Tuesday, August 16, 2016

The Ideal Economic Policy

MP Economic Policy  This was an interesting read.

Here are Louis Johnston's Economic Goals
  1. Promote faster economic growth. From 1929 to 2001, the U.S. economy averaged 2 percent per year growth in GDP in per capita. Since, then, the economy has grown at about 1-1.5 percent per year. Growth of GDP per capita is the key to growth in average incomes.
  2. Promote a more equal, less skewed distribution in of income. Even if we could get the U.S. economy to grow faster, this will be for naught if the majority of the gains accrue to only a small minority. A healthy economic system rewards those who create and nurture that system, and that includes everyone who participates, not just those at the top.
Here are some of his reform ideas.
  1. Eliminate many (or even most) deductions and credits from the tax code so that the households make decisions based primarily on their own circumstances, not to in order to avoid taxes.
  2. Move from a system of tax brackets to continuous, progressive tax rates. For instance, Donald Trump and House Republicans propose creating three tax brackets with rates of 12, 25, and 33 percent. This system creates “cliffs,” that is places where tax rates suddenly jump when household income changes only a small amount. A better way would be to have the tax rate rise slowly and smoothly as household income rises rather than hit them hard at some arbitrary income level.
  3. Eliminate the distinction between labor income and capital income for tax purposes. Under the current system, someone earning $100,000 in wages pays a higher tax rate than someone else who earns $100,000 in capital gains. Thus, workers and small businesses (who often run their taxes through the personal tax code) end up paying higher rates for no logical economic reason.
  4. Eliminate the corporate income tax and then tax everyone through the personal income tax system as outlined above.


Here are my first comments.
  1. I do agree that a rising river lifts all boats, and a rising GDP should increase the incomes of many.  The challenge is that what we really want to do is increase the disposable income of Americans.  Therefore it is critical to control cost increases while increasing GDP.  Be they amount of taxes paid, inflation, other.
  2. I guess I disagree...  I think what we want is people correctly compensated based on their knowledge, capabilities, effort, personal decisions, investment, etc.  The USA is not a collective where everyone deserves a share for just living on US soil.  The compensation must be competitive with the global markets, or money / jobs will flow elsewhere.  If a person saves money, invests it overseas, makes a profit, etc...  Do the people living in America really deserve a large share?  Same for someone working Overseas?
  3. The tax code is used for more than just collecting money as you note.  You want to use it strongly to drive some kind of equitable income distribution.  Where as I think it should also be used to strongly encourage citizens to save for college, rainy days, retirement, reduce debt load, etc  I don't see that in your plan.  Remember that the Great Recession was only a problem for people with too much debt and too little liquidity...

28 comments:

Sean said...

"Remember that the Great Recession was only a problem for people with too much debt and too little liquidity..."

Really?
.
.
.
I mean, really?

John said...

Sean, Yes... Please explain your different viewpoint.

All,
From MP, I am kind of thinking Victoria may even be Left of Bernie...

"Fairness: Your tax suggestions are excellent - but not enough. We also need to regulate capitalism in ways that enable more people to accumulate some wealth. Enough to buy a home and small savings account, for instance. ESOPs, co-ops, etc. can help here. How do we encourage such? (Reich, Alperovitz and others have relevant suggestions.)

And market does not work very well in care taking sector. How do we price these so that the caretakers get adequate pay?

Growth needs to be accomplished in ways that do not increase damage to planet. Possible, but takes thought and careful planning."

Sean said...

Lots of people who didn't meet the "too much debt and too little liquidity" were hurt by the recession. Employers didn't check on that before they issued layoffs, did they? People who were ready to cash in their investments and retire suddenly found 40% of their value had vanished. Huge declines in home values weren't limited to the unvirtuous folks, either. Not to mention the fact that many creditworthy folks found that markets had dried up afterwards.

So I'm not sure where you're getting that the effects were so compartmentalized.

John said...

Facts vs Fear...

Housing vs Inflation

SP 500 Inflation Adjusted Graph

Sean said...

" I am kind of thinking Victoria may even be Left of Bernie..."

Yes, thinking folks should be able to buy a house and have a small savings account are truly radical, socialist notions. Will no one think of the struggling plutocrats? How will the top 1% survive when they only control 35% of the country's wealth?

And letting employees buy stock in the company they work for? Radical! We have to save that stock to give to the CEO for his record of under-performing the market!

John said...

Markets go up. Markets go down.

If you are nearing retirement age. ~10% of your net worth should be in CASH.

Layoffs happen. People with manageable debt, some savings, unemployment payments, etc survive fine.

Sean said...

"Facts vs Fear..."

If you're ready for retirement (or worse, already retired), the five years you lost on your investments due to the Great Recession were a real problem. Are you capable of seeing beyond your own nose?

John said...

Now let's think about this. Let's say someone is 64 years old and approaching retirement.

Do you think they are fully invested in stock/bond funds? My guess they are holding some money funds. Rough guide: 120 - Age = % of portfolio in Stocks/Bonds.

