Category Archive for: Taxes [Return to Main]

Saturday, March 02, 2013

A Conversation with Emmanuel Saez: Taxing away Inequality

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

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

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

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

Wednesday, February 27, 2013

'Republicans Must Bridge the Income Gap'

Sheila Bair:

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

Saturday, February 16, 2013

'The Myth of the Rich Who Flee From Taxes'

Do the wealthy move away when taxes are increased?:

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

Why Tax Rates Should be Progressive

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

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

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

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

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

Thursday, February 14, 2013

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

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

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

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

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

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

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

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

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

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

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

Tuesday, February 12, 2013

The 1935 Version of 'Who Built That"

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

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

The call for inheritance and gift taxes:

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

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

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

But what about small businesses?

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

And relevant to the current corporate cash accumulation:

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

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

Monday, February 11, 2013

'Why Has Employment Remained Stubbornly Low?'

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

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

Friday, February 08, 2013

Fed Watch: Payroll Taxes Hitting Home. Or Not.

Two from Tim Duy -- this is the second:

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

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

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

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

Yet I also see this in the Wall Street Journal:

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

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

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

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

Sunday, February 03, 2013

'America’s First Progressive Revolution'

Idealist and dreamer Robert Reich:

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

Thursday, January 31, 2013

Fed Watch: Interesting Anecdote

One more from Tim Duy:

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

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

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

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

Sunday, January 27, 2013

Climate Policy in Obama's Second Term

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

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

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

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

Wednesday, January 23, 2013

Higher Marginal Taxes Reduce Economic and Political Power

Richard Green:

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

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

Monday, January 21, 2013

Paul Krugman: The Big Deal

Progressives should cheer up:

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

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

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

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

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

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

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

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

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

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

Monday, December 31, 2012

The Benefits Tax View

Richard Green:

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

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

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

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

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

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

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

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

Sunday, December 30, 2012

Must Middle Class Taxes Go Up?

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

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

Too Much Wishful Thinking on Middle-Class Tax Rates

Dean Baker responds:

Greg Mankiw Says We Have to Tax the Middle Class More

The Republican's 'Biggest Priority'

Is Obama finally figuring it out?:

“They [Republicans] say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” he said.
“That seems to be their only overriding, unifying theme.”

Seems to be?

Sunday, December 23, 2012

'In the Fiscal Debate, a Little Symbolism Can Go a Long Way'

Tyler Cowen on the negotiations over the fiscal thingie:

In the Fiscal Debate, a Little Symbolism Can Go a Long Way, by Tyler Cowen, Commentary, NY Times: ...We must decide whether to pursue a relatively loose and stimulative policy, and to trust in our later discipline, or to slam on the brakes now.
Yet there may be a way to square this circle. When it comes to income tax rates, we could raise them for virtually everyone, to send a clear message that the current fiscal situation is unsustainable. ...
To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.
Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice. ...
Of course, the notion of tolerating — and especially endorsing — any tax increase is anathema to many of President Obama’s opponents. But keep in mind that possible alternatives, like another debt-ceiling debacle or an agreement that panders to our fiscal illusions, would probably be worse for both the economy and the longer-term reputation of the Republican Party.
In our country, the typical approach to fiscal deadlines is to kick the can down the road. But that assumes we are kicking a can, not a grenade. It’s time for at least one party — and why not the electoral loser? — to do something just a little shocking. It can give in on much of the negotiations, but insist that both sides start stressing the fiscal truth.

Maybe I'm just having one of those days and can't see the obvious, a house full of family will do that, but I'm a bit confused about the spending side of this proposal. Does Tyler mean that the spending cuts Obama has proposed will remain, but the tax increase will be moderated for now and replaced by a commitment to increase them further at some future date? If so (and I may have this wrong), why is the only worry that "Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cut"? Why isn't it undesirable to cut spending as well? When all is said and done, spending cuts plus tax increases, how would the burden be distributed? Is the current situation -- the baseline from where we start the changes -- fully optimal, or do we also need to correct distortions, inequities in the past distribution of income, etc.? If there are corrections that are needed, and I believe there are, then the share equally notion has much less force.

It's true that “we are all in this together” under Tyler's proposal, but it is not at all clear that the shares are equitable. In any case, it probably doesn't much matter since the chances of Republicans agreeing to vote for a tax increase, no matter how small, is extremely low.

Saturday, December 22, 2012

'The New Mandate on Defense'

Barney Frank argues that, when it comes to defense spending, we should "spend less, and liberals should not flinch from that position." The essential point, I think, is that "the major trade-off in putting together a total deficit reduction package is between the military and health care," and, though he does note this in a couple of places, I wish that point had been stressed more in the article (the essay is much, much longer):

The New Mandate on Defense, by Barney Frank, Democracy: There were so many encouraging signs for liberals in the election results this year that one of the most significant has been overlooked. For the first time in my memory, a Democratic candidate for President argued for less military spending against a Republican candidate who called for great increases—and the Democrat won. ...
Because so much of that spending stems from overreach advocated by those who believe that America should be the enforcer of order everywhere in the world—and because we subsidize our wealthy European and Asian allies by providing a defense for them...—there has been increasing conservative support for reining in the military budget. Ron Paul, who goes far beyond most liberals in his eagerness to impose severe military cuts, was a popular figure with a significant base of GOP support not despite taking this position but in part because of it.
Earlier this year, for the first time that I can recall, a majority of the House of Representatives voted to reduce the military appropriation recommended by the House Appropriations Committee. The cut was only $1.1 billion—less than it should have been—but it ... passed... with the support of ... a significant minority of Republicans...
A realistic reassessment of our true national security needs would mean a military budget significantly lower... That is, by next year, we no longer should be forced to spend additional funds—close to $200 billion a year at their peak—in Afghanistan and Iraq. Additionally, we can reduce the base budget by approximately $1 trillion over a ten-year period ... while maintaining more than enough military strength...
Even with the revenue increase we can achieve by raising taxes on the wealthy, serious deficit reduction must come in part from reducing military spending beyond what the President proposes, unless we make very deep cuts in the nonmilitary parts of the budget. ... Given the numbers involved, the major trade-off in putting together a total deficit reduction package is between the military and health care...
To be clear, this is not an argument against America continuing to be the strongest nation in the world. ... That said, being the strongest nation in the world can be achieved much less expensively than at current levels. Obama ... underestimates the extent to which the public is willing to support even further reductions, and I believe that he may appear to be overly influenced by being told that as President, he has the duty to continue to lead the indispensable nation.
The United States was indispensable in 1945 and for many years thereafter... But things have changed. We can no longer afford ... extending a military umbrella over many allies on whom it is not raining—and who can well afford their own protective gear if it does. ...
This all means that a major political task going forward for liberals is pushing for further reductions in military spending, an objective that we now know is not only socially and economically necessary but also politically achievable.

Important social services versus tax cuts for the rich and military spending. Those with unmet needs and little social/economic power versus the wealthy and the military. I suppose in some sense, given who's in this battle, it's remarkable there's been any headway at all. But there needs to be more progress on protecting the vulnerable.

Sunday, December 16, 2012

Summers: How to Fix Our Costly and Unjust Tax System

Larry Summers:

How to fix costly and unjust US tax system, by Lawrence Summers, Commentary, Financial Times: Sooner or later the American tax code will be reformed. ...
So far, the debate has focused on scaling back provisions of the tax code that have favored activities traditionally deemed to be valuable..., reducing reliefs for charitable contributions, taxes paid to state and local governments, home mortgages, employer-provided health insurance and many less important provisions. There are reasonable arguments ... in each case. But taking only the “limit tax incentives” approach to tax reform has several major defects. [lists] ...
What is needed is an additional element, one that has largely been absent to date: the numerous exclusions from the definition of adjusted gross income... There are far too many provisions that favor a small minority of very fortunate taxpayers. ... it should not be possible to accumulate and transfer large fortunes while avoiding taxation almost entirely. Yet this is all too possible today. ... [lists several ways] ...
I believe it is plausible to raise $1tn over the next 10 years by going after provisions that cause what adds to wealth and spending not to be regarded as income.
It has been observed that the greatest scandals are not the illegal things that people do but the things that are fully legal. This is surely true with respect to a tax code in urgent need of reform.

