The "size of government" paradox (with polling data!)

[luiz]

The only alternative figure I found was 10% own 70%.
Wealth taxes likely won't be able to pull all the weight - fair enough - but there is also room for significantly higher taxes for the top income brackets.

10% owning 70% is vastly different from 1% owning 90%. And remember, what is usually taxed is not wealth, but rather income and consumption, and those are much more equitably distributed.

And sure there is room for higher taxes on the top income brackets, I wasn't disputing that. I was just pointing out that the notion we see frequently thrown around by "progressives" both on CFC and American media that the US could have an European-style welfare state if only those nasty millionaires paid their "fair share" is a complete fallacy. The European countries that do have a comprehensive welfare state apply higher taxes not only to their richest citizens, but pretty much across the board. A middle class American would see much less disposable income (and of course would in turn have more services provided by the government). This trade-off may seem desirable to many, but I doubt it is to the average middle class American.

 

[Arwon]

I think you're strawmanning a bit there, luiz.

 

[bender19]

I don't think they're necessarily contradictory.

Hypothetically, take 2 issues, welfare and internet regulation. If you polled a right wing group of people in Australia you might find a majority who want less government welfare, however when combined with a left wing segment you may get a minority. Conversely a left wing group might in the majority want less internet intervention, while a right wing group might not, such that overall the majority may not want less intervention. However if you asked them if they wanted less government its quite conceivable both groups would think of their pet issue and in the majority prefer less government.

I wouldn't consider that list of issues exhaustive, or the multiple choice answers comprehensive. Take illegal drugs, if you ask people wether government should make laws in respect to marijuana, the majority would say yes. Does that suggest people are happy with the level of government intervention is this area? Its quite possible another poll with different phraseology could find a majority don't like the current laws and favour a legal regulated market, such a policy potentially could reduce the size of government.

You're also polling on specific services. In many cases people want the same or more services but to pay less taxes. This isn't necessarily contradictory. I work in the public service and have at both state and federal levels, it is quite possible to have the bureaucracy of government working more efficiently without reducing front line services. Even if you think every public servant is working at maximum efficiency it doesn't mean the system as a whole doesn't have vast inefficiencies. We have 3 levels of government, the state and federal levels overlap in too many cases.

For example, take the currently proposed national occupational licensing reforms, the idea is simple enough have a single set of regulations across the country, reducing the administrative and regulatory burden on the public, 1 instead of 8 systems. Certainly there's potential obvious savings there, achieving the same outcome with less input. Even then its not quite that simple, under the previous Qld government the plan was to keep the entire administrative structure in Qld. So we'd actually end up with an extra layer of administration, not less. You also have to remember this is politics, naturally purely on the basis of a loss of power reforms can be opposed.

On the other side could the governments of Australia collect the same amount amount of taxes with less bureaucracy, of course they could. For example GST or proposals in the Henry Review.

The polling is very simplistic, I wouldn't read to much into it, and hopefully populist politicians don't either.

 

[Cutlass]

10% owning 70% is vastly different from 1% owning 90%. And remember, what is usually taxed is not wealth, but rather income and consumption, and those are much more equitably distributed.

And sure there is room for higher taxes on the top income brackets, I wasn't disputing that. I was just pointing out that the notion we see frequently thrown around by "progressives" both on CFC and American media that the US could have an European-style welfare state if only those nasty millionaires paid their "fair share" is a complete fallacy. The European countries that do have a comprehensive welfare state apply higher taxes not only to their richest citizens, but pretty much across the board. A middle class American would see much less disposable income (and of course would in turn have more services provided by the government). This trade-off may seem desirable to many, but I doubt it is to the average middle class American.

For what reason would they have lower disposable incomes? Tax differences would be very small at most. But the income of the middle groups would be expected to be higher.

 

[Arwon]

The polling is very simplistic, I wouldn't read to much into it, and hopefully populist politicians don't either.

I dunno that you can call the polling "simplistic". It's compiled from the cross-tabs of our main opinion polling companies and seems a pretty clear picture of what we actually think.

 

[luiz]

For what reason would they have lower disposable incomes? Tax differences would be very small at most. But the income of the middle groups would be expected to be higher.

