It is really quite simple. We don’t need “an ass to kick” or massive cash escrow accounts. Alex Tabarraok nails it in the NYT:
Most important, nowhere did the president mention two hard ideas that the public must accept if we are to move to a cleaner energy future: nuclear power and carbon taxes.
End of story.
There has been a debate in the Econ blogosphere about neoliberal policies and their effect on growth. That is techno-econ speak for “is smaller, less-regulated government better or worse for the citizens of a country?”
It started with Paul Krugman saying that the conservative idea that the US was crap until Reagan came along and fixed it is largely a myth. He has an interesting case, showing that economic growth was pretty steeply positive through 60′s and and early seventies with very high marginal tax rates, strong labor unions and the like. Then, in the late 70′s and 80′s the growth curve actually levels off as marginal tax rates go down.
Scott Sumner took the other side, sort of, by comparing the US rate of growth to other countries at the same time. His basic argument is that a lot of countries around the world experienced phenomenal growth post-WWII because their populations were engaged in productive labor rather than shooting at each other. Then, he shows global growth slowed considerably in the 1970′s across the board, and the “flattening” that Krugman showed was generally true worldwide, but the US’s growth outpaced virtually every other country in the 1980′s in particular. His basic point is that the US economy was going to slow down anyway with everyone else, and deregulation and reforms of the 1980′s allowed higher growth than would otherwise have happened.
Krugman responded with multiple points, but one good one I want to highlight: that we primarily measure growth as GDP, which is a measure of economic output. Thus, we capture things like wages, jobs, and consumption; what we do not capture is leisure. Time at home with your family is certainly a great positive, and he gives the example of France, which does not always do well in these measurements, but French are somewhat legendary in their consumption of leisure, which is surely a benefit to be included.
What to take from all of this? My take is that the high marginal tax rate/strong labor union period of the post-WWII time period likely wasn’t as bad as some conservatives make it out to be, but that doesn’t mean there is a strong case to be made to go back to it. Correlation is not causality. Secondly, there was benefit to the Reagan deregulatory movement of the 1980′s. Sumner also shows in his post that the countries that have grown the most since the 1980′s (even Sweden!) have implement deregulatory policies.
Now, that does not prove that deregulation all the time is good. It is very possible that these countries had certain over-regulated industries, which by deregulating, provided growth benefits. There is path dependence. But I remain convinced that, in general, market mechanisms – i.e. prices – provide valuable information which evaluate quality that are not possible with government services.
P.S. StatsGuy at BaselineScenario has a great post decomposing the Hertiage Foundation Freedom Index. I don’t quite agree with everything he says, but it’s a good post on this topic as well. He argues that Good Government matters more than Less Government. I think they are pretty linked; he separates them.
Who wrote this? (scroll all the way to the bottom)
if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households.
And what would you do about it? The story goes on to discuss conditions in an African village where this is true. But this is by no means isolated to Africa – we know that many poorer people in the United States make poor choices with their money.
This is, I think, a pretty good example of where people differ. My tendency is toward non-intervention, because I place a high value on person freedom of choice, including the decision to choose poorly. And this is why it is so hard to help the poor. Because honestly, it would best if we could just hand them cash in the form of a negative income tax.
For those who don’t know, a negative income tax would work like this: we set a threshold, say, $30,000 per year and pass a law that says that everyone gets that amount. If your income is below that amount, you get a check from the government (it could be every other week like a paycheck, similar to withholding taxes now) to top up your income to that level. Once you pass that level, you begin paying taxes.
This does a lot of wonderful things. First, it allows people to get a job, even a low paying one. Much research has shown that a lot of our happiness is tied to employment; there is a dignity and identity to be found in the fact that you go to work each day. Also, we know that if often takes a job to get a job: many social networks form around employment relationships. Those who are unemployed automatically lose their best means of finding a job – their coworkers. This way, there is a much smoother transition from potentially minimum-wage jobs to better jobs when all the while you have enough to provide for your family.
Second, it levels the playing field in many ways for the poor – their money is green as well. They can choose the products they like, perhaps even find their child a tutor after school. They no longer face the silly restriction on what they can buy with food stamps at the grocery store* and in general can live what should be a relatively middle class life. Here, as well, there is dignity – the power and freedom to choose for yourself. Because most programs for the poor come with a lot of strings attached.
But that’s exactly the point. What would go with this is the removal of all the controls around these programs – we couldn’t use government money to alter behavior. They may buy alcohol or even drugs. They may buy a brand new full size car or truck. And most people don’t like that.
