There was little economic news for American workers to celebrate this Labor Day, given the dismal employment statistics released by the Bureau of Labor Statistics on Friday. This Thursday night, President Obama will respond with a major speech on his plans to improve the economy and specifically to boost job growth. With that in mind, I’ve decided to focus my posts this week on jobs and unemployment. To start off, here are 10 key facts you should know about our current unemployment crisis…
In Right vs. Left I examine what the think tank pundits are saying about a specific policy issue.
The Obama administration recently announced that the Department of Homeland Security will review its 300,000 active deportation cases to identify and focus on immigrants who pose a threat to national security or public safety, or are repeat immigration law violators. Low-priority cases will be suspended and it is unlikely new cases will be brought against illegal immigrants who do not pose a threat. Under the new policy, young people who came to the U.S. as children, members of military families, same-sex partners of U.S. citizens, and others with extensive ties to the U.S. may be able to avoid deportation.
There are 11 million individuals in the US illegally and this policy change could have a big effect on who gets deported and who does not. Prioritizing the deportation of dangerous individuals is nothing new. What is new is the administration’s statement that it will forgo deportation of individuals identified as low-priority. Some may be allowed to apply for work permits.
So what are the think tank pundits saying about the new policy?
An analysis by the Economic Policy Institute shows that real wages for recent college graduates are lower than they were a decade ago. And college-educated women, even those in their twenties, still earn less than college-educated men.
Brian Michael Jenkins of RAND argues that a new, tiered approach to airline security could be more efficient and keep us safer.
At the NY Times, Catherine Rampell reports that many older unemployed workers fear their age is holding them back from getting work.
On Tuesday I wrote about Warren Buffett’s recent op-ed in the NY Times arguing that the super-rich aren’t paying their fair share of taxes. Yesterday Roberton Williams at the Urban-Brookings Tax Policy Center posted an interesting graph that shows how preferential rates for dividends and capital gains income affect the overall tax rates households pay.
The graph is a bit complicated at first glance, so here’s a breakdown:
- It shows effective tax rates (ETR), which sum individual income taxes and payroll taxes (I explained why payroll taxes matter in my previous post).
- The blue bars show the average ETR a household pays if they earn less than 10% of their income from dividends and gains on investments.
- The red, green, and purple bars show the average ETRs paid by households that earn more of their income from investments. The purple bars, for example, represent households that earn at least 2/3 of their income from these sources.
As I explained the other day and as the graph shows, the more of your income you earn from investments rather than wages, the lower your overall tax rate. And it’s almost exclusively the top earners who are making large shares of their money from investments and getting those lower tax rates shown by the red, green, and purple bars.
If this is still a little confusing, let’s consider two hypothetical families:
Family #1: An upper-middle class family earning $90,000 a year, which puts them in the fourth income quintile. 97% of families in this group make less than 10% of their income from capital gains and dividends. So this family is almost certainly going to be in the blue bar group and will likely pay an average effective tax rate of 16.1%.
Family #2: A super-rich family earning $5 million a year, which places them in the top 0.1% of earners. Almost half of families in this category make more than 10% of their income from capital gains and dividends. If our hypothetical family earns half of their income from these sources, they will be part of the green bar group and will be paying an effective tax rate of around 15%, lower than Family #1.
Why Investors Pay Less Tax than the Rest of Us
Urban-Brookings Tax Policy Center // Roberton Williams // August 31, 2011
FYI, these are the income groups shown in the graph:
Lowest quintile: < $17,000 Top quintile: > $103,500
Second quintile: $17,000 – $33,500 Top 1%: > $532,500
Middle quintile: $33,500 – $60,000 Top 0.1%: > $2,179,000
Fourth quintile: $60,000 – $103,500
The LA Times describes how public-private partnerships have helped keep California state parks operating in a time of tight budgets.
Richard Epstein of the Hoover Institution argues that price controls have led to shortages of cancer drugs.
Brad Plumer at the Washington Post discusses how a pre-paid, “rainy-day” government fund for disaster relief could benefit us as natural disasters become increasingly expensive.
The Heritage Foundation’s Hans Von Spakovsky examines the controversy over new voter-identification laws in several states.
“Greater New Orleans continues to recover and in some ways is rebuilding ‘better than before’ with emerging signs of a healthier economy, better social outcomes, and improved schools and basic services.” – From “The New Orleans Index At Six”
This week marks the sixth anniversary of Hurricane Katrina’s devastation in New Orleans and the Gulf Coast region. A new book from the Brookings Institution and a report from their partner, the Greater New Orleans Community Data Center, explore how far New Orleans and the Gulf region have come since the disaster and the challenges these areas still face.
Before the hurricane struck in 2005, New Orleans struggled with high crime and poverty; a sluggish economy; dysfunctional education, healthcare, and criminal justice systems; and racial and economic inequality. Though the city still wrestles with these and other problems, Brookings expert Amy Liu argues that the utter destruction wreaked by Katrina created a blank slate upon which a great deal of systemic change could be enacted.
