In today's Washington Post, Robert Frank writes:
But while Congress clearly should not rescue borrowers who lied about their incomes or tried to get rich by flipping condos, such borrowers were at most a minor factor in this crisis. Primary responsibility rests squarely on regulators who permitted the liberal credit terms that created the housing bubble.
Hints of how things began to go awry appeared in "The Two-Income Trap," a 2003 book in which Elizabeth Warren and Amelia Warren Tyagi posed this intriguing question: Why could families easily meet their financial obligations in the 1950s and 1960s, when only one parent worked outside the home, yet have great difficulty today, when two-income families are the norm? The answer, they suggest, is that the second incomes fueled a bidding war for housing in better neighborhoods.
It's easy to see why. Even in the 1950s, one of the highest priorities of most parents was to send their children to the best possible schools. Because the labor market has grown more competitive, this goal now looms even larger. It is no surprise that two-income families would choose to spend much of their extra income on better education. And because the best schools are in the most expensive neighborhoods, the imperative was clear: To gain access to the best possible public school, you had to purchase the most expensive house you could afford.
But what works for any individual family does not work for society as a whole. The problem is that a "good" school is a relative concept: It is one that is better than other schools in the same area. When we all bid for houses in better school districts, we merely bid up the prices of those houses.
In the 1950s, as now, families tried to buy houses in the best school districts they could afford. But strict credit limits held the bidding in check. Lenders typically required down payments of 20 percent or more and would not issue loans for more than three times a borrower's annual income.
In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the intervening decades. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families' ability to bid for housing.
The result was a painful dilemma for any family determined not to borrow beyond its means. No one would fault a middle-income family for aspiring to send its children to schools of at least average quality. (How could a family aspire to less?) But if a family stood by while others exploited more liberal credit terms, it would consign its children to below-average schools. Even financially conservative families might have reluctantly concluded that their best option was to borrow up.
Professor Frank has missed the ball on this one. As I observed in the Wall Street Journal last August in my column "The Two Income-Tax Trap" the math behind this simply doesn't add up--using Warren and Tyagi's own numbers:
The argument is developed in the book, "The Two Income Trap: Why Middle Class Mothers and Fathers are Going Broke," by Harvard Law School Professor Elizabeth Warren and her daughter Amelia Tyagi. In fact, using their own numbers, it is evident that they have overlooked the most important contributor to the purported household budget crunch — taxes.
Ms. Warren and Ms. Tyagi compare two middle-class families: an average family in the 1970s versus the 2000s (all dollar values are inflation-adjusted). The typical 1970s family is headed by a working father and a stay-at-home mother with two children. The father's income is $38,700, out of which came $5,310 in mortgage payments, $5,140 a year on car expenses, $1,030 on health insurance, and income taxes "which claim 24% of [the father's] income," leaving $17,834, or about $1,500 per month in "discretionary income" for all other expenses, such as food, clothing, utilities and savings.
The typical 2000s family has two working parents and a higher income of $67,800, an increase of 75% over the 1970s family. But their expenses have also risen: The mortgage payment increases to $9,000, the additional car raises the family obligation to $8,000, and more expensive health insurance premiums cost $1,650. A new expense of full-time daycare so the mother can work is estimated at $9,670. Mother's income bumps the family into a higher tax bracket, so that "the government takes 33% of the family's money." In the end, despite the dramatic increase in family income, the family is left with $17,045 in "discretionary income," less than the earlier generation.
The authors present no explanation for why they present only the tax data in their two examples as percentages instead of dollars. Nor do they ever present the actual dollar value for taxes anywhere in the book. So to conduct an "apples to apples" comparison of all expenses, I converted the tax obligations in the example from percentages to actual dollars.
In fact, for the typical 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income is $22,374.
Although income only rose 75%, and expenditures for the mortgage, car and health insurance rose by even less than that, the tax bill increased by $13,086 — a whopping 140% increase. The percentage of family income dedicated to health insurance, mortgage and automobiles actually declined between the two periods.
During this period, the figures used by Ms. Warren and Ms. Tyagi indicate that annual mortgage obligations increased by $3,690, automobile obligations by $2,860 and health insurance payments by $620 (a total increase of $7,170). Those increases are not trivial — but they are swamped by the increase in tax obligations. To put this in perspective, the increase in tax obligations is over three times as large as the increase in the mortgage payments and almost double the increase in the mortgage and automobile payments combined. Even the new expenditure on child care is about a quarter less than the increase in taxes.
