Longish travel day today, but hope to have internet access along the way. Anyway, another quick one before heading out:
Greg Mankiw says middle class taxes are going to go up unless we make large cuts to social services:
Dean Baker responds:
Longish travel day today, but hope to have internet access along the way. Anyway, another quick one before heading out:
Greg Mankiw says middle class taxes are going to go up unless we make large cuts to social services:
Dean Baker responds:
Is Obama finally figuring it out?:
“They [Republicans] say that their biggest priority is making sure that we deal with the deficit in a serious way, but the way they’re behaving is that their only priority is making sure that tax breaks for the wealthiest Americans are protected,” he said.
“That seems to be their only overriding, unifying theme.”
Seems to be?
Tyler Cowen on the negotiations over the fiscal thingie:
In the Fiscal Debate, a Little Symbolism Can Go a Long Way, by Tyler Cowen, Commentary, NY Times: ...We must decide whether to pursue a relatively loose and stimulative policy, and to trust in our later discipline, or to slam on the brakes now.
Yet there may be a way to square this circle. When it comes to income tax rates, we could raise them for virtually everyone, to send a clear message that the current fiscal situation is unsustainable. ...
To see how this could work, consider this script: Let’s say the Republicans decide to largely give in to what the President Obama is proposing. There is, however, a catch: the president has to agree to raise marginal tax rates on all income classes, not just on the rich. The tax increase would be one-quarter of a percentage point, or some other arbitrary small amount, with larger increases possible for higher incomes, as has been discussed. The deal also stipulates that both the president and Congress must publicly acknowledge that current plans for government spending can’t be financed unless taxes on most or all income groups climb further yet, and by some hefty amount.
Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cuts. A small but publicly trumpeted clawback of some of the cuts would send the right message to voters, while minimizing the macroeconomic fallout. The nice thing about symbols — single shots across the bow — is that they often can suffice. ...
Of course, the notion of tolerating — and especially endorsing — any tax increase is anathema to many of President Obama’s opponents. But keep in mind that possible alternatives, like another debt-ceiling debacle or an agreement that panders to our fiscal illusions, would probably be worse for both the economy and the longer-term reputation of the Republican Party.
In our country, the typical approach to fiscal deadlines is to kick the can down the road. But that assumes we are kicking a can, not a grenade. It’s time for at least one party — and why not the electoral loser? — to do something just a little shocking. It can give in on much of the negotiations, but insist that both sides start stressing the fiscal truth.
Maybe I'm just having one of those days and can't see the obvious, a house full of family will do that, but I'm a bit confused about the spending side of this proposal. Does Tyler mean that the spending cuts Obama has proposed will remain, but the tax increase will be moderated for now and replaced by a commitment to increase them further at some future date? If so (and I may have this wrong), why is the only worry that "Given the slow economy, it is undesirable to reverse all or even most of the Bush tax cut"? Why isn't it undesirable to cut spending as well? When all is said and done, spending cuts plus tax increases, how would the burden be distributed? Is the current situation -- the baseline from where we start the changes -- fully optimal, or do we also need to correct distortions, inequities in the past distribution of income, etc.? If there are corrections that are needed, and I believe there are, then the share equally notion has much less force.
It's true that “we are all in this together” under Tyler's proposal, but it is not at all clear that the shares are equitable. In any case, it probably doesn't much matter since the chances of Republicans agreeing to vote for a tax increase, no matter how small, is extremely low.
Barney Frank argues that, when it comes to defense spending, we should "spend less, and liberals should not flinch from that position." The essential point, I think, is that "the major trade-off in putting together a total deficit reduction package is between the military and health care," and, though he does note this in a couple of places, I wish that point had been stressed more in the article (the essay is much, much longer):
The New Mandate on Defense, by Barney Frank, Democracy: There were so many encouraging signs for liberals in the election results this year that one of the most significant has been overlooked. For the first time in my memory, a Democratic candidate for President argued for less military spending against a Republican candidate who called for great increases—and the Democrat won. ...
Because so much of that spending stems from overreach advocated by those who believe that America should be the enforcer of order everywhere in the world—and because we subsidize our wealthy European and Asian allies by providing a defense for them...—there has been increasing conservative support for reining in the military budget. Ron Paul, who goes far beyond most liberals in his eagerness to impose severe military cuts, was a popular figure with a significant base of GOP support not despite taking this position but in part because of it.
Earlier this year, for the first time that I can recall, a majority of the House of Representatives voted to reduce the military appropriation recommended by the House Appropriations Committee. The cut was only $1.1 billion—less than it should have been—but it ... passed... with the support of ... a significant minority of Republicans...
A realistic reassessment of our true national security needs would mean a military budget significantly lower... That is, by next year, we no longer should be forced to spend additional funds—close to $200 billion a year at their peak—in Afghanistan and Iraq. Additionally, we can reduce the base budget by approximately $1 trillion over a ten-year period ... while maintaining more than enough military strength...
Even with the revenue increase we can achieve by raising taxes on the wealthy, serious deficit reduction must come in part from reducing military spending beyond what the President proposes, unless we make very deep cuts in the nonmilitary parts of the budget. ... Given the numbers involved, the major trade-off in putting together a total deficit reduction package is between the military and health care...
To be clear, this is not an argument against America continuing to be the strongest nation in the world. ... That said, being the strongest nation in the world can be achieved much less expensively than at current levels. Obama ... underestimates the extent to which the public is willing to support even further reductions, and I believe that he may appear to be overly influenced by being told that as President, he has the duty to continue to lead the indispensable nation.
The United States was indispensable in 1945 and for many years thereafter... But things have changed. We can no longer afford ... extending a military umbrella over many allies on whom it is not raining—and who can well afford their own protective gear if it does. ...
This all means that a major political task going forward for liberals is pushing for further reductions in military spending, an objective that we now know is not only socially and economically necessary but also politically achievable.
Important social services versus tax cuts for the rich and military spending. Those with unmet needs and little social/economic power versus the wealthy and the military. I suppose in some sense, given who's in this battle, it's remarkable there's been any headway at all. But there needs to be more progress on protecting the vulnerable.
How to fix costly and unjust US tax system, by Lawrence Summers, Commentary, Financial Times: Sooner or later the American tax code will be reformed. ...
So far, the debate has focused on scaling back provisions of the tax code that have favored activities traditionally deemed to be valuable..., reducing reliefs for charitable contributions, taxes paid to state and local governments, home mortgages, employer-provided health insurance and many less important provisions. There are reasonable arguments ... in each case. But taking only the “limit tax incentives” approach to tax reform has several major defects. [lists] ...
What is needed is an additional element, one that has largely been absent to date: the numerous exclusions from the definition of adjusted gross income... There are far too many provisions that favor a small minority of very fortunate taxpayers. ... it should not be possible to accumulate and transfer large fortunes while avoiding taxation almost entirely. Yet this is all too possible today. ... [lists several ways] ...
I believe it is plausible to raise $1tn over the next 10 years by going after provisions that cause what adds to wealth and spending not to be regarded as income.
It has been observed that the greatest scandals are not the illegal things that people do but the things that are fully legal. This is surely true with respect to a tax code in urgent need of reform.
[If you can't get to the article, it usually appears on the Washington Post's editorial page later in the day, though sometimes the editing is slightly different. Update: It's here.]
John Makin of the American Enterprise Institute says that "trillion-dollar deficits are sustainable for now, unfortunately." I don't agree with everything he says -- the "unfortunately" in the title for one, his fear of inflation and the increase in debt servicing costs that come with it for another (though he is not saying inflation is just around the corner like some others have claimed) -- but I appreciate that he is trying to play it straight rather than support the nonsense other Republicans have tried to foist upon the public:
Trillion-dollar deficits are sustainable for now, unfortunately, by John H. Makin: Congress is attempting, unsuccessfully, to reduce “unsustainable” deficits and debt accumulation by engineering “crises” that are meant to force politically challenging action on spending cuts (entitlements) and tax increases (loophole closing, higher tax rates on the “rich”). The mid-2011 debt-ceiling crisis fiasco and the upcoming year-end “fiscal cliff” are striking examples of this dangerous tactic. ...
The tactic of threatening to go over the fiscal cliff will fail ... because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little “sky is falling” approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised... Two percent inflation means that the real inflation-adjusted cost of deficit finance averages –1.5 percent...
The debt-to-GDP ratio is not a reliable guide for gauging the sustainability of deficits, notwithstanding the Reinhart and Rogoff warning...
The United States Is NOT Greece ... The hyperbolic claim that the United States is becoming Greece because of the absence of dramatic progress on deficit and debt reduction is unfortunately ridiculous. ...
The real danger facing American policymakers is, contrary to the cries of imminent “crisis” and “unsustainable” deficits and debt accumulation, the sustainability of trillion-dollar deficits. Eventually, probably much later than most pundits claim if the experience of Japan is any guide, the Federal Reserve’s monetary accommodation of US government debt accumulation, largely aimed at sustaining the growth of outlays on entitlements that do not support economic growth, will cause inflation to rise. ...
Once inflation rises and the Fed is forced to tighten, borrowing costs for both the government and private sectors will rise. Growth measured in real, constant-dollar terms will fall relative to real, inflation-adjusted interest rates along with tax revenues, and the US debt-to-GDP ratio will rise rapidly. ...
We certainly disagree on how to solve the problem, i.e. whether to rely upon tax increases or cuts to important social programs, and on the pace of deficit reduction (though he calls for more gradual reduction than most), but I appreciate his willingness to acknowledge, as Krugman noted today, that "We are not having a debt crisis."
(I should also note, yet again, that with a "real inflation-adjusted cost of deficit finance [that] averages –1.5 percent," we ought to be investing heavily in critical infrastructure to stimulate output and employment, and to increase our future growth prospects.)
Just sayin': I was thinking of writing a lengthy post about climate change denial being completely unscientific nonsense, but then geochemist and National Science Board member James Lawrence Powell wrote a post that is basically a slam-dunk of debunking. His premise was simple: If global warming isn’t real and there’s an actual scientific debate about it, that should be reflected in the scientific journals.
He looked up how many peer-reviewed scientific papers were published in professional journals about global warming, and compared the ones supporting the idea that we’re heating up compared to those that don’t. What did he find? This:
Maximillian Auffhammer at the Berkeley blog:
Doha schmoha: On Saturday (Dec. 8) another wildly unsuccessful round of climate negotiations, in Doha, Qatar, concluded with applying a band aid to solve the rapidly accelerating climate problem. The 1997 Kyoto accord was extended to 2020. If you think this is a good thing, you are severely mistaken. China, the US and the other usual suspects made no significant concessions. Further, the climate leader — the EU — is internally in disagreement over what reductions should be agreed to. ...
While academics have proposed a number of interesting avenues for further studies of so called architectures for future agreements, time is slowly running out. It is simply too difficult to get 200+ countries to agree and then stick to a binding agreement. So what to do?
I think a simple handshake between the U.S. and China would be a good start. Each agrees to a carbon tax which is collected fairly far upstream. Any country wanting to sell its goods into the U.S. or Chinese markets could either pay a carbon tariff at the border or start charging its own equivalent carbon tax and be exempt from the tariff.
Is this going to happen? Maybe not...
But one thing is for sure: We are becoming richer as a species and we will want to consume more energy services. Unless we start pricing carbon, that energy will largely come from coal. And if that happens, limiting warming to 2 degrees is a pipe dream. In fact, it may already be too late.
