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Posts Tagged ‘Tax Policy’

GOP Openly Wishes For Bad Economy

September 19, 2012 1 comment

After the Federal Reserve’s announcement to engage in more quantitative easing, the Republican Party neglected to hide its cynicism and now openly complains that the Ben Bernanke is trying to boost the economy. The GOP argues that the Fed Chairman shouldn’t be fulfilling the second half of his dual mandate to seek maximum employment because that might help Obama win reelection.

Sen. John Cornyn, R-Texas, said Bernanke is “trying to juice the economy” before the Nov. 6 election, and it “looks to be political,” notes the website This Week.

At the website Conservative HQ, George Rasley called the Fed a “taxpayer-funded super PAC that has so-far pumped something like $2 trillion into the economy to help re-elect President Obama.”

And:

“It really is interesting that it is happening right now before an election,” Rep. Raul Labrador, an Idaho Republican, told The Hill prior to the Fed announcement. “It is going to sow some growth in the economy, and the Obama administration is going to claim credit.”

Paul Ryan denounced the monetary stimulus as a “bailout” of the economy. A Romney/Ryan fundraising letter criticized the Fed for its move “to prop up this administration’s jobless recovery.”

All these criticisms either implicitly or explicitly acknowledge that the Fed’s actions might improve the economy, yet they don’t want that to happen because it’d help the political prospects of their opponent. If anyone had any doubts, the GOP cares more about winning elections than helping the unemployed and struggling businesses.

Mitt Romney apparently believes that only tax cuts tilted toward the wealthiest Americans can really help the economy, everything else is “artificial and ineffective.” It’s tough to understand what the problem with “artificial” economic growth is. If it lowers unemployment and increases production those are tangible benefits in real people’s lives and businesses’ profits that we’re in no position to dismiss.

The conservative tradition in this country wasn’t always so purely cynical or married to the economic fringes. They once recognized that presidents and politicians weren’t the only determining factor for the state of the economy and that monetary policy may be the single most important policy tool for economic management. Today, the mainstream of the conservative movement regards cutting top marginal tax rates as the real and effective means to growth. Others -the ones that liberals favor – are imposters. If only it were as easy as cutting taxes; unfortunately, a complex global economic system doesn’t match up with the 1 dimensional fiction Republicans treat as textbook.  Turns out, tax cuts hardly matter at all in determining growth – especially when they’re already at historic lows.

At the level of taxes we’ve been at the last couple decades and the magnitude of the changes we’ve had, it’s hard to make the argument that tax rates have a big effect on economic growth,” Mr. [Donald] Marron [Tax Policy Center director and former Bush administration official] said. Similarly, a new report from the nonpartisan Congressional Research Service found that, over the past 65 years, changes in the top tax rate “do not appear correlated with economic growth.

The Fed has a duty to foster the conditions suitable for growth. Ben Bernanke doesn’t set tax policy, trade policy, or fiscal policy – he and his board of governors set monetary policy.  After 43 months of unemployment above 8 percent along with research showing that previous monetary easing created millions of jobs and with evidence-based theory suggesting that altering future expectations with an open-ended commitment to easy money improves growth, both parties should be encouraging the Fed to do whatever it can to get us back to full employment as soon as possible.

Pointing Out The Obvious

November 22, 2011 Leave a comment

From time to time I like to do a feature here called “Graphs that Subvert Conventional Wisdom.” It’s always worthwhile to challenge popular notions about the world that happen to be wrong. But it’s also worth reminding people that sometimes obviously true things are actually true.

A lot of right-wing commentators like to pretend that tax cuts actually increase revenue or that tax revenue can’t rise above some magical boundary despite evidence from the US and nations all over the world. Despite the evidence that tax cuts reduce revenue except in extreme circumstances, supply-siders like to pretend that controversy exists about the facts. It seems creationists, global warming deniers, and supply-siders all have something in common. Of course, it’s likely they’re a lot of the same people.

Thanks to the IGM poll of economic experts from a wide range of political attitudes, we can see that there is virtually no disagreement. Here are the results of a politically relevant question as Congress debates whether or not we should raise taxes on the wealthiest Americans: (I’ve added a helpful red circle for those extra dedicated to ignoring the obvious)

Trail Mix

October 21, 2011 Leave a comment

I’m off on another hike this weekend. Here’s a hardy blend for your consumption while I’m away.

The Myth of Sisyphus by Albert Camus:

The gods had condemned Sisyphus to ceaselessly rolling a rock to the top of a mountain, whence the stone would fall back of its own weight. They had thought with some reason that there is no more dreadful punishment than futile and hopeless labor.

