U.S. Budget and Economy

Kevin Hassett Continues to Cherry-pick Data and Cite Uncommon Sources

2026-10-06T23:34:47.473-07:00

As the transcript at https://transcripts.cnn.com/show/sotu/date/2026-10-04/segment/01 shows, White House economic adviser Kevin Hassett continues to cherry-pick data and cite uncommon sources on the Sunday news shows to defend Trump's economic record. Jake Tapper began an October 4 interview by playing a clip of Trump and citing some recent economic data:

So, you just heard the president say -- quote -- "It was just announced that we have the best economic numbers of any president in the history of our country."

So, let's break down the economic numbers. Growth is a modest 2.2 percent. Unemployment is relatively low, but ticking up a bit at 4.2 percent. Hiring is weak, only 29,000 jobs added at September. July and August were revised down. Inflation is at 3.4 percent. Prices rose 0.4 percent in August. Wage growth is at a five-year low, hourly wages down 0.3 percent over the past year. So, assessing it here, it's a growing economy, but hiring is slow, wages are not keeping up with rising prices. So what is the president talking about when he says it's the best economic numbers ever? Is he misinformed or is he not telling the truth?

As can be seen from the first two graphs at https://www.econdataus.com/cpi_m2.html, the Consumer Price Index for All Urban Consumers is at 3.4 percent and read GDP growth, year over year, is at 2.2 percent, just as Tapper said. As stated below the graphs, the source is the U.S. Bureau of Economic Analysis as graphed by FRED (Federal Reserve Economic Data). Hence, Tapper's quotes for these numbers are correct.

Hassett begins by calling this a "double-bind question" and goes on to mention the "buffer-stock theory of savings". He goes on to state the following regarding GDP growth:

We just had this week the consumer -- the consumer information data came out or price data came out that showed that consumption was up year over year at the highest rate in years. We have got GDP now for the third quarter running 4 to 5 percent.

This 4 to 5 percent number is far above Tapper's 2.2 percent number. In fact, Hassett is referencing a projection called GDPNow from the Federal Reserve Bank of Atlanta. Following is a graph of recent values of this measure compared to the Blue Chip consensus:

This graph comes from this link. Checking this page in the Internet Archive shows that the Third-Quarter GDPNow estimate for Q3 of 2026 has been 3.7 percent since at least September 30, 2026. It was 5.1 percent on September 25, 2026. Hence, the "4 to 5 percent" appears to rounding the 3.7% up to 4% and including the estimate from more than a week before. In addition, the graph shows that the Blue Chip consensus is much lower, closer to the current value of 2.2 percent. In addition, the second graph at this link shows that, if you ignore the huge swing during COVID, year over year GDP growth has not hit 4 percent since Q1 of 2015 and has not hit 5 percent since Q2 of 2000. This would suggest that this projection is likely just a temporary peak value if, in fact, it is reached. Nevertheless, Hassett seems to have taken to referencing the GDPNow estimate for GDP recently, likely because of the relatively high value compared to other esimates.

Shortly after the GDP reference, Hassett addresses inflation as follows:

If we look at the three-month moving average of the PCE data that came this week, then core inflation is running now at 2 percent, which is the Fed's target, and top-line inflation is at 1 percent, because food prices and gasoline prices are dropping faster than everything else.

To check Hassett's core inflation number, you can go to https://fred.stlouisfed.org/series/PCEPILFE and measure the current PCE index is 130.455 and 3 months ago was 129.796. The 3-month annualized growth over that period equals ((130.455 / 129.796)^4 - 1)*100 which equals 2.046 percent. For top-line inflation, you can go to https://fred.stlouisfed.org/series/PCEPI and measure the current PCE index is 131.579 and 3 months ago was 131.241. The 3-month annualized growth over that period equals ((131.579 / 131.241)^4 - 1)*100 which equals 1.034 percent. Hence, Hassett's numbers are correct. However, it's instructive to look at the annualized monthly changes. You can see that for core inflation via the following steps:

Go to https://fred.stlouisfed.org/series/PCEPILFE
Click the 'Edit Graph' button and change units to 'Compounded Annual Rate of Change'
Click on the graph to close the Edit window
Change on the 5Y link which should change the first date below it to 2021-08-01

This should result in the following graph:

Hover the mouse over the last three points in the graph and note their values are 1.61121, 1.52476, and 3.01001. The average of these 3 values is 2.049, almost identical to the 2.046 calculated above. That's because the 3-month annualized rate is almost exactly equal to the average of the 3 monthly annualized rates. So Hassett is essentially reaching back to grab the very low rates of June and July to moderate the higher rate of August and still get a very low rate. Excellent cherry picking! If he had looked at just the last month, he would have had to report 3 percent instead of 2 percent. If he had looked at the year over year increase (which could have been done by step 2 above by selecting 'Percent Change from Year Ago'), he would have likewise gotten 3 percent. But, by looking at a 3-month average, he can look back in time and grab those 2 low increases and get the desired low number of 2 percent.

The same process applies to the top-line inflation. You can look at the annualized monthly changes for top-line inflation via the following steps:

Go to https://fred.stlouisfed.org/series/PCEPI
Click the 'Edit Graph' button and change units to 'Compounded Annual Rate of Change'
Click on the graph to close the Edit window
Change on the 5Y link which should change the first date below it to 2021-08-01

This should result in the following graph:

Hover the mouse over the last three points in the graph and note their values are -1.22741, 0.60577, and 3.78756. The average of these 3 values is 1.055, close to the 1.034 calculated above. That's because the 3-month annualized rate is close to the average of the 3 monthly annualized rates. So, once again, Hassett is reaching back to grab the very low rates of June and July to moderate the higher rate of August and still get a very low rate. If he had looked at just the last month, he would have had to report 3.8 percent instead of 1 percent. If he had looked at the year over year increase (which could have been done by step 2 above by selecting 'Percent Change from Year Ago'), he would have gotten 3.42 percent. But, by looking at a 3-month average, he can look back in time and grab those 2 low increases and get the desired low number of 1 percent.

It would be interesting to study if Kevin Hassett's appearances on the news shows tend to coincide with times when monthly or quarterly numbers are temporarily favorable for his arguments. In any event, he seems to be very adept at cherry-picking numbers and sources.

Fact-checking the Sunday News Shows with Online Tools and AI

2026-08-11T21:06:46.345-07:00

On August 9, 2026, White House economic advisor Kevin Hassett appeared on State of the Union with Jake Tapper. Following is an excerpt of their conversation taken from the transcript:

TAPPER: There have been job losses for six out of the 18 full months of President Trump's second term. That's a third of them. And the Trump administration has only added 548,000 net jobs so far, which is considered very slow growth. It's growth, but very slow.

Two million jobs were created in the last 18 months of Biden's presidency. Are you really arguing that your numbers are better than that?

HASSETT: Well, I disagree with your number. We will have to follow up on e-mail, but I just looked at the latest number. It was that job creation under President Trump since January 20 is about 880,000 jobs.

But we won't argue about 800 or 500 factually on a show right now. But the fact is that the thing that really jumps out at us is that those are really good jobs. They're manufacturing jobs. They're construction jobs. The number of manufacturing jobs under Joe Biden dropped by 230,000.

It's possible to quickly check whose numbers are correct on the BLS (Bureau of Labor Statistics) web site via the following steps:

Go to https://www.bls.gov/
Click on 'DATA TOOLS' in the top blue menu and then select 'Top Picks, One Screen, Multi-Screen, and Maps'.
In the Employment section, select the first 'TOP PICKS' icon (for Employment, Hours, and Earnings - National). This will go to https://data.bls.gov/toppicks?survey=ce.
Check the second checkbox labelled "Total Nonfarm Employment, Seasonally Adjusted - CES0000000001".
Press the blue 'Retrieve data' button.
Click on "More Formatting Options".
Check the checkbox labelled "Include graphs" in the Graphs section and press the 'Retrieve Data' button.

This should result in the following graph and table:

As can be seen, job growth under Trump has been 158,858 thousand (July 2026) minus 158,310 thousand (February 2025) which equals 548 thousand, the number that Jake quoted. The answer to the first question of "What is the CES survey?" on this BLS page states that the "reference period for the CES survey is the pay period which includes the 12th of the month." Hence, an argument could be made for counting from January 2025 for which that week is very close to January 20, the date referenced by Hassett. In that case, the number would be 158,858 thousand (July 2026) minus 158,268 thousand (January 2025) which equals 590 thousand. Both numbers are far short of Hassett's 880 thousand number. In fact, 158,858 thousand (July 2026) minus 880 thousand equals 157,978 thousand, a number that Biden passed in November of 2024.

Regarding Hassett's statement that the "number of manufacturing jobs under Joe Biden dropped by 230,000", that can be checked on the BLS (Bureau of Labor Statistics) web site via the following steps:

Go to https://www.bls.gov/
Click on 'DATA TOOLS' in the top blue menu and then select 'Top Picks, One Screen, Multi-Screen, and Maps'.
In the Employment section, select the first 'TOP PICKS' icon (for Employment, Hours, and Earnings - National). This will go to https://data.bls.gov/toppicks?survey=ce.
Check the third checkbox labelled "Manufacturing Employment, Seasonally Adjusted - CES3000000001".
Press the blue 'Retrieve data' button.
Click on "More Formatting Options".
Check the checkbox labelled "Include graphs" in the Graphs section and press the 'Retrieve Data' button.

This should result in the following graph and table:

As can be seen, the number of manufacturing jobs under Biden went from 12,142 thousand in January of 2021 to 12,673 thousand in january of 2025. That's an increase of 531 thousand manufacturing job. Of course, some of that was due to the recovery from COVID and manufacturing jobs did go down from there to 12,673 thousand in January of 2025. That's a drop of 230 thousand manufacturing jobs in 24 months. However, the number of manufacturing jobs continued down under Trump, going from 12,673 thousand in January of 2025 to 12,580 thousand in December of 2025, a drop of 93 thousand before recovering 31 thousand since then. Hence, Hassett was referring to the drop in manufacturing from the high in the middle of Biden's term, ignoring the rise of 113 thousand from the pre-COVID high to that time (January of 2023).

In any case, following is an excerpt from further on in the interview:

TAPPER: Yes, it's 800,000, according to you, versus two million under Biden.

And I think the issue is that there are two things right now that the economists say are weighing on the economy. Both of them are specifically Trump policies. One is obviously the Iran war, which has led to high gas prices. The president said that that war would take four to six weeks. We're now in month six.

And the second policy that's having an impact is tariffs, which, according to a recent report by the Fed, those tariffs were passed on to customers, consumers, in the form of higher prices. So it does seem as though the president's policies have led to this economic situation where the job growth is slower than in the last 18 months of Biden's administration.

HASSETT: Well, let's unpack these things.

First of all, if you look at the latest inflation numbers, right, the Consumer Price Index was negative for the month of June. Core was zero. That's the thing that the Fed cares about. The PCE index, which is the Fed's number one index, was negative both for core and top line.

And so all of the price data have been decelerating. Now, there was a big inflation in the previous administration, but there's been rapid deceleration of inflation under President Trump. And so, if you're going to tell a story that tariffs are causing some kind of positive shock to inflation, then you got to come up with some counterfactual that explains why it is that right now inflation is running at about zero.

At first, Kevin Hassett's claim that "the Consumer Price Index was negative for the month of June" seems to very much contradict recent reporting of the CPI. The trick is that Hassett is referring to the CPI of a single month whereas most reporting looks at the percent change from a year ago. At the time of the interview, that number was about 3.5 percent. The measurement that Hassett is referring to can be added to the fourth graph in this section:

Click the "Edit Graph" button.
Click the 'ADD LINE' tab.
Under "Add data series to graph", enter CPIAUCNS and select "Consumer Price Index for All Urban Consumers: All Itmes in U.S. City Average".
Click the "Add data series" button.
Change Units to "Compounded Annual Rate of Change" and ensure that "Modify frequency" is "Monthly".
Change the first date above the graph from "1913-02-01" to "2000-01-01".
Click the "Edit Graph" button.
Click the FORMAT tab.
Click 'Customize' in the box in the 'Line 3' section and change the 'Line style' to Solid, the first 'Width' to 1, and Color to orange (#f4a261).
Also, set 'Mark type' to Circle and the second 'Width' to 3.
Click on graph to close Edit Graph panel.
Optionally, you can click on the "Download" button to download the data to a CSV or Excel file or download the graph to a PNG file or Powerpoint file.
Hover the mouse over the far right at June 2026 to show that the value to which Hassett is referring.

This should display the following graph:

A larger copy of the above graph can be found at this link. Note the 3 orange dots preceding the orange dot showing -4.1 percent for June 2026. Those dots show compounded annual rates of change of about 13.3, 10.7, and 7.8 percent for March, April, and May of 2026. Of course, Hassett doesn't mention this since it would show the misleading nature of his argument that "right now inflation is running at about zero".

Also, note in the graphs above how the the annual growth in the M2 money supply was already very high in January of 2021, the last month of Trump's first term as President. The annual growth reached its peak just a month later, in February of 2021. This growth in M2 likely had much to do with the growth in inflation which peaked in June of 2022 at about 9 percent, just 5 months after Trump left office. Hence, it seems misleading to blame the inflation only on Biden when many of the conditions that led to it were likely already in place when he took office.

These and other problems with Hassett's statement were found by asking the following question of Gemini and ChatGPT:

Evaluate the accuracy of Kevin Hassett's comments at https://transcripts.cnn.com/show/sotu/date/2026-08-09/segment/01. Provide the evaluation in HTML.

Gemini's response is at https://econdataus.com/ai/hassett_260809_gemini.htm and ChatGPT's response is at https://econdataus.com/ai/hassett_260809_chatgpt.htm.

Kevin Hassett Continues to Mislead on the Sunday News Shows

2026-06-06T11:47:35.312-07:00

As the transcript at https://abcnews.com/Politics/week-transcript-5-31-26-white-house-national/story?id=133455615 shows, White House economic adviser Kevin Hassett continues to make misleading statements on the Sunday news shows to defend Trump's economic record. Regarding inflation, Jonathan Karl asked him the following question on This Week With George Stephanopoulos on March 31, 2026:

Well, I mean, recounting what I'm hearing and what a lot of people are hearing.

But let me ask you about inflation, because we had the Bureau of Economic Analysis came out this week -- this is the Fed’s go-to gauge for inflation -- saying that inflation increased to 3.8 percent in April.

Are you -- are you concerned about that? I mean, we’re seeing, you know -- and, obviously, a lot’s going to depend on what happens in the Middle East. But are you concerned about this nagging inflation and it might actually force the Fed to increase interest rates?

Hassett replied:

HASSETT: No. You know, first of all, you know, you’re exactly right, the energy prices are high, and they’re high around the world. Gas prices are high, and that’s extremely frustrating, and it’s something that we’re working on doing lots of different things to minimize the disruption. And hopefully, again, the problem of the Gulf will be over soon, and then things will go back to normal.

Absolutely true that the top line number, which includes energy, is a high number. But if you look at core, the history of this is, the energy shocks don’t usually peak through the core. That’s why, at the Fed, you know how they always talk about, well, core inflation this, core inflation that.

Well, actually, as a consumer, you care about overall inflation. But the reason they talk about core is that’s the central tendency of what’s going to happen over the next year or two.

And if you look, at the Cleveland Fed, you probably go here all the time, Jon, but if you don’t, the Cleveland Fed has an nowcaster for CPI, what they think the next month is going to be. And they’ve got core CPI at 0.23, which I think is about right, because that’s what our experience is, is that these energy stocks, painful while they happen, do not feed through to core.

Ignoring Hassett's little dig of "you probably go here all the time, Jon", I was struck by the smallness of the number 0.23. I thought that I did hear the this was projected for next month but it seemed that I had always heard monthly numbers given as annualized numbers so as to make them comparable with the annual numbers that are normally discussed. Hence, I went to the Inflation Nowcasting page of the Cleveland Fed at https://www.clevelandfed.org/indicators-and-data/inflation-nowcasting to see if the 0.23 number was correct and, if so, why it was so small. Following is the first table on that page:

Inflation, month-over-month percent change

Month       CPI     Core CPI    PCE     Core PCE    Updated
----------  ------  ----------  ------  ----------  -------
June 2026   0.12    0.23        0.20    0.27        06/05
May 2026    0.46    0.23        0.40    0.27        06/05
----------  ------  ----------  ------  ----------  -------
Note: If the cell is blank, it implies that the actual data corresponding to the month for that inflation measure have already been released.

As can be seen, the table does list 0.23 as the value for Core CPI for June. However, immediately following that table is the following table:

Inflation, year-over-year percent change

Month       CPI     Core CPI    PCE     Core PCE    Updated
----------  ------  ----------  ------  ----------  -------
June 2026   4.05    2.83        3.90    3.34        06/05
May 2026    4.18    2.82        3.99    3.33        06/05
----------  ------  ----------  ------  ----------  -------
Note: If the cell is blank, it implies that the actual data corresponding to the month for that inflation measure have already been released.

As a year-over-year number, this gives Core CPI for June to be 2.83 percent. This is about a percent less than the 3.8 percent total inflation that Karl had just cited for April but above the Fed's stated target of 2 percent inflation. Hassett could have easily cited this number. To paraphrase Hassett, he probably reads beyond the first table all the time! In any case, the 2.83 number appears to simply be the annualized value of the 0.23 perent month-over-month value. Starting with 0.23 percent, you can convert it to a ratio by dividing it by 100 and adding 1. This gives a ratio of 1.0023. To get the annualized value, you then raise 1.0023 to the power of 12 to get the ratio 1.027952. You then convert this back to a percent by subtracting 1 and multiplying by 100. This gives 2.7952 percent.

This 2.7952 percent number is very close to the 2.83 percent given in the second table. The difference is likely due to round-off error. In fact, you can likely get a more accurate value for the month-over-month change by working backwards. You can convert 2.83 percent to the ratio 1.0283 by dividing by 100 and adding 1. You can then convert this to a month-over-month ratio by raising it the power of (1/12). This gives the value 1.002328. You can then convert this to the month-by-month percent of 0.2328 percent by subtracting 1 and multiplying by 100. This is likely much closer to the precise month-over-month percent than the 0.23 percent figure.

In any case, why would Hassett give the month-over-month figure and force the casual listener to calculate the annualized figure? The answer seems obvious. Hassett's goal was to give the casual listener as small a number as possible and mislead them to believe that core CPI was incredibly low.

Analyzing the Monthly Treasury Statement with Online Tools and Shiny

2026-03-15T18:55:00.000-07:00

Analyzing the Federal Debt with Online Tools and Shiny

On March 13, 2026, Yahoo Finance posted an article from Fortune Magazine titled "The national debt isn't $39 trillion. One economist says it's actually $100 trillion". The article begins:

The U.S. national debt is nearly $39 trillion. One of the country's top fiscal economists says the real number is closer to $100 trillion - and that Washington's own accounting rules are designed to hide it.

The $39 trillion figure can be verified on the Federal Reserve Economic Data (FRED) website at https://fred.stlouisfed.org/series/GFDEBTN. On March 14, it displayed the following graph:

As cam be seem. the federal debt is nearly $39 trillion dollars. Further on, the article states:

If the U.S. government were required to report its finances under the same accounting rules as a publicly traded corporation, Smetters pointed out, the debt-to-GDP ratio wouldn't be the current level of 100%, which is bad enough. "We'd be reporting a debt-to-GDP ratio closer to 300%." The gap between those two numbers, he warned, is not a rounding error - it is the deliberate product of federal accounting standards designed to keep the full picture hidden from the public.

Actually, the author seems to be making an error in stating that saying that the current debt-to-GDP ratio is 100%. The following FRED graph at https://fred.stlouisfed.org/series/GDP/ shows the current value of the GDP to be $31.442483 trillion:

The federal debt of $38.514 trillion is 122.49 percent of $31.442 trillion, not 100 percent. This can be seen in the following FRED graph from https://fred.stlouisfed.org/series/GFDEGDQ188S.

The 100% of GDP figure likely comes from a confusion of two measures of the federal debt. Table 6 of the latest Monthly Treasury Statement lists "Debt Held by the Public" as $31,186,964 million and "Total Treasury Securities Outstanding" as $38,769,806 million. The difference is "Intragovernmental Holdings" of $7,582,841 million. The values of all 3 of these debt measures can be via the R Shiny app at https://econdata.shinyapps.io/mts1/. The steps to display a plot of these values are as follows:

Go to https://econdata.shinyapps.io/mts1/
Set 'Topic' in the left sidepanel to "Debt".
Ensure that 'Units' is set to "Actual Dollars".
Hover the mouse over the rightmost point in the green line.

This should display the following plot:

Changing 'Units' to "Percent of GDP" to display the following plot:

As can be seen, the Public Debt (or Debt Held by the Public) is just below 100 percent. The blue line shows the "Intergovernmental Holdings". These holdings are described on Wikipedia as "debt obligations that a government owes to its own agencies" which, in the United States are "primarily composed of the Medicare trust funds, the Social Security Trust Fund, and Federal Financing Bank securities."

Analyzing the Trust Funds with Shiny

Changing 'Topic' to "Trust Funds" and changing 'Units' back to "Actual Dollars" should display the following:

As can be seen, the Old-Age and Survivors Insurance (OASI) Trust Fund (orange line) and Military Retirement Trust Fund (purple line) both have a bit over $2 trillion (about $2.308 trillion and $2.083 trillion, respectively). The Federal Employment Retirement Trust Fund (green line) has a bit over $1 trillion (about $1.128 trillion). The full Social Security Trust Fund consists of the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance Fund (red line) and the full Medicare Trust Fund consists of the Hospital Insurance Fund and the Supplemental Insurance Fund (cyan line).

