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House passes spending bill

by Linda Beale

  House passes spending bill

While the Senate was wrangling over what of the noxious provisions in HR 3630 they would have to keep in order to get expanded unemployment compensation and a payroll tax cut, the House passed a spending bill 296-121 (with 147 Republicans and 149 Democrats in favor) to carry the government through September 2012.  Steinhauer & Pear, Senate Leaders Agree to a Two Month Extension of the Payroll Tax Cut, New York Times (Dec. 16, 2011).

The GOP strategy is to obstruct and demand–one right-wing idea after another is inserted into every bill, just so the Dems will think they have won something when they give the Republicans ten things instead of 100!

As wrangling over the tax has continued, Republican leaders have sought to build support for the measure by adding conservative policy provisions, which have replaced earmarks as the legislative sweetener for Republican lawmakers in a Congress where fundamental differences about the role of government in American life deeply divide the parties.
That conflict, which mirrors the broader political dynamic across the country, is unlikely to ebb in the second session, as Republicans labor to make life more difficult for President Obama and Democrats struggle to hold the White House and the Senate.  Id.

The spending bill isn’t much better.  See Sonmez, Government Funding Bill That Will Avert Shutdown Passed by House, Washington Post Blog, Dec. 16, 2011; Steinhauer & Pear, Senate Leaders Agree to a Two Month Extension of the Payroll Tax Cut, New York Times (Dec. 16, 2011). Defense gets $518 billion and military gets a 1.6% pay raise.  (Remember that this same house in HR 3630, the unemployment extension bill, wanted to freeze all federal workers’ pay for another year, and require greater retirement contributions, among other stingy things for ordinary people.)

In line with the GOP’s anti-regulations ploy, the House bill makes it harder for the government to regulate marketing for food targeted at kids–now there has to be a cost-benefit analysis.  Regretably, cost-benefit analysis is one of those “economics”-based policy ideas that essentially favors the retention of the status quo: any regulation will cost businesses something (restrained marketing to kids costs junk food businesses a whole sector of potential targets, er, customers), and the business world portrays the benefit of healthy food or less exploited kids as miniscule compared to the wonders of their profits and what that can do for society (the wealthy will get wealthier, no doubt).

The House doesn’t care much for ordinary people.  Low-income heating assistance spending will be cut compared to last year and the National Institutes for Health will be barely increased.  The GOP is placing its moral oprobrium of gays in the limelight by prohibiting health money from being used in needle exchange programs, which have been shown to be effective in curbing the spread of AIDS.  Obama’s education initiative is cut 20%–in spite of the fact that education is key to economic growth and the development of human capital.

crossposted with ataxingmatter

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Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

by Linda Beale 

Payroll Tax Cut -Keystone vote up Saturday at 9 in Senate

Apparently, Senate leaders on Friday ironed out the difficulty between the GOP and the Democratic party.  The GOP got most everything it wanted, and the Dems got just barely more than nothing.  That’s the way “negotiating” seems to go in the Congress these days.  The right demands and demands and demands and gets most of it by obfuscating and obstructing.

This time the Dems were worried about not getting a spending bill.  So while the House passed a spending bill to carry the Federal Government through September 2012, the Senate caved on all the things they’d said they wouldn’t cave on–like the ridiculous provision for expedited approval of the Keystone Pipeline.  All to get just a 2-month extension of the payroll tax cut and expanded unemployment benefits–which the GOP knew it could not afford not to pass, no matter what.  And Obama has already flipped on his earlier looks-like-he’s-finally-figured-out-how-to-stand-tall position that he would veto any bill that carried the expedited Keystone approval provision.  See Steinhaur & Pear, Senate Agrees to a Two-Month Extension of the Tax Cut, New York Times (Dec. 16, 2011).
The GOP continues to call the Keystone pipeline project a “job creator”, even though it will create no more than 50 permanent jobs, at a considerable environmental cost.  Schumer calls the Keystone provision a “Pyrrhic victory” for the GOP, because he says Obama will not approve it if pushed.  That’s not so clear to me.  Schumer also spins the cave-in as a victory for Dems! saying that the GOP won’t have the leverage of the need to pass a spending bill when this issue comes back.  See  Rubin et al, U.S. Senate Leaders Agree on Two-Month Payroll Cut , (Dec. 16, 2011).
Again, past experience suggests this may be too rosy an assessment.  There were commentators who thought that surely the Congress would not pass further tax cuts after the 2001 tax cuts resulted in large deficits but instead we got the 2003 bill and the 2004 tax giveaway for corporations bill and many others, with the deficits mounting with each one.  One would have thought that the sunset of the various Bush tax cuts in 2010 would have been a perfect time for the Dems to develop a spine, but they didn’t.  And the Dems weren’t even able to pass a bill ending the carried interest subsidy for hedge fund managers, in spite of the Great Recession and the need to reign in financial institutions.
The Senate bill will apparently at least not include some of the bad stuff  that was in HR 3630 as passed by the House–it is “scaled back” so it looks like medicare premiums won’t rise for seniors, and  the GOP won’t win its attempt to end medicare’s coverage of outpatient rehabilitative therapy for stroke victims and medicare payments to doctors will not be affected.   Nor will it include the “extensions” of expiring tax provisions like the R&D credit or the active financing exception for the financial  industries’ deferral of its offshoreprofits.  Id.
The Senate bill will apparently be paid for by raising the guarantee fees for Freddie and Fannie, something that was included in HR 3630.  Id.  Vote is to take place at 9 am Saturday.
crossposted at ataxingmatter

