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Archive for April 2011

Three Cheers for Eric Schoenberg!

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Eric Schoenberg has an article at the HuffPo about how little he paid in federal taxes for 2010. Out of his income of $207,415 he was able to deduct $155,466 plus another $14,600, leaving him with only $37,349 in taxable income. His federal taxes then amounted to $2,173 for a tax rate of 1.0%. His take: Thanks a lot, but this is insane. Under my proposal he would have paid $43,147 in taxes, for a tax rate of 20.8%. Now, if that were the case he might be writing a different article (Why Are My Taxes so High?), but at least we would be paying the bills.

Now, there are a few problems with my tax proposal. The main one I’ve been thinking about, is that doesn’t take state (or local) income taxes into account which can lead to a higher marginal tax rate. Ideally, the maximum marginal rate would be 50% (half for me, half for the society once you get above a fairly high threshold), so maybe I should reduce the top rates somewhat. Of course, perhaps simply allowing the deduction for state and local income taxes takes care of that.

However, the more I think about deductions, the less sense they make, especially from a libertarian point of view. A deduction (outside of deductions for other taxes) is basically the government saying, “I approve of how you spent this money so you don’t have to pay income on it.” You bought a house? Great, don’t pay taxes on the interest. You pay for someone to take care of your young child? No tax on that. You spend a lot on medical bills? Let me just reduce your taxes for you. Why should the government have any business telling us (or at least influencing us on) how to spend our money? It doesn’t make sense.

I wouldn’t normally describe myself as a libertarian. I believe in the glue and benefits that society provides. In order to make it a society in which I want to live, a society that takes care of its poor, elderly, and unlucky, I’m willing to pay taxes and make my fellow citizens pay them as well. But I’m still an economist. I still believe that people should, for the most part, be able to decide to spend their money how they would like to.

But in order to do that we need to make sure that our higher income people, like Eric Schoenberg, pay their fair share. I’m glad he was willing and able to use his own example to show that the rich often don’t pay their fair share.

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Written by Liam C Malloy

April 27, 2011 at 2:53 pm

Krugman in 2012?

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The New York Magazine has a long piece on Paul Krugman’s lonely voice from the left. I’m a big fan of PK. While I don’t always think his political prognostications are correct (would HRC really have been better than BHO? I doubt it), his economic pronouncements are almost always right. With the left without a leader, should we start draftpaulkrugman2012.com? Probably not. I doubt he would make a good politician (and might not even make a good chairman of the CEA), despite the fact that he’s a better thinker on economic/social issues than anybody else currently around.

Recently I’ve been thinking about what the country does need in order to move farther left to a world with universal healthcare, stronger unions, a higher minimum wage, and publicly-financed campaigns. Many of us on the left felt that we were getting just the kind of politician that we wanted in Obama, only to be disappointed by his desire to lead by compromise, to be the grownup in the conversation.

  • You want a $1.2 trillion spending stimulus? How about we ask for $850 billion and then compromise by reducing that and making half of it ineffectual tax cuts.
  • You want to close Guantanamo Bay? Well, let’s release some of them, maybe try to get a trial in Federal court, and then back down and just keep the status quo.
  • You want to nationalize the banks that caused this financial panic in order to protect the taxpayers? Let’s just funnel them billions of dollars, reduce the industry’s competitiveness, and hope they can recapitalize through profits.
  • You want to worry about the unemployed and create some sort of temporary jobs program? Well, maybe I can get another year of extended unemployment benefits by agreeing to keep taxes on the rich at low levels.

The list goes on and on. I can sympathize with the President. I understand all too well the impulse to compromise somewhere in the middle when a decision has to be made. It makes you look reasonable, it allows you to avoid more overt confrontation, and it allows you to move to the next problem. But there are at least two large problems with this style of leadership.

First, the Republicans are better at this game. Like an intelligent child, they see that if you want to compromise as a way of resolving conflicts, they should ask for two hours of TV instead of one. They should suggest cutting the top marginal tax rate to 25% instead of 35%. Democrats, on the other hand, seem much more likely to actually propose what they want. When we have a compromiser-in-chief, we end up a lot farther right than we ever expected to.

