On the Economy
House Oversight and Investigations subcommittee member Rep. Henry Waxman, D-Calif., holds up a memo on Capitol Hill in during the subcommittee's hearing on "Continuing Developments Regarding the Solyndra Loan Guarantee." Waxman is a member of the Congressional supercommittee charged with reducing the national deficit, and he has recently complained that the process is undemocratic. (Jacquelyn Martin/AP)
Henry Waxman gets mad
I haven’t written much on the deliberations of the Congressional super-committee developed as part of the Budget Control Act—you remember; 6 D’s, 6 R’s tasked with coming up with another $1.2 trillion in deficit reduction.
They’re predictably stuck on revenue issues—D’s insist that revs be part of the package, as they must, R’s are resisting. This article will bring you up to date, should you care to go there.
But aside from all the (very important) bean counting, here’s the thing that really caught me eye.
“Rep. Henry Waxman [D-CA]…represents those who are at wits’ end with the process.
The 36-year Washington veteran said he has “no stake” in the committee and called it an “outrageous process” that is “not open and transparent.” He said the “things put forward by Democrats … I would never vote for.”
“I find it an outrageous process, that 12 people could rewrite the laws of the United States and come up with ideas just sitting there and getting into some mood that might influence them at the moment,” Waxman said in an interview.
Waxman added, “They don’t lay out proposals for examinations. They don’t get direct input on ideas. They get a whole bunch of things from other people officially, who knows who unofficially, then they’re talking to themselves about a grand deal we won’t have a choice to discuss or amend. We’ll have to vote yes or no. That’s an offensive process.””
It’s easy to get swept up into the process of spending cuts and revenue fights—these are extremely important negotiations, and much depends on how the committee achieves the savings.
But it’s also easy to lose sight of the dysfunctionality underlying this process. Of course, Congress will vote on the committee’s recommendations, if they get that far, and the President can veto, etc. But Rep Waxman’s comments capture something fundamentally undemocratic about the process.
Republican presidential candidates Herman Cain, Mitt Romney, and Rick Perry pose for a photo before a Republican presidential debate in Las Vegas. Bernstein argues that Republican tax plans, like Cain's 9-9-9 plan and Perry's flat tax, would worsen economic inequality in the US. (Isaac Brekken/AP)
Republican tax plans will make inequality worse
One reason why all these Republican tax plans seem so dissonant is that they exacerbate the inequality trends generated by the increased concentration of market incomes—i.e., incomes from all market sources, before any taxes or transfer programs (like Social Security benefits, welfare, or unemployment insurance) kick in.
Think of the income distribution in two parts. The first is the primary distribution of market outcomes, before any taxes or transfers take place. The secondary is the distribution of household income after taxes have been collected and transfers handed out.
Nobody argues that the tax system should completely offset the dispersion of market outcomes, and many would probably argue that it’s not the purview of the tax code to redistribute much at all. But neither would most people argue that the tax code should make the post-tax distribution more unequal.
Yet, that’s precisely what the Cain and Perry tax plans would do. Cain’s plan is particularly egregious in this regard. Perry’s plan wouldn’t have much effect on the poor and middle class, though it would cut taxes for the wealthy considerably.
I understand that many conservatives are less concerned than, say, I am, about the growth of unequal economic outcomes…the figure below shows the increase in after-tax income by income group from a rich new study by CBO. But what is the rationale for making it worse?
In fact, the CBO study finds that while the level of inequality is always lower after taxes and transfers, income dispersion has increased more in the so-called “secondary distribution of income”—after taxes and transfers—than in the primary distribution (market outcomes):
“CBO estimates that the dispersion of market income grew by about one-quarter between 1979 and 2007, while the dispersion of after-tax income grew by about one-third.”
This suggests that while the primary distribution is generating more inequality, taxes and transfers, while still progressive, are doing less to offset it: “The equalizing effect of transfers and taxes on household income was smaller in 2007 than it had been in 1979.”
The R’s tax plans—and I’d strongly include the Ryan budget in this analysis, as it reduces transfers for the poor and cuts taxes for the wealthy–would exacerbate this problem by making the current tax and transfer system a lot less progressive.
