Tuesday, January 31, 2012

GOP and Dems struggle with Econ 101

Sen. Brent Waltz, R-Greenwood, who was among nine Republican senators to vote against the bill last week, was the single “no” vote in the committee Monday. Waltz said he believes the proposal could cost the state jobs and won’t raise wages for Indiana workers...
Wow! Lower labor costs could reduce the quantity of labor demanded? OK...

Opponents say the law only leads to lower wages and poorer quality jobs. 

When you hear someone say "only" about a change in a public policy, you know that they're dupes or demagogues. Will it lead to lower compensation for those within the cartel? Yes. Will it lead to any benefits? Yes, in fact, it will yield net benefits. (That said, I expect the benefits to be modest but not huge.) To note...

Many experts say states’ economies respond to a mix of factors, ranging from swings in the national economy to demographic trends, and that isolating the impact of right-to-work is nearly impossible.

Wednesday, January 25, 2012

more confusion on Romney and tax percentages paid

How the details of Romney's extensive wealth will play among taxpayers, rival campaigns and the news media started to emerge Tuesday, as more than 500 pages from a 2010 tax return and a 2011 estimate spilled out both significant and minor revelations about Romney's scattered holdings, tax strategies and charitable donations.

--> First problem: why do we have a tax code where *anyone* needs hundreds of pages to file? 
--> Second problem: a tax code with so many loopholes that hundreds of pages are in play? Flat tax, anyone? Anyone?

The returns outline both the dimensions of Romney's finances and the complexity of the tactics used to reduce his effective tax rate to less than the 15% paid by many middle-class Americans...Romney paid about $3 million in federal income taxes in 2010 on an income of $21.7 million, putting him among the wealthiest of American taxpayers. At the same time, Romney gave nearly $3 million to charity -- about half of that amount to the Mormon church -- which helped lower his effective tax rate to a modest 14%...

A big part of his lower rates is taxation on capital gains (lower than labor income, but based on income that's already been taxed once). The other consideration is that many people think marginal tax rates are the same as average tax rates, overestimating what wealthy and middle-class people usually pay in federal income taxes. (Contrary to Braun's assertion, few in the middle class pay anything close to 15%.)

Obama's SOTU and ignorance on economics and tax policy

Declaring the American dream under siege, President Barack Obama delivered a populist challenge Tuesday night to shrink the gap between rich and poor, promising to tax the wealthy more and help jobless Americans get work and hang onto their homes.

--> President, you and Congress are the ones continuing to lay the siege!
--> Faux populist; more style than substance
--> He's been shrinking the wealth gap between "rich" and "poor". That's what recessions do!
--> More taxes on the wealthy. Not good for the economy, but if you're not going to cut spending...
--> Work and homes? How are you going to do that...really?

In a signature swipe at the nation’s growing income gap, Obama called for a new minimum tax rate of at least 30 percent on anyone making more than $1 million...“Now you can call this class warfare all you want,” Obama said, responding to a frequent criticism from the GOP presidential field. “But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.”...Obama calls this the “Buffett rule,” named for billionaire Warren Buffett, who has said it’s unfair that his secretary pays a higher tax rate than he does. Emphasizing the point, Buffett’s secretary, Debbie Bosanek, attended the address in first lady Michelle Obama’s box.

--> All billionaires pay far more, in dollar terms. Most billionaires pay far more, in percentage terms.  
--> Those who do not are subject to lower capital gains tax rates (paying tax on money for a second time) or are taking advantage of loopholes. Any credible, "fair" approach to income taxation would eliminate loopholes. But most Democrats and many Republicans don't want that.
--> If you want to deal with taxes and the middle class, your first priority has to be payroll taxes-- 15.3% of eery dollar earned. Democrats should step up on this issue, but they're busy demagoguing Social Security, Medicare, and tax policy. 

Romney and Buffett's "tax rates" (vs. the little people)

Romney and (supposedly) Buffett pay lower tax rates than common people?!

Variations of this story have been increasingly popular over the last few years. (Apparently, the President used this in the SOTU last night!) This isn't too surprising, given the economic doldrums inspired by the "Financial Crisis" and extended for more than four years now by the policies of Presidents Bush/Obama and their Congresses. Envy and resentment find more fertile ground in tougher times. (I wonder whether the politicians are dopes or are doing this on purpose, but that's another story.)

