Category Archive for: Taxes [Return to Main]

Sunday, January 13, 2008

The Brookings Institution on Fiscal Stimulus of the U.S. Economy

I had this ready a couple of days ago, but didn't post it. However, since Greg Mankiw, Brad Delong, and PGL have all noted Douglas Elmendorf and Jason Furman: If, When, How: A Primer on Fiscal Stimulus, here's the CSPAN video of the event discussing the paper (expires in 15 days):

With: Elmdorf (Overview) Rubin (Moderator), Feldstein, Furman, Rivlin, Zandi.

Monday, January 07, 2008

Brad DeLong on Huckabee's FairTax Proposal

Can Mike Huckabee use hatred of the IRS to convince the majority of voters to vote against their own economic self-interest and shift the tax burden from those making over $200,000 to those making less than that amount? Brad DeLong says that with the help of a press that refuses to say much about the substance of policy leaving many voters uniformed about the consequences of the proposal, perhaps so:

Mike Huckabee wants to abolish the IRS, by By Brad DeLong, Salon: ...Republican presidential front-runner Mike Huckabee is [proposing]... the "FairTax": a plan to replace the income tax and the Internal Revenue Service with a nationwide federal sales tax. ...

The ... FairTax ... promises to be a game changer. It would abolish the IRS and all current federal taxes, including Medicare, Social Security, and personal and corporate income taxes, and replace them with a national, across-the-board, 23 percent point-of-purchase retail sales tax. It would also give each household a multi-thousand-dollar "prebate" every year on their expected annual taxes and exempt people living below the poverty line from taxes altogether.

The FairTax asks: Don't we all hate the IRS? Don't we wish it would just die? And once Huckabee has made the don't-we-all-hate-the-IRS move, his establishment competitors are suddenly thrown on the defensive. ... Cynical on the part of Huckabee? Surely. Dishonest? Somewhat. But remember that this move of Huckabee's is less cynical and dishonest than the standard Republican line on how tax cuts raise revenue, which the other front-running GOP candidates are still mouthing.

From another perspective, however, you have to scorn Huckabee. He is adding yet more layers of confusion to America's conversation about taxes. Huckabee says that the FairTax would mean a 23 percent sales tax rate on all items. First of all, the real tax rate proposed is 30 percent. ... Second, and more important, both conservative and liberal economists believe the real rate would end up even higher. ... Congress' Joint Committee on Taxation, which draws members from both parties and both houses, says the real rate would be 57 percent. (And this leaves aside the enormous federal outlay required by the "prebates"...)

Also, Huckabee calls his proposal a "fair" tax. But it's a mammoth tax cut for the crowd making more than $200,000 a year and a substantial tax increase for those making between $30,000 and $200,000 a year. Does this make economic sense? It is hard to see how...

Does the FairTax make political sense? It is hard to see how -- at least not if people know what he is really proposing. After all, a lot more people make between $30,000 and $200,000 a year than make more than $200,000. ...

So why is Huckabee doing this? I believe ... he is counting on people not knowing what he is really promising. I believe he is counting on the nigh total fecklessness of America's press corps -- a fecklessness that I at least now see as deployed with a sharp partisan edge. ...

Huckabee is a Republican. And it is different if you are a Republican. The New York Times in its big Huckabee profile by Zev Chafets said:

Huckabee's answer to his opponents on the fiscal right has been his Fair Tax proposal ... Governor Huckabee promises that this plan would be "like waving a magic wand, releasing us from pain and unfairness." Some reputable economists think the scheme is practicable. Many others regard it as fanciful ... In any case, the Fair Tax proposal is based on extremely complex projections.

And that's all the crack journalism of the New York Times has to say. If you are seeking information in a daily newspaper, look elsewhere...

Since America's mainstream press believes that it cannot talk about the substance of policy, about who actually would gain and who would lose from a shift to a national sales tax -- that, you see, depends on "extremely complex projections" -- the only point to grab onto when talking about the national sales tax is that it eliminates the IRS. And that sounds very good. And sounding very good is what Huckabee is counting on.

But what replaces the IRS? What agency administers a national sales tax? ... [T]his FairTax selling point is bogus too. The FairTax doesn't eliminate the IRS. It replaces the IRS with another agency -- the United States Fair Tax Federal Revenue Administration and State Tax Authority Reconciliation Service, or the USFTFRASTARS. It is true that the USFTFRASTARS doesn't audit individuals -- it audits businesses and state governments instead. This is a good thing for the $200,000-plus crowd: They are the ones who get audited, and so they get both a big tax cut and greatly increased peace of mind. But this is not a good thing for everybody else. The administrative and enforcement burden does not go away but, rather, becomes even more complicated.

Is Huckabee's FairTax smoke and mirrors? Yes. Is it voodoo economics? Yes. But remember one more thing: It is more reality based than the proposals of the establishment Republican candidates.

Given all the deceptions in Huckabee's FairTax proposal (more here, here, and here), and the actual substance of the plan, I'm not so sure Huckabee deserves to be elevated above the rest of the Republican candidates.

Sunday, January 06, 2008

"There's Many a Slip Twixt the Cup and the Lip"

Larry Summers says fiscal policy needs to be part of the policy package that is implemented to try to avoid a recession. As I've noted several times recently, I agree. There are both theoretical and empirical reasons to expect monetary policy to lose its effectiveness as recessions deepen, and if you wait to see if monetary policy will work or not, it will be too late to use fiscal policy as a backup should monetary policy fail.

The title is a quote from Keynes where he talks about why monetary policy may not work in recessions. The problem is that there is a long chain of events that must occur for monetary policy to be effective - interests rates must fall when policy is eased (something that won't occur in a liquidity trap, for example), and once interest rates fall people have to be induced to go out and buy new houses and cars on the household side, and new factories and equipment on the business side (but in a recession people may be hesitant to make large purchases, and as Summers notes below credit, which is needed to buy these goods and services, may dry up in a recession, something that also makes it hard to use credit to replace lost income when GDP turns downward). For this reason fiscal policy, which operates directly on aggregate demand instead of merely creating incentives to purchase goods and services, can provide a more certain means of stimulating the economy than monetary policy (though the three principles Summers sets out below are important). Here's Larry Summers with more details:

Why America must have a fiscal stimulus, by Lawrence Summers, Commentary, Financial Times: The odds of a 2008 US recession have surely increased after a very poor employment report, growing evidence of weak holiday spending, further increases in oil prices, more dismal housing data and further writedowns in the financial sector. ... Markets now predict the Federal Reserve will provide further stimulus to the economy by cutting rates by an additional 125 basis points on top of the 100 basis points they have already been cut so that rates fall to the 3 per cent range.

There is now a compelling case for the president and Congress to create a programme of fiscal stimulus to the US economy that could be signed into law in the next several months. ...

The question is whether it is better for all the stimulus to come from discretionary monetary policy or for some of the stimulus to come from discretionary fiscal policy. A diversified policy approach seems clearly preferable in that (i) ...judging the impact of policy measures is difficult, the outcome is less uncertain with a diversified mix of stimulus measures; (ii) the proximate impact of fiscal policies is felt by the families bearing the brunt of recession, in contrast to monetary policies whose immediate impact is on financial institutions; (iii) use of fiscal policy reduces the amount by which interest rates have to be reduced, thereby reducing downward pressure on the dollar, which in turn contributes to upward pressure on US inflation and international instability; (iv) partial reliance on fiscal policy mitigates the various risks of bubble creation associated with excessively low interest rates.

Beyond policy mix considerations there is the desirability of maintaining stable demand by insuring against excessive declines in consumer spending... One reason why the economy has been more stable in recent years than historically is that consumer credit markets have allowed households that suffered income declines as the economy turned down to maintain spending by borrowing on credit cards or home equity. These mechanisms, like monetary policy, are less reliable with burdened borrowers and troubled financial institutions. Japan’s experience in the early 1990s when it failed to act decisively to respond to a downturn associated with collapsing financial bubbles ... should be highly cautionary regarding the importance of supporting consumption in the wake of financial problems.

Fiscal stimulus is appropriate as insurance because it is the fastest and most reliable way of encouraging short run economic growth... [But] ... Poorly provided fiscal stimulus can have worse side effects than the disease that is to be cured. This suggests close attention to three issues:

First, to be effective, fiscal stimulus must be timely. To be worth undertaking, it must be legislated by the middle of the year and be ... be implemented almost immediately.

Second, fiscal stimulus only works if it is spent so it must be targeted. Targeting should favour those with low incomes and those whose incomes have recently fallen...

Third, fiscal stimulus, to be maximally effective, must be clearly and credibly temporary – with no significant adverse impact on the deficit for more than a year or so... Otherwise it risks being counterproductive by raising the spectre of enlarged future deficits pushing up longer-term interest rates and undermining confidence and longer-term growth prospects.

Taken together these criteria suggest ... a programme of equal payments to all those paying either income or payroll taxes combined with increases in unemployment insurance benefits for the long-term unemployed and food stamp benefits. Such a programme could be implemented quickly, would largely benefit those most likely to be cut off from credit markets and with the most urgent need to spend. It could easily be made temporary. ...

Tuesday, January 01, 2008

"Alan Greenspan's Continuing Legacy"

Robert Reich discusses the constraints that Alan Greenspan placed on our ability to address domestic problems and help the middle and lower classes improve their standard of living:

2008 and Beyond: Alan Greenspan's Continuing Legacy, by Robert Reich: Alan Greenspan's ... libertarianism [is] based on his early interest in the philosopher and social critic, Ayn Rand. ...

Greenspan’s worst legacy sprang from ...[this] source. Ayn Rand had made virtues out of individualism and enlightened self-interest and was deeply suspicious of all collective effort. Greenspan grew to share Rand’s views. In particular, he was sceptical about efforts to help the less fortunate. “What attracted me to Reagan”, he explains, “was the clarity of his conservatism which was to say that tough love is good for the individual and good for society.” This “implies much less government support for the downtrodden”.

Bill Clinton was elected in 1992, in part to reverse what Reagan had wrought. Clinton promised to provide all Americans with the health care, education, job training and other supports they needed in order to adapt to a fast-changing economy, as well as repair the nation’s roads, bridges and ports, which had been neglected for many years. Yet by the time Clinton came to office, the federal budget deficit had grown so large he had to trim his ambitions. Ironically, that deficit had ballooned largely because Ronald Reagan had cut taxes and increased spending, mostly on the military. Although he was chairman of the Federal Reserve Board during Reagan’s final years in the White House, Greenspan’s memoirs don’t suggest he warned Reagan against the widening deficit. It seems more likely that Greenspan agreed with Reagan and others in his administration that deficit spending as Reagan undertook it would serve to “starve the beast”, forcing any subsequent Democratic President – such as Bill Clinton – to offer less support to the downtrodden.

The question we faced at the start of the Clinton administration was how much deficit reduction was necessary, and how much of Bill Clinton’s original agenda would have to be jettisoned as a result. Greenspan urged Clinton in no uncertain terms to make deficit reduction the priority and sacrifice everything else. ... What Greenspan did not tell Clinton, but admits in his memoirs, was that Clinton had been saddled with Reagan’s profligacy – almost exactly as Republicans had planned it. “Reagan had borrowed from Clinton, and Clinton was having to pay it back.” Greenspan’s advice to Clinton came with an implied promise and threat. If Clinton cut the deficit, Greenspan would reduce interest rates and allow the economy to expand briskly. This would make the “latter part of the 1990s . . . look awfully good”, thereby improving the odds of Clinton’s re-election. But if Clinton failed to cut the deficit adequately, Greenspan would not reduce interest rates, and the economy would continue to limp along, perhaps threatening Clinton’s re-election. Greenspan admits he was “not oblivious to the fact that 1996 would be a presidential election year”. He was, in short, engaging in political extortion. The choice was Clinton’s, but Greenspan held a gun at his head. “Either he could opt for a package of spending programs that would fulfill some of his campaign promises, or he could opt for a deficit-cutting plan . . . there was no in-between – we couldn’t afford both.” Several of Clinton’s advisers, of whom I was one, did not believe the budget needed to be cut as much as Greenspan wanted... As Greenspan puts it, “the conflict extended to within the White House, where key people were still pushing for an agenda less compatible with Wall Street”. But only Greenspan had a gun. So he and Wall Street won.

The ensuing boom seemed to validate the choice Clinton made, but in reality it only validated Greenspan’s power. Lower interest rates had the desired effect, at least in the short term. The economy surged forward, and Clinton won re-election. In the ensuing years, tax revenues exploded, the budget deficit disappeared, and by the start of the Bush administration the federal government had a significant budget surplus. For the first time in decades, America had the resources it needed to provide health care, education and job training, and repair the nation’s infrastructure. But Greenspan did not trust the government to do any of this. He threw his support behind a tax cut, instead: "Chronic surpluses could be almost as destabilizing as chronic deficits," he writes. "Spending would have to be raised or taxes cut, and to me the preferable course seemed clear. ..."

Greenspan’s testimony before Congress in 2001, calling for a tax cut, was critical to George W. Bush’s successful mustering of the political support he needed for his mammoth tax cut, the benefits of which have gone mostly to wealthy Americans. The Bush tax cut drained the federal treasury, eliminating the entire budget surplus within months. Greenspan writes that he didn’t intend to endorse the Bush tax proposal specifically, but this seems disingenuous. ... Greenspan must have known his testimony would be interpreted as support for Bush’s tax cut. He had spent decades in Washington and well understood the ways of the capital city. ...

What Greenspan still views as “dangerous” was a tragically missed opportunity to redress the nation’s long-term problems. They ... must still be dealt with if middle- and lower-income Americans are to have any chance of improving their standard of living. In the new global economy, private investment will go anywhere around the world it can get the highest rate of return. The only aspect of a nation’s economy that remains unique is its people – especially their education, health and the transport and communications systems linking them together. These generate lasting productivity gains. But partly owing to Greenspan the libertarian, even if a Democrat were to retake the White House in 2008, the government wouldn’t have nearly enough money to do what is needed. America’s primary and secondary schools will lack the necessary resources to provide young people from lower-income families with the education they need. Tens of millions of Americans will continue to lack health insurance and tens of millions more will barely be able to afford the insurance they do have. America’s infrastructure will continue to deteriorate. ....

Alan Greenspan the Ayn Rand libertarian has caused the nation grave injury.

[There's a bit more in the original, and Reich does say a few kind words about "Greenspan the empiricist" that I left out.]

In his discussion of Greenspan's impact on our ability to address domestic problems, Reich doesn't mention the cost of the war, something else Greenspan actively supported. But having to pay for the war doesn't make it any easier to deal with domestic issues either.

I don't know for sure how often or how effectively Greenspan used his power as Fed chair to influence political and economic decisions outside the Fed's purview, more than I'd like to see in any case, but it does seem clear that Greenspan had too much power to control the outcome of rate decisions. Without the power to control the outcome of rate-setting meetings, if he cannot credibly threaten to keep interest rates high or low independent of the state of the economy, then he has little ability to make the kinds implicit political threats described above.

There are indications that Ben Bernanke is more willing to share power and to listen to other voices on the Committee than Greenspan was. If so, then that's a healthy development. In addition, Bernanke has a different personality than Greenspan and that might help too. A big part of Greenspan's power came from the treatment he received in the press (even now he seems to have the need to make headlines on a regular basis - I'm sure there are times when Bernanke and other members of the FOMC wish he would just be quiet, at least for a little while). To the extent that the press is less willing to embrace Bernanke in the way they did Greenspan, and if because of that he has to share power within the FOMC more than Greenspan did, then that's a good development too.

Thursday, December 20, 2007

"Hoover Economics" at the State and Local Level

Menzie Chinn's post on the pro-cyclical nature of state and local government spending, "Make that Four Reasons Why Recession May be Averted," reminded me of this editorial written by a colleague exactly six years ago. Menzie is analyzing and disputing a claim that robust state and local government spending will help to avert a recession. As he notes, due to reasons such as balanced budget requirements at the state and local levels and borrowing constraints, in recessions revenues fall as income falls, and since the budget must be balanced, spending falls as well (and the fall in property taxes in the current case could make things worse than usual). This is about Oregon, but the principles apply to all state and local government spending  where budgets are required to be in balance year by year. [For a bit of background, in Oregon (where there is no sales tax) if state revenues are more than 2% above the forecasted amount, the entire amount of the surplus must be refunded to taxpayers - I received a check a couple of weeks ago since revenues have been higher than anticipated this year even though future finances are in question if the economy falls into a recession. It works the other way too - if revenues are too low there are automatic cuts in state spending. This editorial was written when state and local government services were being cut by quite a bit due to revenue problems from the 2001 recession.]:

Commentary: State badly needs a rainy day fund, by George Evans, Commentary, The Register-Guard, December 20, 2001: Oregon's budget crisis is the direct result of the lack of a rainy day fund and indirectly due to past tax kickers. The principle of the rainy day fund is simple: income tax revenue automatically rises in boom times and falls in recessions, so common sense and a sound economic policy dictate that part of the revenue during periods of strong growth be set aside in a special fund to finance expenditures in recessions.

This is common sense, because it is a principle that would be followed by a prudent household facing systematic fluctuations in income. It is sound economics because it helps to smooth government expenditures and stabilize the state economy. Economists agree that government budgets should also be balanced over the business cycle, running surpluses in booms and using them to finance deficits in recessions. Such a policy acts as an automatic stabilizer, restraining the economy during booms and stimulating the economy during recessions.

