Federal government finances deteriorated by $6.5 trillion in 2012

By James D. Agresti
January 30, 2013

In January 2013, the U.S. Treasury released its annual “Financial Report of the United States Government,” which presents an “accrual” accounting of the federal government’s finances. In contrast to the White House budget, which primarily uses “cash” accounting, this Treasury report uses accounting standards like those that the government requires of large corporations.

Based on this newly published data, Just Facts calculates that our national government has $67.4 trillion in debts, liabilities, and unfinanced Social Security/Medicare obligations. This represents a significant deterioration over the past year. Although the official federal deficit for fiscal year 2012 was $1.1 trillion, this comprehensive accounting reveals that the federal government’s fiscal position deteriorated by $6.5 trillion—or an average of $53,000 per household.

Beyond the commonly cited national debt, the accrual accounting methods used in this Treasury report account for other federal financial obligations, such as retirement and healthcare benefits for federal employees, liabilities from government-sponsored enterprises (like Fannie Mae and Freddie Mac), and obligations to current participants in Social Security and Medicare that exceed the programs’ dedicated revenues.

The report also accounts for federal government assets, such as cash on hand, certain properties and equipment, and stocks in companies such as General Motors. The report, however, does not account for federal stewardship land and heritage assets, such as national parks and the original copy of the Declaration of Independence. While these items have tangible value, the report explains that the government “does not expect to use these assets to meet its obligations.”

In total, the federal government’s comprehensive fiscal shortfall now equals $214,000 for every person living in the U.S. or an average of $557,000 per household. The precise methodology for computing these figures is detailed in Just Facts’ national debt research, which will soon be updated with this new data. This research also shows that this shortfall is based upon federal agency projections that incorporate some highly optimistic assumptions. As such, the true shortfall may be considerably worse.

Further reading:
The Reality of the Federal Government’s Fiscal Hole

Consequences of the National Debt

Paul Krugman’s claims about the dangers of government debt

Roe v. Wade allows abortions for all 9 months of pregnancy, not just the first 3

By James D. Agresti
January 18, 2013

With the 40-year anniversary of the Supreme Court’s ruling in Roe v. Wade just days away, media outlets are trumpeting a Pew Research poll showing broad support for the court’s decision, which overturned the laws of 30 states that barred abortions except to save the life of the mother. However, the poll misrepresents Roe v. Wade in a way that manipulates public opinion in favor of the ruling.

The flaw underlying this Pew poll is revealed by a 2002 Gallup analysis of 146 survey questions about abortion posed by 18 different polling organizations. Gallup found that public opinion was generally “consistent across differently worded questions. But in a few cases, particularly with respect to Roe v. Wade, the responses vary widely, depending on the information provided in the question.” Lydia Saad, the senior Gallup poll editor who authored the analysis, explained:

Most survey questions about Roe v. Wade provide the respondent with information about the case, and these details appear to have a major impact on the answers. … If Roe v. Wade is presented only as legalizing abortion in the first three months, support for the decision is much higher than if it is characterized as making abortion legal throughout pregnancy or for any reason.

The designers of the Pew poll boost support for the ruling by telling respondents: “In 1973 the Roe versus Wade decision established a woman’s constitutional right to an abortion, at least in the first three months of pregnancy. Would you like to see the Supreme Court completely overturn its Roe versus Wade decision, or not?”

That language is misleading because Roe v. Wade, along with its accompanying ruling, Doe v. Bolton, mandate that abortion be legal up until the point of birth if any one physician willing to perform an abortion says it is needed for “the preservation of the … health of the mother.” Furthermore, Roe cites specific examples of what may be considered harmful to a mother’s health, such as the “stigma of unwed motherhood,” the work of “child care,” and “the distress, for all concerned, associated with the unwanted child.”

Likewise, Doe v. Bolton, which was issued by the Supreme Court on the same day as Roe v. Wade with an order that they “are to be read together,” states that “the medical judgment may be exercised in the light of all factors — physical, emotional, psychological, familial, and the woman’s age — relevant to the well-being of the patient. All these factors may relate to health.”

Thus, “health,” as defined by Roe v. Wade and Doe v. Bolton, provides broad leeway to perform abortions throughout pregnancy. In Roe v. Wade, the majority wrote that their ruling does not permit abortions “at whatever time, in whatever way, and for whatever reason” a woman chooses, but they provided no example of a circumstance where abortion could be prohibited. The implications of this are evident in the words of noted abortionist Warren Hern, author of “the nation’s most widely used textbook on abortion standards and procedures.” In 1997, Hern explained: “I say every pregnancy carries a risk of death,” and “I will certify that any pregnancy is a threat to a woman’s life and could cause grievous injury to her physical health.”

Nonetheless, some states have passed laws that restrict late-term abortions without the broad health exceptions required under Roe v. Wade. Moreover, a 2011 New York Times op-ed explains that abortion proponents have generally shied away from challenging these laws in court because the laws are popular with the public and because of fear that the Supreme Court may strike down Roe. A number of Democratic Senators and Representatives (including Barack Obama) have sponsored federal legislation to overturn all local, state and federal laws that defy Roe v. Wade, but the bills were not voted upon.

Regardless of what current abortion laws may be, this new Pew poll significantly misrepresents Roe v. Wade, thereby manufacturing support for it. On top of this, major medias outlets such as the Associated Press, CNN, Reuters, Politico, and the Los Angeles Times are broadcasting these misleading poll results to their audiences. Perhaps most critically, in the same articles, some of these media outlets explicitly spread the falsehood that Roe merely permits abortions for the first three months of pregnancy.

Raising payroll taxes to save Social Security will cost the average worker $73,000

By James D. Agresti
January 12, 2013

To resolve Social Security’s looming financial shortfalls, one of the primary ideas being promoted is to raise taxes. Such a proposal was recently outlined in a Fox Business commentary by financial planning and retirement specialist Gail Buckner, who asserts that a “small” increase in the payroll tax rate would cover Social Security’s projected shortfalls for the next 75 years. However, a careful look at the plan’s details show that the costs would be substantial, and even with these extra taxes, the program would still be fiscally unsound.

