Category Archive for: Taxes [Return to Main]

Sunday, August 12, 2012

The Opposite of Courage

Romney doesn't want you to know the truth about his economic plan:

A Tax Plan That Defies the Rules of Math, by David Firestone, Editorial, NY Times: In May of 2000, when George W. Bush was running for president on a platform of extravagant tax cuts for all, his campaign did something that would be considered remarkable today: it submitted his tax plan to the Congressional Joint Committee on Taxation, to see how much all those tax cuts would cost the Treasury.
The bipartisan committee ran ... predicted that the tax plan would cost about $1.3 trillion over nine years, an underestimate but a clear sign of its high price tag. With the budget in surplus at the time, Mr. Bush didn’t dispute that cost, and never tried to pretend that the cuts would be free. Within a decade, in fact, they would turn out to be the biggest factor in the huge deficit he created.
Twelve years later, Mitt Romney, the presumptive Republican nominee, claims his far deeper tax cuts would have a price tag of exactly zero dollars. He has no intention of submitting his tax plan to the committee or anywhere else that might conduct a serious analysis, since he seems intent on running a campaign far more opaque than any candidate has in years.
He has made his economic plan the fundamental basis of his candidacy, and yet with the Republican convention just two weeks away, we know next to nothing of the plan’s details. ...
On issue after issue, the dominant theme of Mr. Romney’s plan is a refusal to make real choices..., you can scrutinize all 160 pages of his economic booklet without finding any evidence of decision-making. ...
The plans Mr. Ryan submitted as House budget chairman — which are now Mr. Romney’s too — were never models of clarity, but they at least made his priorities quite stark: more than three-fifths of his cuts would come from low-income programs like job training, Pell grants and food stamps. That’s not something Mr. Romney ever talked about on the stump ...

When the campaign refuses to release details -- tax returns come to mind as well -- it's because it has something to hide. The question to ask, and the last paragraph has the answer, is what he is trying to hide about his budget proposal. There's no way whatsoever to make his numbers work out without deep cuts to social insurance programs that benefit working class households, and higher taxes would also be required for these households (in part to offset large tax cuts for upper income households). But Romney doesn't have the courage to tell you that, instead he wants to keep it hidden, to blow smoke around the numbers, anything but the truth about his plan.

Monday, August 06, 2012

'Important Reasons to Challenge Professor Mankiw'

You will be shocked by this. Greg Mankiw, in an attempt to serve his political interests, said something misleading on his blog:

Measuring Mooching, by Nancy Folbre, Commentary, NY Times: ...Gregory Mankiw .... called attention to a recent Congressional Budget Office report showing that government transfers, net of federal taxes, were greater than market income for the bottom three quintiles of all households ranked by market income in 2009.
Professor Mankiw concluded that the lowest 20 percent of families were receiving $3 in government benefits for every dollar they earned and that the middle quintile “having long been a net contributor to the funding of government, is now a net recipient of government largess.”
This is not the same as calling the middle class moochers, but some might interpret it that way. Here are some important reasons to challenge Professor Mankiw...:
First, a ranking of households by market income puts households with retirees, young children, the sick and disabled at the bottom. We shouldn’t be surprised that net government transfers to these groups exceed their market income. As the C.B.O. report points out, almost two-thirds of the benefits received by the bottom quintile came from Social Security and Medicare. ... Calculations of “government largess” should be based on what people receive over their lifetimes. Retirees receiving Social Security and Medicare have paid taxes into the system in previous years. ...
Second, earnings were low in the bottom quintiles largely as a result of involuntary joblessness. ... People shouldn’t be faulted for unemployment when no jobs are to be had. ...
Third, the C.B.O. estimates do not provide entirely accurate measures of net government transfers. They are based on calculations of the difference between total transfers (including those from state and local government), and federal, but not state and local, taxes.
Indeed, an estimate of state and local taxes paid by the middle quintile in 2009 ... comes to $2,858 — enough to nudge their average total taxes paid ($10,558) above the value of the government transfers they received ($10,400).
In response to a reader’s comment..., Professor Mankiw posted a correction...

This captures an essential point (see here too):

Stepping back from these particulars, the larger point is that most government transfers take the form of social insurance against risks related to health, unemployment and poverty. As with private insurance, people shouldn’t expect the premiums they pay to equal the benefits they receive. What they should expect — and appreciate — is reduced risk of an economic shock that could turn their lives upside down.

Saturday, July 28, 2012

Shiller: Taxes Needn’t Discourage Philanthropy

Robert Shiller says tax increases should be accompanied by increased incentives for charitable giving. Do you find this more convincing than I do?:

Taxes Needn’t Discourage Philanthropy, by Robert Shiller, Commentary, NY Times: ...Should charitable deductions be fundamental to financial capitalism? I argue so... We need to accompany any tax increases with an affirmation and a broadening of the tax system’s support of philanthropy.

After a big tax increase on high incomes, people should have an especially strong incentive to give money to good causes: to the needy and to schools, colleges, hospitals, churches, the arts and other purposes. Many such donations reduce the need for government spending, so the deduction isn’t terribly costly to the government. It is also likely to bring entrepreneurial creativity to such causes.

Of course, there are counterarguments: that few people are motivated to work for money that will largely have to be given away, and that it’s natural for people to want to make their families better off from their earnings. But there is an answer to that line of thinking: after one attains a certain level of comfort, greater wealth arguably contributes only to social status, which philanthropy certainly bolsters.

That’s a good reason for national policies that encourage philanthropy. Although it’s natural for people to want high social status, there are ways for high achievers to reach the same relative rank without so much wasteful conspicuous consumption...

Unfortunately, much talk today focuses on just the opposite idea: curtailing the charitable deduction for high-income people, in order to help close the federal deficit. ...

Amid rising concern about inequality, we should focus on how we can improve our tax code and other rules to encourage positive feelings of reciprocity in our society. And we can do it while still giving people incentives to innovate — and to keep working hard.

Wednesday, June 27, 2012

Laughing at People Who Say Tax Cuts from Present Levels Will/Might Increase Revenue

There are two responses to the post below this one on the Laffer curve:

Miles Kimball explains why tax cuts are unlikely to increase revenue. This is worth reading.

Dave Henderson: Where are we on the Laffer Curve. Henderson says:

Cutting marginal tax rates will somewhat increase taxable income. But the odds are very high that it wouldn't increase nearly enough to increase tax revenue.

That is, he is asserting we are to the left side of the peak, but he leaves himself wiggle room even though there's little reason to do so based upon the evidence ("odds are very high"). He then says:

the question is not whether the Laffer Curve is right. The question is where we are on the Laffer Curve.

But he's already answered this question, we're to the left of the peak, or at least "the odds are very high" that we are. I'd be curious to hear what he thinks those odds are, and if they are non-trivial what evidence it is based on. So to me the real question is trying to figure out what point he is trying to make. We're to the left of the peak, almost surely, but the real question is whether we're to the left or right of the peak? Huh? Saying it could be true that tax cuts will increase revenue -- leaving wiggle room -- when all the evidence points in the other direction just gives the politicians and others who say tax cuts from present rates will increase revenue something to hang on to in their ideological battle against taxes. Why give them this opening when the evidence says the opening isn't there?

Along the way he tries to take a swipe at me based on play on words in the title -- but his assertion that I deny the existence of a revenue curve, or that it has a peak, is silly. I don't think we are anywhere near the peak (based partly, but only partly, on recent research showing it's near a 70% rate), but where have I ever said no such peak exists? As I said in comments, what I am laughing at is people -- politicians in the GOP in particular -- who still say that if we cut taxes it will increase revenue (and I am disappointed with economists who abet that by saying it could be true, or that the real question is what side of the peak we're on even though, as Henderson admits, that's all but a settled question: "Not one economist surveyed agrees with this claim [that tax cuts will increase revenue within five years]. I don't either." He doesn't agree, but it just might be true? Hmm.).

Update: Bryan Caplan also responds: Did the IGM Reject Laffer Optimism or Old-School Keynesianism?

Laughing at the Laffer Curve

Via the IGM Forum:

Question B: A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.



Marianne Bertrand, Darrel Duffie, and Claudia Goldin are the disappointing "uncertain" votes out of the many responses to this question. They should listen to Ed Lazear:

This is the Laffer curve issue. There is little (if any) evidence that rates exceed revenue-maximizing levels. See Mankiw, Feldstein.

Or David Autor:

Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer.

Or Michael Greenstone:

All evidence that I'm aware of suggest that cutting tax rates "marginally" from their current levels would DECREASE revenues, even 5 yrs out

Or Kenneth Judd:

That did not happen in the past. No reason to think it would happen now.

Or Anil Kashyup:

May look plausible on a cocktail napkin (or at a cocktail party), but not true empirically in the US.

Or Pete Klenow:

Not enough time for capital to respond much (physical, human, technology), so it would require implausibly large labor supply elasticities.

Or Robert Hall

See previous question. In addition, few studies suggest we are already at the max of the Laffer curve, though we may be close.

Or Austan Goolsbee:

Moon landing was real. Evolution exists. Tax cuts lose revenue. The reasearch has shown this a thousand times. Enough already.

There are many people who have an interest in making you believe otherwise, but tax cuts are inconsistent with deficit reduction  -- they make the deficit problem worse.

[Update here -- the post that follows this one.]

Wednesday, June 06, 2012

"The GOP's Bizarre, Disturbing Passion for Raising Taxes on the Poor"

James Kwak says the explanation I gave yesterday for why Republicans ignore the interests of the poor and the unemployed, that the Party is simply expressing the wishes of the wealthy interests that fund campaigns, is not the most most disturbing explanation for the recent behavior of the GOP:

The GOP's Bizarre, Disturbing Passion for Raising Taxes on the Poor, by James Kwak: ... The vast majority of Republicans in Congress have signed the Taxpayer Protection Pledge, which commits them to vote against any bill that would either increase tax rates or increase tax revenues.
That should be the whole story. But it isn't..., leading Republican figures ... as well as a majority of party members, argue that taxes should go up ... on the poor. They are talking about the famous "47 percent" who don't pay federal income taxes. ...
If you include payroll taxes, it turns out that only 18 percent of households pay no direct federal taxes. ... The majority of people who don't pay either income or payroll taxes are the elderly... If Eric Cantor wants to solve the "problem"..., he should push to make Social Security benefits taxable. Good luck with that.
Almost all of the other households that don't pay direct federal taxes make less than $20,000 per year. So, it turns out, the only people that Republicans want to raise taxes on are the very poor -- and they want to do it so much that they are willing to consider breaking the Pledge. ...
Two explanations jump to mind. The first is that the modern Republican Party is funded by the very rich. ... The result is that the parties' platforms now reflect the wishes of their major funders, not their median voters. ...
The other, even-more-disturbing explanation, is that Republicans see the rich as worthy members of society (the "producers") and the poor as a drain on society (the "takers"). ... This is why today's conservatives have gone beyond the typical libertarian and supply-side arguments for lower taxes on the rich, and the campaign to transfer wealth from the poor to the rich has taken on such self-righteous tones.
This just goes to show how pathological the Republican Party has become. It would be so much simpler, more logical, and more politically appealing if they would just draw a line against higher taxes for anyone. ... The fact that Eric Cantor feels compelled to go out of his way to talk about raising taxes on the poor shows how the nasty instinct for class warfare is undermining what should be a simple, small-government agenda.

Sunday, June 03, 2012

John Rawls's Critique of Capitalism

Daniel Little:

Rawls on a property-owning democracy, by Daniel Little: John Rawls's critique of capitalism was deeper than has been commonly recognized -- this is a central thrust of quite a bit of important recent work on Rawls's theory of justice. Much of this recent discussion focuses on Rawls's idea of a "property-owning democracy" as an alternative to both laissez-faire and welfare-state capitalism. This more disruptive reading of Rawls is especially important today, forty years later, given the great degree to which wealth stratification has increased and the political influence of wealth has mushroomed. (I've addressed this set of issues in prior posts; link, link.) Martin O'Neill and Thad Williamson's recent volume, Property-Owning Democracy: Rawls and Beyond, provides an excellent and detailed discussion of the many dimensions of this idea and its relevance to the capitalism we experience in 2012. It includes contributions by a number of important younger political philosophers.