Changing 'Units' to "Percent of GDP" to display the following plot:

Looking at the trust funds as a percent of GDP shows that the Old-Age and Survivors Insurance (OASI) Trust Fund (orange line) appears to have been declining at a fairly constant rate until 2021 and has been declining at a slightly larger constant rate since then. Clicking on the 'Text' tab should display the following data since 2021:

          date disability_insurance fed_emp_retirement hospital_insurance old_age_survivors_ins supplemental_insurance military_retirement other_trust_funds     cpi      gdp

71  2021-01-31            0.4580358           4.593780                 NA             13.184492              0.6516136            4.704209                NA 261.582 21349.62
72  2021-02-28            0.4535446           4.572279                 NA             13.097455              0.8083394            4.710372                NA 263.014 21362.45
73  2021-03-31            0.4538321           4.546836                 NA             13.026600              0.8303103            4.703938                NA 264.877 21396.82
74  2021-04-30            0.4654968           4.518864                 NA             13.055145              0.7164996            4.687467                NA 267.054 21452.74
75  2021-05-31            0.4633100           4.484096                 NA             12.948881              0.8388042            4.709497                NA 269.195 21530.19
76  2021-06-30            0.4509430           4.492623                 NA             12.851316              0.8198373            4.694000                NA 271.696 21678.15
77  2021-07-31            0.4449079           4.428974                 NA             12.691463              0.6829802            4.643062                NA 273.003 21896.61
78  2021-08-31            0.4375252           4.307450                 NA             12.454456              0.7820285            4.646670                NA 273.567 22185.58
79  2021-09-30            0.4368347           4.223497                 NA             12.279858              0.7605424            4.598622                NA 274.310 22441.50
80  2021-10-31            0.4290049           4.117455                 NA             12.117650              0.7552861            5.040950                NA 276.589 22664.38
81  2021-11-30            0.4249771           4.083167                 NA             11.943961              0.7313615            5.002342                NA 277.948 22854.21
82  2021-12-31            0.4312788           4.380259                 NA             11.938885              0.7883837            4.956183                NA 278.802 23056.49
83  2022-01-31            0.4392147           4.321014                 NA             11.865159              0.7560827            4.945086                NA 281.148 23271.24
84  2022-02-28            0.4345018           4.261769                 NA             11.670182              0.7744925            4.914332                NA 283.716 23498.44
85  2022-03-31            0.4348044           4.204287                 NA             11.509327              0.8042476            4.886534                NA 287.504 23721.29
86  2022-04-30            0.4485074           4.151984                 NA             11.472982              0.6861343            4.852628                NA 289.109 23939.78
87  2022-05-31            0.4460070           4.102202                 NA             11.304613              0.8285649            4.878241                NA 292.296 24153.92
88  2022-06-30            0.4613925           4.097347                 NA             11.321972              0.8220010            4.844105                NA 296.311 24364.33
89  2022-07-31            0.4576758           4.044925                 NA             11.188351              0.7882762            4.835416                NA 296.276 24571.01
90  2022-08-31            0.4564162           3.995309                 NA             11.032248              0.8017778            4.857632                NA 296.171 24773.96
91  2022-09-30            0.4591808           4.140874                 NA             10.905464              0.6725397            4.783461                NA 296.808 24974.64
92  2022-10-31            0.4537770           4.093283                 NA             10.768989              0.8121029            5.405533                NA 298.012 25173.06
93  2022-11-30            0.4513644           4.046417                 NA             10.607734              0.7882758            5.364666                NA 297.711 25369.23
94  2022-12-31            0.4618844           4.049123                 NA             10.612353              0.8296724            5.303926                NA 296.797 25554.36
95  2023-01-31            0.4723508           3.842836          0.7976329             10.568500              0.8072709            5.280905         1.3102179 299.170 25728.46
96  2023-02-28            0.4732721           3.818393          0.7656543             10.428175              0.8014602            5.241423         1.3210724 300.840 25891.54
97  2023-03-31            0.4792612           3.794674          0.6812753             10.319765              0.6795042            5.201531         1.3042989 301.836 26054.87
98  2023-04-30            0.4936913           3.770791          0.8118405             10.305767              0.7978666            5.213650         1.3044222 303.363 26218.46
99  2023-05-31            0.4953478           3.747105          0.7909285             10.165540              0.7860859            5.187112         1.3569181 304.127 26382.30
100 2023-06-30            0.5299922           3.850582          0.7361862             10.282985              0.6176741            5.138160         1.3368196 305.109 26537.88
101 2023-07-31            0.5286998           3.816513          0.7709068             10.177003              0.7331675            5.137074         1.3121231 305.691 26685.20
102 2023-08-31            0.5276288           3.775862          0.7461101             10.034197              0.7211911            5.129442         1.3048219 307.026 26824.27
103 2023-09-30            0.5299620           3.929856          0.7207849              9.915531              0.5916396            5.068910         1.2812252 307.789 26965.27
104 2023-10-31            0.5254896           3.895158          0.7511757              9.791168              0.7059852            5.874921         1.2681931 307.671 27108.21
105 2023-11-30            0.5243166           3.859983          0.7307539              9.641926              0.6694912            5.845104         1.2655940 307.051 27253.09
106 2023-12-31            0.5361879           3.872587          0.7612762              9.641642              0.6843091            5.773578         1.2451973 306.746 27395.62
107 2024-01-31            0.5500146           3.835502          0.7732212              9.621307              0.6758853            5.749821         1.2323159 308.417 27535.82
108 2024-02-29            0.5533975           3.801068          0.7409869              9.490274              0.6711032            5.726413         1.2384088 310.326 27673.67
109 2024-03-31            0.5603871           3.772173          0.7492632              9.391386              0.6661912            5.703515         1.2281068 312.332 27807.00
110 2024-04-30            0.5796481           3.741883          0.8356788              9.412454              0.6713640            5.704079         1.2223279 313.548 27935.83
111 2024-05-31            0.5834980           3.715164          0.7350020              9.294332              0.5109325            5.673968         1.2799720 314.069 28060.14
112 2024-06-30            0.6154082           3.731823          0.8570216              9.374657              0.6337875            5.671207         1.2624900 314.175 28187.93
113 2024-07-31            0.6151730           3.698284          0.8110754              9.273292              0.5953471            5.644704         1.2279484 314.540 28319.20
114 2024-08-31            0.6156570           3.670948          0.7316095              9.138713              0.4703896            5.606632         1.2222572 314.796 28453.94
115 2024-09-30            0.6219441           3.834747          0.8220058              9.033841              0.5751959            5.594593         1.1726379 315.301 28583.69
116 2024-10-31            0.6195469           3.804077          0.8010183              8.921925              0.5764149            6.252086         1.1364364 315.664 28708.43
117 2024-11-30            0.6198908           3.774619          0.7422561              8.786587              0.4535275            6.198674         1.1368514 315.493 28828.16
118 2024-12-31            0.6325613           3.796673          0.8186213              8.768465              0.5853155            6.161679         1.1282759 315.605 28946.89
119 2025-01-31            0.6473171           3.703284          0.7922451              8.751512              0.4576564            6.127409         1.1118098 317.671 29064.60
120 2025-02-28            0.6508068           3.688384          0.7680100              8.628558              0.4737486            6.116531         1.1165143 319.082 29181.31
121 2025-03-31            0.6585771           3.578998          0.8061272              8.484199              0.6019260            6.127444         1.0961452 319.799 29296.17
122 2025-04-30            0.6778885           3.565727          0.8785015              8.485952              0.6044833            6.121213         1.1101670 320.795 29409.18
123 2025-05-31            0.6810719           3.551521          0.7823958              8.354538              0.4438842            6.075324         1.1388910 321.465 29520.34
124 2025-06-30            0.7123367           3.072998          0.9062740              8.390033              0.6047600            6.073556         1.1451732 322.561 29631.63
125 2025-07-31            0.7144232           3.648903          0.8651646              8.291606              0.5648649            6.047881         1.1133087 323.048 29743.06
126 2025-08-31            0.7158387           3.624865          0.7830491              8.149024              0.4189114            6.035877         1.1047207 323.976 29854.61
127 2025-09-30            0.7184849           3.773328          0.8437794              8.009888              0.5132740            6.028479         1.0475413 324.800 29973.05
128 2025-10-31            0.7171595           3.743290          0.7135603              7.882171              0.2070161            6.717770         1.0254667      NA 30098.37
129 2025-11-30            0.7181365           3.714635          0.8245122              7.734926              0.5043586            6.921521         1.0140557 324.122 30230.57
130 2025-12-31            0.7338338           3.742346          0.8467537              7.699746              0.5561542            6.870791         0.9939345 324.054 30364.94
131 2026-01-31            0.7484462           3.708704          0.8093079              7.665160              0.4133847            6.805909         0.9826990 325.252 30501.50
132 2026-02-28            0.7530596           3.680246          0.7878123              7.531750              0.4346201            6.797988         0.9896794 326.785 30640.24

As can be seen, the OASI Trust Fund declined from about 13.097 percent of GDP in 2021-02-28 to about 7.532 percent of GDP in 2026-02-28. That's 5.565 percent of GDP in 5 years. At that rate, the OASI Trust Fund should run out of funds in about 6.767 years or by the end of 2033. A suumary of the 2025 Annual Reports of the Social Security and Medicare Boards of Trustees is posted at this link. It states:

The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year's report. At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 77 percent of total scheduled benefits.

Hence, the estimate obtained from the numbers above match the latest Trustees Report. Setting the text box under the plot that is titled 'Y From, To, Step, Tick' to "0,1.5" should display the following plot:

As can be seen, the size of the Disability Insurance Trust Fund is increasing and the size of the Hospital Insurance Trust Fund appears to be steady. However, the size of the Supplemental Insurance Trust Fund and the total funds in other trust funds is declining.

Analyzing Federal Receipts and Outlays with Shiny

Clearing the 'Y From, To, Step, Tick' to "0,1.5" text box and changing 'Topic' on the left sidepanel to "Receipts' should display the following plot:

As can be seen, Individual Income Taxes (green line) as measured over the prior 12 months reached a low point in 2020 (6.47% of GDP on 6/30/20) and a high point in 2022 (11.46 on 4/20/22) but was fairly flat over the entire 10-year period. Other receipts (black line) also varied during a period, going from 1.507% of GDP on 5/31/22 down to 0.779% of GDP on 3/31/24 and back up to 1.582% of GDP on 2/28/26. Other than that, it and corporate income tax (red line) and social insurance (blue line) were fairly steady over the 10-year period.

Changing 'Topic' on the left sidepanel to "Outlays' should display the following plot:

As can be seen, Social Security outlays (cyan line) were fairly steady as a percent of GDP until about 2022 when it started to rise. These outlays are paid for by Social Insurance receipts so that rise is a key reason why the Social Security Trust Fund is declining. In addition, Veteran outlays appear to have been rising slightly as a percent of GDP over the entire period and Total Treasury outlays have been rising sharply since about 2023.

Changing 'Topic' on the left sidepanel to "Treasury Outlays' should display the following plot:

As can be seen, IRS outlays went up sharply in 2020 but returned to about the same level by 2023. However, interest outlays started rising noticeably in 2021, with Gross Interest outlays rising from about 2.25% of GDP on 3/31/01 to about 4.1% of GDP on 2/28/26. Hence, it appears that interest outlays are becoming a major and growing expense. This is due both to rising interest rates and the growing federal debt.

Note: This blog post is also posted at https://www.econdataus.com/mts2602.htm.

Analyzing the Deficit and Debt with Online Tools and AI

2026-01-16T23:04:00.000-08:00

On December 21, 2025, Margaret Brennan interviewed the White House National Economic Council Director, Kevin Hassett, on "Face the Nation". According to this transcript, it included the following exchange:

MARGARET BRENNAN: Let me ask you a bit about tariffs. Since as far back as July, we have heard the president refer to this idea of $2,000 checks being given out to households. The Treasury secretary said this would go to households making less than $100,000. Should Americans plan to receive those checks in 2026?

HASSETT: That's going to depend on what happens with Congress. Congress is going to have to send those money to those peoples. But the thing we can say is that since July, we've had a lot of positive news about the economy. We've had a couple of quarters of almost 4% growth. We've got a big government surplus actually running for a few months in a row. The deficit relative to last year, is down by $600 billion and so in the summer, I wasn't so sure that there was space for a check like that, but now I'm pretty sure that there is, and so I would expect that in the new year, the President will bring forth a proposal to Congress to make that happen.

Hassett's statement about us having a "big government surplus actually running for a few months in a row" can be checked via the following steps:

Go to https://fred.stlouisfed.org/
In the search box that contains "Search FRED Data...", enter the word deficit and click on the magnifying glass.
Click on the first selection of "Federal Surplus or Deficit [-]" which will go to https://fred.stlouisfed.org/series/MTSDS133FMS
Above the date selector above the graph, click on 1Y to set the range of the graph to 1 year.
Click the Download button above the graph and the select "Image (graph)". This will download the following image:
Click the Download button above the graph and the select "CSV (data)" or "Excel (data)". This will download a file containing the the following numbers:

     date    MTSDS133FMS
12/1/2024   -86,731.61901
 1/1/2025  -128,640.2067
 2/1/2025  -307,017.1947
 3/1/2025  -160,530.3215
 4/1/2025   258,399.9491
 5/1/2025  -316,003.7612
 6/1/2025    27,010.02208
 7/1/2025  -291,142.6603
 8/1/2025  -344,791.8919
 9/1/2025   197,949.6304
10/1/2025  -284,350.0508
11/1/2025  -173,277.1751
12/1/2025  -144,749.2356

As can be seen, the U.S. government ran a surplus in only 3 months in the past year - April, June, and September. These are the same months in which quarterly taxes are paid, the fourth month being January. As none of these months are "in a row", Hassett is obviously wrong that the U.S. has "a big government surplus actually running for a few months in a row".

In addition, Hassett's statement that "the deficit relative to last year, is down by $600 billion" can be checked via the following steps:

Go to https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-penny
Click on the Chart tab
Hover the cursor along the top line at the vertical line at 2024, 2025, and 2026, taking a screenshot (Alt-Print Screen) at each year.

This should create the following 3 screenshots:

As can be seen, the cumulative deficit (the debt) increased by $2.18 trillion ($36.17 trillion - $33.99 trillion) in 2024 but a slightly larger $2.25 trillion ($38.42 trillion - $36.17 trillion) in 2025. Hence, the $600 billion figure is very much false judging from the total public debt outstanding. However, there are alternative measures of the deficit. In any event, the accuracy of such statements can be quickly estimated by asking ChatGPT or another AI assistant a carefully worded question like the following:

On December 21, 2005 Kevin Hassett said "We've got a big government surplus actually running for a few months in a row. The deficit relative to last year, is down by $600 billion". How accurate is that statement? Please output the reply in raw HTML.

This question resulted in the following reply from ChatGPT:

On December 21, 2025, Kevin Hassett was quoted saying:

“We've got a big government surplus actually running for a few months in a row. The deficit relative to last year is down by $600 billion.”

This statement contains two parts — one about a “surplus running for a few months” and another about a “$600 billion” reduction in the deficit. Here’s how accurate those claims are based on official budget data and analyses:

1. “Big government surplus running for a few months in a row”

Official U.S. government budget data show that the United States has continued to run overall budget deficits through fiscal 2025 — not sustained surpluses. For example, the Treasury reports a consolidated federal budget deficit of about $1.8 trillion for fiscal year 2025.

It is true that on a monthly cash basis, occasional months (such as September 2025) posted surpluses because revenues exceeded outlays for that month. These monthly “surpluses” are timing results of receipts and payments and do not indicate an overall multi-month or annual surplus.

Conclusion: Claiming a “big government surplus running for a few months in a row” is misleading — it refers to isolated monthly cash accounting, not sustained government surplus in the comprehensive budgetary sense.

2. “Deficit relative to last year is down by $600 billion”

Government budget data and independent analyses show that the overall federal deficit in fiscal year 2025 was modestly lower than in 2024, but the reduction was far smaller than the $600 billion figure. For example, the Treasury and budget analysts estimate the fiscal 2025 deficit at about $1.8 trillion — only about $40–50 billion lower than the roughly $1.8+ trillion deficit in fiscal 2024.

While some internal projections, partisan commentary, or short-term year-to-date comparisons might suggest larger changes in certain periods, the official annual budget totals do not support a near-$600 billion reduction year-over-year. Independent analysts have noted that the “$600 billion” claim is not backed by the underlying data and appears to reflect selective or non-standard comparisons rather than the standard annual deficit figures.}

Conclusion: The “$600 billion” reduction claim is not supported by the official annual budget deficit data and is a substantial overstatement in that context.

Overall Accuracy

The statement on sustained surpluses is misleading because the U.S. has continued to run significant overall deficits, even if some months show temporary cash surpluses.
The claim of a $600 billion year-over-year deficit reduction significantly overstates the actual change measured by official deficit data.

Summary: Both parts of Hassett’s statement are inaccurate or misleading when judged against standard federal budget and deficit accounting.

Analyzing the Jobs Report with online BLS tools and AI

2026-01-11T23:39:00.000-08:00

On January 9, 2026, the Bureau of Labor Statistics (BLS) released the Employment Situation Report for December of 2025. Following is the first paragraph of that report:

Both total nonfarm payroll employment (+50,000) and the unemployment rate (4.4 percent) changed little in December, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in food services and drinking places, health care, and social assistance. Retail trade lost jobs.

Shortly later, Stephen Moore posted a tweet on X which stated the following:

Don't believe the headlines calling this a 'weak jobs report.'

The household survey tells the real story:

A record number of Americans working and 200,000 more people joining the workforce.

Moore's claim that "200,000 more people joining the workforce" in December can be checked on the BLS web site as follows:

Go to https://www.bls.gov/
Click on "DATA TOOLS" and then "BLS Popular Series" on the top menu.
In the Employment section, check the checkbox for "Civilian Employment (Seasonally Adjusted) - LNS12000000".
Click the blue "Retrieve Data" button.
In the "Change Output Options", change the From year to 2021, check the "include graphs" checkbox, and click the blue GO button.

The above steps should result in the following output:

This comes from the Household Survey. As can be seen, the table shows 163,760 thousand jobs in November of 2025 and 163,992 thousand jobs in December of 2025. That is an increase of 232 thousand jobs. Now repeat the same steps but for Series CES0000000001, total nonfarm employment:

Go to https://www.bls.gov/
Click on "DATA TOOLS" and then "BLS Popular Series" on the top menu.
In the Employment section, check the checkbox for "Total Nonfarm Employment - Seasonally Adjusted - CES0000000001".
Click the blue "Retrieve Data" button.
In the "Change Output Options", change the From year to 2021, check the "include graphs" checkbox, and click the blue GO button.

The above steps should result in the following output:

This comes from the Payroll Survey. As can be seen, the table shows 159,476 thousand jobs in November of 2025 and 159,526 thousand jobs in December of 2025. That is an increase of just 50 thousand jobs, the number in the first paragraph of the jobs report. Which survey is best for measuring month-to-month job gains and losses? When asked the question, "Which survey is better for measuring month-to-month job gains and losses, the payroll survey or the household survey?, ChatGPT replied:

The payroll survey (Current Employment Statistics) is better for measuring month-to-month job gains and losses.

It has a much larger sample size, lower statistical noise, and is specifically designed to track monthly changes in nonfarm jobs, which is why the BLS uses it for the headline jobs number.

The household survey (Current Population Survey) is more volatile month to month and is better suited for identifying broader trends, turning points, and demographic patterns, not precise monthly job changes.

Answer: the payroll survey.

Asking ChatGPT "What is the sample sizes of the household and payroll surveys?" gives the following reply:

Here are the standard sample sizes used by the U.S. Bureau of Labor Statistics:

Household survey (CPS - Current Population Survey)

About 60,000 households
Represents roughly 110,000 individuals
Conducted monthly by the Census Bureau for the BLS
Measures employment status of people (employed, unemployed, not in labor force)

Payroll survey (CES - Current Employment Statistics)

About 122,000 businesses and government agencies
Covering roughly 666,000 individual worksites
Measures jobs, not people
Produces the headline monthly nonfarm payroll jobs number
Why this matters

The payroll survey's much larger sample is why it is far more reliable for month-to-month job gains and losses.
The household survey's smaller sample makes its monthly changes much noisier, even though it is essential for unemployment and labor force measures.
In short: ~60,000 households vs. ~122,000 employers (666,000 worksites).

This smaller sample size likely has much to do with why the first graph above, from the Household Survey, is much noisier than the second graph, from the Payroll Survey, which is much smoother. Also, note that the graph for the Household Survey often jumps from December of one year to January of the next year. This is due to adjustments to Household Survey population estimates. The most recent adjustment is described at this link. In any case, the noisiness of the Household Survey data can also work against Moore's argument of strong job growth. The Household Survey shows 163,831 thousand jobs in January of 2025 and 163,992 thousand jobs in December of 2025. That's an increase of just 161 thousand jobs in 11 months! The Payroll Survey shows an increase of 473 thousand over those 11 months. That's a relatively weak 43 thousand per month but far better than the 14.6 thousand per month implied by the Household Survey.

From Record Monthly Surplus to the Largest Annual Deficit in 6 Years

2018-10-16T23:25:00.000-07:00

On May 25, 2018, Judy Woodruff interviewed Marc Short, White House Director Of Legislative Affairs, on the PBS Newshour. The video and transcript can be found at this link. At 2:43 in the video, Marc Short states the following:

And, lastly, in April, we had the largest surplus on record in American history. That is a result of the growth and the revenues coming into the federal government because of the tax plan.

READ FULL REPORT

Do the Trump Tax Cuts Mostly Pay for Themselves?

2018-04-12T02:15:00.000-07:00

On April 9, 2018, the Congressional Budget Office released The Budget and Economic Outlook: 2018 to 2028. The next day, the Investor's Business Daily ran an editorial titled It's Official: Trump Tax Cuts Are Boosting Growth And Mostly Paying For Themselves. That editorial begins:

When the Congressional Budget Office released its updated budget forecast, everyone focused on the deficit number. But buried in the report was the CBO's tacit admission that it vastly overestimated the cost of the Trump tax cuts, because it didn't account for the strong economic growth they would generate.

Further on, the editorial states:

The CBO report also makes clear that this faster-growing economy will offset most of the costs of the Trump tax cuts.

In a table buried in the appendix of the CBO report, it shows that, before accounting for economic growth, the tax cuts Trump signed into law late last year would cut federal revenues by $1.69 trillion from 2018-2027.

But it goes on to say that higher rate of GDP growth will produce $1.1 trillion in new revenues. In other words, 65% of the tax cuts are paid for by extra economic growth.

The "table buried in the appendix of the CBO report" is Table A-1, on page 94, the second page of Appendix A. The title of the table is "Changes in CBO’s Baseline Projections of the Deficit Since June 2017". In the section for "Legislative Changes", the table lists the "Total Change in Revenues" from 2018-2027 as -$1.69 trillion. In the section for "Economic Changes", however, it lists the "Total Change in Revenues" from 2018-2027 as $1.088 trillion. This matches the two numbers cited in the editorial above. However, it's not clear from the table that these changes are due to the tax cuts. In fact, the CBO report states the following on page 94:

As a result of legislative changes, CBO has reduced its projections of revenues by $163 billion for 2018 and by $1.7 trillion for the 2018–2027 period. Almost all of that decrease stems from the 2017 tax act.

Regarding economic changes in revenues, the report states the following on page 99:

Revisions to CBO’s economic forecast caused the agency to increase its projections of revenues by $4 billion for 2018 and by $1.1 trillion for the 2018–2027 period. More than half of those changes were driven by the macroeconomic effects of recently enacted legislation—specifically, the 2017 tax act, the Bipartisan Budget Act of 2018, and P.L. 115-120. Updated data for key measures from the national income and product accounts (NIPAs) also led to economic revisions.

Hence, the report says that "almost all of the decrease" in revenues due to legislation is due to the tax cuts but "more than half" of the increase in revenues due to economic changes is due to the tax cuts and two other pieces of legislation. Just before the above statement, the report states:

About half of the economic changes stem from the macroeconomic effects of the 2017 tax act (see Appendix B).

