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Blanket the Earth

The Rude Pundit Has a Brilliant Suggestion. OWS didn’t expect to be in Zucotti Park for more than two months. It looks as if they’ll be there a lot longer.

UPDATE: Michael Swanwick shows how easy it can be:

It’s Halloween! So Marianne and I went down to City Hall to donate a case of water, a box of granola bars, and some M&Ms (for the seasonality) to the Occupy Philadelphia people.

This presents some issues; that summer sleeping bag isn’t really adequate for NYC winters:

[W]inter’s coming, fast up here in the Northeast. And while the Rude Pundit is convinced that the true flourishing of the Occupy movement will occur next spring (and into the awful summer and awfuller fall of an election year), there’s a core of the protesters who are gonna stay, no matter what.

Here’s what the Rude Pundit proposes, an action in the spirit of OWS:

On Friday, November 25, the day after Thanksgiving, Black Friday, the biggest shopping day of the year, as marketers force us to know, let’s give to our local Occupy encampments what they need to stay warm for the winter.

The deal: check out your local Occupy website. There’s a list of all the things they need in order to flat out survive into the Spring. [links to NY, Buffalo, Chicago, Nashville, and SF lists in original]

Having shoveled snow this weekend—and knowing people in NJ, MA, and CT who are without power, and (especially in MA) don’t expect to have it back until the weekend at least—my only concern with this plan is that 25 November may be late.

Speaking of marketing, we could call this “Blanket the Earth.” We could organize this on, say, a Facebook page or perhaps a Twitter feed or a hastag.

Blanket the Earth it is. Just make certain there are no smallpox virus cultures in them this time.

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crony capitalism and casino capitalism–bad flavors for right or left, per Kristof and Stiglitz

by Linda Beale

crony capitalism and casino capitalism–bad flavors for right or left, per Kristof and Stiglitz

The Occupy Wall Street focus on “we are the 99 percent” juxtaposed with the CBO’s recent report on the growing inequality in America (see here) come at a time when the American right is pushing hard for policies, like Perry’s so-called “Flat Tax” and Cain’s so-called “FairTax”, that will exacerbate that inequality in a winner-take-all economic system that rewards the speculators and fat cats to the detriment of ordinary society.  Hopefully those first two items will cause ordinary folk to think twice before supporting that exacerbating trend on the right.  The right likes to disguise them as ‘folksy’ ‘down-home’ populism.  They aren’t.  They are wolves disguised in sheep’s clothing.

In Crony Capitalism Comes Home, New York Times (Oct. 26, 2011), Nicholas Kristof notes the “alarmist view” of Occupy Wall Street rampant among the media and the elitist critics of the movement–one that sees the protesters as “half-naked Communists aiming to bring down the American economic system” or “a ‘mob’ trying to overthow capitalism.”  He rightly responds that it is instead a movement that “highlights the need to restore basic capitalist principles like accountability.”

[I]n recent years, some financiers have chosen to live in a government-backed featherbed. Their platform seems to be socialism for tycoons and capitalism for the rest of us.

***

The American critique of the Asian crisis was correct. The countries involved were nominally capitalist but needed major reforms to create accountability and competitive markets.  Something similar is true today of the United States.

***

Capitalism is so successful an economic system partly because of an internal discipline that allows for loss and even bankruptcy. It’s the possibility of failure that creates the opportunity for triumph. Yet many of America’s major banks are too big to fail, so they can privatize profits while socializing risk.

***

[Mohamed El-Erian, chief executive of Pimco] told me that the economic system needs to move toward “inclusive capitalism” and embrace broad-based job creation while curbing excessive inequality.  “You cannot be a good house in a rapidly deteriorating neighborhood,” he told me. “The credibility and the fair functioning of the neighborhood matter a great deal. Without that, the integrity of the capitalist system will weaken further.”

Kristof and El-Erian are correct.

