Category Archive for: Taxes [Return to Main]

Thursday, May 26, 2016

Study Dispels Myth about Millionaire Migration in the US

From the American Sociological Association

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

Tuesday, April 12, 2016

For an Inheritance Tax

Chris Dillow:

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

Tuesday, March 29, 2016

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

From the CBPP:

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

Wednesday, March 23, 2016

The State of American Politics

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

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

Followed by:

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

Bruce Bartlett:

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

Monday, March 21, 2016

Paul Krugman: On Invincible Ignorance

Republicans are in denial:

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

Thursday, March 17, 2016

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

The EPI's Hunter Blair:

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

Monday, February 29, 2016

"Financial Transaction Taxes in Theory and Practice'

From the Brookings Institution"

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

Thursday, January 28, 2016

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

Jared Bernstein:

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

Wednesday, January 27, 2016

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

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

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

Friday, January 22, 2016

'A Progressive Way to End Corporate Taxes'

Curious what you think of this proposal from Dean Baker:

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

Saturday, January 09, 2016

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

From the NBER Digest

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

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

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

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

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

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

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

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

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

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

Wednesday, December 23, 2015

'An Aging Society Is No Problem When Wages Rise'

Dean Baker:

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

Wednesday, November 25, 2015

'The Pfizer–Allergan Merger Is a Disgrace'

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

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

Wednesday, November 04, 2015

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

James Kwak at The Baseline Scenario:

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

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

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

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

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

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

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

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

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

Tuesday, October 27, 2015

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

Henry Aaron at Brookings:

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

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

Monday, October 19, 2015

Paul Krugman: Something Not Rotten in Denmark

The important lessons we can learn from Denmark:

Something Not Rotten in Denmark, by Paul Krugman, Commentary, NY Times: No doubt surprising many of the people watching the Democratic presidential debate, Bernie Sanders cited Denmark as a role model for how to help working people. Hillary Clinton demurred slightly, declaring that “we are not Denmark,” but agreed that Denmark is an inspiring example. ... But how great are the Danes, really? ...
Denmark maintains a welfare state ... that is beyond the wildest dreams of American liberals. ... To pay for these programs, Denmark collects a lot of taxes..., almost half of national income, compared with 25 percent in the United States. Describe these policies to any American conservative, and he would predict ruin. Surely those generous benefits must destroy the incentive to work, while those high taxes drive job creators into hiding or exile.
Strange to say, however, Denmark ...is ... a prosperous nation that does quite well on job creation. ... It’s hard to imagine a better refutation of anti-tax, anti-government economic doctrine...
But ... is everything copacetic in Copenhagen? Actually, no..., its ... recovery from the global financial crisis has been slow and incomplete. ...
What explains this poor recent performance? The answer, mainly, is bad monetary and fiscal policy. Denmark hasn’t adopted the euro, but it manages its currency as if it had... And while the country has faced no market pressure to slash spending ... it has adopted fiscal austerity anyway.
The result is a sharp contrast with neighboring Sweden, which doesn’t shadow the euro (although it has made some mistakes on its own), hasn’t done much austerity, and has seen real G.D.P. per capita rise while Denmark’s falls.
But Denmark’s monetary and fiscal errors don’t say anything about the sustainability of a strong welfare state. In fact, people who denounce things like universal health coverage and subsidized child care tend also to be people who demand higher interest rates and spending cuts in a depressed economy. (Remember all the talk about “debasing” the dollar?) That is, U.S. conservatives actually approve of some Danish policies — but only the ones that have proved to be badly misguided.
So yes, we can learn a lot from Denmark, both its successes and its failures. And let me say that it was both a pleasure and a relief to hear people who might become president talk seriously about how we can learn from the experience of other countries, as opposed to just chanting “U.S.A.! U.S.A.! U.S.A.!”

Tuesday, October 06, 2015

'Marco Rubio is Insisting That His Massive Tax Cuts Will Pay for Themselves'

Ezra Klein:

Why Marco Rubio is insisting that his massive tax cuts will pay for themselves, explained: On Tuesday, Marco Rubio told CNBC's John Harwood that his massive tax cuts — which estimates have found would blow a roughly $4 trillion to $5 trillion hole in the deficit — creates a surplus "within the 10-year window."
It is worth slowing down to make clear exactly what Rubio said there. Rubio's plan cuts corporate taxes, capital gains taxes, taxes on the rich, taxes on the middle class — it cuts taxes on everyone. The cuts are so large that the New York Times called it "the puppies and rainbows plan." And what Rubio is saying is that his massive tax cut is actually going to mean more tax revenue for the government — that two minus one will equal four. ...
Rubio's assurance will, to most tax analysts, sound like nonsense. And it is nonsense. A plan that massively cuts taxes isn't going to lead to budget surpluses. But it's nonsense that has been validated by an important conservative tax group, that shows the kind of candidate Rubio is looking to be, and that speaks to why the debate over taxes in Washington has become so dysfunctional. ...

 

Friday, October 02, 2015

Paul Krugman: Voodoo Never Dies

Why do Republican politicians support tax cuts for the wealthy despite their unpopularity (as documented in a part I left out), and their failure to spur economic growth?:

Voodoo Never Dies, by Paul Krugman, Commentary, NY Times: So Donald Trump has unveiled his tax plan. It would, it turns out, lavish huge cuts on the wealthy while blowing up the deficit.
This is in contrast to Jeb Bush’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit, and Marco Rubio’s plan, which would lavish huge cuts on the wealthy while blowing up the deficit.
For what it’s worth, it looks as if Trump’s plan would make an even bigger hole in the budget than Jeb’s. Jeb justifies his plan by claiming that it would double America’s rate of growth; The Donald, ahem, trumps this by claiming that he would triple the rate of growth. But really, why sweat the details? It’s all voodoo. The interesting question is why every Republican candidate feels compelled to go down this path.
You might think that there was a defensible economic case for the obsession with cutting taxes on the rich. That is, you might think that if you’d spent the past 20 years in a cave (or a conservative think tank). ...
True, you can find self-proclaimed economic experts claiming to find overall evidence that low tax rates spur economic growth, but such experts invariably turn out to be on the payroll of right-wing pressure groups (and have an interesting habit of getting their numbers wrong)... There is no serious economic case for the tax-cut obsession.
Still,... every Republican who would be president is committed to a policy that is both demonstrably bad economics and deeply unpopular. What’s going on?
Well,..., it’s straightforward and quite stark: Republicans support big tax cuts for the wealthy because that’s what wealthy donors want. No doubt most of those donors have managed to convince themselves that what’s good for them is good for America. But at root it’s about rich people supporting politicians who will make them richer. Everything else is just rationalization.
Of course, once the Republicans settle on a nominee, an army of hired guns will be mobilized to obscure this stark truth. We’ll see claims that it’s really a middle-class tax cut, that it will too do great things for economic growth, and look over there — emails! And given the conventions of he-said-she-said journalism, this campaign of obfuscation may work.
But never forget that what it’s really about is top-down class warfare. That may sound simplistic, but it’s the way the world works.