The way to implement this policy at the state level is through a rainy day fund. The advantage of such a fund is painfully obvious now that we have entered a recession, but it should have been anticipated by setting up a rainy day fund in Oregon in the early 1990s.

What political forces prevented setting up a rainy day fund that would have avoided the current budget crisis? The principal obstacle has been the "tax kicker," which returns to households the "excess" tax revenues that are generated during booms.

I understand the argument made in favor of the kicker, that it prevents state spending from increasing if politicians are tempted to spend the excess tax revenues. But this argument fails to apply if the excess tax funds are instead set aside in a rainy day fund that can only be tapped during recessions. In contrast, the kicker operates with a perverse and devastating cyclical timing. Because the kicker deprives us of the rainy day fund, it in practice leads to downward pressure on state government spending during recessions, and therefore acts to intensify the recession. ...

The current State budget crisis would have been much less acute, and possibly entirely avoided, if a rainy day fund had been in place, and tapping the rainy day fund would have also helped reduce the extent of the recession in Oregon.

The current regime of balancing the budget year by year is bad economics. At the national level this "Hoover economics" approach to fiscal policy is widely understood to be discredited. The same principle applies at the state level. Current budgetary choices remain critical, but we are operating under artificial constraints. Not having a rainy day fund in place is subjecting us to unnecessary economic distress. Surely we can at least now agree to change our flawed budget policy design so that we are never again compelled to face a recession so unprepared.

I wonder how much additional stabilization could be achieved at the national level if all states had such a fund to stabilize their economies over the business cycle.

Tuesday, December 18, 2007

"Crazy Views on the Economy"

Dean Baker reviews the economic plans of the Republican presidential candidates:

Creative thinking, by Dean Baker, Comment is Free: Since several of the Republican presidential candidates regard creationism as a serious theory in biology, it should not be surprising that their economic views also have little connection to reality. In fact, the Republicans' test scores in biology are probably somewhat higher than in economics. Creationism is a minority view... By contrast, all of them seem to be spouting some pretty crazy views on the economy.

Of course tax cuts are central to the Republicans' economic story. They have great plans to reduce taxes, especially for people who don't work for a living. For example, Mitt Romney ... insists that anyone with an income of less than $200,000 a year should pay no tax on any income from dividends, capital gains or interest. Under the Romney plan, a person who collects $200,000 a year in interest on $4m held in government bonds would pay zero tax. By contrast, a custodian working two jobs to earn $40,000 a year can look to pay around $4,000 a year in taxes.

In the same vein, Mike Huckabee has proposed the "Fair Tax", which his website claims is "based on wealth", although it is described as a sales tax. Huckabee proposes to have his Fair Tax replace all other forms of taxation... If a national sales tax is to replace all other federal taxes, then it would have to be in the neighbourhood of 25% to 30%. ... If we don't tax items like healthcare and house sales ..., we might be up to 40% with Huckabee's Fair Tax.

But this is where the fun comes in. Typical workers will probably have to pay President Huckabee's Fair Tax on almost everything they buy throughout their life. But, the smart folks who make their money by inheritance, strike it rich on Wall Street or work in highly paid professions can simple skip out on the Fair Tax. ... Their tax burden will get passed on to the teachers, fire fighters, custodians and others who are left behind. What could be fairer?

Fred Thompson also deserves credit for creativity. He proposes the option to pay tax at a marginal rate of 10% for couples on earnings below $100,000 and 25% on earnings over $100,000. This would be a modest cut in taxes for most workers, but it would reduce taxes by more than a third for the richest 1%. ...

All the Republican candidates claim to be devout believers in tax cut creationism: the view that tax cuts pay for themselves due to their effect on stimulating growth. Even Rudy Giuliani and former straight talker John McCain claim to believe that tax cuts pay for themselves.

It is important to understand that this one is not a debatable point, as often claimed in the media. Tax cuts do not come close to paying for themselves. There is no serious dispute among economists on this issue. The Congressional Budget Office recently did a study examining the range of predictions from the available theoretical models on this topic. It found that the most optimistic model showed that growth replaces less than one-third of the lost revenue, and even this gain was only possible for a limited period of time. In short, when the Republicans claim that they can have large tax cuts without any offsetting cuts in spending, they are prescribing a route to really large deficits.

Of course, this suggests an important reason why some people may opt to support the Republican contenders. With the Democrats backing down from plans to end the war in Iraq, the war may continue long into the future if Democrats take the White House. On the other hand, the tax cuts proposed by the leading Republicans could take away the money needed to prosecute the war. In short, when it comes to the war in Iraq, the only way out may be to "starve the beast".

Since I've been noting reality-based Laffer curve reporting lately, I should acknowledge this from Ross Douthat (as pointed out at Crooked Timber, it's helpful to realize that David Frum is one of Giuliani's "senior policy advisers"):

Anti-Intellectualism, the Right, and Rudy, by Ross Douthat: David Frum, on populism and anti-intellectualism:

Conservatives have drawn strength from populism. But you can overdo any good thing —and I am beginning to think that on this one, we've zoomed the car into the red zone.

For me, the lights started flashing in 2005, during the battle over the nomination of Harriet Miers to the Supreme Court of the United States. Defenders of the president's under-qualified nominee began attacking the concept of qualification. One wrote: "The GOP is not the party which idolizes Ivy League acceptability as the criterion of intellectual and mental fitness. Nor does the Supreme Court ideally consist of the nine greatest legal scholars." Harriet Miers, we were told, had a good Christian heart. That was enough ... In the end, it was not quite enough for Ms. Miers. But it may be enough for many voters in 2008.

The currently front-running candidate in Iowa, former Arkansas governor Mike Huckabee, has built his campaign on a plan to abolish the Internal Revenue Service and replace the federal income tax with a national sales tax ... Economists and tax experts virtually unanimously agree that the plan is beyond unworkable -- that it is downright absurd.

... Just a little lower down in the polls is a libertarian candidate named Ron Paul. Paul is best known for his vehemently isolationist foreign policy views. But his core supporters also thrill to his self-taught monetary views, which amount to a rejection of everything taught by modern economists from Alfred Marshall to Milton Friedman.

Huckabee and Paul have not the faintest idea of what they are talking about. The problem is not that their answers are wrong -- that can happen to anyone. The problem is that they don't understand the questions, and are too lazy or too arrogant to learn.

Fair points all: ..., and Frum's larger worry about anti-intellectualism in the contemporary Right is one I share in spades. But if you're going to be hard on the current crop of Republican candidates for making bogus claims about public policy, it seems awfully unfair to leave out the candidate given to running ads in which he announces: "I know that reducing taxes produces more revenue. The Democrats don't know that. They don't believe that." (They don't believe it, of course, because in the current fiscal landscape you can't find a serious conservative economist who thinks it's true.) Or penning op-eds in which he explains that "the meaning of fiscal conservatism" includes the principle that "lower taxes can result in higher revenue." Or telling a GOP debate audience, in response to a question about whether we need to raise taxes to fix up our nation's transportation infrastructure, that the way “to do it sometimes is to reduce taxes and raise more money.”

Now it’s true that occasionally Rudy Giuliani hedges his bets (“sometimes,” “can,” and so forth) on this topic, and it’s true as well that he may not actually believe the extreme supply-side talking points he’s spouting, in the way that Huckabee presumably believes in the Fair Tax and Paul in the gold standard. On the other hand, neither of those ideas are likely to serve as the basis for economic policy in the United States any time soon, and both are marginal even within the right-wing coalition; the “tax cuts raise revenue” canard that Giuliani keeps promoting, on the other hand, is a staple of Bush Administration rhetoric and probably the dominant view among movement conservatives. If you’re looking for cases where the Right’s anti-elitism has shaded into outright anti-intellectualism - for cases where, in Frum's words, a GOP politician has deliberately failed to "study the problem, master the evidence, and face criticism" - Giuliani’s frequent channeling of Larry Kudlow seems like at least as telling an example as anything Mike Huckabee and Ron Paul are peddling.

I don't believe it's "anti-intellectualism," i.e. I don't believe that Giuliani is unaware of the evidence on this issue (and his policy advisers ought to be aware of it - if they aren't, or if they are reluctant to correct his misleading, untrue statements, that's a big worry).

This is a character issue. I don't believe Giuliani has deliberately 'failed to "study the problem, master the evidence, and face criticism"' through a deliberate act of anti-intellectualism. The chances that the campaign is unaware of all the fact checks on this issue are zero. It seems to me that what is deliberate is the willingness to pander to the movement conservative base even if it requires ignoring the evidence and saying things he knows in his heart of hearts aren't true. He's not deliberately ignorant, he's deliberately calculating and we shouldn't excuse it by acknowledging the occasional hedge (“sometimes,” “can,” and so forth) when the intent is to mislead, or use terms like anti-intellectualism to describe the behavior. We shouldn't just say, "when the Republicans claim that they can have large tax cuts without any offsetting cuts in spending, they are prescribing a route to really large deficits," we should also note that there is an intent to deceive, that they are not telling the truth, or they are so ignorant of the truth that it ought to raise questions about their fitness for office.

Giuliani and others who make this claim know what they are doing. When it comes to, say, selling a war with Iran, reforming Social Security, or other issues, will they also be willing to ignore evidence, to only accept "facts" that confirm their preconceived beliefs instead of objectively reviewing the situation, will they be willing to look you in the eye and mislead in order to convince you to go along with their plans? Those who continue to make misleading claims about tax cuts in spite of the very public debunking of that position have given every indication that the answer is yes.

Sunday, December 16, 2007

How Will You Pay for That Free Lunch?

The CBO has this graph featured on its website:

Federal Spending (Percentage of gross domestic product)

The graph identifies the main source of the projected growth in our fiscal imbalance, health care costs (and it's mainly the growth in costs, not the baby boom retirement wave, though demographics do play a role). The CBO report says:

The rise in health care spending is the largest contributor to the growth projected for federal spending. Therefore, efforts to reduce overall government spending will require potentially painful actions to slow the rise of health care costs. There may be ways, however, in which policymakers can reduce costs without harming the health of Medicare and Medicaid beneficiaries. Changing those programs in ways that reduce the growth of costs—which will be difficult, in part because of the complexity of health policy choices—is ultimately the nation’s central long-term challenge in setting federal fiscal policy.

Given the magnitude and importance of the budget problem, why are some politicians proposing tax cuts that will make the problem even worse?:

The Republicans’ Expensive Tax Promise, by Tom Redburn, NY Times: For decades, ever since Ronald Reagan was elected in 1980, promising to cut taxes has been an essential element of every successful Republican campaign for the presidency. ...

But there is a crucial twist to the campaign this time around. All of the Republican candidates have pledged to extend President Bush’s tax cuts from the early 1990s beyond their scheduled expiration in 2010. That promise, however, does not carry the same weight as in the past.

That’s because, rather than delivering any additional benefit..., carrying out such a pledge would do nothing more than maintain the status quo. Nobody’s taxes would be cut further... There’s not as much political payoff in that.

And preventing anybody from being worse off is going to be incredibly costly. ... Simply to extend the Bush tax cuts indefinitely into the future and ... prevent the alternative minimum tax from imposing an increasingly heavy burden on tens of millions of middle-class and upper middle-class taxpayers would cost the government, over the next decade, roughly $2.5 trillion in revenues now expected under current law. And that’s just the beginning.

Even without taking on any additional tasks, merely meeting the government’s existing obligations — mostly to pay for the military and to keep up with the health care and retirement needs of the elderly — would send the budget deficit soaring... [graph]

“The combination of roughly constant revenues and significantly rising expenditures would quickly create an unstable fiscal situation,” the budget office report notes...

How would the Republican candidates deal with this problem? Most say they would try to hold down spending — and cut taxes even more.

Continue reading "How Will You Pay for That Free Lunch?" »

Friday, December 14, 2007

Is Stephen Moore "That Stupid"?

I'm very pleased that the press seems to finally be getting it: tax cuts have not paid for themselves. Politicians too, for the most part anyway, but there is one notable exception noted below. Justin Fox has a nice write-up, as does Avi Zenilman at Politico who summarizes the positions of Republican candidates on the "tax cuts pay for themselves"claim and reviews academic work on this issue:

Continuing with the 'shameless commie propaganda' on tax cuts and revenues, by Justin Fox: The comment screening software here seems to have gone hyperactive in the past few days... I will try to fish regularly in the junkpile, where I find gems like this comment to one of my Arthur Laffer posts from alex:

Shameless Commie Propaganda (I simply refuse to believe that you are that stupid)

1. Mr. Laffer did state the evident and nothing else: (1) if government will collect 100% nobody will show up for work, (2) if government won't collect nothing it will have no revenues and (3) there is a maximum somewhere in between.

2. So "diminishing returns" is far from being the biggest danger of raising taxes, the biggest dangers is sliding into area of negative impact on Laffer's curve.

3. Tax cuts did paid for themselves: e.g. in 1984 federal revenue were greater than in 1982 and grew up until 2001 and again after tax cut of 2003, revenues in 2004 were greater than in 2002 and are growing ever since

Now I simply refuse to believe that alex, or WSJ editorialista Stephen Moore, who makes similar claims to #3 all the time, is that stupid. So what does that make them? Definitely disingenuous, maybe something worse.

Continue reading "Is Stephen Moore "That Stupid"?" »

Monday, December 10, 2007

"Do Tax Cuts Ever Raise Revenues?"

Justin Fox, in response to my criticism of his statement that ""Some tax cuts do raise revenues", says:

Do tax cuts ever raise revenues?, by Justin Fox: Mark "Economist's View" Thoma was appalled by my statement in this post that, "Some tax cuts do raise revenues, of course." So much so that he took back a bunch of nice things he'd just said about my column on Arthur Laffer. ...

I'm certainly not going to say that no tax rate cuts have ever raised revenues. Would Mark Thoma say that?

Yes I would, see below. Continuing:

Just two off the top of my head: The 1964 Kennedy reduction of the top marginal income tax rate from 91% to 70% (it was enacted after JFK's assassination, but it was his bill), the 1981 Reagan reduction of the top marginal rate from 70% to 50%. I'm not at all an expert on this, but I don't think it's too controversial among economists to assert that those particular changes (but not the rest of the of Kennedy and Reagan tax legislation) were a break-even or better for the Treasury. (Brad DeLong on the 1980s tax cuts: "As I read the evidence ... reducing the top tax rate from 70% to 50% is probably a revenue gainer and surely not much of a loser. From 50% to 28% is, I think, very different: a big revenue loser.") ...

He's right, it's not controversial, but the lack of controversy is in the other direction, and it's too bad Brad has confused the issue. Let's look at what other economists have said. Quoting Robert J. Gordon's textbook, Macroeconomics, pg. 394:

The fact that the United States entered into an era of persistent deficits after the Reagan tax cuts suggests that it moved from a point like C to B in the 1980s, not from D to C.

He is talking about a graph of the Laffer curve and moving from C to B is a fall in revenues. Likewise, William Baumol and Alan Blinder's text, Macroeconomics, says (pgs. 195-197):

The large Reagan tax cuts in the early 1980s ballooned the budget deficit ... Thus supply-side tax-cuts are bound to raise the government budget deficit. This problem proved to be the Achilles heel of supply-side economics in the United States in the 1980s. It left behind a legacy of budget deficits that took 15 years to overcome.

So, the Reagan tax cuts do not provide us with an example of tax cuts paying for themselves, not at all. There's no controversy about whether deficits increased after the Reagan tax cuts - they did - so the Reagan tax cuts were not self-financing. It's disappointing to see that some people think they were after all the debunking of this myth that has occurred.

It was mainly the suggestion about the Reagan tax cuts that brought the response, but let's deal with the Kennedy tax cuts as well. Did they pay for themselves? Unlikely. Rather than running down a bunch of references, here's the explanation for the confusion. It's important to remember that the debt from the Vietnam war was, to a large extent, monetized (so the debt that was created was hidden by monetary policy). Thus, throughout this period there was stimulus to the economy from debt monetization, and when evaluating the tax cuts it's important to take this effect out (i.e. the effect that monetary policy had on stimulating output as well as the reduction in debt from the  debt monetization). When you do, the evidence that the tax cut paid for itself just isn't there.

So, to answer Justin's question once again, yes, I would and do say that there's no evidence that tax cuts have ever paid for themselves. [I realize that there is an attempt by Brad and Justin to isolate particular features of the tax changes, e.g. to just look at the change for the top group in isolation and analyze those changes by themselves, and I suppose with a narrow enough focus we could find somebody who paid more taxes after the change, perhaps even a group who did, but to me that just confuses the issue - overall these tax cuts did not pay for themselves, and even the statement that they did for small subgroups at the very top is debatable and subject to interpretation].

Update: Here's Bruce Bartlett:

As the staff economist for Representative Jack Kemp, a Republican of New York, I helped devise the tax plan he co-sponsored with Senator William Roth, a Delaware Republican. Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964, which lowered the top rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent.

We believed that our tax plan would stimulate the economy to such a degree that the federal government would not lose $1 of revenue for every $1 of tax cut. Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results. Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models...

I think that's overly optimistic (recovering a third), but even that is a far cry from self-financing.

Update: More from David Beckworth.

