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Scott Sumner Digs Deeper

by Mike Kimel

Scott Sumner Digs Deeper

Scott Sumner criticizes my most recent post in which I indicate that Keynesian theory explains growth rates during the New Deal era better than theories proposed by monetarists.

He starts by criticizing this, which I wrote in my earlier post.

Aggregate demand was very slack when FDR took office.

FDR showed up in Washington with a plan to start spending a lot of money and thus boost aggregate demand.

The immediate effect was to convince factories they’d be running down their inventories. That boosted producer prices. It had a much smaller effect on consumer prices because everyone knew the gubmint was going to buy a heck of a lot more producer goods than consumer goods. (The government did buy some consumer goods for the various programs, plus there was a spillover effect, but as the graph clearly shows, the action was on the producer side.)

After a bit of time, the public realized FDR wasn’t planning just a one-off, but rather a sustained program of purchases of industrial items. That led them to start using some of their idle capacity, which meant not just selling the fixed amount that was in inventory. The rate of price increases thus dropped.

GDP increased the fastest rate in the United States peacetime history since data has been kept. There was a big hiccup, of course, in 1937 when the government cut back on spending for a while.

Sumner’s most important point:

Prices didn’t start rising when FDR came to Washington with spending plans; they started rising when he began depreciating the dollar. Furthermore, the weekly rise in the WPI index was highly correlated with weekly increases in the dollar price of gold (i.e. currency depreciation.) And those changes (in gold prices) were caused by explicit statements and actions by FDR. Not by fiscal stimulus, which would be expected to appreciate the dollar.

OK. Using the cool graphical tool from FRED, the Federal Reserve Economic Database, I generated this graph of the series that from what I can tell seems to be Sumner’s favorite price index when discussing the period:

Figure 1.

Now, take a gander at the graph. And bear in mind, FDR was inaugurated in March 1933. But everyone knew what he was going to do, spending-wise, once he showed up. You can see the decline in prices halt and start reversing even before he took office.

Additionally, I’m not sure what Sumner means when he refers to the period when he says FDR “began depreciating the dollar.” There was a gold standard in place going back a long time. That means the value of the dollar was its price in gold. The price of gold was $20.67 an ounce for decades before FDR took office. It was $20.67 an ounce until the Gold Reserve Act of January 30, 1934, when the price of gold was changed to $35 an ounce. (To be precise, the government devalued the dollar on January 31, the day after the Act passed.)

The peak in the curve came in February 1934, days or at most weeks (the index isn’t that precise) after the Gold Reserve Act. Put another way… price inflation using Sumner’s measure peaked when the currency was devalued. That is precisely 100% the opposite of what Sumner wrote.

But there are some extenuating circumstances for Sumner.

(The next paragraph summarizes this story, from the memoirs of Jesse Jones.)

It seems that on October 22, 1933, Jones, the head of the Reconstruction Finance Corporation and Henry Morgenthau, then Farm Credit Administrator but soon to be Treasury Secretary, were told by FDR to come by on October 23 to devaluing the dollar by changing its relationship with gold. The three men – FDR, Morgenthau, and Jones, then went about raising the price of gold by fiat between then and January 31, 1934, when prices came to rest at $35 an ounce, a price where they stayed through 1971.

I assume that’s what Sumner is talking about. So let me modify Figure 1 to only show the period from January to October 1933.

Figure 2.

Now, recall, Sumner’s evidence that the Keynesian view is wrong and the monetary view is right is: “Prices didn’t start rising when FDR came to Washington with spending plans; they started rising when he began depreciating the dollar.”

And yet… the graph shows very clearly that prices started to rise when FDR came to Washington with spending plans, not at the end of October when he began depreciating the dollar. As is very evident from the graph, by that time prices had already been increasing for quite a while. Wholesale prices, by October 1, were up 17% from the beginning of the year. If you started in October of 1933, it wasn’t until December of 1936 before prices increased another 17%.

The point is, Sumner is wrong. He is very wrong about when prices started to rise. He is also very wrong about why prices started to rise. And since “when” and “why” are assumptions in his model, his model is very wrong.

Now, for completeness I’m going to tackle the other thing Sumner mentioned in his post. Sumner’s critique of me includes this:

There are all sorts of the problems with the argument that the inflation of 1933-34 was caused by expectations of fiscal stimulus. First of all, it’s completely at variance with Keynesian theory, which Kimel seems to be trying to defend. Keynesian theory says demand stimulus doesn’t raise prices when there is “slack,” and there has never been more slack in all of American history than in 1933.

The problem for Sumner is that Keynesian theory is merely an extension of good old fashioned Adam Smith. Prices depend on supply and demand. You can have a good or service go up in price locally even as it goes down everywhere else.

As I noted in my earlier post, and he quoted:

The immediate effect was to convince factories they’d be running down their inventories… After a bit of time, the public realized FDR wasn’t planning just a one-off, but rather a sustained program of purchases of industrial items. That led them to start using some of their idle capacity, which meant not just selling the fixed amount that was in inventory. The rate of price increases thus dropped.

Which of course, is very consistent with the timing of events.

None of this is to pick on Sumner. There’s a whole cottage industry dedicated to advancing a story that government spending cannot have a positive effect on the economy during recessions or depressions. The problem for those trying to advance that story is that government spending does seem to correlate with positive effects during those periods. So alternate theories are proposed, and have been proposed for decades. And those theories often make a lot of sense… until you take a close look at the data.

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Super-Congress wants to have its cake and eat it too

by Linda Beale

Super-Congress wants to have its cake and eat it too

So the Democrats and Republicans on the so-called “Super-Committee” that is supposed to find $1.2 trillion in budget reductions/increased revenues within a week now thinks it has a solution–let the regular tax committees (Finance and Ways & Means) come up with the tax revenues, while the Super-Committee will go on and specify the spending cuts.  See Deficit Panel Seeks to Defer Details on Raising Taxes, New York Times (Nov. 14, 2011).

