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With Tax Reform, America Must Go “Back to the Future”

Tax reform is not “sexy”, there is no getting around this fact. It is, however, a very important issue, as every government program is funded either by tax dollars or debt. While the specifics of tax policy may be difficult to comprehend, almost everyone has their own beliefs on taxation and the role of government.

Looking at these preferences, the majority of Americans believe the government does not do enough to help poor and middle class people. Relatedly, a full three quarters of Americans feel that the wealthy aren’t paying their fair share of taxes.

Against this backdrop, lets consider Trump’s tax proposal:

  • Fewer tax brackets at lower rates for the wealthiest. The plan sets three tax brackets for individuals — 12 percent, 25 percent and 35 percent — down from the existing seven rates (which top out at 39.6 percent).
  • Lowering the corporate tax rate from 35 to 20%. While our corporate tax rate is too high, due to loopholes the actual rate paid is much lower (particularly for large corporations who can afford the best lobbyists, lawyers, and accountants). Based on actual taxes paid, the U.S. ranks comparatively low among developed countries. The corporate tax rate should only be lowered if the revenue lost if offset by closing the right loopholes. Trump has not specified which loopholes, if any, he plans to close.
  • Cutting the “pass-through” tax rate, which is what individuals who file their corporate earnings as personal income pay, from the current highest income tax rate of 39.6% to 25%. This rate cut would almost exclusively benefit the wealthy, and is one to watch closely-in recent years more and more businesses have begun filing as “pass-throughs” in order to minimize their tax bill.
  • Repeal of the alternative minimum tax, which is essentially in place to ensure wealthy people pay a certain minimum amount as they use their accountants to game the tax code. But it will make the tax code fit on a post card! And thats what matters!
  • A lowering an eventual repeal of the inheritance tax, which is only paid on the largest estates. This is being billed as a move to help family farmers, which is an audacious spin of the issue to be sure.
  • Trump’s plan has been light on details about capital gains taxes. However, there is nothing to suggest his financier-stacked Cabinet (Mnuchin, Cohn) will want to do anything but lower these rates as well.

All these proposed ideas would reduce taxes paid by the wealthy, compromising the government’s ability to further help poor and middle class people. So the question is, if these ideas are so unpopular, how is Trump selling them to the American public?

For some, it is enough to say that lower taxes will promote growth, increase employment, and pay for themselves. People who drink this “supply-side” Cool-Aid are outliers, and notably the vast majority of economists disagree with these claims. But remember, we are talking about many of the same people who disagree with 97% of climate scientists on climate change, so this is actually a consistent (if not irrational) repudiation of “experts”.

Most reasonable people, however, believe what the overwhelming majority of experts in a field conclude. For these people, support for Trump’s plan likely comes from being told they will receive a “massive” tax cut. But when you look at it, the “massive” cuts in Trump’s plan are reserved for those with the highest incomes.

Consider the distribution of income tax cuts, as shown on the table below. 77% of the cuts go to people earning more than $143,100 a year. That is hardly the “middle class”.

It’s more of the same when it comes to corporate tax cuts. According to the nonpartisan Tax Policy Center, “middle-income taxpayers would receive less than 10 percent of the benefit of a corporate rate cut while the top 20 percent would receive about 70 percent. The top 1 percent would see about one-third of the benefits and the top 0.1 percent would get about one-fifth.

Trump’s plan would increase our national debt by well over a trillion dollars. The IMF has warned the plan will increase inequality and will not lead to higher growth. Wall Street is betting it will lead to greater investments in automation, not workers. The Fed has even waded into the debate to issue a rare warning, saying the proposed plan could lead to high inflation.

For all these negatives, middle class earners will only get a small tax cut, if that. Treasury Secretary Mnuchin admitted some middle class earners may not get any cut at all. This is coming from the man who also said it is “hard to create a system where you’re not going to also cut taxes on the top 10 percent“. Maybe if you are a derisive elitist with zero consideration for societal well-being, who has no business governing, it is difficult to imagine not cutting taxes for the wealthy. For most people, it is extremely easy to imagine.

So Trump’s plan is unpopular, and those who support it are either irrational, have been misled, or are wealthy and likely to benefit personally. Just like with healthcare, the GOP has no tax reform plan that works for the vast majority of Americans; hopefully its tax reform efforts will meet a similar defeat.

The Case for Higher Top Rates

Remember, Trump’s plan sets three tax brackets for individuals, down from the existing seven. While the U.S. tax code has become overly complicated due to deductions and loopholes, the complicating factor is not the number of income tax brackets. Like any misdiagnosis, reducing the number of tax brackets would not solve any problems, and would likely make the situation worse.

Republicans in Congress plan on including a fourth higher bracket in their proposal, but this is not enough. There should be even higher brackets and rates for people with 7 and 8 digit incomes.

After a certain point, the higher your income, the less it is connected to working harder, and the more it is related to the risks one takes and the carefully constructed, trade-based global economy in which we operate (infrastructure, government R&D, international peace and trade rules, strong judicial systems, educated workforces, relatively prosperous customer bases, etc.). Notably these characteristics are all, to varying degrees, financed by tax revenue. 

