Archive for the ‘taxes’ Category

The other 90%

19 October 2011

That’s who loses from Herman Cain’s “9-9-9” tax plan, according to analysts at the nonpartisan Tax Policy Center (jointly run by the Urban Institute and the Brookings Institution). Krugman has a quick synopsis.

Income stratum   Impact on after-tax income

  • Bottom 20%       -18.7%
  • 20th-40th %ile  -15.4%
  • 40th-60th %ile  -10.1%
  • 60th-80th %ile   -6.1%
  • 80th-90th %ile  -2.3%
  • 90th-95th %ile  +0.9%
  • 95th-99th %ile  +6.5%
  • Top 1%  +19.7%
  • Top 0.1%  +26.6%

Howard Gleckman of the Tax Policy Center notes, “In Cain’s world, a typical household making more than $2.7 million would pay a smaller share of its income in federal taxes than one making less than $18,000.”

I wrote before that the Cain tax plan seemed calculated to appeal to Republicans whose idea of economic injustice is poor people not paying income tax (which happens because they earn less than the standard deduction and personal exemption. Never mind that they do pay payroll taxes, sales taxes, and excise taxes). But even if you do think the tax system is too generous to the poor, you probably don’t think we should raise taxes on the middle and upper-middle class while cutting taxes on millionaires. In fact, a poll this month found that 64% of Americans wanted to raise taxes on millionaires, including 83% of Democrats, 65% of independents, and 40% of Republicans.

9-9-9 is a joke

13 October 2011

I think this is the first time I’ve ever agreed with Grover Norquist on anything: Herman Cain’s tax plan is bogus. Naturally, old Grover and I have different reasons for thinking it so. He says that having three 9% tax rates — income, profits, and sales — is “like having three needles in your arm.” There’s also the conservative objection that a sales tax is just too easy a way to raise revenue, making it harder for Norquist to realize his dream of starving the government beast and drowning it in the bathtub.

Unlike Norquist and Cain, I’m one of those people who’s against regressive taxes, like, you know, a 9% sales tax. As David Weigel at Slate noted, it seems to be about sticking it to that alleged freeloading 47% who don’t pay income taxes (but do pay payroll, excise, and state income taxes). And, as Bruce Bartlett notes, there’s no mention in Cain’s income tax plan of a personal exemption, so the income tax rate is presumably 9% for everyone. So Cain would raise taxes on nearly half the population by up to 18% of their income.

Once upon a time Republicans boasted about taking poor people off the income tax rolls (as with the Reagan tax reform of 1986 and even the Bush tax cuts of 2001), but times have changed. Demanding that almost half of Americans pay an extra 9% of their income in taxes is now the order of the day, as long as that half is the poorer half.

Oh, and if lowering the top income tax rates to 9% weren’t enough Robin Hood in reverse, Cain’s plan would also exempt capital gains from taxes altogether. Imagine, hedge fund managers might not have to pay income taxes at all!

And then there’s the issue of lost revenue from slashing tax rates and shrinking the tax base for the affluent. The basic rationale for progressive taxation is that it raises more revenue more easily than flat or regressive taxation. Cain claims that his upper-income tax cuts would spur so much prosperity that they’d pay for themselves. Stop me if you’ve heard that one before.

Better than nothing

26 September 2011

. . . is how I’d describe this month’s major developments on the fiscal and monetary policy front, namely Pres. Obama’s new jobs proposal and the Fed’s decision to reallocate its Treasury bond portfolio so as to try to push long-term interest rates down.

The Fed’s decision is simpler, so I’ll start with that one. Last Wednesday the Federal Open Market Committee kept its fed funds rate target unchanged at 0-0.25% and announced that it would sell most of its short-term T-bill portfolio and replace it with longer-term T-notes and T-bonds. This is quite a bit less than the “QE3” (quantitative easing, round 3) that many in the market were hoping for, as it does not involve a net increase in the Fed’s Treasury holdings, and the stock markets took a tumble that afternoon. The media quickly dubbed the Fed’s move “Operation Twist,” after a similar action in 1961. Nobody expects this move to have more than a marginal impact, not when mortgage and other long-term interest rates are already at historic lows, but it’s hard to argue against a positive marginal impact, purchased at so little cost. A Wall Street Journal editorial notes that the 1960s Operation Twist lowered long-term interest rates by about 0.20 percentage points, and “Some experts said that was enough to make the program effective; others deemed it a failure.” It seems to me that any reduction in unemployment from this move, however small, is welcome news at a time of 14 million unemployed.