Wednesday, September 30, 2015

'Jeb Goes Galt'

Paul Krugman:

Jeb Goes Galt: This is amazing:

“I think the left wants slow growth because that means people are more dependent upon government,” Bush told Fox Business’ Maria Bartiromo.

Remember, this is the establishment candidate for the GOP nomination — and he thinks he’s living in Atlas Shrugged.

Back when Romney made his "47 percent" remark, Rich Lowry of the National Review Online responded:

...The contention is that if people aren’t paying federal income taxes, they are essentially freeloaders who will vote themselves more government benefits knowing that they don’t have to pay for them. As NR’s Ramesh Ponnuru has pointed out, there’s no evidence for this dynamic. ...
Fear of the creation of a class of “takers” can slide into disdain for people who are too poor — or have too many kids or are too old — to pay their damn taxes. For a whiff of how politically unattractive this point of view can be, just look at the Romney fundraising video.

Bush didn't learn a thing from Romney' venture down this road. "There's no evidence" for the charge itself, it's a political loser except with a certain population that would vote Republican in any case, and it falsely asserts that Democrats are opposed to policies that spur economic growth (hence our repeated calls for things like infrastructure to provide jobs, get the economy ready for a highly competitive international economy, and avoid the potential for secular stagnation?).

What we are opposed to, or what I am opposed to -- guess I should speak for myself -- is growth where all the benefits are captured by those at the top. Imperfections in economic institutions along with changes in the rules of the game pushed forward by those with political influence have caused those at the top to be rewarded in excess of their contribution to economic output, while those at the bottom have gotten less than their contribution. It's not "taking" to increase taxes at the top and return income to those who actually earned it, to the real makers who toil each day at jobs they'd rather not do to support their families. It's a daily struggle for many, a struggle that would be eased if they simply earned an amount equivalent to their contributions. That's why it's so "politically unattractive", people explicitly or implicitly understand they have been, for lack of a better word, screwed by the system. The blame is sometimes misplaced, but that doesn't change the nature of the problem. They don't want "free stuff," they want what they deserve, and there is nothing whatsoever wrong with that.

The other thing I'm opposed to is tax cuts for those at the top that make this problem even worse without delivering any corresponding benefits. These tax cuts redistribute income upward and cause the income received by workers to fall even further below their contribution, and there's no corresponding benefit to economic growth (or if there is, it's very, very small). We keep hearing that putting money in the hands of the "makers' at the top will produce magical growth, but the reality is that these are the true takers, the ones who are receiving far more from the economy than they contribute, while those who actually work their butts off each day to make the things we all need and enjoy struggle to pay their bills.

Tuesday, September 29, 2015

'Trump World and the Fed'

Magic plans meet the reality called the Fed:

Trump World and the Fed, by Dean Baker: ...Suppose that Donald Trump's tax cut really is the magic elixir that would get the economy to 6.0 percent annual growth. But what if the people at the Fed's Open Market Committee (FOMC) don't recognize this fact? Suppose the FOMC thinks the economy is still bound by the pre-Trump tax cut rules and believes that inflation will start to accelerate out of control if the unemployment rate falls much below its current 5.1 percent level.
In this case, we would expect to see the Fed raise interest rates sharply as they saw the Trump tax cuts boosting growth. ... If the Fed raises interest rates high enough, it could fully offset the boost that Trump's tax cut is giving to the economy. In this case, even though the Trump tax cuts might have been the best thing for the economy since the Internet (okay, better than the Internet), we wouldn't see any dividend because the Fed would not allow it.
For this reason, the Fed's likely response to a tax cut is a fundamental question that reporters should be asking. If the Fed is likely to simply slam on the brakes to offset any possible stimulus, then a tax plan will have little prospect of providing a growth dividend.

Maybe they aren't asking because they know in their heart of hearts that the plan will be lucky to boost growth at all.

Monday, September 28, 2015

'The Growth Fairy Model'

Kevin Williamson at the National Review Online tells Republican candidates to get real:

The Thing about Tax Cut, by Kevin D. Williamson: Every Republican tax-reform plan should be rooted in this reality: If you are going to have federal spending that is 21 percent of GDP, then you can have a.) taxes that are 21 percent of GDP; b.) deficits. There is no c.
If, on the other hand, you have a credible program for reducing spending to 17 or 18 percent of GDP, which is where taxes have been coming in, please do share it.
The problem with the Growth Fairy model of balancing budgets is that while economic growth would certainly reduce federal spending as a share of GDP if spending were kept constant, there is zero evidence that the government of these United States has the will or the inclination to enact serious spending controls when times are good (Uncork the champagne!) or when times are bad (Wicked austerity! We must have stimulus!). So even if we buy Jeb Bush’s happy talk about growth, or Donald Trump’s, the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional.
There are no tax cuts when the government is running deficits, only tax deferrals.

Remembering that the "math simply does not add up" for Republicans -- partly that's Williamson's point -- let's take a look at the evidence on government spending as a share of potential GDP. This is from Paul Krugman in 2013, but the underlying trends do not change. He explains why this is the best measure to use when looking at this question:

The Non-Surge in Government Spending: The fiscal debate in Washington is dominated by things everyone knows that happen not to be true. One of those things is the notion that we have a fiscal crisis... The crucial thing to understand here is that you do need to take the state of the business cycle into account; it’s not enough simply to do what Nate Silver, for example, does, and look at spending as a share of GDP — a calculation that can be deeply misleading in the aftermath of a severe recession followed by a slow recovery.
Why does this matter? First, if the economy is depressed — if GDP is low relative to potential — the share of spending in GDP will correspondingly look high. ...
Second, there are some programs — unemployment benefits, food stamps, to some extent Medicaid — that tend to spend more when the economy is depressed and more people are in distress. And rightly so! You don’t want to take a temporary spike in UI payments after a deep slump as a sign of runaway spending.
So how can we get a better picture? First, express spending as a share of potential rather than actual GDP; we can use the CBO estimates of potential for that purpose. Second, keep your eye on the business cycle — and, in particular, on how spending is evolving now that a gradual recovery is underway.
So, let’s look first at a longish time series of total government spending as a share of potential GDP:
Ratio of government spending to potential GDP.
Ratio of government spending to potential GDP
What you see is not a sustained upward trend: there’s actually a considerable fall during the Clinton years, reflecting in part falling defense spending, then a more modest rise in the Bush years, mainly reflecting spending on the War on Terror (TM), and finally a temporary surge associated with the financial crisis — but much of that surge has already been reversed.
Here’s a closeup on Bush’s last two years and Obama’s first four:
That was the spending surge that was. ...

The claim is that "the idea that spending is just going to magically sit there, inert, while the economy zips forward and the tax coffers fill up, is delusional." Here's an updated graph using the latest data:

Fredgraph[1]

Taking away the surge from the crisis, which has been reversed, the trend in the last few decades looks pretty flat to me. To the extent that there is a tendency for the ratio to move upward in recent years, it's hardly the fault of Democrats. There is something delusional here, but it's not that spending as a share of potential GDP -- the right way to look at this question -- always rises when times are good or bad, or that Democratic administrations cannot keep spending under control.

