Category Archive for: Taxes [Return to Main]

Tuesday, April 17, 2012

"Our Tax System is on the Wrong Track"

Brad DeLong has a warning:

I am Cassandra.

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

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

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

This is not good for America.

This is not good for America for two reasons.

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

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

This finishes my warning.

Our tax system is on the wrong track.

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

We need to do this now.

Thank you.

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

Bruce Bartlett:

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

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

Monday, April 16, 2012

"The Migration Myth"

Greg Mankiw argues that:

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

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

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

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

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

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

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

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

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

As our report stated:

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

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

Tuesday, April 10, 2012

Where Do Our State Tax Dollars Go?

Via the CBPP:

Bulk of State Spending Goes To Education and Health Care

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

Friday, April 06, 2012

"Nontaxpayers are Overwhelmingly Eldery"

Matthew Yglesias:

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

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

Saturday, March 31, 2012

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

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

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

Saturday, March 17, 2012

"Wishful Thinking About Tax Rates"

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

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

Thursday, March 15, 2012

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

Peter Diamond:

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

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

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

Tuesday, March 13, 2012

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

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

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

"The Myth of the Non-Paying 47 Percent"

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

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

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

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

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

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

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

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

Tuesday, March 06, 2012

The Real Moral Problem

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Monday, March 05, 2012

The Benefits of a Gas Tax

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

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

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

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

Pain at the pump

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

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

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

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

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

See also Ryan Avent who comments on related research.

Friday, March 02, 2012

"Democrats and the Bush Tax Cuts"

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

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

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

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

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

Paul Krugman: Four Fiscal Phonies

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

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

Monday, February 27, 2012

"How Much Do Taxes Matter?"

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

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

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

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

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

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

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

Wednesday, February 22, 2012

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

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

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

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


Thursday, February 09, 2012

Eichengreen: Europe’s Tobin Tax Distraction

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

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

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

Tuesday, February 07, 2012

Politicizing the Budget Process

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

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

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

Thursday, February 02, 2012

Will Tax Increases to Close the Deficit Harm Economic Growth?

Tax increases will be needed to close the budget gap:

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

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

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

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

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

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

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

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

Saturday, January 28, 2012

Is Romney Double Taxed?

Rajiv Sethi:

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

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

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

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

Sunday, January 22, 2012

Who Should Pay for Deficit Reduction?

Richard Green makes an argument for progressive taxes:

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

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

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

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

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

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

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

Friday, January 20, 2012

Paul Krugman: Taxes at the Top

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

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

Wednesday, January 18, 2012

Should We Feel Sorry for the Wealthy?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Saturday, January 07, 2012

"Romney’s Tax Proposal"

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

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

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

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


Monday, January 02, 2012

Profits and Resource Flows

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

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

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

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

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

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

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

Saturday, December 31, 2011

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

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

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

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

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

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

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

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

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

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

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

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

Wednesday, December 28, 2011

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

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

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

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

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

Thursday, December 22, 2011

Failure to Extend the Payroll Tax Cut Will Slow Recovery

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

Failure to extend tax cut will slow recovery

Tuesday, December 20, 2011

The Great Economic Divide Makes Everyone Poorer

I have a new column:

The Great Economic Divide Makes Everyone Poorer

A divided society is a poorer society.

Johnson: Austerity and the Modern Banker

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

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

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

Sunday, December 18, 2011

Payroll Tax Cut in "Serious Doubt"

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

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

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

Friday, December 16, 2011

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


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

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

Friday, December 09, 2011

Paul Krugman: All the G.O.P.’s Gekkos

Myths about "job creators":

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

Wednesday, December 07, 2011

"Who Would Pay a 73 Percent Income Tax?"

Richard Green:

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

Friday, December 02, 2011

"The Facts about Small Businesses and the Millionaire Surcharge"

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

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

Wednesday, November 30, 2011

DeLong: The 70% Solution

Busy morning -- quick one between meetings:

The 70% Solution, by J. Bradford DeLong, Commentary, Project Syndicate: Via a circuitous Internet chain – Paul Krugman of Princeton University quoting Mark Thoma of the University of Oregon reading the Journal of Economic Perspectives – I got a copy of an article written by Emmanuel Saez, whose office is 50 feet from mine, on the same corridor, and the Nobel laureate economist Peter Diamond. Saez and Diamond argue that the right marginal tax rate for North Atlantic societies to impose on their richest citizens is 70%.

It is an arresting assertion, given the tax-cut mania that has prevailed in these societies for the past 30 years, but Diamond and Saez’s logic is clear. The superrich command and control so many resources that they are effectively satiated: increasing or decreasing how much wealth they have has no effect on their happiness. So, no matter how large a weight we place on their happiness relative to the happiness of others – whether we regard them as praiseworthy captains of industry who merit their high positions, or as parasitic thieves – we simply cannot do anything to affect it by raising or lowering their tax rates.