The President’s new jobs bill is a more complicated animal. (Note that they’ve dropped the term “stimulus package,” apparently out of belated recognition that “jobs bill” is simpler and sounds more appealing and also because the $787 billion stimulus of 2009 is unpopular. I’ve been over this one before: leading estimates are that it saved a few million jobs, which is good, but it was supposed to save all of them, and that obviously didn’t happen. Thus it is unpopular.) The main complication is that it has no chance whatsoever of passing, given knee-jerk opposition to all things Obama in the Republican-controlled House and the Republican-filibuster-strength minority in the Senate. This despite the fact that, as Obama said, that virtually everything in it has been supported by Democrats and Republicans alike. (To be fair, not much in it has been supported by Republicans recently, i.e., since Obama became president.)

Specifics: The American Jobs Act (its official name) has a price tag of $447 billion, most of which apparently would be spent during the next 12 months, so roughly the same yearly amount as the 2009 stimulus. More than half of that is a $240 billion cut in payroll taxes, including a reduction in the payroll tax paid by workers, a cut in the employer share for small businesses, and a tax holiday for new employees. The next biggest item is $140 billion for infrastructure and local aid, notably transportation, retaining and rehiring teachers and first responders, and modernizing public schools. The last area is $62 billion for unemployment insurance extensions, tax credits for hiring the long-term unemployed, and subsidized employment for low-income individuals.

All of this seems reasonable, maybe too reasonable. In a less toxic political environment, this proposal would pass, but just like the 2009 stimulus, it would be way too small to fill America’s jobs deficit. The payroll tax has already been cut to 4.2% (down from about 6.2%), and the jobs bill would cut it to 3.1%, or about $11 on every $1000 of income.  Small potatoes. And while poorer workers would surely spend their payroll tax cut, upper-middle class and upper-class workers would probably save much of theirs. The current payroll tax cut is set to expire at the end of this year, and Republicans aren’t crazy about it (they prefer permanent tax cuts aimed at “job creators” in the top tax brackets) but don’t want to be cast by Democrats as favoring tax increases for the little guy, so a further extension of the 4.2% payroll tax rate seems likely.

The payroll tax holiday and ($4000) tax credit for hiring the unemployed should also be expected to have a positive but marginal impact on employment. The number one question in any prospective employer’s mind is “Can I sell the extra output that this person would produce?” Tax holidays and tax credits make a Yes more likely, but only if the product demand is strong enough to almost warrant hiring the person in the first place. Still, we economists live at the margin, and as with the Fed’s Operation Twist, anything that creates jobs at minimal cost is a positive thing.

And now on to costs. This is the main area where I have a problem with the president’s proposal. Obama says the program is fully funded, when really that’s the last thing we should be worrying about during a depression.The more you offset the new spending and tax cuts with spending cuts and tax increases elsewhere, the less stimulus you have. Obama said the program will be paid for by additional spending cuts in the future, closing corporate tax loopholes, and reinstating the “millionaire’s tax” on personal income. (Note: We last had a $1 million tax bracket in 1940, in nominal terms. Adjusting for inflation, we last had a $1 million tax bracket in 1973.) If the spending cuts are sufficiently far off in the future, like when the unemployment rate is back below 6%, they should do little macroeconomic damage. Ditto the closing of tax loopholes — which probably have little to do with hiring anyway — and the millionaire’s tax. As far as I can tell, those tax increases — and some others that I would support, like taxing hedge fund managers’ salaries as ordinary labor income instead of at the lower capital gains rate — would take effect immediately. While I don’t buy the Republican rhetoric about every rich person being a Job Creator, I still don’t think raising taxes in a depression is a good idea. It can wait.