The second problem with this kind of leadership is that it simply isn’t leadership. The platoon leader doesn’t say, “Ok, the captain says we need to take this hill, but Robinson here has some serious misgivings. I’ve decided we’re going to go halfway up and ask the enemy for a truce.” The parent doesn’t shouldn’t say, “If you don’t want to eat your broccoli you at least have to eat a piece of bread.” The CEO doesn’t say–well, you get the point.

The leader must lead. She must say, “This is the right way. Follow me.” If she runs into obstacles, she must fight through them. If she runs into a roadblock, she must scream and batter it until it is lifted or it crumbles. She may not always seem to accomplish as much as someone willing to compromise, but she will do more of what she believes is right.

And this is the type of president that Americans admire. FDR was a leader. So was LBJ. Carter was not a leader. Reagan (in his own wifty way) was a leader. George W. Bush (in his demented way) was a leader in a way his father was not. Eisenhower was perhaps the best leader we’ve had, even though he did it in a fairly quiet, unassuming way. I think one of the problems for Obama is that Bill Clinton was fairly successful as a compromiser. As he is the only Democratic president we’ve had in the last 30 years, there are not a lot of other role models.

But I can’t help but think that Clinton was fairly lucky. The economy was getting a fairly big productivity shock from the introduction of information technologies into more and more industries. That allowed him to cut back on spending and (modestly) raise taxes without any economic problems. Obama seems to want to take that blueprint and apply it to the current economic situation which, unfortunately, is completely different. We had a huge financial crisis followed by a very deep recession and an incredibly slow recovery. If he needs a role model, he should look to FDR.

Don’t get me wrong, FDR made as many mistakes as he had successes. But he lead the country through the Depression. He showed the people that he was on their side, that he was fighting for them, and that he would try anything that might work to get the country back on its feet. When conservative judges dismantled his New Deal legislation, he tried to pack the court. Sure, that was a mistake and didn’t work, but at least it showed he was serious. His one major mistake was compromising in 1937 and pulling back on his stimulus programs, pushing the economy back into recession.

Is there anyone on the left who can lead? I don’t see anyone. Our smartest and most successful politicians (on the left) seem to be compromising technocrats. And those farther left (Waxman, Kucinich, etc.) just seem a little too odd to appeal to the majority of Americans. Obama the candidate could lead. Obama the president does not seem able to.

Written by Liam C Malloy

April 25, 2011 at 4:51 pm

When Will the Golden Bubble Pop?

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So the NYT has a piece on how the price of gold has exceeded $1,500 an ounce. The article notes that while a nominal high, it was actually higher in real terms in the 1980s. I had been asked last Thanksgiving by a relative about the price of gold because a “friend” had invested heavily in gold and silver. I say now what I said then: It’s a bubble. And it’s going to pop.

But I was also a little curious. Gold, after all, while not completely useless, is basically only used for jewelry and other types of ornamentation. It’s not a really useful commodity like oil or silicon or corn. So why was the price so high? Why were Glenn Beck and others hawking it on TV?

The first thing I did was put together a graph of the annual price of gold going back to the 1950s, adjusting for inflation using the CPI.

Notice anything unusual? Well, the price of gold spiked from 1979-1982, hitting a high in 1980. Then it started spiking again in 2006 and 2007. To someone who spends a lot of time looking at unemployment numbers, this looked very familiar. After all, the highest unemployment rate since the Great Depression was in 1982. When you add the unemployment rate to the graph, you can see the correlation.

The correlation for these annual numbers is 0.6 which is fairly high when we’re talking macroeconomics. It also would seem to offer an opportunity for profitable arbitrage (although it’s hard to see from this graph if the price of gold is leading the unemployment rate or following it). But the one thing that seems to be clear from the graph is that when the unemployment rate falls, the price of gold is going to fall along with it.

If I’m correct in my surmise about the CES, then the unemployment rate may continue to fall substantially throughout the year. In real terms the price of gold fell from over $1,000 in 1982 to $650 in 1984, a 35% drop. If I was a rich risk-neutral investor, I would be shorting gold right now in a big way. Of course, timing the popping of a bubble is notoriously difficult and smarter people than I have lost their shirt trying to do it.