There are a variety of factors to consider-- differential taxes on capital gains vs. labor income; whether to include onerous payroll taxes on income in the calculations (but we usually ignore these, despite the pain inflicted on the lower-middle and middle classes, so why start now?); whether to include state and local taxes (more complicated and difficult to compare cases). In any case, the most common comparisons are simple (and simplistic), focusing on federal income taxes only.

Unfortunately, the comparisons often suffer from ignorance of the tax code and different expressions of "tax rate". Most notably, few people understand the difference between average tax rates (ATR) and marginal tax rates (MTR).

ATR is the proportion of one's income devoted to a tax or taxes in general. For example, if one has an income of $100K and pays federal income taxes of $12,000, then their ATR is 12%.

MTR is the proportion of tax paid on the last dollar earned. If one is in the 28% "tax bracket", then the last dollar earned is taxed at 28%. Each dollar earned is taxed in its respective tax bracket. Instead, most people believe that if you're in the 28% tax bracket, then every dollar earned is taxed at 28%. Not true! (The Tax Foundation does a really nice job with the big picture.)

For example, singles have a standard deduction of $5,800 and exempted income of $3,700. So, the first $9,500 earned is not exposed to any federal income taxes. (They've already lost about $1,400 to payroll taxes, but who cares about that?) If they earn $10,000, only the last $500 is exposed to the 10% MTR in the lowest tax bracket, resulting in taxes of $50 and an ATR of .5%.

In the Romney example popular on Facebook, Romney is said to have a tax rate of 13.9% while a teacher is said to have a 25% rate. Since there is no 13.9% tax bracket, the author must be referring to Romney's ATR. But if you do the calculations, a teacher who is single would need to earn at least $232,600 to have a 25% ATR (married with no children = $367,000; head of household with only one child = 314,700.) Why do I say "at least"? I'm assuming no itemized deductions, so our prospective teacher is a miser and doesn't have a mortgage on her home.

The irony of a valid comparison? The Occupy Wall Street crowd would say that she needs to be paying higher taxes!

Of course, teachers don't make this much money. So, those making such comparisons are invoking Romney's ATR and the teacher's MTR-- comparing apples and oranges, or better, apples and rocks.

the numbers on Romney vs. the teacher

If you take the comparison literally, then the teacher must be making at least $232,600.

Instead, it's a faulty comparison is based on (purposeful?) confusion of marginal and average tax rates (MTR and ATR). 

Using this tax table and looking at this year's 1040...

For a teacher who is single, a 25% ATR results from an income of at least $232,600.
-standard deduction of $5,800 and exempted income of $3,700 ($9,500 of income exempted)
-income of $232,600 results in taxable income of $223,100
-in the 33% tax bracket (MTR), resulting in a tax of $43,482.50 + 33% of the income over $178,650
-total tax of $58,151

For a teacher who is married (no kids), a 25% ATR results from an income of at least $367,000.
-standard deduction of $11,600 and exempted income of $7,400 ($19,000 of income exempted)
-income of $367,000 results in taxable income of $348,000
-in the 33% tax bracket (MTR), resulting in a tax of $48,665 + 33% of the income over $217,450
-total tax of $91,747

For head of household (with only one child), a 25% ATR results from an income of at least $314,700.
-standard deduction of $8,500 and exempted income of $7,400 ($15,900 of income exempted)
-income of $314,700 results in taxable income of $298,800
-in the 33% tax bracket (MTR), resulting in a tax of $46,430 + 33% of the income over $198,050
-total tax of $78,677

Why do I say "at least" $X in each of the three cases? I'm assuming no itemized deductions, so our prospective teacher is a miser and doesn't have a mortgage on her home.

The irony of a valid comparison? OWS would say that she needs to be paying much higher taxes!

Of course, teachers don't make this much money. So, those making such comparisons are invoking Romney's ATR and the teacher's MTR-- comparing apples and oranges, or better, apples and rocks.

Wednesday, January 4, 2012

my review of Entrepreneurship and Religion

As it appeared in The Journal of Markets & Morality...

Entrepreneurship and Religion
Ed. Leo-Paul Dana
Cheltenham, UK: Edward Elgar, 2010 (442 pages)

Entrepreneurship and Religion is a volume of articles edited by Leo-Paul Dana. He dominates the work; aside from the editing, he had a hand in writing nine of its 22 papers. (No other author appears more than once—except for two articles he co-authored with Teresa Dana.) Nine of the articles had already appeared in seven academic journals, signaling quality and providing a single outlet for related work.