The unavoidable implication of this argument is that when we calculate what the tax rate for the superrich will be, we should not consider the effect of changing their tax rate on their happiness, for we know that it is zero. Rather, the key question must be the effect of changing their tax rate on the well-being of the rest of us.

From this simple chain of logic follows the conclusion that we have a moral obligation to tax our superrich at the peak of the Laffer Curve... [continue reading]...

Tuesday, November 29, 2011

Republicans Don't Mind a Payroll Tax Increase

John Kyl doesn't mind some types of tax increases:

Saturday’s Jon Kyl vs. Sunday’s Jon Kyl, by Steve Benen: On Saturday, Senate Minority Whip Jon Kyl (R-Ariz.), along with his five other GOP colleagues from the super-committee, wrote a Washington Post op-ed on the debt-reduction process. Kyl’s point wasn’t subtle: he and other Republicans just can’t accept tax increases, at least for the foreseeable future.

Kyl called tax increases “the wrong medicine for our ailing economy,” and said the mere possibility of tax increases has “put a wet blanket over job creation and economic recovery.”

That was Saturday. Just 24 hours later, Kyl told a national television audience he’s comfortable with a payroll tax increase on all American workers on 2012. ......

Senate Democrats are moving forward with its plan to extend the payroll tax cut, with a vote perhaps coming as early as this week. Republicans will filibuster the proposal, though Sen. Pat Toomey (R-Pa.) told ABC yesterday that “probably some package” that includes a payroll extension “might very well pass.”

The reason for the objection, as Steve Benen points out, is that the payroll tax cut would be paid for by increasing taxes on the very wealthy. Can't have that. But unlike their reaction to other types of proposed tax increases, Republicans are not insisting that spending be cut to protect workers from a tax increase. Wonder why?

Monday, November 28, 2011

Paul Krugman: Things to Tax

Increased in revenue from taxes on very high incomes and taxes on financial transactions should be part of the long-term deficit reduction plan:

Things to Tax, by Paul Krugman, Commentary, NY Times: The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?
And I don’t just mean a return to Clinton-era tax rates. ... The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?
Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest...: taxes on very high incomes and taxes on financial transactions.
About those high incomes: In my last column I suggested that the very rich ... should pay more in taxes. I got many responses from readers ... that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.
Folks, you’re living in the past. ... The IRS reports that in 2007 ... the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and ... taxes ... would raise a significant amount of revenue...
For example,... before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. ... I’ve extrapolated ... using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit. ...
So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.
And then there’s the idea of taxing financial transactions... Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.
But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything,... to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing. ...
Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

Saturday, November 26, 2011

"A Share of the Burden"

A little less than two weeks ago, I said:

This trick is used again and again to oppose raising taxes on one interest group or another, but the fact that raising taxes on a particular group won't fully solve the debt problem does not imply that the change in taxes for that group should be zero."

Here's Paul Krugman making the same point -- more forcefully with numbers -- and he shows that raising taxes on the wealthy makes a contribution to deficit reduction that is far from trivial. But even if the numbers were smaller, it still wouldn't imply that the change in these taxes should be zero. Even then, the wealthy "should be bearing a share of the burden" whatever that share might be:

Where The Money Is, by Paul Krugman: I’ve been getting the predictable hysterical reactions to today’s column. And it’s true — I’m a Sharia Jewish atheist Marxist who hates America! Bwahahaha!
But one thing actually worth reacting to is the assertion I keep getting that this is all a distraction, that even if we seized all the money of the top 0.1% it would make no difference to the fiscal outlook. Here’s a piece of advice nobody will take: before you make assertions about numbers, look at the numbers.
So, what we learn from IRS data is that in 2007, before the Great Recession depressed everyone’s income, the top 0.1% had around $1 trillion in taxable income. Now, even confiscating that whole sum wouldn’t eliminate our current deficit, especially since the top 0.1% already paid something like a third of that total in taxes. But then, no single action would close our current budget gap — not even the complete elimination of Social Security or Medicare.
What you want to ask is how much higher taxes on the super-elite might contribute to deficit reduction, as compared with the kinds of things politicians are actually proposing.
So let’s suppose that it was possible to collect an additional 10 percent of that super-elite’s income in taxes, to the tune of $100 billion a year. How would this stack up against the kinds of things on the table right now?
Well, consider the idea of raising the Medicare eligibility age — a move that would create vast hardship. According to the Congressional Budget Office (big pdf), when fully phased in this would save … $42 billion a year.
I could multiply comparisons, but the point is that higher taxes on the very rich could make a significant contribution to deficit reduction. They couldn’t eliminate the deficit on their own, but what could? There’s real money up there, and those making it should be bearing a share of the burden.