Appendix B is titled "The Effects of the 2017 Tax Act on CBO’s Economic and Budget Projections". On page 129 is the following table:

Table B-3.
Contributions of the 2017 Tax Act to CBO’s Baseline Budget Projections
Billions of Dollars
                                                                                           Total
                                                                                       -------------
                                                                                        2018–  2018–
                                2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028   2022   2028
-------------------------------------------------------------------------------------- ------ ------
                              Effects Without Macroeconomic Feedback*
Effects on the Primary Deficit^  194  281  307  304  263  218  183  164   36  -60  -46  1,349  1,843
Effects on Debt-Service Costs      3    8   17   29   39   48   55   63   68   70   71     97    471
Effects on the Deficit#          197  289  325  333  302  266  238  227  104   10   25  1,445  2,314
                                Effects of Macroeconomic Feedback*
Effects on the Primary Deficit^  -33  -67  -65  -58  -55  -49  -47  -49  -48  -50  -51   -278   -571
Effects on Debt-Service Costs      0    5   12   18   23   27   23   13    3   -4  -11     59    110
Effects on the Deficit#          -33  -61  -53  -41  -31  -22  -24  -36  -44  -54  -62   -219   -461
                            Total Contributions to Baseline Projections
Effects on the Primary Deficit^  160  214  243  246  208  169  136  115  -12 -110  -97  1,071  1,272
Effects on Debt-Service Costs      3   14   29   47   63   74   78   76   71   66   60    156    582
Effects on the Deficit#          164  228  272  292  271  243  214  191   59  -43  -37  1,226  1,854
----------------------------------------------------------------------------------------------------
Source: Congressional Budget Office.
* Macroeconomic feedback refers to the ways in which the act would affect the budget by changing the economy.
^ The primary deficit is the deficit excluding debt-service costs.
# Positive numbers indicate an increase in the deficit; negative numbers indicate a decrease in the deficit.

On page 128, the CBO report explains the table as follows:

The 2017 tax act had significant effects on CBO’s budgetary projections for the 2018–2028 period. The agency took two steps to incorporate those effects into the projections. First, CBO estimated the act’s direct effects, which are the effects on the budget that do not take into account any changes to the aggregate economy. For example, this step incorporated the ways in which the act’s reduction in tax rates will diminish federal revenues through its effects on taxpayers’ behavior. Second, CBO considered macroeconomic feedback—that is, the ways in which the act will affect the budget by changing the overall economy (such as by increasing wages, profits, and interest rates). Incorporating both kinds of effects boosts the projected primary deficit by a cumulative $1.272 trillion over the course of the 11-year period. After debt service too is incorporated, the projected deficit is higher by $1.854 trillion (see Table B-3).

Hence, the CBO report puts the cost of the tax cuts at $1.85 trillion over 10 years, $1.26 trillion more than the $0.59 trillion suggested by the editorial. The CBO report does estimate the cost on the deficit over 10 years to be $1.84 trillion, close to the $1.69 trillion mentioned by the editorial. However, it also lists $0.58 trillion in additional debt-service costs due to the higher debt and somewhat higher interest costs. Also, it lists the full macroeconomic benefits to be $0.57 trillion, over a half trillion dollars less than the $1.1 trillion stated in the editorial. Those differences of $0.15 trillion, $0.58 trillion, and $0.53 trillion add up to the $1.26 trillion difference between the $1.85 trillion cost of the tax cuts given by the CBO report and the $0.59 trillion cost given by the editorial.

The lesson of this is to verify as much as possible any conclusions put forth in an article, especially if those conclusions may be affected by politics and/or the article is an editorial. In my experience, it's not uncommon for the numbers to be correct but for the interpretation of those numbers to be wrong. That is the case here. If possible, one should verify the numbers and attempt to check the conclusions. At the very least, it's instructive to check if the report from which the numbers come states the same or a contrary conclusion. Also, it can be helpful to seek other sources and check their interpretation of the numbers. Googling "Trump Tax Cuts Paying For Themselves CBO Report" (without the quotes) turns up a number of Washington Post article titled "No, tax cuts do not pay for themselves". Many of of the other headlines mention the tax cuts, spending, and trillion dollar deficits. However, an article in "The Hill" is titled "GOP tax law will add $1.9 trillion to debt: CBO" and states many of the numbers from Table B-3 above. It states:

The GOP's signature tax law is projected to increase the national debt by $1.9 trillion between 2018 and 2028, according to a new report by the Congressional Budget Office (CBO).

According to the report, the tax law would cost the government $2.3 trillion in revenues, but economic growth would offset that figure by about $461 billion.

Who Will See Their Taxes Go Up under the Final GOP Tax Bill? (Part 2)

2017-12-23T01:12:00.002-08:00

Taxpayer Examples Cited by Supporters of the Tax Bill

In my last post, I looked at several groups of taxpayers who would pay higher taxes under the new GOP tax bill. The Committee on Rules has posted a Summary of the bill, a Joint Explanatory Statement, and the full bill. Since then, however, it seems like Republican members of Congress are focusing more and more on just a couple of examples that show taxpayers who will receive large tax cuts. For example, a Washington Examiner article quotes Mitch McConnell reading an outline of a possible script for an advertisement that he expects will air:

“Here’s the commercial against Joe Manchin: ‘Head of household, family of four, making $73,000 a year, gets a $2,000 tax reduction. Now maybe Sen. Manchin that doesn’t sound like a lot of money to you, but for me it’s a 58 percent reduction in my taxes; 58 percent,’” McConnell said, playing the role of ad voiceover. “Or Sen. Heitkamp: ‘Maybe $1,300 doesn’t sound like a lot to you, but I’m a single mom with one child making $41,000 a year, and that’s a 73 percent reduction in my tax bill.’”

Searching for 73,000 and 41,000 in the December 19 Congressional Record shows 11 and 7 occurrences of those two examples, respectively. In addition, there's a Twitter hash #2059more for the tax cut calculated for the $73,000 example. In fact, these two examples are the first two of three taxpayer examples that were released in November 21st by the Senate Committee on Finance.

Because of the continued focus on these two examples, it may help to looks at variations of these examples to show taxpayers who will pay higher taxes under the new bill. Following is information for these two examples as generated by the interactive application at this link:

Married, 2 children, 73000 income, standard deduction Names Taxes Released After_Tax 1 Current 2018 3,557.5 69,442.5 2 Final Bill 1,499.0 71,501.0 3 Change -2,058.5 -2059 2,058.5 4 % Change -57.9 3.0	Household, 1 child, 41000 income, standard deduction Names Taxes Released After_Tax 1 Current 2018 1,792.5 39,207.5 2 Final Bill 488.0 40,512.0 3 Change -1,304.5 1,304.5 4 % Change -72.8 3.3
Married, 2 children, 73000 income, standard deduction Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 73,000 73,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -16,600 0 16,600 5 Standard deductions -13,000 -24,000 -11,000 6 Itemized deductions 0 0 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest 0 0 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 43,400 49,000 5,600 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 5,558 5,499 -58 18 Child credit -2,000 -4,000 -2,000 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 3,558 1,499 -2,058 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 3,558 1,499 -2,058	Household, 1 child, 41000 income, standard deduction Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 41,000 41,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions -9,550 -18,000 -8,450 6 Itemized deductions 0 0 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest 0 0 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 23,150 23,000 -150 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 2,792 2,488 -304 18 Child credit -1,000 -2,000 -1,000 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 1,792 488 -1,304 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 1,792 488 -1,304

The above plots show the tax cut that will be received by taxpayers in both examples, in dollars and percentage, for all incomes up to $200,000. You can click on any of the plots above or following to see a fully expanded version of the plot. Red points indicate taxes for which the taxpayer receives a refund under both the current and new laws and black points indicate taxes for which the taxpayer pays taxes under both the current and new laws. The blue points are taxes for which the taxpayer pays taxes under the current law but receives a refund (or pays nothing) under the new law or vice-versa.

As can be seen, the incomes that were selected for the examples provided relatively large tax cuts when judged by percentage. Still, the plots show that all taxpayers with the same characteristics (married couple with 2 children and no deductions or single mother with one child and no deductions) will receive tax cuts under the final tax bill, at least up to an income of $200,000.

Family of Four, Making $73,000 a Year

A natural question is whether there are taxpayers with one or more different characteristics who don't receive tax cuts. The above plots show that varying income, at least up to $200,000, does not reveal any taxpayers who will see their taxes increase. But, as suggested by a prior post, two of the oft-mentioned benefits of the tax bill are the doubling of the standard deduction and child tax credit. What if the taxpayer has characteristics such that they don't benefit from these provisions? The first of the following two examples varies deductions from zero up to $73,000, the total wages for the first Senate example. It assume the deduction to be for home mortgage interest since this is the largest deduction for many families and it's not uncommon for families to spend 35 to 45 percent of pretax income on housing. However, any deductions can be included, as long as they are deductible under both the current and new laws.

The second of the following two examples looks at exactly the same thing as the first example except that it assumes only one child. Following is information for the two examples as generated by same interactive application:

Married, 2 children, 73000 income, 37500 itemized Names Taxes Released After_Tax 1 Current 2018 -110 73,110 2 Final Bill -121 73,121 3 Change -11 -2059 11 4 % Change -10 0	Married, 1 child, 73000 income, 37500 itemized Names Taxes Released After_Tax 1 Current 2018 1,505 71,495 2 Final Bill 1,879 71,121 3 Change 374 -2059 -374 4 % Change 25 -1
Married, 2 children, 73000 income, 37500 itemized Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 73,000 73,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -16,600 0 16,600 5 Standard deductions 0 0 0 6 Itemized deductions -37,500 -37,500 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest -37,500 -37,500 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 18,900 35,500 16,600 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 1,890 3,879 1,989 18 Child credit -2,000 -4,000 -2,000 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax -110 -121 -11 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax -110 -121 -11	Married, 1 child, 73000 income, 37500 itemized Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 73,000 73,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -12,450 0 12,450 5 Standard deductions 0 0 0 6 Itemized deductions -37,500 -37,500 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest -37,500 -37,500 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 23,050 35,500 12,450 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 2,505 3,879 1,374 18 Child credit -1,000 -2,000 -1,000 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 1,505 1,879 374 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 1,505 1,879 374

As can be seen from the plots on the left for the first example, the tax cut received is $2,059 up to a deduction level of $13,000 but then drop sharply to $24,000 and then a bit less sharply to $37,250. This is the deduction level to which the above numbers apply. Hence, with $37,250 in mortgage interest (or some other) deduction, the family's tax cut drops to just 11 dollars. That's an $11 increase in their refund which is why the point is colored red.

The plots on the right for the second example shows that, if the family has only one child, the tax cut is $1,681 (instead of $2,059) up to a deduction level of $13,000 but then drops sharply to just above zero (to $31) at a deduction of $24,000 and reaches a minimum of a $494 tax increase at a deduction of $41,500. That is over half of their income so the above numbers are once again for a deduction of $37,250. At that level, the tax increase is $374, nearly 25 percent.

The first of the following two examples looks at exactly the same thing as the last two examples except that it assumes that the married couple has no children. The second example likewise looks at the same thing except that it assumes that the couple has two dependents who do not qualify for the child credit, for example two children aged 17 or over, possibly in college. Following is information for the two examples as generated by same interactive application:

Married, no children, 73000 income, 37500 itemized Names Taxes Released After_Tax 1 Current 2018 3,128 69,872 2 Final Bill 3,879 69,121 3 Change 752 -2059 -752 4 % Change 24 -1	Married, no children, 2 other dependents, 73000 income, 37500 itemized Names Taxes Released After_Tax 1 Current 2018 1,890 71,110 2 Final Bill 2,879 70,121 3 Change 989 -2059 -989 4 % Change 52 -1
Married, no children, 73000 income, 37500 itemized Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 73,000 73,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions 0 0 0 6 Itemized deductions -37,500 -37,500 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest -37,500 -37,500 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 27,200 35,500 8,300 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 3,128 3,879 752 18 Child credit 0 0 0 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 3,128 3,879 752 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 3,128 3,879 752	Married, no children, 2 other dependents, 73000 income, 37500 itemized Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 73,000 73,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -16,600 0 16,600 5 Standard deductions 0 0 0 6 Itemized deductions -37,500 -37,500 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest -37,500 -37,500 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 18,900 35,500 16,600 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 1,890 3,879 1,989 18 Child credit 0 0 0 19 Other dependent credit 0 -1,000 -1,000 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 1,890 2,879 989 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 1,890 2,879 989

The plots on the left for the first example show that, if the family has no children, the tax cut is $1,304 (instead of $2,059) up to a deduction level of $13,000 but then drops sharply to a tax increase of $347 at a deduction of $24,000 and reaches a minimum of a $992 tax increase at a deduction of $45,500. That is over half of their income so the above numbers are once again for a deduction of $37,250. At that level, the tax increase is $752, about 24 percent.

The plots on the right for the second example show that, if the family has no children but two non-child dependents, the tax cut is $1,059 (instead of $2,059) up to a deduction level of $13,000 but then drops sharply to a tax increase of $592 at a deduction of $24,000 and reaches a minimum of a $989 tax increase at a deduction of $37,500. That is a tax increase of about 52 percent and is shown in the numbers above.

One interesting thing about these two examples is that they both reach about the same minimum ($992 versus $989) even though the second example is the same as the first with two added dependents. This is because each nonchild dependent causes the elimination of a $4,150 personal exemption. Multiplying that by 12 percent (this taxpayer's top marginal rate) gives $498. This is just $2 dollars less than the $500 credit that the taxpayer receives so that credit supplies a net benefit of just about two dollars. In the same way, the $1,000 increase in the child tax credit supplies about a $502 benefit for a taxpayer whose top marginal rate is 12 percent.

Two other number to note are the $13,000 and $24,000 levels of deductions at which the plots change direction above. They are equal to the size of the standard deduction under current law and under the new law, respectively. In any event, the next section deals with the second Senate example, a single mother with one child who makes $41,000 a year.

Single Mother with One Child, Making $41,000 a Year

The first of the following two examples varies deductions from zero up to $41,000, the total wages for the second Senate example. As before, it assume the deduction to be for home mortgage interest but, as before, any deductions can be included, so long as they are deductible under both the current and new laws.

The second of the following two examples looks at exactly the same thing as the first example except that it assumes that the child is 17 or older and does not qualify for the child tax credit. Following is information for the two examples as generated by same interactive application:

Household, 1 child, 41000 income, 19000 itemized Names Taxes Released After_Tax 1 Current 2018 375 40,625 2 Final Bill 368 40,632 3 Change -7 7 4 % Change -2 0	Household, no children, 1 other dependent, 41000 income, 19000 itemized Names Taxes Released After_Tax 1 Current 2018 1,375 39,625 2 Final Bill 1,868 39,132 3 Change 493 -493 4 % Change 36 -1
Household, 1 child, 41000 income, 19000 itemized Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 41,000 41,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions 0 0 0 6 Itemized deductions -19,000 -19,000 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest -19,000 -19,000 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 13,700 22,000 8,300 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 1,375 2,368 993 18 Child credit -1,000 -2,000 -1,000 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 375 368 -7 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 375 368 -7	Household, no children, 1 other dependent, 41000 income, 19000 itemized Tax Plan 2018 Final Bill Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 41,000 41,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions 0 0 0 6 Itemized deductions -19,000 -19,000 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest -19,000 -19,000 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 13,700 22,000 8,300 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 1,375 2,368 993 18 Child credit 0 0 0 19 Other dependent credit 0 -500 -500 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 1,375 1,868 493 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 1,375 1,868 493

The plots on the left for the first example show that the mother with one child and income of $41,000 will receive a tax cut of $1,305 up to a deduction level of $9,500 but then drops sharply to a tax increase of just $7 at a deduction level of $19,000. That represents a tax cut of about 1.9 percent.

The plots on the right for the second example show that, if the child is 17 or older and is not eligible for the child tax credit, the mother will face a tax increase of $493, an increase of nearly 36 percent. This assumes home mortgage interest of $19,000 as before.

The change from a $7 tax cut to a $493 tax increase makes perfect sense since the difference is $500, same as the difference between the child tax credit increase of $1,000 and the dependent credit of $500. Similar to before, the numbers that mark the endpoints of the line segment that heads sharply down are $9,500 and $18,000, the size of the standard deduction under current law and under the new law for a head of household.

Summary

The above examples show that, in the case of the two examples being cited as providing large tax cuts, those tax cuts become tax increases if deductions reach about a third of wages and the children are over 17 and do not qualify for the child tax credit. To be precise, this occurs at about 28 percent (20,500/73,000) for the family of four and at about 37 percent (15,000/41,000) for the single mother. The tax increases in these cases are $989 or 53 percent and $493 or 36 percent, respectively.

A tax increase also occurs at about 35 percent (22,000/73,000) if there is just one child in the family of four (making it a family of three) and at about 30 percent (22,000/73,000) if there are no children (making it a family of two). With a deduction of $37,500, the family of three will see a tax increase of $374 or 25 percent and the family of two will see a tax increase of $752 or 24 percent.

The fact that the level of a taxpayers current deductions can turn an expected tax cut into a tax increase could cause some problems with withholding. An article in Newsday concludes as follows:

For many people, the law renders obsolete the calculations companies use to withhold taxes from their paychecks, potentially leading some workers to not set aside enough for federal taxes and face a penalty. The American Payroll Association is warning of a potential “disaster” as companies wait to update their computer systems to reflect the changes.

Who Will See Their Taxes Go Up under the Final GOP Tax Bill?

2017-12-17T22:52:00.002-08:00

Taxpayer Examples Cited by Supporters of the Tax Bill

On December 15th, the GOP released its final tax plan. The Committee on Rules has posted a Summary of the bill, a Joint Explanatory Statement, and the full bill. In addition, House Speaker Ryan released an article that states that, with this bill, "the median family income of $73,000 will receive a tax cut of $2,059". This has been repeated many times since then, such as here, here, and here. In fact, this example is the first of three taxpayer examples that were released in November 21st by the Senate Committee on Finance. Following is information for this and the second example, as generated by the interactive application at this link:

Example S1 - Family of Four Earning $73,000 Per Year Names Taxes Released After_Tax 1 Current 2018 3,557.50 69,442.50 2 Conference 1,499.00 71,501.00 3 Change -2,058.50 -2059 2,058.50 4 % Change -57.86 2.96	Example S2 - Single Parent with One Child Earning $41,000 Per Year Names Taxes Released After_Tax 1 Current 2018 1,792.50 39,207.50 2 Conference 488.00 40,512.00 3 Change -1,304.50 1,304.50 4 % Change -72.78 3.33
Example S1 - Family of Four Earning $73,000 Per Year Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 73,000 73,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -16,600 0 16,600 5 Standard deductions -13,000 -24,000 -11,000 6 Itemized deductions 0 0 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest 0 0 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 43,400 49,000 5,600 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 5,558 5,499 -58 18 Child credit -2,000 -4,000 -2,000 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 3,558 1,499 -2,058 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 3,558 1,499 -2,058	Example S2 - Single Parent with One Child Earning $41,000 Per Year Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 41,000 41,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions -9,550 -18,000 -8,450 6 Itemized deductions 0 0 0 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes 0 0 0 11 Home mortgage interest 0 0 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 23,150 23,000 -150 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 2,792 2,488 -304 18 Child credit -1,000 -2,000 -1,000 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 1,792 488 -1,304 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 1,792 488 -1,304

The above plots show the tax cut that will be received by taxpayers in both examples, in dollars and percentage, for all incomes up to $200,000. You can click on any of the plots above or following to see a fully expanded version of the plot. As can be seen, the incomes that were selected for the examples provided relatively large tax cuts when judged by percentage. Still, the plots show that all taxpayers with the same characteristics (married couple with 2 children and no deductions or single mother with one child and no deductions) will receive tax cuts under the final tax bill, at least up to an income of $200,000.

Taxpayers Who Have Deductions as Large as the New Standard Deduction

A natural question is whether there are taxpayers with different characteristics who won't all receive tax cuts. As suggested by my prior post, two of the oft-mentioned benefits of the tax bill are the doubling of the standard deduction and child tax credit. What if the taxpayer has characteristics such that they don't benefit from these provisions? The following two examples are for single and married taxpayers who have no children and who currently have deductions equal to the new standard deductions. Under these conditions, the taxpayers will not benefit from either the expanded child credit or the expanded standard deduction. However, they also won't be hurt by any deductions that are being eliminated since they will still get the amount of their deductions through the new standard deduction. Following are the two examples:

Example X1 - Single Person Making $25,000 Per Year with $12,000 in Deductions Names Taxes Released After_Tax 1 Current 2018 885 24,115 2 Conference 1,370 23,630 3 Change 484 -484 4 % Change 55 -2	Example X2 - Married Couple Making $50,000 Per Year with $24,000 in Deductions Names Taxes Released After_Tax 1 Current 2018 1,770 48,230 2 Conference 2,739 47,261 3 Change 969 -969 4 % Change 55 -2
Example X1 - Single Person Making $25,000 Per Year with $12,000 in Deductions Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 25,000 25,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -4,150 0 4,150 5 Standard deductions 0 -12,000 -12,000 6 Itemized deductions -12,000 0 12,000 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes -3,000 -3,000 0 11 Home mortgage interest -9,000 -9,000 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 8,850 13,000 4,150 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 885 1,370 484 18 Child credit 0 0 0 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 885 1,370 484 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 885 1,370 484	Example X2 - Married Couple Making $50,000 Per Year with $24,000 in Deductions Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 50,000 50,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions 0 -24,000 -24,000 6 Itemized deductions -24,000 0 24,000 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes -6,000 -6,000 0 11 Home mortgage interest -18,000 -18,000 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 17,700 26,000 8,300 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 1,770 2,739 969 18 Child credit 0 0 0 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 1,770 2,739 969 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 1,770 2,739 969

As can be seen in the plots, taxpayers in both examples will pay higher taxes if their incomes are below about $43,000 for the single taxpayer and about $85,000 for the married taxpayers. One thing to check, however, is how realistic those deductions are for various income levels. As can be seen in the calculation of the tax cuts above, the deductions were set to real estate taxes of $3,000 and mortgage interest of $9,000 for the single taxpayer and twice that for the married taxpayers filing jointly. These number were derived from taxpayer examples posted at this link by the Tax Foundation. The fifth household uses the example of a $340,000 home financed with a 30-year mortgage with 3.5 percent interest and 20 percent down and an effective property tax rate of 1 percent. This works out to mortgage interest of $9,520 ($340,000 * 0.8 * 0.035) and property tax of $3,400 ($340,000 * 0.01). Assuming a $300,000 home financed with a 30-year mortgage with 3.75 percent interest and 20 percent down will give mortgage interest of $9,000 ($300,000 * 0.8 * 0.0375). Assuming an effective property tax rate of 1 percent on that home will give a property tax of $3,000 ($300,000 * 0.01).

For the married couple, I just assume a $600,000 home with all of the same rates. That gives mortgage interest of $18,000 ($600,000 * 0.8 * 0.0375) and property tax of $6,000 ($600,000 * 0.01). Hence, these two examples could represent homeowners in any state, regardless of whether or not that state has state income taxes. For example, if the taxpayer did pay $1,000 in state income tax but $1,000 less in mortgage interest, the result would be exactly the same. In fact, it would even be the same if that $1,000 were instead for a deduction that has been repealed, say for moving expenses.

As the tables show, both examples result in a 55 percent tax increase. The plots show that for single taxpayers, taxes will increase between incomes of about $13,000 and $42,000 and for married couples, taxes will increase between incomes of about $25,000 and $84,000.

Taxpayers Who Have Deductions Larger than the New Standard Deduction

The results will be generally the same if the taxpayer has more deductions than the new standard deduction. To be precise, the above plots will appear to move to the right by the amount more than the standard deduction that is deductible. That is because the only real change is that the taxpayer's taxable income is lowered by that amount. However, the taxpayer will see a larger increase in taxes if some of those deductions have been repealed. Under the final tax bill, most lower income taxpayers should not have deductions that are repealed. That's because the major deductions (medical, state and local taxes, real estate taxes, mortgage interest, and charity) are still deductible with some limitations. Those limitations should likely not hit lower income taxpayers who have modest homes. For example, the married couple in the second example above could pay an 8% effective state income tax on their income of $50,000 and would just hit but not go over the limitation of $10,000 for combined state income and property tax.

