Category Archive for: Taxes [Return to Main]

Monday, October 16, 2017

Paul Krugman: The G.O.P. Is No Party for Honest Men

"A strategy based entirely on lies":

The G.O.P. Is No Party for Honest Men, by Paul Krugman, NY Times: According to a new CBS News poll, almost 60 percent of the American public believes that the current Republican tax plan favors the wealthy. Some people see this number as a sign that the plan is in trouble; I see it as a sign that Republican lies are working far better than they deserve to.
For the plan does indeed favor the wealthy — overwhelmingly.... It’s shocking that as many as 40 percent of Americans don’t realize this. ...
So the question about this plan isn’t whether it favors the wealthy — it does, to an outrageous extent. The questions we should be asking instead are why Republicans are pushing this so hard, and how they can hope to get away with it. ...
So what’s behind this priority? Follow the money. Big donors are furious at missing out on the $700 billion in tax cuts that were supposed to come out of Obamacare repeal. If they don’t get big bucks out of tax “reform,” they might close their pocketbooks for the 2018 midterm elections.
Beyond that, modern conservatism is a sort of ecosystem of media outlets, think tanks, lobbying outfits and more that offers many lucrative niches — so-called wingnut welfare — for the ideologically reliable. And that means being reliable to the interests of the wealthy.
But how can an administration that pretends to be populist, to stand up for ordinary (white) working people, sell such elitist policies?
The answer is a strategy based entirely on lies. ...
Nor do I mean that there are just one or two big lies. There are many — so many I literally don’t have space to ... list them... In a long blog post ... I came up with 10 major Republican lies about tax cuts, and I’m sure I missed a few.
So, politically, can they really get away with this? A lot depends on how the news media handles it. ...
One thing we know for sure, however, is that a great majority of Republican politicians know perfectly well that their party is lying about its tax plan — and every even halfway competent economist aligned with the party definitely understands what’s going on.
What this means is that everyone who goes along with this plan, or even remains silent in the face of the campaign of mass dissimulation, is complicit — is in effect an accomplice to the most dishonest political selling job in American history.

Tuesday, October 10, 2017

Suppression of the Wealth Tax: An Historical Error

Thomas Piketty:

Suppression of the wealth tax: an historical error, by Thomas Piketty: Let it be said at once: the suppression of the wealth tax (Impôt sur la Fortune or ISF) constitutes a serious moral, economic and historical mistake. This decision reveals a profound misunderstanding of the challenges to inequality posed by globalization.
Let’s go back for a moment. During the first globalization period between 1870 and 1914, a strong international movement gradually took shape which sought to promote a new type of redistribution and taxation. Based on a progressive taxation system on income, wealth and inheritance, this new model was aimed at a better distribution of productivity gains and the structural reduction of the concentration of property and economic power. It was successfully implemented in the period 1920 to 1970, partly as a result of the pressure of dramatic historical events, but equally thanks to a lengthy intellectual and political process.
We may perhaps today be witnessing the premises of a similar movement. Confronted with the rise in inequality, awareness is gaining momentum. ...

Tuesday, October 03, 2017

Paul Krugman: Republicans, Trapped by Their Flimflam

"In broad outlines, the tax story is a lot like health care":

Republicans, Trapped by Their Flimflam, by Paul Krugman, NY Times: Last week the Trump administration and its congressional allies working on tax reform achieved something remarkable. They released a tax plan — or, actually, a vague sketch of a plan — that manages both to add trillions to the deficit and to raise taxes on a large fraction of the population. That takes talent.
...On taxes, as with health, leading Republicans have been lying for years. And now the fraud has caught up with the fraudsters.
The road to this tax-cut turkey began in 2010, when Paul Ryan ... unveiled the first of a series of much-hyped budget plans, all purporting to offer a blueprint for eliminating the U.S. budget deficit.
In fact, they did no such thing. They proposed major tax cuts — primarily benefiting the rich, of course — then simply asserted that no revenue would be lost ...
And what was the Ryan plan if you took out those mysterious revenue raisers and spending cuts? A plan to drastically cut taxes on the rich, savagely cut benefits for the poor and the middle class, and increase the overall deficit.
In other words, it was all a con. ...
And the con went on for years. ...
But then Republicans regained the White House, meaning that they had to come up with actual tax legislation. And this has put the con under terrible strain. ...
So they came up with what probably seemed like a clever idea: eliminate the deductibility of state and local taxes. Hey, that would mainly punish people in tax-and-spend blue states, right? Not their problem.
But this turns out to be a much bigger deal than they seemed to realize. ... According to the nonpartisan Tax Policy Center, their plan would give huge tax cuts to the top 1 percent, who would receive 79.7 percent of the benefits. But eliminating deductions would make many Americans, especially in the upper reaches of the middle class, directly worse off: ...
And this would happen even though the plan would add several trillion dollars to the deficit. Did I mention that many of those facing tax hikes vote Republican? ...
In broad outlines, the tax story is a lot like health care. In both cases, Republicans have spent years getting away with big promises backed by lies. Now, with real policy to be made, the lies won’t work anymore. And they can’t handle the truth.

Friday, September 15, 2017

Paul Krugman: Politicians, Promises, and Getting Real

Paul Krugman:

Politicians, Promises, and Getting Real, by Paul Krugman, NY Times: On Wednesday Donald Trump demanded that Congress move quickly to enact his tax reform plan. But so far he has not, in fact, offered any such plan...
Meanwhile, 17 Senate Democrats ... have signed on to Bernie Sanders’s call for expanding Medicare to cover the whole population. So far, however, Sanders hasn’t produced either an estimate of how much that would cost or a specific proposal about how to pay for it.
I don’t mean to suggest that these cases are comparable: The distinctive Trumpian mix of ignorance and fraudulence has no counterpart among Democrats. Still, both stories raise the question of how much ... policy clarity matters for politicians’ ability to win elections and ... govern.
About elections: The fact that Trump is in the White House suggests that politicians can get away with telling voters just about anything that sounds good. ...
On the other hand, the ignominious failure of Trumpcare shows that reality sometimes does matter. ... Once the public realized that tens of millions would lose coverage..., there was a huge backlash...
The story of tax reform ... is starting to look a bit similar. ...
In fact, Trump himself seems to be experiencing cognitive dissonance. “The rich will not be gaining at all with this plan,” he declared Wednesday. ... Is he oblivious, lying, or both? ...
The contrast between what he’s claiming and anything Republicans in Congress will be willing to support is so great as to practically invite ridicule and another popular backlash. ...
But is the push for single-payer health care taking Democrats down a similar path?
Unlike just about everything Trump and company are proposing, Medicare for all is a substantively good idea. Yet actually making it happen would probably mean ... a serious political backlash. For one..., it would require a substantial increase in taxes. For another, it would mean telling scores of millions of Americans who get health coverage though their employers, and are generally satisfied..., that they need to give it up and accept something different. ...
Democrats could eventually find themselves facing a Trumpcare-type debacle, unable either to implement their unrealistic vision or to let it go.
The point is that while unrealistic promises may not hurt you in elections, they can become a big problem when you try to govern. Having a vision for the future is good, but being real about the difficulties is also good. Democrats, take heed.

Thursday, August 31, 2017

Monopoly Rents and Corporate Taxation

Paul Krugman:

Monopoly Rents and Corporate Taxation (Wonkish): At one level it’s hard to take the Trump administration’s tax “reform” push seriously. A guy gets elected as a populist and his first two big proposals are (a) taking away health insurance from millions (b) cutting corporate taxes. Wow.
Furthermore, Trump is invincibly ignorant on taxes (and everything else) — he keeps declaring that America is the highest taxed nation in the world, which is nearly the opposite of the truth among advanced countries. And his allies in Congress aren’t ignorant, but they’re liars: Paul Ryan is the master of mystery meat, of promising to raise and save trillions in unspecified ways.
But there is an actual interesting question here, even if we shouldn’t give any credence to Republican answers. Who does, in fact, pay the corporate profit tax? Does it fall on corporations, and hence eventually on their shareholders? Or is the ultimate incidence mainly on wages, as the administration claims?

Skipping forward to the punchline:

...much corporate taxation probably doesn’t fall on returns to physical capital, but rather on monopoly rents. ... As long as the local source of profit is some kind of monopoly rent, corporate tax incidence is going to fall on shareholders, not workers. ...
And there’s a lot of reason to believe that market power is an increasingly big deal. ...
This changes the narrative, doesn’t it? Instead of focusing on rising capital mobility as a reason profits taxes might fall on workers, maybe we should focus on rising market power as a reason why profits taxes fall on capitalists.
The point for now is that when someone tells you that changes in the world have made old-style corporate taxes obsolete, be skeptical. Some changes in the world may have made profit taxation a better idea than ever.

Monday, May 22, 2017

The Heartless Tradeoffs in the Trump Budget

I have a new column:

The Heartless Tradeoffs in the Trump Budget: As the bombshells continue to drop on the Trump administration, behind the scenes Trump’s first detailed budget proposal is being developed, and it has a few bombshells of its own, particularly for the poor. The budget proposal is not yet finalized, so the details could change, but according to what has leaked so far, the budget is a combination of tax cuts for the wealthy, reduced spending on social programs that serve the needy, and wishful thinking about tax cuts and economic growth. ...