'Trump Plan Is Tax Cut for the Rich, Even Hedge Fund Managers'

Josh Barro:

Trump Plan Is Tax Cut for the Rich, Even Hedge Fund Managers: Donald Trump’s tax plan, released Monday, does not live up to the populist language he has offered on taxes all summer.
When talking about taxes in this campaign, Donald Trump has often sounded like a different kind of Republican. He says he will take on “the hedge fund guys” and their carried interest loophole. He thinks it’s “outrageous” how little tax some multimillionaires pay. But his plan calls for major tax cuts not just for the middle class but also for the richest Americans — even the dreaded hedge fund managers. And despite his campaign’s assurances that the plan is “fiscally responsible,” it would grow budget deficits by trillions of dollars over a decade.
You could call Mr. Trump’s plan a higher-energy version of the tax plan Jeb Bush announced earlier this month: similar in structure, but with lower rates and wider tax brackets, meaning individual taxpayers would pay even less than under Mr. Bush, and the government would lose even more tax revenue. ...
A document from the Trump campaign says all these tax cuts would be “fully paid for” by the elimination of deductions and by a one-time tax on foreign profits of American firms held abroad. That math simply does not add up: As discussed above, rich people do not currently take enough tax deductions to offset the tax rate cuts Mr. Trump proposes, and the one-time foreign profits tax might raise $250 billion, not close to the trillions of revenue that would be lost through tax rate cuts.
At a news conference Monday, Mr. Trump offered another way his tax plan would pay for itself: economic growth, perhaps as fast as 6 percent a year, again a higher-energy estimate than the 4 percent Mr. Bush has proposed. But there is no evidence to support the idea that such rapid growth can be produced through tax cuts.

"That math simply does not add up" could be applied to Republican tax plans in general. There's always some sort of magical thinking that makes their plans work (or, perhaps, better described as cunning deception that relies upon the press remaining effectively silent, or playing the "he said she said" game that gives people little information about truth, in the face of absurd claims). Talk like a populist, act like a plutocrat seems to be a winning formula -- somehow many who have been disaffected by the economic system believe Republicans are on their side, and have their best interests at heart, that all the unfairness they see around them (which is not always real, but rather stoked by the closed loop news system they adhere to) will be addressed by a Republican administration. Not gonna happen.

Tuesday, September 15, 2015

'Collecting Taxes Is Government Work'

This was in links a day or two ago, but it's worth highlighting:

Collecting Taxes Is Government Work, Editorial, NY Times: Buried in the Senate-passed version of the big highway bill is a provision that would require the Treasury secretary to use private debt collectors to collect unpaid back taxes.
The provision, added to the bill by Republican leaders, is ostensibly intended to help pay for highways. But it’s a bad idea that should be kept out of the House version of the bill and out of any final compromise version.
Private tax collection was tried in the 1990s and in the 2000s. Both times it lost money. It increases the cost of handling complaints and appeals at the Internal Revenue Service, and it is far less efficient than simply increasing the collection budget of the I.R.S.
Worse, it fosters taxpayer abuse. The debts involved are ones that the I.R.S. has not been able to collect, in part because the taxpayers are too hard-pressed to pay up. A private company is probably not going to have better luck unless it uses abusive tactics.
And yet, private tax collection is an idea that keeps resurfacing. Why? One reason is that it would be a cash cow for the four companies likely to win tax-collection contracts...
Senator Chuck Schumer, Democrat of New York, has argued in the past that using federal money to pay private companies for tax collection would create jobs at those companies. But it would be better to increase the I.R.S. budget to create middle-class public-sector jobs in professional tax collection than to throw money at low-paying private-sector contractors who cannot do the job as well. ...

I've posted this before (in 2006) (I left out his two other examples of the Bush administration trying to take us "back to the 16th century"):

Back to a bad old future:

Tax Farmers, Mercenaries and Viceroys, by Paul Krugman, A Monarchy Commentary, NY Times: Yesterday The New York Times reported that the Internal Revenue Service would outsource collection of unpaid back taxes to private debt collectors, who would receive a share of the proceeds.

It’s an awful idea. Privatizing tax collection will cost far more than hiring additional I.R.S. agents, raise less revenue and pose obvious risks of abuse. But what’s really amazing is the extent to which this plan is a retreat from modern principles of government. I used to say that conservatives want to take us back to the 1920’s, but the Bush administration seemingly wants to go back to the 16th century....

In the bad old days, ...[t]here was no bureaucracy to collect taxes, so the king subcontracted the job to private “tax farmers,” who often engaged in extortion. There was no regular army, so the king hired mercenaries, who tended to wander off and pillage the nearest village. There was no regular system of administration, so the king assigned the task to favored courtiers, who tended to be corrupt, incompetent or both.

Modern governments solved these problems by creating a professional revenue department to collect taxes, a professional officer corps to enforce military discipline, and a professional civil service. But President Bush apparently doesn’t like these innovations, preferring to govern as if he were King Louis XII.

So the tax farmers are coming back...

Tax farmers, mercenaries and viceroys: why does the Bush administration want to run a modern superpower as if it were a 16th-century monarchy? Maybe people who’ve spent their political careers denouncing government as the root of all evil can’t grasp the idea of governing well. Or maybe it’s cynical politics: privatization provides both an opportunity to evade accountability and a vast source of patronage.

But the price is enormous. This administration has thrown away centuries of lessons about how to make government work. No wonder it has failed at everything except fearmongering.

Monday, September 14, 2015

'Thoughts on Dynamic Scoring'

Brad DeLong:

Thoughts on Dynamic Scoring: Last Thursday two of the smartest participants at last Friday's Brookings Panel on Economic Activity conference--Martin Feldstein and Glenn Hubbard--claimed marvelous things from the enactment of JEB!'s proposed tax cuts and his regulatory reform program.

They claimed it would boost economic growth over the next ten years by 0.5%/year (for the tax cuts) plus an additional 0.3%/year (for the regulatory reforms).

That would ... mean that over the next ten years faster growth would produce an average of $210 billion a year of additional revenue to offset more than half of the $340 billion a year "static" revenue lost from the tax cuts... And that would mean that in the tenth year--fiscal 2027--the $400 billion "static" cost of the tax cuts in that year would be outweighed by a $420 billion faster-growth revenue gain.

The problem is that if I were doing the numbers I would reverse the sign.

  • I would say that, on net, deregulatory programs have been very costly to the U.S. economy in unpredictable ways--witness the subprime boom and the financial crisis.
  • I would say that the incentive effects would tend to push up growth by only 0.1%/year, and that would be more than offset by a drag on the economy that would vary depending on how the tax cuts were financed.
    • If they were financed by issuing debt, I would ballpark the drag at -0.2%/year.
    • If they were financed by cutting public investment, I would ballpark the drag at -0.4%/year.
    • If they were financed by cutting government programs, there might be a small boost to growth--0.1%/year--but any societal welfare benefit-cost calculation would conclude that the growth gain was not worth the cost.

