Sunday, August 5, 2012

Systematic planning leads to systemic problems

First, a word on the difference between "systematic" and "systemic." Briefly, systematic refers to an approach, a methodology. Systemic refers to a result or an observed condition that is system-wide. Thus, I might have a systematic approach to my rotisserie baseball league (i.e. fantasy league) wherein I only pick players under a certain weight. As one can imagine, such an approach would probably not work very well. And given that many big hitters are hefty guys, this approach might result in a systemic flaw: minimal home run production throughout my lineup.

Now, on to the red meat...

Last week, the Brookings Institute released a study roughly based on Mitt Romney's proposals, with regard to income tax and federal spending (long and short: Romney wants to cut tax rates and decrease federal spending). The conclusion of the study:
Our major conclusion is that a revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed – including reducing marginal tax rates substantially, eliminating the individual alternative minimum tax (AMT) and maintaining all tax breaks for saving and investment – would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.
Needless to say, those on the Left--from journalists to the Obama Campaign--have jumped all over this. For instance, this piece at the Boston Globe by Callum Borchers opens with the following claim:
Mitt Romney’s tax plan would provide large tax cuts to wealthy Americans and hike taxes on middle- and low-income households, according to an analysis by The Brookings Institution.  
The report published Wednesday estimated households with incomes over $1 million would receive average tax cuts of $87,117 under Romney’s plan, while those earning $200,000 or less would pay higher taxes.
This basic conclusion--that the Brookings study shows Romney's plan raising taxes on everyone but the rich--is sweeping through the internet on various message boards and in other columns by liberal-leaning writers. Unfortunately for Mr. Borchers and others picking up on the meme, the study doesn't say any such thing. From the study:
Absent any base broadening, the proposed reductions in individual and estate taxes specified in Governor Romney’s plan would decrease federal tax revenues by $360 billion in 2015.[7] These tax cuts predominantly favor upper-income taxpayers: Taxpayers with incomes over $1 million would see their after-tax income increased by 8.3 percent (an average tax cut of about $175,000), taxpayers with incomes between $75,000 and $100,000 would see somewhat smaller increases of about 2.4 percent (an average tax cut of $1,800), while the after-tax income of taxpayers earning less than $30,000 would actually decrease by about 0.9 percent (an average tax increase of about $130) due to the expiration of the temporary tax cuts enacted in 2009 and extended at the end of 2010.
In other words, the Romney "plan" (it's not really a plan, just basic ideas Romney has espoused) lowers taxes on everyone. Taxpayers making under $30,000 a year see a small decrease in after-tax income based on a comparison to levels under the Bush tax cuts, which are set to expire before the end of the year. If they do expire, Romney wins the Presindency, and implements the "plan" studied by Brookings than everyone at every income level would see a decrease in their income tax rate. That's quite a different thing than everyone earning $200,000 or less paying higher taxes, isn't it?

Assuming Mr. Borchers was being honest in his piece, we can trace his misstatement to the following chart from the study:

Under "Average federal tax change," there are two columns, "Specified tax changes without base broadening," and "Revenue-neutral." The first shows the consequences of the Romney tax proposals examined by Brookings. Consistent with the above quote, all income tax levels--except the lowest--show a decrease in taxes owed. The second column--"Revenue-neutral"--shows increases in taxes for all levels except the highest two: incomes over $500,000. But Mr. Borchers clearly doesn't understand where these numbers are coming from.

The Brookings study is also looking at proposed cuts in Federal spending. It assumes certain levels of Federal spending as a given, allows cuts to spending above those levels--as suggested by Romney--and then arrives at a final level. Then, it proportionally adjusts taxes owed by each income level to produce a "revenue-neutral" system, i.e. one where there is no deficit spending. The numbers Mr. Borchers and others are fixated on are not Romney's, at all. They are a product of increasing tax rates to create a revenue-neutral system. Thank goodness I'm not the only one that realizes all of this.

But the larger issue here is the nature of the approach in the Brookings study: a systematic one--with regard to taxes and spending--to achieve a revenue-neutral result. Look at all of the various "plans" promulgated by various political leaders and pundits--mostly on the left--across the past couple of decades or so. All of them are built on assumptions about how things work and how specific results can be produced via planning, from healtcare to the stimulus to poverty in general to crime to the deficit, there's always a big, all-encompassing plan. And the proponents of these plans are always absolutely certain of the consequences. Yet, they are always ultimately wrong, in some cases tragically so.

As I've noted in the past, complex open systems about which we lack a complete understanding simply cannot be manipulated in the fashion many (technocrats) would like to believe. And regardless, neither the country nor the world is a big laboratory experiment for such people to use and abuse as they see fit. We don't need a "revenue-neutral" system--wherein tax rates and spending are arbitrarily decided in order to make the numbers work--for two primary reasons.

First, because the numbers never will work: the system is too big, too complex, and too unpredictable. Arbitrary changes made to produce specific results ripple through the system as a whole, producing unplanned effects and destroying the assumptions uses to justify the initial changes. And oftentimes, these changes cannot be simply undone: they become, yes, systemic. A good example of this is the minimum wage, instituted under the assumption that it would simply raise income levels for the lowest tier of workers. But as economists learned--after the fact--the only certain consequences of a minimum wage is decreased employment and an increased cost of living over time. Thus resulting in systemic problems: higher unemployment levels and less buying power at the lowest income levels. The envisioned fix for the second? Raise the minimum wage. The result? More unemployment and--eventually--less buying power. Despite the clarity of these lessons, the attempts to control the system continue.

And second, because we--the people--are individuals first and foremost, not bits of data in a program. This nation was founded on this postulation, that what mattered most was liberty and individualism: the ability and right of people to chart their own course in life. Government is a necessity, true. And thus taxes are a reality. But the basic assumption about such--as clearly implied and even noted outright--in various Founding documents is that equality rules. Tax policy--like every other policy--is supposed to be based on this fundamental assumption. And the truth of the matter: income is property. It is not a tool for achieving social justice or for implementing government policy. Taxes--properly instituted--are what they are. The revenue produced is what it is. And from this, the government fulfills its role by performing its essential duties. No more, no less: it is limited.

Cheers, all.



  2. Thanks Dm, but that link is in my post at "Thank goodness I'm not the only one that realizes all of this." :)