I guess I know the answer to the question I posed above (why go here?), or at least I know the “benign” answer: cutting taxes on the wealthy will unleash waves of growth that will lift the rest. But dress it up anyway you like–that’s just trickle down…and trickle down has a terrible track record.
You cut wealthy people’s taxes, you make them more wealthy, full stop. Mind you, I’m not saying that’s a bad thing—I’m just saying that rich people not having enough riches is not this country’s problem right now.
It’s one thing for the political class not to deal with the real problems we face; it’s quite another for them to make them worse.
A strong capital reserve requirement for banks and other financial institutions would be a safeguard against future banking meltdowns (Francis Joseph Dean/Newscom/File)
Capital reserves are the key to financial reform
This is an important editorial from the NYT.
As financial sector lobbyists work to gut the financial regulation bill that Congress passed last year (Dodd-Frank)—and the Rs seek to repeal it—it’s somewhere between mind-numbing and soporific to follow the details. There’s the Volcker rule (which restricts banks from proprietary trades—betting their own “book”), the Consumer Protection Bureau, derivatives regulations, and…
Capital reserves.
There are many malfunctions that contributed to the financial market meltdown in 2008, from liar loans, lousy underwriting, feckless credit raters, originate-to-securitize and distribute, to blind allegiance to Greenspanian self-correction hypotheses. They all need to be addressed.
But if you forced me to choose one thing to change in perpetuity, it would be the rules governing capital reserves—the amount of capital banks and nonbanks (these rules should apply to institutions that speculate in markets, regardless of what it says above their doorways) must keep in reserve as a cushion against losses.
You can get a lot of the other stuff wrong, but with a strong capital requirement rule, you’ve built in a backstop against overleveraging. In fact, after the crash, the extent to which banks were unsustainably leveraged was often discussed in terms of leverage ratios that were 40 and 50 to 1, instead of 10-1.
The banks and hedge funds and PE shops will fight tooth and nail on this one: a dollar sitting around creating a cushion can neither be used to buy Dutch tulip bulbs nor subprime MBSs.
To which we should all say: tough toenails. You want to drive the global financial superhighway, be my guest. But put on your seatbelt before you hurt yourself and everybody else…again. And that means ample capital reserves.
Republican presidential candidate, Texas Gov. Rick Perry, runs prior to delivering a keynote address during the Western Republican Leadership Conference in Las Vegas. (Isaac Brekken/AP)
Perry's flat tax: What to watch out for
Went on the Larry Kudlow show to talk about Gov Perry’s flat tax idea—I mean, you can’t call it a proposal yet because…um…there ain’t one yet (will post clip when it’s available). But the dude (Perry) is still getting a lift in the media from saying he’s got a plan. For those who found it just too darn complicated to keep track of all those 9’s in the other tax plan we’ve been hearing a lot about, this one will simplify it down to one number.
Some issues to keep in mind as this and other such plans come out:
–Most flat tax plans are basically consumption taxes that share a basic equity problem: compared to what we have today, they tend to shift the tax burden to middle and lower income families…it might not look as regressive as 9-9-9, but unless you start carving out low-income folks, it won’t look a lot better.
–Once you start offsetting the regressivity by carving out different income groups or consumption goods (like food or housing) you a) complicate the thing so it’s not as simple as advertised, and b) lower your base so you’ll have to raise the single, flat rate. The Fair Tax from a few years ago was a version of this, and with a very broad base (they excluded the poor but included everything households bought) they were setting it at around 25%. Larry K, who’d been on a call with the Perry folks, suggested that the income exemption would stretch up to the middle class, which gives Gov Perry good optics against Cain, but means he’ll need a higher rate for revenue neutrality. (Though I suspect we’ll get a low rate, low revenues, and a bunch of “dynamic scoring” rhetoric about how this simple, low rate will magically raise all the revs we need.)
–The whole tax reform thing is really overplayed. Yes, there are gross complexities and inefficiencies in the current system—and btw, such complications can easily be replicated in any other system, including a flat tax. Our best move would be to simplify our current system—get rid of loopholes (e.g., deferral of foreign earnings), distortions (favoring of debt financing, special rates for unearned income, some of the large tax expenditures like the mortgage interest deduction), and we’d be fine.