And there is substantial evidence that I am right:

  • You cannot find a boost to potential output growth flowing from either the Reagan or the Bush tax cuts.
  • You cannot find a drag on growth from the Obama tax increases.
  • You can find an effect of the Clinton tax increases--but it is that, thereafter, growth was faster, because the reduction in the deficit powered an investment-led recovery.

Over the past thirty years, the agencies that do the government's accounting have tried to reduce their vulnerability to the imposition of a rosy scenario by their political masters by claiming as a matter of principle that they do not calculate positive growth impacts of policies. This is clearly the wrong thing to do--policies do affect growth rates. But is overestimating growth effects in a way that pleases one's political masters a less-wrong thing? ...

The problem is that when I look at the example of "dynamic scoring" that was on the table at Brookings today--the 0.8%/year growth boost that I really think should be a -0.1%/year growth drag...

Yet the near-consensus of the meeting was that dynamic scoring--done properly--was a thing that estimating agencies like JCT and CBO (and Treasury OTA) should do.

If there were to be a day less favorable to such a consensus conclusion, I do not know what that day would have looked like...

Thursday, September 10, 2015

'Jeb’s Tax Plan Makes George W. Bush’s Policies Look Good'

Bruce Bartlett:

Jeb’s tax plan makes George W. Bush’s policies look good: ... There is no doubt that Bush’s tax plan would blow a massive hole in the budget deficit. His own economic advisers estimate that it would raise the budget deficit by $3.4 trillion over 10 years. Even if their dubious estimate of higher growth is achieved, massive spending cuts will be needed just to keep the deficit from rising above current projections.
In this respect, Bush’s tax plan is much more similar to his brother’s than to Reagan’s tax reform. According to the Congressional Budget Office, George W. Bush’s tax cuts added $3 trillion to the national debt and did nothing to raise growth or forestall the massive recession that began in 2007. That recession was still ongoing when Barack Obama took office, yet Jeb spends much space in his proposal criticizing him for not immediately reversing all the negative budgetary effects of his brother’s policies, which added a total of $12 trillion to the national debt, according to CBO.
It appears that Bush has relied upon advice from economists who have been wrong about just about everything to do with taxes for the last 20 or more years. One, Stephen Moore, who founded the Club for Growth and now works for the ultra-right-wing Heritage Foundation, published a book in 2004, “Bullish on Bush,” that made the same extravagant promises for George W. Bush’s tax cuts that Jeb Bush now claims for his.
The reality is that the U.S. economy did very, very poorly under George W. Bush – even before the recession began in December 2007. At the very minimum, there is zero evidence that his tax cuts did anything whatsoever to raise growth or lower unemployment. ..
We had a real world test of Jeb Bush’s tax plan from 2001 to 2008 – and it failed miserably. The people advising him have an unblemished record of being wrong... The only effect of this discredited ideology has been to make the rich richer while doing nothing for the average American. ...

Jared Bernstein talked yesterday about a few bones the Bush tax plans throws in the direction of the less fortunate (i.e. people not among the wealthy constituents the Bush plan mainly serves). But with such massive cuts in revenues, Bush as president (imaging what is hopefully impossible), and a Republican congress (not impossible), program cuts would almost surely follow leaving the less fortunate, on net, far worse off.

Wednesday, September 09, 2015

'Jeb Bush’s New Tax Plan: A Revenue-Eating Wolf in Sheep’s Clothing'

Jared Bernstein on the Bush tax plan:

Jeb Bush’s new tax plan: A revenue-eating wolf in sheep’s clothing: It seems like just yesterday we were pointing out that a) the arithmetic in Republican presidential candidates’ tax plans didn’t add up, and b) they were highly regressive.
Well, crank up the old calculator, because Jeb Bush’s new tax plan appears to have both of those problems, big time. ... I can confidently assert that the plan loses piles of revenue. Perhaps that’s the point, but if so, it’s a serious problem for our fiscal accounts, our economy, and the ability of our government to do what we need it to do. ...[some details of the plan] ...
These are just absolutely huge, regressive changes, far bigger than his bro’s, and really–what did we get for all of W’s supply-side cuts? Growth, jobs, and productivity had little to show for them, while after-tax inequality significantly worsened.
There are a few pieces I’ll note below that claw back some lost revenue, but this is really aggressive tax cutting. ... But didn’t I say something about sheep’s clothing?
There are a few ideas in the plan that tilt in different directions from the usual supply-side formula. To its credit, the Bush team expands the Earned Income Tax Credit for childless workers... They also expand the standard deduction, thereby significantly reducing the number of households with federal tax liability..., this pits Bush against the Romney “makers/takers” crowd...
[More details, both positive and negative] ... OK, that’s enough of the weeds. And I give the Bush team credit for presenting a fairly detailed plan at this early stage of the race. Also..., we’ll have to wait for a score by someone not associated with the campaign (rev up the hamster wheels, TPC!) to see the real extent of the revenue and distributional damage. But I’d be amazed—and I promise ... I will admit my mistake on these pages ... if I’m wrong—if this plan doesn’t blow a huge hole in the budget and make the federal tax code less progressive.
And those are two things we really, really don’t need right now.

Thursday, August 06, 2015

'The Declining Impact of U.S. Income Taxes on Wealth Inequality'

Nick Bunker:

The declining impact of U.S. income taxes on wealth inequality: A growing number of papers measuring U.S. wealth inequality and its continuing growth were published over the past year. One of those key papers, by economists Emmanuel Saez of the University of California-Berkeley and Gabriel Zucman of the London School of Economics, finds that the share of wealth held by the top 0.1 percent of families in the United States grew from about 7 percent in the late 1970s to 22 percent in 2012. Yet it’s important to note that Saez and Zucman’s results and similar estimates look at the distribution of wealth before accounting for the impact of taxation. A new paper looks at the post-tax distribution of wealth and finds that the federal income tax system is doing significantly less to reduce wealth inequality than in the past. And there are signs that the federal tax system in recent years might actually be increasing wealth inequality.
The paper by economists Adam Looney at the Brookings Institution and Kevin B. Moore at the U.S. Federal Reserve looks at trends in wealth inequality from 1989 to 2013 using data from the Fed’s Survey of Consumer Finances. ...
Looney and Moore’s analysis is, as they note, the first attempt to analyze trends in post-tax wealth inequality. So their paper is just the beginning of the investigation into this area. But if their results hold up they would have strong implications for how we think about the tax code and wealth inequality.

