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More About How to Tax the Rich.

June 28, 2011 Leave a comment

A couple months ago, I posted a blog about how we hold the power to tax the rich. The basic premise being if we all stopped buying products and services from large corporations, those companies would quickly go out of business. Imagine what would happen to Walmart’s profit margin if for one month we all bought food from a farmer’s market, used washcloths after our bathroom visits and just washed laundry more often, skipped the coffee and soda, and found alternatives to all of the products we might normally get at Walmart or Target. Now if we continued that, that farmers and local grocery stores would have to expand and hire more workers. Your local coffee shop (and not the large chains) might open a second location. After a few months, the economy would be shifting dramatically. We would all have to put up with having less for awhile since it would be a bit more of a drain on our wallets, but the rich would no longer be rich. Note: Just remember that most of us with retirement funds are likely invested in these large corporations through our mutual funds within our 401(k) accounts and similar vehicles. If they fail or go bankrupt, it could be a hit to your retirement funds. The economy and the rich are more connected to us than you think!

This subject came back into my mind because of the debate in Minnesota over raising taxes on the top 2% of income earners. The justification from the liberal side is that the top 5% of income earners in MN pay less than the rest of Minnesota pays. See how easy it is to twist this stat? It is true in a sense, but the base truth is the top 5% of income earners in MN pay 43% of the income taxes collected. So yes, the other 95% pay 57% of all taxes, but does that really translate to that 5% not paying a fair share? The simple analogy is if 20 people have a $100 bar tab, and 1 person pays $43, the remaining 19 people pay $3 each. Not bad considering you each had a $5 drink. Also, in MN, the bottom 30% pay no net income tax. So in the bar analogy, 1 person pays $43, 13 people pay about $4.39, and 6 people pay nothing. So you can see that only one person in that group of 20 paid more than what they got in return, everyone else paid less than the cost of their drink.

You will see the question in the comments of this article is “where are the jobs?” Liberals often question the idea of trickle-down economics (the more formal economic term is supply-side economics). I’ll start by going back to the idea of the Laffer Curve. The premise of the Laffer Curve is that there is a point in taxation that starts to stifle economic growth and actually brings in lower tax revenue than a lower rate would. It is very common sense at a basic level. If the government taxes at 0%, it collects no money. If it taxes at 100%, it collects no money because no one will work for free. At 99%, the government still gets very little because no one wants to work for only 1% of their total pay. The idea is that there is a “sweet spot” where the government maximizes revenue and yet few business decisions are based on tax policy. I had a discussion on twitter with University of Minnesota professor Bill Gleason about this a few days back, and he sent me an article “debunking” the Laffer Curve. The best part is the article says it debunks it but than admits in the body of the article the Laffer Curve does work (under certain circumstances). If you read the full Laffer Theory, Art Laffer says the maximum is not easy to find, and changes over time as well as changes with circumstances. It is more important to understand the Laffer Curve so that we are more judicious in our decision to change tax policy.

One other interesting piece of information that come across Twitter this morning was a piece from thinkprogress.org. The piece was a chart showing states that had spending decreases lost jobs, while states that spent more money had a small gain in jobs (on average). But to put a skeptical eye on any statistic is important so I thought I should point out something interesting.