[If you can't get to the article, it usually appears on the Washington Post's editorial page later in the day, though sometimes the editing is slightly different. Update: It's here.]

Friday, December 14, 2012

'Trillion-Dollar Deficits are Sustainable for Now'

John Makin of the American Enterprise Institute says that "trillion-dollar deficits are sustainable for now, unfortunately." I don't agree with everything he says -- the "unfortunately" in the title for one, his fear of inflation and the increase in debt servicing costs that come with it for another (though he is not saying inflation is just around the corner like some others have claimed) -- but I appreciate that he is trying to play it straight rather than support the nonsense other Republicans have tried to foist upon the public:

Trillion-dollar deficits are sustainable for now, unfortunately, by John H. Makin: Congress is attempting, unsuccessfully, to reduce “unsustainable” deficits and debt accumulation by engineering “crises” that are meant to force politically challenging action on spending cuts (entitlements) and tax increases (loophole closing, higher tax rates on the “rich”). The mid-2011 debt-ceiling crisis fiasco and the upcoming year-end “fiscal cliff” are striking examples of this dangerous tactic. ...
The tactic of threatening to go over the fiscal cliff will fail ... because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little “sky is falling” approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised... Two percent inflation means that the real inflation-adjusted cost of deficit finance averages –1.5 percent...
The debt-to-GDP ratio is not a reliable guide for gauging the sustainability of deficits, notwithstanding the Reinhart and Rogoff warning...
The United States Is NOT Greece ... The hyperbolic claim that the United States is becoming Greece because of the absence of dramatic progress on deficit and debt reduction is unfortunately ridiculous. ...
The real danger facing American policymakers is, contrary to the cries of imminent “crisis” and “unsustainable” deficits and debt accumulation, the sustainability of trillion-dollar deficits. Eventually, probably much later than most pundits claim if the experience of Japan is any guide, the Federal Reserve’s monetary accommodation of US government debt accumulation, largely aimed at sustaining the growth of outlays on entitlements that do not support economic growth, will cause inflation to rise. ...
Once inflation rises and the Fed is forced to tighten, borrowing costs for both the government and private sectors will rise. Growth measured in real, constant-dollar terms will fall relative to real, inflation-adjusted interest rates along with tax revenues, and the US debt-to-GDP ratio will rise rapidly. ...

We certainly disagree on how to solve the problem, i.e. whether to rely upon tax increases or cuts to important social programs, and on the pace of deficit reduction (though he calls for more gradual reduction than most), but I appreciate his willingness to acknowledge, as Krugman noted today, that "We are not having a debt crisis."

(I should also note, yet again, that with a "real inflation-adjusted cost of deficit finance [that] averages –1.5 percent," we ought to be investing heavily in critical infrastructure to stimulate output and employment, and to increase our future growth prospects.)

Wednesday, December 12, 2012

Just Sayin': It May Already Be Too Late

Tim Haab:

Just sayin': I was thinking of writing a lengthy post about climate change denial being completely unscientific nonsense, but then geochemist and National Science Board member James Lawrence Powell wrote a post that is basically a slam-dunk of debunking. His premise was simple: If global warming isn’t real and there’s an actual scientific debate about it, that should be reflected in the scientific journals.
He looked up how many peer-reviewed scientific papers were published in professional journals about global warming, and compared the ones supporting the idea that we’re heating up compared to those that don’t. What did he find? This:

Powell-Science-Pie-Chart[1]The thin red wedge.   Image credit: James Lawrence Powell

Maximillian Auffhammer at the Berkeley blog:

Doha schmoha: On Saturday (Dec. 8) another wildly unsuccessful round of climate negotiations, in Doha, Qatar, concluded with applying a band aid to solve the rapidly accelerating climate problem. The 1997 Kyoto accord was extended to 2020. If you think this is a good thing, you are severely mistaken. China, the US and the other usual suspects made no significant concessions. Further,  the climate leader — the EU — is internally in disagreement over what reductions should be agreed to. ...
While academics have proposed a number of interesting avenues for further studies of so called architectures for future agreements, time is slowly running out. It is simply too difficult to get 200+ countries to agree and then stick to a binding agreement. So what to do?
I think a simple handshake between the U.S. and China would be a good start. Each agrees to a carbon tax which is collected fairly far upstream. Any country wanting to sell its goods into the U.S. or Chinese markets could either pay a carbon tariff at the border or start charging its own equivalent carbon tax and be exempt from the tariff.
Is this going to happen? Maybe not...
But one thing is for sure: We are becoming richer as a species and we will want to consume more energy services. Unless we start pricing carbon, that energy will largely come from coal. And if that happens, limiting warming to 2 degrees is a pipe dream. In fact, it may already be too late.

Monday, December 03, 2012

Paul Krugman: The Big Budget Mumble

Exposing the Republican con game on the deficit:

The Big Budget Mumble, by Paul Krugman:, Commentary, NY Times: In the ongoing battle of the budget, President Obama has done something very cruel. Declaring that this time he won’t negotiate with himself, he has refused to lay out a proposal reflecting what he thinks Republicans want. Instead, he has demanded that Republicans themselves say, explicitly, what they want. And guess what: They can’t or won’t do it.
No, really. While there has been a lot of bluster from the G.O.P. about how we should reduce the deficit with spending cuts, not tax increases, no leading figures on the Republican side have been able or willing to specify what, exactly, they want to cut.
And there’s a reason for this reticence. ...Republican posturing on the deficit has always been a con game, a play on the innumeracy of voters and reporters. Now Mr. Obama has demanded that the G.O.P. put up or shut up — and the response is an aggrieved mumble.
Here’s where we are right now: As his opening bid in negotiations, Mr. Obama has proposed raising about $1.6 trillion in additional revenue over the next decade, with the majority coming from letting the high-end Bush tax cuts expire and the rest from measures to limit tax deductions. He would also cut spending by about $400 billion...
Republicans have howled in outrage. ... They say they want to rely mainly on spending cuts instead. Which spending cuts? Ah, that’s a mystery..., when you put Republicans on the spot and demand specifics about how they’re going to make good on their posturing about spending and deficits, they come up empty. There’s no there there.
And there never was. ... Now Republicans find themselves boxed in. With taxes scheduled to rise on Jan. 1 in the absence of an agreement, they can’t play their usual game of just saying no to tax increases and pretending that they have a deficit reduction plan. And the president, by refusing to help them out by proposing G.O.P.-friendly spending cuts, has deprived them of political cover. If Republicans really want to slash popular programs, they will have to propose those cuts themselves.
So while the fiscal cliff — still a bad name for the looming austerity bomb, but I guess we’re stuck with it — is a bad thing from an economic point of view, it has had at least one salutary political effect. For it has finally laid bare the con that has always been at the core of the G.O.P.’s political strategy.

Saturday, December 01, 2012

Should We Extend the Payroll Tax Cut?

Jared Bernstein says we should renew the payroll tax cut:

When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture This. by Jared Bernstein: It’s just a slide…in both senses of the word…of the real earnings—pretax, which is important—of middle-wage workers: blue collar workers in manufacturing and non-managers in services, adjusted for inflation. And it’s not inflation holding back these wage rates—it’s the weak economy. This series starts in 1964, and in nominal terms, it’s never grown more slowly than it has this year.

