Tag Archives: taxes

Where Do You Want to Be Born?

By James Kwak

That seems like a nonsensical question. Of course, each of us born where he or she was born, and we didn’t have much choice in the matter. But, philosopher John Rawls asked, if you lived behind a veil of ignorance, not knowing what position you would occupy in the socio-economic hierarchy, what rules would you choose to govern society?

Rawls was reasoning from a situation in which people could decide on any set of rules.* In the real world, the set of existing countries gives us a limited set of options to choose from; among those, if you didn’t know if you were going to be rich or poor, where would you choose to be born? On Friday, I was discussing this question with a scholar who is in the United States for a year, and one thing we noted was the instinctive tendency of many Americans to assume that we must be the best at everything and have the best of everything in the world (best health care, best Constitution, best hockey team, etc.).

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Posturing from Weakness

By James Kwak

President Obama’s 2015 budget proposes a number of tax increases that will mainly affect the rich. They include:

  • Limiting the tax savings on deductions to 28 percent of the deduction amount (and applying this limit to exclusions as well, such as the one for employer-provided health benefits)
  • Requiring a minimum 30% income tax on income less charitable contributions, which is intended to limit the benefit of tax preferences on capital gains and qualified dividends
  • Reducing the estate tax exemption from $5.34 million to $3.5 million and raising the estate tax rate from 40% to 45%
  • Eliminating tax preferences for retirement accounts once someone’s account balance is enough to fund a $200,000 annuity in retirement (simplifying slightly)

These are all good things, given the size of the projected national debt and the urgent needs elsewhere in society. But, of course, they have no chance of actually happening.

If President Obama really wanted these outcomes, there was a way to get them. He could have let the Bush tax cuts expire for good a year ago, making high taxes on the rich a reality. Then, a year later, he could have proposed a middle-class tax cut and dared the Republicans to block it in an election year. (He could also have traded a reduction in the top marginal rate—from the 39.6% that would have resulted, not counting the 3.8% Medicare tax—for the reforms he is now proposing.)

But no. Instead, he locked in low marginal rates, including low rates on dividends, that cannot be budged so long as Republicans have 41 votes in the Senate. And today he’s left waving a “roadmap” that has no chance of becoming reality.

Who Cares About the National Debt?

By James Kwak

Not Greg Mankiw. Or, to be precise, not “Republicans.”

This past weekend Mankiw wrote a column for the Times laying out the arguments for a carbon tax. They are so well known and so obviously correct that I won’t bother repeating them. (A tradable permit system could work equally well, depending on how it is designed.)

In addition, many people think that the national debt is a serious long-term problem. A carbon tax (or a tradable permit system where permits are auctioned off) would obviously bring in revenue. In White House Burning, we estimated this at about 0.7–0.9 percent of GDP by the early 2020s (citing Metcalf, Stavins, and the CBO).

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Wealth Taxes? Don’t Hold Your Breath

By James Kwak

Tyler Cowen thinks that we are entering an age of debates over wealth taxes. If only.

It’s true, as Cowen notes, that national debt everywhere is a relatively small fraction of national wealth and that, therefore, “fiscal problems are best regarded as problems of dysfunctional governance.” One of our central arguments in White House Burning was that the United States obviously, easily has the ability to pay down the national debt, and how it will do so is basically a distributional issue.

Even if wealth taxes make sense, that doesn’t mean they will happen. Cowen claims that “Like the bank robber Willie Sutton, revenue-hungry governments go ‘where the money is.’” But all that is cleverly phrased is not true. Consider this chart from White House Burning:

Screen shot 2013-07-24 at 1.30.09 PM

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If Only

By James Kwak

Paul Krugman describes the battle lines this way:

“Democrats want to preserve the legacy of the New Deal and the Great Society — Social Security, Medicare and Medicaid — and add to them what every other advanced country has: a more or less universal guarantee of essential health care. Republicans want to roll all of that back, making room for drastically lower taxes on the wealthy.”

I think he’s right about the Republicans. But I don’t think he’s right about the Democrats.

If you want to preserve Social Security, Medicare, and Medicaid, in a world where the population is aging and health care costs are going up, then it’s obvious that your top priority should be higher tax revenues. Without a reasonable level of federal tax revenues, there’s no way we’ll be able to pay for those programs in the future.

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It’s Not That Complicated

By James Kwak

Of course the tax bill couldn’t have passed today, even if the two sides reached a compromise. Today it would have been a tax “increase.” Tomorrow it will be a tax “cut.” As my daughter would say, “Duh.”

