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Optimal Tax Rates for Generating Economic Growth According to Barro-Sahasakul Tax Data

By Mike Kimel

Optimal Tax Rates for Generating Economic Growth According to Barro-Sahasakul Tax Data

This piece is a bit more wonky than what I normally post.

I recently re-read “Macroeconomic Effects from Government Purchases and Taxes” by Barro & Redlick. I was struck by how different the conclusions they make about taxes are from what you get if you simply make a bar chart of the top marginal rate at any given time versus the growth rate over the next year.

Now, obviously, Barro & Redlick take a completely different approach… but at the bottom of everything is the data set they use (see Table 1 of the above referenced paper and this explanation of the “Barro-Sahasakul” data set). To cut to the chase, they use estimates of the average marginal tax rates paid by taxpayers rather than the top marginal rate that I used in the bar chart referenced above. Their overall marginal rate is made up of not just federal tax rates, but also social security tax rates, and even estimates of the state tax rates. It should be noted the Barro is an average rate, and since the average includes non-filers (who pay zero), the Barro rate is often well below the top marginal rate. The top Barro rate is 41.8% which occurred in 1981 (compared to top marginal rates of 90%+ from 1951 and through 1963). The Barro rate is also not correlated with the top marginal income tax rate (correlation going back to 1929 is -30%).

A lot of work clearly went into producing this overall marginal rate (I’m going to call it the “Barro tax rate” for simplicity). But does it explain economic growth rates any better than the top marginal rate?

I ran a quick and dirty regression…

Growth in real GDP from t to t+1 = f(Barro Tax Rate, Barro Tax Rate Squared, Top Marginal Income Tax Rate, Top Marginal Income Tax Rate Squared)

Data ran back to 1929, the first year for which real GDP was computed by the BEA. Top marginal rates came from the IRS Statistics of Income Table 23. And the Barro Tax Rate came from Table 1 of the Barro & Redlick paper. Since Barro rates are computed only through 2005, that’s when the analysis stops.

Results were as follows:

Figure 1

(Note… the errors got big during leading up to WW2, but I don’t think that invalidates this quick and dirty look.)

Here’s what I get out of this:

1. There is definitely a quadratic relationship between tax rates in one period and real economic growth the next.
2. If you’re going to pick either the Barro rate or the top marginal income tax rate, go with the latter. Its clearly better at explaining economic growth rates.
3. There may be something to be said about using the Barro rate and the top marginal income tax rate together. They do explain different things.

If you compute the “optimal tax rate” – the rate that maximizes economic growth implied by the regression – you get a Barro rate of 25% and a top marginal income tax rate of 64%. The optimal Barro rate was last seen in 1966, when the top marginal rate was 70% and the bottom rate was 14%. I’m guessing from this, and from looking at the Barro rate series, that this would imply that if you want to maximize growth, the top rate should be raised to about 64% and the tax burden on folks at the lower end of the income scale should be lowered. I’m not sure Barro would be pleased with these results.

I may return to this, but my next post should be the next in the series on GDP growth and the S&P 500.

As always, if you want my spreadsheet, drop me a line with the name of this post. I’m at my first name (mike), my last name (kimel – with only one m) at gmail.com. BTW… this spreadsheet contains a lot more wonky goodness!

Thanks to Sandi Saunders for getting me started wading through this particular pile of weeds.

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Four Graphs Looking at Real Economic Growth

by Mike Kimel

Four Graphs Looking at Real Economic Growth

This post contains four graphs looking at real economic growth, three of which also contain some tax information.

The first graph shows the five year annualized growth in real GDP for every five year period beginning the one ending in 1934. (I begin then simply because data on real GDP is only available from the BEA beginning in 1929.)

Figure 1.

I took the liberty of adding in two lines free-style. The first is my attempt to trace the high points over time, leaving out WW2. The second traces the low points, assuming the collapse from 1929 to 1932 and the post-WW2 drop are special cases. (That huge dip from 1945 to 1950, economic shrinkage and all, is what libertarian professors like David R. Henderson keep referring to inexplicably as a post-war miracle.) Those ad hoc lines seem to indicate that any “Great Moderation” in the economy – whether it began in the 1980s or earlier – is more due to a slowing down of the rapid periods of growth than to a reduction in the severity of downturns. Put another way… the Great Moderation = the Great Suckening (for readers who aren’t economists, that’s a technical term like “sterilizing monetary policy” or heteroscedasticity).

