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NY AG defends tax-exempt organization probe

by Linda Beale

NY AG defends tax-exempt organization probe

After complaints from some academics about the rationale for a New York investigation of tax exempt organizations and a letter from Congressional Republicans Dave Camp (MI) and Orrin Hatch (Utah)suggesting that the New York Attorney General should not be seeking copies of federal returns from taxpayers but rather through the IRS, AG Schneiderman responded in defense of his rights to investigate based on federalism and the New York AG’s interest in state law enforcement.  See Bernie Becker, New York AG defends efforts on tax-exempt groups, The Hill: On the Money blog (Sept. 24, 2012).

Schneiderman is investigating a group of tax-exempt organizations called “501(c)(4)s” after the Code section that permits them for federal income tax purposes.  Those groups are not required to reveal their donors, and are supposed to conduct social services.  Many of these groups these days are functioning as purportedly independent advertisers for political candidates and parties, funded by big donors who want to remain anonymous.

cross posted with ataxingmatter

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The Effect of Capital Gains Tax on Investment – Appendix

In comments to my previous post, Robert requested the unsmoothed data from Graph 3.  Here it is.   GPDI is plotted against the Capital Gains Tax Rate.

Since the Capital Gains Tax Rate (X-axis) is quantized, the result is columns of data.  Compared to the smoothed version, there is little change in either the slope or intercept of the best fit straight line.  R^2 is, of course, much lower.

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Tiresome QE III and bond rates update

I have an embarrassing confession to make.  I forgot the date QE III was announced.

I decided to graph the 3 year Tresury constant maturity interest rate.  The logic is that I don’t believe the current FOMC can plausibly precommit to policy more than around three years from now.  Most members’ terms end in January 2016. Bernanke’s term ends 2014 and there is no way Republicans will allow an up or down vote on reconfirmation (I guess he will be acting Fed chairman for a while).  So I made a graph from Sept 1 2012 on.  I didn’t remember that QE III was announced on September 13th.  I looked at the graph.  I had no idea whenthe huge signal about future monetary policy became public.

To make the graph less boring and more like my older discussion, I added the 5 year constant maturity rate.  This shows a modest decline on the 13th entirely reversed on the 14th.

The reason I am back on this topic (aside from the fact that I am obsessive) is that I am very sure I haven’t explained properly why I look at exactly these numbers.  I am trying to assess the forward guidance effect of QE III and not at all the portfolio balance effects.  This means that I absolutely am not claiming QE III was a flop.  I don’t think that, I think it is working very well.  I try to explain myself after the jump.

By forward guidance I mean signals about future conventional monetary policy, that is signals about the future target federal funds rate.  Basically, one argument for QE is that it is a dramatic way to convince people that the FOMC will keep the federal funds rate below 0.25% for a long time.  This can affect output right now in large part because if they keep the rate low until inflation rises medium term real interest rates will be lower.  The Krugman Woodford solution for monetary policy in a liquidity trap is to credibly commit to causing higher inflation therefore causing higher expected inflation right now.

But this works by changing forecasts of future conventional monetary policy, that is future short term rates.  Medium term rates are equal to the expected geometric average short term rate plus a risk premium.  The risk premium could be negative in theory, but it is generally positive as is shown by the fact that the yield curve slopes up.  Given a three year rate of 0.37 % short term rates expected for the next three years must be very very low.  Note the current 3 month rate is 0.1% not exactly zero.  My view is that the FOMC has reached the limit of what it can achieve via forward guidance.  Abstract models consider the case of no precommitment and total precommitment forever.  But they are depending on the current FOMC signalling what future FOMCs quite probably with different members will do.

In any case, to me the data are clear.  Expected average short term rates over the next 3 and 5 years were very very low before QE III was announced.   Then they didn’t change. There is no sign that bond investors’ views about short term interest rates during the term of current members of the FOMC changed at all.

Again this does not mean that QE III had no effect.  Massive purchases of MBS are not just a signal of future monetary policy.  They change the amount of mortgage default risk which private agents must bear.  This should increase the price (reduce the yield) of MBS.  This should make issuing mortgages more attractive and promote refinancing and home construction.

All of this can cause higher expected inflation not because of changed forecasts of conventional policy (the federal funds rate) but because of the direct effects of the massive QE III purchases.

For those who have read this far, I stress that this is a pointless purely academic dispute.  I agree with Woodford and Krugman that QE III is much better designed than QE II because a) the Fed is purchases MBS not Treasuries and b) the Fed says it will continue to purchase MBS as long as necessary.  They think improvement b is more important than improvement a.  I think improvement a is more important than improvement b.  But we agree about what the Fed should do which is both  buy risky assets and signal in any way it can that it will accept higher inflation.

update: Bruce Krasting asks why I wrote that QE III is working.  It is partly because, after some frustrating googling, I know that MBS yields are at a record low (but I don’t know how much they decreased).  It was mostly because I knew that the 5 year TIPS rate (the market real interest rate) dropped sharply after QE III was announced.  But when I went to Fred to make the graph, I discovered to my surprise and dismay that the 5 year constant maturity TIPS rate has gone up again and is only about 17 basis points below it’s September 12th close.

