More on Mankiw

By James Kwak

I recently criticized Greg Mankiw’s New York Times op-ed. I like the post on his blog better (hat tip Tyler Cowen). Basically he says that if conservatives on the deficit commission want to make the commission work (a big if — see my previous post), they “will have to agree to higher taxes as part of the bargain.” In exchange, they should ask for the following:

  1. Substantial cuts in spending.  Ensure that the commission is as much about shrinking government as raising revenue.  My personal favorite would be to raise the age of eligibility for Social Security and Medicare.  Do it gradually but substantially.  Then index it to life expectancy, as it should have been from the beginning.
  2. Increased use of Pigovian taxes.  Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue.  He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.
  3. Use of consumption taxes rather than income taxes.  A VAT is, as I have said, the best of a bunch of bad alternatives.  Conservatives hate the VAT, more for political than economic reasons.  They should be willing to swallow a VAT as long as they get enough other things from the deal.
  4. Cuts in the top personal income and corporate tax rates.  Make sure the VAT is big enough to fund reductions in the most distortionary taxes around.  Put the top individual and corporate tax rate at, say, 25 percent.
  5. Permanent elimination of the estate tax.  It is gone right now, but most people I know are not quite ready to die.  Conservatives hate the estate tax even more than they hate the idea of the VAT.  If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

I would agree with #1 (at least with a gradual increase in the eligibility ages, plus indexing, although the indexing should be lagged so people have some predictability) and #2.

It’s harder to give a blanket endorsement to the others, because they raise a number of issues that are interconnected: What taxes would you raise to compensate for elimination of the estate tax?  How big would the VAT be? Mankiw has previously said he would be open to a VAT that was made progressive via a rebate to poor people — I would agree to that much sooner than to a VAT without such a rebate. Also, Mankiw prefaced this list by saying conservatives would have to agree to higher taxes. If he wants to cut income tax rates and eliminate the estate tax, just what taxes would he agree to make higher? Is he saying the VAT should not only make up for those cuts, but add additional tax revenue on top of that?

But if I were a Democratic representative on the deficit commission, I would certainly be willing to talk about those issues.

Just thinking: What if they put Mankiw and Krugman on this commission?

105 responses to “More on Mankiw

  1. Love the idea of indexing SS to life expectancy!

    So the simplest solution is to index it to life expectancy…meaning the retirement age should be somewhere around 85 now. The attitude of perfectly healthy 65 year olds think they’re entitled to a free ride for the remaining 20 years of their lives is strange. If they have enough money, fine, retire, but if you can work, work. Historically people have worked until they’ve died.

    Then again, in the middle ages, life expectancy was about 35. Looking on the bright side, one third died as children. I don’t see any reason we couldn’t achieve a dieback like that, with a little help from the profit sector on infant mortality.

  2. We should also recognize that we have a taxation system that is in some ways dishonest and exploitative. It also supports a tax preferential underground economy. I hate to see an estate tax paid by one family when another paid nothing because of tax planning. It exploits ignorence. Also, with the myriad of taxes and fees at all levels of government, no one really has a clue what they are paying in total. Preying on the disenfranchised tthrough sin taxes is not right even if there is some public policy rationale. Small business tax cheating is rampant. The tax preparation economy is anti competitive globally. Let’s put those minds to real work.

  3. Referring to Mankiw’s “substantial cuts in spending,” James Kwak adds, “My personal favorite would be to raise the age of eligibility for Social Security and Medicare.”
    It is intellectually dishonest for anybody to discuss “substantial cuts in spending” without discussing the insanely bloated Pentagon budget.
    It is intellectually dishonest to discuss Medicare’s problems without discussing the extortionate pricing imposed by the medical oligopolies and their stooges in the US Congress.
    N. Greg Mankiw and the rest of the “deficit hawks”–most notably, the Peterson Institute–are all about looting Main Street in favor of Wall Street and the military-industrial-congressional complex. This cannot be done honestly, which is why the preferred venue is a “bipartisan commission” that circumvents Congressional responsibility for spending.

  4. Well…. 85 as a retirement age might work fine for desk-sitters. I don’t think it works so well for people who have to use their bodies to labor. Waitresses, sales clerks, even — 8 hours or more a day on your feet takes its toll. And, on the other end of the spectrum, you have engineers and IT workers unemployable at age 50 because they’re “too old.”

    I don’t think any economist can credibly argue that 85 is the new 65.

    Just what work do you envision people doing in those 20 years? Answer that question first, and then talk about raising the retirement age.

  5. Get rid of the estate tax ,which essentially contains a huge amount of previously untaxed capital gains, so we can pay a VAT. Such a deal!

  6. So what do you propose instead of our current system, a VAT or straight-up consumption tax?

  7. I like the horse trading ideas contain in the post with the Republicans. However if by VAT you mean the English system, I would be very skeptical. From a consumer point of view the VAT is a really big incentive not to spend money. It is also an additional taxation system that once in place there is no turning back from. I would much rather have higher personal income taxes, higher taxes on imported goods, than a VAT any day. It is such a massive government float that we will never be able to rein in the Congressional spendthrifts, much the same as we can’t now. As an aside, wonderful site, I have been reading you guys on Nouriel’s site for two years now, you do a great job. Simon is a financial god that walks the planet.

  8. Allow anyone under 40 to completely opt out of social security and in exchange only be subject to a 2% payroll tax rate. Increase short term deficit but improve long run outlook due to elimination of future benefit payments for those that participate. #freedom

  9. VAT is by its nature regressive (or at best flat). Cutting top marginal income tax rates combined with introducing VAT isn’t something I think Democrats can realistically support.

  10. Also… how much of that increased life expectancy statistic is due to more people living longer versus fewer people dying young? In the 1930s we still didn’t have antibiotics, vaccines for a lot of childhood diseases, and there were a few wars going on between then and now, killing the younger men. So life expectancy statistics would reflect that greater chance of not even reaching age 65.

    The question really is: how much as the life expectancy increased for people once they reach age 65?

  11. Hmm… are you sure about that? Seems like that kind of gift to the wealthy and tax on the middle class/poor would fit right in with Obama’s Democratic party.