'Unwavering Fealty to a Failed Theory'

Bad economic theory (but good if you are rich) has trickled down to this cycle's Republican presidential candidates:

Unwavering Fealty to a Failed Theory, by David Madland, US News and World Report: With their first debate set for tonight, Republican candidates have been trying mightily to claim they can help address the economic problems most Americans face. ...
While Jeb Bush declared in February that "the opportunity gap is the defining issue of our time," more recently he's been forced to backtrack from his statement that Americans "need to work longer hours" in order to boost their incomes. Sen. Marco Rubio's argument that if the United States is to "remain an exceptional nation, we must close this gap in opportunity," rings a bit hollow next to his tax plan that disproportionately benefits the wealthy. Gov. Scott Walker says he wants to help families achieve the "American Dream," but thinks the minimum wage is "lame," has stripped the words "living wage" from state laws, and has attacked workers' right to join together to collectively bargain for better wages.
Looking beyond the rhetoric and individual policies, however, lies the Republican Party's major problem: unwavering fealty to trickle-down economics. Virtually all Republicans since Ronald Reagan was elected president have run on a platform of supply-side policies, and the 2016 election will be no different. But it should be, because there is now a growing recognition that trickle-down economics has failed....

Friday, July 24, 2015

'Raise the Gas Tax Already'

James Surowiecki:

Raise the Gas Tax Already: Senate Majority Leader Mitch McConnell is a conservative Republican. Senator Barbara Boxer is a liberal Democrat. So the fact that they’ve worked together to come up with a plan to fund highway spending for the next three years might seem like a good thing, a rare moment of bipartisanship in a Congress riven by ideological hostility. And, in fact, you could see the thousand-page bill they’ve produced as, in the words of the Times, “real progress,” except for one thing: their complicated, jury-rigged plan is only necessary because of the continued refusal by Congress to embrace the obvious, economically sensible solution to highway funding, namely raising the gas tax. ...
The fundamental problem, of course, is that raising taxes, no matter how economically sensible those taxes might be, is anathema to a huge swath of the Republican Party. ... Opposition to higher income taxes has some theoretical justification: higher marginal rates discourage people from working more and investing. ... But no such argument exists against the gas tax: all it does, in essence, is ask drivers to pay for the roads they use. It’s not even fair to say that keeping this tax at its current level is a check on big government, since most federal highway spending now goes toward rebuilding and repairing roads—maintenance that even conservatives recognize we must do.
Highway revenue has to be raised somehow. Congress should show some political spine, discard the Rube Goldberg funding schemes, and stop treating all taxes as bad ones.

As noted in the article, there are also, of course, environmental benefits from an increase in gas taxes.

Monday, June 29, 2015

'The Stimulative Effect of Redistribution'

Bart Hobijn and Alexander Nussbacher in the SF Fed's Economic Letter:

The Stimulative Effect of Redistribution, by Bart Hobijn and Alexander Nussbacher: The idea of taking from the rich and giving to the poor goes back long before the legend of Robin Hood. This kind of redistribution sounds desirable out of a sense of fairness. However, economists often judge a policy less on whether it is fair, and more in terms of whether it is efficient or inefficient, as well as whether it stimulates or slows economic activity.
In this Economic Letter we evaluate the stimulative effect of redistributing income from rich to poor households in a few distinct steps. We first provide a simple back-of-the-envelope calculation of the potential stimulus from redistributive policies. We then review the two main assumptions behind this policy prescription. We argue that the stimulative impact of such policies is likely to be lower than the simple calculation suggests. ...

Thursday, June 18, 2015

Blow Up the Tax Code and Start Over???

Here we go again with the flat tax proposals. This time it's Rand Paul:

Blow Up the Tax Code and Start Over, by Rand Paul: Some of my fellow Republican candidates for the presidency have proposed plans to fix the tax system. These proposals are a step in the right direction, but the tax code has grown so corrupt, complicated, intrusive and antigrowth that I’ve concluded the system isn’t fixable.
So on Thursday I am announcing an over $2 trillion tax cut that would repeal the entire IRS tax code—more than 70,000 pages—and replace it with a low, broad-based tax of 14.5% on individuals and businesses. I would eliminate nearly every special-interest loophole. The plan also eliminates the payroll tax on workers and several federal taxes outright, including gift and estate taxes, telephone taxes, and all duties and tariffs. I call this “The Fair and Flat Tax.” ...

He might call it that, but even he admits the rich will pay a lower rate:

The left will argue that the plan is a tax cut for the wealthy. But most of the loopholes in the tax code were designed by the rich and politically connected. Though the rich will pay a lower rate along with everyone else, they won’t have special provisions to avoid paying lower than 14.5%.

Why not just get rid of the special provisions? Why is a flat tax more equitable than taxes based upon ability to pay (i.e. a progressive structure)?

And, of course, this won't provide enough revenue to fund government. How does he solve this? With two pieces of magic. First, magic budget cuts that he leaves unspecified (because proposing what it would actually take to close the budget gap would require severe cuts to social programs that people want to retain), and second, magic economic growth.

On the budget cuts, we get: 

my plan would actually reduce the national debt by trillions of dollars over time when combined with my package of spending cuts.

That's it. Somehow, the spending cuts will magically occur (and since we are imagining, guess who they would fall on?). But the biggest magic is the effect on the economy. It's an "economic steroid injection"!!!:

As a senator, I have proposed balanced budgets and I pledge to balance the budget as president.
Here’s why this plan would balance the budget: We asked the experts at the nonpartisan Tax Foundation to estimate what this plan would mean for jobs, and whether we are raising enough money to fund the government. The analysis is positive news: The plan is an economic steroid injection. Because the Fair and Flat Tax rewards work, saving, investment and small business creation, the Tax Foundation estimates that in 10 years it will increase gross domestic product by about 10%, and create at least 1.4 million new jobs.
And because the best way to balance the budget and pay down government debt is to put Americans back to work, my plan would actually reduce the national debt by trillions of dollars over time when combined with my package of spending cuts.

I bet it would almost be as good for the economy as the Bush tax cuts. Oh wait...

Monday, June 08, 2015

'Why the Mortgage Interest Tax Deduction Should Disappear, But Won't'

Cecchetti & Schoenholtz:

Why the mortgage interest tax deduction should disappear, but won't: In the run-up to the 2012 U.S. Presidential election, Planet Money asked five economists from across the political spectrum for proposals that they would like to see in the platform of the candidates. The diverse group agreed, first and foremost, on the wisdom of eliminating the tax deductibility of mortgage interest. 
The vast majority of economists probably agree. We certainly do. But it won’t happen, because politicians with aspirations for reelection find it toxic. ...
The ... tax deductibility of mortgage interest ... raises inequality and reduces economic efficiency.
The source of increased inequality is simple. The private benefits of the mortgage interest deduction rise both with a person’s income and with the cost of their house. The higher your income, the higher your marginal tax rate; and the bigger your house, the bigger the possible mortgage. When either rises, the value of the tax deduction rises, too. ...
Aside from inequality concerns, there are other powerful reasons to dislike the mortgage interest deduction. Above all, it is inefficient. By subsidizing bigger, more expensive houses, the policy misallocates scarce savings away from productive investments that raise living standards through income- and job-creating innovations. It also makes our financial system more vulnerable: as we wrote in an earlier post, it encourages people to take on risks – in the form of large, subsidized mortgages – that they are not equipped to bear. In the recent crisis, risky mortgage debt was sufficient to put the entire financial system at risk. ...
Unfortunately, the tax deductibility of mortgage interest is here to stay. Nearly 50 million U.S. households currently have mortgages, and politicians don’t wish to alienate them.  
But the borrowers are only the most obvious beneficiaries.  In fact, all homeowners would suffer if the mortgage deduction were eliminated. The reason is that the value of everyone’s house would fall...
A simple computation allows us to estimate the economy-wide impact. ... If the subsidy were eliminated, homeowners would lose ... about $4.1 trillion. ... For comparison, the plunge of real estate value from the 2006 peak to the 2011 trough was $6.4 trillion. ...
Aside from the contractionary impact on the economy, many people would see such a drop in house prices as dramatically unfair. It’s true that the biggest losers in monetary terms would be the owners of the most valuable (oversized) houses; but the less well-off would suffer, too. While it is a progressive policy, all 80 million households that own homes would take a hit.
It is tempting to just give up and admit political defeat, but there may be a way out. Our suggestion is to build on past reforms that capped the tax deduction by limiting the size of eligible mortgages. ... Since roughly 10% of U.S. homes are worth more than $500,000, our proposal is to set the limit at the interest payments on a $400,000 mortgage (indexed appropriately). This would promote both efficiency and equality. ...
Policies that provide asset owners large “rents” (payments unwarranted by the scarcity of the asset itself) are incredibly difficult to eliminate, even when they are both unfair and inefficient. Such rents create an entire ecosystem of beneficiaries (in this case, ranging from construction firms and workers, to real estate brokers, to mortgage lenders and borrowers) who constitute a powerful political constituency blocking almost any reform. ...

Saturday, May 23, 2015

Video: Top Rate of Taxation

Taxing high incomes – a special session discussing recent research on top tax rates in the UK, France and Denmark, and their effects on tax revenues, tax avoidance, labour supply and inequality

Slides for this lecture are available here: http://www.fsmevents.com/res/2015/session11

Friday, April 24, 2015

Paul Krugman: Zombies of 2016

Some bad ideas just won't die:

Zombies of 2016, by Paul Krugman, Commentary, NY Times: Last week,...Chris Christie ... gave a speech in which he tried to position himself as a tough-minded fiscal realist. In fact, however, his supposedly tough-minded policy idea was a classic zombie — an idea that should have died long ago in the face of evidence that undermines its basic premise, but somehow just keeps shambling along.
...Mr. Christie ... thought he was being smart and brave by proposing that we raise the age of eligibility for both Social Security and Medicare to 69. Doesn’t this make sense now that Americans are living longer?
No, it doesn’t..., almost all the rise in life expectancy has taken place among the affluent. The bottom half of workers,... who rely on Social Security most, have seen their life expectancy at age 65 rise only a bit more than a year since the 1970s. Furthermore,... many ... still have to perform manual labor.
And while raising the retirement age would impose a great deal of hardship, it would save remarkably little money. ...
And there are plenty of other zombies out there. Consider, for example, the zombification of the debate over health reform. ...
Finally, one of the interesting political developments ... has been the triumphant return of voodoo economics, the “supply-side” claim that tax cuts for the rich stimulate the economy so much that they pay for themselves.
In the real world, this doctrine has an unblemished record of failure..
In the world of Republican politics, however, voodoo’s grip has never been stronger. Would-be presidential candidates must audition in front of prominent supply-siders to prove their fealty to failed doctrine. ... Supply-side economics, it’s now clear, is the ultimate zombie: no amount of evidence or logic can kill it.
So why has the Republican Party experienced a zombie apocalypse? One reason, surely, is the fact that most Republican politicians represent states or districts that will never, ever vote for a Democrat, so the only thing they fear is a challenge from the far right. Another is the need to tell Big Money what it wants to hear: a candidate saying anything realistic about Obamacare or tax cuts won’t survive the Sheldon Adelson/Koch brothers primary.
Whatever the reasons, the result is clear. Pundits will try to pretend that we’re having a serious policy debate, but, as far as issues go, 2016 is already set up to be the election of the living dead.

Friday, March 20, 2015

'We’re Frighteningly in the Dark About Student Debt'

Susan Dynarski:

We’re Frighteningly in the Dark About Student Debt, NY Times: ...The ... United States government ... has a portfolio of roughly $1 trillion in student loans, many of which appear to be troubled. The Education Department, which oversees the portfolio, is ... neither analyzing the portfolio adequately nor allowing other agencies to do so.
These loans are no trivial matter... Student loans are now the second-largest source of consumer debt in the United States, surpassed only by home mortgages. In a major reversal, they now constitute a larger portion of household debt than credit cards or car loans. ...
The frightening reality, however, is that we are remarkably ignorant about student debt..., we can’t quantify the risks that student debt places on individual households and the economy as a whole. ...
Over at the Federal Reserve and consumer bureau, as well as outside the government, highly trained analysts are eager for data. A sensible solution would be for the Education Department to put it in their hands and let them get to work.
An additional longer-term solution is to move the loan program out of the Education Department entirely — either into an existing agency that has the statistical expertise or a new student-loan authority. ...

An even better solution would be to stop saddling students with so much debt.

Paul Krugman: Trillion Dollar Fraudsters

Why do Republicans use "magic asterisks" in their budget proposals?:

Trillion Dollar Fraudsters, by Paul Krugman, Commentary, NY Times: By now it’s a Republican Party tradition: Every year the party produces a budget that allegedly slashes deficits, but which turns out to contain a trillion-dollar “magic asterisk” — a line that promises huge spending cuts and/or revenue increases, but without explaining where the money is supposed to come from.
But the just-released budgets from the House and Senate majorities break new ground. Each contains not one but two trillion-dollar magic asterisks: one on spending, one on revenue. And that’s actually an understatement. If either budget were to become law, it would leave the federal government several trillion dollars deeper in debt than claimed, and that’s just in the first decade. ...
The modern G.O.P.’s raw fiscal dishonesty is something new in American politics... And the question we should ask is why.
One answer you sometimes hear is that what Republicans really believe is that tax cuts for the rich would generate a huge boom and a surge in revenue, but they’re afraid that the public won’t find such claims credible. So magic asterisks are really stand-ins for their belief in the magic of supply-side economics, a belief that remains intact even though proponents in that doctrine have been wrong about everything for decades.
But I’m partial to a more cynical explanation. Think about what these budgets would do if you ignore the mysterious trillions in unspecified spending cuts and revenue enhancements. What you’re left with is huge transfers of income from the poor and the working class, who would see severe benefit cuts, to the rich, who would see big tax cuts. And the simplest way to understand these budgets is surely to suppose that they are intended to do what they would, in fact, actually do: make the rich richer and ordinary families poorer.
But this is, of course, not a policy direction the public would support... So the budgets must be sold as courageous efforts to eliminate deficits and pay down debt — which means that they must include trillions in imaginary, unexplained savings.
Does this mean that all those politicians declaiming about the evils of budget deficits and their determination to end the scourge of debt were never sincere? Yes, it does.
Look, I know that it’s hard to keep up the outrage after so many years of fiscal fraudulence. But please try. We’re looking at an enormous, destructive con job, and you should be very, very angry.