Overall, the typical family in the 2000s pays substantially more in taxes than the combined expenses of their mortgage, automobile and health insurance. And the change in the tax obligation between the two periods is substantially greater than the change in mortgage, automobile expenses and health-insurance costs combined.
Isolating just the mortgage burden, according to Warren & Tyagi's figures the percentage of family income dedicated to mortgage payments actually declined from the 1970s to 2000s, from 14% of household income ($5310 of $38,700) to 13% of household income ($9000 of $67,800). Again, this is using Warren & Tyagi's own figures.
I learned after writing the column that there is some dispute about the source of the rising tax burden. I followed Warren and Tyagi's lead from the book and attributed the growth in the tax burden primarily to the second-earner bias. Subsequently I found that there is some dispute about the extent to which the growth in the tax burden is attributable to income taxes rather than state and local taxes (including state income taxes). What has not been questioned is that Warren and Tyagi's own numbers show that the growth in the overall household tax burden overwhelms the growth in home mortgage expenses with respect to its impact on the household bottom line.
I like some of Bob Frank's work, especially back before he started writing his really political stuff. But I'm afraid on this one he fell into the two-income trap.
Update:
There is some confusion over whether Warren and Tyagi's analysis refers to marginal or average tax rates. It is average. In a long post on which the WSJ column was based I quoted the relevant excerpt from the book The Two-Income Trap (for those who don't have ready access to the book itself). As I noted in that post, the increase in taxes (in dollar terms) is more than three times greater than the increase in mortgage payments (the supposed driver of the "two-income trap"). I present the budget analysis graphically there as well.
Related Posts (on one page):
- Robert Frank Falls For the Two-Income Trap:
- An Even More Confusing Presentation of the Two-Income Trap and Taxes:
- The Two-Income Tax Trap:
- Evaluating The Two-Income Trap Hypothesis:
How does the percieved need for the latest and greatest at all times fit into this? I've seen far too many columns and call in shows where someone is trying to justify replacing a two year old car, still in fine working order, that they are upside down on. Or the perennial holiday season news coverage of parents fighting each other for that toy little Johnny just has to have.
I just have to wonder which is the cause and which the symptom.
That's not at all clear from the FBI's report on their mortgage fraud investigations.
Our credit system encourages a lot of this borrowing from Peter to pay Paul and the three-card-monte of transferring balances or removing your home equity to pay for other unrelated matters. Our society needs to educate kids in high school about how to balance the checkbook, understand how credit cards work, and explain the borrowing process of a mortgage or a loan. Sometimes the first example of this information is delivered to the young person by way of a credit card offer or dubious car financier.
People who lied to get loans should go to jail. For people who "tried to get rich" I can't see how it is self-evident they are less entitled than anyone else to their piece of the proposed government bonanza. Rather, it seems to me there is just as much justification for rescuing these borrowers as anyone else (which is to say approximately nil). What are the sins, precisely, of these hated and fabled middlemen? That they hoped to buy low and sell high, to adult borrowers who could judge their prices by comparing to others in the marketplace? Does Frank think they unfairly "drove up the market?"
If the political panderfest currently underway is to maintain its fevered pitch between now and the election, surely we cannot cut out those who sought to profit. In that case it might become obvious that all residential buyers purchase homes in the hope and expectation that their real estate will rise in value over the years, building themselves and their families a nest-egg of capital. The giveway might have to be curtailed in recognition of their evil and base hope of profit.
Of course, that would require applying something resembling reason to the Grand Giveaway Program of 2008-09. And we just can't have that.
Obviously, if there are people out there who were lied to ("your payments will never increase!") they have their remedies as a defense to any foreclosure based on higher rates. And the liars should go to jail. But if they knew what they were getting into, and misjudged the future, well, next time I assume they will be more careful. But I think it is outrageous to ask others to pay for their mistakes.
