United States taxation compared to various European countries

It is well established that the United States has a much lower average tax burden than Europe (broadly).

source: OECD Tax Database

However, some people seem to believe that ordinary people in Europe do not actually have to pay much higher taxes and that somehow (illogically) these countries with presumably lower income inequality are able to generate all of this tax revenue to pay for all this “free” stuff by just taxing the top 5% or some such.  This is complete nonsense!  These European countries generate this revenue, in the main, with a much broader tax base, both income and social security taxes (and consumption taxes to lesser extent).

Below are a bunch of graphs and figures produced from the OECD’s estimates from the statutory tax code (note: these are particularly sensitive to assumptions made)

National Healthcare Expenditure: United States versus Other Countries: The US is not really an outlier.

Numerous people have asserted that the United States spends dramatically more on healthcare than other countries, presumably even more than countries of our level of wealth and affluence, and that this can only be explained by the fact that we do not have single-payer or some such.

Here are some examples graphs used to make this point

These appear to be very convincing at first blush, but i never found these arguments particularly convincing due primarily to:

1. Imperfect comparability between the selected countries
2. Issues relating to comparing countries of the “same” GDP
3. cherry-picking of countries

I knew the proponents of single-payer were, at best, making an incomplete argument and that it invited an exaggerated impression of what we should likely expect from a country like ours, but, up until now, I lacked the data and the time to present these argument comprehensively.  I recently got in an argument with someone over this subject and found a treasure trove of data all in one place (mostly) to thoroughly debunk this overly simplistic argument.

To make my points, vis-a-vis fundamental issues with naive treatment of GDP per capita and sensitivity to comparison countries, here is a quick chart showing National Healthcare Expenditure (NHE) as a percent of GDP by GDP per capita

 

More silliness related to corporate profits

I was pointed to this work by Hussman through Business Insider.

The implication here is that total dissaving is not only strongly correlated with corporate profits, but is directly causative.

Although he doesn’t fully specify this methods, it’s obvious that Corporate Profits is after-tax corporate profits (including foreign profits) and I was able to approximate his results using this FRED2 link.

Update: I re-charted this using the NIPA corporate profits inventory & capital adjusted data that he clearly used (CPROFIT).  It doesn’t really change the outcome here, but it matches his chart more precisely.

Corporate profits is, in other words, after-tax and including foreign profits.

Savings is approximately personal savings (PSAVE) + the Federal deficit/surplus (FGRECPT-FGEXPND) (multiplied by -1 to match to shape of the profit line)

There are many issues with this analysis

Some misc. charts and data on wealth shifts

 

Smaller welfare state?

Someone recently told me that welfare programs are smaller than they’ve ever been.

Here is some actual data from the Whitehouse’s Office of Management and Budget (OMB): See table 3.1 – Outlays by Superfunction and Function: 1940–2017

 

Some data on IRS changing income concept

IRS report on changing AGI income definitions

The Tax Reform Act of 1986 (TRA 86) made extensive changes to the calculation of AGI beginning with 1987. These changes made necessary a revision of the calculation of the 1979 Income Concept, in order to make tax years beginning with 1987 comparable to the base years, 1979 through 1986. The law changes limited the deduction of passive losses and eliminated unreimbursed employee business expenses and moving expenses as “adjustments” (moving expenses changed back for 1994) in figuring AGI beginning with Tax Year 1987. Since passive losses had been fully deductible for both income measures prior to 1987, the disallowed passive losses had to be deducted in the 1979 Income Concept calculation for tax years after 1986. Some income items, such as capital gains, that had been partially excluded from AGI under prior law were fully included. The new law also eliminated or restricted some deductions. Therefore, if AGI is used to measure income, comparisons between 1986 income and tax data with that for years after 1986 are misleading. A more accurate comparison can be made using the 1979 Income Concept because it measures income in the same way for all years. Table B shows total income and selected tax items for 2009 using AGI and the 1979 Income Concept, classified by size of 2009 income. Before TRA 86 became effective, a comparison of income measured by AGI with that measured by the 1979 Income Concept showed significant differences at income levels of $200,000 or more.

