March 4, 2012
Daily Question

huskerred:

I’m going to ask this until I get some responses. It seems to be widely acknowledged that the US tax code is in shambles. What should be done to improve the system? Do we need different tax brackets, tax rates, etc? Do we need to throw out the entire system and start from scratch?

LTMC: From my standpoint, there are multiple solutions.  A flat tax on personal income with all credits and deductions replaced by an exemption up to a statutory percentage of the federal poverty line would simplify the code while creating inherently progressive tax rate that provides relief to the poor.

For example, let’s assume a federal rate of 35% on all income.  The federal poverty line for 2012 is roughly $11,000.  Let’s say we set the exemption at 133% of the federal poverty line.  That’s just about $15,000.  So let’s look at the tax burden of a few different taxpayers with different incomes:

1. $15,080 (minimum wage)

Income Tax burden: $80*.35 = $28 = <1% 

2. $25,000

Income Tax burden: $10,000*.35 = $3500 = 14% 

3. $35,000

Income Tax burden: $20,000*.35 = $7000 = 20% 

4. $45,000

Income Tax burden: $30,000*.35 = $10500 = 23.33% 

5. $55,000

Income Tax burden: $40,000*.35 = $14000 = 25.45% 

6. $550,000

Income Tax burden: $535,000*.35 = $187250 = 34.04%

As you can see, the functional rates are naturally progressive, but they increase at a decreasing pace as your income goes up, towards the limit of 35%.  And everyone always pay zero taxes on their first $15k of income.  

Now the numbers I’m using are just for demonstration purposes only.  You could easily tweak the numbers to one’s preference, whether you want to craft a proposal that would be roughly revenue neutral, increase revenue, or reduce it. But even a revenue neutral proposal of this sort would shrink the size of the federal bureaucracy.  You don’t need an expansive IRS when anyone who knows multiplication could figure out their individual federal tax burden.

This is just one proposal, of course.  And again, I stress that the numbers are for demonstration only, and don’t necessarily reflect a realistic breakdown of how the numbers would look in practice.  But the concept is there, and could conceivably be a solution that simplifies the code without sacrificing the poor on the altar of a horribly regressive tax system.

(Source: jgreendc)

December 21, 2011
Subjective Value, Redistribution, And The Ghost Of Christmas Welfare Enhancement

Slate discusses the economics of Gift Exchange:

In a system of monetary exchange, everything has more or less one price. In that sense, we can say that a Lexus or a pile of coconuts is “worth” a certain amount: its market price. But I, personally, would have little use for a Lexus. I live in an apartment building near a Metro station and above a supermarket; I walk to work; and driving up to New York to visit my family is much less practical than taking a bus or a train. So while of course I won’t complain if you buy me a Lexus, its value to me will be low relative to its market price. Similarly, I don’t like coconuts and I’m not on the verge of starvation. If you dump a pile of coconuts in my living room, all you’re doing is creating a hassle for me. The market price of coconuts is low, but the utility I would derive from a gift of coconuts is actually negative.  

In the case of the Lexus, the sensible thing for me to do would be to sell the car. But this would be a bit of a hassle and would doubtless leave me with less money in my pocket than you spent.  

This gap between what something is worth to me and what it actually costs is “deadweight loss.” The deadweight loss can be thought of in monetary terms, or you might think of it as the hassle involved in returning something for store credit. It’s the gap in usefulness between a $20 gift certificate to the Olive Garden and a $20 bill that could, among other things, be used to buy $20 worth of food at Olive Garden. Research suggests that there’s quite a lot of deadweight loss during the holiday season. Joel Waldfogel’s classic paper (later expanded into a short book) suggests that gift exchange carries with it an average deadweight loss of 10 percent to a third of the value of the gifts. The National Retail Federation is projecting total holiday spending of more than $460 billion, implying $46-$152 billion worth of holiday wastage, potentially equivalent to an entire year’s worth of output from Iowa.  

