The Custom-House

Distribution of the U.S. Federal

Distribution of the U.S. Federal tax burden

New Congressional Budget Office (CBO) study on how federal government tax burdens were distributed among income groups from 1997-2000, here: "Effective Federal Tax Rates, 1997 to 2000" There are lots of tables and charts here, and I may try to reproduce some when I figure how to copy figures with my old version of Acrobat reader. However, the key points:

"In the late 1990s, households experienced only small changes in effective tax rates. Between 1997 and 2000, the overall effective federal tax rate dipped slightly in the first year before climbing to a level in 2000 that was 0.2 percentage points above that in 1997... In each of the four years, the overall effective tax rate was higher than in any year since 1979, peaking at 23.1 percent in 2000. That rising rate resulted at least partly from the tax code�s progressive rate schedule and the continued growth of pretax household income, the average of which reached an all-time high of $74,100 in 2000�11 percent above its level in 1997 of $66,700 (expressed in 2000 dollars).

"Those overall trends were not uniform across the income distribution. The effective tax rate borne by households in the lowest fifth, or quintile, of the distribution climbed by 0.6 percentage points�from 5.8 percent in 1997 to 6.4 percent in 2000... In contrast, the rate faced by households in the middle quintile fell by 0.7 percentage points�from 17.4 percent to 16.7 percent. The top quintile�s effective tax rate was a steady 28.0 percent in both 1997 and 2000. The biggest reduction in rates was found among households in the top 1 percent of the income distribution: the effective rate for those households fell by 1.7 percentage points to 33.2 percent in 2000. That drop in rates resulted from a reduction in the effective corporate income tax rate faced by those households.

"The increase in the overall effective tax rate stemmed from a rise of 0.8 percentage points in the effective individual income tax rate that was offset by smaller declines in the effective rates on payroll and corporate income taxes... Two factors contributed to the uptick in individual income tax rates. First, real (inflation-adjusted) income growth pushed more house-holds into higher tax brackets, a phenomenon known as �real bracket creep.� Second, reported income at the upper end of the income distribution grew disproportionately quickly, making a larger share of income subject to the higher rates of the top tax brackets.

"Effective individual income tax rates rose (became less negative) for households in the lowest income quintiles and rose for those in the highest quintiles. They were nearly constant for households in the fourth quintile and fell for those in the second and middle quintiles...

"Effective rates for other taxes showed little change between 1997 and 2000, almost regardless of income level. Social insurance, or payroll, tax rates were roughly constant for all households except those in the highest quintile, for which the cap on Social Security taxes limits the growth of payroll tax liability (see Figure 5). The effective corporate income tax rate fell slightly in every year between 1997 and 2000; the largest percentage-point decline occurred among the highest income categories... Finally, the effective federal excise tax rate during that period shifted by no more than 0.1 percentage points for any income group and was constant across all four years for households with the highest income...

"Average real pretax reported income increased by 11 per-cent between 1997 and 2000... However, all quintiles did not see the same percentage rise. For households in the lowest quintile, average income grew by 3 percent, compared with 17 percent for those in the highest quintile. That unequal growth was observed as well in the top percentiles of the income distribution: average income for the top 10 percent of households climbed 20 percent over the three years but jumped 34 percent for the 1 percent of households with the highest income...

"Because of the rapid growth of reported income for that 1 percent of households�and despite the decline in their effective tax rate�the share of taxes paid by the wealthiest households increased from 22.7 percent of all federal revenues in 1997 to 25.6 percent in 2000... Other households in the top 10 percent of the income distribution experienced a small increase in their tax share. The larger share paid by the wealthiest households was balanced by decreases in the shares paid by house-holds in the middle three quintiles and the lower half of the highest quintile. The share of taxes that households in the lowest quintile accounted for did not change over the period."

I learned about this from EconoPundit "Rich pay more..."