But, with the elimination of preferential treatment of various income items by TRA 86, such as the exclusion of a portion of capital gains, much of the difference disappeared. Under tax law prior to 1987, the capital gains exclusion accounted for the largest difference at the higher income levels between the two income measures. For 2009, 1979 Concept income was 2.2 percent higher than income as calculated using AGI. This difference was primarily attributed to the inclusion of more than $343.4 billion in nontaxable pensions and annuities (including IRA distributions) in the 1979 Income Concept. Income for all returns, using the 1979 Income Concept, decreased 8.2 percent for 2009; income for the $200,000 and above group decreased 20.0 percent. Total income tax for all returns decreased 16.1 percent in 2009 after an decrease of 7.5 percent in 2008; and total income tax reported for the $200,000 and above income group decreased 19.3 percent for 2009, down from the 12.0 percent decrease for 2008. The average tax rates (income tax as a percentage of total income) for each income class and both income concepts for years 1986 through 2009 are shown in Figure 4. For the population as a whole, average tax rates for 2009 (based on the 1979 Income Concept) were 1.1 percentage points lower than those for 2008. Between 1986 and 2009, the average tax rates declined in all income categories except the $1 million or more category.

Average income tax rates using consistent 1979 Income Concept (direct from IRS data table)

Observation: The very top income groups are paying roughly similar taxes as they paid in 1986 when we actually use a consistent methodology like this.  Lower to middle income groups are paying substantially less and the methodology makes much less difference for them (AGI and TIC render similar results).

United States physician income in context

One of the issues that I have when people assert that United States physician compensation is much higher than other countries is that they make terribly naive comparison.  They compare, say, PPP-adjusted incomes to PPP-adjusted incomes in other countries without accounting for the fact that the “average” person in this country has a much higher PPP-adjusted income by most measures.   Likewise, they’ll compare physician income to “average income” or “average wage” ratios without comparing it to the more relevant labor pool in each country, i.e., at least college graduates (or better). example

Average Physician Gross Income to Average College Grad Gross Income [apples-to-apples]

Note: In both cases, “gross” is pre-tax income, including social security/payroll contributions.

Detailed analysis of Piketty and Saez top income growth data

Recently I have been scrutinizing the data produced by Piketty and Saez on the evolution of top incomes in the United States (“Income Inequality in the United States 1913-2002”)

Their data can be downloaded directly here in Excel format that covers 1913-2012.

Their analysis is not 100% comparable to the CBO for several reason:

1. They are analyzing family income (not households, as the CBO does, and not individual earners, and not necessarily even tax units)
2. They do not adjust their rankings by unit size (the CBO divides household income by the square root of the household size).
3. Their “income” is essentially identical to IRS’s AGI figures.  (Unlike the CBO et. al, they do not include health benefits, payroll taxes, corporate income taxes, etc)
   
4. They also are forced to make a lot of assumptions to create a historical series stretching back this far (again, unlike the CBO)
5. Their “real” incomes are deflated with the CPI, whereas the CBO use the PCE index.

So while this data set has its issue and probably isn’t very relevant to income distribution per se, it is a useful and probably relatively accurate picture of the distribution of 90th percentile of top AGIs.

—-

My thesis here is that most of the apparent divergence that we have seen over the past several decades is a function of several things:

1. A changing tax code and, especially, top marginal rates
2. A large increase from the mid-80s of business owners converting to or starting up as pass-through entities instead of C Corporations (e.g., S Corporations, LLCs, etc).  [Note: This is probably substantially a result of the fact that these pass-through entities started  paying lower effective rates relative to similar investments in C Corporations).]
3. A significant change in the household composition and types of income earned at the lower end (fewer people per household, a smaller proportion of income as cash wages, increase in payroll taxes, etc)

The data from P&S provide some pretty powerful evidence for my first two arguments.