O'Neill and Williamson make the point in their introduction that this issue is not merely of interest within academic philosophy. It also provides a powerful conceptual and normative system that might serve as a basis for a more successful version of progressive politics in North America and the UK. Politicians on the left have found themselves locked into a defensive battle trying to preserve some of the features of welfare state capitalism -- usually unsuccessfully. The arguments underlying the idea of a property owning democracy have the potential for resetting practical policy and political debates on more defensible terrain.

The core idea is that Rawls believes that his first principle establishing the priority of liberty has significant implications for the extent of wealth inequality that can be tolerated in a just society. The requirement of the equal worth of political and personal liberties implies that extreme inequalities of wealth are unjust, because they provide a fundamentally unequal base to different groups of people for the exercise of their political and democratic liberties. As O'Neill and Williamson put it in their introduction, "Capitalist interests and the rich will have vastly more influence over the political process than other citizens, a condition which violates the requirement of equal political liberties".  A welfare capitalist state that succeeds in maintaining a tax system that compensates the worse-off in terms of income will satisfy the second principle, the difference principle. But in the striking recent interpretations of Rawls's thinking about a POD, a welfare state cannot satisfy the first principle. (It would appear that Rawls should also have had doubts about the sustainability of a welfare state within the circumstances of extreme inequality of wealth: wealth holders will have extensive political power and will be able to effectively oppose the tax policies that are necessary for the extensive income redistribution required by a just welfare capitalist state.) Instead, Rawls favors a form of society that he describes as a property-owning democracy, in which strong policies of wealth redistribution guarantee a broad distribution of wealth across society. Here is how Rawls puts it in Justice as Fairness: A Restatement:

Property-owning democracy avoids this, not by the redistribution of income to those with less at the end of each period, so to speak, but rather by ensuring the widespread ownership of assets and human capital (that is, education and trained skills) at the beginning of each period, all this against a background of fair equality of opportunity. The intent is not simply to assist those who lose out through accident or misfortune (although that must be done), but rather to put all citizens in a position to manage their own affairs on a footing of a suitable degree of social and economic equality.

O'Neill and Williamson draw out the implications of this view of a just society by contrast with the realities of 2012:

The concentration of capital and the emergence of finance as a driving sector of capitalism has generated not only instability and crisis; it also has led to extraordinary political power for private financial interests, with banking interests taking a leading role in shaping not only policies immediately affecting that sector but economic (and thereby social) policy in general.... The United States is now further than ever from realizing what Rawls termed the "fair value of the political liberties" -- that is, the core value of political equality.

How would the wide dispersal of wealth be achieved and maintained?  Evidently this can only be achieved through taxation, including heavy estate taxes designed to prevent the "large-scale private concentrations of capital from coming to have a dominant role in economic and political life".

It seems apparent that progressives lack powerful visions of what a just modern democracy could look like. The issues and principles that are being developed within this new discussion of Rawls have the potential for creating such a vision, as compelling in our times as the original idea of justice as fairness was in the 1970s.  It is, in the words of O'Neill and Williamson, "a political economy based on wide dispersal of capital with the political capacity to block the very rich and corporate elites from dominating the economy and relevant public policies".  And it is a society that comes closer to the ideas of liberty and equality that underlie our core conception of democracy than we have yet achieved.

(Williamson and O'Neill provided an excellent exposition of the idea and some of the foundational questions that need to be explored in 2009 in "Property-Owning Democracy and the Demands of Justice" (link).  The concept of a property-owning democracy originates in writings by James Meade, including his 1965 Efficiency, Equality and the Ownership of Property.)

Friday, June 01, 2012

Tax Cut History Lesson

Republicans will almost surely propose tax cuts (for you know who) to stimulate the economy. A reminder:

And the Bush tax cuts didn't do any better.

Tuesday, May 22, 2012

Tax Cuts Disguised as Reform

No matter what Republicans say, always remember the ultimate goal is more tax cuts for their supporters:

Don’t let Congress fast-track another tax cut, Andrew Fieldhouse: House Speaker John Boehner’s (R-Ohio) high-profile speech at last week’s 2012 Fiscal Summit garnered much attention for its pledge to again hijack the debt ceiling; less noticed was his announcement that the House of Representatives will establish a fast-track process for expediting “tax reform.” Comprehensive tax reform could add much needed revenue and balance to a long-term deficit..., but that’s not what Boehner is talking about:

“If we do this right, we will never again have to deal with the uncertainty of expiring tax rates. We’ll have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code. And if we do that right, we will see increased revenue from more economic growth.” (Full text here.)

Anything resembling the tax plan recommended by Ways and Means Committee Chairman Dave Camp (R-Mich.) and included in Budget Committee Chairman Paul Ryan’s (R-Wis.) fiscal 2013 budget resolution—Boehner’s chief fiscal policy deputies—is going to have a devilishly hard time meeting this laundry list of talking points. That’s because conservatives falsely equate a “simpler” tax code with cutting and consolidating tax brackets, which would confer big tax cuts to upper-income households in the top tax brackets. This is the bedrock of the Camp-Ryan tax plan: “Consolidate the current six individual income tax brackets into just two brackets of 10 and 25 percent.” Short of unspecified offsets, this would sap progressivity from the tax code and deprive the Treasury of $2.5 trillion over a decade—accounting for more than half of the $4$4.5 trillion of unfunded tax cuts proposed in the Ryan budget. Combined with the other major tenants—repealing the alternative minimum tax (AMT), cutting the corporate tax rate to 25 percent, exempting foreign profits from taxation, and repealing health care reform—the tax code would be markedly flattened at the top of the income distribution...:


The red bars show what regressive upper-income tax cuts and lower-income tax increases look like, not what tax reform looks like. The missing element is how the tax cuts would be financed—i.e., which unspecified tax expenditures would be eliminated in “broadening the tax base.” House Republicans object to eliminating or even scaling back the preferential tax rates on capital gains and dividends—the tax expenditures most disproportionately benefiting upper-income households—which would be the only feasible way to maintain progressivity at the top of the income distribution...

Lastly, Boehner’s implied objectives of revenue and distributional neutrality—which guided the Tax Reform Act of 1986—are now wholly inappropriate benchmarks, as they would lock-in the past decade’s unaffordable and regressive Bush-era tax cuts and exacerbate Gilded-Age levels of income inequality. ...

If Congress really is heading toward comprehensive tax reform in the next few years, policymakers need to be kept honest about what amounts to reform versus a tax cut. The United States simply can’t afford to let Congress fast-track another tax cut disguised as “tax reform.” And House Republicans are currently $4.5 trillion shy of proposing even revenue-neutral tax reform.

Beyond the unspecified cuts, etc., it's hard to believe they are still trying to get away with the claim that tax cuts will increase revenue and actually help with the long-term deficit -- that won't happen, it will make the deficit worse just as it did in the past. But I guess if the press lets you get away with bogus claims, unspecified cuts and the like, why not say whatever?

Tuesday, May 15, 2012

The Social Security Shortfall and the Cost of the Bush Tax Cuts


Wednesday, May 09, 2012

How Are U.S. Workers Using the Payroll Tax Cut?

This study from Basit Zafar, Grant Graziani, and Wilbert van der Klaauw of the NY Fed shows that the payroll tax cuts in the stimulus package have been used mostly to pay off debt and add to savings -- around 40% went to consumption. Does the relatively low amount that went to consumption mean the payroll tax cuts didn't work? As I've argued before, the 60% that went to saving and debt reduction represents balance sheet rebuilding, something that has to happen before households can return to more normal expenditure patterns. This may mean "that our estimated MPC [of .405] is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments." And it's not just a reduction in interest, once balance sheets are rebuilt the amount of income that goes to consumption instead of saving and debt reduction ought to go up:

A Boost in Your Paycheck: How Are U.S. Workers Using the Payroll Tax Cut?, by Basit Zafar, Grant Graziani, and Wilbert van der Klaauw, Liberty Street Economics, FRB NY: Over the past several months, there was a flurry of debate in Washington over the extension of the payroll tax cut. Many supporters of the tax cut—worth about $1,000 to a family earning the median income of slightly more than $50,000 a year—have cited its importance to the nation’s economic recovery, while opponents claim that it will only add to the national deficit without boosting the economy. Exactly how such a tax cut affects the aggregate economy relies heavily on how U.S. workers use the extra funds in their paychecks. Unfortunately, we know little about how such tax cuts are used by workers. So we decided to ask them and, in this post, report the answers they gave us.
The initial payroll tax cut, passed into law as part of the 2010 Tax Relief Act, reduced workers’ Social Security tax withholding rate from 6.2 percent to 4.2 percent for all of 2011. After much legislative debate, the 2 percent payroll tax cut for nearly 160 million U.S. workers was extended in December 2011 for the first two months of 2012, and then again on February 22, 2012, for the rest of the year. In order to understand how these cuts might affect economic activity, we used the RAND Corporation’s American Life Panel (ALP) to conduct online surveys of 372 individuals, 200 of whom were working, at two points last year: in February 2011, and then in mid-December 2011, close to the expiration of the initial tax cuts.
In the first survey, we asked respondents how they intended to spend any extra funds from the payroll tax cut in their paychecks. More precisely, respondents were asked to provide the share (out of 100 percent) of funds that they would spend on: consuming, saving, and paying off debt. The table below shows that 8.8 percent of respondents planned to use most of the tax-cut funds for consumption, 39.8 percent planned to use majority of it on saving, and 50.3 percent planned to use a majority of it to pay off debt. Such a low intended rate of consumption is consistent with the permanent income hypothesis, which claims that transitory changes in income should not change consumption behavior, as individuals would use the extra funds to smooth their consumption over the rest of their lifetime.


To explore the relationship between the perceived permanence of the tax cuts and the intention to spend the funds, we also asked respondents how likely they thought it was that the tax-cut extensions would continue into future years. The table below shows how intended consumption patterns relate to the perceived likelihood of future tax-cut extensions. On average, those who consider long-term extensions to be likely plan to spend about 8 percentage points more of their tax-cut funds than those who consider them to be unlikely (20.5 percent compared with 12.6 percent). Additionally, the last three columns of the table show that when comparing the two groups, a higher proportion of the “likely” group intend to use the majority of their tax-cut funds for consumption (17.9 percent compared with 8.1 percent). This supports the permanent income hypothesis, as those who consider these tax cuts to be more permanent plan to spend more of the extra funds.


In the second survey, conducted in December 2011, respondents were asked how they had used the extra funds from the tax cut over the past year. The second column in the first table shows that 35.0 percent of individuals actually spent the majority of their tax-cut funds, a sharp increase from the intended use of 8.8 percent. We next compare individuals’ intended use of the tax-cut funds (reported in the early 2011 survey) with what they reported actually doing with the funds. The figure below shows the relative frequency of actual tax-cut-fund use by the three groups based on intended use (that is, mostly consume, mostly save, and mostly pay off debt). For example, of those who planned to spend most of their tax-cut funds, 66.7 percent did in fact spend the majority of it, while 16.7 percent saved the majority of it, and 16.7 percent paid off debt. A similarly high proportion of those who intended to use the majority of their funds to pay off debts did so (60.8 percent), while 46.2 percent of those who planned to save most of their funds actually did so. Two patterns are of note in the chart: (i) while there is a positive correlation between intended and actual uses, there is a high degree of inconsistency; and (ii) there is a systematic shift toward spending for those who did not use their funds in the way they intended, that is, individuals ended up spending more of their tax-cut funds than they had intended.


