Category Archive for: Taxes [Return to Main]

Saturday, November 22, 2014

'High Marginal Tax Rates on the Top 1%'

Fabian Kindermann and Dirk Krueger:

High marginal tax rates on the top 1%: Optimal tax rates for the rich are a perennial source of controversy. This column argues that high marginal tax rates on the top 1% of earners can make society as a whole better off. Not knowing whether they would ever make it into the top 1%, but understanding it is very unlikely, households especially at younger ages would happily accept a life that is somewhat better most of the time and significantly worse in the rare event they rise to the top 1%.
Recently, public and scientific attention has been drawn to the increasing share of labour earnings, income, and wealth accruing to the so-called ‘top 1%’. Robert B. Reich in his 2009 book Aftershock opines that: “Concentration of income and wealth at the top continues to be the crux of America’s economic predicament”. The book Capital in the Twenty-First Century by Thomas Piketty (2014) has renewed the scientific debate about the sources and consequences of the high and increasing concentration of wealth in the US and around the world.
But what is a proper public policy reaction to such a situation? Should the government address this inequality with its policy instruments at all, and if so, what are the consequences for the macroeconomy? The formidable literature on optimal taxation has provided important answers to the first question.1 Based on a static optimal tax analysis of labour income, Peter Diamond and Emmanuel Saez (2011) argue in favour of high marginal tax rates on the top 1% earners, aimed at maximising tax revenue from this group. Piketty (2014) advocates a wealth tax to reduce economy-wide wealth inequality....
Conclusions and limitations Overall we find that increasing tax rates at the very top of the income distribution and thereby reducing tax burdens for the rest of the population is a suitable measure to increase social welfare. As a side effect, it reduces both income and wealth inequality within the US population.
Admittedly, our results apply with certain qualifications. First, taxing the top 1% more heavily will most certainly not work if these people can engage in heavy tax avoidance, make use of extensive tax loopholes, or just leave the country in response to a tax increase at the top. Second, and probably as importantly, our results rely on a certain notion of how the top 1% became such high earners. In our model, earnings ‘superstars’ are made from luck coupled with labour effort. However, if high income tax rates at the top would lead individuals not to pursue high-earning careers at all, then our results might change.7 Last but not least, our analysis focuses solely on the taxation of large labour earnings rather than capital income at the top 1%.
Despite these limitations, which might affect the exact number for the optimal marginal tax rate on the top 1%, many sensitivity analyses in our research suggest one very robust result – current top marginal tax rates in the US are lower than would be optimal, and pursuing a policy aimed at increasing them is likely to be beneficial for society as a whole.

Thursday, November 20, 2014

'Encouraging Work: Tax Incentives or Social Support?'

Tim Taylor:

Encouraging Work: Tax Incentives or Social Support?: Consider two approaches to encouraging those with low skills to be fully engaged in the workplace. The American approach focuses on keeping tax rates low and thus providing a greater financial incentive for people to take jobs. The Scandinavian approach focuses on providing a broad range of day care, education, and other services to support working families, but then imposes high tax rates to pay for it all. In the most recent issue of the Journal of Economic Perspectives, Henrik Jacobsen Kleven contrasts these two models in "How Can Scandinavians Tax So Much?" (28:4, 77-98). Kleven is from Denmark, so perhaps his conclusion is predictable. But the analysis along the way is intriguing.
As a starting point, consider what Kleven calls the "participation tax rate." When an average worker in a country takes a job, how much will the money they earn increase their standard of living? The answer will depend on two factors: any taxes imposed on what they earn, including, income, payroll, and sales taxes; and also the loss of any government benefits for which they become less eligible or ineligible because they are working. In the Scandinavian countries of Denmark, Norway, and Sweden, this "participation tax rate" is about double what it is in the United States. ...
A standard American-style prediction would be that countries where gains from working are so low should see a lower level of participation in the workforce. That prediction does not hold true in cross-country data among high-income countries. ...
What explains this pattern? Kleven argues that just looking at the tax rate isn't enough, because it also matters what the tax revenue is spent on. For example, the Scandinavian countries spend a lot of money on universal programs for preschool, child care, and elderly care. Kleven calls these "participation subsidies," because they make it easier for people to work--especially for people who otherwise would need to find a way to cover or pay for child care or elder care. The programs are universal, which means that their value expressed as a share of income earned means much more to a low- or middle-income family than to a high-income family. ...
Any direct comparisons between the United States (population of 316 million) and the Scandinavian countries of Denmark (6 million), Norway,  (5 million) and Sweden (10 million) is of course fraught with peril. Their history, politics, economies, and institutions differ in so many ways. You can't just pick up can't just pick up long-standing policies or institutions in one country, plunk them down in another country, and expect them to work the same way.
That said, Kleven basic conceptual point seems sound. Provision of good-quality preschool, child care and elder care does make it easier for all families, but especially low-income  families with children, to participate in the labor market.   In these three Scandinavian countries, the power of these programs to encourage labor force participation seems to overcome the work disincentives that arise in financing and operating them. This argument has nothing to do with whether preschool and child care programs might help some children to perform better in school--although if they do work in that way, it would strengthen the case for taking this approach.
So here is a hard but intriguing hypothetical question: The U.S. government spends something like $60 billion per year on the Earned Income Tax Credit, which is a refundable tax credit providing income mainly to low-income families with children, and almost as much on the refundable child tax credit. Would low-income families with children be better off, and more attached to the workforce, if a sizeable portion of the 100 billion-plus spent for these tax credits--and aimed at providing financial incentives to work--was instead directed toward universal programs of preschool, child care, and elder care?

Or we could raise taxes on the wealthy, cut defense spending, etc., etc. and then ask which if the two programs it would be better to enhance (or in what proportions), the EITC and other tax credits or the "universal programs of preschool, child care, and elder care." If the programs are complementary and insufficient, as I believe they are, then neither should be cut to enhance the other (though I would choose the Scandinavian model if I had to pick on of the two to augment).

Monday, October 20, 2014

''State 'Income Migration' Claims Are Deeply Flawed''

Differences in income taxe ratess across states have little impact on migration:

State “Income Migration” Claims Are Deeply Flawed, by Michael Mazerov, CBPP: Some proponents of state income tax cuts are making highly inaccurate claims about the impact of interstate migration patterns on states with relatively high income taxes based on a misleading reading of Internal Revenue Service data.
Those making these arguments claim that many of the people who leave states with relatively robust income taxes do so largely in order to pay little or no income tax in another state, and that they take their incomes with them when they move, harming the economies of the states they left.  As a consequence, these “income migration” proponents claim, states with relatively high income taxes are suffering severe damage from the loss of income as “money walks” out of their states to lower-tax states.[1]
The first part of this argument — that interstate differences in tax levels are a major explanation for interstate migration patterns — is not supported by the evidence, as we documented in an earlier paper.[2]  People rarely move to lower their state income taxes.  Other factors, such as job opportunities, family considerations, climate, and housing costs, are much more decisive. 
The second part of the argument — that states with relatively high income taxes are suffering severe economic damage because they are losing the incomes of people who migrate to other states — is also deeply flawed. ...

Saturday, October 11, 2014

Inequality and Progressive Taxes

Steve Waldman has a nice discussion of a recent debate:

Scale, progressivity, and socioeconomic cohesion, Interfluidity: Today seems to be the day to talk about whether those of us concerned with poverty and inequality should focus on progressive taxation. Edward D. Kleinbard in the New York Times and Cathie Jo Martin and Alexander Hertel-Fernandez at Vox argue that focusing on progressivity can be counterproductive. Jared Bernstein, Matt Bruenig, and Mike Konczal offer responses offer responses that examine what “progressivity” really means and offer support for taxing the rich more heavily than the poor. This is an intramural fight. All of these writers presume a shared goal of reducing inequality and increasing socioeconomic cohesion. Me too.
I don’t think we should be very categorical about the question of tax progressivity. We should recognize that, as a political matter, there may be tradeoffs between the scale of benefits and progressivity of the taxation that helps support them. We should be willing to trade some progressivity for a larger scale. Reducing inequality requires a large transfers footprint more than it requires steeply increasing tax rates. But, ceteris paribus, increasing tax rates do help. Also, high marginal tax rates may have indirect effects, especially on corporate behavior, that are socially valuable. We should be willing sometimes to trade tax progressivity for scale. But we should drive a hard bargain.
First, let’s define some terms...

Friday, October 10, 2014

'Ed Kleinbard Does Not Want a Less Progressive Tax System'

Jared Bernstein wants to correct a potential "misimpression" of an op-ed by Ed Kleinbard (this was in today's links):

No, Ed Kleinbard Does Not Want a Less Progressive Tax System: I favorably reviewed Ed Kleinbard’s book here the other day so I’m obliged to step in a correct what looks to me like a misimpression growing out of an oped he has in today’s NYT.
Because the oped is entitled “Don’t Soak the Rich” and because Ed, IMHO, doesn’t articulate the nuances in his argument the way he needs to, the oped is being misrepresented as a call for a less progressive tax system (I also think Ed’s mistaken in his claim that the US tax system, all in, is the most progressive across advanced economies—in fact, it’s only mildly progressive…but more on that later).
For example, responding to the oped, Len Berman, a DC tax expert, tweeted “a progressive’s call for less progressive taxation.”
I can see where Len gets that from the piece, and obviously Ed will have to speak for himself, but Ed’s book clearly supports progressive taxation. He may not see the need to make the tax system more progressive, though his book calls for just that in ways I’ll note in a moment. But he certainly does not call for less progressivity. ...

Monday, October 06, 2014

Paul Krugman: Voodoo Economics, the Next Generation

Will Republicans "destroy the credibility of a very important institution"?:

Voodoo Economics, the Next Generation, by Paul Krugman, Commentary, NY Times: Even if Republicans take the Senate this year, gaining control of both houses of Congress, they won’t gain much in conventional terms: They’re already able to block legislation, and they still won’t be able to pass anything over the president’s veto. One thing they will be able to do, however, is impose their will on the Congressional Budget Office, heretofore a nonpartisan referee on policy proposals.
As a result, we may soon find ourselves in deep voodoo.
During his failed bid for the 1980 Republican presidential nomination George H. W. Bush famously described Ronald Reagan’s “supply side” doctrine — the claim that cutting taxes on high incomes would lead to spectacular economic growth, so that tax cuts would pay for themselves — as “voodoo economic policy.” Bush was right. ...
But now it looks as if voodoo is making a comeback. At the state level, Republican governors — and Gov. Sam Brownback of Kansas, in particular — have been going all in on tax cuts despite troubled budgets, with confident assertions that growth will solve all problems. It’s not happening... But the true believers show no sign of wavering.
Meanwhile, in Congress Paul Ryan, the chairman of the House Budget Committee, is dropping broad hints that after the election he and his colleagues will do what the Bushies never did, try to push the budget office into adopting “dynamic scoring,” that is, assuming a big economic payoff from tax cuts.
So why is this happening now? It’s not because voodoo economics has become any more credible. ... In fact,... researchers at the International Monetary Fund, surveying cross-country evidence, have found that redistribution of income from the affluent to the poor, which conservatives insist kills growth, actually seems to boost economies.
But facts won’t stop the voodoo comeback,... for years they have relied on magic asterisks — claims that they will make up for lost revenue by closing loopholes and slashing spending, details to follow. But this dodge has been losing effectiveness as the years go by and the specifics keep not coming. Inevitably, then, they’re feeling the pull of that old black magic — and if they take the Senate, they’ll be able to infuse voodoo into supposedly neutral analysis.
Would they actually do it? It would destroy the credibility of a very important institution, one that has served the country well. But have you seen any evidence that the modern conservative movement cares about such things?