Figure 2 is similar to Figure 1, but it strips out the two ad hoc lines and adds in the five year average top marginal individual income tax rate.

Figure 2.

As Figure 2 shows, there doesn’t seem to be much of a relationship between the average top marginal tax rate in any five year period and the annualized growth in real GDP over that same period, and certainly there’s no sign from this graph that higher tax rates discourage economic growth. The fact that the correlation between the two series is positive indicates that if anything, in general real economic growth rates have tended to be higher when tax rates were higher.

Figure 3 is a scatter-plot version of the data in Figure 2.

Figure 3.

Notice that it kind of looks like you can put a quadratic curve to these points – at “low” tax rates, increasing tax rates are associated with faster economic growth. Only at very “high” tax rates – somewhere north of 70% or 80% – does it appear that reducing tax rates are associated with faster economic growth. Reminiscent of this graph, dontcha think? Another thing that’s noticeable… the greater variability in growth that accompanies higher tax rates, which was also visible from Figure 2.

Finally, Figure 4 is the same as Figure 3, but rescaled to leave out 1942-1945, which only makes the lack of a lower taxes = faster economic growth relationship more obvious.

Figure 4.

As always, if you want a copy of the spreadsheet where these graphs were produced, drop me a line. I’m at mike period my last name (that is “kimel” – one m only!) at gmail period com.

Cross posted at the Presimetrics blog.

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Libertarians Looking Vaguely in the Direction of Apostasy

by Mike Kimel

Libertarians Looking Vaguely in the Direction of Apostasy

Tyler Cowen is a prominent libertarian, a professor at GMU and Director of the Mercatus Institute. He is also on very, very dangerous ground. Lately he has had a couple of posts – the latest one here – that quote a new book by Alexander Fields. I haven’t read the book yet, but it seems to describe the 1930s as a period of great innovation despite pervasive misery.

But some of the passages Tyler quotes come tantalizingly close to noting that the economy was actually growing very rapidly by 1939. But what happens if he realizes it isn’t just after 1939, that real growth under FDR was faster than under any President since data has been collected – even if you leave out 1941 through 1945. See Figure 1 at this post. (Or that FDR was followed by LBJ, and then JFK, and then Clinton.) What if he takes a look at private investment during the New Deal era. What if he looks at the relationship between tax rates and economic downturns or comparison of growth rates between the “roaring 20s” favored by libertarian myth and the New Deal era?

Could a person really remain a libertarian if they realized things like that? Cowen has a lot at stake. I wonder if he’ll take the next step.

Note… Arnold Kling is also skating on the same ground. As of this writing, his readers, usually good for at least a few comments on every post, are stunned into silence.

Cross-posted at the Presimetrics blog.

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Where Has the Spending Gone, Joe Dimaggio?

by Mike Kimel

Where Has the Spending Gone, Joe Dimaggio?

Lately there’s been a gnashing of the teeth about the deficit and the debt and what to do about it. Democrats point out that when GW took office, there was no deficit, and that a big part of the problem is that federal tax revenues have fallen from 20.6% of GDP in Fiscal Year 2000 to 14.9% in Fiscal Year 2010 (warning – Excel file), and are slated to fall to 14.4% this fiscal year. I found a nice graph here. Despite the nonsense that gets referred to as Hauser’s Law, the big fall in tax revenues is is in large part due to the tax cuts, although the poor economy also plays its share.

(Note – so I don’t have to keep typing it, all years in this post are fiscal years.)

But for there to be a deficit, tax revenues (whether high or low) have to be less than spending. And spending has also gone up (again see OMB Table 1.2 referenced above) from 18.2% of GDP in 2000 to 23.8% of GDP in 2010, and is slated to go above 25% of GDP this fiscal year. (It is worth noting – federal spending as a percentage of GDP fell in every single year during the Clinton administration… which means Newt Gingrich doesn’t get credit for it unless you believe he had one heck of a time machine.)

I thought it would be interesting to see where that spending is going, so I pulled the data from OMB Table 3.1 and graphed it below. (Dotted lines indicate future projected spending.)

Figure 1

The figure indicates that for the most part, spending in most categories has been pretty flat. Defense spending, though, rose from 3% of GDP in 2000 to 4.3% in 2008, 4.8% in 2010, and is slated to go above 5% this year. Afghanistan, Iraq, and now Libya all cost money, especially if conducted with sweetheart no-bid deals. The bigger ticket category that saw increases was “human resources” – that was 11.4% of GDP in 2000, reached 13.2% of GDP in 2008, and is expected to top 16% this year.

