A thought for Sunday: the Rule of Gerontocracy
by Hale Stewart (originally published at Bonddad blog)
Is This Why Wages Are Low?
These are two graphs from a post over at the Center for Equitable Growth.
The Incidence of the Obamacare Subsidies
Justin Fishel and Mary Bruce covers Trump’s dismantling of Obamacare:
The White House announced Thursday night that the administration will slash Obamacare subsidy payments to insurers. The “cost-sharing reduction payments,” worth an estimated $7 billion this year, are intended to reduce out-of-pocket costs for low-income Americans on Obamacare … House Democratic leader Nancy Pelosi and Senate Democratic leader Chuck Schumer issued a joint calling the action “pointless sabotage.” “Sadly, instead of working to lower health costs for Americans, it seems President Trump will singlehandedly hike Americans’ health premiums,” they said in a joint statement. “It is a spiteful act of vast, pointless sabotage leveled at working families and the middle class in every corner of America.”
Trump’s counter is that the health insurance companies are very profitable because they are reaping the benefits of these subsidies. I would argue that health insurance company profit margins are high in large part because we have not enforced the anti-trust laws and allowed a lot of market power. Brad and Michael Delong made this point last fall:
The United States’ Affordable Care Act (ACA), President Barack Obama’s signature 2010 health-care reform, has significantly increased the need for effective antitrust enforcement in health-insurance markets. Despite recent good news on this front, the odds remain stacked against consumers … It is not surprising, then, that in 2015 some of the largest private American health-insurance companies – Anthem, Cigna, Aetna, and Humana – began exploring the possibility of merging. If they could reduce the number of national insurers from five to three, they could then increase their market power and squeeze more profits from consumers.
Even five health insurance companies are two few. But suppose we did have real competition in the health insurance market – what would be the effect of subsidies. Let’s consider this primer on the incidence of taxes:
The tax incidence depends on the relative price elasticity of supply and demand. When supply is more elastic than demand, buyers bear most of the tax burden. When demand is more elastic than supply, producers bear most of the cost of the tax.
Most economists know this and we know how to translate this into the implications for the incidence of a subsidy. We have to admit, however, that Trump is really awful at economics. But he does have economic advisors. Trump is implicitly assuming a very elastic demand for health care or a very inelastic supply of health care. But where is his evidence for these claims? I guess when Kevin Hassett produces his “analysis, we might see a link from Greg Mankiw.
Enslaved to an Individualist View of Social Change
I note with some interest the debate over whether it is ethically necessary to refer to slaveholders as “enslavers” in order to convey our disapproval over their actions. The obsessive use of the enslaving terminology in The Half Has Never Been Told (Baptist) bothered me at the time, and now I see he was part of a trend.
I understand the motivation—up to a point. Anyone who participated in the slave system had a share in the responsibility for it. It is not anachronistic to look at it this way, since many members of slave-owning households had the same feeling and chose to opt out. Of course, this moral judgment applies not only to those who directly owned slaves, but also those whose livelihood was predicated on enslavement, which includes financiers accepting slaves as collateral and business owners producing goods for slave maintenance and exploitation. To some extent, in my opinion, it even applies to workers for those slavery-based businesses: I’d like to think that I would never have taken such a job if I had been around back then.
Nevertheless, the insistence on language that parcels out responsibility to each participating individual implicitly distracts attention from the systemic, collective basis for slavery. In what sense was an individual slaveholder an enslaver, personally responsible for the enslavement of his or her chattel? An individual is responsible for whether they will be the one with the whip, but not whether individuals will be placed in bondage to someone. The institutions of slavery, which encompassed the political, legal and financial mechanisms that defined, enforced and managed enslavement, took care of this. Language that foregrounds individual responsibility backgrounds the institutional basis of the system.
They are monsters
SChip recipients – this program, which provides medical insurance coverage for over 8 million lower income children, was allowed to expire on September 30. Despite assurances from the Congressional GOP that it would be re instituted promptly, nothing has been done.
Puerto Ricans – Unlike Texas, Louisiana, and Florida, which are GOP majority states, the malAdministration never provided prompt aid to the over 3 million Puerto Ricans, and is threatening to withdraw the aid before basic services are restored.
Recipients of Obamacare subsidies – the malAdministration is refusing to make subsidy payments under the ACA to insurers who enroll those who have less than 2.5 times the income of the Federal poverty level, which includes about 7.5 million people who have enrolled under Obamacare.
That’s a total of close to 19,000,000 hostages.