Thursday, September 18, 2014

Tax Cuts Can Do More Harm Than Good

More on the new work from William Gale and Andrew Samwick (I've posted on this before, but given the strength of beliefs about tax cuts, it seems worthwhile to highlight it again):

Tax Cuts Can Do More Harm Than Good: Tax cuts are the one guaranteed path to prosperity. Or so politicians have told Americans for so long that the claim has become a secular dogma.
But tax cuts can do more harm than good, a new report shows. It draws on decades of empirical evidence analyzed with standard economic principles used in business, academia and government.
What ultimately matters is the way a tax cut is structured and how it affects behavior. A well-designed tax cut can help increase future prosperity, but a poorly structured one can result in a meaner future with fewer jobs, less compensation and higher costs to society.
William G. Gale of the Brookings Institution, a nonprofit Washington policy research house, and Andrew Samwick, a Dartmouth College professor, last week issued the report, “Effects of Income Tax Changes on Economic Growth.”
Gale said he expects emailed brickbats from those who have incorporated the tax cut dogma into their views without really understanding the issue. ...

Saturday, September 13, 2014

'Taxes and Growth'

Dietz Vollrath:

Taxes and Growth, The Growth Economics blog: William Gale and Andy Samwick have a new Brookings paper out on the relationship of tax rates and economic growth in the U.S. ... Short answer, there is no relationship. They do not identify any change in the trend growth rate of real GDP per capita with changes in marginal income tax rates, capital gains tax rates, or any changes in federal tax rules. ...

One of the first pieces of evidence they show is from a paper by Stokey and Rebelo (1995). ... You can see that the introduction of very high tax rates during WWII, which effectively became permanent features of the economy after that, did not change the trend growth rate of GDP per capita in the slightest. ...

The next piece of evidence is from a paper by Hungerford (2012), who basically looks only at the post-war period, and looks at whether the fluctuations in top marginal tax rates (on either income or capital gains) are related to growth rates. You can see ... that they are not. If anything, higher capital gains rates are associated with faster growth.

The upshot is that there is no evidence that you can change the growth rate of the economy – up or down – by changing tax rates – up or down. Their conclusion is more coherent than anything I could gin up, so here goes:

The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity.

The effects of tax cuts on growth are completely uncertain.

Wednesday, September 10, 2014

The Durbin-Schumer Inversion Proposal

Pro-Growth Liberal (pgl):

Durbin-Schumer Inversion Proposal: Bernie Becker reports on an interesting proposal in the Senate:
Schumer’s bill takes aim at a maneuver known as earnings stripping, a process by which U.S. subsidiaries can take tax deductions on interest stemming from loans from a foreign parent. The measure comes as Democrats continue to criticize companies, like Burger King, that have sought to shift their legal address abroad … Schumer’s bill would cut in half the amount of interest deduction that companies can claim, from 50 percent to 25 percent. It also seeks to limit companies that have already inverted from claiming the deduction in future years, requiring IRS on certain transactions between a foreign parent and U.S. company for a decade.
Had Walgreen decided to move its tax domicile to Switzerland, this proposal would limit the amount of income shifting that might take place after the inversion. But consider companies like Burger King and AbbVie. They are already sourcing the vast majority of their profits overseas. The reason that the effective tax rates are about 20 percent and not in the teens is that they have to pay taxes on repatriated earnings. An inversion would still eliminate the repatriation taxes and alas the horse has left the barn as far these two companies and their aggressive transfer pricing. The proposal is a very good one but Congress should still encourage the IRS to conduct transfer pricing reviews of what companies such as these have done in the past.

Wednesday, August 27, 2014

State Income Taxes Have Little Impact on Interstate Migration

From Michael Mazerov of the CBPP:

More Evidence That State Income Taxes Have Little Impact on Interstate Migration: The New York Times’ Upshot blog has published a fascinating set of graphs of Census Bureau data on interstate migration patterns since 1900, bolstering our argument that state income taxes don’t have a significant impact on people’s decisions about where to live.
We plotted the same Census data, which shows which states do the best job of retaining their native-born populations, on the chart below, also noting which states have (or don’t have) a state income tax.  Our chart shows that taxes have little to do with the extent to which native-born people leave their states of origin.
If Heritage Foundation economist Stephen Moore’s claim (which other tax-cut advocates often repeat) that “taxes are indisputably a major factor in determining where . . . families locate” were true, states without income taxes would see below-average shares of their native-born populations leaving at some point in their lifetime, while states with relatively high income taxes would see the opposite.  But the graph shows no such pattern...

Tuesday, August 26, 2014

'Who Pays Corporate Taxes?'

Justin Fox

Who Pays Corporate Taxes? Possibly You: Who pays corporate income taxes? Just one thing’s for sure: it’s not corporations. ...
For a long time it was thought the owners paid the tax. That belief can be traced largely to a classic 1962 theoretical analysis by economist Arnold Harberger...
Harberger saw this as a bad thing. By taking money away from capital owners, the corporate income tax was depressing investment and distorting the economy. But for those more concerned with the distributional effects of taxation, Harberger’s model at least showed the burden landing on people who were wealthier than average.
His theoretical model, however, assumed a closed economy... As the world’s economies became more intertwined in recent decades, economists — Harberger among them — began constructing open-economy models that showed workers bearing a larger share of the burden. ...
So in the past few years there’s been a determined attempt to answer the question empirically... Gravelle has a 2011 summary of this work, and her chief conclusions are that the results are all over the place and the most dramatic ones just aren’t credible. But most of these studies do show some significant chunk of the corporate tax burden landing on workers, which is perhaps not yet conclusive but is really interesting.
Most public discussions of corporate taxes in the U.S., however, still ignore the possibility that workers might actually be the ones bearing the burden. ... Perhaps it’s ... just that, if corporations pay lower taxes, individuals have to pick up the slack. And even if you understand tax incidence perfectly well, a direct tax is still more noticeable than an indirect one.

Monday, July 28, 2014

Paul Krugman: Corporate Artful Dodgers

Congress should do something about "ever-more-aggressive corporate tax avoidance":

Corporate Artful Dodgers, by Paul Krugman, Commentary, NY Times: In recent decisions, the conservative majority on the Supreme Court has made clear its view that corporations are people, with all the attendant rights. ...
There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we’re heading toward a world in which only the human people pay taxes.
We’re not quite there yet: The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s... Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.
Which brings us to the tax-avoidance strategy du jour: “inversion.” This refers to a legal maneuver in which a company declares that its U.S. operations are owned by its foreign subsidiary, not the other way around, and uses this role reversal to shift reported profits out of American jurisdiction to someplace with a lower tax rate.
The most important thing to understand about inversion is that it does not in any meaningful sense involve American business “moving overseas.” ... All they’re doing is dodging taxes on those profits.
And Congress could crack down on this tax dodge...
Opponents of a crackdown on inversion typically argue that instead of closing loopholes we should reform the whole system by which we tax profits, and maybe stop taxing profits altogether. They also tend to argue that taxing corporate profits hurts investment and job creation. But these are very bad arguments against ending the practice of inversion. ...
As for reforming the system: Yes, that would be a good idea. But..., there are big debates about the shape of reform, debates that would take years to resolve... Why let corporations avoid paying their fair share for years, while we wait for the logjam to break?
Finally, none of this has anything to do with investment and job creation. If and when Walgreen changes its “citizenship,” it will get to keep more of its profits — but it will have no incentive to invest those extra profits in its U.S. operations.
So this should be easy. By all means let’s have a debate about how and how much to tax profits. Meanwhile, however, let’s close this outrageous loophole.

Sunday, July 20, 2014

'California's Job Growth Defies Predictions after Tax Increases'

This article, by David Cay Johnston, is getting a surprising number of retweets:

State’s job growth defies predictions after tax increases, by David Cay Johnston, The Bee: Dire predictions about jobs being destroyed spread across California in 2012 as voters debated whether to enact the sales and, for those near the top of the income ladder, stiff income tax increases in Proposition 30. Million-dollar-plus earners face a 3 percentage-point increase on each additional dollar.
“It hurts small business and kills jobs,” warned the Sacramento Taxpayers Association, the National Federation of Independent Business/California, and Joel Fox, president of the Small Business Action Committee.
So what happened after voters approved the tax increases, which took effect at the start of 2013?
Last year California added 410,418 jobs, an increase of 2.8 percent over 2012, significantly better than the 1.8 percent national increase in jobs. ...

Friday, July 18, 2014

Stiglitz Interview

Joseph Stiglitz Hails New BRICS Bank Challenging U.S.-Dominated World Bank & IMF

Transcript - Part 1

Joseph Stiglitz on TPP, Cracking Down on Corporate Tax Dodgers

Transcript - Part 2

Wednesday, July 16, 2014

'Double Irish Dutch Sandwich'

Tim Taylor:

Double Irish Dutch Sandwich: Want a glimpse of how companies can shift their profits among countries in a way that reduces their tax liabilities? Here's the dreaded "Double Irish Dutch Sandwich" as described by the International Monetary Find in its October 2013 Fiscal Monitor. This schematic to show the flows of goods and services, payments, and intellectual property. An explanation from the IMF follows, with a few of my own thoughts. ...

Monday, June 30, 2014

Paul Krugman: Charlatans, Cranks and Kansas

"The enduring power of bad ideas":

Charlatans, Cranks and Kansas, by Paul Krugman, Commentary, NY Times: Two years ago Kansas embarked on a remarkable fiscal experiment: It sharply slashed income taxes without any clear idea of what would replace the lost revenue. Sam Brownback, the governor, proposed the legislation — in percentage terms, the largest tax cut in one year any state has ever enacted — in close consultation with the economist Arthur Laffer. And Mr. Brownback predicted that the cuts would jump-start an economic boom...
But Kansas isn’t booming — in fact, its economy is lagging both neighboring states and America as a whole. Meanwhile, the state’s budget has plunged deep into deficit, provoking a Moody’s downgrade of its debt.
There’s an important lesson here — but it’s not what you think. Yes, the Kansas debacle shows that tax cuts don’t have magical powers, but we already knew that. The real lesson from Kansas is the enduring power of bad ideas, as long as those ideas serve the interests of the right people. ...
For the Brownback tax cuts didn’t emerge out of thin air. They closely followed a blueprint laid out by the American Legislative Exchange Council, or ALEC, which has also supported a series of economic studies purporting to show that tax cuts for corporations and the wealthy will promote rapid economic growth. The studies are embarrassingly bad, and the council’s Board of Scholars — which includes both Mr. Laffer and Stephen Moore of the Heritage Foundation — doesn’t exactly shout credibility. ...
And what is ALEC? It’s a secretive group, financed by major corporations, that drafts model legislation for conservative state-level politicians.... And most of ALEC’s efforts are directed, not surprisingly, at privatization, deregulation, and tax cuts for corporations and the wealthy.
And I do mean for the wealthy. ...ALEC supports ... cutting taxes at the top while actually increasing taxes at the bottom, as well as cutting social services.
But how can you justify enriching the already wealthy while making life harder for those struggling to get by? The answer is, you need an economic theory claiming that such a policy is the key to prosperity for all. So supply-side economics fills a need backed by lots of money, and the fact that it keeps failing doesn’t matter.
And the Kansas debacle won’t matter either. Oh, it will briefly give states considering similar policies pause. But the effect won’t last long, because faith in tax-cut magic isn’t about evidence; it’s about finding reasons to give powerful interests what they want.