The following charts probably sum this up best:

[This is all income EXCEPT for capital gains index in real dollar terms, indexed to the year 1917]

Issues with the CBO income distribution data

The Congressional Budget Office periodically produces income distribution and effective tax rate data for households by income group.

One interesting, but little known fact, is they produce their “income categories” (quintiles, top 1%, etc) with a weighting according to the household size.

Here is their definition:

“Income categories are defined by ranking all people by their income adjusted for household size—that is, divided by the square root of a household’s size. (A household consists of the people who share a housing unit, regardless of their relationships.) Quintiles, or fifths, contain equal numbers of people, as do percentiles, or hundredths. Households with negative income (business or investment losses larger than other income) are excluded from the lowest income category but are included in totals.“

What this means is that a household with 1 person and 50K of income would be ranked identically to a household with 100K of income and 4 people, as would a household with 150K in income and 9 people, and so on.

Although I think this is, in some respects, a useful and perhaps necessary way of approximating the welfare of each individual household, I suspect they unintentionally mislead a lot of people with respect to both the effective tax rates and the actual distribution of income since few people probably know that they do this in the first place and fewer still understand the implication of this.

Consider, for instance, that if the wealthiest 0.5% of households (unadjusted for size) adopted 1 child each, it would surely produce a more “unequal” distribution since highest reaches of the income distribution would account for that much more of the population (CBO income groups always account for similar shares of the entire population), despite the fact that they have less discretionary income and haven’t (for the sake of argument) increased their incomes by one dime.

The CBO further confuses this issue by then quoting the average income, pre- and post- tax, across these adjusted-income groups without actually quoting the adjusted-incomes (which seems very strange to me indeed).    Thus, say, middle 20% of households may shrink dramatically in size and may include people with very different raw-income levels, but their published results do not give you any hint of this at all.

This is not an academic argument since, in fact, the households have never been identically sized and there has been a significant shift in the distribution of population (and, in fact, earners) amongst the households.

Below I have calculated the approximate size using their household count data (they round the numbers so there is a small amount of error between years).

Average number of people per CBO household income group (scaled to 1979)

Observation: The very richest and very poorest grew or stayed the roughly the same, whereas the middle income groups and the like dropped dramatically in size.  (Remember: this is after their weighting method so “middle” can mean very different pre-weighted incomes… the effects are probably even more dramatic w/o this weighting)

Assessing corporate profits in context

To add some more persective to claims like this, i.e., assertions that corporate profits are at an all time high while labor costs are at an all time low…

These analysis suffer from several major issues:

1) The “wages” component is much too narrow — it excludes benefits like healthcare that are a large and growing share of total compensation.

2) The “profits” themselves are essentially just financial accounting profits — they do not account for inventory or capital depletion which boosts apparent profitability during recoveries and makes it seem much lower in the lead up.  more here

3) The profits used by Henry Blodget et. al are after-tax profit which, in presence of an apparent shift in corporate ETR, further exxagerates these trends since the apparent ETR is different now [much larger shares of NIPA corporate profits are earned foreign receipts and a much larger share of these profits are now also derived from S-corporations that do NOT pay corporate income taxes]

4) These profits include ALL national corporate profits — including a large and growing amount of non-repatriated foreign profits.   These profits are not, for the most part, generated with US labor (except, perhaps, for some corporate overhead), so it’s very misleading to blend that in….

Below I’ve attempted to correct for the above mentioned issues by using NIPA’s pre-tax corporate profit calculations with inventory and capital adjustments.   I have further focused primarily on domestic profits (both financial and non-financial) to see how these trends compare to historical levels.

I think the evidence is quite clear….

Domestic corporate profits as percentage of GDP and as ratio of total compensation of employees

Composition of corporate profits by major source

Note: This does not include the distiguish by corporate entity type, i.e., whether it’s a C-corp or an S-Corp [which is relevant to the tax rate debate… since they don’t pay corporate taxes and they’re a growing share of NIPA corporate profits   more here]