Monday, April 23, 2018

The Challenges of Measuring Discrimination Against LGBTI Individuals

It seems quite clear (at least to me) that there is often discriminatory feeling against lesbians, gay men, bisexuals, transgender and intersex people. One can also observe a range of survey evidence and outcomes for people in these categories in terms of family life (including marriage and parenthood), education, health, and economic outcomes. But for economists, at least, drawing a firm connection from discrimination to outcomes can be tough. Marie-Anne Valfort has written "LGBTI in OECD Countries: A Review," which appears in the OECD Social, Employment and Migration Working Papers No. 198  (June 22, 2017).

The lengthy report pulls together a considerable body of evidence that exists on the topic, and is also clear-eyed and thoughtful about the analytical difficulties that arise in this area. Here, I'll sidestep her discussion of family life, education, and health issues, and focus on economic outcomes.

One problem in this area limitations on data.  In survey data, for example, people give dramatically different answers to whether they identify as LGB, whether they have participated in same-sex sexual behavior, or whether they have sometimes felt a same-sex attraction. If it is hard to define a group, then coming up with summary statistics to characterize outcomes for that group will be difficult. And carrying out studies that seek to isolate the effects of discrimination will be difficult, too.

After reviewing the evidence for the US, where the data is better than in many places, Valfort offers this summary (references to later sections of the paper are omitted from the quotation:
"Tentative but conservative measures suggest that LGBTI stand for a sizeable minority. They represent approximately 4.5% of the total population in the US, a proportion that can be broken down as follows among LGBTI subgroups (bearing in mind that these subgroups partly overlap): 3.5% for lesbians, gay men and bisexuals if one relies on sexual self-identification known to yield lower estimates than sexual behaviour or attraction, 0.6% for transgender people and 1.1% for intersex people."
As Valfont summarizes, there have been three broad ways to look at the extent to which differences across groups are due to discrimination. One approach looks at "observational" data, and tries to adjust for factors that seem likely to matter. For example, one could look at income for people, making a statistical adjustment for levels of education, job experience, age, occupation type, and so on. If there is a wage gap remaining after taking these other factors into account, then there is at least some reason to suspect that discrimination might be an issue. However, drawing firm conclusions from such studies is difficult, for a number of reasons that Valfont describes:

-- It seems likely that LGBTI people are likely to move to places where social acceptance of their group is greater and discrimination is less. "Failing to control for this geographic sorting could therefore lead to conclude that LGBT people do not face discrimination while they actually do, an error better known as the “omitted variables bias”.  The underlying problem is that factors not observed in the data can make a difference.

-- Data is weak, and "disclosure of sexual orientation, gender identity or intersex status of LGBTI to their social environment is not a given." It is possible, as Valfont writes: In other words, only the most successful gay men and lesbians (those suffering the least from discrimination) may disclose their sexual orientation to the interviewer."

-- Valfont points out that a number of studies measure the  LGBTI population indirectly, based on surveys where people say they are living with a same-sex partner. " Put differently, most population-based surveys only allow for identifying partnered homosexuals and comparing how they fare relative to their heterosexual counterparts ...  that is surely not representative of the LGBTI population as a whole."

-- Adjusting for other factors isn't as simple as it seems, either. For example, say for the sake of argument that there is discrimination against LGBTI indiviuals in school and when growing up and thinking about occupational possibilities. Then if a researcher comes along later, and does a statistical adjustment for level of education and occupation, that researcher is (in a statistical sense) wiping out any discrimination which occurred at that earlier stage.