Friday, April 25, 2014

Paul Krugman: The Piketty Panic

Money talks, but sometimes not very coherently:

The Piketty Panic, by Paul Krugman, Commentary, NY Times: “Capital in the Twenty-First Century,” the new book by ... Thomas Piketty, is ... serious, discourse-changing scholarship... And conservatives are terrified. ...
The really striking thing about the debate so far is that the right seems unable to mount any kind of substantive counterattack... Instead, the response has been all about name-calling — ...that Mr. Piketty is a Marxist...
For the past couple of decades, the conservative response to attempts to make soaring incomes at the top into a political issue has involved two lines of defense: first, denial that the rich are actually doing as well and the rest as badly as they are, but when denial fails, claims that those soaring incomes at the top are a justified reward for services rendered. Don’t call them the 1 percent, or the wealthy; call them “job creators.”
But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increasingly not from enterprise but from inheritance?
What Mr. Piketty shows is that these are not idle questions. Western societies before World War I were indeed dominated by an oligarchy of inherited wealth — and his book makes a compelling case that we’re well on our way back toward that state.
So what’s a conservative, fearing that this diagnosis might be used to justify higher taxes on the wealthy, to do? He could try to refute Mr. Piketty in a substantive way, but, so far, I’ve seen no sign of that happening. Instead, as I said, it has been all about name-calling..., to ... denounce Mr. Piketty as a Marxist..., which only makes sense if the mere mention of unequal wealth makes you a Marxist. ...
And The Wall Street Journal’s review, predictably, goes the whole distance, somehow segueing from Mr. Piketty’s call for progressive taxation as a way to limit the concentration of wealth ... to the evils of Stalinism. ...
Now, the fact that apologists for America’s oligarchs are evidently at a loss for coherent arguments doesn’t mean that they are on the run politically. Money still talks — indeed, thanks in part to the Roberts court, it talks louder than ever. Still, ideas matter too, shaping both how we talk about society and, eventually, what we do. And the Piketty panic shows that the right has run out of ideas.

Saturday, April 12, 2014

'Better Insurance Against Inequality'

Robert Shiller:

Better Insurance Against Inequality: Paying taxes is rarely pleasant, but as April 15 approaches it’s worth remembering that our tax system is a progressive one and serves a little-noticed but crucial purpose: It mitigates some of the worst consequences of income inequality. ...
But it’s also clear that ... what we have isn’t nearly enough. It’s time — past time, actually — to tweak the system so that it can respond effectively if income inequality becomes more extreme. ...
In testimony before the Senate Finance Committee last month, [Leonard] Burman proposed a version of inequality indexing that might be politically acceptable... His idea was to integrate inequality indexing with inflation indexing: Instead of just linking tax brackets to inflation..., he proposed that ... if inequality worsened, higher tax brackets would bear a bit more of the burden, and people at the bottom would bear less.
A relatively minor change like this should be politically acceptable. It is a reframing of inflation indexing, which is already a sacrosanct principle, and would be revenue-neutral. ... Such a plan would be a nice first step toward making our tax system manage the risk of future increases in inequality.

I'm a bit more doubtful than he is about the political acceptability of this proposal so long as the GOP is in a position to block any movement in this direction.

Tuesday, April 01, 2014

'High Speed Trading and Slow-Witted Economic Policy'

Busy morning, so I will take advantage of the Creative Commons license and do a quick post. This is from Dean Baker:

High Speed Trading and Slow-Witted Economic Policy, by Dean Baker: Michael Lewis' new book, Flash Boys, is leading to large amounts of discussion both on and off the business pages. The basic story is that a new breed of traders can use sophisticated algorithms and super fast computers to effectively front-run trades. This allows them to make large amounts of money by essentially skimming off the margins. By selling ahead of a big trade, they will push down the price that trader receives for their stock by a fraction of a percent. Similarly, by buying ahead of a big trade, they will also raise the price paid for that trade by a fraction of a percent. Since these trades are essentially a sure bet (they know that a big sell order or a big buy order is coming), the profits can be enormous.
This book is seeming to prompt outrage, although it is not clear exactly why. The basic story of high frequency trading is not new. It has been reported in most major news outlets over the last few years. It would be nice if we could move beyond the outrage to a serious discussion of the policy issues and ideally some simple and reasonable policy to address the issue. (Yes, simple should be front and center. If it's complicated we will be employing people in pointless exercises -- perhaps a good job program, but bad from the standpoint of effective policy.)
The issue here is that people are earning large amounts of money by using sophisticated computers to beat the market. This is effectively a form of insider trading. Pure insider trading, for example trading based on the CEO giving advance knowledge of better than expected profits, is illegal. The reason is that it rewards people for doing nothing productive at the expense of honest investors.
On the other hand, there are people who make large amounts of money by doing good research to get ahead of the market. For example, many analysts may carefully study weather patterns to get an estimate of the size of the wheat crop and then either buy or sell wheat based on what they have learned about the about this year's crop relative to the generally held view. In principle, we can view the rewards for this activity as being warranted since they are effectively providing information to the market with the their trades. If they recognize an abundant wheat crop will lead to lower prices, their sales of wheat will cause the price to fall before it would otherwise, thereby allowing the markets to adjust more quickly. The gains to the economy may not in all cases be equal to the private gains to these traders, but at least they are providing some service.
By contrast, the front-running high speed trader, like the inside trader, is providing no information to the market. They are causing the price of stocks to adjust milliseconds more quickly than would otherwise be the case. It is implausible that this can provide any benefit to the economy. This is simply siphoning off money at the expense of other actors in the market.
There are many complicated ways to try to address this problem, but there is one simple method that would virtually destroy the practice. A modest tax on financial transactions would make this sort of rapid trading unprofitable since it depends on extremely small margins. A bill proposed by Senator Tom Harkin and Representative Peter DeFazio would impose a 0.03 percent tax on all trades of stocks, bonds, and derivatives. This would quickly wipe out the high-frequency trading industry while having a trivial impact on normal investors. (Most research indicates that other investors will reduce their trading roughly in proportion to the increase in the cost per trade, leaving their total trading costs unchanged.)The Joint Tax Committee projected that this tax would raise roughly $400 billion over a decade.
A scaled tax that imposed a somewhat higher fee on stock trades and lower fee on short-term assets like options could be even more effective. Japan had a such tax in place in the 1980s and early 1990s. It raised more than 1 percent of GDP ($170 billion a year in the United States). Representative Keith Ellison has proposed this sort of tax for the United States.
If the political system were not so corrupt, such taxes would be near the top of the policy agenda. Even the International Monetary Fund has complained that the financial sector is under-taxed. However, because of the money and power of the industry the leadership of both political parties will run away from imposing any tax on the financial industry. In fact Treasury Secretary Jack Lew has been working to torpedo the imposition of such a tax in Europe. So look for lots of handwringing and outrage in response to Lewis' book. And look also for nothing real to be done. 

Saturday, November 02, 2013

'In New York Casino Vote, a Dance With Temptation'

Robert Frank:

In New York Casino Vote, a Dance With Temptation, by Robert Frank, Commentary, NY Times: In the 48 states that permit at least some form of commercial gambling, lively debate continues over the industry’s relentless efforts to expand. On Tuesday, New Yorkers will vote on a proposed constitutional amendment that would permit up to seven new full-scale gambling casinos in the state. (The state’s five existing casinos are confined to Indian reservations.)
Gov. Andrew M. Cuomo argues that the amendment would create jobs, increase school aid and lower property taxes. And, yes, it would do all those things. But it’s still a bad idea. Other strategies would accomplish the same goals more effectively, without the disastrous spillovers that invariably accompany expanded gambling. ...
If casino gambling were expanded, most New Yorkers wouldn’t be directly affected. Even in places that already have it, only a small proportion of people become problem gamblers. But much the same could be said of crack cocaine. If it were legal, most people wouldn’t even use it, much less become addicted to it. But in both cases, the number who would become addicted, though small in proportional terms, would be disturbing. If governments shouldn’t raise revenue by sharing revenue with sellers of crack cocaine, why should they enter similar pacts with casino operators? ...

Thursday, October 24, 2013

'Why the 1% Should Pay Tax at 80%'

Emmanuel Saez and Thomas Piketty:

Why the 1% should pay tax at 80%, by Emmanuel Saez and Thomas Piketty,  theguardian.com: In the United States, the share of total pre-tax income accruing to the top 1% has more than doubled, from less than 10% in the 1970s to over 20% today (pdf). A similar pattern is true of other English-speaking countries..., however, globalization and new technologies are not to blame. Other OECD countries ... have seen far less concentration of income among the mega rich.
At the same time, top income tax rates on upper income earners have declined significantly since the 1970s... At a time when most OECD countries face large deficits and debt burdens, a crucial public policy question is whether governments should tax high earners more. The potential tax revenue at stake is now very large. ...
There is a strong correlation between the reductions in top tax rates and the increases in top 1% pre-tax income shares...
The ... data show that there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s. ... What that tells us is that a substantial fraction of the response of pre-tax top incomes to top tax rates may be due to increased rent-seeking at the top (that is, scenario three), rather than increased productive effort....
By our calculations about the response of top earners to top tax rate cuts being due in part to increased rent-seeking behavior and in part to increased productive work, we find that the top tax rate could potentially be set as high as 83% (as opposed to the 57% allowed by the pure supply-side model). ...
In the end, the future of top tax rates depends on what the public believes about whether top pay fairly reflects productivity or whether top pay, rather unfairly, arises from rent-seeking. With higher income concentration, top earners have more economic resources to influence both social beliefs (through thinktanks and media) and policies (through lobbying)...
The job of economists should be to make a top rate tax level of 80% at least "thinkable" again.

Tuesday, October 15, 2013

'The GOP Tax'

Paul Krugman:

The GOP Tax: Macroeconomic Advisers has a new report out about the effects of bad fiscal policy since 2010 — that is, since the GOP takeover of the House. ... They say that combined effects of uncertainty in the bond market and cuts in discretionary spending have subtracted 1% from GDP growth. That’s not 1% off GDP — it’s the annualized rate of growth, so that we’re talking about almost 3% of GDP at this point; cumulatively, the losses come to around $700 billion of wasted economic potential. This is in the same ballpark as my own estimates.
And they also estimate that the current unemployment rate is 1.4 points higher than it would have been without those policies (a number consistent with almost 3% lower GDP); so, we’d have unemployment below 6% if not for these people.
Great work all around, guys.