Friday, November 25, 2011

Paul Krugman: We Are the 99.9%

The wealthy can pay more in taxes without endangering the economy's ability to create jobs:

We Are the 99.9%, by Paul Krugman, Commentary, NY Times: “We are the 99 percent” is a great slogan. It correctly defines the issue as being the middle class versus the elite (as opposed to the middle class versus the poor). And it also gets past the common but wrong establishment notion that rising inequality is mainly about the well educated doing better than the less educated; the big winners in this new Gilded Age have been a handful of very wealthy people, not college graduates in general.
If anything, however, the 99 percent slogan aims too low. A large fraction of the top 1 percent’s gains have actually gone to an even smaller group, the top 0.1 percent — the richest one-thousandth of the population.
And while Democrats, by and large, want that super-elite to make at least some contribution to long-term deficit reduction, Republicans want to cut the super-elite’s taxes even as they slash Social Security, Medicare and Medicaid in the name of fiscal discipline. ...
But ... why do Republicans advocate further tax cuts for the very rich even as they warn about deficits and demand drastic cuts in social insurance programs?
Well, aside from shouts of “class warfare!” whenever such questions are raised, the usual answer is that the super-elite are “job creators”... So what you need to know is that this is bad economics. ...
For who are the 0.1 percent? Very few of them are Steve Jobs-type innovators; most of them are corporate bigwigs and financial wheeler-dealers. One recent analysis found that 43 percent of the super-elite are executives at nonfinancial companies, 18 percent are in finance and another 12 percent are lawyers or in real estate. And these are not, to put it mildly, professions in which there is a clear relationship between someone’s income and his economic contribution.
Executive pay ... is famously set by boards of directors appointed by the very people whose pay they determine; poorly performing C.E.O.’s still get lavish paychecks, and even failed and fired executives often receive millions as they go out the door.
Meanwhile, the economic crisis showed that much of the apparent value created by modern finance was a mirage..., seemingly high returns before the crisis simply reflected increased risk-taking — risk that was mostly borne not by the wheeler-dealers themselves but either by naïve investors or by taxpayers, who ended up holding the bag when it all went wrong. ...
So should the 99.9 percent hate the 0.1 percent? No, not at all. But they should ignore all the propaganda about “job creators” and demand that the super-elite pay substantially more in taxes.

Sunday, November 20, 2011

The Surprising Number of "Near Poor"

Given the shape of the job market, and the hollowing out of the middle class, is there any reason to think this will not get worse in the near future?:

Older, Suburban and Struggling, ‘Near Poor’ Startle the Census, NY Times: ...When the Census Bureau this month released a new measure of poverty, meant to better count disposable income, it began altering the portrait of national need. Perhaps the most startling differences between the old measure and the new involves data ... showing 51 million people with incomes less than 50 percent above the poverty line. That number of Americans is 76 percent higher than the official account... All told, that places 100 million people — one in three Americans — either in poverty or in the fretful zone just above it.
After a lost decade of flat wages and the worst downturn since the Great Depression, the findings can be thought of as putting numbers to the bleak national mood — quantifying the expressions of unease erupting in protests and political swings. They convey levels of economic stress sharply felt but until now hard to measure. ... The size of the near-poor population took even the bureau’s number crunchers by surprise. ...
Outside the bureau, skeptics of the new measure warned that the phrase “near poor” ... may suggest more hardship than most families in this income level experience. A family of four can fall into this range, adjusted for regional living costs, with an income of up to $25,500 in rural North Dakota or $51,000 in Silicon Valley.
But most economists called the new measure better than the old, and many said the findings, while disturbing, comported with what was previously known about stagnant wages.
“It’s very consistent with everything we’ve been hearing in the last few years about families’ struggle, earnings not keeping up for the bottom half,” said Sheila Zedlewski, a researcher at the Urban Institute...
The results scrambled the picture of poverty in many surprising ways. The measure shows less severe destitution, but a bit more overall poverty; fewer poor children, but more poor people over 65. ...
Perhaps the most surprising finding is that 28 percent work full-time, year round. “These estimates defy the stereotypes of low-income families,” Ms. Renwick said. ...
One group likely to gain attention is older Americans. By the official count, only 22 percent of the elderly are either poor or near poor. By the alternate count, the figure rises to 34 percent.
That is still less than the share among children, 39 percent, but it erases about half the gap between the economic fortunes of the young and old recorded in the official count. The likeliest explanation is high medical costs.
Another surprising finding is that only a quarter of the near poor are insured...