Exposing the Republican con game on the deficit:
The Big Budget Mumble, by Paul Krugman:, Commentary, NY Times: In the ongoing battle of the budget, President Obama has done something very cruel. Declaring that this time he won’t negotiate with himself, he has refused to lay out a proposal reflecting what he thinks Republicans want. Instead, he has demanded that Republicans themselves say, explicitly, what they want. And guess what: They can’t or won’t do it.
No, really. While there has been a lot of bluster from the G.O.P. about how we should reduce the deficit with spending cuts, not tax increases, no leading figures on the Republican side have been able or willing to specify what, exactly, they want to cut.
And there’s a reason for this reticence. ...Republican posturing on the deficit has always been a con game, a play on the innumeracy of voters and reporters. Now Mr. Obama has demanded that the G.O.P. put up or shut up — and the response is an aggrieved mumble.
Here’s where we are right now: As his opening bid in negotiations, Mr. Obama has proposed raising about $1.6 trillion in additional revenue over the next decade, with the majority coming from letting the high-end Bush tax cuts expire and the rest from measures to limit tax deductions. He would also cut spending by about $400 billion...
Republicans have howled in outrage. ... They say they want to rely mainly on spending cuts instead. Which spending cuts? Ah, that’s a mystery..., when you put Republicans on the spot and demand specifics about how they’re going to make good on their posturing about spending and deficits, they come up empty. There’s no there there.
And there never was. ... Now Republicans find themselves boxed in. With taxes scheduled to rise on Jan. 1 in the absence of an agreement, they can’t play their usual game of just saying no to tax increases and pretending that they have a deficit reduction plan. And the president, by refusing to help them out by proposing G.O.P.-friendly spending cuts, has deprived them of political cover. If Republicans really want to slash popular programs, they will have to propose those cuts themselves.
So while the fiscal cliff — still a bad name for the looming austerity bomb, but I guess we’re stuck with it — is a bad thing from an economic point of view, it has had at least one salutary political effect. For it has finally laid bare the con that has always been at the core of the G.O.P.’s political strategy.
Jared Bernstein says we should renew the payroll tax cut:
When You’re Trying to Decide if We Need to Renew the Payroll Tax Break, Picture This. by Jared Bernstein: It’s just a slide…in both senses of the word…of the real earnings—pretax, which is important—of middle-wage workers: blue collar workers in manufacturing and non-managers in services, adjusted for inflation. And it’s not inflation holding back these wage rates—it’s the weak economy. This series starts in 1964, and in nominal terms, it’s never grown more slowly than it has this year.
So it is to his great credit that the President proposed another round of the payroll tax break, or something like it, as part of his opening bid for the cliff negotiations... With unemployment still way too high, we need to continue to support workers’ paychecks and temporarily offset some of the fiscal contraction from the tax increases and spending cuts that are likely to come out of the cliff negotiations.
I know that adding a spending program to a deficit reduction package may sound counterintuitive, but it’s really countercyclical. And by dint of being temporary—we could even write in the legislation that it expires when unemployment goes (and stays) below 7%–it won’t affect the medium-term deficit. ...
I think the payroll tax should be extended, but as I noted when this first came up, I'd prefer the "optics" to be different:
I see the payroll tax reduction as potentially troublesome... Though the revenue the Social Security system loses due to the tax cut will be backfilled from general revenues, the worry is that the tax cut will not expire as scheduled -- temporary tax cuts have a way of turning permanent. That's especially true in this case since labor markets are very unlikely to recover within the next year and it will be easy to argue against the scheduled "tax increase" for workers. In fact, it will never be a good time to increase taxes on workers and if the tax cut is extended once, as it's likely to be, it will be hard to ever increase it back to where it was. That endangers Social Security funding -- relying on general revenue transfers sets the system up for cuts down the road -- and for that reason I would have preferred that this be enacted in a way that produces the same outcome, but has different political optics. That is, leave the payroll tax at 6% on the books and keep sending the money to Social Security, and fund a 2% tax "rebate" out of general revenues. The rebate would come, technically, as a payment from general revenues rather than through a cut in the payroll tax, but in the end the effect would be identical. But the technicality is important since it preserves the existing funding mechanism for Social Security even if the taxes are permanently extended.
[On the connection between the payroll tax and support for Social Security, see here. As Bruce Bartlett notes while expressing similar worries, "Arch Social Security hater Peter Ferrara once told me that funding it with general revenues was part of his plan to destroy it by converting Social Security into a welfare program, rather than an earned benefit. He was right."]
Robert Reich is worried:
Will Tim Geithner Lead Us Over or Around the Fiscal Cliff?, by Robert Reich: I’m trying to remain optimistic that the President and congressional Democrats will hold their ground over the next month as we approach the so-called “fiscal cliff.”
But leading those negotiations for the White House is outgoing Secretary of Treasury Tim Geithner, whom Monday’s Wall Street Journal described as a “pragmatic deal maker” because of “his long relationship with former Treasury Secretary Robert Rubin, for whom balancing the budget was a priority over other Democratic touchstones.” ...
Both Rubin and Geithner are hardworking and decent. But both see the world through the eyes of Wall Street rather than Main Street. I battled Rubin for years in the Clinton administration because of his hawkishness on the budget deficit and his narrow Wall Street view of the world.
During his tenure as Treasury Secretary, Geithner has followed in Rubin’s path — engineering a no-strings Wall Street bailout that didn’t require the Street to help stranded homeowners, didn’t demand the Street agree to a resurrection of the Glass-Steagall Act, and didn’t seek to cap the size of the biggest bank, which in the wake of the bailout have become much bigger. In an interview with the Journal, Geithner repeats the President’s stated principle that tax rates must rise on the wealthy, but doesn’t rule out changes to Social Security or Medicare. And he notes that in the president’s budget (drawn up before the election), spending on non-defense discretionary items — mostly programs for the poor, and investments in education and infrastructure — are “very low as a share of the economy relative to Clinton.” If “pragmatic deal maker,” as the Journal describes Geithner, means someone who believes any deal with Republicans is better than no deal, and deficit reduction is more important than job creation, we could be in for a difficult December.
Not sure if this will make you feel more confident, but a recent post on the Treasury's blog from Jason Furman asserted that "Increasing Taxes on Middle-Class Families Will Hurt Consumer Spending." Unfortunately, it didn't say much about Social Security and Medicare. I am worried too.
The good old days hold lessons for today:
The Twinkie Manifesto, by Paul Krugman, Commentary, NY Times: The Twinkie ... will forever be identified with the 1950s... And the demise of Hostess has unleashed a wave of baby boomer nostalgia for a seemingly more innocent time.
Needless to say, it wasn’t really innocent. But the ’50s ... do offer lessons that remain relevant in the 21st century. ... Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. ...
Yet in the 1950s ... taxes on corporate profits were twice as large... The best estimates suggest that circa 1960 the top 0.01 percent ... paid an effective federal tax rate of more than 70 percent, twice what they pay today.
Nor were high taxes the only burden wealthy businessmen had to bear. They also faced a labor force with a degree of bargaining power hard to imagine today. In 1955 roughly a third of American workers were union members. In the biggest companies, management and labor bargained as equals...
Squeezed between high taxes and empowered workers, executives were relatively impoverished by the standards of either earlier or later generations. ... Between the 1920s and the 1950s real incomes for the richest Americans fell sharply...
Today, of course, the mansions, armies of servants and yachts are back, bigger than ever — and any hint of policies that might crimp plutocrats’ style is met with cries of “socialism.” ... Surely, then, the far less plutocrat-friendly environment of the 1950s must have been an economic disaster, right? ...
On the contrary,... the high-tax, strong-union decades after World War II were in fact marked by spectacular, widely shared economic growth...
Which brings us back to the nostalgia thing.
There are, let’s face it, some people in our political life who pine for the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, “Are you now or have you ever been?” The rest of us, however, are very glad those days are gone. We are, morally, a much better nation... Oh, and the food has improved a lot, too.
Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda..., it prospered. And we can do that again.
Is James Kwak correct?:
...if you take the long view, there’s no reason for conservatives to back away from their absolutist anti-tax stance. So they lose an election or two. What happens? When it comes to taxes, Democratic majorities at best hold the line against further tax cuts. After their sweep in 2008, President Obama and his congressional allies passed a couple of modest tax increases to pay for Obamacare (and one of those, the excise tax on Cadillac plans, is one that conservative economists profess to like), but also extended the Bush tax cuts and added a few more tax cuts of their own; now Obama wants to make more than 80 percent of the Bush tax cuts permanent, and last summer he offered up his own proposals for entitlement cuts. When the Republicans return to power, as they inevitably will, they can just pick up where they left off..., for the last eighteen years, the hardline anti-tax position has been a huge winner for Republicans. Given that Democrats have shown exactly zero ability to punish them for it, I can’t see any reason why they should change their ways now.
If there is some sort of compromise in the next couple of months, it’s going to be one that Republicans can frame as a tax cut, not an out-and-out violation of the Grover pledge; one scenario is that the year ends with no deal, tax rates go up, and then Obama and the Republicans agree to cut them. ...Republicans may object to tax rate increases, and no doubt will, but for once I'm not sure they'll prevail.
I am hearing a lot lately about using a carbon tax to fill the budget gap. I'm all for a carbon tax, internalizing externalities so that these markets work better is a good idea if we can somehow get through the political barriers, but we shouldn't be overly optimistic about how much revenue such a tax will bring.
In order to get support for such a tax and to implement it equitably, some groups will need to be compensated for the higher energy costs they will face. For example, these proposals often come with a proposal to return some of the tax as a lump-sum payment to lower income households (the microeconomics of a tax on carbon combined with lump-sum payments can be found here). Presumably, the higher the threshold for "low income," the easier it will be to get support for a carbon tax proposal, so there will be pressure for the compensation to extend, perhaps on a sliding scale, to middle class households.
And, at least in the initial years, there are other groups that will likely need to be compensated (okay, bought off) in order to garner the necessary political support.
All of these attempts to insulate various groups from the consequences of the tax (through fancy schemes that retain te incentive to save energy) will eat into potential revenue, and the fact that the response to the tax will be greater as more time passes -- for example as people switch to more efficient cars and appliances -- will also reduce revenue (this is not a problem in a larger sense, such substitutions are the whole point of the tax, but it does reduce the revenue).
Overall, the point is a simple one: don't overestimate the revenue from a carbon tax.
The Democracy in America blog at The Economist responds to recent posturing on taxes by Glenn Hubbard and John Boehner:
Elections have consequences, redux, by M.S.: We are told that in the aftermath of Barack Obama's re-election, both he and the Republican leadership in Congress are signaling a willingness to compromise in order to avoid going over the dread fiscal cliff. " ... In terms of Republican conciliation, they are referring to statements like this one by John Boehner, the speaker of the House, and articles like this one by Glenn Hubbard, formerly Mitt Romney's chief economic adviser...
Do these, in fact, represent proposals for compromise? ... It seems to me that Mr Hubbard has a fundamental and difficult realization ... to make, to wit, that the candidate he supported lost the presidential election. The proposals he embraces here, like those outlined by Mr Boehner, were advanced by Mr Romney during the presidential campaign. Mr Romney argued that any increases in revenues ought to come from the elimination of tax exemptions, rather than from hikes in the top marginal tax rate. And like Mr Boehner, he wanted plans for reducing the deficit to somehow lead to tax rates that are lower, rather than higher. Neither Mr Boehner nor Mr Hubbard has signaled any willingness to accept higher revenues from any source...