Source: BLS

So it is to his great credit that the President proposed another round of the payroll tax break, or something like it, as part of his opening bid for the cliff negotiations... With unemployment still way too high, we need to continue to support workers’ paychecks and temporarily offset some of the fiscal contraction from the tax increases and spending cuts that are likely to come out of the cliff negotiations.
I know that adding a spending program to a deficit reduction package may sound counterintuitive, but it’s really countercyclical. And by dint of being temporary—we could even write in the legislation that it expires when unemployment goes (and stays) below 7%–it won’t affect the medium-term deficit. ...

I think the payroll tax should be extended, but as I noted when this first came up, I'd prefer the "optics" to be different:

I see the payroll tax reduction as potentially troublesome... Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road -- and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics. That is, leave the payroll tax at 6% on the books and keep sending the money to Social Security, and fund a 2% tax "rebate" out of general revenues. The rebate would come, technically, as a payment from general revenues rather than through a cut in the payroll tax, but in the end the effect would be identical. But the technicality is important since it preserves the existing funding mechanism for Social Security even if the taxes are permanently extended.

[On the connection between the payroll tax and support for Social Security, see here. As Bruce Bartlett notes while expressing similar worries, "Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right."]

Tuesday, November 27, 2012

Tim Geithner: 'Pragmatic Deal Maker'?

Robert Reich is worried:

Will Tim Geithner Lead Us Over or Around the Fiscal Cliff?, by Robert Reich: I’m trying to remain optimistic that the President and congressional Democrats will hold their ground over the next month as we approach the so-called “fiscal cliff.”
But leading those negotiations for the White House is outgoing Secretary of Treasury Tim Geithner, whom Monday’s Wall Street Journal described as a “pragmatic deal maker” because of “his long relationship with former Treasury Secretary Robert Rubin, for whom balancing the budget was a priority over other Democratic touchstones.” ...
Both Rubin and Geithner are hardworking and decent. But both see the world through the eyes of Wall Street rather than Main Street. I battled Rubin for years in the Clinton administration because of his hawkishness on the budget deficit and his narrow Wall Street view of the world.
During his tenure as Treasury Secretary, Geithner has followed in Rubin’s path — engineering a no-strings Wall Street bailout that didn’t require the Street to help stranded homeowners, didn’t demand the Street agree to a resurrection of the Glass-Steagall Act, and didn’t seek to cap the size of the biggest bank, which in the wake of the bailout have become much bigger.  In an interview with the Journal, Geithner repeats the President’s stated principle that tax rates must rise on the wealthy, but doesn’t rule out changes to Social Security or Medicare. And he notes that in the president’s budget (drawn up before the election), spending on non-defense discretionary items — mostly programs for the poor, and investments in education and infrastructure — are “very low as a share of the economy relative to Clinton.” If “pragmatic deal maker,” as the Journal describes Geithner, means someone who believes any deal with Republicans is better than no deal, and deficit reduction is more important than job creation, we could be in for a difficult December.

Not sure if this will make you feel more confident, but a recent post on the Treasury's blog from Jason Furman asserted that "Increasing Taxes on Middle-Class Families Will Hurt Consumer Spending." Unfortunately, it didn't say much about Social Security and Medicare. I am worried too.

Monday, November 19, 2012

Paul Krugman: The Twinkie Manifesto

The good old days hold lessons for today:

The Twinkie Manifesto, by Paul Krugman, Commentary, NY Times: The Twinkie ... will forever be identified with the 1950s... And the demise of Hostess has unleashed a wave of baby boomer nostalgia for a seemingly more innocent time.
Needless to say, it wasn’t really innocent. But the ’50s ... do offer lessons that remain relevant in the 21st century. ... Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. ...
Yet in the 1950s ... taxes on corporate profits were twice as large... The best estimates suggest that circa 1960 the top 0.01 percent ... paid an effective federal tax rate of more than 70 percent, twice what they pay today.
Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals...
Squeezed between high taxes and empowered workers, executives were relatively impoverished by the standards of either earlier or later generations. ... Between the 1920s and the 1950s real incomes for the richest Americans fell sharply...
Today, of course, the mansions, armies of servants and yachts are back, bigger than ever — and any hint of policies that might crimp plutocrats’ style is met with cries of “socialism.” ... Surely, then, the far less plutocrat-friendly environment of the 1950s must have been an economic disaster, right? ...
On the contrary,... the high-tax, strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth...
Which brings us back to the nostalgia thing.
There are, let’s face it, some people in our political life who pine for the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, “Are you now or have you ever been?” The rest of us, however, are very glad those days are gone. We are, morally, a much better nation... Oh, and the food has improved a lot, too.
Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda..., it prospered. And we can do that again.

Thursday, November 15, 2012

'No Reason for Conservatives to Back Away from their Absolutist Anti-Tax Stance'

Is James Kwak correct?:

...if you take the long view, there’s no reason for conservatives to back away from their absolutist anti-tax stance. So they lose an election or two. What happens? When it comes to taxes, Democratic majorities at best hold the line against further tax cuts. After their sweep in 2008, President Obama and his congressional allies passed a couple of modest tax increases to pay for Obamacare (and one of those, the excise tax on Cadillac plans, is one that conservative economists profess to like), but also extended the Bush tax cuts and added a few more tax cuts of their own; now Obama wants to make more than 80 percent of the Bush tax cuts permanent, and last summer he offered up his own proposals for entitlement cuts. When the Republicans return to power, as they inevitably will, they can just pick up where they left off..., for the last eighteen years, the hardline anti-tax position has been a huge winner for Republicans. Given that Democrats have shown exactly zero ability to punish them for it, I can’t see any reason why they should change their ways now.
If there is some sort of compromise in the next couple of months, it’s going to be one that Republicans can frame as a tax cut, not an out-and-out violation of the Grover pledge; one scenario is that the year ends with no deal, tax rates go up, and then Obama and the Republicans agree to cut them. ...
Republicans may object to tax rate increases, and no doubt will, but for once I'm not sure they'll prevail.

Wednesday, November 14, 2012

Carbon Taxes and the National Debt

I am hearing a lot lately about using a carbon tax to fill the budget gap. I'm all for a carbon tax, internalizing externalities so that these markets work better is a good idea if we can somehow get through the political barriers, but we shouldn't be overly optimistic about how much revenue such a tax will bring.

In order to get support for such a tax and to implement it equitably, some groups will need to be compensated for the higher energy costs they will face. For example, these proposals often come with a proposal to return some of the tax as a lump-sum payment to lower income households (the microeconomics of a tax on carbon combined with lump-sum payments can be found here). Presumably, the higher the threshold for "low income," the easier it will be to get support for a carbon tax proposal, so there will be pressure for the compensation to extend, perhaps on a sliding scale, to middle class households.

And, at least in the initial years, there are other groups that will likely need to be compensated (okay, bought off) in order to garner the necessary political support.

All of these attempts to insulate various groups from the consequences of the tax (through fancy schemes that retain te incentive to save energy) will eat into potential revenue, and the fact that the response to the tax will be greater as more time passes -- for example as people switch to more efficient cars and appliances -- will also reduce revenue (this is not a problem in a larger sense, such substitutions are the whole point of the tax, but it does reduce the revenue).

Overall, the point is a simple one: don't overestimate the revenue from a carbon tax.

