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CRS reports on repatriation tax holiday impact

by Linda Beale

CRS reports on repatriation tax holiday impact

Shortly before the Christmas holiday, CRS released a report by Donald Marples and Jane Gravelle on the possibility of a second repatriation tax holiday for multinational corporations. Download Marples and Gravelle. tax cuts on repatriation earnings as economic stimulus. an economic analysis. 122011.c

The holiday has been pushed by various commentators who support reducing corporate taxation based on the argument that lower tax, and repatriated earnings, will result in greater investment in domestic business expansion and more US jobs.

Our experience with the 2004 repatriation holiday was not impressive. Much of the repatriated funds were diverted to share buybacks and not used to increase investments or increase jobs. IN fact, many companies that repatriated the most money engaged in heavy firings of workers. Hewlett Packard was notable, with large layoffs accompanying significant repatriated cash.

To repeat that experiment at a time when US companies have even more cash socked away in the US and abroad would merely reward those companies that decided to bet on (and lobby heavily for) a second repatriation holiday that would amount to a huge cut in their taxes–like having the best of a territorial tax system at the same time that they get all the benefits (foreign tax credits, active financing exception, etc.) of the current worldwide tax regime.

The CRS report doesn’t suggest that another repatriation holiday would be a sure-fire economic growth engine. In fact, it notes that it can be counterexpansionary if money is used to address cash-flow problems or to pay out to shareholders.

Viewed in the current debate on how to most efficiently stimulate the economy, economic theory suggests that the simulative effect of a temporary tax cut for repatriations may be offset, or more than offset, by exchange rate adjustments that would reduce net exports.

In addition, how businesses use repatriated earnings will impact the stimulative or contractionary effect of a tax cut for repatriations. For example, repatriated earnings will have a larger stimulative effect, or smaller contractionary effect, the greater the degree to which they are used to increase current investment. A smaller stimulative effect or a larger contractionary effect will result, in contrast, if more of the repatriated earnings are used to shore up “cash-flow” issues or pay dividends.

A repatriation tax holiday is not a good idea. it wasn’t a good idea in 2004. It is not a good idea now. There is no reason to give multinational corporations a tax break to bring money back to this country. They’re cash rich as it is and can make investments if they want to.

originally published at ataxingmatter

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Romney’s Tax Plan–good for the wealthy, not so good for everybody else

by Linda Beale

Romney’s Tax Plan–good for the wealthy, not so good for everybody else

The Tax Policy Center has done an analysis of Romney’s plan for US taxation. SeeThe Romney Plan. It doesn’t look bad at all for the wealthy. In adding at least $600 billion to the U.S. deficit by 2015, Romney would

  • reduce the statutory corporate tax rate from 35% to 25% immediately (apparently with no need for offsets). Since most corporations that actually pay any federal corporate income tax–which is very few of them, even when they are quite profitable economically–already pay effective tax rates as low as 0% and typically less than 25%, this can be expected to reduce those payments even more. Lightening the burden on corporations will tend to result in higher payouts to those already overcompensated managers and higher payouts to shareholders, who tend to come from the very top of the income distribution. Net result–more money for the wealthy, less money to finance the U.S. government, and more demands for limitations to the already thin safety net.
  • eliminate the US system of taxation of worldwide income in favor of a “territorial” tax system. this will be especially beneficial for multinational corporations and their owners and managers, and will tend to speed up the offshoring of US manufacturing and service jobs. A boon for the wealthiest, but a real job eliminator for the rest of us.
  • reduce the maximum individual rate from 35% to 25% immediately (apparently with no need for offsets). This will benefit the wealthiest of the wealthy, who already enjoy a very compressed income bracket progression.
  • Eliminate the estate tax. This will benefit the wealthiest of the wealthy, who are the only ones who pay the estate tax now.
  • Retain the 15% rate for capital gains. This will benefit the wealthy, since the top of the income distribution owns most of the financial assets.
  • Eliminate the capital gains tax for those with income of $200,000 or below. This is one item that will benefit a few ordinary Americans, though even here it will provide minimal tax savings for them and more savings for those in the $100-200,000 income range, who are among the most well off, though not the upper-upper crust.

Note there’s only one thing of the major changes in Romney’s list that can be said to be directed at all at the majority of taxpayers in the below $100,000 group (though it also favors those in the 100-200 thousand income). Not surprisingly, Romney’s plan would increase taxes on the poorest among us, those with $20,000 or less in annual income, by 60%.

How can that be justified? Romney says his plan is going to make the world better for inventors, job creators and entrepreneurs.

“My administration will make America the best place in the world for entrepreneurs, inventors and job creators,” Romney said at a campaign event in Davenport, Iowa, on Dec. 27. “I’ll lower and simplify taxes, especially for middle-income Americans.” Bloomberg Newsweek (link below).