However, repealed deductions could still be a problem for lower income taxpayers if they take any of the following deductions which have been repealed:

Home equity indebtedness
Personal Casualty and Theft Losses
Miscellaneous Itemized Deductions Subject to the 2 Percent Floor including:
- Unreimbursed employee expenses
- Tax preparation expenses
- Safe deposit box rental
- Hobby expenses
- Investment fees and expenses
- Legal expenses
Alimony payments
Moving Expenses

The following two examples are similar to the prior two examples except that the taxpayers have additional deductions ($3,000 for the single taxpayer and $6,000 for the married couple) which have been repealed:

Example X3 - Single Person, $82,000/year, $36,000 Itemized, $3,000 Repealed Deductions Names Taxes Released After_Tax 1 Current 2018 5,366 76,634 2 Conference 6,060 75,940 3 Change 693 -693 4 % Change 13 -1	Example X4 - Married Couple, $128,000/year, $36,000 Itemized, $6,000 Repealed Deductions Names Taxes Released After_Tax 1 Current 2018 10,732 117,268 2 Conference 12,119 115,881 3 Change 1,386 -1,386 4 % Change 13 -1
Example X3 - Single Person, $82,000/year, $36,000 Itemized, $3,000 Repealed Deductions Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 82,000 82,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -4,150 0 4,150 5 Standard deductions 0 0 0 6 Itemized deductions -39,000 -36,000 3,000 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes -13,000 -10,000 3,000 11 Home mortgage interest -26,000 -26,000 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 38,850 46,000 7,150 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 5,366 6,060 693 18 Child credit 0 0 0 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 5,366 6,060 693 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 5,366 6,060 693	Example X4 - Married Couple, $128,000/year, $36,000 Itemized, $6,000 Repealed Deductions Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 128,000 128,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions 0 0 0 6 Itemized deductions -42,000 -36,000 6,000 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes 0 0 0 10 Real estate taxes -16,000 -10,000 6,000 11 Home mortgage interest -26,000 -26,000 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 77,700 92,000 14,300 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 10,732 12,119 1,386 18 Child credit 0 0 0 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 10,732 12,119 1,386 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 10,732 12,119 1,386

As can be seen from the calculation of the taxes, both of the above examples have repealed deductions due to having property taxes above the $10,000 limit. The two examples assume an effective property tax rate of 1.3 percent and 1.6 percent, respectively. This is line with some of the property tax rates shown on this map from the Tax Foundation. The mortgage interest of $26,000 comes from assuming that it has a 30-year mortgage with 3.4667 percent interest and 25 percent down (1,000,000 * 0.75 * 0.034667). Note that paying 25 percent down keeps the debt under the new $750,000 limit.

As the tables show, both examples result in a 13 percent tax increase. The plots show that for single taxpayers, taxes will increase between incomes of about $37,000 and $105,000 and for married couples, taxes will increase between incomes of about $37,000 and $174,000.

Taxpayers Who Live in States with High Income Tax Rates

The above examples look at homeowners because lower and middle income taxpayers who have large deductions tend to be homeowners. Because they don't include state income taxes, they could generally apply to taxpayers in any state. However, states that do have high income tax rates present an additional problem to some middle income and most all high income taxpayers. The following tables and plots show examples for single taxpayers and married couples with incomes up to 2 million dollars:

Example X5 - Single Person with 8 Percent of Income in State and Local Taxes Names Taxes Released After_Tax 1 Current 2018 124,530 345,470 2 Conference 135,990 334,010 3 Change 11,459 -11,459 4 % Change 9 -3	Example X6 - Married Couple with 8 Percent of Income in State and Local Taxes Names Taxes Released After_Tax 1 Current 2018 669,497 1,330,503 2 Conference 670,499 1,329,501 3 Change 1,002 -1,002 4 % Change 0 0
Example X5 - Single Person with 8 Percent of Income in State and Local Taxes Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 470,000 470,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -4,150 0 4,150 5 Standard deductions 0 -12,000 -12,000 6 Itemized deductions -37,600 0 37,600 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes -37,600 -10,000 27,600 10 Real estate taxes 0 0 0 11 Home mortgage interest 0 0 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 428,250 458,000 29,750 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 124,530 135,990 11,459 18 Child credit 0 0 0 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 124,530 135,990 11,459 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 124,530 135,990 11,459	Example X6 - Married Couple with 8 Percent of Income in State and Local Taxes Tax Plan 2018 Conference Change 1 --------------------------- -------- -------- -------- 2 Wages, salaries, tips, etc. 2,000,000 2,000,000 0 3 Tax-deferred contributions 0 0 0 4 Exemptions -8,300 0 8,300 5 Standard deductions 0 -24,000 -24,000 6 Itemized deductions -160,000 0 160,000 7 --------------------------- -------- -------- -------- 8 Medical 0 0 0 9 State and local taxes -160,000 -10,000 150,000 10 Real estate taxes 0 0 0 11 Home mortgage interest 0 0 0 12 Charity 0 0 0 13 Misc. repealed deductions 0 0 0 14 --------------------------- -------- -------- -------- 15 Taxable income 1,831,700 1,976,000 144,300 16 --------------------------- -------- -------- -------- 17 Tax on taxable income 669,497 670,499 1,002 18 Child credit 0 0 0 19 Other dependent credit 0 0 0 20 Parent credit 0 0 0 21 Earned income tax credit 0 0 0 22 --------------------------- -------- -------- -------- 23 Income tax 669,497 670,499 1,002 24 Payroll tax 0 0 0 25 --------------------------- -------- -------- -------- 26 Total tax 669,497 670,499 1,002

The above examples assume an effective state income tax rate of 8 percent. This is in line with some of the state income tax rates shown on this map from the Tax Foundation. Most of the states with top marginal rates above 8 percent are so-called blue states though there is one (Iowa) that is not. In any case, the plot shows that an 8 percent rate results in a single taxpayer having their taxes increase by about 9 percent at an income of $470,000. The increase then starts to become less, reaching about 3 percent at an income of $2 million. A married couple, however, will continue to receive a tax cut until an income of about $2 million at which their tax will increase by just $1,002. The reason for this difference between the effect of the tax cut on single taxpayers and married couples appears to be due to the change in the brackets. For a single taxpayer, the tax rate actually goes up from 33% to 35% between $200,000 and $424,950. For married couples, there is a similar glitch where the tax rate goes up from 33% to 35% but it only goes from $400,000 to $424,950.

At very high incomes, the effect of an 8 percent state income tax converges to about 1.56 percent for both single taxpayers and married couples. By $200 million, the increases are 1.55% and 1.57%, respectively. The reason for the convergence is that, under the current system, a very high income taxpayer will pay about 39.6 percent on 92 percent of their income (after deducting the 8 percent that they pay to the state). That comes out to 36.432 percent of their income. Under the new system, that taxpayer will just pay about 37 percent on ALL of their income. The increase then is 37 divided by 36.432 or about 1.56 percent. If the effective state income tax is 6 percent, then the change in the tax is 37 - 39.6 * 0.94 which equals -0.224 percent, a slight tax cut. In fact, the break-even state income tax rate is 1 - (37/39.6) which equals about 6.57 percent. This likely has much to do with why the upper tax rate was lowered to 37 percent. This serves to nullify the increase in taxes for taxpayers with very high incomes in states with an top income tax rate of 6.57 percent or less. That's even before considering other changes from which such taxpayers may benefit, such as the lower corporate and pass-through tax rates and cuts in the Alternate Minimum Tax and the estate tax.

The above examples look chiefly at homeowners and other taxpayers whose deductions equal or exceed the amount of the current standard deduction and taxpayers in high tax states. Some taxpayers who are in both groups may see an even larger effect. There are many other concerns such as the currently scheduled expiration of most of the individual tax cuts in 2025 and spending cuts which may be forced by increased deficits. But the above examples highlight some of the taxpayers who will see increases in their taxes immediately.

How Big of a Benefit is the Doubling of the Standard Deduction and Child Credit?

2017-12-13T12:10:00.001-08:00

Note: This post has been updated to use the final GOP tax bill.

On December 15th, the GOP released its final tax plan. The Committee on Rules has posted a Summary of the bill, a Joint Explanatory Statement, and the full bill. A fact sheet on the White House web site lists the following points, among others:

The Tax Cuts Act nearly doubles the standard deduction.
- For individuals, the standard deduction will be increased from $6,500 to $12,000.
- For single parents, the standard deduction will be increased from $9,550 to $18,000.
- For married couples, the standard deduction will be increased from $13,000 to $24,000.
The vast majority of American families will now be able to file their taxes on a single page because they lower taxes by claiming the standard deduction.
American families will see their Child Tax Credit doubled to $2,000 per child under age 17.
- Families will receive a new $500 tax credit for dependents age 17 or older.
- The full Child Tax Credit will now be available for families with incomes of up to $200,000 for single households and incomes of up to $400,000 for married households.
- Lower and Middle-Income families will benefit from a 40 percent increase in the refundable portion of the Child Tax Credit.

Effect of the Change in the Brackets

The following tables show the decrease in the tax rates for single, head of household, and married couples filing jointly under the final bill:

          SINGLE FILER                    HEAD OF HOUSEHOLD FILER           MARRIED FILING JOINTLY FILER

   Bracket Current   Final              Bracket Current   Final              Bracket Current   Final
 N   Start    2018    Bill Change     N   Start    2018    Bill Change     N   Start    2018    Bill Change
-- ------- ------- ------- ------    -- ------- ------- ------- ------    -- ------- ------- ------- ------
 1       0    10      10      0.0     1       0    10      10      0.0     1       0    10      10      0.0
 2    9525    15      12     -3.0     2   13600    15      12     -3.0     2   19050    15      12     -3.0
 3   38700    25      22     -3.0     3   51800    15      22      7.0     3   77400    25      22     -3.0
 4   82500    25      24     -1.0     4   51850    25      22     -3.0     4  156150    28      22     -6.0
 5   93700    28      24     -4.0     5   82500    25      24     -1.0     5  165000    28      24     -4.0
 6  157500    28      32      4.0     6  133850    28      24     -4.0     6  237950    33      24     -9.0
 7  195450    33      32     -1.0     7  157500    28      32      4.0     7  315000    33      32     -1.0
 8  200000    33      35      2.0     8  200000    28      35      7.0     8  400000    33      35      2.0
 9  424950    35      35      0.0     9  216700    33      35      2.0     9  424950    35      35      0.0
10  426700    39.6    35     -4.6    10  424950    35      35      0.0    10  480050    39.6    35     -4.6
11  500000    39.6    37     -2.6    11  453350    39.6    35     -4.6    11  600000    39.6    37     -2.6
                                     12  500000    39.6    37     -2.6

The above tables were created by merging the brackets under current law and the Senate bill. The tables and following plots were generated by the interactive application at this link. As can be seen, the new rates are generally lower except for a few brackets (such as $157,500 to $195,450 for single filers) where the tax rate is slightly higher. These would seem to generally be more than compensated by lower rates in the brackets below them. However, the final bill does give single and head of household filers higher rates over all or most of the incomes from $157,500 to $424,950. This can be seen in the following plots:

Clicking on any of the above or following plots to enlarge them to full size. Red points indicate taxes for which the taxpayer receives a refund under both the current and new laws and black points indicate taxes for which the taxpayer pays taxes under both the current and new laws. The blue points are taxes for which the taxpayer pays taxes under the current law but receives a refund (or pays nothing) under the new law or vice-versa.

As can be seen, single and household filers actually see a tax increase in the area around $440,000 due to these higher rates. On the other hand, married filers tend to see progressively larger tax cuts over this entire range. Still, it does appear that single and head of household filers will likewise see gains (though somewhat smaller) up to $160,000.

Effect of the Near Doubling of the Standard Deduction and the Elimination of the Personal Exemption

As stated in the first point from the White House fact sheet, the standard deduction will nearly double, increasing by the amounts listed for single filers, heads of households, and married couples. However, the fact sheet makes no mention of the fact that personal exemptions are being eliminated. Factoring this in, a single taxpayer will lose $4,150 of the $5,500 increase in the standard deduction, resulting in a net gain of just $1,350 (12000-6500-4150). A head of household will lose $4,150 of the $8,450 increase in the standard deduction, resulting in a net gain of $4,300 (18000-9550-4150). Finally, a married couple will lose $8,300 (for 2 exemptions) of the $11,000 increase in the standard deduction, resulting in a net gain of just $2,700 (24000-13000-8300). Hence, the net gain in deductions will be about 20.7 percent (1350/6500 or 2700/13000) rather than the expected 84.6 percent (5500/6500 or 11000/13000) for single and married filers. For head of household filers, the net gain will be a bit larger 45 percent (4300/9550) rather than the expected 88.5 percent (8450/9550).

As mentioned above, the standard deduction will cause a net increase of $1,350, $4,300, and $2,700 for single, head of household, and married filers, respectively. However, this will be an increase in taxable income and will mean a larger dollar tax cut for taxpayers who have a higher top-marginal rate. This can be seen in the following plots:

Effect of the Doubling of the Child Tax Credit and the Elimination of the Child Exemption

The increase in the child tax credit has a similar problem due to the loss of the exemption for each child. For a taxpayer with a new top marginal rate of 22 percent, the loss of a $4,150 exemption will increase their taxes by $913 (4150*0.22), just $87 short of the increase in the child tax credit of $1,000. Hence, that taxpayer will gain just 87 dollars. For the new marginal rates of 10 and 12 percent, the gains will be $585 (1000-4150*0.10) and $502 (1000-4150*0.12), respectively. However, this only applies to single and head of household filers making up to $75,000 and married filers making up to $110,000. Above that, the child credit starts to phase out under current law but not under the Senate bill. This can be seen in the following plots:

Effect of the New $500 Dependent Credit and the Elimination of the Dependent Exemption

The loss of the exemption creates an even bigger problem for dependents who are not children. For each of these dependents, the Senate bill provides a $500 credit. This means that a taxpayer will experience a loss of $500 greater than they would if that dependent were a child. Hence, a taxpayer with a top marginal rate of 22 percent will see a tax increase of $413 (87-500) for each non-child dependent over what they would have seen otherwise. A taxpayer with a top marginal rate of 10 and 12 percent will see small decreases in their taxes of $85 and $2, respectively. At the top marginal rates of 22, 24, 32, 35, and 38.5 percent, it causes tax increases of $413, $496, $828, $953, and $1,098, respectively. These changes in taxes due just to the loss of the exemption and the new $500 credit can be seen in the following plots:

Summary

In summary, the Senate bill causes the following changes:

The change in the brackets cause a general increase in the tax cut except for incomes from $157,500 to $424,950 for single and head of household filers.
The increase in the standard deduction (along with the loss of the taxpayer exemptions) causes net decreases of $1,350, $4,300, and $2,700 in taxable income for single, head of household, and married filers, respectively. This results in tax cuts ranging from $135, $430, and $270 for single, head of household, and married filers with a top marginal rate of 10 percent to about $500, $1,591, $999 for those filers with top marginal rate of 37 percent.
The increase in the child tax credit (along with the loss of the child exemption) causes tax cuts of $585, $502, and $87 for taxpayers with top marginal rates of 10, 12, and 22 percent, respectively. This jumps up to around the full $1,000 after $75,000 for single and head of household filers and after $110,000 for married filers due to the fact that the credit no longer phases out at that level under the Senate bill. However, this then declines to nearly a $1,600 tax increase at the top marginal rate of 37 percent where the credit phases out under the Senate bill.
The new credit for nonchild dependents (along with the loss of the dependent exemption) causes tax cuts of $85, and $2 for taxpayers with top marginal rates of 10, 12 percent, respectively. At the top marginal rates of 22, 24, 32, 35, and 37 percent, it causes tax increases of $413, $496, $828, $953, and $1,036, respectively.

This last item suggests that dependents may cause many taxpayers to have their taxes increase under the Senate bill. The following plots show the effect of declaring one nonchild dependent on the taxes of head of household and married filers:

As can be seen, there are no tax increases except for head of household filers with incomes over $300,000 (caused by the increase in rates above $160,000). This is likely due to the benefit provided by the increase in the standard deduction. The following plots show the same filers with itemized deductions equal to the new standard deduction:

As can be seen, taxpayers now see an increase in taxes up to incomes of about $56,000 for head of household filers and $88,000 for married filers. This is as expected, given the preceding analysis of specific changes in Senate bill. Hence, this analysis aids in finding winners and losers that may not be apparent when simply looking at the assorted taxpayer examples that have been put out by various organizations. In addition, this analysis shows that the benefits of the doubling of the standard deduction and child tax credit is not as large as they appear once the loss of the taxpayer and child exemptions are included. Also, the benefit of the decrease in brackets reverses for incomes from $157,500 to $424,950 for single and head of household filers. Finally, it show that the benefit of the credit for nonchild dependents is more than offset by the loss of the dependent exemption.

The Problems with "Taxpayer Examples" (Part 3)

2017-12-06T01:12:00.000-08:00

On December 4, the House debated and voted on the motion to go to conference with the Senate on the Republican tax reform bill. A transcript of the debate can be found in the Congressional Record and a video can be found at this link. As mentioned here, Kevin Brady had been named the conference chair by Paul Ryan and he spoke many times throughout the debate. In the process, he offered numerous examples of taxpayers who would get a tax cut from the bill. In fact, each example appeared to follow a Democrat speaker and show a family from their district that would get a tax cut. Following are the examples, taken from the Congressional Record. In addition, each example is preceded by the time that it occurred and can be found in the video. The list under the video allows the user to jump to the exact time desired.

1. (0:50:09) Mr. Speaker, I would point out that a family of four in Michigan’s Ninth District will save over $1,700 each and every year.

2. (0:55:31) Mr. Speaker, I would note that the average family of four making $59,000 a year in the 35th District of Texas will see a tax cut of over $1,100.

3. (1:00:20) Mr. Speaker, I would point out that the average family of four in the Fifth District of California will see a tax cut of over $2,370.

4. (1:06:03) Mr. Speaker, I am proud to remind the House that a family of four in Connecticut’s First District will see a tax cut of $3,858 each and every year.

5. (1:11:12) Mr. Speaker, I would note that a family of four in Oregon’s Third District will see tax savings of $2,256.

6. (1:12.53) Mr. Speaker, that family of four in New Jersey’s Ninth District making $90,000 a year, two workers, will see a tax cut of $2,044.

7. (1:14:52) Mr. Speaker, I am pleased to report that the median family of four in New York’s 14th District making $63,000 a year working hard will see a tax cut of $1,251.

8. (1:16:38) Mr. Speaker, I am proud to report that that median family of four with two kids in the Seventh District of Illinois making $73,000 really working hard where every dollar counts will see a tax cut of $1,546.

9. (1:18:31) Mr. Speaker, I am proud to report that that median family of four making $74,000, blue-collar workers in the 26th District of New York, will see a tax cut of $1,562.

10. (1:20:14) Mr. Speaker, I would point out that the median family of four making $65,000 in Alabama’s Seventh District would see a tax cut of $1,311.

11. (1:22:05) Mr. Speaker, I point out that a median family of four with two kids in Washington’s First District will see a tax cut of $5,008.

12. (1:23:43) Mr. Speaker, I would point out that that hardworking family of four in California’s 38th District would see a tax cut of $1,870.

13. (1:25:23) Mr. Speaker, I would point out that that hardworking family of four in the 27th District of California will see a tax cut of $2,249.

14. (1:30:19) Mr. Speaker, I point out that a middle class family making $74,000, in the Fifth District of South Carolina, will see a tax cut of $1,568.

15. (1:36:27) Mr. Speaker, I am proud to report that a median, hardworking, middle class family in the Fifth District of Maryland, will see a tax cut of $4,158.

16. (1:49:42) I would point out that a hardworking middle class family in the 12th District of California will see a tax cut of $5,508.

The following table summarizes these 16 examples:

                                                                                          HOUSE    DIFFERENCE     SENATE
 N          FAMILY DESCRIPTION  CONGRESSIONAL DISTRICT             INCOME      TAX CUT     2018  AMOUNT  PERCENT    2018 
--  --------------------------  --------------------------------  -------  ------------  ------  ------  -------  ------        
 1              family of four  Michigan’s Ninth District                  over $1,700*
 2      average family of four  35th District of Texas            $59,000  over $1,100   1105.5     5.5    0.500  1638.5
 3      average family of four  Fifth District of California               over $2,370
 4              family of four  Connecticut’s First District                    $3,858*
 5              family of four  Oregon’s Third District                         $2,256
 6              family of four  New Jersey’s Ninth District       $90,000       $2,044   2035.5    -8.5   -0.416  2568.5
 7       median family of four  New York’s 14th District          $63,000       $1,251   1225.5   -25.5   -2.038  1758.5
 8       median family of four  Seventh District of Illinois      $73,000       $1,546   1525.5   -20.5   -1.326  2058.5
 9       median family of four  26th District of New York         $74,000       $1,562   1555.5    -6.5   -0.416  2088.5
10       median family of four  Alabama’s Seventh District        $65,000       $1,311   1285.5   -25.5   -1.945  1818.5
11       median family of four  Washington’s First District                     $5,008
12              family of four  California’s 38th District                      $1,870
13              family of four  27th District of California                     $2,249
14         middle class family  Fifth District of South Carolina  $74,000       $1,568   1555.5   -12.5   -0.797  2088.5
15  median middle class family  Fifth District of Maryland                      $4,158
16         middle class family  12th District of California                     $5,508

* each and every year

The first four columns come from Brady's examples. As can be seen, every single one of the first 13 is a "family of four" though two are described as "average" and 5 are described as "median". The last 3 examples are described as "middle class family". It appears that Brady was likely referring to a family of four since the first of the three examples seem to match the numbers for a family of four under the House plan. The remainder of this analysis will assume that the last three examples are for a family of four but there's no way to be sure, especially for the last two.

The last four columns give the tax cuts according to the latest House and Senate plan according to this tax cut calculator. As can be seen, Brady only stated the income for 7 of his 16 examples. It's unclear whether this is an oversight or whether he attempted to use the median or average income for the districts in question. In any case, the tax cuts for the 7 examples for which he does give incomes appear to be much closer to those given by the House plan than the Senate plan. The largest discrepancy is $25.5 and 2.038 percent.

The following plot shows the dollar amount of all tax cuts under the current House plan for incomes under $300,000:

This plot was generated by going to the tax cut calculator, selecting "Example 1 - Family of Four (House)" for "Tax Examples", selecting "Current 2018" and "House 2018" for "Tax Plan 1" and "Tax Plan 2", and setting "Wage Maximum" to 300000. As can be seen, the plot shows tax cuts ranging from about $1,000 to $8,000. This can be used to estimate the incomes for the tax cuts for which Brady provided none. For example, the last tax cut of $5,508 appears to be for an income of about $250,000.

