Tuesday, August 30, 2011

What Percentage of the Congressional Black Caucus (CBC) Are Also Members of the Congressional Progressive Caucus (CPC)?

In a post last year, I noticed that a number of members of the Left-leaning Congressional Progressive Caucus (CPC) are also members of the Left-leaning Congressional Black Caucus (CBC). I was wondering how many CBC members were also CPC members and vice versa.

Using the lists of CBC members and CPC members as of 30-AUG-2011, I compared the names and tallied how many members there were in each group and how many members were common to both groups. Interestingly, most members of the Congressional Black Caucus (CBC) tend to have Left-leaning political views. The noticeable exception is Congressman Allen West of Florida, who is a former Lt. Colonel in the U.S. Army and an outspoken favorite of the Tea Party. Congressman West is the only Republican on the CBC. Although, due to racist rhetoric coming from members of the Congressional Black Caucus itself, Congressman West is apparently reconsidering his decision.

Perhaps not surprisingly, 89% of CBC members where also members of the CPC. Similarly, more than half of the CPC membership is from members of the CBC. I'd call that significant overlap.

Wednesday, August 24, 2011

Is Warren Buffett Paying His "Fair Share"?

I have tremendous respect for Warren Buffett. I own shares in Berkshire Hathaway and he and his group of companies have generated some reasonable gains over the years.

But, is Mr. Buffett right? Do the superwealthy like him pay less than their "fair share" of taxes as he seemingly claims is his New York Times editorial? Mr. Buffett's non-scientific technique was to ask 20 of his employees how much tax they pay.

Likewise, Mr. Buffett didn't distinguish between income taxes, sales taxes, corporate taxes, estate taxes, or payroll taxes. I'll focus on federal income taxes, which generates one of the largest shares of revenue for the federal government. Payroll taxes (Social Security and Medicare) are another matter that I'll cover in a later post. Likewise, Mr. Buffett didn't distinguish between MARGINAL tax rate or EFFECTIVE tax rate. The MARGINAL rate is the amount that you pay on each additional dollar of income. The EFFECTIVE rate is how much you pay in total taxes, divided by your total income. The EFFECTIVE rate is nearly always less than the MARGINAL rate, although most people remember the MARGINAL tax rate because it usually seems so extreme. See "Pretty Pictures and a Political Rorschach Test" to see how marginal rates have changed over time.

Unfortunately, Mr. Buffett's non-scientific sample of 21 taxpayers represents just 0.000015% of the total population of 140 million taxpayers, or about 1 in 6.664 MILLION taxpayers. In statistics, this is called a non-representative sample. Given that Mr. Buffett by himself is also a member of an elite group, the Top 400 taxpayers, any result will be highly skewed.

Wouldn't it be great if we could use real IRS data and could validate if wealthy taxpayers were indeed not paying their "fair share"? Oh wait, we can! The IRS provides freely downloadable summary statistics for all income taxes filed by year, income group, etc. Groups like the Tax Foundation and the Tax Policy Center use this data to report on how the tax burden falls on taxpayers.

According to Warren Buffett's editorial, he paid $6,938,744 ($6.938 MILLION) in federal income taxes in 2010, representing 17.4% of his taxable income. So, is Warren Buffett scamming the system? The average tax bill for all taxpayers in 2008 (the latest year of data from the IRS), was $7,373, down from $7,911 in 2007. The average taxpayer paid 12.24% of his taxable income in federal income tax in 2008. Taxpayers in the Top 0.1% population paid an average $1,357,143 in taxes in 2008. Warren Buffet paid over $5 MILLION more! The Top 0.1% also paid 22.7% of their total income as income tax. Warren Buffet paid about 5.3% less. However, Mr. Buffett is 80 years old and like many others his age, he likely receives considerable income from long-term capital gains, which are presently taxed at 15%. Likewise, being a shrewd investor and having lived through prior times with much higher tax rates, Mr. Buffett likely has an extensive portfolio of tax-free municipal bonds and U.S. Treasuries, but this is conjecture.

