Macro Roundup

Important Research from David Splinter (you will likely cite this) looks the impact of taxes and transfers on the middle of the income distribution (middle three quintiles of population, for a four person household the range is $31,400 to $168,200) and finds that since 1979 non-elderly middle-class market income increased 39 percent in real per person terms. The increase was 57 percent when accounting for taxes and transfers. He finds that income support for this group is a recent phenomenon as prior to 2000, market income and income after taxes and transfers grew together whereas since 2000,middle-class income after taxes and transfers grew three times faster than market income

In terms of their share of transfers/ the tax burden he finds, "...Focusing just on amounts for non-elderly households, between 1979 and 2016, the share of means-tested transfers received by middle-class households increased from 27 percent to 49 percent. Their share of federal taxes paid fell from 45 to 31 percent..."

However he also finds“on average, non-elderly, middle-class households pay slightly more in taxes than they receive in current transfers and social insurance benefit” though he notes that the payroll tax burden exaggerates the lifetime burden on these households and that“…Many in the middle class are net beneficiaries as well….”

Interestingly he finds a structural break in 2000. Prior to 2000 middle-class incomes grew at the same rate before and after taxes and transfers, and since then income after taxes and transfers grew three times faster (see Figure 6)"...In other words, between 1979 and the late 1990s, after-tax, after-transfer income and market income of the middle class grew at about the same rate. Since 2000, middleclass income after taxes and transfers grew three times faster than market income. In addition to boosting cumulative income growth over this period, Figure 6 shows that federal policy substantially mitigated the temporary sharp declines in middleclass market incomes that occurred during the 2001 and 2007 recessions. Increasing transfers to non-elderly middle-class households resulted from growth in Medicaid, disability, and other transfers. Between 1979 and 2016, Figure 7 shows that these transfers grew from about 4 to 11 percent of middle-class market income. For the non-elderly middle-class, average real per person transfers increased $1,360 for Medicaid, $250 for disability and other payments from Social Security, and $190 for SNAP and SSI transfers. These increases occurred throughout the middle class, but especially for the lower-middle class. Total transfers among non-elderly average households increased $3,500 for the second quintile, $1,800 for the middle quintile, and $1,000 for the fourth quintile (2016 dollars)..."

There is a good analysis of what sort of additional taxes would be required to fund new levels of transfers (see Table 2):“….For instance, raising the incomes of poor households by “taxing the rich” is straightforward when the number of poor households receiving transfers is a relatively small share of the population. As these poor households earn only a small share of total income, meaningful increases in income can be financed with modestly higher taxes on the remaining tax base. However, increasing the number of households that benefit from transfers (or tax cuts) is costly for two reasons: First, it mechanically increases the number of recipient households and reduces the number of paying households. Second, it requires higher marginal tax rates on paying households that cause a narrowing of the tax base due to avoidance and behavioral changes. Table 2 provides the results of a simple empirical exercise examining this tradeoff: If you raise the income of specified households by 10 percent and fund these transfers with taxes on higher-income households, what is the necessary tax rate?...”

Core findings, “…The “middle class” has benefitted from government redistribution in recent decades. For individuals in non-elderly households in the middle three income quintiles (the middle class), the share of federal taxes decreased, and the share of transfers increased. Between 1979 and 2016, market income per person increased 39 percent. But when accounting for taxes and transfers income increased 57 percent. Middleclass income support, however, is a recent phenomenon. Before 2000, market income and income after taxes and transfers grew together. Since 2000, middle-class income after taxes and transfers grew three times faster than market income. In a revenue neutral exercise, we explore the limits of further support to the middle class…In our analysis of taxes and transfers, we focus on individuals in non-elderly households in the middle three quintiles (60 percent) of the income distribution, whose material living standards provide a broad view of middle-class incomes and changes over time.1 Although the elderly middle-class is also important, we focus on non-elderly households in order to avoid the challenge of inferring the income class of non-working retirees. Doing so also allows us to examine the taxes paid and benefits received by households during their working and child-rearing years and to abstract from issues related to the aging of the population and the substantial growth in Social Security, Medicare, and Medicaid benefits…. In 2016, according to estimates using data from the Congressional Budget Office (2019), the average income earned from market activities—like employment, business ownership, or interest—was about $71,900 per non-elderly middle-class household. Social insurance and means-tested transfers boosted this group’s average income by $7,900 per household, and they paid (or their employer paid on their behalf) $12,600 in federal income, payroll, corporate, and excise taxes—including their contributions to entitlement programs such as Social Security and Medicare. Hence, the net effect of federal income transfers and taxes is to reduce the after-tax, after-transfer income of middle-class households only by about 7 percent. That “net burden” of taxes and transfers is historically low and relieves the middle class from much of the cost of paying for federal public goods or income support to other groups (like poor, disadvantaged, or elderly households)….”