  12. The point here is that life expectancy is a different measure than how long people can sustain their productivity over their lifetime.

    In the past, the major improvements in life expectancy were due to lower risk of dying before the age of 65, in fact, it’s mostly about reducing infant and early childhood deaths.

    I don’t think the current average 75 year old is significantly more able to work, at the very least regarding physical work, than the equivalent 75 year old in 1930. It’s just that a lot more people live to see that age.

    In short: I agree, indexing the retirement age to life expectancy is overlooking the fact that increases in life expectancy for the most part came from preventing early deaths.

    Now that may change in the future since I think we’re close to the limit of how far down we can reduce child mortality without adverse fiscal affects (disregarding morality here).

  13. maynardGkeynes

    I think a VAT would hit the middle class (aka, the New Poor) much to hard. Bad idea.

  14. “What if they put Mankiw and Krugman on this commission?”

    If we assume that Krugman weighs 75 Kilos, and Minkiw weighs 75 kilos, something akin to what would happen if 75 kg of antimatter came into contact with 75 kg of matter.

    e=mc^2 gives us 1.350*10^19 joules.

    A megaton is 4.184*10^15 joules.

    About 3226.6 megatons.

    Can someone check my math?

  15. The thing about Mankiw’s “compromise” offer is that it says: in return for smaller government and lower taxes on corporations, high-earning workers, hiers, and hieresses, we will allow you to raise taxes on the poor and middle class.

    That doesn’t sound like a compromise to me. It sounds like a conservative plan to reduce the deficit.

  16. Your math is right. (Checking it finally gave me a use for wolfram alpha!)

    Thing is, Krugman and Mankiw are not opposites. They are both Keynesians, as Mankiw explains here: http://www.economics.harvard.edu/files/faculty/40_Macroeconomist_as_Scientist.pdf

    I think Krugman and a freshwater economist would do the trick.

  17. Looks like a plan to drop the mask and declare once and for all the the business of America is rent seeking. Employing people and making things is so over – so let’s tax what little is left. Now if the surplus population would be so obliging as to crawl off to a corner and not bother their betters with silly demands like health care and a means for survival.

  18. Is not VAT a regressive tax?

    I believe there is a need for a whole new generation of taxes that reflect a totally new economy… in line with the too big to fail discussion I have sometimes toyed with the idea of a corporate tax based on market share… and a property tax on the intellectual property rights that governments issue and spend money defending.

  19. maynardGkeynes

    Corporate tax on market share = taxing success. Not a good idea!

  20. Taxing the lower competition!!!

  21. The sacrifices demanded for a tax hike are ok with me, except the last. The sole justification for reducing the estate tax is that it discourages effort to produce wealth for the purpose of bequests. Two of my favorite economists made comments that support the tax. Adam Smith said the purpose of accumulating wealth is “the parade of riches.” Keynes said something like “As I look about me, I see English industry is a little stupid – too much dominated by third generation men.” May explain the rise of British estate taxes.
    It galls me that the American public supports eliminating the estate tax. Makes me despair of the U.S. ever arriving at a sensible solution to the budget.

  22. maynardGkeynes

    Call it the Yugo tax, to reward companies with the worst products that nobody will buy.

  23. maynardGkeynes

    Let me take a wild guess — you have an estate under $3.5M.

  24. Goldilocksisableachblond

    “The question really is: how much as the life expectancy increased for people once they reach age 65?”

    Precisely. Any talk of indexing should be using life expectancy remaining once a person reaches retirement age , since that figure reflects the increased burden on SS finances due to increased lifespans.

    There’s a good reason why those who want to gut SS don’t use that figure , however : it’s not nearly as dramatic as the life expectancy at birth data.

    For men , over the 50 years from 1940 to 1990 , average life expectancy at age 65 went from 12.7 to 15.3 years , an increase of 2.6 years , or a gain of a little over 6 months per decade.

    For women , it went from 14.7 to 19.6 years , an increase of 4.9 years , or almost 1 year per decade.

    http://www.ssa.gov/history/lifeexpect.html

    Even being generous and using the higher , 1 year per decade figure , I doubt there would be much of an outcry from future SS recipients over indexing , because it would be based on a rational premise.

    Using life expectancy at birth to index is just a means to a different end : gutting entitlements.

  25. You get it wrong… higher market share = easier to produce profits

    Why should a company that has to produce profits fighting it out in the markets against a lot of competition have to pay the same tax as a company that enjoys a monopoly?

  26. Would you make a difference between smokers and non-smokers… in England I believe smokers have the right to negotiate higher annuities based on lower life expectancies.

  27. <>

    I was shocked to see an agreement on this. Social Security is self-funding or very near to it. These radical adjustments to Social Security would be a gross breach of the social contract and amount to theft of the investment of millions of people. Any unequal distribution fatally weakens the program. We had a deal!

  28. Can you spell IDEOLOGUE, boys and girls?

  29. People aren’t going to find employment in their winter years. It is hard enough to find work in your late 50s, let alone your 60s/70s. Most people have a productivity span of 40 years and then lose vigor. In theory, a second career could ensue but companies REALLY don’t want to hire a gray hair when younger/foreign outsource workers are better choices. Health care cost to hire a 65+ worker will kill most late life opportunities.

    Most of the later boomers I know plan on hopping aboard the SS boat at 62 because they fear oncoming changes to the age retirement scheme.

  30. Surely the real issue with Medicare spending is not that too many people are eligible, it’s that health care in the US simply costs too much. Reduce the number of people getting health care and then watch the expenditures bloat right back up.

    The discussion about retirement age is a bit disingenous too. What would really happen is that you would end up with a lot of old unemployed people. *Can* work and *have* work are not the same.

  31. Well I’m one of those desk sitters and I work with many others like myself. Let me tell you, as a whole desk sitters are an unhealthy bunch. I would guess that more than 1/3 are obese, I’m sure over ½ are overweight. Most of the ones over 40 are on diabetes/cholesterol medicine. Boring, sedentary lifestyles can take its toll on the body.