But the master's of the universe -- the wealthy supporters of the GOP and a driving force behind the push for austerity -- are doing great. If they get lower taxes as a result of all this, that's allthat matter, right? Who cares about all the other people who are struggling as a result of cuts to social services, higher unemployment rates, and the like?

Saturday, August 17, 2013

Manski: Removing Deadweight Loss from Economic Discourse on Income Taxation and Public Spending

Another quick one:

Removing deadweight loss from economic discourse on income taxation and public spending, by Charles F Manski, Vox EU: Economists usually think of taxation as inefficient. This column argues that the anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Optimal income taxation doesn’t have to employ the pejorative concepts of inefficiency, deadweight loss and distortion; and this column argues that it is high time for economists to discard them and make analysis of taxation and public spending distortion-free.

Column here.

Friday, July 19, 2013

'Laffer Wants to Raise At Least One Tax'

Pro-Growth-Liberal:

Laffer Wants to Raise At Least One Tax: Art Laffer along with Donna Arduin released some fantasy called Pro-Growth Tax Reform and E-Fairness that claims that if we would tax Internet sales then we could have a huge increase in output and employment by 2022 if we used the extra sales taxes to reduce income taxes:

Gross domestic product would grow by more than $563 billion, creating 1.5 million jobs nationwide.

I just read what Laffer and Donna Arduin wrote and there really isn’t much there to support this conclusion. They note that after 1999, real GDP growth fell far short of the 3.5% per annum growth rates we enjoyed for much of the latter half of the 20th century. Then again – didn’t we try lower tax rates starting in 2001? How did that work out? A lot of conservatives seem to love this idea and why not. Sales taxes tend to be regressive while income taxes tend to be progressive. A switch from income taxation to sales taxation fits the bill if one wants a more regressive tax system. But to claim that this would lead to some magical surge in economic growth rates is a real Laugher.

Tuesday, June 11, 2013

Blinder: Fiscal Fixes for the Jobless Recovery

Alan Blinder says "the fiscal cupboard is not bare":

Fiscal Fixes for the Jobless Recovery, by Alan Blinder, Commentary, WSJ: Do you sense an air of complacency developing about jobs in Washington and in the media? ... The Brookings Institution's Hamilton Project ... estimates ... the "jobs gap" ... is 9.9 million jobs. ... So any complacency is misguided. Rather, policy makers should be running around like their hair is on fire. ...
The Federal Reserve has worked overtime to spur job creation, and there is not much more it can do. Fiscal policy, however, has been worse than AWOL—it has been actively destroying jobs. ... So Congress could make a good start on faster job creation simply by ending what it's doing—destroying government jobs. First, do no harm. But there's more.
Virtually since the Great Recession began, many economists have suggested offering businesses a tax credit for creating new jobs. ... You might imagine that Republicans would embrace an idea like that. After all, it's a business tax cut... But you would be wrong. Maybe it's because President Obama likes the idea. Maybe he should start saying he hates it.
Another sort of business tax cut may hold more political promise. ... Suppose Congress enacted a partial tax holiday that allowed companies to repatriate profits held abroad at some bargain-basement tax rate like 10%. The catch: The maximum amount each company could bring home at that low tax rate would equal the increase in its wage payments as measured by Social Security records....
My general point is that the fiscal cupboard is not bare. There are things we could be doing to boost employment right now. That we are not doing anything constitutes malign neglect of the nation's worst economic problem

Wednesday, May 29, 2013

'The Real IRS Scandal'

Linda Beale:

The Real IRS Scandal, ataxingmatter: ... It does not appear to be quite so clear that the IRS actions were either "outrageous" (as so many hopping on the IRS "scandal" bandwagon suggest) or even "inappropriate". ...

Most of the media--which is generally right of center--has foamed at the mouth over the "scandal", puffing it up to bigger and bigger proportions with each day. ... A great deal of that coverage (much of it from the right) involves super emphasis on the word "scandal" and not much emphasis on the underlying facts of the matter.

So kudos to the New York Times for a recent story on the issue that probes the question of politicking much more closely. Confessore & Luo, Groups Targeted by IRS Tested Rules on Politics, New York Times (May 26, 2013). See also Barker & Elliot, 6 things you need to know about dark money groups, Salon.com (May 27, 2013).

Here are the Times writers' descriptions of a few of the groups that applied for C-4 status and "cried foul" about the IRS's selection of them for closer scrutiny for politicking:

  • CVFC: "its biggest expenditure [the year it applied for C-4 status] was several thousand dollars in radio ads backing a Republican candidate for Congress"
  • Wetumpka Tea Party, Alabama: in the year it applied, it "sponsored training for a get-out-the-vote initiative dedicated to the 'defeat of President Barack Obama' "
  • Ohio Liberty Coalition: its head "sent out e-mails to members about Mitt Romney campaign events and organized members to distribute Mr. Romney’s presidential campaign literature"

As noted in the report, "a close examination of these groups and others reveals an array of election activities that tax experts and former I.R.S. officials said would provide a legitimate basis for flagging them for closer review." That is what the IRS is supposed to do, suggesting that much of the scandal mongering that is going on is more about furthering the anti-tax/anti-government rightwing goal of "starving the beast" than it is about ensuring that the law is appropriately enforced. The stakes are high, since the ability of politicking groups to use C-4 status permits high-powered donors and strategists to cloak their campaign activities behind the veneer of social welfare activity.

Which is probably why of the right-wing bloviators are bloviating over this in Congress, calling for jail time for IRS employees, calling for a special prosecutor, insisting that this is a "scandal" along the lines of Watergate that goes to the heart of Obama's presidency. Hogwash, folks, pure and simple. This so-called "scandal" is just another instance of right-wing obstructionism that is willing to sacrifice good government for maintaining or increasing political power.

Monday, May 27, 2013

Stiglitz: Globalization and Taxes

Joe Stiglitz on tax avoidance by companies such as Apple and Google:

Globalisation isn't just about profits. It's about taxes too: ... Apple, like Google, has benefited enormously from what the US and other western governments provide: highly educated workers trained in universities that are supported both directly by government and indirectly (through generous charitable deductions). The basic research on which their products rest was paid for by taxpayer-supported developments – the internet, without which they couldn't exist. Their prosperity depends in part on our legal system – including strong enforcement of intellectual property rights; they asked (and got) government to force countries around the world to adopt our standards, in some cases, at great costs to the lives and development of those in emerging markets and developing countries. Yes, they brought genius and organizational skills, for which they justly receive kudos. But while Newton was at least modest enough to note that he stood on the shoulders of giants, these titans of industry have no compunction about being free riders, taking generously from the benefits afforded by our system, but not willing to contribute commensurately. Without public support, the wellspring from which future innovation and growth will come will dry up – not to say what will happen to our increasingly divided society. ...
To say that Apple or Google simply took advantage of the current system is to let them off the hook too easily: the system didn't just come into being on its own. It was shaped from the start by lobbyists from large multinationals. Companies like General Electric lobbied for, and got, provisions that enabled them to avoid even more taxes. They lobbied for, and got, amnesty provisions that allowed them to bring their money back to the US at a special low rate, on the promise that the money would be invested in the country; and then they figured out how to comply with the letter of the law, while avoiding the spirit and intention. If Apple and Google stand for the opportunities afforded by globalization, their attitudes towards tax avoidance have made them emblematic of what can, and is, going wrong with that system.

Much more here.

Wednesday, May 15, 2013

'How Are American Workers Dealing with the Payroll Tax Hike?'

Basit Zafar, Max Livingston, and Wilbert van der Klaauw examine the impact of the payroll tax cut in 2011 and 2012, and its subsequent reversal:

My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike?, by Basit Zafar, Max Livingston, and Wilbert van der Klaauw, Liberty Street Economics, NY Fed: The payroll tax cut, which was in place during all of 2011 and 2012, reduced Social Security and Medicare taxes withheld from workers’ paychecks by 2 percent. This tax cut affected nearly 155 million workers in the United States, and put an additional $1,000 a year in the pocket of an average household earning $50,000. As part of the “fiscal cliff” negotiations, Congress allowed the 2011-12 payroll tax cut to expire at the end of 2012, and the higher income that workers had grown accustomed to was gone. In this post, we explore the implications of the payroll tax increase for U.S. workers.
The impact of such a tax hike depends on two factors. One, how did U.S. workers use the extra funds in their paychecks over the last two years? And two, how do workers plan to respond to shrinking paychecks? With regard to the first factor, in a recent working paper and an earlier blog post, we present survey evidence showing that the tax cut significantly boosted consumer spending, with workers reporting that they spent an average of 36 percent of the additional funds from the tax cut. This spending rate is at the higher end of the estimates of how much people have spent out of other tax cuts over the last decade, and is arguably a consequence of how the tax cut was designed—with disaggregated additions to workers’ paychecks instead of a one-time lump-sum transfer. We also found that workers used nearly 40 percent of the tax cut funds to pay down debt.
To understand how the tax increase is affecting U.S. consumers, we conducted an online survey in February 2013. We surveyed 370 individuals through the RAND Corporation’s American Life Panel, 305 of whom were working at the time and had also worked at least part of 2012. ...

After a presentation of the survey results, and a discussion of what they mean, the authors conclude:

Overall, our analysis suggests that the payroll tax cut during 2011-12 led to a substantial increase in consumer spending and facilitated the consumer deleveraging process. Based on consumers’ responses to our recent survey, expiration of the tax cuts is likely to lead to a substantial reduction in spending as well as contribute to a slowdown or possibly a reversal in the paydown of consumer debt. These effects are also likely to be heterogeneous, with groups that are more credit and liquidity constrained more likely to be adversely affected. Such nuances may be lost in the aggregate macroeconomic statistics, but they’re important for policymakers to consider as they debate fiscal policy.

In response to arguments that tax cuts wouldn't help because they would be mostly saved, I have argued that there are two ways that tax cuts can help (see Why I Changed My Mind about Tax Cuts). One is to increase spending, and the other is to help households restore household balance sheets that were demolished in the downturn (i.e. the cure for a "balance sheet recession"). The sooner this "deleveraging process" is complete, the sooner the return to normal levels of consumption and the faster the exit from the recession (rebuilding household balance sheets takes a long time and this is one of the reasons the recovery from this type of recession is so slow, tax cuts that are used to reduce debt can help this prcess along). It looks like both effects are present for payroll tax changes (and work in the wrong way with a payroll tax increase).

Tuesday, May 14, 2013

'Why Should Any Of These Groups Have Tax-Exempt Status?'