No it wouldn't, because even middle class citizens would be subject to 40%-50% of taxation. As an example, someone making 60,000 USD per year in Denmark would pay 36% of that amount in income taxes alone (that is not a marginal rate, that's the actual tax paid over the full income!!!) Once you account for the fact that consumption taxes are also much higher (so everything from gasoline to laptops is far more expensive than in the US) you can see that the total amount eaten up by taxes of this middle class individual is huge. Of course, he would receive many quality public services in return, but there's no doubt whatsoever he has a much smaller disposable income than an American making 60K (all else being equal).

Edit: And sure enough, the US tops the global list of personal disposable income. Not how small the difference between gross personal income and disposable personal income is in the US, and how big it is the most extreme social-democracies. And note the huge difference between the US and Sweden. As I said, it may seem a desirable trade-off to a lot of people, but I doubt it is to your average middle class American.

 

[Cutlass]

No it wouldn't, because even middle class citizens would be subject to 40%-50% of taxation. As an example, someone making 60,000 USD per year in Denmark would pay 36% of that amount in income taxes alone (that is not a marginal rate, that's the actual tax paid over the full income!!!) Once you account for the fact that consumption taxes are also much higher (so everything from gasoline to laptops is far more expensive than in the US) you can see that the total amount eaten up by taxes of this middle class individual is huge. Of course, he would receive many quality public services in return, but there's no doubt whatsoever he has a much smaller disposable income than an American making 60K (all else being equal).

Edit: And sure enough, the US tops the global list of personal disposable income. Not how small the difference between gross personal income and disposable personal income is in the US, and how big it is the most extreme social-democracies. And note the huge difference between the US and Sweden. As I said, it may seem a desirable trade-off to a lot of people, but I doubt it is to your average middle class American.

You forget that the economy would be larger and wages higher... Not to mention that it would be a very small difference from the taxes we are paying now. We pay for our stingy welfare state in lower incomes and higher government costs for law enforcement and welfare eligibility.

 

[luiz]

You forget that the economy would be larger and wages higher... Not to mention that it would be a very small difference from the taxes we are paying now. We pay for our stingy welfare state in lower incomes and higher government costs for law enforcement and welfare eligibility.

And that's why your per capita disposable income is the highest in the world...

 

[Terxpahseyton]

Luiz, you originally argued that it was the universal "hardcore truth" that even the lower end of the middle case would have be taxed heavy to finance a comprehensive welfare state.
Now lets look at this graph of the US of 2011, which shows income distribution.

http://economix.blogs.nytimes.com/2011/05/24/where-do-you-fall-on-the-income-curve/
If I interpret this graph right, than the top 95% have significantly more income than the button 50%. Not just wealth, but income. And assuming that "lower end of middle class" means below 50%, I think this graph demonstrates that your "hardcore truth" in reality is not that easy to establish, at least with regards to the US.

 

[luiz]

But you have interpreted the graph completely wrong. That's just the mean household income of each percentile, it says nothing of what share of the total income each percentile commands.

Here's the actual data, for the US:

-The top 20% earn slightly less than 50% of all income.
http://en.wikipedia.org/wiki/Household_income_in_the_United_States#Aggregate_income_distribution

As you can see, while still quite concentrated, it's not even near the level which you suggest. As I said, income is much more equitably distributed than wealth.

 

[Cutlass]

And that's why your per capita disposable income is the highest in the world...

And why we won't for long if we don't return to the economic policies that worked.

 

[Terxpahseyton]

But you have interpreted the graph completely wrong.

I in deed did. Didn't realize that percentile is essentially a quantil (only started this semester with statistics )
But then what is the actual share of the bottom 50% of total income?. That is surprisingly hard to google.
Here is all I found so far:

http://conceptualmath.org/philo/incomes.htm
Again, I think strongly in disfavor of your factual clame (and even without misinterpretation).

 

[luiz]

It doesn't. I haven't looked at the data source (and I won't because I'll demonstrate my point in a different way, as you'll see in the second part of my post), butthe bottom half is probably skwed by the unemployed, part-timers, etc. Also, the "mid-92%" is a too broad group; clearly they'd have to bear a big part of the tax burden, and clearly a large part of middle class falls there.