Wednesday, May 17, 2017

Trump Tax Plan Would Give 400 Highest-Income Americans More Than $15 Million a Year in Tax Cuts

Brandon DeBot at the CBPP:

Trump Tax Plan Would Give 400 Highest-Income Americans More Than $15 Million a Year in Tax Cuts: President Trump’s tax plan contains specific, costly tax cuts for the wealthy and profitable corporations but only vague promises for working families.[1] Even accounting for his proposal to restrict most itemized deductions, the top 1 percent would still receive annual tax cuts averaging at least $250,000 per household. But the tax cuts at the very top would be far larger. Their annual tax cuts would be more than five times the typical college graduate’s lifetime earnings.The 400 highest-income taxpayers — whose incomes average more than $300 million a year — would get average tax cuts of at least $15 million a year each, we estimate from IRS data.  Their annual tax cuts would be more than five times the typical college graduate’s lifetime earnings.[2]..  The total tax cut for these 400 households would be at least $6 billion annually.
The Trump plan prioritizes these tax cuts for the highest-income Americans over many worthy programs that need more resources. For example, $6 billion is more than the federal government spends on grants for major job training programs to assist people struggling in today’s economy. An additional annual investment of $6 billion could enable roughly 1.5 million adults each year to train for a new career.[3]
Also, $6 billion is roughly the cost of providing 600,000 low-income families with housing vouchers that would help them afford decent, stable housing. ...
Yet, far from investing in these areas, President Trump has proposed to sharply cut the budget area (non-defense discretionary programs) that funds job training and housing vouchers, even as his tax plan delivers massive tax cuts to the top.[5] ...
While the Trump tax plan would clearly shower windfall tax cuts on those at the very top, it provides little detail on whether or how it would help working families. Indeed, the plan wouldn’t provide any tax benefits to at least 17 million working families and individuals because they don’t earn enough to owe federal income taxes (though most pay significant payroll and other taxes). Those families would very likely be worse off under the plan because policymakers eventually would likely pay for the large tax cuts for the very wealthy at least in part by cutting programs on which they and millions of other low- and middle-income families rely.[9]

Tuesday, May 16, 2017

Top Taxes & Growth

Chris Dillow:

Top taxes & growth: Rich people don’t like paying taxes. This is pretty much the only thing we’ve learned from some of the hysterical reaction in the papers to Labour’s plan to raise taxes on the rich.
Let’s remember the historical facts here. Low tax rates aren’t associated with faster growth – if anything the opposite. ...
For me, the non-hysterical arguments against Labour’s tax plans lie elsewhere. You could argue that – with tax morale low partly as a result of the rise of individualism – they’ll decrease social solidarity. People will regard them not as the price for living in a civilized society but as a burden which subsidizes “scroungers”. Or you could argue that the revenue raised by taxes will fuel wasteful public spending. Or you might argue that redistributive taxation isn’t enough: we need to reduce inequalities of power as well as income. Or you might argue that the tax base should be shifted from incomes to land and inheritances...
What you shouldn’t do, though, is argue that higher top taxes will wreck the economy. Other things might do that, but it’s unlikely that top taxes will.

Monday, May 15, 2017

Paul Krugman: The Priming of Mr. Donald Trump

"a delusion of truly Trumpian proportions":

The Priming of Mr. Donald Trump, by Paul Krugman, NY Times: Donald Trump has said many strange things in recent interviews. ... Over here in Econoland, however, the buzz was all about Trump’s expressed willingness, in an interview with the Economist magazine, to pursue tax cuts even if they increase deficits, because “we have to prime the pump” — an expression he claimed to have invented. “I came up with it a couple of days ago and I thought it was good.”
Actually, the expression goes back generations...
But why should anyone besides pedants care?
First, a mind is a terrible thing to lose..., that Economist interview was basically one long senior moment...
Second, we’re talking about some really bad economics here. ...
America may not be all the way back to full employment — there’s a lively debate among economists over that issue. But the economic engine no longer needs a fiscal jump-start. This is exactly the wrong time to be talking about the desirability of bigger budget deficits. ...
Which brings me to my third point: Trump’s fiscal delusions are arguably no worse than those of many, perhaps most professional observers of the Washington political scene.
If you’re a heavy news consumer, think about how many articles you’ve seen in the past few weeks with headlines along the lines of “Trump’s budget may create conflict with G.O.P. fiscal conservatives.” The premise ... is that there is a powerful faction among Republican members of Congress who worry deeply about budget deficits...
But there is no such faction, and never was.
There were and are poseurs like Paul Ryan, who claim to be big deficit hawks. But there’s a simple way to test such people’s sincerity:... when you see a politician claim that deficit concerns require that we slash Medicaid, privatize Medicare, and/or raise the retirement age — but somehow never require raising taxes on the wealthy, which in fact they propose to cut — you know that it’s just an act.
Yet somehow much of the news media keeps believing, or pretending to believe, that those imaginary deficit hawks are real, which is a delusion of truly Trumpian proportions.
So I’m worried. Trump may be not just ignorant but deeply out of it, and his economic proposals are terrible and irresponsible, but they may get implemented all the same.
But maybe I worry too much; maybe the only thing to fear is fear itself. Do you like that line? I just came up with it the other day.

Monday, April 24, 2017

Paul Krugman: Zombies of Voodoo Economics

 "Because it offers a rationale for lower taxes on the wealthy":

Zombies of Voodoo Economics, by Paul Krugman, NY Times: According to many reports, Donald Trump is getting frantic as his administration nears the 100-day mark. It’s an arbitrary line in the sand, but one he himself touted in many pre-inauguration boasts. And it will be an occasion for numerous articles detailing how little of substance he has actually accomplished. ...
Mr. Trump sold himself to voters as unorthodox as well as effective. He was going to be a different kind of president, a consummate deal-maker who would transcend the usual ideological divide. His supporters should therefore be dismayed, not just by his failure to actually close any deals, but by the fact that he evidently has no new ideas to offer, just the same old snake oil the right has been peddling for decades.
We saw that on Trumpcare... And now we’re seeing it on taxes. ... Whatever the details, Trumptax will be a big exercise in fantasy economics.
How do we know this? Last week Stephen Mnuchin, the Treasury secretary, told a financial industry audience that “the plan will pay for itself with growth.” And we all know what that means..., history offers not a shred of support for faith in the pro-growth effects of tax cuts..., supply-side economics is a classic example of a zombie doctrine: a view that should have been killed by the evidence long ago... Why, then, does it persist? Because it offers a rationale for lower taxes on the wealthy...
Still, Donald Trump was supposed to be different. Guess what: he isn’t.
To be fair, it’s not clear whether Mr. Trump really believes in right-wing economic orthodoxy. He may just be looking for something, anything, he can call a win — and it’s a lot easier to come up with a tax reform plan if you don’t try to make things add up, if you just assume that extra growth and the revenue it brings will materialize out of thin air.
We might also note that a man who insists that he won the popular vote he lost, who insists that crime is at a record high when it’s at a record low, doesn’t need a fancy doctrine to claim that his budget adds up when it doesn’t.
Still, the fact is that the Trump agenda so far is absolutely indistinguishable from what one might have expected from, say, Ted Cruz. It’s just voodoo with extra bad math. Was that what his supporters expected?

Wednesday, April 19, 2017

Supply-side, trickle-down nonsense on the NYT oped page

Jared Bernstein:

Supply-side, trickle-down nonsense on the NYT oped page: There’s a robust debate to be had as to why the NYT published this op-ed on the alleged economic benefits of trickle-down tax cuts, as virtually every paragraph touts an alternative fact. It is the opinion page, I guess, and the authors advise (or at least advised) the president, so I can see why it’s there. But it does require debunking, so thanks NYT, for some make work.
Here’s much of the article’s text, followed by my comments in italics:

A few of the comments:

... Here we have the first in a series of trickle-down claims. The alleged sequencing is: cut taxes of business and the wealthy, they invest more, that raises profits and productivity, and the benefits trickle down to the middle class. Every link in that chain is broken: tax cuts, even on investment income, do not correlate with greater investment, and they certainly are uncorrelated with faster productivity growth. Businesses already receive very favorable tax treatment on their investments; in fact, their tax burden on debt-financed investments can be negative. No question, tax cuts raise after-tax profitability, but absent much more worker bargaining power, those profits stay in the pockets of those at the top of the income scale. ...
Here we have the “money” ‘graf: the straight-up claim that trickle down tax cuts will boost the earnings of the working class, which will help offset their cost—the Laffer curve in action. I guess I should give the authors credit for adding “if we are right,” though I’ll give you very long odds that the editors insisted on this addition. Because there’s no reason to ask if they’re right. They’re not, with the latest exhibit being the state of Kansas, an “experiment” derived by some of these very authors.
BTW, I’ve endorsed my friend Kevin Hassett for his new job as a voice of economic reason in this administration. But I’ve been careful to note this flaw in his work and his thinking. In fact, the study they reference here has been thoroughly debunked in various places. ...
Again with the urgency, and “trust us, folks, it’s not the zillionaires for whom our hearts bleed—it’s ‘jobs and the economy.’” Not to mention the stock market, which is getting “jittery” over the possibility that Trump won’t deliver a tax plan like the one these guys wrote, which delivers fully half of its goodies to the top 1 percent (or even better, the Ryan plan, which, once fully phased in, delivers 99 percent of its cuts to the top 1 percent).
Puh-lease. How stupid do these people think we are (rhetorical question!)? Their simple scheme—Trump wins, the rich get big tax cut—has turned out to be harder to pull off than they’d hoped. That’s a feature, not a bug, of our current political moment, even if it means we have to read a WSJ oped in the NYT.

Thursday, April 13, 2017

Tax Reforms and Top Incomes

Enrico Rubolino and Daniel Waldenström at VoxEU:

Tax reforms and top incomes: The link between tax progressivity and the income distribution is the subject of intense debate. This column presents new evidence from tax reforms during the 1980s and 1990s to examine how reduced progressivity affects top income shares. Reduced progressivity boosted top incomes, particularly for those in the top 0.1% of earners. Income tax changes are a plausible candidate for explaining the recent surge in income inequality. ...
Tax reforms did not increase the size of the cake
Tax progressivity was reduced in the 1980s on the argument that there would be a positive impact on economic activity and efficiency (Auerbach and Slemrod 1997, Gale and Samswick 2014). Therefore it could be that the estimated boost in top shares reflects new resources created in top groups, rather than a redistribution of incomes away from the bottom and middle. We evaluate this hypothesis..., this analysis does not show large real income responses to reductions in progressivity. ...
Taxation and inequality
Our findings suggest that tax progressivity changes influence pre-tax income inequality. Focusing on large, progressivity-reducing tax reforms in the 1980s and 1990s, we show that they had a positive, increasing effect on top income shares in all the countries we studied. ...

Monday, April 10, 2017

The Fed, the Reality of Tax Cuts Reality, and Donald Trump

I have a new column:

The Fed, the Reality of Tax Cuts Reality, and Donald Trump: For many years, Republicans argued that tax cuts for the wealthy pay for themselves. Cutting taxes on the wealthy, according to Republicans, allows them to keep a larger share of anything new they create and this leads to new economic activity and new innovation – so much that the resulting increase in economic growth and tax revenue fully offsets the budgetary effects of the tax cuts. Everyone is better off as income “trickled down” from the top.
What actually happened is that the tax cuts had very little, if any, impact on economic growth. Deficits went up, and somehow income never trickled down – if anything, it trickled up. Today, Republicans are less likely to argue that tax cuts pay for themselves, though you still hear it, but they still insist tax cuts for the wealthy magically increase economic growth and offset much of the revenue loss.
But even in the very unlikely case that Trump’s proposed tax cuts are successful (beyond increasing the income of the wealthy which many argue is the true goal), the economic growth rates Trump has promised are unlikely to be attained. ...