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Should reinsurance using foreign affiliates be deductible to US corporations?

by Linda Beale

Should reinsurance using foreign affiliates be deductible to US corporations?

Foreign-owned US insurance companies frequently reinsure through their foreign affiliates and then claim a deduction under section 832(b)(4)(A) for the reinsurance premium paid to the affiliate to reduce the US tax liability of the US company.

Rep. Richard Neal (D-Ma) introduced a bill on October 12 that has been referred to the House Ways & Means Committee, where it now languishes unattended by the Republican chair, David Camp of Michigan.  H.R. 3157 amends the Internal Revenue Code to create a new section 849, which disallows the deduction for certain reinsurance premiums and related amounts paid to non-taxed foreign affiliates, defined as members of a controlled group, with 50% rather than the usual 80% used to define a control relationship.

The President’s FY 2012 Budget included a similar proposal for disallowing some affiliated reinsurance premium amounts.  Earlier iterations of a disallowance bill were introduced in 2000 and 2001.  A bill with somewhat broader disallowance provisions, H.R. 3424, was introduced by Representative Neal in 2010 and did receive a hearing at Ways & Means that year.  The Joint Committee on Taxation issued a report on reinsurance with offshore affiliates prior to the hearings on H.R. 3424 in 2010, titled “Present Law And Analysis Relating To The Tax Treatment Of Reinsurance Transactions Between Affiliated Entities”, JCX-35-10 (including a description of HR 3424 and the President’s FY 2012 proposal, beginning at page 22).  As noted in the JCT report:

When these assets are shifted from a U.S. insurer to an offshore reinsurer with a foreign parent, these earnings may no longer be subject to U.S. income taxation. If the U.S. insurer and the offshore reinsurer are affiliated, the profits attributable to the reinsured risks remain within the affiliated group, although the earnings on the assets may no longer be subject to U.S.income taxation. (footnotes deleted)

If the offshore affiliate is in a low or no-tax jurisdiction, the result may be almost no tax  on the reinsurance premium amounts (other than the applicable excise tax, if not eliminated by treaty).  Not surprisingly, the trend over the last few decades has been towards reinsurance arrangements with affiliates:  between 2001 and 2008, ceding of insurance of offshore affiliates grew by more than 108%, while ceding of insurance to nonaffiliated offshore entities grew by only 16%.  See JCT report at 11, n.21 and accompanying text.  Bermuda, a jurisdiction with no corporate tax and one especially friendly to insurers, is the most frequent jurisdiction for these affiliated reinsurance transactions.  The JCT report notes that the lack of a market price for affiliate transactions provides an incentive to shift income between affiliates at off-market prices.

Also not surprisingly, lobbyists for these foreign-owned insurance companies have fiercely fought the possibility that this handy tax-reduction technique might be legislated away.  The “Coalition for Competitive Insurance Rates” put out a press release on November 29, praising Republican lawmakers from Florida who had joined in a letter, available here, opposing the bill. The claim is that eliminating the tax avoidance technique will be a “punitive tax on reinsurance” that would “lead to higher premium costs” because it would “impose a tariff on international reinsurance firms”  and that this would amount to “punitive and anti-competitive taxes.”

The Florida Republican representatives note that 90% of Florida’s insurance is reinsured offshore.  The fact that such affiliate reinsurance is widespread does not mean that it is a better means of risk management.  The regular amount of US taxes that would be charged on those US affiliates” income is not a “punitive” tax: it is merely the amount of tax that those firms would pay if they do not use affiliates as reinsurers.

Note that moving the insurance to an affiliate doesn’t achieve the risk-shifting that reinsurance is designed to accomplish–it retains the risk within the controlled group.  (The IRS litigated a number of captive insurance cases under the theory that a controlled group constitutes a single economic “family” and hence cannot achieve risk-shift or risk-diversification.  Although courts were hesitant to adopt this theory, it does seem to capture the essence of the affiliate reinsurance problem.  The JCT report noted above also suggests the theory as a means of addressing the tax avoidance technique.)  Although lobbyists claim that reinsurance with affiliates is a valuable “risk-management” tool and that reinsurance with affiliates accomplishes the same risk management as reinsurance with non-affiliated parties, it seems that reinsurance within a controlled group does not provide the same risk protection as nonaffiliated reinsurance.   A catastrophic event covered by the reinsurer could result in liquidation of its assets, including its interest in the US affiliate.