Now, the wealthiest taxpayers making $1 million or more will see a 15% cut in taxes paid. That assumes, of course, that those ultra-wealthy who are mostly benefited by his version of tax “reform” fit that bill (inventors, job creators, entrepreneurs). But most of their ownership is not an investment in a company, it is acquired in secondary market trades. And most of them aren’t job creators and entreprenuers, they are just wealthy traders in the secondary market. If we really want to help job creators and entrepreneurs, we’d be funding public education from K-12 through university and we’d be reinforcing and adding to our safety net programs instead of constantly threatening to reduce or eliminate them. See Mike Kimel’s post on Pelzman at Angry Bear…

Steven Sloan, Romney Tax Plan Adds $600 Billion to Deficit, Analysis Says, Bloomberg BusinessWeek (Jan. 5, 2012);

Greg Sargent, Romney Plan Would Cut Taxes on Top 0.1% by Nearly Half a Million Dollars, Wash. Post Blog (Jan. 5, 2012).

Schoenberg, Steve Forbes, Campaigning for Rick Perry, Attacks Romney’s Capital Gains Tax Policy, Boston (Dec. 28, 2011) (opposing the extension of zero tax rates on capital gains only to those with $200,000 or less in income).

originally published at ataxingmatter

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Corporatism and taxes

by Linda Beale

Corporatism and taxes

Corporatism is the term used to describe a economic and governmental approach that favors large entities over people, including adopting rules and regulations to suit the regulated entities, tilting legislation to protect corporate entities that might otherwise be considered to be causing harm to the public good, and allowing access to public fora and public representatives in ways that ensures that corporate voices are heard, whether or not those opposing them are heard.

Corporatism in tax policy has resulted in highly favorable readings of the reorganization provisions–for example, current IRS regulatory approaches proclaim that even losses can be recognized in corporate reorgs, going against well-settled understandings of the operation of the corporate reorganization provisions, and the Code and regulations permit a vastly expanded range of flexible transactions, especially of spins under section 355 and of A reorgs (a mere 40% equity consideration now ‘counts’ as sufficient to provide tax-free reorganization status).

Corporatism has been around in one form or another for a long time, but it was immensely aided by the activism of organizations like the US Chamber of Commerce and the National association of Manufacturers and the ideological ‘think-tanks’ supported by them and by corporate and wealthy backers.

For a revealing slice of the history of corporatism, every reader should be familiar with Lewis Powell’s 1971 memo on the means by which business could take over government. It is given a thorough airing (and there’s a link to the memo itself) by William Black on the blog New Economic Perspectives, My Class Right or Wrong: the Power memorandum’s 40th Anniversary (April 25, 2011).


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The Peltzman Effect: Why Economic Growth Has Slowed in the US Over Time

by Mike Kimel

(Update: Naked Capitalism notes Mike’s post is the top read of the day in ‘links’)

In recent years, there have been a number of studies showing that generational income mobility is particularly low in the US. To quote this 2006 study by Tom Hertz:

By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.

Hertz provides this handy chart:

Most of the “big government” countries that compare favorably with the US on intergenerational mobility also do pretty well on measures of entrepreneurship. The following snapshot comes from this paper by Acs and Szerb:

(GEDI = Global Entrepreneurship and Development Index)

While studies are, no doubt, imperfect, I’ve seen similar results before and they seem credible to me.

The studies note, essentially, that the US is not, for many, the land of opportunity it is touted to be, and is now being beaten out by countries like Denmark and Canada. Big government countries, countries where Americans seem to believe people aren’t motivated to get off their duff, are actually quite entrepreneurial and offer offer their citizens a lot of opportunity.

Meanwhile, one other thing to note… growth, real economic growth, has been slowing for decades in the US. George W Bush’s term, even prior to the start of the Great Recession, compares unfavorably with the 1970s. The highly touted Reagan years, for instance, saw much slower growth than, say, the big government LBJ administration or the even bigger government New Deal years.

What is going on here? Is it really the catch-up effect, whereby wealthy countries like the US necessarily grow more slowly than other countries? Or is there a Great Stagnation going on? And if so, why?

I think one explanation for this is the Peltzman effect. Sam Peltzman once noted that, in response to some types of regulation, people can have a tendency to change their behavior in ways that counteracts the intended purpose of the regulation. For instance, some bicycle and motorcycle riders will take greater risks when forced to wear helmets, assuming that the helmets make them safer and more impervious to accidents.

Now, economic advance depends on creative destruction, and creative destruction requires people to take risks. Come up with a great idea for a super duper new widget and it has zero effect on anything if you don’t go out and try to market the thing.

But take two people, both of whom independently came up with the same idea for that super duper new widget. One lives in the US, the other in Denmark. Which one gives up his/her job to start a new company? The American or the Dane? My guess is the Dane will, precisely because the Dane, unlike the American, retains a safety net. The Dane doesn’t give up health insurance for herself or her family, and has more social programs she can rely on if the new business fails. My guess is that isn’t just true for Danes and Canadians, but also for people in a whole host of countries with a stronger safety net than the US. If the US still scores higher than on entrepreneurship than these countries, it is for historical reasons. Attitude is part of the ranking, after all, and Horatio Alger stories are still in our DNA.