To summarize the plan and its political implications in Buckner’s words:

I bet if you asked your friends and colleagues if they’d be willing to pay 1.3% more to shore up Social Security for the foreseeable future, the overwhelming response would be, “Is that all we need to do? I’m in!”

Of course, no politician will ever mention this. That would entail uttering the deadly phrase “raise taxes.” (It would also make Social Security less useful as a means for scaring voters.) But, really, that’s what it would take: 1.3% more- if we act today. The longer we delay, the bigger the adjustment.

In reality, this proposal would cost workers far more than she suggests. Buckner arrives at her 1.3% figure by starting with the Social Security Administration’s projection of a 2.67% long-term actuarial funding deficit. “In other words,” she says, “if we raised the payroll tax rate by this amount today, we would solve the problem.” She then slashes this figure of 2.67% in half because “employers and employees split” the payroll tax. However, that math is based upon a common misunderstanding about who bears the burden of taxes. As explained in the textbook Public Finance:

When we consider the burden of a tax, we must distinguish between the burden as it is specified in the tax law and the true economic burden. … Consider a simple example. The U.S. Social Security payroll tax requires that employers and employees split the tax, each paying one-half of the total. … But, the true economic incidence of the payroll tax is quite different. The employer has some ability to adjust the employee’s wage and pass the employer’s half of the tax on to the employee. In fact, the employee may bear the entire tax.

The Congressional Budget Office (CBO) concurs: “In the judgment of CBO and most economists, the employers’ share of payroll taxes is passed on to employees in the form of lower wages.” Likewise, the U.S. Government Accountability Office states: “While employees and employers pay equal amounts in social insurance taxes, economists generally agree that employees bear the entire burden of social insurance taxes in the form of reduced wages.” Furthermore, self-employed workers must directly pay both the employee and employer taxes.

Thus, workers would bear the full 2.67% burden of the tax, not 1.3%. This may not sound like much at first glance, but this is a percentage point increase, not a percentage increase, meaning that the current Social Security payroll tax of 12.4% would increase by 2.67 percentage points or by 21%. And because this additional tax is levied every year, it would add up to significant money. For example, under this plan, average-wage earners now entering the workforce would forfeit an additional $73,458 of their salaries to payroll taxes over the course of a 45-year career. (This is measured in 2012 dollars. Without accounting for inflation, the figure is $150,323.)

Moreover, these additional taxes may not even come close to solving Social Security’s fiscal problems. This is because the actuarial deficit of 2.67% is based upon the Social Security Administration’s intermediate projections, which are highly tenuous. Although these projections “reflect the Trustees’ best estimates of future experience,” the Trustees emphasize that “significant uncertainty” surrounds these projections. More importantly, the track record of these projections offers cause for serious concern. For example:

• In 2010, the Social Security Administration projected that the program’s trust fund would increase in real value through 2020. One year later in 2011, this projection was revised to 2018. One year after this, the projection was revised to 2012—or eight years earlier than estimated only two years prior. Hence, the trust fund in now projected to start declining in real value in 2013.

• The 2008 Trustees Report projected that Social Security would have $1.31 in income for every dollar it spent in 2011. The actual figure turned out to be $1.09.

• In 1977, President Carter signed a bill that increased Social Security payroll taxes and changed the formula governing benefit increases. At the signing ceremony, Carter said it “is never easy for a politically elected person to raise taxes,” but these changes “will guarantee that from 1980 to the year 2030, the Social Security funds will be sound.” As it turned out, the program’s trust fund continued to deteriorate until 1983 when President Reagan signed a bill that further increased taxes, raised the retirement age, and made other changes to keep the program solvent.

Perhaps more significantly, a recent paper in the journal Demography found that the Social Security Administration is using an antiquated method to project life expectancies, and as a result, the program “may be in a considerably more precarious position than officially thought.” For example, the study’s findings indicate that by 2031, Social Security Administration projections understate the cost to keep the program solvent by an average of $553 per taxpayer per year (in 2012 dollars). And this accounts for only one of many uncertainties in the government’s projections.

Hence, if politicians raise taxes to cover Social Security’s projected shortfalls, the actual shortfalls might be much greater, requiring yet more tax increases. This has been the repeated history of the program. In fact, when the program began, the federal government sent a brochure to workers stating that “the most you will ever pay” to fund Social Security is an annual tax of 6% on your first $3,000 of earnings. Accounting for inflation, this is a maximum tax of $1,741 per person. Yet in 2013, the maximum Social Security payroll tax is $14,099 or eight times the promised maximum. This does not include other taxes that are also levied to fund Social Security.

Buckner says there is “plenty of time to act” to fix Social Security because the trust fund won’t become insolvent until 2033. In addition to the fact that this date is subject to a great deal of uncertainty, the longer we wait to address the problem, the higher the cost will be. For instance, if we wait until 2033 to fix the program’s finances, the Social Security Administration projects that payroll taxes would need to increase by 32.8% to keep the program solvent, as opposed to 21% if we act now. This same principle applies to our national debt: the longer we fail to get it under control, the larger the problem becomes.

Should the U.S. adopt Australia’s strict gun laws?

By James D. Agresti
December 20, 2012

In the aftermath of the Dark Knight shooting in Aurora, Colorado, media outlets were awash with misleading claims about violence and firearms. Since the tragic school shooting in Newtown, Connecticut, some of the same false assertions are being repeated, but another has emerged as a common talking point: this is the claim that Australia’s 1996 gun laws and government-funded gun buyback prove such policies are effective in stemming violence. Versions of this narrative have recently been circulated by ABC News, the New York Times, CNN, Slate, the Huffington Post, and countless other smaller outlets.

ABC News, for an example, published an article entitled, “Will Lessons From Down Under Stem the Undertaker Here?” In this piece, correspondent Nick Schifrin reports that strict Australia gun laws passed in 1996 have proved “extremely effective. In the last 16 years, the risk of dying by gunshot in Australia has fallen by more than 50 percent. The national rate of gun homicide is one-thirtieth that of the United States.”