Insurers using offshore affiliate reinsurers claim that there are nonetheless real non-tax advantages: (i) reducing adverse selection/moral hazard from information asymetry between insurer and reinsurer and (ii) “allowing risk and capital to be moved more easily … to respond to changing market conditions.”  See Cragg, Cummins & Zhou, The Impact of a U.S. Tax on Offshore Reinsurance Market, TheBrattle Group , May 1, 2009 (research funded by the Coalition for Competitive Insurance Rates projecting a 2.1 – 2.4% rise in insurance costs upon elimination of the affiliate reinsurance scheme) (also cited in the JCT report for these claims).

These so-called advantages of affiliate reinsurance appear spurious.  First, while the interests of the insurer and its affiliated reinsurer are aligned (so that the insurer will have less incentive to select the worse policies for that affiliated reinsurer or to be lax in its policy making for policies it will reinsure with its affiliate), the absence of real risk-shifting would make that alignment of little real value.  Alternatively, as the JCT report notes, the aligning of interests may mean that the premium paid to affiliated reinsurers should be lower than the third-party premium, meaning that much of the affiliated reinsurance market may result in understatement of the US company’s income. Furthermore, nonaffiliated reinsurers may well undertake more comprehensive due diligence connected with taking on real reinsurance risk, and thus in fact contribute to a better risk-balanced insurance market. 

Second, the claim that reinsuring with offshore affiliates allows for easier movement of capital in response to market conditions is of little real benefit to the U.S. insurance market.  The foreign parent that reinsures the U.S. affiliate has received an advantage from having that reinsurance premium as its capital while at the same time reducing its US affiliate’s tax liability, but that merely substantiates the complaint of domestic companies that the ability to reinsure with a foreign affiliate gives an unjust  competitive advantage–the double whammy of the tax deduction to the US affiliate and the capital infusion to the foreign company.  Further, as we saw in the 2008 financial crisis,  globalization of interactions among financial companies can have deeply negative systemic effects.

On balance, eliminating the deduction for affiliate reinsurance premiums is not the creation of an “anti-competitive tax” whenthe insurer is using the affiliate to shift income offshore and avoid paying U.S. corporate taxes.   In fact, the ability of some insurance companies to offshore preimums is itself anti-competitive, since it puts wholly domestic U.S. insurance companies at a disadvantage.

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GOP’s payroll tax cut bill (with a lot of other stuff)

Dan here…Linda Beale writes on the intent and passage of these bills. Whether the use of the payroll tax has political and budget consequences for people’s perceptions of Social Security and its future remains a question previously discussed at Angry Bear here.

by Linda Beale

(Update from Linda: Payroll Tax Extension Passes)

GOP’s payroll tax cut bill (with a lot of other stuff) up for vote on Tuesday

[edited 2 pm 12/13 to provide additional links to news coverage of some of the changes]

Congress has been playing politics as usual over the few policies that are on the table that have a real chance of assisting, to some degree, the plight of ordinary Americans and perhaps even the slow recovery that is still trying to gain steam–extension of the reduction in payroll taxes (from 6.2% to 4.2%) and extension of unemployment compensation.

The Republicans have refused to pay for these common sense tax reductions for ordinary Americans with a similarly common sense tax increase on the wealthiest Americans who have continued to capture all the productivity gains in the economyt.  Republicans in the House think that these kinds of provisions should be offset by more goodies for the “uberclass”–at least as evidenced by the H.R. 3630, the bill introduced by Dave Camp (R-MI) and to be voted on today at about 4:30 pm.