Tuesday, April 04, 2017

The Myth That the Estate Tax Threatens Small Farms

This is from Chloe Cho of the CBPP:

The Myth That the Estate Tax Threatens Small Farms: Ahead of tomorrow’s House Agriculture Committee hearing on tax reform, a group of agricultural trade associations have called for repealing the estate tax on inherited wealth, arguing that “all too often at the time of death, farming and ranching families are forced to sell off land, farm equipment, parts of the operation or take out loans” due to the tax. Their arguments miss the mark.  Only 50 small farm and small business estates in the entire country will pay any estate tax in 2017 (see chart), and they’ll owe less than 6 percent of their value in tax, on average, the Tax Policy Center estimates

4-4-17estatetax

...Moreover, most farmers and business owners with estates large enough to owe the tax have sufficient liquid assets ... to pay the tax without having to touch other assets or liquidate their farm and business, a 2005 Congressional Budget Office (CBO) study found. Today’s estate tax rules are even more generous than those CBO assumed. ...
While doing next to nothing for family farms, repeal would provide a windfall to the wealthiest 0.2 percent of estates — the only ones large enough to pay the tax.  A repeal proposal recently reintroduced in the Senate would provide the 0.2 percent of wealthiest estates with an average tax cut of more than $3 million in 2017.  Roughly 330 estates worth more than $50 million would get more than $20 million apiece in tax cuts, the Joint Committee on Taxation estimates.  The proposal would also cost $269 billion over the decade, expanding deficits and adding to pressure for cuts in federal programs.

Monday, March 27, 2017

Tax Cuts Can’t be Financed by Reducing Government Waste

I have a new column (my title was "Some of These Markets are Not Like the Others"):

It’s a Ruse: Tax Cuts Can’t be Financed by Reducing Government Waste: The Republicans suffered a humiliating defeat on their proposal to cut taxes for the wealthy disguised as healthcare reform. But as the Trump administration has made clear, they are not about to give up on their tax cut plans.
But how will those tax cuts be financed? The Republican’s health care reform plan would have delivered $600 billion in tax cuts, but with that option gone where will the money come from? ...

Tuesday, March 21, 2017

The World's Easiest Chart to Make

In case you were wondering (any your probably weren't), from Kevin Drum:

Well, This Was the World's Easiest Chart to Make: CBPP has calculated how much tax money you'll save if Obamacare is repealed. Behold:

Blog_cbpp_tax_savings_obamacare_repeal

You know what really gets me? Even among the millionaires, repeal will only net them about $50,000. That's like finding spare change in the sofa cushions for this crowd. Is clawing back a few nickels and dimes really worth immiserating 20 million people?

Tuesday, March 14, 2017

Public Capital, Private Capital

Thomas Piketty:

Public capital, private capital: The present economic debate is over-determined by two realities which, moreover, are connected as we sometimes tend to forget. On one hand we have the steady rise in public debt and, on the other, the prosperity of privately owned wealth. The figures for the level of public debt are well known; almost everywhere the level approaches or exceeds 100% of national income ... as compared with barely 30% in the 1970s. ...
During the post-war boom (the Trente Glorieuses) public assets were very considerable (approximately 100-150% of national income, as a result of a very large public sector, a consequence of post-war nationalisations), and significantly higher than public debt...
The most recent data available for 2015-2016 shows that net public capital has become negative in the United States, Japan and the United Kingdom. In all these countries, the sale of the total public assets would not be sufficient to repay the debt. In France and in Germany net public capital is only just positive.
But this does not mean that rich countries have become poor: it is their governments which have become poor, which is very different. ... The fact remains that private capital grew much faster than the decline in public capital, and that rich countries themselves hold even a little more...
Why be so pessimistic in the face of such prosperity? Simply because the ideological and political balance of power is such that public authorities are not able to make the main beneficiaries of globalisation contribute their fair share. The perception of this impossibility of a fair tax sustains the flight towards the debt. ...
Historically, major changes in the structure of property ownership often come together with profound political changes. We see this with the French Revolution, the American Civil War, the Euro-World Wars in the 20th century and the Libération in France. The nationalist forces at work today could lead to a return to national currencies and inflation, which would promote a chaotic redistribution of resources, at the expense of severe social stress and an ethnicisation of political conflicts. In the face of this fatal risk to which the present status quo could lead, there is only one solution. We must chart a democratic pathway out of the impasse and organise the necessary redistribution of resources within the framework of the rule of law.

Monday, March 06, 2017

Paul Krugman: A Party Not Ready to Govern

"They have no idea how to turn their slogans into actual legislation

A Party Not Ready to Govern, by Paul Krugman, NY Times: According to Politico, a Trump confidante says that the man in the Oval Office — or more often at Mar-a-Lago — is “tired of everyone thinking his presidency is screwed up.” Pro tip: The best way to combat perceptions that you’re screwing up is, you know, to stop screwing up.
But he can’t, of course. And it’s not just a personal problem.
It goes without saying that Donald Trump is the least qualified individual, temperamentally or intellectually, ever installed in the White House. ... Thanks, Comey.
But the broader Republican quagmire — the party’s failure so far to make significant progress toward any of its policy promises — isn’t just about Mr. Trump’s inadequacies. The whole party, it turns out, has been faking it for years. Its leaders’ rhetoric was empty; they have no idea how to turn their slogans into actual legislation, because they’ve never bothered to understand how anything important works.
Take the two lead items in the congressional G.O.P.’s agenda: undoing the Affordable Care Act and reforming corporate taxes. In each case Republicans seem utterly shocked to find themselves facing reality.
The story of Obamacare repeal would be funny if the health care — and, in many cases, the lives — of millions of Americans weren’t at stake. ...
Then there’s corporate tax reform — an issue where the plan being advanced by Paul Ryan ... is actually not too bad, at least in principle. ...
But Mr. Ryan has failed spectacularly to make his case either to colleagues or to powerful interest groups. Why? As best I can tell, it’s because he himself doesn’t understand the point of the reform. ...
At this point, then, major Republican initiatives are bogged down for reasons that have nothing to do with the personality flaws of the tweeter in chief, and everything to do with the broader, more fundamental fecklessness of his party.
Does this mean that nothing substantive will happen on the policy front? Not necessarily. Republicans may decide to ram through a health plan that causes mass suffering, and hope to blame it on Mr. Obama. They may give up on anything resembling a principled tax reform, and just throw a few trillion dollars at rich people instead.
But whatever the eventual outcome, what we’re witnessing is what happens when a party that gave up hard thinking in favor of empty sloganeering ends up in charge of actual policy. And it’s not a pretty sight.

Friday, February 24, 2017

Paul Krugman: Death and Tax Cuts

"So why do Republicans hate Obamacare so much?":

Death and Tax Cuts, by Paul Krugman, NY Times: Across the country, Republicans have been facing crowds demanding to know how they will protect the 20 million Americans who gained health insurance thanks to the Affordable Care Act... And after all that inveighing against the evils of Obamacare, it turns out that they’ve got nothing. ...
After years to prepare, Mr. Ryan finally unveiled what was supposedly the outline of a health care plan. It was basically a sick joke: flat tax credits, unrelated to income, that could be applied to the purchase of insurance.
These credits would be obviously inadequate for the lower- and even middle-income families..., so it would cause a huge surge in the number of uninsured. Meanwhile, the affluent would receive a nice windfall. Funny how that seems to happen in every plan Mr. Ryan proposes.
That was last week. This week, perhaps realizing how flat his effort fell, he began tweeting about freedom, which he defined as “the ability to buy what you want to fit what you need.” Give me consumer sovereignty or give me death! And Obamacare, he declared, is bad because it deprives Americans of that freedom by doing things like establishing minimum standards for insurance policies.
I very much doubt that this is going to fly, now that ordinary Americans are starting to realize just how devastating loss of coverage would be. But for the record, let me remind everyone what we’ve been saying for years: Any plan that makes essential care available to everyone has to involve some restriction of choice. ...
So yes, Obamacare somewhat restricts choice — not because meddling bureaucrats want to run your life, but because some restrictions are necessary as part of a package that in many ways sets Americans free.
For health reform has been a hugely liberating experience for millions. ...
So why do Republicans hate Obamacare so much? It’s not because they have better ideas; as we’ve seen..., they’re coming up empty-handed on the “replace” part of “repeal and replace.” It’s not, I’m sorry to say, because they are deeply committed to Americans’ right to buy the insurance policy of their choice.
No, mainly they hate Obamacare for two reasons: It demonstrates that the government can make people’s lives better, and it’s paid for in large part with taxes on the wealthy. Their overriding goal is to make those taxes go away. And if getting those taxes cut means that quite a few people end up dying, remember: freedom!

Tuesday, February 14, 2017

What Type of Tax Changes Boost Economic Growth?

Me, at MoneyWatch:

Not just any kind of tax cut can boost economic growth: President Donald Trump promised last week he would unveil a “phenomenal” tax reform package in the next few weeks. Although no details were offered, Mr. Trump’s past statements suggest that his proposal will adhere to fairly standard supply-side principles.
The idea behind supply-side policy is to encourage more investment, more labor effort and technological innovation through changes in the tax code and regulatory structure.
Have these policies been successful in the past? Are some types of policies better than others at spurring economic growth? To answer those questions, it’s useful to put supply-side policies into broad categories...

Wednesday, February 08, 2017

The U.S. Tax Code Actually Doesn’t 'Soak the Rich'

Nick Buffie at the CEPR:

The U.S. Tax Code Actually Doesn’t “Soak the Rich” : In 2012, Republican presidential candidate Mitt Romney famously commented that 47 percent of Americans were “dependent on government” because they didn’t pay any federal income taxes. He went on to explain that his job was “not to worry about those people.”
Journalists and other public figures often claim that only the rich pay taxes, supporting this with the argument that the rich pay the vast majority of federal income taxes. However, federal income taxes are just one part of the broader tax code. When we consider other types of federal taxes as well as state and local taxes, it becomes clear that the overall tax code isn’t extremely progressive – in other words, it doesn’t “soak the rich,” and it certainly doesn’t let the poor off the hook. ...