More on Broadening the Base versus Raising Tax Rates

The Democracy in America blog at The Economist responds to recent posturing on taxes by Glenn Hubbard and John Boehner:

Elections have consequences, redux, by M.S.: We are told that in the aftermath of Barack Obama's re-election, both he and the Republican leadership in Congress are signaling a willingness to compromise in order to avoid going over the dread fiscal cliff. " ... In terms of Republican conciliation, they are referring to statements like this one by John Boehner, the speaker of the House, and articles like this one by Glenn Hubbard, formerly Mitt Romney's chief economic adviser...
Do these, in fact, represent proposals for compromise? ... It seems to me that Mr Hubbard has a fundamental and difficult realization ... to make, to wit, that the candidate he supported lost the presidential election. The proposals he embraces here, like those outlined by Mr Boehner, were advanced by Mr Romney during the presidential campaign. Mr Romney argued that any increases in revenues ought to come from the elimination of tax exemptions, rather than from hikes in the top marginal tax rate. And like Mr Boehner, he wanted plans for reducing the deficit to somehow lead to tax rates that are lower, rather than higher. Neither Mr Boehner nor Mr Hubbard has signaled any willingness to accept higher revenues from any source...
Barack Obama won the presidential election running on an explicit platform of hiking the top marginal income-tax rate... Americans want the wealthy to pay a higher tax rate. ... Republicans appear to think that by merely stating that they are not in principle opposed to the federal government getting more revenue, they are entitled to be congratulated for their conciliatory approach, despite the fact that they continue to make the same basic tax proposals they made before the election, which they lost...
What we're seeing here, in sum, isn't compromise; it's posturing. Republicans are trying to define the press and public's view of what counts as a compromise, by reiterating their existing positions as if they constituted concessions. ... But the idea that Democrats will accept the implementation by Barack Obama of Mitt Romney's economic philosophy is ridiculous. ...
I hope it's "ridiculous" to think Obama will acquiesce to these demands as part of a compromise, but I wouldn't be posting so much on this topic if I was sure.

Broadening the Base versus Raising Tax Rates

Robert Reich:

The Difference Between “Broadening the Tax Base” and Raising Taxes on the Rich, by Robert Reich: The President says he wants $1.6 trillion in tax hikes. Republicans say they won’t raise tax rates but might be willing to close some loopholes and limit some deductions and tax credits. Is compromise in the air?
Not a chance. True enough, such “base broadening,” as Republicans like to call it, could conceivably generate $1.6 trillion in additional tax revenues over the next decade.
But, wait. Didn’t the President just win a second term? The major issue decided in last week’s election was that the rich should pay more. So, presumably, that $1.6 trillion should come out of the pockets of the wealthiest Americans.
“Broadening the base” has nothing whatever to do with the rich paying more. That’s because a lot of tax credits and deductions help the middle class and the poor. ...
If Republicans won’t budge on raising tax rates but insist on broadening the base, Democrats should take aim at the biggest tax loophole of all for America’s wealthy: the preference for capital gains.
Capital gains are now taxed at only 15 percent (the major reason Mitt Romney pays a rate of under 14 percent on over $20 million of annual income). Capital gains should be taxed the same as ordinary income. That way, under a progressive tax system, the wealthy would pay far more — on the way to $1.6 trillion.

Tuesday, November 13, 2012

'The President’s Opening Bid on a Grand Bargain'

Robert Reich has a recommendation for an opening bid on deficit reduction:

The President’s Opening Bid on a Grand Bargain: Aim High, by Robert Reich: I hope the President starts negotiations over a “grand bargain” for deficit reduction by aiming high. After all,... if the past four years has proven anything it’s that the White House should not begin with a compromise.
Assuming the goal is $4 trillion of deficit reduction over the next decade (that’s the consensus...), here’s what the President should propose:
First, raise taxes on the rich... Why not go back sixty years when Americans earning over $1 million in today’s dollars paid 55.2 percent of it in income taxes, after taking all deductions and credits? If they were taxed at that rate now, they’d ... reduce the budget deficit by about $1 trillion over the next decade. That’s a quarter of the $4 trillion in deficit reduction right there.
A 2% surtax on the wealth of the richest one-half of 1 percent would bring in another $750 billion over the decade. A one-half of 1 percent tax on financial transactions would bring in an additional $250 billion.
Add this up and we get $2 trillion over ten years — half of the deficit-reduction goal.
Raise the capital gains rate to match the rate on ordinary income and cap the mortgage interest deduction at $12,000 a year, and ... we’re up to $3 trillion in additional revenue.
Eliminate special tax preferences for oil and gas, price supports for big agriculture, tax breaks and research subsidies for Big Pharma, unnecessary weapons systems for military contractors, and indirect subsidies to the biggest banks on Wall Street, and we’re nearly there.
End the Bush tax cuts on incomes between $250,000 and $1 million, and — bingo — we made it: $4 trillion over 10 years.
And we haven’t had to raise taxes on America’s beleaguered middle class, cut Social Security or Medicare and Medicaid, reduce spending on education or infrastructure, or cut programs for the poor. ...

Obama should at least reverse the Republican pre-election mantra and insist: raise taxes first, then we'll talk spending cuts.

Monday, November 12, 2012

Republicans Shift Stance on Taxing Wealthy?

Are Republicans changing their tune on taxes?:

Republicans shift stance on taxing wealthy, by James Politi, FT: The US Congress should agree to higher taxes on the wealthy to avoid the fiscal cliff, a top Republican economist has conceded in a sign of the rapidly shifting political climate in Washington before negotiations to avert the looming budget crisis.
Writing for the Financial Times, Glenn Hubbard, who advised Barack Obama’s rival Mitt Romney on his losing presidential bid, is the latest prominent conservative to suggest Republicans should change tack and accept the president’s structure for impending budget talks.
“The first step is to raise average (not marginal) tax rates on upper-income taxpayers,” he wrote. “Revenues should come first from these individuals.” The growing debate among Republicans over how to generate more revenue highlights the change in the political mood since Mr Obama’s victory...

It doesn't seem that this is much different than the base-broadening talk we heard from conservatives before the election. So while there does seem to be resignation on the right that some sort of tax increase is coming, I'm not so sure this is as big of a shift as it's being made out to be (e.g., from the article, "Mr Hubbard said a deal could be achieved by eliminating tax loopholes and capping popular deductions – such as those for mortgage interest, charitable giving and employer-provided health plans – rather than allowing Bush-era tax rates for the rich to expire this year, as Democrats are demanding," or, today from Cato, "The Proper Post-Election Agenda: Cut Spending, Then Taxes" which promotes the usual supply-side justifications for low taxes on the wealthy). However, the stories the press tells seem to matter, and if this creates momentum toward the self-fulfilling expectation that Republicans are capitulating on taxes, that works for me.

Update: Grover Norquist:

President Barack Obama did not win re-election because of his promise to raise taxes on the wealthy, but it was because attack ads made voters thing that Mitt Romney was a "poopy-head." During a Monday interview on CBS, Norquist suggested that Republicans had a mandate not to raise taxes, even it meant going off the so-called "fiscal cliff."

Sunday, November 11, 2012

Hasn't Paul Krugman Heard about the Magic of Tax Cuts and Supply-Side Economics? No, and for Good Reason...

Paul Krugman:

Squirming Hawks, by Paul Krugman: The fiscal cliff poses an interesting problem for self-styled deficit hawks. They’ve been going on and on about how the deficit is a terrible thing; now they’re confronted with the possibility of a large reduction in the deficit, and have to find a way to say that this is a bad thing.

And so what you see, in reports like this one from the Committee for a Responsible Federal Budget — is a lot of squirming..., making a mostly incoherent case: it’s too abrupt (why?), it’s the wrong kind of deficit reduction (???), and then this:

a better approach would be to focus spending cuts on low-priority spending and on changes which can help to encourage growth and generate new revenue through comprehensive tax reform which broadens the base – ideally by enough to also lower tax rates.

Low-priority spending? I think that means spending on poor people and the middle class. And isn’t it amazing how people who claim to be horrified, horrified about deficits can’t stop talking about cutting tax rates?...

I guess Paul Krugman hasn't heard about the magic of tax cuts and supply-side economics. Well, Cato-at-Liberty has, and it's ticked at the CBO because "it assumes higher tax rates generate more money" when making budget projections. That's right, despite all the evidence against the claim that tax cuts actually increased revenue -- it's a myth that won't die because people who know better, or ought to, still promote it -- we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.