This means if the spouse (i.e., second wage earner) is also working at a job commensurate with his or her likely educational level, the family is earning well above 200K. Worse, if the spouse is self-employed (such as being a physician or even a therapist) the total tax load is increased by another 7% because of the "employers" social security contribution. In California, even at today's tax rates this puts the tax on the self-employed spouse at over 50%. For most taxpaying couples in the 200-300K range, the AMT effective rate is well over 30%, California state tax is 9.3% (not deductible in AMT), and the total social security tax is about 12% after a income tax deduction of the "employers" half of the contribution.
Actually yes, for a very small number of people this can be a good idea. Admittedly if you are not planning on selling the property soon after improving it then this is usually a bad idea, but the terms of a reverse mortgage can be significantly better than other loans - good enough even to make investing the money from a reverse mortgage a good idea at times.
I think I see your problem.
After all, in 1954 the bottom income tax rate was 20% and the top Tax rate was 91% and was imposed of incomes of $200,000 or more. Incomes from $20,000 to $30,000 a year were all generally taxed in the 50% range.
In 1964 those rates changed to 16% and 77%,
It wasn't until 1982 that this was reduced significantly, to 12% for the bottom bracket and 50% for the top.
Today it's 10% for the bottom bracket and 35% for the top.
Just given those raw numbers, It's very difficult to imagine how there's a "Rising tax burden" such people.
to be in the 33% tax bracket in 2007, you had to earning $165,000 as a single filer, or $195,000 as a joint filer.
To be in the 24% tax bracket in the 1970's it appears you only had to earn $6000 a year.
Adjusted for inflation, that's only $31,000 a year.
2. If the figures are inflation-adjusted, how did mortgage costs go up almost 70%?
I don't have the resources to work out average tax rates by myself at the moment, But this was the first link I found looking for data on it. (I don't know who the Center for Budget and Policy Priorities is, as I said it was just the first source I found that talked about historical average rates)
As for inflation, I simply ran the number through an inflation calculator. However, given that Frank's (and Warren and Tyagi's) thesis was about an alleged disproportionate rise in mortgage prices, I would think the answer would be obvious.
Also unaccounted for is the increase in house sizes. Two or three bedroom homes of 1200 square feet were normal in the '50's - '70's. Today's home buyer wants at least 1800 square feet -- a relatively small house by today's standards. So at least part of the increased cost is attributable to buying a 50% - 100% bigger house.
And taking Ben P's example of a $30K wage earner from 1970 who was paying a 50% marginal rate [with many more deductions available than today, such as credit card interest deductions], then by using this handy inflation calculator, we see that that wage earner's inflation-adjusted income would be $167,905 today.
Adding today's much higher SSAN taxes, plus the exploding state and local taxes, property taxes, sales taxes, etc., it's pretty clear that the total government take is much greater than it was in 1970.
I'll admit that the difference may be close enough that deductions, state income taxes and Social Security taxes may make up the difference, but I still don't see how a 50% marginal tax rate on $30,000 dollars is less burdensome than a 33% marginal tax rate on $167,000 dollars.
Yes, (assuming it's average) in one case the government's taking $15,000 and in the other it's taking $55,000 dollars, it's much smaller as a percentage of income. If you were to equalize the whole thing, you'd have $83,000 dollars after taxes under the old rate and $112,000 dollars left under the new rate.
Again, the social security tax obviously narrows this some, and I can see some states where state income tax might close the gap entirely. (Although I know nothing about the level of state income taxes in the 70's) But that would leave us roughly even, and Zywicki's assertion is that the tax burden increased.
Thus everyone here complaining about VC contributors not understanding marginal versus average; its YOU who are confused (in this instance).
This is done in the Netherlands. The law requires the loan issuer to maintain documentation of these things. In the event of bankruptcy, the issuer is left holding the bag if the documentation doesn't check out.
As you can see, our GDP has risen almost 300% -- but we're individually not much better off than we were in 1960. Practically all of the increased wealth has gone into the pockets of government.
Ironically this means that the government has been growing relative to itself in constant dollar terms--albeit not relative to our wallets. Here is something else to chew on: suppose you buy a chair today, and then an identically constructed chair ten years from now--at the same price. What's the inflation rate? Answer: who knows. Its a funny thing we experience productivity growth every year, but things do not get cheap.
Hint: They should be.
That doesn't necessarily mean that, but I see your point.
That doesn't take into account population Growth. Per Capita GDP has just barely doubled since 1960. It also doesn't take into account deficit spending, which would be a part of government spending but not GDP.