I can already hear people moaning at this point and calling me a socialist, so allow me to clarify with an example. Take someone who manufactures clothing. Decades ago, the owner of this company would more or less be constrained to selling his or her goods domestically. Despite working very hard, their overall earnings were capped (at least by today’s standards). Today, the same person, putting in the same amount of work, can sell their goods all over the world through the internet, earning a lot more money. The work these two owners from different eras put in is roughly equivalent, but the modern day entrepreneur can potentially earn a lot more. In fact, this is half of the story of increasing extreme global inequality.

What about my other point, about these systems being financed to varying degrees by tax revenue? Well this is certainly true of the internet (whose origins were in defense research). It is also true of all of the spending that promotes international peace and fair trade practices (defense spending, development aid, contributions to international organizations like the WTO, etc.).

While the risks people take should be rewarded, the context in which wealth is earned should not be ignored. This is not to say “you didn’t build it” or “you didn’t work hard”, it is simply acknowledging that outside factors play a role in how much wealth one can amass. Ignoring this reality does not make it go away, but it does risk underinvesting in making sure it continues into the future.

A Quick Lesson on Marginal Tax Rates

I think that much of the opposition to higher tax brackets comes from misunderstanding how marginal tax rates work. When you enter a higher bracket, only the amount you earn over the higher threshold gets taxed at the higher rate.

Lets take a look at a hypothetical numerical example. If the rate below $100,000 is 20%, and the rate above is 30%, when a person earns their 100,001st dollar, only the amount over the threshold–the one dollar–is taxed at the higher 30% rate. The rest, the first $100,000, is still taxed at the lower 20% rate. People do not become poorer by moving into a higher tax bracket.

In recent history, before the Reagan era tax cuts, top income tax rates were around 50%. This seems like a reasonable number if not for its roundness and inherent fairness, but the exact optimal number of brackets and rates is not what’s most important. More important is recognition by people across the political spectrum that the wealthy must pay their fare share of taxes. Based on the survey results cited earlier, most people already do share this belief–it is well past time their elected representatives acted on it.

The tax code should be used neither to venerate the wealthy as infallible job creators, nor to vilify wealth so much as to stifle innovation. Simply put, the tax code must allow us to adequately invest in the very systems which enabled America to become the wealthiest nation in the world in the first place. Anything else is a short-sighted failure of governance.

“Back to the Future” (With Some Help From Our Friends)

Trump’s base often talks about “Making America Great Again”. To a small minority, this is a thinly veiled embrace of our country’s racially charged past. To others, I’d like to think most people, making America “great” is about (re)creating an economy that rewards anyone who is willing to work hard.

So how can we make sure that, as a country, we can afford to make the investments needed to get back to this “Golden Age”? Not surprisingly, some of the answers lie in the past; America has historically had both more income tax brackets, and higher tax rates for top earners. These were the good old days many low-tax advocates are pining for!

There is nothing uniquely American about these higher historic rates either. According to the Organisation for Economic Co-operation and Development (OECD)top personal income tax rates in rich nations had fallen to 35 percent in 2015 from an average of 62 percent in 1981.To put a bow on an earlier point, this is the other half of the story of increasing extreme global inequality.

Now admittedly some things have changed in the past few decades. The rise of information technologies has led to irreversible changes in financial markets. When people can move their money around the world instantly with the click of a mouse, it is important to have some level tax coordination between countries in order to fight tax evasion (in its many forms). In today’s globalized world, countries and international institutions such as the OECD must work together to ensure the ultra-wealthy are not getting a free ride.

If America wants to be able to adequately invest in the very systems that made and continue to make it great, and if we want to be able to give working class people a tax cut without greatly increasing our national debt, we must hold the wealthiest Americans economically accountable.

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Economic Outlook: Fiscal Policy, Equality of Opportunity, and Social Mobility

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“Your chances of achieving the American Dream are almost two times higher … if you are growing up in Canada than in the United States,” said Harvard’s Raj Chetty at a Center on Children and Families (CCF) event held on Monday. Chetty, the Bloomberg Professor of Economics and a leading scholar on opportunity and intergenerational mobility, presented his latest research on how where one grows up has a huge impact on success later in life.

Chetty and colleagues calculated upward mobility for every metro and rural area in the United States. 

The heat map below shows the chances that a child born in the bottom fifth of the income distribution in that particular place will reach the top fifth later in life.

My more perceptive readers may be thinking, “Ben, you usually advocate for equality of opportunity, not outcomes, what gives?”

This is a fair observation. Generally speaking, I do believe more in equality of opportunity than equality in outcomes. But these two concepts cannot be fully separated. In fact, they intersect at what has become an important issue for politicians, academics, and social scientists alike–social mobility.

Observing social mobility outcomes at the macro level provides insight into opportunity (or lack thereof) at the micro level. At more macro levels (neighborhood, city, county, etc), the differences in individuals’ development experiences (wealth, culture, parental values, personal ability, luck, etc.) are naturally smoothed out. Taking into consideration every possible permutation of personal development, these forces offset one another. What we are left with is the “average” (for lack of a better word) personal development experience.  

This “average” experience leaves a common factor–public goods and services–as the variable explaining why certain areas recognize greater social mobility than others (as shown on Mr. Chetty’s map). The fact that the administration of many important public services is carried out at these same levels reinforces the idea that social mobility outcomes are the result of policy choice(s).