The movement in the US over the last few decades has made crony capitalism possible by pretending that abstract economic theories about “free markets” developed by Milt Friedman and his Chicago boys and based on unreal assumptions about human behavior should not only be consulted for setting fiscal policy but are the “God’s Truth” bible from which such policies should be derived.  This has led to the capture of the markets by big money.  Swarms of lobbyists for Big Oil/ Insurance/ Banks/ Pharma draft the laws that apply to their industries then work with the agencies to draft favorable interpretations into the regulations and then use powerful firms funded by business coalitions like the U.S. Chamber of Commerce, National Association of Manufacturers or supported by “business-funded so-called ‘think tanks’ to exploit the courts (packed by the right in the four decades since Reagan) to push industry favorable policies no matter the ‘externalities’  for people’s lives, the environment, other priorities, and individual freedoms.

Crony capitalism doesn’t hold capitalists accountable for what they do.  We put minimal if any restraints (tax law, anti-trust law, patent  law) on business monopolization and business consolidation and business ability to use the power of money to influence the work of legislators, executives and courts.  We allow private equity funds that buy, fire, and sell at great profits to themselves but at great cost to communities, not just in jobs lost, but also in abandoned buildings left to be handled at the taxpayers’ expense and polluted waterways, ground and air left to be cleaned (if at all) at taxpayers’ expense.  Wal-Mart moves from one address to another across the street and a short hop down the road, because it gets a new tax rebate from the county over the line and leaves behind the community that gave it a tax rebate for the first store, without ever providing the financial benefits the rebate was intended to buy and leaving behind the pollution, waste and destruction of an empty shell megabuilding (real life anecdote from Champaign, Illinois).

Crony capitalism results in excessive inequality (witness the way the managers and owners have accrued all the productivity gains of the last decade) and excessive inequality furthers crony capitalism.

[Lawrence Katz, a Harvard economist, says that] excessive inequality can have two perverse consequences: first, the very wealthy lobby for favors, contracts and bailouts that distort markets; and, second, growing inequality undermines the ability of the poorest to invest in their own education.  “These factors mean that high inequality can generate further high inequality and eventually poor economic growth.”

This is very similar to what Joseph Stiglitz has been telling us for some time.  In his 2010 book, Freefall, Stiglitz recognized that America’s economic crisis stemmed in part from unfounded faith in Econ 101.  :

Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.

The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions.  (This and the following excerpts are from the extract of his book, Why we have to change capitalism, The Telegraph)

Saying that does not make anyone “against capitalism”.  It just means that we must open our eyes to understand the potential that unfettered capitalism has for highly negative destruction.  As Stiglitz says, “markets lie at the heart of every successful economy but … [they] do not work well on their own.”  We have to let government work to correct the imbalances that otherwise result from unfettered capitalism–especially the kinds of imbalances that start to grow when casino capitalism is let loose by socializiation of losses and privatization of gains resulting in enormous inequality within the society.

Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world.  The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US.

***

[A] closer look at the US economy suggests that there are some deeper problems [than just the ones resulting from our current financial crisis and recession]: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in “Old Europe.”

Stiglitz concludes, as many of us have, that this crisis should be taken as an opportunity to ask what kind of society we would like to have and to make the changes necessary to ensure that we are on the right path.

We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.

***

The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.

But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice.

The government plays an important role in restraining the “dark angels” of capitalism and allowing the “good angels” to operate for the benefit of society.  Without government as an enforcer of accountability and trust, some version of crony capitalism and its brute-force harm to those who lose out in the struggle for wealthy is inevitable. 

This crisis has exposed fissures in our society, between Wall Street and Main Street, between America’s rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.

We need to keep this in mind, as we deal with the myriad proposals coming from the right to continue the trend of unfettered markets, crony capitalism and winner-take-all policies.  Deregulation for Big Banks/Oil/Pharma et al will not create jobs, tax cuts for the wealthy will not unleash broad-based growth, and larger inflows of lobbyists [see, e.g., Eggen & Farnam, Lobbyists playing key role in 2012 fundraising, Wash. Post (Oct. 27, 2011)] into even our political decisionmaking processes made possible by the Citizens United case will not provide ever more “free speech” for everyone.  These are excesses of brute-force capitalism exercised in a plutarchy, not evidence of a sustainable democracy.