Taxes — not lonely enough at the top?

20 August 2011

Bruce Bartlett offers a fine economic history lesson on the U.S. top marginal tax rate. Most people know that the top rate has changed quite a bit over time. (For those keeping score: 91% from WW2 to the early 1960s; 70% till the early 1980s; 50% for most of the Reagan administration; 28% in the late 1980s; raised to 31%, then 36%, then 39.6% in the early 1990s; lowered to 35% in 2001). Bartlett compares the top tax rate with the economic growth rates during those intervals and finds basically no correlation. That, too, is not really news (and a more careful study would take other factors into account).

What is striking, however, is how the threshold level of income for the top rate has changed over time. The original income tax, at the height of the Progressive Era during the Wilson administration, set the threshold at $500,000, which is not only higher than today’s $374,000 but was in 1913. The price level has increased more than 20 times since then; adjusting for inflation, the 1913 top tax rate kicked in at $11 million.

The famous tax cuts engineered by Harding-Coolidge-Hoover Treasury Secretary Andrew Mellon in the 1920s lowered that threshold considerably (to $100,000, or $1.2 million in today’s dollars) but in real terms left it still well above today’s. Pres. Franklin Roosevelt raised both the top tax rate and the threshold to sky-high levels (79%, and a threshold that would be $80 million in today’s dollars and may have only affected one person; some called it “the Rockefeller tax”).  The threshold fell to $200,000 (equivalent to about $3 million today) during WW2 and basically stayed there till the early 1980s. The “Reagan tax cuts” of 1981 lowered the threshold to $85,600 (not quite $200,000 today). The Tax Reform Act of 1986, which Reagan signed, flattened the tax system further, with a top rate of 28% that kicked in at just $30,000 (about $50,000 today). The “Clinton tax increase” raised the threshold from $86,000 to $250,000, and inflation adjustments have raised it to $374,000 today.

Notice a partisan pattern here? It’s no secret that Republicans think the rich are overtaxed and Democrats think the rich are undertaxed, but the discussion almost always focuses on the top tax rate. What’s often missing is just where the definition of “rich” begins. In the historical record, Democrats (Wilson, Franklin Roosevelt, Clinton) have tended to set the top tax threshold high, whereas Republicans (Harding, Reagan) have tended to lower it. Much of this comes down to different notions of fairness: Democrats tend to favor a progressive income tax in which richer people pay a larger share of their income and poor people pay little or none; Republicans tend to favor a flat income tax (or no income tax), in which everyone pays the same marginal rate. Having the top rate kick in at very high levels of income tends to go hand in hand with a multiplicity of different tax rates and a highly progressive tax structure, whereas having it kick in at low levels of income means a much flatter tax.

Ever since the “Bush tax cuts” of 2001 were passed, many Democrats have talked about raising the top tax from 35% back to 39.6%, but until recently I’d  heard surprisingly little talk about raising the threshold.This was surprising to me, because, as Bartlett points out, many people do not regard $250,000 or even $374,000 as particularly rich — at least not if, say, you live in New York City and have a family of four. It’s rather unclever politics to talk about raising the top rate without reassuring upper-middle class people that you’re not going to raise their taxes too. Republicans, with clever simplicity, typically truncate “tax increase on the wealthy” to “tax increase,” implying that it’s a tax increase on everybody. Lately Pres. Obama has called for raising the threshold to $1 million, so that people making $374,000-$999,999 would still pay 35 cents on their last dollar of income but people would pay 39.6 cents on every dollar of income above $1 million.

It is still debatable whether raising anyone’s taxes in a depression is ever a good idea, but ideally whatever major long-term deficit reduction plan Congress passes will go into effect only when recovery is well underway and unemployment is down to, say, 7% or less. When that happens, I agree with Bartlett that raising revenues efficiently and equitably will entail raising taxes on the top brackets (either through raising rates or, better yet, closing loopholes) and raising the top tax threshold.