So what are these human resources? I don’t have the definition in front of me, but I think that includes things like unemployment compensation, food stamps, and the like. Put another way, some of the spending (it’s 3:36 AM right now – I think the “how much” part of “some” has to wait for another post) is happening because the tax cuts didn’t work as advertised. But then, its not like that should have been a surprise.

Cross-posted at the Presimetrics blog.

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Robert Reich’s After Shock and Corey Robin’s Freedom Arguments

by Linda Beale

In earlier posts on ataxingmatter (here and here), I reviewed Robert Reich’s 2010 book, After Shock, and wrote about his suggested cures for the problems made most visible in the 2007 crash and the Great Depression that followed.

The gist of the book is summed up in the following quote:

“[L]eft to its own devices, the market concentrates wealth and income–which is
disastrous to an economy as well as to a society.” at 59

Corey Robin writes in the Nation about the same problem, Reclaiming the Politics of Freedom, The Nation, Apr. 26, 2011. But he notes that harping on the distributional inequality doesn’t resonate with voters. If the left wants to influence policies and capture the hearts of voters, he suggests, it needs to demonstrate that this distributional mayhem, which leaves everybody but the rich vulnerable, has even broader consequences that reach to the very fundamental creation myths of our society–the desire to be our own masters, to free ourselves from a tyrannical monarchy and colonial overlords who seemed to want to dictate how we could work, what we could drink, and where we could live. That is, to make what we are saying comprehensible at the “yeah, that’s what counts for me” level, we need to connect to America’s own Founding Moment. We need to “reclaim[] the politics of freedom.”

And I think he is correct. Because the problem we are facing today, with corporate lobbying and campaign contributions reinforcing the elite class’s wining and dining of politicians, is more than the dysfunction of the economy. Yes, there is too much money at the top where there is not enough ability to spend it. Yes, there is too little money at the bottom where there is no way to provide for basic needs. Yes, there is barely enough in the middle, resulting in stagnation in local businesses who don’t have enough customers to sell to and can’t afford to give credit to those who want to buy.

It is not just that banks, connected to power through their managers and shareholders, are able to speculate with other people’s money (our money!) in the international derivatives casino and then push their losses off on us. It is not just that corporate bosses rake in as much in a day as many of their workers make in an entire year of hard labor. It is not just that we can no longer talk to anybody local when there is a problem with our phone or our order from a company. It is not just that ordinary people are ignored, disregarded, almost shunned, because the elite really are only comfortable in the company of other elites. It is not just that we can’t get an appointment with a doctor unless we have (expensive) health insurance, or can’t get that crown we need on the broken tooth because it costs as much as some of us make in half a year.

No. These things are real, they affect us every day, they make us angry every day because we recognize our powerlessness to deal with the highly impersonal Big Business world that has been fostered by the four decades of reaganomics’ deregulation, privatization, tax cuts and militarization. But still, the problem goes much deeper than these things.

Our very freedom is threatened. When we are economically powerless, we are also powerless in our lives because we lose our freedom to make choices that are right for us.

  • we lose our rights to bargain with our employers (look at how Wisconsin and Ohio have treated their public employees or how WalMart treats its workers and anyone who talks unions),
  • we lose the power to improve ourselves by pulling ourselves up by the bootstraps through publicly funded education from grade school through university,
  • we are dominated in the marketplace by powerful businesses that use automated systems to turn us off, ignore our calls and letters seeking redress for a mischarge or a poorly done job,
  • we lose our jobs, are forced to accept paycuts or furloughs, when the company claims times are tought, yet we watch the same public companies to pay their CEOs millions more

Our freedom to improve ourselves, freedom to choose the kind of work we want to do, freedom to prepare for our retirement and then retire with some security about our future, freedom from worry about whether or not a catastrophic medical emergency will eat up all our savings and leave family without an adequate living–all these freedoms are being threatened today by the concentration of wealth in the hands of an elite few who thereby become emplowered to set the market terms as they choose.

The idea of the “free market” is a bill of goods sold to replace the real concepts of freedom we should be considering. Markets, of course, can only function well for the people where government constraints prevent the owners and managers from setting all the terms to suit themselves, leaving externalities of their profitmaking to be borne by the people. literally ripping them off. The sloganeers have persuaded ordinary Americans to think that the American Dream of freedom is encapsulated in that little bitty notion of a “free market” so that they will unknowingly throw away the big idea of freedom–the freedom to set one’s own course in life, in a cooperative society that works to provide those tools.

