Connecting Some Dots on Taxes

US
Microsoft founder Bill Gates smiles while playing bridge with Warren Buffett, in Omaha, Nebraska U.S. May 6, 2018. (Rick Wilking/Reuters)

Michael Tomasky’s column (“Bill Gates, I Implore You To Connect Some Dots”) Monday in the New York Times is the sort of thing that tempts me to shout at the writer about intellectual dishonesty and astounding stupidity, but I do not want to do that. Instead, I would like to ask a few relatively simple questions, because I genuinely am perplexed by his assumptions and his arguments. Assuming that he is arguing in good faith and assuming, as I do, that he is not just bone ignorant:

Tomasky writes: “Multibillion-dollar fortunes are often called excessive and decadent. But here’s something they’re rarely called but ought to be: anti-democratic. These fortunes will destroy our democracy. . . . Any democracy needs a robust and thriving middle class, and we have spent the last 30 or so years transferring trillions of dollars from the middle class to the people at the very top. Just one set of numbers, from the University of California, Berkeley, economist Gabriel Zucman: The 400 richest Americans — the top .00025 percent of the population — now own more of the country’s riches than the 150 million adults in the bottom 60 percent of wealth distribution. The 400’s share has tripled since the 1980s.”

Question: Can Tomasky or anybody else describe the actual mode of “transfer” at work here? In what sense has money been transferred from the middle class to billionaires such as Bill Gates? And who did the transferring?

As is the case with most American billionaires, Gates’s vast fortune has its origin in the launching of a new business. When Microsoft made its initial public offering of stock, it created three billionaires and about 12,000 millionaires. That money came from stock investors, who traded their cash for equity in Microsoft. That was an excellent decision: An investment of $1,000 in Microsoft shares at the IPO would be worth more than $1.6 million today (assuming the reinvestment of dividends, etc.). The American middle class could stand some more victimization of that kind. If that is what getting ripped off looks like, then let’s have some more of the same.

The other way money is “transferred” to Microsoft and its shareholders is in the form of corporate income, which is used to pay both salaries to employees and dividends to shareholders. When it makes a sale, Microsoft gets cash, and consumers get copies of Office or Windows or whatever. If that is what is meant by “transfer,” then “transfer” is just a fancy word for “business.”

In reality, there has been a “transfer” only in the counterfactual sense, i.e. that things would be different if there had been transfers (in the form of higher taxes) in excess of what actually took place.

That’s a funny and backward way of talking about things. But it gets worse.

Indulging in the most sophomoric kind of zero-sum analysis, Tomasky insists that the middle class is worse off because Gates is better off. But there is not really any evidence that that is the case. It is entirely possible to imagine a world in which Microsoft products did not exist and Microsoft profits did not exist, and Bill Gates was just another guy working in tech or finance or insurance. But the middle class would be worse off in that scenario, not better off: It would be deprived of Microsoft’s products, which consumers value (that is what makes Microsoft profitable) and also deprived of the jobs, tax payments, and secondary economic activity associated with Microsoft. Tomasky’s argument really does not stand up to a second’s scrutiny here.

The idea that there is some big national slop bucket marked “income” and that Gates et al. are grabbing up more than their fair share is breathtakingly primitive. A relatively small number of high-growth firms has accounted for a very large share of economic growth in the United States in the past several decades. That represents wealth creation, not a wealth transfer.

What makes this even more irksome is the fact that there has been a gigantic wealth transfer from the middle class and we know to whom it is that so much middle-class wealth has been transferred. And it isn’t Bill Gates or Mark Zuckerberg.

Question: What actually is the variable at the heart of the American middle class’s relatively low levels of savings and wealth formation? This has been studied fairly extensively, and it isn’t the fact that the founders of tech companies become very wealthy in IPOs or the fact that a few thousand people in finance make a lot of money in bonuses. According to the Federal Reserve, the main culprit is student loans. Which is to say: The money wasn’t transferred to Bill Gates — it was transferred to the associate dean of students for diversity and inclusion at Oberlin. Tuition rates and university administrative payrolls have soared roughly in tandem with the amount of money that Washington makes available for student loans. From the Motley Fool: “The Fed found that among households with the greatest negative net worth, the majority of debt comes in the form of student loans. And the more student debt a household has, the greater its negative net worth is likely to be. In fact, among households whose net worth measures negative-$12,500 to negative-$46,300, student loans represent 40 percent of total debt, compared with less than 10 percent for households that don’t have negative net worth.”

This is not a great secret. It even has been mentioned in the very newspaper that publishes Michael Tomasky’s column!