Remember, our biggest problem is pretax–jobs, income, wages, inequality. And despite rhetoric to the contrary, we can’t solve that through tax reform (though with plans like 9-9-9, we can make it worse).
This excitement bubble re Gov Perry’s flat tax is just a variant of the “where’s our white knight?” syndrome that’s been characteristic or the R’s search for a candidate. It may provide a sugar high for a fraction of a news cycle, but there’s not likely to be a lot of “there” there.
Rick Perry during a Republican presidential debate Tuesday, Oct. 18, 2011, in Las Vegas. (Chris Carlson/AP)
Taxes: Flat isnt always simple and vice versa
There’s a theme developing in the tax debate that a flat tax, like Herman Cain’s 9-9-9 or another version that Gov Perry’s now talking about, is simpler than a system of progressively higher, or graduated rates.
Not so. Both can be as simple or complicated as you like. What complicates the tax code is not the rate structure, it’s the exemptions, loopholes, credits, and so on.
A flat tax has an immediate appeal because it sounds so simple. But as the link above (to a NYT article) points out, most flat schemes exempt certain groups, like the lowest income households, or, if they’re a sales tax, essentials like food. Even the Cain camp is now saying they’re going to tweak their plan in the light of new information. And “tweak”=more complicated.
Conversely, a progressive system, where tax rates rise with income, can be perfectly simple and even administered automatically, as my former White House colleague Austan Goolsbee has pointed out.
Economists often like the flat tax because of its efficiency advantages—I’m hoping to write up something on that soon—it’s not as clear cut as it looks, I think—but that supposed advantage has to be weighed against equity/fairness concerns.
My point is that you shouldn’t be fooled into believing that any tax structure is truly simple until you’re intimately familiar with the details. Complicating factors can and do and will enter any tax code that is written by people, whether it’s 9-9-9, a 17% flat rate, or any number of graduated rates.
Republican presidential candidate businessman Herman Cain waves to the crowd before a Republican presidential debate Tuesday, Oct. 18, 2011, in Las Vegas. (Isaac Brekken/AP)
9-9-9 will get you...eventually
Re: Herm Cain’s 9-9-9 tax plan, a number of commenters (very reasonably) question why you would assign the full 9% of the sales tax to people who don’t consume all of their income.
Perhaps the easiest answer is to just think of the sales taxes you face today, if you live in a city or state that has one. If it’s X%, you probably don’t think of it as <X just because you don’t spend every penny. You correctly think of it as X, because eventually, you (or your progeny) will spend what you’re not spending today, and at that point you’ll face the tax.
If you don’t consume your income today, you will tomorrow, and it amounts to the same thing in “present value” terms (“present value” is just the value of future income streams in today’s dollars).
Ed Kleinbard explains it here, but I grant you it’s not exactly intuitive:
Imagine, for example, that an employee has $500…available to spend on consumption goods. When she spends that, she will incur a sales tax bill on her purchases. If the sales tax rate is 9 percent…she will incur a sales tax bill of $45…
But what if she doesn’t spend all the money today?
One way of seeing what happens in the deferred consumption case is to imagine that the employee sets aside $45 today into a little fund to pay her eventual sales tax bills attributable to spending $500. If the employee spends all her available money ($455) on consumption goods tomorrow, the money just immediately goes out of the little set-aside fund. If by contrast the employee defers consumption for a few years, then her budget for consumption (her $455 of cash, net of her mental sales tax set-aside fund) goes up by the time value of money [meaning she invests it, for example, so it grows--JB]…, but so does her $45 set-aside fund. When she does consume she will consume more in absolute terms, but the same in original present value terms…
The net consequence is that the sales tax is equivalent to another 9 percent payroll tax…
This figure shows that most businesses employ few workers. Just about 50% employ four or fewer workers, and 80% of businesses employ fewer than 100 workers. ( Census, Table 2a, data are for 2008)
The most commonly misunderstood fact about the job market
I was listening to the Diane Rehm show today when the guy from the small business lobby (NFIB) was asked whether most workers were employed by small firms. He misleadingly said they did.