Once we get past the question of “if” government programs can impact people’s opportunities, we can focus on which programs are most effective in promoting social mobility. Data mapping serves an important role here, highlighting areas that may have a working policy mix (although since economic development is context sensitive, even the seemingly best policy mix must be adapted to local realities to be effective).

The question then becomes how to pay for the programs which enable equality of opportunity. Fiscal debates are always implicitly an often explicitly shaped by underlying budgetary positions. The unwillingness of governments around the world to engage in stimulus spending despite low interest rates and high un(der)employment (a liquidity trap) is case-in-point.

In order to pay for the services needed to enhance social mobility in poorer neighborhoods, significant investments are needed. This necessitates higher effective tax rates on the ultra-wealthy (which in turn requires a multi-faceted approach, closing loopholes in capital gains, income, and inheritance/gift taxes to name a few); people whose wealth is often unrelated to productivity.

The economic outcomes of the wealthiest ultimately must be impacted in order to finance programs that promote equality of opportunity. This fact, however, does not necessitate class warfare between the lower, middle, and upper-middle classes–the vast majority of the America’s citizenry.

The American economy must work for everybody who is willing to work hard to succeed, regardless of their socioeconomic background. Once this condition is met, inequality is not only defensible, it actually spurs hard work and innovation. Unfortunately, contemporary America is nowhere near this “good inequality”; our inequality is not the result of meritocracy, but primarily the result a political process / tax code beholden to wealthy interests and an outdated criminal justice system.


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Economic Outlook: Business Tax Reform is a Social Justice Issue

Since President Obama’s SOTU address, the term “middle class economics” has penetrated mainstream political discourse. These were not all new ideas, but rather a catchy phrase to sum up the priorities of the Obama administration and provide direction for the Democratic party going forward.

Of course, in a functioning democracy, broad based growth is not (or should not be) a partisan position. A recent NYT news analysis article highlighted how the G.O.P. has, in recent years, attempted to re-brand itself to be more appealing to low and middle class Americans (i.e. engage in “middle class economics”).

One potential avenue for such re-branding is compromising on a long overdue overhaul of the American tax system (the last major overhaul was in 1986). According to a recent Al Jazeera America poll, a majority of self-proclaimed Democrats (79%) and Republicans (68%) are “somewhat” or “very” willing to have their congressional leaders compromise on taxes.

Fortunately, bipartisan support for tax reform is not limited to the general public. Both the Democratic party and the G.O.P. have powerful voices in the Federal Executive and Legislative branches (respectively) advocating for compromise on tax reform:

G.O.P Stance:

“Though there are disagreements on the details, there is bipartisan support for tax reform in Congress,” said Orrin Hatch, Republican chairman of the Senate Finance Committee, at a conference for tax lawyers, analysts and economists.

“Members of both parties have expressed their support for a tax overhaul. And, I believe there is real momentum to get something done on tax reform this year, if we remain committed. And, believe me, I’m committed,” he said.

The U.S. tax code has not been overhauled thoroughly in 28 years. In that time it has become riddled with loopholes. As a result, tax avoidance is a growing problem.

At the same time, tax experts also generally agree that the system is so complex and often contradictory that compliance costs are excessive and economic productivity is harmed.

Hatch has laid out basic principles for reform. At the conference, he said he has the impression that Democratic President Barack Obama might be willing to do a deal on business tax reform alone, setting aside individual income tax issues.

“We need to lower corporate tax rates and transition toward a territorial tax system,” Hatch said. A territorial system is one that would exempt all or most of the foreign profits of U.S. corporations from the corporate income tax.

Democratic Party Stance:

Let me (Secretary of Treasury Jacob Lew) say at the outset that our entire federal tax code needs to be overhauled.  It has been almost 30 years since we last rewrote it, and since then, the tax system has become heavily burdened by loopholes and inefficiencies

I continue to believe that the best way to achieve reform today is to start with pro-growth business tax reform that protects and strengthens the middle class, lowers rates, simplifies the system, levels the playing field, and eliminates unfair and inefficient loopholes.

The fact is, there is a growing bipartisan consensus in Washington on how to achieve business tax reform, and we have a unique opportunity now to get this done.

On paper, we have one of the highest corporate income tax rates in the world, but in practice, there is a wide disparity in effective corporate tax rates.  Some corporations pay little or no income tax at all, while others pay the highest rate in the developed world.

Moreover, our business tax system is far too complicated — particularly for small businessesOne estimate suggests that a small business, on average, devotes hundreds of hours plus spends thousands of dollars, to comply with the tax code.  We can and must reduce this burden.

Our business tax system actually skews business decisions in ways that make it harder for the economy to grow.  Too many investment decisions are shaped by tax considerations when they should be driven by what will best enhance productivity and growth.  Our tax code should favor the best businesses that create the most economic value — not those that are best at taking advantage of tax deductions.

The international tax system is often looked at in terms of either what is known as a territorial system, in which a company located in a particular country only pays taxes on income earned in that country, or a system like that of the United States, in which that company must pay tax on worldwide income, regardless of the country where it is earned.  The President’s proposal strikes a sensible balance, and would move us towards a more hybrid system.  What that means is we would create a new minimum tax on foreign earnings and make it simpler for a business to bring income back to the United States.  It would also tighten the rules so that companies cannot use accounting techniques to avoid paying taxes, such as shifting profits to low-tax countries (inversions).

