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Category: tax policy

Published on Leave a comment on Happy Birthday, Great Recession

I've started contributing occasional posts to the Economic Intelligence blog at U.S. News and World report.  My first post takes note of the fact that the Great Recession began five years ago and revisits a number of themes about fiscal policy and dealing with downturns that I have been blogging about for almost as long.  Here's the motivation for the birthday wishes:

The mantra that guided both the small stimulus legislation signed by President George W. Bush in January 2008 and the much larger stimulus legislation signed by President Barack Obama a year later was that fiscal stimulus should be "timely, targeted, and temporary." The Brookings Institution went so far as to publish a primer on fiscal stimulus emphasizing this approach. One can only hope that with five years of hindsight and a continuing struggle to recover from the Great Recession, this approach has been discredited. 

I also spent some time discussing the fiscal cliff on a radio program last evening.  Listen here.

Published on Leave a comment on When You Come to a Fiscal Cliff, Take It

That's my main point in a Faculty Forum Q&A posted to the Dartmouth website last week.  Eight plus years of blogging, and you know what to expect:

What would you like to see happen?
Our biggest problem is that we’ve become accustomed to having a tax system that doesn’t raise enough revenue to cover our expenses. We’d be closer to it if we allowed all the policies in the fiscal cliff to actually revert. It’s not ideal to have them all revert at once, but that’s better than continuing to kick the can down the road. When you come to a fiscal cliff, take it.

Having the policies all revert is being portrayed in media coverage as the worst possible thing that could happen. 
No. Continuing what we’re doing is worse. Look, I’ll pay more in taxes, you’ll pay more in taxes—we’ll all pay more in taxes. The fact that we’re paying more taxes means that we’re covering more of our own bills.

If taxes go up, how do we avoid an economic slowdown?
We don’t have a problem that private consumption is too low. We have a problem that public investment is too low. If you were really worried about a decline in economic activity, you would let everything revert, and then you would commit to spending an extra $350 billion per year on public infrastructure, even if it had to be debt-financed. I would ramp up public investment in infrastructure and other critical national needs like roads, civilian defense, disaster infrastructure, smart grids, and basic research and development. All of these are needs that we’ve been neglecting.

Bill Gale of Brookings has been saying this for some time -- here is a recent interview with NPR -- though he and I offer different suggestions for how to spend the additional revenue to help promote economic growth in the short term.

Published on Leave a comment on Is This Journalism? I Say No

The title of the post refers to this article by Associated Press writer Andrew Taylor, "Huge Tax Increase Looms at Year-End 'Fiscal Cliff.'"  The purpose of the article seems to be to report on the findings of a study released yesterday by the Tax Policy Center, "Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?"  The study is worth your time.  The article is not.

I am wondering whether it is standard practice in schools of journalism to encourage this style of writing (emphasis added):

Taxpayers across the income spectrum will get slammed with increases totaling more than $500 billion — a more than 20 percent increase — with nine out of 10 households being affected by the expiration of tax cuts enacted under both President Barack Obama and his predecessor, George W. Bush.

[...]

Monday's study, by the independent Tax Policy Center, deals with the immediate increases set to slap taxpayers in January under the existing framework of the tax code.

[...]

Few are talking of renewing Obama's payroll tax cut, even though that would mean a healthy tax increase for many working people. Working families with modest incomes would be hit hard as the child tax credit would shrink from a maximum of $1,000 per child to $500.

The world is complicated enough without reporters using violent language to describe non-violent events.  Running deficits in perpetuity is not a civil right.  The simple facts of the matter are that for over a decade, policy makers have been able to agree only on ways to lower tax revenues through the income and payroll tax systems, not on how to raise them.  They chose to do so by enacting temporary measures.  The failure of the anything-but-super committee to accomplish its objectives has brought this poor style of policy making to defense expenditures as well.   Many of these measures would not have passed if they had been described as permanent from the beginning.  In eight years of blogging, I have never defended this last decade of fiscal policy.

So what is looming is simply a reversion back to an older tax code.  We should let that reversion happen, as dictated by prior legislation.  Starting from that new baseline, we can ask the question of what productive uses of deficit spending we might have available.  The answer is the same now as it was nearly five years ago.

Published on Leave a comment on Taking Income

I think the choice of words in Annie Lowery's New York Times story about Emmanuel Saez and Thomas Piketty is unprofessional.  Here are the excerpts in which she describes the income of high-income or high-wealth households, with my emphasis added:

More than anything else, their work shows that the top earners in the United States have taken a bigger and bigger share of overall income over the last three decades,...

But both also express bewilderment over the current conversation about whether the wealthy, who have taken most of America’s income gains over the last 30 years, should be paying higher taxes. 

They figured out the benchmark for various income levels — the top 10 percent, top 1 percent and top 0.1 percent of earners, for instance — and calculated what share of income each group took each year.

But then inequality started increasing again, with the top 1 percent of earners drawing a bigger and bigger share of overall income.

Data that the two economists released in March showed that the top 1 percent of earners got nearly every dollar of the income gains eked out in the first full year of the recovery. In 2010, the top 10 percent of earners took about half of overall income. 

So, what is that -- 4 takes, 1 draw, and 1 got?  Income isn't taken by individuals away from some collective pile of "overall income."  It is produced by individuals working together under voluntary arrangements.  Absent coercion or government largesse, income is earned in ways that don't deserve to be derided in this way.