This is widely misunderstood, but the fact is that most businesses are small, but most employees work in large firms (the figure below focuses on “establishments” rather than firms—the former is a single physical place of business; firms can incorporate numerous establishments; the main result is insensitive to this difference).
The above figure shows that most businesses employ few workers. Just about 50% employ four or fewer workers, and 80% of businesses employ fewer than 100 workers.
But as the second bar in each group—number of employees—shows, about half of all employees work in firms of 500 or more workers and two-thirds work in firms of at least 100 workers.
Payroll (total compensation) is even more skewed: 57% is paid out by firms of 500 or more workers; only 30% of payroll is paid by firms of less than 100 workers.
Nor is it the case that small businesses, per se, are the engine of job growth their advocates claim. Research like this finds that “once we control for firm age there is no systematic relationship between firm size and [job] growth.” As I stress here, that research shows that it’s surviving startups that are particularly important in terms of generating new jobs.
So, summing up, small businesses, say those with 100 workers or less, account for a minority of both workers and payrolls, and are not the primary engine of job growth.
Why then all the favoritism in policy circles, which is especially problematic if you listen to the one-sided agenda of their guy on the Diane Rehm show (e.g., his organization is against extended unemployment benefits because their members allegedly report that recipients won’t take jobs until their benefits run out; Larry Mishel, along with a bunch of folks who called into the show, did a good job of calling him out)?
In part, because they need and deserve help. Larger firms have fewer credit and cash flow challenges, nor do they operate on such tight margins. It’s easier for larger firms to sell into and expand foreign markets, which is especially useful to them right now, as that’s where the growth is.
But the political clout of small businesses and the misrepresentations of folks like the guy on this show are a big problem in our politics. In this regard, small is not beautiful.
Republican presidential candidate businessman Herman Cain speaks during a "Faith and Freedom" rally at Ohio Christian University in Circlevile, Ohio. (Mike Munden/AP)
999 Plan: A 'distributional nightmare'
I debated Herman Cain’s economic advisor, Rich Lowrie, last night on the Larry Kudlow Show. A key point here is that the plan, which Bruce Barlett calls a “distributional nightmare,” radically shifts the tax burden from high-income households to everyone else. I focused on the median household, and Lowrie either doesn’t understand the implications of the plan or he’s deliberately misrepresenting it.
For a $50K household, married couple, two kids, all income from earnings and standard deductions, the current tax burden is $8.3K. Under 9-9-9, that would grow to $13.5K, an increase of over $5,000 (hat tip: CCH, BS). The WaPo fact checker came to a similar conclusion. E Klein too.
(I expect that any minute now the Tax Policy Center will release a slew of data supporting these points with their much more detailed tax model.)
But Lowrie wouldn’t accept that conclusion. In fact, he asserted that their federal tax would be lower because they’d move from a 15% payroll tax to a 9% income tax. This, as I said on air, is “patently wrong.”
First of all, assuming they plan to exist, they’ll need to consume stuff, and thus they’ll also face the 9% sales tax. That already makes their tax rate 18%, higher than the 15%.
But as Michael Linden points out, and this is widely agreed upon by tax economists, the incidence of the 9% tax on business income (which denies businesses a deduction for wages paid) also hits them, which is why former Joint Tax Committee chief of staff Ed Kleinbard described the tax as a 27% payroll tax for families whose incomes derive from earnings (note that Lowrie is perfectly comfortable with the standard assumption assigning the incidence of the employers side of the payroll tax to the family—this one re the business tax is equally standard).
For a family with $500K, same assumptions as above, their tax bill would fall by $44K.
But where this plan really gets regressive is when you get up into the families who derive their income from non-labor sources. While the details of the plan are fuzzy when it comes to capital gains and dividends, it seems clear that those earning thousands or even millions of dollars in these types of non-labor income would enjoy a massive tax cut. And that would further widen the disparity between the highly preferential treatment of capital gains and dividends on the one hand, and the taxation of “ordinary” wage and salary income on the other.
We’ve got enough income and wealth inequality coming from the pretax distribution—we don’t need to exacerbate it through the tax code.