And that's not all. The CBO should be further discredited because it says the stimulus package helped to ease the recession:

The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.

I'll pass over the "record levels of unemployment' claim (but note that unemployment peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best this is playing games with the word "levels" and ignoring population growth -- and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most). On the main claim about fiscal policy, there's plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how much of the stimulus package was tax cuts -- it's amusing to listen to conservatives tell us how useless the tax cuts they fought for as part of the stimulus package turned out to be, especially when in the next breath they argue for more tax cuts). The CBO is dealing in actual evidence, the claims made by Cato-at-Liberty are backed by nothing more than the Republican noise machine that is so good at misleading followers.

Republicans just can't help themselves from attacking anyone and anything that is inconvenient to their goals, and actual evidence has little to do with it. Apparently, they learned nothing from the election. This is part of a larger effort to discredit the CBO because it doesn't agree with Republican views on the magic of tax cuts, and for other results the non-partisan agency has come up with that Republicans don't want to hear (so they basically cover their ears and ignore them).

The effort is successfully discrediting someone, but it's not the CBO.

Thursday, October 25, 2012

Does Taxing the Wealthy Hurt Growth?

This is by Ethan Kaplan of the University of Maryland (via email):

Does Taxing the Wealthy Hurt Growth?, by Ethan Kaplan: What is the impact of taxation on growth? In theory, a country without taxation will have difficulty providing basic public goods such as roads and research that are fundamental for economic growth. However, many politicians and some economists argue that once basic public goods are provided for, increases in taxation have a negative impact on growth. According to this argument, this is especially true for taxes on the very wealthy, who are likely to save their income and channel that savings into entrepreneurship or other investment. Much of the argument over tax policy in the United States is focused on whether the rich should be taxed at a higher or lower rate than they are today. The argument in favor of higher rates is that income inequality is at extremely high levels and the government should focus more on redistribution and also that the rising national debt is also potentially harmful to growth. The argument against higher rates is that raising taxes on wealthy would disincentivize the people most likely to create economic growth and thus jobs. In a climate where jobs are scarce, the argument goes, this is a particularly bad economic idea.
This debate, however, is largely based on ideology rather than evidence. Unfortunately, it is quite difficult to figure out the impact of taxation on growth. Changes to the tax codes usually pass Congress when other things are happening to the economy. For example, the 1982 tax cuts, which dropped the top marginal tax rate from 69% to 50%, were passed towards the end of a large recession. Moreover, the impact of taxes on growth can change over time as the economy changes.
Nevertheless, looking at the raw correlation between top marginal tax rates and growth can be helpful for getting a rough sense of the likely impacts of higher taxation on growth. One recent paper by Pikkety, Saez, and Stantcheva looks at the correlation between top marginal tax rates and growth and finds the growth is higher when top marginal tax rates are higher. I restrict myself to the historical experience of the United States and go back to 1930. In particular, I took real chained per capita GDP growth from 1930 to the present from the Bureau of Economic Analysis' (BEA) website. The correlation over this period between the top marginal tax rate and output growth is strong and positive as can be seen below:


A rise in the top marginal tax rate from 0 to 100 percent is correlated with a rise in per capita growth of 5.85 percentage points per year. One reason that this simple correlation might overstate the impact of the marginal tax rate on growth is that the top growth years were in the early 40s when the government was spending heavily and when the country was finally recovering from the Great Depression. If we look only at the post war period (after 1946), a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase of only 2.69 percentage points of growth. Moreover, the statistical significance of the relationship becomes marginal, as the p-value rises from 0.017 to 0.122. On the other hand, if we look at the time period encompassing 1960 to the present, a rise in the top rate from 0 to 100 percent is correlated with a rise in per capita growth of 3.03 percentage points of growth per year, and the relationship becomes more statistically significant (with a p-value of 0.064 percent). Finally, if we look only at the years since 1980, a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase in growth of 3.87 percentage points. In this case, the relationship is statistically insignificant (with a p-value of 0.392 percent), in part because the sample size is small.
While we cannot say that there is a robust significant positive relationship between tax rates and growth, it is still interesting that regardless of when we start the sample, higher top marginal tax rates are associated with higher not lower growth. Moreover, a narrative reading of postwar US economic history leads to the same conclusion. The period of highest growth in the United States was in the post-war era when top marginal tax rates were 94% (under President Truman) and 91% (through 1963). As top marginal rates dropped, so did growth. Moreover, except for 1984, a recovery year, the highest per capita growth rates since 1980 were all in the late 1990s, after the top marginal tax rate had been increased from 28% under President Reagan to 31% under the first President Bush and then 39.6% under President Clinton. One possible reaction to this finding is that what matters more than the top marginal tax rate on income is the capital gains tax rate but growth has also been higher when the capital gains tax rate has been higher.
So, what does this tell us? Of course, it would be silly to make the argument that increasing top marginal rates from 0 to 100 percent increased per capita growth by almost 6 percentage points per year. No doubt there are other factors that could confound the relationship between tax rates and growth. However, the changes in top marginal tax rates over the period are quite large so it seems likely that if raising top marginal rates did have a large negative impact on growth, we should be able to see it in the correlations. Thus, it also seems silly to argue that higher taxes on the rich have a large negative impact on growth, given that historically growth is, if anything, positively correlated with the top marginal rate.
What does this mean for public policy? Given the large rise in inequality in the United States over the past 40 years, if the historical evidence tells us that it is unlikely that taxing the wealthy has a large negative impact on growth (and it might even have a positive impact), shouldn't we increase rates on the wealthy from their current top rates of 35%?
p.s. the data used to analyze the time series is available on my website:

Wednesday, October 24, 2012

'Four Magic Tricks for Fiscal Conservatives'

Jeffrey Frankel:

Four Magic Tricks for Fiscal Conservatives, by Jeffrey Frankel, Commentary, NY Times: ...Aspiring fiscal conservatives ... might be interested in learning four tricks that American politicians commonly use when promising to cut taxes while simultaneously reducing budget deficits. ...
The first ... was coined by Reagan’s budget director, David Stockman..., because the numbers in the 1981 budget plan did not add up. “We invented the ‘magic asterisk,’” ... Ever since, the magic asterisk has become a familiar American device. ...
[Second,]... the conjurer ... resorts to the rosy scenario: since he cannot find enough tax loopholes to eliminate, he must claim that ... stronger economic growth will bring in the additional revenue. ..
Right on cue, it is time for the famous Laffer hypothesis – the proposition ... that reductions in tax rates ... so stimulate economic growth that total tax revenue ... goes up... One might think that the Romney campaign would not resurrect so discredited a trick. ...
The final trick, “starve the beast,” typically comes later, if and when the president has enacted his tax cuts and discovers ... tax revenues have not grown... The audience is now told that losing tax revenue and widening the budget deficit was the plan all along. The performer explains that the deficit is all the fault of congress for not cutting spending and that ... “Congress can’t spend money it doesn’t have.” This trick never works...
By the time the crowd realizes that it has been conned, the magician has already pulled off the greatest trick of all: yet another audience that came to see the deficit shrink leaves the theater with the deficit bigger than before.

Friday, October 19, 2012

Do Tax Cuts Stimulate the Economy?

Laura Tyson and Owen Zidar report on some recent research showing that tax cuts for high income households do little to stimulate economic activity, but tax cuts to lower income households are a different story -- they appear to be effective at stimulating both consumption and investment:

Tax Cuts for Job Creators, by Laura D’Andrea Tyson and Owen Zidar, Commentary, NY Times: The centerpiece of Mitt Romney’s tax plan is an across-the-board 20 percent cut in marginal tax rates. ... His plan rests on the assertion that lower taxes for high-income taxpayers will increase economic activity and employment... This assertion ... is not supported by the evidence.