Of course, there are tax expenditures that make sense and that need to be protected — like the New Markets Tax Credit, expensing for small businesses, and the Research and Experimentation Tax Credit.  But these tax incentives cost money and need to be paid for to maintain adequate revenue levels.  And we cannot apply a double standard, as some have proposed, where we permanently extend business provisions without paying for them, without permanently extending critical improvements to the EITC, child tax credit, and college credits that help working families at the same time.

Secretary Lew laid out the five pillars of the administration’s proposal for a new business tax system:

1. Lower rates and close wasteful loopholes.
2. Build on the resurgence of manufacturing in the United States.
3. Reform the international tax rules that encourage companies to shift income and investment overseas.
4. Simplify and reduce taxes for small businesses.
5. Fix “our broken tax code and increase investment in a way that maintains current revenues.”

Sounds like both parties want many of the same things.

However, “revenue neutral” business tax reform does not go far enough. Looking at the Federal OMBs Historic Tables (p34-35) tells the story. Since 1934, individual income taxes have consistently made up 40+% of government receipts, while corporate income taxes have varied from as high as 30% to around 10% of receipts in recent years.

True this declining share is partially due to rising Social Security taxes, but since those are split evenly between employers and employees, it is clear that the burden of financing our government has shifted from corporations to people and small businesses. Looking at contributions as a % of GDP (p36-37) further supports this narrative.

These meager contributions by corporations are symptoms of an outdated and unfair tax code, and should not be enshrined in a new one.

Lower tax receipts skew the debate over how to invest in America and her people. Operating from a position of high debt and primary deficit, it is easy to drum up fears that accommodative economic policies will result in rising borrowing costs, ballooning deficits, and [hyper]inflation (despite the fact that America is facing the opposite–historically low borrowing costs, a shrinking deficit, and a very strong dollar).

Implementing business tax reforms would help push America into primary surplus, changing the context of this national debate.

I do not claim to know the exact amount or proper allocation of resources between public goods (education, infrastructure) and welfare programs needed to achieve greater “equality of opportunity” / social mobility. But I can say with confidence that more resources need to go to these causes, as the status-quo has long failed the vast majority of Americans.

The sooner we can have a clear-eyed debate on what policies are needed to promote broad based, sustainable American growth, the better. Holding back this debate, aside from uncompromising politicians, is a failure to overhaul our tax code.

In the interest of balance, work also needs to be done on individual tax reform, to fix high marginal tax rates affecting people who benefit from welfare programs. However, the importance of this issue has been, in my opinion, overblown by those on the political right.

Lastly, the Congressional Budget Office’s use of “dynamic scoring”, as it as been pushed through by the G.O.P. dominated congress (using it for tax proposals but not for spending bills) is another impediment to achieving social justice through tax reform and fiscal policy. 

Van Hollen (D-MD) added that while the bill requires the CBO to run dynamic analyses on major bills, it specifically excludes appropriations bills. He said that exemption shows that Republicans want to downplay how federal spending on education, infrastructure and other areas can also help the economy.

Ryan replied by saying that exemption is there because subjecting all spending bills to dynamic scoring would create significantly more work for the budget office. Rep. Gerry Connolly (D-Va.) proposed an amendment to include major spending bills, but the House rejected it 182-214.

Ryan’s argument is unfounded and offensive to the talented people employed by the CBO. It is a weak attempt to defend wealthy interests, while downplaying the awesome potential of the American people.

Ideally, this method would be implemented for both tax and spending proposals. If that is not possible, dynamic scoring should not be used at all.


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Economic Outlook: From The Left and Right, Differing Views of Future Risks

When you ask an American about the future risks facing their country, the answer you get will likely vary depending on political affiliation. Those who lean left (“liberals”) will likely mention climate change, while those who lean right (“conservatives”) will likely mention social spending / national debt. (According to a recent Gallup poll, peoples views also tend to align based on age; understandably older respondents care more about economic growth, while younger respondents favor environmental concerns):

According to Pew Research Center surveys conducted last year, 25 percent of self-identified Republicans said they considered global climate change to be “a major threat.” The only countries with such low levels of climate concern are Egypt, where 16 percent of respondents called climate change a major threat, and Pakistan, where 15 percent did.

By comparison, 65 percent of Democrats in the United States gave that answer, putting them in the same range as Brazilians (76 percent), Japanese (72 percent), Chileans (68 percent) or Italians and Spaniards (64 percent). If you combine Democrats and independents into one group, 52 percent called climate change a major threat, according to Pew. That’s the same broad range of concern as in Germany (56 percent), Canada and France (54 percent), Australia (52 percent) or Britain (48 percent).

Over all, between 40 percent and 45 percent of Americans in recent Pew polls have called climate change a major concern (with a similar share of independents giving that answer).

The Republican skepticism about climate change extends across the party, though it’s strongest among those who consider themselves part of the Tea Party. Ten percent of those aligned with the Tea Party called climate change a major threat, compared with 35 percent of Republicans who did not identify with the Tea Party.