Medical costs are clearly a large part of the problem. But it's not the only difficulty middle and low income households face. Here's how Jeff Sachs describes the more general problem:

...The key to understanding the U.S. economy is to understand that we have two economies, not one. The economy of rich Americans is booming. Salaries are high. Profits are soaring. Luxury brands and upscale restaurants are packed. There is no recession.
The economy of the middle-class and poor is in crisis. Poverty and near-poverty are spreading. Unemployment is rampant. Household incomes have been falling sharply. Millions of discouraged workers have dropped out of the labor force entirely. The poor work at minimum wages to provide services for the rich.
There are two forces that account for this deep divide. The first is globalization. Manufacturing employment peaked in 1979, with jobs and factories increasingly shifting overseas. For a while, the housing bubble provided construction jobs that partly offset the loss of manufacturing jobs. Now the housing bubble has burst. Good jobs for young people with a high-school diploma or less have disappeared.
Unless you have a four-year college degree, you're struggling. Yet only one-third of young men ages 25-29 have a bachelor's degree. Most of the rest are holding on for dear life. Among young Hispanic men, only 11 percent have a bachelor's degree; among young African-American men, the figure is 16 percent. ... Yet with more cuts in state support for tuition and in federal Pell Grants, the situation is rapidly getting worse.
The second force is politics. When Obama has one of his many $35,800-a-plate fundraising dinners, he doesn't meet young people struggling to cover tuition payments. Obama has been separated from reality by the White House's campaign to collect between $750 million and $1 billion for Obama's re-election bid. The big money on the Republican side is even worse. Big Oil controls the party.
The upshot is that both parties champion the 1 percent, the Republicans gleefully and the Democrats sheepishly. Both parties have worked together to gut the tax code. Companies use accounting tricks approved by the IRS to shift their profits to foreign tax havens. Hedge-fund managers and recipients of long-term capital gains pay only 15 percent top tax rates. As a result of these irresponsible tax policies and rampant tax evasion, tax collections as a share of national income have sunk to 15 percent, the lowest in modern American history.
Americans are told daily that these low tax rates on the rich are the natural order of things, that the American economy would collapse if the top 1 percent were to pay more to help fund education, job training, infrastructure, and new technologies. This claim is absurd. ...

Anyone who thinks struggling households aren't trying hard enough, i.e. that social services cause people to be lazy so eliminating them will motivate these households to work harder, is nuts. You can find exceptions at all income levels, but for the most part these households are doing all they can to survive. It's a self-serving argument by those who are afraid that they might be asked to help the people who, when jobs are available, work so hard day in and day out for wages that do not even keep up with productivity so that they can accumulate their fortunes. Unfortunately, this group has the power to bring self-serving arguments to fruition and so long as the rich and powerful are doing okay, we shouldn't expect much to change.

Monday, November 14, 2011

"The Latest from the Not-So-Super-Committee"

Stan Collender:

Not-So-Super Committee Seriously Considers Becoming A Circular Firing Squad, by Stan Collender: A quick note... This story by Robert Pear in today's New York Times about the latest from the not-so-super committee tells you everything you need to know about the status of the negotiations. According to Pear, one of the main plans for reducing the deficit the committee apparently is considering is to set up a process by which tax increases would be considered by the House Ways and Means and Senate Finance Committees at some point next year.
Does anyone else see how ridiculous this is? 
The anything-but-super committee was set up because the regular committees and legislative process could not agree on what to do about the deficit. But rather than make those decisions, the super committee may decide that the best way to deal with this situation is to throw it back to the two tax-writing committees that, because they were unable to come up with a plan in the first place, gave the job to the super committee.
And the most inane, stupid, absurd, remarkable thing about this is that the definitely-not-super committee will claim that this make-someone-else-do-the-hard-work-later process complies with the legal requirement to reduce the deficit by $1.2 trillion.

The fact that they are willing to make cuts in social insurance and other programs but cannot agree on revenue increases says a lot about the relative power and influence of various groups in Washington.

Sunday, November 13, 2011

Does the Middle Class Have to Take the Hit?