Saturday, December 08, 2007

Reframing the Debate over Taxes

After this, it's good to see Robert Frank back in action. This is on the framing of taxes:

Reshaping the Debate on Raising Taxes, by Robert Frank, Commentary, NY Times: Powerful anti-tax rhetoric has made legislators at every level of government afraid to talk publicly about a need to raise taxes. The constituents of the few who dare speak are typically bombarded with attack ads that go something like this: “It’s your money, but your esteemed senator thinks the bureaucrats in Washington know how to spend it more wisely than you do.”

Because of our inability to talk sensibly about taxes, the United States has been sliding toward second-class status in the world economy. Our national debt, for example, has increased by more than $3 trillion since 2002. Once the world’s largest creditor nation, we are now its largest debtor. We are currently borrowing more than $800 billion a year from the Chinese, Japanese, South Koreans and others — loans that will have to be repaid in full with interest. These imbalances have sent the dollar plummeting.

The situation is set to become worse. ... In short, realistic proposals for solving our budget problems must include higher revenue. But unless political leaders can develop strategies for dealing with the powerful anti-tax rhetoric that has sunk similar proposals in the past, the impasse will continue.

One strategy would be to inform voters that the “it’s your money” argument is incoherent. Taken to its logical conclusion, it implies that it is illegitimate for the government to collect taxes. ...

Continue reading "Reframing the Debate over Taxes" »

Friday, December 07, 2007

"Its not True"

I think this is a good sign. Do tax cuts pay for themselves?:

Washington Post: Mr. Giuliani and the Tax Fairy. Editorial "...It's not true..."

Time: Tax Cuts Don't Boost Revenues, by Justin Fox ..."these claims are false..."

Now, will the press make the connection between the willingness to make these claims and character? Those who say this are either making claims they know are false, or have economic advisors who don't know what they are talking about. In any case, whether its the willingness to mislead to promote an idea, or the incompetence in choosing advisors and the unwillingness to consider evidence at odds with their preconceived notions, it's worth noting. My own view is that their economic advisors know what the evidence really says, and the candidates are choosing to ignore what they are told. But a simple question, "Have your economic advisors informed you that there's no basis for that claim, and if so, why are you making it anyway" or something like that, would tell us the answer. It's not as though this is unimportant, the difference between the claim that the most recent tax cuts are self-financing and the actual evidence is hundreds of billions of dollars and it would seem that with so much at stake, we would hear more about those who mislead us about the true cost of the policies they advocate.

Update: I take back praise of Justin Fox and Time, it's undeserved. Justin introduces his article on his blog by saying "Some tax cuts do raise revenues, of course."

Update: Here's the Boston Globe on John McCain:

Straight shooter, wacky tax idea "Alluring as such a theory may be, it's not true."

That's more like it.

Update: Quite a bit more from Brad DeLong here on the Time and Washington Post pieces - his take is more generous than mine in some ways (see the update at the end), less so in others (comments on Washington Post).

Wednesday, December 05, 2007

Feldstein: How to Avert a Recession

Marty Feldstein says it's time to use both monetary and fiscal policy to deal with the weakness in the economy:

How to Avert Recession, by Martin Feldstein, Commentary, WSJ: The American economy is now very weak and could get substantially weaker. Current economic conditions call for lowering interest rates and for enacting a tax cut now that is conditioned on economic developments in 2008. More generally, fiscal policy should be considered in the future whenever there is a risk that an excessively easy monetary policy could cause an asset-price bubble. ...

Almost every economic indicator -- including credit conditions, housing and consumer sentiment -- has deteriorated significantly since the Federal Reserve's October meeting. In my judgment, the probability of a recession in 2008 has now reached 50%. If it occurs, it could be deeper and longer than the recessions of the recent past.

Further interest-rate cuts can reduce the risk of recession and increase output and employment in 2008 and 2009. The current 4.5% fed-funds rate is essentially neutral... Although there are risks that the rise in oil prices and the falling dollar will raise the inflation rate, the ... Fed should reduce the fed-funds rate at its December meeting and continue cutting toward 3% in 2008, unless there is a clear sign of an economic improvement.

Because of current credit market conditions, there is a risk that interest rate cuts will not be as effective in stimulating the economy as they were in the past. ...

But rate cuts can still help. Lower interest rates will still reduce monthly interest payments for the one-third of homeowners who have adjustable rate mortgages, thus freeing up cash to spend on other things. When banks make new loans, they will do so at lower interest rates, encouraging more business and household borrowing.

Yet more than lower interest rates is needed. Fed Chairman Ben Bernanke signaled a desire for additional policies to reinforce monetary easing when he called for a dramatic temporary rise in the maximum size of eligible Fannie Mae and Freddie Mac mortgages -- to $1 million from the current $417,000. While this would help to stimulate the market for high-priced homes, it would cause these government-sponsored lenders to assume an even greater share of the U.S. housing market when there is a strong fundamental case for reducing their role. And why should American taxpayers provide an implicit guarantee to mortgages of up to $1 million when the average sale price of a home is now less than $250,000?

In a similar attempt to go beyond Fed easing, the head of the FDIC recently proposed that the government impose an across-the-board limit on the mortgage interest increases that are now scheduled to occur. With more than $350 billion of mortgages scheduled to adjust up in 2008, such an imposed limit could no doubt avoid many personal defaults. But arbitrarily changing the terms of mortgages ... would also destroy the credibility of American private debt. Who would invest in U.S. bonds or mortgages if the government could arbitrarily reduce the contracted interest payments?

What's really needed is a fiscal stimulus, enacted now and triggered to take effect if the economy deteriorates substantially in 2008. There are many possible forms of stimulus, including a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability. There are also a variety of possible triggering events. The most suitable of these would be a three-month cumulative decline in payroll employment. The fiscal stimulus would automatically end when employment began to rise or when it reached its pre-downturn level.

Enacting such a conditional stimulus would have two desirable effects. First, it would immediately boost the confidence of households and businesses since they would know that a significant slowdown would be met immediately by a substantial fiscal stimulus. Second, if there is a decline of employment (and therefore of output and incomes), a fiscal stimulus would begin without the usual delays of the legislative process. ....

The excessive asset-price increases caused by some past monetary expansions -- especially the induced rise in the prices of real estate -- provide a further reason to use fiscal as well as monetary policy. By cutting the fed-funds rate to just 1% in 2003 and promising that it would be raised only slowly, the Fed contributed to the sharp rise in house prices and the market's current weakness. A mixed strategy that included a prospective fiscal stimulus would have reduced the Fed's perceived need for a sustained negative real fed-funds rate, and would therefore have produced a more balanced expansion of demand. Now is surely a time for such a two-part strategy of expansion.

If we go the temporary fiscal policy stimulus route, which can occur through either an increase in government spending or a decrease in taxes, there is a reason to prefer increased spending. A tax cut creates an incentive for households to increase consumption, but there is no guarantee that they will, e.g. they could just retire debt instead. This is just the familiar split of a change in taxes and hence disposable income into a change in consumption and a change in saving, and most of the time consumption and hence aggregate demand will increase when taxes are cut, but we can't be sure in advance how a tax cut will be used. In addition, when the tax cut is temporary, as this one would be, the impact on consumption is generally lower than with a permanent change in taxes.

With government spending, however, the impact on aggregate demand is assured. A change in government spending impacts aggregate demand directly on a dollar for dollar basis so there is no uncertainty at all about whether or how much aggregate demand will increase with a change in fiscal policy. And, with all of our infrastructure needs, it's not as though we can't find places where government spending could increase output and employment and also improve our public capital (there are many other ways spending could help as well, infrastructure enhancement is not our only need).

So, I agree that we may need to try fiscal policy, but I don't see why temporary tax cuts should be preferred to temporary increases in spending. In fact, here's Greg Mankiw on this point. This is from his textbook Macroeconomics (5th ed., pg. 454) and it explains why temporary changes in taxes are not very useful for stimulating the economy:

 The permanent-income hypothesis can help us to interpret how the economy responds to changes in fiscal policy. According to the IS-LM model..., tax cuts stimulate consumption and raise aggregate demand, and tax increases depress consumption and reduce aggregate demand. The permanent-income hypothesis, however, predicts that consumption responds only to changes in permanent income. Therefore, transitory changes in taxes will have only a negligible effect on consumption and aggregate demand. If a change in taxes is to have a large effect on aggregate demand, it must be permanent. ... The lesson to be learned ... is that a full analysis of tax policy must ... take into account the distinction between permanent and transitory income. If consumers expect a tax change to be temporary, it will have a smaller impact on consumption and aggregate demand.

[Update: William Polley continues the discussion. Update: Free Exchange also comments.]

Thursday, November 08, 2007

"There are Only Two Economic Philosophies in America"

Robert Reich says bottom up:

Trickle Down or Bottom Up, by Robert Reich: ...There are only two economic philosophies in America – trickle down and bottom up. Trickle down means the rich get richer and pay less taxes. Supposedly they use their extra income to invest in America, which makes all of us more productive. But it doesn’t work that way. In a global economy, investments don’t trickle down; they trickles out to wherever on the planet the rich can get the highest return. If trickle down worked as advertised inequality wouldn’t be widening so fast.

Bottom up means giving all Americans what they need to be productive – universal and affordable health coverage, good schools, a chance to attend college, job retraining, affordable child care, and good public transportation to and from the job, for starters. But as we learned a decade ago, this requires money – even more, now. So the question is how the nation can afford it and ALSO give the soon-to-retire baby boomers the Social Security and Medicare they expect, pay for homeland security and national defense, invest in non-fossil based fuel technologies, and repair the nation’s decrepit infrastructure (recall the pipe that blew out in New York last July and the bridge that collapsed in Minneapolis). I haven’t even mentioned the trillion dollars necessary to shield the middle class from the Alternative Minimum Tax. Even if we cut corporate welfare, eliminated subsidies to agribusiness, and banned all earmarks, we wouldn’t have nearly enough.

The only way is to stop obsessing about balancing the budget and start pushing for a serious tax hike on the rich. Yet all Democratic presidential candidates are styling themselves "fiscal conservatives" and none has suggested raising the marginal tax rate on the richest beyond the 38 percent rate it was under Bill Clinton. They may talk bottom-up economics but they're still wedded to trickle down.

What is fair? For a given level of government spending, how would you decide who pays what? What sort of tax distribution would you consider equitable and why? I like the equal marginal sacrifice principle, i.e. that the pain of giving up the last dollar in taxes should be the same for everyone, and that gives a progressive structure, but there are other principles of taxation that can be used. As to the tax hike on the wealthy, I think a revenue neutral change that tilted the structure upward a bit more might be viewed as more equitable and hence be politically viable, though it would be a close call, a large upward tilt would face more resistance, and a tax proposal designed to enhance revenue would face more resistance yet, to the point where pushing for it in an election year may not be wise.

Sunday, November 04, 2007

knzn: Incentive Effects of Progressive Taxation at the High End

knzn says that making taxes more progressive acts as insurance against bad economic outcomes thereby encouraging additional entrepreneurial activity:

Incentive Effects of Progressive Taxation at the High End, by knzn: Does progressive (labor) taxation at the high end reduce the incentive to engage in high-value activities? It seems to me that (to the extent that highly lucrative activities really are high value) it actually increases the incentive. Most of the people with the highest compensation -- movie stars, star athletes, CEOs of large corporations, successful hedge fund managers, successful entrepreneurs, etc. -- have that high compensation not just because of decisions to engage in (ostensibly) high-value activities but because of a combination of an intentional occupational choice decision and unpredictable outcome of success in that occupation. The ones who made the same occupational choices but weren't so successful -- ordinary actors, minor league athletes, middle managers of large corporations, hedge fund managers without a lot of assets under management, entrepreneurs with limited or no success, etc. -- don't get that ultra-high compensation.

How could the tax code encourage people to undertake these activities? If people were risk-neutral, the progressivity wouldn't make much difference, since any increase in taxation of the high rewards for being successful would be offset by a decrease in taxation of the lower rewards of being not-so-successful. But economists usually assume that people are risk-averse. If so, progressive taxation encourages people to enter high-risk, high-value occupations, because it provides a form of insurance for people who choose to do so. If you're successful, you make gobs of money, and you have to pay a lot in taxes, but you still end up with gobs of money; if you're not so successful, you don't make so much money, but you get an insurance payment in the form of a reduced tax bill. If the government were explicitly providing an at-cost insurance policy for actors, athletes, business people, hedge fund managers, and so on, I don't think there would be much question that the policy would encourage, rather than discourage, entry into these occupations.

Some people may be entrepreneurs and some people workers precisely because of differences in preferences for risk, i.e. entrepreneurs may be entrepreneurs because they are have more tolerance for risk. This would mean that increased progressivity of the tax code would not have a large impact on the behavior of those agents who are near risk neutrality, i.e. on existing entrepreneurs, but would impact those with larger aversions to risk, i.e. workers near the risk tolerance margin. Thus, an explicit insurance policy may encourage workers at the margin to become entrepreneurs. [One question for knzn. What if entrepreneurs, or at least a fraction of them worth worrying about, are risk lovers?]

This plays into a more general point about social safety nets that is often overlooked. Suppose you are thinking of quitting your long-held steady job and using your accumulated savings to invest in a business (or you are thinking of moving to a potentially better job, but there are risks). When would you be more likely to do so, when there is a social safety net to catch you if things don't work out, a net that allows a smooth return to wage employment and covers things like health insurance, or when there is little, if any help waiting for those who fail to make the business or the move to a new job work? We hear that social insurance stifles effort and risk-taking, but there are forces working in both directions.

Wednesday, October 31, 2007

"Truth About Taxes"

David Leonhardt lists "basic facts" about taxes "that ideology can’t change":

Plain Truth About Taxes and Cuts, by David Leonhardt, NY Times: You’re going to hear a lot about taxes over the next two years. ... There are big philosophical questions about taxes that facts alone can’t answer. ... But there are also some basic facts that ideology can’t change. If you keep these five in mind, you will have an easier time keeping up with the debate:

As a group, the rich pay a greater share of taxes than in the past. The top 1 percent of taxpayers — those with adjustable gross income of at least $267,000 in 2004 — paid more than 25 percent of all federal taxes that year, according to the Congressional Budget Office. That was up from 15 percent in 1979. People sometimes pick nits with these statistics... But don’t get bogged down in all this. The big picture is clear enough. The main reason for the trend is also clear.

The affluent are paying more of the taxes because they’re making so much more money. ...A family in that top 1 percent of earners paid a total federal tax rate — including everything from payroll taxes to income taxes to capital gains taxes — of 30 percent in 2004. That was down from 41 percent a decade before. Since the 1950s, tax rates on high-income families have generally been falling.

The top earners pay a bigger share of the government tab than in the past because their incomes have risen so sharply — even more sharply than their tax bills. ... The affluent, in short, are paying less in taxes on every dollar they earn but earning many more dollars.

Corporate taxes have dropped significantly in recent decades. ...Everyone from Mr. Rangel on the left to Fred Thompson on the right is saying that high corporate taxes are hurting American companies. But the effective corporate tax rate isn’t any higher than it has been on average over the last 25 years, and it’s far lower than it was in the 1960s and ’70s.

“A dirty little secret is that the corporate income tax used to raise a fair amount of revenue,” says Richard Clarida, a Columbia University economist and former Treasury Department official under Mr. Bush.

What’s going on here? This country really does have a high corporate tax rate, but it also has so many loopholes that companies can often avoid paying the tax. A much smarter policy, economists say, would include a lower rate with fewer loopholes. ...

The nation’s total tax bill hasn’t changed much over the years. Put it all together — less corporate tax collection and lower individual tax rates, combined with more income for the people who face the highest tax rates — and the trends mostly cancel each other out. The taxes that the federal government took in last year equaled 18.4 percent of the gross domestic product, almost exactly the average since 1980. ...

The obvious conclusion is that moderate shifts in taxes don’t dictate economic growth. Mr. Bush’s father and Bill Clinton raised taxes — and the economy grew for almost the entire decade of the 1990s. The current administration has cut taxes — and the economy has grown for almost all of this decade.

So if short-term economic growth were the only thing to worry about, you could make a good argument either for cutting taxes or for raising them.  Unfortunately, there is another problem out there.

The budget deficit is worse than either party says it is. ...White House officials are absolutely correct when they note that the current budget deficit isn’t especially large. But it will soar in coming years, as baby boomers ... move onto the Social Security and Medicare rolls

If nothing changes over the next couple of decades, the United States will build up a debt burden... There are several ways to prevent that. Taxes could be raised across the board, or they could be raised on the affluent. Or the Medicare budget — a much bigger problem than Social Security — could be held in check if the government figured out how to say no to some expensive medical procedures. Or all of the above could happen. But something has to give. No amount of clever argument can pay the bills.

Just one complaint: There is no direct attempt in this set of "truths" to debunk the supply-side myth that tax cuts have paid for themselves, a myth that will survive so long as those making the claim are not revealed as hacks pushing falsehoods. [Note: That tax increases increase revenues is implied in the last paragraph where raising taxes across the board fixes the deficit, but there's no direct challenge to this pervasive myth. Since the topic is "basic facts that ideology can’t change," and given the prominence of this myth among supply-side advocates, it seems to me the myth ought to be addressed directly.]

A Convenient Lie

As soon as you read this from Pete Du Pont:

Inconvenient Tax Truths: Al Gore believes global warming is "an inconvenient truth." Here are some economic truths that America's liberal leadership finds too inconvenient to support. ... Tax rate reductions increase tax revenues. This truth has been proved at both state and federal levels, including by President Bush's 2003 tax cuts on income, capital gains and dividends. Those reductions have raised federal tax receipts by $785 billion.