The reason we need a progressive tax policy–including at the least progressive tax rates with brackets that reach much higher into the stratosphers of the ultra rich (55% for those making $1 million or more annually) ; elimination of the capital gains preference (so that all income is taxed under the same rate structure); and an estate tax with bite (meaning a graduated rate that protects a reasonable nest egg for the next generation while serving as one method of limiting the concentration of wealth)– is to ensure the freedom of each and every one of us, from rich to poor, from newly arrived immigrant to elderly Native American.

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GW Broke with Clinton. Did Obama Break with GW?

by Mike Kimel

Update: McClatchy tackles the question here.

GW Broke with Clinton. Did Obama Break with GW?
Cross-posted at the Presimetrics blog

The following major initiatives had occurred toward the end of April 2003, about two years and three months into the GW Bush administration:

1. Marginal income tax rate cuts in 2001, 2002 and 2003.
2. Passage of No Child Left Behind Act
3. Outlays as a percentage of GDP rose.
were 18.2% in fiscal 2000, 18.2% in fiscal 2001 and 19.1% in fiscal 2002.
4. The inherited surplus became a deficit.
5. Passage of the Patriot Act.
6. Invasion of Afghanistan in response to the Sept 11 attacks. Note that by April 2003, the Taliban insurgency was already gaining strength again.
7. Abortion restrictions. Reinstatement of the Mexico City Policy. Withdrawing funding for the United Nations Population Fund. Began the push for the Partial Birth Abortion Ban (introduced in Feb. 2003 by Rick Santorum, passed in November of 2003).
8. Sarbanes Oxley.
9. Homeland Security Act.
10. Invasion of Iraq.

Whether you agree with these policies or not, its a not insubstantial list. Several, if not most of these initiatives represent big breaks with the previous administration. For instance, Clinton raised marginal tax rates, whereas GW lowered them. Federal spending / GDP fell during every single year of the Clinton administration, but would rise in most years of the Bush administration. Clinton managed to turn a deficit into a surplus, whereas GW went the other way. The Mexico City Policy which GW reinstated had been rescinded by Clinton. The Patriot Act and the Homeland Security Act don’t seem to be Clinton’s style. And while one might argue Clinton might have acted against Afghanistan following 9/11/2001, it is very, very hard to envision the subsequent invasion of Iraq had Clinton been President in 2003.

We are now about two years and three months into the Obama administration – about the same amount of time it took GW to engage in the initiatives mentioned above. So…. what are the major initiatives of the Obama administration so far, and which of them represent clear breaks with the Bush administration? (Please stick to things that actually happened or at least in which Obama invested some political capital. Something Obama might have said during his campaign, something you heard from one of your hallucinations, or something reported by Fox News may not fit into that category.)

Note – this post is a follow-up to the post entitled Why I Will Not be Voting for Obama in 2012 which appeared in the Presimetrics blog and at Angry Bear.

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Why I will not be Voting for Obama in 2012

by Mike Kimel

Why I will not be Voting for Obama in 2012

Cross posted at the Presimetrics blog.

The presidential elections are a year and a half away, but I am pretty certain of one thing: I will not be voting to re-elect Barack Obama. That does not mean that I will be voting for the Republican nominee, or for any of the third party candidates, but rather that I do not see any likely circumstances under which Barack Obama will do anything I think is necessary to earn my vote. That may seem unusual because I voted for Obama, and my economic views are probably best described as slightly left center.

Now, I’m nobody special, and my endorsement or lack of it isn’t going to make a whit of difference, but I suspect there are other people who are also somewhere close to slightly left of center (i.e., who are either what Obama considers to be his “natural constituency” or close enough that they can be convinced to vote for him rather than his likely eventual opponent) who are starting to think the same thing I am. So perhaps its worth trying to explain why I feel the way I do. I think its easiest to do that by discussing the issues I think I important and what Obama has done (or not) about them.

1. Economic growth/unemployment/taxes. These three topics, as Senator Ryan and all economists know, are closely inter-related. Sadly, the relationship between these three topics is very, very different than Senator Ryan and most economists believe. Getting the economy moving is vital after eight years of mediocre growth under GW Bush, culminating in the Great Recession. But when you go back as far as the data allows, you find a quadratic relationship between the top marginal tax rate in one year and growth in the subsequent year , and that we are at a point on the curve where it is an increase, not a decrease in tax rates, that is likely to lead to faster economic growth. Even sticking to the period of relatively low taxes we’ve been in since Reagan started his tax cuts, growth rates should go up and unemployment rates should go down if tax rates go up.

