Relevant and even prescient commentary on news, politics and the economy.

Estate tax and extension of Bush cuts generally

by Linda Beale
crossposted with Ataxingmatter

Estate tax and extension of Bush cuts generally

According to an interview with Treasury’s Michael Mundaca reported in the Wall St. J. today (Sept. 13, 2010), Congress and the Obama administration are discussing a possible bill to allow estates that pass in 2010 to have the 2009 or the 2010 law apply. See Martin Vaughn, Estate Tax Choice May Be In Works For 2010 — Treasury Official, Wall St. J..

Does that make sense? Probably not. The problem exists because the gimmick was adopted by the GOP to pretend that the cost of all their tax changes wasn’t as big as it actually would be if the changes were permanent reforms rather than temporary. Allowing an election doesn’t make sense, but neither did the original Bush tax cuts, that provided a gradual phasing out of the estate tax over the years of the Bush regime with a complete repeal for one year in 2010 and then a resurrection of the 2001 laws in 2011. But how Congress deals with that sunsetting gimmick now will determine a great deal about the economy in the future.

Regretably, politicians hear the loud ranting from the tea partiers and others, and so, as the New York Times reported on Saturday, in an article by David Kocieniewski, Tax Cuts May Prove Better for Politicians Than for Economy, NYTimes, Sept. 11, 2010.

Obama at least knows that passing a new tax cut for the wealthiest 2% makes very little sense–they will save it or invest it overseas; they are unlikely to spend it on consumer goods that create new production demand in the economy or use it to create new, entrepreneurial businesses that hire people. But Obama wants to create billions in new tax breaks for businesses that make no sense at all–such as making the R&D credit permanent (just a tax break for R&D that businesses have to do to stay viable) or providing 100% expensing (just a tax break, and likely to result in purchases of equipment from overseas, thus shipping jobs out of the country rather than helping jobs domestically).

Meanwhile, the Republicans generally haven’t ever seen a tax cut they didn’t like (unless it is one targeted at the lowest-income Americans). They make ridiculous claims such as the one that not providing an extension of the Bush tax cuts for the wealthiest Americans will stifle small businesses and hurt job creation. Ridiculous, because very very few Americans who receive income from small businesses will be much impacted by letting the tax cuts for the wealthiest Americans lapse as currently set by law (only 2% of small business owners receive more than $250,000 of income from their business) and those with small business income aren’t really encouraged to plow it back into the business by cutting their income taxes. See, e.g., William Gale, 1Five Myths About the Bush Tax Cuts, Washington Post, July 30, 2010 (hat tip Linda Galler for reminding me about this article).

The Times article reports on the CBO’s analysis of short-term effects of policy decisions, which concluded that (to quote the Times’ description) “extending the tax cuts would be the least effective way to spur the economy and reduce unemployment” while tax cuts for the rich “would have the smallest ‘bang for the buck’ because wealthy Americans were more likely to save their money than spend it.” The CBO had more support for payroll tax relief, since those cuts in taxes would got to the people who are most likely to spend it in ways that stimulate the domestic economy. The problem I see with payroll tax cuts is not who they are targeted to benefit but the result that can be misused by the right-wingers who want to decimate Social Security and Medicare–a payroll tax cut results in less money going into those coffers, which just feeds the ridiculous notion that the payroll tax programs are nearing bankruptcy. No sense in giving the entitlement-haters more ammunition. Better would be a pre-bate of income tax amounts, including a negative income tax refund to those who won’t pay any income tax but will pay payroll taxes.

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Genetic Information, Health Insurance, and "Socialized Medicine

by Maxine Udall
re-posted Maxine Udall Girl Economist with authors permission

Genetic Information, Health Insurance, and “Socialized Medicine”

Brad Delong provides an excellent blog about U Cal’s genetic testing of students and the likely ways in which genetic information would be used by private health insurers, not to manage risk better, but to sort on it better, thereby defeating the ostensible purpose of insurance. Disease prevention and health promotion over the life cycle should and would be the objective of any health insurer likely to bear the costs of all your future illnesses and injuries. Of course, our fragmented US system does not provide the incentives to do this. The system most likely to align short and long term health risk management objectives (and (I would add) to reduce health care costs in the long run) is a single-payer system, which the US is not likely to have any time soon.

The problem with the current system is that if my genes predict a hip fracture at 70, the average private or employer-based plan should have little or no interest in incurring costs to prevent it since they are unlikely to bear those future costs. I will age into Medicare several years before age 70 and the costs will fall to the US (payroll-)tax payer. On the other hand, Medicare and US taxpayers have a real interest in preventing disease and promoting health over the life cycle since many of our (bad health) chickens come home to roost after age 65-67. Those of us who are younger and still working are on the hook for at least some of those costs or will face reduced future Medicare benefits because of their increasing share of national output.