  • Two states that caught my eye right away are Texas and South Dakota. They had some of the highest gains in employment (with their spending increases). These states also have no income tax.
  • North Dakota would be considered an outlier, but  interesting that we loosened some drilling regulation there and they can’t even build enough houses for all the people going out there to work the oil drills.
  • Montana increased spending almost 50%, and got a less than 1% gain in employment. North Carolina had a 30% cut in spending, and only lost about 2% in employment.
  • You might also notice the cluster of states at or near zero increase/decrease in spending – more states are above the line of employment gain than are below it.
  • These numbers are inflation adjusted, so you could adjust the 0% line of spending to the right a bit. If you were to look at this in real dollar spending, the picture of how government spending affects jobs becomes even less clear.
The truth is tax and spending policy be the government isn’t all science. It is a bit of an art. The effects of a change in regulation, in taxation, or in government spending  all take time to show adjustments in the economy. This is why I am a strong advocate of a major overhaul of the tax code. We need to simplify it, and we need a long-term commitment to it. When “the rich” and businesses don’t know what their tax rate will be a year or 2 down the road, it is difficult for them to make decisions of investment including hiring people (see above, “where are the jobs?”). We are still debating a tax rate hike in Minnesota, possibly on income this year while we are already 6 months into the year. The tax rates signed into law by President Bush were extended by President Obama for only 2 years. We need long-term certainty in taxation. We may even need to raise taxes to get out of the debt mess we are in. I am simply saying is let’s be honest and really evaluate how much money the government needs and should have, and let’s set the rates there and keep them there for a long time.
President Obama as a candidate agreed government spending was too high. From the third presidential debate:
  • “…what I’ve done throughout this campaign is to propose a net spending cut.”
  • “Every dollar that I’ve proposed, I’ve proposed an additional cut so that it matches.”
  • “We need to eliminate a whole host of programs that don’t work. And I want to go through the federal budget line by line, page by page, programs that don’t work, we should cut.”
  • “And we are now looking at a deficit of well over half a trillion dollars…we’ve got to take this in a new direction, that’s what I propose as president.” (Note: this year’s deficit is about $1.5 trillion)
Finally, while you ponder where taxes should be set, I leave you with another (Note: Penn doesn’t always use the best language, so NSFW, but worth it for the message) Penn Point video. I think Penn Jillette is awesome, because he uses logic, is willing to admit ignorance or errors when needed, and he always stands up for freedom. In this video about his friend Christopher Hitchens, he says (with my paraphrasing), “My utopia is where people can disagree, they understand the other’s side, they’re not crazy, they’re not lying, and we learn from it.” The video that caught my attention is one where he uses an analogy to make a point at the end that it is not realistic to think anyone, including government leaders, can be so smart that they know everything. Instead, if we can admit we don’t always know, we can see why government that is too big is not good. Note : again, NSFW language.
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Logical Fallacies in Politics

June 1, 2011 Leave a comment

I am still seeing two issues come across the news and social media quite a bit in regards to Minnesota politics. One is the lack of a budget (vetoed by Gov. Dayton)/upcoming special session/tax rates. The other is the gay marriage amendment. My idea here today is to show how rampant the use of logical fallacies in defending each side, and to give a lesson on common logical fallacies so we can all spot them and make more informed decisions.

One of my favorite podcasts is The Skeptics’ Guide to the Universe. Their website carries a great explanation on what is a logical fallacy:

All arguments have the same basic structure: A therefore B. They begin with one or more premises (A), which is a fact or assumption upon which the argument is based. They then apply a logical principle (therefore) to arrive at a conclusion (B). An example of a logical principle is that of equivalence. For example, if you begin with the premises that A=B and B=C, you can apply the logical principle of equivalence to conclude that A=C. A logical fallacy is a false or incorrect logical principle. An argument that is based upon a logical fallacy is therefore not valid. It is important to note that if the logic of an argument is valid then the conclusion must also be valid, which means that if the premises are all true then the conclusion must also be true. Valid logic applied to one or more false premises, however, leads to an invalid argument. Also, if an argument is not valid the conclusion may, by chance, still be true.

Most of us will be guilty of using logical fallacies often. I am guilty of it myself, but for most of us it is done by accident. It takes reflection and discussion to uncover the fallacies and form a more sound, logical argument. Politicians are guilty of using logical fallacies purposely to advance their personal or party views.

Here is an egregious logic fallacy committed by AFSCME. The key statement here is this:

The Republican majorities are choosing to protect the richest 2 percent. They’re making sure these households – making $300,000 or more – don’t have to do their share to fix the state’s budget problems.

This claim falls under a few different categories. The first would be a False Dilemma. AFSCME’s assumption here is the only way to solve the state’s budget problems is to raise taxes on the rich. I haven’t looked at the budget in detail, but my understanding is the budget vetoed by Gov. Dayton was roughly a 6% increase in spending (with no tax increases). According to the BLS, inflation from 2010 was under 3%. If inflation stays at the same pace, then the 6% increase in dollars is a true increase in spending as well since the extra dollars should be able to buy more even when considering inflation. So is the state’s budget truly dire when we can increase spending without a tax increase? Yes, I know this could be construed as it’s own logical fallacy since government is only one sector of the economy and it is possible inflation in those sectors is much higher. The counter-argument to that is to then ask why is inflation higher in those sectors since the government is so heavily invested in those certain sectors of the economy, it could be partially due to their own doing.