The sad thing is that the professional investors will no doubt get out of gold quickly when it starts to turn. It will be the smaller investors that will be left holding the bag of bullion. After all, the only people who are in gold right now must be the fools who invest in bubbles and the professionals who take advantage of them. And if you don’t know who the fool in the room is…

Written by Liam C Malloy

April 20, 2011 at 5:06 pm

Posted in Recession, Unemployment

Class Warfare

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Whenever the working class bring up the exorbitant salaries of the rich, they are accused of engaging in class warfare. The rich seem to have decided that the best defense is a good offense, and rather than try to justify their unjustifiable incomes, they accuse the plebs in the bottom 90% of fighting a class war.

Steven Geenhouse, over at the NYT Economix blog, links to a site from the AFL-CIO that points out that the average salary of 299 CEOs at S&P 500 companies averaged over $11 million in 2010. I’m sure that pointing this out will lead to claims that the AFL-CIO is engaging in class warfare.

As I’ve pointed out before, the income for the top 1% and the top 0.01% has been growing out of control for the last 30 years. The most obvious thing to do would be to tax all of that income at a fairly high rate. That will either bring pay down (to levels from the 1950s-1970s when the American economy was strong and growth was shared) or it will raise a lot of tax revenue that can be spent on education and infrastructure that should support growth in the future.

The major problem is the top 1% (and top 0.01%) which has increased its share of (non-capital gains) income from 8% in 1981 to almost 18% in 2008. Those numbers are 0.7% in 1981 and 3.3% for the top 0.01% (all of about 15,000 households). But the whining of those in the top 5% (say percentile 95-99) also pisses me off. These are the people who have an average income of around $200,000 (almost twice the income of my family, and I realize I’m rich almost every day) and complain that they’re not really rich.

Catherine Rampell (also at the NYT Economix blog) notes that 2/3 of people earning over $250,000 think their taxes are too high. Well this group has increased its income share from 12.9% in 1981 to 15.7% in 2008. The real average income for this 4 percent of the population increased from $130,000 to over $200,000 during that time period. Meanwhile the average income of the bottom 90% went from $30,199 to $30,981, a whopping $782 per year (“Yeah! We can take that vacation to the movie theater this year!”).

The comments on Rampell’s post just make me want to puke. Here’s my favorite of the one’s I read from JH:

What is “rich?” I wouldn’t say someone is “rich” unless they have significant discretionary income. When you say “rich” people think of Donald Trump, and they would certainly be right. But, unfortunately, under this columnist’s definition of rich, a lot of very hard working people who have very little discretionary income are being caught in that net. And that’s unfair. As another poster noted, 250K is one thing in a place like Cincinnati, another in Washington, DC or San Francisco. My wife and I both work, have three children to support, have a nice but modest home in a nice neighborhood in DC, have two cars, and we try to go on vacation once a year. We make about 250K. We get nailed by the alternative minimum tax every year. After we take care of expenses – mortgage, utilities, car payments, education and day care, insurance, and of course, taxes, guess what? We have nothing left. There are probably millions like us. We are paying taxes through the nose and they are going up everywhere we turn. You want to bash us for being rich? Fine. We’ll vote Republican then. But we ain’t rich. The Democrats are making a BIG mistake if they think families who make 250K are rich!!!

Ok, maybe JH and his wife couldn’t earn the $250k they do if they lived in Cincinnati (I can’t help but wonder if either of their jobs is related in any way to the Federal government and the taxes he hates to pay). But I know a little bit about this area, and they could live very well on $250k a year if they so chose. If they want to send their kids to public schools, I would recommend Silver Spring or another town in Montgomery County. They could have a reasonable house for the five of them for under $500k. If they wanted to live like kings, just move over to Prince George’s County (Greenbelt is very nice and quite affordable). True, the public schools are fairly stinky there, but I know a great private school for only $8k a year.

My only point is that the top 5% doesn’t seem to know how the bottom 90% lives. Or maybe these people do know how the others live and want nothing to do with it. But when you earn $250k a year you are rich, no matter where you live. You are very close to the richest 1% of all Americans (threshold income in 2008 was $340k). Could you have more money? Yes. Would you enjoy more money? Yes. Do you need more money? Most definitely not.