In fact, it happens that all of the tax cuts missing incomes in the table above are in the second and fifth segments of the above plot. For the second and fifth segments, the income can be calculated using the following two formulas, respectively:

2nd segment: income = (taxcut * 100/3) + 22150
5th segment: income = (taxcut * 100/3) + 68833.33

Using this second formula for the last tax cut of $5,508 gives (5508 * 100/3) + 68833 which equals $252,433. Using these formulas to fill in the above table gives the following:

                                                                                          HOUSE    DIFFERENCE     SENATE   HOUSEHOLD INCOME
 N          FAMILY DESCRIPTION  CONGRESSIONAL DISTRICT             INCOME      TAX CUT     2018  AMOUNT  PERCENT    2018    MEDIAN     MEAN
--  --------------------------  --------------------------------  -------  ------------  ------  ------  -------  ------  --------  --------
 1              family of four  Michigan’s Ninth District          80,000  over $1,700*  1735.5    35.5           2268.5   $56,582   $78,160
 2      average family of four  35th District of Texas            $59,000  over $1,100   1105.5     5.5    0.500  1638.5   $48,490   $61,107
 3      average family of four  Fifth District of California      101,200  over $2,370   2371.5     1.5           2904.5   $73,006   $94,695
 4              family of four  Connecticut’s First District      197,500       $3,858*  3860.0     2.0           4916.0   $70,215   $92,139
 5              family of four  Oregon’s Third District            97,350       $2,256   2256.0     0.0           2789.0   $63,231   $83,699
 6              family of four  New Jersey’s Ninth District       $90,000       $2,044   2035.5    -8.5   -0.416  2568.5   $64,964   $91,675
 7       median family of four  New York’s 14th District          $63,000       $1,251   1225.5   -25.5   -2.038  1758.5   $53,512   $70,658
 8       median family of four  Seventh District of Illinois      $73,000       $1,546   1525.5   -20.5   -1.326  2058.5   $54,147   $88,912
 9       median family of four  26th District of New York         $74,000       $1,562   1555.5    -6.5   -0.416  2088.5   $47,358   $64,320
10       median family of four  Alabama’s Seventh District        $65,000       $1,311   1285.5   -25.5   -1.945  1818.5   $34,664   $50,729
11       median family of four  Washington’s First District       235,770       $5,008   5008.1     0.1           6446.8   $91,018  $113,292
12              family of four  California’s 38th District         84,480       $1,870   1869.9    -0.1           2402.9   $66,421   $83,039
13              family of four  27th District of California        97,120       $2,249   2249.1     0.1           2782.1   $71,223   $99,899
14         middle class family  Fifth District of South Carolina  $74,000       $1,568   1555.5   -12.5   -0.797  2088.5   $48,743   $66,232
15  median middle class family  Fifth District of Maryland        207,430       $4,158   4157.9    -0.1           5313.2   $95,442  $109,200
16         middle class family  12th District of California       252,430       $5,508   5507.9    -0.1           7113.2  $105,918  $146,341

* each and every year

As can be seen, some of the calculated incomes are very high with 3 of them over $200,000 and one very nearly equal to it. The last example lists an income of $252,430 for the 12th District of California but the U.S. Census lists the median and mean household income to be $105,918 and $146,341, respectively, for this district. The following shows the corresponding incomes for all four of these high-income districts:

                                                                            HOUSEHOLD INCOME
 N          FAMILY DESCRIPTION  CONGRESSIONAL DISTRICT             INCOME    MEDIAN     MEAN
--  --------------------------  --------------------------------  -------  --------  --------
 4              family of four  Connecticut’s First District      197,500   $70,215   $92,139
11       median family of four  Washington’s First District       235,770   $91,018  $113,292
15  median middle class family  Fifth District of Maryland        207,430   $95,442  $109,200
16         middle class family  12th District of California       252,430  $105,918  $146,341

As can be seen, all four have median and mean incomes far, far less than those implied by Brady's tax cuts. It's therefore unclear why Brady chose them unless it was to increase the reported tax cut. In any event, the table showing all 16 examples above shows that all of the incomes stated or implied by Brady were greater than the median and all but 5 were greater than the mean income reported by the U.S Census for that district.

Likely much more important, however, is the fact all of the examples are for a family of four. Following are the calculation shown on the "Calculation of Taxes" tab for Example 2 above:

Example 1 - Family of Four Making $59,000 Per Year

                      Tax Plan     2018 House 2018   Change
1  --------------------------- --------   -------- --------
2  Wages, salaries, tips, etc.    59000      59000        0
3   Tax-deferred contributions        0          0        0
4                   Exemptions   -16600          0    16600
5          Standard deductions   -13000     -24400   -11400
6          Itemized deductions        0          0        0
7  --------------------------- --------   -------- --------
8                      Medical        0          0        0
9        State and local taxes        0          0        0
10           Real estate taxes        0          0        0
11      Home mortgage interest        0          0        0
12                     Charity        0          0        0
13   Misc. repealed deductions        0          0        0
14 --------------------------- --------   -------- --------
15              Taxable income    29400      34600     5200
16 --------------------------- --------   -------- --------
17       Tax on taxable income   3457.5       4152    694.5
18                Child credit    -2000      -3200    -1200
19      Other dependent credit        0          0        0
20               Parent credit        0       -600     -600
21    Earned income tax credit        0          0        0
22 --------------------------- --------   -------- --------
23                  Income tax   1457.5        352  -1105.5

As can be seen, the tax cut in this case is chiefly due to the increase in the child credit and the standard deduction. Hence, the families that will get the largest tax cuts will tend to be those which have children and which are currently using the standard deduction. It's likely no coincidence that this was the type of family used by Brady in every single one of this 16 examples. This is an obvious example of cherry-picking. To be consistent, Brady should propose that the tax bill be renamed "Tax Cut for the Family of Four using the Standard Deduction Act".

It's important that the Democratic party continue to point to distributional studies of the tax cut such as the recent CBO and JCT studies. However, it would seem that they also need to respond to the taxpayer examples that Republicans continue to mention, verifying that they are correct, calling out mistakes and/or cherry-picking, and coming up with reasonable counterexamples. The distributional studies may be more meaningful and complete in some ways but the taxpayer examples are easier to verify and understand by the media and the public. Hence, both need to be addressed.

The Problems with "Taxpayer Examples"

The Problems with "Taxpayer Examples" (Part 2)

Who Will See Their Taxes Go Up under the House and Senate Plans?

The Problems with "Taxpayer Examples" (Part 2)

2017-11-26T12:44:00.000-08:00

On November 16, the Senate Committee of Finance advanced the "Tax Cuts and Jobs Act" out of committee. Information on the plan is posted here, including a link to Taxpayer Examples. The first two of those examples are for a "Family of four earning $73,000" and a "Single parent with one child earning $41,000". I've created an R Shiny application which can interactively show the tax savings for these two examples and other variations. That application can be accessed at this link.

Selecting "Example 5 - Family of Four (Senate)" in the "Tax Examples" select list causes the following table and plot to be output:

Example 5 - Family of Four Earning $73,000 Per Year

         Names       Taxes          Released
1 Current 2017  3682.50000              3683
2  Senate 2018  1499.00000              1499
3       Change -2183.50000             -2184
4     % Change   -59.29396 nearly 60 percent

The "Taxes" column are the numbers calculated by the application and the "Released" column are the numbers released by the Senate committee for their first example. As can be seen, the numbers are identical (when rounded to the nearest dollar). The plot shows the calculated percent tax cut for this example for all incomes up to $200,000 which have tax cuts up to 100 percent. As can be seen, the tax cut is about 100 percent at about $60,000 (actually $60,509) but is still positive at $200,000 (at about 13 percent). The vertical red line is at $73,000, relatively close to the income with the maximum tax cut shown in the plot.

Selecting "Example 6 - Single Parent, One Child (Senate)" in the "Tax Examples" select list causes the following table and plot to be output:

Example 6 - Single Parent with One Child Earning $41,000 Per Year

         Names       Taxes          Released
1 Current 2017  1865.00000              1865
2  Senate 2018   488.00000               488
3       Change -1377.00000             -1377
4     % Change   -73.83378 nearly 75 percent

The columns are the same as before but now are for the Senate committee's second example. As can be seen, the calculated and released numbers in the table are identical. As before, the plot shows the calculated percent tax cut for this example for all incomes up to $200,000 which have tax cuts up to 100 percent. As can be seen, the tax cut is about 100 percent at about $40,000 (actually $38,915) but is still positive at $200,000 (at about 15 percent). The vertical red line is at $41,000, very close to the income with the maximum tax cut shown on the plot.

There's a problem with the above two examples, however. They are comparing the taxes in 2017 under current law with the taxes in 2018 under the Senate plan. Because certain items like the tax brackets and the standard deduction increase with inflation, taxes tend to go down on a salary which does not increase with inflation. For example, comparing taxes for the above two examples for 2017 and 2018 under current law results in an apparent tax cut of 3.39 and 3.89 percent respectively. This is relatively small but should be accounted for. Hence, following are the results for the two example comparing the taxes in 2018 under current law with the taxes in 2018 under the Senate plan.

Married, 2 children, 0 dependents, 73000 in wages        Household, 1 children, 0 dependents, 41000 in wages
                                                         
         Names       Taxes          Released                      Names       Taxes          Released
1 Current 2018  3557.50000              3683             1 Current 2018  1792.50000              1865
2  Senate 2018  1499.00000              1499             2  Senate 2018   488.00000               488
3       Change -2058.50000             -2184             3       Change -1304.50000             -1377
4     % Change   -57.86367 nearly 60 percent             4     % Change   -72.77545 nearly 75 percent

As can be seen, the change is not great but does make a difference. In any event, the above two plots show a problem with discrete taxpayer examples. Such examples don't show the variation of a tax cut across incomes, even when all of the other parameters are the same. Still, both of these two examples did seem to show tax cuts across incomes, even if the size of the tax cut may vary. Are there examples in which taxpayers don't get a tax cut?

To answer this question, it helps to look at exactly which changes in the law lead to the tax cuts. The "Calculation of Taxes" tab shows the actual calculation of taxes under the different plans. Following is the output for the two examples:

Example 5 - Family of Four Earning $73,000 Per Year             Example 6 - Single Parent with One Child Earning $41,000 Per Year
                                                                
                      Tax Plan     2018 Senate 2018   Change                          Tax Plan     2018 Senate 2018   Change
1  --------------------------- --------    -------- --------    1  --------------------------- --------    -------- --------
2  Wages, salaries, tips, etc.    73000       73000        0    2  Wages, salaries, tips, etc.    41000       41000        0
3                   Exemptions   -16600           0    16600    3                   Exemptions    -8300           0     8300
4          Standard deductions   -13000      -24000   -11000    4          Standard deductions    -9550      -18000    -8450
5          Itemized deductions        0           0        0    5          Itemized deductions        0           0        0
6  --------------------------- --------    -------- --------    6  --------------------------- --------    -------- --------
7                      Medical        0           0        0    7                      Medical        0           0        0
8        State and local taxes        0           0        0    8        State and local taxes        0           0        0
9            Real estate taxes        0           0        0    9            Real estate taxes        0           0        0
10      Home mortgage interest        0           0        0    10      Home mortgage interest        0           0        0
11                     Charity        0           0        0    11                     Charity        0           0        0
12   Misc. repealed deductions        0           0        0    12   Misc. repealed deductions        0           0        0
13 --------------------------- --------    -------- --------    13 --------------------------- --------    -------- --------
14              Taxable income    43400       49000     5600    14              Taxable income    23150       23000     -150
15 --------------------------- --------    -------- --------    15 --------------------------- --------    -------- --------
16       Tax on taxable income   5557.5        5499    -58.5    16       Tax on taxable income   2792.5        2488   -304.5
17                Child credit    -2000       -4000    -2000    17                Child credit    -1000       -2000    -1000
18      Other dependent credit        0           0        0    18      Other dependent credit        0           0        0
19               Parent credit        0           0        0    19               Parent credit        0           0        0
20    Earned income tax credit        0           0        0    20    Earned income tax credit        0           0        0
21 --------------------------- --------    -------- --------    21 --------------------------- --------    -------- --------
22                 Amount owed   3557.5        1499  -2058.5    22                 Amount owed   1792.5         488  -1304.5

As can be seen, the one increase in taxes is Exemptions. This is because the Senate bill eliminates the deduction for exemptions. The exemption amount in current 2018 law is $4,150. Hence, a family of four loses $16,600 (4 * $4,150) and a single parent with one child loses $8,300 (2 * $4,150) from the elimination of this deduction.

The two major decreases in taxes is Standardized deductions and the Child credit. This is because the former almost doubles and the latter does double. This leads naturally to the question of how taxpayers who don't benefit from these two changes in the tax law would do. The latter would obviously be taxpayers who have no eligible children and the former would be taxpayers who itemize deductions. In addition, taxpayers who have many non-child exemptions would seem to be worse off by the new tax law.

These cases are covered in my prior post. Examples A and B look at taxpayers who have no child credits and who itemize up to the approximate level of the new standard deduction. Examples C and D look at such taxpayers who also have an additional several thousand dollars of deductions which have been eliminated. Examples E and F look at taxpayers who pay 10 percent of their income in state and local taxes. Finally, Examples G through J look at taxpayers who have one or more non-child dependents.

As described there, Examples A through D show taxpayers with lower incomes who will end up paying higher taxes immediately whereas Examples E and F show taxpayers with higher income who will end up paying more. Examples G through J do not show any taxpayers with non-child dependents (but who use the standard deduction) who will pay higher taxes. This is likely because the Senate bill provides a credit of $500 for such dependents which appears to make up for the loss of the exemption.

As mentioned in my prior post, it should be noted that these examples don't include a number of major components that should greatly favor taxpayers with higher income. Those components include repeal of the alternative minimum tax, a large tax cut for some “pass-through” income of individual business owners, and the large corporate tax cut. There's also the repeal of the estate tax which will chiefly benefit taxpayers of great wealth, if not great income.

Still, the above information shows the severe limitations of the discrete examples released by the Senate Committee of Finance. It also shows how the examples can be examined over all incomes and additional examples can be found and examined to obtain a broader view of the effect of the Senate tax plan will have on taxpayers. Those who release discrete examples would do well to likewise broaden their analysis. At the very least, they would do well to show the calculations that lead to their results. This would serve to both verify the calculations and to show which tax measures are having the greatest effect on the results.

The Problems with "Taxpayer Examples"

The Problems with "Taxpayer Examples" (Part 3)

Who Will See Their Taxes Go Up under the House and Senate Plans?

2017-11-16T00:13:00.000-08:00

As shown at the end of my last post, Example 4 released by the House Ways and Means Committee gives a tax increase if the wages are reduced to $45,000. This reveals an important point. It isn't just taxpayers who lose their deduction for medical or state and local taxes who can end up paying more in taxes. That appears to also occur for lower-wage workers who have no children but already have as many itemized deductions as the new standard deductions, even when they can still take those deductions. The following tables and plots show the change in taxes for such taxpayers, single and married, under the House and Senate tax bills. They were generated by selecting Examples A and B in the interactive application at this link.

Example A - Single Person Making $25,000 Per Year with $12,000 in Deductions             Example B - Married Couple Making $50,000 Per Year with $24,000 in Deductions

House                              Senate                                                House                              Senate
         Names      Taxes                   Names      Taxes                                      Names      Taxes                   Names       Taxes
1 Current 2018  885.00000          1 Current 2018  885.00000                             1 Current 2018 1770.00000          1 Current 2018 1770.00000
2   House 2018 1236.00000          2  Senate 2018 1369.50000                             2   House 2018 2472.00000          2  Senate 2018 2739.00000
3       Change  351.00000          3       Change  484.50000                             3       Change  702.00000          3       Change  969.00000
4     % Change   39.66102          4     % Change   54.74576                             4     % Change   39.66102          4     % Change   54.74576

As can be seen in the first table, a single person making $25,000 per year and having $12,000 in deductions (same as the new standard deduction in the Senate plan) will now have to pay nearly 40 percent more in taxes under the House plan. The result is the same however the $12,000 is divided up among deductions, regardless of whether or not those deductions are still allowed. As can be seen in the third table, a married couple making $50,000 per year and having $24,000 in deductions (same as the new standard deduction in the Senate plan) will now have to pay nearly 40 percent more in taxes under the House plan. As before, the result is the same however the $24,000 is divided up among deductions. In fact, it's interesting to note that the taxes in this table are exactly double the taxes in the prior table and the percent change in taxes is the same 39.66 percent increase. This is because a number of other key variables like income and standard deduction are also exactly double.

The second and fourth tables and the last two plots show the change in taxes under the Senate plan. As can be seen, both single and married taxpayers get an even larger tax increase of over 54 percent under this plan. The main reason for the difference is chiefly that the House plan has a family credit of $300 that applies to the parents whereas the Senate plan has a non-child dependent credit of $500 which does NOT apply to the parents. Hence, it's important to note that the $300 credit in the House plan covers the parents but the $500 credit in the Senate plan does not. An additional concern, however, is that the $300 House credit is currently scheduled to expire in 5 years. Selecting "House 2018 w/o Family Credits" for Tax Plan 2 shows that taxes increase over 73 percent for both Examples A and B in this case. The chief reason for this is likely that the Senate plan retains the 10 percent bracket while the House plan raises it to 12 percent.

What happens if the taxpayer currently has deductions that are higher than the new standard deduction? If the additional deductions have not been repealed, their should be little difference as the taxpayer can continue to deduct them. The result is very much different if those additional deductions have been repealed. The following tables and plots show the change in taxes for such taxpayers, single and married, under the House and Senate tax bills. For single taxpayers, they show the effect of $3,000 ($2,800 for the House) of additional repealed deduction and for married taxpayers, they show the effect of $6,000 ($5,600 for the House) in additional repealed deductions. The tables and plots were generated by selecting Examples C and D in the same interactive application.

Example C - Single Person Making $25,000 Per Year with $15,000 in Repealed Deductions    Example D - Married Couple Making $50,000 Per Year with $30,000 in Repealed Deductions

House                              Senate                                                House                              Senate
         Names     Taxes                    Names     Taxes                                       Names     Taxes                    Names      Taxes
1 Current 2018  585.0000           1 Current 2018  585.0000                              1 Current 2018 1170.0000           1 Current 2018 1170.0000
2   House 2018 1236.0000           2  Senate 2018 1369.5000                              2   House 2018 2472.0000           2  Senate 2018 2739.0000
3       Change  651.0000           3       Change  784.5000                              3       Change 1302.0000           3       Change 1569.0000
4     % Change  111.2821           4     % Change  134.1026                              4     % Change  111.2821           4     % Change  134.1026

As can be seen in the first table, a single person making $25,000 per year and having $15,000 in deductions ($2,800 more than the new standard deduction in the House plan) will now have to pay over 111 percent more in taxes under the House plan. The result is the same however the $15,000 is divided up among deductions, as long as they include at least $2,800 in deductions that are being repealed. As can be seen in the third table, a married couple making $50,000 per year and having $30,000 in deductions ($5,600 more than the new standard deduction in the House plan) will now have to pay over 111 percent more in taxes under the House plan. As before, the result is the same however the $30,000 is divided up among deductions, as long as they include at least $5,600 in deductions that are being repealed. As before, it's interesting to note that the taxes in the third table are exactly double the taxes in the first table and the percent change in taxes is the same 111.28 percent increase. Again, this is because a number of other key variables like income and standard deduction are also exactly double.

The second and fourth tables and the last two plots show the change in taxes under the Senate plan. As can be seen, both single and married taxpayers get a larger tax increase of over 134 percent under this plan. As before, the main reasons for the difference from the House plan is chiefly that the $300 Family Credit in the House applies to parents but the $500 Non-child Dependent Credit in the Senate does not.

The prior examples look at cases with the same deduction across all income levels. State and local taxes, of course, will be more related to a percentage of the taxpayer's income. The following tables and plots show the change in taxes for taxpayers paying 10 percent of their income in state and local taxes, under the House and Senate tax bills. The tables and plots were generated by selecting Examples E and F in the same interactive application. For these examples, the maximum wage is automatically increased from $200,000 to $2,000,000 since this negative effects of this change mainly effects taxpayers with higher incomes. Also, the specific wages for the tables were chosen to be close to local minimums shown in the plots.

Example E - Single Person with 10 Percent of Income in State and Local Taxes             Example F - Married Couple with 10 Percent of Income in State and Local Taxes
                     ($470,000 in wages)                                                                      ($530,000 in wages)
      
House                              Senate                                                House                              Senate
         Names        Taxes                 Names        Taxes                                    Names        Taxes                 Names        Taxes
1 Current 2018 121290.75000        1 Current 2018 121290.75000                           1 Current 2018 1.302715e+05        1 Current 2018 1.302715e+05
2   House 2018 134080.00000        2  Senate 2018 136796.00000                           2   House 2018 1.386600e+05        2  Senate 2018 1.340920e+05
3       Change  12789.25000        3       Change  15505.25000                           3       Change 8.388500e+03        3       Change 3.820500e+03
4     % Change     10.54429        4     % Change     12.78354                           4     % Change 6.439244e+00        4     % Change 2.932721e+00

As can be seen in the first table, a single person making $470,000 per year and paying 10 percent of their wages in state and local taxes will now have to pay 10.54 percent more in taxes under the House plan. The second table shows that this increases to be 12.78 percent under the Senate plan. The reason for the difference appears to be slightly more favorable tax brackets for a single taxpayer with those wages in the House bill. In any case, the first plot shows that the increase in taxes continues through a 2 million dollar income at about 10 percent under the House bill. The third plot shows that the increase in taxes through a 2 million dollar income becomes slightly smaller under the Senate bill. This appears to be due to the cut in rates from 39.6 to 38.5 percent under the Senate bill for incomes over $500,000.

As can be seen in the third table, a married couple making $530,000 per year and paying 10 percent of their wages in state and local taxes will now have to pay 6.44 percent more in taxes under the House plan. The fourth table shows that this decreases to 2.93 percent under the Senate plan. The reason for the difference appears to be slightly more favorable tax brackets for a married couple with those wages in the Senate bill. In any case, the increase in taxes is 6.79 and 4.45 percent at a 2 million dollar income under the House and Senate bills, respectively, according to the application. As can be seen in second and fourth plots, these increases become close to zero (a tax increase of 1.6 percent and a tax cut of 2.8 percent according to the application) at a 1 million dollar income. This upward bulge at 1 million dollars appears to be due to the fact that both plans increase the income at which the tax bracket starts from $470,700 to 1 million dollars.

A final concern is the effect of the tax plans on non-child dependents. Both plans benefit taxpayers with children in that the child credit is increasing under both. The effect on non-child dependents is less clear, however. This is because both plans eliminate the Exemptions but provide a credit to compensate. The following tables and plots show the change in taxes for single taxpayers with one non-child dependent and married couples with two non-child dependents, under the House and Senate tax bills. The tables and plots were generated by selecting Examples G and H in the same interactive application.