There are two reasons this is true. One is that taxes pay for the existence of the government. The government provides services the government provides that are conducive to growth and which the private sector simply has not historically provided at non-negligible levels. These services include national defense, monitoring and controlling epidemics, and building infrastructure.

The government also provides some leadership that can make it possible for the private sector to adopt new technologies. As an example – in this day and age, having a vehicle that could run on any mix of gasoline, ethanol or natural gas (depending on which is cheapest per mile) would be a nice thing to have. You can buy one of those vehicles today… in Brazil. Never heard of such a thing? Well, there are millions of bi-flex and tri-flex vehicles on the road in Brazil today, made by such exotic companies as GM, Ford, Volkswagen, and Mercedes. Why are there so many flex-fuel cars and motorcycles on the road in Brazil? Because the Brazilian government realized you can’t get from 1970s fuel shortages to where they are now without someone forcing both auto makers and fuel stations to make changes simultaneously. Without government action, auto makers wouldn’t have been willing to mass produce flex-fuel vehicles out of fear there would be no filling stations for those vehicles, and fueling stations would have been reluctant to make investments out of fear that there would be no vehicles to take advantage of them. In other words, the situation we see in the U.S.

But there is another, perhaps more important reason, why higher tax rates often lead to faster economic growth and lower unemployment. As I keep pointing out, any good business owner (and any lousy one, for that matter) will tell you, if you tax something more, you get less of it. And income taxes can be seen as penalties on withdrawing money from one’s business for the purpose of consumption, which means they discourage business owners from taking profits out of their business. The alternative to taking profits and consuming is re-investing in the business. Thus, higher tax rates on income lead to more investment on business. And this result is borne out empirically; when the top marginal rate is below 50%, a tax increase is correlated with more private investment and less private consumption.

2. Deficits and the national debt. This is another tax related issue. Historically, during and following tax hikes tax collections /GDP rise. During and following tax cuts, tax collections fall. (How a fact so basic that even a child could observe it in the data became a surprise to many people is a testament to, ahem, economists like Art Laffer and Thomas Sowell.
But there are many ways to cut taxes people pay, and changing the marginal rate is only one such way. Enforcement of tax law is another. Since 1929 (that’s as far back as data is available) – every single Republican President decreased the tax burden, the percentage of people’s income paid in taxes, and thus far, all Democrats but Truman and Obama have increased that percentage. Click on the link and you’ll also see that growth rates were much faster for Presidents who increased the tax burden than for Presidents who decreased it. Though there are many ways of being fiscally responsible or irresponsible, it is, of course, easier to balance the budget if tax revenues are higher. The last four Republican Presidents – Ford, Reagan, and the two Bushes all increased the national debt. Conversely, before Obama you had to go back to 1944, when the nation was fighting World War 2, to find a Democrat in the Oval Office who increased the national debt.

And yes, I know, there was a bad recession going on when Obama took office, and the economy still sucks. And yes, I agree with Keynes – the data shows that expansions following recessions during which the government increased its spending are longer and stronger than when expansions following recessions during which the government cut spending. But that spending should have been paid for with tax hikes. Historically, when the government raises taxes during or shortly after a recession, the resulting expansion is longer and stronger than when the government cuts taxes. That’s what the data shows. The reasons are the same as given above in the discussion about economic growth, plus one: during periods of economic weakness those in the private sector tend to sit on money.

As an aside – it is worth noting that both this Great Recession and the Great Depression came about half a decade after big reductions in both marginal tax rates and regulation. Coincidence?

3. Obama’s performance might resemble that of other Democratic administrations more closely had he chosen economic advisors who paid more attention to data and were less enamored of the policies GW Bush was employing. When you pick an advisor who jumps through hoops to be like one of GW’s economic advisors, you will get GW’s outcomes. Its even worse when you’ve been warned and you do it anyway. Frankly, if I say so myself, it isn’t that difficult to find people who actually can spot business cycles at both ends.

4. The bail-outs. Of course, one of the big contributors to the Obama deficits are how Obama reacted to the poor state of the economy. (In fairness, some of the bail-out spending was pre-committed by the previous administration, but then Obama voted in favor of that spending as a Senator and didn’t try to walk it back once he became President.) But where are the prosecutions? Was there not wrongdoing? And then you have stories like Matt Taibbi’s latest. Like GW’s policies before him, Obama’s approach seems almost designed create another mess.

