Tax VOX
President Obama (shown here at a press conference earlier this month) is pushing a compromise bill that includes two big revenue enhancers: a 0.9 percent increase in Medicare taxes and a 2.9 percent investment tax for wealthy households. (Pablo Martinez Monsivais/AP/File)
Obama's health care plan adds new investment, Medicare tax on wealthy
President Obama’s new $950 billion health plan would impose a new “payroll” tax on investment income, and keep a watered-down version of the Senate proposal to tax high-cost health plans.
In his new health package, based largely on the Senate’s version of reform, the President lays out for the first time his own specific design. And to help pay for a broad expansion of insurance coverage, he includes several big revenue measures. The two biggest: He’d increase by 0.9 percentage point the Medicare tax for households with incomes over $200,000 for singles and $250,000 for joint filers. In addition, he’d impose a 2.9 percent tax on these same households on interest, dividends, annuities, and most other investment income.
The President has also endorsed the Senate proposal to tax high-cost insurance policies, but in his version the levy would not kick in until 2018, rather than 2013. It is designed as an excise tax on insurers, but is widely expected to result in reduced benefits for employees. In the Obama version, the excise tax would apply only to premiums above $27,500 for families and $10,200 for singles (the Senate bill limits were $23,000 and $8,500) and would be adjusted by the consumer price index plus one percentage point thereafter. As a result, the tax would slowly bite more workers since health care costs (and thus insurance premiums) have historically grown much faster.
The fate of the Obama plan is unknown. It will be the major topic of discussion at Thursday’s health summit, although there is little reason to believe the GOP, which has opposed all the key elements of the Obama plan for the past year, will embrace any of these ideas.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Supporters of Yes on 66/67 tax measures in Portland, Ore., celebrate as early returns projected last month's passage of the tax increases, which included a tax on business. Debates rage about whether corporate taxes are appropriate, but on the federal level at least, they do seem to be progressive. (Doug Beghtel/The Oregonian/AP/File)
Is the corporate tax progressive?
Economists can't seem to agree about whether the corporate tax falls on the rich or the poor. We pretty much concur that sales and payroll taxes are regressive and that income and estate taxes are progressive, but we argue endlessly about whether the burden of the corporate tax falls more on the wealthy or the middle class.
This is an important question because progressivity—the notion that the wealthy pay a proportionately higher share of the tax—is one justification for having a corporate tax in the first place. To my mind, for all of its flaws, the corporate tax is progressive.
The heart of the progressivity question is the issue of corporate tax incidence. That is, who really pays the corporate tax? While a corporate officer may sign the check to the IRS, the money to pay the bill either comes from workers or capital owners (or both). Conventional wisdom among economists is that the corporate tax is regressive if it leads to lower wages and progressive if it leads to lower returns to capital.
Many economists have tried to sort out where the incidence falls, but their conclusions are all over the map. Some theoretical papers conclude that the corporate tax falls primarily on labor through lower wages. Others report the tax falls mostly on capital through lower returns to investors. And still others say both labor and capital pay a share. A series of empirical papers finds that the corporate tax burden does lead to lower wages, though they generally don't agree about why.
This is an important debate, but when it comes to progressivity, it may not matter much. That's because whether the tax hits wage-earners or capital owners, it still falls disproportionately on wealthy individuals. Why? Because wealthy households tend to have substantial income from both wages and capital. Workers who have high wages also tend own a lot of capital, and investors with a lot of capital usually (though not always) have high wages.
Additional details are presented here, but the bottom line is simple: The corporate tax is generally progressive whether it falls 80 percent on labor, for example, or 80 percent on capital, or is split evenly between the two. While these assumptions may affect the degree of progressivity, the tax is still disproportionately paid by wealthier households.
This doesn't mean the corporate tax is perfect. The merit of a tax depends not only on fairness, but also compliance and efficiency. By these criteria the corporate tax comes up short. For example, just about everyone agrees the tax is inefficient due to a toxic mix of a high tax rate, a diluted tax base, and a host of tax provisions that distort corporate behavior. But at least it's progressive, and that's true whether the tax is paid by labor or capital.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Dueling Jobs Credits: And the winner is—Obama.