  32. I see SS referred to as an entitlement. It is really a forced savings program. Upon retirement I am entitled to my principal and a reasonable return on my money. That is not to say that I want to participate in this program; remember we are being forced to participate.
    It needs to be dismantled through a phasing-out process. Proposal: I would forfiet any claim to future payments due to me upon retirement if I could offset my continued contributions against my income for tax purposes. This could be phased in by date of birth – say 1945 – 1950 you are 90% eligible; 1950 – 1955 80% eligible; 1960 – 1965 70% eligible and so on until the obligations are 100% eliminated. In the future our children and grandchildren would not have to support this failed experiment.

  33. Goldilocksisableachblond

    An economic incentive to hasten one’s own demise , by taking up smoking ?

    Not something I’ve ever considered , but with Obama everything seems to be “on the table” , so you never know.

  34. Social Security forced savings are being lent to the General Fund of the US Government. Let the future generations pay off their debt plus interest. There is no obligation of the citizenry to provide income tax dollars for support of SS. There is an obligation of the USG General Fund to pay interest and principal back. Set up a tax to pay back the SS fund and use the proceeds to invest in direct dividend paying projects.

    There is no entitlement. My wife and I paid in the value of our house over the last 45 years, along with the employer match. That is principal only. Indexed to 2008 dollars, of course. The interest would be staggering. But we were simply stolen from to pay benefits to those that were not 100 % paid in like we are.

    There should have been a make good tax to cover theft payments for those already in the cemetery.
    But there is not a whiff of entitlement involved.

  35. maynardGkeynes

    Isn’t there an element of entitlement, since SS is a pay as you go system?

  36. “Just thinking: What if they put Mankiw and Krugman on this commission?”

    Then there would be TWO idiots on it.

  37. I’m not an economist, I’m a writing teacher, but I know this much: the estate tax functions reasonably well to recapture the percentage of wealth that has accrued to an individual from a) the social advantages of having a surrounding society (infrastructure, educated workers, boards of trade, whatever: society!), and b) from personal luck; if properly designed, it can recapture the percentage due to those external factors, and leave for heirs the percentage that is due to personal skill (much less than our financial geniuses think, but still measurable and fairly theirs).

    Ronald Dworkin solved most of these problems 30 years ago in his work on Equality of Resources: why do I never see him cited on this blog or in similar discussions? Stop reinventing the wheel! We don’t have time, this is an emergency!

    Abolishing the estate tax would be the most barbaric move yet–my God, Simon Johnson is worried about oligarchies, just wait ’til that happens!

  38. Well, I won’t answer your guess. Nor does my view give away a disregard for my children – enlightened rich realize a big inheritance can do more harm than good. But I have worked on this stuff – we could get the vast bulk of the revenue with a well-structured tax limited to estates over $20 million. (The tax we have is little more than than a tax on the tax-planning challenged.) My point is, the average voter should not expect to suffer from the tax, unless he or she believes the marginal product of government is negative, or that its propensity to consume out of income exceeds unity, or both. If I thought that was their reasoning, I would take heart. Alas, I suspect it is less well-informed and maleable to propaganda. Your view?

  39. Indeed. Check out the cost of individual health insurance plans and you will note that the premiums increase radically from 45 to 65, where the insurers assume that Medicare will take over. The premiums for a 55-60 year old are 20% higher than for a 45-50 year old, peaking at 25-30% higher at 60-65. Add to this the lesser vigor of the older worker (so what about the advantages of experience…the younger worker learns faster) and the 50+ worker can cost the employer double per unit of output. The country would need to adopt practices common in other countries like Japan, etc. where the older citizens work at more lower end service related tasks and adopt a more modest lifestyle. However, the pay scales for these jobs would need to increase to something providing a “modest” standard of living.
    The overall result would be to force American business to accept a lower profit and Americans to be satisfied with a more modest, but more equitable life style.
    Not gonna happen smoothly.

  40. I am surprised neither you nor the commenters have expressed much opposition to the permanent elimination of the estate tax.

    I think that a healthy estate tax is a very good thing, and am appalled at the efforts to repeal it.

  41. maynardGkeynes

    The estate tax is easily avoided and thoroughly inefficient. The revenues raised are a fraction of the dead weight loss it imposes on the society due to the complex estate planning strategies it engenders, which serve no purpose other than tax avoidance (which is legal). It is a boon for lawyers only.

  42. While they’re at it, they should also bury the dinosaur that is the Alternative Minimum Tax (AMT). Instituted in 1969 to target 155 high-income households who were side-stepping their fair share of taxes, the AMT in 2010 is set to affect 1 of every 5 taxpayers.

    http://en.wikipedia.org/wiki/Alternative_Minimum_Tax

    @ KEgan – re-inventing the wheel? While everyone obviously has their own opinions as to what constitiutes an equitable tax system, I think now is as good as time as any to look how the country’s entire structure is formulated. Fair Tax, VAT, something, anything that works for the long haul and that is simple and just. If we’re going to change the basic tax structure, I would argue we don’t need to rush to screw it up even further.

    And isn’t that part of the saga that got us to where we are today, Paulsen telling Congress that if they did not approve TARP tomorrow that the financial system as we know it would end? How’d that work out?

  43. I find the following two of Mankiw’s points to be abhorrent:

    4.Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.

    This one is really sick and assures the continuing overwhelming power of the plutocratic state (not really a party issue, except to the outspoken tax cutting Republican plutarchs), and, there is little good evidence to support the idea that it has any real stimulative effect on growth (see the 1950′s growth rate vs. tax rate, and, more recently the “trickle down” ridiculousness of Reaganomics).

    5.Permanent elimination of the estate tax. It is gone right now, but most people I know are not quite ready to die. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

    I think that the estate tax should be reinstated, but should not apply to estates with a net value of under $1,000,000.

    Lastly, why have we completely eliminated: (a) any discussion of a flat tax, and (b) any discussion of a 30% to 40% cut in military spending, which would only cut an unnecessary number of overseas bases (now more than 700) and the production of programs which are hangovers from the Cold War, which ended 20 years ago.