The proposal doesn’t sound like anything that the Dems on the panel should accept.  For a piddling reduction in some of the deductions available to the most affluent individuals, the GOP is willing to lower the rate on those individuals to 28%!  Just more enriching the rich.  The Dems shouldn’t agree to that.  Especially since Grover Norquist thinks that any such agreement would be undone immediately, while any stupid agreement the Dems make to “reforming” (i.e., cutting benefits from) the earned benefits programs will be allowed to take place.

Grover G. Norquist, the president of Americans for Tax Reform, whose antitax pledge has been signed by most Republicans in Congress, said in an interview, “I am not losing any sleep” over the Republicans’ latest proposal. Mr. Norquist said he was confident that, “at the end of the day, the Republican House will not pass a tax increase.”

“As a face-saving measure,” Mr. Norquist said, the deficit reduction panel “could give lots of instructions to the tax-writing committees.” In complying with those instructions, he said, the House and the Senate could pass very different bills.  Id.

It is hard to see why any cuts to the earned benefits programs should be made. Social Security, Medicare and Medicaid are more important now than ever because of the weak economy.  We are a rich country and we can afford these programs.Tax 100% of compensation for Social Security.   And treat all profits interests as compensation income when allocations are received, so that partnerships treat persons as partners only when they have a capital investment in the partnership business.

Let the military be cut at least $750 billion.  And raise the rest through taxes–especially through a progressive estate tax and through eliminating the character preference for capital gains income.

This country is tired of being held hostage by far-right radicals  who don’t understand that the government acts for the people and who don’t give a damn for anybody that isn’t in the top 20% of the income and wealth distribution.  We are tired of the radical right’s anarchistic actions to prevent the government from borrowing money to carry out important programs.  We are tired of the radical right’s stupidity about the economy and its reliance on ideological beliefs in “trickle down” programs to justify tax cuts no matter what situation the country is in.  We are tired of the radical right’s refusal to acknowledge the facts about the failures of the four-decade experiment with reaganomics, during which time the large multinational corporations have been allowed to function like quasi-sovereigns.  We are tired of seeing tax policies that support consolidation of corporate empires and movement of business overseas, while Americans lose jobs and watch their wages decline.


originally published at ataxingmatter

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GOP wants to repeal Dodd-Frank: instead they should listen to Nassim Taleb

by Linda Beale

GOP wants to repeal Dodd-Frank: instead they should listen to Nassim Taleb

Nassim Taleb, the author of the book on long-tail events, suggests in a Nov. 6, 2011 op-ed in the New York Times that “it is only a matter of time before private risktaking leads to another giant bailout like the ones the United States was forced to provide in 2008.”

That’s pretty strong language, and should be cause for worry among those GOP debaters who have been in a pissing contest over how much legislation they can suggest for repeal, like Dodd-Frank, health care reform, and environmental protection.  Instead of defending big banks, the GOP should start thinking about how to break them up.  Instead of suggesting that we need to repeal Dodd-Frank and end regulation of banks, Taleb says we do need  regulation but can’t depend on it alone: “Supervision, regulation, and other forms of monitoring are necessary, but insufficient.”

And instead of defending risk-taking bankers as innovators and entrepreneurs, Congress should be considering measures to undo the incentives for risk taking.  Taleb says–End Bonuses for Bankers.

[I]t’s time for a fundamental reform:  Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever.  In fact, all pay at systemically important financial institutions–big banks, but also some insurance companies and even huge hedge funds–should be strictly regulated.


Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called ‘black swan’ events.

Seems like sound advice.  Bonuses encourage risktaking, and risktaking encourages breakdowns of TBTF banks.  Breakdowns lead to taxpayer bailouts.  To break the chain, deny the bonuses.

The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accmumlate in the financial system and become a catalyst for disaster.  This violates the fundamental rules of capitalism:  Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

Here Taleb touches on a factor in the expanding risk of our economy–and the expanding immunity of the manager class from the risk they cause.  Corporations provide limited liability to their owners.  And innovations over the last few decades have expanded limited liability to almost all investors even in pass-through entities that pay no entity-level tax, through the limited liability company and the limited liability partnerships. That is one of the reasons I have argued for Congress to enact legislation to restrain the availability of tax-free mergers and reorganizations.  The combination of easily attained limited liability plus easily attained consolidation of entities has been a factor in the growth of the corporatist state.

Taleb has a good point about the incidence of bonuses in the US market system as well.

We trust military and homeland secrutiy personnel with our lives, yet we don’t give them lavish bonuses.  They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail.  For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust.

Eliminating bonuses would make banking boring again, like it was before the repeal of the Glass-Steagall Act.  Boring, in this case, is good.  Congress should consider what kind of legislation could be designed to make bonuses in banking less likely, through tax disincentives or other means.

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The right’s smoke and mirrors scam about Social Security–it ain’t broke (unless China is too)

by Linda Beale

The right’s smoke and mirrors scam about Social Security–it ain’t broke (unless China is too)

We’ve noted in these postings the growing inequality between rich and the rest of us in America, and that is the appropriate backdrop against which to investigate further the right’s smoke-and-mirrors scams about tax policy and earned benefits.  Let me remind you with Kevin Drum’s Mother Jones article on The Price of Plutocracy: “For all practical purposes, every year about $700 billion in income is being sucked directly out of the hands of the poor and the middle class and shoveled into the hands of the rich.” (That sentence is illustrated with a great chart, with data drawn from Joseph Hacker of Yale and Paul Pierson of Berkeley, the authors of Winner-Take-All Politics, a book I highly recommend.)

The national debate about deficits has been part of a relentless push by the right to reduce as much as possible the New Deal earned benefit programs of Social Security and Medicare. The right twists the facts to suit the arguments it wants to make.  Krugman hones in on this issue, noting Dean Baker’s similar anger at the Washington Post’s inconsistency in considering Social Security in a recent article by Post writer Lori Montgomery, who seems to be miming for the hard right, anti-New Deal crowd in Washington .  See Krugman, Social Security, Bait and Switch, a Continuing Series, New York Times (Oct. 30, 2011).