If tax cuts for high-income earners generate substantial real economic activity and job creation, then we should expect to see two things in the data. First, employment growth should be stronger in the years after tax cuts for these earners. Second, parts of the country with a larger share of high-income earners should experience stronger employment growth after national tax cuts for these taxpayers, because the places where they live receive a larger share of the national tax cuts.
What do we actually see after combing through a half-century of economic data? Neither of these predictions is borne out. ...[presents evidence, along with supporting graphs]..., we have found no evidence that such cuts lead to substantially faster employment growth at the national, state or even ZIP-code level.
Tax cuts for everyone else are a much more effective path to job creation. Our research found a statistically significant and positive relationship between tax cuts for the bottom 95 percent and job growth at both the national and state levels. ... Lower-income taxpayers spend a higher share of their tax cuts. ... Investment also increases after tax cuts for the bottom 95 percent...
Over all, our research shows that tax cuts for the bottom 95 percent are much more effective than tax cuts for the top 5 percent at increasing job creation in the subsequent two years. Other analysts reach similar conclusions. ... [summarizes other evidence] ...
[I]f the priority is to create a substantial number of jobs over the next presidential term, evidence from the last half-century strongly suggests that tax cuts for the top 5 percent won’t work. Tax cuts for working families, tax cuts directly aimed at expanded hiring or increases in infrastructure investment would have much more bang for the buck and would cost much less in terms of forgone revenue and deficit reduction...
[Still under the weather, so I'll take the easy route and link to an old post of mine on tax cuts and (lack of) subsequent economic growth.]

Saturday, October 13, 2012

The Futility of Base-Broadening to Pay for Massive Tax Rate Cuts

A quick one before hightailing it to the airport:

New JCT Study Shows Futility of Base-Broadening to Pay for Massive Tax Rate Cuts, by David Dayens: As long as the only thing we’re going to talk about for the next few weeks in the election is taxes, I might as well provide the update. The Joint Committee on Taxation, the “CBO for taxes” as it were, the nonpartisan scorekeeper on tax policy, just released a report that should end all discussion about the Romney campaign’s plans for a deficit-neutral 20% across-the-board rate cut.

Repealing all itemized deductions in the U.S. tax code would pay for only a 4 percent cut in income tax rates,... an estimate ... that casts doubt on Republicans’ ability to finance lower income-tax rates with base broadening....

...[T]his is not a perfect indicator of the Romney plan. But the basic principle applies, and it’s so far from the reality of what Romney wants to achieve – a 20% rate cut without adding to the deficit, and without an increase on the middle class – that I think it serves as more evidence of the futility of the exercise. ...

Mark Zandi, the Moody’ economist always trotted out to bless this or that plan, admitted today that the Romney plan is mathematically impossible....

Thursday, October 11, 2012

What's Driving Projected Deficits?

The CBPP has updated its chart (full report) showing the source of the budget deficit, "and they continue to find that these deficits stem overwhelmingly from the economic downturn, the tax cuts first enacted under President Bush, and the wars in Iraq and Afghanistan." But going forward, it's the Bush-era tax cuts that make the largest contribution:

Tuesday, October 02, 2012

The Impossible Math behind the Romney-Ryan Tax Plan

Nice to see this report from Catherine Rampell:

The Math on the Romney-Ryan Tax Plan, NY Times: On Fox News Sunday, Paul Ryan said that he didn't have time to explain the math behind his tax proposal. Fortunately I have a few minutes to spare, so I thought I'd pitch in. ...
There's a reason why it would take too long -- infinitely long, you could say -- to go through the math that holds this policy proposal together: because math will never hold this particular policy proposal together.
You cannot lower tax rates as much as Mr. Romney and Mr. Ryan propose to do and keep all the existing tax expenditures for middle class Americans and still end up with the same total amount of tax revenue. ... The taxes for this group, ... "middle income," would have to go up. ...

Saturday, September 29, 2012

'For the Wealthy, a 28 Percent Solution'

Richard Thaler likes the number 28:

For the Wealthy, a 28 Percent Solution, by Richard Thaler, Commentary, NY Times: Everyone knows that America’s tax code is a mess... But there is a possible solution. ...
I can state my idea in just one sentence: All income above $1 million a year for a household will be taxed at 28 percent. There are no deductions, and all income, including capital gains and dividends, is included. President Reagan favored something like this...
While we’re at it, let’s make the corporate tax rate 28 percent, too, because our current rate is high by international standards. Oh, and the estate tax exemption? On amounts above $3.5 million for individuals, the rate would be, of course, 28 percent. ...
But what about the argument that taxing capital gains and dividends at the same rate as ordinary income will discourage investment? I don’t find this claim convincing. ...
Of course, I haven’t said what would happen to the households in the middle, or what the taxes would be on the first $1 million for the rich... One possibility is to scale back deductions smoothly, starting at household incomes above $250,000, and completely eliminate them for incomes above $1 million. ... A more radical plan, curtailing deductions for this large group, is probably politically infeasible...
And what if the resulting revenue falls a bit short...? I suggest that we get our gasoline tax more in line with those of the rest of the world. Gradually raising it to something like $1 a gallon would both bring in revenue and help reduce emissions. In the long term, we could set the rate as a percentage of the price at the pump. Maybe 28 percent?

Tuesday, September 18, 2012

'How to Cut the US Deficit'

I really do need to get to jury duty, but one more quick one. Curious to hear what you think about this idea:

How to cut the US deficit by fixing taxes, by Laura Tyson, Commentary, Financial Times: One of the few issues on which Barack Obama and Mitt Romney agree is the need for tax reform. ... But tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. ...
Proponents of greater progressivity often call for an increase in corporate taxes but this would lead to slower growth and fewer jobs. The US ... effective marginal corporate tax rate is one of the highest in the world. ... Of all taxes, corporate income taxes do the most harm to economic growth.
Both Mr Obama and Mr Romney advocate corporate tax reform that lowers the rate and broadens the base. The economic benefits could be significant. ...
A lower rate would stimulate investment, narrow the tax preference for debt over equity financing and weaken the incentives for international companies to move production to lower-tax locations. But lowering the corporate tax rate is expensive – each percentage point reduction would cut revenues by about $120bn over 10 years. ...
A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labor, which bears the burden in the form of fewer jobs and lower wages. ...
The US economy needs efficient and progressive tax reform and it needs more revenues for deficit reduction. Revenue increases have been a significant component of all major deficit-reduction packages enacted over the past 30 years. ...

Monday, September 17, 2012

Nontaxpayers are Overwhelmingly the Elderly and Students

When Romney talks about the people who don't pay taxes and tries to make you believe that 47 percent of us are moochers living off the system, it's important to recognize that the people who don't pay federal income taxes are mostly the elderly and students. And notice how narrow the category is -- it's only federal income taxes -- but there are lots of other types of taxes. When all things are considered, "nearly 100 percent of Americans pay taxes in some way, shape or form":

Who Pays Taxes?, Hamilton Project: A popular myth swirling around Washington, DC, and throughout the media these days is that many Americans do not pay taxes, and are therefore free-riding off of our society without contributing themselves. ...  The origin of this misconception is the observation that only about 54 percent of American households paid federal income taxes during recession-affected 2011.  But that statistic is misleading because it provides an incomplete picture of the overall tax burden on American families, and because it incorporates individuals who naturally shouldn’t be paying taxes because of their age or economic circumstances due to the Recession. A closer look reveals that nearly all Americans do, in fact, pay taxes. ...
In fact, many households with no tax liability are young or old, meaning that they are likely to be led by students who subsequently will pay taxes or retirees who paid taxes over their lifetimes. The figure below illustrates the relationship between age and the odds of paying payroll and income taxes. The graph makes clear that younger individuals—those in their late teens and early 20s—pay taxes at relatively low rates, but that is largely because they are in school and not working.  But as they get older and find jobs, the evidence suggests that they will pay taxes. Similarly, after age 60, when more and more Americans are retiring and leaving the labor force, the fraction paying taxes falls rapidly. These retirees have certainly contributed to America’s revenue stream over their lifetimes. To this point, as the U.S. population ages into the future and a greater proportion of Americans reach the retirement age, it is inevitable that a growing percentage of the overall population will pay no income or payroll taxes.