    And, finally, a cure to the Medicare (huge) long term deficit issue is to institute Medicare of all, and to pay premiums as taxes (increase in FICA to cover both SS and Medicare).

  44. Taxes on imported goods are lousy economic policy (they hurt the country that it is importing good and benefit the exporting comuntry, they benefit domestic protected sectors at the cost of connected domestic sectors that use the production of the protected domestic sector) and lousy social policy (they conserve jobs in the protected sector at cost far higher than any other reasonable employment policy). One of the greatest tricks that the corporate lobbiests ever pulled was convincing the general public that taxes on imported goods are ever more than extremely rarely the plunder of a nation by one of its industries.

    I also like income taxes, but the economic logic is that they are distortionary (some have estimated that there is a deadweight loss of 40 cents on the dollar from regular income taxes). A consumption tax is generally less distortionary. Conseveratives, usually, estimate the deadweight loss at the high end are aren’t concerned as much as about inequality, liberals, usually, estimate the deadweight loss lower and/or think it’s worth it for equity reasons.

    Mankiw’s theory is that conservatives would take the less distortionary VAT as a substitute for more distortionary income tax. I actually doubt that- the days when the Republicans stood for such things (i.e. when they were economically liberal) seem gone, at least for now. Now they seem just socially conservative, opportunistic and simply against anything proposed by Obama.

  45. Some lousy spelling and editing in that post, sorry guys.

  46. maynardGkeynes

    My impression has been that the estate tax is favored by most people in the US. The reason, quite simply, is that they believe that someone else will pay it. That’s the worst possible basis for imposing any tax. Yes, there are arguments that could be made in it’s favor from a meritocracy point of view, but those are largely BS. It’s basically a “that guy doesn’t need the money” justification, which I think really sucks.

  47. I don’t think that corporate tax based on market share would be a good principle in general.

    A lot of businesses need to get larger to have decent economies of scale. Look at airlines- even a lot of the national flag carriers are probably “too small to exist” (cf. “too large to fail”). Penalizing bigness in itself will give business a disincentive to become as big as they need to be, and thus will make them less efficient and less competitive than they could be. That equates to less growth, weakened international competitiveness.

    There will be a level where you will want to stop their growth, even though it would be beneficial in terms of increased efficiency, because the firms would get too much market power and reduce competition. But it is surely better to do it on a case-by-case basis, as the Justice Department and other competition authorities now do, then create a default anti-big incentive.

    With banking, the same solution needs to be applied- break up banks that are TBTF and prevent M&A that would make them TBTF. But the basis for doing that is not that they gain market power (as in current monopolies investigations) but that they create too much systemic risk.

  48. maynardGkeynes

    Bayard, would you be in favor of a 40% estate tax on every estate, including your own? And if that were the case, and you had the opportunity to do any estate planning at all as you got older, are you really going to let the government get 40% of it? I suspect that the answer is “no.” Well, guess what? People with estates valued over $1m aren’t stupid either. They are going to do what you would do, and give it away as gifts to their children, to their foundations, or blow it at the race track. Rest assured that neither you nor government will ever get your greedy little hands on it.

  49. Dead people don’t need money, “you can’t take it with you”.

    Plenty of people have made good arguments here for the estate tax, but you have this anecdotal sense that “most people” support it for the wrong reasons. But doing something for a reason you suspect “sucks”, whether it is the right thing to do or not, is wrong.

    Why do you have so much concern for people who stand to inherit millions. Fact is, most of us don’t know anyone who will pay estate taxes, because very few people have millions of dollars. And the first $3.5 MM is tax free! Get a life and stop living off mommy and daddy. Or if you’re mommy or daddy, maybe there’s time to teach your brats how to do something useful and productive.

    And I disagree with Mr Kwak. You should never have any discussions with intellectually dishonest people (i.e. any conservative in the last 30 years). Mankiw is obviously such a dishonest person.

  50. The estate tax has never been primarily a revenue tax; it is instead a policy tax to avoid the extreme concentration of wealth in a few families. Even at the 2009 levels, less that .1% of the population were affected, without implementation of significant tax planning.

    Interestingly, it is my clients who are Mexican nationals who understand, appreciate, and approve of the tax once explained to them.

    Given this purpose for the tax, it should only be imposed on wealth that might lead to concentration. At present, somewhere between a 1.5M and 2M exemption equivalent makes sense, with an equal gift tax exemption, which translates with simple, inexpensive planning to twice that amount for a married couple. This would put approximately the top 3-4% of the population back into the tax.

    I also take issue with the notion that it is an avoidable tax. While substantial planning can minimize the tax, for larger estates the tax will be paid, and over several generations even an effective rate of 25-30% (taking into account aggressive tax planning strategies which very few individuals will undertake) will preclude the concentration of wealth the tax addresses.

    I firmly believe everyone should be able to earn and accumulate as much as they personally can, and be able to provide a reasonable start for their descendants. This does not mean that their descendants should win a lottery solely by accident of birth.

  51. maynardGkeynes

    @Walter Wm. Hofheinz: I don’t think people with $2M estates have anything remotely to do a harmful concentration of wealth in this country. They have no more political power or economic influence than the enlightened Mexicans you refer to. They are mostly people in urban bi-coastal areas with 3 and 4 bedroom homes that have appreciated over years of ownership. I will also tell you that even Charlie Rangel has put the minimum exemption at $3.5M – $7M in order to exempt people who are actually small savers who live in appreciated single family homes in NY and California. They are not who you think they are.

  52. “The overall result would be to force American business to accept a lower profit and Americans to be satisfied with a more modest, but more equitable life style.”

    Not gonna happen *at all*, so long as “greed is good”. However, I’d say the result you’re pointing out needs to be the end result of ALL actions taken after this crisis. Sadly, I think the Randroids are still running things quite they way they want to.

  53. The top marginal income tax rate should be 90%, kicking in at $100 million per year. We can index that for inflation, against the day when $100 million a year is not enough to live on.

    Is there any reason in the world why the “top” marginal rate has to be the one that kicks in at $350K or so? I mean: aside from the slavish devotion of certain intellectuals to the welfare of people who earn two orders of magnitude more money than they do?