Example G - Single Person Making $25,000 Per Year with 1 Non-Child Dependent             Example H - Married Couple Making $50,000 Per Year with 2 Non-Child Dependents

House                              Senate                                                House                              Senate
         Names      Taxes                   Names      Taxes                                      Names      Taxes                   Names      Taxes
1 Current 2018 1053.75000          1 Current 2018 1053.75000                             1 Current 2018 2107.50000          1 Current 2018 2107.50000
2   House 2018  936.00000          2  Senate 2018  869.50000                             2   House 2018 1872.00000          2  Senate 2018 1739.00000
3       Change -117.75000          3       Change -184.25000                             3       Change -235.50000          3       Change -368.50000
4     % Change  -11.17438          4     % Change  -17.48517                             4     % Change  -11.17438          4     % Change  -17.48517

As can be seen from the plots, both tax plans provide tax cuts for these two cases for all incomes up through at least $200,0000. However, the Family Credit of $300 under the House plan is currently scheduled to expire in 5 years. For this reason, it makes sense to look at the House Plan without Family Credits. It also makes sense to look at the effect of the tax plans on families with additional non-child dependents since these families exist. The following tables show the effect of the tax plans on single taxpayers with 1 to 3 non-child dependents and on married couples with 1 to 6 non-child dependents.

Example G - Single Person Making $25,000 Per Year with N Non-Child Dependent             Example H - Married Couple Making $50,000 Per Year with N Non-Child Dependents

House                                     Senate                                         House                                    Senate

   Non-Child   Tax Cut(-)   w/o Family       Non-Child   Tax Cut(-)                         Non-Child   Tax Cut(-)  w/o Family       Non-Child   Tax Cut(-)
  Dependents  or Increase      Credits      Dependents  or Increase                        Dependents  or Increase     Credits      Dependents  or Increase
           1    -11.17438     45.76512               1    -17.48517                                 1    -20.43956    12.52747               1    -17.98535
           2      5.123967   153.8843                2    -38.92562                                 2    -11.17438    45.76512               2    -17.48517
           3     76.84211    708.4211                3   -168.6842                                  3     -3.261538   89.04615               3    -23.75385
                                                                                                    4      5.123967  153.8843                4    -38.92562
                                                                                                    5     22.26415   286.4151                5    -69.93711
                                                                                                    6     76.84211   708.4211                6   -168.6842

As can be seen in the first and third tables, elimination of the Family Credit causes tax cuts to become tax increases in the House bill. These increases get larger with additional non-child dependents. With the Family Credits, the House bill provides a tax cut for a single payer with one non-child dependent and for a married couple with up to 3 non-child dependents. However, additional non-child dependents beyond this cause the tax cuts to become tax increases.

Under the Senate bill, both single and married taxpayers appear to get a tax cut with any number of non-child dependents. In fact, the percentage of the tax cut grows as the number of non-child dependents grow. This would suggest that the $500 Family Credit in the Senate bill is large enough to make up for the loss of the exemption but the $300 Family Credit in the House bill is not. This actually makes sense since the exemption amount for 2018 is $4,150. Multiplying this by the 12 percent rate paid by the above examples gives $498. Hence, the House bill $300 Family Credit in the House bill is far too small to compensate for the loss of the exemption but the $500 Family Credit in the Senate bill is large enough. The brackets in the Senate bill also help in that the first $9,525 for single taxpayers and $19,050 for married taxpayers is taxed at 10 percent.

Example I was created from Example G by increasing the number of non-child dependents from 1 to 2. Similarly, Example J was created from Example H by increasing the number of non-child dependents from 2 to 4. The following tables and plots were generated by selecting these two new examples in the same interactive application.

Example I - Single Person Making $25,000 Per Year with 2 Non-Child Dependent             Example J - Married Couple Making $50,000 Per Year with 4 Non-Child Dependents

House                              Senate                                                House                              Senate
         Names      Taxes                   Names      Taxes                                      Names       Taxes                  Names      Taxes
1 Current 2018 605.000000          1 Current 2018  605.00000                             1 Current 2018 1210.000000         1 Current 2018 1210.00000
2   House 2018 636.000000          2  Senate 2018  369.50000                             2   House 2018 1272.000000         2  Senate 2018  739.00000
3       Change  31.000000          3       Change -235.50000                             3       Change   62.000000         3       Change -471.00000
4     % Change   5.123967          4     % Change  -38.92562                             4     % Change    5.123967         4     % Change  -38.92562

As mentioned in my prior post, the biggest concern raised by the House bill is likely the higher taxes that they represent to some lower income taxpayers in the first year and to many more lower income taxpayers in future years. The Senate bill has similar problems.

In any event, the above tables and plots do show several cases in which certain groups of taxpayers will immediately pay higher taxes. The plots for Examples A and B show that taxpayers who currently have deductions as large as the new standard deductions (about $12,000 for single and $24,000 for married) will likely pay more if their incomes are below about $37,500 for single and $75,000 for married. For the Senate, these incomes look to be closer to $40,000 and $80,000. The plots for Examples C and D show that taxpayers with the above-mentioned incomes that have additional deductions that are expiring on the order of $3,000 for single and $6,000 for married will see tax increases under both plans. The plots for Example E and F show that taxpayers with state and local income taxes that are 10 percent of their income will see tax increases above about $250,000 for single taxpayers. For married taxpayers, the tax increases will occur above incomes of about $350,000 for the House plan and $500,000 for the Senate plan. Example I and J and the preceding tables show that single taxpayers with two or more non-child dependents and married taxpayers with 4 or more non-child dependents will see tax increases. Examples I and J and the preceding tables show that some single taxpayers with two or more non-child dependents and married taxpayers with 4 or more non-child dependents will see tax increases under the House plan. Those taxpayers will have lower incomes, between about $25.000 and $30,000 for single and between about $50,000 and $60,000 for married. Under the Senate plan, however, these taxpayers will all see tax cuts.

It should be noted that these examples don't include a number of major components that should greatly favor taxpayers with higher income. As can be seen in this article, those components include repeal of the alternative minimum tax, a large tax cut for some “pass-through” income of individual business owners, and the large corporate tax cut. There's also the repeal of the estate tax which will chiefly benefit taxpayers of great wealth, if not great income. Hence, it would seem very possible that both plans are heavily tilted to those with high incomes and/or wealth. In any event, the examples show that there are a number of lower-income taxpayers who will see their taxes increase. There are also a number of higher-income taxpayers who will see their taxes increase due to the elimination of the deduction for state and local income taxes.

The Problems with "Taxpayer Examples"

The Problems with "Taxpayer Examples" (Part 2)

The Problems with "Taxpayer Examples" (Part 3)

The Problems with "Taxpayer Examples"

2017-11-06T12:47:00.002-08:00

On November 2, a press release from the office of Speaker Paul Ryan announced the introduction of the Tax Cuts and Jobs Act. It begins as follows:

Today, House Speaker Paul Ryan (R-WI), Ways and Means Committee Chairman Kevin Brady (R-TX), and other members of House leadership and the Ways and Means Committee introduced the Tax Cuts and Jobs Act—bold legislation to overhaul America’s tax code for the first time in 31 years. With this bill, a typical middle-income family of four, earning $59,000 (the median household income), will receive a $1,182 tax cut.

At the end of the release is a link to descriptions of this and several other examples of how the proposed tax cuts would save money for various types of taxpayers. I've created an R Shiny application which can interactively show the tax savings for the first four examples and other variations. That application can be accessed at this link.

Selecting "Example 1" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017  1582.50000     1582
2   House Bill   400.00000      400
3       Change -1182.50000    -1182
4     % Change   -74.72354

The second column shows the calculated taxes and the third column shows the taxes reported in the press release. As can be seen in the table, they are almost identical. The plot, on the other hand, shows the percent taxcut for the example but does so for all incomes from $0 to $200,000 with the example's income denoted by a red vertical line. As can be seen, this income has one of the higher tax cuts among those displayed.

Selecting "Example 2" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017  -670.54660         
2   House Bill -1276.79660  < -1000
3       Change  -606.25000   < -700
4     % Change    90.41132         

Note: Taxes for both plans include an EITC of $1536.7966 (using the 2017 formula)

As can be seen in the third column of the table, the press release was somewhat vague about the tax numbers for this example, stating that "Cindy will receive a tax refund of over $1,000" which is "over $700 larger than the refund she receives today. However, the second column shows her paying taxes in both cases, not getting a refund. The $1277 tax refund for the House Bill can be verified by the following calculation:

($30,000 - $12,000) * 0.12 - $1600 - $300 - $1537 = -$1277

In this calculation, $12,000 is the standard deduction for single taxpayers, 0.12 is the 12% tax rate, $1,600 is the child credit for the child, and $300 is the family credit for the mother. Finally, the $1537 is the Earned Income Tax Credit (EITC) as calculated using the 2017 formula.

Hence, the figure for the House Bill refund is "over $1,000" but it is just $606 more than the current refund, not "over $700 larger than the refund she receives today". To my knowledge, the House Bill has not changed how EITC is calculated and is using the 2017 formula. In any case, $606 rather than "over $700" is a relatively small disagreement.

Selecting "Example 3" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017  5173.75000     5173
2   House Bill  4020.00000     3872
3       Change -1153.75000    -1301
4     % Change   -22.30007

As can be seen from the table, the numbers for the Current 2017 taxes do match but the calculation for the House Bill taxes is $148 greater than the releases figure. The $4,020 figure can be verified by the following calculation:

($48,000 - $12,000) * 0.12 - $300 = $4,020.

Hence, the $3,872 figure appears to be in error. Unlike the prior two examples, however, the plot shows that the income of $48,000 provides among the lower tax cuts for incomes under about $60,000.

Finally, selecting "Example 4" in the "Tax Examples" select list causes the following table and plot to be output:

         Names       Taxes Released
1 Current 2017 12180.00238    12180
2   House Bill 10450.00000    11050
3       Change -1730.00238    -1130
4     % Change   -14.20363

The press release specifies that the taxpayers in this example "will pay $8,400 in mortgage interest and $6,900 in state and local property taxes". However, it does not specify how much they paid in state and local taxes despite stating that they were in a "high tax state". For this reason, I calculated that paying 7.64347 percent of their income in state and local taxes would have provided them with the deduction to achieve the $12,180 figure for Current 2017 taxes given in the press release. With no deduction for state and local taxes, their taxes would have been $14,377.50.

As can be seen from the table, the calculated taxes for the House Bill is $10,450, exactly $600 less than the $11,050 figure given in the press release. This suggests that the figure in the press release may have been calculated without including the family credit of $300 per person. This can be checked by selecting "House Bill w/o Family Credits" in the "Tax Plan 2" select list. In that case, the following table and plot are output:

                          Names        Taxes Released
1                  Current 2017 12180.002375    12180
2 House Bill w/o Family Credits 11050.000000    11050
3                        Change -1130.002375    -1130
4                      % Change    -9.277522

Now, the calculated taxes match those in the press release. Also, the plot shows that the income of $115,000 has about the highest tax cut among those displayed.

The selection of "House Bill w/o Family Credits" is appropriate for another reason. A Washington Post article points out that the "new Family Flexibility Credit of $300 for each tax filer and another $300 for a spouse" expires after five years. It links to an analysis by David Kamin, a tax law professor at New York University which goes into more details. It shows that, because of this and other provisions in the House Bill tax bill, the tax cut shown in the first example would turn into a tax hike over current law in 2024 and beyond.

The above two plots show something else that's interesting. In the fourth example, the House Bill represent a tax hike for some lower income taxpayers in the first year. For example, selecting "Example 4" and changing "Wages, salaries, tips, etc." to 45000 causes the following table to be output:

         Names       Taxes Released
1 Current 2017 1816.043850    12180
2   House Bill 1920.000000    11050
3       Change  103.956150    -1130
4     % Change    5.724319

Hence, the House Bill represent a 5.7 percent tax increase in this case. Of course, the 7.64347 percent of income for state and local taxes may be a bit high for this income level. Still, you can move this number to "Medical and dental expenses (% over 10% of income)" and set state and local taxes to 0 and get the same result. Or, alternately, you can set both medical and state & local taxes to zero, set "Charitable contributions" to $3,440 and get about the same result.

The biggest concern raised by the House Bill bill is likely the higher taxes that they represent to some lower income taxpayers in the first year and to many more lower income taxpayers in future years. Also, the above plots show that it is helpful to look at taxpayer examples over broad ranges of income. Still, it is very concerning that the examples released by the office of Speaker Paul Ryan (which came from the Committee of Ways and Means) appear to contain a number of errors. This suggests that, even for something as seemingly simple as the calculation of taxes under various plans, publications should show their work.

The Problems with "Taxpayer Examples" (Part 2)

Who Will See Their Taxes Go Up under the House and Senate Plans?

Will the Fed selling Treasuries affect interest rates?

2017-04-25T22:55:00.002-07:00

On April 5, it was reported that the Federal Reserve wants to start unwinding the $4.5 trillion in bonds on its balance sheet this year. This revelation came from a summary of the Federal Open Market Committee meeting held in March. The composition of the Fed's balance sheet can be seen in the following chart:

Note: In the following charts, click on the chart to see its data and sources.

As can be seen from the purple area in the chart, about 2.5 of the 4.5 trillion in assets are Treasuries. Also visible is that these levels have remained stable since the end of 2014, when QE3 ended. In any event, there has been much discussion on what will happen when the Fed starts selling its Treasuries. More specifically, who will step in and buy the Treasuries that the Fed is selling plus any additional debt being created? To judge this, it helps to look at how the holders of Treasuries have changed over time. The following chart shows the holders of Treasury securities since 1970:

As stated below the table on this page, this includes marketable and nonmarketable Treasury securities held by the public (net of premiums and discounts) and Treasury securities held by federal government employee retirement funds. Hence, it does not include the $2.8 trillion of special-issue treasuries held by the Social Security trust fund. In any event, it's worth noting how the total value of Treasuries has increased sharply since the financial crisis. Hence, there is likely to be a great deal of new Treasuries that need to be bought in addition to those being sold by the Fed.

The chart does show that the value of Treasuries held by individuals and mutual funds increased sharply after the 2008 financial crisis. It would seem likely that this was in response to the fact that Treasuries were one of the few asset classes that did not go down sharply during the crisis. The value of Treasuries held by banking institutions also increased somewhat, possibly due to the improvement in their balance sheets. Treasuries held by government (state and local) and insurance companies seemed to remain fairly stable. Pension funds (including government retirement funds) did increase somewhat but were already major holders of Treasuries. Of course, as shown in the first chart in this post, the value of Treasuries held by the Fed increased sharply starting in 2011.

The one other major holder of Treasuries were foreign holders and they likewise can be seen to have increased after the crisis. The composition of this group can be seen in the following chart:

As can be seen, Japan and Mainland China are the two countries with the largest holdings of Treasuries at just over $1 trillion each. The chart shows that the holdings of both countries have decreased over the past three years. The next two largest holdings are in Ireland and the Cayman Islands. This may initially seem surprising but the reason is that both are regional financial centers. The holdings in both of those countries have increased sharply since the financial crisis. Finally, the olive-colored line shows that the holding of all other countries have remained about the same over the past two years. As a result, the blue line at the top shows that the holdings of all countries has decreased slightly over the past two years.

Judging from the above chart, it would not seem that foreign holders of Treasuries can be counted on to buy many of the new Treasuries being created or sold by the Fed. One exception would be if those Treasuries pay higher interest rates. Another exception might be if there is another global financial crisis and U.S. Treasuries are seen as a safe harbor. The same may be true for Treasuries bought by individuals and mutual funds. Higher interest rates and/or a major market correction could motivate more investors to buy Treasuries.

There is no agreement on the effect of all this on future interest rates. For example, one blog suggests that "[i]n addition to actual rate hikes, this would put further upward pressure on interest rates, and downward pressure on bond prices." However, another blog reminds readers that "[a]s the Fed ceased QE1 and all economists knew rates must rise...rates shocked 100% of economists and fell by a third." It concludes "I don't think the Federal Government nor the Federal Reserve are about to let a "so called free-market" determine the yields paid on America's debt." Of course, the Federal Government and Federal Reserve may not be able to do anything to avoid higher interest rates. However, it is true that higher interest rates will cause the interest payments to increase, putting additional pressure on the U.S. budget. This will certainly be a motivation to keep interest rates low if that is possible.

Why does President Trump like a low-interest rate policy?

2017-04-21T00:38:00.000-07:00

In an interview with the Wall Street Journal published on Wednesday, April 12th, President Trump said "I do like a low-interest rate policy, I must be honest with you". This view has reportedly changed over time with Trump saying that "Janet Yellen should have raised the rates" on November 3, 2015. In any event, it seems worth looking into why Trump may be supportive of a low-interest rate policy now.

This blog post lists winners and losers from low interest rates in the United Kingdom. The third item listed under winners is government debt payments and the first chart shows that bond yields are declining but then states the following:

This fall in bond yields is occurring, despite a rise in government debt to GDP, and a persistent budget deficit. It is important for limiting the percentage of tax revenue spent on debt interest payments.

This same statement could be made about the United States. The following chart shows various treasury interest rates since the early 50s:

Note: In the following charts, click on the chart to see its data and sources.

As can be seen, they have been dropping since they reached highs in the early eighties. The following chart then shows the federal debt as a percentage of GDP:

The red line is the gross federal debt and includes the debt owed to Social Security and other government trust funds and the blue line is the federal debt owed to the public. The net interest that is paid on this debt to the public is the purple line in the following chart:

As can be seen, the net interest has come down to historically low levels even as the federal debt has risen sharply. This is due to the historically low interest rates being paid on that debt. However, note that the net interest is projected to double from about 1.25 percent of GDP in 2015 to about 2.5 percent of GDP by 2021. This is chiefly because the interest rates being paid on that debt is projected to increase. The following table shows the projected rates that will be paid on 91-day Treasury bills and 10-year Treasury notes through 2026:

Table S–12. Economic Assumptions
(Calendar years)
                            Actual  Projections
                            ------  -----------------------------------------------------------
                              2014  2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Interest rates, percent:      ----  ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
  91-day Treasury bills  .....   *     *  0.7  1.8  2.6  3.1  3.3  3.4  3.4  3.3  3.3  3.2  3.2
  10-year Treasury notes ..... 2.5   2.1  2.9  3.5  3.9  4.1  4.2  4.2  4.2  4.2  4.2  4.2  4.2

* 0.05 percent or less.
Source: U.S. Budget, FY 2017, Summary Table S-12

The CBO (Congressional Budget Office) just put out The 2017 Long-Term Budget Outlook in March. On page 19, it states:

The government’s net interest costs are projected to nearly double as a share of the economy over the next decade—from 1.4 percent of GDP in 2017 to 2.7 percent by 2027—as currently low interest rates rise and as greater federal borrowing leads directly to greater debtservice costs. In the extended baseline, those costs reach 6.2 percent of GDP by 2047 (see Figure 5 on page 12).

It would seem very possible that President Trump has been made aware that lower interest rates would have a beneficial effect on the budget, making any planned tax cuts or infrastructure spending more affordable. That could have much to do with why he now likes a low-interest rate policy.

Is Washington D.C. the Problem?

2014-02-16T02:28:00.002-08:00

On December 17th, the Washington Business Journal posted an article titled "D.C. far outpaces nation in personal earnings". It began:

D.C. residents are enjoying a personal income boom.

The District’s total personal income in 2012 was $47.28 billion, or $74,733 for each of its 632,323 residents, according to the Office of the Chief Financial Officer’s Economic and Revenue Trends report for November.

The U.S. average per capita personal income was $43,725. The highest of the 50 states, Connecticut, fell 25 percent short of D.C.

The article concludes:

The numbers suggest D.C. residents are living the high life. Some are, but, of course, it’s not that simple. Poverty is entrenched in many D.C. neighborhoods, especially east of the Anacostia River, where earnings are virtually nonexistent and the need for social services is dire. But as long as the District is booming on a per capita basis, the money should be available to help.

As it turns out, the $74,733 and $43,725 figures are slightly in error. They come from page 1 of the article's source but on page 17 of that source and on the BEA web site, the numbers are given as $74,773 and $43,735. Still, googing the erroneous numbers turns up a number of articles whose titles suggest conclusions that are less subdued than those drawn by the Business Journal. Just the first page of the google results include Who's Really Making Out Like Bandits in Obama's Economy?, As Unemployed Lose Benefits DC Enjoys A Wonderful Year Of Patronage, Fat City, Living High on the Hog, and It’s a Very Merry Christmas for Washington’s Parasite Class. This last article is by Daniel J. Mitchell of the Cato Institute and is reposted here, here, and here and is referenced on numerous other pages. In it, Mitchell cites the prior figures and states the following:

Why is income so much higher? Well, the lobbyists, politicians, bureaucrats, interest groups, contractors, and other insiders who dominate DC get much higher wages than people elsewhere in the country.

He goes on the reference an article titled Lobbying: A Terrific Investment and, following a link to a Reason TV interview with Andrew Ferguson of the Weekly Standard, he concludes:

I particularly like his common sense explanation that Washington’s wealth comes at the expense of everyone else. The politicians seize our money at the point of a gun (or simply print more of it) to finance an opulent imperial city.

So if you’re having a hard time making ends meet, remember that you should blame the parasite class in Washington.

Is Washington D.C. an "opulent imperial city" that is to blame for some of us "having a hard time making ends meet"? To answer that, it would seem that we need to do more than just compare the per capita personal income of D.C. against that of the entire United States. After all, D.C. is a single city and the U.S. is an entire country. At the very least, it would help to look at other cities. It might also be good to look at entire metropolitan areas so as to capture more of the people who are working in the city or as lobbyists and contractors to the government.

The following graph shows the 10 metropolitan areas which had the highest per capita personal income in 2012.

The numbers and sources for this and the following graph can be found at this link. Surprisingly, the metropolitan with the highest personal income is Midland, Texas. A recent article titled "Oil-rich Midland, TX is nation’s fastest growing metro area, with highest per-capita income in the country at $83,000" states:

For the third year in a row, Midland was the nation’s fastest growing MSA, with growth in personal income in 2012 of 12.1%. Midland also led the country as the MSA with the highest per capita personal income in 2012 at $83,049, followed by Bridgeport-Stamford-Norwalk, CT ($81,068), San Francisco ($66,591), the Silicon Valley MSA of San Jose-Santa Clara-Sunnvale ($65,679) and Washington, DC ($61,743).

The article goes on the explain that "America’s Shale Revolution is creating shale-based wealth, income, jobs and prosperity, especially in the states of Texas and North Dakota". This also likely has much to do with the recent rise of Casper, Wyoming to number 10 on the list.

A Bloomberg article from two years ago titled Rich Man, Poor Man: Connecticut Tops U.S. Wealth Gap says the following about the Bridgeport-Stamford-Norwalk metropolitan area:

In the Bridgeport-Stamford-Norwalk metro area, 53,076 households took home at least $200,000 -- and 16,505 earned less than $10,000.

“This region is a microcosm of the U.S.,” Pearson said.

Exacerbating the gap are the ranks of wealthy residents who have grown richer as the region became a hub for investment firms and hedge funds, she said. Median household income hovers 60 percent above the national figure at about $80,000.

Hence, this article suggests that the high income has some relation to the area becoming a hub for investment firms and hedge funds. In any case, the Washington D.C. metropolitan area does not stand as an "opulent imperial city" in terms of per capita personal income. How about in terms of the total personal income? The following graph shows the 10 metropolitan areas which had the highest total personal income in 2012.

The graph shows each metropolitan area's total personal income as a percent of the total personal income of all metropolitan areas in the U.S. This was about $12.095 trillion in 2012. It should be noted that this was actually 88.1 percent of the total personal income in all of the U.S. in 2012 of about $13.729 trillion. The difference is that the latter figure includes the rural (non-metropolitan) areas.

