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Republican “Intellectuals” View Life as a Game

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Alec MacGillis writes about Mankiw’s defense of the tax treatment of carried interest. At the end he (doesn’t) link to Matt O’Brien who links to a Mankiw blog post saying the exact opposite.

This is what I mean when I say that those academics and other public intellectuals on the right view this whole thing as a game. It’s not about doing what’s right and it’s not even about doing what you believe to be true. It’s about confusing the issue so that your masters can do what they want.

But it’s not a game. Allowing hedge fund managers to pay 15% in federal income taxes instead of 35% robs the Treasury of much needed revenue, putting a burden on current and future tax payers. It also increases inequality in a way that simply didn’t happen fifty years ago.

Written by Liam C Malloy

March 6, 2012 at 1:01 pm

The Difference Between Being Pro-Market and Pro-Business

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As an economist, I’m generally pro-market. By that I mean I believe that the best way to produce most goods and services is with a free market system. Why? The profit incentive, combined with competition, generally is able to supply customers with what they want at the lowest cost. That is, the free market is generally the most efficient way to produce the stuff we want. Of course, there are times when the market fails. Sometimes there are fixed costs that are so large that competition is not possible (rail, utilities, etc.). Sometimes there are significant externalities (negative or positive) that mean the good or service is over or under produced. Sometimes there are information or bargaining asymmetries that lead to inefficient, or at least inequitable, outcomes. In those cases I believe it is the government’s job to come up with regulations that provide the correct incentives for market players, whether it is a pigovian tax (or surplus) or a cap and trade system, or whatever. On very rare occasions it makes sense for the government to supply or pay for the good itself (education and scientific research are two that come to mind. Oh, and national defense, of course).

But generally I’m pro-market. And as someone who is pro-market, I support policies that help the market function. One of the most important of these is anti-trust legislation. In order for the market to function effectively, there has to be competition. That’s why the justice department is correct in filing suit to stop the merger between AT&T and T Mobile. While mobile phone service will never be one in which there are hundreds or even dozens of firms due to the large fixed costs involved, consumers will end up paying significantly more if we go from four major carriers to three.

When most people think about economics and “the market” they think of business. After all, it’s businesses that compete in the market. And so one of the common misperceptions is that businesses are also pro-market. In fact, most businesses are not pro-market. As long as there have been “business interests” there have been businessmen (and union leaders) talking about “ruinous competition.”

Executives and managers basically have two goals: maximize profits and keep their jobs, not necessarily in that order. One way to do that is by constantly innovating, coming up with new products that customers want and new ways to make those goods more cheaply. But another (and perhaps easier) way of accomplishing those goals is to reduce competition by buying up competitors and keeping new entrants out of your market. If you can get tariffs to keep out foreign goods or legislation that limits competition, so much the better!

Pro-business policies, then, are rarely pro-market. If you limit competition you will increase profits for businesses, but you will do so by reducing choice for consumers and forcing them to pay higher prices. Politicians seem never to make this distinction, maybe because they don’t want to piss off their corporate donors. But it is not a terribly difficult distinction to make, and would be an easy way for Democrats to distinguish themselves from the “pro-business” Republicans. After all, we are all consumers, whether we are a factory worker, a school teacher, a police officer, or a farmer. Lower prices and better products are something we can all support.

Written by Liam C Malloy

September 1, 2011 at 10:24 am

Posted in Market, Policy

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

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

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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