This graph is a little better.
But here's where that logic doesn't work.
If I lower taxes and due to the Laffer Effect the economy expands and government revenues rise and government spending rises accordingly to keep pace with the GDP, according to this logic the tax burden hasn't actually decreased any because "more money is in the hands of the government."
Maybe I'm obtuse, but I think chair inflation in that example would be 0%. Also, I think things are getting cheap. I'd much rather have $10,000 to spend today than twenty years ago.
Can you really make such a sweeping statement without specifying the spending target? I'd agree if we're talking PCs or recorded music. Housing and Microsoft stock, not so much.
Why who knows? Suppose the fella who makes the chairs can make twice as many in the same amount of time. How much should the chairs cost then? less. Official estimates say that the economy books 1-2% productivity growth per year.
Yet prices don't fall. They go up on-average 3%... 3+2=5%
Food for thought.
Take as an example a metro area I'm personally familiar with - the San Francisco Bay Area.
Overall, because of the stronger-than-normal emphasis on education, from 1900 to 2000 average housing price increase was over 7%. Yes, you read that correctly - an _average_ increase of just over 7%. Year in, year out, rain or shine, boom or bust, war or peace, an appreciation rate of close to twice the rate of inflation - for a full 100 year period.
Looking at microclimes within the larger area, as a rule, any zip code that had good schools tended to have higher appreciation rates, and retain that appreciation better. What's the result? Small tract houses in some upscale _districts_ go for over $1m.
The distribution might be more at play here, but I am really not sure. Without data on that point, it is a difficult proposition to assess.
Although it may not feel like it, California's total tax burden is just above the national average. States that are worse: high tax places like Kentucky, Mississippi, and Idaho.
When I was growing up in the 70s, if a woman with small kids got divorced and had to downscale, she could move into an all-white ethnic neighborhood in the city, rent a cheap apartment while she went back to school or reentered the job market. Married students also gravitated to these areas.
These days, in a lot of places, either you are paying a fortune for housing in a low-crime, high-school achievement neighborhood, or you are in a very sleazy area with high crime and bad schools. In the 50s, there were neighborhoods where only whites could live. Now there are lots of neighborhoods where whites are not welcome, and other neighborhoods where blacks keep out the Mexicans, or Mexicans keep out the blacks. In many high schools and junior highs, the kid of the wrong ethnicity will be beaten up repeatedly till he transfers or drops out, and school administrators appear powerless to prevent this. Not everybody is trying to keep up with the Joneses. Some people just want a safe environment for themselves and their kids, although there are certainly a lot of people who bought an enormous Dream Home while telling themselves that they were doing it for the kids.
On the whole, I think that so much has changed in the world over the past few decades that it is hard to make comparisons. Certainly 50 or 60 years ago few young married couples would have decided to artificially limit their family size to two kids so that they could buy a 5000 square foot house.
This belief that economic growth serves chiefly to intensify a zero-sum status competition that leaves everybody worse off is one of the most insidious beliefs of the current left--not something we want to accept at face value (regardless of arguments about tax burdens).
What do you all think?
Hilarious.
Maybe on "Leave it to Beaver" this was the case, but not for the overwhelming majority of Americans.
Unless you count having 1 car, 1 tv, hand me down clothes, and a diet consisting of few choices as "easily meeting financial obligations"
This is a silly statement.
Sounds like meeting financial obligations to me.
The needs of me and my kids come before the wants of me and my kids. I don't consider us to be too good for hand-me-down clothes or to only have 1 TV in the house. But we've got plenty to eat, are shielded from the elements, and have health insurance.
Then again, it doesn't need to be; wealth is a pretty good proxy for knowing a school doesn't suck. Simply shown pictures of neighborhoods, I think most people could tell you how good the schools are with pretty good accuracy. There are other accurate proxies that nobody wants to talk about because, well, they sound very racist.
To put this another way, there is a very high direct correlation between desirable places to live and how good the schools are in those places. (And the cause isn't actually wealth per se, but residents who actually give a damn about their schools and neighborhoods.)