  • It would restructure unemployment compensation in ways that add hurdles and make it less likely that unemployed Americans will qualify–providing more state flexibility and experimentation (including paying employers to cover part of cost of wages exceeding the recipient’s prior benefit level), permitting demeaning drug testing of all unemployment compensation recipients (section 2127), and requiring a high school diploma or participation in state “reemployment services” for which recipients may be charged up to $5 weekly out of their unemployment compensation.  It would severely curtail the total number of weeks for which federal unemployment assistance is available–moving to a 59-week limit from a 99-week limit.  Methinks I see Scrooge here…..
  • It will interfere with the Environmental Protection Agency’s ability to regulate, letting corporations continue to harm the environment at the expense of ordinary Americans.   See Subtitle B.  Section 1102(b) lists rules that are “stayed” by the legislation and provides that no new rules can have an effective date earlier than 5 years out and requires consideration of various factors in determining that date.  Further, it requires adoption of the laxer 2000 definitions for certain key terms and the imposition of the “least burdensome” among potential regulatory alternatives.  This is a key cave-in to corporate polluters. 
  • It will expedite the KeystoneXL pipeline by requiring a permit to be issued within 60 days unless within that time the President determines that the pipeline will not serve the national interest (in which case within 15 days the President must provide various committees and members of Congress a report justifying that conclusion from various perspectives).  It indicates that the environmental impact statement from August will be treated as satisfactory for environmental and historical preservation purposes and shall not have to be supplemented if there are modifications to the plan  and no further federal environmental review shall be allowed.  This is a clearly ideologically driven provision, failing to give due regard to the potential longterm environmental impact on drinking water aquifers or historical preservation impact. 
  • It would provide yet another tax reduction for US corporations that have paid less and less taxes over the last decade, with a renewal of the ill-advised 100% expensing provision in section 168(k)(5) (along with the alternative of accelerating AMT credits)
  • it makes further changes to medicare such as applying a cap to hospital outpatient therapy services and reversing part of the Health Reform Act passed earlier, by permitting new doctor-owned hospitals and permitting existing ones to expand, even though it has been shown that such hospitals spend more on testing and procedures (and profit more from them).  See, e.g., Pear, G.O.P. Bill Would Benefit Doctor Owned Hospitals, New York Times at A24, Dec. 13, 2011.
  • it would continue funding for the “healthy marriage and responsible fatherhood” initiative, see 42 U.S.C. section 603(a)(2)  (the cynic in me suspects that these funds primarily go to programs supported by religious institutions and that they proselytize more than they teach reasonable relationship skills)
  • it includes an extensive section remaking flood insurance provisions, including, in section 3005, lifting the cap for premium increases for flood insurance from 10% to 20% (an apparent boon to insurers), and another section prohibiting the administration from “disregarding” any levee or floodwall, even if it is not accredited.  The goal, made clear in section 3009, is privatization of the national flood insurance program.
  • It includes extensive broadband spectrum auction provisions in Title IV, Subtitle A, reallocating spectrum from federal to nonfederal use.  These provisions, among many detailed ones, e.g., permit private administrators of state public safety networks to use the public spectrum for private purposes as well as the public safety  purposeand prevent states from denying requests for modifications of existing wireless towers that do not substantially change the physical dimensions thereof.
  • It increases the guarantee fees charged by Fannie Mae and Freddie Mac.
  • It requires a social security number for the refundable child credit
  • It provides in section 5895 a 100% tax on “excess unemployment benefits” that go to millionaires (unemployment compensation is reduced proportionately as the adjusted gross income increases from $750,000 to $1 million)–The Times today has an article on the bill and notes that the number of millionaires receiving unemployment compensation is very small, but that their participation is predicated on the fact that the unemployment compensation program is a type of insurance into which payments are made to cover payouts.  Means testing such insurance programs is in sync with the right-wing goal of means-testing as a prelude to privatizing and/or eliminating all federally administered social welfare insurance programs, such as medicare and Social Security (and, see above, national flood insurance).
  • It increases pension contributions from longterm federal workers by .5% a year for 2012-2014 and for those “secure annuity employees” with less than five years of service, by more than 10% a year and using 5 year average pay rather than 3 year average pay, sets annuity amounts, and ends the annuity supplement for post-2012 retirees.
  • it extends the general freeze on federal pay for another year
  • It increases the premiums for Medicare Part B and Part D for those making $80,000 or more (for those making $200,000 or more, the applicable percentage is 90%)–this again appears to move these national social welfare insurance programs towards more means-testing that will facilitate privatization or eventual elimination. 
  • It sets up a number of procedural hurdles in the Senate, which is already hogtied by the ease with which a minority of its members can filibuster and thus stop legislation that is supported by a solid majority of its members.  For examples,
    • it requires a 2/3 vote in the Senate to amend the dates for section 601(c) of the 2010 Tax Relief Act–that’s the temporary employee payroll tax cut;
    • it provides that a point of order by any Senator against an emergency designation in a bill eliminates that designation and makes it impossible to bring the designation through a floor amendment unless there is a supermajority 3/5 vote in favor of doing so (limiting debate to 1 hour)–thus one right-wing Senator intent on obstructionism can make it very unlikely that an important provision can pass by preventing even reasonable debate about the importance of the provision!

The GOP, of course, touts its bill as creating jobs.   While the Keystone pipeline may create some short-term jobs (the New YorkTimes reports estimates from Transcanada itself  and the State Department of only about 6500 temporary construction jobs  and maybe 50 permanent new jobs–see Keystone Claptrap, Editorial, New York Times at A34, Dec. 13, 2011), the potential negative impact on aquifers could be life-threatening.  Most of the other provisions are Scrooge-like additions of hurdles and caps on social welfare provisions or attempts to roll back the social welfare insurance provisions into means-tested ones that will be even more susceptible to the derogatory and inflamatory class-action warfare that the right has increasingly unleashed on anything that doesn’t give a break to the wealthy and corporate clients of the all-powerful Washington lobbies.

