Saturday, December 31, 2011

Free Speech, Elections, and the Left

With the Occupy Movement’s renewed commitment to “getting the money out of politics,” the idea of restricting wealthy Americans' freedom of speech appears to be gaining traction on the political left. 

Of course, most people who champion spending limits on “electioneering communications” would frame the issue quite differently. The standard premise is that money is not speech, and corporations are not people. Thus, many progressives argue, portraying the Supreme Court’s decision in Citizens United v. Federal Election Commission as a defense of civil liberties is simply a category error.

Those on the left who support repeal of Citizens United argue that the Court’s ruling implies wealthy corporations are entitled to “more speech” than the average American. And given the level of influence that money has in our political system, this strikes many progressives as an incredibly dangerous principle to adopt.

However, despite what some activists seem to believe, the notion that spending on electioneering communications represents a form of protected speech has been around for quite a long time. In fact, the Supreme Court first articulated this view decades ago in the case of Buckley v. Valeo (1976). Though justices in this case upheld provisions in the Federal Election Campaign Act limiting individual contributions to candidates for federal office, they struck down all restrictions on independent electioneering expenditures. The logic of the Court was fairly straightforward, but it’s worth reading through the relevant passage in this ruling:

A restriction on the amount of money a person or group can spend on political communication during a campaign necessarily reduces the quantity of expression by restricting the number of issues discussed, the depth of their exploration, and the size of the audience reached. This is because virtually every means of communicating ideas in today's mass society requires the expenditure of money. . . . By contrast with a limitation upon expenditures for political expression, a limitation upon the amount that any one person or group may contribute to a candidate or political committee entails only a marginal restriction upon the contributor's ability to engage in free communication. A contribution serves as a general expression of support for the candidate and his views, but does not communicate the underlying basis for the support. At most, the size of the contribution provides a very rough index of the intensity of the contributor's support for the candidate. . . . While contributions may result in political expression if spent by a candidate or an association to present views to the voters, the transformation of contributions into political debate involves speech by someone other than the contributor.    

Some may argue that this decision validates the underlying point that more money implies a greater capacity for free speech, allowing the wealthy to exercise outsized influence over the political system. But if having more money gives certain individuals an unfair speech advantage, doesn’t celebrity provide the same advantage? What about rhetorical skill, personal charisma, or the sheer volume of a person’s voice? Status and ability certainly enhance a person’s capacity to disseminate ideas, but no one seems to be suggesting that we restrict famous or dynamic speakers from engaging in electioneering communications.

While more money may provide certain individuals with a greater capacity to communicate political messages, there’s no principled reason to single out this advantage over any other kind of advantage. Keep in mind that the Court deals in rule-based distinctions, not pragmatic quibbles over which form of advantage may be most dangerous.

As Eugene Volokh explained in a 2010 blog post:

People continue to characterize the Court’s campaign finance decisions as resting on the theory that money is speech. And of course money isn’t speech.

But, as I wrote a few years ago, money isn’t abortion, either. Nonetheless, a law that banned the spending of money on abortion would surely be a serious restriction on abortion rights (whether or not you think that the Court was right to recognize such rights). A law that capped the spending of money for abortions at a small amount, far smaller than abortions often cost, would likewise be a burden on abortion rights, and dismissing this argument as “it is quite wrong to equate money and abortion” would be unsound.

It goes without saying that the concept of “corporate personhood” is largely disconnected from the idea of spending as speech. But once you accept the notion that spending on independent electioneering communications is a form of protected speech, it’s easy to see why corporations should be entitled to the same liberties as other associations of people. In the same way that a group of private citizens may come together and pool money to pay for an independent political advertisement, a collection of shareholders may choose to use corporate funds—owned by each shareholder relative to her percentage of stock—to pay for an independent political advertisement. To restrict the latter and not the former is to draw an arbitrary division between business associations and other kinds of associations. Why should associations of people lose their constitutionally protected freedoms simply because of the legal structure of the organization?

The fact that most major media outlets are set up as corporate entities only reinforces this point. Are news corporations entitled to freedom of the press, but not freedom of speech? Why wouldn’t other kinds of corporations be entitled to freedom of the press? By what logic should only a single clause in the First Amendment be applied selectively to certain kinds of corporate entities?

