Market Income, Transfers and Taxes

I am indebted to Greg Mankiw for his recent post “The Progressivity of Taxes and Transfers” for two reasons.  First, it citied a CBO report that I had not seen and enjoyed reading.  Second, his post reports transfers as a percentage of market income, and this is the fifth column of my table.

A current political debate focuses on the “fairness” of federal taxes.  Fairness means something different for everybody, but a clear view of a presentation of data should clear up some misunderstandings or data cherry picking on one side of the political aisle or the other. 

The income data is broken into quintiles, or fifths of the country’s households.  The highest quintile is further divided into smaller groupings.  Market income is the sum of labor income, business income, capital gains, capital income, income received in retirement for past services, and other sources of income.  Labor income includes in-kind payments such as health insurance. 

2009	Market Income	Transfers	Taxes	Effective Tax Rate
First Quintile	$7,600	$22,900	$0	-301.3
Second Quintile	30,100	14,800	2,200	-41.9
Third Quintile	54,200	10,400	7,700	-5.0
Fourth Quintile	86,400	7,100	15,400	9.6
Highest Quintile	218,800	6,000	53,400	21.7
Breakdown of Highest Quintile
81st-90th	125,800	5,800	25,800	15.9
91st-95th	169,800	5,700	38,300	19.2
96th-99th	266,200	6,200	66,800	22.8
Top 1 Percent	1,219,600	9,000	356,300	28.5

Transfer are are cash payments and in-kind benefits from social insurance and other government assistance programs.  Taxes include the federal income tax, social insurance taxes, corporate income tax, and excise taxes.

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The ACA and National Income Accounts

I was reviewing my notes on national income accounting as the great debate about whether the payment under that Affordable Care Act that forces citizens to buy health insurance is a tax or a penalty raged.  Although I would bet dollars to doughnuts that the Department of Commerce has worked out most of the particulars, what follows is my musings on how these payments will fall. 

My analysis uses definitions from Greg Mankiw’s and my favorite principles text.  The income approach starts with gross domestic product, and through the deletion and addition of accounts, is reduced successively to gross national product, net national product, national income, personal income, and finally, disposable income.  Important to this post are national income, the income households receive from wages, profit, rent and interest, personal income, which is defined below, and disposable income, the sum that households have at their disposal to consume or save. 

Personal income and disposable income are defined in equations (1) and (2)

(1) Personal Income (PI) = National Income (NI) – retained earnings – indirect business taxes – corporate income taxes – social insurance taxes + interest on government debt + government transfers,

and

(2) Disposable personal income (DI) = PI – personal taxes – nontax payments.

Substituting equation (1) into (2) and regrouping terms yields equation (3) which contains the accounts that  will be affected by the ACA.

(3) DI = NI – indirect business taxes – retained earnings - corporate income taxes – social insurance taxes – personal taxes – nontax payments + interest on government debt + government transfers.

I believe that the benefits of the ACA will be part of government transfers, in this case, subsidized medical insurance payments.  The costs will show as social insurance taxes or nontax payments such as parking tickets and other penalties.  From an economic accounting perspective, there is little difference between a tax and penalty. They both reduce disposable income.  In the long-run, payments and penalties will exceed the subsidized insurance payments because it is costly to collect taxes.  The income does not leave the economy.  This cost will consist in part in wages to new government employees that administer the ACA bureaucracy and those who interface with them in the private sector. 

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An Example of Age and Educational Success

Last week, I had a pleasant and useful conversation with an older student who described to me his past and current attempts at earning a BA degree. They sounded typical of a number of MCC’s students so I asked him to briefly describe his efforts.

I have attempted to complete my college degree on three different occasions, my current being my most successful. Right out of high school, my parents sent me to MCC to begin my college journey and my first semester was great, I went to classes and really studied. On my second semester, I realized that my professors did not care if I showed up to class, and there was no one to call my parents and let them know that I was not going. So I began it skip classes and got lured away from college by a full-time job, making what I thought was a lot of money. So my parents gave me an option. Finish College and they would pay for it, or I could quit and I would have to pay for any type of school later on my own. So off into the real world I went.

Fast forward 5 years, and I am now married and we are expecting our first born. Realizing that my full-time job was not going to be able to provide for my wife and child, I went back to school for my second try. This time, I was going to TSTC for computer networking, and this time, I was paying for everything myself. After about a year of schooling, I got a job at a local retail store as a department manager. I thought it over and spoke to my wife and I made a decision to quit school and focus on my career once again.

Now fast forward 10 more years. I have been promoted to a store manager and my career was doing very well. Then at one point I came to a stale mate. I was no longer up for promotions and I was not getting moved any longer. I looked around and tried to figure out what it was that I was doing wrong and I found nothing. What I did find out was that everyone at this level was just as good as me, if not better. We all had the same skill levels. The individuals that were getting promoted did have an advantage over me; they had actually finished their degrees. They all had Bachelors or Master Degrees. So, here we are at my third and final attempt at completing my Bachelor’s Degree in Business Mgmt. This time is different as I have learned from my previous mistakes. By continuing my college education, I have been able to see the rewards. I have been able to use some of my new found skills in my current role. By demonstrating to my current supervisors my drive and focus, I feel that I will once again be recognized.

Why is this student enjoying more success in his third attempt? Let me suggest a few possible explanations. He is older and older students are more focused. This is not a very satisfying explanation. Does aging cause physical changes that make us better students? Do additional years help us better measure benefits of a degree? During his first attempt at earning a degree, his parents paid the bill. Beginning with his second attempt—earning a computer networking degree for TSTC—he paid his own bills. Have skin in the game may increase effort but the real improvement did not come until his next attempt. His third attempt came after glancing up the corporate ladder and seeing that those above him all had degrees and really were as good as or better than him and that their edge probably came from their educations. Was necessity the mother of educational effort? His parting words of advice to students

Please learn from my mistakes and allow me to save some of you time, stay in school. There is no substitute.

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Mismeasurement of the Cost of For-Profits?

The Obama and the Bush administrations distrust the quality of education offered by for-profit schools (John Hechiger and John Lauerman, “For-Profit Colleges May Lose Tax Money Under New Rules”).  The schools derive income from tuition paid largely by student loans.  Apparently, a high percentage of their students graduate with large student loans that they cannot payoff with income earned based on their degrees and taxpayers are left with the bill.

Is the government’s concern due in part to mismeasurement?  Public colleges and universities are subsidized by taxes and for-profit colleges are not.  Student loans may be a good estimate of the cost of the education at a for profit but a poor estimate of the cost at a public institution.  The tax subsidy per student at public institutions must be added to a student’s loan balance to more accurately compare the costs to the taxpayer.  Public institutions should undergo the same scrutiny as for-profits.   

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