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Quantitative tax modeling?

November 2, 2011

Yes, it’s true. I’m going to talk about taxes. Don’t leave! Wait! I promise I’m going to keep it sexy. Buckle up for the most titillating tax convo of your life. Or at least the most bizarre.

Think of us as Murakami characters. I am a young woman, symbol both of purity and of unearthly sexual power, and I’ve taken your hand and led you down a well. We are crawling in underground tunnels looking for an exit, or perhaps an entrance. This is where taxes live, down here, along with talking animals and Bob Dylan recordings.

Do you know what I hate? I hate it when people say stuff like, the Cain 9-9-9 tax plan is bad for rich people. Or that it’s good for rich people. I hate both, actually, because you hear both statements and they both seem to be backed up with numbers and it’s so confusing.

But then again, this stuff is pretty confusing. Even when I think about the most ridiculously stupid questions about money I get confused. Even just the question of “what is the 1%?”, which has been coming up a lot lately, is hard to answer, for the following reasons among others:

  • By income? Or by wealth? This matters because most rich people have most of their wealth in savings. They may not make any salary! Living off dividends or some such.
  • Measured by individual? Or household? This matters because people with good jobs tend to marry each other.

But you know what? Just give me the answer in any of the four cases above – they are all reasonable choices. And tell me exactly how you’re doing it – which reasonable choices exactly? Better yet, write an open-source program that does this computation and give it, and the data you’re using, to me so I can tweak it.

As I write about this I realize I should confess here and now: I know nothing about taxes. However, I do know something about modeling, and I think in a certain way that makes it easier for me to imagine a tax model. And to critique the way people try to talk about taxes and tax plans.

Here’s my point. Let’s separate the measurement of a tax plan from the tax plan itself- it’s too easy to find a pseudo-quantitative reason to hate a tax plan that you just happen to disagree with politically (for example, by finding a weird theoretical example of a rich person who doesn’t benefit from a given tax plan, without admitting that on average rich people benefit hugely from that tax plan). If we already agree on a model for measurement then we could try to resist the urge to spin, even to ourselves.

Of course we’ll never agree on a model for measurement, so instead we should have many different models, each with a set of “reasonable choices”.

Characteristically for Murakami characters, we do not shirk from the manual labor and repetition of creating a million mini universes of tax scenarios, like folding so many tiny origami unicorns. We write down our thoughts in English and translate back to Japanese, or python, which gives it an overall feeling of alien text, but it has internal consistency. We can represent anyone in this country, under any tax situation. We may even throw in corporate tax structure models while we wait for our spaghetti water to boil.

Once we have the measurement machine, we feed a given tax proposal to the machine and see what it spits out. Probably a lot, depending on how many “reasonable choices” we have agreed to.

Average them! Seriously, that’s what you do in your head. Right? If you hear that so-and-so’s flat tax plan is good for rich people if you consider one year but bad when you take into account retirement issues, or some such thing, then overall, in your head, you basically conclude that it’s kind of a wash.

So by average I mean a weighted average where the weights depend on how much you actually care and believe in the given model. So someone who’s about to retire is going to weight things differently than someone who’s still changing diapers.

What could the end result of such a system be? Perhaps a graph, of how taxes in 2009 (or whatever time period) would have looked like under the putative new plan, versus what they actually looked like. A graph whose x-axis is salary and whose y-axis indicates relative change in tax burden (by percent of taxable income or something like that) of the new plan compared to what actually happened.

It’s nice to use “what actually happened” models since the current tax code is impossibly difficult, so we can duck the issue of writing a script that has the same information just by pretending that nobody cheated on their taxes in 2009. Of course we may want adjust that once we have a model for how much people actually do cheat on their taxes.

If we have decided to build a corporate tax model as well, let’s draw another graph which compares “what happened” to “what would have happened” based on the size of the company. So two graphs. With code and data so we can see what the model is doing and we can argue about it. We’re at the bottom of the well looking up and we see hazy light.

Categories: open source tools, rant
  1. RiskPractitioner
    November 2, 2011 at 9:05 am

    Great post! Wish there was a tax incidence machine too to show where the real effects of tax policies are. For example, you might put in Mortgage Interest Deduction and get out 80% of the benefit goes to mortgage lenders and 20% to home owners (I have no idea what the real numbers would be).