Freedom of the press does not simply mean freedom to publish the news. Ever since Lovell V. City of Griffin (1938), the Court has held that this constitutionally protected liberty is “not confined to newspapers and periodicals. It necessarily embraces pamphlets and leaflets. These indeed have been historic weapons in the defense of liberty, as the pamphlets of Thomas Paine and others in our own history abundantly attest. The press, in its historic connotation, comprehends every sort of publication which affords a vehicle of information and opinion.”

To add a bit of irony, it seems that the majority of Americans—particularly well-educated people—dramatically overestimate the amount of corporate money in political campaigns, in part because media outlets present a distorted picture of reality. In a sense, opponents of corporate electioneering communications seem to be heavily influenced by misleading corporate media communications.

The truth is that money doesn’t have as much of an influence over our politics as people seem to believe. While this subject is difficult to study empirically, political scientists who are familiar with the literature tend to believe that spending is a relevant but less important factor in campaign outcomes. Most campaign ads have a minimal impact on the results of an election, even when they’re coming directly from the candidate. Indeed, voter perceptions and media narratives are far more likely to influence the results of an election than any electioneering communications.

As my undergraduate political science professor once put it: “shelves of academic research suggest that individual political ads have only marginal power to swing races, which depend instead on fundamentals like people’s perception of the economy.” The same can be said of lobbying, which appears to have a little overall impact on policy changes, given the general inertia of our political system.

Instead of trying to restrict freedom of speech, perhaps a better goal of the Occupy Movement and the political left would be to focus on problems like the advantage of incumbency or the general lack of engagement and understanding throughout the electorate on basic policy issues. At this point, it’s just strange to see a movement that was founded on constitutionally protected rights to freedom of speech and association so eager to take these rights away from other Americans.

Wednesday, November 2, 2011

Income Inequality and Tax Policy: Q & A

There’s been a lot of talk lately about the causes and consequences of income inequality, particularly in relation to tax policy. So, I figured I’d offer some thoughts (and some data) on this subject in the form of an extended Q & A. Enjoy.

Is rising inequality a uniquely American phenomenon?

The short answer is no. Since the late 1970s, income inequality has been steadily increasing throughout the industrialized English-speaking world. The time series chart below shows income shares of the top one percent across four major Anglo-Saxon economies.


Source:   
Piketty and Saez, The World Top Incomes Database; retrieved from: http://184.168.89.58/sketch/

All four countries appear to be following a similar trend, though the United States is a bit of an outlier in terms of the magnitude of its growth in recent decades. What could possibly account for the discrepancy? If we scrutinize the data a bit more closely, we see a dramatic – and seemingly permanent – jump in the share of income accruing to top earners in the mid-1980s.

Academic economists have proposed a number of explanations for this jump, but Scott Winship (a resident scholar at The Brookings Institute) makes a compelling argument that it is largely a figment of changes in the tax code:

It helps to know that the 1986 tax reform created big incentives for people who had previously reported income on corporate returns (where it is invisible to the datasets above) to report on individual income tax returns (where it appears as an out-of-the-blue increase).  And if this may be considered a permanent change in the tax regime, then the effect is for more income to show up on individual returns after 1986 than before, artificially lifting the top income share in every subsequent year

Whether or not this theory is correct, it’s clear that other post-industrial Anglophone countries have been following a similar (if slightly less extreme) upward trend. This suggests that the growth in earnings at the top of the income distribution is driven in large part by cross-national factors like globalization. The bottom line is that the increase in U.S. income inequality is far from exceptional, and probably has a lot more to do with larger macroeconomic forces than with U.S. domestic policy.

Is U.S. tax policy driving the growth income inequality?

Though Winship provides further evidence to support his theory about the 1986 tax reform, it’s possible that a genuine shift in U.S. income inequality resulted from tax policy changes under the Reagan Administration. But this seems very unlikely given the data.

As wealthier Americans captured an increasing share of the income distribution, they continued to take on an equally large proportion of the federal tax burden. The time series chart below shows the share of income (including capital gains) accruing to the top one percent of households in the United States, along with their share of the federal tax burden. 