The second fallacy of AFSCME’s statement is an example of an Appeal to Emotion, more specifically an Appeal to Spite. Saying the GOP is “protecting” the rich is a way of inciting an emotional class warfare. These people have way more than most people, and that “isn’t fair.” You could even say this is an Ad Hominem attack, saying the GOP’s position is wrong simply because they are protecting those people which most people hate.

Finally, AFSCME uses an Appeal to Belief that the rich don’t pay a fair share of taxes. Statistics on the federal level are readily available and reported. The top 1% of income earners pay 40% of federal income taxes and the top 5% of income earners pay 60% of federal income tax. The democrats want to tax the top 2% of Minnesota incomes on the premise that they don’t pay enough. Think of an analogous situation: If 100 people are in a bar and in total ring up a $5000 bar tab. 1 person in the bar pays $2000, 4 more people pay another $1000, leaving the rest of the people in the bar to pay just over $21, even though the average bar bill was $50. Did the first 5 people pay their fair share? Let’s say they each drove away in a Bentley, would you then feel cheated by how much of the bar bill they paid? Maybe you could make a moral argument that they should pay more, but claiming they didn’t even pay a fair share is simply a bad conclusion.

In the gay marriage amendment debate, I have heard 2 arguments for passing a gay marriage ban. The first one is the idea that being homosexual is biologically unnatural because it doesn’t lead to procreation and that it would be like saying “sand is food.” Human psychology and physiology is much more complex than simple procreation. While it is true that humans are animals and sex is mostly about procreation, Wikipedia has a great summary showing examples in other animals where sex is more than just a mechanism for procreation. To get very basic, it is unnatural for human males to be with only one partner in marriage. In many large mammal species, the biggest and strongest males get to breed with several females to best ensure the survival of the species. Another example where we go “against biology” is when men shave their face or women shave their legs. Biology intended that hair to be for warmth and protection. Should we ban shaving too because it is “biologically unnatural?”

Yes, that last question is a Straw Man argument, but I was employing it in this case as an exaggeration to prove a point that the “sand is food” argument is also the same type of argument. Homosexuality isn’t a biological “wrong” and cannot be explained that way. There are layers of biology, psychology, and other reasons beyond a simple “yes or no” explanation. So the “sand is food” argument doesn’t prove anything.

The other argument used is the past history of voting on this issue in the U.S. I haven’t looked at each vote and what was specifically addressed, but the claim is 34 votes banning gay marriage have taken place and all have had the outcome of supporting a ban. This is wrong based on both the Appeal to Popularity fallacy, as well as the Appeal to Common Practice fallacy. This is easy to explain. I am sure everyone remembers a parent saying to you, “If friend A and B jump off a bridge, are you going to as well?” Just because something is popular or has always been done doesn’t automatically make the position or action correct.

Both major parties are horrible at explaining their logic and presenting evidence for their positions on issues. Most usually want to ignore past data to support an idealistic position that is popular. For example, raising taxes on the rich sounds like a great idea in theory, but it never comes out in practice because we ignore the fact people will adjust their behavior to derive maximum benefit for the amount of work they do. It is human nature. If we taxed every dollar above $1 million at 95%, do you think many people are going to work much past that $1 million mark? Stated another way, if I make $1 million for working 6 months out of the year and make $2 million if I work 12 months, but I keep $500,000 if I work 6 months and keep $550,000 to work 12 months, how many months do you think I am going to work?

My example above doesn’t mean a tax increase isn’t warranted in this budget cycle. Maybe it does need to be part of the solution. But to say tax increases on the rich are always justified is wrong. It is also wrong to assume raising taxes will raise the revenue needed to solve the budget concerns.