By Steve Roth (originally published at Evonomics)
How Amazon’s Accounting Makes Rich People’s Income Invisible
Image you’re Jeff Bezos, circa 1998. You’re building a company (Amazon) that stands to make you and your compatriots vastly rich.
But looking forward, you see a problem: if your company makes profits, it will have to pay taxes on them. (At least nominally, in theory, 35%!) Then you and your investors will have to pay taxes on them again when they’re distributed to you as dividends. (Though yes, at a far lower 20% rate than what high earners pay on earned income.) Add those two up over many years, and you’re talking tens, hundreds of billions of dollars in taxes.
You’re a very smart guy. How are you going to avoid that?
Simple: don’t show any profits (or, hence, distribute them as dividends). Consistently set prices so you constantly break even. This has at least three effects:
1. You undercut all your competitors’ prices, driving them out of business. Nobody who’s trying to make a profit can possibly compete.
2. You control more and more market share.
3. You build a bigger and bigger business.
Number 3 is how you monetize this, personally. The value of the company (its share price/market cap) rises steadily. Obviously, a business with $136 billion in revenues (2016) is going to be worth more than one with $10 or $50 billion in revenues — even if it never shows a “profit.” You take your profits in capital gains.
IMF Fiscal Monitor: Progressive Taxation Need Not Deter Growth
The latest from the IMF is a must read for progressives even if it runs contrary to the nonsense coming out of the White House:
At the global level, inequality has declined substantially over the past three decades, but within national boundaries, the picture is mixed: some countries have experienced a reduction in inequality while others, particularly advanced economies, have seen a significant increase that has, among other things, contributed to growing public backlash against globalization. Excessive levels of inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth, but whether inequality is excessive depends on country-specific factors, including the growth context in which inequality arises, along with societal preferences. This Fiscal Monitor focuses on how fiscal policy can help governments address high levels of inequality while minimizing potential trade-offs between efficiency and equity. It documents recent trends in income inequality, including inequality both between and within countries, then examines the redistributive role of fiscal policies over recent decades and underscores the importance of appropriate design to minimize any efficiency costs. It then focuses on some key components of fiscal redistribution: progressivity of income taxation, universal basic income, and public spending policies for achieving more equitable education and health outcomes. The analysis relies on the existing theoretical and empirical literature, IMF work on inequality and fiscal policy, country experiences, and new analytical work, including various static microsimulation analyses based on household survey data. Simulations using a dynamic general equilibrium model calibrated to country-specific data and behavioral parameters illustrate the potential impact of alternative budget-neutral tax and transfer measures on income inequality and economic growth.
(Dan here…see also Yves Smith)
Does Kevin Hassett Understand Transfer Pricing?
Howard Gleckman does:
It is true that bringing US corporate rates in line with our trading partners may reduce incentives for improper transfer pricing. But there is a flaw in Hassett’s argument: While these practices are aimed at reducing tax lability, they do not represent real economic activity. And limiting income shifting won’t significantly increase domestic employment.
He was noting this presentation:
Kevin Hassett, chair of President Trump’s Council of Economic Advisers, argued today that the corporate tax cuts in the Sept. 27 Republican Unified Framework would boost overall economic growth. How? In large part because its corporate tax rate reductions would encourage firms to shift jobs from overseas to the US. But the claim is unsupported by the evidence. In a speech at the Tax Policy Center today, Hassett said that the GOP plan would not only increase domestic employment but also raise worker wages by an average of $7,000. That is quite a promise, but after unpacking his argument, it seems improbable at best. His claim: Making statutory US corporate tax rates competitive with the rest of the developed world would encourage firms to stop inappropriate transfer pricing, corporate inversions, and other income-shifting practices. Half of the US trade deficit, he said, results from transfer pricing.
The Times Handles the Trump Tax Cut Framework with Kid Gloves
There’s been a good bit written about the Trump tax cut framework released just over a week ago. Most of it points out, as I have here and here, the absurdity of the claims by Trump and GOP spokespeople that this isn’t a tax cut aimed at benefiting the ultra wealthy. After all, even with few details and no attempt to deal with the really tough issues that would face real tax reform considerations, it is awfully clear that almost everything in the package is designed to make the wealthy even wealthier.