As in the financial sector, private health insurers have offloaded much of the high risk (and costs) in health insurance markets onto US (payroll-) taxpayers, who pay for much of Medicare and Medicaid. These are two programs that became necessary because private markets failed to provide insurance for individuals and families characterized by high risk of medical expenditures: the elderly and the poor (who are often poor because acute and chronic health problems prevent them working). Mercifully, our ethics and our values require them to have access to health care. Hence, we have two government run programs: Medicare for those over 65 and Medicaid for those who are poor children, poor chronically ill adults, poor elderly adults in nursing homes, or poor pregnant women (with some variation in eligibility thresholds across states).

Yet the spectre of “socialized medicine” prevents us moving to single payer, where the incentives for prudent life cycle management of risk across all age and income groups would be better aligned. Why, when we already have what is in effect single payer for the elderly and the poor, do some believe that single payer is “socialized medicine” and why do they fear it so?

I gained some insight into this recently when an elderly relative started complaining about “Obamacare” and how it would lead to “socialized medicine.” Knowing the person had heart surgery courtesy of Medicare and was receiving ongoing monitoring and care, I said, “I didn’t realize you were so unhappy with Medicare.” To which I received the reply: “I’m not talking about Medicare, I’m talking about socialized medicine.”

“How is Medicare different from socialized medicine?” I asked.

“Medicare isn’t socialized,” came the reply. “I pay for it. I pay every month and when I’ve had surgery, I’ve had to pay some of it. Medicare is like any other insurance.”

“Well,” I said, “I know you’re paying a premium for Part B and I know there are copayments and deductibles, but Medicare is a government run health insurance program.”

To which the reply was: “But I’m talking about socialized medicine. You know that whenever the government gets involved in anything, it never does a good job.”

“I had no idea you were having problems with Medicare.” said I. “I always had the impression you were pretty satisfied with it. And with the VA, too. I know you’ve used the VA for some care recently. What problems have you had with Medicare or the VA?”

“Well, none with Medicare or the VA, but I’m not talking about Medicare. I’m talking about socialized medicine.”

“So you’re happy with Medicare?”

“Yes.”

“Would you mind if your [adult] children could buy into it? Your son is unemployed. Would it be OK if he could buy into Medicare?”

“Well, sure. As long as he has to pay like I do.”

You were all wondering how someone could say, “Keep your government hands off my Medicare?” Well, there you have it. Now that I’ve told you, I’m still not sure I understand it. It was one of the most frustrating and at the same time enlightening conversations I have had in a long time. The person with whom I was conversing is intelligent, educated, and not senile.

I’m just not sure how to use the above information. I was unable to persuade my elderly relative. I confess that since the conversation, I have despaired that the national conversation will ever be much better

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Who coined ‘Catfood Commission’?: a Contest!

by Bruce Webb

(A contest with no prizes, AB doesn’t have fundraisers or sell t-shirts and is lucky if ad money keeps the servers on. And this is just a solo effort by me anyway.)

‘Catfood Commission’ or alternately ‘Cat Food Commission’ apparently started as a lefty-blogger in-joke but has since caught on in a big way, to the point that it is moving the messaging on Social Security. For example below the fold you will find an invite to a counterprotest in DC that hit my in-box specifically using this theme. And note they don’t even have to explain the reference directly, this one went viral in a big way. So who gets credit?

Early contenders are Digby of Hullabaloo and Jane Hamsher of FireDogLake but they might have just picked it up from their commenters or bloggers. A preliminary search on ‘Catfood Commission’ turns up this one from Lambert at CorrenteWire on June 16th, but already seems to be assumed to be familiar to the sites readership Cat Food Commission is strategic default by the rich. I’ll be poking around and updating as I find earlier cites, others can put candidates in the comments. But somebody deserves credit for this one.

(Update 1) So far it looks like Jane may have conceptual credit, she drew the connection between the Peterson inspired Fiscal Responsibility Commission that was supposed to come out of the Fiscal Responsibility Summit all the way back in Feb 2009. Hedge Fund Billionaire Pete Peterson Key Speaker At Obama “Fiscal Responsibility Summit,” Will Tell Us All Why Little Old Ladies Must Eat Cat Food. But I am still interested in finding the first citation of ‘Catfood Commission’ specifically referring to the Obama Commission.