So, the government implements all sorts of programs which attempt to save the poor from themselves; helping them while trying to coerce their behavior. This requires some convoluted rules, lots of oversight and lots of inconvenience for the poor. This causes lots of means testing which make the climb out of poverty quite steep when you compute the marginal tax rates.
To be sure, there are other problems here. First, no congressman will ever vote for this because it is too broad-based and could only be funded by the removal of many individual programs. Also, if/when recipients choose poorly, they will clamor for a higher bar to be set because they “don’t have enough to live on” after they’ve gotten their new iPads and 3G cell phones to buy diapers for their baby.
But it gets at a deeper issue: How much should the government use it’s power to coerce it’s citizens to behave “well”? My answer is “as little as possible” and that may be many of your answer as well. But the nuts and bolts of where one of us says “no” and another says “yes” is a recurring dividing line in American politics.
*A Wisconsin senator (maybe Vermont?) got the WIC program to mandate the purchase of something like 2 gallons of milk to use the program. Not only is this silly for a single mom with one child (who may not yet be able to drink milk) but it is highly problematic for those in cities who have to take groceries home on the bus. But that senator got his/her milk subsidy! And helped the poor, too! I can find a citation for this if you’d like, but don’t feel like look it up right now.
It was Nicholas Kristof in the NY Times. We know where he stands:
If we’re going to make more progress…we need to look unflinchingly at uncomfortable truths — and then try to redirect the family money now spent on wine and prostitution.
I think this is important to understand, so even though I’ve blogged about it before, it is here again. Marginal tax rates. The reason why I’m bringing them up again is because they are really confusing, but a big unintended consequence of progressive taxation.
First, look here. (It’s just a graphic).
Now, I’ll try to explain. I think the first kink in the graph for a single, no child taxpayer is when income goes from $10K up to $20K, or at least that’s what I’ll assume. This is on the horizontal axis. On the vertical axis, you’ll notice that the tax rate (not including payroll taxes) goes from 8% to 18%. Payroll taxes matter because if they didn’t exist, employees would be paid more (not necessarily the whole amount of the tax, but more). But we’ll leave them out.
Here is what this means. At $10K, the person is paying $800 in taxes per year for take home pay of $9,200. But then, they get a raise to $20K – double the salary! Now they pay $20K times .18 = $3600 in taxes. So, while they are getting twice the gross pay, their tax bill just went up by more than a factor of 4. Take home pay is $16,400.
Now, a marginal tax rate is the implicit tax rate if you count only the additional incremental pay and the additional incremental tax. The incremental pay is $10K, the incremental tax is $2800. So, your marginal tax rate is 28%.
Practically, what this means is that a person’s first $10K earned is taxed at 8%, but the next $10K earned is taxed at 28%. And as you look at the steep part of those graphs all the way up to $100K, there is a lot more of this going on.
The reason why I emphasize this is that by making income taxes more progressive, we create this gradient that makes it much harder for people to earn their way out of poverty to middle class to upper middle class. Think of those steep steps early in that graph is big hurdles that people need to overcome. And remember, if you’re in that range, your new raise or nice new salary may not be all it’s cracked up to be. Your gross pay may have doubled, but your take home pay may only have gone up by about 50%. In the $50K range, there are examples where you can get a raise, but because you pop up to a higher tax bracket, you actually make less money take home than you did before.
So, practical advice (now that we’re past tax season. sorry.) is always check to see how much an IRA contribution helps you. If you don’t want to pay attention to the tax tables (I know I don’t) then run the numbers contributing $5K or something to an IRA and see what it does to your tax bill. You might be surprised at what you find if you’re just above one of those thresholds.
Practical advice for those who are politically active: think through both the costs and benefits of progressive taxes. They may seem moral, but remember that they create barriers for people trying to climb the income ladder.
I assume that readers of this blog are not really paying attention to the debt problems and potential default faced by Greece, but you should. The reason why is that it is an example of a “rich world” country whose politicians gave generous handouts to it’s citizens without the taxes to pay for it. My personal feel is that there is a higher probability that the US will have a debt crisis like Greece than there is of a major climate change problem.