-- There is an issue of "household specialization bias." In heterosexual household, it is still fairly common to find a situation in which the man has a longer-term and heavier-hour commitment to the (paid) labor force than does the woman. "In heterosexual households, men are indeed typically more engaged in market activities than are women. Therefore, the average partnered heterosexual man should be more involved in the labour market than the average partnered gay man, while the average partnered heterosexual woman should be less involved in this market than the average partnered lesbian.:" Thus, findings of a wage penalty for gay men and wage premium for lesbians are common:  "However, multivariate analyses of individual labour earnings with couples-based survey data do not provide results consistent with lower job satisfaction among both gay men and lesbians. These analyses, which amount to 18 studies (26 estimates for gay men and 30 estimates for lesbians) ... reveal an earnings penalty for partnered gay men but an earnings premium (or no effect) for partnered lesbians. ...[T]his pattern is observed irrespective of the country where, or the time when the data used in these studies were collected. More precisely, partnered gay men suffer an average penalty of 8% while partnered lesbians enjoy an average premium of 7%." Sorting out how to think about this household specialization bias and to adjust for it isn't an easy task.

Another broad approach to looking at discrimination is "experimental" studies. Broadly speaking, these fall into two categories. In "correspondence" studies, researchers send out a bunch of job applications that are meant to be essentially the same, except that some of them have a fairly clear identifier that the applicant is likely to be LGBTI (or in other studies, there will be information to reveal race/ethnicity or male/female). Valfort reports:
"[T]he 13 correspondence studies that have tested for hiring discrimination based on sexual orientation typically point to an unfair treatment of the gay male and lesbian applicants: on average, they are 1.8 times less likely to be called back by the recruiter than are their heterosexual counterparts. For gay men, the heterosexual-to-homosexual callback rates ratio varies from 1.1 (Sweden – Ahmed, Andersson and Hammarstedt (2013b) and the UK - Drydakis (2016)) to 3.7 (Cyprus – Drydakis (2014b)) with an average at 1.9. For lesbians, it varies from 0.9 (Belgium – Baert (2014)) to 4.6 (Cyprus – Drydakis (2014b)) with an average at 1.7. Consistent with attitudes toward gay men being more negative than attitudes toward lesbians, homosexual men face slightly stronger hiring discrimination than do homosexual women."
Such studies offer compelling evidence that discrimination exists, but by the nature of such studies, they can only look at the non-face-to-face part of the job market. As Valfort writes:
"Moreover, this weakness implies that discrimination in the labour market is measured at only one point of an individual’s career, i.e. his/her access to a job interview. It says nothing however about his/her likelihood of being hired, or paid equally and promoted once hired. Nevertheless, audit studies indicate that, conditional on being interviewed, individuals from the minority (i.e. the group that typically receives the lowest rate of invitation to a job interview) are also less likely to be hired (e.g. C├ędiey and Foroni (2008)). These findings suggest that correspondence studies underestimate hiring discrimination."
The other experimental approach are "audit" studies, which involve people who have been trained to play a role of a person with a certain background who is applying for job, or for a mortgage, or trying to rent an apartment, and so on. Audit studies have been a powerful way of revealing racial discrimination in a US context, but they have difficulties. Because they involve real people doing real-life applications and waiting for answers, such studies are often time-consuming and expensive. But they are workable in certain contexts. Valfont gives many examples, but here are two of them:
Various field experiments have shown that sexual minorities face discrimination in their everyday life. For instance, Jones (1996) sends letters from either a same-sex or opposite-sex couple, requesting weekend reservations for a one-bed room in hotels and bed-and-breakfast establishments in the US. His results show that opposite-sex couples are granted 20% more reservations than both male and female same-sex couples. Similarly, Walters and Curran (1996) conduct an audit study where same-sex and opposite-sex couples enter retail stores in the US while an observer measures the time it takes for the staff to welcome them. They find this time to be significantly less for heterosexual than for homosexual couples who often were not assisted and who were more likely to be repudiated.
Discrimination can manifest itself in many ways: in social settings, education, health, family life, occupational pressures, job interviews, promotions and wage raises, and more. Understanding where its manifestations are more powerful can be an important step in thinking about how best to address it. 