We can also go beyond grouping respondents by how they used the majority of their funds. In particular, we can directly estimate the marginal propensity to consume (MPC) by taking the average of the proportion of each person’s tax-cut funds that was reported to be used on spending. This, of course, can also be done for saving and paying off debt. This value is far more useful for policymakers when considering how the total tax cut will be used by households. The chart below summarizes the average breakdown of tax-cut-fund use for the full sample and by demographic groups. On average, respondents used 40.5 percent of their tax-cut funds on spending (that is, an MPC of 0.405), 24.1 percent on saving, and 35.3 percent on paying off debt. These figures are quite different from the intended average proportions reported in the first survey, in which, on average, respondents intended to use 16.3 percent of their tax-cut funds on spending (intended MPC of 0.163), 34.2 percent on saving, and 49.5 percent on paying off debt. That is, on average, individuals ended up spending a significantly larger part of the tax-cut funds than they had intended. ...
Our estimated MPC of 0.405 is at the higher end of the range of estimates from the literature based on recent tax rebates: in examining the use of the 2008 tax rebates, one study estimates an MPC of 0.33, and another an MPC of about 12 to 30 percent in the first three months from receiving the rebate; similarly, the MPC in the first three months after the 2001 tax rebates has been estimated in the 20 to 40 percent range. One possible explanation for why we observe a higher MPC out of tax-cut funds than out of tax rebates is that tax cuts show up in smaller amounts spread over multiple paychecks, which many people claim not to notice. These smaller, multiple payments may be more easily spent than large, lump-sum tax rebates.
Three of our findings are noteworthy. One, our larger MPC estimates highlight the importance of the design of tax holidays (rebates or cuts) in determining the response of spending to policies. Second, our finding—that people who perceive tax cuts to be more permanent plan to spend more of their funds—has fiscal policy implications as to whether such tax cuts are implemented as long-term extensions or sequential short-term extensions. Third, we find that people spend a large portion of their tax-cut funds to pay off debts—this may be good news considering the large debt issues leading up to and during the financial crisis—and may also suggest that our estimated MPC is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments.

Tuesday, May 01, 2012

"Robert Samuelson Playing Anti-Robin Hood Again"

Should we feel sorry for the rich?:

Robert Samuelson Playing Anti-Robin Hood Again, by Barkley Rosser: In today's Washington Post, Robert J. Samuelson is at it again with a column called "The real Washington," in which he admonishes his readers for not realizing that we are a democracy and that the rich are paying for huge increases in aid to the poor, up from $126 billion in 1980 in real terms to $626 billion today, even while the suffering top income quintile are supposedly paying "70%" of federal taxes, poor things. He clearly decries this and thinks that aid to the poor along with his usual favorite target, Social Security, should if not be cut at least capped. The rich are doing enough, more than enough, poor things, and here we are facing the "terrible threat of long term deficits," even though he only once manages to mention that "More promises were made than can be kept without raising taxes, which -- for the most part -- were also subject to bipartisan promises against increases." That this last remark is ridiculously lopsided should go without saying, but RJS is keen to maintain his position as a Very Serious Centrist. ...
RJS's numbers ... are not as dramatic as they look. While indeed the top quintile does pay 67.2% of federal taxes (not RJS's apparently rounded off 70%), the same top quintile earns 53.4% of income. So, yes, indeed, the federal tax code is mildly progressive. But in fact it used to be more so than it is now. The average federal tax rate for that top quintile has been lower since 2001 than it was for any years since the end of WW II except for 1982 and 1983. This moaning about the poor rich on taxes just looks silly.
Furthermore, RJS's numbers overstate what has gone on regarding aid for the poor. ... The problem as almost always with RJS is that he ignores the outsize price increases in healthcare costs. ... This seems like a massive increase, but when one corrects for the far greater increase in medical care costs than overall prices, the real increase in this is relatively modest, and this increase supposedly constitutes nearly half the overall increase.
While we are at it, expenditures on TANF have not risen since welfare reform, and the number of enrollees has barely budged during the Great Recession. This part of the system for helping the poor has been nearly useless in the recent crisis. I am glad that food stamps (SNAP) have been way up, but Samuelson is just missing it when he tries to paint a picture of the rich being snagged badly by a bunch of overcovered poor people (along with ignoring the skewing to the rich of the tax code...).

[More here.]

Wednesday, April 25, 2012

"Let's Beef up Social Security Benefits"

More on Social Security:

Let's beef up Social Security benefits instead of cutting them, by Michael Hiltzik: Advocates for strengthening Social Security have come to dread the release of the annual report of the program's trustees. That's because the event has become the basis for more hand-wringing about Social Security's fiscal condition and calls to cut benefits for current and future retirees. This week's release of the 2012 report is no exception. ...

What won't be adequately explained is that the program isn't "insolvent" or "bankrupt." ... Economic recovery alone will improve the program's fiscal condition, and the trustees say that even if Congress does absolutely nothing, in 2033 there still will be money to pay about 75% of currently scheduled benefits.

And by the way, despite facing the worst economic conditions in its history, the program ran a surplus of $69 billion last year, increasing the trust fund to nearly $2.7 trillion. ...
It's time to shut down the talk of cutting benefits, which serves nobody, and pump up the volume on making them better. ... Of the customary three legs of the retirement stool, two — personal savings and employer-paid pensions — have been shattered into smithereens by the markets, high unemployment and changes in workplace benefits. Social Security is the third leg. ...

Modernizing Social Security is crucial today because the actions of government and industry have increased Americans' dependence on the program. ...

Undoubtedly you're going to hear that improving Social Security will bankrupt America. This is the mating cry of the haves-and-want-mores, and it's malarkey. Federal taxes ... amounted to about 15.4% of our gross national product last year... That's lower than the level of every other industrialized country...

Isn't it curious that the same people who insist that America is the greatest, richest country in the world, ever, are those who insist that there's no way we can afford to provide for our elderly, our disabled and the survivors of our deceased workers to the same degree as the rest of the industrialized world? ...

We can afford to give people a decent retirement. People who benefitted from the hard work of others -- those who reaped the gains of increasing inequality and have more than enough -- can do more to help provide a decent retirement to the people who toiled day in and day out to help create that wealth. And as I've said again and again, the income distribution mechanism has gone awry in recent decades. People at the lower income are not getting what they have earned, and people at the top are getting more than what they contribute. So I view this as simply returning income to its rightful owners.

Tuesday, April 24, 2012

Raise the Cap and Close the Gap

Dean Baker:

The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution, by Dean Baker: In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:
"Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."
Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.
The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.
In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.

Raising the cap is my favored solution, but (surprise) somehow raising taxes of those with the most political power is not on the agenda. Instead, the proposed solutions always seem to hit those who are the most politically and economically vulnerable.

Peter Dorman also weighs in:

For the past thirty years we have seen repeated campaigns to eviscerate Social Security—to privatize it, siphon off its finances, drain it of its essential social insurance character.  These have failed, not because of the brilliance or commitment of its defenders, but simply because it fulfills a vital social function and is wildly popular.  Even those who, in their heart of hearts, want to crush it to bits, claim to be in favor of “saving” it.  So what’s the strategy of the anti-SS minions?
Cynicism.  Convince younger voters, whose benefits are still decades away, that the program is dying a slow but certain death, and that politicians are too myopic or pandering or just stupid to do anything about it.  From time to time I poll my students, and by a big majority they always tell me that SS will not be around to support them in their retirement.  (Not that this has provoked a big Feldsteinesque spike in their personal savings....)  As this mindset takes hold, it becomes easier to simply tune out the debate over SS.  After all, it’s not like it’s actually going to be there when I’m old, no matter what they say, right?  At some point, it goes from being a third rail to a footnote to just background noise, to mangle a bunch of metaphors.
What I’d like to see are news stories that say something like, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”

People also need to realize that "Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that’s a real concern. But compared to other concerns, it’s really pretty minor, and doesn’t deserve a tenth the attention it gets. It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now."

Notice that even under the worse case scenario, real benefits would be higher than they are now. The benefits would not keep up with increases in productivity as they do presently -- payments rise as the standard of living rises -- but the benefits would still rise as much or more than inflation. So today's standard of living would still be available even in the worst possible case. But there is the problem of how to cover the productivity increases over the next quarter century. What to do?

Raise the cap and close the gap.

Monday, April 23, 2012

"High Tax Rates Won't Slow Growth"

Peter Diamond and Emmanuel Saez:

High Tax Rates Won't Slow Growth, by Peter Diamond and Emmanuel Saez, Commentary, WSJ: The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? ...
But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate? ...
According to our analysis..., the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70%... Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. ...
But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. ... Neither does international evidence support a case for lower growth from higher top taxes. ...
By itself, a suitable increase in the taxation of top earners will not solve our unsustainable long-term fiscal trajectory. But that is no reason not to use this tool to contribute to addressing this problem.

With the "taxes harm growth" and Laffer curve arguments undercut by research such as this, Republicans have fallen back on the argument that it's unfair to take income away from those who earn it. But that presumes that the system allocates income fairly, a claim that is hard to swallow given how much financial executives are paid relative to their contribution to the productive process (to name just one example). There's nothing unfair about using taxes to "clawback" misdirected income, and it won't harm growth to send income where it should have gone in the first place.

Tuesday, April 17, 2012

"Our Tax System is on the Wrong Track"

Brad DeLong has a warning:

I am Cassandra.

I am here to warn you that on taxes America has, over the past generation, gotten itself onto the wrong track.

A generation or so ago, we had a federal tax system which was roughly one-third social insurance taxes on wages, one third taxes on businesses, and one-third progressive taxes on individual incomes.

Over the past generation we have shifted to a system in which (a) taxes on corporations have become much smaller--less than half as large--and riddled with loopholes, and (b) taxes on income have become much less progressive.

This is not good for America.

This is not good for America for two reasons.

First, the market has handed us in this generation a much more unequal distribution of income that it did a generation ago. Therefore it is now extremely good policy to have not a less but a more progressive tax now than we did then--and taxes on businesses are by and large progressive.

Second, over the past generation our our economy has shifted in directions--toward education and toward healthcare--where the private competitive market is much less effective. As a result, a good society now would have a significantly larger role for government than a good society then. And it is thus bad policy to drop any of our sources of revenue to fund government.

This finishes my warning.

Our tax system is on the wrong track.

We need to pick it up, carry it over, and put it back onto the right track.

We need to do this now.

Thank you.

"An Election-Year Giveaway Unlikely To Create Any Jobs"

Bruce Bartlett:

Do Small Businesses Create Jobs?, by Bruce Bartlett, Commentary, NY Times: ... Congress is, of course, always keen to find ways of aiding small businesses, which are akin to mom and apple pie in its eyes. Just recently, it approved the JOBS Act, which is intended to ease access to credit by “emerging growth” companies. Congressional Republicans are anxious to enact a new tax cut for small businesses, as well. The Small Business Tax Cut Act, which was reported out by the House Ways and Means Committee on April 10, would give a one-year, 20 percent tax cut to every business with 500 or fewer employees.
The Joint Committee on Taxation estimates that it will reduce federal revenues by $46 billion. The committee report offered virtually no rationale for the legislation other than that small businesses are good and deserve a tax cut, period. The linkage between a small business’s tax burden and job creation, however, is tenuous at best. ...
The Tax Policy Center estimates that the benefits would accrue overwhelming to the wealthy, with 49 percent of the total tax cut going to those making more than $1 million.
There may be policies that would increase the number of business start-ups and aid employment this way. But an across-the-board tax cut for every small business, defined only in terms of employment, is nothing but an election-year giveaway unlikely to create any jobs whatsoever.

Instead, let's use the $46 billion this would cost (and mostly waste in terms of job creation) to build infrastructure. If it helps to sell it, make it infrastructure that would be useful to small businesses -- it can probably be argued that most infrastructure projects would help small businesses in one way or the other. This way, even apart from the better prospects for job creation from infratructure spending, at least we'll have something to show for the money when all is said and done.

Monday, April 16, 2012

"The Migration Myth"

Greg Mankiw argues that:

If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet.

How much evidence is there that people actually do this, i.e. move to another place to flee high taxes?:

Migration Myth Strikes Again, by Jon Shure, CBPP: Proponents of the migration myth are at it again, trying to sell the idea that if states with lower taxes gain more population than states with higher taxes, taxes must be the reason.

To prove that people migrate from state to state in search of lower taxes, the latest edition of the American Legislative Exchange Council’s (ALEC) “Rich States, Poor States” report notes that, over the past two decades, Hawaii (which has an income tax with a relatively high top rate) has lost twice as many residents to other states as Alaska (which has no income tax).

Wait, you might ask. What about differences in the job market? Oil prices? Housing costs? Shouldn’t we take these and other potential factors into account? Indeed we should.

As we discussed in a major report last year,... Studies by economists and demographers that take into account the wide range of other factors show consistently that taxes have little if any impact on migration.

The ALEC report ignores the growing body of research that debunks the tax-flight myth, instead citing statistical tidbits that might seem compelling at first glance but wilt under scrutiny.

For example, ALEC attributes Florida’s 46 percent population gain between 1990 and 2010 to its lack of an income tax, ignoring the fact that neighboring Georgia — which has an income tax — grew by 50 percent over that period.

As for Alaska and Hawaii – the states that ALEC uses to illustrate the tax-flight myth — IRS data show that, in fact, slightly more households are moving from no-income-tax Alaska to high-income-tax Hawaii than the other way around. ...