To summarize ...
  • Warren Buffett paid significantly more in absolute dollars than did the average taxpayer ($6.938 MILLION vs. $7,373).
  • Warren Buffet paid a higher percentage of adjusted income in taxes than the average taxpayer (17.4% vs. 12.24%) but less than those in the Top 0.1% of taxpayers (17.4% vs. 22.7%)
(Click image to enlarge)

QUESTION: Does Warren Buffett pay more or less of the total share of income taxes than his total share of income?

Let's determine how much he made last year. He claims that he paid $6.939 MILLION in taxes and had a 17.4% effective tax rate. Divide $6.939 MILLION by 17.4% and you derive that his adjusted gross income was around $39.878 MILLION (a nice job, if you can get it!). Because 2010 tax data isn't yet available, I'll mix some apples and oranges using the top-line 2009 tax summary data. In 2009, the total US adjusted gross income (for tax purposes) was $7.63 TRILLION. The total 2009 federal income tax bill was $865.95 BILLION.
  • Warren Buffett's share of total U.S. income = 0.00052% ($39.878 MILLION / $7.626 TRILLION)
  • Warren Buffett's share of total U.S. income tax bill = 0.00080% ($6.939 MILLION / $7.626 TRILLION)
As do most wealthy taxpayers, Warren Buffett also pays a higher share of the total tax bill than his total share of US income. In fact, Warren Buffett pays 53% more in taxes than his share of income ((share of taxes / share of income) - 100%). A number greater than 0% indicates that the taxpayer is taxed on both income and on a fraction of accumulated wealth. A number less than 0% indicates that the taxpayer potentially receives government services that are subsidized by all other taxpayers.

(Click chart to enlarge)

Using 2008 historical data for the Top 0.1% taxpayers (again, Mr. Buffett is in the Top 400 group or the Top 0.0003%), his share of taxes versus total income should be around 85%. His tax payments current are more in line with the Top 1% to 5% of taxpayers. If this Top 0.0003% taxpayer wants to keep up with the Top 0.1% of taxpayers, then his 2010 tax bill should be in the neighborhood of $11.128 MILLION instead of a "measly" $6.939 MILLION. However, if he wants to pay 22.7% of his income as tax to match the Top 0.1%, then he only needs to contribute another 5.3% of his income or $2.144 MILLION. Instead of waiting for the slow-moving Congress to take action, Mr. Buffett is free to voluntarily write a check for an addition $2.114 MILLION or $4.189 MILLION or more, unless perhaps he has better use of that money such as investing in the U.S. economy and creating jobs--two actions that the federal government that is seemingly incapable of doing.

The last time that Congress attempted to address "inequalities" in the U.S. tax code, it created the ill-conceived and poorly-constructed Alternative Minimum Tax (AMT). AMT was originally targeted at just 155 high-income taxpayers, who paid $0 in income tax but broke no law and merely followed existing U.S. tax code. Ultimately, because AMT was not indexed to inflation, it impacted millions of middle-class taxpayers (myself included).

Back to our fundamental question: Does Warren Buffett pay his "fair share" of income tax? He pays significantly more taxes than the average taxpayer, both in total dollars, as a percent of his income, and as a percent of his share of total income. Could he pay more? Undoubtedly. Is he paying his "fair share"? First, tell me what your definition of "fair share" is.

You know what we're not discussing while wasting time on the definition of "fair share"? TAX REFORM! I believe that all sides agree that our current income tax system is antiquated and internationally un-competitive. Generally, you get less of whatever you tax. The U.S. government currently taxes work (jobs), investments, and savings. Instead, we should be taxing consumption! But, there will likely be no changes until the next major crisis.
See also ...

Wednesday, August 10, 2011

Another Example of California's Flawed Government

California is home to some of the nation's toughest anti-smoking legislation. The state collects an extra $0.25 tax per pack to pay for the adverse health effects of smoking and to fund a public-service campaign that advertises against tobacco use.