    –TP

  54. Republicans would probably consider a reduction income tax, elimination of estate tax, and addition of a VAT a “tax increase” even if the VAT doesn’t compensate for lost revenue.

    This whole topic is predicated on crazy assumptions. Our deficit problem is not insufficient revenue, our deficit problem is healthcare cost growth. If Republicans were willing to compromise to protect the deficit, they would have worked to compromise on a healthcare bill.

    Mankiw is just using the deficit as a way to support his pet taxation issues, he’s not talking about adding a VAT that could even come close to covering projected health cost growth.

  55. The dramatic fall in housing prices did little to minimize this country’s growing inequality. Moreover, the dramatic growth in housing prices is something that has only happened over the last 5 years, the dramatic growth in inequality has been happening over the last 25 years.

    It can be traced to #1 Federal Reserve’s stronger commitment to lower inflation. #2 Deregulation of the financial industry and its subsequent outsize growth.

  56. “What if they put Mankiw and Krugman on this commission?”

    Krugman proposes health care reform, which Mankiw decries with the phrase “death panels”, and gets public support from people fighting for “government to take its hands out of their Medicare”.

    When finally forced to reveal a solution himself, Mankiw proposes scrapping a meaningful Medicare altogether…

    [Looking at the discrepancy between his much less widely read blog post, and his more popular op-ed, makes me believe that Mankiw, much like Republicans, is not above politicking to further his cause]

  57. Given your opinions above, we know who’s responsible for that “dead weight loss.”

    The defendant who killed his parents, to the court:

    “Have mercy on me. I’m an orphan!”

  58. Offhand I can’t think of anyone in America I’d say has “earned” more than $3.5 million (all sectors are mature by now, and all the real returns went to tollbooth tenders anyway), and indeed very few who have much more than that who I wouldn’t say stole most or all of it. So I start with an empirical and not even a moral meritocratic argument. According to your own capitalist textbooks all this bloated income is a market inefficiency.

    So that would be my main reason for the tax – it would collect the money that should have been taxed as income originally, and which really shouldn’t have been personal income in the first place.

    But yes, horrors, I also do care about both meritocracy and having a decent society, both of which have been destroyed by our neo-feudal practices and wealth concentrations.

    And yes, nobody “needs” to be super-rich. The very existence of the superrich simply drives up the cost of living for the non-rich and forces them onto the slave treadmill. Which is of course an intended feature of the modern corporate tyranny.

  59. Taxes??? Have any of you read the monstrous labyrinthine behemoth that is the US Tax Code.

    It’s a joke.

    Simplify!!!

    Gary Hart in his run for the presidency advocated a flat tax, a set percentage that would both fund the government, and allocate equitably the tax burden. No deductions. No offshoring!!! A flat tax for everyone (except for those fellow Americans living at or below the proverty line).

    Of course this radical idea – is – under the current panjandrum, – untenable, – because of the reams of accountants, and tax lawyers, and associates that would be instantly unemployed, – but what would the benefit to the greater society, if there was a fair, equitable tax system? The predatorclass, the superrich, and the oligarchs employ platoons a lawyers to insure they don’t pay any taxes currently. The poor and middleclass have few viable tax options. The US taxsystem as it exists today totally and completely favors and benefits the superrich, the predatorclass.

    That said, – I thought we lived in America – and that any untoward concentration of power by any individual, klan, cartel, oligarch, church, or coterie is an aberration and an affront to every principle this nation is found upon?

    Am I mistaking here?

    If so, – then I humbly apologize for daring to question the supernatural powers of the predatorclass masters of universe, and their allknowing, omnipotent, and sacred policies.

    If not – then, heads must roll!!!

  60. I would not hold it to be an anti-big incentive… there are millions of incentives to be big… but it is to claw back a little bit more from those who have special market powers that other’s don’t.

  61. “A consumption tax is generally less distortionary”
    Less distortionary for whom? Definitely not for those earning little.

    I am not against VAT… it is a good complement but the basic buildin block for a just tax should be tax on income and properties.

    VAT is defended based on expediency… and expediency has little to do with anything but with expediency on its own. A society is not built on expediency.

  62. maynardGkeynes

    It’s a question of incentives. It does seem that $100M is excessive incentive, but then you have to ask why a company pays an executive that much? GE did pretty well when Jack Welch was running it. One could argue he earned his pay. Maybe he would move to another country if taxes here are too high. Or he might decide to retire earlier. Or he might not work as many hours.

  63. maynardGkeynes

    The argument in favor of the VAT is that it is a tax on consumption rather than work or savings. We do over consume in this country, and much of what we buy is not edifying — video games, expensive clothing, over-priced restaurants, BMWs, that sort of thing. So maybe a VAT would make people think before they buy more junk they don’t need.

  64. Good idea. All we need is a million more Wal Marts for them to work in. Chances are we will get the million Wal Marts anyhow, so its win-win.

  65. How about a progressive income tax on the overcompensated (use your own definition), a progressive franchise tax on corporate capitalization, an estate tax on estates above ten or twenty million with no avoidance loopholes, a transaction tax on financial transactions involving more than $500,000?

    How about a propaganda tax on broadcast and cable television networks (and stations), a bribery/extortion tax on Congressional campaign contributions, a hot air tax on television appearances by corporate poobahs, Larry Kudlow and others too numerous to name individually ……

  66. A tax on corporate lobbying payments sounds interesting as it has quite a broad spectrum!!!

  67. The real question is whether what people experience after age 65 is life in any useful sense. Of course, we could increase postal deliveries to 3 per day, which might prove useful to commercial interests now stuffing our mail boxes with unread garbage.

    Folks, wake up there! We can’t find any use for 25% of the working population as it is. More geezers in the work force is not the answer. What we need first is more work, which means the substitution of productive investment for financial slight of hand. Although both make identical contributions to GDP, only one makes life sustainable. It all boils down to infrastructure and energy, two things in which the vaunted private sector has no interest, because they would increase the relative power of labor. So instead, we get non stop bulls**t from the likes of Gregory Mankiw, whose very name is a typographical error.