The above graph is a little more as expected with the New York City area having by far the highest total personal income, followed by the Los Angeles area and then the Chicago area. As can be seen, the Washington D.C. area is fourth with just about 3 percent of the total personal income of all metropolitan areas. Hence, it's difficult to see how those who are having a hard time making ends meet should lay all blame on the "parasite class in Washington", as Mitchell describes them.

There does seem to be some agreement among many members of both parties that there is a problem with lobbyists, interest groups, and other insiders in Washington. However, there seems to be much disagreement about what to do about it. Some groups promote reforms of our campaign financing and other laws to better regulate these groups. In contrast, Mitchell ends his article with the following line:

P.P.P.S. Making government smaller is the only way to reduce the Washington problem of corrupt fat cats.

In any event, the above discussion shows the importance of looking at as much and as varied a selection of data as possible when studying economic issues. Even the above two graphs have their limitations. They say nothing about the distribution of income within those metropolitan areas and give no information as to what is going on immediately outside those areas. However, they give much, much more information than the simplistic comparison of one measure of a single city against an entire country.

Ben Bernanke and the Federal Reserve Balance Sheet

2014-02-02T02:27:00.001-08:00

January 31st marked the end of Ben Bernanke's 8-year tenure as Federal Reserve Chairman. An article titled "Bernanke Leaves Fed with Record Balance Sheet of $4,102,138,000,000" gives a short history of the actions of the Fed and growth in the Fed Balance Sheet during that time. Following is a short summary of the actions taken from there and Wikipedia:

DATES AND DESCRIPTIONS OF FEDERAL RESERVE ACTIONS

Program   Start      End     Securities purchased
-------  --------  --------  --------------------
QE1      Dec 2008  Mar 2010  agency mortgage-backed securities (MBS) and agency debt, up to $600 billion total
         Mar 2009  Mar 2010  expanded to $1.25 trillion in MBS, $175 billion in agency debt, and $300 billion in treasuries
QE2      Nov 2010  Jun 2011  longer dated treasuries, at a rate of $75 billion per month for a total of $600 billion
Twixt    Sep 2011  Dec 2012  longer dated treasuries with funds from selling shorter dated treasuries, total of $400 billion
QE3      Sep 2012  Present   agency mortgage-backed securities (MBS) at a rate of $40 billion per month
         Dec 2012            added longer dated treasuries, at a rate of $45 billion per month (same rate as Twixt)
         Jan 2014            cut back to $35 billion MBS and $40 billion in treasuries per month
         Feb 2014            cut back to $30 billion MBS and $35 billion in treasuries per month
         Mar 2014            cut back to $25 billion MBS and $30 billion in treasuries per month
         Apr 2014            cut back to $20 billion MBS and $25 billion in treasuries per month

The effect of these programs on the federal reserve balance sheet can be seen in the following graph:

As can be seen, federal reserve assets jumped sharply toward the end of 2008 in response to a number of Fed programs. These programs are shown in more detail in graphs and tables at this link. Then, mortgage-backed securities (MBS) are seen to grow sharply from early 2009 to early 2010 in response to Quantitative Easing 1 (QE1). Then, treasuries are seen to grow sharply from then end of 2010 to mid-2011 in response to Quantitative Easing 2 (QE2). Operation Twixt, which went from late 2011 to the end of 2013 is not visible because the changes occurred entirely within the purple area of "Other U.S. Treasuries" where longer dated treasuries were bought with the funds from selling shorter dated treasuries. However, both mortgage-backed securities (MBS) and treasuries are seen to grow sharply from the end of 2012 to the present in response to Quantitative Easing 3 (QE3).

The Federal Reserve website has an excellent program for downloading and graphing this data at this link. The data for the above graph is posted at this link and was downloaded via this program. This program was also used to generate the following graph:

This graph looks very similar to the first graph but differs in that it is not a "stacked-area" graph. As a result, mortgage-backed securities (the red line) are shown separately from the U.S. Treasury securities (the green line). As can be seen, the Federal Reserve assets consisted chiefly of U.S. Treasuries before the financial crisis but its holdings of mortgage-backed securities briefly surpassed its treasury holdings in 2010 in response to QE1. However, the Fed's treasury holdings came back to surpass its MBS holdings with QE2 and that has continued as both have grown with QE3.

There is some disagreement as to the effects of these programs. On January 31st, the PBS Newshour had a segment titled "How economists grade Ben Bernanke’s Federal Reserve tenure". The following excerpt from the transcript shows a apparent disagreement between the conservative economist Charles Calomiris and Alan Blinder, a past vice chairman of the Fed, apparently over the wisdom of QE3:

CHARLES CALOMIRIS: The Fed under Bernanke in the last two years has created inflationary risk that could be hard for his successors to manage. What he created was a risk of inflation over the next five years, in exchange for getting very small potatoes in terms of improvement in the economy over the past two years.

PAUL SOLMAN: That risk is why Calomiris gives Bernanke a post-crash grade of incomplete.

But Alan Blinder calls inflation fears baseless.

ALAN BLINDER: For years, there was going to be inflation next year, inflation next year. Wrong, wrong, wrong, wrong. We haven’t had any inflation. Lately, since there’s no inflation, often, it’s the same people have started this, it’s causing speculative bubbles.

So let’s see, where? House prices? I don’t think so. They have recovered about one-third of what they lost, and it looks like they’re kind of leveling off. Can’t tell. Stock prices? Well, maybe, but, you know, we have extraordinarily high profits. We have extraordinarily low interest rates. On basic fundamentals, stock prices should be high. I don’t stay awake worrying about bubbles now.

On the other hand, Richard Fisher, President of the Federal Reserve Bank of Dallas, discussed what he believed to be the costs and benefits of the programs on a recent episode of EconTalk. In the following excerpt from the transcript, he discusses the costs:

And I'm worried about the long-term consequences of having all that money sitting out on the sidelines. These are in depository institutions as well as significant amounts of money sitting in private equity firms and sitting in hedge funds, etc., outside our purview. That's a lot of tender. If velocity were to pick up, how do we tamp it down so that it doesn't lead to inflationary impulses? Right now inflation is not an issue. But our charge, given to us by the Congress, says long run, long run, long run. And that's what I'm worried about. Those are the costs that I'm worried about.

He then goes on the discuss the benefits:

And the benefits? Well, I'll be blunt about this. Mr. Druckenmiller said this on television the other day: this is great for rich people; it's great for Warren Buffett. Bless his heart, he's a good investor. Good for Mr. Druckenmiller and others, they get money for free. It hasn't done what we wanted it to do, which is lead to greater job creation for the two middle income quartiles.

My impression is that there is general agreement that Bernanke handled the immediate aftermath of the financial crisis well. In the Newshour interview, both Blinder and Calomiris gave Bernanke an A for that period. However, there seems to be much less agreement on the Fed's recent policies. Much will likely depend on how things play out and whether the Federal Reserve is able to unwind its balance sheet without any major problems. As Paul Solman said at the end of the Newshour segment:

And so, as Ben Bernanke leaves office after what everyone agrees is an unforgettable eight years on the job, his final grade probably won’t come for years, during the tenure of successor Janet Yellen, or maybe even later than that.

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 4)

2014-01-28T00:10:00.001-08:00

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 4)

At the end of my last post, I said that it would be interesting to see if the Wall Street Journal finally corrects the online version of Brett Stephens's column, "Obama's Envy Problem". As it happens, they have finally done so. I first noticed it when I rechecked the site after my last post late on January 20th. According to a blog post by Paul Krugman titled "Department of Corrections, and Not", the column was still uncorrected when he checked it a few minutes before his posting at 1:40 PM on January 20th. Hence, the Journal may have corrected it shortly after that. I may have initially missed it because they posted the correction at the end of the column. The correction reads as follows:

Corrections & Amplifications

Inflation-adjusted income data from the U.S. Census Bureau show that incomes declined by 2.6% for the bottom quintile between 1979 and 2012, increased by 5.7% for the middle class (third quintile), and by 42% for the top quintile. This column used non-inflation adjusted income figures.

An interesting blog post titled "Bret Stephens and Paul Krugman: What Should a Correction Look Like in the Digital Era?" discusses what an online correction should look like. The Journal did in fact follow the advice not to do a "silent edit" after a column's errors become the basis for other people’s posts. However, there may have been additional reasons that the Journal did not do a silent edit. Once the nominal figures are corrected for inflation, the entire argument put forth by the column pretty much falls apart. For this reason, it might be better if the Journal puts the correction before the column rather than after it. That will save future readers the time and effort of reading it. Coming at the end, the correction should likely begin with the words "Never mind!". Still, it is good to see that the Journal did correct the online column. Hopefully, this might help lead to a policy of doing this on all corrected articles posted by the Journal and other publications. However, that does leave open the question in the title of this post. To what degree do publications have the responsibility to screen their columns and catch these obvious errors to begin with?

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 3)

2014-01-20T23:54:00.002-08:00

In my last post, I pointed out that the Wall Street Journal website is still displaying the same editorial with the same non-inflation-corrected numbers for which they had posted a correction. I concluded that it will now be interesting to see if the Wall Street Journal corrects it.

As of this posting, the Wall Street Journal has still not corrected it and I was therefore happy to see Paul Krugman also take up this issue. On January 19th, a Krugman column titled "The Undeserving Rich" was posted on the New York Times website. In it, he stated:

For an example of de facto falsification, one need look no further than a recent column by Bret Stephens of The Wall Street Journal, which first accused President Obama (wrongly) of making a factual error, then proceeded to assert that rising inequality was no big deal, because everyone has been making big gains. Why, incomes for the bottom fifth of the U.S. population have risen 186 percent since 1979!

If this sounds wrong to you, it should: that’s a nominal number, not corrected for inflation. You can find the inflation-corrected number in the same Census Bureau table; it shows incomes for the bottom fifth actually falling. Oh, and for the record, at the time of writing this elementary error had not been corrected on The Journal’s website.

On his blog, Krugman added a post titled "Department of Corrections, and Not" which recounts that Bret Stephens has contacted the Times to protest his contention that Stephens' error in using nominal incomes has not been corrected on the WSJ’s website. Krugman goes on to explain that Stephens is apparently referring to this correction but that that is not what he calls a "correction". He continues:

What, after all, is the purpose of a correction? If you’ve misinformed your readers, the first order of business is to stop misinforming them; the second, so far as possible, to let those who already got the misinformation know that they were misinformed. So you fix the error in the online version of the article, including an acknowledgement of the error; and you put another acknowledgement of the error in a prominent place, so that those who read it the first time are alerted. In the case of Times columnists, this means an embarrassing but necessary statement at the end of your next column.

Nothing like that happened in Stephens’s case. Someone reading his original column on line will see exactly the same piece that was originally published, bogus statistics and all, with no hint of a problem and no link to his mea culpa.(Or at least that was true a few minutes ago — maybe they’ll scramble to fix it now.) Maybe one in a hundred will hear somewhere that there was a problem — but for everyone else the misinformation is continuing to spread.

Krugman need not have worried as there appears to be nobody at the Journal scrambling to fix the original editorial. As of this moment, it has still has not been corrected. By the way, if you attempt to view the original column directly, you will likely just see the first few lines with a prompt to subscribe. However, there is an alternative method that usually seems to view the entire article. Go to google.com, search for "Obama's Envy Problem", and then click on the first item which should be titled "Bret Stephens: Obama's Envy Problem - WSJ.com". This should bring you to the same URL but show the entire article. It may be best to use Internet Explorer for this as Chrome does not always seem to show the whole article. As can be seen, the increase of 186% for the bottom 20%, based on nominal numbers, is still there.

Rather than fix the original editorial the Journal has posted a response by Stephens titled "Stephens: Krugman and the Ayatollahs". In it, Stephens states that "a formal correction was posted on Jan. 5 and I addressed the subject at length on Jan. 3". Can't anyone at the Journal read? Do they truly not understand that Krugman is talking about correcting the original editorial still posted online? Why hasn't the Journal corrected it? A cynical person might suggest the following:

The initial editorial was read by tens or hundreds of thousands of readers and the use of nominal numbers helped to make the case that Stephens and the Journal editorial staff supported. But, as Krugman suggested, the corrections might be seen by one in a hundred of the original readers. I don't subscribe to the Journal so I don't know where those corrections were printed in the paper. But Krugman seems to indicate that a correction was not included at the end of Stephens's next column, a place where his regular readers, at least, would be likely to see it. And by leaving the original editorial uncorrected, the same editorial will be read of additional readers, likely via search engines like Google, and the same flawed numbers will continue to help make the case which Stephens and the Journal support.

Stephens also took his arguments to Twitter, tweeting the following:

Paul Krugman nastily accuses me of "crude obfuscation," in the course of which me makes a dumb factual mistake. See if you can spot it.

As someone tweets back, I think that Stephens meant "he" instead of "me". In any event, following are the final three responding tweets (at this time):

PK with an excellent point. Any "correction" should be done as an addendum to the original article.

Man up, make a legit correction, and get over it.

Why not link to your original column and Krugman's in your acknowledgement of the error? Why not note error in original column?

It will be interesting to see if Stephens responds. What will be more interesting will be if the Journal will finally correct the original editorial or include a correction at the beginning and/or end of it. If they do not, I hope that people with large readerships like Krugman continue to hold them to account. Of course, Stephens and the Journal are free to hold Krugman to account for any uncorrected columns that the Times continues to post online. However, they have not yet shown that they recognize the principle, much less are prepared to follow it.

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 2)

2014-01-08T01:30:00.002-08:00

At the end of my last post, I wrote:

It will be interesting to see if Stephens or the Wall Street Journal publish a correction to this egregious mistake. That might give some indication as to whether they are concerned about their reputations or are simply pushing a point of view by whatever means possible.

As it happens, a correction written by Stephens titled "About Those Income Inequality Statistics" was posted on January 3rd. In it, he admits his error in using data that had not been corrected for inflation, stating:

In my Dec. 31 column on income inequality, I used a data set from the U.S. Census Bureau to make the case that incomes in the U.S. have been growing across the board, even if the incomes of the wealthy have grown faster than those of others further down the income scale. But I wrote those lines looking at a set of numbers that had not been adjusted for inflation.

Professor Krugman, in a post on his New York Times blog, takes me to task for this. Had I done so looking at the inflation-adjusted table, it would have shown the incomes of the bottom 20% essentially stagnating since 1979 (and long before then, too), though it also would have shown incomes for the top 20% rising far less dramatically.

He goes on to mention that Krugman accuses him, not of making an honest mistake, but of "pulling a fast one". He then continues:

My mistake is all the more unfortunate because the basic point I was making is right: Americans are getting richer across the entire income spectrum, even if they are getting richer at very different rates. That much is confirmed by data from the Congressional Budget Office. The CBO finds that between 1979 and 2007 income for poor households grew by 18%, for the middle classes by nearly 40%, and for the top 81-99% by 65%. It's the top 1% who have made out very handsomely, with a jump of 275% over nearly three decades.

Hence, Stephens feels that his basic point is still right despite the fact that he was forced to switch from using Census data to CBO data to maintain it. He feels this despite the fact that he goes on to admit that the differences between Census and CBO data is complicated and ultimately subjective. In any event, the CBO numbers calculate that the income of the bottom 20 percent of households increased by 18% over the 28 years from 1979 to 2007. That works out to about 0.6 percent per year compounded.

The idea that this shows that "Americans are getting richer across the entire income spectrum" is highly debatable. As mentioned, Stephens had to go with CBO data instead of Census data. In addition, he is basing this statement on a mere four categories. The CBO data gives no indication as to the variation of income increases in the bottom 20 percent. This is especially the case when you consider the variation in inflation. Those who have been hit by high inflation in health care and higher education likely do not feel "richer". In addition, you would expect incomes to rise faster than inflation due to productivity and the real growth in the GDP. The following graph shows the growth in output and wages since 1950:

As can be seen, wages generally kept up with productivity gains until the 70s but have generally lagged since. The following graph shows wages and corporate profits as a percent of GDP since 1950:

As can be seen, wages as a percent of GDP stayed fairly level to the mid-70s but have generally declined since. Meanwhile, corporate profits as a percent of GDP have risen sharply since about 2001. The actual data and sources for both of these graphs can be found at this link.

In addition to Stephen's correction, the Wall Street Journal has posted a correction that reads as follows:

Inflation-adjusted income data from the U.S. Census Bureau show that incomes declined by 2.6% for the bottom quintile between 1979 and 2012, increased by 5.7% for the middle class (third quintile), and by 42% for the top quintile. Bret Stephens's column of Dec. 31 (Global View, "Obama's Envy Problem") used non-inflation adjusted income figures.

However, there is one major problem remaining. If you look at the original editorial, you'll see that nothing appears to have changed! The Wall Street Journal website is still displaying the same editorial with the same non-inflation-corrected numbers that they have posted a correction for! What is the point of the correction if you're not going to correct the original posting?

It was a positive step for Stephens and the Wall Street Journal to post corrections to this story. However, it will now be interesting to see if the Wall Street Journal corrects their original editorial. That might give some indication as to whether they are truly concerned with correcting their mistakes and limiting their effects or are simply going through the motions.

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 3)

Do Publications Have Any Responsibility to Screen Their Editorials?

2014-01-03T01:25:00.002-08:00

On Dec. 30th, the Wall Street Journal ran an editorial titled "Stephens: Obama's Envy Problem". The editorial was written by the WSJ's Bret Stephens and begins as follows:

As he came to the end of his awful year Barack Obama gave an awful speech. The president thinks America has inequality issues. What it has—what he has—is an envy problem.

Further on, Stephens states:

Mr. Obama tried to prove that in his speech, comparing present-day income with that halcyon year of 1979: "The top 10 percent no longer takes in one-third of our income—it now takes half," he said, suggesting that the rich are eating a larger share of the national pie. "Whereas in the past, the average CEO made about 20 to 30 times the income of the average worker, today's CEO now makes 273 times more. And meanwhile, a family in the top one percent has a net worth 288 times higher than the typical family, which is a record for this country."

Here is a factual error, marred by an analytical error, compounded by a moral error. It's the top 20% that take in just over half of aggregate income, according to the Census Bureau, not the top 10%. That figure is essentially unchanged since the mid-1990s, when Bill Clinton was president. And it isn't dramatically different from 1979, when the top fifth took in 44% of aggregate income.

Stephens would have done well to check Obama's sources before trumpeting the superiority of his own numbers. Paul Krugman gives the following explanation on his blog:

What’s going on here? Stephens is citing the Census data, which everyone who knows anything about inequality knows has a problem with very high incomes thanks to “top-coding”. The Piketty-Saez data, which use tax returns to estimate income shares, do indeed show the top 10 percent receiving half the income, up from 42 percent in 1995. Maybe you don’t like those estimates, but Obama made no mistake – while Stephens did.

An article titled "Recent Census Data Significantly Understate The Increase in Income Disparities" explains this in more detail:

In contrast, the Census data are based upon a voluntary population-based survey. They cover virtually the entire population. However, the standard data on income that the Census Bureau publishes do not include capital gains income, which is a large source of income for high-income individuals. The Census Bureau also places an upper limit on the amount of certain types of income it counts for any individual, disregarding income above these amounts; this is done for confidentiality and other reasons. For example, the highest salary that can be recorded is $999,999. Anyone with a salary above this amount is recorded as having a salary of $999,999. As a result of these and other factors, the Census data significantly understate the income of those at the top of the income spectrum as well as recent increases in income among this group.

In fact, Table A3 of a spreadsheet on the Piketty-Saez site shows the income share of the top 10 percent to have risen from 34.21% in 1979 to 50.42% in 2012. Hence, Obama's statement that "The top 10 percent no longer takes in one-third of our income—it now takes half" was correct.

Despite Krugman's contention that "everyone who knows anything about inequality knows [the Census data] has a problem with very high incomes", this error might be understandable. However, Stephens then goes on to make an error that is just astonishing. He continues:

Besides which, so what? In 1979 the mean household income of the bottom 20% was $4,006. By 2012, it was $11,490. That's an increase of 186%. For the middle class, the increase was 211%. For the top fifth it's 320%. The richer have outpaced the poorer in growing their incomes, just as runners will outpace joggers who will, in turn, outpace walkers. But, as James Taylor might say, the walking man walks.

Stephens appears to be using the Census data from this spreadsheet of Table H-3 on the Census website as it exactly matches his numbers. The following numbers are from that spreadsheet:

Table H-3.  Mean Household Income Received by Each Fifth and Top 5 Percent
            (in current and 2012 CPI-U-RS adjusted dollars)

           Lowest   Second    Third   Fourth  Highest    Top 5
    Year    fifth    fifth    fifth    fifth    fifth  percent
-------- -------- -------- -------- -------- -------- --------
Current Dollars
    1979    4,006    9,964   16,428   24,108   43,265   65,984
    2012   11,490   29,696   51,179   82,098  181,905  318,052

% Change    186.8    198.0    211.5    240.5    320.4    382.0

           Lowest   Second    Third   Fourth  Highest    Top 5    Top 5
    Year    fifth    fifth    fifth    fifth    fifth  percent  percent*
-------- -------- -------- -------- -------- -------- -------- --------
2012 Dollars
   1979    11,808   29,369   48,422   71,060  127,526  194,491  214,767
   2012    11,490   29,696   51,179   82,098  181,905  318,052  433,937

% Change     -2.7      1.1      5.7     15.5     42.6     63.5    102.0

Source: U.S Census Bureau, Table H-3 (except last column)

* last column from Piketty-Saez, Table A6

As can be seen, the spreadsheet gives the incomes in "current dollars" and in "2012 dollars". The latter measure adjusts the incomes for inflation, converting all of the numbers to "2012 dollars". The former measure (current or nominal dollars) is NOT corrected for inflation. This is the measure that Stephens saw fit to use. If one uses the figures that are corrected for inflation, however, the incomes of the lowest fifth actually went down 2.7 percent from 1979 to 2012, not up by 186% as Stephens contends.

Regarding Stephens' choice of non-inflation-corrected numbers, Miles Kimball, Professor of Economics and Survey Research at the University of Michigan, writes the following:

It is hard to read the 186% figure in this passage in any way that is not egregiously misleading. The gist of the argument is that a rising tide is lifting all boats, so that the passage seems to suggest that the bottom 20% have been lifted by 186%. Even on the editorial page, the Wall Street Journal’s journalistic standards should be higher.

Correcting dollar figures for inflation is a concept so basic that it is likely known by every living economist. In fact, it is likely known by the great majority of living adults. How could Stephens and the editorial board at the Wall Street Journal have missed it? As Kimball says, it's hard not to read this as "egregiously misleading". It will be interesting to see if Stephens or the Wall Street Journal publish a correction to this egregious mistake. That might give some indication as to whether they are concerned about their reputations or are simply pushing a point of view by whatever means possible.

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 2)

Is Obama Rewriting Debt-Limit History?

2013-10-07T01:57:00.003-07:00

Is Obama Rewriting Debt-Limit History? On October 3rd, the Wall Street Journal ran an editorial titled "Kevin Hassett and Abby McCloskey: Obama Rewrites Debt-Limit History". The editorial begins as follows:

As the government shutdown continues, the nation gets closer and closer to the day—probably Oct. 17—when Washington hits the debt limit, and with it the specter of default. President Obama may be getting nervous about what will happen to his negotiating position as that day approaches.