However, this value loss isn’t necessarily a bad thing, because it redistributes wealth to those that would otherwise have little:

Partially rescuing Christmas is the reality that a lot of gift-giving isn’t exchange at all. Rather, it’s a kind of Robin Hood transfer in which we take resources from (relatively) rich parents and grandparents and give them to kids with little or no income. This is welfare enhancing for the same reason that redistributive taxation is welfare enhancing: People with less money need the stuff more.   

This leads to my first guideline for efficient giving: Gift-giving should be redistributive. Reciprocity is a lovely sentiment, but the holidays are an excellent time to rebalance the overall family or friend group portfolio in favor of its needier members.

I think there’s two points to take away from this: 1) Value loss occurs in private exchanges as well (not just government programs).  2) If you don’t support redistribution, you clearly hate Christmas.

October 15, 2011
The Tragic, Hilarious “We Are The 53 percent” Movement

The conservative response to the “We are the 99 percent” movement is … hilarious. (And, sure, heartbreaking.) Conservative filmmaker Mike Wilson and vacuous right-blogger Erick Erickson joined forces to start“We Are the 53%,” a blog made up of contributions from the 53 percent of Americans who pay more in federal income taxes than they receive back in deductions or credits.

The project was kicked off by Erick Erickson, who announced that he works “three jobs,” by which he means being a professional television pundit, radio pundit and Internet pundit. There is a stunning amount of cognitive dissonance, misplaced resentment and class revulsion going on, even for a conservative Web project.

The site can’t even manage to correctly represent that 53 percent, with multiple contributors very clearly belonging to the 47 percent of people who make up the supposed parasite class. There is a blog dedicated to this confused minority. The best example is obviously this dog.

Let’s get this out of the way early: Pretty much every adult American pays taxes. Workers who are too poor to pay federal income taxes still pay payroll taxes, and property taxes if they own their home. Even the unemployed pay sales taxes. The poorest Americans — people who make an average of $12,500 a year — pay, on average, 16 percent of their paltry income in taxes. That is less than every other demographic, but the point of a progressive tax system is that 16 percent of a poor person’s income is a hell of a lot more meaningful to that person than 30 percent of a millionaire’s. It’s a simple concept, and one that most Americans agree with. And that simplicity and popularity is why the conservative movement has spent 100 years attempting to muddy the debate with misinformation. (They are quite dedicated, actually, to class warfare, in that they seek to align the shrinking middle with the elites in a war against the downtrodden.)

So a good number of people who pay no federal income taxes are simply lucky enough to be impoverished. The rest are beneficiaries of tax breaks and loopholes championed most vocally by Republicans. A member of “the 1 percent” (or, more accurately, the tenth-of-1 percent) likely considers these harried taxpayers “the 53 percent of people without the sense to hire a good accountant.”

Here’s my Tumblr idea, for Americans resentful of the free rides they imagine others are getting as they work themselves to the bone: “We are the 94 percent of people who claim never to have received government benefits who have actually directly benefited from government social programs.”

In conclusion, rockets.

October 4, 2011
Making The Case For Redistribution Through Progressive Taxation

Josh Harkinson documents a study published in IMF’s Quarterly Finance and Development, which demonstrates that rising income inequality correlates negatively with economic growth (i.e. a huge gap in income inequality is bad for the economy).

I’ve said this in the past, but it bears repeating: Progressives need to stop harping on the old “social justice” trope when making arguments for progressive taxation.  Supporters of progressive taxation have to be able to convince the average voter that redistributive tax schemes are actually good for the economy.  It’s not a new argument, but it’s not one that gets very much public face time.  I suspect this is because most Progressives don’t actually believe in their heart-of-hearts that taxing the rich is economically sound.  They just feel that the wealthy can afford to be taxed at far greater rates than the working class; i.e. they take a Consequentialist perspective.  And by itself, there’s nothing wrong with that.  But that perspective also tells us nothing about whether taxing the rich and redistributing their earnings to the working class via social service programs and robust government services is economically sound.  I believe that it is, and this study tends to confirm that view (although I’d agree that the way we do it today is enormously inefficient, and would much prefer a universal negative income tax and point-of-service model rather than having to hire an army of bureaucrats to adjudicate circumstantial eligibility and investigate fraud).