Update 2) A search at Digby shows she drew the same conceptual connection a few days after Jane but first seemed to use the label ‘Catfood Commission’ in connection with the attempt to attach Conrad-Gregg to the Debt Limit Bill in this post from Nov 12, 2009 It’s Baaaack

Not that it ever went away. The catfood commission is the Zombie that has been clawing at the door since Obama was elected:

Please join the Americans United Protest at the Young Guns event tonight at 5:30 outside Johnny’s Half Shell near Union Station. There will be a big display of cat food backing our protest against the Republican plan to gut Social Security.

Seniors, Activists Gather for Cat Food Feast; As Republican “Young Guns” Take Aim at Social Security, Medicare
Reps. Paul Ryan, Eric Cantor Unveil New Book, Old Plan to Force Millions of Seniors into Poverty

On Tuesday, September 14, 2010 at 5:30 p.m., seniors and advocates will gather for a symbolic feast of “Cat Food on the Half Shell” outside the restaurant where Republican leaders will snack on lobster and tout their plans to gut Medicare and Social Security and force millions into poverty.

Ed Coyle, National Executive Director of the Alliance for Retired Americans will detail the potential damage that could result if Rep. Paul Ryan, Eric Cantor and Kevin McCarthy’s misguided plans to replace Medicare with vouchers to buy private insurance and to gamble your Social Security on Wall Street take affect under a Boehner-led Congress.

What: Public Protest; Date: Tuesday, September 14th; When: 5:30 pm EDT (event will end by 6 pm)
Where: Side walk outside Johnny’s Half Shell 400 North Capitol Street, NW (1 block from Union Station) Corner of North Capitol and Louisiana Ave. (in DC)

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Corporate Tax Rates and Unemployment

by Mike Kimel

Corporate Tax Rates and Unemployment
Cross posted at the Presimetrics blog.

Update: Reader JzB has noted that a large drop in the top marginal rate that appears in graph two may not have occurred. At this point I think I made a transcription error in pulling the data. I will check the numbers when I get a chance and redo the post. Apologies.
________________________
I’ve been kind of swamped, low on sleep, and doing a few book related things in my few waking hours that don’t work or parenting (buy a copy of Presimetrics!!!!), so posting has been light. But I thought I’d do a quick and dirty post today about a hot topic – the effect that taxes on businesses have on unemployment. The usual argument is that the lower the taxes on businesses, the more money they keep and pump back into, well, doing business, and thus, the more people they end up hiring. But is it true?

Now, since the talk right now is about cutting payroll taxes in particular, ideally I’d use that data. However, in a quick perusal at the IRS’ site, all I found was the corporate marginal tax rate. However, the folks who suggest tax cuts as a way to boost hiring aren’t particular – most of them feel any tax cuts will lead to more hiring. So let’s check that, at least, shall we?

Figure 1 below shows the data used in this post; the top corporate marginal tax rate (obtained from the IRS) is on one axis and the unemployment rate for individuals sixteen years and over (from the Bureau of Labor Statistics) is on the other axis. The latter series begins in 1947, but I decided to start with 1948 just to be far enough off from WW2 to avoid that effect as much as possible.


Figure 1

Now, consider the correlation between the top corporate marginal tax rate and the unemployment rate. If it is true that lower taxes = lower unemployment, the correlation between the two series should be positive. A positive correlation means the series should move more or less in the same direction; as tax rates rise, unemployment rises, and as tax rates fall, unemployment falls.

If the correlation is, in fact, negative, that means that lower unemployment tends to happen when tax rates are higher. Correlation may not be causation, but it would be very hard to argue that cutting taxes on corporations leads to lower unemployment if we do not see a positive correlation between the two series.

Now, obviously, it may take time for tax rates to do whatever magic they might have. So Figure 2 looks at the correlation between the top corporate marginal tax rate and the unemployment rate in the same year, the unemployment rate the next year, etc., all the way through ten years out. Its really hard to see how the effect of tax rates should last beyond a couple of years, but I figured I’d be thorough and put up the figures. I’ll take a pass at interpreting them, but feel free to reach your own conclusions.

Additionally, because whatever effect tax rates might have on unemployment might change over time, each correlation is computed several times: once for the entire 1948 – 2009 sample, a second time for 1960 – 2009, a third time for the period since 1970, a fourth for the period from 1980 and a fifth time for the 1990 – 2009 period. (I didn’t look at just post-2000 because the top corporate rate has been frozen during that period.)


Figure 2.

So what does this say? Here’s my interpretation. If you look at the entire data set, the correlation between tax rates and unemployment appears to negative. That is to say, lower unemployment rates tend to be associated with higher corporate tax rates, not lower ones. Fast forward to the 1970s, and you see some of the oft-stated effect; higher taxes do seem to be associated with lower unemployment, and that effect becomes even stronger when you focus on the 1980s and beyond. However, the whole thing falls apart when you move into the 1990s and beyond, when the correlation is clearly negative, at least for the early years. The effect in out years is positive, but once again, its hard to see how the effect would lag that long. If I had to guess, the 1970s and 1980s were an aberration but I don’t have time to develop that thought right now.