  68. All you need is a progressive tax on corporate capitalizations. Want to avoid it? Break up the financial monopolies, let them save money by increasing competition. Try selling this one to Larry Kudlow. I can hear him squealing already!

  69. I am afraid very few people on this thread have any understanding of money. Taxing estates larger than $20 million cannot possibly have any significant adverse consequences, but taxing estates of $3.5 to $10 million will simply eliminate the remaining middle class. Of course, I know $3.5 million sounds like a lot of money to some people, but at today’s rates it generates about $15,000 per year tax free, which means $80,000 per year of capital erosion, unless the owner chooses to play Russian Roulette in the financial markets, and good luck with that.

    The only reason estates of $3.5 – $20 million are taxed is to generate popular opposition to the tax. Very clever, n’cest pas?

  70. maynardGkeynes

    Russ, not true! I’m totally in favor of higher taxes to fund needed social programs, but I think the efficient way is through higher income taxes, higher taxes on capital gains (and eliminating the stepped up basis in the gift and estate tax) and possibly a VAT if we can avoid hitting the middle class and poor. Like the AMT, the inheritance tax is no longer a tax only on the super-rich, which is what it was originally intended to be. It’s a boon for lawyers, and nobody else IMO.

  71. The existing estate tax is easily avoided by the very wealthy, because it was designed to be avoided by large estates. It is not so easily avoided by estates in the $3 – $10 million range; mostly, avoidance at that level requires buying expensive life insurance, another financial industry rip off.

    The fact that the existing estate tax is a monstrosity is not an argument against enacting an effective estate tax, which is the only conceivable defence against a permanent American plutocracy unlikely to be much different than 1780s France.

  72. maynardGkeynes

    I would add (as #1) the collapse of the labor unions after Reagan broke the back of the Air Traffic Controllers union. Instead of calling for a national strike, the workers of this country applauded him and he crushed Walter Mondale in the 1984 election. Without labor unions setting an umbrella, wage scales have collapsed. That’s the biggest cause of the current income inequality IMO. The little guy by herself has no chance without organized labor to defend it.

  73. maynardGkeynes

    Jake, you are exactly right.

  74. Oh my God! Where would we be without Jack? Do you realize he set the company up to explode in 2008 by borrowing short and lending long for 20 years? Are you fooled by that hot air routine of non stop a** kissing on his network? Do you know that he collected $600 million in tax refunds under Reagan’s 1981 Corporate Giveway Act and then just leveraged up? Do you realize the company’s basic business is usury? Save this nonsense for MSM readers. Had it not been for the Fed commercial paper rescue, that crown jewel would now be a zombie like the major banks.

  75. Now we get moderation for invoking the diety?

  76. maynardGkeynes

    Apology accepted, my son.

  77. The thing to realize is that because of the cap on payroll taxes and the changing mix of income sources in higher brackets bringing the top income tax rate down to 25% would mean essentially a flat or even regressive marginal tax burden. Or you’d have to basically eliminate income taxes for the median household in order to keep the level of progressiveness. Seriously when Conservatives were making the argument for welfare reform they pulled great data about how the value of benefits created marginal tax rates above 100% and so on. But when it comes to ordinary people they won’t admit where the data shows that the difference in real marginal tax rates between the middle class and the rich is much smaller than Americans would actually like.

  78. Support your local geezer!

  79. Taxes, taxes, taxes. Sure we need to constrain spending but the spending that really counts is Medicare and the conservatives, as the voices of the corporate healthcare industry, oppose any and all meaningful efforts to contain costs. Unless, of course, you are talking about efforts to reduce benefits, which they favor in various guises.

    So what to do?

    -increase medicare taxes and eliminate the cap

    -reinstate the estate tax for estates in excess of $3.5/$7 million and eliminate all the loopholes.

    -eliminate the corporate tax deduction for lobbying expenses, political donations, political advertising and donations to trade associations and groups who engage in such activities (and couple this with improving shareholder access to the proxy process with respect to such expenditures)

    -eliminate tax deductions for drug advertizing as well as marketing expenses for any activities that do not involve direct contact with doctors and nurses and cap the latter expenses to tax golf seminars at expensive resorts

    -in the alternative, adopt a flat corporate income tax with no deductions and no allowances for shifting income overseas or expenses into the US. This has the added advantage of allowing companies to reinvest many of the millions they spend on tax avoidance/evasion into productive activity. It will also reduce the population of tax lawyers and CPAs. A win, win,win.

    -reduce all individual tax rates by progressive percentages and eliminate all deductions. The formula should slightly reduce taxes (net) for those earning less than $15000/$250000 per year and raise taxes on those earning more. Allow small businesses (sole proprieters and partnerships) to be taxed as corporations

    -eliminate farm subsidies for farmers earning more than $150,000 net of property taxes

    -reduce the defense department hardware budget by 10% to 20% across the board but do not reduce personnel benefits or wages. Replacement hardware should get priority over so-called new technology hardware.

    -reduce defense department consulting/outsourcing budget by 30% across the board.

    -eliminate tax deductions for entertainment, advertising and marketing expenses related to government contracting for all government contractors

    -gradually increase the eligibility age for Medicare by up to three years, phased in over 10 to 20 years with a proviso that folks falling within gap, on a means tested basis, be permitted to buy into Medicare during those years at reasonable rates

    -tax financial institutions bases on net assets (no off-books-accounts allowed) until TBTF is eliminated and commercial banking is separated from investment banking

    The list can go on and on. The point is that there are many alternatives to consider before a VAT is adopted and Medicare and Social Security is chopped.

  80. “Well…. 85 as a retirement age might work fine for desk-sitters. I don’t think it works so well for people who have to use their bodies to labor. Waitresses, sales clerks, even — 8 hours or more a day on your feet takes its toll. And, on the other end of the spectrum, you have engineers and IT workers unemployable at age 50 because they’re “too old.” ”

    You show me a job market where people aren’t discriminated against by their 40′s, for *any* job.

    In addition, by the time that somebody is in their 60′s, they are probably justifiably hard to employ, both mentally and physically (I say this as a person who’s pushing 50, and who watched his parents go through their 70′s just now).