Some of the articles are historical; others are contemporary. They have an international range, including research about minority peoples within a dominant society. Some of the work is empirical; most of it is descriptive. The result is a fascinating set of articles that, nonetheless, has limited impact as an academic approach. The projects are so context-specific that it is difficult to confidently extend their applicability.

Then again, that is the nature of this field. It reminds me of “Industrial Organization” in economics—where one studies various market structures, such as competition and oligopoly. One of my friends in graduate school jokingly described the field as a “compendium of special cases”. Much of this work has the same feature.

One deficiency in the editing is that many of the essays cover similar ground in their introductions—as they provide the background literature and an overview of entrepreneurship. This is good if one reads the essays separately, but creates much redundancy if one reads the book as a whole. (Along these lines, Dana’s introductory essay is most effective and allows one to skim the other chapters more quickly.)

One of the book’s strengths is in modeling and describing entrepreneurs as more than mere individuals who are to some extent constrained or encouraged by a legal framework. Entrepreneurial efforts are also a product of cultural, social, and religious contexts.

But as Dana notes in his introduction, culture, religion and society are intertwined with ethnicity. As it turns out, this hinders the goal of the volume. Often, inferences in the essays about the impact of “religion” are spurious or stretched. Beyond that, some of the essays do not address religion at all. (The book’s title should have included a reference to ethnicity and culture.)

For example, in Anne White’s study of Methodism (chapter 7), the reader is left wondering whether the entrepreneurs are driven by being Methodist, Christian, or Canadian. In Dimitri Tassiopoulos’s study of Greeks (chapter 4), one cannot tell whether the cause is Greek ethnicity or adherence to Greek Orthodox religion.

When such distinctions can be made, the authors effectively detail how religious beliefs and doctrine can be a catalyst or deterrent for entrepreneurship; observe that religions are generally effective at promoting and propagating values; and note that religious communities often provide low-cost “networks” for labor, product, and information. Some religious contexts create religion-centered, demand-side opportunities. (See, for example, specially-prepared foods for Jews and Muslims—and Welch’s grape juice for Methodists.) And some religious entrepreneurship is indirect—as a supply-side response to religious and ethnic discrimination.

The volume features a number of strong essays on religion and entrepreneurship: the influence of the “Protestant work ethic” (Ivan Light in chapter 6); the impact of Islam in general (Wafica Ali Ghoul in chapter 12); categories of entrepreneurs within Islam (Nekka & Fayolle in chapter 14); Jewish middlemen in Alsace before World War II (Dana in chapter 17); Jewish entrepreneurs in Montreal (Morton Weinfeld in chapter 18); and a comparative analysis of the French and Dutch portions of the island of St. Martin (Baldacchino & Dana in chapter 20).

Three other essays are solid and warrant attention from those interested in the title of the book: Edwina Pio on Hinduism and caste (chapter 1); Dana on Jews in a variety of countries (chapter 3); and Heilbrunn & Asbeh on the Druze living in Israel (chapter 15)

I found three points especially interesting. First, Light notes that as markets become more competitive, discriminatory behavior becomes more costly. Beyond that, he focuses on the impact of Protestantism’s “universalism”—as opposed to the insularity of Catholic and Jewish communities. He argues that our contemporary distaste against discrimination and favoritism should be credited to Protestantism.

Second, how much discrimination and favoritism is “personal” (based on bias) as opposed to “statistical” (where discrimination in the face of highly imperfect information is the “best” decision)? For example, Light (177) notes that Puritans faced a dilemma in “doing business with dynamic but unknown Quakers, who might be dishonest, versus the security of doing business with mediocres of known probity.” 

Third, in his study of Jewish middlemen in Alsace, Dana discusses the provocative idea that being an “entrepreneur” could be perceived as less risky than other alternatives—given one’s experience with being entrepeneurial!

This last observation leads to one of two suggestions in closing. How should we define “entrepreneur”? The literature seems to conflate entrepreneurship as a penchant for innovation along with someone who is hard-working. At one extreme, entrepreneurship simply becomes a synonym for any business venture, particularly if one is self-employed. To weigh one implication: the Amish avoid technology—and thus, to be successful, must work harder. Does this make them more or less entrepreneurial?

Finally, returning to the title of the book: More work should be done to distinguish “religion” as religious belief, rather than merely a blanket reference to a culture influenced indeterminately by religion. Maybe this point is difficult for researchers to recognize and embrace, because people routinely conflate these categories in everyday life. But in fact, they are quite different. As such, developing measures of religiosity would be a step forward in analyzing the impact of “religion” on behavior in general and entrepreneurship in particular.