There's no need to read any further, he's revealed himself (yet again) as a political hack. The saddest part is that some people actually believe these lies.

It's also too bad that under Rupert Murdoch the Wall Street Journal's editorial page has continued to print these lies to support an ideology, lies that helped to push through tax cuts that did not raise revenues by $785 billion or at all, but instead lowered revenues by hundreds of billions of dollars according to Congressional Budget Office estimates. [Just to be clear, this is about the editorial pages, not the news pages, e.g. see Greg Ip's excellent story on changes in the Fed under Bernanke for an example of the difference in quality].

Thursday, October 25, 2007

Robert Reich's Postscript on Fair Taxes

Robert Reich says "the case for substantially raising marginal income tax rates on the rich" is clear:

Who Pays the Dollars that Finance Bush's War? More on a Fair Tax Burden, by Robert Reich: President Bush has just sent Congress an “emergency” request for an extra $46 billion in expedited funds for Iraq, Afghanistan and other national security needs. That’s in addition to the $145 billion in war-related spending included in Bush’s original 2008 budget. Which brings me back to the subject of who’s gonna pay for all this. ...

[T]he principle for who’s gonna pay should be equal sacrifice. Equal sacrifice means that in paying taxes, people ought to feel about the same degree of pain – regardless of whether they’re wealthy or poor. This means that someone earning $2 million a year ought to pay a larger portion of her income in taxes than someone earning $20,000 a year. Even Adam Smith saw the wisdom of a graduated tax. “The rich should contribute to the public expense, not only in proportion to their revenue, but something more in proportion,” he wrote. (Wealth of Nations, vol. 2, ed. Campbell, Oxford U Press, 1976, p. 840.)

Traditionally during wartime, taxes have been raised substantially on top incomes to help pay the extra costs of war. The estate tax was imposed by wartime Republican presidents Lincoln and McKinley. It was maintained through World War I, World War II, the Korean War, and the Cold War. Now, under Bush, with Bush's war costing more and more, it's being phased out.

During World War I the marginal income tax on the richest Americans rose to 77 percent; during World War II it was over 90 percent. In 1953, with the Cold War raging, Republican president Dwight Eisenhower refused to support a Republican bill to reduce the top rate, then 91 percent. By 1980, the top marginal rate was still at 70 percent.

Combine this logic with the facts I shared with you two blogs ago – about how large a share of national income and wealth the super-rich now claim – and the case for substantially raising marginal income tax rates on the rich should be even clearer.*
* Postscript: The blogger who asserts that 84.6 percent of all federal taxes are paid by the top 25 percent of income earners, and over a third are paid by the top 1 percent, advances a specious argument. First, most Americans pay more in payroll taxes than in income taxes; in addition, state sales taxes have grown faster than almost any other form of taxation. Both payroll taxes and sales taxes take a much bigger portion of the paychecks of lower-income Americans than of higher-income. Viewed as a whole, the current tax system is quite regressive.

Second, and more to the point, it’s irrelevant how much of the total income tax burden is paid by the top 25 percent, or even the top 1 percent. The ethical and logical issue is what sort of sacrifice individuals are making, or should be expected to make, rather than what sacrifice an economic “class” is making as a whole. The rich have become so wealthy that even if each wealthy American paid a very small share of his or her incomes in taxes, the rich would still, as a group, account for a large share of total income taxes. I find it ironic that conservatives who extol the virtues of individualism and abhor so-called “class warfare” would resort to such a deceptive argument.

And, though I think Reich has in mind a net increase in taxes rather than revenue neutral offsets that increase progressivity, along these lines:

A Tax Plan as Trial Run for ’09 Law, by Edmund L. Andrews, NY Times: The House’s leading Democratic tax writer will propose a sweeping overhaul of the tax code on Thursday that would increase taxes on many people with incomes above $200,000 but cut them for most others.

The bill, [is] to be introduced by Representative Charles B. Rangel of New York ... Mr. Rangel has acknowledged that he does not expect to enact such a bill this year, and President Bush would almost certainly veto legislation that raises taxes on the wealthy. ...

Monday, October 22, 2007

The Great Lie of Supply-Side Economics

I am very pleased to see this, and not just because there's a link to this site. I've been frustrated with the press on the 'Laffer curve, tax cuts have paid for themselves' issue because the press has enabled a big lie. It's a lie Republican candidates, even the president, can still repeat with very little attention from the mainstream media. No matter how often reputable economists on the right and the left have said this is a lie, the press has ignored it and allowed it to continue unquestioned. Some of you around here are probably tired of hearing about it (though see here), but it's a lie with consequences. The tax cuts that went through were sold on false premises - what it costs us is far greater than advocates said, advocates who claimed it would actually increase revenue and cost us nothing. It does cost us, hundreds of billions of dollars so far, and that cost has not been presented honestly to the public by either the advocates of the tax cuts or the press reporting on the issue. Without an adequate understanding of the true costs, the public discussion on the issue is distorted and the result is bad public policy.

The big lie matters, and the sooner the press starts to call politicians on it, the better for us all. There are encouraging signs, Jon Chait's recent book being one example and this being another, but it's still possible to tell the lie with little consequence from the mainstream media. Here's James Surowiecki (whom I've come to respect as an excellent reporter on economics):

The Tax Evasion: The Great Lie of Supply-Side Economics, by James Surowiecki, The New Yorker: In American politics, supply-side economics is the monster that will not die. The supply-side argument that, in the United States, tax-rate cuts pay for themselves ... has little or no support within the mainstream economic profession, and no hard empirical data to back it up. Myriad studies have demonstrated that both the Reagan tax cuts of the nineteen-eighties and the tax cuts put through under the current Administration shrank government revenues and led to bigger budget deficits.

Yet the absence of proof for supply-side theory has not dimmed Republicans’ devotion to it. Last month, President Bush told Fox News that his tax cuts had “yielded more tax revenues, which allows us to shrink the deficit.” Dick Cheney insists that “sensible tax cuts increase economic growth and add to the federal treasury.” Every major Republican Presidential candidate ... is on the record as saying that tax cuts pay for themselves. And, just last week, a New York Sun editorial published a list of what “the Republican Party stands for.” First on the list? “Reductions in top marginal tax rates . . . lead to greater government revenues in the long run.”

This supply-side orthodoxy is striking in a couple of ways. First, it requires Republican politicians to commit themselves publicly to a position that is wrong—and wrong not as a matter of ideology or faith but as a matter of fact. ... Second, despite the fact that the supply-side faith has no grounding in reality, within the Republican Party there is little room for dissent on the subject, as Jonathan Chait details in his new book, “The Big Con.” Last week, the blogger Megan McArdle wrote that she had a book review for an unnamed right-wing publication spiked because in it she dared suggest that, in the U.S., tax cuts decreased government revenues.

The cynical explanation for the persistence of the supply-side dogma is that it’s simply cover for cutting taxes for the rich. But the supply-side orthodoxy has flourished for other reasons, too. To begin with, the absurd idea that tax cuts pay for themselves is based on an idea that is not at all absurd, which is that tax rates can have an impact on people’s behavior. Increase taxes too much, and people may work less ... and invest less..., and so the economy will grow more slowly. The opposite can happen if you cut taxes. (How much of an impact tax rates have ... is a subject of much debate in economics, but it’s inarguable that they do matter.) What supply-siders have done is start with that reasonable idea and extrapolate it to unreasonable lengths.

They’re aided in that extrapolation by the simple fact that the American economy grows over time. As a result, even if you cut taxes the federal government will eventually take in more tax revenue than it once did. And that allows supply-siders to fashion a spurious syllogism: taxes were cut in 2001, government revenues are higher in 2007 than they were in 2001, therefore the tax cuts increased revenue. The comparison that really matters in analyzing the impact of the tax cuts, of course, is ... the comparison between actual tax revenue in 2007 and what tax revenue would have been in 2007 had there been no tax cuts in 2001. And studies that make these types of comparisons—including one by Bush’s own Treasury Department ... find that government revenues would be greater had taxes not been cut. But that hasn’t stopped President Bush from claiming victory.

In one sense, of course, it’s odd that a Republican President should treat higher government revenues as a point of pride. Historically, after all, Republicans have been the party of small government...

The conservative pundit Larry Kudlow recently attacked the Republican candidates for failing, in their most recent debate, to explain what spending cuts they would advocate to accompany the tax cuts they propose. But Kudlow should hardly have been surprised, because supply-side rhetoric suggests that spending cuts aren’t really necessary. ... This tax-cut-and-spend approach is the promise of a free lunch, something that voters like to hear. The appeal of that promise may make it easier for politicians to run a campaign. But the fraudulence of the promise makes it awfully hard to run a government.

Update: Maybe I spoke too soon:

The Case of the Missing Surowiecki Column, by Felix Salmon: Memo to Jeff Bercovici: What's with Jim Surowiecki's column in this week's New Yorker? It's right there on the website – complete with no fewer than nineteen hyperlinks. (Someone give this guy a blog!) But it's in the "online only" section: if you pick up the actual magazine, it skips straight from the Talk of the Town section to the feature well, which means that Surowiecki's "Financial Page" is a page only in metaphor.

The most charitable explanation I can think of is that the New Yorker decided the column was simply too reliant on its hyperlinks to work in print. But if that's the case, why didn't they just ask Surowiecki to write a different column, or to rewrite this one so that it worked in print form? ...

I can't remember Surowiecki ever being banished from the print edition like this before, which is why it's so bittersweet to read this, from Mark Thoma:

I am very pleased to see this, and not just because there's a link to this site. I've been frustrated with the press on the 'Laffer curve, tax cuts have paid for themselves' issue because the press has enabled a big lie. It's a lie Republican candidates, even the president, can still repeat with very little attention from the mainstream media. No matter how often reputable economists on the right and the left have said this is a lie, the press has ignored it and allowed it to continue unquestioned.

He's writing, of course, about Surowiecki's column, which is about supply-side economics. And it turns out that the one time he singles out "the press" for praise in exposing the lie is also the one time that the article remains unprinted by any physical press.

Thursday, October 18, 2007

Reich: The logic of Taxing the Rich, and Why Dems are Afraid to Use It

Robert Reich makes the case for a more progressive tax structure:

The logic of Taxing the Rich, and Why Dems are Afraid to Use It, by Robert Reich: No candidate for president has suggested that the nation should raise the marginal tax rate on the richest beyond the 38 percent rate it was under Clinton (it’s now 35 percent, but the richest of the rich, as I’ll explain in a moment, are paying only 15 percent). Yet new data from the IRS show that income inequality continues to widen. ...

The biggest emerging pay gap is actually inside the top 1 percent. It's mainly between CEOs, on the one hand, and Wall Street financiers – hedge-fund managers, private-equity managers ..., and investment bankers – on the other. ... The 25 highest paid hedge fund managers are earning more than the CEOs of the largest five hundred companies in the Standard and Poor’s 500 combined. CEO pay is outrageous; hedge and private-equity pay is way beyond outrageous. Several of these fund managers are taking home more than a billion dollars a year.

You might think that Democrats would do something about the anomaly in the tax code that treats the earnings of private-equity and hedge fund managers as capital gains rather than ordinary income, and thereby taxes them at 15 percent... But Senate Democrats recently backed off a proposal to do just that. Why? It turns out that Dems are getting more campaign contributions these days from hedge fund and private equity partners than Republicans are getting. They don’t want to bite the hands that feed.

Taxing the super-rich is not about class envy, as conservatives charge. It’s about the nation having enough money to pay for national defense and homeland security, good schools and a crumbling infrastructure, the upcoming costs of boomers’ Social Security ..., and, hopefully, affordable national health insurance. Not to mention the trillion dollars or so it will take to fix the Alternative Minimum Tax, which is now starting to hit the middle class.

If the rich and super-rich don’t pay their fair share of this tab, the middle class will get socked with the bill. But the middle class can’t possibly pay it. America’s middle class is under intense financial pressure. Median wages and benefits, adjusted for inflation, have been going nowhere for thirty years; health costs are soaring..., fuel costs are out of sight, the prices of the houses occupied by the middle-class are in the doldrums.

What’s fair? I’d say a 50 percent marginal tax rate on the very rich (earning over $500,000 a year). Plus an annual wealth tax of one half of one percent on net worth of people holding more than $5 million in total assets. Can’t be done, you say? Well, the highest marginal tax rate under Republican Dwight Eisenhower was 91 percent. It dropped under JFK to the 70 percent range. You say the rich will leave the country rather than face a marginal tax of 50 percent? Let them, and take away their citizenship.

If the Democrats stand for anything, it’s a fair allocation of the responsibility for paying the costs of maintaining this nation. So far, neither the Dem candidates for president nor the Senate Dems have shown a willingness to uphold this fundamental principle. It seems the rich have bought them out.

The Democratic leadership's decision to sell-out on the capital gains versus ordinary income tax issue was disappointing. On Robert Reich's proposal, whaddayathink? Is 50% fair?

Wednesday, October 17, 2007

PGL: Composition of the Tax Bite

Since Greg Mankiw no longer allows comments (a sentiment I understand on those days when comments are particularly trying), we'll have to do it this way:

Composition of the Tax Bite, by pgl: Greg Mankiw should be congratulated as he provides a graph of personal current taxes that includes what we pay at the state and local level relative to GDP. It does not include deferred taxes but no one knows how these will be paid as George W. Bush just scoffs at this reality. It also does not include payroll taxes but that’s OK as long as we are not denying the Trust Fund reserves.

But I do have a complaint. It leaves the impression that we are paying a lot more now they we have ever paid except during the Clinton years. To be fair – Greg did not say that... But we should notice that Greg left off what I’d call business taxes. Since Greg was kind enough to cite his source – line 3 from table 3.1 found here - I’m defining business taxes to be the sums of lines 3 and 4. I’ve also graphed line 2 from the same table as total current tax receipts. Total taxes as a share of GDP are not higher than they’ve ever been. You see – we may be paying more in personal taxes but business taxes as a share of GDP have declined from their levels before 1981.

Tuesday, October 16, 2007

"It Violated Their Editorial Line on Taxation"

Wow. I didn't think it would be this blatant:

I take it all back, by Megan McArdle: A conservative publication, which I will not name, just spiked a book review because I said that the Laffer Curve didn't apply at American levels of taxation, even while otherwise expressing my vast displeasure with the (liberal) economic notions of the book I was reviewing. This isn't me looking for an alternative explanation for the spiking of a bad review: the literary editor accepted it, edited it, and then three hours later told me it couldn't be published because it violated their editorial line on taxation.

I suppose I ought to have known, but I didn't. Go ahead liberals, pile on: you told me so. The Laffer Curve and the supply siders pushing it seem to be the teacher's unions of the right.

[From earlier today, Paul Krugman pokes holes in the Laffer curve.] Update: Ezra Klein asks:

"A Conservative Publication" by By Ezra Klein: Shouldn't McMegan name the outlet that spiked her book review because she refused to toe the line on the Laffer Curve? Wouldn't it be useful knowledge for her readers?

I wondered the same thing. Why protect them?

Update: Brad DeLong adds:

...McMegan concludes:

The Laffer Curve and the supply siders pushing it seem to be the teacher's unions of the right.

Funny how I have never heard of a liberal publication spiking a piece because it was insufficiently friendly to teachers' unions or trial lawyers or AARP. Don't I remember seeing a lot of things in liberal publications about how school systems are overbureaucratized, in large part because of the unions?

It is true that I have seen a lot of right-wing hyenas but haven't seen many liberals attack teachers for being overpaid and underworked. Liberals are more likely to take a line like this:

Pay Teachers More Money: Without improving the average quality of our teachers, there is little hope of improving the system... teacher quality has declined over time... ironically... [because of] reduced discrimination against women. Fifty years ago, talented, educated women had few options other than teaching, and the schools were filled with highly qualified and able teachers. Today, college-educated women have moved into other occupations....

This is no surprise. Teachers are not paid very well, and many talented potential teachers have other options.... Why are teachers so important? Since most education in this country takes place in classrooms where there are many children, disruption by one child imposes penalties on other children in the class. The evidence suggests that child behavior is very sensitive to teacher quality....

[S]chools are failing badly for some subgroups... education has been demonstrated conclusively to be very important both for a country's economic growth and for raising the wages of individual citizens. Each year of schooling is associated with about a 10 percent increase in subsequent annual earnings....

[T]he reality is that the public school system will be with us for years to come, and it is important to make that system stronger.... To improve our schools in the 21st century, it is first necessary to attract more high-quality teachers...

That's the liberal line--that teachers need more money. But that line is not just a liberal line. It is a reality-based line. The quote is from Eddie Lazear, Hoover Institution Senior Fellow and Chair of President Bush's Council of Economic Advisers. (Eddie is also strongly, strongly in favor of vouchers, educational competition, and parental voting-with-the-feet--things that liberals tend to be more skeptical of.)

Also see Ezra Klein and Mathew Yglesias. One more point on this. The supply-siders are enforcing a big lie - that tax cuts pay for themselves - a lie that helped them to push through huge tax cuts. Show me where liberal publications are enforcing  message discipline based upon a lie about unions. As the above makes clear, they aren't enforcing message discipline at all, let alone to support a falsehood.

Who’s Laffering now?