But here's why I don't have to dwell in excessive details: we can actually test the hypothesis of what the tax rate for a middle class American would look like if they adopted a comprehensive welfare system by looking at countries that have adopted those systems and are roughly as rich as the USA. So we can look at the Scandinavian countries, plus Finland.

Here's why the comparisson makes sense:

-As was demonstrated in another thread, before taxes and transfers the income distribution in the US is roughly similar to that of European welfare states (it's actually more equitable than quite a few of them). So if the Scandinavian countries adopted US tax and transfer rates, their income distribution would look a lot like that of the US. Likewise, the American income distribution would look a lot like that of Scandinavia if they replied their taxes and transfers.

-If the Scandinavian countries, which are roughly as rich as the US and have a comparable pre-tax income distribution, can't manage to fund their welfare states without heavily taxing the middle class, neither would the US if they chose this path. It's a complete falacy that the US has some magic milk cow named "the rich" which can foot the whole bill. Norway is richer than the US and still taxes the hell out of the middle class. Why? Are norwegians evil or stupid?

So it's pretty damn obvious that if the US wants a comprehensive welfare system, the middle class will have to pay, and a lot. Would the rich pay even more? Of course. But I think your are overlooking just how little taxed not only the rich, but also the American middle class is compared to its european counterparts. And that's why per capita disposable income is the highest in the US, and relatively low in Sweden.

There is a trade-off to be held, and different people will choose different paths. I doubt the average American is willing to pay for a comprehensive welfare system.

And Arwon, you can see that I wasn't strawmanning at all. Many people do seem to believe that the rich are a magical milk cow.

 

[Terxpahseyton]

And Arwon, you can see that I wasn't strawmanning at all. Many people do seem to believe that the rich are a magical milk cow.

If that refers to me, then it is a strawman-textbook-example. I initially explicitly stated that I didn't pursue a particular agenda by my argument with you. Whoever are these people which few the rich as "magical milk cows" (I sincerely personally don't know any), I can assure you that I am not one of them. But it seems over the course of the debate you forget what we are even arguing, which was you claim, that even the lower part of the middle class would have to be taxed heavily to finance a "comprehensive" welfare state, and that this was a sort of universal truth. Now I already stated that by "lower part of the middle class" I'd assume a part of society which belongs to the bottom 50% (feel free to disagree, but that is as it stands now for me). And if this part of society has an overall negligible share of total income in the US, then I see it strongly implied that said claim of yours is false. Citing Scandinavian countries as counter examples won't change this, as I didn't argue that your claim might be correct in an instance, but argued its universal truth. Like it was a law of nature, which I think was you making things more simple than they actually are for the sake of having a stronger argument against those (to me) unknown people who believe in magical cows. And how this may apply to Scandinavian countries but not the US is easily explained with the observation, that Scandinavian countries are famous for their relative egalitarian distribution of income which results in the lower part of middle class having a greater share of total national income than in the US. Which makes them the ideal nations for your view to apply.

Also, I strongly doubt that it is - at least usually - more useful than misleading to talk of "The" European nation, as Europe is very diverse. For instance, I think it is save to assume that you will find grave difference in income distribution between Norway or Romania. Be it after or before taxes and social security contributions.

So if the Scandinavian countries adopted US tax and transfer rates, their income distribution would look a lot like that of the US. Likewise, the American income distribution would look a lot like that of Scandinavia if they replied their taxes and transfers.

If true, that would do quit a bit to change my views on some things, and while not saving your point I argued, it would certainly help your point against the magical-rich-cows believers (not that I think it requires much help). But I strongly doubt that this is true. So I would like a citation.

 

[luiz]

The Scandinavian countries only have very equitable income distributions because of their tax and transfer policies. Before tax and transfers, there is no big difference between them and the US. This information is easily obtained in the OECD database and was posted in another thread.

So if their pre-tax income distributions are roughly similar, so would their post-tax distribution if they pursued the same policy.

I wonder what is left to debate.

 

[Terxpahseyton]

You wonder what is left to discuss? How is that even possible, unless you somehow blacked out or did not understand things I said?