On lobbies, just read the New York Times article about the wealth that online educators are getting from state and federal taxpayer dollars for delivering no or sub-standard education, and the amount of taxpayer money being spent on lobbying to ensure the continuous flow of that wealth.  See Saul, Profits and Problems at Online Charter Schools, New York Times, Dec. 12, 2011.  It’s obvious that the corporatist agenda sees no problem with siphoning off taxpayer dollars for private benefit with little public good created, but complains mightily about any siphoning off of exorbitant corporate profits–that tend to go to wasteful excess managerial compensation or portfolio enhancement–for taxes intended for public benefit.

The inclusion of the Keystone and other right-wing-rhetoric-driven items in a bill to provide the payroll tax cut and a limited unemployment extension (with hurdles) demonstrates the absurd level of ideological partisanship engaged in by the House Republicans.  Senate Majority Leader Reid characterized the bill as loaded with “ideological candy” that the Senate would reject.  Sloan & Rubin, House to Vote on Payroll Bill as senate Eyes Tax Sweeteners, (Dec. 13, 2011).    Of course, most of the sweeteners that Reid proposes adding are components of the right-wing corporate-friendly agenda–like the R&D credit that rewards what companies do anyway; the active financing exception for big banks, insurers and other financial institutions that lets them defer taxation on their financing income earned overseas; and accelerated depreciation for restaurants and motorsports tracks that provide special tax subsidies to particular industries!

Also read more:

Environment and Taxes, Insurance, Job creation, Payroll Taxes, Regulation, Tax in the News, Tax Legislation

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American v. Brazilian Healthcare, a Continuing Series

by Mike Kimel

American v. Brazilian Healthcare, a Continuing Series

I spoke to my sister on Skype last night. She’s been in Natal, in Northeastern Brazil, for the past few months. Last week, she noticed a couple small warts growing on her leg. So she wandered down to a government run hospital and and had them removed. The hospital was low on supplies, and the doctor asked her to contribute a box of Q-tips (since Q-tips would be needed in the procedure). The total cost of the whole thing: 12 reais, or about $6.60 American, plus a box of Q-tips.

This isn’t the first time I’ve had a post that dealt with my sister and the Brazilian health care system. A few years ago I wrote about the time she had emergency open heart surgery in Brazil, and how it compared very favorably with her experience with (planned) open heart surgery in the US.

Now, on the subject of the US, my wife also has an interesting healthcare story to relate. She got a letter from Aetna, her insurance provider, indicating they didn’t know why they were being asked to pay for services when she doesn’t have health insurance through them. Interestingly enough, money is withdrawn from our bank account each month to pay for her health insurance, and a call to Aetna indicated that she did, in fact, have health insurance. A number of phone calls back and forth between my wife, Aetna, and her doctor resolved the issue (I think) – the doctor is being paid, etc. But it isn’t the first time this has happened, and it serves to follow up our family’s earlier experience with health insurance. All told, I would estimate my wife and I have spent about 40 hours – that would be a workweek – dealing with health insurance since July.

Brazil is a poor country, and I don’t think anyone has ever suggested that the Brazilian health system is the best in the world. On the other hand, we often hear precisely that about the American system from certain circles, despite the astounding cost (which doesn’t seem to include the waste of time dealing with the paperwork or fighting with health insurance companies) and ho-hum outcomes. I’m starting to think a lot of Americans are absolutely insane. Lord knows it would explain a lot.

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A Simple Question about NGDP Targeting

by Mike Kimel

A Simple Question about NGDP Targeting

It seems that a big part of the econosphere these days talks about NGDP targeting. Translating this into English, a number of economists believe the Fed should be adjusting monetary policy to achieve a desired level of nominal GDP in any given year. To be very precise, both the economese and the English should be adjusted slightly to explain what is really meant: the Fed should be adjusting monetary policy to achieve a given desired rate of nominal GDP in any given year

To me there are two very obvious problems with this. The first should be evident to anyone who ever spent time in South America in the 1970s or 1980s, or has so much as heard of, say, Zimbabwe or the Weimar Republic: why should the Fed or anyone else care about nominal growth rates? Nominal figures are useful for Sowellizing, which apparently can be very profitable, but in the end, only inflation adjusted figures tells us whether we’re better off or not.

But there is a second problem, and the easiest way to state it is by analogy. Think of the Fed as the quarterback on an American football team. I don’t much like American football, but it is evident that the goal of a quarterback is not to throw a specific number of completed passes, or even to get certain score the board. The goal is to do what it takes to win the game. Getting 28 points doesn’t help you if the other team walks away with 35. On the other hand, 28 to 21 achieves the quarterback’s goal nicely. (And of course, whether 28 points looks impressive or not depends on a number things, including the condition of your teammates and the other team’s defense.) For a good quarterback, winning the game sometimes means mostly staying out of the way, while at other times it means taking charge. But specific measurable numbers mean nothing in the end.