Since Katrina, New Orleans has made significant gains in the following areas:
- A strong educational reform and charter school movement has taken hold, test scores have improved, and a greater share of students are now at schools that meet state standards.
- Violent and property crime have fallen, though violent crime rates are still higher than the national average.
- Reforms have made the criminal justice and healthcare systems more equitable.
- Entrepreneurship has boomed and the rate of new business development is much higher.
- The gap has been narrowing between the median income and average annual wages in New Orleans and the national averages for these figures.
- Ethics reforms have reduced government corruption.
- A better disaster-response plan has been developed that addresses many of the evacuation failures that occurred during Katrina.
Three key factors made these developments possible:
- Residents used the holes left by the disaster as opportunities, building high levels of citizen engagement and develop an “informed and sophisticated network” of community-based organizations.
- Local efforts were backed by government and philanthropic recovery funding, the assistance of national experts, and support from federal agencies such as HHS, DOJ, and HUD.
- The ongoing rebuilding efforts buffered the local economy from the worst of the recession. The rate of job loss in New Orleans has been one-fourth that of the nation as a whole.
Although much progress has been made, challenges remain. Some of the most critical:
- Environmental issues that contributed to the disaster, such as the degradation of local wetlands, have yet to be addressed.
- Though it has been diversifying, the regional economy still relies heavily on industries that are shrinking – oil and gas, shipping, and tourism.
- Significant racial disparities in income still exist and while white incomes increased over the past decade, black and Hispanic incomes fell.
- Housing costs jumped after Katrina and remain high.
- A great deal of rebuilding remains to be done and some neighborhoods are still damaged and vacant.
- Much of the progress was built on recovery funds that won’t be around forever, so reformers will have to find new sources of money.
These reports suggest that, though work remains to be done, the people of New Orleans have used the tragedy of Hurricane Katrina as an opportunity to bring much-needed change to their city.
Resilience and Opportunity Lessons from the U.S. Gulf Coast after Katrina and Rita (book)
Brookings Institution Press // Edited by Amy Liu, Roland V. Anglin, Richard M. Mizelle Jr., Allison Plyer // 2011
The New Orleans Index at Six
Greater New Orleans Community Data Center // Allison Plyer, Elaine Ortiz // August 2011
Guess what share of his income the third richest person in America paid in federal taxes last year? 45%? Maybe 38%? It has to be at least 25%, right? Actually, Warren Buffett paid 17.4%, a lower tax rate than any of the twenty other people working in his office, who paid an average of 36%. Interestingly, Buffett isn’t happy about his low tax bill. Two weeks ago he wrote an attention-grabbing op-ed in the New York Times asking Congress to please tax him and other super-rich folks more.
So, just how does it happen that Warren Buffett pays a lower tax rate than his coworkers? It has a lot to do with how different types of taxes are structured.
- The super-rich make most of their income from earnings on investments, rather than wages paid for work (which is where the average, non-retired person makes most of her money). People who “make money with money,” as Buffett puts it, see much of their income taxed at the capital gains rate of 15%, rather than the highest personal income tax rate of 35%.
- People who earn more pay a smaller portion of their income in payroll taxes (the taxes designated for Social Security, Medicare, and unemployment), since Social Security taxes are only paid on income up to $107,000.
According to the Urban-Brookings Tax Policy Center, Buffett’s point about the discrepancy between the tax rates on investment income and wage income is a valid and important one. However, most high-earners pay a higher tax rate than Buffett’s 17% and most low- and middle-earners pay a lower rate than the 36% Buffett’s colleagues pay. For Buffett to imply that all, or even most, wealthy people pay a lower tax rate than low- and middle-income people is inaccurate.
The thing is, Buffett’s argument doesn’t really apply to your run-of-the-mill millionaires making $1 or $2 million a year. A lot of those people still earn most of their income from wages so they end up paying higher tax rates than someone making, say, $50,000. It’s the super-rich investors like Buffett who get the low tax rates. The average federal tax rate for the top 400 taxpayers is around 18%, which is significantly lower than the rate for someone making, for example, $180,000 or $1 million. The graph at left, from the excellent blog Visualizing Economics, shows just how far the average tax rate for the top 400 taxpayers has dropped in the past two decades.
Another thing Buffett has been criticized for is not mentioning the corporate income tax in his article. Corporations pay taxes too, at a rate of about 35%, but since corporations aren’t people the burden of these taxes gets passed on to actual humans – to investors in the form of lower returns on their investments or to workers in the form of lower wages. Buffett’s true net tax rate, some argue, is 17.4% plus whatever share of corporate taxes fall on investors. The problem is, economists can’t agree on who, investors or workers, bears what share of the corporate tax burden. Given this disagreement, perhaps Buffett was right to leave it out of his argument.
Beneath all this is the question of fairness and how much every group should ideally contribute. For more on this, see one of my older posts here.
Stop Coddling The Super-Rich
Warren E. Buffett // NY Times // August 14, 2011
Was Buffett Right? Do Workers Pay More Tax than Their Bosses?