If my guess is correct, there are things we should expect to see in US data:

  1. The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by foreign born people relative to native born people has been growing. (I.e., native born Americans are becoming more risk averse when it comes to starting companies.)
  2. The ratio of American companies, particularly successful American companies which required substantial commitments by their founders, that are founded by native born people who were born wealthy (and thus have their own built in safety net) relative to those founded by native born people who weren’t born wealthy has been growing. (I.e., non-wealthy Americans are becoming more risk-averse when it comes to starting companies.)

Note that I am trying to distinguish between a “business” and a business that requires some substantial commitments by their founders. There is a big difference between someone leaving their existing employer to start a new business based on an idea they have been toying with for a while and someone who was fired six months earlier deciding that they have no choice but to start something, anything, to put food on the table. I don’t have that data, but I would be surprised if it 1 and 2 weren’t borne out. Unfortunately, I think the direction we are taking, politically, is just going to reduce entrepreneurship in this country more and more. There are only so many wealthy people, and only so many foreigners coming to our shores. The land of opportunity, we will find in the long run, is the one with a safety net.


  1. The first paper cited was put out by the Center for American Progress, which leans left. The second paper was commissioned by the Small Business Administration, but its authors are both at George Mason U, which has a definite libertarian bent. –
  2. Consider this a companion piece to Why Don’t Tax Havens Become Economic Powerhouses? and A Simple Explanation for a Strange Paradox.

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Ian Ayres on the Brandeis Tax

by Linda Beale

  Ian Ayres on the Brandeis Tax

I’ve often argued here that vast inequality is harmful to democracy, and that the kind of unequal society that we have today, reflected the Gilded Age of yore, is especially worrisome.  Much of what is happening in this country that threatens freedom and economic suffering for many is related to the vastly unequal incomes and wealth of the top 1% compared to the rest of us.  Oligarchy finds it easy to flourish in such a society, and democracy struggles to keep its head above water.  The corporatist agenda that favors big business (and its owners) facilitates the capture of the state for the benefit of the rich–lobbyists swarm legislators, and campaign funding by corporations floods the airwaves with repetitive (and hence believed even if untrue) messages favoring corporatist allies.

The main defenses that a society has against such developments are twofold:  1) a strong sense of community that incentivizes the uberrich to give a good bit of their wealth away to help the community and 2) a strong tax system–especially estate taxes and other taxes that fall primarily or exclusively on the uberrich as a way of skimming off the excess rents they have acquired because of their status and unrelated to genuine merit or hard work.  {As Elizabeth Warren said, nobody can claim to have earned all they earn without the help of the state, and the wealthy in particular depend on the state to protect their property and even their status.)  Hence I talk here of democratic egalitarianism and my view that equilibrium is not a realistic state so redistribution is always occuring.  Most redistribution will be ‘upwards’ for the benefit of those at the top, unless democratic institutions push for a rebalancing redistribution ‘downwards’ to assist those in the middle and lower income groups.

Ian Ayres has a series of postings on a proposed “Brandeis” tax intended to impose limitations on the inequality gap.   
Don’t tax the rich, tax inequality itself, New York Times, Op-Ed, Dec. 18, 2011.

In 1980, the wealthiest 1 percent of Americans made 9.1 percent of our nation’s pre-tax income; by 2006 that share had risen to 18.8 percent — slightly higher than when Brandeis joined the Supreme Court in 1916.

Congress might have countered this increased concentration but, instead, tax changes have exacerbated the trend: in after-tax dollars, our wealthiest 1 percent over this same period went from receiving 7.7 percent to 16.3 percent of our nation’s income.
What we call the Brandeis Ratio — the ratio of the average income of the nation’s richest 1 percent to the median household income — has skyrocketed since Ronald Reagan took office. In 1980 the average 1-percenter made 12.5 times the median income, but in 2006 (the latest year for which data is available) the average income of our richest 1 percent was a whopping 36 times greater than that of the median household.
Brandeis understood that at some point the concentration of economic power could undermine the democratic requisite of dispersed political power. This concern looms large in today’s America, where billionaires are allowed to spend unlimited amounts of money on their own campaigns or expressly advocating the election of others.

There will be rich always: finding a new way to think about income inequality, Freakonomics, Dec. 20, 2011.

The vast shift in national income toward our richest 1 percent is especially vivid if their income is expressed in terms of the median household income. Indeed, an important goal of our op-ed was to suggest a new unit of measure, “medians” to help us think about what it means to be rich. In 1980, if you earned 3.8 medians, you were in the top 1 percent, but by 2006 even the poorest in the 1 percent club earned 6.9 medians.
What we call the “Brandeis Ratio,” the average income of the richest 1 percent (which includes the billions earned by the lucky few) has grown even more disproportionate. As shown in the chart below, in 1980, one-percenters on average made 12.5 medians, but in 2006 (the latest year in which data is available) the average income of our richest 1 percent was a whopping 36 medians.