Grover Norquist’s Taxpayer Protection Pledge will remain technically inviolate, which was not terribly hard to predict. And it will have done its most important work: making a small and obvious policy change—allowing moderately higher taxes for the rich—seem like an enormous, gut-wrenching concession by Republicans.

See you next year!

Rewriting History

By James Kwak

This morning Matt Yglesias wrote a post arguing that the December 2010 tax cut was an Obama victory. By the time this evening that I finally found time to figure out what annoyed me about it, I had to go to the second page of his blog to find it, since he had posted so much in the interim. That man sure can write.

I’m not so sure about his memory, though. Yglesias says Obama won because he got the (Bush) middle-class tax cuts extended along with some other goodies like a payroll tax cut and extended unemployment benefits, and all he had to give up was an extension of the (Bush) upper-income tax cuts. The reason people think it was not a good deal, he says, was that “to get a favorable deal Obama had to downplay the extent to which he hadn’t given anything up.”

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Grover Still Matters

By James Kwak

Last week I wrote a post arguing that Grover Norquist’s Taxpayer Protection Pledge is alive and well and still a binding constraint on Republican lawmakers. The media continue to push the story of Republicans renouncing the pledge, however, and who knows, I could turn out to be wrong. Maybe some Republicans will vote to reduce deductions without a compensating reduction in marginal rates.

Even in that world, however, the pledge will still have a major impact. All this focus on the pledge makes it seem as if the few apostates—Peter King, Lindsey Graham, etc.—are making some enormous, admirable stand on principle. In fact, all they are saying is that they might be willing to close a few loopholes and keep tax rates where George W. Bush left them; they are still adamantly opposed to increases in tax rates (even though those increases, set to take effect on January 1, are the result of Bush’s choosing to use reconciliation to pass his tax cuts).

The specter of the pledge has allowed them to dress up a tiny concession—conservatives should want to get rid of distortions anyway, since they distort economic choices—as a major move to the center. In return for breaking the pledge, they can demand that Democrats agree to major changes to entitlement programs.

The tactical beauty of the pledge is that it credibly committed the Republican Party to never increase taxes, thereby forcing Democrats to meet them not in the middle, but all the way over on their side. (See the tax compromise of December 2010 and the debt ceiling compromise of August 2011, for example.) Even if a few signatories break free, it will still have much the same effect.

I’m Betting on Grover

In the wake of their overwhelming defeat last week (at least relative to expectations a few months ago), Republicans are wondering how to improve their position in the next election. John Boehner has apparently told his caucus to “get in line” and support negotiations with the president over the “fiscal cliff” and the national debt. More shockingly, The Hill reported rumblings that Grover Norquist’s stranglehold over tax policy may be weakening, with one Democratic aide even saying, “As far as [Norquist’s] ability to sway votes, it’s gone.” Norquist’s Taxpayer Protection Pledge forbids lawmakers from voting for legislation that would either raise tax rates or increase tax revenues; if Republicans are questioning the pledge, that might pave the way for a bipartisan compromise to increase taxes.

Norquist’s response: “Nobody’s actually broken the pledge. That doesn’t keep me up at night.” He’s right not to worry. He has history on his side.

Let’s take a brief look at American political history since the 1970s, courtesy of the incomparable xkcd:

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Incentive Effects of Higher Wages

By James Kwak

My Atlantic column this week is on a familiar theme: why don’t Barack Obama and Democrats provide an clear alternative vision to the Romney-Ryan state of nature, instead of slowly stumbling along in the Republicans’ wake? But it also brings up a question that I haven’t seen before.

The theoretical argument against higher tax rates is that it reduces the incentive to work because it changes the terms of the tradeoff between labor and leisure. That is, higher taxes reduce your effective returns from labor, while your returns from leisure remain constant, so you will substitute leisure for labor.

In the long term, however, real wages tend to go up; even in the past three decades, which have generally been bad for labor (and good for capital), they’ve gone up by about 11 percent. If tax rates remain constant, that should increase the effective returns to labor, causing people to substitute labor for leisure (i.e., work more). Put another way, you could increase tax rates and keep the tradeoff between labor and leisure constant.

I generally don’t buy these pure theoretical arguments, but my point is that if you believe that higher taxes reduce labor supply through the substitution effect, then you should acknowledge that the effect of higher taxes could be swamped by growth in real wages.