Sir William Petty's catamaran Kieran

Sir William Petty's catamaran

Kieran Healy has a short posting (based on his reading of Pepys' diary) on 17th Century proto-economist William Petty's experiments with catamarans, here "Funding Basic Research ". Healy links to sites with writings by and about Petty. While Healy's post is short, he does link to a longer Petty catamaran post (use his "double-bottomed boat" link).

Neoclassical and behavioral economics

The Economist "Economics focus" column this week highlights research examining the implications of cognitive psychology for economic analysis.

Modern mainstream, or neo-classical, economics is based on assumptions about decision making that cognitive psychology finds wanting. Neo-classical economics assumes that people make decisions to maximize a satisfaction or utility that does not depend on their income or consumption levels relative to those of the people around them. It assumes that people make decisions without regard to sunk costs or to their current endowments of goods. It assumes that they don't psychologically compartmentalize their budgets or resources, devoting the different compartments to different purposes.

Results from cognitive psychology are challenging many of these assumptions, and economics is faced with figuring out the implications. The Economist column is devoted to research on one of these issues - the endowment effect. In summary, the article finds that experience in market contexts is associated with a learning process. Persons with little experience with market transactions have a significant endowment effect, but this disappears as they acquire experience. The article is here: "To have and to hold". The following selection doesn't address the main result of the article, but it does indicate what's at stake:

"Some recent work should at least help. It explores the �endowment effect�, one of the chief tenets of prospect theory. Put simply, this means that people place an extra value on things they already own. Think of a favourite sweater, or your house: would you swap either for something of equal market value? Over the past decade, prospect theorists have found support for the endowment effect in scores of experiments. In one of the best-known, researchers at Cornell University began by giving university students either a coffee mug or a chocolate bar, each with identical market values. First the experimenters confirmed that roughly half the students preferred each good. After the goodies were handed out, they let the students trade: those who had wanted mugs but got chocolate (or vice versa) could swap. "With barely 10% of students opting to trade, the endowment effect seemed established (you would expect 50% to have swapped, given the random allocation of gifts). Even after a short time with things of little value, ownership had overwhelmed the students' prior tastes. Dozens of other tests have produced similar results, and have produced a wave of criticism of neoclassical economics. "The criticism has been taken seriously, as it should be: if the endowment effect is real, people's economic decisions are fundamentally different from what economists have assumed. The implications of this are profound. To take one example, the Coase theorem, which argues that initial allocations of wealth do not matter as long as markets allow people to trade their stakes�the rationale for government auctions of everything from radio spectrum to mobile-telephone licences�would no longer be valid. To take another, although economists have shown that you need only a few sharp traders for prices in financial (and other) markets to become efficient, the volume of trade with an endowment effect will be below what it might be without one."

I learned about this from "Pejmanesque". I think cognitive psychology will enhance and enrich neo-classical economics, but that neo-classical economics will ultimately retain much of its essential character. I've thought this since I read a book called Choosing the Right Pond by Robert Franks of Cornell (many years ago).

Franks accepted that status matters to people, an idea not built into the neo-classical assumptions. He pointed to evidence that people care less about their position vis-a-vis people they don't come in contact with, and more about their position with respect to others in the circles within which they move. He also recognized that people are different, that status matters much more for some than for others, In this, he saw, were opportunities for gains from trade.

Neo-classical theory suggests that in competitive markets, people will be paid a wage equal to the value of their marginal product. Now people differ in their marginal productivity as well as in their taste for status. Everyone could work in a firm where everyone else had the same marginal products and was paid the same wage. But how much better off things would be if people with a taste for status worked in firms with people who were indifferent to it!  This would make the people who really valued status happier without a proportionate reduction in the happiness of the others. Relatively high wage people, who valued status highly, might be willing to give up some part of their wages in order to enjoy the proximity of other persons who had lower wages (and thus status). People with lower wages might be willing to work in an organization with higher wage and status persons if they were given a somewhat higher wage than they would otherwise have had as compensation for their relatively lower status.

