WOW: no country effectively “soaks the rich” more than… the USA?!

Tax law professor Paul Caron has some eye-opening data on his blog.

You see, high marginal personal income tax rates are one thing: but “soaking the rich” in this manner, regardless of whether or not this is moral, is a mere exercise in intellectual self-gratification unless it actually brings in more revenue. As a rule, “the rich” have much more access to (legal) tax evasion/tax exposure minimization tools and techniques than the average citizen — quite aside from the fact that an overtaxed rich person may simply decide to voluntarily reduce his income and enjoy more leisure time (“going Galt”).

A more objective measure for how much any given country “soaks the rich” or “leans on the rich” would be how great the share they contribute to total tax revenue is relative to their share of total earnings. The study quoted by Dr. Caron considers the top decile (to 10% earners), across the OECD. (Israel is not on the list as it was only just admitted to the OECD.)

On average, across the OECD, the top decile (top 10% earners) bring in 28.4% of all income, and contribute 31.6% of all tax revenue. 31.6/28.4 yields what I might call a “revenue contribution coefficient” (RCC) of 1.11, where values below 1.0 would represent a windfall to the “rich”, values above 1.0 would represent “leaning” on them, and 1.0 would be neutral.

Now admittedly, in the USA, the top decile earns 35.1% of all income (considerably higher than the OECD average), but they also contribute… 45.1% of all tax revenue. This leads to an RCC of 45.1/35.1=1.35, the very highest in the OECD. Australia (RCC=1.28) and the Netherlands (RCC=1.25) come 2nd and 3rd in the OECD, respectively, while, surprisingly, famously “high-tax” Belgium, Sweden, and Norway all have RCCs below one!

The real world is rather different from economic fantasyland.

Using the Oscars to rewrite the history of the subprime crisis

Zombie writes at length on this year’s Oscar winner for best documentary:

Whenever I visit Berkeley — in particular certain upscale areas populated by academics and wealthy intellectuals — practically everyone I see has this creepy look on his or her face. […] In an instant, the Berkeley expression communicates to everyone in the vicinity, “Isn’t it great that you and I and all of us here are morally superior to the rest of the world?” […]

Charles Ferguson’s[…]  winning documentary was called Inside Job, which traces the history of the financial meltdown of 2008, and places the blame entirely on greedy Wall Street insiders who scammed the world out of trillions of dollars. Every year, the Academy voters feel compelled to make some kind of political statement with an Oscar, and this year they chose Inside Job as their statement. Predictable.

I had pretty much already forgotten about the Oscars when I opened my morning paper yesterday to discover an explanation for Charles Ferguson’s instantly identifiable facial expression — he really is from Berkeley!

At first I simply found it amusing that one can pinpoint someone’s hometown simply by their smug expression — just as Sherlock Holmes could identify the village you came from by the color of the mud splatters on your trouser cuffs — but as I continued to read the article, my mood took a decidedly political turn when I encountered this passage:

Robert Gnaizda, former president of Berkeley’s Greenlining Institute, says some of the responsibility lies with the current White House.

“There’s an unwillingness by the Obama administration to effectively criticize ‘too big to fail’ institutions,” said Gnaizda, who is featured in the documentary vainly warning successive Federal Reserve Board chairmen about the kind of doomed-to-fail loans Countrywide Financial and others were making.

Whoa whoa whoa — stop right there. Am I reading this correctly? The head of the Greenlining Institute is in the film warning against subprime loans???

As it happens, Zombie had written an essay in September 2008 on the role that the Greenlining Institute (which really ought to be called the “redlining institute”) had in creating the subprime crisis:

This short post not only posits the exact opposite theory than does Inside Job, but it actually points the finger of blame at Robert Gnaizda’s Greenlining Institute as the ultimate cause of the problem, rather than as the heroes who tried to prevent the crisis.I know I’m tilting at windmills here: the budget of my original post was exactly $0, and I’m up against an Academy-Award-winning film with a production budget of $2 million and which took over two years to complete. Furthermore, the narrative pushed by the film is the narrative favored and relentlessly affirmed by almost the entire media and all of academia, and it is therefore the narrative that the general public has come to accept.