Social Security is a program that is part of the federal budget, but is by law supported by a dedicated source of revenue. This means that there are two ways to look at the program’s finances: in legal terms, or as part of the broader budget picture.

In legal terms, the program is funded not just by today’s payroll taxes, but by accumulated past surpluses — the trust fund. If there’s a year when payroll receipts fall short of benefits, but there are still trillions of dollars in the trust fund, what happens is, precisely, nothing — the program has the funds it needs to operate, without need for any Congressional action.

Alternatively, you can think about Social Security as just part of the federal budget. But in that case, it’s just part of the federal budget; it doesn’t have either surpluses or deficits, no more than the defense budget.

Both views are valid, depending on what questions you’re trying to answer.

What you can’t do is insist that the trust fund is meaningless, because SS is just part of the budget, then claim that some crisis arises when receipts fall short of payments, because SS is a standalone program.  Id. (emphasis added).

Further, the right refers to these programs as “entitlements”, a term that is meant to dredge up resentments against those who have some rights to benefits from these programs.  The right uses “personal responsibility” and “entitlements” as though they refer to two non-intersecting worlds, whereas in fact the opposite is true.

Workers pay into Social Security to support current workers who paid into it in the past.  The trust fund was established, and amended with a good deal of actuarial research under Reagan in 1983, with the knowledge that the baby boom generation would be passing through and create a bulge of benefit needs and that US birth rates tended to be smaller now than they were a century ago.  In other words.  what is happening now in terms of the baby boomer population reaching retirement age and the decline in US birthrates was exactly the information on which the Social Security changes made in the 1980s were predicated.  Either we believe that these kinds of predictions are reasonable (in which case it is utterly silly to raise nightmare scenarioes about bankruptcy, because there is nothing of the sort) or we believe that it is impossible to predict for sure what will happen (in which case it is utterly silly to raise nightmare scenarios about Social Security bankruptcy, because GDP could grow just a little faster than predicted, easing all future problems, or boomer needs could grow just a little less than predicted, easing all future problems).  Either way, the crisis-bell ringing being done by the right as a way to attribute deficits to Social Security is a smoke and mirrors scam.

It is even more so since the Social Security trust fund is invested in US Treasuries and those Treasuries plus new tax funds coming in pay all the benefit costs.  Is the US going to default on Treasuries.  Well, if so, we have a bigger problem with Japan and China not liking that–not just the Social Security trust fund.  The hard right seems to think it is okay to play political games with US debt, but American citizens should be aware that this is what they are doing.

For a good overall exposition of these issues, see the article in  Salon by Gene Lyons, How the Rich Created the Social Security ‘Crisis’ (Nov. 3, 2011) (noting the “decades-long propaganda war against America’s most efficient, successful and popular social insurance program”).

[T]his is the beneficiaries’ money, invested by the Social Security trustees in U.S. Treasury bonds drawn upon “the full faith and credit of the United States.” Far from being “meaningless IOUs” as right-wing cant has it, they represent the same legally binding promise between the U.S. government and its people that it makes with Wall Street banks and the Chinese government, which also hold Treasury Bonds.

A promise not very different, the Daily Howler’s Bob Somerby points out, from the one implicit in your bank statement or 401K (if you’re lucky enough to have one). Did you think the money was buried in earthen jars filled with gold bullion and precious stones?  Id. (emphasis added).

One might add that many of our multinational corporations that are currently lobbying heavily for yet another tax break in the form of a “repatriation holiday” for their offshored, untaxed profits actually have the substantial portion of those profits invested in those same U.S. Treasury notes.  So, as ataxingmatter has noted before, much of that money is already in the US and repatriation will generally not be of much benefit merely from bringing cash back to go through the US economy.  As the article notes, allowing repatriation would lead to corporations dumping about a trillion of US Treasuries on the market, and likely cause a rise in the interest rate the US government must pay to borrow.  Not a win-win situation.  IN fact, clearly a loss for the US government and the majority of US taxpayers, both in Treasury interest rates and in lost corporate tax revenues.


originally published at ataxingmatter

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Infrastructure gamesmanship puts wealthy ahead of jobs, good bridges, and country

By Linda Beale

Infrastructure gamesmanship puts wealthy ahead of jobs, good bridges, and country

For those who are paying attention to the House and Senate these days, it seems like a frustrating exercise.  Mostly it is one of watching the “do-nothing” Republicans find excuses for never requiring millionaires and billionaires to pay their fair share of taxes while making up excuses for not doing anything of the varied real approaches to stimulating the economy in ways that will create jobs for ordinary Americans.

Take the vote on the infrastructure bills.  The Senate leadership asked the Senate to vote for funding $60 billion of much needed infrastructure projects (just a tip of the iceberg of everything that is needed to bring this country’s infrastructure into nonembarassment).  The GOP refused, because it was funded by a de minimis tax on millionaires.

There’s no end to things that can be said about this further evidence of the craven state of the GOP in the US today.  Political advantage for the wealthy class is to be given primary importance, no matter what happens to the vast majority of Americans and the country we all love.  Jim Maule has it right, in The Tax and Spending Stalemate: Can It Destroy the Nation?, MauledAgain (Nov. 7, 2011).

When partisan loyalties mean more than the nation’s well-being, when money means more to wealthy “world citizens” than does the long-term physical security of the nation, and when protection of millionaires who fund campaign treasure chests means more than the lives and safety of the rest of America, the literal physical survival of the nation is imperiled. …

[A]s long as this absurd tax and spending stalemate continues, where decisions are not made on the merits of the issue but on the partisan attachments of supposedly public servants, the nation and its infrastructure, the nation and the health of its citizens, the nation and its economy, will continue to stagnate, deteriorate, and crumble. The question now is how close we are to the point of no return.