I do wonder if changes in the legal status of LGBTI individuals may offer a handle on looking at different types of discrimination. For example, the number of gay marriages reveals something about the number of such marriages that would have been blocked earlier. Similarly, changes in occupations and pay patterns that happen after legal changes will reveal something about earlier patterns of discrimination, too.

Those interested in this subject might also want to check the post on "Some Patterns for Same-Sex Households" (February 19, 2018).

Saturday, April 21, 2018

Most Global Violent Deaths are Murder, Not War

I did not know that by far most violent deaths in the world are a result of murder, not war. The pattern is reported in Global Violent Deaths 2017: Time to Decide, by Claire Mc Evoy and Gergely Hideg. It's a report from Small Arms Survey, which is a research center at the Graduate Institute of International and Development Studies in Geneva, Switzerland. The report notes:
'"In 2016, interpersonal and collective violence claimed the lives of 560,000 people around the world. About 385,000 of them were the victims of intentional homicides, 99,000 were casualties of war, and the rest died in unintentional homicides or due to legal interventions. ...

"In 2016, firearms were used to kill about 210,000 people—38 per cent of all victims of lethal violence. About 15 per cent of these individuals died in direct conflict, while the majority fell victim to intentional homicide (81 per cent). ...

"In terms of homicides alone, states could save up to 825,000 lives between 2017 and 2030 if they gradually stepped up their approach to crime control and prevention to reach the violence reduction levels of the top performers in their respective world regions. In so doing, states in the subregion of Latin America and the Caribbean would benefit most, saving as many as 489,000 lives in total by 2030, followed by states in South-eastern Asia (86,000 lives) and Eastern Africa (56,000 lives) ..."
This report doesn't present country-by-country data on homicide rates. But the World Bank DataBank website tabulates country-by-country-rates on Intentional Homicide using data from the UN Office on Drugs and Crime's International Homicide Statistics database. In 2015, for example, the global intentional  homicide rate in this dataset was 5.3 per 100,000, while the US intentional homicide rate was 4.9 per 100,000.

For the situation of deaths in armed conflict, the SAS report shows that in recent years by far the largest share are represented by events in Syria, Iraq, and Afghanistan.

Homage: I ran into the SAS report because it was a lead story in the April 5 issue of the Economist magazine.



Friday, April 20, 2018

The Clean Cooking Problem: 2.3 Million Deaths Annually

"Today around 2.8 billion people – 38% of the global population and almost 50% of the population in developing countries – lack access to clean cooking. Most of them cook their daily meals using solid biomass in traditional stoves. In 25 countries, mostly in sub-Saharan Africa, more than 90% of households rely on wood, charcoal and waste for cooking. Collecting this fuel requires hundreds of billions of hours each year, disproportionately affecting women and children. Burning it creates
noxious fumes linked to 2.8 million premature deaths annually."

Thus reports "Chapter 3: Access to Clean Cooking,:" from Energy Access Outlook 2017: From Poverty to Prosperity, published in October 2017 by the International Energy Agency and the OECD.  The report continues:
"Progress on access to clean cooking has been gathering momentum in parts of Asia, backed by targeted policies focussed mainly on the use of LPG [liquified petroleum gas]. In China, the share of he population relying on solid fuels for cooking declined from over one-half in 2000 to one-third in 2015. In Indonesia, the share of the population using solid biomass and kerosene fell from 88% in 2000 to 32% in 2015. Despite these efforts, the number of people without clean cooking access has stayed flat since 2000, with population growth outstripping progress in many countries. In sub-Saharan Africa, there were 240 million more people relying on biomass for cooking in 2015 compared to 2000."



The report estimates that an investment of an additional $42 billion, above and beyond what is already happening, would be needed by 2030 to provide access to clean cooking for the 2.3 billion people who otherwise will not have access to clean cooking by that time. At one level, $42 billion is a lot of money: at another level, it's almost an absurdly cheap price to pay for the potential benefits.