Barack Obama won the presidential election running on an explicit platform of hiking the top marginal income-tax rate... Americans want the wealthy to pay a higher tax rate. ... Republicans appear to think that by merely stating that they are not in principle opposed to the federal government getting more revenue, they are entitled to be congratulated for their conciliatory approach, despite the fact that they continue to make the same basic tax proposals they made before the election, which they lost...
What we're seeing here, in sum, isn't compromise; it's posturing. Republicans are trying to define the press and public's view of what counts as a compromise, by reiterating their existing positions as if they constituted concessions. ... But the idea that Democrats will accept the implementation by Barack Obama of Mitt Romney's economic philosophy is ridiculous. ...I hope it's "ridiculous" to think Obama will acquiesce to these demands as part of a compromise, but I wouldn't be posting so much on this topic if I was sure.
The Difference Between “Broadening the Tax Base” and Raising Taxes on the Rich, by Robert Reich: The President says he wants $1.6 trillion in tax hikes. Republicans say they won’t raise tax rates but might be willing to close some loopholes and limit some deductions and tax credits. Is compromise in the air?
Not a chance. True enough, such “base broadening,” as Republicans like to call it, could conceivably generate $1.6 trillion in additional tax revenues over the next decade.
But, wait. Didn’t the President just win a second term? The major issue decided in last week’s election was that the rich should pay more. So, presumably, that $1.6 trillion should come out of the pockets of the wealthiest Americans.
“Broadening the base” has nothing whatever to do with the rich paying more. That’s because a lot of tax credits and deductions help the middle class and the poor. ...
If Republicans won’t budge on raising tax rates but insist on broadening the base, Democrats should take aim at the biggest tax loophole of all for America’s wealthy: the preference for capital gains.
Capital gains are now taxed at only 15 percent (the major reason Mitt Romney pays a rate of under 14 percent on over $20 million of annual income). Capital gains should be taxed the same as ordinary income. That way, under a progressive tax system, the wealthy would pay far more — on the way to $1.6 trillion.
Robert Reich has a recommendation for an opening bid on deficit reduction:
The President’s Opening Bid on a Grand Bargain: Aim High, by Robert Reich: I hope the President starts negotiations over a “grand bargain” for deficit reduction by aiming high. After all,... if the past four years has proven anything it’s that the White House should not begin with a compromise.
Assuming the goal is $4 trillion of deficit reduction over the next decade (that’s the consensus...), here’s what the President should propose:
First, raise taxes on the rich... Why not go back sixty years when Americans earning over $1 million in today’s dollars paid 55.2 percent of it in income taxes, after taking all deductions and credits? If they were taxed at that rate now, they’d ... reduce the budget deficit by about $1 trillion over the next decade. That’s a quarter of the $4 trillion in deficit reduction right there.
A 2% surtax on the wealth of the richest one-half of 1 percent would bring in another $750 billion over the decade. A one-half of 1 percent tax on financial transactions would bring in an additional $250 billion.
Add this up and we get $2 trillion over ten years — half of the deficit-reduction goal.
Raise the capital gains rate to match the rate on ordinary income and cap the mortgage interest deduction at $12,000 a year, and ... we’re up to $3 trillion in additional revenue.
Eliminate special tax preferences for oil and gas, price supports for big agriculture, tax breaks and research subsidies for Big Pharma, unnecessary weapons systems for military contractors, and indirect subsidies to the biggest banks on Wall Street, and we’re nearly there.
End the Bush tax cuts on incomes between $250,000 and $1 million, and — bingo — we made it: $4 trillion over 10 years.
And we haven’t had to raise taxes on America’s beleaguered middle class, cut Social Security or Medicare and Medicaid, reduce spending on education or infrastructure, or cut programs for the poor. ...
Obama should at least reverse the Republican pre-election mantra and insist: raise taxes first, then we'll talk spending cuts.
Are Republicans changing their tune on taxes?:
Republicans shift stance on taxing wealthy, by James Politi, FT: The US Congress should agree to higher taxes on the wealthy to avoid the fiscal cliff, a top Republican economist has conceded in a sign of the rapidly shifting political climate in Washington before negotiations to avert the looming budget crisis.
Writing for the Financial Times, Glenn Hubbard, who advised Barack Obama’s rival Mitt Romney on his losing presidential bid, is the latest prominent conservative to suggest Republicans should change tack and accept the president’s structure for impending budget talks.
“The first step is to raise average (not marginal) tax rates on upper-income taxpayers,” he wrote. “Revenues should come first from these individuals.” The growing debate among Republicans over how to generate more revenue highlights the change in the political mood since Mr Obama’s victory...
It doesn't seem that this is much different than the base-broadening talk we heard from conservatives before the election. So while there does seem to be resignation on the right that some sort of tax increase is coming, I'm not so sure this is as big of a shift as it's being made out to be (e.g., from the article, "Mr Hubbard said a deal could be achieved by eliminating tax loopholes and capping popular deductions – such as those for mortgage interest, charitable giving and employer-provided health plans – rather than allowing Bush-era tax rates for the rich to expire this year, as Democrats are demanding," or, today from Cato, "The Proper Post-Election Agenda: Cut Spending, Then Taxes" which promotes the usual supply-side justifications for low taxes on the wealthy). However, the stories the press tells seem to matter, and if this creates momentum toward the self-fulfilling expectation that Republicans are capitulating on taxes, that works for me.
Update: Grover Norquist:
President Barack Obama did not win re-election because of his promise to raise taxes on the wealthy, but it was because attack ads made voters thing that Mitt Romney was a "poopy-head." During a Monday interview on CBS, Norquist suggested that Republicans had a mandate not to raise taxes, even it meant going off the so-called "fiscal cliff."
Squirming Hawks, by Paul Krugman: The fiscal cliff poses an interesting problem for self-styled deficit hawks. They’ve been going on and on about how the deficit is a terrible thing; now they’re confronted with the possibility of a large reduction in the deficit, and have to find a way to say that this is a bad thing.
And so what you see, in reports like this one from the Committee for a Responsible Federal Budget — is a lot of squirming..., making a mostly incoherent case: it’s too abrupt (why?), it’s the wrong kind of deficit reduction (???), and then this:
a better approach would be to focus spending cuts on low-priority spending and on changes which can help to encourage growth and generate new revenue through comprehensive tax reform which broadens the base – ideally by enough to also lower tax rates.
Low-priority spending? I think that means spending on poor people and the middle class. And isn’t it amazing how people who claim to be horrified, horrified about deficits can’t stop talking about cutting tax rates?...
I guess Paul Krugman hasn't heard about the magic of tax cuts and supply-side economics. Well, Cato-at-Liberty has, and it's ticked at the CBO because "it assumes higher tax rates generate more money" when making budget projections. That's right, despite all the evidence against the claim that tax cuts actually increased revenue -- it's a myth that won't die because people who know better, or ought to, still promote it -- we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.
And that's not all. The CBO should be further discredited because it says the stimulus package helped to ease the recession:
The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.
I'll pass over the "record levels of unemployment' claim (but note that unemployment peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best this is playing games with the word "levels" and ignoring population growth -- and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most). On the main claim about fiscal policy, there's plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how much of the stimulus package was tax cuts -- it's amusing to listen to conservatives tell us how useless the tax cuts they fought for as part of the stimulus package turned out to be, especially when in the next breath they argue for more tax cuts). The CBO is dealing in actual evidence, the claims made by Cato-at-Liberty are backed by nothing more than the Republican noise machine that is so good at misleading followers.
Republicans just can't help themselves from attacking anyone and anything that is inconvenient to their goals, and actual evidence has little to do with it. Apparently, they learned nothing from the election. This is part of a larger effort to discredit the CBO because it doesn't agree with Republican views on the magic of tax cuts, and for other results the non-partisan agency has come up with that Republicans don't want to hear (so they basically cover their ears and ignore them).
The effort is successfully discrediting someone, but it's not the CBO.
This is by Ethan Kaplan of the University of Maryland (via email):
Does Taxing the Wealthy Hurt Growth?, by Ethan Kaplan: What is the impact of taxation on growth? In theory, a country without taxation will have difficulty providing basic public goods such as roads and research that are fundamental for economic growth. However, many politicians and some economists argue that once basic public goods are provided for, increases in taxation have a negative impact on growth. According to this argument, this is especially true for taxes on the very wealthy, who are likely to save their income and channel that savings into entrepreneurship or other investment. Much of the argument over tax policy in the United States is focused on whether the rich should be taxed at a higher or lower rate than they are today. The argument in favor of higher rates is that income inequality is at extremely high levels and the government should focus more on redistribution and also that the rising national debt is also potentially harmful to growth. The argument against higher rates is that raising taxes on wealthy would disincentivize the people most likely to create economic growth and thus jobs. In a climate where jobs are scarce, the argument goes, this is a particularly bad economic idea.
This debate, however, is largely based on ideology rather than evidence. Unfortunately, it is quite difficult to figure out the impact of taxation on growth. Changes to the tax codes usually pass Congress when other things are happening to the economy. For example, the 1982 tax cuts, which dropped the top marginal tax rate from 69% to 50%, were passed towards the end of a large recession. Moreover, the impact of taxes on growth can change over time as the economy changes.
Nevertheless, looking at the raw correlation between top marginal tax rates and growth can be helpful for getting a rough sense of the likely impacts of higher taxation on growth. One recent paper by Pikkety, Saez, and Stantcheva looks at the correlation between top marginal tax rates and growth and finds the growth is higher when top marginal tax rates are higher. I restrict myself to the historical experience of the United States and go back to 1930. In particular, I took real chained per capita GDP growth from 1930 to the present from the Bureau of Economic Analysis' (BEA) website. The correlation over this period between the top marginal tax rate and output growth is strong and positive as can be seen below:
A rise in the top marginal tax rate from 0 to 100 percent is correlated with a rise in per capita growth of 5.85 percentage points per year. One reason that this simple correlation might overstate the impact of the marginal tax rate on growth is that the top growth years were in the early 40s when the government was spending heavily and when the country was finally recovering from the Great Depression. If we look only at the post war period (after 1946), a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase of only 2.69 percentage points of growth. Moreover, the statistical significance of the relationship becomes marginal, as the p-value rises from 0.017 to 0.122. On the other hand, if we look at the time period encompassing 1960 to the present, a rise in the top rate from 0 to 100 percent is correlated with a rise in per capita growth of 3.03 percentage points of growth per year, and the relationship becomes more statistically significant (with a p-value of 0.064 percent). Finally, if we look only at the years since 1980, a rise from 0 to 100 percent in the top marginal tax rate is associated with an increase in growth of 3.87 percentage points. In this case, the relationship is statistically insignificant (with a p-value of 0.392 percent), in part because the sample size is small.
While we cannot say that there is a robust significant positive relationship between tax rates and growth, it is still interesting that regardless of when we start the sample, higher top marginal tax rates are associated with higher not lower growth. Moreover, a narrative reading of postwar US economic history leads to the same conclusion. The period of highest growth in the United States was in the post-war era when top marginal tax rates were 94% (under President Truman) and 91% (through 1963). As top marginal rates dropped, so did growth. Moreover, except for 1984, a recovery year, the highest per capita growth rates since 1980 were all in the late 1990s, after the top marginal tax rate had been increased from 28% under President Reagan to 31% under the first President Bush and then 39.6% under President Clinton. One possible reaction to this finding is that what matters more than the top marginal tax rate on income is the capital gains tax rate but growth has also been higher when the capital gains tax rate has been higher.
