This morning’s AM Reads linked an article from Annie Lowery. The graph below is a highlight from the study she cited.
Posts Tagged ‘Tax Policy’
Whatever its past political advantages, the payroll tax now imposes an unnecessary burden on a stagnating economy. In an era of mass unemployment, mediocre wage growth and weak mobility from the bottom of the income ladder, it makes no sense to finance our retirement system with a tax that falls directly on wages and hiring and imposes particular burdens on small business and the working class.
What’s more, the payroll tax as it exists today can’t cover the program’s projected liabilities anyway, and the pay-as-you-go myth stands in the way of the changes required to keep Social Security solvent. All of the components of a sensible Social Security reform — means-testing for wealthier beneficiaries, changing the way benefits adjust for inflation, a slow increase in the retirement age — become easier if the program is treated as normal safety-net spending rather than an untouchable entitlement with a dedicated funding stream.
President Obama has proposed much of the needed adjustment, including eliminating the special treatment of dividends and raising the tax on capital gains to 20 percent for the rich.
Personally, I would go further and raise the capital gains rate to 28 percent, right where it was during the strong recovery of Bill Clinton’s first term, and grab hold of a total of $300 billion of new revenues over the next decade.
Rattner also offers the graphic below as support.
The Economist this week includes a summary (above) of some of the major tax policy proposals being tossed around. It also includes this blurb about some GOP ideas:
One way this could be done is to target deductions that primarily benefit the rich. During the election campaign, Mitt Romney proposed paying for big marginal rate cuts by setting a cap on total deductions. The Tax Policy Centre, a think-tank, reckons a cap of $50,000 would raise $749 billion over ten years, comparable to the $800 billion that Mr Boehner entertained during failed negotiations with Mr Obama in 2011. Importantly, this fix would make the tax system much more progressive: 80% of the additional money would come from the top 1% of earners. This has helped draw interest from some Democrats.
A slightly different proposal by Martin Feldstein, a prominent Republican economist, and Maya MacGuineas of the Committee for a Responsible Federal Budget, a think-tank, would cap the tax benefit of itemised deductions at 2% of income for all households. Mr Feldstein reckons that would raise more than $2 trillion over ten years, although almost all families would pay more tax, not just the rich.
Timothy Taylor reviews some of the CBO’s findings in its Effective Marginal Tax Rates for Low- and Moderate-Income Workers report. He concludes (referencing the graph below in part):
These high marginal tax rates on those with low and moderate levels of income raise some questions for those on all sides of the tax debates. For those who don’t believe that high marginal tax rates have much affect on incentives to work at higher income levels, like households earning $250,000 or more per year, consistency would seem to suggest that they shouldn’t worry too much about incentives to work at lower income levels, either. For those who express a lot of concern about how high marginal tax rates would injure incentives to work for those at the top income levels, consistency would seem to suggest that they express similar concern over lower marginal tax rates for those at the lower and moderate income levels, too–which means making programs like the Earned Income Tax Credit, food stamps, welfare, and others more generous, so that they can be phased down more slowly as people earn income.
From the report itself, I particularly enjoyed this section on marginal tax rates and the decision to enter the workforce.
A person’s marginal tax rate influences many different decisions about working: whether to increase or decrease the number of hours worked, bargain for wages or nontaxable fringe benefits, get or quit a second job, or enter or leave the labor force. For people who are already working, an increase in marginal tax rates on additional earnings lowers the financial gain from working additional hours, which in turn has two effects:
- Hours worked tend to fall from their initial level because other uses of time become relatively more attractive; and
- Hours worked tend to increase from their initial level because the amount of additional disposable income (income after accounting for taxes and transfers) available to reach consumption and saving goals is lower.
Because those two effects work in opposite directions, the net effect depends on which one dominates.On balance, in CBO’s judgment, increases in marginal tax rates on earnings tend to decrease the supply of labor by inducing people already in the workforce to put in fewer hours or to be less productive. The responsiveness of labor supply to tax changes varies across groups. On average, working-age men are not very responsive to changes in marginal tax rates. Married women, who tended in the past to be the lower earner in the household, typically decreased their hours of work—on average—when marginal tax rates rose. In recent decades, their decisions about decreasing or increasing the number of hours worked have become more similar to those made by men.
Marginal tax rates that result from a relatively large increase in income are relevant to the decision to enter the workforce. For instance, because the earned income tax credit increases disposable income for all eligible workers, the ability to qualify for the credit makes work more appealing. Studies have found that expansions of the EITC between 1986 and 1996 significantly increased the movement of single mothers into the workforce but had little effect on the number of hours they worked.
This, I think, adds some granularity to the debate of the disincentives of things like the EITC; though I would add one very important caveat. The work incentive is only a component of the overall picture related to tax policy benefits for the unemployed and working poor. As the fiscal debate continues in Washington, I suspect the quantification of specific tax and spending policies will become very popular (rightfully so). What I will be interested in seeing is if there is any quantification of secondary and tertiary effects of policy changes. For instance, I have been reading quite a bit lately about the idea of progressive consumption taxes (something I’ve written about in the past) as an alternative to income taxes. Beyond the practical and political challenges of implementation; there are two problems I see with such a system (not to imply that these issues are without remedy).