Adam Looney, Jeff Larrimore and David Splinter, "Middle Class Redistribution: Tax and Transfer Policy For Most Americans," Aspen Strategy Group, December 10, 2020, https://www.economicstrategygroup.org/publication/tax-and-transfer-policy/

Matt Klein post on relative housing costs and average worker incomes finds, "...the most expensive housing—at least from the perspective of the average worker—is generally near a beach in southern California, Florida, or Hawaii...."

Interesting looking at major cities doesn't change this story, "...Focusing only on the biggest metros doesn’t change this basic narrative. Among the metro areas with at least two million people—and combining the San Francisco and San Jose metros on a population-weighted basis—the average workers’ income buys the most housing in the industrial heartland, while the most expensive housing is in Miami, Los Angeles, and San Diego. Amusingly, considering the recent migration trends, housing-adjusted average wages are almost identical in Austin, Texas, New York, and the SF Bay—and all three are more affordable than Denver or Las Vegas...."
Note I asked him, this does not include taxes (or as he pointed out quality of schools) but from the perspective of the average worker I'm not sure that changes the story outside of the margin given their income tax burden is relatively low

New Splinter using CBO data looks finds (as he has previously) that the progressivity of our tax code has increased significantly since 1979 and has more than doubled since 1986. This has been primarily driven by large tax credits for persons at the bottom, at the same time the average tax burdens of top earners have been relatively unchanged because lower marginal rates were offset by decreased use of tax shelters

The tax code has become more progressive“…Figure 2 presents average federal tax rates for the top, middle, and bottom quintiles. Between 1979 and 2016, tax rates decreased across the income distribution: for the top quintile by 0.6 percentage points (27.1 to 26.5 percent), for the middle quintile by 5.2 percentage points (19.1 to 13.9 percent), and for the bottom quintile by 7.6 percentage points (9.3 to 1.7 percent). The larger decline for those with lower incomes implies an increase in tax progressivity. Although a crude measure of progressivity, the gap between tax rates of the top and bottom quintiles increased by 39 percent over this period and since 1986 increased by 110 percent, suggesting a substantial increase in tax progressivity. Decreases in individual income taxes drove the overall decline in bottom- and middle quintile tax rates. The bottom-quintile decrease of 7.6 percentage points resulted from average income tax rates decreasing from zero to -11 percent and corporate tax rates decreasing about half a percentage point, with offsetting payroll and excise tax rate increases (Figure A1). The middle-quintile decrease of 5.2 percentage points resulted from average income tax rates decreasing 4 percentage points and corporate tax rates decreasing about 1 percentage point. The temporary middle-quintile decrease between 2008 and 2012 resulted from policies in response to the Great Recession: recovery rebates in 2008, making work pay credits in 2009 and 2010, and a payroll tax holiday in 2011 and 2012…. Figure 8 shows that between 1979 and 2016, the RS index of tax-and-transfer redistribution increased 59 percent (from 0.13 to 0.21). Since 1986, it increased 66 percent…

David Splinter, "U.S. Tax Progressivity and Redistribution,"National Tax Law Journal, December 2020, http://www.davidsplinter.com/Splinter-TaxProgressivity-NTJ.pdf

Christoph Irmscher, "‘The Knowledge Machine’ Review: Science’s Stubborn Majesty,"The Wall Street Journal, December 18, 2020, https://www.wsj.com/articles/the-knowledge-machine-review-sciences-stubborn-majesty-11608333769

Description of the scientific process, “…Where Popper envisioned scientific truth rising from a “mass extermination of hypotheses,” Kuhn saw it happening through paradigm changes by which a new way of scientific thinking creeps up on and eventually obliterates another, older, exhausted one. Mr. Strevens’s machine, by contrast, isn’t driven by revolutions or falsification efforts. Like the deadly apparatus in Kafka’s famous story “In the Penal Colony,”it works slowly, indifferently, oblivious to the world around it. Supremely self-sufficient, it is immune to the potshots of the “radical subjectivists,” those humanists or sociologists, disdained by Mr. Strevens, who believe that science has no special claim to objectivity. While the results of the machine’s work are open to debate, the machine itself is not; it is that stubborn imperviousness that, to the outside observer, seems “irrational.”…When left to its own devices, science will advance and eventually save us from ourselves. Or so Mr. Strevens assures us in his final, pandemic-inflected chapter….”