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Conservative Arithmetic

It appears that in the conservasphere Rasmussen polling is called “Rasmussen the most accurate pollster.”  In fact Rasmussen had the best performance in 2008.  This was widely noted.

However Rasmussen performed terribly in 2010. 

If one focused solely on the final poll issued by Rasmussen Reports or Pulse Opinion Research in each state — rather than including all polls within the three-week interval — it would not have made much difference. Their average error would be 5.7 points rather than 5.8, and their average bias 3.8 points rather than 3.9.

So I googled [ rasmussen “most accurate pollster” -2008 ] for the claim without the qualification which makes it accurate.  The results were impressive with a huge number of sites confidently claiming that Rasmussen is (not was is) the most accurate pollster.  To be honest, I haven’t clicked the links (I notice that the text around one refers to the President as “Obumbler”).  To me this is a glance into conservatives’ separate reality.

Somehow the new data from 2010 is irrelevant.  Once a claim has been accepted as fact, it becomes immortal and invulnerable to new data.

There is a simple explanation for why Rasmussen used to be accurate and later had a huge Republican bias. They don’t call cell phones (they are a robopoller and not allowed to call cell phones).  Back in the good old days of 2008 when almost everyone had a land line, this wasn’t a huge problem.  Now it is.  Clearly in 2010 they didn’t remove the bias from not polling cell phone only households.  As far as I understand it, they weight using a 3 month average of Rasmussen polls.  This removes noise but does nothing to bias.  In any case the weird kids these days who don’t have normal phones may be different from well me not just because they tend to be young and poor but also because they … well I just don’t understand them and I think Scott Rasmussen doesn’t have a clue either.

So there is a plausible story for why Rasmussen might have been accurate in the past then became inaccurate.  This hypothesis is overwhelmingly supported by data in the public domain.  And it hasn’t penetrated the conservabubble at all.

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27% definitely crazy 11% definitely sane

I am aware of the internet tradition called the 27% Crazification Factor which is undead and well

But can we get a solid lower bound on the sane (OK really well informed) factor ?  For example, there was the February 2010  New York Times CBS News poll in which 12% of respondents correctly noted that Obama and the Democrats had (at the time) decreased taxes for most Americans

Now we have a DailyKos SEIU PPP poll in which a grand total of 11% of respondents report that they paid no Federal Income tax on 2011 income.

OK more than 53% of people paid positive income tax (it’s 47% of tax paying units without positive liability and they are more than proportionally single member families students and widows and a smaller number of widowers).  So in addition to the roughly (but less than) 36% who are just wrong there are somewhat more than 53% who correctly answered “yes” and might *might* have answered correctly even if the correct answer had been no.

OK OK this is a poll of likely voters so  47 percenter impoverished. But still 11 % !!!*

But that’s not the fun part.  The fun part is that Romney does better among the small subset of 47 percenters who actually know they are 47 percenters than he does among those who think they paid income taxes.

Wow look at that.  Behind 3% among self identified members of the group he calls deadbeats and behind 5% among self identified tax payers.

*I, by the way, am a 47% because of the foreign earned income exclusion although I pay huge amounts of Italian income tax by US standards (but almost all of my income comes from Italian taxpayers so I can’t complain).

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The Effect of Capital Gains Tax on Investment

Matt Yglesias, servitor to our corporate overlords, suggests that the reduced capital gains tax rate paid by rentiers like Willard Romney is really a very, very good thing.  To wit:

The main reason Romney’s effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income.
. . .
But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.
.  .  .
That’s the theory, at any rate. It’s a pretty solid theory, it’s in most of the textbooks I’ve seen, and it shapes public policy in basically every country I’m familiar with. Even researchers like Thomas Piketty and Emmanuel Saez (see “A Theory of Optimal Capital Taxation”) who dissent from the standard no taxation of investment income position think capital income should be taxed more lightly than labor income. Empirically, it’s a bit difficult to verify that variations in capital gains tax rates and the like really are making a material difference to investment levels. But then again the data is noisy.

Scott Lemieux at LGM demurs.

Sure, if you 1)accept the premise that reducing or eliminating capital gains taxes will result in productive infrastructure investments rather than worthless accounting tricks, 2)ignore the economic benefits created by consumption, 3)assume that significant numbers of people will forgo money for doing nothing just because the profits will be taxed , and 4)ignore the fact that in most jurisdictions consumption is also “double taxed,” then reducing capital gains taxes looks good.   But since all of these assumptions are (to put it mildly) highly contestable, it’s just question-begging.

My response to Matt is that in my jaundiced opinion, you might as well consult The Necronomicon of Abdul Alhazred as an economics textbook for an issue like this; and that in a world that has on the one hand Krugman, Thoma and Delong, and on the other Fama, Cochran and Cowan, a consensus among experts is about as likely as lions lying down with lambs for some purpose other than a quick snack.