Statistics like these do more to mislead than inform. First, a simple comparison of current firearm homicide rates between countries cannot possibly establish the impact of their gun control laws. This is because there are numerous other factors endemic to each country that impact homicide rates, such as their law enforcement and criminal justice systems, the portion of children raised in single-parent households, poverty rates, and many other relevant variables. Schifrin’s argument is analogous to an argument made by the NRA that right-to-carry states have a 28% lower murder rate than the rest of the country. Such statistics tell us little. To provide any legitimate indication of the effects of gun laws, before-and-after comparisons are almost always necessary.

Schifrin does provide a before-and-after comparison of the “risk of dying by gunshot in Australia” over the past 16 years, but this is deceptive because it accounts for lives taken with guns while failing to account for lives saved with guns. As shown in several studies summarized in the Journal of Criminal Law and Criminology, in the vast majority of cases where someone uses a gun for self-defense, a bullet is never even fired because the would-be assailant retreats when he discovers that his target is armed. Schifrin’s “risk of dying by gunshot” statistic fails to account for such scenarios.

The “risk of dying by gunshot” statistic also fails to account for weapons substitution, which occurs when murderers use whatever weapons are readily available to them. Would someone judge a gun control law to be a success if every averted gun murder were replaced by another type of murder? Of course not, but the press commonly cites statistics that fail to account for such outcomes. For these reasons, to assess the full effects of gun laws on homicides, one must look at all homicides, not just those committed with firearms.

The homicide data does not fit the storyline commonly advanced by the media. Quite to the contrary, the data shows that U.S. homicide rates have dropped more rapidly since the federal ban on assault weapons expired than homicide rates dropped in Australia after its strict gun laws were implemented. To be precise, seven full calendar years have transpired since the federal ban on assault weapons and high-capacity magazines elapsed in 2004, and over this entire period, the U.S. murder rate has averaged 3.9% lower than it was when the ban expired. Correspondingly, in the seven years that followed the implementation of Australia’s gun laws in 1997, the Australian murder rate averaged 0.4% lower than it was when the laws took effect.

If association equals causation—as the ABC article suggests—the expiration of the federal assault weapons ban was 10 times more effective in reducing homicides than the enactment of Australia’s tight gun laws and gun buyback. Of course, cause and effect cannot be proved because many other factors affect murder rates, and it is practically impossible to accurately isolate all of these effects. Nevertheless, the above graph allows us to observe trends and constrains the impact of many variables because the data is drawn from large population sets with limited demographic changes from year to year.

The other media outlets cited above draw similarly flawed conclusions based upon data from Australia. The New York Times editorial board also points to “a decline in murders involving firearms” that occurred after “the British government banned all private ownership of automatic weapons and virtually all handguns” in 1996. What the editors fail to mention is that homicide rates, which were relatively low to begin with, actually increased in the wake of this ban. Again, this does not prove cause and effect, but it does prove that the Times storyline is not founded in objective reality.

Other fallacies about violence and guns that are being propagated by media outlets include claims that “assault rifles” are legal in the U.S. and that guns are ineffective for self-defense. These and other falsehoods were addressed after the Dark Knight shooting in an article from Just Facts.

In the words of a major gun control analysis published by the National Academies of Science, “Drawing causal inferences is always complicated and, in the behavioral and social sciences, fraught with uncertainty.” This means that simplistic and misleading claims on all sides of the gun control debate have the potential to stoke public opinion for policies that lead to more deaths than would occur in the absence of these polices.

Warren Buffett’s fraudulent tax claims (part 2)

By James D. Agresti
December 6, 2012

Note: The first part of this two-part series is located here.

In addition to his skewed tax rate comparisons, Buffett advanced several other misleading narratives in his recent New York Times commentary. These pertain to (1) the negative effects of higher tax rates, (2) the notion that his proposed “minimum tax” will stop lobbyists from obtaining tax breaks, and (3) what it will take to get the national debt under control.

Buffett opened his op-ed by declaring that no negative economic fallout can possibly result from increasing taxes on the wealthy. To drive the point home, Buffett said that when he managed funds for investors, “Never did anyone mention taxes as a reason to forgo an investment opportunity that I offered.” However, the written record of Buffett’s storied career betrays this rhetoric. Indeed, some of his primary business and investment strategies involve calculated decisions to elude taxes:

[Buffett's] approach to portfolio management may appear quirky … but it has two important economic benefits … It increases aftertax returns. When you sell a stock at a profit, you will be hit with capital gains taxes, eating into your profit. The solution: leave it be. If you leave the gain in place (this is referred to as an unrealized gain), your money compounds more forcefully. Overall, investors have too often underestimated the enormous value of this unrealized gain—what Buffett calls an “interest-free loan from the Treasury.” The Warren Buffett Way, pages 173-4

Berkshire doesn’t pay dividends, and Buffett doesn’t like them. Why? Taxes. When dividends are paid, income is taxed twice. First, the company pays income tax; then the shareholder pays tax on his dividends. The Winning Investment Habits of Warren Buffett & George Soros, page 119

Unless you’re in the lowest tax bracket, you should buy only tax-free (municipal) bonds outside your retirement accounts. Otherwise too much of your bond income will end up in the hands of the IRS. The Intelligent Investor, page 106 (The preface and appendix of this book were authored by Buffett, and the following quote from Buffett appears on its cover: “By far the best book on investing ever written.”)

While these tax-avoidance strategies may have helped Buffett, creditable sources explain how such logical reactions to taxes can harm the economy. For example:

[I]t is marginal tax rates that affect incentives for taxpayers to work, to save, or to take advantage of various tax preferences. These incentives may distort taxpayer choice, which in turn may promote an inefficient allocation of society’s labor and capital resources. A less efficient allocation of labor and capital resources leaves society with a lower level of output of goods and services than it would otherwise enjoy in the absence of tax-system induced economic distortions. U.S. Joint Committee on Taxation

[H]igh capital gains tax rates discourage the realization of capital gains and encourage the realization of capital losses. Investors induced to hold appreciated assets because of capital gains tax when they would otherwise sell are said to be “locked in.” Lock-in effects impose efficiency losses when investors are induced to hold suboptimal portfolios with inappropriate risk or diversification, or to forego investment opportunities offering higher expected pre-tax returns. NTA Encyclopedia of Taxation and Tax Policy

[B]ecause the [corporate income] tax reduces capital investment in the United States, it reduces workers’ productivity and wages relative to what they otherwise would be, meaning that at least some portion of the economic burden of the tax over the longer term falls on workers. Congressional Budget Office

All of the economic impacts outlined above can reduce productivity, which inflicts escalating harm on America’s economy. As explained by the Congressional Budget Office, “A small change in the growth of productivity can, over a long period, have a larger effect on GDP than most recessions do … [because] the shortfall from a recession is generally temporary, whereas a change in the long-term rate of productivity growth reduces output by an ever-increasing amount.” This is only one of many economic consequences that can result from higher taxes on the wealthy, and of course, those with lower incomes.