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Nader Argues for a Financial Transactions Tax

by Linda Beale

Nader Argues for a Financial Transactions Tax

Ralph Nader provided an op-ed on the question of a financial transaction tax, “Time for a Tax on Speculation,” Wall St. Journal, A17 (Nov. 2, 2011).  He ties the need for the tax as a curb to speculation to the growing concern among ordinary Americans about corporate power and Wall Street excesses.

A financial transactions tax would impose a small charge on the value of stock, bond and derivatives transactions–probably somewhere around 0.25% to 0.5% (the latter is the figure pushed by Nader and groups like National Nurses United). Such a tax would raise a considerable amount of money and at the same time serve another important function–curbing speculative and high-frequency trading.

[This tax] has the potential to curb risky speculative trading that contributes little real economic value.  The Capital Institute’s John Fullerton has stated that a financial speculation tax could have a significant impact on the high-frequency trading and other ‘quant’ trading strategies that now comprise an astonishing 70% of vastly bloated equity-trading volume.  Over the past few decades, trading volume has grown exponentially.  In 1995, the total shares of stock traded on the Nasdaq and the NYSE, not including derivates and other options, was 188 billion.  By the peak of the financial crisis, in 2008, this annual number had skyrocketed to three trillion.

*** Sen. Harkin, Rep. DeFazio and others in the past few years have proposed protecting ordinary investors from the direct effects of the tax by providing exemptions for mutual funds, retirement funds and for the first $100,000 in trades made annually by an individual

originally published at ataxingmatter

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The right’s nutty claims about job creation–Gingrich and the estate tax

by Linda Beale

The right’s nutty claims about job creation–Gingrich and the estate tax

The right is busy selling its program for enriching the rich to the working class.  As usual, the sales pitches are full of false and nutty claims pitched to fool hard workers who are uninformed about the facts.

Newt Gingrich, for example, pitched the claim that eliminating the estate tax that applies only to the biggest multimillion dollar estates–a large tax cut applicable only to the uberrich silver-spoon kids who do nothing to earn the largesse–will cause all kinds of wondrous economic changes.   See “To create Jobs, abolish the death tax now” (The Newt Gingrich Letter).

These claims are based on a  so-called “study” by the American Family Business Foundation (put in quotes, since this is a paid “study” by  a propaganda tank that asks family businesses of the kind that might have to pay the tax whether they would create more jobs if they didn’t have to pay the tax, and gets the not at all unsurprising self-serving answer that “oh yes, we’d have more jobs with fewer taxes”.)   So the study and Gingrich make pie-in-the-sky claims that

  • the US government would actually take in more tax revenues by getting rid of the millionaires & billionaires’ estate tax–even claiming a specific number of $362 billion more in taxes.  (It helps if the persons answering the self-serving survey give numbers that can be used to make these specific type of claims.)
  • Gross Domestic Product would increase by 2.26% just by eliminating the tax
  • New revenues from the “economic activity that would result from the elimination of the [estate] tax” would be twice as much as the revenue gained from the current estate tax;
  • the economic growth from eliminating the estate tax would “create thousands of new jobs as families kept more small businesses running through mutliple generations and shifted their efforts from avoiding estate taxes to investing in America”


Eliminating the estate tax won’t create new economic growth, new investment in jobs, save family businesses or divert monies now spent on tax evasion to worthwhile domestic investments.  Most of the claims in articles like Gingrich’s or in “studies” like the self-serving American Family Business Foundation are unfounded, based on absurd assumptions or simply made up.

  • Estate tax reduction or repeal doesn’t lead to growth.  We have cut taxes on estates enormously in the last decade and growth has stagnated, with none of the benefits going to the vast middle and lower classes.  There’s no empirical evidence supporting the self-serving claims that such a tax cut helps growth.  In fact, evidence on inequality in societies supports exactly the opposite conclusion–the more we allow spendthrift heirs to take over family fortunes tax free and accumulate even more wealth, the worse it is for economic growth and societal wellbeing.
  • Estate tax reduction or repeal doesn’t create jobs.  Money saved from taxes doesn’t automatically get plowed back into businesses in a way that creates jobs.  It’s more likely to get plowed into private equity funds (that strip companies of their employees and load them up with debt in order to resell them at great gain for the equity investors and great loss of jobs) or invested in emerging market economies to diversify portfolios.  Most use of excess funds by the wealthy, that is, benefits the wealthy at little or no good to society and in fact often with considerable harm to society in terms of job loss
  • Estate tax repeal doesn’t “save” family businesses, because they aren’t at risk from the estate tax in the first place.  Very Very few (if any) family businesses are lost to the estate tax.  There is a provision in the Code allowing installment payments over 14 years to ensure that family farms can stay in business by paying the estate tax out of annual incomes.  The argument about loss of family businesses is invented to appeal to those who do not understand the very limited number of estates subject to the tax in the first place (fewer than 2%).
  • Estate tax repeal doesn’t prevent sales of family businesses upon death of the founder–and those sales are often a good thing!  Many times, family businesses are sold upon the death of the founder because nobody in the family wants to run it anymore–they want to take their cash and go live their own lives.   That’s probably not a bad result for the economy–new management will tend to see opportunities that the old business had ignored.  All repeal of the estate tax would do would be to put more money in the hands of heirs who do nothing to deserve it.
  • Estate tax repeal isn’t needed to avoid “double taxation.”  Gingrich tries to make the case, quoting Petter Ferrara as follows:

“The [estate] tax taxes yet again a lifetime of savings and investment that has already been taxed multiple times.  It is double taxation on top of double taxation, which often forces loved ones left behind to sell the family farm, ranch or business to pay the taxes just when they are suffering from their loss the most.”

Not so.  Many estates have as their primary assets investment securities that represent considerable appreciation that has NEVER been taxed.  Elimination of the estate tax means that even this “last chance” for getting a single tax bite would be eliminated.  Many of the biggest estates represent passage of stock from one generation to another with almost no taxation along the way.  Whereas workers pay tax on every single dollar earned and have little ability to use their salaries as collateral for big investment plays, wealthy heirs of financial assets can use their assets as collateral for loans to “monetize” their wealth without taxation.  Most substantial family farms and ranches are now incorporated, with use of various schemes to zero out corporate income and pay no taxes (especially, e.g., depreciation of equipment and “salaries” for family members and corporate ownership of personal residences resulting in widespread ability to deduct personal expenses not possible to ordinary wage workers).  Double taxation is a fabricated myth for most of these estates.  As Leona Helmsley famously stated–only little people pay taxes.