An inequality tax trigger: the Brandeis Ratio explained, Freakonomics, Dec. 21, 2011.

A central idea behind our Brandeis tax proposal was to have a tax that is triggered by increases in inequality. Our Brandeis tax does not target excessive income per se; it only caps inequality. Billionaires could double their current income without the tax kicking in — as long as the median income also doubles. The sky is the limit for the rich as long as the “rising tide lifts all boats.” Indeed, the tax gives job creators an extra reason to make sure that corporate wealth does in fact trickle down.
As emphasized by Lawrence Lessig in Republic, Lost (presaged somewhat in Ayres’ book with Bruce Ackerman, Voting With Dollars), the bulk of campaign finance dollars comes disproportionately from not just the 1% club, but the richest one-half of one-percenters.  Focusing on the average income of one-percenters is a good proxy for the rising political power of plutocrats.

Of lags and caps: possible implementations of a Brandeis Tax, Freakonomics, Dec. 26, 2011 (discussing potential ways to deal with bunching of income and the question of work disincentives–see my earlier post on Greg Mankiw).
originally published at

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Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

Romney’s Wall St. J. Interview with Gigot–Protecting the Rich

[edited to rephrase and correct typos 12/26/11 5 pm]
Joseph Rago and Paul Gigot interviewed Mitt Romney on his ‘vision’ for America–“On Taxes, ‘Modeling’, and the Vision Thing”, Wall St. J. Dec. 23-24, 2011, at A13.  In it, Romney reveals the way patrician wealth has affected his values, casting President Obama as a “European social democrat” and suggesting that contrasts with his own belief in a “merit-based opportunity society–where people earn their rewards based upon their education, their work, their willingness to take risks and their dreams.”  
Now everybody likes the idea of people being able to advance based on merit, rather than on crony capitalism, improper influence or whatever.   The problem with suggesting that America is a ‘merit-based opportunity society’ is that it isn’t much of one anymore: America in this second Gilded Age is primarily a wealth-and-status-based opportunity society. 
  • Education:  Even Romney admitted (obviously unintentionally) that wealth makes a real difference, since he noted that rewards depend in part on education.  People with wealth receive the finest educations from pre-K through post-graduate, getting preferences at the best children’s academies in Manhattan and at the highest ranked universities like Harvard and Yale.  People without wealth lose out from the very beginning, with inferior schools that are no longer fully supported by the public, as charter and for-profit schools take over offering inferior educations that no patrician family would ever accept.  The poor and middle class take on enormous loans and work loads to finance even their public university educations, since state support has slipped down to a mere 20-30% of the cost of that education.  That makes study and grades and success much more difficult for them. 
  • Working hard (with Contacts/Influence/lobbyists):  The wealthy are introduced early to the most important people of influence in society, like the Vanderbilts and the Astors of old, the private equity fund managers and the Wall Street bankers that can smooth their way through all the trials and tribulations of their ‘work’ careers–i.e., becoming owners of major league baseball team when you have no relevant experience (George W. Bush, with the aid of his papa and his papa’s influential and rich partners) or setting up a venture capital fund (like Romney’s Bain Capital). These connections ultimately permit the wealthy to mingle in a monied society that offers the right contact for every venture to succeed–including lobbyists to help a wealthy entrepreneur get his business going and ability to ‘invest’ in politicians who are willing to risk alienating the middle class to support preferential taxation of the rich. 
    • By the way, lots of the not-rich work quite hard, often at thankless jobs that provide no cushion to deal with life’s difficult blows or at a job that, at minimum wage, still leaves their family below the poverty line.  Without the contacts and influence that smooth the way of the rich, there chances of moving up are much more limited.  If they persevere, have an entrepreneurial idea, and catch a break, they may be able to move beyond where they are, but they have to do a lot more than just ‘work hard.’  
  • Taking Risks (and Getting Subsidies and Preferential Tax Provisions):  The poor take a risk every time they get up in the morning–will their health hold out so they can keep working? will they be able to make it to their job in that car that needs a new starter? can they manage to arrange for someone to take care of their kids while they work or will they have to be “latch-key kids” yet another day?  But they don’t usually have the kind of capital nest-egg to take a risk with in the way that Romney means it–the excitement of opening a new business demands from the poor and near-poor Herculean efforts to pull together family, friends, and workers to support their business ideas.  Those with money, on the other hand, have a head start on all of this.  Bill Gates’ parents offered him an educated life of relative ease; he could ‘play’ in the garage on that dream of his rather than running heavy machinery or working behind a counter at a McDonalds.  And those with contacts and money are able (and willing) to hire the best lobbyists to ensure that they get all the tax-advantaged benefits and subsidies that they can finnangle (or buy) from local, state and federal legislators for their activities.  That includes favorable tax provisions that allow them to keep a significant percentage of their wealth (and to fight for even more favorable provisions), such as the carried interest provision that gave Romney a preferential rate on almost all of his compensation income, the preferential capital gains rate that gives all the wealthy a low tax rate on their income from trading stocks and bonds with each other, and the various ways that the tax code subsidizes the kinds of personal deductions that provide the most benefit to those with money–from the charitable contribution deduction (including the ability to give away stock and claim a deduction for its value rather than for your actual basis) and the mortgage interest deduction (for interest on home loans up to a million plus $100,000) to all of those provisions that allow the wealthy to retire well–pension plans, exclusion of life insurance benefits, etc.  Then there are the many subsidies they get various governments to provide for their businesses, presumably by using those long-term family/status connections to wine, dine and influence.  They include low-cost loans such as those enjoyed by Romney’s Bain Capital for various businesses that Bain Capital was ‘turning around’.  (Handily, they can make low-taxed profits for themselves even when their turnarounds fail, with all those subsidies, so that the taxpayer sometimes ends up paying  for their losses along with the fired workers.)  See the links provided in the posting yesterday on Romney’s reluctance to release his tax returns, which discuss some of the subsidies and other benefits to Romney’s business. 