UPDATE:  On the topic of redistribution, I am reminded of this study which suggests that increasing the pay of Wal-Mart employees to $12.00/hour would result in an average increase per shopping trip of .46 cents per customer.  Common sense suggests that, if the off-setting price increase is that low, someone is already getting paid handsomely off Wal-Mart’s present pricing scheme.  But it’s not the average Wal-mart employee.  Draw your own conclusions about who’s actually getting that money.

August 15, 2011
The U.S.: Still Well To The Left Side Of The Laffer Curve

Yglesias pulls a quote out from a recent paper by Peter Diamond and Emmanuel Saez that all Progressives should read if they really want to understand the economic case for progressive taxation, rather than relying solely on valid-yet-vague ideas about social justice and fairness:

When a tax system offers tax avoidance or evasion opportunities, the tax base in a given year is quite sensitive to tax rates, so that the elasticity e is large, and the optimal top tax rate is correspondingly low. Two important qualifications must be made. First, as mentioned above, many of the tax avoidance channels such as re-timing or income shifting produce changes in tax revenue in other periods or other tax bases—called “tax externalities”—and hence do not decrease the optimal tax rate. Saez, Slemrod, Giertz (2011) provide formulas showing how the optimal top tax rate should be modified in such cases. Second, and most important, the tax avoidance or evasion component of the elasticity e is not an immutable parameter and can be reduced through base broadening and tax enforcement (Slemrod and Kopczuk, 2002; Kopczuk, 2005). Thus, the distinction between real responses and tax avoidance responses is critical for tax policy. As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be τ*=1/(1+1.5 x 0.57)=54 percent while the optimal top tax rate using a broader income base with no deductions would be τ=1/(1+1.5 x 0.17)=80 percent. Taking as fixed state and payroll tax rates, such rates correspond to top federal income tax rates equal to 48 and 76 percent, respectively. Although considerable uncertainty remains in the estimation of the long-run behavioral responses to top tax rates (Saez, Slemrod, Giertz, 2011), the elasticity e=0.57 is a conservative upper bound estimate of the distortion of top U.S. tax rates. Therefore, the case for higher rates at the top appears robust in the context of this model.

For those unfamiliar with the Laffer Curve and its impact on tax policy, see my post on the subject here. 

August 8, 2011
Redistribution: It Works!

Peter Frase has an excellent post whose points of emphasis a somewhat disagree with highlighting the fact that globalize/grow/give is in fact a perfectly viable strategy for increasing people’s living standards. He notes the contrast between the change in inequality over time in Germany and the U.K.:

Here we see something very interesting. Before you take taxes and transfers into account, the rise in inequality in Germany looks very similar to what happened in the UK–indeed, the two countries converge to almost the same value by 2005. But disposable income inequality has stayed flat in Germany, because the German state has used taxes and transfers to counteract rising inequality.

As he also notes, “the transfers included in disposable income are only cash transfers and ‘near-cash’ benefits (like food stamps), not in-kind services like health care.” Given the large and growing shares of GDP accounted for by health care and education, and the large role of state provision in these sectors, that means this doubtless understates the amount of redistribution that is happening in practice in both Germany and the United Kingdom.

Frase wants to make the lesson of these charts that people like me have “to either make [our] peace with the sources of working-class power that currently exist, or else come up with workable models of what might replace them.” That’s fine by me. But to me the real lesson here is that, once again, it’s not clear to me what the alternative policy agenda for residents of Anglophone countries is beyond pushing for policies that are friendly to economic growth and for taxation of high-end consumption to transfer money to poorer people. It’s great that Germany has a strong labor movement, and that surely explains why it’s politically easier to enact progressive policies in Germany. But even in Germany where they have a strong labor movement they’re not doing anything miraculous to control inequality or boost living standards. It’s taxes and it’s transfers. And of course differential union strength is hardly the only difference between U.S. and German political institutions. If the U.S. Senate operated by majority vote, we would have enacted some steeply progressive tax measures in the 111th Congress. Conversely, in many European countries growing racial diversity seems to be somewhat undermining political support for the welfare state, a problem American progressives have been coping with forever.