Bobbing and Weaving

By James Kwak

Mitt Romney’s latest attempt to make his tax plan seem plausible (that is to say, not a pack of blatant lies) is the idea of capping deductions at some level, like $17,000 or $25,000. Of course, as we all know, it doesn’t add up; Dylan Matthews provides a quick summary. If you cap deductions and you cut rates by 20 percent, everyone’s taxes go down, and the very rich (but not the super-super-rich) benefit the most.

This shouldn’t be news to anyone, because this problem has already been solved in its general form: there’s no way his numbers add up, because you could eliminate all the tax breaks for the rich and still not pay for a 20 percent rate cut. I confess I have some attachment to this issue because I think I was one of the first people to point out the mathematical impossibility of the Romney tax plan (the day after he announced the 20 percent rate cut).

Unfortunately, of course, this is all about politics, and arithmetic coherence is not the bar Romney needs to clear. He just needs to get enough undecided voters (stop and think for a second about what it means to be undecided right now) to think that his tax plan isn’t a complete fraud and to think that all of us self-appointed defenders-of-math are just Obama hacks. And this latest cap on deductions is probably enough to clear that much lower bar.

Luck, Wealth, and Richard Posner

By James Kwak

I disagree with Richard Posner—the old Richard Posner behind the law and economics movement—on so many things that I always worry when he seems to agree with me. Did I do write something stupid? I wonder.

A friend forwarded me Posner’s latest blog post, “Luck, Wealth, and Implications for Policy,” parts of which sound vaguely like a post I wrote three years ago, “Do Smart, Hard-Working People Deserve To Make More Money?“* In that post, I argued that even if differences in incomes are due to things that people ordinarily think of as “merit,” like intelligence and hard work, that doesn’t mean that rich people have a moral entitlement to their wealth, because they didn’t do anything to deserve their intelligence or their propensity to work hard. In summary, “I have little patience for the idea that rich people deserve what they have because they worked for it. It’s just a question of how far back you are willing to acknowledge that chance enters the equation.”

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Why Taxes Should Pay for Health Care

By James Kwak

William Baumol and some co-authors recently published a new book on what is widely known as “Baumol’s cost disease.” This is something that Simon wanted to include in White House Burning, but I couldn’t find a good way to fit it in (and it would have gone in one of the chapter’s I was writing), so I it isn’t in there. (Baumol is cited for something else.) But in retrospect, I should have put it in.

Baumol’s argument, somewhat simplified, goes like this: Over time, average productivity in the economy rises. In some industries, automation and technology make productivity rise rapidly, producing higher real wages (because a single person can make a lot more stuff). But by definition, there most be some industries where productivity rises more slowly than the average. The classic example has been live classical music: it takes exactly as many person-hours to play a Mozart quartet today as it did two hundred years ago. You might be able to make a counterargument about the impact of recorded music, but the general point still holds. One widely cited example is education, where class sizes have stayed roughly constant for decades (and many educators think they should be smaller, not larger). Another is health care, where technology has vastly increased the number of possible treatments, but there is no getting around the need for in-person doctors and nurses.

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43.4 = 30.9?

By James Kwak

Adam Davidson wrote his latest New York Times Magazine column about how Barack Obama and Mitt Romney largely agree on economic questions. This is a classic example of how to mislead through deceptively selective citation.

Here’s the core assertion:

For someone who lived in the first 150 years or so of this country, it might be hard to see what’s so different about the economic policies of Barack Obama and Mitt Romney. Romney seeks a 25 percent top corporate tax rate, and Obama is proposing 28 percent. Romney wants to eliminate capital-gains taxes for the typical investor and leave the rate at 15 percent for higher earners. Obama wants to increase it to 20 percent. They differ on how to tax the highest incomes. But for most Americans, the distinctions might be mistaken for a rounding error. Both men strongly support expanding free trade and maintaining close to the same level of Social Security and welfare benefits.

As anyone who follows fiscal policy knows, the corporate tax rate is a sideshow. It’s the individual income tax and payroll taxes that bring in the big dollars, and it’s the individual income tax that has the real impact (or not) on inequality.

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Capital Gains Tax Rates and Savings

By James Kwak

Earlier this week, I  wrote my own “job creator’s” manifesto for The Atlantic, in response to Steven Pearlstein’s great parody. You can read it if you are interested in knowing what one “job creator” thinks our country needs.

There’s something I forgot to add, however. (Literally: while I was away from my computer I decided to add it, but then I forgot to do so before sending it to my editor.) As I’ve said before, the capital gains tax rate had no impact on my decision to start a company. It couldn’t have had any impact, because I didn’t know what it was.

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