Tuesday, March 17, 2015

'Tax Cuts Still Don’t Pay for Themselves'

I get tired of saying that tax cuts don't pay for themselves, so I'll turn it over to Josh Barro:

Tax Cuts Still Don’t Pay for Themselves: Last week, I wrote about the new tax plan from Senator Marco Rubio and Senator Mike Lee... It calls for big tax credits for middle-income families with children, corporate tax cuts and complete elimination of the capital gains tax — and as a result would cost trillions of dollars in revenue over a decade.
Or would it? The Tax Foundation released a report last week arguing the Rubio-Lee plan would generate so much business investment that, within a decade, federal tax receipts would be higher than if taxes hadn’t been cut at all. ...
I discussed the Tax Foundation report with 10 public finance economists ranging across the ideological spectrum, all of whom said its estimates of the economic effects of tax cuts were too aggressive. “This would not pass muster as an undergraduate’s model at a top university,” said Laurence Kotlikoff, a Boston University professor whom the Tax Foundation specifically encouraged me to call. ...
[T]he House adopted a rule in January that requires “dynamic scoring” of tax bills... In principle, dynamic scoring is fine. Tax policy really does affect the economy... But as the Tax Foundation report shows, dynamic scoring can be misused: You can get essentially any answer you want ... by changing the assumptions...
The crucial thing to watch, in the guts of future C.B.O. reports that rely on dynamic scoring, will be whether the new dynamic assumptions are more reasonable than zero — or whether, like the Tax Foundation assumptions, they take us farther away from accuracy, and make unsupportable promises of tax cuts paying for themselves.

Tuesday, March 03, 2015

'The Unfulfilled Promise of Tax Credits as Economic Policy'

Nick Bunker at the WCEG:

The unfulfilled promise of tax credits as economic policy: The relative paucity of the modern welfare state in the United States is a well-known fact among researchers. Compared to rich countries in Europe, the United States spends far less on social insurance programs and other social programs such as education. But these large disparities decrease once the private-sector side of the U.S. welfare state is included in the analysis. Yale University professor Jacob Hacker calls this the “divided welfare state,” where in many instances the U.S. tax code is now the main vehicle for social policy in retirement, college savings, and housing.
How well has this “submerged state” worked? At least in these three areas, the effectiveness of the tax code, via deductions and credits, is questionable. Consider the state of the private-sector retirement system in the United States. .... Or consider the submerged state approach to high college tuitions. ... The mortgage-interest tax deduction is another example of policy being run through the tax code. ...
To be sure, the creation of this network of tax credits and tax expenditures wasn’t without reason. Political realities necessitated the use of the tax code to achieve these ends. And these programs have done real good. But as the evidence shows, they are far from optimal.
The record of using the tax code to do tasks traditionally associated with the welfare state is clearly mixed. At best, it works like a Rube Goldberg machine that attacks a problem by hoping that a chain reaction will do the job. At worse, the machine doesn’t work for the broad majority of the population. The relevant question is now how to re-engineer it for future, more efficient use.

Saturday, February 28, 2015

'A Slippery New Rule for Gauging Fiscal Policy'

Greg Mankiw:

A Slippery New Rule for Gauging Fiscal Policy: the case for dynamic over static scoring is strong in theory. Yet three problems make the task difficult in practice.
First, any attempt to estimate the impact of a policy change on G.D.P. requires an economic model. Because reasonable people can disagree about what model, and what parameters of that model, are best, the results from dynamic scoring will always be controversial. ...
Second, accurate dynamic scoring requires more information than congressional proposals typically provide. ...
Third, dynamic scoring matters most over long time horizons. Some policy changes, such as those aimed at encouraging capital investments, take many decades to have their full impact on economic growth. Yet congressional budgeting usually looks only five or 10 years ahead. ...
So there are good reasons for the economists hired by Congress to pursue dynamic scoring. But there are also good reasons to be wary of the endeavor. ...

Another worry is the politicization of the CBO. See here and here. Also see here and here on the application of dynamic scoring to things such as Head Start and infrastructure spending.

John Whitehead comments:

Mankiw on dynamic scoring: ...Mankiw:

First, any attempt to estimate the impact of a policy change on G.D.P. requires an economic model. Because reasonable people can disagree about what model, and what parameters of that model, are best, the results from dynamic scoring will always be controversial. Just as many Republicans are skeptical about the models of climatologists when debating global warming, many Democrats are skeptical about the models of economists when debating tax policy.

My read of the article was going just fine until the climate model analogy. Two assumptions are made:

  1. All economists agree on "the models of economists" 
  2. Reasonable people can disagree about climatology models

In terms of #1, there is significant disagreement amongst economists about macroeconomic models (i.e., have you read Krugman lately?). In terms of #2, science is different than social science. Climatology involves forecasts so it is different than tests of the law of gravity, but still, ninety-x percent of climate scientists agree. That is a bit higher than the number of economists who agree on anything macro

My stance is that we should accept that the earth is likely warming and people contribute to it (even the U.S. Senate, including those Republicans that Mankiw mentions [did he miss that vote?], overwhelming thinks so). That moves us to the debate on whether we should do anything it or learn to adapt. I think that reasonable people can disagree on that second question. 

Thursday, February 26, 2015

Is Competition to Attract Businesses Harmful?

At MoneyWatch:

Is competition to attract businesses harmful?: State and local governments often use incentives such as tax cuts, rebates, promises of government services and the easing of regulatory restrictions to induce new or existing businesses to locate in their region.

But this strategy raises some important questions:

  • Do these policies work
  • Do the costs exceed the benefits?
  • Do the policies simply redistribute economic activity from one region to another, what economists call a "zero-sum game," or do they create a positive aggregate effect from easing tax burdens and other restrictions?
  • Finally, if it is a zero-sum game, would the U.S. benefit from banning this sort of competition for businesses at the state and local level because it lowers the tax revenue needed to fund critical services and erodes regulatory protections?

These questions are addressed... First...

Wednesday, February 25, 2015

What's a Fair Tax Rate?

Me, at MoneyWatch:

What's a fair tax rate? It depends: How progressive should the U.S. tax system be? Answering this question requires an assumption about what's fair in terms of tax burdens across income groups. But people differ widely on what they consider fair. Therefore, fairness isn't something economic theory can address. Instead, a principle of fairness must be assumed.
For example...

Monday, February 23, 2015

'Even Better Than a Tax Cut'

Larry Mishel:

Even Better Than a Tax Cut: With the early stages of the 2016 presidential campaign underway and millions of Americans still hurting financially, both parties are looking for ways to address wage stagnation. That’s the good news. The bad news is that both parties are offering tax cuts as a solution. What has hurt workers’ paychecks is not what the government takes out, but what their employers no longer put in — a dynamic that tax cuts cannot eliminate. ...
Yes, a one-time reduction in taxes through, say, expanded child care credits or a secondary earner tax break, as Democrats propose, could help families. But as wages continue to stagnate, it is impossible to continuously cut taxes and still pay for things like education and social programs for the growing population of older Americans. ...
Contrary to conventional wisdom, wage stagnation is not a result of forces beyond our control. It is a result of a policy regime that has undercut the individual and collective bargaining power of most workers. Because wage stagnation was caused by policy, it can be reversed by policy, too.