Other chapters of the report have a useful overview of the progress toward all people having access to electricity. The big success story in the last 20 years or so is India. The lagging region is sub-Saharan Africa.



Thursday, April 19, 2018

A Classic Question: Does Government Can Empower or Stifle?

If you look at the high-income countries of the world--the US and Canada, much of Europe, Japan, Australia--all of them have government which spend amounts equal to one-third or more of GDP (combining both central and regional or local government). Apparently, high-income countries have relatively large government. Conversely, when you look at some of the world's most discouraging and dismal economic situations--say, Zimbabwe, North Korea, or Venezuela--it seems clear that the decisions of the government have played a large role in their travails. So arises a classic question: In what situations and with what rules does government empower its people and economy, and under what situations and with what rules does the government stifle them?

Like all classic questions, only those who haven't thought about it much will offer you an easy answer. Peter Boettke instead offers a  thoughtful exploration of many of the complexities and tradeoffs in his Presidential Address to the Southern Economic Association, "Economics and Public Administration," available in the April 2018 issue of the Southern Economic Journal (84:4, pp. 938-959).

Boettke offers a reminder that a number of prominent economists have pondered the issue of how states can empower or become predatory. For example, here are reminders from a couple of Nobel laureates:
Douglass North [Nobel '93] in Structure and Change in Economic History (1981) ... said that the state, with its ability to define and enforce property rights, can provide the greatest impetus for economic development and human betterment, but can also be the biggest threat to development and betterment through its predatory capacity. James Buchanan [Nobel '86] in Limits of Liberty (1975) stated the dilemma that must be confronted as follows—the constitutional contract must be designed in such a way that empowers the protective state (law and order) and the productive state (public goods) while constraining the predatory state (redistribution and rent-seeking). If the constitutional contract cannot be so constructed, then economic development and human betterment will not follow.
Although Boettke doesn't make the point here, the authors of the US Constitution struggled as well with the idea that government was an absolute necessity, but finding a way for government to be controlled was also a necessity. As James Madison wrote in Federalist #51:
"If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions."
This challenge of building a government that is strong, but not too strong, and strong only in certain ways while remaining weak in others, is not just a matter of writing up a constitution or design of a government. Plenty of governments act oppressively at times, or even a majority of the time, while having the form of elections and constitutional rights. The heart of the issue, Boettke argues, runs deeper than the formal structures of government, and down to the bedrock of the social institutions on which these forms of government are based. He writes:
"The observational genius of the 20th century Yogi Berra once captured the essence of this argument while watching a rookie ball player attempting to imitate the batting stance of Frank Robinson, the recent triple crown winner, when he advised, “if you can t imitate him, don t copy him.” ... The countries plagued by poverty cannot simply copy the governmental institutions of those that are not so plagued by poverty. They are constrained at any point in time by the existing institutional possibilities frontier, and thus must shift the institutional possibilities frontier as technology and human capital adjust to find the constitutional contract that can effectively empower the protective and productive state, while effectively constraining the predatory state."
Economists have often ducked or assumed this question of institution building. For example, most of the arguments that economists make about how markets function, or about how self-interested sellers and buyers may act as if ruled by an "invisible hand" to promote social welfare, are based on the assumption that a decently functioning government is hovering in the background. Boettke refers to an essay by Lionel Robbins and writes:
"Adam Smith and his contemporaries never argued that the individual pursuit of self-interest will always and everywhere result in the public interest, but  rather that the individual pursuit of self-interest within a specific set of institutional arrangements— namely well-defined and enforced private property rights—would produce such a result. Though as Robbins (ibid, p. 12) writes, “You cannot understand their attitude to any important concrete measure of policy unless you understand their belief with regard to the nature and effects of the system of spontaneous-cooperation.” The system of spontaneous-cooperation, or economic freedom, does not come about absent a “firm framework of law and order.” The “invisible  hand,” according to the classical economists, “is not the hand of some god or some natural agency independent of human effort; it is the hand of the lawgiver, the hand which withdraws from the sphere of the pursuit of self-interest those possibilities which do not harmonize with the public good” (Robbins 1965, p. 56).
"In other words, the market mechanism works as described in the theory of the “invisible hand” because an institutional configuration was provided for by a prior Non-Market Decision Making process. The correct institutions of governance must be in place for economic life to take place (within those institutions)."
When we move outside the realm of market transactions set against a backdrop of decently functioning government, social scientists find it harder to draw conclusions. "But what happens when we move outside the realm of the market economy? Public administration begins where the realm of rational economic calculation ends."

