August 22, 2007

Joyous Fun With Tax Statistics

SO HOW WAS YOUR TUESDAY EVENING? I spent mine boxing up more books. Then I took a break and started reading The New York Times. Unfortunately for my continued book-distribution project, I read an article in the NYT about national income statistics that first puzzled me, then annoyed me, and then got my Scotch-Irish up. So I spent the next couple of hours doing some on-line research to see whether I could gather up enough information to analyze the analysis, and in fact, I did.

First, though, let's look at what NYT scribe David Cay Johnston wrote for the Paper of Record:

Americans earned a smaller average income in 2005 than in 2000, the fifth consecutive year that they had to make ends meet with less money than at the peak of the last economic expansion, new government data shows.

While incomes have been on the rise since 2002, the average income in 2005 was $55,238, still nearly 1 percent less than the $55,714 in 2000, after adjusting for inflation, analysis of new tax statistics show.

The combined income of all Americans in 2005 was slightly larger than it was in 2000, but because more people were dividing up the national income pie, the average remained smaller. Total adjusted gross income in 2005 was $7.43 trillion, up 3.1 percent from 2000 and 5.8 percent from 2004.

Total income listed on tax returns grew every year after World War II, with a single one-year exception, until 2001, making the five-year period of lower average incomes and four years of lower total incomes a new experience for the majority of Americans born since 1945.

The White House said the fact that average incomes were smaller five years after the Internet bubble burst “should not surprise anyone.”

The growth in total incomes was concentrated among those making more than $1 million. The number of such taxpayers grew by more than 26 percent, to 303,817 in 2005, from 239,685 in 2000.

These individuals, who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total income gains in 2005, compared with 2000.

People with incomes of more than a million dollars also received 62 percent of the savings from the reduced tax rates on long-term capital gains and dividends that President Bush signed into law in 2003, according to a separate analysis by Citizens for Tax Justice, a group that points out policies that it says favor the rich.

The group’s calculations showed that 28 percent of the investment tax cut savings went to just 11,433 of the 134 million taxpayers, those who made $10 million or more, saving them almost $1.9 million each. Over all, this small number of wealthy Americans saved $21.7 billion in taxes on their investment income as a result of the tax-cut law.

The nearly 90 percent of Americans who make less than $100,000 a year saved on average $318 each on their investments. They collected 5.3 percent of the total savings from reduced tax rates on investment income.

The I.R.S. data showed that the number of Americans making less than $25,000 a year shrank, down by 3.2 million, or 5.5 percent.

Nearly half of Americans reported incomes of less than $30,000, and two-thirds make less than $50,000.

The number of taxpayers making more than $100,000 grew by nearly 3.4 million and accounted for more than two-thirds of the growth in the number of returns filed in 2005 compared with those in 2000.

The fact that average incomes remained lower in 2005 than five years earlier helps explain why so many Americans report feeling economic stress despite overall growth in the economy. Many Americans are also paying a larger share of their health care costs and have had their retirement benefits reduced, adding to their out-of-pocket costs.

OK, so that's pretty much the entire article, but I'm analyzing it, so I had to post that much. I left out the bits at the end, which include the White House's response to the statistics and some policy analyst saying the data shows supply-side economics doesn't work. Discuss amongst yourselves.

Naturally, the Times' article has been on the receiving end of some pretty heavy firepower. Tom Blumer fired back a response saying the newspaper was twisting the facts to make things look bad. Randall Hoven also fired back, pointing to other Government data that apparently contradicted Mr Johnston's analysis. This prompted Mr Johnston to issue a response, which can be seen at Mr Blumer's site.

Anyway, based on my reading of the data, Mr Johnston oversimplifies and exaggerates the situation. He does not help matters by not explicitly mentioning where the data came from and how it was collected, leaving analysts no choice but to run around looking for it. After a while, though, I found it.

The data Mr Johnston cites comes from the Internal Revenue Service's Statistics of Income -- Individual Income Tax Returns report. (Publication 1304). The report, if you really want to download it, can be found here. It contains a bunch of PDF and XLS files which you'll then have to slog through. However, I did this for you out of the goodness of my heart. You're welcome, I'm sure.

Anyway, it would have been nice if Mr Johnston had mentioned this, as well as the fact the SOI report's figures "are all estimates based on samples." It also would have been nice if Mr Johnston had made clear that his average income statistics were based on the number of income tax returns filed. Thus, given the various filing options people have, they can only be quoted as being on an income-tax return basis. This isn't clear in the story and Mr Johnston should have taken care in pointing this out, even if it meant cutting out a quote from the policy wonk.

Furthermore, Mr Johnston's article could have certainly used a good bit of perspective. Yes, incomes have been down over the past five years. However, they're only down $476 on average, as his own data show. That works out to a whopping $1.90 per day, if we assume 250 working days in a year. My God -- people might have to give up their morning crueller to compensate. However will America's middle class survive this body blow to its way of life?

The drop also isn't all that much when one considers 2000 was something of a banner year, and over the next few years we had the Sept. 11 attacks, myriad corporate scandals and conflicts that sent the price of oil through the roof. All these things had a way of depressing income growth. As such, I have to agree with Mr Johnston's critics that the real story here was the recovery in average incomes over the past few years and not the drop from 2000.

Along those lines, I don't understand how Mr Johnston could present his data about the effect of the 2001 and 2003 tax cuts without mentioning that, you know, the rich pay the lion's share of the taxes in America. In 2006, the Tax Foundation projected that nearly 41 percent of Americans paid no federal income tax at all. In another 2006 examination, the Foundation found the top 1 pc of earners -- those making more than $328,000 per annum -- paid nearly 37 pc of the nation's income taxes! The top 10 pc -- those making more than about $100,000 per year -- were carrying more than 68 percent of the load.

I don't know. You would think, given the data Mr Johnston is dealing with, mentioning how income tax payments are already skewed would be slightly important. Just give it a line if that's all the space you've got, but put it in for Christ's sake. It also might have been nice if he mentioned that after the tax cuts, the wealthy were actually carrying a higher proportion of the tax burden than ever before -- at least in 2004, anyway.

Anyway -- overexaggeration and simplification. Not good things. Especially not when dealing with numbers.

Posted by Benjamin Kepple at August 22, 2007 01:07 AM | TrackBack
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