5. Health care. Obama care = Romney care. This is a policy that Republicans were pushing a decade ago, and would still be pushing if a Democrat hadn’t proposed it. Where is the public option?

6. The wars. I don’t have a solution, but then I didn’t spend a few hundred million bucks running for President, nor am I about to spend a billion dollars running for re-election. It is the height of immorality to seek out the presidency or re-election in a time of war and yet have no clue how to bring the war to a successful conclusion.

I always thought it was the height of insanity for anyone to vote to re-elect GW in 2004, after screwing up the economy and two wars. Yes, I know some worthies were still talking “Mount Rushmore” a year or two later, but one should be better than that. And yes, there are a handful of things Obama did that GW might not do, but let’s be realistic – this has looked from the very beginning like GW’s third term.

Which leaves just one question – if the policies of the Republicans are even worse than Obama’s – and they tend to support anti-growth tax policies (calling them pro-growth doesn’t change the data), what should a rational person do? I don’t know. But I think if I’m going to see Republican policies enacted, I’d prefer to see them run under a Republican label. See, Democratic policies may not be very good, but historically they have tended to produce better results than Republican policies. (BTW – Michael Kanell and I have an entire book called Presimetrics looking at how Presidents performed on a wide range of topics.) Another four years spent bringing the feeble Democratic brand down to the levels of the even more feeble Republican brand will cause lasting damage.

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John Taylor in Favor of Higher Marginal Income Tax Rates? If Not, Why Not?

by Mike Kimel

John Taylor in Favor of Higher Marginal Income Tax Rates? If Not, Why Not?

A couple of weeks ago, John Taylor posted a graph showing that since 1990, there has been a negative correlation between the Investment to GDP ratio and unemployment.

There’s been some back and forth between Taylor and some of the other big boys (some of it summarized at Mark Thoma’s Economists View, and even Krugman has weighed in).

Lots of fun is being had by all, but it seems everyone, especially John Taylor, is missing a key point. If, as he states in his post, “the most effective way to reduce unemployment is to raise investment as a share of GDP” and if we want to reduce unemployment, then we should be raising the top marginal tax rate.. After all, going back to 1929 (that’s as far back as the Bureau of Economic Analysis has data), there’s a quadratic relationship between the top marginal income tax rate and the ratio of private investment to private consumption.

As I note in the post in which that analysis is done (complete with a nice graph):

correlation between the top marginal tax rate the ratio of investment to consumption for top marginal tax rates below 50% is 55%. That is to say, an increase in tax rates increases the ratio of investment to consumption when tax rates are below 50%.

So… raise top marginal rate —> more investment —> lower unemployment. I imagine John Taylor’s endorsement of higher marginal tax rates should come any moment now.

—————–
Cross-posted at the Presimetrics blog.

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Some @*$&s Write a Letter

by Mike Kimel

Deficit numbers for CEA chair signatories on the deficit letter Cross-posted at Presimetrics Title updated

I’m kind of late to this, but apparently ten ex-chairs of the President’s Council of Economic Advisors decided to share their opinion about the national debt with the rest of us. There’s been commentary here and there about how hypocritical some of the names on the list are – the CEA chair is the President’s chief economic advisor, and many of these people served under Presidents (and provided economic advice) that drove up the debt. I thought it would be an interesting exercise to put some numbers on the hypocrisy.

To do that, I pulled the dates for which each CEA chair served and quarterly figures for the total public debt. The debt series I obtained (from the Federal Reserve Economic database) goes back to 1966. The terms of each CEA chair served did not completely coincide with a yearly quarter, but I split them up as best I could. (Note – because sometimes it took a while for a CEA chair to be confirmed, but that person could well be offering the President advice before confirmation, I assumed that each CEA chair “took office” immediately after his/her predecessor left.)

The debt was adjusted by quarterly CPI, and population, resulting in the real national debt per capita. The following figure shows the change in the national debt per person on a quarterly basis, over the length of each CEA chair’s term. The gray bars represent those who signed the letter.

Figure 1.

A few comments.

1. Most of the signatories to the letter increased the national debt per person.

2. A number of the CEA chairs are or have been with the Fed – none of them (Greenspan, Yellen, Bernanke) have signed the letter.

3. Harvey Rosen may look responsible… but that’s a function of the timing of the brief term (about a quarter) he served, encompassing the period when individual tax returns were due. He served under GW Bush, after all, and nothing GW, and despite what many supposed conservatives were saying through 2004, at no point did GW ever do anything that resembled being fiscally responsible.