So, what does this tell us? Of course, it would be silly to make the argument that increasing top marginal rates from 0 to 100 percent increased per capita growth by almost 6 percentage points per year. No doubt there are other factors that could confound the relationship between tax rates and growth. However, the changes in top marginal tax rates over the period are quite large so it seems likely that if raising top marginal rates did have a large negative impact on growth, we should be able to see it in the correlations. Thus, it also seems silly to argue that higher taxes on the rich have a large negative impact on growth, given that historically growth is, if anything, positively correlated with the top marginal rate.
What does this mean for public policy? Given the large rise in inequality in the United States over the past 40 years, if the historical evidence tells us that it is unlikely that taxing the wealthy has a large negative impact on growth (and it might even have a positive impact), shouldn't we increase rates on the wealthy from their current top rates of 35%?
p.s. the data used to analyze the time series is available on my website: econweb.econ.umd.edu/~kaplan
Four Magic Tricks for Fiscal Conservatives, by Jeffrey Frankel, Commentary, NY Times: ...Aspiring fiscal conservatives ... might be interested in learning four tricks that American politicians commonly use when promising to cut taxes while simultaneously reducing budget deficits. ...
The first ... was coined by Reagan’s budget director, David Stockman..., because the numbers in the 1981 budget plan did not add up. “We invented the ‘magic asterisk,’” ... Ever since, the magic asterisk has become a familiar American device. ...
[Second,]... the conjurer ... resorts to the rosy scenario: since he cannot find enough tax loopholes to eliminate, he must claim that ... stronger economic growth will bring in the additional revenue. ..
Right on cue, it is time for the famous Laffer hypothesis – the proposition ... that reductions in tax rates ... so stimulate economic growth that total tax revenue ... goes up... One might think that the Romney campaign would not resurrect so discredited a trick. ...
The final trick, “starve the beast,” typically comes later, if and when the president has enacted his tax cuts and discovers ... tax revenues have not grown... The audience is now told that losing tax revenue and widening the budget deficit was the plan all along. The performer explains that the deficit is all the fault of congress for not cutting spending and that ... “Congress can’t spend money it doesn’t have.” This trick never works...
By the time the crowd realizes that it has been conned, the magician has already pulled off the greatest trick of all: yet another audience that came to see the deficit shrink leaves the theater with the deficit bigger than before.
Laura Tyson and Owen Zidar report on some recent research showing that tax cuts for high income households do little to stimulate economic activity, but tax cuts to lower income households are a different story -- they appear to be effective at stimulating both consumption and investment:
Tax Cuts for Job Creators, by Laura D’Andrea Tyson and Owen Zidar, Commentary, NY Times: The centerpiece of Mitt Romney’s tax plan is an across-the-board 20 percent cut in marginal tax rates. ... His plan rests on the assertion that lower taxes for high-income taxpayers will increase economic activity and employment... This assertion ... is not supported by the evidence.
If tax cuts for high-income earners generate substantial real economic activity and job creation, then we should expect to see two things in the data. First, employment growth should be stronger in the years after tax cuts for these earners. Second, parts of the country with a larger share of high-income earners should experience stronger employment growth after national tax cuts for these taxpayers, because the places where they live receive a larger share of the national tax cuts.
What do we actually see after combing through a half-century of economic data? Neither of these predictions is borne out. ...[presents evidence, along with supporting graphs]..., we have found no evidence that such cuts lead to substantially faster employment growth at the national, state or even ZIP-code level.
Tax cuts for everyone else are a much more effective path to job creation. Our research found a statistically significant and positive relationship between tax cuts for the bottom 95 percent and job growth at both the national and state levels. ... Lower-income taxpayers spend a higher share of their tax cuts. ... Investment also increases after tax cuts for the bottom 95 percent...
Over all, our research shows that tax cuts for the bottom 95 percent are much more effective than tax cuts for the top 5 percent at increasing job creation in the subsequent two years. Other analysts reach similar conclusions. ... [summarizes other evidence] ...
[I]f the priority is to create a substantial number of jobs over the next presidential term, evidence from the last half-century strongly suggests that tax cuts for the top 5 percent won’t work. Tax cuts for working families, tax cuts directly aimed at expanded hiring or increases in infrastructure investment would have much more bang for the buck and would cost much less in terms of forgone revenue and deficit reduction...[Still under the weather, so I'll take the easy route and link to an old post of mine on tax cuts and (lack of) subsequent economic growth.]
A quick one before hightailing it to the airport:
New JCT Study Shows Futility of Base-Broadening to Pay for Massive Tax Rate Cuts, by David Dayens: As long as the only thing we’re going to talk about for the next few weeks in the election is taxes, I might as well provide the update. The Joint Committee on Taxation, the “CBO for taxes” as it were, the nonpartisan scorekeeper on tax policy, just released a report that should end all discussion about the Romney campaign’s plans for a deficit-neutral 20% across-the-board rate cut.
Repealing all itemized deductions in the U.S. tax code would pay for only a 4 percent cut in income tax rates,... an estimate ... that casts doubt on Republicans’ ability to finance lower income-tax rates with base broadening....
...[T]his is not a perfect indicator of the Romney plan. But the basic principle applies, and it’s so far from the reality of what Romney wants to achieve – a 20% rate cut without adding to the deficit, and without an increase on the middle class – that I think it serves as more evidence of the futility of the exercise. ...
Mark Zandi, the Moody’s.com economist always trotted out to bless this or that plan, admitted today that the Romney plan is mathematically impossible....
The CBPP has updated its chart (full report) showing the source of the budget deficit, "and they continue to find that these deficits stem overwhelmingly from the economic downturn, the tax cuts first enacted under President Bush, and the wars in Iraq and Afghanistan." But going forward, it's the Bush-era tax cuts that make the largest contribution:
Nice to see this report from Catherine Rampell:
The Math on the Romney-Ryan Tax Plan, NY Times: On Fox News Sunday, Paul Ryan said that he didn't have time to explain the math behind his tax proposal. Fortunately I have a few minutes to spare, so I thought I'd pitch in. ...
There's a reason why it would take too long -- infinitely long, you could say -- to go through the math that holds this policy proposal together: because math will never hold this particular policy proposal together.
You cannot lower tax rates as much as Mr. Romney and Mr. Ryan propose to do and keep all the existing tax expenditures for middle class Americans and still end up with the same total amount of tax revenue. ... The taxes for this group, ... "middle income," would have to go up. ...
Richard Thaler likes the number 28:
For the Wealthy, a 28 Percent Solution, by Richard Thaler, Commentary, NY Times: Everyone knows that America’s tax code is a mess... But there is a possible solution. ...
I can state my idea in just one sentence: All income above $1 million a year for a household will be taxed at 28 percent. There are no deductions, and all income, including capital gains and dividends, is included. President Reagan favored something like this...
While we’re at it, let’s make the corporate tax rate 28 percent, too, because our current rate is high by international standards. Oh, and the estate tax exemption? On amounts above $3.5 million for individuals, the rate would be, of course, 28 percent. ...
But what about the argument that taxing capital gains and dividends at the same rate as ordinary income will discourage investment? I don’t find this claim convincing. ...
Of course, I haven’t said what would happen to the households in the middle, or what the taxes would be on the first $1 million for the rich... One possibility is to scale back deductions smoothly, starting at household incomes above $250,000, and completely eliminate them for incomes above $1 million. ... A more radical plan, curtailing deductions for this large group, is probably politically infeasible...
And what if the resulting revenue falls a bit short...? I suggest that we get our gasoline tax more in line with those of the rest of the world. Gradually raising it to something like $1 a gallon would both bring in revenue and help reduce emissions. In the long term, we could set the rate as a percentage of the price at the pump. Maybe 28 percent?
I really do need to get to jury duty, but one more quick one. Curious to hear what you think about this idea:
How to cut the US deficit by fixing taxes, by Laura Tyson, Commentary, Financial Times: One of the few issues on which Barack Obama and Mitt Romney agree is the need for tax reform. ... But tax reform should not come at the expense of progressivity. Income inequality is greater in the US than in the other developed countries of the OECD. ...
Proponents of greater progressivity often call for an increase in corporate taxes but this would lead to slower growth and fewer jobs. The US ... effective marginal corporate tax rate is one of the highest in the world. ... Of all taxes, corporate income taxes do the most harm to economic growth.
Both Mr Obama and Mr Romney advocate corporate tax reform that lowers the rate and broadens the base. The economic benefits could be significant. ...
A lower rate would stimulate investment, narrow the tax preference for debt over equity financing and weaken the incentives for international companies to move production to lower-tax locations. But lowering the corporate tax rate is expensive – each percentage point reduction would cut revenues by about $120bn over 10 years. ...
A more efficient and progressive way to pay for a lower corporate tax rate would be to increase taxes on dividends and capital gains. This would shift more of the burden towards capital owners and away from labor, which bears the burden in the form of fewer jobs and lower wages. ...
The US economy needs efficient and progressive tax reform and it needs more revenues for deficit reduction. Revenue increases have been a significant component of all major deficit-reduction packages enacted over the past 30 years. ...
When Romney talks about the people who don't pay taxes and tries to make you believe that 47 percent of us are moochers living off the system, it's important to recognize that the people who don't pay federal income taxes are mostly the elderly and students. And notice how narrow the category is -- it's only federal income taxes -- but there are lots of other types of taxes. When all things are considered, "nearly 100 percent of Americans pay taxes in some way, shape or form":
Who Pays Taxes?, Hamilton Project: A popular myth swirling around Washington, DC, and throughout the media these days is that many Americans do not pay taxes, and are therefore free-riding off of our society without contributing themselves. ... The origin of this misconception is the observation that only about 54 percent of American households paid federal income taxes during recession-affected 2011. But that statistic is misleading because it provides an incomplete picture of the overall tax burden on American families, and because it incorporates individuals who naturally shouldn’t be paying taxes because of their age or economic circumstances due to the Recession. A closer look reveals that nearly all Americans do, in fact, pay taxes. ...
In fact, many households with no tax liability are young or old, meaning that they are likely to be led by students who subsequently will pay taxes or retirees who paid taxes over their lifetimes. The figure below illustrates the relationship between age and the odds of paying payroll and income taxes. The graph makes clear that younger individuals—those in their late teens and early 20s—pay taxes at relatively low rates, but that is largely because they are in school and not working. But as they get older and find jobs, the evidence suggests that they will pay taxes. Similarly, after age 60, when more and more Americans are retiring and leaving the labor force, the fraction paying taxes falls rapidly. These retirees have certainly contributed to America’s revenue stream over their lifetimes. To this point, as the U.S. population ages into the future and a greater proportion of Americans reach the retirement age, it is inevitable that a growing percentage of the overall population will pay no income or payroll taxes.
But during middle age, almost all workers face a tax burden. When looking at those in middle-age, 84 percent faced a net payroll and income tax bill in 2007. This general theme also holds true for low-income households... On net, even these families face a positive tax bill over time (Dowd and Horowitz 2008).
Furthermore, rising unemployment during the Great Recession has meant that the proportion of American families paying no federal taxes is unusually large today. Unemployed workers without incomes naturally don’t face tax liabilities. But as they find jobs and rejoin the labor force, they will once again contribute to the federal system. Indeed, some of the trends we see today are less illustrative of an unfair tax advantage for the poor; rather, the trends indicate the existence of a group of unfortunate families who have found themselves affected by hard times. And young people today have been particularly hard hit: many are unemployed or weathering the storm in graduate schools, meaning that they are, thus, not paying taxes. When looking more specifically at middle-aged workers with jobs, 96 percent paid federal income or payroll taxes.