On one side, decisions made by public administration areunlikely to involve competitive producers, choices made by consumers between these producers, and a price mechanism. Nonetheless, public decisions still have tradeoffs, and still face questions of whether the marginal benefits of a certain action (or a change in spending) will outweigh the marginal costs. 

Moreover, we know from sad experience that public administration is subject to special interest pressures and being captured by those who are supposedly the subjects of the regulation. We know that a number of politicians and government workers (no need to quibble over the exact proportion) put a high priority on pursuing their own personal career self-interest. We know that when a private sector firm fails to provide what customers want, it goes broke and is replaced by other firms, but that when a part of government fails badly in providing what citizens want, the part of government does not disappear and instead typically claims that failure is a reason for giving it more resources to do the job. 

One approach to all these issues is to take what Boettke calls "the God s-eye-view assumption," in which the all-seeing, all-wise, and all-beneficent economist can see the path that must be taken. But if you instead are skeptical of economists (and others involved in politics), then Boettke points out that some questions about public administration must be faced.
"Those who favor public administration over the market mechanism must at least acknowledge the question raised earlier—how is government going to accomplish the task of economic management?What alternative mechanisms in public administration will serve the role that property, prices and profit and loss serve within the market setting?
"Let us consider the following example—a vacant piece of land in a down-town area of a growing city. The plot of land could be used as a garage, which would complement efforts to develop commercial life downtown. Or, it could be used to build a park, encouraging city residents to enjoy green space and outdoor activities. Alternatively, it could be used to locate a school which would help stimulate investment in human capital. All three potential uses are worthy endeavors. If this was to be determined by the market, then the problem would be solved via the price mechanism and the willingness and the ability to pay. But if led by government, the use of this land will need to be determined by public deliberation and voting. We cannot just assume that the “right”
decision on the use of this public space will bemade in the public arena. In fact, due to a variety of problems associated with preference aggregation mechanisms, we might have serious doubts as to any claim of “efficiency” in such deliberations. ...

"More recently, Richard Wagner, in Politics as a Peculiar Business (2016, p. 146ff), uses the example of a marina surrounded by shops, hotels, and restaurants—think of Tampa, Florida. The marina, shops, hotels, and restaurants operate on market principles, but the maintenance of the roads and waterways are objects of collective decision making. Road maintenance and waterway dredging, for example, will be provided by government bureaus, but how well those decisions are made will have an impact on the operation of the commercial enterprises, and the viability of the commercial enterprises will no doubt have influence on the urgency and care of these bureaucratic efforts."
Boettke argues that "the idea of a unitary state populated by omniscient and benevolent expert bureaucrats" should be rejected. He also argues that economists (and other social scientists) can be prone to casting themselves in the role of these omniscient and benevolent experts. He quotes from near the beginning of James Buchanan's  1986 Nobel lecture:  “Economists should cease proffering policy advice as if they were employed by a benevolent despot, and they should look to the structure within which political decisions are made.” 