Friday, February 13, 2015

'States Consider Increasing Taxes on Poor, Cutting Them on Affluent'

Compassionate conservatism:

States Consider Increasing Taxes on Poor, Cutting Them on Affluent: A number of Republican-led states are considering tax changes that, in many cases, would have the effect of cutting taxes on the rich and raising them on the poor.
Conservatives are known for hating taxes but particularly hate income taxes, which they say have a greater dampening effect on growth. Of the 10 or so Republican governors who have proposed tax increases, virtually all have called for increases in consumption taxes, which hit the poor and middle class harder than the rich.
Favorite targets for the new taxes include gasoline, e-cigarettes, and goods and services in general (Governor Paul LePage of Maine would like to start taxing movie tickets and haircuts). At the same time, some of those governors — most notably Mr. LePage, Nikki Haley of South Carolina and John Kasich of Ohio — have proposed significant cuts to their state income tax. ...

Tuesday, January 27, 2015

Taxing the Wealthy Won't Hurt Economic Growth

I have a new column:

Taxing the Wealthy Won't Hurt Economic Growth: I have no idea whether or not Mitt Romney will run for president, and if he does, if he will get the nomination. But many of the issues he ran on when he was a candidate in the last election are likely to reappear this time around no matter whom the candidates turn out to be.
One of the fiercely debated issues in the last presidential election was taxation of the wealthy, and Republican proposals similar to those Romney made when he ran against Obama –– lowering or eliminating the taxes on capital gains, interest, dividends, and inheritances –– will undoubtedly arise again. I expect Republicans will throw a few bones to the middle class in an attempt to get the support of this important constituency, but I also expect the thrust of the proposals to be the same old supply-side policies favoring the wealthy that we have seen in the past.
What I want to focus on, however, is the economic arguments that are made to support the ideological goal of low taxes. ...

Tuesday, January 20, 2015

'The 2003 Dividend Tax Cut Did Nothing to Help the Real Economy'

Mike Konczal:

The 2003 Dividend Tax Cut Did Nothing to Help the Real Economy: President Obama is going big on capital taxation in the State of the Union tonight, including a proposal to raise dividend taxes on the rich to 28 percent. ...Bush’s radical cuts to capital taxes are part of his legacy... And it’s a part that the latest evidence tells us did a lot to help the rich without helping the overall economy at all.
In the response to Obama’s proposal, you are going to hear a lot about how lower dividend rates increase investment and help the real economy. Indeed, lowering capital tax rates has been a consistent goal of conservatives. As a result, one of the biggest capital taxation changes in history happened in 2003, when George W. Bush reduced the dividend tax rate from 38.6 percent to 15 percent... So did the tax cut make a difference?
This is where UC Berkeley economist Danny Yagan’s fantastic new paper, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” (pdf, slides) comes in. ...
Here’s what he finds: ... There’s no difference in either investment or adjusted net investment. There’s also no difference when it comes to employee compensation. The firms that got a massive capital tax cut did not make any different choices about things that boost the real economy. This is true across a crazy-robust number of controls, measures, and coding of outliers. ...
President Obama will likely focus his pitch for the dividend tax increase on the future, when, in his argument, globalization and technology will cause compensation to stagnate while investor payouts skyrocket and the economy becomes more focused on the top 1 percent. But it’s worth noting that while capital taxes are a solution to that problem, that the radical slashing conservatives have brought to them are also partly responsible for our current malaise.

Thursday, January 15, 2015

'State and Local Tax Systems Hit Lower-Income Families the Hardest'

Michael Leachman of the CBPP:

State and Local Tax Systems Hit Lower-Income Families the Hardest, CBPP: In nearly every state, low- and middle-income families pay a bigger share of their income in state and local taxes than wealthy families, a new report from the Institute on Taxation and Economic Policy (ITEP) finds. As the New York Times’ Patricia Cohen wrote, “When it comes to the taxes closest to home, the less you earn, the harder you’re hit.”...
In the ten states with the most regressive tax systems, the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy neighbors. ...
A number of states, including Kansas, North Carolina, and Ohio, have made the situation worse in recent years by cutting income taxes, the only major state revenue source typically based on ability to pay. Income tax cuts thus tend to push more of the cost of paying for schools and other public services to the middle class and poor — exactly the opposite of what is needed.

Wednesday, January 14, 2015

'Supply-Side Enablers'

pgl:

...Norman Ture indeed was the original supply-sider who basically told Chairman Mills to ignore the CEA’s recommendations for fiscal restraint in 1966. We now know the unfortunate history of politics not heeding the advice of sensible economists. And yes – the supply-siders once again pushed for fiscal stimulus in 1981. How did that work out? I bring this up today in light of the fact that Mitt Romney is once again running for President. The last time he did so, he advocated large tax cuts without any serious consideration of how to pay for them. I’m sure Romney will have plenty of supply-side enablers once again.

Tuesday, January 13, 2015

'Selective Voodoo'

Paul Krugman:

Selective Voodoo: House Republicans have passed a measure demanding that the Congressional Budget Office use “dynamic scoring” in its revenue projections — taking into account the supposed positive growth effects of tax cuts. It remains to be seen how much damage this rule will actually cause. The reality is that there is no evidence for the large effects that are central to right-wing ideology, so the question is whether CBO will be forced to accept supply-side fantasies.
Meanwhile, one thing is fairly certain: CBO won’t be applying dynamic scoring to the positive effects of government spending, even though there’s a lot of evidence for such effects.
A good piece in yesterday’s Upshot reports on a recent study of the effects of Medicaid for children; it shows that children who received the aid were not just healthier but more productive as adults, and as a result paid more taxes. So Medicaid for kids may largely if not completely pay for itself. It’s a good guess that the Affordable Care Act, by expanding Medicaid and in general by ensuring that more families have adequate health care, will similarly generate significant extra growth and revenue in the long run. Do you think the GOP will be interested in revising down estimates of the cost of Obamacare to reflect these effects? ...

Monday, January 05, 2015

'Do Tax Cuts Partly Pay for Themselves?'

Me, at MoneyWatch, on the Republican's effort to institute dynamic scoring:

Do tax cuts partly pay for themselves?: Now that Republicans have taken control of the House and Senate, they are pushing to change how the Congressional Budget Office (CBO) and the Joint Tax Committee (JTC) evaluate tax legislation.
The effort is being made on two fronts. The first is an attempt by many Republicans to replace the director of the CBO, Doug Elmendorf, with someone more sympathetic to a new approach to evaluating the budgetary impact of proposed legislation. The second is a push from Rep. Paul Ryan, R-Wisconsin, who will take over as chair of the to the Ways and Mean Committee in January, to implement a new rule that would require the CBO and JCT to implement the alternative approach.
At issue is what is known as "dynamic scoring." ...

[I should note that this was written before this appeared.]

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.