Read more…

Scott Sumner Vs. The World of Progressives

March 30, 2011 2 comments

In a recent post Scott Sumner challenges a number of progressive assumptions and calls them out for the “”faith-based” reasoning that they tend to deride in conservatives.” Sumner is a monetary economist that progressives should be required to read to see that rational critiques actually exist of their fiscal policies. Sadly, the mainstream conservative movement gave up on dispassionate evaluation of public policy.

Sumner’s “progressive wishful thinking” criticism defends Greg Mankiw’s posts that upset the standard liberal story on the progressiveness of the US tax regime and on fiscal stimulus. The defense credibly knocks down some of the more fragile volleys from the Left flank.

Lindert showed that Europeans were able to raise more tax revenue only by having more regressive tax systems than the US, i.e. tax systems that relied more heavily on consumption taxes. This is now pretty much common knowledge in the public finance area.

That is an important point to disrupt some common progressive assumptions, but I don’t think it directly counters Ygelsias’s and others’ point that the wealthiest “pay a huge share of the total taxes in the United States because they have a huge share of the money.” But it seems to me that Sumner is largely right that the US tax code has a progressive rate structure even compared to Europeans.

Sumner also weighs in on where the US sits on the Laffer curve:

I’d argue that this data is strongly supportive of the view that both the US and Europe are near to tops of the Laffer Curve for total taxation.  I did not say then, nor do I claim now, that we are precisely at the top.  But I also don’t see any reason to believe that if we raised taxes from 28% to 40% of GDP, that revenue would rise anywhere near proportionately, with no change in GDP per capita.

I do think the Laffer curve is “far-fetched” but I don’t deny that revenues always rise “proportionately, with no change in GDP per capita.” It is illustrative that Sumner doesn’t quote anyone making that claim he’s rebutting. Most popular proponents of the Laffer curve like to claim that tax cuts actually raise revenue not just that tax increases dampen receipts a bit. But the Left should think harder about challenging their assumptions with reference to European models if they’re going to argue for a much more progressive tax code. I’m with him on a progressive consumption tax.

Most interesting, and surprising, to me was Sumner’s claim that “for decades our best macroeconomists have been saying that that fiscal stimulus is a bad idea.” I really wish he cited something here because if true I’m embarrassed that I wasn’t aware of this. I always assumed economists like Christina Romer were true authorities on this, but I willing to confront a counter consensus of experts if it exists. Not that a consensus of experts is always correct but we should be giving more deference to it, as Bertrand Russell makes clear in Let People Think:

(1) that when the experts are agreed, the opposite opinion cannot be held to be certain; (2) thet when they are not agreed, no opinion can be regarded as certain by a non-expert; and (3) that when they all hold that no sufficient grounds for a positive opinion exist, the ordinary man would do well to suspend his judgment.

Sumner correctly emphasizes the need for more monetary action, which could be even more important than fiscal stimulus to help our economy. I haven’t neglected monetary policy but have focused mainly on the fiscal side because (1) it’s easier to convey (2) it’s more direct (3) it’s something that politicians (and, therefore, the public) have more influence over. Matt Yglesias is certainly right that progressives need to grapple more with Fed policy (must read) and that Obama’s biggest mistake might be his lack of focus staffing the Fed.

I’m extremely disappointed Sumner is taking a break from blogging. I hope he returns soon and continues to offer insightful and challenging commentary. I’ll be sure to rummage through his archives – others should too.

Tax Cut Compromise and Political Ratchets

December 8, 2010 6 comments

If I had my way we would have just scrapped our currently inefficient tax system and started from scratch, but given the time to reach a deal this compromise between the White House and Republicans seems to have enough positive features to support. David Leonhardt correctly views this tax cut plan as an imperfect but necessary stimulus package.

Mr. Obama effectively traded tax cuts for the affluent, which Republicans were demanding, for a second stimulus bill that seemed improbable a few weeks ago. Mr. Obama yielded to Republicans on extending the high-end Bush tax cuts and on cutting the estate tax below its scheduled level. In exchange, Republicans agreed to extend unemployment benefits, cut payroll taxes and business taxes, and extend a grab bag of tax credits for college tuition and other items.

For the White House, the deal represents a clear shift in policy focus. Mr. Obama and Democrats spent much of the last year pursuing long-term goals like a health care overhaul and financial regulation, while hoping the economic recovery would continue. But with the recovery faltering and Republicans retaking the House, the administration is turning back to short-term job creation.