According to those most concerned about climate change, continued inaction will lead to multiple catastrophes: coastal flooding, ecosystem / food-system disruption, air and water quality degradation, and an increase in extreme weather events to name a few. “How could we leave such a future to our children?”, they ask.

According to those most concerned about economic issues, continued fiscal irresponsibility will also lead to a plethora of adverse consequences: rising interest rates, [hyper]inflation, and ballooning national debt (never-mind that these two consequences are incompatible, as inflation erodes debt). The Government will be unable to pay for future public programs, contributing to the general “decline” of American. “Forget that ‘global warming’ conspiracy, how can we leave this future to our children?” they counter.

Both sides paint dire pictures that are entirely separate from one another. Both arguments appeal to “the children!!” to augment their political beliefs. So which argument holds more merit? Well lets look at the facts:

Climate Change:

It’s been an extraordinary six weeks for climate scientists. Any lingering doubts about the immediacy of climate impacts on the lives of Americans are now permanently laid to rest, thanks to four extensive reports from thousands of scientists.

It began with a straight-talking, no-nonsense report called “What We Know” from the world’s largest general science organization (AAAS) earlier this spring that laid out in clear detail why the entire scientific community no longer has any doubts whatsoever about the nature and extent of the climate risk to our economy and communities.

Weeks later, the second and third of successive reports from different arms of the Intergovernmental Panel on Climate Change (IPCC) issued separate, detailed reports on the current science around climate change impacts in the world, and the potential costs to society and the economy right now if we don’t change our energy patterns. 

And then this week, a report written by hundreds of American scientists culminated this six-week run of world-class, peer-reviewed science reports with the congressionally-mandated National Climate Assessment that laid climate impacts literally at the doorsteps and window panes of most Americans.

Climate change isn’t a computer model, a fuzzy prediction, a cute picture of polar bears on shrinking icebergs, or some far-off, distant threat that people who aren’t born yet will have to deal with. It’s here, now – and it’s disrupting our lives.

It’s affecting food prices through extended droughts and flooding basements in extreme rainfall events – the types of dry and wet extremes that scientists have been telling us for years would be part of a changing world. Now we can see these things with our own eyes, out our own windows.

The scientific consensus is that climate change is real, it is man made, and the adverse effects–while more pronounced in the future–are already beginning to occur.

National Debt:

There are two sides to national debt, revenues (taxes) and expenditures (government spending). Whenever expenditures exceed revenues, the government must either take money from its surplus (which we do not currently have), or issue new debt to finance its spending. Every dollar of debt has an interest rate attached to it, the government’s borrowing cost.

With large annual deficits, an increase in interest rates on bonds would indeed cause a great increase in government debt. However, the fiscal responsibility doomsday theorists have been proved wrong:

In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know (or should know) that depressed economies behave quite differently from economies that are at or near full employment.

For example, many seemingly knowledgeable people — bankers, business leaders, public officials — warned that budget deficits would lead to soaring interest rates and inflation. But economists knew that such warnings, which might have made sense under normal conditions, were way off base under the conditions we actually faced. Sure enough, interest and inflation rates stayed low.

And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didn’t apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression…We needed more government spending, not less, to fill the hole left by inadequate private demand…Since 2010, we’ve seen a sharp decline in discretionary spendingand an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.

To be sure, eventually interest rates will increase and deflationary pressures will subside–the economy will emerge from it’s “liquidity trap“. Here’s the good news, emergence from the liquidity trap corresponds with near full employment (not zero unemployment, but the “natural” rate of unemployment). Interest rates and inflation will not rise until the economy is in much better shape, meaning increased interest costs will be at least partially offset by a decline in “automatic stabilizer” spending (spending on poverty reduction programs–SNAP, unemployment insurance, etc.–which increase automatically during economic downturns).

Factoring for automatic stabilizers, Krugman’s analysis shows that we are barely running a primary deficit at all. True we should not leave past debt for future generations, but we should also not under-invest in current generations / pursue wrong-minded economic policies because of past policy follies. When you invoke the specter of “the children!!, consider current generations of children and young adults who have been seen their futures compromised / delayed due to political failures.

Going Forward:

On one hand, the risks associated with inaction on climate change are real and rising. On the other hand, the risks associated with high levels of national debt have proven overblown and are partially self-correcting. That is not to say there are long-term drivers of debt which must be addressed in order to reign in long term fiscal deficits. But the U.S. Government has the benefit of being a reserve currency and a “safe haven” for investment–both factors pushing down the interest rate our government pays to borrow money. We can pay down our debts responsibly and counter-cyclically, when the economy recovers. 

The common perpetrator in both these future risks–national debt and environmental degradation–are corporate interests and the politicians that enable them. Consider these historic tables of government tax revenues by source (pg. 34-35). Personal income tax contributions have been fairy stable, while corporate income taxes have decreases drastically over the past decades.

The greatest threat to our Nation’s future is not public / social spending, it is our continued inability to pursue comprehensive tax reform (including carbon taxation).

Corporate profits are at an all time high; perhaps big corporations do not need a healthy domestic economy to prosper in a globalized world. But people, as ever, still need to have their basic needs met. It is up to our leaders to ensure these corporations, which benefit from every element of public spending (infrastructure, technological innovation via public R & D, a skilled workforce), pay their fare share towards financing necessary government expenses.