Nevertheless, to support his argument that higher taxes on the wealthy won’t have negative effects, Buffett cited the rapid economic growth America enjoyed in the 1950s when top marginal federal tax rates on income and capital gains were far higher than now. This narrow focus on a few federal tax brackets obscures the countless larger realities that define these eras. For instance, during the 1950s, combined taxes at all levels of government consumed 23% of the U.S. economy, as compared to 26% over the past ten years. More relevantly, combined government spending, which is a broader measure of government’s economic footprint, averaged 22% of the economy in the 1950s versus 33% over the past ten years—a 50% increase. As the graph below shows, the 1950′s were marked by smaller government, while since 2009, government spending has been a greater portion of the economy than ever recorded in the history of the U.S., including the peak of World War II:

Perhaps most significantly, since the late 1950s, the federal government has spent a rapidly increasing share of its budget on social programs, many of which reduce peoples’ incentives to work and save, thus depriving the economy of their labor and investment. Even Lawrence Summers, Obama’s former chief economist and Clinton’s Treasury Secretary, affirmed that government assistance programs provide “an incentive, and the means, not to work.”

Buffett’s arguments for raising taxes on the wealthy are very similar to a campaign waged in 1969 to pass the “minimum tax,” which is now known as the “alternative minimum tax” or AMT. Buffett even used the same name (“minimum tax”) to describe his proposal. The detailed history of the AMT is documented here, but the condensed version is that it was sold to the public using rhetoric that targeted a small number of wealthy individuals amounting to 0.0002% of taxpayers. However, the tax was not automatically indexed for wage growth or even inflation, and now unless this tax is reduced, 11% of taxpayers will be liable for the AMT in 2013, and this figure will steadily rise to more than 50% by 2037.

Notably, Congress and President Obama did the same with the Affordable Care Act and did not index its taxes for wage growth or even inflation. Thus, due to a phenomenon known as bracket creep, these taxes—some of which were targeted only at high-income earners—will fall on an ever-increasing share of Americans as time progresses.

Buffett wrote that his proposal for a minimum tax will “block the efforts of lobbyists, lawyers and contribution-hungry legislators to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of ours.” This is deceptive not just because of the faulty tax rate comparison—but also because Buffett has proposed a minimum tax on “taxable income,” which excludes numerous categories of income. For example, one of the primary means by which wealthy investors limit their taxes is by investing in tax-free municipal bonds. Since federal law does not classify income from these bonds as “taxable income,” this income would be entirely exempt from Buffett’s minimum tax. Hence, instead of stopping wealthy influence peddlers from securing tax breaks, Buffett’s tax would raise the incentives to lobby so that their favored sources of income can be classified as nontaxable.

Finally, Buffett called for taming the national debt by bringing federal revenues up to 18.5% of GDP while bringing spending down to 21%. Ironically, the Congressional Budget Office has projected that if the Bush tax cuts and even some of the Obama tax cuts are renewed, federal revenues will reach 17.9% of GDP in just two years, which is 97% of Buffett’s preferred tax level. Meanwhile, the Congressional Budget Office has also projected that under current policies, federal spending is going to skyrocket far beyond Buffett’s target due to increasing costs from Social Security and mandatory healthcare programs such as Medicare, Medicaid, and the health insurance subsidies established under the Affordable Care Act. Yet, Buffett pushed for tax increases without offering a single specific proposal to control spending.

Buffett has called on Congress to “offer a realistic and concrete plan” for taming the national debt and has proclaimed that “nothing less is acceptable.” He has also designated revenue and spending levels that would allow the federal government to consume about the same share of the economy that it has averaged for the past 40 years. Paradoxically, to meet these targets, the federal government probably will not need the tax increases that Buffett is demanding, but it will unquestionably need serious spending cuts, which Buffett has thus far failed to address.

Warren Buffett’s fraudulent tax claims

By James D. Agresti
December 3, 2012
Revised 12/6/12

In the op-ed pages of last week’s New York Times, Warren Buffett again called for increased taxes on “the wealthy.” Buffett, whose net worth of $46 billion makes him the second-richest person in America, defined “wealthy” as those who earn more than half a million dollars per year or about .001% of his aggregate wealth. Buffett laced his arguments with explicit “outrage” and dramatic statistics about how the “ultrarich” pay federal tax rates “well below those incurred by people with income just a tiny fraction of ours.” Buffett’s figures, however, are based upon deceptive measures of taxes and income, which create a false impression that high-income earners pay a lower federal tax rate than other income groups—when in reality—the polar opposite is true.

Buffett distorts the truth about taxes via a two-step process. First, he entirely ignores corporate income taxes, which fall much harder on high-income earners. The effect of this lapse is evident in the Tax Policy Center’s estimates of federal tax burdens, which show that the federal corporate income tax burden on the top 0.1% of income earners is 10.7%, whereas this burden on the middle class is only 0.6%. By excluding these taxes, Buffett skews his figures to make it seem like high-income earners pay far lower tax rates than they actually do.