4. About the only signatories who on the face of it have a leg to stand on signing this letter are Schultze (Carter’s CEA) and Bailey (Clinton’s last CEA chair).

5. I think its fair to stretch the leg to stand on thing to include Laura Tyson, Clinton’s first CEA chair. Yes, the debt increased while she was in office, but at a rapidly decreasing rate, and her advice provided some of the ground for the surpluses that came at the end of the Clinton term.

6. I’m sympathetic to Keynes’ view that a responsible government runs up the debt when times are bad, and pays off the debt at other times. By that standard, a lot of these signatories have no excuse whatsoever. I believe it speaks very poorly of economics as a profession that anyone takes Martin Feldstein, Glenn Hubbard, Greg Mankiw, or Edward Lazear seriously, and I believe it is a sign that they have no honor that they would have the temerity to put their names on a letter like this. These are not, after all, low level drones whose livelihood depends on not making waves, but rather financially secure architects of the policies that cratered this country’s finances. As I see it, they were in the position to do good, and instead they enabled bad.

7. That Obama inherited an economic mess does not excuse his economic policies, or those who provided him with advice (Romer & Goolsbee). Nationalizing debt incurred by companies (and there is no other way to describe the process by which nonperforming financial assets were taken off the ledgers of many companies) without also nationalizing the assets of those companies is a surefire way to ensure something like the Great Recession will happen again. And even a mediocre economist should have had the skills to convince even the densest of White House residents what happens when you don’t even try to incarcerate any of the bad actors.

8. I hesitate to disagree with Brad DeLong who is usually right, but I think there is yet another reason to avoid excusing his colleague Christina Romer. When a person’s most famous paper reaches a conclusion that gives ammunition to those who are wrong about economic policy, and that paper is itself a textbook application of Maier’s Law, that person’s advice can only produce poor results.

9. If I had to award a “Supreme Chutzpah” award to any of the signers, I guess it would be Glenn Hubbard. Not only did he turn a surplus into a deficit and lay the groundwork for bigger and better deficits to come, his defense of that deficit he created was fairly unique, involving an implicit assumption of double digit GDP growth!!!. (Yes, this man is now Dean of the Business School at Columbia.) I believe Hubbard was last seen co-authoring a paper explaining the desirability of “a 4.5 percent mortgage for homebuyers for a period of time. This bold idea, akin to our proposal on this page on October 2, would help arrest the decline in house prices and absorb excess inventory of housing.” I’m not sure what “a period of time” is to Hubbard, but we had rates in that neighborhood for about six months last year. The rates got there shortly after the Case Schiller Home Price Index had bottomed out and started rising, and right about the time the index started tanking again. The index is now rising to new post-crash depths.

10. On the other hand, I suspect Brad DeLong might nominate Greg Mankiw for some sort of award among the signatories of the letter and its hard to disagree with him. FYI – my views on debt haven’t changed since this.

Which leads to another look at the figure I put up earlier, this time color coded by the party of the President in office. Figure 2

And one more thing… as Michael Kanell and I wrote in Presimetrics, sooner or later “Democrats who make it to the Oval Office [will] realize that they are going to be tarred as fiscally irresponsible no matter what, so why make the tough decisions that Republican presidents have refused to make in recent decades?” I guess after Ford, Reagan and the two Bushes, an Obama has come home to roost.

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Information Reporting on foreign depositors in US banks–Florida’s GOP delegation shamefully supports tax evasion facilitation

by Linda Beale
crossposted with Ataxingmatter

Information Reporting on foreign depositors in US banks–Florida’s GOP delegation shamefully supports tax evasion facilitation

Many wealthy Americans have taken advantage of banking secrecy in other countries, particularly Switzerland, to hide their assets and income from the United States, thus avoiding paying their fair share of taxes on their riches.  That practice became somewhat harder when reports on American accountholders became available to the government and the media were filled with stories of Swiss bankers for UBS carrying diamonds in tubes of toothpaste for their wealthy US clients, in order to help them evade US income tax laws.  The government instituted a voluntary disclosure program that permitted Americans with foreign accounts to come forward, at a relatively low penalty cost compared to the charges that could be assessed against them (including potentially criminal tax fraud charges).  When that program ended after thousands had voluntarily come forward, a new program (with a 25% penalty rather than the former program’s 20% penalty) was instituted and is currently ongoing.  The result of the UBS episode was a deferred prosecution and a final agreement to reveal the names of about 4500 accountholders, presumably the largest accounts and the most likely to involve fraudulent tax evasion.  At the same time, there was some progress on the attempt to get offshore banking secrecy jurisdictions to be more open and transparent and to participate more readily in tax information exchange programs, so that it would be harder for US taxpayers to evade their tax obligations by hiding their assets offshore in those jurisdictions.  All this is praiseworthy, though there is still considerable progress to be made before we can conclude that it is generally difficult for the wealthy to hide their assets from the US tax collectors.