As our report stated:

It would not be credible to argue that no one ever moves to a new state because of the desire to live someplace where taxes are lower. But neither is it credible to say that taxes are a primary motivation, nor that migration has a large impact on the revenue impact of tax measures.

[On Mankiw's column, see the list of responses in today's links. See here too.]

Tuesday, April 10, 2012

Where Do Our State Tax Dollars Go?

Via the CBPP:

Bulk of State Spending Goes To Education and Health Care

... States spend more than half of our tax dollars on education and health care, on average.

Friday, April 06, 2012

"Nontaxpayers are Overwhelmingly Eldery"

Matthew Yglesias:

A somewhat strange myth has taken hold in some precincts of American conservative opinion that some vast swathe of the population isn't paying taxes. In fact everyone pays sales taxes and other state and local taxes, and as Adam Looney and Michael Greenstone write for the Hamilton Project almost all working-age people pay federal tax on their income.

The main bloc of people who don't pay income or payroll taxes are elderly people. Old people tend not to work, and many old people don't have much in the way of investment income either. But it's not like they're freeloading, they're just people who paid taxes in the past when they were working.

Saturday, March 31, 2012

"Why Gas Prices Are Out of Any President’s Control"

One more quick one from the airport -- Richard Thaler attempts to nudge people away from the idea that the president can control gas prices (and he calls for an increase in the gas tax):

Why Gas Prices Are Out of Any President’s Control, by Richard Thaler, Commentary, NY Times: Everyone knows it’s dangerous to ingest gasoline or to inhale its fumes. But I am starting to believe that merely thinking about the price of gasoline can damage cognitive processing. Thus I may be risking some of my precious few remaining brain cells by writing about that topic.
Here is a one-item test to see whether you are guilty of cloudy thinking about gas prices: Do you believe that they are something a president can control? Many Americans believe that the answer is yes, but any respectable economist will tell you that the answer is no.
Consider a recent poll of a panel of economists conducted by the University of Chicago Booth School of Business, where I teach. ... The 41 panel members were asked whether they agreed with the following statement: “Changes in U.S. gasoline prices over the past 10 years have predominantly been due to market factors rather than U.S. federal economic or energy policies.”
Not a single member of the panel disagreed with the statement.
Here is why: Oil is a global market in which America is a big consumer but a small supplier. ...[continue reading]...

Saturday, March 17, 2012

"Wishful Thinking About Tax Rates"

Christina Romer gives some evidence (or, to be more precise, notes the lack of evidence) on the dynamic effects of tax cuts discussed in the post below this one:

That Wishful Thinking About Tax Rates, by Christina Romer, Commentary, NY Times: At least since Calvin Coolidge, politicians have trumpeted the supply-side benefits of cutting marginal income tax rates. Lower rates will unleash economic growth and the cuts will largely pay for themselves — or so it’s often said. Yet careful studies find little evidence of such effects. ...
This idea was the essence of President Ronald Reagan’s theory of supply-side economics, and his justification for large, permanent tax cuts in the early 1980s. Mitt Romney, now seeking the Republican nomination for president, cited a similar argument when he proposed cutting all income tax rates 20 percent. ...
History shows that marginal federal income tax rates have varied widely. ... If you can find a consistent relationship between these fluctuations and sustained economic performance, you’re more creative than I am. ...
Of course, many factors affect the economy, so a lack of correlation doesn’t prove that marginal-rate changes have little impact. That’s why economists have devoted thousands of pages in journals to testing the effects more scientifically.
One standard approach is to look for natural experiments in the tax code. ... But a critical review of several natural-experiment studies concluded that ... if the marginal tax rate for high earners decreased from its current level of 35 percent to 28 percent (which Mr. Romney proposes), reported income would rise by just 2 1/2 percent.
In a new study, David Romer and I found that changes in marginal rates in the 1920s and ’30s had even smaller effects. ...
Where does this leave us? I can’t say marginal rates don’t matter at all. ... But the strong conclusion from available evidence is that their effects are small. ...
[I]ncome inequality has surged in recent decades. Raising marginal rates on the wealthy is a straightforward, effective way to counter this trend, while helping to solve our looming deficit problem. Given the strong evidence that the incentive effects of marginal rates are small, opponents of such a move will need a new argument. Invoking the myth of terrible supply-side consequences just won’t cut it.

Thursday, March 15, 2012

"Without Significantly Deterring the Wealthy from Trying to Earn More"

Peter Diamond:

...Diamond also pointed to some of his own recent research, with economist Emmanuel Saez of the University of California at Berkeley, which found that the optimal marginal income tax rate on the highest earners — those making $400,000 or more per year — is well above the current 36 percent, or even the 39 percent level that existed during the 1990s.  

“The Washington debate right now is between the Bush and Clinton tax rates on the top,” Diamond said. But his work with Saez shows that a more efficient rate for raising revenue — without significantly deterring the wealthy from trying to earn more — is “somewhere between the tax rate at the top in Reagan’s first administration, which was 50 percent, and the tax rate at the top from the Johnson years up to the Reagan change, which was 70 percent.” ...

The objection to increased taxes on the wealthy used to be about growth, but as that argument has been undermined by actual evidence (or lack of it when it comes to detecting the promised effect of tax cuts on growth), the argument has shfted to fairness. It wouldn't be fair to tax them that much, it's their money, etc. But since the gowth of income for the typical household has not kept up with productivity -- the money flowed to the top of the income distribution instead -- the issue of fairness may not work in their favor.

Tuesday, March 13, 2012

"There is No Economic Reason Not to Raise the Top Rate"

Bruce Bartlett says Allan Meltzer made a pretty good case for raising taxes on the wealthy::

Would a Higher Top Tax Rate Raise Revenues?, by Bruce Bartlett, Commentry, NY Times: On Friday, Prof. Allan Meltzer of Carnegie Mellon University, a well-known conservative economist, offered a commentary in The Wall Street Journal arguing against policies to equalize the distribution of income.
His key piece of evidence is ... from a study by the Swedish economists Jesper Roine and Daniel Waldenstrom, that shows the share of income accruing to the top 1 percent of earners in seven Western democracies. They all follow the same trend line, Professor Meltzer says, and it proves that “domestic policy can’t be the principal reason for the current spread between high earners and others.” ...
Leaving aside the fact that the ultrarich have gained far more in the United States than any other country in his sample and that there is no upward trend at all in the Netherlands, he seems to have missed an important implication of his own conclusion.
If the rich are going to continue to get richer in low-tax countries and high-tax countries alike, then it must mean that high tax rates have far less of a disincentive effect on the rich than conservatives like Professor Meltzer continually proclaim. ...
If, as Professor Meltzer has shown, the rich get richer regardless of the tax rates, there is no economic reason not to raise the top rate. Perhaps unwittingly, his research confirms that of other economists who say that we could get substantial additional revenues even if the top rate doubled.

"The Myth of the Non-Paying 47 Percent"

Another reminder that Republican politicians are citing tax figures that are a very misleading indicator of the overall tax burden that various income groups face:

The Myth of the Non-Paying 47 Percent, CBPP: The argument that we should raise taxes on the bottom half of households because too many of them don’t owe federal income tax doesn’t take the tax system as a whole into account, our former colleague Aviva Aron-Dine explains in a new piece in the Milken Institute Review. Here’s an excerpt:

These are tough times, especially for low- and moderate-income families. For much of 2011, the unemployment rate exceeded 9 percent, and was higher among those without a college education. Last year, 15 percent of Americans lived in poverty, up from 12 percent before the recession. Meanwhile, the median income of working-age households fell sharply for the third year in a row. And that decline came on top of more than three decades of sluggish growth for all but the highest earners.

Yet to hear some people tell it, one of the major problems facing America is that the bottom half of U.S. families is getting off too easy. Every major candidate in the Republican presidential race, along with the Republican congressional leadership, has expressed outrage over the fact that 47 percent of households didn’t owe any federal income tax in 2009. …

But the picture changes dramatically once other federal taxes are included. When all federal taxes are taken into account, even the lowest fifth of households (with average incomes of about $18,000) pay 4 percent of income in federal taxes, while the second-lowest fifth (average income: $43,000) pay 11 percent. ...

State and local tax systems are typically quite regressive... When state and local taxes are taken into account along with federal taxes, the poorest fifth of households pays about 15 percent of income in taxes; the next fifth pays about 21 percent.

These figures give the lie to the idea that there is a large class of Americans who “don’t pay taxes.” To the contrary, they show that the federal income tax is one of the few taxes that doesn’t impose higher burdens on low- and moderate-income households than on upper income ones. The overall U.S. tax system is progressive only because the federal income tax is very progressive. Put differently, we’ve chosen to concentrate almost all of the system’s progressivity in the Federal income tax. ...

The percentage of people who didn't pay federal taxes in 2009 was also elevated due to the recession, so even in isolation this figure distorts the picture relative to more normal times.

Tuesday, March 06, 2012

The Real Moral Problem

Ezra Klein points out that we shouldn't confuse structural and cyclical debt accumulations. Saying that recent changes in debt reflect a moral issue when it is being driven by the recession is very misleading:

Deficits don’t reflect a crisis of American character, by Ezra Klein: There are many good points in David Brooks’s encomium to the life and work of James Q. Wilson, but permit me a quick quibble.
”Every generation has an incentive to spend on itself, but none ran up huge deficits until the current one,” Brooks writes. His point is that the growing federal debt is superficially attributable to higher spending and, more profoundly, is a reflection of changes in the national character. But that’s not what the numbers show. Rather, they show that the growing federal debt is attributable to tax cuts that began in the 1980s and, in the future, to the aging of the population and the ceaseless advance of medical technology.
Current deficits reflect the aftermath of a generational financial crisis. They show an economy saving itself, not a generation spending on itself. ... For the last two decades, debt has been around what it was in the immediate run-up to the crisis. So there’s been no major change to structural deficits in the last 20 years, and thus, no evident change in the national character. ...
So perhaps a more accurate way to make Brooks’s point is that every generation has an incentive to cut taxes on itself, but none ran up huge deficits doing so until Ronald Reagan. But that was a previous generation. Then this generation did the same thing under George W. Bush...

Why should we care about the misleading rhetoric? Because it gives ammunition to those who have had social programs in their sites for decades -- it gives them the arguments they are looking for to make severe cuts in government programs. And centrist, right-leaning Democrats will go along in the interest of solving this "great problem" that we face:

Grand bargain, redux?, by Steve Benen: Last year, as part of the fiasco surrounding Republicans' debt-ceiling hostage crisis, President Obama offered House Speaker John Boehner (R) an overly-generous "grand bargain." Though some of the details are murky, by all accounts, the Democratic president offered Republicans a $4 trillion deal on debt reduction, which included GOP-friendly entitlement "reforms," in exchange for modest increases in tax revenue.

Presented with a ridiculously sweet deal on what is ostensibly the party's top priority, Republicans rejected the offer out of hand. It would have required a fairly small concession on taxes, which GOP lawmakers simply were unwilling to make. It was, in retrospect, the best possible outcome for Obama -- he offered far too much and was poised to get far too little.

Regardless, the Republican opposition to the compromise scuttled the grand bargain, seemingly for the indefinite future. Oddly enough, there's renewed scuttlebutt eight months later.

A small, bipartisan group of lawmakers in both the House and Senate are secretly drafting deficit grand bargain legislation that cuts entitlements and raises new revenue.

Sources said that the task of actually writing the bills is well underway, but core participants in the regular meetings do not yet know when the bills can be unveiled. ...

You'll notice those paragraphs mention three conservative Republicans and one conservative Democrat as participating in the talks. I'd add that there's no evidence of any progressive Democrats playing any role whatsoever in these negotiations.

The result, if there is a result, will almost certainly be a bargain that's very favorable to Republicans. ...

If there's a moral issue here, it's the Republicans using misleading rhetoric about the effects of tax cuts on growth, trickle down economics, tax cuts paying for themselves, and so on to obscure what, at its essence, is a large transfer of income to those at the top of the income distribution.