1 car, 1 TV, hand-me-down clothes, and a limited diet by current standards were normal in the 60s. So were various communal arrangements that seem to have vanished in many areas, including neighborhood schemes for reusing a lot of things that children outgrow before they wear out. Dress-up shoes and bicycles had lots of owners where I grew up, and I remember feeling a definite bond with the neighbor kid who always had my "party shoes" the year before I did.
I imagine that a lot of this is still going on in apartment buildings in poorer neighborhoods, but this was in an area of single-family homes and pretty good schools. The question for me is, can people of moderate means still live that way? I imagine not. Shoes and bikes have become ridiculously cheap in any case, now that they are made in China, and so people in the economic middle no longer have to share them. But houses are a lot more expensive relative to many people's earnings.
Here's a question for the group, based on something written above by the person from Ann Arbor. Does the "good enough" school district still exist in major urban areas? I define this as one that doesn't particularly care about making those "Top 100" lists, but that still places its top students very well and its mid-level students in solid mid-level schools. Oh, and that has those two groups making up a clear majority of students.
I ran the numbers and can't get anywhere close to this amount. For reference, please see this comment.
Now, if you add in all the taxes being passed onto me for various reasons including excessive government regulation and trade protectionism, the actual governmental burden is probably higher.
Perhaps you can answer the one question that has always bedeviled me: How on earth did she keep her house so clean with out ever cleaning it, or hiring a maid?
Also, was there ever an episode where she didn't wear pearls?
Possibly someone else mentioned that and I missed it.
Another consequence of women entering the general workforce would have been a significant decrease in the quality of workers in traditional women's occupations. Why settle for being a teacher, even a darn good one, or a nurse, if you can be a lawyer or doctor or engineer or Congresscritter instead? So the best and brightest migrate to higher-paying, higher-status jobs and the education system has to make do with women who would otherwise be housewives or waitresses.
The real question is not whether the test scores are high, since the SAT is basically an IQ test, and a smart kid will do pretty well on the test even if he spends K through 12 in lousy schools. The real question is: "Is this the best school in the area for MY child." I personally would NOT send a child to a school with 3000 kids in it, no matter how many kids they had headed to the Ivy League.
If you have young kids, and you aren't loaded with money, I think that the important thing is to teach them to read BEFORE they go to public school (check out Hooked on Phonics from the public library,) send them to public school for K - 4th grade, and then put them in a private or parochial school for fifth to eighth grade. At the high school level, send them to the smallest, best public high school you can.
Most elementary schools do a decent job of imparting the basics, but 5th through 8th grade is a vast wasteland in the public schools these days, even in the "better" school districts, and the bullying and emotional cruelty is VERY bad, especially at the huge campuses. At the high school level, the schools DO sort the kids by ability level, and your child will tend to make friends with other kids in his ability range. But the public junior highs usually used "mixed ability grouping" which means "lowest common denominator." Obviously, if you can afford private schools all the way through, that is generally your best bet.
I'm with you. This may be a case where the macroeconomic variables don't really lend themselves to "averages" because they are highly skewed distributions. Most people pay very little in taxes. You only needed an AGI of about 85000 to be in the top 15% of returns in 2005. Taking an average of taxes would make it seem like those at the bottom pay a very large share of income to taxes, when in reality they pay very little. This type of analysis is always suspect and must be used very carefully. I too would be interested in how these numbers are calculated. I wouldn't be surprised to see alot of hand waving and very little substance.
Doing a rough calculation with going from three kids down to two would change that percentage to about 22% (though my disposable income would greatly increase.)
The major point being that there is no way the total burden is 33% for a family of four (even if I use the New York State property tax rate for the house I grew up in I still only hit 26%.)
Consider a small country with ten people. Nine of the make $10,000 per year and pay no taxes The other makes $1,000,000 and pays ten percent of income in taxes. Thus the "average" tax burden in this economy is $10,000 per person, which is 100% of the median income. However, nobody has an actual tax rate above 10%.
The devil is in the details. You can make the data say anything you want as long as nobody is watching. That is why it is critical to know the details in any statistical method. It may seem like a waste of time to some, but alot of work goes into shaping data to support a conclusion that was arrived at before the work even started.
There is a great old book called "How to Lie with Statistics" by Darrel Huff. It is an easy read and a great reference on topics like this. I'm not accusing anybody of data manipulation here, but it remains to be seen where this 33 percent average tax rate comes from.