To Scott I say, why assume or ignore anything when that oh-so-noisy data is readily available?

Graph 1 shows the capital gains tax rate and year-over-year growth in gross domestic private investment (GPDI,) each presented as a percent.  If Matt and what he calls “the mainstream” are right, then there should be a negative correlation between the tax rate and investment growth, since higher taxes would be a disincentive to investment.

Graph 1  C G Tax Rate and GPDI, 1954 – 2011

Instead, what we find is that over time, as the capital gains top rate has gone down, so has GPDI.  This is indicated by the downward slope of the best fit straight lines through each data set.  The best fit lines are based on the data through 2008, so the huge 2009 negative in GPDI is not represented.

One way to handle noisy data is to superimpose a moving average.  The dark heavy line that snakes up to a top in 1978 is an 8-Yr moving average.  This top corresponds exactly with the last year of the 40% Cap Gains Tax rate.  The purple horizontal line is the period average of GPDI YoY growth from 1954 through 2011.   Note that until 1986, the 8 Yr line is mostly above the long average line, and since 1986 it is mostly below.

This is not because the bottoms in the GPDI data set are lower since 1986.  A quick look shows that, except for the 2009 plunge, they are not.  It is because the peaks are lower.  The table gives a count of extreme data points for GPDI growth, before and after 1982, the year the Cap Gains rate was reduced to 20%.

Even at a detail level, it appears that a higher tax rate corresponds with a higher rate of investment growth, as both curves peak in 1978.

Graph 2 provides a close-up view of 1985 through 2005.

Graph 2  C G Tax Rate and GPDI, 1985 – 2005

When the Cap Gains tax rate was increased from 20 to 28% in 1987, the rate of investment growth increased from 1.4 to 5.2%, and stayed at about that level until it was derailed by the 1990-91 recession.  Then from 1992 through 2000, 8 of 9 years had GPDI growth above the long average (purple line,) an unprecedented occurrence.  Granted, the last three of these years were at the lower C G Tax rate of 21.19%, instituted in 1998.  But also note that this decrease did absolutely nothing to spur increased investment.

Cutting across the data in a different way, Graph 3 presents a scatter plot of the C G Tax Rate and YoY GPDI growth, each presented as an 8 Yr average.

Graph 3 Scatter Plot of GPDI Growth vs C G Tax Rate, Smoothed

Even with smoothing, there’s a lot of scatter.  No surprise, since many other factors can affect investment: business cycle, commodity price shocks, wars, etc.  I’m tempted to say the obvious relationship is that a higher C G Tax rate leads to higher investment, but I don’t want to get into a correlation-is-not-causation brouhaha.  So I’ll simply say that the idea that lowering C G taxes leads to increased investment – and therefore increased economic growth – is not only unsupported by the data, it is refuted by the data, and therefore contrary to fact.

So, once again, we find a mainstream economic idea that is only valid in some imagined alternate reality.

Capital Gains Rate data can be found here (Returns With Positive Net Capital Gains Table, 1954-2008) and here.  There are a few slight discrepancies between these sources, mostly in transition years.  I have used the maximum tax rate, column farthest to the right in either table.
Gross Domestic Private Investment is FRED series GPDI.

Cross posted at Retirement Blues

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Hospital Consolidation and ACO’s

Jason Shafrin over at the Healthcare Economist points to this recent paper over at the RWJF. Interestingly the authors find that hospital consolidation increases prices and could decrease quality. Something that many of us have considered in the past.

In concentrated markets, the effects were even more pronounced with price increases over 20% noted.

Competition was noted to increase quality under an “administered” pricing system, ala the NHS in the UK. The evidence for competition increasing quality in a market system was much more mixed.

I have thought this for some time, and have even wrote about the concepts of leverage in the past. For example, I have cited a BNET article before. When one examines the the health markets in Milwaukee and Chicago, which are both midwestern cities, and geographically close to each other, one finds higher prices in Milwaukee, with providers not accepting less than 200% of Medicare. Which does not seem intuitive, as there is far more market competition in the health insurance industry there. In Chicago, one insurer, BC-BS, is rather dominant and prices are lower, with providers accepting 112% of Medicare on average. It would seem to make sense that increasing the leverage of the hospitals and providers through the mechanism of consolidation will increase prices. The same thing happens in Milwaukee, which has no dominant insurer, and therefore is unable to exert leverage over the hospital systems in Milwaukee.

The ACO models as proscribed by the ACA will increase consolidation. By developing an accountable model of care delivery, providers will attempt to consolidate to increase quality and minimize risk exposure in the sense of decreasing reimbursements.

The problem with the RWJF paper, as it rightly notes, is that the study does not really examine integrated health care systems. When you look at consolidation with true vertical and horizontal integration, it is my belief that quality improves even in the absence of competition. True integration in the case of Mayo Clinic and Kaiser also lowers prices.

In essence, I don’t think the problem is consolidation…..I think the problem is consolidation in the absence of integration.

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