Dean Baker says there's no reason for the middle class to take on most of the burden for deficit reduction:

Dealing With the Budget Deficit: Does the Middle Class Have to Take the Hit?, by Dean Baker: Adam Davidson has a piece in the NYT magazine about how the middle class will have to take a hit to deal with the country’s deficit. It’s a bit quick to reach this conclusion.  
First, the piece too quickly dismisses the possibility of getting substantial additional tax revenue from the wealthy. It presents the income share for those earning more than $1 million as $700 billion, saying that if we increase the tax rate on this group by 10 percentage points (from roughly 30 percent to 40 percent), then this yields just $70 billion a year.
However, if we lower our bar slightly and look to the top 1 percent of households, with adjusted gross incomes of more than $400,000..., then we get ... $140 billion a year. ...
There are also other ways to address much of the shortfall. In the case of defense, the baseline projects that military spending will average 4 percent of GDP over the next decade. We had been spending 3 percent of GDP on defense in 2000... If military spending averaged 3 percent of GDP over the next decade, that would save us $2 trillion before interest savings..., it should not be absurd to imagine that we could get by with the same sort of military budget (relative to our economy) that we actually had a decade ago.
Another way in which we could have substantial savings that would be relatively painless is to have the Fed simply keep the bonds that it has purchased as part of its various quantitative easing operations. It currently holds around $3 trillion in bonds. The interest on these bonds is paid to the Fed and then refunded to the Treasury. Last year it refunded close to $80 billion in interest. The projections show that ... if it continued to hold the assets, over the course of a decade it could save the government around $800 billion in interest payments. The Fed might have to take other measures to contain inflation...
Finally, the big story in any serious discussion of the long-term budget is health care. We pay twice as much per person as people do in other wealthy countries. ... If we paid the same amount per person for our health care as people in other wealthy countries, we would be looking at long-term budget surpluses rather than deficits. ...
We can’t keep on this course on either the public or private side. The real question is whether we look to save money by having people get fewer services or we look to save money by paying providers less. The former could mean, for example,... seniors ... will just have to do without some amount of care.
The other route involves restructuring the health care system. This is incredibly difficult politically... Nonetheless, in the long-run serious reform is the only option, since the alternative is that large numbers of people (including very middle class people) will not be able to get decent care. ...
In short, there is little reason to be talking about imposing increased burdens on the middle class any time soon. ...

More from Edge of the American West:

It’s Sunday, Let’s Pick On The New York Times, by silbey: It’s Sunday, let’s pick on the New York Times. ... I thought I would extract one particular article and be mean to it. The article of choice is Adam Davidson’s ... “It’s Not Just About the Millionaires,” which is of the school of Very Serious People. The VSP used to be exclusive to foreign policy, but have branched out, and usually consist of someone (Friedman is a charter member) explaining that the current path picked by the policy experts is the best one despite all the naysayers, as those naysayers Don’t Really Understand How The World Works. Davidson Very Seriously explains why the government’s debt problem can’t be solved by taxing just corporations or rich people, but have to come by taxing the middle class. It finishes with the classic trope of a VSPerson that we have to give up our “fantasy” of raising taxes on businesses and rich people.

Davidson does some math to show that taxing the rich heavily won’t bring in that much money to help cure the debt. I’ll outsource that treatment of the rich to ...[Dean Baker]...

His treatment of businesses is equally shaded. ... “Any serious analyst who isn’t paid by one of the tax-benefiting industries would suggest eliminating most industry-specific loopholes.” Ah, good, one thinks, he’s now going to deal with how much revenue could be generated by improving the corporate tax code... Right? ... “But the problem is that cutting them will not even come close to reviving our economy.” But. Huh? I thought we were talking about debt and revenue issues? Where did “reviving the economy” come from?

And he’s off to the races. No discussion of debt, no discussion of what closing the loopholes would actually raise from corporations, no discussion of how it would affect the revenue picture. Instead, he wanders into cutting Social Security and Medicare,... finally reaching the conclusion that taxing businesses “isn’t the answer.”

Combine that with the sleight-of-hand in treating the rich and you have an article that concludes that raising taxes on the middle class is the only way to go. Davidson’s article ... enters service as a reference piece, to be used as evidence. “Look,” Very Serious People will say “Even a liberal like NPR’s Adam Davidson demonstrates that we can’t tax corporations or the rich!” Never mind Occupy Wall Street; never mind the 99%. They don’t understand.

Only Very Serious People understand.

This trick is used again and again to oppose raising taxes on one interest group or another, but the fact that raising taxes on a particular group won't fully solve the debt problem does not imply that the change in taxes for that group should be zero.

Sunday, November 06, 2011

"The Problem With Flat-Tax Fever"

There's nothing particularly new here, but it's still worth emphasizing that a flat tax doesn't have the magical properties that supporters claim, and that its distributional consequences are tilted heavily in favor of the wealthy:

The Problem With Flat-Tax Fever, by Robert Frank, Commentary, NY Times: Close watchers of presidential politics weren’t surprised to see many of this year’s Republican hopefuls proposing ... a flat tax. Such plans reliably surface every four years...
Yet none will be adopted, for at least two reasons. One is that a flat tax would do nothing to make filing tax returns any simpler. But, more important, it would greatly exacerbate longstanding growth in income inequality. ...
The contention that a flat tax would be simpler because it involves only a single rate is flatly wrong. The complexity of the current system has nothing to do with its multiple income brackets.
The hard step in figuring your tax bill is to compute your adjusted gross income — roughly, the amount you earn, less the myriad exemptions, deductions and various other offsets described in the 3.4-million-word code of the Internal Revenue Service. You’d also have to calculate your adjusted gross income under a flat tax. But once you’ve completed that step under either system, you consult the tax tables to see how much you owe..., so this step is no harder than it would be under the tables for a flat tax.
The much more serious concern is that a flat tax would reinforce the trends toward greater income inequality that have been seen over the last several decades. ...
According to an analysis by the nonpartisan Tax Policy Center, Mr. Cain’s proposal would increase the annual tax bill of a typical family of four earning $50,000 a year by more than $4,000, but would reduce the taxes owed by a similar family earning between $500,000 and $1 million by almost $60,000. The center also estimated that families in the top one-tenth of 1 percent of households would enjoy an average annual tax reduction of nearly $1.4 million... Similar distributional effects are common under all flat-tax plans, not just Mr. Cain’s. ...
For the time being, then, our best bet is to do all we can to reduce the gratuitous complexity of our progressive income tax.

Thursday, November 03, 2011

"Were the Bush Tax Cuts Worse for Progressivity or for Revenues?"

Lane Kenworthy:

Were the Bush tax cuts worse for progressivity or for revenues?, by Lane Kenworthy: The Bush tax cuts of the early 2000s reduced the progressivity of federal taxes, but not that much. The chart below shows the effective federal tax rate for each quintile of households and for the top 1% in the business-cycle peak years of 2000 and 2007. The tax rate dropped by a similar amount for each quintile, and only slightly more for the top 1%. (For more discussion and analysis, see pages 24-31 of this CBO report .)

What should we make of this? On the one hand, it’s good that there was little reduction in progressivity. The progressivity of federal taxes helps to offset the regressivity of state and local sales taxes.
On the other hand, there was a compelling case in the early 2000s (and still today) for increasing the progressivity of federal taxes. One of the chief rationales for progressive taxation is that those with high income can afford to contribute a larger share of that income. In the 1980s and 1990s, the top 1% of Americans enjoyed whopping income gains. ... For households in the bottom 20%, average income barely budged... Given these developments, it would have been sensible to increase the effective tax rate a bit for those at the top and perhaps reduce it a little for those at the bottom. President Bush and the Congress instead chose to reduce rates for everyone.
The chief harm inflicted by the Bush tax cuts wasn’t to progressivity. It was to government revenues. The average effective federal tax rate for all households dropped from 23% in 2000 to 20.4% in 2007. Judging from the CBO’s data on income, that two-and-a-half percentage point decline subtracted roughly $300 billion from federal tax revenues in 2007. Proponents of the tax cuts hoped the economy would grow faster, mitigating the revenue loss caused by the lower rates, but that didn’t happen.
$300 billion a year wouldn’t address all of our revenue needs, but it could do a lot of good.

Tuesday, November 01, 2011

"How My Taxes are Raised Matters"

We are not going to solve our long-term deficit problem without more revenue. Is it time for the mortgage interest deduction to go?:

How my taxes are raised matters, by Richard Green: .To get to fiscal balance, I need to pay higher taxes. ... The federal government can get at me one of two ways: it can scale back or eliminate my deductions, or it can raise my rates. If my mortgage interest deduction goes away, for example, my federal tax liability would increase by around 10 percent; alternatively, the federal government could just charge me a ten percent surtax on income.
If my income is taxed, the impact on my desire to work is ambiguous. On the one hand, because the cost of leisure would fall, I would have an incentive to work less. On the other hand, if I want to restore my previous after tax standard of living, I would have an incentive to work more.
If you take away my mortgage interest deduction, however, the impact is not ambiguous--I will have an incentive to work more. Leisure is no less expensive (there is no substitution effect), but my desire to restore my previous income remains as before.

Who would this affect the most?:


The white bar in the graph shows the distribution of the home mortgage interest deduction. The deduction is concentrated in the upper end of the income distribution, e.g. 69% goes to households making at or over over $100,000 (in 2004).

From Suzanne Mettler, the source of the graph and statistics:

In an age of rising economic inequality, our nation has permitted the continuation of these submerged policies that aid primarily the most advantaged Americans and sharply reduce federal revenues, making programs that could assist low to moderate income people far more difficult to afford. The design of these policies obscures them from view, and neither policymakers nor the media do much to reveal them to the public. They are also shrouded by the fact that they are not part of the regular budget process: they face fewer hurdles in being enacted in Congress than regular spending programs, and once in place, they operate essentially on “autopilot.” Even if they grow into large entitlements, like the ones mentioned above, policymakers are never obligated to revisit the question of their value or costs.
As the supercommittee looks for how to proceed, reducing tax breaks—at the very least, curtailing their bias toward the wealthy—could go far to improve the nation’s balance sheet and to reduce inequality.

