June 08, 2004

It's in the way that you choose it...
Posted by Jon Henke

Paul Krugman today....(alt URL)

For many middle- and low-income families, this tax increase more than undid any gains from Mr. Reagan's income tax cuts. In 1980, according to Congressional Budget Office estimates, middle-income families with children paid 8.2 percent of their income in income taxes, and 9.5 percent in payroll taxes. By 1988 the income tax share was down to 6.6 percent but the payroll tax share was up to 11.8 percent, and the combined burden was up, not down.
I suppose it all depends on how, and where, you parse the numbers. Please note that Krugman uses 1980 as his starting point, despite the fact that Reagan didn't take office until 1981 and his 1981 tax cut plan didn't take much effect until 1982. (though, there was a small retroactive cut for 81)

Does it help Krugmans case to start counting in 1980? Yes. According to the Tax Policy Center--a credible joint effort by the Brookings Institution and the Urban Institute--the total effective federal tax burden in 1980 by income quintile was as follows:
Lowest Quintile: 7.7%
Second Quintile: 14.1%
Third Quintile: 18.7%
Fourth Quintile: 21.5%
Highest Quintile: 27.3%

The very next year--while still under Carter's last fiscal year, and before the Reagan tax cuts took any significant effect--those numbers jumped up to:
Lowest Quintile: 8.3%
Second Quintile: 14.7%
Third Quintile: 19.2%
Fourth Quintile: 22.1%
Highest Quintile: 26.9%

So, Krugman gives his argument a bit of a headstart, by running the numbers back to Carter's last year. It has very little to do with Reagan, but it helps make Krugman's point, so.....he uses it again in 1988.
Lowest Quintile: 8.5%
Second Quintile: 14.3%
Third Quintile: 17.9%
Fourth Quintile: 20.6%
Highest Quintile: 25.6%

Yet, the very next year--you know, the year Reagan left office--the numbers looked like this....
Lowest Quintile: 7.9% (compare to 1981 rate of 8.3%)
Second Quintile: 13.9% (compare to 1981 rate of 14.7%)
Third Quintile: 17.9% (compare to 1981 rate of 19.2%)
Fourth Quintile: 20.5% (compare to 1981 rate of 22.1%)
Highest Quintile: 25.2% (compare to 1981 rate of 26.9%)

It becomes apparent why Krugman chooses the dates he presents, doesn't it?

On another matter, Krugman writes...

Nonetheless, there was broad bipartisan support for the payroll tax increase because it was part of a deal. The public was told that the extra revenue would be used to build up a trust fund dedicated to the preservation of Social Security benefits, securing the system's future. Thanks to the 1983 act, current projections show that under current rules, Social Security is good for at least 38 more years.
Hm...if by "good for at least 38 more years", Krugman means "tax income will begin to fall short of outlays in 2018" and the trust fund will be completely "exhausted" in 2042....then, yes. It's doing just fine. Or, as the Social Security Board of Trustees put it: "The HI Trust Fund fails the Trustees' test of short-range financial adequacy...".

In 2000--before Bush took office--the SSA board of Trustees decided the "year of exhaustion of the funds is now estimated to be 2037"--5 years earlier than the current projection--and said that, while the funds "separately meet the short-term solvency test", "the OASDI program is not in close actuarial balance over the full 75-year projection period and therefore does not meet the long-term solvency test" and was "sufficient to enable the timely payment of benefits for the next 37 years" - one year less than the current estimates about which Krugman is in high dudgeon.

Just so we're clear.


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