The answer is what might be called “mitigated capitalism”–an economy that can benefit from the incentive power of capitalism, but that limits and restrains its excesses through reasonable social welfare programs and safety nets for those that are left behind in one way or another, strong emphasis on providing public education and other systems that allow individuals to take advantage of opportunities to advance themselves, and strong enforcement of laws that protect the public commons (natural resources, air, water, land, and the public square) for the public.  The progressive income tax–a system that taxes every person on their income from whatever source (capital or labor)–and the estate tax–a system that redresses the inability of the tax system to capture the appreciation of capital resources during a person’s lifetime–are key ingredients of the tax answer to preventing crony/brute-force capitalism’s sway.

October 27, 2011 in Chicago School/Freshwater Economics, Debunking the Reagan “Free Marketarian” Myth, Democratic Egalitarianism, Estate Tax, Inequality of wealth or income, Occupy Wall Street, Sustainable Economy, Tax Policy | Permalink

Technorati Tags: brute-force capitalism, casino capitalism, crony capitalism,Freefall, Joseph Stiglitz, mitigated capitalism, Nicolas Kristof, plutarchy

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How can the Fed precommit to a permanent expansion of the money supply ?

A challenge for monetary authorities in a liquidity trap is that it is hard convince people that they won’t reverse expansionary policies as soon as the economy leaves the liquidity trap. The other problem is that they can’t do much other than affect expectations while the economy is in a liquidity trap. This suggests that they can’t do much at all. This argument assumes model consistent expectations (aka rational expectations) but that doesn’t mean it is totally wrong.

My view has been that the key word is “Much” and that the monetary authority can also bear risk. In particular, I think that the Fed can and should bear mortgage default risk by buying mortgage backed securities.

The disadvantage of this approach is that, if house prices and/or GDP tank, then the Fed’s balance sheet won’t balance. It would not be possible for the Fed to retire as much of its obligations as it might choose, because they are worth more than its assets.

This disadvantage is an advantage. It means if things turn out to be worse than expected, then the Fed will not be able to reverse the expansion of the money supply. This means that, if the Fed loses on its investments, then, when the economy recovers, there will be higher than target inflation — the Fed would like to reduce the money supply but won’t be able to do so.

I think this is exactly what the economy needs. The disadvantage of Fed purchases of risky assets is, in fact, a huge advantage.

If the Fed wins its bet, we win (it would transfer the profits to the Treasury). If the Fed loses its bet, we win (it would automatically commit to high inflation even if when the inflation comes the Fed wants lower inflation).

OK Ken, the ball’s in your court.

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#Occupywallstreet alternative banking group in NYC Sunday

Yves points us to #OccupyWallStreet Alternative Banking Working Group Meeting in NYC Sunday @ 3 PM –

The New York City General Assembly website has a section for a recently-formed Alternative Banking group, which has started meeting on Sundays from 3:00 to 5:00 PM. You can read the notes from last week’s session here. Despite the title, this is NOT about moving your money. An alternative economics committee had already started on that effort and the alternative banking committee agreed to let them run with that ball. Although this group is still in the process of deciding what it is about, it appears to be moving towards making fundamental, wide-ranging critiques and proposals.

Reader rjs suggest that “Anyone is welcome, and the group would particularly benefit from the input of people with capital markets, regulatory, and wholesale banking expertise. The group already has some members with relevant experience (SEC, major hedge fund, investment banking) but more depth would be of great benefit. Please sign up at the NYCAG webpage to find the meeting location. There is also a dial in number if you are not in NYC and would still like to take part.”

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NYT Americas Exploding Pipe Dream

This from today’s Times.

http://www.nytimes.com/2011/10/29/opinion/blow-americas-exploding-pipe-dream.html?_r=1&ref=opinion

America’s Exploding Pipe Dream

By CHARLES M. BLOW

We are slowly — and painfully — being forced to realize that we are no longer the America of our imaginations. Our greatness was not enshrined. Being a world leader is less about destiny than focused determination, and it is there that we have faltered.

We sold ourselves a pipe dream that everyone could get rich and no one would get hurt — a pipe dream that exploded like a pipe bomb when the already-rich grabbed for all the gold; when they used their fortunes to influence government and gain favors and protection; when everyone else was left to scrounge around their ankles in hopes that a few coins would fall.