When I was a renter, I didn't think this deduction was fair. Now I am sort of attached to it, but if taxes need to go up -- and they do -- this is one way to do it.

Sunday, October 30, 2011

"It Doesn’t Get Any More Immoral Than This"

Yesterday, Ross Douthat argued that "higher taxes on America’s richest 1 percent" won't solve the problems with government. Thomas Friedman explains why that's wrong, and why a more equitable distribution of income is essential to stripping the ability of those at the top to control government:

Did You Hear the One About the Bankers?, by Thomas Friedman, Commentary, NY Times: Citigroup is lucky that Muammar el-Qaddafi was killed when he was. The Libyan leader’s death diverted attention from a lethal article involving Citigroup... The news was that Citigroup had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.
It doesn’t get any more immoral than this. ...
This gets to the core of why all the anti-Wall Street groups around the globe are resonating. I was in Tahrir Square in Cairo for the fall of Hosni Mubarak... When I talked to Egyptians, it was clear that what animated their protest, first and foremost, was ... a quest for “justice.” Many Egyptians were convinced that they lived in a deeply unjust society where the game had been rigged by the Mubarak family and its crony capitalists. Egypt shows what happens when a country adopts free-market capitalism without developing real rule of law and institutions.
But, then, what happened to us? Our financial industry has grown so large and rich it has corrupted our real institutions through political donations. As Senator Richard Durbin, an Illinois Democrat, bluntly said in a 2009 radio interview, despite having caused this crisis, these same financial firms “are still the most powerful lobby on Capitol Hill. And they, frankly, own the place.”
Our Congress today is a forum for legalized bribery. One consumer group using information from calculates that the financial services industry, including real estate, spent $2.3 billion on federal campaign contributions from 1990 to 2010, which was more than the health care, energy, defense, agriculture and transportation industries combined. Why are there 61 members on the House Committee on Financial Services? So many congressmen want to be in a position to sell votes to Wall Street. ...
U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they’re taking money from. The public needs to know.
Capitalism and free markets are the best engines for generating growth and relieving poverty — provided they are balanced with meaningful transparency, regulation and oversight. We lost that balance in the last decade. If we don’t get it back..., the cry for justice could turn ugly. ...

To what extent is fear of inflation, fear of deficits, and other fears holding up more government help for struggling, unemployed households the result of the powerful interests who control Congress standing in the way? My answer, as ought to be clear from recent columns (here, here, and here), is that the imbalance in political power that comes with such a large degree of inequality is a large factor in the government's tepid response to the unemployment crisis.

Thursday, October 27, 2011

Charlatans and Cranks

Suzy Khimm poses a question to the Perry campaign:

1) How will the new tax breaks for the wealthy be paid for?
Perry campaign: The purpose of this bold tax proposal is to give the economy the jumpstart it needs to get people back to work. ... Gov. Perry is confident that the economic growth that results from this plan will generate the necessary revenue to balance the budget by 2020.

So the tax cuts will pay for themselves? Greg Mankiw:

I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't.

There's no mystery here. The tax cuts for the wealthy will be paid for by cutting benefits for the working class, the poor, and others who are already having a tough time making ends meet.

Saturday, October 22, 2011

Raise Taxes on the Wealthy: It’s the Fair Thing to Do

When this column appeared appeared on, it got hundreds of comments (it was originally published here). I didn't read them, the 73% thumbs down (plus the email I received) was enough to tell me what the comments probably said, and a few people who did read them said I shouldn't bother -- for the most part they hated it.

Here's the unedited version:

Raise Taxes on the Wealthy: It’s the Fair Thing to Do: Many economists worry that making societies more equal through income redistribution lowers economic growth. This “big tradeoff” between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue. At some point the tradeoff of more equality for less output – which worsens as we push toward more and more equality – becomes intolerable.

The Bush tax cuts were justified, in part, by the claim that equity had overshadowed efficiency in tax policy decisions. Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially. Accordingly, the lower end of the income distribution would fare much better after income trickled down than it would under redistributive policy.

The economy did grow after the tax cuts, but the rate of growth was unremarkable, especially for jobs, and there’s little evidence that the Bush tax cuts caused large increases in output growth as promised. In fact, there’s little evidence that they had any effect at all.

And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before.