So far, two tax plans aimed at boosting hiring this year are on the table: one from President Obama and another from senators Chuck Schumer (D-N.Y.) and Orrin Hatch (R-UT). Which would do a better job at increasing employment? I’m betting on Obama’s.
As readers of TaxVox know, I am skeptical about any tax incentive targeted at job creation. If government is going to enact more stimulus, I’d rather it be aimed at increasing overall demand for goods and services, and not at hiring workers. My biggest concern: Most of the benefit--as much as 85 percent or more-- of even the best-designed jobs credit will inevitably end up in the hands of companies that were going to hire anyway.
Still, there is a good chance Congress will pass some version of a jobs tax credit this year. So which model is better? I think the Obama plan wins, hands down. If a credit is going to have any chance of boosting jobs, it needs to be generous enough to matter to employers, easy to understand, and not filled with all sorts of constraints on who gets hired. At the same time, if it is not going to become an utter boondoggle, it also needs to prevent the inevitable gaming that comes with such subsidies. The Obama plan is better on all counts.
This is how the two plans would work:
Obama would give businesses a $5,000 tax credit for every net new employee they hire in 2010, and an additional credit against the employer’s 6.2 percent share of the Social Security payroll tax for increasing their payroll (whether from hiring new workers, expanding hours of current employees, or raising wages). He'd also prevent employers from gaming the system by replacing high-wage workers with more low-wage employees or adding new workers while reducing total payroll. The subsidy would be aimed mostly at small businesses, and the White House figures the total cost would be about $33 billion.
Schumer-Hatch, by contrast, only exempts employers from their share of the payroll tax. Firms eventually get another $1,000 for new hires they keep on for a year. They can claim the subsidy for every new worker they hire, regardless of whether it results in a net increase in jobs. But they’d only be eligible if their new employee has been out of work for at least 60 days. This proposal would cost about $13 billion, according to the Senate Finance Committee.
These differences are critical. Because the Schumer-Hatch subsidy is so small, it is hard to imagine many employers would hire workers they otherwise would not have taken on. Worse, by limiting the benefit to new hires who have been unemployed for two months, this version creates exactly the kind of paperwork headache that businesses hate. Besides, if the goal is to increase employment, why is it better to hire someone who has been out of work for 60 days instead of, say, 59?
If you don’t believe me, ask Tim Bartik. He is a huge fan of a jobs credit, and has extensively researched Jimmy Carter's 1970s version of this subsidy. Tim figures the Obama credit could result in more than one million new jobs, while Schumer-Hatch would generate only one-fifth as many. My guess is that Tim’s estimates may be high for both, since recession-ravaged employers may be less likely to hire this year, even with the new subsidy, than they would in a healthier economy. Still, I think Tim’s basic analysis is spot on: The Obama plan is likely to create many times more jobs than the Senate version.
I remain a skeptic about this whole enterprise. As one lobbyist told me the other day, “My members are not in business to hire people. They are in business to sell things, and they’ll hire only if they have more orders than their workers can fill.” That describes, more clearly than I ever could, why any credit gets such a small bang for the buck.
But if Congress insists on plowing ahead, it may as well do so in the most effective way possible. And that is the Obama version.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
While the dollar is still a key global reserve currency China may be holding off on treasury bill purchases. While the argument of interdependence has put many at ease, what will happen if China does pull back from their long-standing policy of buying T-Bills? (Karen Bleier/AFP/File)
Is China Turning Bearish on the U.S. Treasury?
Is America’s banker turning bearish? This week, Japan eclipsed China as the largest foreign holder of U.S. Treasury securities. This news comes one week after it was reported that China may sell-off some of its U.S. Treasury holdings to punish Washington for selling weapons to Taiwan. These developments offer more evidence that Beijing is growing less willing to continue buying and holding U.S. debt.
If China is indeed losing its taste for Treasuries, its timing could not have come at a worse time. The federal government has to finance over $1.3 trillion in deficit spending this fiscal year. And in the past, the U.S. has relied on China to buy not only Treasuries, but corporate and mortgage debt as well. Without China in the picture, it’s unclear where all this money will come from.