Our family income puts us right at the 90th percentile. Like everybody else, we would like more. And because of the spending decisions we’ve made we don’t have much extra from month to month. But that was a choice. We live in a nice town in a nice house. We drive decent cars and send our kids to nice schools. But just because we can’t afford that vacation to France or even California doesn’t mean we aren’t rich. We are and we know it.

Maybe it’s time to remind those in the top 10% or top 5% or top 1% how rich they are. Maybe if the bottom 90% is going to be accused of class warfare it should actually engage in some class warfare. Maybe it’s time for some political candidates to run on a truly progressive platform of taxing the rich, spending it on public goods, and making America as strong as it was 50 years ago.

I’m not going to hold my breath.

Written by Liam C Malloy

April 19, 2011 at 10:03 pm

Taxes Aren’t Bad

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Jonathan Cohn has a nice post about the benefits of taxes. He points out all of the nice things that taxes buy and that U.S. taxes are fairly low when compared to other OECD countries.

One of the bugaboos of the right is that higher taxes will lead to lower economic growth. There is no evidence of this, either in our own country’s history, or in the international data. In fact, a simple (quadratic) regression on U.S. post-WWII data suggests that a marginal income tax rate on the top 1% (those earning over $900k) of between 40-45% would maximize growth. If you look at the top 0.01% (those earning over $17 million) that growth-maximizing marginal tax rate is over 70%. In an earlier post I showed that we could eliminate the corporate income tax by raising top rates to only 50% (maybe a bit higher to actually balance the budget).

There may or may not be a causal relationship between higher taxes on the rich and higher GDP growth, but it is certainly possible. Higher taxes allow the government to spend more on infrastructure and education, both important for economic growth. Currently, higher taxes would allow the government to provide health insurance for all. This should increase the health, especially of the working lower middle class (who are the ones most often without insurance), and benefit economic growth.

The rich, very rich, and wannabe rich on the right have certainly stepped up their rhetoric over the last decade and seem to have convinced most politicians that higher taxes are evil things. But this is clearly not always the case. My total health insurance premium is about $19,000 a year for an excellent family coverage plan. That amounts to about 25% of my gross salary. If we put in a Medicare-for-all plan, I would bet those costs would fall fairly substantially (with only a small drop in coverage, after all, all providers would be in the network). I would gladly pay an extra 15-20% in taxes for such a plan, assuming that my salary is increased by the amount of my current coverage. The economic (and social) benefits of covering everybody, I would bet, would be significant.

Written by Liam C Malloy

April 18, 2011 at 3:19 pm

Why Don’t People Understand Health Insurance Markets?

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There’s been a minor debate in the blogs I read about the value of Medicare as opposed to a cash voucher. The basic idea is that if you’re 65 you could either sign up for Medicare or take the cash equivalent. Now, as someone who has received his fair share of stupid gifts from friends, family, and employers and has often thought, “Gee, could you just give me the cash instead?”, I understand the impetus to think that the cash might in fact be better.

So Ezra Klein points out the debate between Tyler Cowen and Matt Yglesias. He also points out that this is not the proposal in the Ryan plan which would simply cut benefits. The voucher in that plan could only be used to buy health insurance and would not, as far as I can see, be redeemable for cash. Klein says that the point is that we don’t want people to die in poverty on the street so we won’t deny them healthcare in their final days. He is, of course, right, and somebody will have to pay for that healthcare.

But Klein misses the larger point. Cowen points out that many people might in fact choose the cash as opposed to the health care. And that’s exactly the point! Healthy people will opt out of coverage, costs will increase, and pretty soon the market will fail to work. As Brad DeLong notes, we’ve known this since at least Arrow’s 1963 paper on health insurance markets.

I guess this is why it’s important to have a degree in economics. So you don’t make stupid mistakes. I suppose Klein and Yglesias can be forgiven since they lack such a distinction. I wonder what Cowen’s degree is in.