A Conservative Case for Climate Action

Feldstein, Halstead, and Mankiw :

A Conservative Case for Climate Action: Crazy as it may sound, this is the perfect time to enact a sensible policy to address the dangerous threat of climate change. Before you call us nuts, hear us out.
During his eight years in office, President Obama regularly warned of the very real dangers of global warming, but he did not sign any meaningful domestic legislation to address the problem, largely because he and Congress did not see eye to eye. Instead, Mr. Obama left us with a grab bag of regulations aimed at reducing carbon emissions, often established by executive order. ... As Democrats are learning the hard way, it is all too easy for a new administration to reverse the executive orders of its predecessors.
On-again-off-again regulation is a poor way to protect the environment. ...
Our own analysis finds that a carbon dividends program starting at $40 per ton would achieve nearly twice the emissions reductions of all Obama-era climate regulations combined. ...
The idea of using taxes to correct a problem like pollution is an old one with wide support among economists. ...
Republicans are in charge of both Congress and the White House. If they do nothing other than reverse regulations from the Obama administration, they will squander the opportunity to show the full power of the conservative canon, and its core principles of free markets, limited government and stewardship. ...

One suggested edit to the last paragraph: If the Republicans do more than reverse regulations from the Obama administration and impose a carbon tax, they will squander the opportunity to show the full power of the conservative canon, and its core principle of rewarding wealthy supporters in the business community.

Saturday, January 14, 2017

The Case Against Cutting Top Marginal Tax Rates

Adam Ozimek:

The Case Against Cutting Top Marginal Tax Rates: For some people, cutting income tax rates is an evergreen strategy for expanding the economy. If you cut income taxes, the argument goes, people will work more. Under this logic, cutting the top marginal tax rates is good for everyone because these households work more, which increases the size of the economy. There’s one simple problem with this argument: High-income workers already work a lot. ...
 Workers with higher family incomes tend to put in the longest hours already...
It seems unlikely that there is much room to improve here, which suggests a limited upside to cutting top marginal income tax rates. In contrast, employment rates and hours worked for the lowest income has much more room to improve. This suggests that cutting taxes and even subsidizing employment would be better focused on low-income workers.

Even if there was room to work more, it's not at all clear that tax cuts would motivate more effort. And on the demand side, the tax cuts would not impact aggregate demand as much as they would for lower income households.

Monday, January 09, 2017

Narrative Economics and the Laffer Curve

Tim Taylor:

Narrative Economics and the Laffer Curve: Robert Shiller delivered the Presidential Address for the American Economic Association on the subject of "Narrative Economics" in Chicago on January 7, 2017. A preliminary version of the underlying paper, together with slides from the presentation, is available here.

Shiller's broad point was that the key distinguishing trait of human beings may be that we  organize what we know in the form of stories.  He argues:

"Some have suggested that it is stories that most distinguish us from animals, and even that our species be called Homo narrans (Fisher 1984) or Homo narrator (Gould 1994) or Homo narrativus (Ferrand and Weil 2001) depending on whose Latin we use.  Might this be a more accurate description than Homo sapiens, i.e., wise man? Or might we say "narrative is intelligence" (Lo, 2007), with all of its limitations? It is more flattering to think of ourselves as Homo sapiens, but not necessarily more accurate."

Shiller goes on to make a case that narratives play a role in economic activity: for example, the way people act during the steep recession of 1920-21 and the Great Depression, as well as in the Great Recession and the most recent election. To me, one of his themes is that economist should seek to bring the narratives of these times that economic actors were telling themselves into their actual analysis by applying epidemiology models to examine actual spread of narratives, rather than bewailing narratives as a sort of unfair complication for the purity of our economic models.

Near the start, Shiller offers the Laffer Curve as an example of a narrative that had some lasting force. For those not familiar with the story, here's how Shiller tells it (footnotes omitted):

Let us consider as an example the narrative epidemic associated with the Laffer curve, a diagram created by economist Arthur Laffer ... The story of the Laffer curve did not go viral in 1974, the reputed date when Laffer first introduced it. Its contagion is explained by a literary innovation that was first published in a 1978 article in National Affairs by Jude Wanniski, an editorial writer for the Wall Street Journal. Wanniski wrote the colorful story about Laffer sharing a steak dinner at the Two Continents [restaurant] in Washington D.C. in 1974 with top White House powers Dick Cheney [at the time, a Deputy Assistant to President Ford, later to be Vice President] and Donald Rumsfeld (at the time Chief of Staff to President Ford, later to be Secretary of Defense]. Laffer drew his curve on a napkin at the restaurant table.  When news about the "curve drawn on a napkin" came out, with Wanniski's help, the story surprisingly went viral, so much that it is now commemorated. A napkin with the Laffer curve can be seen at the National Museum of American History ... 

Why did this story go viral? Laffer himself said after the Wanniski story exploded that he himself could not remember the event, which had taken place four years earlier. But Wanniski was a journalist who sensed that he had the elements of a good story. The key idea as Wanniski presented it is, indeed, punchy: At a zero-percent tax rate, the government collects no revenue. At a 100% tax rate the government would also collect no revenue, because people will not work if all the income is taken. Between the two extremes, the curve, relating tax revenue to tax rate, must have an inverted U shape. ...

Here is a notion of economic efficiency easy enough for anyone to understand. Wanniski suggested, without any data, that we are on the inefficient side of the Laffer curve. Laffer's genius was in narratives, not data collection. The drawing of the Laffer curve seems to suggest that cutting tax rates would produce a huge windfall in national  income. To most quantitatively-inclined people unfamiliar with economics, this explanation of economic inefficiency was a striking concept, contagious enough to go viral, even though economists, even though economists protested that we are not actually on the inefficient side of the Laffer Curve (Mirowski 1982). It is apparently impossible to capture why it is doubtful that we are on the inefficient side of the Laffer curve in so punch a manner that it has the ability to stifle the epidemic. Years later Laffer did refer broadly to the apparent effects of historic tax cuts (Laffer 2004); but in 1978 the narrative dominated. To tell the story really well one must set the scene at the fancy restaurant, with powerful Washington people and the napkin.

Here an image of what must be one of history's best-known napkins from the National Museum of American History, which reports that the exhibit was "made" on September 14, 1974, and measures 38.1 cm x 38.1 cm x .3175 cm, and was a gift from Patricia Koyce Wanniski:

Did Laffer really pull out a pen and start writing on a cloth napkin at a fancy restaurant, so that Jude Wanniski could take the napkin away with him? The website of the Laffer Center at the Pacific Research Institute describes it this way:

"As to Wanniski’s recollection of the story, Dr. Laffer has said that he cannot remember the details, but he does recall that the restaurant where they ate used cloth napkins and his mother had taught him not to desecrate nice things. He notes, however, that it could well be true because he used the so-called Laffer Curve all the time in classroom lectures and to anyone else who would listen." 

In the mid-1980s, when I was working as an editorial writer for the San Jose Mercury News in California, I interviewed Laffer when he was running for a US Senate seat.  He was energy personified and talked a blue streak, and I can easily imagine him writing on cloth napkins in a restaurant. When remembering the event 40 years later in 2014, Dick Cheney said:

It was late afternoon, sort of the-end-of-the-day kind of thing. As I recall, it was a round table. I remember a white tablecloth and white linen napkins because that’s what [Laffer] drew the curve on. It was just one of those events that stuck in my mind, because it’s not every day you see somebody whip out a Sharpie and mark up the cloth napkin at the dinner table. I remember it well, because I can’t recall anybody else drawing on a cloth napkin.

The point of Shiller's talk is that while a homo sapiens discussion of the empirical evidence behind the Laffer curve can be interesting in its own way, understanding the political and cultural impulse behind tax-cutting from the late 1970s up to the present requires genuine intellectual opennees to a homo narrativus explanation--that is, an understanding of what narratives have force at certain times, how such narratives come into being, why the narratives are powerful, and how the narratives affect various forms of economic behavior.

My own sense is that homo sapiens can be a slippery character in drawing conclusions. Homo sapiens likes to protest that all conclusions come from a dispassionate consideration of the evidence. But again and again, you will observe that when a certain homo sapiens agrees with the main thrust of a certain narrative, the supposedly dispassionate consideration of evidence involves compiling every factoid and theory in support, as well as denigrating those who believe otherwise as liars and fools; conversely, when a different homo sapiens disagrees with the main thrust of certain narrative, the supposedly dispassionate consideration of the evidence involves compiling every factoid and theory in opposition, and again denigrating those who believe otherwise as liars and fools. Homo sapiens often brandishes facts and theories as a nearly transparent cover for the homo narrativus within.

Paul Krugman: Deficits Matter Again

Republicans are planning to "blow up the deficit mainly by cutting taxes on the wealthy":

Deficits Matter Again, by Paul Krugman, NY Times: Not long ago prominent Republicans like Paul Ryan ... liked to warn in apocalyptic terms about the dangers of budget deficits, declaring that a Greek-style crisis was just around the corner. But ... tax cuts ... would, according to their own estimates, add $9 trillion in debt over the next decade. Hey, no problem. ...
All that posturing about the deficit was obvious flimflam, whose purpose was to hobble a Democratic president... But running big deficits is no longer harmless, let alone desirable.
The way it was: Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied... In particular, deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.
This diagnosis ... was ... always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored. ...
What changes once we’re close to full employment? Basically, government borrowing once again competes with the private sector for a limited amount of money. This means that deficit spending no longer provides much if any economic boost, because it drives up interest rates and “crowds out” private investment.
Now, government borrowing can still be justified if it serves an important purpose..., infrastructure is still a very good idea... But while candidate Trump talked about increasing public investment, there’s no sign at all that congressional Republicans are going to make such investment a priority.
No, they’re going to blow up the deficit mainly by cutting taxes on the wealthy. And that won’t do anything significant to boost the economy or create jobs. In fact, by crowding out investment it will somewhat reduce long-term economic growth. Meanwhile, it will make the rich richer, even as cuts in social spending make the poor poorer and undermine security for the middle class. But that, of course, is the intention. ...
But back to deficits: the crucial point is not that Republicans were hypocritical. It is, instead, that their hypocrisy made us poorer. They screamed about the evils of debt at a time when bigger deficits would have done a lot of good, and are about to blow up deficits at a time when they will do harm.