Paul Krugman on the Laffer curve:

Who’s Laffering now?, by Paul Krugman: The Bushies have used rising tax receipts since 2004 as supposed proof that tax cuts pay for themselves — carefully ignoring the fact that revenues plunged in the early years of the administration, and that the subsequent rapid growth basically just gets us back to the previous trend. Also, they’ve pretended not to notice that mainly the revenue comes from an incredible surge in corporate profits, the byproduct of an economy in which economic growth leaves most workers behind.

But anyway, the revenue surge is over.

The chart currently shown at the top of the CBO home page tells most of the story. (Sorry, getting graphics up on this blog is a real pain — no time right now.) A read of the report shows that the revenue slowdown is continuing: September 2007 revenues were only 2 percent higher than September 2006 revenues.

Bye-bye Bush revenue boom.

Here's the graph:


Estimated Year-to-Year Growth Rates (Percent)

Here's an update:

Failing to Pass the Laffer Test, by Paul Krugman: OK, a follow up on my previous tax revenue post. The revenue boom of the last few years, which mainly depended on booming corporate profits, is over. Here’s a chart from the Congressional Budget Office [see above]:

And a further slowdown is visible within the fiscal 2007 data: revenue in September was up only 2 percent from the previous year. To put this in perspective, here’s revenue as a percent of GDP since Clinton took office:


So everything you’ve heard about how revenues have boomed since the Bush tax cuts is wrong. What really happened was that revenue plunged, as a percent of GDP, in the early Bush years, then staged a partial, but only partial, recovery. And that recovery seems to have run its course.

Yet on the basis of this experience, both Bush and his would-be Republican successors are proclaiming that tax cuts actually increase revenue.

Saturday, October 13, 2007

Trickled Pink

From The Onion, evidence of trickle-down effects:

Reaganomics Finally Trickles Down To Area Man, The Onion: Twenty-six years after Ronald Reagan first set his controversial fiscal policies into motion, the deceased president's massive tax cuts for the ultrarich at last trickled all the way down to deliver their bounty, in the form of a $10 bonus, to Hazelwood, MO car-wash attendant Frank Kellener. ...

"Back when Reagan was in charge, I didn't think much of him," Kellener, 57, said, holding up two five-dollar bills nearly three decades in the making. "But who would have thought that in 2007 I'd have this extra $10 in my pocket? He may not have lived to see it, but I'm sure President Reagan is up in heaven smiling down on me right now."

Leading economists say Kellener's unexpected windfall provides the first irrefutable proof of the effectiveness of Reagan's so-called supply-side economics, and shows that the former president had "incredible, far-reaching foresight."

"When the tax burden on the upper income brackets is lifted, the rich and not-rich alike all benefit," said Arthur Laffer, who was a former member of Reagan's Economic Policy Advisory Board. "Eventually." ...

Prior to joining Marlin Car Wash in 2005, Kellener worked for nearly two decades at a local Ford assembly plant that is now defunct. Before that, he was employed by the FAA as an air traffic controller until his union went on strike and Reagan fired him, along with nearly 13,000 others. ...

Kellener, who has cared for his schizophrenic sister ever since her federally funded mental institution was closed in 1984, said that he plans to donate the full $10 to the Republican presidential candidate who best embodies Reagan's legacy.

Thursday, October 11, 2007

Tax Farmers

Privatization at any cost:

Private Debt Collection of Federal Taxes: House Passes HR 3056, by Linda McBeale: The House passed its bill ... to end private debt collection for federal taxes, in a bipartisan vote of 232 to 173, in spite of a White House veto threat. 

Senate Republican leader Chuck Grassley has expressed his opposition to ending privatization of debt collection and declared it "dead in the water" as far as the Senate is concerned, where the Democrats have a majority of only one vote. 

Grassley's views haven't deterred Senate leaders who think it is silly to keep paying more to private bill collectors than it would cost to do the same job with government employees, especially when the private bill collectors cannot be held accountable as easily for abuses in the debt collection process, which have already been reported for this short-lived program.  Byron Dorgan, Democratic Senator, stated that "[t]here is ample evidence that private debt collectors cost more and collect less than professional IRS employees do, and often engage in abusive practices.”   Some of that evidence was provided in today's BNA report on the vote:

"[T]he private collection firms used by IRS were projected for fiscal year 2007 to bring in a gross of between $45.7 million and $65 million. The private employees ended up bringing in a gross of $32.13 million. All of those figures are before the employees are given the 21 percent to 24 percent bonus they receive for collecting the taxes."...

It is fairly obvious that this administration has been very interested in privatization of government functions, whether or not there are cost savings involved. A prime example is Bush's war in Iraq, for which we are hiring tens of thousands of mercenaries at incredibly high pay compared to our own soldiers ($1000 a day, according to one report I read). Congress should get us off the train that says privatize at any cost, particularly in sensitive areas like tax compliance.

A Paul Krugman rerun on this topic from August, 2006:

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.

And privatized tax collection is only part of the great march backward. 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.

Continue reading "Tax Farmers" »

Tuesday, October 09, 2007

While Visions of Tax-Cuts Dance in Their Heads

Jonathan Chait wonders why Republicans have allowed their party to be captured by a small group of supply-side ideologues:

Captives of the Supply Side, by Jonathan Chait, Commentary, NY Times: Remember the Republican presidential debate a few months ago, when three candidates raised their hands to indicate they didn’t believe in evolution? Something just as laughable is likely to happen today, at the first Republican debate on the economy. Every candidate will probably embrace the myth that cutting taxes increases government revenues. At the very least, no one will denounce it as a falsehood. ...

Last year, Senator John McCain earned widespread ridicule for publicly embracing Jerry Falwell, whom he had once described as “evil.” But an equally breathtaking turnabout occurred earlier in the year, when Mr. McCain embraced the Bush tax cuts he had once denounced as an unaffordable giveaway to the rich. In an interview with National Review, Mr. McCain justified his reversal by saying, “Tax cuts, starting with Kennedy, as we all know, increase revenues.” ...

Mr. McCain is not alone. Every major Republican contender — Rudy Giuliani, Fred Thompson, Mitt Romney — has said that the Bush tax cuts have caused government revenues to rise. No prominent Republican office-seeker dare challenge this dogma for fear of offending the economic far right.

Yet there is no more debate about this question among economists than there is debate about the existence of evolution among biologists. Most economists believe that it is theoretically possible for tax rates to be high enough that a reduction in rates could actually produce more revenues. But I do not know of any tenured economist in the United States who believes this is true of the Bush tax cuts.

Granted, economic growth sometimes causes revenues to rise faster than expected after a tax cut, as has happened since the 2003 tax cut. But sometimes revenues fall faster than expected after a tax cut, as they did after the 2001 tax cut. And sometimes revenues rise faster than expected after a tax increase, as they did after the 1993 Clinton tax increase. ...

No Republican candidate can risk committing heresy by acknowledging this bipartisan consensus among economists. On social issues, however, Republicans actually tolerate diversity of thought. For example, Mr. McCain, Mr. Giuliani and Mr. Thompson all oppose, on federalist grounds, a constitutional amendment to ban gay marriage...

As Trent Lott, the former Senate majority leader, recently observed: “Republicans tend to squabble, but when it’s fiscal issues, when it’s economic issues, we tend to come together. That’s what makes us Republicans.” Mr. Lott is right if he’s referring to the members of the Washington establishment who run the Republican Party. But when it comes to the party’s rank-and-file members, he has it exactly backward. Grassroots Republicans agree on social issues but disagree on economics.

The most recent Pew survey of the electorate ... revealed that Republicans find common ground on social issues like discouraging homosexuality and teaching creationism alongside evolution in the public schools. They disagree on economic policy. In the survey, most members of the Republican coalition preferred deficit reduction to tax cuts.

Ardent anti-tax conservatives represent a clear minority among Republican voters. And yet the most extreme and counterfactual subgroup among them — supply-siders — remain firmly in control of the party.

The party’s economic priorities are reinforced at Grover Norquist’s weekly “Wednesday Group” meetings, where conservative activists, politicians, business lobbyists and pundits meet to hash out a common agenda. Mr. Norquist is known to cut off any mention of issues like abortion or homosexuality with a curt “No sex talk, please.”

A handful of fanatical ideologues, along with a somewhat larger number of money men who stand to gain a fortune from supply-side policies, relentlessly enforce the faith. They do so with far more success than the religious right, and they receive far less mockery for their efforts.

Just last month President Bush insisted, yet again, that “supply-side economics yields additional tax revenues.” Hardly an eyebrow was raised.

From an editorial in today's WSJ:

The Shrinking Deficit, Editorial, WSJ: ...[F]ederal receipts have climbed ... since the 2003 investment tax cuts... Income, dividend and capital gains tax rates were all cut in 2003, but individual income tax receipts have soared..., with payments by the wealthy accounting for most of the windfall. ... The budget deficit has declined ... in the wake of the Bush tax cuts ...

Saturday, October 06, 2007

Robert Frank: We Need a Progressive Consumption Tax

Is a progressive consumption tax the answer to our problems?

Why Not Shift the Burden to Big Spenders?, by Robert Frank, Economic View, NY Times: ...As even veteran supply-siders now concede, the president’s tax cuts have added hundreds of billions of dollars to the national debt. ...

As all serious participants in this debate now agree, no strategy can succeed without increasing federal revenue substantially. The leading Republican presidential aspirants, advocating further tax cuts, have elected to skip this debate. Their Democratic counterparts have proposed allowing Mr. Bush’s tax cuts for top earners to expire as scheduled. That step alone, however, would not be nearly enough.

Given the political risk of proposing painful tax increases in an election year, many fear that the crisis will remain unresolved. Yet a simple remedy is at hand. By replacing federal income taxes with a steeply progressive consumption tax, the United States could erase the federal deficit, stimulate additional savings, pay for valuable public services and reduce overseas borrowing — all without requiring difficult sacrifices from taxpayers.

Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A family’s annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction — say, $30,000 for a family of four — would be the family’s taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.

As taxable consumption rises, the tax rate on additional consumption would also rise. With a progressive income tax, marginal tax rates cannot rise beyond a certain threshold without threatening incentives to save and invest. Under a progressive consumption tax, however, higher marginal tax rates actually strengthen those incentives.

Consider a family that spends $10 million a year and is deciding whether to add a $2 million wing to its mansion. If the top marginal tax rate on consumption were 100 percent, the project would cost $4 million. The additional tax payment would reduce the federal deficit by $2 million. Alternatively, the family could scale back, building only a $1 million addition. Then it would pay $1 million in additional tax and could deposit $2 million in savings. The federal deficit would fall by $1 million, and the additional savings would stimulate investment, promoting growth. Either way, the nation would come out ahead with no real sacrifice required of the wealthy family, because when all build larger houses, the result is merely to redefine what constitutes acceptable housing. With a consumption tax in place, most neighbors would also scale back the new wings on their mansions.

A progressive consumption tax would also reduce the growing financial pressures confronting middle-class families. ... The problem is not that middle-income families are trying to “keep up with the Gateses.” Rather, these families feel pressure to spend beyond what they can comfortably afford because more expensive neighborhoods tend to have better schools. A family that spends less than its peers on housing must thus send its children to lower-quality schools.

Some people worry that tax incentives for reduced consumption might throw the economy into recession. But total spending, not just consumption, determines output and employment. If a progressive consumption tax were phased in gradually, its main effect would be to shift spending from consumption to investment, causing productivity and incomes to rise faster.

Should a recession occur, a temporary cut in consumption taxes would provide a much more powerful stimulus than the traditional temporary cut in income taxes can. People would benefit from a temporary consumption tax cut only if they spent more right away. In contrast, consumers who fear that they might lose their jobs in a recession are often reluctant to spend the dollars they are no longer paying as income tax.

Failure to address the current fiscal crisis is not an attractive option. With baby boomers retiring and most voters now favoring universal health coverage, budget shortfalls will grow sharply. Annual borrowing from abroad, now more than $800 billion, will also increase, causing further declines in the slumping dollar. And the personal savings rate, which has been negative for the last two years, will fall still further, causing future reductions in economic growth.

The progressive consumption tax is perhaps the only instrument that can reverse these trends at acceptable political cost. It has been endorsed by a long list of distinguished economists of varying political orientations. It was proposed in the Senate in 1995 by Sam Nunn, the Georgia Democrat then serving his final term, and Pete V. Domenici, Republican of New Mexico, who called it the Unlimited Savings Allowance tax. In short, this tax is not a radical idea. ...

I'd prefer to see this tax justified on the economics (i.e. it provides superior incentives) rather than as a relatively painless way to provide higher revenues (becasue it may not be painless, and because the maginiture of the required increase in future revenues is subject to some dispute and is a political minefield). But it's hard to imagine a change of this magnitude being implemented anytime soon in any case.

Thursday, October 04, 2007

America is Not at War, America is at the Mall

A proposal to raise taxes to help to pay for the war:

The Iraq money pit, by James P. McGovern, Boston Globe: I recently came across a photo of a handwritten sign in a US military facility in Ramadi, Iraq. The sign read, "America is not at war. The Marine Corps is at war; America is at the mall."

The sign reflects a perception among many US soldiers and their families that the American people are not sharing in their sacrifice. It is a perception grounded in reality..., who is really sacrificing? Certainly not members of Congress. We will not wake up tomorrow in harm's way in Baghdad or Fallujah. ...

I propose we change this dynamic by raising taxes on nearly every American in order to pay for the war in Iraq. ...

It is reasonable to assume that the cost will approach $800 billion by the time Bush leaves office. I will soon introduce legislation to impose a "surtax" to begin paying for future war costs that have not been budgeted and paid for by existing federal revenues. This war surtax is modeled on similar surtaxes imposed during World War II and the Vietnam War to cover war costs. ...

My surtax proposal is not an additional tax on income; rather, it is a tax on tax liability.

For example, if a low-income taxpayer owes $100 in taxes, he would be subject to an additional 2 percent surtax of $2. Wealthy taxpayers would pay a higher percentage. Corporations, trusts, and estates would also be subject to the surtax.

Needless to say, this idea of a surtax makes my colleagues - Democrat and Republican - exceedingly nervous. No politician likes to talk about raising taxes. But somebody, someday, somewhere will pay the hundreds of billions we have borrowed so far for this war.

My conservative colleagues will argue that we should cut spending to cover the costs. That's nice rhetoric, but it's not real. Are we going to eliminate the entire departments of Labor, Education, and Health and Human Services? Or how about eliminating all funding for the departments of Agriculture, Commerce, Justice, Energy, Interior, Treasury, the EPA, and NASA combined? That's what it would take to fund just one year of the Iraq war.

Some of my fellow antiwar liberals believe that since the war in Iraq is wrong, they do not want to pay for it. But isn't it also wrong to force future generations to pay for it?

I voted against the war in Iraq. I have consistently fought to bring the war to an immediate end and to bring our troops home. I believe it is the worst political, military, and diplomatic tragedy in our history.

But to force our children to pay for that tragedy would only compound it. The war in Iraq has been this generation's mistake. It should not be the next generation's burden.

We have an opportunity to say to our soldiers and their families that we are in this together; that their fellow citizens are also sacrificing just a little bit.

That's a message worth sending.

While it's certainly true that someone will have to pay for the war at some point - somebody, someday, somewhere will have to give up something to pay the bills - raising taxes right now is not good short-run economic policy given the current weakness in the economy. Driving the economy into a recession would show sacrifice, but that's not the best way to show our support.

It's not good politics either. If a bill was passed raising taxes, and George Bush actually signed it only to have the economy then sink into a recession due to the housing slump or other causes, the political fallout would be large (The WSJ is already claiming that the belief that Democrats will raise taxes is making businesses hesitant to invest and contributing to the current weakness). Thus, while good long-run budget policy does require a plan to pay for expenditures, the political gain from raising taxes now seems small relative to the potential political and economic downside.

I am not objecting to implementing reality-based long-run budget policy, but the mistake was cutting taxes with a war on and the economy relatively strong. We shouldn't compound that error by now raising taxes just as the economy is showing signs of weakness. We will need to pay for this war, and I understand the underlying political point being made through a proposal which has no realistic chance of passage. But even if it did have a chance to pass, now is not the time to put the brakes on the economy.

And please drop this argument:

My surtax proposal is not an additional tax on income; rather, it is a tax on tax liability. For example, if a low-income taxpayer owes $100 in taxes, he would be subject to an additional 2 percent surtax of $2.

That's just an accounting gimmick that invites ridicule from the opposition. This raises taxes, so just say that directly. If the person earns $1,000 and the tax is 10% (=$100), then with the surcharge the tax on income is 10.2% or $102. The $2 comes out of income one way or the other and calling it a tax on a tax doesn't change that.

Wednesday, September 26, 2007

Alan Greenspan versus Naomi Klein

This is part of a longer interview of Alan Greenspan and Naomi Klein:

Alan Greenspan vs. Naomi Klein on the Iraq War, Bush's Tax Cuts, Economic Populism, Crony Capitalism and More, Democracy Now [Watch 128k stream, Watch 256k stream]: AMY GOODMAN: ...We welcome you both to Democracy Now! ... You worked with six presidents, with President Reagan, with both President Bushes. You worked with President Ford, and you worked with Bill Clinton, who you have called a Republican president; why?

ALAN GREENSPAN: That was supposed to be a quasi-joke. ... I’m a libertarian Republican, which means I believe in a series of issues, such as smaller government, constraint on budget deficits, free markets, globalization, and a whole series of other things, including welfare reform. And as you may remember, Bill Clinton was ... doing much that same agenda... [H]e is a centrist Democrat. And that's not all that far from libertarian Republicanism. ...