For years, concerns over the growing U.S. debt to China—estimated at $755 billion—were met with calming explanations of the economic interdependence of the two superpowers. After all, the argument went, China wouldn’t ever sell off its U.S. paper because the two economies need each other so much.
While that symbiotic relationship remains, it might not be enough to persuade the Chinese to continue lending us billions of dollars annually. Decisions of foreign leaders aren’t driven by budget finances alone: continued arms sales to Taiwan, free-speech issues raised by Google and others, and unhappiness with currency valuations could all come into play. And the Chinese might decide that the benefits of a more diversified portfolio and protection against an inflated dollar might outweigh the costs of selling off T-bills.
In truth, no one knows exactly what to expect from China in the future. Its continued investment in the U.S. government isn’t an “either-or” decision; there are about 800 billion different lending positions the Chinese could take. And no one really knows what would happen if China stopped buying Treasuries, although U.S. interest rates would almost certainly rise. This uncertainty is unsettling, and we don’t seem to have a plan B. It’s time to think hard about dealing with a world in which the Chinese aren’t the reliable lenders we’ve come to rely upon so heavily.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
The House Budget Committee ranking Republican Rep. Paul Ryan, R-Wis., questions Budget Director Peter Orszag, on Capitol Hill in Washington during the committee's hearing on the President Barack Obama's fiscal 2011 federal budget. (LAUREN VICTORIA BURKE/AP)
US Rep. Ryan responds to concerns about his balanced-budget roadmap
In recent weeks, TaxVox has posted a couple of articles (here and here) that expressed concerns about US Rep. Paul Ryan's dramatic fiscal plan aimed at balancing the budget and eliminating the national debt by the end of the century. Today, the Wisconsin Republican issued this response.
We raised two specific issues. The first was that Ryan's tax proposals are unlikely to generate enough revenue to accomplish his goals, even after he makes major reductions in spending. The second was that, rather than fully analyzing Ryan's Plan, the Congressional Budget Office, at the congressman's request, scored only the spending provisions and simply assumed the tax portion would raise the revenue Ryan claimed.
In his response, Ryan says he asked both CBO and the Joint Committee on Taxation to formally score his tax plan, but neither did so. His also lays out his case for why his tax plan would raise the amount of revenue he projects--about 19 percent of GDP.
I hope we can all keep the discussion going on this critical issue.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Sin taxes like this are always a two-edged sword. If government wants to maximize revenue, it can't impose a tax so high that it will discourage too many sinners. On the other hand, if the goal is to discourage the sin, the state would want to maximize the tax rate--or flat ban the activity. Trouble is, if everyone quit smoking, or drinking booze, revenues would eventually dry up. (NEWSCOM)
Cigarette taxes: Where there’s smoke, there’s money
A new study by a national anti-smoking group argues that states could raise more than $9 billion in new revenues if they all hiked cigarette taxes by $1-a-pack. The levy wouldn’t come close to balancing recession-ruined state budgets, but it wouldn’t hurt. And, the group says, the higher tax would keep 2.3 million kids from becoming smokers and convince 1.2 million adults to quit, saving one million lives and $52 billion in health costs over the long-run. The study comes from the Campaign for Tobacco-Free Kids.
Sin taxes like this are always a two-edged sword. If government wants to maximize revenue, it can't impose a tax so high that it will discourage too many sinners. On the other hand, if the goal is to discourage the sin, the state would want to maximize the tax rate--or flat ban the activity. Trouble is, if everyone quit smoking, or drinking booze, revenues would eventually dry up.
Two more issues to consider: Very high taxes will encourage smuggling, Internet purchases, and—if neighboring states don’t raise their taxes too--a quick drive across the border to stock up on smokes. Finally, some economists worry that tobacco taxes unfairly target the poor.
The tobacco-free kids study assumes that every state raises its tax by $1-a-pack. And it recognizes that demand for cigarettes is relatively inelastic—even high taxes won’t discourage many addicted smokers to quit. The paper assumes that a 10 percent tax increase would reduce overall consumption by about 4 percent, and youth smoking rates by 6.5 percent. It also recognizes that higher taxes will increase tax avoidance.