We have not taken care of the least among us. We have allowed a revolting level of income inequality to develop. We have watched as millions of our fellow countrymen have fallen into poverty. And we have done a poor job of educating our children and now threaten to leave them a country that is a shell of its former self. We should be ashamed.

Poor policies and poor choices have led to exceedingly poor outcomes. Our societal chickens have come home to roost.

This was underscored in a report released on Thursday by the Bertelsmann Stiftung foundation of Germany entitled “Social Justice in the OECD — How Do the Member States Compare?” It analyzed some metrics of basic fairness and equality among Organization for Economic Co-operation and Development countries and ranked America among the ones at the bottom.

I could write (and have written) ad nauseam about our woeful state, but it might be more powerful to see it for yourself. So here are some of the sad data from the report

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Perry’s Flat Tax and other "bold reform" ideas in context of the richer 1%

by Linda Beale

Perry’s Flat Tax and other “bold reform” ideas in context of the richer 1%

The hard right candidates of the GOP are competing to set forth plans that demonstrate their utter and complete loyalty to the right’s  “make the rich richer and make businesses less accountable” economic program.
This program involves the tired and failed policies of Reaganomics, just magnified:

  • more tax cuts for the wealthy (zero direct taxation of their primary source of income–making money off money, and –to the extent that the incidence of corporate taxes says that corporate taxation should be attributed to shareholders–reducing those taxes as well);
  • elimination of earned benefits for the rest of us (assuring huge revenue shortfalls to the federal government and no dedicated funding of programs, along with dedicated axing of benefits through the ‘deficit/debt’ scare tactic);
  • deregulation of everything to do with business or capital (gutting EPA, Dodd-Frank, Sarbanes-Oxley, and every other regulatory agency no matter the impact on the economy or on ordinary Americans, thus encouraging a return to  speculative frenzy that allows socialization of losses/privatization of gains);
  • privatization wherever possible (Perry’s plan for privatization of whatever Social Security remains after the afore-mentioned gutting; privatization of schools, firefighters, bridges, highways, etc.); and
  • continued militarization.

Michael Kingsley noted that the “economic growth” rationalization of the various flat tax plans that shift the tax burden to the middle class while granting enormous tax cuts to the wealthy is merely “hope masquerading as theory.”   See Kingsley et al,Flat Tax Proposals are Perpetual Fount of False Promises: View, Bloomberg.com (Oct. 24, 2011) (“This hope masquerading as a theory has dominated conservative economic thinking for three decades, despite all evidence to the contrary”).
Perry’s flat tax proposal is right on track with the right’s apparent goal of enriching the rich and shrinking Social Security and Medicare and other federal government’s programs for the well-being of its citizens.   He offers the so-called “Flat Tax” as an option, part of his “cut, balance, and grow” economic ‘plan’.   He says it’s a “bold reform.” Opel, Perry Calls His Flat Tax Proposal ‘Bold Reform’, New York Times (Oct. 25, 2011).
Perry’s plan involves devastating federal program cuts including cuts to Social Security and Medicare for current and future recipients, as well as a ‘cart before the horse’ constitutional amendment –a ‘balanced budget amendment’ that would, for example, prevent us from borrowing cheaply even if it were to pay for a temporary surge in costs for Veterans’ medical care due to the cohort of soldiers returned from Iraq and Afghanistan.  The proposal entails an unfounded assumption that reducing federal spending from about 24% of GDP today to around 18% of GDP within a decade would be reasonable, given the lingering costs of the Iraq and Afghanistan wars,  expenditures to make up for the drain on our military, the ongoing costs of the financial crisis sparked by deregulation and the ‘too big to fail’ phenomenon, etc.   Perry has argued against “arbitrary cuts” to defense spending while at the same time calling for enormous tax cuts for the wealthy.
Perry says his system is “fair, simple, and flat”.  In fact, it is none of the above.

So perhaps it is time to discuss two questions about Perry’s tax plan: (1) just what is this “Flat Tax”? and (2) what would be the distributional, administrative, government and other impacts of this new system of taxation (option to choose between the current income tax and the ‘Flat Tax)?
Regarding the nature of the Flat Tax, it is probably helpful to point out what it is not, since most Americans do not understand how it would work.