- A PCT does not easily allow for fiscal policy shocks through the tax code. While tax preferences for certain behavior are generally distortionary and not beneficial, things like education and HSAs ought to be encouraged. Obviously tax relief for such spending could be implemented, but I think it amplifies some of the practicality concerns.
- I have seen no writing as of yet on the transition costs of such a system. Businesses, individuals, investors, savers, spenders, charities, etc. have all developed systems based on an income tax structure. Not to say the status quo is best by virtue of being the status quo, but there are certainly costs for any change that must be analyzed.
Point 2 above really goes to my concern in the current and upcoming debate over taxes and spending. Will we properly access the impacts of our various tax and spending proposals? Will we consider the fact that by incentivizing increased transitions from the unemployed poor to the working poor without increasing HHS benefits, we are potentially disincentivizing focusing on children’s behavior.
The numbers mandate action on the fiscal front and I am very much in favor of creating work incentives, but that probably also means maintaining strong familiar support for certain segments of society.
Scott Sumner was the sole source of AM Reads this morning and here he makes his second appearance on the blog today. Writing about tax policy he makes a suggestion about which he concludes:
The combined effects of both plans would reduce MTRs for everyone. More importantly, the net effect of these two changes would be that 99% of non-self-employed people would not have to file income tax forms. The IRS would simply withhold the appropriate amount of wage and salary income, and that would be the end of it. For those lucky people (like me!) the income tax would become essentially identical to the payroll tax, except with a more complex rate structure.
Citizens of most industrial countries have demanded more public services as they have become richer. And they have been by and large willing to pay more taxes to finance them. Since 1965, tax revenue raised by governments in the developed world have risen to 34 percent of their gross domestic product from 25 percent, on average.
The big exception has been the United States. In 1965, taxes collected by federal, state and municipal governments amounted to 24.7 percent of the nation’s output. In 2010, they amounted to 24.8 percent. Excluding Chile and Mexico, the United States raises less tax revenue, as a share of the economy, than every other industrial country.
The article goes on to look at some of America’s oddities when it comes to taxes. Interestingly enough, when considering the OECD reported total tax revenue as a percentage of GDP, the U.S. and the UK have been essentially level (with slight reductions) in the last 40 years of fully reported data; of course the UK is still about 10% higher than the United States. I’ve highlighted some of that information below.
This morning’s AM Reads included a post by Adam Ozimek at Modeled Behavior that suggests the NYC soda ban has had unintended consequences. He writes about a business owner who has thousands of dollars poured into large drink containers of which he will now have to rid himself. But isn’t that the point of the ban? How is expelling large containers from NYC not an obvious (and intended) consequence of a ban on such containers?
The debate over preferences for and the utility of large soda containers certainly has merit. It may be that a ban on serving drinks that have 25 calories per 8 ounces of liquid in a 16 or more ounce container is not optimal for the people of New York. Of course there are other options. Drink sales taxes by the ounce? Or perhaps by the calorie? The city could simply find the optimal level of taxation for achieving their desired consequence. This still means that Mr. Goldman from the Ozimek post overpaid for his soft drink containers; still, maybe he will save money in the long run when his friends and neighbors that are on the margin of debilitating obesity are able to remain in the workforce at some point in the future.
Only time will tell if Michael Bloomberg’s intended unintended consequence will actually make New Yorkers healthier.
Sorry for the lack of posts this week (I’m on vacation in Chicago). While sitting in Midway airport I just read an interesting post by Will Wilkinson at Democracy in America. He concludes:
Perhaps reducing income inequality would by itself improve the quality of our democratic institutions or reduce the risk of a socially destabilising sense of exploitation and stratification. Perhaps. But Mr Obama’s notion that the rich get more out of our common institutions than they put in is questionable, to say the least. And his suggestion that opposition to higher top income-tax rates could only be based on by-the-bootstraps social atomism is a silly bit of bad faith.
The entire post is worth reading for its honest assessment of success and Mr. Obama’s arguments about taxation. Unlike some of the commenters, I think Wilkinson, while critiquing the President’s statement, makes a clear break with hyper-capitalist ideology that would say success is the sole product of an individual.
Two economists from the St. Louis Fed, Michael Owyang and Katarina Vermann, have published a paper on the effectiveness of smoking bans. They conclude:
Nonetheless, the results of this paper imply that increasing cigarette taxes may be more effective in changing smoking behavior than implementing a ban. In the majority of the estimates, the magnitude of an increase in cigarette prices is larger and of greater statistical significance than any of the magnitudes for an individual ban or the aggregate effect of all three types of bans. Hence, increasing taxes appears to be more effective in reducing the number of smokers. This finding is especially true in analyses of current smokers and their attempts to quit smoking: In all models of smoking cessation attempts, the ban variables are neither statistically nor economically significant, but the price variables are.
Marginal Revolution guest blogger Mark Koyama looks at the history of centralization of government, subsequent taxation and growth thereafter of European economes. He notes:
The implication of this argument is that an increase in the measured size of central government need not have been associated with an increase in the total burden of government. Rather the total deadweight loss of all regulations and taxes could have gone down in the 18th and 19th centuries, even as the tax rates imposed by the central state went up.
Koyama provides the figure below as some evidence.