    Now, HarWhores and ChicWhores and pundits are employable well into their 80′s, but that’s because they have guaranteed jobs, and (in the case of pundits) their assistants are probably writing their columns. For those of us with actual jobs, it’s different.

  81. Yup. It reminds me of one of those World’s Shortest Books – ‘Honest Harvard Economics Professors’.

  82. To James Kwak: You wrote: “I like the post on his blog better “. Some comments (redundant with other comments I’ve posted):

    Raising the eligibility age of Social Security and Medicare.

    Are you kidding? As I’ve said above, age discrimination *starts* by no later than one’s 40′s. It gets worse from there. You go out at age 60 and get a job in the private sector, and see what you find – or not. Now, once you have, try to get health insurance. How many 60-year olds has McKinsey hired in the last decade? How many has the Yale Law School admitted?

    Points 4 and 5 are cutting taxes on the rich, and paying for them with tax increases on everybody else. Do you seriously think that the rich in the USA are so impoverished and threatened that they need a tax cut? Do you think that our major problem with economic growth is too little money in the hands of thr rich?

    And that is *after* the basic point that the GOP has spent the last several *decades* making it clear to any honest observer that they have no interest in fiscal honesty, that any interest is just a front to sucker people into cutting taxed on the rich. Do you remember the Greenspan Commission? It raised SS taxes starting in the 1980′s, to pay for Baby Boomer’s SS benefits. And now – oh darn! We spent it on tax cuts for the rich! Need to cut benefits!

    And during much of the Bush administration, they were in an excellent place to attempt some reforms. But they didn’t, because looting and tax cuts for the rich were what they really wanted, along with f*cking the rest of us.

  83. Per is trying to say “Tax the Rents”.

  84. jake chase: “I am afraid very few people on this thread have any understanding of money.”

    I’m afraid it is you who has no understanding of the reality of the American economy. Only a small minority of people will have even $1 million in assets when they retire, let alone when they die. The median family income is around $45k. $3.5 million will supply that for on the order of 70 years out of principle, much longer than retirement, even if real lowest risk interest rates are zero for most of the rest of the century. If you inherit $3.5 million you most likely could get through life comfortably without working a single day.

    The estate tax exemption is rapidly changing due because the republicans wanted to eliminate it, but wanted to delay its effect on the deficit and eliminate its effect on long term deficit projections. The democrats took a shot at locking it in at $3.5 million this year (which didn’t get through the senate so it is still set to go to zero this year, then back to $1mil next year under the republican law) because only a tiny minority of people will pay anything with that exemption.

    The reality of the politics of the estate tax is that a ludicrously large fraction of the American population has absolutely no idea how it works and think that they will pay it because talk radio entertainers/deceitful pundits/republican politicians insinuate that they might. My own grandmother who might, if she and my grandfather die cheaply and soon, go out with around 600k thinks her estate will be taxed despite the fact that I have on multiple occasions explained that the exemption was double her wealth ten or fifteen years ago and is currently an order of magnitude above ($7 mil for a couple). She reads the wall street journal editorial page and holds various ludicrous beliefs about the state of the world.

    In fact for the vast majority of heirs the estate tax is a great boon. It resets the cost basis of inherited assets so they don’t have to pay capital gains taxes and don’t have to try to figure out the original cost basis on assets that may have been purchased decades ago by person who is seriously unavailable for questioning. Because of this the actual break even point for the estate tax is somewhere above the exemption at the point where the capital gains taxes avoided equals the estate taxes paid.

    The reality is that most retired people get most of their income from social security. They pass on far less than $1 million, let alone 3.5 or 7 or 20. There is a word for people who die as multi-millionaires and who could spend more than the average for many decades without working at all: rich.

    This reality disconnect isn’t accidental. Some of the wealthy are spending a lot of money to create these false beliefs in the people because they actually do expect to pay a lot in estate taxes. These people aren’t funding the anti-estate tax propaganda machine out of the goodness of their hearts because they are dim enough to think most people are multi-millionaires they are doing it because another part of their propaganda is false: the estate tax isn’t so easy for the super wealthy to avoid. For the most part they do have to pay it on the tens or hundreds or even thousands of millions they leave to their heirs. If they can get the tax rate reduced or the whole thing eliminated the tens of millions they have spent marketing those ideas will have been very well spent.

    If everyone was opining on the estate tax based on whether their inheritance or estate would be affected something like 99% of people would support it in its current form. The 50% break would probably be more like a $100k exemption, a lot of people die with nothing even if social security keeps them fairly comfortable in their retirement or medicaid pays their bills in the nursing home (most long term nursing home patients are on medicaid having quickly gone broke paying the bills themselves).

  85. It likely would have minimal economic impact and tax revenue effect as long as the capital gains rate was 15%. If you raised cap gains rate to that level, you would destroy the economy.

  86. So I would have thought, but then why did its demise pass the legislature, with no popular opposition? The argument for the estate tax is not that it soaks the rich or that it is taken from people who don’t need it or don’t deserve it. The argument for the tax is that it is much more efficient than the alternative graduated income tax – that is, it does less to discourage work effort. A. Smith would agree, I think. And the statement by your namesake implies he would, too.

  87. Jeez, a post on taxes, and no one points out in the comments what the best tax is.

    Get this: a tax which
    (a) is nondistortionary (no deadweight loss!)
    (b) is completely equitable, because it’s a tax on rent
    (c) is, all things being equal, very progressive

    Land value taxation.

  88. Can’t do it merely as gifts to their children; the estate tax is paired with a gift tax.

    They do it by wrapping it in insurance policies.

  89. “It’s basically a ‘that guy doesn’t need the money’ justification, which I think really sucks.”

    Almost all massive fortunes are made from rent collection, and there’s no injustice to taxing rents at 100%.

  90. maynardGkeynes

    The problem with a land tax is lack of cash flow. It’s a major problem with taxes on residential property . Your home does not generate revenue. You could force the elderly to sell their houses but, that is rather harsh.

  91. Don’t know where you live, Maynard, but I’ve owned a three bedroom house in a good (i.e. safe, quiet) SoCal neighborhood for many years, and if you can show me how to get a $2-$3 million estate out of it, please do. Soon.

