skills not suited to the modern economy. It is the understanding that in the richest nation on earth, no one should want for food, shelter, or healthcare, no matter what their ability to contribute. This is not rhetoric. It is a judgement of values, and an assertion of a logical argument. Think of it in terms of human capital. Those born into poverty today lack the access to crucial resources, such as education, to contribute to the economy to their full potential. It is a colossal waste of human resources to allow these conditions to continue. Imagine if Bill Gates had been born in Compton instead of Seattle.

gills 18y ago

Um...The article was pointing out that those two curves are independent. Isn't that what you're saying too? That even large fluctuations in the highest tax bracket have no material effect on the bottom line. However I agree with you that journalists should provide actual statistical analysis alongside charts, instead of adding sensational writing and letting the masses draw their own conclusions visually. I would like to see a chart that plots (/ tax-revenue GDP) to the early 1900's.

cia_plant 18y ago
We can't conclude from this chart that the two curves are independent - only that they have been independent historically. One explanation that leaps to mind is that the total tax level will remain constant because the government will always tax sufficiently to fund its programs, and those have stayed roughly constant as a proportion of GDP. This leads to a seeming noncorrelation between any segment of the tax code and total tax revenue. Even if the above explanation is far off-base, I hope it shows how a historical noncorrelation doesn't necessarily mean a lack of causal connection.

mattmaroon 18y ago

Yeah, hilarious. Implying causation where there is only correlation is probably the most frequent logical error in print.

hugh 18y ago
I don't think it's implying causation where there's only correlation. It seems to be implying non-causation due to non-correlation. I'd say the bigger flaw is that it only looks at the very top tax rate without looking at the point at which the top bracket cut in. In the 1950s the top tax rate was enormous but it only affected a tiny number of people. Now it's a lot lower but affects a larger slice of the population.
- mattmaroon 18y ago
  Yeah, you're correct.

noonespecial 18y ago

A classic case of "lets find a graph to bolster our opinion". They may indeed be right. Raising taxes may produce a disincentive for capital to work and reduce GDP, actually reducing tax revenues. That fits in one sentence... what shall we fill the article with? Comparing this wacky correlation with Boyle's law is just shameful. There are examples in the former eastern-blok countries where low flat taxes actually cut corruption and raised revenues. They would have done better just presenting these anecdotes than this!

learneconomics 18y ago
Why is it shameful? It's not a "wacky correlation" - it's arguing that there is causation. It's basically saying "we have data proving the Laffer curve exists." That's not wacky. That's giving credence to a theory. Low, flat-taxes are helpful but not politically tenable in the United States.

pragmatic 18y ago

I think that's the point this article is trying to make, is it not? The point is that higher taxes lower TOTAL GDP. So that even if taxes are raised, taxes collected as a percentage of GDP remain the same. So the only way to increase the actual amount of collected taxes is to increase GDP as top marginal tax rates don't matter. Hence, if higher marginal taxes on the rich really do hurt the economy, they will effectively lower tax collection not increase it. Now, do higher marginal tax rates hurt the economy?

gojomo 18y ago

The author (David Ranson, not the WSJ board itself) is addressing the idea, implicit in Dem presidential proposals, that you can raise a meaningful amount of tax revenue with higher tax rates on high incomes. The chart is directly relevant to that question: no matter what you do to high-earners, tax revenues don't budge.

GavinB 18y ago
http://www.econ.umn.edu/~tkehoe/U.S.GDP.gif http://www.econ.umn.edu/~tkehoe/U.S.GDP.gif US GDP growth hasn't changed, even as this highest marginal tax rate moved by a factor of 3. It was actually highest in the 60s and 70s, when the top rate was still in the 70% range. GDP and total revenues are just too big to be affected by the tax rate of a single group, even, the most wealthy. What this budget shows us is that total gov’t spending must never be over 19.5% of GDP. That’s the only solution. Then, we can start lowering taxes and see if revenues stay up.
- natrius 18y ago
  For those wondering how we've been doing relative to that 19.5% of GDP, here's a graph: http://carriedaway.blogs.com/carried_away/2005/04/us_government_s.html http://carriedaway.blogs.com/carried_away/2005/04/us_governm... We probably couldn't lower taxes for a while after spending less than 19.5% of GDP so we could actually pay down the national debt, but I like your plan.
dhimes 18y ago
Actually, they were claiming that raising the top rates hurt revenue because it tanked the GDP (while it left revenue as a percentage of GDP intact). However, they did not present evidence of that claim.

gunderson 18y ago

You have missed the point of the article. It doesn't matter if a tax is "income tax" or "lolcats tax", economists agree that any tax creates a disincentive for productive work. The question is, how much do tax rates impact productivity. This article points to some data that suggest that as rates increase, productivity decreases or evasion increases.

MaysonL 18y ago
And of course, as usual, most economists are wrong. Take the case of the average American wage slave, living from paycheck to paycheck. Raise his taxes. What happens? He (or she) needs more money to pay his bills. He has to get a second job, perhaps even start a side business. Thus, in many cases, raising taxes will increase GDP, perhaps even leading to substantial wealth creation.

GavinB 18y ago

The claim: GDP moves to compensate when this tax group's rate changes. The evidence: Er, whoops, we didn't give any data for GDP.

epi0Bauqu 18y ago

It should be noted that this is an op-ed by David Ranson. Mr. Ranson is head of research at H.C. Wainwright & Co. Economics Inc.

cia_plant 18y ago
The fact remains that the Wall Street Journal's editorial board has an obvious agenda and few scruples about pushing it with bad statistics. Other arguments I've seen on that page: America is a classless society (evidence: if you look at people who are poor when they're 20, they're often much richer when they're 40). The poor are "lucky duckies" for having such low tax rates (evidence: tax share statistics which take account only of the income tax, ignoring the state, local, and payroll taxes which make up the majority of the burden for the poor). I'm sure there have been others. I don't know if these have been mainly by the editorial board themselves, or op-eds. I have nothing particularly against market liberalists - I respect the Economist, and Reason Magazine. The WSJ just doesn't seem honest.
- anamax 18y ago
  Since the poor basically aren't paying federal income tax, any tax that they do pay must be, by definition, the majority of their tax burden. SS is basically a crappy retirement plan for poor people. It's even worse for rich ones. Given that, it's irrational to call it a tax.
  - Retric 18y ago
    How is federal income redistribution based on income anything other than welfare supported by tax? And how is it anything other than an income tax? PS: Given the choice I would give my SS benefits if I could avoid paying SS taxes.
    - anamax 18y ago
      SS is mildly redistributionist (for the rich) but mostly time-shifting.

learneconomics 18y ago

It's incredible to see your post get so much karma given that your argument is so wrong. You really should learn some statistics yourself - total revenue for the government happens to be a function of tax rates. Using examples such as "software piracy" just destroys your credibility. Journalists in general are terrible with statistics as is the general public because the concepts of statistical significance and correlation versus causation are lost upon them. In this case however, the article isn't making a statistical fallacy. Given the tremendous portion of government revenues collected from those in the Top 1% of income, it makes sense to analyze whether there is any sensitivity between the highest marginal rate and total revenue. Furthermore, it makes sense to ask whether things like marginal tax rates and capital gains tax rates have an impact on GDP growth which in turn effects revenue growth for the government.