Other Forms of Taxes Also Count
Finally, incorporating the additional—and significant—other forms of taxation into our calculation leads to the conclusion that nearly 100 percent of Americans pay taxes in some way, shape or form. All consumers bear the burden of state and local property, sales, and income taxes, as well as excise taxes on items like gasoline, alcohol, or cigarettes. These other taxes tend to be regressive, imposing more of a burden on low-income families than on high-income families—the state and local tax burden is over twice as large as the federal tax burden for the bottom fifth of households (Citizens for Tax Justice 2011). When you fill up your car with gasoline, you can’t avoid paying the tax. The pump does not differentiate between the richest Americans and the poorest families. ...
A report from the Congressional Research Service finds little support for the claim that tax cuts increase economic growth. They do, however, increase inequality:
Report: Tax Cuts for Wealthy Linked to Income Inequality, by Siobhan Hughes, WSJ: Just in time for the year-end debate over extending the Bush tax cuts for high earners: a new report concludes that tax cuts for the rich don’t seem to be associated with economic growth.
The report, from the Congressional Research Service, finds that tax cuts for high earners can be linked to a different outcome: income inequality.
“The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced,” according to the CRS report, circulated on Friday. ...
“As the top tax rates are reduced, the share of income accruing to the top of the income distribution increases; that is, income disparities increase,” government researchers said.
CRS analysts also said that “capital gains and dividends have become a larger share of total income over the past decade and a half while earnings have become a smaller share.” This phenomenon, the researchers said, suggests that labor may grab a larger share of the pie when the top individual and capital-gains tax rates are higher. ...The implication, of course, is that allowing tax cuts to expire for high income individuals could decrease inequality without harming economic growth.
A new column:
The unemployed have, it appears, been hiding from politicians.
Lane Kenworthy has an important rebuttal to Nicholas Eberstadt's "A Nation of Takers":
We’re all dependent on government, and it has long been thus, by Lane Kenworthy: Nicholas Eberstadt’s “A Nation of Takers” argues that too many Americans have become dependent on government benefits. Over the past half-century, he notes, the share who receive a government cash transfer and/or public health insurance — Social Security, Medicare, Medicaid, unemployment compensation, and so on — has grown steadily. The United States, according to Eberstadt, is now “on the verge of a symbolic threshold: the point at which more than half of all American households receive, and accept, transfer benefits from the government.”
Eberstadt doesn’t contend that this has weakened our economy. His concern is moral. He believes reliance on government for help is undermining Americans’ “fierce and principled independence,” our “proud self-reliance.”
In Eberstadt’s way of seeing things, we are either givers or takers — taxpayers or benefit recipients. This is mistaken. Every American who doesn’t live entirely off the grid pays some taxes. Anyone who is an employee pays payroll taxes, and anyone who purchases things at a store pays sales taxes. Likewise, every American receives benefits from government. If you or your kids attended a public school, if you’ve driven on a road, if you’ve had a drink of tap water or taken a shower in your dwelling, if you’ve deducted mortgage interest payments or a business expense from your federal income taxes, if you haven’t been stricken by polio, if you’ve never had a band of thugs remove you from your home at gunpoint, if you’ve visited a park or lounged on a beach or hiked a mountain trail, if you’ve used the internet….
Eberstadt seems to think receipt of a government cash transfer or health insurance somehow renders people less self-reliant than does receipt of the myriad public goods, services, and tax breaks that government provides. But he doesn’t say why.
Once upon a time public safety was ensured by individuals and privately-organized militias. Then we shifted to government police forces and armies. At one point humans got water and disposed of waste individually. Then we created public water and sewage systems. Education of children was once a family responsibility. Then it shifted to schools. There’s a good reason for this: government provision offers economies of scale and scope, which enables the good or service to be provided to many people who either couldn’t or wouldn’t do it on their own. Did Americans’ character or spirit diminish when these changes occurred? Is there something qualitatively different about the more recent shift from individual to government responsibility in how we deal with retirement saving, health care, unemployment, and other risks? Here too Eberstadt is silent. ...
At the end of his essay, Eberstadt shifts his concern from the moral cost of government to the financial cost. Rising government expenditures on transfers and health care will require, he says, that we cut military spending, sell off public assets (land, buildings, art), or dump the burden onto future generations by running up government debt. None of these options is attractive. But there is, of course, another option: increases taxes. As we’ve transferred various functions from individuals to government over the course of our nation’s history, we’ve (usually) paid for it by asking Americans to contribute more. In many other rich nations governments provide more services and transfers than ours does, and they (usually) fund this by collecting more in taxes than we do. ...Eberstadt ignores this option...
Growth of government spending is not, for the most part, a consequence of rent-seeking special interests or narrow-minded bureaucrats looking to expand their turf. It’s a product of affluence. As people and nations get richer, they tend to be willing to allocate more money for insurance (protection against risks) and for fairness (extension of opportunity and security to those who are less fortunate). Rather than lamenting an imagined shift from self-reliance to dependence, or claiming that we can’t afford more security and fairness, the American right would do better to focus its energy and creativity on devising alternative ways of pursuing these goals. Government doesn’t always do things best; and even when it does, there almost always is room for improvement.
Nicholas Eberstadt’s essay is emblematic of the backward-looking orientation that has dominated America’s right for the past three decades. It’s an orientation that in my view has long since outlived its usefulness. The country will benefit when more smart minds on that side of the spectrum turn their gaze forward.
Mitt Romney, and others like him, are weakening "the bonds that hold a society together":
Mitt Romney’s Fair Share, by Joseph Stiglitz, Commentary, Project Syndicate: Mitt Romney’s income taxes have become a major issue... Is this just petty politics, or does it really matter? In fact, it does matter... Economies in which government provides ... public goods perform far better than those in which it does not. But public goods must be paid for, and ... those at the top of the income distribution who pay 15% ... clearly are not paying their fair share. ...
Democracies rely on a spirit of trust and cooperation in paying taxes. If every individual devoted as much energy and resources as the rich do to avoiding their fair share of taxes, the tax system either would collapse, or would have to be replaced by a far more intrusive and coercive scheme. Both alternatives are unacceptable.
More broadly, a market economy could not work if every contract had to be enforced through legal action. But trust and cooperation can survive only if there is a belief that the system is fair. ... Yet, increasingly, Americans are coming to believe that their economic system is unfair; and the tax system is emblematic of that sense of injustice. ...
Romney may not be a tax evader; only a thorough investigation by the US Internal Revenue Service could reach that conclusion. But, given that the top US marginal income-tax rate is 35%, he certainly is a tax avoider on a grand scale. And, of course, the problem is not just Romney; writ large, his level of tax avoidance makes it difficult to finance the public goods without which a modern economy cannot flourish.
But, even more important, tax avoidance on Romney’s scale undermines belief in the system’s fundamental fairness, and thus weakens the bonds that hold a society together.
On the unfairness, beyond taxes Stiglitz also notes that:
...much of the money that accrues to those at the top is what economists call rents, which arise not from increasing the size of the economic pie, but from grabbing a larger slice of the existing pie. Those at the top include a disproportionate number of monopolists who increase their income by ... anti-competitive practices; CEOs who exploit deficiencies in corporate-governance laws to grab a larger share of corporate revenues for themselves (leaving less for workers); and bankers who have engaged in predatory lending and abusive credit-card practices (often targeting poor and middle-class households). It is perhaps no accident that rent-seeking and inequality have increased as top tax rates have fallen, regulations have been eviscerated, and enforcement of existing rules has been weakened: the opportunity and returns from rent-seeking have increased.
To the extent that this is true, those at the top are receiving income they didn't earn through their contributions to GDP. It is the result of rent-seeking -- they didn't "build that" -- and clawing back those gains through taxes is not unfair, and it does not distort economic activity. Instead it reverses existing distortions that send income to the top of the income distribution instead of to the working class as a reward for their increased productivity.
Carbon Tax Silence, Overtaken by Events, by Robert Frank, Commentary, NY Times: ...Mitt Romney ... has been equivocal about whether rising temperatures are caused by human action. But he has been adamant that uncertainty about climate change rules out policy intervention. ...
Climatologists are the first to acknowledge that theirs is a highly uncertain science. The future might be better than they think. Then again, it might be much worse. Given that risk, policy makers must weigh the potential cost of action against the potential cost of inaction. And even a cursory look at the numbers makes a compelling case for action. ...
The good news is that we could insulate ourselves from catastrophic risk at relatively modest cost by enacting a steep carbon tax. ... A carbon tax would also serve two other goals. First, it would help balance future budgets. ... If new taxes are unavoidable, why not adopt ones that ... make the economy more efficient? By reducing harmful emissions, a carbon tax fits that description.
A second benefit would occur if a carbon tax were ... phased in gradually, only after the economy had returned to full employment. High unemployment persists in part because businesses, sitting on mountains of cash, aren’t investing it... News that a carbon tax was coming would create a stampede to develop energy-saving technologies. ...
Some people argue that a carbon tax would do little good unless it were also adopted by China and other big polluters. It’s a fair point. But access to the American market is a potent bargaining chip. The United States could ... tax imported goods in proportion to their carbon dioxide emissions if exporting countries failed to enact carbon taxes at home.
In short, global warming has a fairly simple and cheap technical solution. ...Update: I didn't do a very good job of highlighting Robert Frank's point that we shouldn't "expect to hear much about climate change at the Republican and Democratic conventions," but "Many climate scientists ... are now pointing to evidence linking rising global temperatures to the extreme weather we’re seeing around the planet." Thus, "Extreme weather is already creating enormous human suffering, and "If the recent meteorological chaos drives home the threat of climate change and prompts action, it may ultimately be a blessing in disguise."
If we had nearly a trillion in additional tax revenue over the next ten years, it would help the budget picture quite a bit:
CBO: Ending High-Income Tax Cuts Would Save Almost $1 Trillion, CBPP: The Congressional Budget Office’s (CBO) new report shows that allowing President Bush’s 2001 and 2003 income tax cuts on income over $250,000 to expire on schedule at the end of 2012 would save $823 billion in revenue and $127 billion on interest on the nation’s debt, compared to permanently extending all of the Bush tax cuts. Overall, this would mean $950 billion in ten-year deficit reduction, a significant step in the direction of fiscal stability.
Top U.S. tax expert in savage attack on transfer pricing rules, Tax Justice Network: Lee Sheppard of Tax Analysts is one of the world's top experts in international tax... She has just issued one of the most devastating critiques ever made of the prevailing system for taxing multinational corporations, in a nine-page document entitled Is Transfer Pricing Worth Salvaging? Tax Analysts have kindly given us permission to republish it.
What is the tax problem?, Sheppard asks, in her (fairly U.S.-focused) article."In a nutshell, developments in law and planning have enabled U.S. multinationals to deprive the United States of tax revenue..."
And the main way they do this is through transfer pricing. ...
Mitt Romney thinks the correct response to growing inequality is to cut tax rates for the wealthy:
Mitt Romney’s peculiar approach to tax fairness, by Lane Kenworthy: Mitt Romney in a recent Fortune magazine interview: “I indicated as I announced my tax plan that the key principles included the following. First, that high-income people would continue to pay the same share of the tax burden that they do today.”