AMY GOODMAN: Alan Greenspan, let's talk about the war in Iraq. You said what for many in your circles is the unspeakable, that the war in Iraq was for oil. Can you explain?

Continue reading "Alan Greenspan versus Naomi Klein" »

Saturday, September 22, 2007


Pro-Growth Liberal (PGL), in a post at EconoSpeak, says "Greg Mankiw Asks the Democrats a Good Question on Fiscal Policy." PGL has a few questions of his own.

EconoSpeak is a new blog featuring Kevin Quinn, PGL, Peter Dorman, Michael Perelman, Econoclast, B. Rosser, Sandwichman, and others to whom I apologize for leaving off the list.

Thursday, September 20, 2007

"A Serious Middle-Class Tax Cut?"

National Review editor Ramesh Ponnuru wonders why Republicans are pushing tax cuts that don't benefit the Party's lower income supporters:

Taxing the Hand That Feeds Us, by Ramesh Ponnuru: Republican presidential candidates can’t get elected without owning the tax issue. So far, the current crop is giving it away. ...

Republican contenders for 2008 are promising to keep all of Mr. Bush’s tax cuts. But the Democrats are not threatening the child tax credit or Mr. Bush’s reductions in the lower-level income-tax rates. Those issues are off the table.

What Mitt Romney and Rudy Giuliani ... are really saying is that they will make sure that taxes on capital gains, dividends, estates and high earners will stay low. Not many middle-class taxpayers will benefit directly from any of those policies.

Mr. Romney adds that he will try to cut the corporate tax rate, which his adviser Glenn Hubbard calls “a drain on competitiveness.” ... Cutting corporate tax rates may or may not be a good idea, but we don’t need to make it a priority to preserve our competitiveness.

Both Mr. Romney and Mr. Giuliani speak vaguely about making sure the alternative minimum tax doesn’t affect any more middle-class families. That is a step in the right direction. But it isn’t a tax cut.

Mr. Romney has also proposed an initiative to make the return on middle-class savings tax-free. It may also be a step in the right direction, but it’s small change. The primary focus of the Romney and Giuliani tax plans remains high earners.

What would be a serious middle-class tax cut? One answer is to expand the tax credit for children. But none of the candidates is proposing to do so, or any other big tax relief for regular folks. You might think that Mr. Giuliani would want to do everything he can to appeal to social conservatives short of actually becoming one himself. But why should he offer a pro-family tax cut when even the hard-core social conservatives in the race aren’t interested? Mike Huckabee wants a national sales tax and Sam Brownback wants a flat tax. Either proposal would increase taxes on a lot of middle-class families.

The Republicans in Congress are no better. For much of the right, the great passion of the moment is to make sure that the carried interest at hedge funds is taxed at what look an awful lot like preferential rates. For years, liberals have said that Republicans talk about “family values” but won’t do anything to meet the economic needs of families. Right now, on taxes, that charge hits home. ...

Continue reading ""A Serious Middle-Class Tax Cut?"" »

Wednesday, September 19, 2007

Uh, No, Your Tax Cuts Didn't Pay for Themselves

Not too long ago, some people were arguing that supply-side ideas are no longer part of the Republican mainstream. This is President Bush responding to Alan Greenspan's criticism of his tax-cuts:

I would also argue that cutting taxes ... made a significant difference in dealing with the deficit because the growing economy yielded more tax revenues, which allowed us to shrink the deficit.

The tax cuts paid for themselves? I wish the President and others would quit misleading people about this because it's not true. His own economists don't even believe that. I know some of you are tired of hearing this over and over, but somebody has to try to call them on this or they'll just keep saying it, and the press seems unwilling to do so so. For example, the Wall Street Journal article the quote above is taken from doesn't even bother to mention that there's no evidence to support this claim, instead it's treated as a "he said-she said" story between Bush and Greenspan.

The tax cuts made the deficit worse. End of story.

Monday, September 17, 2007

Paul Krugman: Sad Alan's Lament

Paul Krugman takes issue with Alan Greenspan's contention that he didn't mean to endorse the Bush tax cuts:

Sad Alan’s Lament, by Paul Krugman, Commentary, NY Times: When President Bush first took office, it seemed unlikely that he would succeed in getting his proposed tax cuts enacted. The questionable nature of his installation in the White House seemed to leave him in a weak political position, while the Senate was evenly balanced between the parties. It was hard to see how a huge, controversial tax cut, which delivered most of its benefits to a wealthy elite, could get through Congress.

Then Alan Greenspan, the chairman of the Federal Reserve, testified before the Senate Budget Committee.

Until then Mr. Greenspan had presented himself as the voice of fiscal responsibility, warning the Clinton administration not to endanger its hard-won budget surpluses. But now Republicans held the White House, and ... Greenspan ... was a very different man.

Suddenly, his greatest concern ... was to avert the threat that the federal government might actually pay off all its debt. To avoid this awful outcome, he advocated tax cuts. And the floodgates were opened. ...

Mr. Greenspan now says that he didn’t mean to give the Bush tax cuts a green light, and that he was surprised at the political reaction to his remarks. ... But ... if Mr. Greenspan wasn’t intending to lend crucial support to the Bush tax cuts, he had ample opportunity to set the record straight...

His first big chance to clarify himself came a few weeks after that initial testimony, when he appeared before the Senate Committee on Banking, Housing and Urban Affairs.

Here’s what I wrote following that appearance: “Mr. Greenspan’s performance yesterday ... was a profile in cowardice. Again and again he was offered the opportunity to say something that would help rein in runaway tax-cutting; each time he evaded the question... He declared ... that he was speaking only for himself, thus granting himself leeway to pronounce on subjects far afield of his role as Federal Reserve chairman. But when pressed on the crucial question of whether the huge tax cuts that now seem inevitable are too large, he said it was inappropriate for him to comment on particular proposals.

“In short, Mr. Greenspan defined the rules of the game in a way that allows him to intervene as he likes in the political debate, but to retreat behind the veil of his office whenever anyone tries to hold him accountable for the results of those interventions.”...

I received an irate phone call from Mr. Greenspan ... in which he demanded to know what he had said that was wrong. In his book, he claims that Robert Rubin ... was stumped by that question. ... I certainly wasn’t: Mr. Greenspan’s argument for tax cuts was contorted and in places self-contradictory, not to mention based on budget projections that everyone knew, even then, were wildly overoptimistic.

[T]wo years later, when the administration proposed another round of tax cuts, even though the budget was now deep in deficit..., guess what? The former high priest of fiscal responsibility did not object.

And in 2004 he expressed support for making the Bush tax cuts permanent —... tax cuts he now says he didn’t endorse — and argued that the budget should be balanced with cuts in entitlement spending, including Social Security benefits, instead. ...

In retrospect, Mr. Greenspan’s moral collapse in 2001 was a portent. It foreshadowed the way many people in the foreign policy community would put their critical faculties on hold and support the invasion of Iraq, despite ample evidence that it was a really bad idea.

And like enthusiastic war supporters who have started describing themselves as war critics now that the Iraq venture has gone wrong, Mr. Greenspan has started portraying himself as a critic of administration fiscal irresponsibility now that President Bush has become deeply unpopular and Democrats control Congress.

Previous (9/14) column: Paul Krugman: A Surge, and Then a Stab

Saturday, September 15, 2007

Mankiw: One Answer to Global Warming: A New Tax

Greg Mankiw proposes (surprise, surprise) a Pigouvian tax to solve the global warming problem. The focus here is on its political viability:

One Answer to Global Warming: A New Tax, by N. Gregory Mankiw, Economic View, NY Times: In the debate over global climate change, there is a yawning gap that needs to be bridged. The gap is not between environmentalists and industrialists, or between Democrats and Republicans. It is between policy wonks and political consultants.

Among policy wonks like me, there is a broad consensus. The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. Q.E.D. ...

Those vying for elected office, however, are reluctant to sign on to this agenda. Their political consultants are no fans of taxes, Pigovian or otherwise. ... Yet this natural aversion to carbon taxes can be overcome if the revenue from the tax is used to reduce other taxes. By itself, a carbon tax would raise the tax burden on anyone who drives a car or uses electricity produced with fossil fuels, which means just about everybody. Some might fear this would be particularly hard on the poor and middle class.

But Gilbert Metcalf, a professor of economics at Tufts, has shown how revenue from a carbon tax could be used to reduce payroll taxes in a way that would leave the distribution of total tax burden approximately unchanged. He proposes a tax of $15 per metric ton of carbon dioxide, together with a rebate of the federal payroll tax on the first $3,660 of earnings for each worker.

The case for a carbon tax looks even stronger after an examination of the other options on the table. Lawmakers in both political parties want to require carmakers to increase the fuel efficiency of the cars they sell. Passing the buck to auto companies has a lot of popular appeal.

Increased fuel efficiency, however, is not free. Like a tax, the cost of complying with more stringent regulation will be passed on to consumers in the form of higher car prices. But the government will not raise any revenue that it can use to cut other taxes to compensate for these higher prices. ...

More important, enhancing fuel efficiency by itself is not the best way to reduce energy consumption. ...

A carbon tax would provide incentives for people to use less fuel in a multitude of ways. By contrast, merely having more efficient cars encourages more driving. Increased driving not only produces more carbon, but also exacerbates other problems, like accidents and road congestion.

Another popular proposal to limit carbon emissions is a cap-and-trade system, under which carbon emissions are limited and allowances are bought and sold in the marketplace. The effect of such a system depends on how the carbon allowances are allocated. If the government auctions them off, then the price of a carbon allowance is effectively a carbon tax.

But the history of cap-and-trade systems suggests that the allowances would probably be handed out to power companies and other carbon emitters, which would then be free to use them or sell them at market prices. In this case, the prices of energy products would rise as they would under a carbon tax, but the government would collect no revenue to reduce other taxes and compensate consumers.

The international dimension of the problem also suggests the superiority of a carbon tax over cap-and-trade. Any long-term approach to global climate change will have to deal with the emerging economies of China and India. ...

Agreement on a truly global cap-and-trade system, however, is hard to imagine. ... A global carbon tax would be easier to negotiate. All governments require revenue for public purposes. The world’s nations could agree to use a carbon tax as one instrument to raise some of that revenue. No money needs to change hands across national borders. Each government could keep the revenue from its tax and use it to finance spending or whatever form of tax relief it considered best.

Convincing China of the virtues of a carbon tax, however, may prove to be the easy part. The first and more difficult step is to convince American voters, and therefore political consultants, that “tax” is not a four-letter word.

Thursday, September 13, 2007

Tax Cut Message No Longer Resonates with Independent Voters

Looks like the magic of the "tax-cuts fix everything" message is wearing off:

GOP Forced to Pivot on Taxes, by Erin Billings, Roll Call: Senate Republicans are likely to engage in a more serious message makeover than they previously thought following a private strategy session ... where they reviewed new polling data showing tax cuts are no longer priority No. 1 with key independent voters.  The news, GOP Senators acknowledged..., served as an important wake-up call as the party undergoes its massive internal image overhaul. The theme of lower taxes has been a cornerstone of the Republican platform ...

The findings ... showed Senators that Americans are far more focused on key domestic reforms like health care reform and the level of government spending rather than on previously enacted GOP tax reductions. ... Republican Senate sources said the latest information ... shows Republicans relied too easily on tax cuts as the answer to every domestic problem... [E]xplained one senior GOP Senate aide. "We've worn out the message."...

Tuesday, September 11, 2007

Robert Reich: The Way to Prevent the Looming Recession

Robert Reich says tax cuts are the answer:

The Way to Prevent the Looming Recession, by Robert Reich: With the economy heading for recession, all eyes are on Ben Bernanke and the Fed... But a Fed rate cut won't stimulate the economy. That's because lending institutions, fearing their portfolios are far riskier than they assumed several months ago, won't lend lots more just because the Fed lowers interest rates.

Average consumers are already so deep in debt ... they can't borrow much more, anyway. With average home prices dropping... And given last Friday’s report showing the first employment drop in four years, people are not in the mood to keep spending.

So if a Fed rate cut can't prevent a recession, what can? Putting more money into American pockets by cutting their taxes. Yes, I know: Tax cuts have gone out of style ever since Democrats became born-again deficit hawks, and George Bush squandered the $5 trillion surplus he inherited in 2000 mainly by cutting taxes on the rich. ...

[T]ax cuts for the rich won't help because the rich don’t increase their spending when their taxes are cut. They already spend as much as they want to spend. That's what it means to be rich. It's middle and lower-income Americans who spend more when their taxes are cut. And because the biggest tax they face is the payroll tax, the payroll tax needs to be cut in order to keep them spending and avoid a recession.

I say exempt the first $15,000 of earnings from payroll taxes for a year, starting as soon as possible. Sure, this may cause the budget deficit to widen a bit. But if the economy goes into the tank, the deficit will be far bigger.

There are reasons that work both for and against the use of fiscal policy to stabilize the economy, and I'm not fully convinced it can work very well in the present political environment in any case. But as to worries about the deficit, in general that is much less of a concern in a recession, and in this particular instance I don't see why workers should risk unemployment now because tax cuts for the wealthy, and the deficit the tax cuts brought about, limit our ability to respond to negative shocks.

Monday, September 10, 2007

Paul Krugman: Where’s My Trickle?

Paul Krugman says the experience since the Bush tax cuts shows that trickle down theory does not work:

Where’s My Trickle?, by Paul Krugman, Commentary, NY Times: Four years ago the Bush administration, exploiting the political bounce it got from the illusion of success in Iraq, pushed a cut in capital-gains and dividend taxes through Congress. It was an extremely elitist tax cut even by Bush-era standards: the nonpartisan Tax Policy Center says that more than half of the tax breaks went to Americans with incomes of more than $1 million a year.

Needless to say, administration economists produced various misleading statistics designed to convey the opposite impression, that the tax cut mainly went to ordinary, middle-class Americans. But they also insisted that the benefits of the tax cut would trickle down — that lower tax rates on the rich would do great things for the economy, helping everyone.

Well, Friday’s dismal jobs report showed that ... working Americans have a right to ask, “Where’s my trickle?” ... What’s really remarkable ... is that four years of economic growth have produced essentially no gains for ordinary American workers.

Wages, adjusted for inflation, have stagnated..., benefits have deteriorated..., [a]nd one of the few seeming bright spots of the Bush-era economy, rising homeownership, is now revealed as the result of a bubble inflated in part by financial flim-flam...

Now you know why 66 percent of Americans rate economic conditions in this country as only fair or poor, and why Americans disapprove of President Bush’s handling of the economy almost as strongly as they disapprove of the job he is doing in general.

Yet the overall economy has grown at a reasonable pace over the past four years. Where did the economic growth go? The answer is that it went to the same economic elite that received the lion’s share of those tax cuts. ...

The absence of any gains for workers in the years since the 2003 tax cut is a pretty convincing refutation of trickle-down theory. So is the fact that the economy had a much more convincing boom after Bill Clinton raised taxes on top brackets. It turns out that when you cut taxes on the rich, the rich pay less taxes; when you raise taxes on the rich, they pay more taxes — end of story. ...

[T]he whole idea that a rising tide raises all boats, that growth in the economy necessarily translates into gains for the great majority of Americans, is belied by the Bush-era experience. As far as I can tell, America has never before experienced a disconnect between overall economic performance and the fortunes of workers as complete as that of the last four years.

America was a highly unequal society during the Gilded Age, but workers’ living standards nonetheless improved as the economy grew. Inequality rose rapidly during the Reagan years, but “Morning in America” was nonetheless bright enough to make most people cheerful, at least temporarily. Inequality continued to increase during the Clinton years, but wages rose, as did the availability of health insurance — and the great majority of Americans felt prosperous.

What we’ve had since 2003, however, is an economic expansion that looks good if not great by the usual measures, but which has passed most Americans by.

Guaranteed health insurance ... would eliminate one of the reasons for this disconnect. But it should be only the start of a broader range of policies — a new New Deal — designed to turn economic growth into something more than a spectator sport.

Previous (9/7) column: Paul Krugman: Time to Take a Stand
Next (9/14) column: Paul Krugman: A Surge, and Then a Stab

Sunday, September 09, 2007

Henry Farrell: Gift Economies

What are the forces driving the shift from government funded charity that represents collective political choice to a system that relies more on private sector sources and individual choice, particularly the choices of the wealthy, to support worthy social causes?:

Gift economies, by Henry: [edited] Christopher Caldwell is a columnist whom I usually find quite annoying, but his attack today ... on Bill Clinton’s forthcoming book on charitable giving gets to the crux of the issue.

...Mr Clinton['s] ... book ... is evidence that he has cracked the code of an inchoate form of political power that is still illegible to most of his contemporaries. … Giving tells us something about a decisive shift that is just beginning – from helping people (soup, a bath) to helping humanity (rain forests, greenhouse gases); from local, self-abnegating charity (the Salvation Army) to glamorous, globalised philanthropy (Angelina Jolie). …

We have seen this shift before. In The Gospel of Wealth (1889), the steel magnate Andrew Carnegie urged the very rich to give away their money during their lifetimes. … When plutocrats are involved in philanthropy, to place philanthropy above criticism is to place money-making above criticism. … If there is a refreshing lack of dogmatism in Mr Clinton’s book, there is also an inattention to elementary questions of political legitimacy. ...