Jared Bernstein:

Why Should Any Of These Groups Have Tax-Exempt Status?: Nope, I’m not going to defend the IRS, which appears to have acted in ways wholly inconsistent with their mandate for unbiased investigations into, in this case, whether certain political groups should receive tax-exempt status. It is unclear how high up the chain of command these untoward actions went, but this morning’s news suggests it wasn’t just a few rogue auditors in Cincinnati. ...
Republicans will of course try to pin this on the President, despite the fact that since Nixon used the IRS to target his enemies, the president’s been barred from even discussing this kind of thing with the agency.
No, the problem here isn’t the president. It’s the Supreme Court’s Citizen United decision and subsequent tax law written by Congress that gives these groups tax exempt status (under rule 501(c)(4)) as long as most of their activities are primarily on educating the public about policy issues, not direct campaigning.
Of course, the ambiguities therein are insurmountable. Many of these groups, especially the big ones, spend millions on campaign ads mildly disguised as “issue ads,” and under current law they can do so limitlessly and with impunity. ...
Weirdly, the IRS hasn’t seemed particularly interested in going after the big fish here, like Rove’s Crossroads GPS on the right or Priorities USA on the left. Instead, they appear to have systematically targeted small fry on the far right. If so, not only is that clearly biased and unacceptable—it’s also ridiculous given the magnitude of the violations of tax exempt status by these small groups relative to the big ones.
At the end of the day, we should really ask ourselves what societal purpose is being served here by carving out special tax status for any of these groups. If anyone can show me any evidence that the revenue forgone is well spent, that these groups are making our political system and our country better off, please do so. If not, then no one’s saying shut them down—they’ve got a right to speak their minds. But not tax free.

Tuesday, April 16, 2013

'A Tax System Stacked Against the 99 Percent'

Except for the dust-up (cyclone?) over the Reinhart and Rogoff results on debt and growth, it's a bit of a slow day and I need to get to a meeting. So, reaching back a few days for a quick post, Joseph Stiglitz does not "eschew the word 'fair'":

A Tax System Stacked Against the 99 Percent, by Joe Stiglitz, Commentary, NY Times: ...About 6 in 10 of us believe that the tax system is unfair — and they’re right: put simply, the very rich don’t pay their fair share. The richest 400 individual taxpayers, with an average income of more than $200 million, pay less than 20 percent of their income in taxes — far lower than mere millionaires, who pay about 25 percent..., and about the same as those earning a mere $200,000 to $500,000. And in 2009, 116 of the top 400 earners — almost a third — paid less than 15 percent of their income in taxes.
Conservatives like to point out that the richest Americans’ tax payments make up a large portion of total receipts. ... Citizens for Tax Justice, an organization that advocates for a more progressive tax system, has estimated that, when federal, state and local taxes are taken into account, the top 1 percent paid only slightly more than 20 percent of all American taxes in 2010 — about the same as the share of income they took home, an outcome that is not progressive at all.
With such low effective tax rates — and, importantly, the low tax rate of 20 percent on income from capital gains — it’s not a huge surprise that the share of income going to the top 1 percent has doubled since 1979, and that the share going to the top 0.1 percent has almost tripled...
Over the years, some of the wealthy have been enormously successful in getting special treatment, shifting an ever greater share of the burden of financing the country’s expenditures — defense, education, social programs — onto others. ...
Economists often eschew the word “fair” — fairness, like beauty, is in the eye of the beholder. But the unfairness of the American tax system has gotten so great that it’s dishonest to apply any other label to it. ...
Society can’t function well without a minimal sense of national solidarity and cohesion, and that sense of shared purpose also rests on a fair tax system. If Americans believe that government is unfair — that ours is a government of the 1 percent, for the 1 percent, and by the 1 percent — then faith in our democracy will surely perish.

So, if we face a choice between cutting programs the middle class relies upon, and making the tax system more progressive, we should... It's not hard to guess my answer.

[The original is much, much longer.]

Monday, April 15, 2013

Why are Republicans Suddenly So Worried about the Elderly and the Working Class?

When conservatives face a choice of cutting Social Security -- something they have long sought -- in return for an increase in taxes, they suddenly become friends of the elderly and the working class. But what is really behind their newfound fondness for the vulnerable?

This is from an article from Andrew Biggs, "resident scholar at the American Enterprise Institute and former principal deputy commissioner of the Social Security Administration," appearing at the NRO:

The Chained CPI: A Bad Deal All Around, by Andrew Biggs, NRO: The Chain-Weighted Consumer Price Index (or chained CPI, for short), which President Obama included as part of his formal budget proposal, seems like a no-brainer for any White House–GOP grand bargain on the budget deficit. After all, the chained CPI ... would reduce entitlement spending and increase tax revenues by a combined $340 billion over ten years, providing something for both sides to like and dislike. Yet ... the chained CPI is bad policy that both liberals and conservatives may come to regret. ...
In Social Security, the chained CPI would replace the CPI-W (intended for urban wage-earners and clerical workers) in calculating annual cost-of-living adjustments (COLAs). Once fully implemented, lower COLAs would reduce a retiree’s average lifetime benefits by around 4 percent, cutting Social Security’s long-term shortfall by around one quarter.
Yet while Social Security does need to be fixed, and lower benefits for middle and high earners should be a part of the equation, smaller COLAs weaken a feature of Social Security that actually works: The program’s generous inflation adjustment counteracts the absence of inflation adjustment in private pensions. And unlike most reforms, which reduce benefits progressively ... COLA reductions fall hardest on the oldest beneficiaries, who are most at risk of poverty. An 85-year-old is 66 percent more likely to be in poverty than a 65-year-old, but the chained CPI will cut the 65-year-old’s by only 1 percent and the 85-year-old’s benefits by 8 percent... Moreover, the chained CPI, like CPI-W, doesn’t account for the fact that older retirees spend disproportionately on health care, a sector in which inflation is particularly high.

[Note: The article and supporters of this policy say the chained CPI is a better measure of inflation, and that may be true for some groups, but the last sentence shows that it is not a better measure of inflation for the elderly.] I don't disagree with the arguments above about who would be hurt, and that we should protect the most vulnerable -- I think we should raise the payroll tax cap rather than cutting benefits -- it's just strange to see them made at the NRO (the Obama administration's proposal includes a call to protect older retirees from the changes noted above, and it's not surprising to see this omitted from the discussion -- it undercuts the GOP's attempt to position itself as defending older retirees against a Democratic proposal). Continuing:

A better policy would peg COLAs to wage growth, which is around 1 percentage point faster than inflation, coupled with a lower initial retirement-benefit level to keep lifetime receipts the same. The lower starting benefit would dissuade workers from retiring too early. Higher benefits later in life would focus resources where the danger of poverty is greatest, as well as compensating for the fact that most non–Social Security sources of retirement income aren’t inflation-indexed at all. ...

Again, I'd raise the payroll tax cap first, but let's move on to the tax argument. As you read this, remember all the complaints from Republicans during the presidential election about middle and lower income households not paying their share of federal taxes, about how they take too much and give too little relative to the "burdens" on the wealthy:

If adopting the chained CPI for Social Security would be misguided, applying it to the income-tax code would be even worse. ...
Republicans would surely oppose such an increase if they understood it. Making matters worse, the largest rate increases will be on low- and middle-income households. The Congressional Joint Committee on Taxation projects that in 2021, 69 percent of the gains in revenue would come from taxpayers with incomes below $100,000, though they pay only 28 percent of total income taxes. Individuals in the highest income brackets would be left essentially untouched... Conservative reformers such as National Review’s Ramesh Ponnuru are pushing for a tax code that’s friendlier to families and middle-income earners. The chained CPI is hard to fit into that narrative. ...
It’s hard to see how chained CPI can be a win for conservatives..., why should Republicans take the rap for a measure that weakens Social Security for the least well-off and institutes a large and regressive tax increase? ...

I don't find it hard at all to imagine Republicans supporting regressive tax changes (see their past policies) and weakening Social Security (ditto). The real goal for Republicans, of course, is to prevent tax increases of any type. If they give in anywhere, it might help with arguments that taxes on the wealthy must go up, and that cannot happen. The puzzle is why Obama would put forth a measure that allows Republicans to position themselves as defending the elderly and the working class as they pursue their real goal of keeping taxes from increasing. I guess he thought it wouldn't really happen, that Republicans would end up looking like unreasonable obstructionists on the tax issue, and that the press would all of a sudden turn on them as a result of their intransigence, but it wasn't hard to see this coming:

So what’s this about? The answer, I fear, is that Obama is still trying to win over the Serious People, by showing that he’s willing to do what they consider Serious — which just about always means sticking it to the poor and the middle class. The idea is that they will finally drop the false equivalence, and admit that he’s reasonable while the GOP is mean-spirited and crazy.
But it won’t happen. ... Oh, and wanna bet that Republicans soon start running ads saying that Obama wants to cut your Social Security?

Anyone else getting tired of relying upon Republican intransigence to defend Social Security and Medicare from Obama's Grand Bargains that are intended to appease the "Serious People" that cannot be appeased?

Saturday, April 06, 2013

'What Happens When Top Income Earners Receive Smaller Subsidies for Retirement Savings?'

Greg Mankiw complains that rich people (like him presumably) will stop saving so much if there is "some kind of penalty for people who have accumulated more than $3 million in retirement accounts" in the president's budget:

The President's Latest Bad Idea

His big complaint? "President Obama's $3 million constraint would be a significant disincentive for saving."

Here's something to consider via Owen Zidar:

What happens when top income earners receive smaller subsidies for retirement savings?: Raj ChettyJohn N. FriedmanSoren Leth-PetersenTorben Heien Nielsen, and Tore Olsen ask this question and answer it here.

When individuals in the top income tax bracket received a smaller tax subsidy for retirement savings, they started saving less in retirement accounts….. but the same individuals increased the amount they were saving outside retirement accounts by almost exactly the same amount, leaving total savings essentially unchanged. We estimate that each $1 of government expenditure on the subsidy raised total savings by 1 cent.

...

I saw this paper presented at an NBER meeting at the SF Fed. It is very impressive work. I'm surprised Greg is unaware of it.

Sunday, March 17, 2013

Clawing Back 'Free Stuff for the Wealthy'

Conservatives are still blaming their loss in the presidential election on "giving away free stuff":

Today on CNN, president of the American Conservative Union Al Cardenas offered an explanation for conservatives’ defeat in November: They weren’t giving away free stuff. He said, “plenty of people have asked me what happened after the 2012 election. . . . Well, look, we were selling broccoli to 70 percent of the American electorate, and they were giving away cheesecake to 100 percent of the electorate.”

They call most everyone who isn't white and rich moochers, and then whine about losing.

But who are the real recipients of income they did not earn? Over the last several decades, almost all of the gains from economic growth have gone to the top. Income flowing to lower income levels has not kept up with changes in worker productivity, and that means members of some group -- guess which one -- received income that exceeds their productivity growth, i.e. in excess of their contribution to national output.

Clawing some of that income back through taxes or other means is far from mooching. In fact, it supports a core conservative idea, making sure that people receive the income that they've earned (or, the flip-side which is being pitched above -- please excuse the double negative -- the conservative obsession with making sure that people don't get income they do not deserve).

Wednesday, March 13, 2013

Huge Flight of Rich after French Tax Hikes? Nope.