Still, the paper finds that a big tax hike would generate significant state revenues, although the bang for the buck might vary from state to state. It found, for instance, that when Texas raised its tax from 41 cents to $1.41 in 2007, the number of packs sold dropped by 21 percent in the following year, but tobacco tax revenues rose by nearly 200 percent. South Dakota also raised its tax by $1 in 2007, and saw consumption fall by one-quarter and revenues double. In Maine, a $1 tax increase in September, 2005 generated 75 percent higher revenues—perhaps because it was much easier for people to get their cigarettes in New Hampshire, where the tax was much lower ( 80 cents in 2006 vs. $2).
Nonetheless, the paper argues that in every state, higher tax rates more than make up for lower consumption (either less smoking or more purchases somewhere else) and would generate more revenue. And an accompanying poll suggests a tobacco tax would be quite popular.
In a TaxVox post last summer, Ruth Levine looked at the avoidance problem with city-level sin taxes. It is probably less of an issue with states, and the paper suggests people are less likely to take the trouble to avoid the tax over time, due in part to what it calls “smoker tax-evasion fatigue.” Still, this is a matter of some concern.
There are two other problems worth thinking about: Some states that have securitized their tobacco settlement money may receive less income from these deals if their cigarette sales fall. So, while their tax revenues may rise, lower demand may temper their overall revenue benefits. In addition, states such as New Jersey that already have very high cigarette taxes may not see as big a revenue boost from a further increase.
My colleague at TPC, Kim Rueben, suggests a solution: Increase the federal tobacco tax and rebate some of the money to states. But whatever the design, it is hard to argue with a tax that raises revenue, reduces smoking, or perhaps does at least a little bit of both.
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The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Their postings appear here on the Monitor's Money site as well as on their own individual blog sites. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the blogger's own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.
Should Congress Abolish the Joint Committee on Taxation?
Should the Joint Committee on Taxation cede its key role as scorekeeper for tax bills to the Congressional Budget Office? A former boss of JCT suggests that maybe it should, at least for a big chunk of the tax code.
To outsiders, these arbiters of the budget implications of tax and spending bills are something of a mystery. CBO tracks the costs of spending bills and, as we've seen in the debate over health reform, its influence can be enormous. At the same time, JCT performs a parallel task by doing revenue estimates of tax bills (JCT also has a staff of lawyers who provide lawmakers with technical tax-writing advice) . But behind the scenes, the two offices have been rivals for many years.
Now, in a footnote (#111) to a new paper on tax expenditures, former JCT chief of staff Ed Kleinbard gives a big shout out to---CBO. This office, he says, is better suited to some key roles because of its “relative stature and independence.” Ed is not criticizing the quality of the JCT staff, but rather the nature of its relationship with tax-writing committees. Still, this is akin to former Yankee manager Joe Torre saying the Red Sox are the better team.
Then, Ed goes a step further. He asks whether the tax legislative process could be improved by incorporating the JCT staff into CBO. He doesn’t answer his own rhetorical question, but he doesn’t have to. His message is pretty clear.
Now a professor at USC's Gould School of Law, Kleinbard has never been a shrinking violet. And I suspect he found his own 2007-2009 tenure as Joint Committee chief of staff to be more than a bit frustrating. He wouldn’t be the first high-profile outsider to feel that way after spending a couple of years watching congressional sausage-making up close.
In the paper, Tax Expenditure Framework Legislation, that he will present Friday at a joint TPC/USC conference in LA, Ed raises an issue with important practical and symbolic meaning. Tax expenditures, soon to reach a staggering $1 trillion-a-year, are an odd hybrid. These subsidies--for health insurance, retirement savings, home ownership, alternative energy, oil and gas production, and just about every other social and economic activity imaginable-- are structured to look like tax law provisions. But economically, they are often indistinguishable from spending. Congress designs them as tax breaks because, well, these days cutting taxes sounds so much better than increasing spending.
By turning the scorekeeping over to CBO, Kleinbard would send a powerful signal that these subsidies are, in fact, spending. But what about the broader point? Is CBO more objective than JCT, as Kleinbard suggests?