Second, Buffett uses two different definitions of income for his tax rate calculations, both of which artificially and significantly inflate the tax burdens of many taxpayers. Tax specialists explicitly warn that these narrow definitions of income (adjusted gross income and taxable income) cannot be used to accurately calculate tax burdens. For instance, the academic book Federal Taxation explains that using “taxable income” to compute tax burdens is a “bit misleading” and says “little about the true impact of a tax on the taxpayer.” Likewise, the Tax Policy Center cautions that adjusted gross income “is a very narrow measure of income” that will “understate taxpayers’ ability to pay taxes and overstate their ETRs [effective tax rates].” Nonetheless, Buffett skips back and forth between these two measures of income without regard for consistency and without regard for the fact that neither of them are honest measures in this context.

Relatively comprehensive estimates of federal tax burdens by the Congressional Budget Office (CBO) and Tax Policy Center both show that the wealthy pay a far greater share of their income in federal taxes than all other income groups. Buffett’s rhetoric advances a narrative that clashes with this reality, and his famous claim that his secretary pays a higher federal tax rate than him is based upon the same incomplete and misleading measures of taxes and income detailed above. The following graphs display the latest CBO data on federal tax burdens. Although there is always room for uncertainty in such estimates, there is not nearly enough uncertainty to make Buffett’s rhetoric remotely plausible.

Buffett is not the only person to use these deceptive accounting methods. The Obama campaign, FactCheck.org, PolitiFact, and former Clinton Labor Secretary Robert Reich have all done precisely the same. Those reports (and many like them) have led to widespread misinformation among voters, which was recently measured in a pre-election poll commissioned by Just Facts. This poll found that only 17% of likely voters knew that the top 1% of income earners pay a higher federal tax rate than the middle class.

Beyond Buffett’s faulty accounting of tax rates, he makes three other materially misleading claims in this latest op-ed. These are detailed in the second part of this two-parts series, which is located here.

Blame for the national debt

By James D. Agresti
November 5, 2012
Revised 11/9/12

Politicians, activists, and college professors have made a virtual cottage industry of assigning blame for the national debt to various presidents, but the vast majority of these analyses fail to pass even basic standards of intellectual honesty or academic rigor. This is because they use misleading measures of debt or fail to account for primary factors that drive the debt.

The most common flaw of such analyses is that they assign debt to presidents while completely ignoring the effects of Congress. This is ironic given that the Constitution vests Congress with the powers to tax, spend, and pay the debts of the federal government. Bills passed by Congress to carry out these functions must either be approved by the President, or in the case of a veto, the bills must be passed by two-thirds of both houses of Congress. Thus, it typically takes three to tango on the national debt: the House, Senate, and President.

Nevertheless, Republicans point the growth in national debt under Obama without mentioning that they have controlled the House of Representatives for the past 22 months. Meanwhile, Democrats point to budget surpluses under Clinton while failing to mention that the national debt rose more rapidly under Bill Clinton with a Democratic House and Senate than it did with George W. Bush and a Republican House and Senate.

There are many ways to quantify the national debt, and no single measure accounts for every relevant aspect of it, but the ratio of gross national debt to the size of the U.S. economy (GDP) is a logical and evenhanded metric during times of low-to-moderate inflation. This is because it accounts for population growth, some effects of inflation, and the relative capacity of the government to service the debt. By this measure, Barack Obama with a Democratic House and Senate presided over the fastest accumulation of debt in modern history, out-borrowing George W. Bush with a Republican House and Senate at a pace of more than ten to one.

However, this does not tell the whole story. The sizes of Congressional majorities directly impact the power of political parties to enact agendas. In this respect, President Obama and Congressional Democrats in 2009-2010 possessed more political power to affect the debt than any party in recent history. During this time, Obama enjoyed a 79-seat Democratic majority in the House and an effective 18- to 20-seat majority in the Senate. Obama’s House majority was greater than that of any president since Bill Clinton in 1993-1994, and Obama’s Senate majority was greater than that of any president since Jimmy Carter in 1977-1980.

However, this too does not tell the whole story because other factors also impact the national debt, such as legislation passed by previous congresses and presidents, economic cycles, terrorist attacks, natural disasters, demographics, and the actions of U.S. citizens and foreign governments. As Obama and his supporters point out, Obama inherited a recession. Yet, they neglect to mention that so did Ronald Reagan and George W. Bush.

Assuming it can even be done, to isolate and accurately quantify the relative responsibility of specific people for the factors listed above and their effects on the national debt would probably require a book-length treatment of each factor. For these reasons, it is more informative to ask, “What is to blame for our national debt?” instead of “Who?” Here, we have some clear-cut answers in the form of federal data from various agencies, the full ranges of which are cited below.

U.S. Bureau of Economic Analysis data shows that from 2009 through 2011, the federal government spent about 50% more than it collected in revenues, amounting to shortfalls that are roughly twice as large as any since World War II (graph below). In 2011, federal spending (measured as a portion of GDP) was 17% higher than it has been on average for the past 40 years, while revenues were 9% lower. What are the components of these increased expenditures and reduced revenues? Here again, we have clarity.

With regard to expenditures, a rapidly increasingly share of federal spending has gone to social programs (such as Medicare, education, and food stamps), which now comprise more than 60% of all federal expenditures (graph below). Moreover, other than interest on the national debt, nearly all future long-term growth in federal spending projected by the Congressional Budget Office (CBO) stems from the “government’s major health care programs: Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the insurance subsidies that will be provided through the exchanges created under the Affordable Care Act [a.k.a. Obamacare].”

With regard to revenues, CBO’s estimates of federal tax burdens show that households at all income levels are paying a smaller portion of their income in federal taxes than they have on average for the past 31 years (graph below). More specifically, in 2009, households in the bottom 20% of the U.S. income distribution paid an 85% lower tax rate than they have on average for the past three decades, the second-lowest income group paid a 44% lower rate, the middle-income group paid a 32% lower rate, the second-highest income group paid a 23% lower rate, and the highest-income group paid a 9% lower rate. However, because the highest-income group earned significantly more than the other income groups, about 32% of the total tax dollars saved accrued to the upper 20% of income earners.

To summarize, the largest culprit in the rise of the national debt is increased federal spending, mainly due to social programs. Secondarily, federal revenues are down as a consequence of lower tax receipts from all income groups. In this regard, it is important not to confuse lower tax revenues with lower marginal tax rates. As federal data going back to 1950 shows, tax revenues and marginal tax rates don’t necessarily correspond—and tax policies that allow for a robust economy can result in more tax revenues with lower marginal tax rates.