I’ll post at some other time about the specifics of the US debt problem, but here is a summary: if our politicians do nothing, entitlement spending will put us in the same position as Greece by 2030. Yes, just 20 years from now. Debt will be over 100% of GDP, Deficits will be 9.4% of GDP, and debt will be about six times annual tax revenue. And the way it will happen is what is called a “sudden stop” as in, markets have full confidence right up until they don’t any more. The Greeks were doing just fine until the cost to finance their debt jumped:
The primary cause of the US Debt problem is health care expenditures, which have still not been addressed; they have been increased with the new health care bill. Fixing Social Security by increasing the retirement age is unpopular, but simple, and needs to be done sooner rather than later so people can alter retirement plans as needed. Fixing the health care cost problem is unpopular, complex, and much larger.
This is a post I’ve been meaning to write for a while. With the growing debt problem we have, there is now a debate about cutting spending and/or raising taxes. Everyone wants to cut spending, just not the same thing. I’ll blog more later on this trade-off, but first a primer on taxation.
First, we know that if something is taxed, you get less of it. This is pretty widely believed across the political spectrum, which is why we have “sin” taxes on alcohol and tax credits to buy houses right now. In fact, part of the problem with taxation is that governments need a certain amount of money to function, yet the only way they can get it involves a response. One of the big problems with most government budgeting processes is assuming “all else equal” when that is never the case. An increased tax on X will lead to less of X so you can’t assume the tax rate * X = revenue obtained. It will always be less – how much is up for debate.
It also goes the other way. It is true that tax cuts on X will create more of X. Need a great example? Can anyone guess what country, in the whole entire world, has the lowest consumption tax? A consumption tax is a tax on stuff you buy – not just food, but clothes, electronics, video games, even more durable items like cars and stoves. It’s the United States! Is it any wonder we are the world leader in consumption?
This is also the problem with income taxes. Raise income taxes and you get…less income? How does that work? Think of it like a bonus. I used to get a (modest) bonus when I worked for a financial services company. But because of the tax rate on bonuses, about 50% of it went to taxes. That meant that my company had to pay more to get the incentive they wanted to me in take home pay. A nice headline bonus number is nice, but you quickly divide by 2 to get at the reality. And so the incentive is muted. This effect is much less pronounced among most of the middle class, but as you get into the six-figure income range, it starts to matter a lot more. My take is that it is not really that people work less as much as they get to a point where they can structure their income differently to avoid massive taxes. This is one of the main reasons why “taxing the rich” is not as effective as it may seem – they are ready, able and willing to move the item being taxed as much as they can to avoid the tax.
Now, what is a VAT tax? There is much talk of this these days. A VAT stands for Value Added Tax and you can think of it as a sales tax all the way through the supply chain. So when your Honda dealer buys tires from a supplier, they pay taxes on the tires. And when you buy your Honda, you pay tax on the car, but subtract from it the portion of the tax already paid on the tires – only on the part where Honda “added value.” The good thing, and the bad thing, about a VAT is that it is pretty hidden. The tax paid by the final consumer is pretty small as it is incrementally collected. That is good because it reduces the distortion a little bit (the final item is still more expensive by the total amount of tax paid). But that is bad because in many ways it makes it much easier to raise the tax without anybody noticing as much and thus reduces the incentives of politicians to be a bit more frugal. A VAT is a consumption tax, and the US not having one is the primary reason it has such low consumption taxes in general.
There are many more. Employers pay payroll taxes, which is a tax on the total amount of compensation they give their employees, including all benefits, not just salary. This is where healthcare gets an exemption that causes employers to provide healthcare. The Social Security tax is 14%, half paid by you (it is called FICA on your paycheck) and half paid by your employer. Those of you who have been contractors or self-employed know this because you found yourself paying the whole 14%. And, as of this year, Social Security is now in deficit and will become a net drain on tax revenue instead of a net provider. Medicare has it’s own line item on your paycheck, but that is a small fraction of the actual cost.
Property taxes mostly go to local governments – both taxes on your car and real estate. So do things like hotel taxes and rental car taxes. Governments love those because they get to tax visitors instead of their own citizens.
So, what to do? Liberals want to tax the rich, but at least they now are admitting that this is not enough. Consumption taxes are low enough that they are a good place to start, but most people dislike them because they fall a bit more on lower income earners (who spend a larger % of their income on consumption goods). Most economists agree that reducing spending is preferable to raising taxes because of the effects on growth, but that is a post for another day.
From the NY Times. What does this mean for most of us?
1. Get out of debt. Not that people are usually sanguine about it, but this should add some urgency. The reality is that savings rates are really, really low right now, so you are likely better off paying down debt than increasing your savings account (assuming you have some buffer already).
Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.
With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.