This is not the only way in which the distribution of income has become disconnected from productivity. While some argue that those at the top of the income distribution earn every cent they receive, and hence deserve to keep all of it, there is plenty of evidence that the income of financial executives, CEOs of major corporations, etc. exceeds the value of what they contribute to society by a considerable margin. That holds true even without the financial crisis, but how, exactly, can we justify the extraordinarily high income of this group when the result of their actions was to ruin the economy?

If those at the top of the income distribution receive far more than the value of what they create, and those at lower income levels receive less, then one way to correct this, at least in part, is to increase taxes at the upper end of the income distribution and use the proceeds to protect important social programs that benefit working class households, programs that are currently threatened by budget deficits. This would help to correct the mal-distribution of income that is preventing workers from realizing their share of the gains from economic growth.

And there is another reason why taxes on the wealthy should go up. Someone has to pay taxes, and the question is how to distribute the burden among taxpayers. Many believe, and I am one of them, that progressive taxes are the most equitable way to do this. In particular, the last dollar of taxes paid should cause the same amount of sacrifice for rich and poor alike.

There has been an attempt to make it appear that taxes are mostly paid by the wealthy, e.g. the deceptive claim that half the people pay no taxes is part of this. But taxes are less progressive than before the Bush tax cuts, and when all taxes at all levels of government are taken into account “the U.S. tax system just barely qualifies as progressive.” Making taxes more progressive would, in my view, make them more equitable.

We face a choice between cutting key benefits for the middle class and creating an ever more unequal society, or raising taxes on the wealthy to preserve the social programs that lower income households rely upon. We hear that raising taxes is unfair, and that tax increases will harm economic growth. But there’s nothing unfair about correcting the mal-distribution of income that we’ve seen in recent decades, or about making sure the burden from paying taxes is more equitable than it is now. And there’s no reason to fear that economic growth will be lower if taxes are increased. Cutting taxes on the wealthy during the Bush years didn’t stimulate growth and raising taxes back to the levels we’ve had in the past – times when growth was quite robust – won’t have much of an effect either.

The claim that there is a tradeoff between equity and efficiency was a key part of the argument for tax cuts for the wealthy, but the tradeoff didn’t materialize. We sacrificed equity for the false promise of efficiency and growth, and society is now more unequal than at any time since the early part of the last century. It’s time to reverse that mistake.

"The Flat-Tax Fraud"

Robert Reich does not like the flat tax (I don't either):

The Flat-Tax Fraud, and the Necessity of a Truly Progressive Tax, by Robert Reich: Herman Cain’s bizarre 9-9-9 plan would replace much of the current tax code with a 9 percent individual income tax and a 9 percent sales tax. He calls it a “flat tax.” Next week Rick Perry is set to announce his own version of a flat tax. ...
The flat tax is a fraud. It raises taxes on the poor and lowers them on the rich. ... The rich usually pay a higher percent of their incomes in income taxes than do the poor. A flat tax would eliminate that slight progressivity.
Nowadays most low-income households pay no federal income tax at all – a fact that sends many regressives into spasms of indignation. They conveniently ignore the fact that poor households pay a much larger share of their incomes in payroll taxes, sales taxes, and property taxes (directly, if they own their homes; indirectly, if they rent) than do people with high incomes. ...
The truth is the current tax code treats everyone the same. It’s organized around tax brackets. Everyone whose income reaches the same bracket is treated the same as everyone else whose income reaches that bracket (apart from various deductions, exemptions, and credits, of course).
For example, no one pays any income taxes on the first $20,000 or so of their income... People in higher brackets pay a higher rate only on the portion of their income that hits that bracket — not on their entire incomes.
So when Barack Obama calls for ending the Bush tax cut on incomes over $250,000, he’s only talking about the portion peoples’ incomes that exceed $250,000. He’s not proposing to tax their entire incomes at the higher rate that prevailed under Bill Clinton.
Republicans have tried to sow confusion about this. They want Americans to believe, for example, that if the Bush tax cut ended, small business owners with incomes of $251,000 a year would suddenly have to pay 39 percent of their entire incomes in taxes rather than 35 percent. Wrong. They’d only have to pay the 39 percent rate on $1,000 – the portion of their incomes over $250,000. ...
The Republicans’ push for a flat tax masks what’s really going on.
Remember: The top 1 percent is now raking in over 20 percent of the nation’s total income and owns over 35 percent of the nation’s wealth. Under almost anyone’s view of fairness, these are grotesque portions. They’re especially large relative to what they were as recently as thirty years ago, when the top 1 percent raked in under 10 percent. And these huge portions at the top continue to increase.
Simple fairness requires three things: More tax brackets at the top, higher rates in each bracket, and the treatment of all sources of income (capital gains included) exactly the same. ...

The confusion over marginal tax rates (i.e. that higher tax rates only apply to income past certain thresholds) is widespread and an obstacle to progressive tax reform.