That’s not a merit-based opportunity society:  it’s an influence-based society, where the poor and even most of the middle class are working against long odds to make headway. 
And there’s not much evidence that Romney recognizes this fundamental difference in existence of the well-off and the not-so-well-off here in America.  Take the Gigot story’s discussion of tax policy and what kinds of “reforms” Romney supports.  The Journal apparently thinks Romney is too timid on ‘risk-taking’ because he didn’t espouse the kind of tax agenda that the Journal supports–moving to a consumption tax–like the national sales tax– that shifts most of the tax burden to ordinary folks (since they will pay tax on most or all of their  income since they spend most of it on food, shelter, clothing and other necessities) and leaves a zero percent tax rate on the capital gains, dividends, and other income from capital that makes up most of the income of the wealthy and little of the income of everybody else.  Why, the Journal notes, Romney’s plan merely calls for extending the Bush tax cuts, cutting the statutory corporate tax rate from 35% to 25%, and eliminating capital gains and dividends taxes only for those who make $200,000 or less.  Romney won’t even say he supports a consumption tax til he’s studied it more, though he likes the purported “simplicity” of a flat tax.    Romney also says he likes “removing the distortion in our tax code for certain classes of investment”.  This means that Romney does not understand the real economics of the consumption tax and the so-called ‘flat tax’, both of which result in taxation of 100% of the income of the poor and near poor and most of the middle class while leaving the rich with a minimal tax burden.  Any system for alleviating that burden (such as a low-level exemption at the bottom of the income scale) would thrust a truly burdensome recordkeeping requirement on those least able to cope with it.  Especially for versions that merely zero out the tax rate on income from capital, distortions would be magnified: the categorization of income into different types is one of the primary distortions in our system, and any plan to eliminate taxes on one type of income while retaining them on another increases distortions rather than removing them!
What about Romney’s saying he won’t propose cuts in individual tax rates for those making more than $200,000?  The Journal seems to think that is rather cowardly, since such a proposal accepts President Obama’s linedrawing on where rate cuts might be reasonable.  Now, aside from the failure to consider dropping the entire bunch of Bush tax cuts and letting all the rates go back to the level that they were when Bush took office (which might well be the best tax reform the Congress could do at this point), Romney should be commended for at least recognizing that the wealthy have gotten a fistful of tax gifts from the Bush individual tax cuts (and, indirectly, from the various corporate tax provisions that have allowed companies to pay less and less into the federal fisc) and for not wanting to proffer even more. 
But here’s the rub.  Romney doesn’t recognize the damage from the wealthier among us continuing to get even wealthier while the vast majority suffers stagnation and decline:  as the concentration of income increases at the top and inequality becomes the defining characteristic of this society, opportunity for all is threatened as is democracy itself.  Tax policies that could serve as a deterrent to that wealth buildup at the top–e.g., a stiffer, progressive estate tax, a financial transactions tax to discourage trading and capture a tiny amount in connection with those secondary market trades amongst the wealthy, and bracket expansions that would create a more progressive set of tax rates for the highest income that would distinguish between those who have $400,000 a year and those who have $2 million a year–aren’t even on Romney’s radar screen.  He’s content with the current system’s distribution, one that is highly favorable to the wealthy.  As a recent FED Finance and Economics Discussion Series article made clear, inequality has made permanent inroads and tax policies haven’t done much to dampen them.  See Jason DeBacker et al, Rising Inequality, Transitory or Permanent? New Evidence from a U.S. Panel of Household Income 1987-2006.
Romeny’s made it clear that he isn’t about to challenge the status quo of an easy tax life for the wealthy.  Here’s what he said to the Journal on the question of making sure that the wealthy never see any kind of a tax increase.
“My intent is to simplify our tax code and create growth, and so I will also look to see whether the top one-half of 1% or one-thousandth of 1% or top 1% are still paying roughly the same share of the total tax burden that they have today.  I’m not looking to lower the share paid for by the top.”  Wall St. J., Dec. 24-25, 2011, at A13 (quoting Romney).
So after a decade of cutting taxes on the wealthy and passing more and more provisions that benefit the wealthy in particular either directly or indirectly, Romney declares today’s status quo as the perfect state for things to be in–the current low taxes on the wealthy, in perpetuity, are his goal.  And while we may applaud him for not intending to lower taxeds further on the wealthy, it is hard to see how continuing current tax policy towards the wealthy makes sense for the fisc or for democracy.   Carried interest–won’t be taxed under Romney as the ordinary compensation that it is.  Mortgage interest deduction on million-dollar loans–won’t be pulled back to a more reasonable amount such as the interest on a loan that is 80% of the value of the median-priced US home.  Charitable contribution deduction for value rather than basis in stocks contributed–won’t get rid of that one.  Establishment of new brackets to recognize the drastic expansion of incomes at the top so that those with progressively more income are paying progressively more in taxes–won’t happen under Romney.  Why?  Because he is going to make sure that the top 1%, the top 1/2%, the top 1/1000% don’t pay less, but also don’t pay a bit more in taxes than they are paying now, this perfect state where the GOP wants to cut people off Medicaid to save money, turn Medicare into a ‘premium support’ system that will shift more and more of the burden of health care in one’s old age to the vulnerable elderly with a pension they can’t count on and a Social Security system that the GOP is trying to ensure that they can’t count on.
Most tax “simplification” promoted by lobbyists won’t create growth–it is much more likely to result in tax loopholes that the wealthy can drive a truck through.  Refusing ever to increase taxes, even on the ultra-rich who can clearly afford to pay more (without really noticing the difference in spending power) won’t create growth–it most likely will result in a stagnant economy where the burdened middle class gradually falls into the ranks of the New Poor. 