That’s odd. Sensible debates about tax fairness and tax policy focus on what rate each group should pay, not on what each group’s share of total tax payments (the “tax burden”) should be.
High-income people’s share of tax payments is determined by their average tax rate, their share of total pretax income, and the average tax rate among all taxpayers.
Policy makers have a lot of control over tax rates. They have some, but far less, influence on the share of pretax income that goes to each group. Hence they have limited ability to control the share of total tax payments paid by a particular group.
In the past several decades federal tax rates on the top 1% of Americans have been lowered... If all else stayed the same, that would have reduced the top 1%’s share of total tax payments. But this effect has been dwarfed by the large rise in the top 1%’s share of pretax income, which causes their share of total tax payments to increase. Here’s what the numbers looked like in 1979 and 2007, two years at comparable points in the business cycle (data are from the CBO).
The top 1%’s share of pretax income doubled, from 8.9% to 18.7%. Although the average tax rate they paid fell, their share of total tax payments increased, from 14.2% to 26.2%, because their income share jumped so much.
Consider what the Romney approach would have implied for tax rates paid by the top 1% during the 1979-2007 period. In 1979 their average federal tax rate was 35%; in 2007 it was 28%. Suppose policy makers had promised to keep the top 1%’s share of total tax payments at its 1979 level of 14%. Given the sharp rise in the top 1%’s income share, the average federal tax rate paid by the top 1% would have needed to fall to just 15%.
What does this mean going forward? In pledging to maintain the tax share of the richest Americans at its current level, Mitt Romney is in effect promising that if that group’s pretax income share continues to rise as it has in the past three decades, he will slash their tax rates.
He is also promising that if the share falls, he'll raise tax rates for upper income households. Anyone think he'd really do that?
Mitt Romney Would Pay 0.82 Percent in Taxes Under Paul Ryan's Plan, by Matthew O'Brien: Under Paul Ryan's plan, Mitt Romney wouldn't pay any taxes for the next ten years -- or any of the years after that. Now, do I know that that's true. Yes, I'm certain.
Well, maybe not quite nothing. In 2010 -- the only year we have seen a full return from him -- Romney would have paid an effective tax rate of around 0.82 percent under the Ryan plan, rather than the 13.9 percent he actually did. How would someone with more than $21 million in taxable income pay so little? Well, the vast majority of Romney's income came from capital gains, interest, and dividends. And Ryan wants to eliminate all taxes on capital gains, interest and dividends. ...
It might seem impossible to fund the government when the super-rich pay no taxes. That is accurate. Ryan would actually raise taxes on the bottom 30 percent of earners, according to the nonpartisan Tax Policy Center, but that hardly fills the revenue hole he would create. The solution? All but eliminate all government outside of Social Security and defense...
On the "eliminate all government outside of Social Security and defense," Social Security isn't safe either. Remember that "Ryan sponsored a Social Security privatization scheme that went so far the George W. Bush administration rejected it." In any case, Social Security is one of the programs Romney and Ryan would need to cut in order to offset the low tax rates they propose for those at the top.
Romney doesn't want you to know the truth about his economic plan:
A Tax Plan That Defies the Rules of Math, by David Firestone, Editorial, NY Times: In May of 2000, when George W. Bush was running for president on a platform of extravagant tax cuts for all, his campaign did something that would be considered remarkable today: it submitted his tax plan to the Congressional Joint Committee on Taxation, to see how much all those tax cuts would cost the Treasury.
The bipartisan committee ran ... predicted that the tax plan would cost about $1.3 trillion over nine years, an underestimate but a clear sign of its high price tag. With the budget in surplus at the time, Mr. Bush didn’t dispute that cost, and never tried to pretend that the cuts would be free. Within a decade, in fact, they would turn out to be the biggest factor in the huge deficit he created.
Twelve years later, Mitt Romney, the presumptive Republican nominee, claims his far deeper tax cuts would have a price tag of exactly zero dollars. He has no intention of submitting his tax plan to the committee or anywhere else that might conduct a serious analysis, since he seems intent on running a campaign far more opaque than any candidate has in years.
He has made his economic plan the fundamental basis of his candidacy, and yet with the Republican convention just two weeks away, we know next to nothing of the plan’s details. ...
On issue after issue, the dominant theme of Mr. Romney’s plan is a refusal to make real choices..., you can scrutinize all 160 pages of his economic booklet without finding any evidence of decision-making. ...
The plans Mr. Ryan submitted as House budget chairman — which are now Mr. Romney’s too — were never models of clarity, but they at least made his priorities quite stark: more than three-fifths of his cuts would come from low-income programs like job training, Pell grants and food stamps. That’s not something Mr. Romney ever talked about on the stump ...
When the campaign refuses to release details -- tax returns come to mind as well -- it's because it has something to hide. The question to ask, and the last paragraph has the answer, is what he is trying to hide about his budget proposal. There's no way whatsoever to make his numbers work out without deep cuts to social insurance programs that benefit working class households, and higher taxes would also be required for these households (in part to offset large tax cuts for upper income households). But Romney doesn't have the courage to tell you that, instead he wants to keep it hidden, to blow smoke around the numbers, anything but the truth about his plan.
You will be shocked by this. Greg Mankiw, in an attempt to serve his political interests, said something misleading on his blog:
Measuring Mooching, by Nancy Folbre, Commentary, NY Times: ...Gregory Mankiw .... called attention to a recent Congressional Budget Office report showing that government transfers, net of federal taxes, were greater than market income for the bottom three quintiles of all households ranked by market income in 2009.
Professor Mankiw concluded that the lowest 20 percent of families were receiving $3 in government benefits for every dollar they earned and that the middle quintile “having long been a net contributor to the funding of government, is now a net recipient of government largess.”
This is not the same as calling the middle class moochers, but some might interpret it that way. Here are some important reasons to challenge Professor Mankiw...:
First, a ranking of households by market income puts households with retirees, young children, the sick and disabled at the bottom. We shouldn’t be surprised that net government transfers to these groups exceed their market income. As the C.B.O. report points out, almost two-thirds of the benefits received by the bottom quintile came from Social Security and Medicare. ... Calculations of “government largess” should be based on what people receive over their lifetimes. Retirees receiving Social Security and Medicare have paid taxes into the system in previous years. ...
Second, earnings were low in the bottom quintiles largely as a result of involuntary joblessness. ... People shouldn’t be faulted for unemployment when no jobs are to be had. ...
Third, the C.B.O. estimates do not provide entirely accurate measures of net government transfers. They are based on calculations of the difference between total transfers (including those from state and local government), and federal, but not state and local, taxes.
Indeed, an estimate of state and local taxes paid by the middle quintile in 2009 ... comes to $2,858 — enough to nudge their average total taxes paid ($10,558) above the value of the government transfers they received ($10,400).
In response to a reader’s comment..., Professor Mankiw posted a correction...
This captures an essential point (see here too):
Stepping back from these particulars, the larger point is that most government transfers take the form of social insurance against risks related to health, unemployment and poverty. As with private insurance, people shouldn’t expect the premiums they pay to equal the benefits they receive. What they should expect — and appreciate — is reduced risk of an economic shock that could turn their lives upside down.
Robert Shiller says tax increases should be accompanied by increased incentives for charitable giving. Do you find this more convincing than I do?:
Taxes Needn’t Discourage Philanthropy, by Robert Shiller, Commentary, NY Times: ...Should charitable deductions be fundamental to financial capitalism? I argue so... We need to accompany any tax increases with an affirmation and a broadening of the tax system’s support of philanthropy.
After a big tax increase on high incomes, people should have an especially strong incentive to give money to good causes: to the needy and to schools, colleges, hospitals, churches, the arts and other purposes. Many such donations reduce the need for government spending, so the deduction isn’t terribly costly to the government. It is also likely to bring entrepreneurial creativity to such causes.
Of course, there are counterarguments: that few people are motivated to work for money that will largely have to be given away, and that it’s natural for people to want to make their families better off from their earnings. But there is an answer to that line of thinking: after one attains a certain level of comfort, greater wealth arguably contributes only to social status, which philanthropy certainly bolsters.
That’s a good reason for national policies that encourage philanthropy. Although it’s natural for people to want high social status, there are ways for high achievers to reach the same relative rank without so much wasteful conspicuous consumption...
Unfortunately, much talk today focuses on just the opposite idea: curtailing the charitable deduction for high-income people, in order to help close the federal deficit. ...
Amid rising concern about inequality, we should focus on how we can improve our tax code and other rules to encourage positive feelings of reciprocity in our society. And we can do it while still giving people incentives to innovate — and to keep working hard.
There are two responses to the post below this one on the Laffer curve:
Miles Kimball explains why tax cuts are unlikely to increase revenue. This is worth reading.
Dave Henderson: Where are we on the Laffer Curve. Henderson says:
Cutting marginal tax rates will somewhat increase taxable income. But the odds are very high that it wouldn't increase nearly enough to increase tax revenue.
That is, he is asserting we are to the left side of the peak, but he leaves himself wiggle room even though there's little reason to do so based upon the evidence ("odds are very high"). He then says:
the question is not whether the Laffer Curve is right. The question is where we are on the Laffer Curve.
But he's already answered this question, we're to the left of the peak, or at least "the odds are very high" that we are. I'd be curious to hear what he thinks those odds are, and if they are non-trivial what evidence it is based on. So to me the real question is trying to figure out what point he is trying to make. We're to the left of the peak, almost surely, but the real question is whether we're to the left or right of the peak? Huh? Saying it could be true that tax cuts will increase revenue -- leaving wiggle room -- when all the evidence points in the other direction just gives the politicians and others who say tax cuts from present rates will increase revenue something to hang on to in their ideological battle against taxes. Why give them this opening when the evidence says the opening isn't there?
Along the way he tries to take a swipe at me based on play on words in the title -- but his assertion that I deny the existence of a revenue curve, or that it has a peak, is silly. I don't think we are anywhere near the peak (based partly, but only partly, on recent research showing it's near a 70% rate), but where have I ever said no such peak exists? As I said in comments, what I am laughing at is people -- politicians in the GOP in particular -- who still say that if we cut taxes it will increase revenue (and I am disappointed with economists who abet that by saying it could be true, or that the real question is what side of the peak we're on even though, as Henderson admits, that's all but a settled question: "Not one economist surveyed agrees with this claim [that tax cuts will increase revenue within five years]. I don't either." He doesn't agree, but it just might be true? Hmm.).
Update: Bryan Caplan also responds: Did the IGM Reject Laffer Optimism or Old-School Keynesianism?
Via the IGM Forum:
Question B: A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.
Marianne Bertrand, Darrel Duffie, and Claudia Goldin are the disappointing "uncertain" votes out of the many responses to this question. They should listen to Ed Lazear:
This is the Laffer curve issue. There is little (if any) evidence that rates exceed revenue-maximizing levels. See Mankiw, Feldstein.
Or David Autor:
Not aware of any evidence in recent history where tax cuts actually raise revenue. Sorry, Laffer.
Or Michael Greenstone:
All evidence that I'm aware of suggest that cutting tax rates "marginally" from their current levels would DECREASE revenues, even 5 yrs out
Or Kenneth Judd:
That did not happen in the past. No reason to think it would happen now.
Or Anil Kashyup:
May look plausible on a cocktail napkin (or at a cocktail party), but not true empirically in the US.
Or Pete Klenow:
Not enough time for capital to respond much (physical, human, technology), so it would require implausibly large labor supply elasticities.