Just a quick review of the way the proposed tax cuts exclusively or primarily benefit the ultra wealthy:
- elimination of the estate tax, which taxes fewer than 2% of the estates, those that have in excess of $11 million (the couples’ exempt amount) and haven’t used the various trusts and family partnerships to let even more estate value escape tax through valuation gimmicks
- Not waiting on the tax cut proposal, Trump’s Treasury secretary Steve Mnuchin announced in “Second Report to the President on Identifying and Reducing Tax Regulatory Burdens” (Oct. 2, 2017) a current step to let wealthy people continue to use valuation gimmicks to avoid a fair estate tax, through withdrawal of the Obama Administration’s proposed regulation under section 2704 that would disregard the purported restrictions on certain family-controlled entities in setting estate valuations–a regulation clearly merited because of the ridiculous scams of putting assets in family partnerships in order to claim that they are worth 1/3 of their actual value, even though the partnership can be dissolved afterwards with the full value magically returning. (I’ll deal with the regulatory changes in my next post.)
- elimination of the AMT, which imposes tax when the taxpayer would otherwise benefit from a surfeit of regular income tax subsidies (loopholes, tax expenditures, deductions, credits). For a thorough analysis of the AMT, see A Taxing Matter series of 6 posts, beginning here.
- reduction of the statutory corporate tax rate for the largest corporations from 35% to 20%, which benefits primarily the highly compensated managers (who receive substantial amounts of stock options as part of their compensation) and big shareholders (who tend to be mainly the ultra wealthy who own most of the financial assets) and does little or nothing to help small businesses, that already pay tax rates of 25% or less
- creation of a single 25% rate for recipients of all business pass-through income (i.e., from partnerships), which benefits almost exclusively the ultra rich, since small business income is already taxed at 25% or less, while wealthy partners in real estate firms would be taxed at the highest individual rate under current law on their pass-through income, and
- creation of full, upfront expensing, resulting in a non-economic windfall to businesses that will, again, mainly just increase profits passed on to their wealthy owners. (Although this is purportedly a five-year provision, everybody knows that is just a gimmick to pretend that its impact on the deficit is less than would be admitted if it were permanent. Everybody also knows that the intent is to make it permanent.)
But there are always journalists who try a little too hard to give obviously bad tax ideas a surface claim to reasonableness. Apparently, even James Stewart, who writes “common sense” entries for the business section of the New York Times, suffers this vulnerability. See, for example, his “Tax Cuts are Easy, but a Tax Overhaul? Three Proposals to Make the Math Work,” New York Times (Oct. 6, 2017), at B1 (digitally titled “Tax Reform that doesn’t bust the budget? I’ve got a Few Ideas, Oct 5, 2017).
I like the print title better, since the Trump Plan has clearly already ditched any real idea of “tax reform” for a wholesale attempt at trillions of dollars of tax cuts mostly benefiting the rich. There are other things that aren’t so good about the article.
1) Stewart calls the Trump giveaway to the rich “the most ambitious attempt at tax reform in over 40 years.” That’s simply not correct, because it isn’t an attempt at tax reform and it isn’t really ambitious.
- Ambitious? How can Stewart call a grab-bag of all the old GOP cuts-for-the-rich gimmicks “ambitious.” Unless he thinks that conning typical Americans who don’t understand much about taxes into thinking that this is a populist tax reform intended to help the middle and lower income classes and not drop more riches on the already rich makes it ‘ambitious’…..
- Tax reform? This isn’t tax reform; it’s just a series of tax cuts. The framework leaves any thinking about tax reform for somebody else to do–which means it really isn’t intended to happen at all. Later in the article Stewart quotes Holtz-Eakin (right-wing tax cut advocate) and Kevin Brady (same) about the “ambitious” framework. They’re gung ho. Brady says it’s ambitious because they are trying to do what the 1986 reform effort did in several years in only a few months. Nope–they are not trying to do what the 1986 reform did. The 1986 reform was a fully bipartisan effort in both the House and Senate, with Packwood in the Senate and Rostenkowski in the House leading lengthy hearings and in-depth study of issues, along with a responsible and active Treasury and CBO providing in-depth analysis of impacts. Trump and the GOP now intend to pass a tax cut for the rich with only GOP support (unless Trump can bully some election-vulnerable Democrats into going along with the travesty). And they don’t intend the kind of exhaustive study and consideration that would provide real information on who would benefit and who would be hurt. We’ve already heard that some GOP want to pay an outside (GOP-friendly) consultant to do the “dynamic scoring” and not the CBO, because they want to be sure that it predicts plenty of growth (a number that is easily manipulable, which is why ‘single score dynamic scoring’ is utterly absurd).