These data on federal spending and revenues are the concrete causes of the national debt, and if one is looking for someone to blame or someone to remedy the problem, it ultimately boils down to those who have the most power to control these factors: American citizens who exercise their right to vote.

High-income earners pay a much higher federal tax rate than the middle class

By James D. Agresti
October 31, 2012

In a commentary entitled “Why America’s wealthy must pay more in taxes,” Robert Reich, a former U.S. Secretary of Labor under Bill Clinton, writes:

In fact, if you add up all the taxes paid — not just on income and capital gains but also payroll taxes (which don’t apply to income above $110,100) and sales taxes — most of us are paying a higher percentage of our income in taxes than are those at the top.

This statement, which is made in the context of federal taxes, is patently false. Reich and others arrive at such misleading conclusions by ignoring corporate income taxes, which happen to fall more heavily on the rich. They also use narrow measures of income that artificially inflate the tax burdens of lower-income households.

The truth is that when all federal taxes and all sources of income are accounted for, the wealthy pay a much higher tax rate than the middle class. Per the Congressional Budget Office’s latest estimates of federal tax burdens, households in the middle 20% of the U.S. income distribution paid an average effective tax rate of 11.1%, as compared to 28.9% for the top 1% of income earners.

The following graph displays the latest Congressional Budget Office data on federal tax burdens, which was published in July 2012. A measure of uncertainty is always inherent in such estimates, but there is not nearly enough uncertainty to make Reich’s claim even remotely plausible.

A recent poll commissioned by Just Facts found that 90% of people who are planning to vote for Barack Obama falsely believe that the middle class pays a greater portion of their income in federal taxes than the upper 1% of income earners. The same is true for 41% of people who are planning to vote for Mitt Romney. Such dramatic levels of misinformation stem not only from political rhetoric but also from a failure of journalists and educators to honestly inform the public. Relevantly, Reich is now a professor of public policy at the University Of California, Berkeley.

Fact-based poll reveals fictions believed by voters

By James D. Agresti
October 23, 2012

What do voters truly understand about public policy issues? To scientifically determine this, Just Facts, a think tank dedicated to researching and publishing verifiable facts about public policy, commissioned a nationwide poll of likely voters. The poll consisted of 20 key questions—two concerning voters’ political views and 18 dealing with their knowledge of public policy issues.

The questions were designed to identify fault lines between perception and reality across the political spectrum. Among the issues addressed are government spending, the national debt, taxes, healthcare, Medicare, global warming, pollution, and Social Security. For instance, voters were asked:

Do you think the federal government spends more money on social programs, such as Medicare, education, and food stamps … or does the federal government spend more money on national defense, such as the Army, Navy, and missile defense?

The poll found deep partisan divides, with both Romney and Obama voters being relatively more or less knowledgeable depending upon the questions. Overall, voters were poorly informed, and the majority gave the correct answer to only four of the 18 policy questions. These results provide ample evidence that voters may be casting their ballots based upon misconceptions.

The poll was conducted by Conquest Communications Group, a professional polling firm. The results were obtained through live telephone surveys of 500 likely voters across the continental United States on October 13-21, 2012. The margin of sampling error for all voters is +/- 4.5% with a 95% level of confidence. The questions and results are as follows.

Question 1: Do you believe that combined government spending at all levels—federal, state and local—now consumes a larger portion of the economy or a smaller portion of the economy than it did 10 years ago?

Correct Answer: A larger portion. Since 2009, combined government spending has been consuming more of the nation’s economy than ever recorded in the history of the U.S., including the peak of World War II. Correct answer given by 77% of all voters, 57% of Obama voters, and 94% of Romney voters.

Question 2: What about taxes, do you think combined federal, state, and local taxes now consume a larger portion of the economy or a smaller portion of the economy than they did 10 years ago?

Correct Answer: Smaller portion. Since 2009, combined federal, state, and local taxes have been a smaller portion of the economy than at any time since 1967. Still, these tax collections amounted to $3.8 trillion in 2011 or an average of $31,774 for every household in the U.S. Correct answer given by 19% of all voters, 38% of Obama voters, and 6% of Romney voters.

Question 3: Do you think the federal government spends more money on social programs, such as Medicare, education, and food stamps … or does the federal government spend more money on national defense, such as the Army, Navy, and missile defense?

Correct Answer: Social programs. In 2010, 61% of federal spending was on social programs, versus 22% for national defense. Fifty years ago, the opposite was true, and 53% of federal spending was for national defense, versus 23% on social programs. Correct answer given by 37% of all voters, 18% of Obama voters, and 57% of Romney voters.

Question 4: Would you say the earth is generally warmer than it was 30 years ago, cooler than it was 30 years ago, or about the same?

Correct Answer: Warmer. According to satellite measurements and ground-level thermometers, the earth’s average temperature has increased over the past 30 years by about 0.6 to 0.9 degrees Fahrenheit. For reference, a temperature analysis of a glacier in Greenland found that the location was about 22ºF colder during the last ice age than it is now. Correct answer given by 53% of all voters, 82% of Obama voters, and 28% of Romney voters.

Question 5: Again, thinking about the whole planet, do you think the number and intensity of hurricanes and tropical storms have increased over the past 30 years, decreased over the past 30 years, or stayed about the same?

Correct Answer: About the same. Data published in the journal Geophysical Research Letters shows that the number and intensity of hurricanes and tropical storms is about the same as it was 30 years ago. Correct answer given by 43% of all voters, 27% of Obama voters, and 60% of Romney voters.

Question 6: Now, just thinking about the United States, in your opinion, is the air generally more polluted than it was 30 years ago, less polluted, or about the same?

Correct Answer: Less polluted. Per EPA data, levels of criteria air pollutants have declined significantly over the past 30 years. The same is true for emissions of hazardous air pollutants. Correct answer given by 36% of all voters, 34% of Obama voters, and 41% of Romney voters.