And they're still trying to mislead us to hide the true agenda:

News Is That Romney's Advisors Are Trying to Keep the Campaign from Claiming That "Dynamic Scoring" Through Faster Growth Will Pay for More than 1/3 of the Tax Cuts..., by Brad Delong

Why isn't Brooks complaining about the morality of this? There's no evidence to support this claim (or similar claims made by Romney and others during the campaign), as his advisors know full well. It's simply a means to cover the fact that the benefits he wants to give to the rich -- more tax cuts -- will blow a hole in the budget. Again, where's the complaints about the morality of doing this? Romney's far, far from alone in making these misleading, dishonest claims, yet Brooks wants to blame a cyclical budget problem and budget problem arising from the Bush tax cuts on the morals of the general population? How convenient.

And isn't empathy a desirable moral trait, one that someone like Brooks would endorse? How about self-pity, is that an attractive moral trait? What about selfishness to the extent of demanding tax cuts for yourself that are likely to come at the expense of important programs for the poor? How moral is that?:

Fanning the Flames of Class Warfare, by Bruce Bartlett, Commentary, Ny Times: A curious phenomenon occurs during every economic crisis – the rich whine that they are the ones who are suffering most. While obviously one’s capacity to suffer under any circumstances is subjective, when we hear that the very well-to-do ... seek pity, it comes across as callous and clueless.
That is especially so when the political agents of the rich are demanding still more tax cuts for them while doing their best to slash spending for programs that aid the poor. ...
But they should have the good grace not to ask for sympathy from those who are unemployed, barely have enough to eat or have had their homes repossessed. In particular, the wealthy ought to stop demanding more tax cuts and cuts in spending for programs aiding the poor, as every Republican presidential candidate promises. That’s just repulsive. ...
I’m still waiting for the growth Republicans promised under George W. Bush after they cut the top federal income tax rate to 35 percent from 39.6 percent, the top rate on qualified dividends to 15 percent from 35 percent and the top rate on capital gains to 15 percent from 20 percent. All of these actions significantly lowered taxes for the rich without raising economic growth at all. Why will more tax cuts for these same people do any good now? ...
President Obama is clearly preparing for a debate on the growing inequality of wealth and income. ... I think the Republican nominee is going to have a hard time responding if all he has to say is the rich need more tax cuts to compensate them for all their suffering during the economic crisis.

There are moral issues out there, but they aren't the ones that Brooks and company think they are. Many of the people pointing fingers at the moral failings of others need to take a hard look at their own behavior and how it has enabled the morality that allows the rich to mislead the public about the impact of budget busting, redistributive, hard to see any growth policies that were key in producing the debt problems that we now face.

Monday, March 05, 2012

The Benefits of a Gas Tax

MIT energy economist Christopher Knittel says a gas tax would pay for itself, or nearly so, with the benefits the tax would bring:

Fuel for thought, by Peter Dizikes, MIT News Office: ...Christopher Knittel ... is the William Barton Rogers Professor of Energy Economics at the MIT Sloan School of Management...

Knittel’s research addresses a clutch of practical and linked questions: How much progress have automakers made on fuel efficiency? (More than you might think.) How do car owners respond when fuel prices rise? (They really do ditch their gas-guzzlers.) How large are the collateral health benefits of removing dirty vehicles from the nation’s fleet? (Very large.) ...
One of his papers, “Automobiles on Steroids,” recently published in the American Economic Review, examines technological progress in the auto industry. From 1980 through 2006, the fuel efficiency of America’s vehicles has increased by just 15 percent — at first glance, a lethargic rate of improvement. But as Knittel points out, cars’ average horsepower has roughly doubled since then, and average curb weight of those vehicles rose 26 percent... Adjusting for these changes, fuel economy has actually increased by 60 percent since 1980, but as Knittel observes, “most of that technological progress has gone into [compensating for] weight and horsepower.”

On the stagnation of overall fuel efficiency since 1980, Knittel adds, “It’s no fault of the manufacturers and consumers. Firms are going to give consumers what they want, and if gas prices are low, consumers are going to want big, fast cars. If you’re going to blame anyone, it’s the policymakers for not creating the incentive structure for putting that technological progress into fuel economy.”

Pain at the pump

Cars and light trucks produce about 15 percent of U.S. greenhouse gases. The best policy for reducing energy consumption from those sources, Knittel believes, would be higher fuel prices. “That would incentivize all the things we want,” Knittel says. “When gas prices go up, people shift to more fuel-efficient cars, they drive fewer miles, and insofar as there are lower-carbon-intensive fuels out there, people shift to them. They get rid of their clunkers faster.”

That’s not just an assumption; Knittel has studied the responses of auto owners nationwide to rising gas prices from 1999 to 2008 in another research paper, “Pain at the Pump,” co-authored with Meghan Busse and Florian Zettelmeyer of Northwestern University. The researchers found that with each $1 rise in the price of gas, purchases of highly fuel-efficient autos increase 21 percent, while purchases of gas-guzzling vehicles drop 27 percent.

A shift to newer, more fuel-efficient vehicles would actually help people in another way, besides releasing fewer greenhouse gases: It would reduce the amount of harmful local pollution in the air, as Knittel detailed in a paper written with Ryan Sandler of U.C. Davis, based on a study of California from 1998 to 2008. “When gas prices go up, you’re getting bigger mileage reductions from cars that are worse in terms of these pollutants,” Knittel observes.

That produces significant health benefits beyond the problems associated with climate change. “We’re talking about asthma attacks and respiratory problems,” he adds. “This isn’t just a matter of helping the world two generations from now. You can point to this and say, ‘Here is a more immediate, salient reason for a gas tax.’” According to Knittel and Sandler, 70 percent of the costs of a gas tax of $1 per gallon could be recouped by immediate health benefits from reduced pollution. Other possible benefits from the tax — reductions in climate change, traffic congestion and accidents — could make it a net winner for people in economic terms alone.

But will politicians ever impose higher gas prices on a financially stretched public? A variety of powerful lobbying interests in Washington oppose such a move — and Knittel knows hardball when he sees it. Indeed, Knittel is examining the financial rewards industries reap from their lobbying efforts in some of his current research. Still, he does retain a sense of optimism. “The idealistic academic in me says that the more you broadcast the truth, the more likely it will be to win out,” Knittel says. “But we’ll see.”

See also Ryan Avent who comments on related research.

Friday, March 02, 2012

"Democrats and the Bush Tax Cuts"

Busy day, so just a few quick words in response to James Kwak's post "Democrats and the Bush Tax Cuts." He wonders why I suddenly embrace tax cuts, even if it's for lower income households. In response to the post below this one he says, among other things:

To me, his post is evidence that many Democrats think that most of the Bush tax cuts were and are a good thing. This confuses me. When did we become the party of tax cuts?

I do not think the tax code is progressive enough (and that remains true even if we allow all tax cuts, which benefitted the wealthy the most, to expire). If we tilt the distribution toward more progressivity first, and then lift the entire distribution to address any remaining buget problems, that's better than doing it the other way around. That is, if the first step is to let all the Bush tax cuts expire returning us to the unsatisfactory levels of progressivity we had in the past, and then we try to increase progressivity as the second step, then it's much less likely that the second step will actually happen. It may not happen in any case, but I think the first scenario improves the odds.

So before doing anything else -- while the "we have to close the budget gap" iron is still red hot -- I'd like to see the tax code made more progressive than it was before the Bush tax cuts. Then, if and when that is achieved, fight to preserve the progressivity (as well as social programs) as taxes are raised more generally to try to get the budget on stable footing.

One other point -- I'm also more worried about bumps on the road to recovery than many others appear to be, and maintaining the stimulus we have -- however imperfect it was in design to begin with (i.e. too many tax cuts, not enough spending and too small overall) -- is important. We need the insurance, however meager it might be. Allowing top end tax cuts to expire is much less risky than allowing all tax cuts to expire. So if the deficit hawks need red meat, toss them high end tax cuts for now and put off the rest, to the extent possible, until the economy is on better footing.

Paul Krugman: Four Fiscal Phonies

Republicans use concern over the deficit as a cover for their true agenda:

Four Fiscal Phonies, by Paul Krugman, Commentary, NY Times: Mitt Romney is very concerned about budget deficits. Or at least that’s what he says; he likes to warn that President Obama’s deficits are leading us toward a “Greece-style collapse.”
So why is Mr. Romney offering a budget proposal that would lead to much larger debt and deficits than the corresponding proposal from the Obama administration?
Of course, Mr. Romney isn’t alone in his hypocrisy. In fact, all four significant Republican presidential candidates still standing are fiscal phonies. They issue apocalyptic warnings about the dangers of government debt and, in the name of deficit reduction, demand savage cuts in programs that protect the middle class and the poor. But then they propose squandering all the money thereby saved — and much, much more — on tax cuts for the rich.
And nobody should be surprised. It has been obvious all along ... that the politicians shouting loudest about deficits are actually using deficit hysteria as a cover story for their real agenda, which is top-down class warfare. To put it in Romneyesque terms, it’s all about finding an excuse to slash programs that help people who like to watch Nascar events, even while lavishing tax cuts on people who like to own Nascar teams. ...
Is there any way to make the G.O.P. proposals seem fiscally responsible? Well, no — not unless you believe in magic. Sure enough, voodoo economics is making a big comeback, with Mr. Romney, in particular, asserting that his tax cuts wouldn’t actually explode the deficit because they would promote faster economic growth and this would raise revenue. And you might find this plausible if you spent the past two decades sleeping in a cave somewhere. ...
What, then, would their policies accomplish? The answer is that they would achieve a major redistribution of income away from working-class Americans toward the very, very rich. ...
There’s one more thing you should know about the Republican proposals: Not only are they fiscally irresponsible and tilted heavily against working Americans, they’re also terrible policy for a nation suffering from a depressed economy in the short run even as it faces long-run budget problems.
Put it this way: Are you worried about a “Greek-style collapse”? Well, these plans would slash spending in the near term, emulating Europe’s catastrophic austerity, even while locking in budget-busting tax cuts for the future.
The question now is whether someone offering this toxic combination of irresponsibility, class warfare, and hypocrisy can actually be elected president.

Monday, February 27, 2012

"How Much Do Taxes Matter?"

James Kwak reports on new research from Romer and Romer. The bottom line is that we can raise taxes on the wealthy without worrying that they will react by reducing work effort to any significant degree:

How Much Do Taxes Matter?, by James Kwak: Christina and David Romer’s new paper, “The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era,” is available as an NBER working paper (if you are so lucky). Given the current debates about taxes, the paper is likely to garner some attention. ...

Their headline finding is that “The estimated impact of a rise in the after-tax share is consistently positive, small, and precisely estimated” pp. 15–16). They find an elasticity of taxable income with respect to changes in the after-tax income share of 0.19.

Advocates of lower tax rates are sure to seize on this as evidence that higher tax rates depress incentives to work. But that’s hardly what the paper says. First of all, the Romers’ elasticity estimate is lower than earlier empirical estimates that are largely based on the postwar period. To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates.

Second, remember that this is a study of the super-rich: not the top 1%, but the top 0.05%. These are the people whom one would expect to have the highest income elasticity, precisely because they don’t need the marginal dollar. Elasticities tend to be lower for ordinary people because they need to cover their expenses.

Finally,... taxable income ... can change both because people are earning less income and because they are engaging in tax strategies to reduce their taxable income. ...[R]ecent U.S. history shows that when you raise taxes on the rich, they don’t stop trying to make money: they just pay their lawyers and accountants more to avoid paying taxes. The solution to that is a simpler tax code with fewer exclusions and deductions.

The claim by some that we cannot raise taxes on the wealthy because they will just find a way to avoid them never struck me as very compelling. It's simply a matter of getting the rules right, and then doing what's necessary to enforce them.

Wednesday, February 22, 2012

Obama's Proposed Corporate Tax Cut Won't Do Much to Stimulate the Economy

I have a few comments on the president's proposal for corporate tax reform (which relies, in part, upon Jared Bernstein's post):

Obama's Proposed Corporate Tax Cut Won't Do Much to Stimulate the Economy

The bottom line is that it is mainly a redistribution of the tax burden rather than a net cut in taxes, and I don't think it will have a large impact on the economy.