California is also home to CalWORKS, a program designed to help unemployed and low-income families. The California Legislature moved to close obvious fraud when CalWORKS cards were used out of state to fund extravagances such as vacations, casino gambling, and at strip clubs--all at taxpayer expense.

Despite that California leads the way on public efforts to discourage smoking and the California Legislature feels free to mandate the behavior of every-day Californians by banning certain incandescent light bulbs, the California Legislature rejected common-sense CalWORKS reforms (SB 417) designed to prevent those that receive taxpayer-funded CalWORKS benefits from purchasing alcohol and tobacco using those same benefits.

It really makes you wonder about what passes for logic in Sacramento--either that or they really need to check the old plumbing in the Capitol for lead contamination.

Friday, August 5, 2011

The Debt Ceiling and Where Do You Hide $238 BILLION?

If you followed the USA's debt-ceiling debate, you may remember that U.S. Treasury Secretary Timothy Geithner said that the U.S. Government would reach the Congress-imposed debt ceiling on 16-MAY-2011.

As Congress did little to act on the debt ceiling up to that point, the debt-ceiling debate was delayed until a 1-AUG-2011 drop-dead date. The Treasury admitted to delaying payments to certain federal retirement and disability funds to postpone the date beyond 16-MAY-2011. Using the ever-popular "everybody-does-it" defense, Secretary Geithner claims, "Each of these actions has been taken in the past by my predecessors during previous debt limit impasses."

After tortuous debate and political wrangling, the U.S. Congress agreed to increase the debt ceiling. Immediately afterward, the U.S. Treasury borrowed a record $238.3 BILLION in a single day!

(click to enlarge)

The chart above uses data directly from the U.S. Treasury and shows the accumulated total public debt from 1-JAN-2011 until 3-AUG-2011. The red line shows the TOTAL public debt. Not all of the debt is subject to the debt ceiling (as described here and here), so the line seemingly crosses the official debt ceiling limit. However, the red line flattens out on 16-MAY-2011, the day that Treasury Secretary Timothy Geithner says that the U.S. hit the official debt limit.

At first glance, it would appear that the U.S. debt did not increase from 16-MAY-2011 until 2-AUG-2011 and then suddenly the debt increases by $238.3 BILLION. However, from the historical "burn-rate", the U.S. Government was in reality still borrowing an average of $2.72 BILLION per day! The blue dashed line shows extrapolated borrowing even during the period where the official total debt flat-lines.

In essence, the Government merely stopped borrowing on the open market and instead borrowed from federal employees and retirees--many whom where likely unknowing and unwilling U.S. creditors.

So, where did the U.S. Treasury "hide" this $238.3 BILLION? If a public company acted this way, these actions would likely trigger an SEC investigation (and shareholder lawsuits). But, as we sadly know, the U.S. government isn't constrained by the same rules that it mandates for everybody else.

In a side note, the total USA public debt is rapidly reaching the size of the U.S. gross domestic product (GDP). In 2010, the U.S. GDP was $14.658 TRILLION.

  • Where did the U.S. Treasury "hide" this $238.3 BILLION?
  • Were their actions legal?
  • Were their action ethical?
  • The Congress delayed action on handling the debt crisis well beyond the original 16-MAY-2011 date. How much did Congress' inaction cost the nation?
See also ...

Wednesday, August 3, 2011

Matt Damon Needs a Wider Circle of Friends (and an Education on the U.S. Tax System)

I loved Matt Damon in "The Adjustment Bureau" where he played a likable, ambitious politician living in a world controlled by a higher-power that makes adjustments to reality. The movie's ending was a bit weak, but Mr. Damon delivered a solid performance. He's a very talented actor.