  2. November 2, 2011 at 9:30 pm

    Do you have any thoughts on how this stuff should be communicated, especially if only one or two analyses from qualified people who don’t work for a campaign or organization closely affiliated with a campaign? I’m trying to break into freelance journalism, and actually working on an article focused on what center-left opinion leaders, politicians, and activists should fight for in tax reform. A lot of reporters talk about such and such study (e.g. modelling by the Tax Policy Center) finding “x” plan was regressive (progressive) or the folks in the top .1% getting enough of a break to buy a Mercedes, country club membership, and dozens of cases of Moet and Chandon, while the middle class has a tax hike while they cope with higher food and energy costs.

    http://taxpolicycenter.org/numbers/displayatab.cfm?Docid=3222&DocTypeID=2

    Should political and economic journalists mention considerations like assumptions of the model? Should they touch on potential changes in models that could alter the conclusion that about economic, distributive, etc. stuff?

    Although much of what you say is relevant to lots of tax policy, I think VAT/sales tax issues come up quite a bit with quantifying impact. Michael Linden at a left wing think tank was talking about issues he had with Tax Policy Center models (who come up a lot with respect to tax plan analysis and public discourse) on sales taxes/VATs and the underlying assumptions in models.

    Also, not to get strange and too personal, but did your sons enjoy Halloween?

    • November 3, 2011 at 8:43 am

      Nadia,

      First, my three-year-old was *incredibly psyched* to learn that it was a possibility to go to other peoples houses to demand candy and all he had to do was get dressed up as a knight. He of course didn’t remember Halloween a year ago so this was completely new. I think he thought he could do it any night of the week though. My nine-year old, being an experienced and somewhat jaded old-timer, was disappointed he only hit 4 buildings (10 stories each); his goal was 5 this year. But since he could barely carry his bag of candy I decided to restrain my sympathy. My 11-year-old decided he’s too old to trick-or-treat, which is the saddest of all. Thanks for asking!

      You raise some excellent and important points. Let me do some digging around with people who actually know something about taxes (and modeling) and see that they think.

      Cathy

  3. November 3, 2011 at 12:17 am

    Taxes are indeed complicated, and–as you say–“rich people” are not a uniform group. Different kinds of rich people would indeed be impacted differently by the Cain 9-9-9 plan.

    But I am not so sure what good it does to be concerned about analyzing the situation for the very rich, in any event. No matter what system you try to put on them, the richest taxpayers have the funds to hire a small army of tax lawyers to engineer creative tax strategies to minimize their tax burdens in ways we can’t anticipate. It is somewhat like water finding its own level. For example, Cain’s plan would exempt all capital gains from income–I suspect there would be even more creative efforts by high income taxpayers to find clever ways to recharacterize ordinary income as capital gains under a Cain regime.

    Let’s look at how these tax plans hit a far more vulnerable group, the poor. They don’t have a small army of tax lawyers to mitigate any bad effects a new tax regime might have on them.

    One thing that does seem clear to everyone is that the 9-9-9 plan, as originally proposed by Cain, would have been massively bad for poor people compared to the current tax system. Even Cain himself recognized this–eventually! After the first round of criticisms came outand, he backed down from his original proposal, changing it to 9-0-9 for people below the poverty line.

    However, the poor are also not a monolithic group. Many low-income people (e.g., working families with young children) would be worse off even under the now-modified 9-0-9 for the poor than they are under the current system. That is because Cain’s system apparently has no role for the Earned Income Tax Credit.

    Other low-income people (e.g., working people whose children have grown up or who don’t have children at all or non-custodial dads paying child support but getting no tax deductions for the kids) might well be better off under 9-0-9 than they are under the current system. That’s because they generally don’t qualify for Earned Income Tax Credit and many low-income folks without kids currently pay surprisingly high effective average federal tax rates (payroll plus income combined)–more than Warren Buffett or the “top 400″ highest income taxpayers do. 9-0-9 would probably be a good deal for those poor who don’t have kids.

    Above all, I have to say, “The devil is in the details.” There are many complications not clearly spelled out in the glossy and glitzy tax reform systems proposed by Panglossianly optimistic politicians.

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