My second interpretation… if I wasn’t some random guy who enjoys looking at data in an attempt to understand the world, but rather someone determined to reach a certain pre-determined conclusion, I’d pick my time sample very, very carefully.

How do you see it?

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Private-sector leverage says that it’s not Bill Clinton

What’s your answer? “Thinking about the past few decades… to the best of your knowledge, which ONE of the following U.S. Presidents do you think did the best job of managing the economy?”

  • Bill Clinton
  • Ronald Reagan
  • Barack Obama
  • Lyndon B. Johnson
  • George W. Bush
  • Richard Nixon

That’s question #11 of the the Allstate-National Journal Heartland poll. 42% of the 1201 adults polled last month answered Bill Clinton.

I wonder why near half of those polled think that Clinton did the best job of “managing the economy”. Using one simple metric, private-sector financial leverage (accumulated dissaving), Clinton ranks among the top three worst economic managers, behind George Bush (Jr.) and Ronald Reagan.

The chart illustrates private-sector leverage as a stock of debt to GDP indexed to the start of each Presidential term. Therefore, the numbers are not the debt ratios, rather the appreciation of the debt ratios since the onset of each President’s term. The data are from the Fed’s Flow of Funds Accounts.

The sector financial balances model of aggregate demand posits that fiscal policy must shift in order to normalize GDP amid deviations of the private-sector surplus (desire to save) and the current account (see Scott Fullwiler’s article on the sector financial balances model of aggregate demand, which references similar work by Bill Mitchell and Rob Parenteau; or you can see last week’s answers and discussion to Bill Mitchell’s quiz for a simple outline).

When the private sector is levering up, the public sector is not doing its job. Since the 1990’s, the private sector loaded up on debt (ran private-sector deficits) in order to maintain GDP closer to full employment in the face of shrinking government deficits relative to those of the current account (since 1991 the current account trended down as a % of GDP). Deregulation, of course, contributed as well.

According to this metric, Barack Obama ranks highest to date, thanks to the automatic stabilizers and the ARRA. But we’ll see what happens when 2011 rolls around: the waning stimulus will drag economic growth; the Congressional tides may turn; and the immediacy of the crisis continues to fade. Unless firms start to “dissave” and pass on profits to households via hiring and wage growth, we may be in for a rocky ride, since the household desire to save will hover at very high levels for years to come (see David Beckworth’s post on the growing mismatch between mortgage debt load and real estate valuations).

Rebecca Wilder

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The mask slips some more

by Dan Crawford

National Review quotes Newt Gingrich:

Citing a recent Forbes article by Dinesh D’Souza, former House speaker Newt Gingrich tells National Review Online that President Obama may follow a “Kenyan, anti-colonial” worldview.

Gingrich says that D’Souza has made a “stunning insight” into Obama’s behavior — the “most profound insight I have read in the last six years about Barack Obama.”

So now we have Gingrich approving a standard rant by D’Souza with a Kenyan twist, and affirming Gingrich’s claim to sanity as a truthsayer…mainstream outlets carrying the Kenyan twist. If our President is not actually Kenyan by birth, he must be in spirit is the Gingrich plea. What a convoluted set of code. Are Kenyans Muslim in addition?

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How would a government shutdown work?

by Bruce Webb

Because I don’t get it. The U.S. government operates on a Fiscal Year basis meaning that next year starts on Sept 30th. Which means, far as I know that government operations, including implementation of HCR, are funded right through the next Sept 30th (because I don’t think there are important Appropriations bills hanging, nor would R’s have control prior). And while I don’t see any Constitutional bar to a new Republican majority passing legislation to actively stop some government spending simple inaction wouldn’t seem to have any effect. And there would not seem to be enough of a political opening to push anything through in light of the ability of a Democratic Senate filibuster (not that I think the Dems will lose the Senate) or a Presidential veto to block action. Are Republicans, in light of what will be at best a narrow majority REALLY willing to institutionalize their image of the Party of No by simply refusing to pass ANY budget and appropriations bills next year? Do they really plan to go to the American people and explain their plan to close all National Parks right in time for next Labor Day? Oh and by the way there will be no one to process your Social Security check come fall?