Tuesday, December 06, 2016

Team Trump’s New Pledge on Tax Cuts

David Leonhardt:

Team Trump’s New Pledge on Tax Cuts: ...Last week..., Steven Mnuchin said something unexpected on CNBC in his first interview after becoming Donald Trump’s choice for Treasury secretary. A friendly host invited Mnuchin to respond to the liberal charge that Trump’s tax cut was a sop to the rich. Mnuchin, a financier and former Goldman Sachs partner, refused — and made news instead.
“It’s not the case at all,” he said. “Any reductions we have in upper-income taxes will be offset by less deductions, so that there will be no absolute tax cut for the upper class. There will be a big tax cut for the middle class, but any tax cuts we have for the upper class will be offset by less deductions that pay for it.” ...
Of course, a single comment from Trump’s orbit — even from the captain of the economic team, who repeated it for emphasis — deserves skepticism. ...
Most Americans oppose a tax cut for the rich, polls indicate. History shows that the economic rationale is nonsense, which means it would not help the working-class voters who elected Trump. And the incoming president’s own Treasury secretary said it would not happen: “There will be no absolute tax cut for the upper class.”
It’s a simple, yes-or-no standard. Call it the Mnuchian standard. Any plan that cuts taxes for the rich falls short and deserves to fail.

Wednesday, November 30, 2016

One Tax Policy Americans Yugely Favor

Gerald E. Scorse:

One tax policy Americans yugely favor, The Hill: Nobody likes taxes, but roughly nine out of 10 Americans want income from investments to be taxed at least as much as other income. Republican leaders, tone-deaf,... close their eyes to a reform enacted under President Ronald Reagan: equal taxes on capital gains, dividends, and ordinary income such as wages. It’s one policy the country would love to have back, yugely. ...
The landslide national preference for at least equal taxes on investments—for tax fairness, not tax breaks—meshes perfectly with the populist belief that the system is rigged in favor of the rich. ... According to an analysis by the non-partisan Tax Policy Center, the top 1 percent of Americans receives over 62 percent of the benefits from lower rates on capital gains, dividends and related tax preferences; for the top 10 percent, the total benefit share is just short of 80 percent.
That’s more than alright with Republicans, whose tax plans will likely drive those percentages even higher—in exactly the opposite direction of the reform ushered in a generation ago by President Reagan. He took Main Street’s side on taxing Wall Street gains, but the GOP likes to pretend it never happened. ...
Donald Trump rode the populist tide all the way to the White House. Let’s see if President Trump listens to the populist yearning—the yuge populist yearning—for equal taxes on income from wealth and income from work.

Thursday, November 03, 2016

Taxing the Rich More—Evidence from the 2013 Federal Tax Increase

Emmanuel Saez:

Taxing the rich more—evidence from the 2013 federal tax increase: One of the most contentious aspects of the tax policy debate in the United States today is the proper level of taxation of the rich. In the current presidential election contest, Hillary Clinton proposes to increase taxes on the rich while Donald Trump proposes to cut taxes on the rich. This policy decision is particularly important because the concentration of income at the top is extremely high. ...
Progressive taxation historically is the most powerful tool to reduce income concentration. The classic counter argument is that higher top tax rates might discourage economic activity among the rich. In a recent paper, I analyze the effects of the 2013 federal income tax increase on the behavior of top income earners to cast light on this issue. ...
After President Obama was re-elected in early November 2012, it was virtually certain that top income tax rates would go up in 2013. For the rich, shifting $100 of income from 2013 to 2012 saves $9 in taxes for capital income (and $6 for labor income), which means the rich had strong incentives to accelerate their incomes into 2012 to benefit from the lower 2012 tax rates and avoid the higher 2013 tax rates. ...
This retiming response is large—income earners in the top 1 percent shifted about 10 percent of their income from 2013 into 2012. Lost government tax revenues, however, were modest as income shifted into 2012 still were taxed at the 2012 rates, which were about three-quarters of the 2013 tax rate. ...
I estimate that only about 20 percent of the projected revenue increase from the 2013 tax hike is lost due to the behavioral responses over the medium term. Second, by itself, the 2013 tax increase will not be sufficient to curb the extraordinarily high level of pre-tax income concentration in the United States.
These findings echo the findings of earlier work analyzing the 1993 Clinton era tax increase, which also generated short-term retiming of top incomes into 1992 but did not prevent top income shares from surging in the mid-to-late 1990s. It is also striking that the best growth experience for the bottom 99 percent of income earners over the past 25 years took place in the mid-to-late 1990s and between 2013 and 2015—after tax increases on the rich. This suggests that taxing the rich more does not have detrimental effects on the broader economy; quite the contrary.

Monday, October 03, 2016

The Facts of Economic Growth

One of the many "Facts of Economic Growth" in an 80 page paper from Charles I. Jones:

The Facts of Economic Growth: ... One of the most obvious and readily quantified measures of government involvement in the economy is taxes. It is easy to write down models in which governments that tax heavily reduce the long-run success of their economies. The facts, however, are not so clear.
Figure 33 shows the growth rate of real GDP per person in the United States since 1980 as well as the total government tax revenues (including state and local) as a share of GDP... The stunning fact that emerges from this graph is that taxes have increased enormously, from around 10 percent of GDP in 1929 to more than 30 percent of GDP at their peak in 2000. But as we already noted earlier, growth rates over the 20th century were remarkably stable — if anything, they were higher after 1950 than before.
Figure 34 shows a related fact by looking across the countries of the world: tax revenues as a share of GDP are positively correlated with economic success, not negatively correlated.
Of course, these are just simple correlations, and they have an obvious interpretation. Governments do not simply throw the tax revenue that they collect into the ocean. Instead, this revenue — at least to some extent — is used to fund the good purposes that governments serve: providing a stable rule of law, a judicial system, education, public health, highways, basic research, and so on. ...

Thursday, September 22, 2016

Estate Tax a Key Tool for Fighting US Inequality

Caroline Freund at PIIE:

Estate Tax a Key Tool for Fighting US Inequality: This year marks the 100th anniversary of the US estate tax, which affects only the ultra-wealthy. Given the rising focus on American income inequality, the tax should be on solid ground. Not so.
Republican presidential candidate Donald Trump has vowed to eliminate the estate tax, while Democrat candidate Hillary Clinton wants to revive it ...
There are good reasons to support this tax:
As I have pointed out previously, there is no productive activity in inheriting a large sum of money, so it does little to distort the economy.
Estate taxes also raise revenue and redistribute wealth. ...
Historically such taxes have worked well in the United States. ...
The future of the estate tax will depend heavily on the upcoming presidential election. Donald Trump would like to see it gone. This is not unthinkable, since in a largely symbolic vote last year the House of Representatives voted to abolish it. ...
Hillary Clinton proposes higher estate tax brackets as wealth increases, reaching 65 percent for a billionaire couple. My guess is that if people really understood the incidence of the tax, 99.8 percent of the population would support her proposal.

Don't Believe Trump’s Tax and Spending Plans

At MoneyWatch, why I think Social Security and Medicare will be in danger of large cuts if Trump is elected:

Don't believe Trump’s tax and spending plans: Donald Trump’s new tax plan will increase the national debt between $4.4 trillion and $5.9 trillion over a decade, and that’s according to estimates from the conservative Tax Foundation. That range of $1.5 trillion is due to uncertainty about how Trump would levy some types of business taxes and how his tax cuts would be paid for.
First, the Republican candidate says, higher economic growth from lower taxes and deregulation will pay for most of the increase in the debt. According to Trump, his plan will boost output substantially, and the higher tax revenue that comes with it will offset most of the lost revenue. 
Second, his “penny plan” would make up the rest of the revenue lost to his tax cuts. This plan would cut spending on nondefense programs funded by annual appropriations by 1 percent each year. 
Since the cuts would affect only a part of the budget (defense and entitlement programs such as Medicare and Social Security are excluded), the plan would reduce spending on programs such as“veterans’ medical care…, scientific and medical research, border enforcement, education, child care, national parks, air traffic control, housing assistance for low-income families, and maintenance of harbors, dams, and waterways,” according to the Center on Budget and Policy Priorities. The total spending reduction would be approximately 25 percent over 10 years.
You should be skeptical of both claims. ...

Thursday, September 15, 2016

Trump Campaign’s “Dynamic Scoring” of Revised Tax Plan Should Be Taken With More Than a Grain of Salt

The Trump campaign endorses a standard Republican tax con. This is from Chad Stone and Chye-Ching Huang at the CBPP:

Trump Campaign’s “Dynamic Scoring” of Revised Tax Plan Should Be Taken With More Than a Grain of Salt: The revised tax plan that Republican presidential nominee Donald Trump will release today was reportedly designed at least in part to reduce the cost of his earlier plan,[1] which would have generated very large revenue losses.[2] The revised plan now looks similar to the tax plan that House Republican leaders introduced in June, which cost less than Trump’s original plan. Moreover, like the House plan, the Trump plan takes advantage of an aggressive approach to “dynamic scoring” that the Tax Foundation uses to estimate how tax cuts affect the economy and the budget, which sharply lowers the estimated revenue loss from certain tax-cut provisions.[3] We should, however, view such large dynamic effects derived from Tax Foundation estimates with considerable skepticism. That’s because the Tax Foundation, with its unusually large dynamic estimates, is considerably outside the analytic mainstream.
In particular, the Tax Foundation assumes that certain tax cuts produce far larger increases in business investment than researchers typically find. Consequently, the Tax Foundation estimates that certain tax changes will produce far greater economic activity and a far smaller revenue loss than do Congress’s highly respected official estimating bodies — the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO). ...
Analysts continue to debate whether and how to implement dynamic scoring.[7] It’s new and controversial: the best way to model dynamic effects remains unsettled; and the estimates produced can vary depending on the assumptions used. Mainstream analysts typically find that any additional economic activity generated by tax cuts can offset, at most, a modest portion of their cost. With that in mind, the Tax Foundation’s dynamic scoring estimates — including those that the Trump campaign is relying on for its estimates of its revised tax plan — should be viewed with particular skepticism.
For instance, in 2015, the Tax Foundation estimated that making permanent the bonus-depreciation tax break (which allows businesses to deduct a larger share of the cost of their equipment in the year they purchase it) would generate enough new revenue to pay for more than 75 percent of its costs, while JCT pegged the figure at less than 5 percent. ...
The Tax Foundation produces its dynamic scoring estimates very quickly, while JCT and CBO take much more time to develop theirs. And JCT and CBO don’t analyze tax plans from candidates, so no official analysis of the Trump plan will be available. The nonpartisan Urban Institute-Brookings Institution Tax Policy Center (TPC) provides estimates of candidates’ tax plans but usually takes some time to provide them. Thus, after Mr. Trump unveils his revised plan today, the estimate based on the Tax Foundation’s model will likely be the most widely cited one for a while.
Consequently, one should approach any forthcoming estimate based on the Tax Foundation model with considerable caution. ...