I’m not so sure. To an outside observer, JCT has almost always seemed to be a pretty honest arbiter. I can think of only one period, when the staff was directed by Ken Kies more than a decade ago, when many considered JCT more partisan than objective. Similarly, CBO has been remarkably immune from political pressure. Certainly, the current incarnation, headed by Doug Elmendorf, has not been shy about making its best calls about the costs and consequences of health reform. The Democrats who appointed Doug can’t be thrilled, but like his predecessors, Elmendorf has called ‘em as he’s seen ‘em. But so did JCT under Ed and so it does now under his successor, long-time career staffer Tom Barthold.
It would not be the end of the world if JCT’s revenue estimating were folded into CBO, but I think Ed’s judgment of his old shop is a bit harsh.
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Guest Bloggers are not employed or directed by The Christian Science Monitor and the views expressed are the blogger's own. Submissions are neither edited nor reviewed before they appear on CSMonitor.com. If you have any comments about a blogger, please contact us. To comment on this post, please go to the blogger's site by clicking on the link above.
Cigarette Taxes: Where There’s Smoke, There’s Money
A new study by a national anti-smoking group argues that states could raise more than $9 billion in new revenues if they all hiked cigarette taxes by $1-a-pack. The levy wouldn’t come close to balancing recession-ruined state budgets, but it wouldn’t hurt. And, the group says, the higher tax would keep 2.3 million kids from becoming smokers and convince 1.2 million adults to quit, saving one million lives and $52 billion in health costs over the long-run. The study comes from the Campaign for Tobacco-Free Kids.
Sin taxes like this are always a two-edged sword. If government wants to maximize revenue, it can't impose a tax so high that it will discourage too many sinners. On the other hand, if the goal is to discourage the sin, the state would want to maximize the tax rate--or flat ban the activity. Trouble is, if everyone quit smoking, or drinking booze, revenues would eventually dry up.
Two more issues to consider: Very high taxes will encourage smuggling, Internet purchases, and—if neighboring states don’t raise their taxes too--a quick drive across the border to stock up on smokes. Finally, some economists worry that tobacco taxes unfairly target the poor.
The tobacco-free kids study assumes that every state raises its tax by $1-a-pack. And it recognizes that demand for cigarettes is relatively inelastic—even high taxes won’t discourage many addicted smokers to quit. The paper assumes that a 10 percent tax increase would reduce overall consumption by about 4 percent, and youth smoking rates by 6.5 percent. It also recognizes that higher taxes will increase tax avoidance.
Still, the paper finds that a big tax hike would generate significant state revenues, although the bang for the buck might vary from state to state. It found, for instance, that when Texas raised its tax from 41 cents to $1.41 in 2007, the number of packs sold dropped by 21 percent in the following year, but tobacco tax revenues rose by nearly 200 percent. South Dakota also raised its tax by $1 in 2007, and saw consumption fall by one-quarter and revenues double. In Maine, a $1 tax increase in September, 2005 generated 75 percent higher revenues—perhaps because it was much easier for people to get their cigarettes in New Hampshire, where the tax was much lower ( 80 cents in 2006 vs. $2).
Nonetheless, the paper argues that in every state, higher tax rates more than make up for lower consumption (either less smoking or more purchases somewhere else) and would generate more revenue. And an accompanying poll suggests a tobacco tax would be quite popular.
In a TaxVox post last summer, Ruth Levine looked at the avoidance problem with city-level sin taxes. It is probably less of an issue with states, and the paper suggests people are less likely to take the trouble to avoid the tax over time, due in part to what it calls “smoker tax-evasion fatigue.” Still, this is a matter of some concern.
There are two other problems worth thinking about: Some states that have securitized their tobacco settlement money may receive less income from these deals if their cigarette sales fall. So, while their tax revenues may rise, lower demand may temper their overall revenue benefits. In addition, states such as New Jersey that already have very high cigarette taxes may not see as big a revenue boost from a further increase.
My colleague at TPC, Kim Rueben, suggests a solution: Increase the federal tobacco tax and rebate some of the money to states. But whatever the design, it is hard to argue with a tax that raises revenue, reduces smoking, or perhaps does at least a little bit of both.
----------
Guest Bloggers are not employed or directed by The Christian Science Monitor and the views expressed are the blogger's own. Submissions are neither edited nor reviewed before they appear on CSMonitor.com. If you have any comments about a blogger, please contact us. To comment on this post, please go to the blogger's site by clicking on the link above.
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