Yes, kick the can down the road

20 July 2011

I don’t say this often, but Eric Cantor is half right. The Republican House Majority Leader’s mantra in the current debate over a long-term budget fix has been “You don’t raise taxes in a recession.” That is good policy advice, and any Keynesian economist would tell you the same. Tax increases lower GDP, indirectly, by lowering people’s disposable income — if they have less money, most people will spend less money, so consumption drops. But any Keynesian economist would also tell you, “Don’t cut spending in a recession.” Cuts in government spending directly lower GDP and indirectly lower it by lowering the consumption of laid-off government workers and government contractors. So neither tax increases nor spending cuts are a good idea in this time of 9.2% unemployment.

(It’s a pity that Cantor doesn’t understand the second part, or pretends not to. But not a surprise. Misrepresenting Keynes is a cottage industry among Republican politicians and pundits. Ezra Klein notes that Cantor wrote in his campaign manifesto of last year that Keynesianism is the theory that “government can be counted on to spend more wisely than the people.” But I digress . . .)

Right now, we’re told August 2 is the deadline for an agreement by Congress to raise the national debt ceiling or face a partial government shutdown in which some Treasury bondholders, government employers, government contractors and/or other government creditors won’t get paid. I’ve written again and again that the whole concept of a debt ceiling is self-destructive and a waste of time — and, as usual, The Onion says it better than I ever could — but the “grand bargain” that the president seeks could easily be self-destructive as well. Both Democrats and Republicans say they want to pass a long-term deficit reduction plan that reduces the national debt by several trillion dollars over the next decade. That’s fine in a broad sense, as health care costs continue to jump by leaps and bounds, two wars continue to drain our resources, and federal taxes as a share of GDP are at their lowest level in a half-century. But if the tax increases and spending cuts kick in while the economy is still in this Little Depression, with unemployment well above its normal range of 5-7%, then the grand bargain becomes a starvation diet.

If we could just fine all politicians and pundits a dollar each time they say “we can’t afford to kick the can down the road any more,” we could pay off the national debt. Barring that, we can at least question that bit of conventional wisdom, telling them, no, it’s not a good idea to raise taxes or cut spending while the economy is still in the tank, and any plan to do either or both that kicks in while unemployment is still above 7% is a bad one. Worse than defaulting on the government’s obligations? Probably not. But a lot worse than doing nothing on both fronts.

The Other 2%

15 August 2010

One of the big issues before Congress right now is whether and how to extend the Bush tax cuts, enacted in 2001 and scheduled to expire at the end of this year.  Congressional Republicans want to make them permanent.  President Obama and many Democrats want to extend the Bush tax cuts for everyone except the very wealthy, i.e., those in the top tax bracket (which would go from 35% back to 39.6%, where it was in 2001).

Throughout this debate I had agreed with the Democratic position, for reasons of both equity and economics.  Over the past thirty years, incomes and wealth in this country have become much more skewed in favor of the rich, so as long as we have a progressive tax system why not use it to push back against that trend?  (I’m not saying let’s equalize incomes, just that trying to check the increase in inequality is a reasonable thing to do.) Only about 2-3% of households — those earning over $373,651 —  are in the top tax bracket, and even then their first $373,651 of income would be taxed at the same rate as before, so the pain associated with raising the top tax rate seems small.  On the economic side, cutting taxes for the wealthy provides a smaller boost to consumer spending than just about any other tax cut or benefit increase you can think of.  See, for example, the “stimulus bang for the buck” table on page 5 of this testimony by Mark Zandi, Chief Economist of Moody’s Analytics back in April.  In the case of making the Bush tax cuts permanent, a dollar of tax cuts would raise GDP by 32 cents, compared with, say $1.41 from an increase in aid to state and local governments or $1.61 for an extension of unemployment benefits.  (The logic is that wealthy taxpayers save much of their income, so small differences in their after-tax income won’t affect their spending much, at least not compared with other taxpayers.  And increases in government spending increase GDP directly and can, if the government starts jobs programs, employ people directly.) And then there are the tax revenues to consider — those top 2-3% of taxpayers have a huge amount of taxable income, so a 4.6% difference in that top tax rate makes a big difference in the government’s deficit and debt.