He keeps asserting that the debt limit has never been used "to extort a president or a government party." Treasury Secretary Jack Lew is selling the same story, saying "until very recently, Congress typically raised the debt ceiling on a routine basis . . . the threat of default was not a bargaining chip in the negotiations."

The editorial goes on to say that this is "simply untrue" and describes "the shenanigans of congressional Democrats in 1989 over Medicare's catastrophic health coverage provision":

In this case, the problem was political infighting within the Democratic Party between the House and the Senate. "Weeks of political maneuvering brought the government to the brink of financial default," the New York Times wrote on Nov. 8 of that year.

The New York Times article being referred to appears to be one titled "Agreement On Raising Debt Ceiling". It begins:

After weeks of political maneuvering that brought the Government to the brink of financial default, Congress tonight approved legislation raising the national debt limit to $3.12 trillion through Sept. 30, 1990.

The article does state that the bill "also paves the way for Congressional approval of separate legislation modifying the Medicare insurance program that covers the catastrophic costs of major illness", the issue mentioned by the Journal editorial. However, it goes on to describe the final holdup to the bill's passage:

At one point, the Senate majority leader, George J. Mitchell of Maine, stormed off the floor, saying he was going to telephone President Bush and Treasury Secretary Nicholas F. Brady and inform them that the bill could not be passed because a single Republican senator, John Heinz of Pennsylvania, had refused to give his consent to proceed.

Leaders in the House and Senate had agreed earlier in the day to approve the bill with only one amendment - a measure repealing 1986 tax rules that bar discrimination in employer-paid health insurance plans. Link to Social Security

But as Mr. Mitchell rose to explain that agreement and move toward a vote, Mr. Heinz objected, saying he would not allow the vote unless the Senate also agreed to consider an amendment to remove the Social Security trust fund surplus from calculation of the Federal deficit.

The article then describes the resolution to this holdup and concludes as follows:

Congressional delays in approving debt limit measures have become routine over the last decade as lawmakers scramble to attach pet initiatives to what they know is must-pass legislation. But the situation this year was particularly complicated because the debt limit bill became entangled in the fierce battles over budget legislation and efforts to cut the capital gains tax.

Republicans agreed last week to abandon their attempts to attach a capital gains tax cut to the debt limit bill, a measure they had regarded as their best hope for winning the votes needed to pass a tax cut this year.

Hence, a Republican Senator played a key role in the final holdup and Republicans had attempted to attach a capital gains tax cut to the bill. For some reason, the editorial did not see fit to report anything except the "shenanigans of congressional Democrats".

In any case, the Journal editorial goes on to state:

One thing is certain: The debt limit has been a powerful negotiating tool in the last several decades. It has enabled the passage of important additional legislation.

According to the Congressional Research Service, Congress voted 53 times from 1978 to 2013 to change the debt ceiling. The debt ceiling has increased to about $16 trillion from $752 billion.

Further on, the editorial states:

Congressional Republicans who want legislative conditions in exchange for a debt-limit increase are following a strategy that has been pursued by both parties the majority of the time. Of the 53 increases in the debt limit, 26 were "clean"—that is, stand-alone, no strings-attached statutes. The remaining debt-limit increases were part of an omnibus package of other legislative bills or a continuing resolution. Other times, the limit was paired with reforms, only some of which were related to the budget.

This statistic has been mentioned recently by a number of people. On the October 6th "This Week With George Stephanopoulos", Paul Gigot, editor of the editorial pages for The Wall Street Journal, stated:

"There have been 53 debt limit increases since 1978, and 27 of those were not clean. They were not just raise the debt limit. They included reforms. Often important, budget reforms."

Following is a longer discussion of the statistic from "Fox News Sunday" on the same day:

OBAMA: You have never seen in the history of the United States the debt ceiling or the threat of not raising the debt ceiling being used to extort a president or a governing party and trying to force issues that have nothing to do with the budget and have nothing to do with the debt.

(END VIDEO CLIP)

WALLACE: But, Mr. Secretary, that is just not true. Congress has voted to raise the debt ceiling 53 times since 1978. More than half -- 27 times -- it's been linked to something else. And among those items it's been linked to: campaign finance reform, school prayer and busing and a nuclear freeze.

What's unprecedented is not Congress tying strings. What's unprecedented is the president refusing to negotiate.

LEW: You know, Chris, let me be clear. The president has always been looking for a way to negotiate, find that reasonable middle ground with a bipartisan, you know, group of members and senators to do the right thing for the American people. He was -- he has -- he put out a budget that actually took an enormous step to do that.

So the president is open to negotiation. The question about the debt limit is different.

And, frankly, I think your history is wrong. If you look at the cases where the debt limit was involved, there were many other things attached to the debt limit, but the question of threatening to cause a default of the United States, not until 2011 did it become a positive agenda.

WALLACE: Mr. Secretary, your history -- with all due respect, your history is wrong.

So let's look at the Congressional Research Service study from which this statistic comes. It appears to have come from a study titled "Votes on Measures to Adjust the Statutory Debt Limit, 1978 to Present, released February 15, 2013. In its Summary, the study does state the following:

Since 1978, the statutory federal debt limit has been changed 53 times by Congress through the enactment of legislation adjusting the federal debt limit, either as stand-alone legislation or as part of legislation dealing with other matters.

The study contains three tables. Table 1 lists information on all 53 debt limit measures since 1978. Table 2 identifies 26 stand-alone measures from these 53. Table 3 then lists the other 27 bills considered as other than stand-alone measures and provides brief background information on the nature of each measure and by what means it was considered. The following table gives some of the key items from Table 1 for the 27 non-stand-alone measures:

               OTHER THAN STAND-ALONE DEBT LIMIT MEASURES

                       House Vote       Senate Vote     Public Law    Debt
                    ----------------  ----------------     Date of   Limit
Year  Bill Number   Tally     Margin  Tally     Margin   Enactment ($ bil)
----  ------------  --------  ------  --------  ------  ----------  ------
1979  H.R. 2534     209-165       44  62-33         29    4/2/1979     830*
      H.R. 5369     219-198       21  49-29         20   9/29/1979     879*
1980  H.R. 7428     335-34       301  68-10         58    6/6/1980    n.c.
1983  H.R. 2990     Voice Vote        51-41         10   5/26/1983    1389*
1984  H.R. 5692     211-198       13  Voice Vote         5/25/1984    1520*
1985  H.R. 3721     300-121      179  Voice Vote        11/14/1985  1903.8
      H.J.Res. 372  271-154      117  61-31         30  12/12/1985  2078.7
1986  H.R. 5300     305-70       235  61-25         36  10/21/1986    2300
1987  H.J.Res. 324  230-176       54  64-34         30   9/29/1987    2800*
1989  H.R. 3024     231-185       46  Voice Vote          8/7/1989    2870*
      H.J.Res. 280  269-99       170  Voice Vote         11/8/1989  3122.7
1990  H.J.Res. 666  362-3        359  Voice Vote         10/9/1990    n.c.
      H.J.Res. 677  379-37       342  Voice Vote        10/19/1990    n.c.
      H.J.Res. 681  380-45       335  Unanimous Consent 10/25/1990    n.c.
      H.J.Res. 687  283-49       234  Voice Vote        10/28/1990    3230
      H.R. 5835     228-200       28  54-45          9   11/5/1990    4145*
1993  H.R. 2264     218-216        2  51-50          1   8/10/1993    4900*
1996  H.R. 2924     396-0        396  Unanimous Consent   2/8/1996
      H.R. 3021     362-51       311  Voice Vote         3/12/1996
      H.R. 3136     328-91       237  Unanimous Consent  3/29/1996    5500
1997  H.R. 2015     346-85       261  85-15         70    8/5/1997    5950
2008  H.R. 3221     272-152      120  72-13         59   7/30/2008   10615
      H.R. 1424     263-171       92  74-25         49   10/3/2008   11315*
2009  H.R. 1        246-183-1     63  60-38         22   2/17/2009   12104*
2010  H.J.Res. 45   233-187       46  60-39         21   2/12/2010   14294*
2011  S. 365        269-161      108  74-26         48    8/2/2011   16394
2013  H.R. 325      285-144      141  64-34         30    2/4/2013

* measures with a final vote margin of less than 100 in the House or less
  than 30 in the Senate
Note: n.c. = no change
Source: "Votes on Measures to Adjust the Statutory Debt Limit, 1978 to Present

A number of interesting facts are evident from this table. First of all, it doesn't appear that all of these 27 cases are independent. For example, there are 5 cases in less than a month, from 10/9/1990 through 11/5/1990. The first 3 of these cases involve no raise in the debt limit. Perhaps more interesting, the majority of these votes do not appear to be heavily contentious. Only 11 of the 27 measures resulted in a final vote margin of less than 100 in the House or less than 30 in the Senate.

The following table contains notes from Table 3 on the 27 non-stand-alone measures:

               OTHER THAN STAND-ALONE DEBT LIMIT MEASURES

Year  Notes on the Measure
----  --------------------
1979  required Congress & President present balanced budgets for 81 and 82
      made increase in debt limit part of budget process (in the House)
1980  included a repeal of the Presidentially imposed oil import fee
1983  included making the whole debt limit permanent
1984  included some miscellaneous admin authority to Treasury Secretary
1985  extended for a month some expiring acts, including a cigarette tax
      required report on legislation for alternative minimum corporate tax
1986  required the restoration of lost interest to certain trust funds
1987  used as legislative vehicle for the Balanced Budget ... Act of 1987
1989  included change in method of accounting for federal debt instruments
      repealed nondiscrimination rules that deal w/ employee benefit plans
1990  change in Debt Limit included in a continuing appropriations measure
      change in Debt Limit included in a continuing resolution
      change in Debt Limit included in a continuing resolution
      change in Debt Limit included in a continuing resolution
      change in Debt Limit included in Omnibus Budget Recon. Act of 1990
1993  change in Debt Limit included in Omnibus Budget Recon. Act of 1993
1996  temporarily exempted from limit monthly insurance benefits to SSA
      temporarily exempted from limit monthly insurance benefits to SSA
      included an increase in the debt limit in Title III
1997  included a debt limit increase in Title V, Subtitle G
2008  included an increase to the debt limit
      included an increase to the debt limit
2009  included an increase to the debt limit
2010  included provisions for “Statutory PAYGO” and “wasteful spending”
2011  included provisions aimed at deficit reduction
2013  required hold on Member salary if no budget resolution by April 15

Source: "Votes on Measures to Adjust the Statutory Debt Limit, 1978 to Present

These are of course very abbreviated notes on the measures. Still, they suggest that most of the additional items in the measure were not very major. I saw no mention of the issues that Wallace mentioned above (campaign finance reform, school prayer and busing and a nuclear freeze). Also, it appears that some of the debt limit increases may have been included with other bills (such as continuing resolutions) simply for convenience. At the very least, more study would be required for these cases. Simply treating all non-stand-alone measures the same does not make sense. Hence, it may be correct that, as Secretary Lew suggested above, "the question of threatening to cause a default of the United States, not until 2011 did it become a positive agenda".

On Friday, Warren Buffett was quoted as saying the following about the debt ceiling:

It ought to be banned as a weapon. It should be like nuclear bombs, I mean, basically too horrible to use.”

In fact, according to this article, only one democratic country, besides America, has a debt ceiling. That country is Denmark but the article states that they "set the ceiling high enough so that it never slows the process of borrowing money and they can avoid political conflicts like the one currently gripping the U.S.". The article continues:

Barry Bosworth, a senior fellow at the Brookings Institute, said the U.S. debt ceiling “has no logical basis.”

Congress, through budget and appropriations bills, has sole authority to decide how much the government will spend, so he said “it makes no sense to have a secondary rule to then object to the deficit that emerges from the other decisions.”

At the very least, we could legislate that the debt ceiling must always be addressed in a stand-alone measure. Meanwhile, those who distort history to defend such threats, as do the authors of the Journal editorial, should be challenged.

Note: On a related issue, this article explains why government shutdowns only seem to occur in America.

Is There a Debt/GDP Threshold at 90 Percent? (Part 2)

2013-05-04T01:18:00.002-07:00

Is There a Debt/GDP Threshold at 90 Percent? (Part 2)

As mentioned in my prior post, I have posted an Excel spreadsheet which is an extension of one included in a zip file posted by Herndon, Ash and Pollin (hereafter called HAP). I will use data from that spreadsheet to look at the HAP criticisms of the Reinhart and Rogoff (hereafter called RR) paper described previously.

A good starting point is the now infamous Excel spreadsheet shown in my prior post and repeated below:

After noting the coding error by which 5 rows were excluded, the first question that occurred to me was "where's the beef?". The number of countries on which the 90 percent threshold is based is a mere seven (Belgium having been left out by RR). The HAP critique points out that RR is using only 71 data points (110 after Belgium and 14 other excluded data points are added). Since there were relatively few data points, my first inclination was to try to look at that data so see how it was distributed. The following table shows the 71 data points used by RR, the 25 data points for Belgium, and the other 14 excluded data points (marked by ^):

        REAL GDP GROWTH FOR DEBT OF 90 PERCENT OF GDP OR ABOVE FOR 1946-2009

                                            New                    Aus-
Belgium* Greece   Italy Ireland   Japan Zealand      UK      US  tralia* Canada* Year
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -----
                                            7.7^   -2.5   -10.9    -3.6^   -1.0^ 1946
   15.2                                    11.9^   -1.3    -0.9     2.5^    4.4^ 1947
                                           -9.9^    2.9     4.4     6.4^    1.8^ 1948
                                           10.8^    3.3    -0.5     6.6^    2.2^ 1949
                                                    3.2             6.9^    7.4^ 1950
                                           -7.6     2.7                          1951
                                                    0.1                          1952
                                                    3.8                          1953
                                                    4.1                          1954
                                                    3.5                          1955
                                                    0.9                          1956
                                                    1.7                          1957
                                                    0.3                          1958
                                                    4.3                          1959
                                                    5.3                          1960
                                                    2.3                          1961
                                                    1.1                          1962
                                                    4.3                          1963
                                                    5.5                          1964
                                                                                 1965
-------------------------(no cases from 1965 to 1982)--------------------------------
                                                                                 1982
                           -0.7                                                  1983
    2.1                     3.2                                                  1984
    1.8                     1.9                                                  1985
    1.9                     0.4                                                  1986
    2.4                     3.6                                                  1987
    4.6                     3.0                                                  1988
    3.6                     5.6                                                  1989
    3.1                                                                          1990
    1.8     3.1                                                                  1991
    1.3     0.7                                                                  1992
   -0.7    -1.6    -0.9                                                          1993
    3.3     2.0     2.2                                                          1994
    4.3     2.1     2.8                                                          1995
    0.9     2.4     1.1                                                          1996
    3.7     3.6     1.9                                                          1997
    1.7     3.4     1.4                                                          1998
    3.4     3.4     1.5            -0.1                                          1999
    3.8     4.5     3.7             2.9                                          2000
    0.8     4.2     1.8             0.2                                          2001
    1.5     3.4                     0.3                                          2002
    1.0     5.6                     1.4                                          2003
    2.8     4.9                     2.7                                          2004
    2.2     2.9                     1.9                                          2005
            4.5                     2.0                                          2006
            4.0                     2.3                                          2007
    1.0     2.9                    -0.7                                          2008
   -3.2    -0.8    -5.1            -5.4                                          2009

* column excluded by RR because of Excel error
^ data excluded by RR

Note that the 1951 data point for New Zealand is the only data point used by RR for that country. The data points from 1946 to 1949 for New Zealand are excluded. Tab A of the aforementioned spreadsheet shows the following numbers for New Zealand from 1946 to 1955:

           DEBT/GDP AND REAL GDP GROWTH FOR NEW ZEALAND: 1946-1955

Year                1946  1947  1948  1949  1950  1951  1952  1953  1954  1955
------------------ ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Debt/GDP(%)        134.0 120.4 117.2 111.5  87.7  91.8  85.8  79.3  75.3  73.8
Real GDP Growth(%)   7.7^ 11.9^ -9.9^ 10.8^ 14.7  -7.6   4.3   3.4  13.8   1.9

^ data excluded by RR

As can be seen, New Zealand had real GDP growth of 14.7% the year before and 4.3% the year after the -7.6% growth in 1951. Hence, if RR had used a debt threshold of 85% of GDP, the average rate of growth would have been 3.8 percent. On the other hand, if RR had used a debt threshold of 95% of GDP, New Zealand would have had no data points. Both of these calculations assume that RR continues to exclude 1946 through 1949. If these are included, the averages become 4.6 and 5.1 percent, respectively. Only by using a threshold of 90% of GDP and excluding 1946 through 1949 did RR come up with -7.6 percent. A cursory inspection of the data, as I have done here, would have shown the -7.6 figure to be an unrepresentative outlier, requiring some sort of corrective action.

That cursory inspection also turns up the real GDP growth of -10.9% for the U.S. in 1946. This was the year after World War II ended so it's no surprise that real GDP dropped that year. If that year had been excluded, the average real GDP growth for years that the U.S. was above the 90% threshold would have been +1.0 percent instead of -2.0 percent.

One might argue that Belgium's real GDP growth of 15.2% in 1947 was also an outlier. Excluding that year, however, just drops the average real GDP growth for years that Belgium was above the 90% threshold from 2.6% to 2.0%. This is because the effect of an outlier is much greater in a small country sample when the weighting is done per country as was done by RR.

The following table shows the effect on the average real GDP growth for all years above the 90% threshold of various corrections and changes in calculation method:

 AVERAGE REAL GDP GROWTH FOR DEBT OF 90 PERCENT OF GDP OR ABOVE FOR VARIOUS SCENARIOS

                                            New                    Aus-
Belgium* Greece   Italy Ireland   Japan Zealand      UK      US  tralia* Canada*  TOTAL  Scenario
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------  --------
            2.9     1.0     2.4     0.7    -7.6     2.4    -2.0                   -0.02  RR (Reinhart and Rogoff)
    2.6     2.9     1.0     2.4     0.7    -7.6     2.4    -2.0                     0.3  + fix Excel Error
    2.6     2.9     1.0     2.4     0.7     2.6     2.4    -2.0                     1.6  + include 1946-1950 for New Zealand
    2.6     2.9     1.0     2.4     0.7     2.6     2.4    -2.0     3.8     3.0     1.9  + include 1946-1950 for Australia & Canada

   64.2    55.3    10.3    17.1     7.6    12.9    45.6    -8.0    18.9    14.8   238.6  Total of all country-years
   25.0    19.0    10.0     7.0    11.0     5.0    19.0     4.0     5.0     5.0   110.0  Count of country-years
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------  ----------------------
    2.6     2.9     1.0     2.4     0.7     2.6     2.4    -2.0     3.8     3.0     2.2  Country-year weighting, all data

            2.9     1.0     2.4     0.7             2.4    -2.0                     1.2  RR minus New Zealand
            2.9     1.0     2.4     0.7             2.4     1.0                     1.7  RR minus New Zealand and 1946 for U.S.
    2.6     2.9     1.0     2.4     0.7             2.4                             2.0  RR minus countries with no cases after 1951
    2.0     2.9     1.0     2.4     0.7             2.9                             2.0  RR for 1952-2009 instead of 1946-2009
    2.0     2.9     1.0     2.4     0.7                                             1.8  RR for 1980-2009 instead of 1946-2009

* column excluded by RR because of Excel error
^ data excluded by RR

The first line shows the slightly negative figure calculated by RR (Reinhart and Rogoff). The next 4 results are in response to various corrections suggested by HAP. The second line shows an improvement of 0.3% when the infamous Excel error is fixed. The biggest improvement of 1.3% occurs in the third line when the missing years of 1946 to 1949 are included for New Zealand. Another improvement of 0.3% occurs when the missing years of 1946 to 1950 are included for Australia and Canada. Finally, another improvement of 0.3% occurs if the data is weighted by country-year instead of by country as suggested by HAP. This gives a real GDP growth of 2.2 percent given by HAP in the Abstract on page 1 of their critique.

The final 5 lines show that, even if one insists on weighing the data by country instead of country-year, any reasonable attempt to minimize the effect of outliers will bring the result much closer to HAP's value of 2.2% than RR's value of -0.02%. The first of these shows that simply excluding the outlier of New Zealand will cause an improvement of 1.2 percent. The second shows that another improvement of 0.5% occurs if one excludes the outlier of the U.S. in 1946.

A more consistent way of dealing with the small samples of debt right after World War II would be to exclude all countries with no case after 1951. This would raise the real GDP growth to 2.0 percent, nearly as high as the HAP value of 2.2 percent. The same result would occur if the starting year of the data was moved from 1946 up to 1952. The final line shows that, if the study were to simply focus on the "modern era" after 1980, the result would be a nearly-as-high 1.8 percent. As can be seen, any of the fixes beyond merely fixing the Excel error would bring the calculation much closer to HAP's value of 2.2 percent than RR's value of -0.02 percent.

What is the lesson to be learned from all of this?

As mentioned here and here, the Reinhart and Rogoff paper was not peer-reviewed. However, the latter article makes the following interesting comment:

So the answer is to only accept peer-reviewed work as economic knowledge, right? Nope. That would be a) too limiting, and b) wouldn't advance the epistemological cause as much as you think. Peers have their own sets of biases, particularly as gate keepers.

I do think that peer-review does have a role to play but I can see that it's not the only answer. However, it does seem that we could at least clearly label what is peer-reviewed and what is not. I don't recall the absence of peer-review having been mentioned once during the public debate of the past three years. Only once the Excel error was found did we hear, "Oh yeah, that paper was never peer-reviewed".

There is an additional step that I think would help a great deal. For any paper to be taken seriously, the authors should have to give their sources AND show their work. In their online appendix, RR stated:

We took great pains to provide the data in as accessible form as possible, including especially meticulous source documentation in the spreadsheets, far more than one sees normally posted with journal papers. So we are simply stunned when bloggers and irresponsible commentators say we have not shared our debt data. Open access to our data has been central to our whole project.

I believe that RR is referring to the links to data that they have posted here. However, it seemed that HAP had to go through a great deal of effort to recreate RR's numbers. It was only by requesting the original Excel spreadsheet that they were able to start recreating the numbers. Speaking of the spreadsheet, I was unable to find a copy of the spreadsheet anywhere on the web even now. I manually typed in the numbers that appeared in the one graphics that I saw on the web and added it as tab C in my spreadsheet. I then tried to reproduce the numbers in the spreadsheet using RR's sources but was unable to find all of the data. Fortunately, HAP posted the zip file with their spreadsheet and I was able to replicate the numbers with that.

Why don't economists just post their original spreadsheets? There may be many reasons. Some may be willing to put up with peer-review when required but not want every pointy-headed number-cruncher with too much time on their hands to be going through their work. I suspect that those number-crunchers would catch a number of errors or questionable methodology that peer-review would not catch. In addition, some economists might feel that publishing their spreadsheets would reveal trade secrets and/or help other economists to compete in their area of study. Hence, I think that it's largely up to those who consume the studies to demand that the work be released. Of course, economists would still be free to release studies without peer-review and showing precisely how they arrived at their conclusions. But if those studies were simply ignored or treated as interesting ideas until they can be verified, I suspect that many of those economists would be willing to "show their work".

Note: There is a discussion of this post at this link.