Now, the Fed has a dual mandate (imposed by law): set policy to maximize employment and keep prices stable. Of course, the two goals conflict to some extent. Stable prices means keeping inflation rates at about zero, which nobody advocates as it would generate slow economic growth (and thus low levels of employment). Maximizing employment could be accomplishing economic growth rates, but the Fed often tries to slow down growth rates in order to prevent the onset of inflation.

The Fed is left with something that loosely translates as this: “try to get the economy to grow as quickly as possible without setting off too much inflation.” It accomplishes that goal to a greater or lesser extent at different times.

But given the number of moving parts out there, that seems to be a much easier, and much more logical approach than saying: let’s shoot for a 3% increase in nominal GDP this year.

Lest this post be seen as a defense of the way the Fed does its job, I should note: I personally think the Fed has been doing a very poor job for quite a while, and some of my earliest posts are criticisms of the Fed. I’m especially horrified by the Fed’s approach to the economic mess we’re in – as I’ve been noting since 2008, ensuring that institutions with insane and harmful business models survive to engage in more spectacularly bad behavior is no way to help the economy, and that is true whether one has NGDP targets or not.

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The Numbers Behind Newt’s Plan to Balance the Budget

by Mike Kimel

The Numbers Behind Newt’s Plan to Balance the Budget

Newt Gingrich’s website provides information on The Gingrich Jobs and Prosperity Plan. It starts with this:

America only works when Americans are working. Newt has a pro-growth strategy similar to the proven policies used when he was Speaker to balance the budget, pay down the debt, and create jobs.

Excellent. That statement should be enough to get an idea of what the program will look like. I want to focus on the first piece: balancing the budget. (You can’t pay down the debt unless you run a surplus, so balancing the budget also deals with that issue.)

Here’s what the surplus / GDP looks like for the years from 1988 to 2004. The gray bar covers the years from 1995 (the Republican Revolution took office, and Newt Gingrich became speaker in 1995) to 1998 (Gingrich resigned as speaker in November 1998.)

(Incidentally – the surplus is simply Total Federal Receipts less Total Federal Expenditures, which come from lines 37 and 40 of the BEA’s National Income and Product Accounts Table 3.2. GDP comes also comes from the BEA.)

Figure 1

As you can see, the deficit did indeed turn into a surplus when Gingrich was in office. However, the chart makes it clear the trend began before Newt took office and continued after Newt left office. In fact, it seems that the deficit started falling in 1993. The surplus, on the other hand, peaked in the year 2000, fell, and the budget returned to a deficit. So what defined the years from 1993-2000? Oh yeah, they were the years Clinton was President. So Newt is basically saying he would support the policies that produced success in the Clinton years.

That is wonderful… those were years of great prosperity. You have to go back to the JFK & LBJ years to find presidents who oversaw faster growth rates in real GDP. But let’s stay focused on the deficit and surplus issue. In fact, let’s deconstruct the number into its constituent parts. Figure 2 shows Total Federal Receipts / GDP and Total Federal Expenditures / GDP.

Figure 2.

As is evident from Figure 2, Total Federal Receipts / GDP hit a low point in 1992 and started to rise in 1993, eventually peaking in the year 2000 and then falling. Total Federal Expenditures / GDP hit a high point in 1992, then began falling in 1993, eventually hitting a local nadir in 2000 and then starting to rise again. The trend during the Newt Gingrich years looks like the rest of Clinton years… well, except for a slight slowing in the rate at which expenditures were dropping.

Now, you might be thinking that Newt’s comments about deficit reduction speak more to his views on expenditures than on taxes. After all, few Republicans talk about increasing the tax burden these days and it would take a lot of guts for Newt to break with his party on this one. But looking once more at the numbers its obvious Newt really does want Americans to pay more.

Consider… in 1995, Gingrich’s first year as speaker, federal expenditures were 22% of GDP.In 1998, they were 20% of GDP. But… revenues in 1995 were 19.2% of GDP. That is to say, had revenues remained at the 1995 level, they would have been less than expenditures and the budget would have still been deficit Newt’s last year in office (and in fact, in 1999 as well). But Newt takes credit for balancing the budget.

Thus… by necessity he is taking credit for raising the tax burden on the American people. Granted, there were no hikes in the marginal rate while he was speaker, but the increase in the tax burden came about with increased enforcement and regulation. This is a man with political courage! This is a man who puts doing the right thing above any thoughts of personal gain!

Now, I’d like to put the tax hikes that Newt seems to be advocating in context. For this, I’m going to steal a graph from Presimetrics, the book I coauthored with Michael Kanell. In it, we used a slightly different version of the tax burden: instead of Federal Revenues / GDP, we looked at the percentage of people’s income that went to taxes. We looked at the annualized rate of change of this version of the tax burden for each Congressional administration from 1952 to 2008.

Here’s what we found:

Figure 3.