Frank's conclusion was that the range of wages observed would not be as wide as a marginal productivity wage model would suggest. As I recall he then had some ingenious tests of the hypothesis and did not reject it.

minor editorial revisions June 11, 2007

Rationing forgiveness under conditions of

Rationing forgiveness under conditions of excess demand

Donald Sensing retells the story of Monsignor Hugh O'Flaherty and Col. Herbert Kappler, here: "Loving one's enemies".

P.S. (8-31-03): A follow-up post: "An Israeli responds".

Resource allocation when prices are

Resource allocation when prices are set below the market clearing level (in Brisbane)

John Quiggin describes the allocation of seats on a city bus, here: "Age before beauty"

Why is Bustamante's proposed constitutional

Why is Bustamante's proposed constitutional amendment to control gasoline prices a bad idea?

California gubernatorial candidate Cruz Bustamente has proposed an amendment to the California constitution to allow the state's public utilities commission to regulate gasoline prices. Natural resource economist Lynne Kiesling describes some of the problems with this proposal, in this blog posting: "Bustamante's Proposal to Regulate Gasoline as a Utility".

Drugs for poor countries I

Drugs for poor countries

I posted Thursday on the agreement this week to alter trade rules to make it easier for poor countries to access pharmaceutical drugs, here: "Drug availability for poor countries" Peter Gallagher posted Friday on the implications of the agreement. Gallagher provides some short, readable background, placing the agreement in the context of international patent protection treaties. He concludes that, really, this shouldn't have been a big deal:

"In truth, it's not much of a public health problem at all. More than 90% of the drugs on the World Health Organization's list of essential public health medicines are not patented anywhere. Of the others, some are not patented in e.g. African countries. Most are already available under preferential pricing arrangements (typically free) between the global drugs companies and governments of poor countries.

"The legal conflict in the TRIPS Agreement, too, is pretty small beer. You can probably think of a couple of sentences that could be added to the TRIPS Agreement to work around specific problems with a small number of patented drugs without undermining the global patent system.

"So why the agony? The real problems appear to have been ideological NGO's who have been pressing exaggerated claims about the public health consequences of the patents and a legalistic approach by the officials and lawyers advising the drug companies that seemed to exaggerate the threat to the companies' global interests

"Most of the negotiators at WTO in Geneva share the general incredulity that this basically simple issue was not solved a year ago. Let's hope it's now behind us."

Bustamante wants to regulate gasoline

Bustamante wants to regulate gasoline prices as if gasoline were a public utility

Mark Kleiman posts on the story here: "BAD and Good Reasons For Not Wanting Bustamente as Governor".

Costs in the Canadian health

Costs in the Canadian health care system

Arnold Kling posts on the costs of health care in the Canadian health care system, here: "Canadian Health Care". Non-price rationing:

"When my wife and I stayed at a Bed and Breakfast on Prince Edward Island, the owner said that seven years ago when they first moved to PEI, he was put on a three year waiting list to be assigned a personal physician. He has a heart murmur, and he was unhappy about this. One day, by chance he ran into the head of the provincial health service and talked her into moving him to the head of the queue. He told this as a reassuring story, but it made me wonder about the people he bumped back."

The IMF has concerns about

The IMF has concerns about U.S. fiscal policy

CNNMoney reports on an upcoming IMF report: "IMF slams U.S. over budget "

"MILAN, Italy (Reuters) - The International Monetary Fund is set to reproach the United States for being too optimistic in its assumptions on government spending and revenues and lacking a coherent budget plan, according to a summary of a draft report.

"The report "criticizes the U.S. government's excessively optimistic assumptions regarding the development of overall state spending and revenues and the lack of a medium-term concept to consolidate budgets and reform the social insurance system," the draft said..."

I learned about this from ArgMax: "IMF on US Budget ". Brad DeLong also links to the story ("The IMF Is Unhappy"), and adds the following comment:

"Various people who have worked in past Republican administrations say that the quality of economic-policy decision-making in this particular Bush Administration really is atrociously bad--as bad as in Reagan's disastrous first year."

I wonder if that continues to apply since the turnover in policy making staff late last year and early this year.