  • The “Flat Tax” is not flat, since it has two rates: it will have an exemption amount of some sort for the poorest taxpayers, just as our income tax provides a standard deduction and personal exemptions (and other provisions, like the Earned Income Tax Credit) to ensure that the poorest Americans do not have to pay the income tax. 
  • The “Flat Tax” does not eliminate all deductions: it will leave deductions for charitable contributions (highly favorable to the rich who are the ones that make the most such contributions) and mortgage interest (also favorable to the rich, who have the most expensive homes and get the full amount of the interest deduction even with a flat tax), and some health and child care expenditures. 
  • The Flat Tax is not just a “single rate” income tax since it is not tax on all types of income:  it will be a tax on wages that are not saved (so for the majority of Americans, a payroll tax or a tax on consumption).  The primary source of income for the rich –money earned by money–would not be counted. 
  • The Flat Tax is not a ‘postcard filing’ tax, Perry’s assertions aside (that “taxes will be cut on all income groups in America” and that taxes can be filed on a post-card size form).  The rich will pay much less, some in the middle class may pay less but only after fiddling with both forms, and the rest will not likely pay less.  The form still will require figuring out what counts as income and when it counts and what type of income it is for anybody in the middle class that might be in either one (lots of filler pages behind that “flat rate” times “taxable income” calculation).

Regarding the feasibility of the “Taxpayer Choice” system of income taxation and Flat Tax:

  • The system would lower taxes for the rich (and some others), with no benefit for the poor and lower middle class, so neither simple nor distributionally fair.
    • About 50% of American families pay no federal income tax anyway or pay less than the 20% rate of the “Flat Tax”.  Those families would have no benefit from the Flat Tax so for half of Americans, no benefit from the option.  But Perry –who says he is “dismayed at the injustice” of Americans who don’t pay any income tax (but do pay payroll and excise taxes) won’t achieve his goal of changing the fact that poorer Americans don’t pay the income tax.  They don’t under our current system because we have designed the stnadard deduction, personal exemptions and earned income tax credit to provide a minimal standard of living.  They won’t under Perry’s system because they can still file under the current system.
    • The wealthy would pay substantially less under the Flat Tax, since their main source of income–income from capital–won’t be taxed at all.  They’ll choose the Flat Tax for a substantial tax cut.
    • Assuming that the system provides an annual choice for taxpayers, it creates a nightmare.  There will be some in the upper middle class  who will have to calculate their taxes both ways and choose the most beneficial.  For some, there may be some tax benefit to the Flat Tax, but their taxes will be that much more complicated and their benefit will be minimal compared to the tax cut received by the wealthy.
    • If it doesn’t permit an annual choice, taxpayers may inadvertently find themselves locked into the clearly wrong system for them–leading to distrust of government, and a sense of lack of fairness in a system that provides a trap for the unaware.
    • The differential treatment of income  depending on its character under the Flat Tax option (zero taxed income from capital and fully taxed income from wages) will be yet a further impetus to tax evasion  and unfair taxation of workers compared to owners–i.e., it is both untenable and unfair.  (This was the reason that the 1986 TRA under Reagan eliminated the category distinction.)
    • Len Burman describes it as “political pandering at its worst.”  Perry Offers Tax-Cut Choice, BusinessWeek (Oct. 26, 2011).
  • The system will result in huge decreases in revenues.
    • The upper middle class and wealthy will choose the most beneficial tax (zero taxation of capital income, still get the mortgage interest and charitable deductions which are the biggest tax subsidies against their taxable income)
    • This will result in substantial decrease in tax revenues, leaving the government wither with huge deficits funded by further borrowing, or the necessity of making huge cuts in long-respected government programs like consumer protection, mine safety, worker safety, food safety, environmental protection and basic research funding for the humanities and sciences
    • The revenue shortfalls will inevitably call for shrinking the parts of government that the right that passes the bill doesn’t like–i.e., New Deal social welfare programs, EPA, etc.  It will make it well nigh impossible for the government to uphold its promise to pay for earned benefit programs like Social Security and Medicare.
    • That impact is an intended result of the revenue shrinkage built into the Flat Tax plans.
  • The choice of tax systems will require duplicate tax administration as well (adding costs).
    • Advocates of Flat Taxes/ VATS/ FAIR Taxes (national sales taxes) claim that their plans will all be “simpler” because of the single rate.  They disregard the facts
    • All of the complexities of the income tax remain for both the income tax and the Flat Tax–what is income, what character is the income, when is it income, is an item deductible or not (charitable contributions can really be quid pro quos, etc.).
    • Having an option means generating an entirely new set of forms, guidance, regulations that underpin the statute, audits, administrative determinations–essentially a new division of the IRS to cover the new option
    • Couple that with the right’s antagonism to the IRS generally and one can expect an underfunded IRS that has trouble enforcing either the income tax or the Flat Tax.
    • Underfunding of enforcement (exaggerated by the right’s demonization of government generally and the IRS specifically) will incentivize tax avoidance behavior–sophisticated, wealthy taxpayers will game the flat tax system in particular by recharacterizing ordinary expenditures as deductible savings or taxable compensation as excludible capital income.
    • Federal revenues will likely decrease even further because of the enforcement problems.
  • The compensatory benefit–the claim that the Flat Tax (and accompanying deregulation of financial institutions and major corporations through the repeal of Dodd-Frank and Sarbanes-Oxley) will unleash pent up investment and create a burst of economic growth that creates jobs is simply unfounded in fact.
    • We’ve tried this philosophy for four decades (since Reagan) and it hasn’t worked–it is not the wealthy elite who create jobs; it is the consumers, whose demand creates the potential for business expansion, that create jobs.  See, e.g., James Livingston, It’s Consumer Spending, Stupid, New York Times (Oct. 26, 2011); Steven Strauss, Actually Tax Cuts Don’t Seem to Have Much Impact on Economic Growth, Huffington Post (Oct. 25, 2011) (noting that “ideology is a poor substitute for pragmatic approaches to complicated problems. In fact the evidence that tax rates influence economic growth in any way is equivocal at best. A myriad of other factors are involved. Simply reducing tax rates, and primarily for the wealthy, may hinder — rather than enhance our economic recovery”).
    • And most of the countries held up as models for how wonderful the “flat tax” is in boosting their economy do not actually provide solid evidence for that.  Many flat taxes are in fact flat INCOME taxes, not just wage or consumption taxes.  Countries like Hong Kong, which had a flat tax and managed quite well for a while, benefited from the extraordinary circumstance of acting as the intermediary between communist China and the capitalist world–so that any tax would have raised sufficient revenues on the kinds of deals going through the city-state.  (And, as my colleague Mike McIntyre just reminded me, Hong Kong also benefited from an early real estate bubble like the one that gave this country a spurt of growth that looked like it was connected to the Clinton and Bush tax cuts but was actually connected to rampant speculation with easy money.)
    • There is no investment need in businesses that can’t be met currently by the vast resources of unspent cash held domestically (as well as offshore).  Corporations are not cash strapped–they are hoarding cash because they don’t have customers for their products.
    • The “Econ 101” Chicago School theory on which the idea of an economic boom from putting more money in the hands of the monied rests is incomplete and just plain wrong. It is based on unrealistic assumptions about human decisionmaking, “efficiency” and “welfare”.  Under that theory of efficiency, the marginal utility of the dollar is essentially disregarded.  Under that theory of welfare, if the rich gain all the benefits of the economy as they have for the last decade, that’s an aggregate increase in welfare so all is fine.  Again, this type of economic analysis is just “hope [for booming economic growth] masquerading as theory.”
    • The facts are different.  Empirical studies show decisively that increasing inequality is extraordinarily harmful to economic growth.  When the top 1% are better off and the 99% are suffering, the society suffers.  See The Spirit Level, Wilkinson & Pickett, or the work of Saenz & Piketty on inequality.  See also Benjamin Friedman’s book on the importance of broad-based economic growth to a sustainable economy.
    • In fact, the shortfalls in government revenues will lead to cuts to social welfare programs and to government spending on everything from infrastructure to disease control and food safety.  As to Social Security, Medicare and Medicaid, Perry himself suggests raising the retirement age, changing age eligibility for Medicaid, and introducing an income factor in determinating eligibility for these earned benefits.  These kinds of changes and governmental program cuts will have a ricocheting bad effect on the entire economy that is likely to throw the economy back into recession.  Indirect impacts including firing of government workers will add to the detrimental impact on the vast majority of Americans in the middle and lower classes.