Thursday, February 09, 2012

Eichengreen: Europe’s Tobin Tax Distraction

Barry Eichengreen is not a big fan of the Tobin tax, at least not for the purposes leaders in Europe have given when arguing for the policy:

Europe’s Tobin Tax Distraction, by Barry Eichengreen, Commentary, Project Syndicate: At last, European leaders have revealed their top-secret plan for solving the euro’s crisis. And it is – drum roll – a version of the “Tobin tax,” a levy on financial transactions first suggested in 1972 by the Nobel laureate economist James Tobin. ...
But how, exactly, a tax on financial transactions would help to cure Europe’s ills is unclear. According to the European Commission’s own estimates, it would raise only about €50 billion ($65.7 billion) a year, even if imposed throughout the European Union. This is a pittance compared to the eurozone’s debts and deficits, and would fall far short of funding Europe’s permanent rescue facility... Moreover, the Commission’s €50 billion estimate surely overstates the prospective receipts. ...
If the aim is to augment revenues, a Tobin tax is the wrong tool. Indeed, Tobin designed it to solve an entirely different problem: excessive volatility in currency markets. ...Tobin’s proposal sought to promote exchange-rate stability by preventing national currencies from coming under speculative attack. The irony, of course, is that eurozone members have no national currencies to attack. ...
Forgive my naiveté, but I have begun to think that politics rather than economics explains European leaders’ enthusiasm for a Tobin tax. Sarkozy can preempt a long-standing proposal of the Socialists in the run-up to this spring’s presidential election. By supporting Sarkozy, Merkel can get in return what she really wants: French support for stronger fiscal rules. And EU leaders can claim that the financial sector is being made to contribute to the costs of Europe’s financial cleanup. ...
Though no one can say for sure what Tobin would have thought of Europe’s crisis, his priority was always the pursuit of full employment. One suspects that he would have urged European policymakers to dispense with their silly fixation on a financial transactions tax and instead repair their broken banking systems and use all monetary and fiscal means at their disposal to jump-start economic growth.

I've supported this tax mainly because it helps to overcome a market failure. If it produces revenue at the same time, so much the better.

Tuesday, February 07, 2012

Politicizing the Budget Process

I assume and hope this would be vetoed by the president Obama, but the effort itself is telling:

Tilting the Budget Process to the G.O.P.,by Bruce Bartlett, Commentary, NY Times: The House of Representatives voted last week to tilt the budgetary process in favor of the Republican economic agenda. On Feb. 3, the House passed ... the Pro-Growth Budgeting Act of 2012. Innocuous on the surface, its long-term purpose is to institutionalize Republican economic policy into the very fabric of budgetary analysis.
The legislation would require that the Congressional Budget Office and Joint Committee on Taxation do a “dynamic” analysis of major legislation.... The dynamic calculation would be supplementary and not replace the current official scoring methodology, but the obvious long-term goal is to require official revenue estimates to incorporate “Laffer curve” effects in order to make it easier to cut taxes and harder to raise them...
As the budget deficit increasingly inhibits Republicans’ tax-cutting, they are planning ahead for tax cuts that they will insist are costless because they will so massively increase growth. ... My concern is that the Republican effort is just a smokescreen to incorporate phony-baloney factors into revenue estimates to justify unlimited tax cutting. How soon before the C.B.O. is required to incorporate estimates from the right-wing Heritage Foundation in its calculations? ... Republicans don’t really care about accurate revenue estimates; they just want them to show that tax cuts pay for themselves...
Confirmation of this fear is the fact that the House-passed legislation would not require a dynamic estimate for appropriations bills, no matter how large. Republicans want the world to know that tax cuts expand real G.D.P., the capital stock and labor supply, but if spending has any such effect they don’t want anyone to know. Implicitly, Republicans want everyone to think that spending never raises growth because it’s their dogma.
But in the real world, everyone knows that government investments in the national highway system, medical and other scientific research, and other programs unquestionably add to growth. ...
Over the last three years, we have seen Republicans politicize every aspect of policy making... It is reasonable to assume that the Republicans’ effort to alter the budget process is just another aspect of their goal to politicize policy and institutionalize their philosophy.

I don't have any problem with the CBO incorporating growth effects into its estimates of the impact of policy (for both spending and taxes), but the CBO should not be forced to adopt a particular macroeconomic model or methodology for evaluating policy. That's a recipe for partisan analysis -- we see that already with infrastructure excluded from the calculations -- where a neutral voice is needed. As I said above, I expect the legislation would be vetoed by president Obama, but a president Romney would be a different story.

Thursday, February 02, 2012

Will Tax Increases to Close the Deficit Harm Economic Growth?

Tax increases will be needed to close the budget gap:

Will Tax Increases to Close the Deficit Harm Economic Growth?, by Mark Thoma, CBS News: Politicians want you to believe tax increases will kill the economy. They won't.

COMMENTARY The CBO's latest Budget and Economic Outlook showing the magnitude of the long-run budget problem we face is another reminder that the considerable long-run deficit problem we face cannot be solved by program cuts alone -- the cuts required would be too deep to be acceptable -- an increase in revenues is needed.

If that's true, why are politicians, particularly those on the right, taking such a strong stance against tax increases of any kind? Taking a hard line on tax increases and insisting on program cuts is an attempt to make as much of the adjustment as possible accord with their ideological preference for smaller government. But politicians understand that enhanced revenue will be part of the final package even if their political posturing suggests otherwise.

But there is another reason for this posturing against tax increases beyond the hope for a smaller government. The resistance to tax increases is also over who will end up paying the increased revenue. Will it be tax increases for the wealthy, closing deductions such as mortgage interest, tax increases for the middle class, etc.? Who, exactly, will foot the bill?

This is evident in the testimony of Doug Elmendorf before Congress today explaining the CBO's findings. From the Atlantic:'s no surprise that Doug Elmendorf's appearance before Congress today was dominated by political grandstanding, as members asked extremely loaded questions designed to get Doug Elmendorf to say that we should close the hole by either raising taxes or cutting spending.  Elmendorf ably ducked these attempts to lead him, but you could see him steeling himself every time a new congressman took their turn.

As this issue heats up, you will hear again and again that tax increases, particularly on the wealthy, will depress economic growth. However, as I detailed in a previous article, there's very little evidence that tax changes of the magnitudes and types being considered will have a significant impact on economic activity:

Economic theory helps us to determine which types of taxes are best in terms of efficiency, but the equity of taxes -- who pays them and whether it's fair -- also matters. Questions of equity must be resolved in the political arena, economics cannot help here, and equity is one of the factors that determines whether a tax is feasible. If allowing the Bush tax cuts to expire for the wealthy is the only acceptably equitable way to raise taxes in this political environment, then there is little evidence that this will be harmful. The cost of allowing these tax cuts to expire is low, and there is much to be gained in terms of reducing our long-term budget problem.

There are ways to produce negative effects from tax increases, and there are ways to harm growth through program cuts as well, I don't mean to imply otherwise. But despite the concerted attempts to make people think their jobs are on the line if certain types of tax increases, e.g. for the wealthy, are put into place, given the plans on the table this is fundamentally a political issue about the size of government and how to pay for it equitably rather than an issue about avoiding economic harm. In fact, if avoiding harm to individual households in one form or another is an important objective alongside deficit reduction, as I think it should be, we should worry just as much about program cuts as tax increases.

Saturday, January 28, 2012

Is Romney Double Taxed?

Rajiv Sethi:

Double Taxation, by Rajiv Sethi: The release of Mitt Romney's tax returns has drawn attention yet again to the disparity between the rates paid on ordinary income and those paid on capital gains. It is being argued in some quarters that the 15% rate on capital gains vastly underestimates the effective tax rate paid by those whose income comes largely from financial investments, on the grounds that corporations pay a rate of 35% on profits. Were it not for this tax, it is argued, dividends and capital gains would be higher, and so would the after-tax receipts of those (such as Romney and Warren Buffett) who derive the bulk of their income from such sources.

Romney himself has made this argument recently, claiming that his effective tax rate is closer to 50%:

One of the reasons why we have a lower tax rate on capital gains is because capital gains are also being taxed at the corporate level. So as businesses earn profits, that's taxed at 35 percent. Then as they distribute those profits in dividends, that's taxed at 15 percent more. So all total, the tax rate is really closer to 45 or 50 percent.

The absurdity of this claim is clearly revealed if one considers capital gains that accrue to short sellers, who pay rather than receive dividends while their positions are open. Following the logic of the argument, one would be forced to conclude that short sellers are taxed at an effective rate of negative 20%, thereby receiving a significant subsidy due to the existence of the corporate tax. The flaw in this reasoning is apparent when one recognizes that asset prices are lower (relative to the zero corporate tax benchmark) not only when a short position is covered, but also when it is entered. ...[continue reading]...

Sunday, January 22, 2012

Who Should Pay for Deficit Reduction?

Richard Green makes an argument for progressive taxes:

The banal moderateness of Thomas Friedman, by Richard Green: In his paean to conventional wisdom this morning, the ever so serious Mr Friedman writes:

Second, I want to vote for a candidate who is committed to reforming taxes, and cutting spending, in a fair way. The rich must pay more, but everyone has to pay something. We are all in this together.

But how over the past decades have we all been in this together? In 2007, those in the bottom quintile had the same income they had in 1998, and a bump of little more than 11 percent since 1969; those in the top five percent have seen incomes rise by 74 percent since then.

GreenSource: Alan De Smet plot of  US Census, Historical Income Tables - Families, Table F-1.

Sure, if everyone had benefitted from the policies of the past 40 years, then everyone should sacrifice now.

But for the time being, lets begin by asking for sacrifice from those with the means to do so.

When we measure who pays for bringing the long-run deficit under control, we should remember that deficit reduction is likely to include both cuts to spending and tax increases. We should also remember the complaint from the wealthy that most of the benefits of government spending go to lower income classes. According to this argument, the cost of reducing the budget deficit through cuts to government spending -- and Republicans will push for this option as much as they can -- will fall mainly on the less fortunate.

Friday, January 20, 2012

Paul Krugman: Taxes at the Top

The arguments for taxing capital gains at a lower rate than other types of income are easily dismissed:

Taxes at the Top, by Paul Krugman:, Commentary, NY Times: Call me peculiar, but I’m actually enjoying the spectacle of Mitt Romney doing the Dance of the Seven Veils —... it’s about time that we had this discussion.
The theme of his dance ... is taxes — his own taxes. Although disclosure of tax returns is standard practice for political candidates, Mr. Romney has never done so, and, at first, he tried to stonewall the issue... Then he said that he probably pays only about 15 percent..., and he hinted that he might release his 2011 return. ...
If Mr. Romney is telling the truth about his taxes, he’s actually more or less typical of the very wealthy. ... The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains — three-quarters of which go to the top 1 percent of the income distribution — warrant such special treatment.
Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation. Both claims are false.
When you hear about the low, low taxes of people like Mr. Romney, what you need to know is that it wasn’t always thus... Low capital gains taxes date only from 1997... Correspondingly, the low-tax status of the very rich is also a recent development. ...
So is it essential that the rich receive such a big tax break? There is a theoretical case for according special treatment to capital gains, but there are also theoretical and practical arguments against such special treatment. In particular, the huge gap between taxes on earned income and taxes on unearned income creates a perverse incentive to arrange one’s affairs so as to make income appear in the “right” category.
And the economic record certainly doesn’t support the notion that superlow taxes on the superrich are the key to prosperity. During that first Clinton term, when the very rich paid much higher taxes than they do now, the economy added 11.5 million jobs, dwarfing anything achieved even during the good years of the Bush administration.
So Mr. Romney’s tax dance is doing us all a service by highlighting the unwise, unjust and expensive favors being showered on the upper-upper class. At a time when all the self-proclaimed serious people are telling us that the poor and the middle class must suffer in the name of fiscal probity, such low taxes on the very rich are indefensible.

Wednesday, January 18, 2012

Should We Feel Sorry for the Wealthy?

The editors at CBS asked me to respond to Ari Fleischer's tweets about how tax burdens have changed in recent years:

Are the wealthy paying to much in taxes?: Ari Fleischer, the former White House Press Secretary for U.S. President George W. Bush , has been trying to make the case on Twitter that the wealthy are taking on more of the tax burden than ever. Here's a sample of his tweets:

@AriFleischer The share of total federal tax paid by bottom 60% dropped from 22.5% in '79 to 14.4% today. Source: CBO     
@AriFleischer   The share of total federal tax paid by middle income dropped from 21% in '79 to 16.5% in '07.
@AriFleischer The share of total federal taxes paid by top 10% rose from 40.7% in '79 to 55% in '07.          
The share of total federal taxes paid by top 1% rose from 15.4% in '79 to 28.1% in '07          

Of course, the argument is incomplete without knowing how the share of income changed over these years. He uses the CBO as a source, so I'll use the same same data to respond to his claims:

CBO finds that, between 1979 and 2007, income grew by:

  • 275 percent for the top 1 percent of households,
  • 65 percent for the next 19 percent,
  • Just under 40 percent for the next 60 percent, and
  • 18 percent for the bottom 20 percent.