But during middle age, almost all workers face a tax burden. When looking at those in middle-age, 84 percent faced a net payroll and income tax bill in 2007. This general theme also holds true for low-income households... On net, even these families face a positive tax bill over time (Dowd and Horowitz 2008).
Furthermore, rising unemployment during the Great Recession has meant that the proportion of American families paying no federal taxes is unusually large today. Unemployed workers without incomes naturally don’t face tax liabilities. But as they find jobs and rejoin the labor force, they will once again contribute to the federal system. Indeed, some of the trends we see today are less illustrative of an unfair tax advantage for the poor; rather, the trends indicate the existence of a group of unfortunate families who have found themselves affected by hard times. And young people today have been particularly hard hit: many are unemployed or weathering the storm in graduate schools, meaning that they are, thus, not paying taxes. When looking more specifically at middle-aged workers with jobs, 96 percent paid federal income or payroll taxes.
Other Forms of Taxes Also Count
Finally, incorporating the additional—and significant—other forms of taxation into our calculation leads to the conclusion that nearly 100 percent of Americans pay taxes in some way, shape or form. All consumers bear the burden of state and local property, sales, and income taxes, as well as excise taxes on items like gasoline, alcohol, or cigarettes. These other taxes tend to be regressive, imposing more of a burden on low-income families than on high-income families—the state and local tax burden is over twice as large as the federal tax burden for the bottom fifth of households (Citizens for Tax Justice 2011). When you fill up your car with gasoline, you can’t avoid paying the tax. The pump does not differentiate between the richest Americans and the poorest families. ...

Friday, September 14, 2012

'Tax Cuts for Wealthy Linked to Income Inequality'

A report from the Congressional Research Service finds little support for the claim that tax cuts increase economic growth. They do, however, increase inequality:

Report: Tax Cuts for Wealthy Linked to Income Inequality, by Siobhan Hughes, WSJ: Just in time for the year-end debate over extending the Bush tax cuts for high earners: a new report concludes that tax cuts for the rich don’t seem to be associated with economic growth.
The report, from the Congressional Research Service, finds that tax cuts for high earners can be linked to a different outcome: income inequality.
“The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced,” according to the CRS report, circulated on Friday. ...
“As the top tax rates are reduced, the share of income accruing to the top of the income distribution increases; that is, income disparities increase,” government researchers said.
CRS analysts also said that “capital gains and dividends have become a larger share of total income over the past decade and a half while earnings have become a smaller share.” This phenomenon, the researchers said, suggests that labor may grab a larger share of the pie when the top individual and capital-gains tax rates are higher. ...
The implication, of course, is that allowing tax cuts to expire for high income individuals could decrease inequality without harming economic growth.

Tuesday, September 11, 2012

The Campaign Trail: No Help for the Unemployed

A new column:

 The Campaign Trail: No Help for the Unemployed

The unemployed have, it appears, been hiding from politicians.

Monday, September 03, 2012

Kenworthy: We’re All Dependent On Government, and It Has Long Been Thus

Lane Kenworthy has an important rebuttal to Nicholas Eberstadt's "A Nation of Takers":

We’re all dependent on government, and it has long been thus, by Lane Kenworthy: Nicholas Eberstadt’s “A Nation of Takers” argues that too many Americans have become dependent on government benefits. Over the past half-century, he notes, the share who receive a government cash transfer and/or public health insurance — Social Security, Medicare, Medicaid, unemployment compensation, and so on — has grown steadily. The United States, according to Eberstadt, is now “on the verge of a symbolic threshold: the point at which more than half of all American households receive, and accept, transfer benefits from the government.”
Eberstadt doesn’t contend that this has weakened our economy. His concern is moral. He believes reliance on government for help is undermining Americans’ “fierce and principled independence,” our “proud self-reliance.”
In Eberstadt’s way of seeing things, we are either givers or takers — taxpayers or benefit recipients. This is mistaken. Every American who doesn’t live entirely off the grid pays some taxes. Anyone who is an employee pays payroll taxes, and anyone who purchases things at a store pays sales taxes. Likewise, every American receives benefits from government. If you or your kids attended a public school, if you’ve driven on a road, if you’ve had a drink of tap water or taken a shower in your dwelling, if you’ve deducted mortgage interest payments or a business expense from your federal income taxes, if you haven’t been stricken by polio, if you’ve never had a band of thugs remove you from your home at gunpoint, if you’ve visited a park or lounged on a beach or hiked a mountain trail, if you’ve used the internet….
Eberstadt seems to think receipt of a government cash transfer or health insurance somehow renders people less self-reliant than does receipt of the myriad public goods, services, and tax breaks that government provides. But he doesn’t say why.
Once upon a time public safety was ensured by individuals and privately-organized militias. Then we shifted to government police forces and armies. At one point humans got water and disposed of waste individually. Then we created public water and sewage systems. Education of children was once a family responsibility. Then it shifted to schools. There’s a good reason for this: government provision offers economies of scale and scope, which enables the good or service to be provided to many people who either couldn’t or wouldn’t do it on their own. Did Americans’ character or spirit diminish when these changes occurred? Is there something qualitatively different about the more recent shift from individual to government responsibility in how we deal with retirement saving, health care, unemployment, and other risks? Here too Eberstadt is silent. ...
At the end of his essay, Eberstadt shifts his concern from the moral cost of government to the financial cost. Rising government expenditures on transfers and health care will require, he says, that we cut military spending, sell off public assets (land, buildings, art), or dump the burden onto future generations by running up government debt. None of these options is attractive. But there is, of course, another option: increases taxes. As we’ve transferred various functions from individuals to government over the course of our nation’s history, we’ve (usually) paid for it by asking Americans to contribute more. In many other rich nations governments provide more services and transfers than ours does, and they (usually) fund this by collecting more in taxes than we do. ...Eberstadt ignores this option...
Growth of government spending is not, for the most part, a consequence of rent-seeking special interests or narrow-minded bureaucrats looking to expand their turf. It’s a product of affluence. As people and nations get richer, they tend to be willing to allocate more money for insurance (protection against risks) and for fairness (extension of opportunity and security to those who are less fortunate). Rather than lamenting an imagined shift from self-reliance to dependence, or claiming that we can’t afford more security and fairness, the American right would do better to focus its energy and creativity on devising alternative ways of pursuing these goals. Government doesn’t always do things best; and even when it does, there almost always is room for improvement.
Nicholas Eberstadt’s essay is emblematic of the backward-looking orientation that has dominated America’s right for the past three decades. It’s an orientation that in my view has long since outlived its usefulness. The country will benefit when more smart minds on that side of the spectrum turn their gaze forward.

Stiglitz: Mitt Romney’s Fair Share

Mitt Romney, and others like him, are weakening "the bonds that hold a society together":

Mitt Romney’s Fair Share, by Joseph Stiglitz, Commentary, Project Syndicate: Mitt Romney’s income taxes have become a major issue... Is this just petty politics, or does it really matter? In fact, it does matter... Economies in which government provides ... public goods perform far better than those in which it does not. But public goods must be paid for, and ... those at the top of the income distribution who pay 15% ... clearly are not paying their fair share. ...
Democracies rely on a spirit of trust and cooperation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable.
More broadly, a market economy could not work if every contract had to be enforced through legal action. But trust and cooperation can survive only if there is a belief that the system is fair. ... Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice. ...
Romney may not be a tax evader; only a thorough investigation by the US Internal Revenue Service could reach that conclusion. But, given that the top US marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale. And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish.
But, even more important, tax avoidance on Romney’s scale undermines belief in the system’s fundamental fairness, and thus weakens the bonds that hold a society together.