But upon re-reading my own post (which even I had half-forgotten about), I was amazed at how still current it remains, and how the points I made two and half years ago seem to have had been written to specifically rebut the thesis of Inside Job, a film which hadn’t even been made yet.

Rather than paraphrase my earlier essay, I’ll just quote part of it here and let you judge for yourself:

…The Greenlining Institute existed solely to bully banks and financial institutions into giving loans to otherwise unqualified minority borrowers.

There’s been a lot of finger-pointing on all sides about this financial crisis, but much of it misses the point. The off-topic details about CEO salaries and bond markets and mergers and bailouts and who voted for what all chase the horse after it’s already left the barn. The key question is this:

Once upon a time, banks only loaned money to individuals who could qualify for a home mortgage; and then sometime recently, they changed their practices and started loaning money to a lot of people who didn’t qualify and could not afford to pay back the loans. And when they started defaulting, and when real estate values starting dropping, the entire industry collapsed, because there was no equity to pay back the loans. The banks lost money, the customers lost money, and it all went down the toilet. Which, of course, many people had predicted. So the question is: Why? Why did banks start making countless risky untenable loans to unqualified customers?

And the answer is: Because they were afraid of being called racists by the legal bullies at the Greenlining Institute and other similar “community organizers.”

It all started with The Community Reinvestment Act, a federal law originally passed during the Carter administration and then ramped up during the Clinton years, that was originally designed to prevent racist lending practices by banks who wouldn’t loan money to minorities, even if they were qualified. Which was a fine idea. But over time the law was twisted to force banks to make loans to minorities even if they weren’t qualified — which all may sound very peachy keen in Fantasy Utopia Land but which inevitably spells long-term financial suicide for a bank.

The Greenlining Institute’s self-appointed role is to identify those banks which by Greenlining’s reckoning haven’t doled out enough money to underqualified minority borrowers, and then threaten them with lawsuits, protests, and accusations of institutional racism if the banks don’t start opening their wallets ASAP. And the banks caved. Greenlining brags that they have unparalleled access to banking boardrooms, and they successfully squeezed $2.4 trillion (yes, trillion) in “CRA commitments” (i.e. loans to unqualified borrowers) out of terrified banks. Nearly every bank and financial institution you’ve ever heard of seems to kowtow to Greenlining.

[…G]roups like the Greenlining Institute saw the banks as potential agents of economic restructuring: If banks could be forced to grant homeownership to poor people, then that would be the first step for the lower classes to climb out of poverty, since everyone knows that owning one’s own home instills a sense of pride, self-worth, and self-reliance.And so, using the bullying tactics described above (and in the original article which first inspired my post), the Greenlining Institute (and similar groups) twisted the banks’ arms to make risky loans, for the purpose of “social justice,” to use the activists’ own terminology.

A then-young community organizer named Barack Hussein 0bama also features in the narrative.

Forced into this situation, the banks then went to great lengths to disguise the risk they had foolishly assumed; to fob the bad loans off on unsuspecting other investors, they devised convoluted financial instruments that obscured the danger of the investments; and so on.

At this point, the sorry mess developed a momentum of its own, as subprime mortgages became available to everybody (not just the targeted group) and house-flipping became a national hobby. Read the whole thing. And weep.  In related news,

The unfunded liabilities of Social Security, Medicare and Medicaid already exceed $106 trillion. That’s well over $300,000 for every man, woman and child in America (and exceeds the combined value of every U.S. bank account, stock certificate, building and piece of personal or public property).

A funeral dirge for eyes gone blind“.

Incidentally, one of the contenders “Inside Job” beat out was “Waiting for Superman” about the dysfunctional public education system. It was made by the director of “An Inconvenient Truth” but, unlike the crockumentary of that name, actually tells exactly that.  The moviemaker set out to document everything every liberal likes to believe about public schools, found the reality rather… different, and, surprisingly, had the guts to kick against some left-wing houses of the holy. (Education, in the old-fashioned sense of the word, is one cause in which some New Class liberals believe sufficiently strongly that they sometimes find themselves on the same side as conservatives.) Of course, the bien-pensant Anointed “cannot have that”…

2010 Census winners and losers

Paul Caron, a.k.a. the Taxprof, has the following useful table of the House seat winners and loser states from the 2010 Census (see also here: and here):


The table speaks for itself. Note one state absent in both columns: California. As Michael Barone points out, his is the first census in which California did not gain any congressional seats since it was admitted to the Union!