Or Robert Hall
See previous question. In addition, few studies suggest we are already at the max of the Laffer curve, though we may be close.
Or Austan Goolsbee:
Moon landing was real. Evolution exists. Tax cuts lose revenue. The reasearch has shown this a thousand times. Enough already.
There are many people who have an interest in making you believe otherwise, but tax cuts are inconsistent with deficit reduction -- they make the deficit problem worse.
[Update here -- the post that follows this one.]
James Kwak says the explanation I gave yesterday for why Republicans ignore the interests of the poor and the unemployed, that the Party is simply expressing the wishes of the wealthy interests that fund campaigns, is not the most most disturbing explanation for the recent behavior of the GOP:
The GOP's Bizarre, Disturbing Passion for Raising Taxes on the Poor, by James Kwak: ... The vast majority of Republicans in Congress have signed the Taxpayer Protection Pledge, which commits them to vote against any bill that would either increase tax rates or increase tax revenues.
That should be the whole story. But it isn't..., leading Republican figures ... as well as a majority of party members, argue that taxes should go up ... on the poor. They are talking about the famous "47 percent" who don't pay federal income taxes. ...
If you include payroll taxes, it turns out that only 18 percent of households pay no direct federal taxes. ... The majority of people who don't pay either income or payroll taxes are the elderly... If Eric Cantor wants to solve the "problem"..., he should push to make Social Security benefits taxable. Good luck with that.
Almost all of the other households that don't pay direct federal taxes make less than $20,000 per year. So, it turns out, the only people that Republicans want to raise taxes on are the very poor -- and they want to do it so much that they are willing to consider breaking the Pledge. ...
Two explanations jump to mind. The first is that the modern Republican Party is funded by the very rich. ... The result is that the parties' platforms now reflect the wishes of their major funders, not their median voters. ...
The other, even-more-disturbing explanation, is that Republicans see the rich as worthy members of society (the "producers") and the poor as a drain on society (the "takers"). ... This is why today's conservatives have gone beyond the typical libertarian and supply-side arguments for lower taxes on the rich, and the campaign to transfer wealth from the poor to the rich has taken on such self-righteous tones.
This just goes to show how pathological the Republican Party has become. It would be so much simpler, more logical, and more politically appealing if they would just draw a line against higher taxes for anyone. ... The fact that Eric Cantor feels compelled to go out of his way to talk about raising taxes on the poor shows how the nasty instinct for class warfare is undermining what should be a simple, small-government agenda.
Rawls on a property-owning democracy, by Daniel Little: John Rawls's critique of capitalism was deeper than has been commonly recognized -- this is a central thrust of quite a bit of important recent work on Rawls's theory of justice. Much of this recent discussion focuses on Rawls's idea of a "property-owning democracy" as an alternative to both laissez-faire and welfare-state capitalism. This more disruptive reading of Rawls is especially important today, forty years later, given the great degree to which wealth stratification has increased and the political influence of wealth has mushroomed. (I've addressed this set of issues in prior posts; link, link.) Martin O'Neill and Thad Williamson's recent volume, Property-Owning Democracy: Rawls and Beyond, provides an excellent and detailed discussion of the many dimensions of this idea and its relevance to the capitalism we experience in 2012. It includes contributions by a number of important younger political philosophers.
O'Neill and Williamson make the point in their introduction that this issue is not merely of interest within academic philosophy. It also provides a powerful conceptual and normative system that might serve as a basis for a more successful version of progressive politics in North America and the UK. Politicians on the left have found themselves locked into a defensive battle trying to preserve some of the features of welfare state capitalism -- usually unsuccessfully. The arguments underlying the idea of a property owning democracy have the potential for resetting practical policy and political debates on more defensible terrain.
The core idea is that Rawls believes that his first principle establishing the priority of liberty has significant implications for the extent of wealth inequality that can be tolerated in a just society. The requirement of the equal worth of political and personal liberties implies that extreme inequalities of wealth are unjust, because they provide a fundamentally unequal base to different groups of people for the exercise of their political and democratic liberties. As O'Neill and Williamson put it in their introduction, "Capitalist interests and the rich will have vastly more influence over the political process than other citizens, a condition which violates the requirement of equal political liberties". A welfare capitalist state that succeeds in maintaining a tax system that compensates the worse-off in terms of income will satisfy the second principle, the difference principle. But in the striking recent interpretations of Rawls's thinking about a POD, a welfare state cannot satisfy the first principle. (It would appear that Rawls should also have had doubts about the sustainability of a welfare state within the circumstances of extreme inequality of wealth: wealth holders will have extensive political power and will be able to effectively oppose the tax policies that are necessary for the extensive income redistribution required by a just welfare capitalist state.) Instead, Rawls favors a form of society that he describes as a property-owning democracy, in which strong policies of wealth redistribution guarantee a broad distribution of wealth across society. Here is how Rawls puts it in Justice as Fairness: A Restatement:
Property-owning democracy avoids this, not by the redistribution of income to those with less at the end of each period, so to speak, but rather by ensuring the widespread ownership of assets and human capital (that is, education and trained skills) at the beginning of each period, all this against a background of fair equality of opportunity. The intent is not simply to assist those who lose out through accident or misfortune (although that must be done), but rather to put all citizens in a position to manage their own affairs on a footing of a suitable degree of social and economic equality.
O'Neill and Williamson draw out the implications of this view of a just society by contrast with the realities of 2012:
The concentration of capital and the emergence of finance as a driving sector of capitalism has generated not only instability and crisis; it also has led to extraordinary political power for private financial interests, with banking interests taking a leading role in shaping not only policies immediately affecting that sector but economic (and thereby social) policy in general.... The United States is now further than ever from realizing what Rawls termed the "fair value of the political liberties" -- that is, the core value of political equality.
How would the wide dispersal of wealth be achieved and maintained? Evidently this can only be achieved through taxation, including heavy estate taxes designed to prevent the "large-scale private concentrations of capital from coming to have a dominant role in economic and political life".
It seems apparent that progressives lack powerful visions of what a just modern democracy could look like. The issues and principles that are being developed within this new discussion of Rawls have the potential for creating such a vision, as compelling in our times as the original idea of justice as fairness was in the 1970s. It is, in the words of O'Neill and Williamson, "a political economy based on wide dispersal of capital with the political capacity to block the very rich and corporate elites from dominating the economy and relevant public policies". And it is a society that comes closer to the ideas of liberty and equality that underlie our core conception of democracy than we have yet achieved.
(Williamson and O'Neill provided an excellent exposition of the idea and some of the foundational questions that need to be explored in 2009 in "Property-Owning Democracy and the Demands of Justice" (link). The concept of a property-owning democracy originates in writings by James Meade, including his 1965 Efficiency, Equality and the Ownership of Property.)
Republicans will almost surely propose tax cuts (for you know who) to stimulate the economy. A reminder:
And the Bush tax cuts didn't do any better.
No matter what Republicans say, always remember the ultimate goal is more tax cuts for their supporters:
Don’t let Congress fast-track another tax cut, Andrew Fieldhouse: House Speaker John Boehner’s (R-Ohio) high-profile speech at last week’s 2012 Fiscal Summit garnered much attention for its pledge to again hijack the debt ceiling; less noticed was his announcement that the House of Representatives will establish a fast-track process for expediting “tax reform.” Comprehensive tax reform could add much needed revenue and balance to a long-term deficit..., but that’s not what Boehner is talking about:
“If we do this right, we will never again have to deal with the uncertainty of expiring tax rates. We’ll have replaced the broken status quo with a tax code that maintains progressivity, taxes income once, and creates a fairer, simpler code. And if we do that right, we will see increased revenue from more economic growth.” (Full text here.)
Anything resembling the tax plan recommended by Ways and Means Committee Chairman Dave Camp (R-Mich.) and included in Budget Committee Chairman Paul Ryan’s (R-Wis.) fiscal 2013 budget resolution—Boehner’s chief fiscal policy deputies—is going to have a devilishly hard time meeting this laundry list of talking points. That’s because conservatives falsely equate a “simpler” tax code with cutting and consolidating tax brackets, which would confer big tax cuts to upper-income households in the top tax brackets. This is the bedrock of the Camp-Ryan tax plan: “Consolidate the current six individual income tax brackets into just two brackets of 10 and 25 percent.” Short of unspecified offsets, this would sap progressivity from the tax code and deprive the Treasury of $2.5 trillion over a decade—accounting for more than half of the $4$4.5 trillion of unfunded tax cuts proposed in the Ryan budget. Combined with the other major tenants—repealing the alternative minimum tax (AMT), cutting the corporate tax rate to 25 percent, exempting foreign profits from taxation, and repealing health care reform—the tax code would be markedly flattened at the top of the income distribution...:
The red bars show what regressive upper-income tax cuts and lower-income tax increases look like, not what tax reform looks like. The missing element is how the tax cuts would be financed—i.e., which unspecified tax expenditures would be eliminated in “broadening the tax base.” House Republicans object to eliminating or even scaling back the preferential tax rates on capital gains and dividends—the tax expenditures most disproportionately benefiting upper-income households—which would be the only feasible way to maintain progressivity at the top of the income distribution...
Lastly, Boehner’s implied objectives of revenue and distributional neutrality—which guided the Tax Reform Act of 1986—are now wholly inappropriate benchmarks, as they would lock-in the past decade’s unaffordable and regressive Bush-era tax cuts and exacerbate Gilded-Age levels of income inequality. ...
If Congress really is heading toward comprehensive tax reform in the next few years, policymakers need to be kept honest about what amounts to reform versus a tax cut. The United States simply can’t afford to let Congress fast-track another tax cut disguised as “tax reform.” And House Republicans are currently $4.5 trillion shy of proposing even revenue-neutral tax reform.
Beyond the unspecified cuts, etc., it's hard to believe they are still trying to get away with the claim that tax cuts will increase revenue and actually help with the long-term deficit -- that won't happen, it will make the deficit worse just as it did in the past. But I guess if the press lets you get away with bogus claims, unspecified cuts and the like, why not say whatever?
This study from Basit Zafar, Grant Graziani, and Wilbert van der Klaauw of the NY Fed shows that the payroll tax cuts in the stimulus package have been used mostly to pay off debt and add to savings -- around 40% went to consumption. Does the relatively low amount that went to consumption mean the payroll tax cuts didn't work? As I've argued before, the 60% that went to saving and debt reduction represents balance sheet rebuilding, something that has to happen before households can return to more normal expenditure patterns. This may mean "that our estimated MPC [of .405] is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments." And it's not just a reduction in interest, once balance sheets are rebuilt the amount of income that goes to consumption instead of saving and debt reduction ought to go up:
A Boost in Your Paycheck: How Are U.S. Workers Using the Payroll Tax Cut?, by Basit Zafar, Grant Graziani, and Wilbert van der Klaauw, Liberty Street Economics, FRB NY: Over the past several months, there was a flurry of debate in Washington over the extension of the payroll tax cut. Many supporters of the tax cut—worth about $1,000 to a family earning the median income of slightly more than $50,000 a year—have cited its importance to the nation’s economic recovery, while opponents claim that it will only add to the national deficit without boosting the economy. Exactly how such a tax cut affects the aggregate economy relies heavily on how U.S. workers use the extra funds in their paychecks. Unfortunately, we know little about how such tax cuts are used by workers. So we decided to ask them and, in this post, report the answers they gave us.