    And, capital’s attack on the unions started long before Reagan and the ATC. See

    (sorry I don’t know how to do links)

  92. Oh, I guess it does itself. Far out.

  93. maynardGkeynes

    The ATC strike was the watershed, not the beginning. In NYC, BOS, and DC, that house will be about $1m. Getting to $1M in savings is not common, but middle class people who save over a lifetime do it all the time. The belief that it can’t be done through savings is actually pretty insidious. They’d rather tell people to depend on the government or risk it with their stock broker.

  94. I hate to say it, but maynard is correct – taxing land is a distortion; it pushes land towards being used to generate current cash flow.

    A columnist once compared this to somebody coming in and assessing income taxes based on what a person *could* earn.

  95. I am afraid that you have to define “distortion”. liberal says that if there is no deadweight loss there is no distortion. Barry says that if the tax alters behavior, there is a distortion.

    It seems like, for Barry, almost every tax is a distortion. Then the question is how much of a distortion is there? How do we measure behavioral change?

    maynardGKeynes brings up the important point of taxing the homes of the elderly. Well, VAT enthusiasts say that much of that tax would be returned to the poor, either through rebates or social programs. Some states already offer sales tax rebates. Other ways include not taxing sales of things like groceries. There is no problem with dealing with property taxes on the elderly in similar manner.

  96. Time to reinvent the wheel I see. Every few years there’s a push to reform the tax code, so commission is set up to study all sorts of proposals and nothing is done.

    Might as well start looking at what was proposed last go around with President Bush’s Advisory Panel on Federal Tax Reform

    http://govinfo.library.unt.edu/taxreformpanel/meetings/index.html

    The May 11, 2005 panel has the two most interesting presentations, Michael Graetz’s proposal includes a VAT tax, he’d keep the income tax but exempt the first $100,000 of family income. Edgar Feige proposed a bank transaction tax which would levy a fraction of one percent of everything that goes through the banking system, from check deposits to derivative trading. He’d use this Automated Payment Transaction (APT) tax to eliminate federal and state income and sale taxes.

  97. Without major health care reform, such as single-payer, all this is useless blather.

  98. And by “freshwater economist,” I think you mean “freshwater economist [sic]“.

  99. Force the elderly to sell their homes? I’m sure Obama’s going to take care of that with “entitlement reform.”

    So get out your forks and knives, rent seekers! More commissions!

  100. min: “It seems like, for Barry, almost every tax is a distortion. Then the question is how much of a distortion is there? How do we measure behavioral change?”

    Please read the original post by liberal: “Jeez, a post on taxes, and no one points out in the comments what the best tax is.

    Get this: a tax which
    (a) is nondistortionary (no deadweight loss!)
    (b) is completely equitable, because it’s a tax on rent
    (c) is, all things being equal, very progressive

    Land value taxation.”

    I was pointing out that he’s wrong, and that it’s pretty clear that he’s wrong, once one stops to think at all.

    And yes, any tax distorts; the question is how much, for whom, etc. This is something that I have no problem with.

  101. Barry: “I was pointing out that he’s wrong, and that it’s pretty clear that he’s wrong, once one stops to think at all.” (He being liberal.)

    Well, as I said, that depends upon the definition of distortion. Plainly you two are using it in different ways.

    One problem I have with the term, “distortion”, is its implied value judgement. The assumption is that distortions are not good. A more neutral term would be better. (Anthropologically speaking, it is interesting how apparently technical terms in economic discourse are value-laden. ;))

    For instance, we could say that body-building distorts the body. Now, becoming muscle-bound is not a good thing, but moderate body-building is probably a good thing, and some level of working out certainly is.

    Now, you did not disagree with the claim that a land tax does not carry a deadweight cost. You pointed out that it would have an effect on behavior. The pluses and minuses of that effect can be debated, but calling the tax a distortion does not further that debate.

  102. What is the attraction of a VAT? It’s regressive, and it requires a whole new accounting rigamarole to administer. A luxury tax, maybe, on the Lexus, the $5 million starter castle, the crown jewels etc. … but what’s wrong with just a straight-up, steeply progressive income tax like we used to have?

  103. I would point out that the VAT need not be coupled with a rebate. European countries have to use two VAT rates, one for necessities (usually under 10%) and one for other VAT-eligible goods and services (can be higher than 20%) to reduce the regressiveness of the tax.

    Furthermore, while a VAT functions no different than a sales tax from the point of view of a customer, the geographical dispersion of the tax is different.

    VAT is a system of payments and rebates. Suppose a company in Michigan produces a car. It’ll have to charge VAT on that and pay it to its local tax bureau. It sells the car to an Ohio-based distributor who sells it t a store in California. The distributor will be able to claim a rebate for the VAT it paid and it will charge VAT on the price for which it sold the car to the store. The added-value goes to the Ohio tax bureau. The same dynamic holds in California.

    In short, a VAT would mean the taxes would be more equitably distributed along the production-distribution chain. In Europe, this isn’t a problem, since most states are unitary states and even in federal states VAT is federal income, with a portion going to the EU budget.

    Conversely, the sales tax (analogous to VAT) is state income in the United States. Right now, consumption-oriented states dominate politcally, not manufacturing- and agriculture-oriented states. Anyone who implements VAT can kiss California and Florida goodbye, so, even though it may be a good idea, a VAT won’t happen.

  104. Well, a VAT is just as regressive as a sales tax. Both function identically to the custormer.

    The catch is that a sales tax/VAT as a general consumption tax nets a lot of income while being administratively simple. It’s also harder to shirk and to displace (consumption is geographically determined). Its distortion encourages saving, which is usually held to be a positive thing.

    As for its regressiveness: Yes, VAT is hugely regressive in its base form. But European states mitigate that by setting two VAT rates, one for necessities and one for other goods (8.5% and 22% in my country, respectively). EU law sets the limitations.

    Since currently 30% of consumption in the US is done by the top 1% of the population, such a VAT might not be a bad idea.

  105. maynardGkeynes

    If most of it is paid by the wealthy, how is that regressive?