We live in a complex world, and there absolutely is a need for expert advice in many areas. But there is also crying need for experts to go beyond arguing with each other, or insulting the opposition, or attempting to get a grip on the levers of political power. There is a need for economists and other experts to participate in and to respect a broader process of institution-building and participating in the social consensus. (In a small way, this "Conversable Economist" blog is an attempt to broaden the social conversation in a way that includes expert insight without overly deferring to it. )

Boettke cites some comments from yet another Nobel laureate along these lines: 
"Elinor Ostrom concludes her 2009 Nobel lecture by summarizing the main lessons learned in her intellectual journey, and they are that we must “move away from the presumption that the government must” solve our problems, that “humans have a more complex motivational structure and more capability to solve social dilemmas” than traditional theory suggests, and that “a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans ... ”  .  Self-governing democratic societies are fragile entities that require continual reaffirmation by fallible but capable human beings. “We need to ask,” Elinor Ostrom continued, “how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of a more effective, equitable and sustainable outcomes at multiple scales." 

Wednesday, April 18, 2018

Global Debt Hits All-Time High

"At $164 trillion—equivalent to 225 percent of global GDP—global debt continues to hit new record highs almost a decade after the collapse of Lehman Brothers. Compared with the previous peak in 2009, the world is now 12 percent of GDP deeper in debt, reflecting a pickup in both public and nonfinancial private sector debt after a short hiatus (Figure 1.1.1). All income groups have experienced increases in total debt but, by far, emerging market economies are in the lead. Only three countries (China, Japan, United States) account for more than half of global debt (Table 1.1.1)—significantly greater than their share of global output."

Thus notes the IMF in the April 2018 issue of Fiscal Monitor (Chapter 1: "Saving for a Rainy Day," Box 1.1, as usual, citations omitted from the quotation above for readability). Here's the figure and the table mentioned in the quotation.
The figure shows public debt in blue and private debt in red. In some ways, the recent increase doesn't stand out dramatically on the figure. But remember that the vertical axis is being measured as a percentage of the world GDP of about $87 trillion, so the rising percentage represents a considerable sum. 

Here's an edited version of the table, where I cut a column for 2015. The underlying source is the same as the figure above. As noted above, the US, Japan, and China together account for half of  total global debt. 

The rise in debt in China is clearly playing a substantial role here. Explicit central government debt in China is not especially high. But corporate debt in China has risen quickly: as the IMF notes of the period since 2009, "China alone explains almost three-quarters of the increase in global private debt."

In addition, China faces a surge of off-budget borrowing from financing vehicles used by local governments, which often feel themselves under pressure to boost their local economic growth. The IMF explains: 
 "The official debt concept [in China] points to a stable debt profile over the medium term at about 40 percent of GDP. However, a broader concept that includes borrowing by local governments and their financing vehicles (LGFVs) shows debt rising to more than 90 percent of GDP by 2023 primarily driven by rising off-budget borrowing. Rating agencies lowered China’s sovereign credit ratings in 2017, citing concerns with a prolonged period of rapid credit growth and large off-budget spending by LGFVs.
"The Chinese authorities are aware of the fiscal risks implied by rapidly rising off-budget borrowing and undertook reforms to constrain these risks. In 2014, the government recognized as government obligations two-thirds of legacy debt incurred by LGFVs (22 percent of GDP). In 2015, the budget law was revised to officially allow provincial governments to borrow only in the bond market, subject to an annual threshold. Since then, the government has reiterated the ban on off-budget borrowing by local governments, while more strictly regulating the role of the government in public-private partnerships and holding local officials accountable for improper borrowing. Given these measures, the authorities do not consider the LGFV off-budget borrowing as a government obligation under applicable laws.
"There is some uncertainty regarding the degree to which these measures will effectively curb off-budget borrowing. "
An underlying theme of the IMF report is that when an economy is in relatively good times, like the US economy today, it should be figuring out ways to put its borrowing on a downward trend for the next few years. A similar lesson applies to China, where there appears to be some danger that the high levels of borrowing from firms and from local governments are creating future risks.