July 10, 2011

atomicsocialist:

anarchistreview:

These are possibly the 5 best sentences you’ll ever read

18goingon80:

1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

2. What one person receives without working for, another person must work for without receiving.

3. The government cannot give to anybody anything that the government does not first take from somebody else.

4. You cannot multiply wealth by dividing it!

5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation.

And my retort

1. You cannot rely on anyone’s greed for your own well being

2. When there are strides in efficiency, many regular people are left behind without opportunities for employment 

3. A capitalist is only capable of paying for his lifestyle with your labor. Every yacht, jet and mansion he owns is a theft from you. 

4. Actually you can. The more money a person has, the less likely they are the spend it. Divisions of wealth from the rich to among the poor actually does create more wealth, since now it is spent and the money multiplier effect comes into action.

5. This is true, every man must work. But the market does not have enough jobs for all the laborers out there. So do we let these people starve? Leave them subject to private charity that may not always come through? Letting the poor die in the streets is the hallmark of the end of an empire as well too. 

As a socialist, I believe that a man who cannot find a job is not an economic indicator or a byproduct of the market, he is facing a true tragedy in every form. And if the private sector will not help him avert tragedy, then the state must help him. 

1 wealthy man needs 1 house, 1 car, 1 blender, 1 refrigerator, and 1 pair of shoes for each occasion.  What he hasn’t already spent on luxury he will save for future use, due to the phenomenon of Declining Marginal Utility.

100 poor men need 100 houses, 100 cars, 100 blenders, 100 refrigerators, and 100 pairs of shoes for each occasion.  Since these individuals have more difficulty meeting their needs due to less cash flow, money given to the poor has greater marginal utility than when it simply sits in the hands of the wealthy.

The trick is to find a system of redistribution in which the inherent inefficiencies of redistribution are outweighed by the additional economic activity generated by putting money into the hands of individuals who will generate more Demand-side economic activity.

The original 5 statements are also probably one of the most profound examples of the is/ought fallacy I’ve ever seen.  They are over-simplistic to the point that they border on deepities.

(Source: conservativebrew, via huberthumphreydeathrally-deacti)

April 29, 2011
Study: The Rich Don't Flee High Tax States

When New Jersey Gov. Chris Christie was presented with a new state tax on the wealthy, he vetoed it. He said:

You’re not going to fix this tax situation by continuing to load more and more taxes onto people who have both the ability to leave the state and the inclination to leave the state if they feel as if they are being treated unfairly.

It’s not just Christie. Democratic governors in New York and Maryland recently dropped extra taxes on the wealthy from their budgets, citing the same concerns.

But two new studies show there is little evidence that the rich flee high-tax states.

 

"Taxes [have] essentially no impact on causing people to leave a state," says Jeff Thompson, of the Political Economy Research Institute at the University of Massachusetts, Amherst.

In a study tracking 18 years of migration between states in New England, Thompson found that people mostly move for job-related reasons. They go where the jobs are, regardless of whether it’s low-tax New Hampshire or higher-tax Maine.

"If you’re living in a state and your tax bill goes up by a thousand or two thousand dollars," he says, "that … pales in comparison to what it would cost you to actually move. And it might not be worth it to have to be farther away from your job, farther away from your friends."

And Thompson says the stickiness of where you live is just as strong for those with higher incomes. In fact, they often have bigger houses, and businesses they can’t move, and more ties to a community.

So why the persistent idea that the rich are ready to pack up at a moment’s notice if state taxes get bumped up?

Part of it is the power of anecdotes.

People move all the time. People complain about taxes all the time. And sometimes those people are famous economists — like, say, Arthur Laffer.

"I left California and I moved to Tennessee, because Tennessee has no income tax," Laffer tells me.

Laffer is famous in part for the Laffer Curve, which describes the way higher taxes can cause people to work less, which in turn can lower the amount of tax revenue the government takes in.