Via the Tax Justice Network:

Financial Times finds evidence of huge flight of rich after French tax hikes: . . . or at least that's what seems to be suggested in an article entitled "Top executives join France exodus." ...
"Exodus" is a pretty big word. Now let's see. What does the article actually say?
"Two senior executives at Moët Hennessy, the champagne and cognac arm of the LVMH luxury group, are moving to London from Paris."
That's your exodus, right there. But it does, admittedly, come with a qualification, a bit lower down in the article: LVMH told the Financial Times that their moves were "not because of tax reasons." ...
In a population of 65 million we have one confirmed departure, one effort to leave... We see kind of story this again and again: hyperventilating threats from a country's wealthiest citizens that they will depart in droves if they have to pay higher taxes - yet when their bluff is called they fail to act - but still keep on grousing and issuing the threats. It's tiresome. ...
So much for the rhetoric. What does the evidence from the real world tell us about the migration patterns of the wealthy, in response to tax rates?
One of the best testing grounds for the 'tax migration' theory is among individual states in the United States, which each levy variable state taxes ... and where cross-state migration is far easier than moving, say, to a different country...
And here the evidence is unambiguous. Take this Stanford paper, for instance, which finds 'negligible' effects from a large state tax hike in New Jersey. Or this ITEP paper entitled "Where Have All of Maryland’s Millionaires Gone?... Or this, on New York, or this, on Oregon. (From those links, get a load of that repeated Wall Street Journal hyper-ventilation, in the face of all the evidence). More generally, take a look at Citizens for Tax Justice's Evidence Continues to Mount: State Taxes Don't Cause Rich to Flee...: the evidence is simply incontrovertible. For a more hilarious British example, take a look at this delicious Tax Research skewering of a ridiculous recent story in the Telegraph newspaper, headlined Two-thirds of millionaires disappeared from official statistics to avoid 50p tax rate.
The Telegraph followed this up five days ago with an article headlined Almost a quarter of millionaires want to quit Britain. (Yes, that's how cheap talk is. Let's now watch and look-see if almost a quarter of Britain's millionaires do leave, shall we?)
And where, pray, do these British millionaires want to go? Well, according to ... this story, the top destinations are: Australia, the U.S. and Canada, and . . . yes, France.

Saturday, March 02, 2013

Is This a Battle of Philosophy?

One more quick one, then I'd better hit the road: Dean Baker explains how you can tell if Republicans (a) are philosophically inclined toward a smaller government, or (b) rent-seekers on behalf of the wealthier members of society:

The Philosopher Politicians Reappear at the New York Times, by Dean Baker: ..."At bottom, it is the oldest philosophic battle of the American party system — pitting Democrats’ desire to use government to cushion market outcomes and equalize opportunity against Republicans’ desire to limit government and maximize individual liberty."
Really, this is a battle of philosophy?
Let's try an alternative explanation. Let's assume that Republicans answer to rich people who don't want to pay a dime more in taxes and would actually prefer to pay many dimes less. Let's imagine that these people are not stupid and that they understand completely what conservative economists like Greg Mankiw, Martin Feldstein and Alan Greenspan have been telling them for years, tax expenditures are a form of spending. In other words, if we give someone a housing subsidy of $5,000 a year by cutting their taxes by this amount if they buy a home, it is the same thing as if the government sends them a check that says "housing subsidy."
If we take the philosophy view of this debate then Republicans would be all for eliminating the tax expenditures that mostly go to line the pockets of rich people. On the other hand, if we think this is a debate about whose pockets get lined then Republicans who are opposed to spending would be opposed to eliminating tax expenditures for rich people. ...

A Conversation with Emmanuel Saez: Taxing away Inequality

Greg Mankiw's post today reminds me that I meant to post this interview with Emmanuel Saez on "taxing away inequality":

Taxing Away Inequality, Interview by David Grusky: David Grusky: In the thirteen years since you secured your PhD, there have been two big developments: first, your research on income inequality, especially its recent takeoff, has taken the world by storm. And, second, the national conversation about income inequality has completely shifted. In fact in the last presidential election it was one of the key topics. I would argue that those two developments are related in the sense that you’re the one, more than anyone else, who has brought about precisely that change in the national conversation.
That said, I suspect that there are some features of your work that you think have been misunderstood or, at the least, inadequately addressed in current debates about inequality. Could you talk a bit about this underappreciated side of your work?
Emmanuel Saez: I did this key work on income concentration in the United States with my colleague Thomas Piketty, and we were indeed quite surprised by how successful our research has been in the public debate. Initially this was really academic work building on the long tradition of the famous economist Simon Kuznets, who started the data series back in the 1950s. So we never approached it in a way that would necessarily be easy for the broader public and the press to use. We had to adjust over time to try to talk to the public and present our findings in a way that was the simplest, because we’ve discovered that to have an impact in the broader world, the way you present your research—the design, the framing—has a tremendous impact.
Naturally the public has focused mostly on the very recent period. But the key goal of our study was to show a very long perspective—a century long perspective—and to think about long-term changes rather than year-to-year changes. And I think there’s a lot to learn about how those long-term changes are related to policy making and government action.
DG: I’m prompted by your last point to suggest that another underappreciated feature of your work is that it delivers rather provocative hints about the causes of the increase in inequality. That is, it not only lays out the descriptive trajectory of income inequality, but also suggests what’s driving that descriptive trajectory.
We participated in a Boston Review debate on one account of the sources of the recent takeoff, namely the expansion of rent, where rent is understood as sweetheart deals, corruption, backdating stock option contracts—all sorts of pay-setting practices that permit those at the top to secure more than they would in a competitive market. On the basis of your research, do you think that rent is an important source of the recent growth in income inequality?
ES: If we define rent in terms of situations where pay doesn’t correspond to what economists call ‘marginal productivity’—that is, the economic contribution a person is providing—I would say yes, because the evolution of income concentration over time and across countries has a number of features that are inconsistent with the story where pay is everywhere equal to productivity. The changes in income concentration are just too abrupt and too closely correlated with policy developments for the standard story about pay equaling productivity to hold everywhere. That is, if pay is equal to productivity, you would think that deep economic changes in skills would evolve slowly and make a gradual difference in the distribution—but what we see in the data are very abrupt changes. Basically all western countries had very high levels of income concentration up to the first decades of the 20th century and then income concentration fell dramatically in most western countries following the historical narrative of each country. For example, in the United States the Great Depression followed by the New Deal and then World War II. And I could go on with other countries. Symmetrically, the reversal—that is, the surge in income concentration in some but not all countries—follows political developments closely. You see the highest increases in income concentration in countries such as the United States and the United Kingdom, following precisely what has been called the Reagan and Thatcher revolutions: deregulation, cuts in top tax rates, and policy changes that favored upper-income brackets. You don’t see nearly as much of an increase in income concentration in countries such as Japan, Germany, or France, which haven’t gone through such sharp, drastic policy changes. ...[continue]...

There's also, as Greg notes, a video:

Emmanuel Saez discusses income equality at Stanford’s Center for Ethics in Society. (Jan. 24, 2013)

Wednesday, February 27, 2013

'Republicans Must Bridge the Income Gap'

Sheila Bair:

Grand Old Parity, by Sheila Bair, Commentary, NY Times: ... I am a capitalist and a lifelong Republican. I believe that, in a meritocracy, some level of income inequality is both inevitable and desirable... But I fear that government actions, not merit, have fueled ... extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks that favor the rich.
This is not a situation that any freethinking Republican should accept. Skewing income toward the upper, upper class hurts our economy because the rich tend to sit on their money... But more fundamentally, it cuts against everything our country and my party stand for. Government’s role should not be to rig the game in favor of “the haves” but to make sure “the have-nots” are given a fair shot. ...
For instance, as part of renewed fiscal discussions over sequestration, Republicans should put fundamental tax reform on the table and make it our priority to end preferential treatment of investment income, which lets managers of hedge funds pay half the tax rate of managers of shoe stores. ... If we eliminate this and other unjustified tax breaks, we can produce enough new revenues to lower marginal rates and reduce the deficit...
Republicans should also put rebuilding the nation’s transportation and energy infrastructure high on our political agenda. ...
Having worked for Senate Republicans in the 1980s, I remember a time when Republicans stood up to special interests and purged the tax code of preferences for investment income and other special breaks. ...

Saturday, February 16, 2013

'The Myth of the Rich Who Flee From Taxes'

Do the wealthy move away when taxes are increased?:

The Myth of the Rich Who Flee From Taxes, by Mikhail Klimentyev, NYT: ... It’s an article of faith among low-tax advocates that income tax increases aimed at the rich simply drive them away..., and on its face, it seems to make sense. But it’s not the case. It turns out that a large majority of people move for far more compelling reasons, like jobs, the cost of housing, family ties or a warmer climate. At least three recent academic studies have demonstrated that the number of people who move for tax reasons is negligible, even among the wealthy. ...
Of course, some people do move for tax reasons, especially wealthy retirees, athletes and other celebrities without strong ties to high-tax locations, like jobs and families. ... But there aren’t many people like that. “Tax-induced flight is rare,” Professor Tannenwald said. ...
Yet the tax flight myth remains surprisingly persistent, fanned by media coverage of celebrities, who are among those most likely to have the means and motive to choose a home based on tax considerations. “You can always find an anecdote.” Mr. Shure said. “Many people want this to be true as a way to discourage tax increases. ...”
Another zombie.

Why Tax Rates Should be Progressive

What is the basis for progressive taxation? One principle of taxation (there are others) is "equal marginal sacrifice," i.e. that the last dollar in taxes paid by the rich and the poor should cause the same amount of pain. This is from Miles Corak:

... Alfred Marshall in his Principles of Economics, the most used economics textbook from the 1890s to the 1920s, not just in Cambridge England where he taught, but in the whole English-speaking world, wrote that:

A rich man in doubt whether to spend a shilling on a single cigar, is weighing against one another smaller pleasures than a poor man, who is doubting whether to spend a shilling on a supply of tobacco that will last him for a month. The clerk with £100 a-year will walk to business in a much heavier rain than the clerk with £300 a-year; for the cost of a ride by tram or omnibus measures a greater benefit to the poorer man than to the richer. If the poorer man spends the money, he will suffer more from the want of it afterwards than the richer would. The benefit that is measured in the poorer man’s mind by the cost is greater than that measured by it in the richer man’s mind.

In other words, losing a dollar when you already have many causes less pain than when you have only a few. Marshall’s argument is the basis for both the substance and the method of a good deal of basic micro-economics: it explains the “law of demand”—why lower prices induce people to buy more—but also why tax rates should rise with income.

Economists judge the functioning of the tax system in a number of ways: certainly the system should not be administratively cumbersome, and it should, to the greatest degree possible, not cause individuals in a well-functioning market to change their behavior. It should also treat equals equally. Finally, the tax system should raise more revenue where it will cause the least pain. And this last concern, when coupled with Marshall’s reasoning, suggests that tax rates should be progressive: as income increases, the greater the fraction that should be paid in taxes. ...

Thursday, February 14, 2013

The NRO is Against a Balance Budget Agreement. Can You Guess Why?

