mathbabe

Scott Hodge just came out with a column in the Wall Street Journal arguing that reducing income inequality is way too hard to consider. The title of his piece is Scott Hodge: Here’s What ‘Income Equality’ Would Look Like, and his basic argument is as follows.

First of all, the middle quintile already gets too much from the government as it stands. Second of all, we’d have to raise taxes to 74% for the top quintile to even stuff out. Clearly impossible, QED.

As to the first point, his argument, and his supporting data, is intentionally misleading, as I will explain below. As to his second point, he fails to mention that the top tax bracket has historically been much higher than 74%, even as recently as 1969, and the world didn’t end.

Hodge argues with data he took from a report from the CBO called The Distribution of Federal Spending and Taxes in 2006. This report distinguishes between transfers and spending. Here’s a chart to explain what that looks, before taxes are considered and by quintile, for non-elderly households (page 5 of the report):

The stuff on the left corresponds to stuff like food stamps. The stuff in the middle is stuff like Medicaid. The stuff on the right is stuff like wars.

Here are a few things to take from the above:

1. There’s way more general spending going on than transfers.
2. Transfers are very skewed towards the lowest quintile, as would be expected.
3. If you look carefully at the right-most graph, the light green version gives you a way of visualizing of how much more money the top quintile has versus the rest.

Now let’s break this down a bit further to include taxes. This is a key chart that Hodge referred to from this report (page 6 of the report):

OK, so note that in the middle chart, for the middle quintile, people pay more in taxes than they receive in transfers. On the right chart, for the middle quintile, which includes all spending, the middle quintile is about even, depending on how you measure it.

Now let’s go to what Hodge says in his column (emphasis mine):

Looking at prerecession data for non-elderly households in 2006 in “The Distribution of Federal Spending and Taxes in 2006,” the CBO found that those in the bottom fifth, or quintile, of the income scale received $9.62 in federal spending for every $1 they paid in federal taxes of all kinds. This isn’t surprising, since people with low incomes pay little in taxes but receive a lot of transfers.

Nor is it surprising that households in the top fifth received 17 cents in federal spending for every $1 they paid in all federal taxes. High-income households hand over a disproportionate amount in taxes relative to what they get back in spending.

What is surprising is that the middle quintile—the middle class—also got more back from government than they paid in taxes. These households received $1.19 in government spending for every $1 they paid in federal taxes.

In the first paragraph Hodge intentionally conflates the concept of “transfers” and “spending”. He continues to do this for the next two paragraphs, and in the last sentence, it is easy to imagine a middle-quintile family paying $100 in taxes and receiving $119 in food stamps. This is of course not true at all.

What’s nuts about this is that it’s mathematically equivalent to complaining that half the population is below median intelligence. Duh.

Since we have a skewed distribution of incomes, and therefore a skewed distribution of tax receipts as well as transfers, then in the context of a completely balanced budget, we would expect the middle quintile – which has a below-mean average income – to pay slightly less than the government spends on them. It’s a mathematical fact as long as our federal tax system isn’t regressive, which it’s not.

In other words, this guy is just framing stuff in a “middle class is lazy and selfish, what could rich people possibly be expected do about that?” kind of way. Who is this guy anyway?

Turns out that Hodge is the President of the Tax Foundation, which touts itself as “nonpartisan” but which has gotten funding from Big Oil and the Koch brothers. I guess it’s fair to say he has an agenda.