Written by Liam C Malloy

April 17, 2011 at 8:06 am

Posted in Healthcare, Policy

A Flat Tax Plus

with 3 comments

It’s that time of year again. Time to gather up our W-2s, 1099s, fire up TurboTax®, and hope for a refund. But don’t sweat it, more likely than not, you’re paying less of the tax bill now than you did 30 years ago. If the Democrats have the courage to suggest it, we could dramatically simplify our income tax structure, make it more representative of the current income distribution, and eliminate the corporate income tax, immediately making the U.S. much more competitive in the global market.

The Tax Foundation shows that the bottom half of all taxpayers paid less than 3% of federal income tax, down from almost 7.5% in Ronald Reagan’s first year in office. The story is the same for the bottom 90%. Meanwhile we are saddling the top with an ever larger piece of the tax pie. The top one percent paid almost two-fifths of all income taxes in 2008, more than double what they paid the year after we elected the Gipper to office. How could that be?

Back in 1981 the bottom half of workers were earning almost (but not quite) one dollar out of every five of taxable income. That number is now down to one dollar out of eight. According to the Census, the inflation-adjusted median family income has grown at a rate at which it will take a century to double. In 2081 our grandchildren will be living large.

According to tax data analyzed by economists Thomas Piketty and Emmanuel Saez, the income of the bottom 90% has fallen from almost two-thirds of total income in 1981 to just over half in 2008, hitting a low in 2007. It hasn’t been that low since 1928. Meanwhile the income share of the top 1% has more than doubled, as has their tax share.

But the top 0.01%, representing just 1 in 10,000 taxpayers, a little over 15,000 families in total, now receives over 5% of all income, one dollar out of every twenty, up from less than 1.4% in 1981 (how did they get by?). To get into the rarified air of that top 0.01% (and don’t we all really want to?), you have to earn over $9 million a year. But the top marginal tax rate begins at an income level of less than $400,000, about what would put you into only the top 1%. Should the merely rich be paying the same rate as the super-, hyper-, mega-rich? It simply doesn’t seem fair.

Table 1: Income Shares, 1981 and 2008 (Including capital gains)

Percentile Share of Income – 1981 Share of Income – 2008
Bottom 90% 65.5% 51.8%
90-95 11.5% 11.7%
95-99 13.0% 15.6%
99-99.5 2.8% 4.1%
99.5-99.9 3.7% 6.5%
99.9-99.99 2.2% 5.4%
Top 0.01% 1.4% 5.0%

 

We can make the tax structure both fairer and simpler while dramatically improving the competitiveness of the United States. I propose that those in the bottom 90% pay a flat marginal tax rate of 10% (with perhaps an exemption on the first $15,000 or a continuation of the earned-income tax credit to help out the poorest families). The next tax bracket, at 25%, would not begin until the household earned more than about $110,000 per year. The marginal tax rate would then increase by 5% increments at the 95th percentile, 99th, 99.5th, 99.9th, and top out at 50% for the top 0.01 percent.

Table 2: Proposed Marginal Tax Rates

Percentile Threshold Income Maximum Income Average Income Share of Income Marginal Tax Rate Average Tax Rate Percent of Taxes
0-90 109,062 31,244 51.8% 10% 10.0% 30.1%
90-95 109,062 152,726 127,184 11.7% 25% 12.1% 8.3%
95-99 152,726 368,238 211,476 15.6% 30% 18.7% 16.9%
99-99.5 368,238 558,726 443,102 4.1% 35% 25.4% 6.0%
99.5-99.9 558,726 1,695,136 878,139 6.5% 40% 32.0% 12.0%
99.9-99.99 1,695,136 9,141,190 3,238,386 5.4% 45% 40.2% 12.6%
99.99-100 9,141,190   27,342,212 5.0% 50% 47.8% 14.0%
Total $54,315 100% 17.2% 100%

 

The numbers here (courtesy of Emmanuel Saez’s website) include capital income, which is generally taxed at a lower rate. I believe we should tax capital income at the full rate, but do away with the double-taxation of corporate income by eliminating all corporate income taxes. As we saw in the New York Times recently, big companies like General Electric don’t pay their taxes anyway. This would automatically make the United States one of the most competitive places to place a business and eliminate the incentive for our multi-national firms to set up elaborate tax dodges.