At first I thought wow, even the NRO has a sensible position on the balanced budget amendment -- it is opposed. But in the end it's mostly the same old stuff, the fear that it might interfere with tax cuts, spending cuts, etc:

Against a BBA, Again, by The Editors: Senate Republicans are again set to mount a fight for a balanced-budget amendment (BBA). ... The amendment would cap federal spending at 18 percent of GDP and require supermajorities for tax hikes and new borrowing.

First question. When income is growing and doubles every 30 years or so, as it does, wouldn't we want to spend more on social insurance? Who said 18 percent is the right amount at any time, let alone always and forever? Anyway, moving on:

Passage of a BBA is not just implausible; it also ... enshrines partisan policy priorities in the founding document of the republic, which was meant to structure the democratic process, not rig its outcome in advance.

I can agree with that, no reason to enshrine Republican dogma in the constitution, especially when it's this harmful. And I can agree with this too, the courts shouldn't be involved in setting fiscal policy:

It would invite a hyperactive judicial intervention in the budget-making process that would throw the separation of powers completely out of balance. ... This means the judiciary might well attempt to set specific levels for every category of spending or otherwise shape budget priorities in an effort to enforce the Constitution. Such a perversion of republican government would raise the stakes of inter-branch hostility and distrust to unprecedented levels.
And Congress would have strong incentives to evade the spirit of such a law. If you think the official scoring of budget proposals is torturously politicized now, wait until constitutionality is at stake. Be prepared for a radical reimagining of just what phrases such as “gross domestic product” and “taxes” mean. And though the amendment includes provisions for exception — waiving spending limits in the case of a declared war, for instance — they are all but certain to prove unequal to reality and subject to abuse (think wars of fiscal choice).

Yes, I can think of a Party that says it doesn't believe in fiscal (Keynesian) policy, but every time there's a recession that same Party argues that we need to cut taxes to cure it. A balanced budget amendment might interfere with this game of lowering taxes to fight recessions, refusing to ever allow them to go up again, and then using the resulting deficit to claim spending is out of control.

But now we get to the real reason for the opposition, it might make it harder to reduce spending and cut taxes:

Moreover, the amendment’s very strictness in pushing for conservative priorities in 2013 could make it harder to realize conservative priorities in the future. Tax rates are lower today than they were in 1980, but could Reagan have slashed Carter-era rates under a constitutional regime that demanded such tight coordination between revenue and spending and erected massive hurdles to their decoupling?
There is no constitutional shortcut to the arduous task of reining in spending. ...

And there is also no constitutional shortcut to "the arduous task" raising taxes to support the programs we want to have either. Glad the editors at the NRO are against the amendment, even if it is for a lot of wrong reasons.

Tuesday, February 12, 2013

The 1935 Version of 'Who Built That"

Remember the debate over "who built that?" in the election? I was scrounging around for information on the history of the income tax and came across this "excerpt from the Ways and Means Committee's report on the Revenue Act of 1935" that discusses this and other issues. As noted in the introduction, "The report reproduces a June 19, 1935, message from President Roosevelt to Congress advocating an inheritance tax, in addition to the estate tax. Although the inheritance tax proposal was not adopted, the message provides information on why the taxation of individuals' estates was considered appropriate." (This is an excerpt of the excerpt):

Message to Congress on Tax Revision June 19, 1935: ... Our revenue laws have operated in many ways to the unfair advantage of the few, and they have done little to prevent an unjust concentration of wealth and economic power.
With the enactment of the Income Tax Law of 1913, the Federal Government began to apply effectively the widely accepted principle that taxes should be levied in proportion to ability to pay and in proportion to the benefits received. Income was wisely chosen as the measure of benefits and of ability to pay. This was, and still is, a wholesome guide for national policy. It should be retained as the governing principle of Federal taxation. The use of other forms of taxes is often justifiable, particularly for temporary periods; but taxation according to income is the most effective instrument yet devised to obtain just contribution from those best able to bear it and to avoid placing onerous burdens upon the mass of our people.
The movement toward progressive taxation of wealth and of income has accompanied the growing diversification and interrelation of effort which marks our industrial society. Wealth in the modern world does not come merely from individual effort; it results from a combination of individual effort and of the manifold uses to which the community puts that effort. The individual does not create the product of his industry with his own hands; he utilizes the many processes and forces of mass production to meet the demands of a national and international market.
Therefore, in spite of the great importance in our national life of the efforts and ingenuity of unusual individuals, the people in the mass have inevitably helped to make large fortunes possible. Without mass cooperation great accumulations of wealth would 'be 'impossible save by unhealthy speculation. As Andrew Carnegie put it, "Where wealth accrues honorably, the people are · always silent partners." Whether it be wealth achieved through the cooperation of the entire community or riches gained by speculation—in either case the ownership of such wealth or riches represents a great public interest and a great ability to pay.

The call for inheritance and gift taxes:

I My first proposal, in line with this broad policy, has to do with inheritances and gifts. The transmission from generation to generation of vast fortunes by will, inheritance, or gift is not consistent with the ideals and sentiments of the American people.
The desire to provide security for oneself and one's family is natural and wholesome, but it is adequately served by a reasonable inheritance. Great accumulations of wealth cannot be justified on the basis of personal and family security. In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others.
Such inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our Government.
Creative enterprise is not stimulated by vast inheritances. They bless neither those who bequeath nor those who receive. As long ago as 1907, in a message to Congress, President Theodore Roosevelt urged this wise social policy:
"A heavy progressive tax upon a very large fortune is in no way such a tax upon thrift or industry as a like tax would be on a small fortune. No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood."
A tax upon inherited economic power is a tax upon static wealth, not upon that dynamic wealth which makes for the healthy diffusion of economic good.
Those who argue for the benefits secured to society by great fortunes invested in great businesses should note that such a tax does not affect the essential benefits that remain after the death of the creator of such a business. The mechanism of production that he created remains. The benefits of corporate organization remain. The advantages of pooling many investments in one enterprise remain. Governmental privileges such as patents remain. All that are gone are the initiative, energy and genius of the creator—and death has taken these away.
I recommend, therefore, that in addition to the present estate taxes, there should be levied an inheritance, succession, and legacy tax in respect to all very large amounts received by any one legatee or beneficiary; and to prevent, so far as possible, evasions of this tax, I recommend further the imposition of gift taxes suited to this end.
Because of the basis on which this proposed tax is to be levied and also because of the very sound public policy of encouraging a wider distribution of wealth, I strongly urge that the proceeds of this tax should be specifically segregated and applied, as they accrue, to the reduction of the national debt. By so doing, we shall progressively lighten the tax burden of the average taxpayer, and, incidentally, assist in our approach to a balanced budget.

A call for an increase in the income tax rate on high income households:

II The disturbing effects upon our national life that come from great inheritances of wealth and power can in the future be reduced, not only through the method I have just described, but through a definite increase in the taxes now levied upon very great individual net incomes.
To illustrate: The application of the principle of a graduated tax now stops at $1,000,000 of annual income. In other words, while the rate for a man with a $6,000 income is double the rate for one with a $4,000 income, a man having a $5,000,000 annual income pays at the same rate as one whose income is $1,000,000.
Social unrest and a deepening sense of unfairness are dangers to our national life which we must minimize by rigorous methods. People know that vast personal incomes come not only through the effort or ability or luck of those who receive them, but also because of the opportunities for advantage which Government itself contributes. Therefore, the duty rests upon the Government to restrict such incomes by very high taxes.

But what about small businesses?

III In the modern world scientific invention and mass production have brought many things within the reach of the average man which in an earlier age were available to few. With large-scale enterprise has come the great corporation drawing its resources from widely diversified activities and from a numerous group of investors. The community has profited in those cases in which large-scale production has resulted in substantial economies and lower prices.
The advantages and the protections conferred upon corporations by Government increase in value as the size of the corporation increases. Some of these advantages are granted by the State which conferred a charter upon the corporation; others are granted by other States which, as a matter of grace, allow the corporation to do local business within their borders. But perhaps the most important advantages, such as the carrying on of business between two or more States, are derived through the Federal Government. Great corporations are protected in a considerable measure from the taxing power and regulatory power of the States by virtue of the interstate character of their businesses. As the profit to such a corporation increases, so the value of its advantages and protection increases.
Furthermore, the drain of a depression upon the reserves of business puts a disproportionate strain upon the modestly capitalized small enterprise. Without such small enterprises our competitive economic society would cease. Size begets monopoly. Moreover, in the aggregate these little businesses furnish the indispensable local basis for those nationwide markets which alone can ensure the success of our mass production industries. Today our smaller corporations are fighting not only for their own local well-being but for that fairly distributed national prosperity which makes large-scale enterprise possible.
It seems only equitable, therefore, to adjust our tax system in accordance with economic capacity, advantage and fact. The smaller corporations should not carry burdens beyond their powers; the vast concentrations of capital should be ready to carry burdens commensurate with their powers and their advantages.
We have established the principle of graduated taxation in respect to personal incomes, gifts and estates. We should apply the same principle to corporations. ...

And relevant to the current corporate cash accumulation:

We should likewise discourage unwieldy and unnecessary corporate surpluses. ...

I'm always amazed at the degree to which we have the same political debates over and over again.

Monday, February 11, 2013

'Why Has Employment Remained Stubbornly Low?'

Remember the debate about whether the slow recovery was due to lack of demand, regulation, or taxes?:

Aggregate Demand and State-Level Employment, by Atif Mian and Amir Sufi, FRBSF Economic Letter: What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors. ...

Friday, February 08, 2013

Fed Watch: Payroll Taxes Hitting Home. Or Not.

Two from Tim Duy -- this is the second:

Payroll Taxes Hitting Home. Or Not, by Tim Duy: Last week, I posted an anecdote about employees not knowing that payroll taxes were heading up. This week I see in the New York Times:

Jack Andrews and his wife no longer enjoy what they call date night, their once-a-month outing to the movies and a steak dinner at Logan’s Roadhouse in Augusta, Ga. In Harlem, Eddie Phillips’s life insurance payment will have to wait a few more weeks. And Jessica Price is buying cheaper food near her home in Orlando, Fla., even though she worries it may not be as healthy.

Like millions of other Americans, they are feeling the bite from the sharp increase in payroll taxes that took effect at the beginning of January. There are growing signs that the broader economy is suffering, too.

Chain-store sales have weakened over the course of the month. And two surveys released last week suggested that consumer confidence was eroding, especially among lower-income Americans.

Yet I also see this in the Wall Street Journal:

U.S. retailers turned in strong sales for January, a time of heavy promotions to clear holiday goods and make way for early spring merchandise.

January is the end of the fiscal year for most retailers, and the month serves as a good barometer of how much consumers have left over after holiday spending and provides inklings of what type of buying may lie ahead.

January sales were helped by a number of factors, including the averted mix of tax increases and government-spending cuts called the "fiscal cliff," growth in jobs and greater wealth from home prices and the rising stock market.

So which is it? How much will the tax increase weigh on the economy? Is this a case of bifurcated spending growth as higher income groups experience greater spending power via wealth impacts? Or do we simply need to wait until February to see the full impact of the tax hikes?