Mr Clinton praises the rock singer Bono’s campaign to obtain debt forgiveness for African countries. Whether this is a wise move or not, who elected Bono to do it? The answer is, capitalism did. Today’s celebrity philanthropists are empowered by a society that specialises in movies and songs in exactly the way the robber barons were empowered by one that specialised in railroads and steel. Philanthropy is a route through which celebrity can be laundered into political power. It is also one means by which the responsibility for important tasks is being reassigned from democratic structures to less democratic ones.

The politics of giving is becoming an important issue ... because of the increasing disparities in wealth between the very rich indeed and the rest of us. It serves at best as a weak and inefficient means of redistribution – the emphasis tends to be more on circuses than on bread, and in particular on the kinds of circuses (alumni associations, high-prestige arts) that have obvious social or personal payoffs for the giver. The increased emphasis on gift-giving reflects how collective political choice ... is increasingly giving way to individual choice (and most importantly the individual choices of a very small minority of people). Contrary to some of the more glib arguments out there, there is no reason to believe that this is an improvement on the previous situation, and some reason to believe that it is a substantial disimprovement. It’s nice to see someone like Caldwell, who is clearly on the right, getting that.

Many people start with the presumption that the private sector is more efficient than the public sector, then use this to argue that there is a net social benefit when tax incentives and other schemes are used to replace public spending with private sector charity. The presumption itself maybe false in many cases, but if the result is that spending is distorted in the sense that resources are directed to uses that are inconsistent with collective political preferences, then another kind of inefficiency arises and it's not at all clear there is a net social benefit. Doing things we don't much care about at low cost is not optimal if important social problems are left unattended as a consequence.

The fact that people help more when the government helps less doesn't relieve the government from its responsibility to broker collective political choice to solve social problems. The government should do what needs to be done and if people or organizations in the private sector want to top it off with more, so much the better. I don't want to criticize Bono, or anyone else, for stepping in and trying to help even if their motive is, ultimately, for personal gain. Operas, museums, soup kitchens, shelters, cash grants to people on the street, whatever, so long as the government is doing its job, it's all just icing on the cake.

Thursday, September 06, 2007

Is Rudy Out of the Mainstream of the GOP?

There's an argument being made (Tyler Cowen, Megan McArdle) that supply-side economics, the kind that says tax cuts pay for themselves, is no longer mainstream in the Republican party, i.e. it no longer has any influence and is no longer used as an argument for cutting taxes.

Is it true that supply-side economics no longer has influence in the Republican party? This is straight from Giuliani's web site:

Rudy is the real fiscal conservative in the race. He cut taxes 23 times in New York and turned a $2.3 billion budget deficit into a multi-billion dollar surplus, while balancing the city’s budget. Because he turned his conservative principles into action, New York City taxpayers saved more than $9 billion in taxes and enjoyed their lowest tax burden in decades, while the economy grew and city government saw its revenues increase from the lower tax rates. Rudy Giuliani believes in supply-side economics, because he did it and he saw it work.

Update: Free Exchange quotes last night's Republican debate (Brendan Nyhan too):

Laffer Riot, Free Exchange: ...Over at The Atlantic, Megan McArdle took issue with Mr Chait's assessment of supply-side tax policies (whereby lower tax rates increase revenues) as hugely influential...

Matthew Yglesias [cited] ... the embrace of supply side orthodoxy by much of the conservative establishment, including prominent columnists and intellectuals, along with GOP congressional leadership and the president himself.

Tyler Cowen now places himself firmly in Ms McArdle's corner, disavowing supply sider influence. ...[A]s a counterpoint, I would refer him to last night's Republican debate in New Hampshire. Looking over the transcript one finds Senator John McCain saying:

I stand on my record, and my record is 24 years of opposing tax increases, and I oppose them, and I’ll continue to oppose them. I think it’s very clear that the increase in revenue that we’ve experienced is directly related to the tax cuts that were enacted, and they need to be made permanent rather than the family budgets and businesses being uncertain about their future.

Moments later, Rudy Giuliani chimes in:

I have without any doubt of all the people running for president the strongest record of lowering taxes. I did it 23 times in a city that had never lowered a tax before well over $9 billion. I lowered the personal income tax 25 percent, and I was collecting 40 percent more in revenues from the lower tax than the higher tax. I made supply-side economics work in a city that didn’t understand it, and I ended up having a very positive impact on the economy of the city as a result of that.

It seems that at least as far as major candidates for the highest elected office in the land are concerned, supply side tax policies remain influential.

Jason Furman: The Effect of the 2001-06 Tax Cuts on After-Tax Incomes

With all the debate about tax cuts the last few days, this is timely. Here is Jason Furman testifying before the House Ways and Means Committee today about the impact of the 2001-06 tax cuts on the level and distribution of after-tax incomes. The extent to which the tax cuts helped to pay for themselves is also examined, and the dynamic impacts are almost imperceptible (and may even work in the wrong direction).

But the fact that these tax cuts did not pay for themselves or even offset the costs to any noticeable degree is old news. What's interesting about these estimates is that they imply that the tax-cuts leave nearly three quarters of households with lower after-tax incomes. Why does this occur? Most dynamic economic models that predict tax cuts will lead to higher GDP growth also generally assume that the tax cuts are paid for by reducing benefits or raising other taxes (e.g. replace labor/capital taxes with lump-sum taxes as in the Mankiw-Weinzerl model).

Thus, although tax cuts may result in efficiency gains, which is often one of the main arguments given for tax cuts (e.g. "tax cuts, by reducing deadweight loss ... will be good for the economy"), when you factor in the new taxes and who pays them (or equivalently reductions in benefits like Social Security, Medicare, or food stamps) and look at the resulting distribution of winners and losers, the outcome is one where three quarters of households come out behind. Jason terms this "dynamic distributional analysis":

The Effect of the 2001-06 Tax Cuts on After-Tax Incomes, by Jason Furman[1], Testimony Before the U.S. House Committee on Ways and Means, September 6, 2007 (summary): Mr. Chairman and other members of the Committee, thank you for the invitation to testify today at this hearing on fair and equitable tax policy for America’s working families. I would like to start with a confession: as an economist I have no special expertise in fairness or equity. The members of this committee were elected, in part, to make critical value judgments about these fundamental questions. But in order to make these value judgments you need the understand who is impacted by the tax changes and how they are impacted. And economists do have a special expertise that can help further this understanding and thus inform the debate on the bigger issues.

Evaluating a tax change requires understanding the impact it has on households through three different channels: (1) the direct impact of the tax changes on take-home pay; (2) the economic effects of the tax change on before-tax incomes; and (3) the impact that the associated budgetary changes have on future taxes or government spending on households. All three channels can be usefully summarized in a single variable: the change in the after-tax incomes of households.[2]

Policy analysts and official scorekeepers have made varying degrees of progress on each of these three channels but have seldom integrated them into one comprehensive assessment of tax proposals. My testimony today applies such an integrated approach, potentially termed “dynamic distributional analysis,” to examine the long-run impact of the tax cuts enacted from 2001 to 2006 on the after-tax income of American families.

Some of the key findings of this analysis are:

  • The direct effect of the tax cuts enacted from 2001-06 is to increase after-tax income inequality. Ignoring the effects on the economy and the budget, making the tax cuts permanent would result in a 0.7 percent increase in the after-tax income of the bottom quintile and a 6.7 percent increase in the after-tax income of the top 1 percent. As a result, the gap between these incomes would grow.
  • Economic models generally rule out the possibility of a large, positive impact of the tax cuts on the economy and incomes. In one favorable – but highly unrealistic – scenario the Treasury found that making the tax cuts permanent would be equivalent to raising the growth rate by 0.04 percentage points annually spread out over 20 years. In other words, the growth rate could rise from 3.00 percent to 3.04 percent – a change that would barely be perceptible in quarterly data on the economy. In more realistic scenarios the Treasury found the tax cuts would result in higher debt and lower savings – thus reducing long-run output.
  • Economic models show that the need to eventually finance the tax cuts could result in a large, negative impact on the disposable income of households, for example through reduced Social Security benefits, Medicare benefits, or higher future taxes. This occurs because no economic model finds that tax cuts pay for themselves. The results of dynamic macroeconomic feedback show that the tax cuts are only slightly more expensive or slightly less expensive than shown by the official estimates that ignore such feedback.
  • Taken together, illustrative estimates show that even in the unrealistic best case scenario – in which tax cuts boost incomes and pay for part of their long-run cost through higher economic output – the financing costs of the tax cuts would leave 74 percent of households with lower after-tax incomes. If the increased debt and reduced savings associated with the tax cuts leads to lower incomes, then 76 percent of households would end up with lower after-tax incomes.

Out of the Mainstream?

Megan McArdle says supply-siders -- the ones who say tax cuts pay for themselves -- are out of the mainstream of the Republican party:

I'm all for someone taking on the sillier kind of supply siders who fanny about claiming that tax cuts increase tax revenue, but they've been rather thin on the ground lately. ...

Yes, very thin on the ground. A quick search of this site turns up, with little effort, Bush, McCain, Romney, Giuliani, Hassett, Stossel, and the WSJ Editorial page all making the Laffer curve claim.

The second three may be a "motley collection of names" and have little influence over the party, but the first four? Are Bush, McCain, Romney, and Giuliani part of the "barking moonbats"? [yes...] I agree they are making a silly assertion, but don't they run counter to the claim that nobody of importance in the party tries to sell tax cuts by saying they pay for themselves?

And, right on cue, in today's Washington Times we have this piece of hackery:

Tax cut extension needed, by David Limbaugh, Commentary, Washington Times: ...Contrary to liberal propaganda, the Reagan tax cuts led to dramatic increases in federal revenues even after adjusting for inflation. ...

Since President Bush's tax cuts took effect, Democrats have been condemning them because of their alleged responsibility for soaring deficits. ... Recent reports definitively confirm ... federal revenues increasing; the deficits are decreasing, just as in the later Reagan years. ... It's past time to extend the Bush tax cuts.

The idea that tax cuts pay for themselves, wrong as it is, is still being actively promoted as part of the sales pitch to cut taxes. It may not be official party policy, but influential members of the Republican party are more than willing to play along and even help to promote this idea, and they do so even though they ought be aware by now that there's no evidence to support such claims.

Update: Brendan Nyhan extends the list of statements from the administration claiming that tax cuts pay for themselves.

Monday, September 03, 2007

How the Supply-Side Cult Hijacked American Politics

Jonathan Chait looks at the Laffer curve cult (there's quite a bit more in the article):

How a cult hijacked American politics: Flight of the Wingnuts, by Jonathan Chait, TNR: American politics has been hijacked by a tiny coterie of right-wing economic extremists, some of them ideological zealots, others merely greedy, a few of them possibly insane. ... Notions that would have been laughed at a generation ago ... are now so pervasive, they barely attract any notice. ...

It was not always this way. A generation ago, Republican economics was relentlessly sober. ... Over the last three decades, however, such Republicans have passed almost completely from the scene, at least in Washington, to be replaced by, essentially, a cult. ...

The cult in question generally traces its political origins to a meeting in Washington in late 1974 between Arthur Laffer, an economist; Jude Wanniski, an editorial page writer for The Wall Street Journal; and Dick Cheney, then deputy assistant to President Ford. ... Wanniski and Laffer believed it was possible to simultaneously expand the economy and tamp down inflation by cutting taxes, especially the high tax rates faced by upper-income earners. ...

Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it..., the Laffer Curve... Cheney apparently found the Laffer Curve a revelation, for it presented in a simple, easily digestible form the messianic power of tax cuts.

The significance of the evening was not the conversion of Cheney but the creation of a powerful symbol that could spread the word of supply-side economics..., ... the Curve explained it all. ...

With astonishing speed, the message of the Laffer Curve spread through the ranks of conservatives and Republicans. Wanniski evangelized tirelessly ..., both on the Journal's editorial pages and in person. ...

Today, ... the core beliefs of the supply-siders are not even subject to question among Republicans. Every major conservative opinion outlet promotes supply-side economics..., deviation from the supply-side creed has become unthinkable for any Republican with national aspirations. ...

Like most crank doctrines, supply- side economics has at its core a central insight that does have a ring of plausibility. The government can't simply raise tax rates as high as it wants without some adverse consequences. ... And there are justifiable conservative arguments to be made on behalf of reducing tax rates.. But what sets the supply-siders apart from sensible economists is their sheer monomania. ... They believe that economic history is a function of tax rates...

It doesn't take a great deal of expertise to see how implausible this sort of analysis is. ... All this is to say that the supply-siders have taken the germ of a decent point--that marginal tax rates matter--and stretched it, beyond all plausibility, into a monocausal explanation of the world.

Aside from popular articles in places like the Journal's editorial page, two classic tomes defined the tenets of supply-side economics: Wanniski's The Way the World Works and George Gilder's 1981 manifesto, Wealth and Poverty. Both have had enormous influence...

Here is what makes the rise of supply-side ideology even more baffling. One might expect that a radical ideology that successfully passed itself off as a sophisticated new doctrine would at least have the benefit of smooth, reassuring, intellectual front men... Yet, if you look at its two most eminent authors, good sense is not the impression you get. Let me put this delicately. No, on second thought, let me put it straightforwardly: They are deranged. ... [...continue reading...]

Sunday, September 02, 2007

Will the Housing Crash Cause Police to Give More Speeding Tickets?

Judith Chevalier examines the impact of changes in local government budgets on revenues from traffic enforcement:

Welcome, Stranger. Here’s a Speeding Ticket., by Judith Chevalier, Economic View, NY Times: Driving through a tiny Vermont town a few weeks ago..., I saw flashing yellow lights appear in my rearview mirror. My car had picked up speed coming down a hill, and a police officer pulled me over. As I waited for a ticket, I wondered: Does this town supplement its finances by giving tickets to visitors like me?

I never got to the bottom of the situation in that particular town, but the broader question — whether police officers in some towns are motivated by fund-raising as well as safety when writing traffic tickets — has been examined systematically by ... Michael D. Makowsky, a doctoral student in economics, and Thomas Stratmann, an economics professor, both at George Mason University, ... in a recent paper, “Political Economy at Any Speed: What Determines Traffic Citations?”

Continue reading "Will the Housing Crash Cause Police to Give More Speeding Tickets?" »

Saturday, August 25, 2007

The Deceptive Presentation of the FairTax Proposal

Bruce Bartlett says when you read the fine print and uncover the deceptions, the FairTax proposal is far less attractive then its supporters woudl have you believe:

FairTax, Flawed Tax, by Bruce Bartlett, Commentary, WSJ [Update: open link]: Former Arkansas Gov. Mike Huckabee's unexpectedly strong second-place showing in the recent Iowa Republican straw poll is widely attributed to his support for the FairTax.

For those who never heard about it, the FairTax is a national retail sales tax that would replace the entire current federal tax system. ...

Rep. John Linder (R., Ga.) and Sen. Saxby Chambliss (R., Ga.) have introduced legislation ... to implement the FairTax. They assert that a rate of 23% would be sufficient to replace federal individual and corporate income taxes as well as payroll and estate taxes. Mr. Linder's Web site claims that U.S. gross domestic product will rise 10.5% the first year after enactment, exports will grow by 26%, and real investment spending will increase an astonishing 76%.

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. ...[T]hink of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%.

This is only the beginning of the deceptions in the FairTax. Under the Linder-Chambliss bill, the federal government would have to pay taxes to itself on all of its purchases of goods and services. Thus if the Defense Department buys a tank that now costs $1 million, the manufacturer would have to add the FairTax.... The tank would then cost the federal government $300,000 more than it does today, but its tax collection will also be $300,000 higher.

This legerdemain is done solely to make revenues under the FairTax seem larger than they really are, so that its supporters can claim that it is revenue-neutral. ...

Similarly, state and local governments would have to pay the FairTax on most of their purchases. This means that it is partly financed by higher state and local taxes. ...

State sales taxes have long exempted all but a few services because of the enormous difficulty in taxing intangibles. But the FairTax would apply to 100% of services, including medical care, thus increasing their cost by 30%. No state comes close to taxing services so broadly. Consumers would also find themselves taxed on newly constructed homes. Imagine paying 30% ... on top of the purchase price...

Since sales taxes are regressive ... some provision is needed to prevent a vast increase in taxation on the nonwealthy. The FairTax does this by sending monthly checks to every household based on income. Aside from the incredible complexity and intrusiveness of tracking every American's monthly income ... the FairTax does not include the cost of this rebate in the tax rate. ...

Rejecting all the tricks of FairTax supporters and calculating the tax rate honestly ... professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%.

A 2000 estimate by Congress's Joint Committee on Taxation found the ... rate would be 57%. In 2005, the U.S. Treasury Department calculated that a ... rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. ...

Perhaps the biggest deception in the FairTax, however, is its promise to relieve individuals from having to file income tax returns, keep extensive financial records and potentially suffer audits. Judging by the emphasis FairTax supporters place on the idea of making April 15 just another day, this seems to be a major selling point for their proposal.

Yet all but six states now have state income taxes. So unless one lives in one of those states, this promise is an empty one indeed. In short, the FairTax is too good to be true, and voters should not take seriously any candidate who supports it.