2. Get a fixed rate mortgage if you don’t already have one
The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.
…
“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”
Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.
3. Change your mindset. We’ve had falling interest rates for 30 years (for most of us, our entire adult life) but that is likely to change.
For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.
This includes credit cards (don’t be surprised if annual fees come back and/or ‘points’ cards disappear or become less valuable), this includes car financing, and probably student loans as well.
4. This means the government too. This is the hardest to predict, but it is yet another squeeze on governmental finances.
Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.
Add increasing costs to fund our rapidly expanding public debt to our worries about taxes and spending, which Travis was posting on this week. More to come on that topic.
This is, of course, predictable, but no less disheartening.
When it comes to decreasing the deficit, cutting spending is a more popular approach than raising taxes, by a margin of 62% to 5%. And here’s what the public is willing to cut:
• Foreign aid makes up less than 1% of America’s total spending.
Economist/YouGov polling: This weeks Economist/YouGov poll | The Economist.
$800B of the $900B cost of the health care bill is subsidies – i.e. payments from the government to individuals or families to help pay for health care. This is necessary for the mandate part of the bill to be remotely feasible. Most people want health care, they simply can’t afford it, so fining them won’t help. They need subsidies to pay for expensive health care.
The problem is that subsidies cause higher spending on the thing subsidized as we all worry about the burden of higher health care costs. We’ve done nothing to lower costs, we’ve simply shifted them from the uninsured and underinsured to the government (i.e. all of us taxpayers who fund the government’s operations).
Remember Cash for Clunkers? How about the first time homeowners tax credit? Both are subsidies – the government handing out money to assist people in buying cars and houses. What was the goal? To increase purchases of cars and homes. So, we now subsidize health care without cost controls means we ease the pressure on doctors and hospitals to lower costs: the government is now helping all sorts of folks get health care. But this was the point, wasn’t it?
The problem is that by releasing this pressure, we will see costs rise again. Markets work like this: if prices rise, many people get priced out of the market, which causes demand to drop. This drop in demand means that less gets sold at those higher prices. Competition then rewards the innovator who can provide the same service for less – they get no only those who have exited the market due to higher costs, but will also get some switching who were paying more. Thus prices go down. This competition mechanism is what is broken in the current system – we only see the cost of healthcare via monthly or annual premiums, not each time we go to the doctor, so the cost-consumer link is separated by space and time. And this bill continues to separate them for those who are assisted by it:
The second part of the subsidies, estimated to cost $466 billion during the next decade, would limit out-of-pocket expenses for deductibles and co-payments. This help, for individuals with salaries of $27,000 and families with income of $55,000, would be significantly more generous than any version of the legislation Congress has considered.
What we now know is that 50 million uninsured and premiums at $10-12K per year (or whatever they are now) is a socio-political breaking point. The current legislation will provide subsidies to ease this tension by reducing that annual cost with subsidies and reducing the uninsured to about 20 million or so. But, what happens now? With no cap on the cost and no incentive with copayment or coinsurance to say ‘no’ to procedures, the cost of healthcare will continue to rise until the costs after subsidies are once again $10-12K per year and we again have 50 million uninsured, but now we’re spending billions each year, let’s say the subsidy is $8K per family, so now the total cost is $18-20K. What happens now? Those same folks are again priced out of the market, and Congress is forced to increase the subsidy. Or, perhaps, they do this:
One part of the subsidies would consist of tax credits to help Americans afford insurance premiums, guaranteeing that they would not spend more than a specific portion of their income for them, ranging from 3 percent to 9.5 percent.
Which guarantees that nobody is priced out of the market, but guarantees that as the costs continue to skyrocket, the government picks up the increase, year after year.
And then what? Remember, Medicare and Social Security are mandatory spending on entitlements, just like this health care bill. In 1965, they accounted for about 25% of federal expenditures, now they are around 55% of spending and growing. Defense spending? About 50% in 1965 and about 20% now. All other spending has been basically flat.
The problem is that Medicare, Medicaid, Social Security, and now this Health Care entitlement are all mandatory (in that no politician will touch them), mostly tied to an aging baby boomer population, and highly linked to rapidly escalating health care costs. I do not see how this ends well for us as a country. If the debt markets start losing faith in the US and the interest we pay on our growing debt starts going up, this will go from ‘bad – we should do something’ to ‘terribly awful – our government may default on it’s debt’ really fast. Things like hyperinflation or a massive dollar devaluation (both basically the same thing) follow. We are not that different from Greece.
Jesse
Travis