Goldman-Sachs pours water on Dem electoral hopes

James Pethokoukis (via Insty) looks at the wishful economic thinking engaged in by the Democrats.

There is a statistical relationship called Okun’s Law (really more of a rule of thumb) between GDP growth and job growth. A simple Okun analysis leads to the conclusion that the unemployment rate rose higher than was warranted given the severity of the Great Recession Why? Perhaps businesses, fearing another Great Depression, panicked and just hacked their workforces to bits. Okun’s Law was suspended, but only temporarily perhaps.

If one buys this theory, then eventually there should be some payback for that psychological overreaction. At some point soon, unemployment should fall way faster than what the rate of economic growth would indicate according to Okun’s Law. At least this is what the White House —  and congressional Democrats hope. And if they are right, the job market might well unexpectedly strengthen right into the November midterm elections, helping avert the worst for Democratic House and Senate incumbents. No Republican tsunami.

But a brand new study from the economics team at Goldman Sachs throws cold water on all this. Their analysis is that the deviations from Okun’s Law were within the historical norm, so no sharp rebound (bold is mine):

It is a common belief that employment and hours worked fell more sharply during and after the 2007-2009 recession than can be explained by moves in real GDP, or in more technical terms, that “Okun’s law”—the empirical relationship between jobs and GDP—broke down during and after the recession. Many forecasters believe that this implies a large amount of pent-up hiring, as the “error” in Okun’s law proves temporary and firms hire aggressively in order to return staffing levels to more normal levels relative to production.

In contrast, we have argued that the relationship between employment and GDP remains quite similar to past cyclical norms, and that employment growth will therefore follow GDP growth without a “special hiring dividend.” … The bottom line is that there is no convincing evidence for a breakdown in Okun’s law, and hence no particular reason to expect a large amount of pent-up hiring during the recovery. … Overall, we see no evidence for any meaningful deviation of the unemployment rate from its historical relationship with real GDP.”

And here is a chart to help visualize the point:


Bottom Line: Unemployment of 9.5 percent or so for the rest of the year seems baked into the cake (this is what the Fed and the economic consensus see) unless GDP growth starts to boom. And good luck finding forecasters who believe that. So far, this recovery has fit into the slow-growth, New Normal paradigm. Although it was a deep recession just like in 1981-82, the recovery has only been half as robust. Voters may not blame Democrats for the Great Recession, but they will likely hold them accountable for the Not-So-Great Recovery.

Social Security cashflow negative

Michael Barone has the story (h/t: Killian Bundy on C2). Is this the “hope” or “change” King Nothing was promising?

One of the commenters suggests a contributing factor I overlooked: baby boomers despairing of ever finding another job in ths economic climate, and applying for Social Security as soon as they are eligible, rather than when they would normally retire.

“realwest” on C2 notes that much of the so-called “job creation” has been in the Federal government apparatus, which doesn’t exactly help Social Security…

New York State’s fiscal lunacy

A few items from Insty make you wonder if New York state politicians routinely have LSD mixed in with their bottled water:

CHANGE: Cash-poor NY state may issue IOUs like California.

Basically, New York state will now pay in virtual money. But you ain’t seen nothing yet:

A PENSION SHELL GAME: “Gov. David A. Paterson and legislative leaders have tentatively agreed to allow the state and municipalities to borrow nearly $6 billion to help them make their required annual payments to the state pension fund. And, in classic budgetary sleight-of-hand, they will borrow the money to make the payments to the pension fund — from the same pension fund.”

Is your head hurting yet? But Roger Kimball has a novel suggestion:

ROGER KIMBALL: The age of the IOU, or chickens/roost, and “anarchy literally.” “And here’s a policy suggestion that I offer free and for nothing. If New York offers its citizens IOUs instead cash, citizens should do the same come April. After wading through the pages of gibberish that our legislators have thoughtfully provided under the rubric of your tax returns, they should enter the amount owed, sign on the dotted line, and enclose an IOU instead of a check. If an irresponsible and fiscally incontinent state can hold on to your money (and you should never forget that it is your money), then you are justified in practicing a little self-defense and treating the state with a little of the contempt with which it treats you. If five or ten or a hundred people did it, it wouldn’t make much difference. What if five or ten thousand people did?”