And it is up to us to find and elect these leaders, in spite of powerful forces acting against these reforms

Please turn out and vote in the 2014 midterm elections. Regardless of your political affiliation, demand bipartisan Congressmen with a history of not being beholden to corporate interests. Despite pervasive cynicism, we the people still hold the power in this country.

Won’t somebody please think of the children!


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Economic Outlook: Obama’s Shift Sights From “Grand Compromise” to Grand Vision

Original Article:

President Obama’s forthcoming budget plan will not include a proposal to trim cost-of-living increases in Social Security checks, the gesture of bipartisanship he made to Republicans last year in a failed strategy to reach a “grand compromise” on reducing projected federal debt.

White House officials said on Thursday that since Republicans in Congress have shown no willingness to meet the president’s offer on social programs by closing loopholes for corporations and wealthy Americans, the proposed budget for the 2015 fiscal year will not assume a path to an agreement that no longer appears to exist.

The budget plan, which will be out in early March, a month late, will abide by the overall spending guidelines agreed to by Republicans and Democrats late last year. But included in those spending limits will be a $56 billion proposal to increase spending on some of Mr. Obama’s key initiatives, officials said.

Mr. Earnest said that would include spending on manufacturing “hubs” that the president has promoted over the last year; additional government programs aimed at helping people develop new skills; and funding for early childhood education programs like preschool.

“This initiative that the president will propose will be fully paid for,” Mr. Earnest said. White House officials declined to describe the revenue increases, but said they would include closing corporate loopholes, a move the president has supported in the past.

Mr. Buck criticized the $56 billion proposal as another effort by the president to spend more taxpayer money than the government can afford.

“The one and only idea the president has to offer is even more job-destroying tax hikes, and that nonstarter won’t do anything to save the entitlement programs that are critical to so many Americans,” Mr. Buck said. “With three years left in office, it seems the president is already throwing in the towel.”

Administration officials said Thursday that the budget would include proposals to make good on the president’s campaign promise to eliminate provisions of the tax code that allow corporations to shift profits overseas to evade their obligations.

Democrats say such provisions are loopholes, and Mr. Obama’s calls to end them are a perennially popular line with voters of both parties and among independents. Democrats and Republicans agree there is virtually no chance again this year of a bipartisan overhaul of the corporate tax code, despite claims by both parties to be in favor of such change.

The proposed changes to the overseas tax provisions would raise additional revenues of several billion dollars a year.

President Obama’s proposal also includes some $300 billion in infrastructure spending, to be paid for by closing certain tax loopholes.

When those on the political right talk about “fiscal responsibility”, they focus solely on cutting social programs. They buy into the notion (or perhaps have been bought into the notion via lobbying / campaign finance) that closing any tax loopholes will cause unemployment to soar.  And people believe them, Why is that? Because regular people experience over-taxation and over-regulation in their daily lives. They do not realize that the very wealth people, and the corporations they control, do not play by the same rules.

Sensationalism is good for two things: 1) distracting people from the real issues and; 2) paralyzing your opponents into inaction. Remember when high levels of U.S. sovereign debt was supposed to cause soaring interest rates? When QE easing was supposed to cause runaway inflation? Every once in a while, you have to call someones bluff to keep them honest; the time is past due for politicians to collectively call the bluff of corporate interests.

One look at the historic tax revenue tables (p 34-35) tells the story; for decades households have paid a relatively steady portion of income tax revenues (between 40-50%) while corporate contributions have been wildly volatile (from upwards of 30% in the years following WWII, to single digit percentage contributions many years starting in the 80s). In 2009, households contributed 43.5% of U.S. income tax revenue; corporations contributed 6.6%.

The U.S. has one of the highest corporate tax rates in the world, at 35%. We also have one of the most complex and loophole ridden tax codes in the world. Corporations find themselves largely off the hook, while households continue to contribute their share towards making the government work. The results are obvious; even during times of economic growth, we see widening inequality accompanied by record corporate profits.

In fairly remarkable news, a proposal to be released tomorrow by Representative David Camp (R), Chairman of the Ways and Means Committee, appears to be the a genuine attempt at tax reform. Despite not yet being released, it has already run into criticism from both political parties:

Mr. McConnell, the Senate minority leader, said efforts to pass the proposal — which is expected to call for a cut in the top corporate income rate to 25 percent from 35 percent, and a reduction of the seven individual tax brackets to two — would prove insurmountable against Democratic demands that any tax overhaul include $1 trillion in new revenue.

“The majority leader and the president have said they want $1 trillion in new revenue for the federal government as a condition for doing comprehensive tax reform, which we know we ought to do,” Mr. McConnell said Tuesday. “So I have no hope for that happening this year.”

Senator Harry Reid of Nevada, the majority leader, agreed with Mr. McConnell’s assessment that a tax overhaul will be difficult to push through Congress this year, but he blamed Republicans for the impasse.

“The truth is, we should have tackled tax reform years ago,” Mr. Reid said Tuesday. “It will be extremely difficult — with the obstruction that we get here from the Republicans on virtually everything — to do something that should have been done years ago.”