"Those states with no income tax have grown a lot, lot faster than those with the highest income tax rates," Laffer says. "So it’s not just the rich who move. But the businesses move as well, and then the workers go with them."

But just because there are people moving out of New York and California and New Jersey, you can’t automatically blame taxes. A lot of those low-tax states have sunny weather, cheap land and relatively healthier economies. It’s a complex equation. 

What researchers needed was a natural experiment to tease out the influence of taxes. And they found just such an experiment, in Chris Christie’s home state of New Jersey.

In 1994, New Jersey increased taxes on income over $500,000 by 2.6 percent. And what happened?

"The vast, vast majority just don’t respond to the tax. They stay put," says sociologist Charles Varner of Princeton University.

Varner compared people who were just under the line for the new tax — who made, say, $400,000 a year — with those who suddenly had to pay more taxes. 

According to Varner’s study, both groups moved away from New Jersey at the same rates. 

"The effect on migration is minimal," he says.

Varner says there may be plenty of reasonable arguments for avoiding new taxes on the rich. You can argue that new taxes aren’t fair. You can argue that they affect investments in new businesses. But a mass exodus? So far, no one has proved it.

April 14, 2011
Why Progressive Taxation?

ilyagerner nails it:

Third, and most importantly, when we talk about “fairness” we need to use the right units. The Economist post uses dollars. But the utility of money is not flat. Suppose we have two families. One has a monthly income of $1,000. The other has a monthly income of $10,000. We’re going to take away 10% of both families income. The family with $1,000 will now need to choose whether to take that money out of housing, food, gas, utilities, or something else we would consider essential. The family with $10,000 per month will need to reduce contributions to savings, scale back on luxuries, or perhaps find a smaller—but still opulent home. The life of the family living near the poverty line got 30% suckier when 10% of the income left. The wealthier family’s life got, maybe, 2% suckier. A “fair” tax code would evenly distribute the actual burden of the tax code, perhaps by making everybody’s life 3% suckier. This would require a far more progressive tax code than we currently have.

Progressives measure fairness in the tax code based on the relative detriment that a given tax rate has on an individual based on how much of their income is required to pay for basic necessities.  This impact is then off-set by comparing it to the relatively trivial detriment that is caused by transferring a low-income tax-payer’s prospective burden to higher earners.  It has nothing to do with punishing success; it’s about the comparative economic impact of taxation.  The average person near the wage floor spends the vast, vast majority of their income on necessities: food, shelter, clothing and transportation.  And even then, most of them do not have health insurance, and rents alone can account for 40-50% of their income.

The comparison is made in terms of detriment to livelihood: assume for sake of argument that food, clothing, transporation, and housing cost an average of $10,000/year.  A person making 15k/year now has 5k to spend on everything else in their life, including utilities, shoes, toiletries, car repairs, furniture, what little entertainment they can afford, etc. A person making 100k, on the other hand, has 18x more income to rely on after necessities are met: if we were to tax both people flatly at 20%, the 15k/year person’s finances would probably be devastated; the loss of $3,000 would be economically catastrophic at that income level.  The person making 100k/year, on the other hand, would have 70,000 left over after taxes + necessities.  Far from being put in the poor house, the higher earner’s expendable income is still exponentially larger.  His sufferance will be in luxury, not in necessity.

Now under this arrangement, the total revenue raised from both parties at a 20% flat rate would be 25k.  Shifting the 15k/year person’s tax burden onto the 100k/year individual would still leave him with 65k/year left over.  While this results in more sacrifice from the high earner, it relieves an economically catastrophic burden from the low earner, at relatively minimal impact to the high earner’s standard of living.

And that’s the moral calculus of progressive taxation; fairness is measured in terms of the relative impact of a tax burden on a person’s finances, rather than the amount paid in real terms.  The former takes into account our common humanity.  The latter does not.

April 4, 2011
"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

Adam Smith, Wealth of Nations, Book V: Of the Revenue of the Sovereign or Commonwealth

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