After an extensive analysis and explanation, they conclude:

The initial Trump tax plan was widely estimated to lose large amounts of revenue and substantially enlarge future deficits and debt. The Trump team says that the revised plan costs substantially less. In addition to including some policy changes that lower the standard cost estimate, the Trump team will cite the estimates they have derived from Tax Foundation work to claim that the plan will produce large “dynamic” effects on economic growth and revenues.
As this analysis documents, the Tax Foundation model generates far larger economic and budgetary effects than the models of the Congressional Budget Office and Congress’s Joint Committee on Taxation, and relies on assumptions that are inconsistent with the economic evidence or well outside mainstream economic thinking. All dynamic budget estimates should be approached with caution. That admonition applies with particular force to the highly questionable dynamic estimates that the Tax Foundation model produces.

Thursday, September 08, 2016

Drivers of inequality: Trade Shocks Versus Top Marginal Tax Rates

Douglas Campbell and Lester Lusher at VoxEU:

Drivers of inequality: Trade shocks versus top marginal tax rates: Growing wealth inequality has been one of the most pressing political issues since the Great Recession. However, there is a relative lack of consensus on the significant drivers of this trend. This column investigates the contribution of globalization, via international trade, to US wealth inequality. Although trade is found to have had important effects on certain parts of the US labor market in the early 2000s, the growth in US inequality since 1980 can be traced back to Reagan-era tax cuts. ...

Thursday, July 28, 2016

The Case for a Financial Transactions Tax

Dean Baker:

The Case for a Financial Transactions Tax, The Century Foundation: There has been considerable interest in financial transactions taxes (FTTs) in the United States and other wealthy countries in the years since the financial crisis. An FTT can be a way to both raise a large amount of revenue and also rein in the financial sector. This report examines the evidence on the potential for raising revenue through an FTT, its impact on the economy, and also the possibility of using the revenue to defray in particular the cost of higher education. The report argues:

  • A financial transactions tax could likely raise over $105 billion annually (0.6 percent of GDP) based on 2015 trading volume. This estimate is roughly in the middle of recent estimates that ranged from as high as $580 billion to as low as $30 billion.
  • The full amount of this tax would be borne by the financial industry, and not individual holders of stock or pension funds and other institutional investors. Evidence suggests that trading volume is elastic with respect to price, meaning that any drop in trading volume resulting from the tax would reduce costs for end users by a larger amount than the tax would increase them.
  • It is reasonable to believe that the industry would be no less effective in serving its productive use (allocating capital) after the tax is in place. This means that one of the primary effects of the tax would be to reduce waste in the financial sector, reducing costs while having little or no effect on its principal purpose: to allocate capital effectively.
  • The revenue raised through an FTT would easily be large enough to cover the cost of free college tuition (among other social programs), although if nothing were done to stem the growth rate of college costs, it would eventually prove inadequate.

The report also notes that the financial sector is the main source of income for many of the highest earners in the economy. This means that downsizing the industry through an FTT could play an important role in reducing income inequality. ...

Wednesday, June 01, 2016

Are Tax Hikes on the Wealthy Bad for Growth?

I have something at MoneyWatch:

Tax hikes on the wealthy: Good or bad for growth?: Conservatives have argued for decades that tax cuts are the key to economic prosperity. And the tax plan presumptive GOP nominee Donald Trump is pushing would cut taxes for the top 0.1 percent of earners by an average of approximately $1.3 million per year, embracing that conservative point of view.
On the other hand, Democrats such as front-runner Hillary Clinton take another approach. Clinton says she'll reform the U.S. tax code so that the wealthiest pay their fair share. The response from Republicans has been predictable: They argue that such a tax plan will lower growth and harm the economy.
Do the conservative arguments against tax increases have any merit? Or are they, as Democrats claim, a way to serve an ideological goal of smaller government and reward wealthy Republican donors? Let's take a closer look. ...

Thursday, May 26, 2016

Study Dispels Myth about Millionaire Migration in the US

From the American Sociological Association

Study dispels myth about millionaire migration in the US., EurekAlert: The view that the rich are highly mobile has gained much political traction in recent years and has become a central argument in debates about whether there should be "millionaire taxes" on top-income earners. But a new study dispels the common myth about the propensity of millionaires in the United States to move from high to low tax states.
"The most striking finding in our study is how little elites seem willing to move to exploit tax advantages across state lines," said Cristobal Young, an assistant professor of sociology at Stanford University and the lead author of the study. ...
In any given year, Young and his fellow researchers found that roughly 500,000 individuals file tax returns reporting incomes of $1 million or more (constant 2005 dollars). From this population, only about 12,000 millionaires change their state each year. The annual millionaire migration rate is 2.4 percent, which is lower than the migration rate of the general population (2.9 percent). The highest rates of migration are seen among low-income tax filers: migration is 4.5 percent among people who earn around $10,000 a year. ...
The study finds that family responsibilities are a key factor that limit migration among top-income earners. "Very affluent people are much more likely to be married and to have school-age children, which makes moving more difficult," Young said. ...
While millionaire migration is extremely limited, there is a grain of truth in the worries about millionaire tax flight, the study finds. "When millionaires do migrate, they are more likely to move to a state with a lower tax rate, and that state is almost always Florida," Young said. ...
"My guess is that if Florida established a 'millionaire tax,' elites would still find Florida appealing because of its climate and geography -- and patterns of elite migration wouldn't really change," Young said. ...
The study also looked at the millionaire population along the borders between states with different tax rates. "In these narrow geographic regions, you would expect millionaires to cluster on the low tax side of the border, but we see very weak evidence of this," Young said.
As for policy implications, Young said "millionaire taxes" result in minimal tax flight among millionaires and help states raise revenue to improve education, infrastructure, and public services, while reducing inequality.
"Our research indicates that 'millionaire taxes' raise a lot of revenue and have very little downside," Young said.

Tuesday, April 12, 2016

For an Inheritance Tax

Chris Dillow:

For an inheritance tax: The news that David Cameron got £500,000 tax-free from his parents raises the question of how or whether inheritances should be taxed. My view is that they should be, and heavily so.
Certainly, a lot of the defences of inheritance look pathetically weak. For example:
“Because a parent’s income was taxed, taxing inheritances is a form of double taxation.” But the same is true for most incomes. When people buy the Investors Chronicle – thus handing money over to me - they do so out of taxed income. Should I therefore escape income tax?
“People should be able to provide for their kids.” Most recipients of inheritances, however, are middle-aged. And the prospect of a big inheritance can actually damage offspring, by reducing their self-reliance and incentives to work and save. ...
“Inheritance tax punishes aspiration.” In most cases, though, the aspiration is an illusory one. HMRC data show that of the 279,301 estates that were left in 2012-13, a mere 6.4% attracted tax. Even if the IHT threshold were greatly reduced, only a minority would pay it.
This, though, brings me to why I favour inheritance taxes. ... We should think of every penny of inheritance which is not taxed as a penny which has to be raised from income taxes. Low inheritance tax thus means high income tax. From this perspective, those who want tax-free inheritances are exactly like benefit scroungers. They want something for nothing at the expense of hardworking tax-payers. It is, therefore, the lack of a serious inheritance tax – and thus the higher taxes on workers, savers and entrepreneurs – that is truly an attack upon aspirations.
If – as I find plausible – the prospect of getting an inheritance reduces labour supply, then optimal taxation might require big inheritance tax rates; these might be less distortionary than income taxes. ...
Surely, there is something fundamentally unjust about being able to get £500,000 tax-free from not working, when the same sum obtained by work would be heavily taxed.
I suspect opposition to sensible inheritance taxes owes more to the rich’s colossal sense of entitlement than it does to justice or economic efficiency. ...

Tuesday, March 29, 2016

'Trump, Cruz Tax-Cut Plans Would Force Historically Dramatic Cuts'

From the CBPP:

Trump, Cruz Tax-Cut Plans Would Force Historically Dramatic Cuts: The tax-cut proposals from Republican presidential candidates Donald Trump and Ted Cruz, in conjunction with their calls for balancing the budget, would dictate low levels of government spending not seen since about 1950, as we explain in a new paper.  Programs that receive support across the political spectrum and are important to the well-being of most Americans would dramatically shrink or disappear altogether.  Even if policymakers didn’t achieve budget balance under their tax-cut plans but simply offset the costs of the plans themselves, the consequences to essential programs — and to low- and middle-income Americans — would be severe. 
These conclusions emerge from an analysis of the Urban-Brookings Tax Policy Center’s (TPC) revenue estimates of the Trump and Cruz tax plans — which would reduce revenues by $9.5 trillion and $8.7 trillion over the next ten years, respectively, according to TPC — and CBPP estimates of what such revenue levels imply for government spending.  This analysis examines only the Trump and Cruz plans because TPC has not analyzed John Kasich’s proposals and because the proposals of Democratic candidates Hillary Clinton and Bernie Sanders would raise revenues, not reduce them.  The specific findings include...
As dramatic as these figures are, they understate the pressure that the two candidates’ proposals would place on many government programs.  Both have proposed large spending increases in certain areas, including Senator Cruz’s proposal to increase defense spending by $2.7 trillion over the next decade and Mr. Trump’s proposal to increase spending on veterans by $500 billion to $1 trillion over this period.  Offsetting the cost of such increases, as well as the tax cuts, would require even deeper cuts to other programs. ...

Wednesday, March 23, 2016

The State of American Politics

Paul Ryan, in a speech on the state of American politics, says:

We don’t lock ourselves in an echo chamber, where we take comfort in the dogmas and opinions we already hold.

Followed by:

... in 1981 the Kemp-Roth bill was signed into law, lowering tax rates, spurring growth, and putting millions of Americans back to work.

Bruce Bartlett:

... I was the staff economist for Rep. Jack Kemp (R-N.Y.) in 1977, and it was my job to draft what came to be the Kemp-Roth tax bill, which Reagan endorsed in 1980 and enacted the following year. ...
Republicans like to say that massive growth followed the Reagan tax cut. But average real GDP growth during Reagan’s eight years in the White House was only slightly above the rate of the previous eight years: 3.4 percent per year vs. 2.9 percent. The average unemployment rate was actually higher under Reagan than it was during the previous eight years: 7.5 percent vs. 6.6 percent. ...