But he praised Mr. Camp for “coming forward with a piece of legislation.”

“Slam Dunk” Tax Code Revisions:

The Biblical phrase, “from each according to their ability, to each according to their need” (Marx took it from the Bible) is a pretty solid baseline for tax policy. When looking to fiscal reform, it is irresponsible (not to mention un-Christian, not that I am a religious man but many in this country purport christian values) to deprive societies most vulnerable of the bare minimum to lead dignified lives. This is not charity; young people need a minimum investment in order for them to become productive citizens. Those who are not lucky enough to be born into wealth are no less deserving of such opportunities. It is essentially what economists call “consumption smoothing” ; In law enforcement, it is know as “I’m the guy you pay later“.

(I am not all opposed to some sort of work-for-welfare program for older welfare recipients, so long as it is not subsidizing an unlivable minimum wage. If anything, the welfare-work should be on the multitude of public works projects needed on American infrastructure; public money for public works, not private profit.)

Two specific tax loopholes violate this general theory: offshore banking and corporate welfare:

There is a general consensus for closing a major loophole is offshore tax evasion / minimization. While tackling such an issues is a difficult task, we even have the requisite international support needed for tackling this  global issue. The only people who are opposed to closing such a loophole it seems are (surprise, surprise) Republican lawmakers. The U.S. government has already taken steps towards holding past violators, such as Credit Suisse, accountable. This is one half of the problem, the other half is taking all possible steps to prevent future tax fraud through laws like FATCA.

Another area worth exploring is the winding down of corporate welfare programs.

Obama has spent too much time learning his lessons. He came into power with a Democratic super-majority and squandered the opportunity in the pursuit of a Golden Age of political compromise and pragmatism. This goal has, beyond any shadow of a doubt, failed miserably over the past 5 years.

It seems Obama has finally learned his lesson. With an eye on regaining a Democratic super-majority in the 2014 midterm elections, He has shifted from his plan for a “Grand Compromise”, to laying out a grand vision for the role of the American government. Until that point (and depending on the outcome of the elections, perhaps past that point) he will use executive actions to push whatever reforms he can.

By clearly laying out his vision, Obama intends to let Americans decide what role they think the Federal government should play.

Disclaimer: It should not have to be this way. America should not need one party to have a super-majority to enact common sense policy reforms. Indeed, in the long run it is counter-productive to not have meaningful deliberation on major issues.

I would also like to commend David Camp’s effort of putting a tax reform proposal on the table (assuming that after 3 years, it carefully considers which loopholes to cut and which to keep). Although it is clearly not progressive enough, it offers a starting point for the tax code reform initiative. Furthermore, its mere existence cuts through the general malaise that has come to define our political system. The next step will be a bipartisan proposal (Mr. Camp’s proposal did not have any input from Democrats)

This, ladies and gentlemen, is what governance should look like; I for one do not care which side of the political isle it comes from.


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Economic Outlook: “American Winter”`

Yesterday a friend of mine, Adam Blejer, pointed me towards an HBO documentary, “American Winter”. He thought, rightfully so, that the message conveyed in the documentary was one that I may be interested in and have some insight on. Always eager to learn from my followers and get them involved, I looked into the documentary.

I should say now that I was unable to actually watch the documentary, as I do not have HBO on demand. What I was able to do was read the summary of the documentary by the producer, which can be found here. This actually helped me analyze the documentary more clearly for two reasons. One, I have the meat and potatoes of the documentary spelled out in front of me, I did not have to watch and take notes or worry about missing anything, it is all there for me to go back and check on. Second, I was able to see the underlying argument without getting emotionally wrapped up in the struggles of the people in the documentary. This would have made an unbiased critique difficult if not impossible.

Without further ado, an analysis of the documentarian’s message:

The first thing I analyzed was any message conveyed based on economic indicators. In the first paragraph, I saw something that could not look right. “Yet 46% of this country is living in poverty, or near poverty, and today we have the highest number of poor since we began keeping records.” This is a slight of word, as the official U.S. poverty rate as of 2011 was 15%–31% of that 46% may be living “near poverty”, but are not actually living in poverty.

One has to be careful, as poverty rates are based on a benchmark rate; set that rate too high and everyone is in poverty, set that rate too low and some people who are truly struggling to survive will not be counted. The census bureau is very transparent about how they find their numbers; an explanation can be found here. I will leave it up to you to determine whether the numbers are too high or too low, but that 46% was an obvious shock value number—many of those 31% living “near poverty” have much much more than even the “wealthy” in less developed countries.

Which brings me to my next point, about inequality in the U.S.: “The Gini coefficient is commonly used as a measure of inequality of income or wealth and is accepted as a fair method to compare income inequality in different countries.  According to America’s Gini coefficient of 0.450, the U.S. ranks near the extreme end of the inequality scale, comparable with Cameroon, Madagascar, Rwanda, Uganda and Ecuador.  China is significantly more equal than the U.S. with a Gini coefficient of 0.415, and India is leagues ahead of the U.S. on income inequality, with a Gini coefficient 0.368.  Even Russia is less unequal than the U.S., at 0.422 Gini.”