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A Random Observation About the 1970s… and the 1980s

by Mike Kimel

A Random Observation About the 1970s… and the 1980s

People often point to the stagnation of the 1970s, and the Reagan administration that followed, as evidence that cutting taxes leads to faster economic growth. But the same folks rarely look at the flip-side of things, and when they do, they don’t reach consistent conclusions. Here’s an example of what I mean. Real GDP grew 14.5% from the first quarter of 2003 to the last quarter of 2007. That is a 20 quarter period. I started with 2003 because that’s the year that tax rates dropped to 35%, and it was also more than a full year after the 2001 recession. I picked the last quarter of 2007 as the end point because the economy peaked in that quarter.

What followed, of course, was the Great Recession. 2003 Q1 to 2007 Q4 were the years of the Greenspan Put, and the real estate bubble. If it isn’t clear, I am cherry-picking, purposely selecting a period that best showcases the the 35% top marginal income tax rate era.
Now, 14.5% growth over 20 quarters lacks context. So here’s context. Take any consecutive 20 quarters beginning no earlier than Q1 of 1970 and ending in Q4 of 1980. There are 25 such periods. Only seven of them, or 28% of those periods, saw real growth rates below 14.5%. 72% of those periods had real GDP growth rates above 14.5%. (It is worth noting that four of those seven periods began in 1970 or Q1 of 1971 and that Carter didn’t take office until Q1 of 1977.)

Now, the 1970s were the decade of the Oil Embargo, the Iranian Revolution, inflation, stagflation, polyester, the Bee Gees and big sideburns. Big sideburns for crying out loud. They were also an era with top marginal tax rates of 70%. And yet, they compare very favorably to the best years we’ve seen since tax rates fell to 35%.

Now… let us discuss a more recent period. Reagan famously cut taxes – top rates were at 70% when he took office, and by 1986 were down to 50%. In 1987 they were cut to 38.5%, and then to 28% in 1988. They rose slightly to 31% in 1991. Finally, under Clinton, in 1993, top marginal tax rates rose to 39.6%. So we’d expect exceptionally rapid growth from 1987, ending around 1993, right? Well, pick any quarter from 1986 Q1 to 1991 Q4 and consider the growth in real GDP over a twenty quarter period. Every single one comes in with growth in real GDP below 14.5%.

That is, every single one under-performs the period that under-performs the 1970s. (I guess we can say those periods were under-performing squared.) The conclusion is clear, but I’m sure it is different to folks on different ends of the political spectrum.

Data here.

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Essential Health Benefits and cost benefit analysis: can we maintain doctors’ incomes and provide decent care for all?

by Linda Beale

Essential Health Benefits and cost benefit analysis: can we maintain doctors’ incomes and provide decent care for all?

 So we thought we had finally created a national system of health insurance that would permit near-universal coverage for essential health benefits to every American.