If the GOP gets its budget passed in Minnesota, it does look like some people are going to lose their access to the social programs they rely on. That could affect them negatively in the short-term. However, we can’t simply look at the first layer of the consequences in a government policy and make our political decisions based on those outcomes. Taxing the rich gains us money in the short-term, but what if that change prompts a corporation to relocate? What if the rich work less or change their investments and the revenue doesn’t pan out to the projected amounts? What if a person dies due to lack of coverage?

As callous as it sounds, we do have to look at the cost/benefit in these decisions. People die more often because of the 70 MPH speed limit on the interstates in Minnesota than they would if the speed limit were 40 MPH. The higher speed limit saves everyone time (and time is money), thus costing less to transport goods, giving us more time for production, etc. We have chosen to set the speed limit at a reasonable human cost in balance with our own financial interest. Most insurance policies have a co-pay to prevent unnecessary trips to the doctor. Maybe someone skips going to the doctor because they think they just have a mild flu (rather than pay the $20) and end up dying when their infection quickly worsens. (Yes, this is more anecdotal because it is harder to quantify scientifically, but I thought it made some sense to discuss here).

Hopefully you are still reading and didn’t get too bored with some basic insights on logic. My point is to stress the importance of analyzing your political positions carefully, especially if you are perfectly aligned with the ideals of a particular political party. Be especially wary if your party or candidate uses an Ad Hominem Tu Quoque attack, where the attack is simply based on the fact the opponent changed their mind. Use your mind, think logically, discuss with a measured reason, and don’t be afraid to change your mind.

Birds falling from the sky does not mean the end of the world.

January 5, 2011 1 comment

After seeing today’s news, I thought it would be a good time to get something up on the web to debunk some of these crazy people.  Some of you may have heard of the birds dying in Arkansas and Louisiana, or more recently in Sweden. There have also been large fish deaths in various areas around the U.S.

Crazy people say it “is a sign from god” or that “the end of the world is near.” Other different crazy people claim the government is poisoning us and the death of a U.S. official is proof of such a claim.

The first premise is pretty easy. An all-powerful god is going to kill a few of the millions of birds and fish as a way of communicating? Alfred Hitchcock must therefore be god. (That was sarcasm if you didn’t notice)

The more complex scenario is the government conspiracy theory. Because of the way probability works, there isn’t a way to 100% rule out that there is some secret government entity involved in these strange happenings. But with a little math, a little reading, and a little logic, you can be at ease that this was a natural, albeit unusual event.

Here’s a real basic summary of why large government conspiracies don’t work. Let’s say from top to bottom 200 people are needed to carry out such a mission of testing chemicals on the U.S. Further, let’s say that they are 99% likely they will keep quiet about such events. In such case, you take 0.99^200 = 13.4% chance that no one will talk. I think WikiLeaks has shown it is pretty hard to keep anyone quiet for long. Another example regarding JFK can be found here.

Tackling logic second brings us to the principle of Occam’s Razor. Again this is not definitive proof, but somewhat of a natural order that says that the “real” or “correct” theory tends towards the simpler ones. It is a delicate balance of leaving enough information to adequately explain the outcome of a scenario or hypothesis without unnecessary complexity. Some government conspiracies also fall under the argument from ignorance (Ad ignorantiam). This is the “well, prove me wrong” argument. Lack of evidence of non-existence does not logically make something exist.

Finally, reading about past events and talking to scientists will reveal much more likely scenarios. First, there was severe weather in Arkansas the day of the event. Secondly, it has been a very cold winter and could have caused too much stress on the birds. (see this link with a quote from a fiction book that talks about this type of phenomenon) These types of birds have poor night vision and usually roost at night, so if they were frightened by weather or fireworks as proposed, it is easy to imagine them running into power lines, houses, cars, etc. These birds are pretty fast, so imagine thousands of people riding their bikes in fog or rain without headlights at 20 mph and see how many would crash. There are other strange phenomenon of frogs and fish raining from the sky that can often come with a simpler explanation than the “end of days.”

So don’t believe the crazies such as those in this comment section or believe the government is secretly poisoning us. We may not get a definitive answer, or it could be multiple causes. We could also find out with good certainty what caused each of these events. Just know that it isn’t the end of days.