First: The income of the bottom 50% in the USA is negligible. Care to run the implications of this through your head?
Second: Scandinavian countries or whatever group of countries logically can not be assumed to represent a broad general "truth" that a "comprehensive" welfare state always requires the lower part of the middle class to be heavily taxed. Even if your claim about their reflection before taxes and transfers of US-American income distribution is true (which according to the http://stats.oecd.org/Index.aspx?QueryId=26068 it actually kind of is, I am glad this argument and respectively you made me aware of it), as "First" IMO clearly suggests or at the very least advises to seriously consider.
Third: The gini coefficient is not even designed to consider the actual income share of the bottom 50%, as it measures spreads in all directions. But the income share of the bottom 50% is what our argument is centered around if we assume my perception of what constitutes the lower part of middle class.

 

[luiz]

There are no implications. I thought I would not have to get into details because the comparison with equally rich countries with similar pre-tax income distributions is extremely clear.

But let me get into more detail: who are the bottom 50%, and why are their income so low? Well, they're the unemployed (zero income), they're students who have part time jobs, they're old people living off small pensions. You can clearly see from the link you posted that the bottom percentiles have incomes below what a full-time employee would have on minimum wage. I was not talking about them. BTW, in Scandinavian countries (or anywhere else) it's certain that before taxes and transfers the "bottom 50%" has a very small share of total income, if you include (as your link did for the US) students, part-timers, unemployed people, etc.

I was rather talking about the tax effect on someone making, say, around 60k USD per year. Sucj person (as per your link) is not on the bottom 50% (it seems that the upper bound of the "bottom 50%" is an income of around 50K USD per year, so only the upper bound could be described as middle class). Currently such a person is very lightly taxed in the US, and heavilly taxed in the states that have a comprehensive welfare system. If the US were to have such system, tax revenue would have to more than double, and to achieve that it's damn obvious the middle class would bear a significant part of the burden.

 

[Arwon]

The US could at least get an Australian-level or Canadian-level social welfare system for not much more than they currently tax.

 

[luiz]

The US could at least get an Australian-level or Canadian-level social welfare system for not much more than they currently tax.

That's true, but bear in mind that Australia and Canada are, along with the US itself, two of the classic examples of liberal capitalist economies (in commiespeak, cut-throat neoliberalism ).

 

[Terxpahseyton]

Great, we managed to move on by you dismissing my interpretation of the middle class (and it has its merit) But you also went back to refuse to acknowledge what we originally discussed, which was the burden of the lower part of the middle class, not of the middle class as a whole.
But screw that, as I am not even arguing real tangible public policy, I'll happily join your theoretic approach and point at its inherent flaw. Probably should have done so right away.
The basis of your conclusion is inductive. That is, you witness something happening and then conclude this applied in a universal fashion. Nations with a pre-tax-and transfers-gini-coefficent like the USA or Sweden would have to heavily tax even the lower middle class, because Sweden heavily taxes the lower middle class (does it even so? And more than this class benefits by transfers, for instance for not having to finance health insurance?). That it may be possible, to simply shape and finance a comprehensive welfare state differently than Sweden (or Norway or Finland) at no point even entered your argument. To conclude by this that it somehow lends itself to tax even the lower part of the middle class fairly strong is surely understandable, but that this was the way it inevitably had to be done not so much.

Also, some additional notes on the Gini coefficents:
For the working population before taxes (18-65):
USA: 0.453
Finland: 0.403
Norway: 0.376
Sweden: 0.368
Norway: 0.376

While not mind-blowing, I would interpret those as differences which are absolutely note-worthy. Perhaps you orientated on gini coefficients for the whole population before taxes, there it gets a lot similar. But that would IMO not make much sense, because retired people in the Scandinavian countries will expect transfers and act accordingly. Which means way less private pension funds or other financial assets which may serve as a private source of income when retired. It is btw. also similar with say university students, who may have to work in the US while not in the Scandinavian countries and the working age can not account for that.
Which means, that a before-taxes-and-transfers gini-coefficent doesn't just favor the US because its economy actually created less inequality as commonly assumed, it also favors the US as it suits US-American financial realities the best.