Unfortunately, Mr. Damon apparently sometimes confuses reality with acting when he plays politician, as shown in the following clip on taxation. Maybe Matt Damon now believes that he is part of The Adjustment Bureau. There are numerous factual mistakes with some of Mr. Damon's remarks and, I can speak from personal experience, that he is wrong about what some people actually did with their Bush Tax Cuts.

DAMON: [0:06] "The wealthy are paying less than they paid, you know, at any time else, I mean, certainly in my lifetime, and probably ... probably, you know, in the last century."

Okay, let's check a few facts.
  • FACT: The share of total income tax paid by upper-income taxpayers has actually INCREASED over time. (chart, data)

  • FACT: There is a difference between the marginal tax rate and the actual taxes paid by a taxpayer, called the effective tax rate. The effective federal tax rate for ALL taxpayers has dropped since at least the 1980s. The absolute drop was larger for upper-income taxpayers because they also pay among the highest effective rates. Taxes from upper-income taxpayers are also swayed by recession.

  • FACT: According to Wikipedia, Matt Damon was born in 1970.

  • FACT: The so-called Bush Tax Cuts reduced the top marginal tax rate on the wealthy from 39.6% to its current rate of 35%. Similarly, the bottom tax rate was reduced from 15% to 10% (though many often forget to mention this point). The top margin rate was reduced by 11.6% while the bottom marginal rate was reduced by 33%.

  • FACT: During Mr. Damon's lifetime, the lowest top marginal tax rate was actually 28%, passed by Congress in 1986. Although many refer to this as one of the Reagan Tax Cuts, this Legislation was co-sponsored by Democratic Congressman Dick Gephardt (MO) and by Democratic Senator Bill Bradley (NJ).

  • FACT: 28% is lower than 35%.

  • FACT: The "last century" includes the period from 1912 until today.

  • FACT: The modern income-progressive tax system started in the United States in 1913 after the passage of the Sixteen Amendment (see one author's take on the damage wrought by the Sixteenth Amendment).

  • FACT: Thanks to the Revenue Act of 1913, the top marginal tax rate was 7% until 1917 when dramatically Congress raised taxes to pay for the United States' entry into World War I, under the Wilson Administration.

  • FACT: During the last century, the lowest top marginal tax rate was 7%.

  • FACT: 7% is lower than 35%.

  • FACT: Technically, before 1913, there was no federal income tax (in modern times, hence the requirement for the Sixteenth Amendment so that income taxes would be considered Constitutional). Because 1912 falls within the "last century," one could argue that the lowest top marginal tax rate was actually 0%. But, I'd be quite happy with 7%.

  • For a more detailed look at recent tax history, see "Pretty Pictures and a Political Rorschach Test."
DAMON: [0:16] "Tax the really rich--you know, guys like me."

Mr. Damon, if you feel that you are not paying your "fair share" of taxes, and you feel that sending more money to the government is the best and most productive use of your excess capital, then there are plenty of easy ways to pay even more taxes.
  • Avoid taking any deductions or exemptions on your federal tax return.

  • Cut a check directly to the Treasury. Please see "Useful Information for Under-taxed Individuals."

  • Don't wait for slow-moving, ineffectual Washington, D.C. to take action!
DAMON: [0:34] "Well, I didn't go start a small business with my tax break, uh, and I don't know anybody else that did. ... Nobody went and started a business with their Bush Tax Cut. I don't know who would believe something like that. It just defies common sense."

Mr. Damon, I recommend broadening your circle of friends. What did I do with the extra money that I kept thanks to the Bush Tax Cuts? I started a business! You what else? That business generates taxable income that pays for things like roads, fire and police protection, public schools, etc. In an indirect way, it created jobs by freeing up my old job at a productive, profitable, tax-generating company, while I created a new position for myself and my employee.

And you know what I do with a portion of the profits from that company? I use it to help math, science, and technology education in my local public and private schools. I take an ACTIVE role in my community. I do not depend on a far-away, slow-moving government in Washington, D.C. to do the job for me.