Thursday, August 16, 2007

Alan Auerbach: How to Tax Capital Gains

Alan Auerbach explains how to tax capital gains:

How to Tax Capital Gains, by Alan Auerbach, Commentary, WSJ: The recent controversy over the taxation of "carried interest" ... demonstrates the problems that can arise from taxing capital gains differently from other types of income. While it's relatively simple to change the way we treat carried interest, it would be far better to undertake an overall reconsideration of the way we tax capital gains.

As President Reagan and others who crafted the Tax Reform Act of 1986 understood, different tax rates on different types of income-producing activities often distort economic decisions and increase the tax system's complexity. Their solution was a broad-based tax with low and uniform marginal tax rates. The identical rate was applied to capital gains and to wage and salary income. But the reform survived only a few years, and we now confront the old problems magnified by two decades of financial innovation.

We can do better, and here are some guidelines:

Increase the capital gains tax rate, but not the "lock-in" effect. ...[T]axing capital gains has a big impact on investors' decisions about when to sell capital assets. Higher tax rates delay sales, causing investors to be "locked in" to their current holdings...

By itself, an increase in the capital gains tax rate worsens the lock-in effect. But this impact can be offset by other desirable changes, such as indexing capital gains for inflation ... and taxing capital gains at death. (Currently, we do not collect capital gains taxes when someone dies; this makes people want to hold onto appreciated assets throughout their lifetimes.) So-called "constructive realization" (i.e., taxation of capital gains at death) could help solve our current estate tax impasse by substituting capital gains revenues for some of the lost estate taxes. ...

Reconsider how best to encourage innovation and risk-taking. Some argue that low capital gains tax rates can spur the formation and development of new enterprises, for the payoffs from successful start-ups flow to their owners largely in the form of capital gains. But ... only a miniscule fraction of the economy's capital gains are associated with new ventures. A low capital gains tax rate is a very poor way to encourage entrepreneurial activity. It would be far better to carefully tailor tax provisions to spur innovation...

Don't raise the cost of capital. ...Lowering capital income taxes reduces the cost of capital and spurs investment; raising these taxes increases the cost of capital and discourages investment.

But not all capital income taxes equally influence the cost of capital. Capital gains taxes have a relatively weak impact on the cost of capital because a large share of the tax revenues is associated with income not generated by new investment. Thus only a small portion of the capital gains realized over the next several years will result from today's investment, so changing the tax rate on the gains won't influence today's investment much. By contrast, tax provisions targeted toward new investment, such as the bonus depreciation scheme introduced in 2002, tie tax reductions to new investment and thereby produce a bigger bang for each buck of tax reduction. Offsetting an increase in the capital gains tax rate with a revenue-neutral tax reduction that targets new investment is likely to reduce the cost of capital. ...

There are, of course, more sweeping tax reform alternatives available. Some proposals would move us from taxing income toward taxing consumption, or toward taxing capital gains as they accrue, rather than only when assets are sold. There are coherent and attractive proposals available to implement either of these approaches. But we need not wait for the next grand tax reform to improve on our current method of taxing capital gains.

Thursday, August 09, 2007

PGL: Bush on Bridge Safety: Spend Smarter Not More

PGL at Angry Bear is driven to shrillness by the latest from the president:

President Bush on Bridge Safety: Spend Smarter Not More, by PGL: AP reports that President Bush is opposed to raising gasoline taxes so we can have more bridge inspections:

A week after a deadly bridge collapse in Minneapolis, President Bush on Thursday dismissed raising the federal gasoline tax to repair bridges at least until Congress changes how it spends highway money. "The way it seems to have worked is that each member on that (Transportation) committee gets to set his or her own priorities first," Bush said. "That's not the right way to prioritize the people's money. Before we raise taxes, which could affect economic growth, I would strongly urge the Congress to examine how they set priorities."

Alice Rivlin would be impressed. Her counsel to John Kerry during the 2004 Presidential race was spend smarter, not more. So President Bush is arguing that we should spend more transportation dollars on repairing bridges and less on bridges to nowhere. I would find this to be a credible argument from a President who had a track record of allocating our Federal dollars where most needed for public policy reasons. But when President Bush has discussed priorities in the past, it would seem his mantra for spending our Federal monies wisely was more driven by some Karl Rove calculus to maximize GOP votes than to maximize the General Welfare. But if President Bush has decided to finally adopt the fiscal wisdom of Alice Rivlin, I say: IT’S ABOUT TIME!

Joseph Stiglitz: Greenspan, Bush Errors Finally Come Home to Roost

Joseph Stiglitz says George Bush and Alan Greenspan have some explaining to do:

Greenspan, Bush errors finally home to roost, by Joseph Stiglitz, Project Syndicate: The pessimists who have long forecast that America's economy was in for trouble finally seem to be coming into their own. Of course, there is no glee in seeing stock prices tumble as a result of soaring mortgage defaults. But it was largely predictable, as are the likely consequences...

The story goes back to the recession of 2001. With the support of US Federal Reserve Chairman Alan Greenspan, US President George W. Bush pushed through a tax cut designed to benefit the richest Americans but not to lift the economy out of the recession that followed the collapse of the Internet bubble.

Given that mistake, the Fed had little choice if it was to fulfill its mandate to maintain growth and employment: it had to lower interest rates. ... But, given that overinvestment in the 1990s was part of the problem underpinning the recession, lower interest rates did not stimulate much investment.

The economy grew, but mainly because American families were persuaded to take on more debt, refinancing their mortgages and spending some of the proceeds. And, as long as housing prices rose as a result of lower interest rates, Americans could ignore their growing indebtedness.

In fact, even this did not stimulate the economy enough. To get more people to borrow more money, credit standards were lowered, fueling growth in so-called "subprime" mortgages. Moreover, new products were invented ... making it easier for individuals to take bigger mortgages. ...

Alan Greenspan egged them to pile on the risk by encouraging these variable-rate mortgages. But did Greenspan really expect interest rates to remain permanently at one percent - a negative real interest rate? Did he not think about what would happen to poor Americans with variable-rate mortgages if interest rates rose, as they almost surely would?  ...

Fortunately, most Americans did not follow Greenspan's advice to switch to variable-rate mortgages. Even as short-term interest rates began to rise, the day of reckoning was postponed... [But the] housing price bubble eventually broke, and, with prices declining, some have discovered that their mortgages are larger than the value of their house.

Too many Americans built no cushion into their budgets, and mortgage companies, focusing on the fees generated by new mortgages, did not encourage them to do so.

Just as the collapse of the real estate bubble was predictable, so are its consequences... By some reckonings, more than two-thirds of the increase in output and employment over the past six years has been real estate-related, reflecting both new housing and households borrowing against their homes to support a consumption binge.

The housing bubble induced Americans to live beyond their means - net savings has been negative for the past couple of years. With this engine of growth turned off, it is hard to see how the American economy will not suffer from a slowdown.

There is an old adage about how people's mistakes continue to live long after they are gone. That is certainly true of Greenspan.

In Bush's case, we are beginning to bear the consequences even before he has departed.

Monday, August 06, 2007

Not Laffing

Mathew Yglesias notes the press's failure to challenge false statements about tax-cuts made by Giuliani in the GOP debate:

Laffer Press Roundup, by Mathew Yglesias: Here's an interesting test case for the press. It seems that at yesterday's GOP debate, Rudy Giuliani derided the idea that higher taxes raise revenues as a "Democratic, liberal" assumption and put forward his alternative view that you generate revenue by lowering tax rates. This is a stunning confession of total ignorance of tax policy and economics by the GOP front runner. So how did the press cover it? Chris Cilizza at the Fix lives down to my expectations by totally ignoring the fact that Giuliani is incorrect:

"There is a liberal Democratic assumption that if you raise taxes, you raise more money," said Giuliani to huge applause from the crowd assembled at Drake University.

Michael Shear in The Washington Post's page A1 story also doesn't care about the merits of the issue:

Former New York mayor Rudolph W. Giuliani sparked loud applause when he declared that "the knee-jerk liberal Democratic reaction -- raise taxes to get money -- very often is a very big mistake."...

Nor does Stephen Braun of The Los Angeles Times care at all whether or not GOP tax policy makes sense:

Referring to last week's devastating bridge collapse in Minneapolis, the GOP rivals found common ground in insisting that increased private investment from cutting taxes would provide more money to repair the nation's failing infrastructure. ...

Mike Glover at the AP doesn't seem to mention the issue at all.

Adam Nagourney at The New York Times, by contrast, doesn't go nearly as far as I'd like, but does way better than his colleagues at the major papers. Here he is on the NYT political blog:

Mr. Giuliani proceeded to explain that when he was mayor of New York he had cut taxes, and that those tax cuts had produced revenues that allowed him to finance bridge reconstruction. (Actually, there’s a good argument that it was the stock market boom in New York that brought all that money into the city’s coffers, but we’ll let that pass for now).

And here he is teamed up with Michael Cooper in the print edition:

Mr. Giuliani said that as mayor of New York, he had increased revenues to pay for bridge and road repair by cutting taxes, thereby jolting the economy, and that he would do the same thing as president. The city’s treasury in that period was flush largely with revenues produced by the stock-market boom of the late 1990s.

It'd be nice to see reporters go further than Nagourney does here, but improvements at the margin deserve recognition and the Times is doing a much better job than the Post here.

Even Nagourney's "we’ll let that pass for now" is inadequate. Any reporter who thinks there's a debate about whether cutting taxes has increased tax revenues has not been paying attention and has no business covering economics. Let's take a cue from Paul Krugman and ask what the press should have asked, what does this say about Giuliani's character? First, I disagree with the characterization of his statements as ignorant. I don't believe he is ignorant about this topic, so that is no excuse (and if he were ignorant, i.e. if he has not bothered to find out about the consequences of tax cuts by now, that would tell us a lot too.)  He noted that he is aware of the evidence, but chooses to portray it as a "liberal Democratic assumption" even though it is nothing of the sort (see Andrew Samwick and Greg Mankiw's statements about this, both of whom served under Bush in the Council of Economic Advisers, or any reputable conservative economist for that matter, or this recent CBO report).

What this tells us is that just like George Bush in the run-up to the Iraq war, Giuliani is not an honest broker. He is willing to tell people what they want to hear in spite of compelling evidence to the contrary, and to surround himself with people who will not challenge him when he uses misleading statements to push a policy. He has no problem using dishonest statements to sell policy. There's a lot to be gleaned about his character from his willingness to engage in this type of dishonest salesmanship, a style of leadership that led us into our current predicament, and it's disappointing to see the press not even bother to make the connections.

Friday, August 03, 2007

Paul Krugman: A Test for Democrats

Paul Krugman on good Democrats, bad Democrats, and the ugly thing the bad Democrats are about to do:

A Test for Democrats, by Paul Krugman, Commentary, New York Times: It’s been a good Democrats, bad Democrats kind of week. The bill expanding children’s health insurance that just passed in the House makes you want to stand up and cheer. Reports that Senator Charles Schumer opposes plans to close the hedge fund tax loophole make you want to sit down and cry.

Let’s start with the good news: The House bill ... would provide coverage to five million children who would otherwise be uninsured.

The bill is so good that it has Republicans spluttering. “The bill uses children as pawns,” declared Representative Pete Sessions of Texas. Yes, the Democrats are exploiting children — by providing them with health care.

The horror, the horror!

What’s especially encouraging is the way House Democrats were willing to take on the insurance companies. The bill pays for children’s health care in part by cutting subsidies to Medicare Advantage, a privatization scheme that yields big profits for insurers...

All in all, the bill is both a fine piece of legislation and a demonstration that Democrats can stand up to special interests. Happy days are here again.

Or maybe not.

The hedge fund tax loophole is a crystal-clear example of unjustified privilege. ... For example, ... pension fund ... manag[ers] ... are taxed ... at rates up to 35 percent. But if that money is invested with a hedge fund ... the fees the ... manager receives ... are mainly taxed as capital gains, with a maximum rate of 15 percent. ...

We’re told that the tax rate on hedge fund managers has to be kept low to encourage risk-taking. But the managers aren’t risking their own money. The only risk ... is the uncertainty of their fees — and as any ... salesman who depends on commissions can tell you, most people with uncertain incomes don’t get any special tax breaks.

We’re also told that management fees would rise, reducing returns to investors... — as if someone with a $100-million-a-year hedge fund job would walk away if his take-home pay fell from $85 million to $65 million.

And we’re talking about a lot of lost revenue here. The Economic Policy Institute estimates ... $6.3 billion a year — the cost of providing health care to three million children. Of that total, almost $2 billion a year ... goes to just 25 individuals.

If being a Democrat means anything, it means opposing this kind of exorbitant privilege. Yet ... Mr. Schumer says that he opposes any increase in hedge fund taxes unless tax breaks for the energy and real estate industries are also eliminated, and pigs start flying. Seriously, his claim that he really would support closing the hedge fund loophole if other, deeply entrenched tax privileges were eliminated ... is a fig leaf that hides nothing.

Mr. Schumer ... insists that the large financial contributions that hedge funds make to his party aren’t influencing him. Well, I can’t read his mind, but from the outside his position looks remarkably like money-driven politics as usual. And that’s not acceptable.

Look, the worst thing that could happen to Democrats is for voters to conclude that there’s no real difference between the parties, that when you replace Republicans with Democrats, all you do is replace sweet deals for Halliburton with sweet deals for hedge funds. The hedge fund loophole is a test — and it’s one that Mr. Schumer is failing.

Previous (7/30) column: Paul Krugman: An Immoral Philosophy
Next (8/6) column: Paul Krugman: The Substance Thing

Wednesday, August 01, 2007

The High-Tech Solution to Voter Irrationality?

I can't resist commenting on this post from Bryan Caplan (here's his co-blogger disagreeing with me today, but that's not what motivated this):

The High-Tech Solution to Voter Irrationality, by Bryan Caplan: This didn't make it into the book, but one of my favorite remedies for voter irrationality has long been to simply clone John Stossel. His column today just reinforces my support for the clone-Stossel solution:

More practically, [Caplan] thinks that "Everyone who knows some economics" should grab every opportunity to teach it. That's what I try to do with my "20/20" segments, television specials and the Stossel in the Classroom program, which brings economic ideas to high-school and college classrooms.

I wonder if Stossel realizes that when I was writing this section, I had him in mind?

Is it John Stossel's "The Tax-Cut Myth" that Bryan has in mind? John Stossel says it's a myth that tax cuts increase the deficit:

The Tax-Cut Myth, by John Stossel, RCP: ...[T]ax cuts stimulated the economy and increased tax revenues. It happens because, as the Laffer Curve illustrates, lower rates mean higher rewards for productive activities. ...

Bush boasted last year, "This economy is growing, federal taxes are rising, and we're cutting the federal deficit... Some in Washington say we had to choose between cutting taxes and cutting the deficit. Today's numbers show that that was a false choice. The economic growth fueled by tax relief has helped send our tax revenues soaring."

But I don't want tax revenues to soar. That's money you and I could be spending for things we want. I want revenue and spending and government overall to shrink. So I'm not celebrating with the president. ...

Bryan has argued that many voters are uninformed - he uses economics as his prime example - and that perhaps we should consider giving the uninformed less say in the political process. So I'm curious, should endorsing "myths," and what Stossel said is a myth, that's clear, should being uninformed about the effect of tax cuts disqualify him from voting?

Tuesday, July 31, 2007

In a Surprise, a Republican is Using Scare Tactics Based upon Misleading Claims

In a thoroughly misleading article designed to scare people about what might happen to the economy because the Republicans did not have the courage to make the tax cuts they enacted permanent, GOP Senator John Kyl says:

Failing to extend the tax relief we have passed would result in a de facto tax hike that could cripple our economy...

But according to a recent CBO report:

CBO director Peter Orszag said, “The short-term effects of [the 2001 and 2003 tax cuts] in stimulating aggregate demand in the economy have largely dissipated by now, and the supply-side effects of those policies are uncertain but are probably small.”

Some of the tax cuts’ provisions “increased incentives for people to work and save (which can increase growth), but other provisions had no effect on incentives. In addition, the two tax laws increased the budget deficit, and doing so tends to reduce economic growth over the medium and long term. At this point in time (several years after enactment), once those various factors have been taken into account, the overall impact of the tax legislation on the economy is likely to be modest”

Thus, despite the scare tactics claiming otherwise, it won't "cripple our economy" if we allow the Republican's tax policy to be enacted exactly as written. There's simply no evidence that these tax cuts had a substantial impact on saving, investment, and growth.

Kyl also uses careful wording to describe tax cuts and deficit reduction:

The tax relief has helped produce an economy that has generated higher than expected tax revenues for the federal government. Tax receipts have risen 37 percent over the last three years and are projected to increase another 7 percent this year. These rising tax receipts have, in turn, helped drive down the deficit...

Though it makes it sound like the tax cuts reduced the deficit without actually saying so, i.e. the standard Laffer curve nonsense, as I hope you know by now that didn't happen (as noted above, "the two tax laws increased the budget deficit"). In fact, the supply-side impact of the tax cuts is estimated to be very small, so small that it generated very little tax revenue. From the CBO report:

the tax cuts’ indirect impact on economic growth, investment and saving and could affect this year’s budget deficit anywhere from an increase of $3 billion to a reduction of $14 billion...

The CBO report also points out that "without the tax cuts, the budget would probably be in surplus this year".

Thus, while there is evidence that leaving the Republican tax legislation exactly as they wrote it and allowing the tax cuts to expire will improve the government's fiscal position, there is no evidence that keeping the Republican tax legislation in place will cripple the economy as claimed.