Sources:
Piketty and Saez, The World Top Incomes Database; retrieved from: http://184.168.89.58/sketch/ 
Congressional Budget Office, Historical Effective Rates, Historical Effective Tax Rates, 1979 to 2005; December 2008; retrieved from: http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_wtoc.pdf

The pattern here is an astounding. At least at the level of simple linear correlation, there is a strong positive relationship between the top one percent’s share of income and their share of federal taxes. Looking at this graph, it’s difficult to argue that top earners have gained a larger proportion of income because they are paying a smaller share of taxes.

However, it is still possible to argue that the declining level of federal taxes paid by top earners is a primary driver of income inequality. Perhaps lower effective federal tax rates for the wealthiest Americans have enabled these earners to gain a growing share of the income distribution.

Again, this doesn’t seem very likely given the data. The time series chart below shows the effective federal tax rate among top earning households, along with the income share accruing to these households. 

Sources: 
Piketty and Saez, The World Top Incomes Database; retrieved from: http://184.168.89.58/sketch/
Congressional Budget Office, Historical Effective Rates, Historical Effective Tax Rates, 1979 to 2005; December 2008; retrieved from: http://www.cbo.gov/ftpdocs/88xx/doc8885/Appendix_wtoc.pdf

There doesn’t appear to be any clear pattern in this data suggesting a causal relationship. At the level of simple linear correlation, these factors are simply not associated:

CORRELATION MATRIX

Total EFTR
Income EFTR

Income Share
Income/Gains Share
Income Share
Income/Gains Share
R
0.339
0.176
0.434
0.305
R-square
0.115
0.031
0.188
0.093

Is more progressive taxation of income the best solution to rising inequality?

While it’s fairly clear that tax policy is not the central factor driving inequality in the United States, many policy experts have argued that progressive taxation should nevertheless be a central response to the problem.

Thomas Piketty and Emmanuel Saez, two of the foremost researchers on global income inequality, argue that the “reduction in taxes at the top since 2001 has mechanically exacerbated the discrepancy in disposable income between the rich and the rest of us. Thus, it is obvious that the progressive income tax should be the central element of the debate when thinking about what to do about the increase in inequality.”

In other words, the Bush Administration’s reductions in top marginal income tax rates didn’t make the inequality situation any better. Whether or not tax policy has been a key driver of inequality, it’s certainly something that should be used to address the growing income disparity in the United States.

The argument seems very reasonable, and I personally support resetting the top marginal income tax rates to what they were in the 1990s. But as a long-term solution to the problem of rising income inequality, this simply doesn’t seem very sensible.

To begin with, the U.S. already has a highly progressive federal income tax structure relative to other industrialized countries. The Tax Foundation recently complied OECD data on the ratio of tax shares to income shares across different industrialized countries.


Alternative measures of progressivity of taxes in selected OECD countries, mid-2000s




Percentage share of richest decile
1. Share of taxes of richest decile
2. Share of market income of richest decile
3. Ratio of shares for richest decile (1/2)
Australia
36.8
28.6
1.29
Austria
28.5
26.1
1.10
Belgium
25.4
27.1
0.94
Canada
35.8
29.3
1.22
Czech Republic
34.3
29.4
1.17
Denmark
26.2
25.7
1.02
Finland
32.3
26.9
1.20
France
28.0
25.5
1.10
Germany
31.2
29.2
1.07
Iceland
21.6
24.0
0.90
Ireland
39.1
30.9
1.26
Italy
42.2
35.8
1.18
Japan
28.5
28.1
1.01
Korea
27.4
23.4
1.17
Luxembourg
30.3
26.4
1.15
Netherlands
35.2
27.5
1.28
New Zealand
35.9
30.3
1.19
Norway
27.4
28.9
0.95
Poland
28.3
33.9
0.84
Slovak Republic
32.0
28.0
1.14
Sweden
26.7
26.6
1.00
Switzerland
20.9
23.5
0.89
United Kingdom
38.6
32.3
1.20
United States
45.1
33.5
1.35
OECD-24
31.6
28.4
1.11
Source: Computations based on OECD income distribution questionnaire.

Based on this table, the top ten percent of earners in the U.S. appear to pay a larger share of the income tax burden than in other industrialized nations. This is true both in absolute terms and relative to their proportion of income.