No, it doesn’t include spending projects such as a high-speed rail system or anything else but with those clearly off the political reality table, stimulus through tax cuts and credits was the best possible scenario for fixing our short term unemployment woes.

Many Democrats and those on the Left are upset at the President for giving so much to the GOP and to the wealthiest; I don’t share their anger since I don’t desire rich people to have to spend more money in taxes. Yet, I still have concerns. First, Paul Krugman is probably right about some of the “front-loading” problems with this.

Now we have unemployment insurance and payroll tax cuts for 2011, going away in 2012 — just in time to put the administration in big trouble as the election looms.

It’s not the political problem for me so much as the assumption that this will lead to a self-sustaining recovery.  Additionally, this bill gives tax cuts to everyone (especially rich people) so costs a lot of money and is going to add to our deficit. As I’ve argued before, this is a medium to long term problem, but it is still a problem. I hope another good compromise can be reached on dealing with our long-term budget but this tax compromise adds some obstacles.

The compromise doesn’t cost as much as it could because many of the cuts are again temporary. But “temporary” tax cuts often act like ratchets. It is very difficult to allow taxes to rise once they’re lowered, which is exactly the reason why this debate over the Bush tax cuts are taking place right now and why Bruce Bartlett previously worried about a payroll tax holiday as a temporary form a stimulus.

My point is that if allowing the Bush tax cuts to expire is the biggest tax increase in history, one that Republicans claim would decimate a still-fragile economy, then surely expiration of a payroll tax holiday would also constitute a massive tax increase on the working people of America. And what are the odds that the economy won’t still be fragile a year from now? Zero, I would say.

He’s right of course, but Bruce being a bigger fiscal conservative than I am places more emphasis on the long-term budgetary impact than on the short-term relief and stimulus the tax cut will provide. We should not ignore that concern however. Just look at the top marginal tax rate through recent history and it becomes obvious that even raising taxes on the richest among us is difficult.

Income of top 0.1% vs top marginal tax

Coupled with that we have the dueling and more consistent ratchet of spending.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Only economic growth can do much to keep these forces from pulling everything apart. Eventually though it is not going to be enough and spending must be cut and taxes must rise. So let’s pass this compromise and start working on the next one.

Taxplomacy, pt. II

November 12, 2010 2 comments

Hey I suggested this, sorta!

Two top Senate Democrats floated the idea Tuesday of extending the Bush-era income-tax rates for a limited time only, and tying that move to an overhaul of the U.S. tax code or passage of policies to address the budget deficit.

My original suggestion.

Categories: Tax Policy Tags:

Taxplomacy

September 21, 2010 15 comments

You’ve all heard the cliche enough times used in international diplomacy: “All options are on the table.”  Of course, that’s code for the military option or even the nuclear option. Here, I want to use that metaphor to discuss our current debate about tax policy. Since the previous administration and legislature wrote into law that the “Bush tax cuts” must expire, we’re now faced with the predicament that lots of taxes will be raised amidst an anemic economy if something isn’t done, but if we extend them the deficit problem will be even worse. The locus of the debate or, if you will, the options on the table seem to be that we do nothing and let all the tax cuts expire, extend all the tax cuts, extend all but those for the wealthiest taxpayers, or compromise by extending the tax cuts for only 2 years.

The argument for extending all the tax cuts is pretty simple. Raising taxes now during a weak economy is going to make the economy worse, not better. Cato’s Jeff Miron wants to see them extended permanently.

Extending the Bush tax cuts — permanently — is a crucial step in restoring economic growth. The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest.

Alan Viard of AEI likes them all too.

The figure shows the increases that will occur in marginal tax rates at the top income levels if the high-income rate reductions (including the dividend tax cut) expire. Beginning in 2011, the top income-tax bracket for wages and self-employment income, and for ordinary investment income, would revert from 35 to 39.6 percent; wages and self-employment income would continue to face an additional 2.9 percent Medicare tax. The top capital-gains tax rate would revert from 15 to 20 percent. Dividends would lose their current 15 percent tax rate and become taxable as ordinary income, subject to the new 39.6 percent rate. All four categories of income would also face a 1.2 percent stealth-tax-rate increase, from the restoration of a provision that phases out itemized deductions at high income levels. Figure 1

Economists left of center like Paul Krugman think that extending the top-rate tax increases is not worth the $700 billion price tag (sounds hypocritical but it’s well reasoned).