Monday, March 21, 2016

Paul Krugman: On Invincible Ignorance

Republicans are in denial:

On Invincible Ignorance, by Paul Krugman, Commentary, NY Times: Remember Paul Ryan? The speaker of the House... I was interested to read what Mr. Ryan said in a recent interview with John Harwood. What has he learned from recent events?
And the answer is, nothing.
Like just about everyone in the Republican establishment, Mr. Ryan is in denial about the roots of Trumpism, about the extent to which the party deliberately cultivated anger and racial backlash, only to lose control of the monster it created. ...
You might think that Republican thought leaders would be engaged in some soul-searching about their party’s obsession with cutting taxes on the wealthy. ...
But here’s what Mr. Ryan said about all those tax cuts for the top 1 percent: “I do not like the idea of buying into these distributional tables. What you’re talking about is what we call static distribution. It’s a ridiculous notion.”
Aha. The income mobility zombie strikes again.
Ever since income inequality began its sharp rise in the 1980s, one favorite conservative excuse has been that it doesn’t mean anything, ... statistics showing that many people who are in the top 1 percent in any given year are out of that category the next year.
But a closer look at the data shows that there is less to this observation than it seems. These days, it takes an income of around $400,000 a year to put you in the top 1 percent, and most of the fluctuation in incomes we see involves people going from, say, $350,000 to $450,000 or vice versa..., which means that tax cuts that mainly benefit the rich are indeed targeted at a small group of people, not the public at large.
And here’s the thing: This isn’t a new observation. ...
Appalled Republicans may rail against Donald Trump’s arrogant ignorance. But how different, really, are the party’s mainstream leaders? Their blinkered view of the world has the veneer of respectability, may go along with an appearance of thoughtfulness, but in reality it’s just as impervious to evidence — maybe even more so, because it has the power of groupthink behind it. ...
What we’re getting ... is at least the possibility of a cleansing shock — of a period in the political wilderness that will finally force the Republican establishment to rethink its premises. That’s a good thing — or it would be, if it didn’t also come with the risk of President Trump.

Thursday, March 17, 2016

'House Republicans Cling to False Promise of Austerity in their Budget Resolution'

The EPI's Hunter Blair:

House Republicans cling to false promise of austerity in their budget resolution: This week, the House Budget Committee reported out, on a party-line vote, their fiscal year 2017 budget resolution. Infighting between House Republicans, centered on the idea that proposed spending cuts should be even more drastic, suggests that this year’s budget resolution is unlikely to pass. However, with all the media attention focused on the House Republican’s inability to come to an agreement, we shouldn’t lose sight of just how austere their budget resolution already is, and how much damage the cuts it calls for would do to the economy over both the short and long run.
For example, the cuts over the first two years would impose a significantly larger fiscal drag on economic recovery than previous Republican budgets. ...
GOP House budget resolutions for the past several years have been obsessed with eliminating the budget deficit by the end of the ten year budget window. This was already a quixotic and damaging goal, and it has become even more so thanks to changes in the CBO’s baseline. And while deficits are created from revenue minus spending, congressional Republicans’ outright refusal to raise any taxes means that spending cuts—and thereby low- and middle- income people—must bear the entire brunt of the budget resolution’s burden. They bear this burden to the tune of $6.5 trillion in spending cuts to vital programs over ten years—programs that overwhelmingly serve those most in need. The cuts would take away affordable health insurance coverage from the millions that have gained it under the Affordable Care Act and then further erode the safety net with cuts to Medicaid, unemployment benefits, and nutrition assistance. Besides making the economic lives of vulnerable populations harder, focusing cuts on this group imposes a large fiscal drag, since these are households that tend to spend (not save) additional dollars of resources back into the economy. ...
In years beyond 2017, the fiscal drag would remain considerable (and would likely damage growth and job creation), but we’re unable to forecast these impacts precisely because the Fed may have regained some scope to (at least partially) offset fiscal cuts in later years. Looking forward, while it is hard to precisely quantify by how much, the deeper budget cuts throughout the ten year window in the House GOP budget resolution would almost surely further hinder and delay a full economic recovery, especially in the near-term.1 ...
1.The cuts in fiscal 2017 of the House GOP budget resolution total $186 billion. We assume a very conservative multiplier of 1.25—Medicaid and SNAP have very high multipliers (between 1.5-2 or even higher), so 1.25 strikes us as quite conservative. This 1.25 multiplier implies that the House budget cuts will place a 1.2 percent drag on a GDP growth in the next year. This loss in GDP means, all else equal, that job-growth in the next year will be 1.4 million less. Putting that in context, job-growth in 2015 was 2.7 million, so the pace of job-growth would be cut by more than half in the coming year. We should note that we are quite confident about this impact for 2017, given that there is little scope or obvious appetite for monetary policymakers to provide enough stimulus with their policy tools to offset this fiscal drag. Cuts totaling $321 billion in fiscal 2018 will also likely drag significantly on growth, but uncertainty about other economic influences on recovery (particularly the response of the Federal Reserve) makes calculating exactly how much hard to quantify.

Monday, February 29, 2016

"Financial Transaction Taxes in Theory and Practice'

From the Brookings Institution"

Financial transaction taxes in theory and practice, by Leonard E. Burman, William G. Gale, Sarah Gault, Bryan Kim, Jim Nunns and Steve Rosenthal: The Great Recession, which was triggered by financial market failures, has prompted renewed calls for a financial transaction tax (FTT) to discourage excessive risk taking and recoup the costs of the crisis. ...
[...Review of arguments for and against an FTT...]
Our review and analysis of previous work suggests several conclusions. First, the extreme arguments on both sides are overstated. At the very least, the notion that a FTT is unworkable should be rejected. ... On the other hand, the idea that a FTT can raise vast amounts of revenue ... is inconsistent with actual experience with such taxes.
Second, a wide range of design issues are critical to the formulation of a FTT... Third, although empirical evidence demonstrates clearly that FTTs reduce trading volume, as expected, it does not show how much of the reduction occurs in speculative or unproductive trading versus transactions necessary to provide liquidity. The evidence on volatility is similarly ambiguous: empirical studies have found both reductions and increases in volatility as a result of the tax.
Fourth, the efficiency implications of a FTT are complex, depending on the optimal size of the financial sector, its impact on the rest of the economy, the structure and operation of financial markets, the design of the tax, and other factors.
We also present new revenue and distributional estimates for hypothetical U.S. FTTs... We ... find the tax would be quite progressive. ...
[Paper: Financial Transaction Taxes in Theory and Practice"]

Thursday, January 28, 2016

'We Desperately Need Major Tax Reform! Or Maybe Not…'

Jared Bernstein:

We desperately need major tax reform! Or maybe not…: It is an article of faith in national politics that the reform of the federal tax code is what’s standing between us and faster growth, higher productivity, better jobs, and whatever other good outcome you want to ascribe to this endeavor. ...
The changes in the Federal tax code since 1986, including the substantial increases to the EITC and CTC…boosted the aftertax income of households in the first two quintiles of the income distribution by about seven percent without even counting any benefits from the additional labor force participation... These gains are an order of magnitude larger than the estimated gains from fundamental tax reform, which are generally measured in the tenths of a percent.
So, let’s stop being distracted by the “fundamental reform fairy,” and pursue incremental reforms:
— Close the carried interest loophole that privileges the earnings of investment fund managers. ...
— Block corporate tax inversions, where U.S. companies merge with overseas companies just to move their tax mailbox to a low tax country.
— End the “step-up basis” provision by which the wealthy can pass capital gains on to their heirs tax free.
— Stop incentivizing multinationals to keep, or at least book, their profits overseas by letting companies repatriate their foreign earnings after paying a minimum tax (the Obama administration suggest a 19 percent minimum rate).
— Increase the EITC for childless adults, who now get very little from it, an idea supported by both Obama and House Speaker Paul Ryan (R).
Above, I called these “tweaks” as opposed to major reforms. Though the contrast is apt, it’s the wrong word, as any such changes are hugely heavy lifts. But heavy lifts are at least in the realm of the possible. And that’s the right realm to be in if we actually want to improve our tax code.

Wednesday, January 27, 2016

''There is No Reason to Believe that Tax Cuts are an Elixir for Economic Growth''

William Gale, Aaron Krupkin and Kim Rueben in the Milken Institute Review:

There is No Reason to Believe that Tax Cuts are an Elixir for Economic Growth: Many folks, and from time to time, majorities in Congress, apparently believe that the cure for what ails the economy is lower taxes – in particular, lower tax rates for high-income earners. Now this enthusiasm has spread to state governments that are led by conservatives, offering new tests of a proposition that has generated scant evidence of success elsewhere.
Failure of this idea at the federal level does not necessarily imply that tax cuts would fail to increase output and jobs at the state level. For one thing, lower taxes in one state might lure existing businesses (and jobs) from other states, even if they yield no overall increase in employment or output. But it’s also worth noting that the stakes are higher for the states. Washington can finance shortfalls in revenue by selling bonds to the public or by borrowing from the Federal Reserve – in effect, printing money. States are far more constrained by the skepticism of the private credit markets or constitutional prohibitions against deficit finance, or both. Thus, any failure of supply-side economics to work its magic could force punishing cuts in state programs. ...
At the core of supply-side economics is Arthur Laffer’s back-of-the napkin curve illustrating the undeniable reality that, at some point, higher tax rates will lead to lower revenues as well as fewer jobs and slower growth. But this does not imply there are many realworld examples of tax rates so high that cutting them would have much impact on jobs or growth. That has been amply demonstrated at the national level, where tax cuts have eroded revenue without discernible effect on economic activity.
The states have no good reasons to believe that tax cuts will bring the desired manna. Yet some continue to erode their tax bases in the name of business growth in an era in which few states can afford to cut critical services (that businesses care about) ranging from education to infrastructure repair. Some ideas live on and on, no matter how much evidence accumulates against them. States that accept them as gospel anyway do so at their peril.

Friday, January 22, 2016

'A Progressive Way to End Corporate Taxes'

Curious what you think of this proposal from Dean Baker:

A Progressive Way to End Corporate Taxes, by Dean Baker, NY Times: Just about every American chief executive has the same dream: to get out from under the corporate income tax. ...
Suppose that, instead of taxing corporate profits, we required companies to turn over an amount of stock, in the form of nonvoting shares, to the government. ...
The shares would be nontransferable, except in the case of mergers or buyouts, but they otherwise would be treated just like any other shares. If the company paid a dividend to its other stockholders, then it would pay the same per share dividend to the government. If it bought back 10 percent of its shares, then it would buy back 10 percent of the government’s shares at the same price. In the event of a takeover, the buyer would have to pay the same per-share price to the government as it did to the holders of other shares.
This way, there is no way for a corporation to escape its liability. A portion of whatever profit it makes will automatically go to the government. It also eliminates the enormous cost and waste associated with complying with or avoiding the corporate income tax... And federal revenues will go up, because companies will have incentive to do what is most profitable, not what minimizes their tax liability. ...
Ideally, replacing the income tax with stock issuance would be mandatory. But it could be done on an optional basis. ...
The switch from a corporate income tax to ownership of shares wouldn’t be good news for the tax avoidance industry, or for leading tax-avoiding corporations. But it would be a huge gain for just about everyone else.