As the original author of the OECD study notes:

Progressivity is not the same as redistribution. Progressivity measures how the distribution of the tax burden is shared, while redistribution measures how much the tax system reduces inequality. Redistribution is influenced both by the progressivity of taxes and the level of taxes collected . . . . [T]he USA reduces inequality a lot less than most other countries, because the other thing that you need to take into account is what taxes get spent on. While the US tax system is progressive and reduces inequality, the US welfare state is much less effective at reducing inequality.

Lest anyone fail to believe that federal income taxes in the United States are highly progressive, here is some additional data from the left-leaning Tax Policy Center:
Effective Federal Tax Rates Under Current Law, By Cash Income Percentile, 2011










Cash Income Percentile1
Average Effective Tax Rate
Individual Income Tax2
Payroll Tax3
Corporate Income Tax
Estate Tax
All Federal Tax4
Lowest Quintile
-5.7
6.2
0.4
0.0
0.8
Second Quintile
-2.8
8.1
0.5
0.0
5.7
Middle Quintile
3.2
8.8
0.5
0.0
12.4
Fourth Quintile
7.0
8.9
0.7
0.0
16.4
Top Quintile
14.0
5.6
3.2
0.2
23.1
All
9.0
7.0
2.0
0.1
18.1
Addendum
80-90
9.3
8.9
0.9
0.0
19.1
90-95
11.7
8.1
1.3
0.0
21.1
95-99
15.1
5.3
2.4
0.1
23.0
Top 1 Percent
18.5
1.7
7.0
0.5
27.6
Top 0.1 Percent
19.1
0.8
10.3
0.7
30.8













We already have a progressive income tax structure. This is the key problem that Piketty and Saez seem to be overlooking. What we don’t have – and what we truly need – is a highly redistributive spending structure. Piketty and Saez aren’t alone in conflating income tax progressivity with redistribution. Pundits on both sides of the political spectrum tend to collapse these two concepts together. It’s simply the way that Americans frame this debate.

For those who support much more dramatic progressivity in the U.S. tax structure, the obvious question is why it really matters that our income tax system is already highly progressive. Given the dramatic growth in inequality over the past several decades, shouldn’t it be even more progressive?

There are several reasons why this is not the case, but I’ll focus on what I believe are the most compelling.

First, a more progressive tax system means far more revenue volatility, which means far more uncertainty for the federal government. When we narrow the tax base, we take on more risk. Any tax policy expert will tell you that a narrow tax base is risky for the same reasons an undiversified investment portfolio is risky. You’re putting all of your eggs in one basket. It’s particularly important to understand the problems with narrowing the tax base when we’re already deriving over 25 percent of our all federal revenues from the top one percent of earners whose incomes are the most volatile.

Second, exempting such a large portion of the income distribution from paying federal income taxes creates a potential free-rider problem. In 2010, about 45 percent of households paid zero (or negative) federal income taxes. While the majority of these earners contributed to federal payroll taxes, these levies were tied (at least in theory) to specific entitlement programs. It’s easy to see why this kind of tax structure poses a problem for our political system. People who pay no federal income taxes are more likely to vote for additional government services when they know someone else is consistently paying the cost of these services. As a practical matter, everyone should have some skin in the game.

Third, higher marginal rates have a dampening effect on productivity, though recent evidence suggests that behavioral effects are far smaller than many conservatives economists seem to believe. Even if increasing marginal rates had no impact on work incentives, however, it would still be distortionary in other ways. Higher marginal rates lead to less economically efficient outcomes, and typically cause wealthier earners to shelter money in places where the federal government can’t get to it.

Fourth, generating more revenue from a small number of wealthy earners may seem like a good way to limit their power, but it’s probably not. In fact, there’s good reason to believe that a highly progressive tax system has the opposite effect. If the federal government is financially dependent on a small number of wealthy Americans, it’s likely that these Americans will have more influence over our political system. If we want to make the government officials less beholden to the rich, it might be a good idea to make sure a large chunk of their paycheck isn’t coming from these individuals.

In the debate over income inequality in the United States, I wish we would spend more time talking about redistributing on the spending side and less time talking about taxing the rich.