Her distorted language detracts from an important issue.  Tax rates need to go up primarily because we have a deficit problem, not a fairness problem.  They have to go up even though we have a weak economy, because we have a deficit problem.  In the process of raising tax rates, we should obviously consider ability to pay, which will generate larger tax increases on higher incomes.  The fine work of Piketty and Saez shows us just how much room there is in different parts of the income distribution, relative to historical distributions, to raise that revenue.

Published on Leave a comment on First, Let’s Get the Prices Right

The Boston Globe ran a story on Friday about NStar's decision to "pay double the cost of conventional energy for Cape Wind power."  The quote is the headline, and the "cost" self-evidently does not include all of the externalities associated with burning fossil fuels.  I don't know if those external costs of transporting and burning natural gas would double the price, but that's the key piece of information required to make sense of the information presented. 

If you read the article, you will see that much of the public disagreement is about whether paying the extra amount for the cleaner energy is worth the environmental benefits.  If you want to make better policy, a wiser course of action would be to resolve what those benefits are and put a price on them.  With that price established, the decisions about whether a given project is worth the cost don't have to play out in public -- private companies can make those decisions and then come to market or not with power to sell.

The article also notes that this source of power would "add about $1 to customers' monthly bills in the first year" (presumably because this is only 2 percent of the load).  It seems like a sensible way to start off with renewable energy in the Northeast.

Published on Leave a comment on I Will Not Be Running a Benefit

For the ethanol producers (based on the first paragraph), but I'll stop short of declaring the Renewable Fuels Association a microeconomics-free zone (based on the second paragraph).  As Robert Pear reports in Sunday's edition of The New York Times:

“We may be the only industry in U.S. history that voluntarily let a subsidy expire,” said Matthew A. Hartwig, a spokesman for the Renewable Fuels Association, a trade group for ethanol producers. “The marketplace has evolved. The tax incentive is less necessary now than it was just two years ago. Ethanol is 10 percent of the nation’s gasoline supply.”

In response to a question about how the loss of the subsidy might affect prices and supply, Mr. Hartwig said: “We don’t expect the price of corn to fall or rise just because the tax incentive goes away. We will produce the same amount of ethanol in 2012 as in 2011, or more.”

Representative Jeff Flake, Republican of Arizona, said, “With record deficits and a ballooning national debt, it was ludicrous to expect taxpayers to pay billions to prop up a mature industry that should be able to fend for itself.”

I would still prefer a carbon tax on nonrenewable fuels, but this is a step in the right direction.  Let's hope the subsidy doesn't "unexpire" with election-year politics.

Published on Leave a comment on Bogus Art

The Los Angeles Times has a story this morning about the revenue loss to the Treasury from overvalued donations of works of art:

An alleged tax-fraud scheme involving donations of overvalued art to four local museums is part of a larger, unchecked problem with inflated art appraisals that has cost the federal government untold millions, a Times analysis has found.

Each year, the Internal Revenue Service audits donations claimed on only a handful of the 100,000 or more tax returns that allow art donors to reap nearly $1 billion in tax write-offs. Half of the donations checked over the last 20 years had been appraised at nearly double their actual value.

The crux of the public policy problem is the infrequency with which appraisals are checked. It makes all other remedies less effective:

A 2006 law tightened standards and increased penalties on bad appraisals. For donors, it lowered the threshold on what the law considers a bloated appraisal, from 200% overvalue to 150%. It also increased oversight of and fines for appraisers. But because the IRS checks so few appraisals, some believe that overvaluations will continue.

This is not a hard problem to solve. Every significant donation should have its appraisal checked by the IRS, and the donor should bear the cost of that process, not the government. There would be fewer small donations of art, but for major pieces, this cost of checking the appraisal would be small relative to the value of the tax deduction.

Published on Leave a comment on Workaholics Are Us

Here is the abstract from a new article by Dan Hamermesh and Joel Slemrod:

A large literature examines the addictive properties of such behaviors as smoking, drinking alcohol, gambling and eating. We argue that for some people addictive behavior may apply to a much more central aspect of economic life: working. Although workaholism raises some of the same health-related concerns as other addictions, compared to most of the more familiar addictions it is more likely to be a problem of higher-income individuals and is more likely to generate negative spillovers onto individuals around the workaholic. Using the Retirement History Survey and the Panel Study of Income Dynamics, we show that high-income, highly educated people exhibit behavior that is consistent with workaholism with regard to retiring–they are more likely to postpone earlier plans for retirement. The theory and evidence suggest that the presence of workaholism calls for a more progressive income tax system than otherwise, although other more targeted policies may be part of optimal policy.

The full paper is here. The reference to negative spillovers and a progressive income tax reminded me of this earlier discussion.

Published on Leave a comment on Your Pre-Super-Bowl Reading

From around the web:

  • Greg Mankiw lets New Hampshire Senate candidate Jay Buckey into the Pigou Club for proposing a gas tax of roughly 7 cents per gallon at current prices. Read about the National Security Levy here. It's as good a place as any for an aspiring politician to start.
  • Closer to home, Dartmouth's president, Jim Wright, will receive the Semper Fidelis Award from the Marine Corps Scholarship Foundation for his work on behalf of wounded veterans. Read more here.

Published on Leave a comment on The Whiner of First Resort

Via Mark Thoma, this piece in the Financial Times by Ricardo Hausmann is quite good. Here's the big finish:

The US should face its need for adjustment with courage and reason, not fear. It should stop behaving as the whiner of first resort, ready to waste all its dry powder on a short-sighted attempt to prevent a 2008 recession. Many poorer countries with weaker markets and institutions have survived and benefited from an adjustment that involves a year of negative growth. Faster bank recapitalisation, fiscal investment stimulus and international co-ordination should be first on the ­policy agenda.

Read the whole thing.