And of course, as already noted, the sales are usually because they WANT to sell, since family farms have 14 years in which to use the income from the business to pay off any (usually small) estate tax due.  Remember that the effective estate tax rate is usually very very low, given the very large current exemption amount.  Only the estate above the multi-million dollar exemption amount is subject to tax, and the rate right now is inordinately low and there are numerous accepted and simple mechanisms, such as family limited partnerships and other devices, which result in much lower evaluations than fair market value under current warped rules.

Meanwhile, it is important to note the many beneficial effects of the estate tax:

  • the estate tax provides revenues to help combat significant budget deficits.  Those deficits have been substantially created by two problems–wars being fought without the normal tax increases to fund them, and tax cuts even when those cuts created hundreds of billions of dollars in annual deficits.
  • the estate tax is a slightly redistributive mechanism to counter the upwards redistribution that is the norm in our current economic system.  CEOs get golden parachutes for ruining companies, and bankers and managers take all the benefits of worker productivity gains.  Ordinary employees are denied the right to form a union by every employer trick imaginable and by the right’s unwillingness to let card check become law.  Workers therefore end up scraping by on a combination of devalued wages and debt.

Keeping the estate tax, and making it more progressive so that the estates of the uberrich are appropriately taxed under “ability to pay” concepts regarding the marginal utility of the dollar, is the fair thing to do. And it would have a stimulative effect on the economy by providing revenues for governmental infrastructure and other projects.  Counter to Gingrich’s claim, repealing the estate tax would be a further step backward  to the robber barons’ gilded age.  Let’s not take that step.

November 01, 2011 in Estate Tax, Job creation, Right Wing Rhetoric | Permalink

Technorati Tags: deficit reduction, estate tax, family businesses, family farms,Newt Gingrich

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the right’s smoke & mirrors scams about corporate tax "reform"

by Linda Beale

the right’s smoke & mirrors scams about corporate tax “reform”

One could get a pretty gloomy picture of the state of Social Security, and the need to “reduce entitlements” while at the same time hearing about the (faked) urgency of cutting corporate taxes in order to give our US multinationals an edge in global competition, if you pay much attention to the GOP presidential candidates talk and listen to their echo chambers in the right-dominated GOP factions in the House and Senate and their marketers in the Koch etc. funded propaganda tanks like the misnamed “Americans for Prosperity” (should be “Americans for prosperity for the have-mores”).

These same right-wing politicians and funders were gung-ho for two budget-busting manuveurs under George W. Bush–outrageous tax cuts of primary benefit to the rich (such as the gradual reduction of the estate tax to its one-year repeal in 2010 and its rebirth in 2011 at an absurdly low rate with an equally absurdly high exemption amount) and outrageous spending for more and more militarization of the US society (wars of choice in Iraq and Afghanistan, where hundreds of thousands have died but little in the way of lasting peace has been gained, and a gigantic “homeland security” apparatus that has eroded the civil rights of US citizens, including allowing one to be targeted and assassinated on solely the say-so of the executive branch without any of the due process protections supposedly guaranteed by our pre-Bush constitution). Cheney of course famously quipped that deficits don’t matter any more, when he was helping to push the $1.3 trillion 2001 tax cut that would give him and George W. huge tax cuts in the tens of thousands for 2001 alone. Then there was the 2003 tax cuts aimed especially at relieving the have-mores of taxes on the money their money earned (cutting dividend rates on corporate stock to the same low rates as net capital gains) and the 2004 tax cuts aimed especially at giving multinational corporations the many tax breaks they’d been lobbying for avidly for the last two decades, along with a “repatriation holiday” that allowed the ones who’d worked most assiduously to avoid paying US taxes on their profits from intangible intellectual property rights to spend the money on outsize managerial compensation and shareholder stock buybacks while firing regular employees with very little or even no tax consequences.

Now, the right wants to repeat all of that.

Dave Camp, minion of multinational corporations, is crafting a give-it-all-away package of so-called corporate tax reform that may cut back on loopholes but in the process will lower rates and allow multinationals to offshore money-making enterprises, with the results that even fewer multinationals will actually pay any federal corporate income taxes. (The text of Camp’s release about his corporate tax “reform” proposal is appended at the end of this posting). Camp calls for a 25% rate and a territorial tax system that would cut corporate tax revenues even further. The Joint Tax Committee has noted that cutting all the loopholes in a base-broadening attempt would allow lowering the corporate tax rate only to 28%. See Wall Street Journal report on the JTC report.

All of this is rationalized by the right as necessary to help US multinationals “compete” on the global stage.

You’d think that US corporations were slaving away under incredibly heavy US federal income tax burdens, but there’s no truth to that at all. Most of the griping about the corporate tax talks solely about federal statutory rates and not about either the effective tax rates (what corporations actually pay) or about the lack of most of the other kinds of corporate taxes paid by corporations housed in other developed nations (much higher Value-Added Taxes and excise and transfer taxes).

In fact, most US multinational corporations are not heavily taxed at all, and most of the smaller US corporations zero out their profits with shareholder “salaries” (deductible) and other often easily manipulated expenses (personal expenses of ‘family farmers’ whose homes and cars and everything else are “owned” by the family farm corporation, etc.). Citizens for Tax Justice has for several years looked at publicly reporting US corporations’ fiscal statements on taxes and profits to tell the real story about profitabilty and taxes. It’s not the story the Chamber, the National Association of Manufacturers, or the anti-tax, anti-government funded groups or the Koch brothers want known. But it’s the facts. CTJ’s most recent study makes clear that US multinationals have no trouble competing due to taxes. See the report: Corporate Taxpayers and Corporate Tax Dodgers, 2008-2010.