But equity and economics are unlikely to carry the day in Washington, D.C.  Today’s New York Times has a remarkable op-ed by the same Mark Zandi, titled “A Tax Cut We Can Afford,” in which he argues for extending the Bush tax cuts, sort of.  He says they should be extended for the wealthy, too. His reasoning is political:  Yes, it would be ideal to let the top rate go back to 39.6% and use the new revenue to pay for jobs programs or bigger jobs tax credits, but that option is not on the table.  Republicans and conservative Democrats would undoubtedly block it.  Another truly sizable spending stimulus is not on the table either.  What is feasible, besides minor measures like the jobs bill passed this month, is . . . extending the Bush tax cuts.

Although extending tax cuts on those making $374,000+ a year is not a great option, Zandi says, raising their taxes and (with effective stimuli off the table) doing nothing with it is a worse option.  Most of U.S. GDP is people’s consumption, and even though the rich consume less of their income than other people do, they still consume a lot, so much that their consumption may determine the fate of GDP over the next few years.  The Times recently reported that rich Americans have cut back on their spending.  The article quotes Zandi yet again: “One of the reasons that the recovery has lost momentum is that high-end consumers have become more jittery and more cautious.”  The top 5% of Americans account for one-third of consumer expenditures, according to the piece.

Generally speaking, you don’t raise taxes in a recession.  That’s one of the endlessly repeated lessons of the Great Depression (Hoover and Congress raised taxes in 1932, Roosevelt and Congress did so in 1936), and it still applies.  Again, if you could raise upper-income taxes and use them to pay for well-targeted stimulus programs, that would be fine, but to quote Zandi again, “it is asking too much of our political system now to get it just right. I’m skeptical that a politicized Congress would be able to pull it off, and failure to do so would leave us next year with higher taxes and a hobbled recovery.”

Zandi says the tax-cut extension for wealthy households should be temporary, to be removed when “the economy is off and running,” with the increase phased in perhaps over a three-year period.

I am pretty well convinced.  I’ve been arguing in this space that the severe slump we’re in makes this a terrible time for drastic spending cuts.  By the same token, this is not a good time to raise taxes on anyone.

Raise *these* taxes

1 August 2009

So many problems out there — health care costs, climate change, mortgage crisis — and so many complicated solutions being pursued.  Some solutions that economists would tend to favor that do not seem to be part of the current political debate involve eliminating a couple of expensive tax loopholes, for health insurance and mortgage interest, and imposing a carbon tax.

All of these would raise a lot of revenue, and tax increases of any kind are like kryptonite to politicians and of course counterproductive in a recession, but they could be made revenue-neutral by cutting tax rates or increasing the personal exemptions or standard deductions.  Or, when the economy has recovered, tax increases like these could be part of a deficit-reduction package.

One by one:

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Geithner’s tax problem, Goolsbee’s solution?

14 January 2009

I’d been expecting Treasury Secretary-designate Tim Geithner to come up for some grilling in his confirmation hearing, over his role in the TARP bailout and in the orgy of deregulation of the late 1990s.  (Neither of those things is necessarily disqualifying in my eyes, as long as he can show that he’s learned from his and other people’s mistakes.)  But as with past nominees, from John Tower to Zoe Baird and Kimba Wood, it’s the small stuff of dubious relevance that tends to blow up — and distract Congress, the media, and the public from issues of actual substance.   The main distraction this time: Geithner failed to pay $43,000 in federal taxes.

On the surface, this looks pretty bad:  the guy who would be the head of the agency that oversees the IRS, failing to pay his Social Security and Medicare taxes for four years in a row (2001-2004).  But not so fast.   Most of us have those taxes withheld directly from our paychecks and don’t think about them otherwise.   Geithner, by contrast, was working for the International Monetary Fund (IMF), where employees don’t pay federal income tax.  Several of my grad school friends went to work for the IMF, and I distinctly remember them saying, it’s great, we don’t pay taxes.  The incoming administration’s talking points on the matter (take them with a grain of salt if you want) note that this confusion is very common among IMF employees.

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