The initial payroll tax cut, passed into law as part of the 2010 Tax Relief Act, reduced workers’ Social Security tax withholding rate from 6.2 percent to 4.2 percent for all of 2011. After much legislative debate, the 2 percent payroll tax cut for nearly 160 million U.S. workers was extended in December 2011 for the first two months of 2012, and then again on February 22, 2012, for the rest of the year. In order to understand how these cuts might affect economic activity, we used the RAND Corporation’s American Life Panel (ALP) to conduct online surveys of 372 individuals, 200 of whom were working, at two points last year: in February 2011, and then in mid-December 2011, close to the expiration of the initial tax cuts.
In the first survey, we asked respondents how they intended to spend any extra funds from the payroll tax cut in their paychecks. More precisely, respondents were asked to provide the share (out of 100 percent) of funds that they would spend on: consuming, saving, and paying off debt. The table below shows that 8.8 percent of respondents planned to use most of the tax-cut funds for consumption, 39.8 percent planned to use majority of it on saving, and 50.3 percent planned to use a majority of it to pay off debt. Such a low intended rate of consumption is consistent with the permanent income hypothesis, which claims that transitory changes in income should not change consumption behavior, as individuals would use the extra funds to smooth their consumption over the rest of their lifetime.
To explore the relationship between the perceived permanence of the tax cuts and the intention to spend the funds, we also asked respondents how likely they thought it was that the tax-cut extensions would continue into future years. The table below shows how intended consumption patterns relate to the perceived likelihood of future tax-cut extensions. On average, those who consider long-term extensions to be likely plan to spend about 8 percentage points more of their tax-cut funds than those who consider them to be unlikely (20.5 percent compared with 12.6 percent). Additionally, the last three columns of the table show that when comparing the two groups, a higher proportion of the “likely” group intend to use the majority of their tax-cut funds for consumption (17.9 percent compared with 8.1 percent). This supports the permanent income hypothesis, as those who consider these tax cuts to be more permanent plan to spend more of the extra funds.
In the second survey, conducted in December 2011, respondents were asked how they had used the extra funds from the tax cut over the past year. The second column in the first table shows that 35.0 percent of individuals actually spent the majority of their tax-cut funds, a sharp increase from the intended use of 8.8 percent. We next compare individuals’ intended use of the tax-cut funds (reported in the early 2011 survey) with what they reported actually doing with the funds. The figure below shows the relative frequency of actual tax-cut-fund use by the three groups based on intended use (that is, mostly consume, mostly save, and mostly pay off debt). For example, of those who planned to spend most of their tax-cut funds, 66.7 percent did in fact spend the majority of it, while 16.7 percent saved the majority of it, and 16.7 percent paid off debt. A similarly high proportion of those who intended to use the majority of their funds to pay off debts did so (60.8 percent), while 46.2 percent of those who planned to save most of their funds actually did so. Two patterns are of note in the chart: (i) while there is a positive correlation between intended and actual uses, there is a high degree of inconsistency; and (ii) there is a systematic shift toward spending for those who did not use their funds in the way they intended, that is, individuals ended up spending more of their tax-cut funds than they had intended.
We can also go beyond grouping respondents by how they used the majority of their funds. In particular, we can directly estimate the marginal propensity to consume (MPC) by taking the average of the proportion of each person’s tax-cut funds that was reported to be used on spending. This, of course, can also be done for saving and paying off debt. This value is far more useful for policymakers when considering how the total tax cut will be used by households. The chart below summarizes the average breakdown of tax-cut-fund use for the full sample and by demographic groups. On average, respondents used 40.5 percent of their tax-cut funds on spending (that is, an MPC of 0.405), 24.1 percent on saving, and 35.3 percent on paying off debt. These figures are quite different from the intended average proportions reported in the first survey, in which, on average, respondents intended to use 16.3 percent of their tax-cut funds on spending (intended MPC of 0.163), 34.2 percent on saving, and 49.5 percent on paying off debt. That is, on average, individuals ended up spending a significantly larger part of the tax-cut funds than they had intended. ...
Our estimated MPC of 0.405 is at the higher end of the range of estimates from the literature based on recent tax rebates: in examining the use of the 2008 tax rebates, one study estimates an MPC of 0.33, and another an MPC of about 12 to 30 percent in the first three months from receiving the rebate; similarly, the MPC in the first three months after the 2001 tax rebates has been estimated in the 20 to 40 percent range. One possible explanation for why we observe a higher MPC out of tax-cut funds than out of tax rebates is that tax cuts show up in smaller amounts spread over multiple paychecks, which many people claim not to notice. These smaller, multiple payments may be more easily spent than large, lump-sum tax rebates.
Three of our findings are noteworthy. One, our larger MPC estimates highlight the importance of the design of tax holidays (rebates or cuts) in determining the response of spending to policies. Second, our finding—that people who perceive tax cuts to be more permanent plan to spend more of their funds—has fiscal policy implications as to whether such tax cuts are implemented as long-term extensions or sequential short-term extensions. Third, we find that people spend a large portion of their tax-cut funds to pay off debts—this may be good news considering the large debt issues leading up to and during the financial crisis—and may also suggest that our estimated MPC is an underestimate because by facilitating deleveraging, it can indirectly lead to higher future spending through a reduction in future interest payments.
Should we feel sorry for the rich?:
Robert Samuelson Playing Anti-Robin Hood Again, by Barkley Rosser: In today's Washington Post, Robert J. Samuelson is at it again with a column called "The real Washington," in which he admonishes his readers for not realizing that we are a democracy and that the rich are paying for huge increases in aid to the poor, up from $126 billion in 1980 in real terms to $626 billion today, even while the suffering top income quintile are supposedly paying "70%" of federal taxes, poor things. He clearly decries this and thinks that aid to the poor along with his usual favorite target, Social Security, should if not be cut at least capped. The rich are doing enough, more than enough, poor things, and here we are facing the "terrible threat of long term deficits," even though he only once manages to mention that "More promises were made than can be kept without raising taxes, which -- for the most part -- were also subject to bipartisan promises against increases." That this last remark is ridiculously lopsided should go without saying, but RJS is keen to maintain his position as a Very Serious Centrist. ...
RJS's numbers ... are not as dramatic as they look. While indeed the top quintile does pay 67.2% of federal taxes (not RJS's apparently rounded off 70%), the same top quintile earns 53.4% of income. So, yes, indeed, the federal tax code is mildly progressive. But in fact it used to be more so than it is now. The average federal tax rate for that top quintile has been lower since 2001 than it was for any years since the end of WW II except for 1982 and 1983. This moaning about the poor rich on taxes just looks silly.
Furthermore, RJS's numbers overstate what has gone on regarding aid for the poor. ... The problem as almost always with RJS is that he ignores the outsize price increases in healthcare costs. ... This seems like a massive increase, but when one corrects for the far greater increase in medical care costs than overall prices, the real increase in this is relatively modest, and this increase supposedly constitutes nearly half the overall increase.
While we are at it, expenditures on TANF have not risen since welfare reform, and the number of enrollees has barely budged during the Great Recession. This part of the system for helping the poor has been nearly useless in the recent crisis. I am glad that food stamps (SNAP) have been way up, but Samuelson is just missing it when he tries to paint a picture of the rich being snagged badly by a bunch of overcovered poor people (along with ignoring the skewing to the rich of the tax code...).
More on Social Security:
Let's beef up Social Security benefits instead of cutting them, by Michael Hiltzik: Advocates for strengthening Social Security have come to dread the release of the annual report of the program's trustees. That's because the event has become the basis for more hand-wringing about Social Security's fiscal condition and calls to cut benefits for current and future retirees. This week's release of the 2012 report is no exception. ...
What won't be adequately explained is that the program isn't "insolvent" or "bankrupt." ... Economic recovery alone will improve the program's fiscal condition, and the trustees say that even if Congress does absolutely nothing, in 2033 there still will be money to pay about 75% of currently scheduled benefits.
And by the way, despite facing the worst economic conditions in its history, the program ran a surplus of $69 billion last year, increasing the trust fund to nearly $2.7 trillion. ...
It's time to shut down the talk of cutting benefits, which serves nobody, and pump up the volume on making them better. ... Of the customary three legs of the retirement stool, two — personal savings and employer-paid pensions — have been shattered into smithereens by the markets, high unemployment and changes in workplace benefits. Social Security is the third leg. ...
Modernizing Social Security is crucial today because the actions of government and industry have increased Americans' dependence on the program. ...
Undoubtedly you're going to hear that improving Social Security will bankrupt America. This is the mating cry of the haves-and-want-mores, and it's malarkey. Federal taxes ... amounted to about 15.4% of our gross national product last year... That's lower than the level of every other industrialized country...
Isn't it curious that the same people who insist that America is the greatest, richest country in the world, ever, are those who insist that there's no way we can afford to provide for our elderly, our disabled and the survivors of our deceased workers to the same degree as the rest of the industrialized world? ...
We can afford to give people a decent retirement. People who benefitted from the hard work of others -- those who reaped the gains of increasing inequality and have more than enough -- can do more to help provide a decent retirement to the people who toiled day in and day out to help create that wealth. And as I've said again and again, the income distribution mechanism has gone awry in recent decades. People at the lower income are not getting what they have earned, and people at the top are getting more than what they contribute. So I view this as simply returning income to its rightful owners.
The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution, by Dean Baker: In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:
"Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."
Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.
The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.
In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.
Raising the cap is my favored solution, but (surprise) somehow raising taxes of those with the most political power is not on the agenda. Instead, the proposed solutions always seem to hit those who are the most politically and economically vulnerable.
Peter Dorman also weighs in:
For the past thirty years we have seen repeated campaigns to eviscerate Social Security—to privatize it, siphon off its finances, drain it of its essential social insurance character. These have failed, not because of the brilliance or commitment of its defenders, but simply because it fulfills a vital social function and is wildly popular. Even those who, in their heart of hearts, want to crush it to bits, claim to be in favor of “saving” it. So what’s the strategy of the anti-SS minions?
Cynicism. Convince younger voters, whose benefits are still decades away, that the program is dying a slow but certain death, and that politicians are too myopic or pandering or just stupid to do anything about it. From time to time I poll my students, and by a big majority they always tell me that SS will not be around to support them in their retirement. (Not that this has provoked a big Feldsteinesque spike in their personal savings....) As this mindset takes hold, it becomes easier to simply tune out the debate over SS. After all, it’s not like it’s actually going to be there when I’m old, no matter what they say, right? At some point, it goes from being a third rail to a footnote to just background noise, to mangle a bunch of metaphors.
What I’d like to see are news stories that say something like, “Social Security has had its ups and downs, but it’s in better financial shape now than it was a generation ago, and unless its enemies prevail, it will be there for you when you need it.”
People also need to realize that "Social Security faces a shortfall — NOT bankruptcy — a quarter of a century from now. OK, I guess that’s a real concern. But compared to other concerns, it’s really pretty minor, and doesn’t deserve a tenth the attention it gets. It’s also worth noting that even if the trust fund is exhausted and no other financing provided, Social Security will be able to pay about three-quarters of scheduled benefits, which would mean real benefits higher than it pays now."
Notice that even under the worse case scenario, real benefits would be higher than they are now. The benefits would not keep up with increases in productivity as they do presently -- payments rise as the standard of living rises -- but the benefits would still rise as much or more than inflation. So today's standard of living would still be available even in the worst possible case. But there is the problem of how to cover the productivity increases over the next quarter century. What to do?
Raise the cap and close the gap.