As Andrew Leonard reports today, the study shows that 37 of the country’s largest corporations paid zero taxes in 2010.

In 2010, Verizon reported an annual profit of nearly $12 billion. The statutory federal corporate income tax rate is 35 percent, so theoretically, Verizon should have owed the IRS around $4.2 billlion. Instead, according to figures compiled by the Center for Tax Justice, the company actually boasted a negative tax liability of $703 million. Verizon ended up making even more money after it calculated its taxes.

Verizon is hardly alone, and isn’t even close to being the worst offender. Perhaps most famously, General Electric raked in $10.5 billion in profit in 2010, yet ended up reporting $4.7 billion worth of negative taxes. The worst offender in 2010, as measured by its overall negative tax rate, was Pepco, the electricity utility that serves Washington, D.C. Pepco reported profits of $882 million in 2010, and negative taxes of $508 million — a negative tax rate of 57.6 percent.

Andrew Leonard, America’s Corporate Tax Obscenity, Salon (Nov. 3, 2011). Four industries–finance, utilities, oil/gas/natural resources and IT– reap huge windfalls from the current corporate tax code. Those windfalls that aren’t likely to be eliminated in any “reform” that passes the right-wing Congress–just look at the current lobbying for maintaining the “active financing” exception for banks’ passive income, an exception that allows banks to defer taxation on their passive earnings, unlike most other industries.

There’s no way that a territorial tax system (that allows US corporations to continue moving active businesses offshore tax free and moving patents and other rights off shore to ensure that the income from the rights aren’t taxed in the US) combined with incredibly low rates will raise an appropriate amount of income from corporations. It is a giveaway to the corporations that think they have now bought Congress. At the same time, as the CTJ report authors note, most of these reform schemes actually will allow corporations to move even more jobs and businesses offshore. If we really wanted to enact good corporate tax reform, we’d remove the loopholes favoring big industries like Big Oil, get rid of the accelerated depreciation allowances that let companies expense long-term investments, require an “exit tax” of ordinary income on all appreciated assets and untaxed earnings whenever a corporation restructures itself into a foreign company or moves its active business assets abroad, and otherwise tighten up the corporate tax rules to ensure that corporations pay a fair share in taxes.

It is up to the people to show that they haven’t loss the power to take control in our democracy, but given the lack of understanding of tax and fiscal issues in this country, and the deep pockets of corporations to fund the Chamber and other group’s misleading information and distortion of facts on these issues, it is questionable whether US democracy can save itself.

Appendix: Camp release about proposal for corporate tax “reform”

Today, Ways and Means Committee Chairman Dave Camp (R-MI) unveiled an international tax reform discussion draft as part of the Committee’s broader effort on comprehensive tax reform that would lower top tax rates for both individuals and employers to 25 percent. In addition to rate cuts, the plan would transition the United States from a worldwide system of taxation to a territorial system – a move virtually every one of America’s global competitors has already made.

Camp unveiled the draft legislative language with a specific request – that employers, academics, practitioners and workers provide comment and add their voices to the legislative process.

Commenting on the release of the proposal as a part of his overall approach to comprehensive tax reform, Camp stated, “Instead of having laws on the books that encourage hiring U.S. workers, our outdated international tax system encourages employers to keep profits and jobs outside of America. If we are serious about creating a climate for job creation, now is the time to adopt tax policies that empower American companies to become more competitive and make the United States a more attractive place to invest and create the jobs this country needs.”

The Ways and Means discussion draft would:

– Reduce the corporate tax rate to 25 percent – bringing it in line with the average of countries in the Organization for Economic Cooperation and Development (OECD). The Committee continues to examine base broadening measures that will replace the revenue foregone by reducing the corporate tax rate, so these measures are reserved in the discussion draft for future release.

– Shift from a worldwide system of taxation to a territorial-based system. The new plan:

* Exempts 95 percent of overseas earnings from U.S. taxation when profits are brought back to the United States from a foreign subsidiary.

* Includes anti-abuse rules to ensure companies do not avoid paying their fair share of U.S. taxes.

* Frees up existing overseas earnings to be reinvested in America after they are taxed at a low rate in line with current repatriation proposals.

* Makes American companies more competitive on the global stage with little or no impact on the federal deficit.

In advocating the need for international tax reform, Camp cited several reasons why current U.S. tax policies are putting American employers and workers at a competitive disadvantage:

– America will soon have the highest corporate tax rates in the industrialized world: Only Japan has a higher corporate tax rate than America, which has a combined federal-state rate of 39.2 percent – and Japan has already indicated its intent to lower its rate.

– Our “worldwide” system of taxation is a remnant from the Cold War: While it has been 25 years since Congress reformed the tax code, it has been almost 50 years since it undertook a bottom-up review of our international tax laws. In other words, our international tax rules were written when the United States accounted for 50 percent of the global economy and had no serious competition from others.

– American employers face double taxation compared to their foreign competitors: As a result of our “worldwide” system of taxation, when U.S.-based companies try to bring profits back home, they must pay U.S. taxes on top of the tax they already pay in the foreign market U.S. tax laws encourage investing in a foreign country instead of bringing profits back home: Because U.S.-based employers face additional taxes if they bring their overseas earnings back to invest in the United States, it is cheaper for these companies to reinvest profits overseas instead of creating jobs here.

– America is losing ground: In 1960, U.S.-headquartered companies comprised 17 of the world’s largest 20 companies – that’s 85 percent. By 2010, just six – or a mere 30 percent – U.S.-headquartered companies ranked among the top 20.