The benefit of this proposal is that it should raise almost enough revenue (if my calculations are correct) to cover the revenue of both the personal and corporate income tax. Of course, we will need to either raise taxes or cut spending in the not too distant future if we are ever to balance the federal budget. We would have to raise the rates in Table 2 by approximately 3 percentage points at each level to bring total income tax receipts to the same percent of GDP as during the last four years of the Clinton administration, the last time we had a balanced budget.

So how does this compare with current tax rates? In the table below I’ve listed the marginal and average tax rates for a number of income levels for both the current system and my proposal. As you can see, at each income level until you get above $1 million, the marginal and average tax rates would be lower than under the current system. In practice this proposal may result in higher taxes at the low end of the spectrum and I would certainly support the continuation and possible expansion of the earned income tax credit.

Table 3: Comparison with Current Tax Rates

Adjusted Gross Income Current Rates Proposed Rates
Marginal Tax Rate Average Tax Rate Tax Bill Marginal Tax Rate Average Tax Rate Tax Bill
$30,000 15% 12% $3,663 10% 10% $3,000
$50,000 15% 13% $6,663 10% 10% $5,000
$100,000 25% 17% $17,362 10% 10% $10,000
$200,000 28% 22% $44,244 30% 18% $36,004
$500,000 35% 30% $148,904 35% 27% $132,593
$1,000,000 35% 32% $323,904 40% 33% $329,656
$5,000,000 35% 34% $1,723,904 45% 42% $2,094,899
$10,000,000 35% 35% $3,473,904 50% 44% $4,387,840
$25,000,000 35% 35% $8,723,904 50% 48% $11,887,840

 

Would taxes actually be lower in practice? I’m not sure (how do we get the CBO to score this?), mainly because this proposal would get rid of all deductions. No mortgage interest deduction, no child deduction, no educational expense deductions, no health insurance deduction, no standard deduction. So a family earning $200,000 but only paying income tax on $150,000 after deductions would probably see only a small change (positive or negative) in their tax bill. But this should get rid of some of the most complicated portions of the tax code while making it more representative of how income is actually distributed. As you can see from Table 4, my proposal relies heavily on the hyper-rich paying their fair share.

Table 4: Income and Tax Shares

Income Group 2008 Share of Income 2008 Share of Taxes Proposed Share of Taxes
Bottom 90% 51.8% 30.1% 30.1%
90-95% 11.7% 11.2% 8.3%
95-99% 15.6% 20.7% 16.9%
99-99.9% 10.5% 19.6% 18.1%
Top 0.1% 10.4% 18.5% 26.6%

 

And that’s the catch. How can we keep the same or lower taxes for almost everybody while raising more revenue? It depends on whether or not the stinking rich will actually pay. While some economists will argue that we shouldn’t increase taxes on the rich because it will make them work less, the probable result is just the opposite. The most likely outcome of my proposal is that it will make the super-rich work more – at avoiding taxes. It will make it more likely that they will try to engage in tax schemes and dodges that allow them to hide their income from the IRS to avoid paying 50% of all their income over $9 million to the Feds. I have two suggestions that might help avoid that.

The first has already been made. Simplify the tax code as much as possible so that there are no places to hide that income. Don’t allow the mega-rich to hide their income as corporation profits. Don’t let them set up tax shelters overseas. Increase the likelihood of an audit for those top 150,000 earners and increase the penalties for avoidance. If they earn it here, they pay taxes here. End of story.

My second suggestion would be the carrot to that stick. Make it a point of pride for those top taxpayers to support the government. They’re paying for our national defense and veterans benefits, research supported by the NIH and NSF, and everything else the federal government does. Publish their names (if they’d like), give them a medal, invite them to meet the President or members of Congress. They can feel proud that they are paying the taxes with which we can “buy civilization.”

And when the mega-rich complain about the share of taxes they must pay, there can be but one answer: The rest of us will gladly pay more taxes when we receive more income.

 

Written by Liam C Malloy

April 13, 2011 at 8:00 pm

Posted in Inequality, Policy, Taxes