As Figure 3 shows, the Republican Revolution (which granted, extended a few years beyond Newt) oversaw the largest (by far!!!) annualized increase in the tax burden of any Congress in several decades! Because taxes aren’t that popular with Republicans these days, Newt is downplaying the issue, but he seems to be dogwhistling it for those of with some familiarity with the numbers. The only alternatives are that he is ignorant of the numbers, or that he is will to obfuscate the facts, but hopefully we can expect more than that from someone running for the highest office in the land.

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Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates

by Mike Kimel

Peter Diamond, Emmanuel Saez, Paul Krugman and Me!! Looking at Optimal Tax Rates

Via Paul Krugman, I learned of this paper by Peter Diamond and Emmanuel Saez. Diamond, of course, is a Nobel Laureate. I will be shocked if Saez isn’t one too in ten or fifteen years.

Long story made very short, Diamond and Saez jump through a lot of hoops and find that the optimal top marginal income tax rate (all in, that is, including federal, state and local), which they define as maximizing social welfare, is about 73%.

Now, long time readers may recall I’ve been doing this sort of analysis for years, though of course I’ve been looking at tax rates that maximize real GDP growth. Simply put, you cannot maximize long run social welfare if you aren’t maximizing economic growth.

My approach is much simpler than that followed by Diamond and Saez. I like to think its much more intuitive and easier to explain. I note that US data shows a simple quadratic relationship between real GDP growth from one year to the next and tax rates:

growth in real GDP, t to t+1 = f(top marginal tax rate, top marginal tax rate squared, other variables)

One recent post on the topic is here. (Unlike the Laffer curve, the coefficients come out statistically significant and with the right signs.)

I mention all this to note that no matter what I throw into the equation, I find that the top marginal tax rate that maximizes economic growth is somewhere around 65%. Of course, I’ve focused only on federal tax rates… add in state and local it comes pretty close to what Diamond and Saez have found.

As I noted above, my approach is somewhat simpler, and easier to follow than that of Diamond and Saez. Part of the reason is that they come at it from a point of view of elasticities. But with all due respect to my betters (Diamond and Saez, and Krugman as well considering the explanation in his post) I think this is the wrong way to consider the problem. It requires all sorts of assumptions and generalizations about people’s behavior, some of which are both false and create resistance from folks on the right.

For example, there is a notion that raising tax rates will reduce people’s willingness to work… which is only true above certain thresholds. (That threshold, of course, varies per individual.) As anyone who has ever had a business will tell you (when they’re not busy demanding tax reductions), you don’t pay taxes on income from the business if you turn around and reinvest that income. (An accountant would talk to you about decreasing your tax liability by increasing expenses which amounts to the same thing.) You only pay taxes on that income you take that income out, presumably for consumption purposes.

So to simplify, consider an example…. is a successful businessperson more likely to take money out of the business if his/her tax rate is 70% or if its 25%? In general, a person is more likely to take that money at 25%, as there’s less of a penalty. At 70% tax rates, there is more of an incentive to reinvest in the business, creating more growth in the business in subsequent years, and more economic growth thereafter. 70% tax rates are more likely to generate faster economic growth than 25% tax rates precisely because people are self-interested and the higher tax rates induce people to continue investing in things they do well.

(Of course, tax rates can get too high. At 95%, people will reinvest almost every dime… even if they have exhausted every good investment opportunity they have. Thus, to avoid taxes they’ll be making lousy investments which in turn slow economic growth.)

Still, its gratifying to see others who are more, er, credentialed doing similar work. If I might end on a digression, though, I can think of a number of examples of work being done on blogs by people who are essentially hobbyists which is somewhat ahead of the academic literature. However, to a large extent, if something wasn’t published in the academic literature, for all practical purposes it didn’t happen. Which is a shame, because most of us who aren’t academics don’t have time or the resources required for such publication (such as access to econlit). That inevitably slows economic development three ways:

1. the lack of recognition discourages hobbyists who have the potential and otherwise would have the willingness to improve on the existing literature
2. should such hobbyists persist and do the research, that research will not be widely disseminated even if it is an improvement over the academic literature
3. it maintains an insular attitude among those who are not hobbyists. As smart as Diamond, Saez, and Krugman all are, none of them are thinking the way someone running a business thinks of they’d have realized immediately how people who are running a business react to higher and lower tax rates. I have read a lot of academic papers on taxation and have yet to stumble on one that gets it right.

Thanks to Steve Roth of Asymptosis and Jazzbumpa of Retirement Blues for notifying me of Krugman’s post.

And since I always offer… if anyone wants any spreadsheets showing the quadratic relationship between tax rates and economic growth or anything else I’ve done, drop me a line. I’m at my first name (mike) then a period then my last name (kimel – with one m only!!!) at

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The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner

By Mike Kimel

The Gold Index, April 1933 – February 1934, Courtesy of Scott Sumner

I’ve been having a bit of a back and forth with Scott Sumner of The Money Illusion over the degree to which monetary policy, in particular the devaluation of the dollar, affected the economy in 1933. (My most recent post on the issue is here.)