– Our foreign competitors are actively reforming their tax laws: Other countries are actively reforming their international tax codes – giving employers lower rates and moving towards a territorial tax system. Countries like the United Kingdom, Canada, and Germany, have recently lowered their tax rates to spur job creation and economic growth. Yet, America is sitting on the sidelines doing nothing. The United States cannot sit back and watch jobs go overseas because the tax code provides such perverse incentives.

originally published at ataxingmatter

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The Kimel Curve and the Kitchen Sink, Part 2: The Reagan Era to the Presen

by Mike Kimel

The Kimel Curve and the Kitchen Sink, Part 2: The Reagan Era to the Present

I often post about the relationship between the top marginal tax rate and economic growth, which I’ve noted can be described this way:

% change in real GDP from t to t+1 =

a + b*Top Marginal Tax Rate at time t
+ c* Top Marginal Tax Rate squared at time t

(I’ve modestly described that relationship as the “Kimel curve.”)

I’ve done this many times, and have added all sorts of things to the curve, but in every case, the results are more or less the same: the top marginal tax rate that maximizes growth is somewhere in the neighborhood of about 64%, give or take about 5%.

Its usually my practice to use all data available when I’m estimating that relationship. That means going back to 1929, the first year for which the BEA keeps data on real GDP. In part that’s because I get accused of cherrypicking if I don’t use all the data available. But lately I’ve started getting accused of somehow trying to bias results by using all the data available.

So I’m going to run a version of the model similar to the one I ran last week, but I’m going to start with data from 1981, which is when Reaganomics set in.

(More after the jump!)

The specific model I’m going to estimate is this

% change in real GDP from t to t+1 =

a + b*Top Marginal Tax Rate at time t
+ c* Top Marginal Tax Rate squared at time t
+ d* % of pop 35 – 44 at time t
+ e* % of pop 45 – 54 at time t
+ f* President is a Republican (Y/N) at time t

Here are the results:

Figure 1

A few things to note: the percentage of the population 35 to 44 is not significant, though it was significant when data going back to 1929 was used. Conversely, the percentage of the population 45 to 54 was not significant with data going back to 1929, but is significant here. What that tells me is that for much of the period from 1929 to the present, the percentage of the population 35 to 44 was one of the more important demographics for driving growth. However, more recently, the population 45 to 54 has become more important reflecting the reduced importance of manual labor.

The Republican dummy wasn’t significant when using data going back to 1929… and it isn’t significant in the more recent period either.

But what really matters, in my opinion at least, is this: the coefficients on the top marginal tax rate and the top marginal tax rate squared are both significant. The former is positive and the latter is negative. That means the Kimel curve applies to the period since 1981 to the present as well.

The growth maximizing tax rate obtained when using data for the period from 1981 on is 44%, about 20 percentage points below the top marginal rate obtained when using data going back to 1929. So, why the difference? I don’t know, but I have some ideas:

1. The period from 1981 on includes one observation where the tax rate was above 50% (i.e., 1981, when the economy was in a recession), several at 50%, and the rest below. The model simply hasn’t “observed” higher tax rates and the growth rates associated with those higher tax rates.

2. Prior to Reagan, the public was more accepting of the idea that tax rates should be higher. Reagan changed the zeitgeist. The government became the problem, not the solution, and taxes, well taxes came to be viewed as theft.

My guess is that its a combination of both factors. But even if you lean primarily toward the second reason, and assume the optimal tax rate has shifted down over time… its still well above where tax rates are now.

In fact, tax rates have been below 40% since 1987. The annualized growth rate in real GDP during the 23 years from 1987 to 2010 was 2.6%. The last time real GDP grew that slowly during a 23 year period was… well, who knows – it never happened before then in the time since the BEA has been keeping data. If you decide to, well, cherry pick and leave out the Great Recession… the annualized growth rates in real GDP from 1987 to 2007 was a hair over 3% a year. Previous to that, the last time annualized growth rates were that low for the same number of years occurred at the end of World War 2. Put another way… the period from 1987 on may have been a success in terms of keeping tax rates low, but it has been a failure in terms of economic growth, as the only time the economy has done worse was when it switched out of a command economy and went immediately into a recession. (I can’t help but notice that the only time when the economy did worse happened to come during what David R. Henderson refers to as the Post War Economic Miracle.) Better policy would get us faster economic growth and that would be good for everyone, even those paying the highest marginal rates.

Housekeeping… GDP data came from the BEA and tax rates came from the IRS.

A few other comments… the correlation between residuals at time t and time t+1 in the model estimated is about 16.5%. One could do other checks, but it seems very, very unlikely that autocorrelation is a problem here. Of course, we’re also missing some important variables… the fit could be a lot higher. I’ll start incorporating some of the suggestions I received from readers after the last post.

As always, if you want my spreadsheet, drop me a line. I’m at my first name (mike) period my last name (kimel – note only one m) at

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Inequality–the facts speak for themselves (don’t listen to the apologists on the right)

by Linda Beale

Inequality–the facts speak for themselves (don’t listen to the apologists on the right)

Inequality is real, and it is growing. It is debilitating for democratic institutions, as the Supreme Court’s Citizens United case and its aftermath start to impact the federal elections and as the money from the Koch brothers, Walton heirs and others swings the debate with purchased sound bites designed to deceive and enable the “enrich the rich” winner-take-all economy created by right obstructionism (itself enabled by the relaxation of the filibuster rule that created a 60 vote requirement in the Senate and allowed an intransigent minority to prevent legislative enactments supported by a clear majority).

Tax policy matters to income inequality. For background on this, read The 30-year growth of income inequality, A Civil American Debate (Apr. 10, 2011) (providing two graphs showing the top tax rate over time the income inequality (the percentage of total income going to the top 10%), which shows that income inequality levels inversely track the top tax rate–as the rate increases, income inequality decreases). When top tax rates are lowered too much, they do not do their work in maintaining respectable limitations on income inequality. With the slide in economic fairness under reaganomics (privitization, deregulation, tax cuts–especially for the wealthy, and militarization), the US has now “two economies, a wealthy ‘top’ economy doing very well, and a ‘bottom’ economy for roughly the bottom 99% facing income stagnation, with dwindling wealth and resources.” The growth in income inequality shows that gains at the top dwarf, by any measure, those for everybody else.


(Note: the most recent CBO report has slightly different numbers, but in the same range–close enough for our purposes.)