The Gini coefficient ranges from 0-1; the closer to 0 the more equally a countries income is distributed.The .45 number checks out, although it is significant lower once you account for taxes and transfers. There are structural issues that have lead to this inequality; low investment in social programs, preferential tax rates on capital gains and other subsidies which disproportionately go to the wealthy, and the decline of union power are all common examples.

However, there are notorious shortcomings for comparing Gini coefficients between countries. For one thing, the same Gini coefficient for two countries can mean different things. Whenever you aggregate numbers, information gets lost in that aggregation. Also, in some countries such as China and India, the most impoverished experience “extreme poverty”. While relative poverty of course exists everywhere, extreme poverty exists only in the developing world. For these reasons, it is irresponsible to say “The Gini coefficient…is accepted as a fair method to compare income inequality in different countries.” This is far from a consensus amongst academics and policy makers.

Next I examined the ethical argument over the welfare state, the “makers vs. takers” argument if you will. Paul Krugman has done a great job of highlighting how transfer programs tend to amount to inter-generational consumption smoothing; you borrow when you’re young, work and contribute when you’re in the prime of your life, and then retire and take from the system again. This formula has underpinned political economy and tax philosophy for decades if not centuries, and it works. In fact, there is really no alternative that works remotely as well in creating the opportunity for social mobility.

Here’s the filmmakers take on the subject:

“How can nearly half of our country be in such dire circumstances and yet our politicians chose this time of the most need in 80 years to cut budgets and social services all across the country?  It’s because there are such pervasive myths and stereotypes about those families who need help—they are lazy, they are takers, they are incapable, they made bad decisions—so we don’t need to care about them.  But as we made American Winter we found a very different story.  The families who we followed for this film are struggling, yet they are just like our friends, neighbors and members of our own family.  They are hardworking, loving folks who have had a bit of bad luck, a job loss, a health issue, a death of a parent, a handicapped child.  These events have set them back and then life becomes an uphill battle to get back on their feet again.”

This is a problem I tend to have with documentaries, is that they cherry pick information. Certainly some people who need help actually need it temporarily to help them get back on their feet. But you can be equally certain that there are some lazy people who rely on handouts their whole lives, people who “game the system”. It is because people see the world as black and white that it is so hard to work on reforms that can strengthen the welfare state and make it work more effectively. This is why politicians talk past each other, instead of deliberating and debating in order to come to reasonable compromises that work for the American people.

Another issue the summary touches on is the inter-generational nature of poverty; what economists refer to as poverty traps:

“In making American Winter we saw firsthand how stressed and scared these parents are everyday by the prospect of losing their homes, and by the daily struggle to pay their bills.  However, the most overwhelming part was seeing the kids who have lost hope for their future.   These kids see their parents work extremely hard, and the kids say to themselves, “we’re barely getting by everyday, how am I going to make it when I grow up?”  And losing that sense of optimism and hope does not bode well for a child’s future.”

“Studies show that it is cheaper to help families before they become homeless.  And it is cheaper to help families before the kids are traumatized by living with food and housing insecurity, because those kids don’t do as well in school and they are more likely to wind up on drugs or in the prison system.  Those costs to society will affect all of us for ten, twenty, thirty years to come.  Yet even though it is cheaper to help families, to get them to a place where they are stable and productive, we seem to turn a blind eye and tell these families that they are on their own.

Every one of us needs help at some time in our lives.  But the idea that families who need social services are “takers” is one of the most destructive myths of all.  The perception is that our tax system and our government disproportionally helps the less affluent at the expense of the wealthy.  In fact, the U.S. government spends $400 billion a year on tax policies intended to help families save and invest.  In 2010, the wealthiest 5% of taxpayers averaged a net benefit of $95,000 each, while the bottom 60% received an average benefit of $5 each.”

I have written about poverty traps many times here at NN, just search poverty traps in the search bar and you will see in how many different contexts poverty traps exist. I fully agree that it is cheaper and more effective to attack the root causes of poverty before they become a problem. I do not know the methodology the filmmakers use to come to their conclusion, but it fits into a general philosophy I have on the subject; that any money saved in the short run by cutting social programs will be dwarfed by increased future spending in the welfare and penal systems.

So while some of the figures and concepts the documentary pronounces may be a bit stretched (as is common with documentaries, as they are meant to have shock value), the overall message is one that I cannot (and do not wish to( refute. Income inequality is too high in America, and it is this way due to structural flaws in our fiscal and tax policies. Sequestration and other short term budget cuts are like putting a Band-Aid on a gunshot wound, it may stop the bleeding for a little but in the long run the problem will be worse.

Capital gains taxes remain too low, even as they have risen from 15 to 20% following the “fiscal cliff” deal. Joseph Stiglitz explains quite eloquently how this perpetuates financial bubbles and takes talent away from more sustainable fields (such as medicine, teaching, manufacturing; basically anything not associated with capital gains).

Meanwhile, no meaningful financial reform has taken place since the financial crisis. The same concept of “securitization” is beginning to rear its ugly head again. We must learn as a country from our past failures, and demand our elected officials enact policies that our in our best interests as a nation (I have often said that the only special interest group Congress should be worried about is the American people).

It is the job of the American people to hold their elected officials accountable, and vote for the politicians that support the policies that we as a nation know are right (or at least vote against politicians who support policies that have been tried and failed).