But the Obama administration says it is not going to write rules regulating exactly what benefits must be covered.  Again bowing his head to the GOP personal responsibility/states’ rights mantras, the president is willing to let states “experiment” like they do with Medicaid.  Question whether this amounts to allowing right-wing states to shift benefits to private profits and away from care for Americans?
This goes back to the recommendation from a panel at The National Academic of Sciences, which said that the federal government should take cost into consideration in deciding what’s essential to be provided by health insurance plans under the reform act and that new benefits should be ‘offset’ by cost cutting elsewhere. Robert Pear, Panel Says U.S. Should Weigh Cost in Deciding ‘Essential Health Benefits'”, New York Times, Oct. 7, 2011, A14.
But a primary problem with cost-benefit analysis as typically understood is that it favors the status quo because any new benefit for which money must be expended will cost compared to the current system, and the benefit is much harder to turn into a quantitative number that will prove that the cost is worth it.  It is very hard to do truly ‘dynamic’ cost-benefit analysis–the assumptions used tend to be a one-size-fits-all and it is hard to calculate the way that the immediate benefit builds even more substantial long-term benefits and then result in much lower costs down the road,

so that current costs that will have substantial long-term benefits that may not add up to significant numbers until years or decades have passed will tend to be viewed as negatives, whereas maintaining a terribly ineffective and unjust status quo will be seen as positive.  Even more killing for any cost-benefit analysis of medical reform where part of the reason for the problem is the exorbitant pricing that creates large profits for doctors and for-profit hospitals is that If ‘costs’ take into account the fact that decent health care modeling should reduce the highest end medical provider incomes (like the excessive profits made by private nursing homes and hospitals and surgeons who do not work on salary, etc.), then of course the cost-benefit analysis will favor the status quo where those that have money get good care and those that don’t die.

One of the ways that the failure to adopt at least a public option or ideally a single (national) payer option for health care reform shows is that the panel suggested that the minimum coverage required should conform to what small employers provide–typically much less generous coverage than that provided by large employers.  As the October New York Times article on this noted, “This reading of the law was unexpected, but the panel said it was justified because small businesses ‘will be among the main customers for policies in the state-based exchanges.'”  Id.  Not surprisingly, the article also concludes that “the recommendation is likely to please employers and insurance companies and could cause concern among some advocates for consumers and patients with particular illnesses who want more expansive benefits.”  Id.  Again–just more evidence that the right option for health reform is an extension of Medicare for all, not this piece-meal attempt to appease health insurers and health providers by attempting to guarantee that they can still reap huge profits out of what should be a universally provided public good.

originally published axingmatter

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Madoff and Mankiw and Inequality–the corporatist ideology at work

by Linda Beale

  Madoff and Mankiw and Inequality–the corporatist ideology at work

There are two letters to the editor in the Times today that are worth noting–as usual, the ‘real’ analysis is hidden in the interior pages, positioned next to a huge ad (for an investment adviser, no less).
Chris Cannon from San Francisco notes that treating Madoff as the iconic symbol of the financial disruption caused by the credit bubble is problematic.

“Everyone agrees that Mr. Madoff broke the rules.  But the damage done by those acting as allowed by our ineffective rules cost the public much more.  ‘Our troubled financial times’ are the product of a bubble economy fueled by cheap money, an abject failure by rating agencies, regulatory agencies that have been hamstrung by regulations written by financial lobbyists, and a laserlike focus by some bank leaders on yearly bonuses.”  Letters, New York Times, Dec. 18, 2011, at BU 7.

Steven Conn, Yellow Springs Ohio, notes that Greg Mankiw (economic adviser to Republicans, and specifically to Mitt Romney) misses the boat on understanding the way that economics is burdened with ideology.

“He seems not to understand that economists aren’t really objective and dispassionate scientists.  Economics is merely a set of tools with which we build the kind of society we want to live in.  Defining what that means is, of course, an ideological proposition, and thus all economic ‘theory’ is freighted with ideological baggage.”  Letters, New York Times, Dec. 18, 2011, at BU 7.

These two ideas are related.

 One of the reasons that someone like Madoff could get away with a long-term, enormous economic scam is that the reigning economic ideology from 1980 to 2010 has been the neoliberal belief in unfettered markets, taking power with ‘reaganomics’ and the acceptance of ‘greed is good’ corporatism that took hold in 1980, in which those that are sleazy, fraudulent or just intent on having things work out a certain way can take enormous means to achieve their petty ends–like hiring just-out-of-Congress people to panhandle for them in the halls of Congress and to hobnob with regulators, drafting the rules that govern the industry.  It is the enormous expansion of this corporatist perspective that permits money to buy the rules that caused the financial crisis and that continues to pervade the policy solutions that can get through a Congress that is behoven to lobbyists and Big Money in various industries.
As long as we leave tax policy fundamentally to the corporatist moneybags and ideological economists, we can expect regulations to fall short of what they ought to do to protect ordinary Americans; corporations to make money out of failing to do what they ought to do to protect their workers, their customers, and their communities; tax laws that fail to exact a reasonable share of the fiscal burden from the very wealthy (such as the current trend towards decimation of the estate tax, often the only way that some extraordinarily wealthy families pay much of anything, because most of their income is in the favored form of capital gains and income on capital); and the passage of stupid laws that take away our most precious Constitutional rights–like the legislation under consideration that will permit the MILITARY TO DETAIN US CITIZENS WITHOUT DUE PROCESS.
And the result of these tax and economic policies will be a continuation of the trend towards a two-class society of the very rich and the rest of us that has been aided and abetted by reaganomics.  See Allegretto, the few, the proud, and the very rich, Berkeley Blog, Dec. 2011.