From Republican rhetoric you would think they have the option to change the name plates on the Office of the Speaker one day and then turn out the lights of DC the next. But from where I sit and from what I know it just doesn’t work that way. Are these guys just blowing smoke? Or just inhaling deeply on some really great ganja? As I said I don’t get this at all. The politics maybe, the mechanics though? Not seeing it.

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Why aren’t the law and order types excited?

by Linda Beale
crossposted with Ataxingmatter

More On UBS and Whistleblower Bradley Birkenfeld

The Washington correspondent for Feature Story News, Daniel Ryntjes, interviewed Bradley Birkenfeld in jail recently. You can find the audio interview and other items on the UBS banking secrecy case, at this link.

Birkenfeld says that most of the US clients were “sophisticated investors” who traveled to Switzerland expressly to set up secret accounts and take advantage of the anonymity in a bank that had been operating this business for decades: they didn’t need to talk about that motive, because everyone knew that was what the service was all about. He notes that the bankers didn’t provide the tax advice, but there were lawyers and trust officers who handled that part of the deals, including setting up Hong Kong or Singapore corporations and otherwise.

Birkenfeld, as a director at UBS with signatory power at the bank, had a base salary of about 160 thousand Swiss francs and bonuses that ultimately landed him just under a million dollars a year for his banking work. Birkenfeld claims that he saw a document not provided to employees that raised questions about the legality and ethicality of the bank’s activity in having bankers travel to the US to meet with US clients. While the activity may have been legal in Switzerland, he asked the bank to explain the issues in the US. He claimed to see a pattern in which “the bank was trying to distance itself and have a corporate cover for itself, but not for its employees.” Meanwhile, it was “compensating, training, encouraging” the employees to do those activities. When the bank declined to answer his queries, he sought outside advice and was told to resign, which he did. In his exit interview (with human resources and other officials), he argued that he should get an answer to those questions.

While on leave, he wrote the bank stating his concern about violations. An investigation commenced, which he saw as a cover-up. Based on this, he traveled to the US and met clandestinely with the DOJ, SEC, IRS and the Senate permanent subcommittee on investigations to testify about the bank’s activities, “out of pure principle”, he says. So he took on the largest bank in the world about the “largest in US history” tax scandal, and now says he wonders why the DOJ had not acted on this issue beforehand. He also thinks that he shouldn’t have gone to the DOJ, since he ultimately was prosecuted after sharing, he claims, information with them about the bank. He says the DOJ is “incompetent”, and using the KPMG case as the example, in which the judge concluded that failure to provide financial support for expensive legal counsel was a violation of the tax evasion promoting defendants’ constitutional rights to counsel. (I find that conclusion highly dubious, but it is the result of the case.)

Birkenfeld sees himself as the victim–the only person in prison after the exposure of UBS. The interviewer notes that he was, in fact, breaking the law for the four years that he worked at UBS pursuing these criminal acts. He notes that there are thousands of Americans who took advantage of the UBS practice who are NOT in jail, and he is not satisfied with the job done by DOJ with the information provided. He notes that the “kingpin” knew all 25,000 clients, but the DOJ failed to extract all of those names because of the deal they made with UBS for a mere 4500. They gave the “kingpin” immunity and he pled the Fifth at the Senate, then they released him in August 2008 while the Senate was on recess. Birkenfeld had a long prison sentence, and no other person in the scandal, so Birkenfeld thinks this will discourage whistleblowers from exposing these kinds of criminal acts in the future. They have prosecuted very few of the names they got early on, so he notes it will take them a long time to prosecute the additional 4500 names.

There is more to the interview, and more in the other links. Enjoy. [hat tip to Daniel Ryntjes]

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Bond bubble


There is still a lot of talk about the bond bubble with so many people expressing their opinions about bond yields being too low. Maybe.

But I thought it might be informative to show that my bond valuation model says that bond
yields are almost exactly where this “objective” analysis says they should be.


Yes, it is the product of a “model” that may or may not be right and even though I have been using this model almost exactly as it is for some 15 to 20 years there is always the possibility that it will blow up next month.

One interesting point is that the model goes along with the Wall Street Journal’s editorial page quarter century campaign to point out that federal debt and interest rates have a negative correlation. At least they push this idea when republicans are in the White House. They are right that cyclically as the government debt rises rates fall and as the debt contracts rates rise. Of course this reflects that the cyclical federal deficit is inversely related to private credit demands. So on a cyclical basis the large federal debt is largely a function of the collapse in private credit demands.

Note that the fitted value ticked up, suggesting that on a short run basis yields may be bottoming. Interestingly corporate America is starting to issue a lot of long term debt.
For example, IBM just floated a large long term bond. Historically IBM has a good long term history of floating large debt issues around the cyclical bottom in rates. There are some sharp people in the IBM treasury operations.

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