Perry’s system also gets rid of the Estate tax.  All told, the right’s slogan here might as well be:  Make the Rich Richer! (no matter who else is hurt).
Note that this is all happening in a context where the rich are getting much richer, and everybody else is barely hanging on.  See, e.g., Pear, Top Earners Doubled Share of Nation’s Income, Study Finds, New York Times (Oct. 26, 2011).  The article reports on the CBO’s Oct. 25 report that the top 1 percent more than doubled their share of the nation’s income over the last three decades of the ascendancy of hard right economic ideas.  Their income increased an astounding 275% between 1979 and 2007.  Meanwhile, the bottom 20% had only an 18% gain in all those years–and in fact their share of the national income dropped from 7% to a measly 5%.  This is because government policies that can counter the upwards redistribution of income from everybody to the rich have been weaker since Reagan–“the equalizing effect of federal taxes was smaller” as the progressive income tax has become less progressive in nature and more federal revenues have been raised by the regressive payroll tax.  See also One Percenters’ Income Nearly Tripled in Last Three Decades: CBO, Huffington Post (Oct. 26, 2011) (noting that the US ranks alongside Uganda and Rwanda in terms of the gap between rich and poor, and adding that inequality at that level is “likely holding back the economic recovery”). The Perry and Cain plans would exacerbate this trend.  If we are almost at plutocracy (rule of the wealthy) now, we will surely be there if any of the hard right tax plans are put into effect.
Perry’s system dramatically changes the corporate income tax to favor multinationals–20% rate, removal of various deductions, almost tax-free repatriation of foreign earnings, and a territorial tax system.  Incredible breaks for the multinationals who are moving jobs offshore as fast as they can.  The right’s slogan here might as well be:  Give It Away to the Multinationals! (so they can move everything offshore).
Makes one think that Charles Pierce is correct when he says that these Flat Tax (Perry), FairTax (Cain) and VAT (Cain) plans are just an “unwieldy parade of hackneyed talking points (Kill the Estate Tax and Save the Family Farm!) and tired applause lines (The Job Creators Are Uncertain!).”  See Ken Houghton’s link on Angry Bear, here.  I only wish I were as certain about the chances of the right’s not being successful at enacting some form of flat/”fair”/VAT tax as Pierce is.
http://ataxingmatter.blogs.com/tax/

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Linda Beale on NH Public Radio…flat tax is back

The Flat Tax is Back

Moderated by  Laura Knoy on Wednesday, October 26, 2011
(follow link)

Quote:
“In past presidential cycles, the idea of fixing the tax code by charging everyone the same rate has caught on like wildfire, only to die out later. This Presidential election season, candidates Herman Cain Rick Perry, and Newt Gingrich are promoting flat tax plans. We’ll look at this concept…why it remains popular…and why it hasn’t yet become law.”

Guests


Linda Beale – associate professor at Wayne State University Law School. She contributes to the economics and finance blog, Angry Bear.


Chris Edwards – director of tax policy studies at the Cato Institute and editor of the website, downsizinggovernment.org
                                                                                                       

                                                                                                      (loonyhiker< /a>via Flickr/Creative Commons)

Of course Linda’s thoughts on the matter appear in more detail at Angry Bear and ataxingmatter

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Is This A Bad Thing? Sane Economists would say No.

Yes, I’m working with the null set again, but Peter Bockvar, chez Ritholtz, raises the most common objection to the Greek restructuring’s likely effect on the CDS market:

[I]t will…potentially destroy [the sovereign CDS] market to the point where it will go away. The unintended consequence of what will be next will be those looking to hedge sovereign exposure, mostly banks, will then have to short sovereign debt or outright cut credit to the region. EU officials better be careful what they wish for the holders of Greek CDS.

The English translation of this is that Mr. Bockvar suggests—I can’t swear that he believes, though I know which way to bet—that the current prices for sovereign debt are artificially high because of the existence of the Sovereign Debt CDS market.

So, unless you are trading acvtively in both markets, as a buyer, you are being charged too much for sovereign debt.