Middle class families that depend on earnings will pay more taxes under the Cain tax plan. High income families will pay a lot less. His advisors who say otherwise are misleading the electorate and that must not stand.
House Majority Leader Eric Cantor of Va., answers questions from reporters during a news conference in his office on Capitol Hill in Washington. Cantor supports the Historic Schools Rehabilitation Tax Credit, a new bill to rehabilitate the nation's historic school. But is the bill too small in scope? (J. Scott Applewhite/AP/File)
Bipartisan support for fixing our schools
[Mary Filardo of the 21st Century School Fund helped with this post]
On October 12, Senators Webb and Warner introduced a bill to rehabilitate the nation’s historic schools. According to their press release, this proposal is also supported by Virginia Governor Bob McDonnell, and U.S. House Majority Leader Eric Cantor.
My FAST! colleagues and I were very happy to see this bipartisan support for fixing up our public school buildings. Like they say, the first step towards fixing a problem is recognizing the problem and taking responsibility for it.
We worry, however, that their plan is too limited in scope. This limits the impact both in terms of jobs and school modernization.
Fix America’s Schools Today (FAST!) –introduced by Senator Sherrod Brown (S. 1597) and Congresswoman Rosa De Lauro (H.B. 2948) like the President’s plan, would provide grants for repair and modernization directly to state education agencies and local school districts by formula, accounting for need. The resources would get out the door quickly, and repair projects would ramp up right away. With FAST thousands of schools can be repaired and modernized and nearly 250,000 jobs can be created.
The Senators’ plan—The Historic Schools Rehabilitation Tax Credit–is a bit more complicated.
Their plan offers developers, states, and school districts a federal tax credit to enter into public/private partnerships to help pay for modernization of schools that are on the National Register of Historic places.
Private partners would need to purchase the historic public school and then lease it back to the school district. As part of the sale-lease-back agreement they would modernize the historic schools using the incentive of the federal tax credit to reduce the overall cost.
We applaud the Senators for recognizing the intersection of need and opportunity here—the need to fix our schools and the opportunity to get folks back to work making the repairs.
However, unlike FAST!, the tax credit program is too small and too slow. There are few public schools already on the National Register of Historic places—maybe in the hundreds (we’re working on an accurate count). The policies, approvals, and agreements needed for school districts to enter into developer partnerships adds a level of complexity that will limit the impact on both school repairs and jobs. And poorer school districts just won’t be able to make use of a tax credit—they need a grant to make these repairs.
School repair and modernization marries two problems—the need to fix our public schools and sky-high unemployment among the folks who do the work—into one solution. And we’re talking here about fixing up one of the most important institutions in our communities: the public schools. So while we’re especially happy to see bipartisan support for this idea, we want to be sure to implement a plan that going to make a real dent in the problem.
We urge lawmakers to consider the limitations noted above, and support FAST! Barring that, there may be ways to help this new variation address some of the limitations we raise above. For example, Congress could temporarily designate all public schools older than, say, 50 years (that’s the average age of our schools) as historic places for this bill.
Whatever it takes, let’s make this work…and FAST!
President Barack Obama speaks at the White House Forum on American Latino Heritage, Wednesday, Oct., 12, 2011, at the Interior Department in Washington. The author argues that Obama's proposed tax hikes won't help the economic crisis if the income cutoff rate for the taxes is $1million, rather than $250,000. (Pablo Martinez Monsivais/AP)
$1M not equal to $250K
I get that the Senate D’s want to pay for the President’s jobs bill by raising a tax surcharge on millionaires and billionaires, and I understand the rationale.
I also get that red is the new black, or something to that effect.
But it’s very important that we don’t allow $1 million to become the new $250,000.
That is, when people talk about sunsetting the highend Bush tax cuts, we’re using $250K as a cutoff, not $1m. To switch to the higher number makes an already tight tax base too tight to raise the revenue we need. Remember, just above 2% of households, and about the same share of small businesses,* are above $250K, so the lower cutoff is not biting the middle class. And moving to the $1m cutoff loses you slightly less than half the revenue from the highend sunset.
*The majority of “small businesses” above $1m are law practices, hedge funds, self-incorporated consultants who are not going to hire anybody, etc…not mom and pop shops.
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