One old lesson re-learned in the global financial crisis is that high levels of debt can be dangerous. If stock prices rise and then fall, investors will be unhappy that they lost their gains--but for many of them, the gains were only on paper, anyway. But debt is different. If circumstances arises where debts are less likely to be repaid, then financial institutions may well find it hard to raise capital, and will be pressured to cut back on lending. If borrowing was helping to hold asset prices high (including housing, land, or stocks), then a decline in borrowing can cause those asset prices to drop. Lower asset prices make it harder to repay borrowed money, tightening the financial crunch, and slowing an economy further. 

When global debt as a share of GDP is hitting an all-time high, it's worth paying attention to the risks involved.

Tuesday, April 17, 2018

Some Economics for Tax Filing Day

U.S. tax returns and taxes owed for 2017 are due today, April 17. To commemorate, I offer some connections to five posts about federal income taxes from the last few years. Click on the links if you'd like additional discussion and sources for of any of these topics.

1) Should Individual Income Tax Returns be Public Information? (March 30, 2015)
"My guess is that if you asked Americans if their income taxes should be public information, the answers would mostly run the spectrum from "absolutely not" to "hell, no." But the idea that tax returns should be confidential and not subject to disclosure was not a specific part of US law until 1976. At earlier periods of US history, tax returns were sometimes published in newspapers or posted in public places. Today, Sweden, Finland, Iceland and Norway have at least some disclosure of tax returns--and since 2001 in Norway, you can obtain information on income and taxes paid through public records available online."

2) How much does the federal tax code reduce income inequality, in comparison with  social insurance spending and means-tested transfers? 

"The Distribution and Redistribution of US Income" (March 20, 2018) is based on a report from the Congressional Budget Office, "The Distribution of Household Income, 2014" (March 2018).



From the post: "The vertical axis of the figure is a Gini coefficient, which is a common way of summarizing the extent of inequality in a single number. A coefficient of 1 would mean that one person owned everything. A coefficient of zero would mean complete equality of incomes.

"In this figure, the top line shows the Gini coefficient based on market income, rising over time.

"The green line shows the Gini coefficient when social insurance benefits are included: Social Security, the value of Medicare benefits, unemployment insurance, and worker's compensation. Inequality is lower with such benefits taken into account, but still rising. It's worth remembering that almost all of this change is due to Social Security and Medicare, which is to say that it is a reduction in inequality because of benefits aimed at the elderly.

"The dashed line then adds a reduction in inequality due to means-tested transfers. As the report notes, the largest of these programs are "Medicaid and the Children’s Health Insurance Program (measured as the average cost to the government of providing those benefits); the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp program); and Supplemental Security Income." What many people think of as "welfare," which used to be called Aid to Families with Dependent Children (AFDC) but for some years now has been called Temporary Assistance to Needy Families (TANF), is included here, but it's smaller than the programs just named.

"Finally, the bottom purple line also includes the reduction in inequality due to federal taxes, which here includes not just income taxes, but also payroll taxes, corporate taxes, and excise taxes."

3) "How Raising the Top Tax Rate Won't Much Alter Inequality" (October 23, 2015)

"Would a significant increase in the top income tax rate substantially alter income inequality?" William G. Gale, Melissa S. Kearney, and Peter R. Orszag ask the question in a very short paper of this title published by the Economic Studies Group at the Brookings Institution. Their perhaps surprising answer is "no."

The Gale, Kearney, Orszag paper is really just a set of illustrative calculations, based on the well-respected microsimulation model of the tax code used by the Tax Policy Center. Here's one of the calculations. Say that we raised the top income tax bracket (that is, the statutory income tax rate paid on a marginal dollar of income earned by those at the highest levels of income) from the current level of 39.6% up to 50%. Such a tax increase also looks substantial when expressed in absoluted dollars. By their calculations, "A larger hike in the top income tax rate to 50 percent would result, not surprisingly, in larger tax increases for the highest income households: an additional $6,464, on average, for households in the 95-99th percentiles of income and an additional $110,968, on average, for households in the top 1 percent. Households in the top 0.1 percent would experience an average income tax increase of $568,617."