Tax Policy Center // Roberton Williams // August 23, 2011
Chris Edwards of the Cato Foundation discusses some of the negative consequences of government infrastructure projects.
Michael Mussa of the Peterson Institute dissects what kind of growth rate we can realistically expect for the U.S. economy in the near future.
The American Enterprise Institute explains how competitive bidding could save Medicare money.
At the Urban Institute’s Metrotrends blog, Margery Turner outlines on how we can reduce neighborhood segregation along racial and ethnic lines
Almost half of all births in the U.S. are of children from racial and ethnic minority groups, according to a Brookings Institution analysis of 2010 Census data. This milestone is part of a demographic shift that has been happening for decades, as each successive generation of Americans becomes increasingly diverse (see the graph below). The trend results from variations in immigration patterns, fertility rates, and age distributions across different racial and ethnic groups.
What I find most interesting about this analysis is a map Brookings created that shows which counties have the highest percentage of non-white births. You can see a band of high concentrations running along the bottom of the mainland U.S., particularly in the Southwest.
This cool video, which illustrates how the population of people of color will grow between 1990 and 2040, shows the same geographic trend: the epicenter of America’s increasing diversity is the South and, particularly, the Southwest.
So what does this mean for national politics? Take a look at the Brookings map above and focus on the South, traditionally a key GOP stronghold. See the blue (which indicates high levels of diversity) along the western edge of Texas and winding through Mississippi, Alabama, Georgia, and South Carolina? Now look at the map below, which shows the 2008 presidential election results by county. You see the same blue areas (indicating votes for Obama) on the western border of Texas and winding through those four Deep South states.
As long as the GOP continues to be the party of, by, and for white people, it is fighting a losing demographic battle, because many of the states it has traditionally relied on winning are quickly becoming less white. North Carolina and Virginia went Democratic in the last presidential election for the first time in 32 and 44 years, respectively. Could someplace like Georgia be next?
America Reaches Its Demographic Tipping Point
Brookings Institution // William H. Frey // August 26, 2011
Yesterday I wrote about the landmark 1996 welfare reform and its impact over the past 15 years. The reform instituted work requirements and time limits on welfare receipt and changed the way the program was administered. While the new model (TANF) led to some early successes, these have been wiped away by the economic downturn and, perhaps more troubling, the program has proven ill-equipped to buffer families from the harsh impact of the recession.
TANF has responded weakly to the increased need brought on by the recession. From the start of the recession in 2007 through 2010, the national unemployment rate increased by 88% but TANF caseloads grew only 14%. Food stamps (SNAP) caseloads, in comparison, increased 60% over roughly the same time period. Of course, not all unemployed people need the cash assistance TANF offers – they may have their own savings to draw on and/or be receiving unemployment benefits. But in one in four states, TANF caseloads have actually decreased since the recession began, a counterintuitive and harmful trend.
Why hasn’t TANF played a greater role in helping people weather the recession? The authors of a new report from the Urban Institute suggest that the ’96 reform may have a lot to do with it. Here’s how:
- Welfare reform made it much harder to get benefits. Meeting work requirements is difficult when there are no jobs to be had, and some families may have already exhausted their lifetime benefits eligibility of five years.
- Welfare reform changed the funding structure of the program to a fixed block grant whose real value (adjusted for inflation) has declined 28% in the past fifteen years. Because federal TANF funding does not change from year to year in response to need or economic conditions,** benefit levels are low and caseloads must be limited.
- Welfare reform gave states significant freedom in determining how to administer the program and set eligibility requirements, and individual states have exercised this discretion very differently. For example, the share of families living below the poverty line who receive TANF ranges from 8% in Texas to 80% in California. During the recession, some states have significantly increased TANF coverage while others have cut their caseloads.
- Welfare reform gave states greater flexibility to spend TANF money on items other than cash assistance, such as job development, childcare, and other poverty-reduction measures. While these measures can help create and support jobs, they do not offer immediate assistance to families in crisis. Currently only 39% of TANF funding is spent on direct cash assistance, compared to 73% in 1997.
While the intent of the ’96 welfare reform – to encourage employment and reduce dependence on government assistance – may have worked well during the strong economy of the late 90s, it reduced the ability of the program to provide a robust response in times of economic crisis. How might Congress make welfare a better tool for helping people weather future recessions?
- Allow welfare recipients the flexibility to participate in job training and education instead of work when jobs aren’t available.
- Expand TANF funding in times of need and increase funding each year to keep pace with inflation.
- Provide increased oversight of state welfare policies to ensure states aren’t making harsh cuts when individuals need welfare the most.
What Role is Welfare Playing in this Period of High Unemployment?
Urban Institute // Sheila R. Zedlewski, Pamela J. Loprest, Erika Huber // August 17, 2011
“A safety net built around work – when there is no work”, The Hill
MDRC // Gordon Berlin // August 22, 2011
**While the stimulus created a $5 billion TANF emergency fund, it was exhausted within a year and has not been renewed.