Question 7: Which type of grocery bag do you think causes the least harm to the environment: Disposable paper bags, disposable plastic bags, or reusable cotton bags?

Correct Answer: Disposable plastic bags. In nine major environmental impact categories, disposable plastic grocery bags are better for the environment than paper bags. Likewise, cotton totes would have to be reused many more times than their expected life to have less environmental impact than disposable plastic bags. Correct answer given by 10% of all voters, 11% of Obama voters, and 10% of Romney voters.

Question 8: In general, who do you think receives a better return on the money they pay into Social Security: low-income workers or high-income workers?

Correct Answer: Low-income workers. People with lower incomes receive much higher ratios of annual benefits to taxes. Although wealthier men tend to live longer than poorer men, this does not make up for the difference in benefits, and it does not account for the fact that women (who typically earn lower incomes than men) tend to live longer than men. Also, people with higher incomes must pay taxes on their Social Security benefits, while people with lower incomes often receive refundable tax credits that effectively refund some or all of their Social Security taxes. Correct answer given by 39% of all voters, 28% of Obama voters, and 53% of Romney voters.

Question 9: Some people say that Social Security faces financial problems because politicians have looted the program and spent the money on other programs. Do you believe that statement is true or false?

Correct Answer: False. By law, all Social Security income can be used only for the Social Security program. The law also requires that any Social Security surpluses be loaned to the federal government, but the federal government is legally required to pay back this money to the Social Security program with interest. Nonetheless, even when this money is repaid, the Social Security Administration projects that the program’s trust fund will be exhausted in 2033, and the program will not have enough money to pay promised benefits every year for the foreseeable future. Correct answer given by 21% of all voters, 35% of Obama voters, and 11% of Romney voters.

Question 10: Some policymakers are proposing that individuals be allowed to save and invest some of their Social Security taxes in personal accounts instead of paying these taxes to the Social Security program. In your view, do you think such proposals generally improve or harm the finances of the Social Security program?

Correct Answer: Improve. Proposals to give Social Security an element of personal ownership are generally structured to strengthen the program’s finances. Although some tax revenues that would have gone to the program go to people’s personal retirement accounts instead, these tax revenues are more than offset by the savings of not paying these individuals full benefits. Correct answer given by 25% of all voters, 5% of Obama voters, and 47% of Romney voters.

Question 11: On average, who pays a greater portion of their income in federal taxes: The middle-class, the upper 1% of income earners, or do you think they both pay about the same portion of their income in federal taxes?

Correct Answer: The upper 1%. Per the Congressional Budget Office’s latest estimate of federal tax burdens, households in the middle 20% of the U.S. income distribution paid an effective tax rate of 11.1%, as compared to 28.9% for the top 1% of income earners. Correct answer given by 17% of all voters, 4% of Obama voters, and 31% of Romney voters.

Question 12: The federal government often gives special tax breaks to certain business sectors. Which business sector do you think pays a higher federal corporate income tax rate: Mining or educational services?

Correct Answer: Educational services. In 2009, out of 20 major business sectors, the effective corporate income tax rate averaged from as low as 16% for mining to as high as 34% for educational services. This disparity is a result of tax preferences. Correct answer given by 29% of all voters, 44% of Obama voters, and 19% of Romney voters.

Question 13: In 2003, Congress and President Bush passed a tax cut law that accelerated and expanded upon tax cuts they had passed a few years earlier. In the four years that followed this 2003 tax cut law, do you think federal revenues generally increased, declined, or stayed about the same?

Correct Answer: Increased. Federal revenues were 16.2% of the nation’s economy in 2003, 16.1% in 2004, 17.3% in 2005, 18.2% in 2006, and 18.5% in 2007. Federal data going back to 1950 shows that higher tax rates do not necessarily correspond with more tax revenues. Other factors, such as the health of the economy, also have a major impact on tax revenues. Correct answer given by 28% of all voters, 12% of Obama voters, and 46% of Romney voters.

Question 14: Most of the Bush tax cuts are due to expire at the end of 2012. If Congress and the President decide to make these tax cuts permanent, do you think in future years that average Americans will pay less of their income in federal taxes than they have on average for the past 40 years, more of their income in taxes, or about the same?

Correct Answer: About the same. The Congressional Budget Office projects that if most of the Bush tax cuts and even some of the Obama tax cuts are renewed, federal revenues will reach their historical average in two years and stay level thereafter. This is partly because many tax laws are not indexed for wage growth and some are not indexed for inflation, which causes taxes to continually consume a greater share of Americans’ income unless tax laws are changed. This is a phenomenon called bracket creep. Correct answer given by 27% of all voters, 26% of Obama voters, and 29% of Romney voters.

Question 15: In 1960, governments paid for 24% of all healthcare costs in the U.S. Do you think government now pays a greater portion or a lesser portion of all healthcare costs in the U.S.?

Correct Answer: A greater portion. Between 1960 and 2009, the portion of U.S. healthcare expenses paid by government increased from 24% to 48%. This is one of the primary drivers of increased healthcare spending, because when people don’t personally pay for their healthcare, they are less likely to be responsible consumers and more likely to use services that have no measurable benefit to their health. Correct answer given by 56% of all voters, 53% of Obama voters, and 64% of Romney voters.

Question 16: In 1960, private insurance paid for 21% of all healthcare costs in the U.S. Do you believe private insurance now pays a greater portion or a lesser portion of all healthcare costs in the U.S.?

Correct Answer: Greater. The same trend that applies to government also applies to private insurance. Between 1960 and 2009, the portion of U.S. healthcare expenses paid by private insurance increased from 21% to 32%. This trend has been driven by federal tax policy, which makes employer-provided health insurance generally exempt from federal taxes but not most medical expenses paid directly by consumers. Between 1960 and 2009, the portion of U.S. healthcare expenses paid directly by consumers decreased from 48% to 12%. Correct answer given by 41% of all voters, 37% of Obama voters, and 48% of Romney voters.

Question 17: Do you think that preventative medical care generally increases or decreases people’s lifetime medical costs?

Correct Answer: Increases. Repeated studies have shown that preventative medical care generally increases overall healthcare costs. As explained by the Congressional Budget Office, “Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall.” Correct answer given by 23% of all voters, 16% of Obama voters, and 28% of Romney voters.