In private correspondence, Sumner provided me with the draft for three chapters of a manuscript he is working on. I can safely say that whether or not I agree with his findings, Sumner has done his homework – the draft is meticulously researched and abounds with details corroborating his findings. Of particular interest to me was a Table 8.2, which shows weekly figures for a number of series from April 15, 1933 to the first week of February, 1934. Sumner has graciously agreed to let me post that table. I don’t want to freeride on his efforts to much, so I’m only reproducing the first few columns.

Figure 1

I believe the most interesting thing in the table is – what has been the cause of some discussion between the two of us – is the Gold Index. From the footnote to the table in the manuscript:

The gold index is the Annualist Index of Commodity Prices measured in gold terms.

Sumner collected that data manually from old trade journals. I haven’t been able to find that data online. What the data shows, to quote Sumner, is that “an ounce of gold could buy more internationally traded goods in 1934 than 1933. That’s what the 815 to 650 is showing—falling prices in gold terms.”

Here’s a graph of the series:

Figure 2

Addendum by Ken: Here’s the Gold Index data listed above with the Vertical Axis rescaled:

Figure 3

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The Hill reports on "supercommittee"

by Linda Beale

The Hill reports on “supercommittee

Alexander Bolton reports that “With Supercommittee Deadlocked, leaders Reid and Boehner meet“, The Hill (Nov. 15, 2011).  Reid (Dem) and Boehner (GOP) met Tuesday, but aides told The Hill that “They’re not about to dive in” to the negotiations.  But as the committee seems to be at an impasse close to the 11/23 deadline, the leaders must be discussing what is likely to be the next step.  The arrangements for the group (in case no bipartisan deal could be reached) called for across-the-board cuts that impose reasonable cuts on Defense but limited cuts for social safety net/earned benefit programs (medicare limited to 2% cuts to insurance companies and health care providers/Social Security and Medicaid exempt).

The GOP members, of course, are casting it as a Dem problem. For example, Hensarling (a very far right member of the group, from Texas) blamed the Dems for not accepting the Toomey proposal for a piddling $300 billion in new tax revenue.  With Supercommittee Deadlocked, leaders Reid and Boehner meet.

The across-the-board cuts would cut Defense by $500 billion.  Various GOP members of Congress have said they want to change the deal to avoid the cuts to the military.  Tea Party favorite and radical right-winger Jim DeMint has essentially admitted that he never intended to stick with the sequester deal, saying that the GOP has “until next election to fix this thing.”  GOP stalwarts want the US to maintain its exorbitant spending as “the world’s only military superpower” even while being willing to cut health care and pensions to the vulnerable and even while the country’s infrastructure–essential for business–crumbles in ruins.  McCain and Graham urged the Senate to reject the sequester of military funds, fearful it would “set off a swift decline of the United States as the world’s leading military power.” Dems gain upper hand in deficit talks, The Hill (Nov. 16, 2011).  This attitude seems to believe that defense spending, no matter what the cost to the country, is okay, while spending on poor people is a waste and raising taxes on the rich is an impossibility.  Apparently GOP McKeon considered that possibility, but then later backtracked.  Certainly, Grover Norquist has been making sure the pressure is on from the corporate masters of our pseudo-democracy–the Hill notes Norquist’s statement Monday that both Senate and House GOP leaders had “assured him they would not raise taxes to reduce the deficit.”  Id.

So we have elected representatives in Congress who willfully ignore the will of the majority of people in favor of higher taxes and higher taxes on the rich and corporations in particular; ignore the facts that show that higher taxes on the rich and a more equal economy are better for everybody; and ignore the fact that their own policies (preemptive war and tax cuts during deficits from 2001-2008 under Bush) represent the substantial reason for long-term deficits–all in order to continue to support extraordinarily disproportionate spending on the military rather than on public infrastructure, education and health and in order to be able to continue to use the self-created “debt crisis” to push for further impoverization of America’s middle class.  What a backwards value system that represents can’t be expressed in a public blog.

But at least Reid has said that method of reneging on the agreement won’t be allowed to happen: “Democrats aren’t going to take an unfair, unrealistic load directed toward domestic discretionary spending and take it away from the military.”    See Id.; see also Reid: Dems will oppose efforts to spare Defense from automatic cuts, The Hil (Nov. 14, 2011).

As one of the commenters on The Hill notes (quoting an NPR program), the supercommittee is set up to force one of two bad choices–reducing the social safety net or cutbacks during economic recession.  What we should be doing is increasing taxes now on the rich and on corporations, and then allowing the Bush tax cuts to expire at the end of next year–in their entirety.  We should make judicious spending cuts in wasteful programs–and the military certainly should be a target of some of those cuts.  And we should make judicious spending increases in infrastructure, research and educational support programs to add stimulus to keep the economy going.

Case in point–the New York Times story today about a small town in Kentucky that decided to increase taxes to pay for infrastructure improvements that are putting the two back on the map.

originally published at  ataxingmatter

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