Saturday, January 09, 2016

'Who Owns U.S. Business? How Much Tax Do They Pay?'

From the NBER Digest

'Who Owns U.S. Business? How Much Tax Do They Pay?', by Laurent Belsie, NBER DigestIn 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent.

The importance of pass-through business entities has soared in the past three decades. Over the same period, the amount of pass-through business income flowing to the top 1 percent of income earners has increased sharply, according to Business in the United States: Who Owns It and How Much Tax Do They Pay? (NBER Working Paper No. 21651).

"Despite this profound change in the organization of U.S. business activity, we lack clean, clear facts about the consequences of this change for the distribution and taxation of business income," write Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, and Eric Zwick. "This problem is especially severe for partnerships, which constitute the largest, most opaque, and fastest growing type of pass-through."

Pass-through entities — partnerships, tax code subchapter S corporations, and sole proprietorships — are not subject to corporate income tax. Their income passes directly to their owners and is taxed under whatever tax rules those owners face. In contrast, the income of traditional corporations, more specifically subchapter C corporations, is subject to corporate income taxes, and after-tax income distributed from the corporation to its owners is also taxable.

In 1980, pass-through entities accounted for 20.7 percent of U.S. business income; by 2011, they represented 54.2 percent. Over roughly the same period, the income share of the top 1 percent of income earners doubled. Previous research has shown that the two phenomena are linked: The growth of income from pass-through entities accounted for 41 percent of the rise in the income of the top 1 percent. By linking 2011 partnership and S corporation tax returns with federal individual income tax returns, in particular Form 1065 and Form 1120S K-1 returns, the researchers find that over 66 percent of pass-through business income received by individuals goes to the top 1 percent. The concentration of partnership and S corporation income is much greater than the concentration of dividend income (45 percent to the top 1 percent) which proxies for income from C corporations (traditional corporations). While taxpayers in the top 1 percent are eight times as likely to receive dividends as taxpayers in the bottom 50 percent, the ratio for partnerships is more than 50 to 1.

Many partnerships are opaque. A fifth of partnership income was earned by partners that the study's authors were not able to classify into one of several categories, such as a domestic individual or a foreign corporation. In addition, some partnerships are circular, in the sense that they are owned by other partnerships, which could in turn be owned by yet other partnerships.

Pass-through business income faces lower tax rates than traditional corporate income. The tax rate on the income earned by pass-through partnerships is a relatively low 15.9 percent, excluding interest payments and unrepatriated foreign income. That compares with a 31.6 percent rate for C corporations and a 24.9 percent rate for S corporations. Only sole proprietorships have a lower average rate, 13.6 percent. Combining both taxes on corporations and taxes on investors, the researchers calculate that the U.S. business sector as a whole pays an average tax rate of 24.3 percent.

The lower average tax rate for pass-through entities than for traditional corporations translates into reduced federal revenues, the researchers conclude. They estimate that in 2011, if the share of pass-through tax returns had been at its 1980 level, when traditional C corporations and sole proprietorships dominated, the average rate would have been 3.8 percentage points higher and the Treasury would have collected $100 billion more in tax revenue.

One reason partnerships pay such a low average tax rate is that nearly half their income (45 percent) is classified as capital gains and dividend income, which is taxed at preferential rates. Another 15 percent of their income is earned by tax-exempt and foreign entities, for which the effective tax rate is less than five percent. The roughly 30 percent of partnership income that is earned by unidentifiable and circular partnerships is taxed at an estimated 14.7 percent rate.

"A long-standing rationale for the entity-level corporate income tax is that it can serve as a backstop to the personal income tax system," the researchers conclude. "Our inability to unambiguously trace 30 percent of partnership income to either the ultimate owner or the originating partnership underscores the concern that the current U.S. tax code encourages firms to organize opaquely in partnership form in order to minimize tax burdens."

Wednesday, December 23, 2015

'An Aging Society Is No Problem When Wages Rise'

Dean Baker:

An Aging Society Is No Problem When Wages Rise: Eduardo Porter discusses the question of whether retirees will have sufficient income in twenty or thirty years. He points out that if no additional revenue is raised, Social Security will not be able to pay full scheduled benefits after 2034.
While this is true, it is important to note that this would have also been true in the 1940, 1950s, 1960s, and 1970s. If projections were made for Social Security that assumed no increase in the payroll tax in the future, there would have been a severe shortfall in the trust fund making it unable to pay full scheduled benefits.
We have now gone 25 years with no increase in the payroll tax, by far the longest such period since the program was created. With life expectancy continually increasing, it is inevitable that a fixed tax rate will eventually prove inadequate if the retirement age is not raised. (The age for full benefits has already been raised from 65 to 66 and will rise further to 67 by 2022, but no further increases are scheduled.)
The past increases in the Social Security tax have generally not imposed a large burden on workers because real wages rose. The Social Security trustees project average wages to rise by more than 50 percent over the next three decades. If most workers share in this wage growth, then the two or three percentage point tax increase that might be needed to keep the program fully funded would be a small fraction of the wage growth workers see over this period. Of course, if income gains continue to be redistributed upward, then any increase in the Social Security tax will be a large burden.
For this reason, Social Security should be seen first and foremost as part of the story of wage inequality. If workers get their share of the benefits of productivity growth then supporting a larger population of retirees will not be a problem. On the other hand, if the wealthy manage to prevent workers from benefiting from growth during their working lives, they will also likely prevent them from having a secure retirement.

Wednesday, November 25, 2015

'The Pfizer–Allergan Merger Is a Disgrace'

John Cassidy (this was in today's links):

The Pfizer–Allergan Merger Is a Disgrace: In an announcement on Monday morning, Pfizer, the big drug company, whose headquarters are on East 42nd Street, in Manhattan, said that it is merging with one of its competitors, Allergan PLC. ...
It is widely acknowledged that the primary impetus for the deal is a financial one. In merging with Allergan, which is based in Dublin, Pfizer intends to move its corporate residency to Ireland, where the corporate tax rate is just 12.5 per cent, compared to thirty-five per cent for a company of its size in the United States. Over the next few years, the merger could save Pfizer billions of dollars in taxes and deprive the U.S. Treasury of the same amount.
Tax-driven deals of this nature are known as “inversions,” and they are becoming increasingly common. ... The Pfizer–Allergan deal will be the biggest inversion yet, and it is nothing short of a disgrace. ...
Read, in his statement explaining the proposal to merge with Allergen, said that it would help put Pfizer “on a more competitive footing within our industry.” This was a reference to the fact that other big pharma companies, such as AstraZeneca, GlaxoSmithKline, and Novartis, are headquartered in countries with lower corporate tax rates...
All things considered, it’s hard to avoid seeing the merger proposal as a cynical move designed to boost Pfizer’s stock price and generate a windfall for the company’s senior managers, who are compensated mainly in equity. ...

Wednesday, November 04, 2015

'60% of Ted Cruz‘s Tax Cut Goes to the Top 1%'

James Kwak at The Baseline Scenario:

60% of Ted Cruz‘s Tax Cut Goes to the Top 1%: I haven’t been commenting on Republican tax plans this season because, well, it takes a lot to impress me when it comes to absurd tax cut proposals. Ted Cruz has done it. The major components of Cruz’s plan amount to this:

  • A flat 10% tax on individual income (labor and investments)—down from top rates today of 43.4% on labor and 23.8% on capital gains and dividends
  • No payroll taxes (15.3% for most people today), corporate income tax (average rate about 13% today), or estate tax
  • A 19% value-added tax (16% of gross business receipts, including the tax)

There are two big things that are crazy about this plan. The first is that it eliminates an enormous amount of tax revenue: $3.6 trillion over ten years, according to the right-wing Tax Foundation’s “static” analysis—that is, before the growth fairy waves her magic wand. To put that in context, that’s more than we plan to spend on the military over the next ten years.

The second is the astonishingly naked handout to the very rich:

60% of the tax cut goes to the top 1%.

That leaves only 40% for everyone else. This number is so embarrassing that you won’t find it in the Tax Foundation’s analysis. ...

Of course, none of this should be any surprise. Republican tax proposals became completely divorced from reality long ago. More importantly, the Republican nomination lies in the hands of a handful of donors who are in the 0.001%, so the rational thing for any candidate to do is pander to them as enthusiastically as possible.

The only policies we have that limit the transmission of wealth from generation to generation are the estate tax and taxes on investment income. Eliminating one and slashing the other, as Ted Cruz proposes, is the single biggest step we can take toward becoming an aristocracy of inherited wealth. As a member of the 1%, that would be good for my grandchildren—but it would be bad for the country.

[I left out quite a bit of the original post.]

Tuesday, October 27, 2015

'Can Taxing the Rich Reduce Inequality? You Bet it Can!'

Henry Aaron at Brookings:

Can taxing the rich reduce inequality? You bet it can!: Two recently posted papers by Brookings colleagues purport to show that “even a large increase in the top marginal rate would barely reduce inequality.”[1] This conclusion, based on one commonly used measure of inequality, is an incomplete and misleading answer to the question posed: would a stand-alone increase in the top income tax bracket materially reduce inequality? More importantly, it is the wrong question to pose, as a stand-alone increase in the top bracket rate would be bad tax policy that would exacerbate tax avoidance incentives. Sensible tax policy would package that change with at least one other tax modification, and such a package would have an even more striking effect on income inequality. In brief:

  • A stand-alone increase in the top tax bracket would be bad tax policy, but it would meaningfully increase the degree to which the tax system reduces economic inequality. It would have this effect even though it would fall on just ½ of 1 percent of all taxpayers and barely half of their income.
  • Tax policy significantly reduces inequality. But transfer payments and other spending reduce it far more. In combination, taxes and public spending materially offset the inequality generated by market income.
  • The revenue from a well-crafted increase in taxes on upper-income Americans, dedicated to a prudent expansions of public spending, would go far to counter the powerful forces that have made income inequality more extreme in the United States than in any other major developed economy.