Now, consider first what would happen if we extend the [high-end] tax cuts for the next 10 years. This would add $700 billion to the debt (pdf). If the rich spread their windfall evenly across the decade, that’s $70 billion a year in additional consumer spending — or $140 billion during the period when we need it. So, $700 billion in deficits for $140 billion in stimulus; not a good bargain!


Alternatively, suppose we extend the tax cuts for only 2 years. That’s only $140 billion on the deficit. But the rich, knowing that it’s temporary, won’t spend much of it — if they really operate on a 10-year horizon, they’ll spend only $14 billion a year more, so $28 billion of stimulus when we need it, in return for $140 billion of debt; still a lousy bargain! 

Just for the record, it’s not like the rich wouldn’t get a tax cut under the Democrat’s proposal.

That’s because of how marginal tax rates work. For a good discussion on that go here.

Most famously President Obama’s former OMB director, Peter Orszag wants to extend all the tax cuts for 2 years, then let them all expire.

In the face of the dueling deficits, the best approach is a compromise: extend the tax cuts for two years and then end them altogether. Ideally only the middle-class tax cuts would be continued for now. Getting a deal in Congress, though, may require keeping the high-income tax cuts, too. And that would still be worth it.

In a great piece, Bruce Bartlett explains why the Bush tax cuts were inefficient, of little benefit, and harmful to the debt, but acknowledges that during this recession recovery economy it’s probably best we just extend them. 

Subsequent research by Federal Reserve economists has found little, if any, impact on growth from the 2003 tax cut. The main effect was to raise dividend payouts. But companies cut back on share repurchases by a similar amount, suggesting that only the form of payouts changed. (See herehere, and here.) Moreover, according to a study by Steven Bank of the UCLA law school, the fact that the dividend tax cut was temporary was a key motivation for higher dividend payouts; had the dividend tax cut been permanent, as the supply-siders favored, the impact probably would have been much less.

Maybe the answer is obvious (politics) but I’m not sure why these are the only options on the table. Can’t we extend the table? The nuclear option doesn’t even seem to be an option right now. But now may be the perfect time to blow up the tax code and put a new one in place. Here’s the diplomatic stick for the Administration to use: “Let’s put in a simpler, better tax code or all the tax cuts are going to expire and opponents will be responsible for raising taxes on Americans at the worst possible time.” There’s a carrot too: “You get to support a simple efficient tax code that everyone has long claimed they support.”

I honestly have trouble understanding why we have to extend poorly designed, little bang-for-the-buck tax cuts rather than doing something that could really be a huge boon for the economy. Talk about a game-changer from the Obama Administration! A Democratic administration gets to be the one supporting fundamental and economically productive tax reform while forcing the Republicans (or Democrats), if they vote against it, to be essentially responsible for raising taxes and blocking what a lot of their supporters favor. If Republicans are really worried, rest assured that the tax reform wouldn’t be able to save the economy soon enough to have a dramatic positive effect by the election so the GOP candidates will still have a great chance to pick up a ton of seats – and most likely take the House. Will businesses, conservative intellectuals, and angry tea-partiers (so-called small government types) really be able to support the Republicans ever again if they don’t jump on an opportunity like this?

I’ve long touted a VAT as a potential replacement for our absurd tax code. Many mainstream conservatives have even had good things to say about it assuming it was replacing the tax code, not being added on top of it. Here’s a favorite option of progressive policy wonks – something that might appeal to Obama, that I’d be excited to support: the progressive consumption tax. Maybe the Democrats could even slip in some decent energy policy (that they’ve given up on) by raising energy taxes as part of tax reform. Even a flat tax that conservatives have often pushed for would be better than the status quo. Lots of different and better options have to exist rather than being stuck with tinkering with the Bush tax cuts.

If the problem is just lack of time, I’m not sympathetic – everyone has known since the Bush tax cuts passed that they were going to expire. It seems difficult to imagine a potentially better time to force lawmakers’ hands to simplify the tax code than now. We’re in desperate need of new revenue, the weak economy could strongly benefit from a more efficient tax code, taxes will automatically rise if nothing is done, and sometimes it takes the people you’d least expect to be able to dramatically shift course. Think of Nixon going to China or Clinton with welfare reform. What Republican wants to be outflanked by a “socialist president” on tax reform? President Obama might be able to drag along enough in his own party to support a tax reform that the business community surely must favor.

It seems perverse that such extreme options can be on the table for international relations but are so limited for domestic issues. When it comes to tax policy, I welcome the mushroom cloud.



File:Nagasakibomb.jpg
(h/t to Greg Mankiw)

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