In political terms, at least, this would be a very large boost. How much would it affect inequality of incomes? To answer this question, we need a shorthand way to measure inequality, and a standard tool for this purpose is the Gini coefficient. This measure runs from 0 in an economy where all incomes are equal to 1 in an economy where one person receives all income (a more detailed explanation is available here). For some context, the US distribution of income based on pre-tax income is .610. After current tax rates are applied, the after-tax distribution of income is .575.

If the top tax bracket rose to 50%, then according to the first round of Gale, Kearney, Orszag calculations, the Gini coefficient for after-tax income barely fall, dropping to .571. For comparison, the Gini coefficient for inequality of earnings back in 1979, before inequality had started rising, was .435. ... 

Raising the top income tax rate to 50% brings in less than $100 billion per year. Total federal spending in 2015 seems likely to run around $3.8 trillion. So it would be fair to say that raising the top income tax rate to 50% might increase total federal revenues by about 2%.

4) The top marginal income tax rates used to be a lot higher, but what share of taxpayers actually faced those high rates,, and much revenue did those higher rates actually collect?

Compare "Top Marginal Tax Rates: 1958 vs. 2009" (March 16, 2012), which is based on a short report by Daniel Baneman and Jim Nunns,"Income Tax Paid at Each Tax Rate, 1958-2009," published by the Tax Policy Center. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%. What share of taxpayer returns paid these high rates? Across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates.



How much revenue was raised by the highest marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It's interesting to note that the share of income tax revenue collected by those in the top brackets for 2009--that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.



5) Did you know "How Milton Friedman Helped to Invent Tax Withholding" (April 12, 2014)?

The great economist Milton Friedman--known for his pro-market, limited government views--helped to invent government withholding of income tax. It happened early in his career, when he was working for the U.S. government during World War II, and the top priority was to raise government revenues to support the war effort. Of course, the IRS opposed the idea at the time as impractical.

Monday, April 16, 2018

The Share of Itemizers and the Politics of Tax Reform

Those who fill out a US tax return always face a choice. On one hand, there is a "standard deduction," which is the amount you deduce from your income before calculating your taxes owed on the rest. On the other hand, there are a group of individual tax deductions: for mortgage interest, state and local taxes, high medical expenses, charitable contributions, and others. If the sum of all these deductions is larger than the standard deduction, then a taxpayer will "itemize" deductions--that is, filling out additional tax forms that list all the deductions individually. Conversely, if the standard deduction is larger than the sum of all the individual deductions is not larger than the list of itemized deductions, then the taxpayer just uses the standard deduction, and doesn't go through the time and bother of itemizing.

In the last 20 years or so, typically about 30-35% of federal tax returns found it worthwhile to itemize deductions.
But the Tax Cuts and Jobs Act passed into law and signed by President Trump in December 2017 will change this pattern substantially. The standard deduction increases substantially, while limits or caps are imposed on some prominent deductions. As a result, the number of taxpayers who will find it worthwhile to itemize will drop substantially.

Simulations from the Tax Policy Center, for example, suggest that the total number of itemizers will fall by almost 60%, from 46 million to 19 million -- which means that in next year's taxes, maybe only about 11% of all returns will find it worthwhile to itemize.

Set aside all the arguments over pros and cons and distributional effects of the changes in the standard deduction and the individual deductions, and focus on the political issue. It seems to me that this dramatic fall in the number of taxpayers, especially if it is sustained for a few years, will realign the political arguments over future tax reform. If one-third or so of taxpayers are itemizing--and those who itemize are typically those with high incomes and high deductions who make a lot of noise--then reducing deductions will be politically tough. But if only one-ninth of taxpayers are itemizing, while eight-ninths are just taking the standard deduction, then future reductions in the value of tax deductions may be easier to carry out. It will be interesting to see if the political dynamics of tax reform shift along these lines in the next few years.