Subsidized loans are a splendid way for politicians to spend money on favored constituencies (here meaning university employees, not students) without having to put it down on the books as an expenditure. Because governments almost never put a meaningful price on the risk associated with loans they make, spending money on favored constituencies through subsidized lending shows up on the books as an asset rather than as a liability. This actually is a transfer — of a particularly sneaky kind: The political constituency (government employees) gets income, and the expense is transferred to a third party (student borrowers) without the politicians having to impose an actual tax and account for it. It’s a nice little scam, if you are into that sort of thing.

So there is a story to be told about a politically powerful interest group financially burdening the American middle class in order to line its own pockets, but it is not the one Tomasky wants to tell. Again, the fact that we can dream up an alternative scenario in which billionaires were taxed more aggressively to make college tuition-free does not change the facts of what actually has happened and is happening. And, at some level, Times columnists have an intellectual obligation to deal with that reality.

Question: How meaningful are comparisons to multiples of $0.00?

Tomasky and others frequently write that the top 1 percent or, in this case, the top 0.00025 percent, has more wealth than the bottom 60 percent or the bottom half or some other population share that looks shocking until you learn that almost 70 percent of U.S. adults have less than $1,000 in savings and that a third of them have no savings at all, and that 20 percent of Americans have a net worth that is zero or negative and a considerably larger share has a net worth that is trivial. Think of it this way: It is not only Bill Gates, but also those of you with a net worth of $1 who have more wealth than the bottom fifth of Americans combined. Those of you with $1,001 in savings worth have more in the bank than the great majority of all Americans. That is not because Bill Gates and you hoovered all the money up — it is because a great many Americans do not save very much.

That is not always bad. (There is no “ideal” savings rate.) If you have just finished up at Harvard Law and you have $200,000 in student loans and other personal debt, plus a $400,000 mortgage on a $500,000 house, you aren’t in a terrible position in life, most likely. On the other hand, if you make $27,000 a year and you have $50,000 in debt, you have a problem. The numbers need to be chopped a little more fine to be meaningful. There are a lot of people with negative net worth who are young and high-earning — and a lot who aren’t. The two situations are not very much alike. And, for that matter, there are a lot of Americans who have relatively high net worths who are not in very good financial shape at all: Being up $100,000 or so isn’t really all that great if you are a year away from retirement.

That gets complicated. But in any case, you could send men with bayonets to Bill Gates’s secret Scrooge McDuck vault to seize 100 percent of his assets without making any of those negative-net-worth households any better off. Michael Tomasky must know this, at some level.

Question: Does Michael Tomasky really not know the difference between tax rates and tax revenue? He writes: “In my lifetime, the top marginal tax rate has gone (roughly speaking) from 91 percent to 77 percent to 50 percent to 35 percent to today’s 37 percent.”

That is true. But taxes are higher today than they were when the top rate was 91 percent — not lower.

In 1950 and 1951, when the top tax rate indeed was, as Tomasky writes, 91 percent, federal tax receipts as a share of GDP amounted to 13.2 percent and 14.9 percent, respectively. In 2018, they were 16.2 percent — lower rates but higher taxes in toto. In fact, federal tax receipts hit their highest postwar level — 19.8 percent of GDP — in 2000, when the top tax rate was a heck of a lot lower than 91 percent. Here are the data; see for yourself.

(Naive supply-siders take note: That millennial tax revenue spike and the notional surplus that accompanied it followed a modest tax hike, not a large tax cut.)

What about progressivity? The share of taxes paid by high earners has increased over recent decades rather than diminishing, and that increase has not been proportional to their share of total income. In 1980, the top 10 percent paid just slightly less than half of all federal income tax; today, the top 10 percent pays about 70 percent, which is substantially more than its share of total income. Put another way: In 1980, the top 10 percent paid a tax burden that was 17 percentage points in excess of its income share; in 2016, the top 10 percent paid a tax burden that was 23 points in excess of its income share. (That’s 32 percent of the income and 49 percent of the taxes in 1980 vs. 47 percent of the income and 70 percent of the taxes in 2016.)

Tomasky might be correct that taxes should be higher on high earners — that is a value judgment — but his empirical analysis is both shallow and misleading.

Is it the case that both he and his editors at the New York Times are incapable of understanding the relevant facts? Or are they so used to repeating these banal and embarrassingly shoddy talking points that they have forgotten how to actually think about these questions?

This kind of journalism is a genuine disservice to the public, irrespective of one’s political beliefs. Tomasky should be ashamed of writing it, and the Times should be ashamed of publishing it.

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