Question 18: In 2010, Congress passed and President Obama signed the Affordable Care Act, also known as “Obamacare.” This law uses price controls to save money in the Medicare program. Do you think these price controls will affect Medicare patients’ access to care?

Correct Answer: Yes. As explained by Medicare’s actuaries, the Affordable Care Act’s price controls will cut Medicare prices for many medical services over the next three generations to “less than half of their level under the prior law.” The program’s actuaries have been clear that this will likely cause “withdrawal of providers from the Medicare market” and “severe problems with beneficiary access to care.” Correct answer given by 56% of all voters, 23% of Obama voters, and 86% of Romney voters.

This is the first poll of voter knowledge commissioned by Just Facts, and plans are in place to conduct such polls on an annual basis. Politicians and the press regularly inundate Americans with information about public policy, but as this poll has found, the end result is that voters are ill-informed. Just Facts aims to correct this by providing voters with documented facts that empower them to make truly informed decisions.

The margin of error for Obama voters is +/- 7.2%, and the margin of error for Romney voters is +/- 6.9%. The number of undecided voters or those planning to vote for other candidates are too small to draw scientifically valid conclusions. The poll results for all voters are available here, and the results broken down by political views, age, and gender are available here.

Does the Affordable Care Act ration Medicare?

By James D. Agresti
September 7, 2012

Among 45 new government organizations created by the Affordable Care Act, one has been the most controversial by far. Called the Independent Payment Advisory Board (or IPAB for short), it has been a focal point in many battles over the Affordable Care Act and whether or not it rations Medicare.

Shortly after the Affordable Care Act (commonly known as Obamacare) became law, Stanley Kurtz, a senior fellow with the Ethics and Public Policy Center, wrote that “IPAB is the real death panel, the true seat of rationing, and the royal road to health-care socialism.” Criticisms of IPAB have multiplied since this time, and even some liberal Democrats like Barney Frank have called for its repeal.

In stark contrast, a White House press release has described IPAB as a “critical contributor to Medicare’s solvency and sound operations,” and President Obama has called for broadening its powers. Furthermore, FactCheck.org, an organization with a mission to “reduce the level of deception and confusion in U.S. politics,” recently declared it is “far from accurate” to claim that IPAB is “a source of rationing.”

What exactly is IPAB? It is a board of 15 senate-confirmed presidential appointees that is required to limit Medicare spending for years in which the Medicare chief actuary projects that the program will not meet the cost targets in Obamacare. The rationale for creating such a board is that it can make hard decisions that politicians may not make because they are swayed by lobbyists and because they must face voters on election day. Also, the board is to be comprised of individuals with expertise in healthcare and related fields, which presumably would qualify them to make informed decisions.

The Affordable Care Act gives IPAB some unusual and formidable powers:

• The board’s proposals automatically acquire the force of law unless new laws are passed to override these proposals.

• The board can function with only one of its 15 seats filled, and if the board does not submit a proposal by the required deadline, the Secretary of Health and Human Services (another presidential appointee) has the power to submit a proposal in its place.

• The board cannot be abolished unless Congress introduces a bill to repeal it in January 2017 and then passes this bill by August 15, 2017 with three-fifths majorities in both houses and the signature of the president.

• The board’s proposals are exempt from the oversight of courts, as the law explicitly states, “There shall be no administrative or judicial review … of the implementation by the Secretary … of the recommendations contained in a proposal.”

Despite these impressive powers, FactCheck asserts that the board’s “power is quite limited in scope” because the law prohibits it from making “any recommendation to ration health care,” “increase Medicare beneficiary cost sharing,” or “otherwise restrict benefits or modify eligibility criteria.” A critical point that FactCheck fails to mention, however, is that the interpretation of these words is left entirely to the board because its decisions are not subject to administrative or judicial oversight.

The implications of authorizing presidential appointees to unilaterally interpret what it means to “ration health care” are momentous. The board can define this term very narrowly, and it can impose polices that technically don’t fall under their definition of rationing but effectively cause it anyway. Enacting price controls is one obvious and probable way in which this can occur because this is the primary mechanism by which Obamacare seeks to control Medicare costs, as detailed below.

To observe the implications of price controls in medicine, we need look no further than Medicaid, the government’s healthcare program for low-income people. Medicaid patients are already subject to effective rationing through price controls because the program’s payment rates for healthcare services are far below market prices. Repeated studies have shown that Medicaid’s low payment rates impede access to healthcare, and as the 2011 Medicare Trustees Report explains, low Medicaid payment rates for health care services “have already led to access problems for Medicaid enrollees.”

Similarly, price controls in Obamacare progressively cut payment rates for inpatient hospital services over the next three generations to “less than half of their level under the prior law.” As the program’s actuaries explain, this will probably cause “severe problems with beneficiary access to care.” Regardless of whether one calls this “rationing” or not, the practical result is the same as explicit rationing.

FactCheck.org claims that IPAB won’t be able to touch many of the healthcare services that Medicare pays for, but this is manifestly untrue. Citing a Kaiser Family Foundation report, FactCheck writes that IPAB is “limited to getting savings from Medicare Advantage (subsidized private insurance that currently covers about 1 in 4 on Medicare), ‘the Part D prescription drug program, skilled nursing facility, home health, dialysis, ambulance and ambulatory surgical center services, and durable medical equipment.’”

That quote appallingly misrepresents the Kaiser report, which explains that these limitations on IPAB are only in effect “until 2020,” and they exist simply because the Affordable Care Act cuts Medicare payment rates for certain services by greater amounts than other healthcare services. In other words, the services exempt from IPAB until 2020 are required under Obamacare to undergo more severe payment cuts than other services.

So does the Affordable Care Act ration Medicare? This depends upon how one defines rationing, but from the standpoint of Medicare patients, the program’s actuaries have been clear that the law’s price controls will likely cause “withdrawal of providers from the Medicare market” and “severe problems with beneficiary access to care.” Any analysis that neglects these facts does not provide an honest assessment of whether Obamacare rations Medicare.