Wouldn’t it be better to know that up front?

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Perry’s Flat Tax Proposal

by Linda Beal

Perry’s Flat Tax Proposal

The Atlantic has a good summary article contrasting Perry’s Flat Tax proposal (an alternative choice to the income tax, that is modeled after Steve Forbe’s flat tax, which will result in much lower taxes for the wealthy because of the deductions it retains along with the zero taxation of capital income) and Cain’s 9-9-9 intermediary proposal as well as Cain’s ultimate goal of the so-called “FAIR tax” –a national sales tax at a tax-inclusive rate of 23%–both of which will result in much lower taes for the wealthy because of zero taxation of capital income.  Of course, along the way to his purported “FairTax”, Cain will put us through his wacky 9-9-9 plan that includes a VAT (but one that has solely a wage base), an individual Flat Tax (but one whose provisions to benefit the poor are uncertain–some kind of poverty exemption and impoverished district exemption, without much information about how it works or how much it helps), and a FairTax (without any relief from the lumpiness of the tax that causes it to be particularly unfair to the poorest of the poor).  See Derek Thompson, Perry Tax, Flat Tax, Fair Tax, VAT (Tax): What’s the Difference?, The Atlantic (Oct. 25, 2011).

None of these proposals are revenue neutral (they will raise less revenues than raised under the current tax system).  Either the rates would have to be increased or the government would be forced to operate in deficits (as it was pushed into doing with the Bush tax cuts where the $1.2 trillion cost over ten years of the 2001 bill moved the nation from surplus to deficit in one fell swoop).

None of them are distributionally fair–they shift the tax burden (to whatever extent the federal government is allowed to exist) down to the middle class and maybe the poor, while giving the rich extraordinary tax reductions through complete exemption of their main type of income.

None of these proposals are “simple” in any meaningful way They all require similar tax administrative apparatus to the current system (or, in Perry’s case, duplicative administration to take care of the choice of Flat or Income tax), involve the same calculations about timing, amount and character of income necessary under the income tax (but now fraught with more potential for abuse through mischaracterization, since one type is entirely tax free), and require the same procedural due process and penalty mechanisms, as well as forms, instructions, guidance and audits that are required under teh current system.  The only sense in which the Flat or FAir tax or VAT is simpler is when you mean by simpler that the wealthy pay less in taxes.

So if we are to judge the proposals by their results, it would seem that these two right-wing contenders for the GOP presidential nod think that two things are immensely important:

1) reducing taxes on the uberrich, and

2) reducing revenues available to the government to fund important programs.

That fits, since the right wants to “drown” government (and get rid of the New Deal earned benefit programs of Social Security and Medicare that aren’t needed by the elite who fund the right) and wants to cut taxes on the rich/big corporations as close to zero as it can get away with.

Let me repeat.  The arguments used to support all of these consumption-type taxes are fundamentally flawed.  They are not simple–they will involve the same hair-splitting on categorization of income as the current income tax, the same forms, timing issues, accounting issues, tax procedures for due process, and tax administration as the income tax.  They are not fair–they push the tax burden off on the middle class (and the poor, especially under some of the variants) and give the wealthy inordinate tax breaks by not taxing at all their most common type of income from capital.  They will not bolster growth and result in superb “trickle down” effects for the poor–tax cutting measures simply cannot do this because the theory that says they can is based on flawed assumptions about real life and flawed judgments about what matters.  They will hurt government programs that are vitally important to quality of life.  They will exacerbate the inordinate inequality already hurting the US society by making the wealthy even wealthier, and push us even further towards outright plutarchy (plutocracy and oligarchy at the same time, where a wealthy and prestigious elite holds all the reins of power). They will result in the dismantling of the New Deal from Social Security to Medicare, accompanied by gleeful sounds of delight from the radical right that supports the corporatist state and moans of pain from the vulnerable, the poor, and the elderly who are thrust back into neofeudal serfdom under the corporate masters of the universe.

Michael Kingsley and Francis Wilkerson agree with me on the latter issues.  I just found their Bloomberg opinion piece on flat taxes:  Flat Tax Proposals are Perpetual Font of False Promises, Bloomberg.com (Oct. 24, 2011).

originally published at ataxingmatter

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