On the unfairness, beyond taxes Stiglitz also notes that:

...much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie. Those at the top include a disproportionate number of monopolists who increase their income by ... anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households). It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased.

To the extent that this is true, those at the top are receiving income they didn't earn through their contributions to GDP. It is the result of rent-seeking -- they didn't "build that"  -- and clawing back those gains through taxes is not unfair, and it does not distort economic activity. Instead it reverses existing distortions that send income to the top of the income distribution instead of to the working class as a reward for their increased productivity.

Saturday, August 25, 2012

'Global Warming Has a Fairly Simple and Cheap Technical Solution'

Robert Frank:

Carbon Tax Silence, Overtaken by Events, by Robert Frank, Commentary, NY Times: ...Mitt Romney ... has been equivocal about whether rising temperatures are caused by human action. But he has been adamant that uncertainty about climate change rules out policy intervention. ...
Climatologists are the first to acknowledge that theirs is a highly uncertain science. The future might be better than they think. Then again, it might be much worse. Given that risk, policy makers must weigh the potential cost of action against the potential cost of inaction. And even a cursory look at the numbers makes a compelling case for action. ...
The good news is that we could insulate ourselves from catastrophic risk at relatively modest cost by enacting a steep carbon tax. ... A carbon tax would also serve two other goals. First, it would help balance future budgets. ... If new taxes are unavoidable, why not adopt ones that ... make the economy more efficient? By reducing harmful emissions, a carbon tax fits that description.
A second benefit would occur if a carbon tax were ... phased in gradually, only after the economy had returned to full employment. High unemployment persists in part because businesses, sitting on mountains of cash, aren’t investing it... News that a carbon tax was coming would create a stampede to develop energy-saving technologies. ...
Some people argue that a carbon tax would do little good unless it were also adopted by China and other big polluters. It’s a fair point. But access to the American market is a potent bargaining chip. The United States could ... tax imported goods in proportion to their carbon dioxide emissions if exporting countries failed to enact carbon taxes at home.
In short, global warming has a fairly simple and cheap technical solution. ...
Update: I didn't do a very good job of highlighting Robert Frank's point that we shouldn't "expect to hear much about climate change at the Republican and Democratic conventions," but "Many climate scientists ... are now pointing to evidence linking rising global temperatures to the extreme weather we’re seeing around the planet." Thus, "Extreme weather is already creating enormous human suffering, and "If the recent meteorological chaos drives home the threat of climate change and prompts action, it may ultimately be a blessing in disguise."

'Ending High-Income Tax Cuts Would Save Almost $1 Trillion'

If we had nearly a trillion in additional tax revenue over the next ten years, it would help the budget picture quite a bit:

CBO: Ending High-Income Tax Cuts Would Save Almost $1 Trillion, CBPP: The Congressional Budget Office’s (CBO) new report shows that allowing President Bush’s 2001 and 2003 income tax cuts on income over $250,000 to expire on schedule at the end of 2012 would save $823 billion in revenue and $127 billion on interest on the nation’s debt, compared to permanently extending all of the Bush tax cuts.  Overall, this would mean $950 billion in ten-year deficit reduction, a significant step in the direction of fiscal stability.

Thursday, August 23, 2012

'Savage Attack on Transfer Pricing Rules'

Transfer pricing is a "tax problem":

Top U.S. tax expert in savage attack on transfer pricing rules, Tax Justice Network: Lee Sheppard of Tax Analysts is one of the world's top experts in international tax... She has just issued one of the most devastating critiques ever made of the prevailing system for taxing multinational corporations, in a nine-page document entitled Is Transfer Pricing Worth Salvaging? Tax Analysts have kindly given us permission to republish it.

What is the tax problem?, Sheppard asks, in her (fairly U.S.-focused) article.

"In a nutshell, developments in law and planning have enabled U.S. multinationals to deprive the United States of tax revenue..."

And the main way they do this is through transfer pricing. ...

Sunday, August 19, 2012

Romney's 'Peculiar' Approach to Tax Fairness

Mitt Romney thinks the correct response to growing inequality is to cut tax rates for the wealthy:

Mitt Romney’s peculiar approach to tax fairness, by Lane Kenworthy: Mitt Romney in a recent Fortune magazine interview: “I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today.”
That’s odd. Sensible debates about tax fairness and tax policy focus on what rate each group should pay, not on what each group’s share of total tax payments (the “tax burden”) should be.
High-income people’s share of tax payments is determined by their average tax rate, their share of total pretax income, and the average tax rate among all taxpayers.

Policy makers have a lot of control over tax rates. They have some, but far less, influence on the share of pretax income that goes to each group. Hence they have limited ability to control the share of total tax payments paid by a particular group.
In the past several decades federal tax rates on the top 1% of Americans have been lowered... If all else stayed the same, that would have reduced the top 1%’s share of total tax payments. But this effect has been dwarfed by the large rise in the top 1%’s share of pretax income, which causes their share of total tax payments to increase. Here’s what the numbers looked like in 1979 and 2007, two years at comparable points in the business cycle (data are from the CBO).

The top 1%’s share of pretax income doubled, from 8.9% to 18.7%. Although the average tax rate they paid fell, their share of total tax payments increased, from 14.2% to 26.2%, because their income share jumped so much.
Consider what the Romney approach would have implied for tax rates paid by the top 1% during the 1979-2007 period. In 1979 their average federal tax rate was 35%; in 2007 it was 28%. Suppose policy makers had promised to keep the top 1%’s share of total tax payments at its 1979 level of 14%. Given the sharp rise in the top 1%’s income share, the average federal tax rate paid by the top 1% would have needed to fall to just 15%.
What does this mean going forward? In pledging to maintain the tax share of the richest Americans at its current level, Mitt Romney is in effect promising that if that group’s pretax income share continues to rise as it has in the past three decades, he will slash their tax rates.

He is also promising that if the share falls, he'll raise tax rates for upper income households. Anyone think he'd really do that?

Sunday, August 12, 2012

Less Social Insurance, More Tax Cuts for the Wealthy

Matthew O'Brien:

Mitt Romney Would Pay 0.82 Percent in Taxes Under Paul Ryan's Plan, by Matthew O'Brien: Under Paul Ryan's plan, Mitt Romney wouldn't pay any taxes for the next ten years -- or any of the years after that. Now, do I know that that's true. Yes, I'm certain.
Well, maybe not quite nothing. In 2010 -- the only year we have seen a full return from him -- Romney would have paid an effective tax rate of around 0.82 percent under the Ryan plan, rather than the 13.9 percent he actually did. How would someone with more than $21 million in taxable income pay so little? Well, the vast majority of Romney's income came from capital gains, interest, and dividends. And Ryan wants to eliminate all taxes on capital gains, interest and dividends. ...
It might seem impossible to fund the government when the super-rich pay no taxes. That is accurate. Ryan would actually raise taxes on the bottom 30 percent of earners, according to the nonpartisan Tax Policy Center, but that hardly fills the revenue hole he would create. The solution? All but eliminate all government outside of Social Security and defense...

On the "eliminate all government outside of Social Security and defense," Social Security isn't safe either. Remember that "Ryan sponsored a Social Security privatization scheme that went so far the George W. Bush administration rejected it." In any case, Social Security is one of the programs Romney and Ryan would need to cut in order to offset the low tax rates they propose for those at the top.