Sunday, February 03, 2013

'America’s First Progressive Revolution'

Idealist and dreamer Robert Reich:

Today, an Anniversary of America’s First Progressive Revolution, by Robert Reich: Exactly a century ago, on February 3, 1913, the 16th Amendment to the Constitution was ratified, authorizing a federal income tax. Congress turned it into a graduated tax, based on “capacity to pay.”
It was among the signal victories of the progressive movement ... reflecting a great political transformation in America. The 1880s and 1890s had been the Gilded Age, the time of robber barons ... when it looked as though the country was destined to become a moneyed aristocracy.
But almost without warning, progressives reversed the tide. ...
A progressive backlash against concentrated wealth and power occurred a century ago in America. In the 1880s and 1890s such a movement seemed improbable if not impossible. Only idealists and dreamers thought the nation had the political will to reform itself...
But it did happen. And it will happen again.

Thursday, January 31, 2013

Fed Watch: Interesting Anecdote

One more from Tim Duy:

Interesting Anecdote, by Tim Duy: Looking at the Reuters report on the latest consumer confidence numbers, this caught my attention:

"The increase in the payroll tax has undoubtedly dampened consumers' spirits and it may take a while for confidence to rebound and consumers to recover from their initial paycheck shock," Lynn Franco, director of economic indicators at The Conference Board, said in a statement.

One of the more interesting anecdotes I picked up last week was from a businessman who said that after his firm issued the first paychecks of the year, virtually every employee came to the payroll office and asked why their paychecks were lower, evidently unaware that the payroll tax cut had expired.

If the expiration does come as a surprise to a large proportion of the workforce, perhaps consumer spending in the first quarter will be somewhat softer than current estimates. Something to watch for.

Sunday, January 27, 2013

Climate Policy in Obama's Second Term

I think of Robert Stavins as being on the optimistic side when it comes to action on climate change, but even he seems discouraged despite Obama's mention of this issue in his inaugural address:

The Second Term of the Obama Administration, by Robert Stavins: In his inaugural address on January 21st, President Obama surprised many people – including me – by the intensity and the length of his comments on global climate change.  Since then, there has been a great deal of discussion in the press and in the blogosphere about what climate policy initiatives will be forthcoming from the administration in its second term. ...
Although I was certainly surprised by the strength and length of what the President said in his address, I confess that it did not change my thinking about what we should expect from the second term.  Indeed, I will stand by an interview that was published by the Harvard Kennedy School on its website five days before the inauguration (plus something I wrote in a previous essay at this blog in December, 2012).  Here it is, with a bit of editing to clarify things, and some hyperlinks inserted to help readers. ...
Q: In the Obama administration’s second term, are there openings/possibilities for compromises...?
A: It is conceivable – but in my view, unlikely – that there may be an opening for implicit (not explicit) “climate policy” through a carbon tax. At a minimum, we should ask whether the defeat of cap-and-trade in the U.S. Congress, the virtual unwillingness over the past 18 months of the Obama White House to utter the phrase “cap-and-trade” in public, and the defeat of Republican Presidential candidate Mitt Romney indicate that there is a new opening for serious consideration of a carbon-tax approach to meaningful CO2 emissions reductions in the United States.
First of all, there surely is such an opening in the policy wonk world. Economists and others in academia, including important Republican economists such as Harvard’s Greg Mankiw and Columbia’s Glenn Hubbard, remain enthusiastic supporters of a national carbon tax. And a much-publicized meeting in July, 2012, at the American Enterprise Institute in Washington, D.C. brought together a broad spectrum of Washington groups – ranging from Public Citizen to the R Street Institute – to talk about alternative paths forward for national climate policy. Reportedly, much of the discussion focused on carbon taxes.
Clearly, this “opening” is being embraced with enthusiasm in the policy wonk world. But what about in the real political world? The good news is that a carbon tax is not “cap-and-trade.” That presumably helps with the political messaging! But if conservatives were able to tarnish cap-and-trade as “cap-and-tax,” it surely will be considerably easier to label a tax – as a tax! Also, note that President Obama’s silence extends beyond disdain for cap-and-trade per se. Rather, it covers all carbon-pricing regimes.
So as a possible new front in the climate policy wars, I remain very skeptical that an explicit carbon tax proposal will gain favor in Washington. ...
A more promising possibility – though still unlikely – is that if Republicans and Democrats join to cooperate with the Obama White House to work constructively to address the short-term and long-term budgetary deficits the U.S. government faces,... then there could be a political opening for new energy taxes, even a carbon tax. ...
Those who recall the 1993 failure of the Clinton administration’s BTU-tax proposal – with a less polarized and more cooperative Congress than today’s – will not be optimistic. ... The key group to bring on board will presumably be conservative Republicans, and it is difficult to picture them being more willing to break their Grover Norquist pledges because it’s for a carbon tax.

Here's the surprising part (to me anyway), some optimism after all:

What remains most likely to happen is what I’ve been saying for several years, namely that despite the apparent inaction by the Federal government, the official U.S. international commitment — a 17 percent reduction of CO2 emissions below 2005 levels by the year 2020 – is nevertheless likely to be achieved!  The reason is the combination of CO2 regulations which are now in place because of the Supreme Court decision [freeing the EPA to treat CO2 like other pollutants under the Clean Air Act], together with five other regulations or rules on SOX [sulfur compounds], NOX [nitrogen compounds], coal fly ash, particulates, and cooling water withdrawals. All of these will have profound effects on retirement of existing coal-fired electrical generation capacity, investment in new coal, and dispatch of such electricity.
Combined with that is Assembly Bill 32 (AB 32) in the state of California, which includes a CO2 cap-and-trade system that is more ambitious in percentage terms than Waxman-Markey was in the U.S. Congress, and which became binding on January 1, 2013. ...  In other words, there will be actions having significant implications for climate, but most will not be called “climate policy,” and all will be within the regulatory and executive order domain, not new legislation. ...

Wednesday, January 23, 2013

Higher Marginal Taxes Reduce Economic and Political Power

Richard Green:

... Higher marginal taxes reduce the ability of high income people to accumulate power, which may mean they work/play less.  I don't know that this is entirely a bad thing.

(The post is: Do higher marginal tax rates lead superstar athletes to play less often? See also Barry Ritholtz who asks Who the Hell Are Phil Mickelson’s Financial Advisers?)

Monday, January 21, 2013

Paul Krugman: The Big Deal

Progressives should cheer up:

The Big Deal, by Paul Krugman, Commentary, NY Times: On the day President Obama signed the Affordable Care Act into law, an exuberant Vice President Biden famously pronounced the reform a “big something deal” — except that he didn’t use the word “something.” And he was right..., if progressives look at where we are as the second term begins, they’ll find grounds for a lot of (qualified) satisfaction.

Consider, in particular, three areas: health care, inequality and financial reform.

Health reform is, as Mr. Biden suggested, the centerpiece of the Big Deal. Progressives have been trying to get some form of universal health insurance since the days of Harry Truman; they’ve finally succeeded. …

What about inequality? ... Like F.D.R., Mr. Obama took office in a nation marked by huge disparities in income and wealth. But where the New Deal had a revolutionary impact, empowering workers and creating a middle-class society that lasted for 40 years, the Big Deal has been limited to equalizing policies at the margin.

That said,... through new taxes ... 1-percenters will see their after-tax income fall around 6 percent... This will reverse only a fraction of the huge upward redistribution that has taken place since 1980, but it’s not trivial.

Finally, there’s financial reform. The Dodd-Frank reform bill is ... not the kind of dramatic regime change one might have hoped for… Still, if plutocratic rage is any indication, the reform isn’t as toothless as all that. …

All in all, then, the Big Deal has been, well, a pretty big deal. But will its achievements last? ... I ... think so. For one thing, the Big Deal’s main policy initiatives are already law. ... And ... the Big Deal agenda is, in fact, fairly popular — and will become more popular once Obamacare goes into effect...

Finally, progressives have the demographic and cultural wind at their backs. Right-wingers flourished for decades by exploiting racial and social divisions — but that strategy has now turned against them...

Now, none of what I’ve just said should be taken as grounds for progressive complacency. The plutocrats may have lost a round, but their wealth and the influence it gives them in a money-driven political system remain. Meanwhile, the deficit scolds (largely financed by those same plutocrats) are still trying to bully Mr. Obama into slashing social programs. ...

Still, maybe progressives — an ever-worried group — might want to take a brief break from anxiety and savor their real, if limited, victories.

Monday, December 31, 2012

The Benefits Tax View

Richard Green:

"We are all in it together," and benefits taxes, by Richard Green: Tyler Cowen says that the Republican Party should propose raising taxes on everyone because, "we are all in it together."

To some extent, this is a benefits tax view--a view that we should pay to society our fair share of what we get from society.  But the implication of this is not necessarily that everyone should sacrifice in order to put us all on a sustainable fiscal path.

With Ronald Reagan's election in 1980, the US saw a sea change in tax and regulatory policy.  While the policy was suppose to benefit everyone, it clearly hasn't.  For the bottom quintile of the income distribution, income has risen about 5 percent since 1982 (the first year in which Reagan's policies bit); for the next quintile, it has risen 8 percent; for the next, 11 percent, for the next, 20 percent, and for the highest, 45 percent.  But most of the highest quintile didn't do so well--the top 5 percent has seen average household income rise by 68 percent.

These data are before tax, and come from the US Census, Table H-3.  Before anyone suggests that this means that everyone has benefited, I should point out that average income in the lowest quintile of the income distribution is $11,239, which is right at the Federal Poverty Level for a single person household.  In a benefits tax view of the world, people who haven't sufficient income to live should not be taxed (they are living at subsistence levels as it is, and taxing them makes thing worse).

So let's begin by holding the bottom quintile harmless in doing any kind of deficit reduction.  But what of the remaining quintiles?  If we look at the share of income growth by quintile (excluding the meager income growth of the bottom quintile), we find that 3 percent went to the second quintile from the bottom; 7 percent to the next; 18 percent to the next, and 73 percent to the top quintile.  So little has gone to the second and third quintile from the bottom that one could make a case that they should be left along as well.

The fourth quintile, though, has seen a material improvement in incomes, so it is probably OK to ask this group for something--this includes people who nearly everyone would consider middle class.  Nevertheless, the lion's share of the benefits of the policy changes of the early 1980s has appeared to go to the top quintile, and so the top quntile should pay the most to put us on a sustainable fiscal path.

One last calculation--the top 5 percent got 57 percent of the income growth within its quintile.

It is true that households move in and out of quintiles, but as Dalton Conley shows, not as much as we would like to think,  In any event, we have not been all in it together when it has come to benefitting from the policies of the past 30 years.

Sunday, December 30, 2012

Must Middle Class Taxes Go Up?

Longish travel day today, but hope to have internet access along the way. Anyway, another quick one before heading out:

Greg Mankiw says middle class taxes are going to go up unless we make large cuts to social services:

Too Much Wishful Thinking on Middle-Class Tax Rates

Dean Baker responds:

Greg Mankiw Says We Have to Tax the Middle Class More