Even these solid income inequality facts are treated by the right as sound bites to be manipulated. An article in The New Republic debunks the American Enterprise Institute’s Jim Pethokoukis’s attempt to mask the facts. See Matt O’Brien, Is Income Inequality a ‘Myth’?, The New Republic (Oct. 31, 2011) (hat tip Mark Thoma) (discussing Jim Pethokoukis, 5 reasons why income inequality is a myth–and Occupy Wall Street is wrong, EnterpriseBlog, American Enterprise Institute (Oct. 18, 2011).

As O’Brien puts it, Pethokoukis’s article asserting that income inequality is a myth “suffers from the defect of having a tenuous relationship with reality.” Especially when, as Jared Bernstein noted, whatever the cuase for the increase in inequality (and there are several likely suspects), “the highest quality data that we have all show the same thing: significant increases in inequality.”

Petrhokoukis tries to suggest that the “move rightward toward a greater embrace of free-market capitalism” is proof that inequality hasn’t exploded in the reaganomics era because inequality should have led to “beleaguered workers unit[ing] and demand[ing] a vastly expanded safety net and sharply higher taxes on the rich.” He calls the “occupy wall street” protesters “radicals”–I guess because they are willing to sacrifice personal comfort to bring a non-violent message to the world through their signs and statements about the unfairness of today’s society with its gaping inequalities in income and wealth, resulting in an influential 1% that can arrange laws to suit them. He tries to argue that the very idea that “the rich are getting richer at the expense of the middle class and poor” is left-wing fantasy.

Of course, the dominance of the free-market mantra is actually proof of inequality, not evidence of some kind of notion of growing equality. The irrational adoption of Friedmania “free market” anti-factual policies has taken place due to the inordinate advantage enjoyed by the uberrich in promoting policies favorable to their own wealth and status in winner-take-all politics, enhanced by recent decisions granting state-created concessions (corporations) “free speech” rights to intervene in political campaigns in which corporations do not have a right to vote,

And the ability of the uberrich to buy policies that suit them means that legislation to re-empower unions as an antidote to plutarchy can’t get passed the “bought and paid for” legislatures. A majority of workers want to be able to unionize; a majority of Americans want higher taxes on the rich; a majority of Americans oppose the kinds of “bailout” policies for banks espoused by Bush where there was lots of taxpayer money and no accountability. The policies favored by the 99% aren’t enacted because of the power of money wielded by the 1%.

So what does Pethokoukis rely on to make his case? snips and snippets of the following:

  • Pethokoukis claims that income gains have been shared “fairly equally” among workers and managers.” While it is true that one piece of research suggests that the gap between productivity and wages may not be as high as commonly thought. Pethokoukis stretches (and abuses) that research in making his claim. There’s clearly a gap, it may be debatable what it’s exact size is, but there’s no debating the story of runaway wealth at the top of the income distribution.
  • Pethokoukis claims that after-inflation median incomes haven’t really stagnated in the last 30 years. He relies on a pair of Federal Reserve studies that use different numbers to jigger the after-inflation incomes produced by CBO. Voila–with these ‘adjustments’, the numbers don’t say what they appear to say. That’s not research–that’s fudging the numbers to get the desired result.
  • Pethokoukis asserts that better accounting for positive transfers (taxes, benefits, pensions, healthcare) and consumption would show there is no real inequality gap. While it is true that after-tax inequality is smaller than pre-tax inequality (thank goodness), it is not true that inequality is eliminated or even that as much inequality is eliminated as used to be. Taxes and benefits are less redistributive downwards than they used to be. and tax cuts have been primarily redistributive upwards. Even taking all benefits into account, inequality is increasing rapidly. As for consumption, the wealthy don’t have to consume as much of their income as the poor (increases inequality), and the poor and middle class had to borrow in order to maintain consumption (shows increases in inequality).
  • Pethokoukis claims that measuring inflation correctly shows inequality has been “roughly” unchanged. That’s ridiculous. Yeah, higher end goods show more inflation in price than the lower-end goods consumed by the growing class of poverty-striken Americans as Americans move from middle to lower middle and lower income groupings. The market can still function at the high end with price increases because the wealthy have more income to pay those inflated prices. The fact that the wealthy have more money to buy more inflated higher end goods doesn’t mean inequality hasn’t increased. Fewer middle class can shop regular goods and now have to shop for discounts. That’s more proof of inequality, not less (inequality still underlies the consumption patterns).
  • Petrokoukis asserts that the fact that most of the population has the ability to take advantage of technological advances (long-distance telephone calss, air condition, dishwashers, iPods, digital cameras and color TVs) means that inequality isn’t growing because “America is better off today.” Of course, this is a straw man argument. First, the growing numbers of American affordable gadgets doesn’t reduce the shame, humiliation and degradation of poverty for the growing numbers of Americans living in poverty. Every family will have some of those gadgets, just like poorer families after the advent of trains could enjoy faster transportation (on the few occasions they used it) by train than queens and kings had indulged in in the age of chariots. Doesn’t mean that inequality isn’t rampant, or that those technological benefits make up in any way for the substantial detriments of a highly unequal society where the benchmark norm is whatever everybody has access to and the relative comparison is in terms of what the wealthy have that others don’t have. What the wealthy have these days are not so much technological advantages (though those also exist in signficant degree and kind different from what the middle and poor classes enjoy) but advantages in terms of education, opportunity, jobs, access to power, access to influence, health care, travel, leisure, personal space, food, entertainment, etc. The suggestion that everybody has been so benefited by the gadget culture so that the huge problem of inequality should be ignored shows that somebody has lived on the “right” side of the tracks for so long that they cannot even comprehend what it is like to be on the losing side of the winner-take-all economy.

The concluding paragraph of the New Republic report sums it up.

Since 1979, incomes for the broader middle class increased 40 percent, while the top one percent shot up a staggering 275 percent. Conservatives can pretend otherwise, but the numbers won’t.

November 02, 2011 in Inequality of wealth or income, Right Wing Rhetoric |

originally published at ataxingmatter

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