The share of wealth held by the top fifth is about 87.2 percent while the bottom four-fifths share the remaining 12.8 percent of wealth—so the Occupiers are correct in their assessment. And, the riches of those in the top 1 percent are about 225 times greater than that held by the typical family—it was 125 times in 1962—so, Grandma was correct too.
In 2007 (the most recent SCF) the cumulative wealth of the Forbes 400 was $1.54 trillion or roughly the same amount of wealth held by the entire bottom fifty percent of American families….Upon closer inspection, the Forbes list reveals that six Waltons—all children (one daughter-in-law) of Sam or James “Bud” Walton the founders of Wal-Mart—were on the list. The combined worth of the Walton six was $69.7 billion in 2007—which equated to the total wealth of the entire bottom thirty percent!  Id.

originally published at

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A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014

by Mike Kimel

A Modest Forecast: The Average Real Growth in Ireland will Exceed 10% a Year From 2012 to 2014

 You read the title correctly: the Irish economy will grow by more than 10% next year. Now, hearing that, you might be asking yourself: “Is this guy for real? He must be nuts.”

 Because I’ve looked around and nobody is predicting that sort of growth for Ireland for the next few years. So let me lay out ten facts that should make it obvious to just about everyone:

1. According to the Central Statistics Office of Ireland, real GDP (measured in 2009 Euros) peaked at 45,583 million Euros in the fourth quarter of 2007. It bottomed out in the fourth quarter of 2010 at 39,403 million Euros. That is, real GDP fell by 13.5%. Since then, GDP has barely budged. So its safe to call 2011, four years after the peak, as a year when the bottom out process was ongoing.

2. According to the OECD, Ireland’s all in top marginal tax rates are about 52.1%.

3. According to the BEA, real GDP (measured in 2005 dollars) was 976.1 billion in 1929. It reached a nadir of 715.8 billion in 1933, amounting to a drop of 26.6%. Note that while growth was negative in 1933 (four years after the peak), it was just a small drop. The bulk of the decrease occurred from 1929 to 1932. 

4. According to the IRS, the top Federal marginal tax rate was 63% in 1934, and it rose to 79% in 1936. Note that this wasn’t an “all in” rate.

5. According to the BEA, real economic growth in the US in 1934, 1935 and 1936 was 10.9%, 8.9% and 13.1%. The annualized rate of growth from 1933 to 1938, years which I’m cherry-picking to show some relatively poor growth, was 6.7% a year.
6. FDR instituted a number of large scale programs. For instance, [b]y March, 1936, the WPA rolls had reached a total of more than 3,400,000 persons. For comparison, according to the BEA’s NIPA Table 7.1, the entire population of the US in 1936 was 128.181 million. Thus, 2.7% of the US population was employed in the WPA alone. Throw in the CCC, the Rural Electrification Administration, the TVA, and I think we can all agree that the Federal government was playing a big role in the economy.

7. Many eminent worthies, too many to name, in fact tell us that the rapid growth in the economy from 1933 to 1940 was due to the bounce-back in the economy. They also tell us that the economy would have recovered much more quickly if FDR had not followed socialist policies.

8. Ireland doesn’t have as far to bounce back from as the US did in 1934, implying slower growth in Ireland today than in the US in 1934.

 9. On the other hand, taxes are much lower in Ireland today than in the US in 1934, and nobody is accusing the Irish today of following socialist policies, implying faster economic growth in Ireland today than in the US in 1934.

10. Facts 8 and 9 probably cancel each other out, leaving us to expect, on average, about the same growth rate in Ireland over the next few years as we saw in the US during the New Deal years when FDR ruined the economy.

As the eggheads say, QED. 

What’s nice about this is that we will see rapid growth in other countries too. Taxes are much lower in the US now then they were during the New Deal years, and for all the cries of socialism and whatnot, there is WPA or CCC or Rural Electrification Program. Heck, even the Fed doesn’t seem to want to do anything about jobs and that’s part of its mandate. Back to the eggheads for a moment.

There’s a bunch of them who think the New Deal helped the economy, that lower taxes don’t generate faster economic growth or that its a good idea for the government go out and buy stuff to boost demand at times of economic weakness. Boy are those folks about to be surprised by the magic of the free market and low taxes. — Disclosure:

I profess, in the sincerity of my heart, that I have not the least personal interest in endeavoring to promote this necessary work, having no other motive than the public good of my country, by advancing our trade, providing for infants, relieving the poor, and giving some pleasure to the rich.

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