The share of income going to higher-income households rose, while the share going to lower-income households fell.

  • The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
  • Most of that growth went to the top 1 percent of the population.
  • All other groups saw their shares decline by 2 to 3 percentage points.

Let's take the top 1% first. Between 1979 and 2007 income for this group grew by 275 percent, and the share of income doubled from around 10 percent to around 20 percent of total income. However, the share of taxes for this group less than doubled. Thus, a doubling of income resulted in less than a doubling of taxes. Given that income growth outpaced tax growth, it's hard to see how we can describe this as an increase in the tax burden for the top 1%.

What about the middle of the distribution? As noted above, the share of total federal tax paid by middle income taxpayers dropped from 21 percent in 1979 to 16.5 percent in 2007. However, over the same time period the share of income for this group went from 51.1 percent to 43.5 percent. When the fact that the share of income for the middle income group has fallen is accounted for, it's no surprise that the share of taxes has fallen as well. On net, the two roughly cancel -- the fall in income and the fall in taxes are roughly proportional. Thus, the notion that the rich are paying more, and middle income families are paying less -- that income is being redistributed from the rich to the middle -- does not hold up to further scrutiny. The rich are doing better than ever, tax rates are at historic lows for this group, and their share of taxes has not risen by as much as their share of income.

What about the bottom of the income distribution? First, it's highly misleading to just look at federal taxes for this group. The federal tax burden is relatively low for this group, but when state taxes, sales taxes, and the like are factored in the burden is relatively high. For example:

Data from the Institute on Taxation and Economic Policy show that the poorest fifth of households paid a stunning 12.3 percent of their incomes in state and local taxes in 2010
When all federal, state, and local taxes are taken into account, the bottom fifth of households paid 16.3 percent of their incomes in taxes, on average, in 2010.

Mitt Romney pays 15 percent, or thereabouts (probably a bit more when state and local taxes are accounted for), while this group pays more than 15 percent in taxes even though their incomes are very low. Enough said about who faces a larger tax burden.

Ari Fleischer is trying to make you believe that taxes on the wealthy have risen, and that the increase in taxes is being used to fund tax reductions for lower income classes. However, when income gains are factored in the numbers tell a different story. This graph shows what has actually happened to the tax rates for the wealthy:

The next time Ari Fleischer or any other political operative tries to make the case that the wealthy have experienced an increase in their tax burden, keep this graph in mind.

Saturday, January 07, 2012

"Romney’s Tax Proposal"

pgl wonders how Republicans can say they are for fiscal responsibility with a straight face:

Romney’s Tax Proposal, by pgl: The Tax Policy Center provides its review of which taxpayers will pay more and which ones will pay less under the tax proposal introduced by Mitt Romney. A really short summary goes as follows:
(a) The well to do will pay less in taxes;
(b) The working poor will pay more in taxes; and
(c) Overall tax revenue will be significantly reduced.

But wasn’t that also the case for the Herman Cain tax proposal as well as any other tax proposal from the Republican candidates for President? And the Republicans claim they are for fiscal responsibility!

(When I first started blogging, pgl went above and beyond the call of duty to make people aware of this blog. I am greatly indebted to him.).


Monday, January 02, 2012

Profits and Resource Flows

The right says that taxing profits destroys the incentive to invest, and interferes with the ability of the invisible hand to direct resources to their most productive use. That's true, but only up to a point and we shouldn't fear taxing profits that are persistently (and in some cases extraordinarily) high.

In a capitalist system, profits are supposed to signal where resources can be used most effectively. If an industry is making above average profits – and perhaps producing huge mega-bonuses for executives as well – that’s a signal that more resources are needed in that industry. According to standard microeconomic theory, the excess profits will draw resources from industries where profits are lower, e.g. industries with below average profits, and redirect them to higher valued use in the booming industry. As this happens and supply in the booming sector increases, the added competition will reduce profits back to normal levels (and the decline in supply in the failing industries will increase profits back to normal as well). Thus, if there is an increase in demand for a product, prices and profits will increase and that will attract more resources to the industry. Hence, there is an automatic mechanism -- an invisible hand -- that pushes resources into areas where demand is high and out of areas where demand has fallen. If we interfere with this invisible hand with taxes, resources will not flow to meet changes in demand, costs, etc. as effectively as before.

Thus, we should accept that high profits are necessary to direct resource flows. If we never allow above average profits, then resources will not be directed to their best (i.e. most profitable) use.

But that doesn't mean that we should accept persistently high profits. Incumbent firms do not want more competition. If more firms enter, the added competition will reduce their high incomes and these firms will do all they can to construct barriers to entry and protect their advantage. Sometimes the barriers are legal, sometimes they are economic, and sometimes the structure of the markets protects the advantages of incumbent firms without them having to do anything active to protect their market power. Thus, while short-term profits are necessary, if we see persistent above average profits that's a sign that entry into an industry is not as free as it should be. Profits that remain high for long time periods are not doing the job of directing resource flows, they are simply putting more money in the profits of owners and there's no reason to defend them on this basis (they are producing less and charging higher prices -- the source of their high profits -- than they would if competition were more robust).

And even in the short-run, incentives are subject to diminishing returns. Would the promise of $300 million dollars per year create less willingness to work hard than the promise of $301 million per year? Would you reduce your effort to any noticeable degree if you only stood to gain $300 million instead of $301? The incentives created by the first million in profits are much higher than the marginal incentive provided by the 301st million dollars, and at some point the marginal effect that additional profit has on incentives is practically zero.

So yes, high profits are necessary to direct resource flows, no argument on that point. But, (1) if profits are persistently high -- if entry and competition do not reduce profit to normal levels -- that's a sign of excessive market power and regulators ought to take a hard look a the industry. The first choice should be to remove the barriers to entry to allow more competition. But if the barriers cannot be fully removed, then taxing the excess profit away (or requiring lower prices) will not reduce the incentive of incumbents to remain in the industry. (2) In the short-run, we shouldn't fear taxes on profits over a certain level -- taxing away massively excessive profits will not change incentives to any noticeable degree. If higher taxes reduce profits to, say, a $40 million return instead of a $50 million return on an investment of $100 million, the effect on the incentive to enter that industry will be very small -- these taxes will not distort incentives enough to make any difference. Profits are still high enough by a considerable margin to encourage the effort needed to enter the industry.

We can tax high and persistent profits without fear that we will snub out the incentive to move resources around in a way that best meets the demands of consumers, and we can also increase taxes when profits are extremely high without worrying we are destroying the incentive to enter particular industries. Above average profits are an important signal in markets, but profits that remain high for long time periods, or profits that are extraordinarily high in the short-run can be taxed without fear that it will distort the allocation of resources in an important way, or reduce long-run economic growth.

Saturday, December 31, 2011

Will the Payroll Tax Cut be Extended Through the End of 2012?

Steve Benen doesn't think there's a very good chance that the payroll tax cut will be extended through the end of 2012:

Enjoy the payroll tax break while it lasts, by Steve Benen: Last week, after a needlessly-contentious process, Congress approved a two-month extension of the payroll tax break. As part of the agreement, a conference committee will try to come up with an agreement to extend the cut through the end of 2012.

I’ve been rather pessimistic about the likelihood of success, and yesterday, the odds got worse.

The Senate Republican leader announced Friday that he had chosen three of his colleagues to try to thrash out a bipartisan deal on payroll taxes, unemployment benefits and Medicare.

The three Republican senators will join four Democratic senators and 13 House members on a conference committee... The newly named Republican conferees are Senators Jon Kyl of Arizona, Michael D. Crapo of Idaho and John Barrasso of Wyoming.

These ... are three senators you’d appoint to a conference committee if you want to be destructive.

Kyl, for example, was instrumental in sabotaging the super-committee process... Crapo and Barrasso, meanwhile, are two far-right senators who’ve never demonstrated any willingness to accept concessions on anything.

What’s more, note that the House GOP leadership has already announced its conferees, most of whom have already said they don’t want a payroll-cut extension no matter what concessions Democrats are willing to make...

What about the risk of being blamed? Remember,... the process itself offers cover. Instead of last week, when House Republicans became the clear villains,... the party will find it easier to spread the blame around.

“It’s not our fault,” GOP leaders will say. “We tried to work with Democrats on a deal, but one didn’t come together. Oh well.”... and the media would feel obligated to say “both sides” failed to reach an agreement.

And even if the payroll tax cut is extended, it's likely that Republicans will demand -- and get -- large concessions in return, e.g. permanent reductions in spending on social insurance programs.

Wednesday, December 28, 2011

"The Proposition is Not Mainstream in the Sense of Being Fully Accepted by Most Economists"

I haven't said much about the (most recent) recent flare up over Ricardian equivalence. Why? The answer's simple, the empirical evidence does not support it. Why argue about something when we already know it fails to adequately explain the data? Making the Ricardian equivalence assumption might be okay as a first approximation for some questions -- though I'd argue that it mostly isn't -- but in any case the theory does not adequately capture economic behavior.

But let me turn the microphone over to one of the architects of the modern version of the theory, Robert Barro. In the following interview with the Minneapolis Fed (from 2005), Barro emphasizes the point Krugman makes here, i.e. that Ricardian equivalence says nothing about the effectiveness of fiscal policy as a stimulus for the economy (a point that IS worth noting since this point is often confused in discussion of this topic. As Barro tries to make clear, "It's never part of Ricardian equivalence that the level of government expenditure doesn't matter.":

Region: The Ricardian equivalence hypothesis, which you brought to prominence in 1974, might be taken to suggest that deficit spending isn't inherently harmful since rational people, expecting to pay higher taxes in the future to pay off government debt, will save more, so private savings will balance out the public deficit.
Does that imply that concerns about "irresponsible" levels of debt are unfounded? And is it puzzling to you that the Ricardian equivalence hypothesis isn't a mainstream belief in macroeconomics?
Barro: Let me say first that I think the Ricardian equivalence idea is basically right as a first-order proposition. However, people get confused as to exactly what it says. Before I say what that is, I should mention that, although the proposition is not mainstream in the sense of being fully accepted by most economists, the idea has had tremendous influence on the way economists think about this issue.
Analysis often begins with Ricardian equivalence as a first-order proposition and then goes on to investigate why there are deviations from precise equivalence. Thus, like the Modigliani-Miller theorem on corporate finance, Ricardian equivalence has become a common starting point for the way people think about budget deficits. This situation is vastly different from what it was before the mid 1970s.
To illustrate the potential pitfalls in what Ricardian equivalence says and does not say, one can consider the famous quote attributed to Vice President Cheney to the effect that President Reagan proved that budget deficits don't matter. The Cheney quote is often interpreted to mean that the level of government expenditure does not matter, and that surely is not what Ricardian equivalence says. The Ricardian proposition is about the consequences of paying for a given amount of public expenditure in different ways. Specifically, does it matter—or does it matter a lot—whether the government pays for its spending with current taxes or with current borrowing, which entails higher future taxes?
So, a central part of the proposition is that the amount of public expenditure—today and tomorrow—is being held constant. It's never part of Ricardian equivalence that the level of government expenditure doesn't matter. As [University of Chicago economist] Milton Friedman put it, the costs or benefits of government outlays depend on the amount and nature of what the government spends—there is no free lunch about paying for that spending. So whether you pay for it now or later is secondary.
As a first-order proposition, it is right that it matters little whether you pay for government spending with taxes today or taxes tomorrow...

[For a more academic discussion of this topic, see this discussion from David Romer's graduate macro text. Romer explains (contra Barro) why ""there is little reason to expect Ricardian equivalence to provide a good first approximation in practice."]

Thursday, December 22, 2011

Failure to Extend the Payroll Tax Cut Will Slow Recovery

I have some comments on the GOP's payroll tax increase:

Failure to extend tax cut will slow recovery

Tuesday, December 20, 2011

The Great Economic Divide Makes Everyone Poorer

I have a new column:

The Great Economic Divide Makes Everyone Poorer

A divided society is a poorer society.