8 reasons why college tuition is the next bubble to burst

Via Insty and others, a nice summary of 8 reasons why college tuition is the next big bubble to burst: (the article is apparently so popular the site exceeded its bandwidth limit, here is the Google cache)

1) Tuition is, and has been, increasing at double the rate of inflation

On average, college tuition increases at around 8 percent per year, which means the cost of college doubles every nine years.  Because colleges know that students will simply borrow more money to cover tuition increases, colleges have been relying on steady tuition hikes to solve all of their money problems.  If this continues a college degree will soon cost as much as a house.

2) Students are borrowing more than ever to pay for college

The number of college students graduating with over $25,000 in student loan debt has tripled in the past decade alone.  Today, 66% of students borrow to pay for college, taking on an average of $23,165 in debt.  Twelve years ago, 58% borrowed to pay for college, taking on only $13,172 in debt.

3) For profit colleges are paying homeless people to take out federal loans to enroll

Because student loans are so easy to acquire, enterprising colleges are paying homeless people to enroll.  The math makes sense when you think about it: if paying someone a $2,000 “stipend” gets the college $20,000/year in tuition courtesy of the federal government, that’s money well spent.  Unfortunately, many people who accept such “stipend” offers never graduate, become overwhelmed with student debt, and destroy their already bad financial records.

4) Colleges are on a non-teaching staff hiring spree that far outpaces enrollment

Why hire a full-time professor when you can hire an “environmental sustainability officer”?  According to the a New York Times article, over the past two decades colleges have doubled their non-teaching staff, while enrollment has only increased by 40%.  Often times staff members have exotic duties like monitoring environmental sustainability, or their focus is on student “lifestyle.”  Economist Daniel Bennett, who conducted this study, says “Universities and colleges are catering more to students, trying to make college a lifestyle, not just people getting an education. There’s more social programs, more athletics, more trainers, more sustainable environmental programs.”  Of course, much this exotic hiring and lifestyle catering is made possible by student loan money.

5) For profit reliance on federal loans has reached an all time high

According to Bloomberg, publicly traded higher education companies derive three-fourths of their revenue from federal funds, up from just 48 percent in 2001 and approaching the 90 percent limit set by federal law.  The fact that colleges are almost completely relying on borrowed money to finance tuition, up to the legal limit, means we’ve almost hit the breaking point.  If not for the easy student loan money sloshing around, many colleges would go belly up tomorrow.

6) Schools are spending on luxurious amenities to lure in more students

Flush with student loan money and wanting to attract even more, colleges are increasingly spending on luxury dorms, gyms, swimming pools and other amenities.

Freakonomics author Stephen Dubner noted that when he went back to his college, a chancellor told him that “[the gym] was a top priority because parents and prospective students increasingly think of themselves as customers, shopping for the most amenities for the best price, and the colleges that didn’t come to grips with this would soon see their customers going elsewhere.”  But gyms are just the tip of the ice burg.  At High Point University in North Carolina, students are treated to valet parking, live music in the cafeteria and Starbucks gift cards on their birthdays.

7) College president salaries are sky high, even in a historical economic downturn

USA Today reported that 23 Private College Presidents Made More Than $1 Million in 2008, while 110 made more than $500,000.  In case you were wondering, this is not the norm — as recently as 2002, there were no million-dollar presidents.  And it’s no wonder the college administrator gravy train continues despite the down economy.  After all, when your “customers” have easy access to credit and pay you with money they don’t have, the economy doesn’t really matter, does it?

8) The student loan problem cuts across all schools, for profit and nonprofit

Often times the discussion about a high tuition leads to a flogging of for profit colleges.  And while for profit colleges are often the worst about shamelessly fattening themselves at the trough of student loans, it’s not a for profit vs. non profit issue. In fact, for profit colleges account for less than half of student loan defaults.  Nor is the issue one of “good colleges” vs. “bad colleges.”  As this New York Times article illustrates, even students at prestigious non-profit schools like NYU can find themselves in financially ruinous circumstances because of their student loans.

Shanghaiing homeless people into enrolling in college so they can get student loans… This is the sort of absurdity that one normally encounters in over-the-top satirical novels…