What is perhaps even more interesting is the fact that the US is a tax haven for the wealthy of other countries.  The US is a tax haven in part because of the withholding exemption for “portfolio” interest–allowing foreigners to earn income by making deposits in our banks without taxation.  We have also not required banks to provide information reporting on that income–so that those foreigners can receive income in the US and avoid paying appropriate taxes on it back in their home countries.  This will change under a proposed regulation issued by the Treasury department in a move to make the US more forthcoming in tax information exchanges with other countries in hopes of reciprocity.  See  IRB 2011-8 regarding the new information reporting requirement under Section 6049 (REG-146097-09) (requiring information reporting for bank deposit interest payable to nonresident alien individuals).  The notice of proposed regulations includes the following explanation of the need for the change:

This extension is appropriate for several reasons. First, since the 2002 proposed regulations [which limited information reporting to accounts of nonresident aliens from a particular list of countries] were released, there is a growing global consensus regarding the importance of cooperative information exchange for tax purposes that has developed. Significant agreements have been reached on international standards for the exchange of information, including, for example, the understanding that information exchange will not be limited by bank secrecy or the absence of a domestic tax interest. Second, requiring routine reporting to the IRS of all U.S. bank deposit interest paid to any nonresident alien individual will further strengthen the United States exchange of information program, consistent with adequate provisions for reciprocity, usability, and confidentiality in respect of this information. Finally, this extension will help to improve voluntary compliance by U.S. taxpayers by making it more difficult to avoid the U.S. information reporting system (such as through false claims of foreign status).

This increase in information reporting is appropriate, if we want other countries to reciprocate and make it easier for us to catch our own tax cheats.  But the current neo-conservative GOP members of Congress seem to think tax cheating against other countries is just fine, so long as their big business buddies can make money off it.  See, e.g., this letter from the Flordia GOP delegation in the House regarding their opposition to these proposed rules: Posey leads delegation effort to stop harmful IRS regulation (website of House Republican representative William Posey).  What’s the argument in favor of taking no action to ensure that US banks aren’t helping foreigners evade their home taxes?  Seems to me it boils down to a narrow-minded self-interest that is willing to sacrifice global cooperation and reasonableness in favor of the profits of Florida banks.  The Florida Republican delegation claims that reporting on the assets held will lead foreign depositors to take all of the assets out of Florida’s banks, and their “worry” is that there will therefore be less money available for lending to legitimate US businesses.

These arguments seem extreme to me.   First, the arguments assume that all of those foreign deposits are sitting in US banks solely for tax evasion purposes.  They disregard the many other reasons that US banks may provide a positive choice for foreign depositors, including the stability of the US system in a world of highly volatile banking pressures, especially as European banks come into question because of the debt crises in Greek, Portugal and Spain; the lack of significant volatility compared to home country banks; or the general security of US deposits compared to the threat of strongman takeover in some third world countries.  Second, we’d have to assume that there isn’t a pure economic advantage in having assets in US banks compared to home country banks–whether from higher interest rates or easier transfer and liquidity provisions.  And of course, to the extent that the rationale for the deposit being held in US banks is to facilitate tax evasion, we’d have to conclude that it was reasonable for US banks to profit from helping foreigners be tax cheats in their foreign countries.

That last argument is especially worrisome, because it can easily be turned against us to justify banking secrecy in other jurisdictions that permit US taxpayers to avoid US taxes.  Maybe that’s the point for these GOP legislators–as a party beholden to the wealthy elite that has garnered most of the advantages of productivity gains over the last decades, they may well have lost their ability to comprehend the importance of tax compliance.  As they push for corporate tax breaks while insisting that the country is “broke”, they are essentially arguing that they don’t care about ordinary Americans.  Being against responsible measures to assure that the US banks don’t act as facilitators for other countries’ taxpayers to avoid their tax obligation fits well with that view.  Shame on them.

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