Johnson: Austerity and the Modern Banker

Simon Johnson says "concentrated financial power is a gift that keeps on giving":

Austerity and the Modern Banker, by Simon Johnson, Project Syndicate: Santa Claus came early this year for four former executives of Washington Mutual (WaMu), a large US bank that failed in fall 2008. The Federal Deposit Insurance Corporation (FDIC) had brought a lawsuit against the four, actions that included taking huge financial risks while “knowing that the real estate market was in a ‘bubble.’” The FDIC sought to recover $900 million, but the executives have just settled for $64 million, almost all of which will be paid by their insurers; their out-of-pockets costs are estimated at just $400,000. ...
But, according to the FDIC, the four still earned more than $95 million from January 2005 through September 2008. So they are walking away with a great deal of cash. ... At the same time, their actions – and similar actions by other bankers – are directly responsible for both the run-up in housing prices and the damaging collapse that followed..., including through the loss of more than eight million jobs.
It is also leading to austerity – taxes are increasing and government spending is falling at the local and state level around the country. ... Precipitate austerity is hardly likely to help the economy find its way back to higher employment levels. ...
Big banks represent the ultimate in concentrated economic power in today’s economies. They are able to resist all meaningful reform that could really change their compensation schemes. Their executives want to get all the upside while facing none of the true downside.
But capitalism without the prospect of failure is not any kind of market economy. We are running a large-scale, nontransparent, and dangerous government subsidy scheme for the benefit primarily of a very few, extremely wealthy people. ... concentrated financial power is a gift that keeps on giving – but not to you.

I don't understand why those who thought they would benefit the most from the inflated asset prices before the crash -- the ones who pushed the bubble the hardest -- and in many, many cases did reap huge gains even after the losses from the crash are accounted for aren't being asked to shoulder a disproportionate share of the costs of cleaning up the mess (I guess I do understand, power talks). One of those costs, and a big one, is the increase in the deficit due to the loss of tax revenue and the increased use of public services after the crash. But instead of asking those who gained so much to give some of it back to help to pay these costs and clean up the mess they created, we are cutting social programs and putting the costs on those who had nothing to do with causing the problems we are having.

Sunday, December 18, 2011

Payroll Tax Cut in "Serious Doubt"

I wonder if the puppeteers in the Republican Party regret what they have created now that they have lost control of the strings controling the actions of the groups they needed to win elections:

For Senate Tax Cut Stopgap, Odds in House Are Uncertain, NY Times: ...the Senate voted overwhelmingly on Saturday to extend a payroll tax cut for only two months, with the chamber’s leaders and the White House proclaiming victory, even as they punted into the new year the issue of how to further extend the tax cut and unemployment benefits.
In an unusual Saturday vote, the Senate approved by an 89-to-10 vote a $33 billion package that would extend a payroll-tax holiday for millions of American workers, extend unemployment benefits and avoid cuts in payments to doctors who accept Medicare. ...
But House passage next week was thrown into serious doubt on Saturday afternoon, when a number of rank-and-file Republicans objected in a conference call with Speaker John A. Boehner, who tried to persuade them that it was good for their party, particularly the provision that would speed the decision process for construction of an oil pipeline from Canada to the Gulf Coast known as Keystone XL. ...
Republican leaders — but not necessarily their rank and file — had wanted a full-year payroll tax cut deal to try to inoculate themselves against accusations by Democrats, as they head into an election year, that they are against tax cuts for low- and middle-income workers. It will be up to Mr. Boehner to convince his members that extending the cut —  and at least appearing to work with Democrats even as they labor to unseat Mr. Obama and the Democrats who still control the Senate — will ultimately work in their political favor. ...

Obama and House Republicans seem to be in some kind of contest to see who can give the biggest political gift to the other side.

Friday, December 16, 2011

"Obama's New Populist Tone Gets Its First Test"


Obama's New Populist Tone Gets Its First Test, by David A. Graham: Coming hot on the heels of the White House's decision not to veto controversial new measures on terror detainees, Democrats are poised for another defeat in Congress after Senate Democrats dropped their demand for a new surtax on millionaires as a means of paying for extending the payroll tax cut...
That's two major concessions in just a couple of days. ... It's a Washington truism that the current crop of Democrats are terrible negotiators. But this time, they really seemed to have it in the bag. They were calling for a tax cut, after all, and they had Republicans tying themselves in knots explaining why the party of Reagan and Tea didn't want lower taxes. All the Democrats wanted in exchange for extending the reduction was a small increase in how much the wealthy paid -- a position that was widely popular among voters. Even RedState's Erick Erickson was grudgingly impressed. "I never thought I would see the day, but Democrats are outmaneuvering Republicans on a tax cut," he wrote.
But Obama's Democratic allies in the Senate say they have now abandoned the millionaires' tax... And the White House does not appear to be pressing the case. ...
There isn't much point in asking, for the umpteenth time, why Republicans are so much better at this than Democrats. What's interesting here is the timing. Last week, Obama went to Osawatomie, Kansas, and delivered a stemwinder of a speech on inequality. The reaction was swift: left and right alike announced that the president was taking his cue from Occupy Wall Street and was adopting a stridently populist message focused on income inequality. More broadly, the speech seemed to be an indication that he was ready to shed the quiet, conciliatory demeanor and adopt a more pugilistic stance.
But the Democrats' two caves suggest Obama's new rhetoric isn't likely, for the foreseeable future, to be much more than posturing.

I really don't like that my choices in the upcoming election will be between one candidate who will betray the things I believe in, civil liberties, progressive taxation, etc., etc., etc., and a crazy person from the other side (take your pick) who will be even worse.

Friday, December 09, 2011

Paul Krugman: All the G.O.P.’s Gekkos

Myths about "job creators":

All the G.O.P.’s Gekkos, by Paul Krugman, Commentary, NY Times: Almost a quarter of a century has passed since the release of the movie “Wall Street,” and the film seems more relevant than ever. The self-righteous screeds of financial tycoons denouncing President Obama all read like variations on Gordon Gekko’s famous “greed is good” speech, while the complaints of Occupy Wall Street sound just like what Gekko says in private:... “Now you’re not naïve enough to think we’re living in a democracy, are you, buddy?” ...
And, according to ... Intrade, there’s a 45 percent chance that a real-life Gordon Gekko will be the next Republican presidential nominee. I am not, of course, the first person to notice the similarity between Mitt Romney’s business career and the fictional exploits of Oliver Stone’s antihero. ... But there’s an issue here that runs deeper than potshots against Mr. Romney.
For the current orthodoxy among Republicans is that we mustn’t even criticize the wealthy, let alone demand that they pay higher taxes, because they’re “job creators.” Yet the fact is that quite a few of today’s wealthy got that way by destroying jobs rather than creating them. And Mr. Romney’s business history offers a very good illustration of that fact. ...
Bain Capital, the private equity firm that Mr. Romney ran from 1984 to 1999 ... specialized in leveraged buyouts... The idea was to increase the acquired companies’ profits, then resell them.
But how were profits to be increased? The popular image — shaped in part by Oliver Stone — is that buyouts were followed by ruthless cost-cutting, largely at the expense of workers who either lost their jobs or found their wages and benefits cut. And while reality is more complex..., it contains more than a grain of truth. ...
So Mr. Romney made his fortune in a business that is, on balance, about job destruction... And because job destruction hurts workers even as it increases profits and the incomes of top executives, leveraged buyout firms have contributed to the combination of stagnant wages and soaring incomes at the top that has characterized America since 1980. ...
Contrary to conservative claims, liberals aren’t out to demonize or punish the rich. But they do object to the attempts of the right to do the opposite, to canonize the wealthy and exempt them from the sacrifices everyone else is expected to make because of the wonderful things they supposedly do for the rest of us.
The truth is that what’s good for the 1 percent, or even better the 0.1 percent, isn’t necessarily good for the rest of America — and Mr. Romney’s career illustrates that point perfectly. There’s no need, and no reason, to hate Mr. Romney and others like him. We do, however, need to get such people paying more in taxes — and we shouldn’t let myths about “job creators” get in the way.

Wednesday, December 07, 2011

"Who Would Pay a 73 Percent Income Tax?"

Richard Green:

Who would pay a 73 percent income tax? Not necessarily the rich., by Richard Green: A paper which is receiving considerable attention (see here, here and here) is Diamond and Saez's Journal of Economic Perspectives piece on optimal marginal tax rates. They put the rate at 73 percent, and declare it an optimum because it would maximize revenue that could then be used for other things. In particular, they argue that the utility lost to the rich would be much less than the utility gained by lower income people via government programs. I do believe that many government programs leave people better off, but I am skeptical about whether the optimal size of government is that which is supported by a revenue maximizing income tax.
In any event, one aspect of the paper bothers me: if one searches for the word "incidence," it is not found. Incidence reflects who really bears the burden of a tax. If one taxes a person or a business, they might absorb it, or they might pass it on to someone else.
The formula for the incidence of a tax on those who demand a taxed good is (Supply Elasticity)/(Supply Elasticity - Demand Elasticity). (I apologize for having elegant formulas--I don't know how to paste them into Blogger). Because demand curves are generally downward sloping, demand elasticity has a negative sign, so in a sense, the incidence reflects how relatively elastic supply is relative to the sum of the absolute values of the elasticities of demand and supply.
Now let's think about supply elasticity at the revenue maximizing point. It is exactly one, in that the reduction in labor offered exactly offsets any increase in the rate. To illustrate, let us just assume for a moment that demand elasticity is -1. Then half the incidence of the tax is on the supplier of labor or capital (a.k.a. the rich) and half the incidence is on the demander. This means that the burden on the rich person is 36.5 percent, not 73 percent.
What we do know is that as tax rates fall, the supply elasticity of the wealthy falls. Why? Because we know at lower tax rates, raising rates raises revenue-the supply response to an increase in taxes is smaller. Let's assume that at a 50 percent marginal tax rate, the elasticity of labor supply for the rich is .25. Now the incidence on demanders is .25/1.25, or 20 percent of the tax burden; it is 80 percent on the rich. hence with a 50 percent tax rate, the effective tax on the rich is 40 percent, or higher than it would be with a 73 percent rate!
These arguments all depend on assumed elasticity parameters, and so it is important to estimate them as best as possible. I should also note that I am all for raising taxes, including on myself, to pay for the many government services that I do support. Somedays I think that if I could change the tax code, I would just raise my own taxes by ten percent and then have policy that assured that everyone with income greater than mine would pay an effective tax rate no lower than mine.

Friday, December 02, 2011

"The Facts about Small Businesses and the Millionaire Surcharge"

The millionaire surcharge would have very little impact of small business:

The Facts about Small Businesses and the Millionaire Surcharge, by Jenni LeCompte, Treasury Notes: This week Congress will vote on President Obama’s proposal to extend and expand the payroll tax cut for working families and to add two new payroll tax cuts for employers. These tax cuts would benefit 160 million working Americans and their families, would lower taxes for employers, especially small businesses and those who are expanding their payrolls, and would provide the economy a much needed boost for the coming year.
These tax cuts can be fully paid for by asking the most fortunate Americans to pay a modest 3.25 percent surcharge on incomes over $1 million. Contrary to recent statements made by some in Congress, this surcharge would affect only a very, very small number of small business owners.
Specifically, a recent discussion paper by Treasury’s Office of Tax Analysis shows that only 1 percent of all small business owners have adjusted gross income over $1 million and would be affected by this surcharge. Not only will the remaining 99 percent of small business owners be protected from paying this surcharge, they will receive a net benefit from the employer-side payroll tax cuts.
The percentage of affected taxpayers who earn a significant share of their income from small businesses is also much smaller than the opponents of the Senate Democratic plan claim. Critics of the plan often use a definition of “small business” that includes many investment managers, lawyers and extremely wealthy people who are not by any common sense definition small business owners. In fact, more than half of the top 400 earners – whose average annual income was $271 million – would qualify as small business owners under their definition.
Moreover, because the surcharge applies only to income above $1 million, even much of the actual small business income earned by these taxpayers would not be affected by the surcharge.
The fact is that the vast majority of small businesses would benefit from the President’s proposals. The employee-side tax cut will support demand, which is the most important thing businesses need, and the employer-side tax cuts will give small businesses extra room to hire and invest. These benefits significantly outweigh the impact of the surcharge, which will affect only a very small fraction of the wealthiest small business owners.