Do you think SS payments were reduced during the crash? Medicare?

What about people with pensions?

Hopefully they had been in their house for awhile, had watched the value increase faster than it should have, watched it decrease some, then increase again and it was mostly paid for.

That is me fortunately... I kept dreaming of getting into one of those West Plymouth beautiful monster houses, but stayed in my moderate home instead. Price went up, price went down, price went up... So what...

Same for my stock funds...

Sean said...

No would have been a much shorter answer.

John said...

So please enlighten me why these soon to retire and retirees were impacted so severely?

As I have pointed out, most of them were on relatively fixed incomes. That is unless they were big gamblers who lost their nerve and sold at the low. Now that would hurt...

Now I do acknowledge that being laid off bites. (been there done that) And buying a house at the top of a bubble can't be any fun. However as I said. "People with manageable debt, some savings, unemployment payments, etc survive fine."

John said...

As Victoria's comments. Here are the ones that I think are out there.

"We also need to regulate capitalism in ways that enable more people to accumulate some wealth."

This sounds like a TERRIBLE idea since the USA is only a small part of a very capitalistic and competitive world. Public Unions bankrupted hundreds of companies, Regulations and well wishers may bankrupt America...


"And market does not work very well in care taking sector. How do we price these so that the caretakers get adequate pay?"

Price fixing... Really... Where are we, the Soviet Union?

"Growth needs to be accomplished in ways that do not increase damage to planet."
No duh. There is something we all agree on. However we disagree on "damage".

Sean said...

"Regulations and well wishers may bankrupt America."

That doesn't seem likely, frankly. Of the first world economies, we've come out of the Great Recession the best.

jerrye92002 said...

I want to know who the heck Louis Johnston is and why we pay any attention to him? He obviously knows almost nothing about economics.
-- "Promote Economic Growth" Who does he think is going to do this "promoting"? If it's government, as it sounds, then his leftist pals have made a muck of it. Time was, free enterprise capitalism was the engine of our economy and created economic growth. Government can only hamper it.
--"...the majority of the gains accrue to only a small minority." Right, a rising tide lifts all boats, and the income gap DECREASES in times of good economic growth.
-- "Eliminate many (or even most) deductions and credits from the tax code... so that the households make decisions based primarily on their own circumstances, not to in order to avoid taxes." So who is it who fights so strenuously against tax reform or the flat tax? Hint: liberals and Democrats.
-- "Move from a system of tax brackets to continuous, progressive tax rates." What a stupid thing to say. Regardless of where you put the break points, all income below the break point is taxed at the lower rate, and only the amount above the break point is taxed at the higher rate. That means the tax IS perfectly progressive, except for all the deductions, credits, exemptions and complexity,
-- "Eliminate the distinction between labor income and capital income for tax purposes." That's ridiculous. By all means let us discourage investment and risk-taking so that economic growth is reduced, contrary to the fundamental goal Johnston sets.
--" Eliminate the corporate income tax and then tax everyone through the personal income tax system ..." Now that makes sense, if the personal income tax system made sense. Corporations pay no taxes, they just pass it through. And businesses should make decisions based on business reasons, not tax consequences. So again, who opposes eliminating or reducing corporate taxes, to make the US more competitive?

John said...

Sean,
You made and excellent point.

"Of the first world economies, we've come out of the Great Recession the best."

And yet Victoria and the Liberals dream of making America more like them.

How can this make sense?

Sean said...

"So again, who opposes eliminating or reducing corporate taxes, to make the US more competitive?"

First, the U.S. corporate tax structure is competitive. Yes, we have a high statutory rate, but few businesses pay anything close to that rate due to the deduction and credits. Looking at the actual taxes paid, we're middle of the pack in the OECD.

Second, there would need to be major reform in personal income taxes to make this work. Two-thirds of corporate dividends go to tax-exempt entities like retirement funds or university endowments. And under such a change, there would be great incentive to setup a corporation and hire yourself out that way instead of as an employee. Without a corporate income tax, you could shelter your income for a long period of time. You would also need to make the personal income tax more progressive because today the corporate income tax is largely paid by wealthy shareholders.

Third, the corporate income tax is, frankly, a useful check on corporate power.

John said...

Sean, Deductions and credits are not free money. They are usually expenses or behavioral enticements. Are you saying you want to tax revenues, not profits? Do you want to stop having the government promoting certain behaviors?

Tax Rate Comparison

John said...

Politifact Check

Sean said...

I'm saying that all the complaining about "we have the highest corporate tax rate in the world" isn't really applicable, because practically nobody pays the statutory rate.

jerrye92002 said...

OK, Sean, would you accept the wording that the US has the THIRD highest STATUTORY corporate tax rate in the world? That there are all these loopholes, etc, is simply a sign that the tax system is riddled with corruption, created by lobbyists and campaign contributions. Eliminate the corporate tax and all that corruption goes away, and decisions get made based on what is good for the business, not the games Congress plays.

jerrye92002 said...

Sean, if I may, it seems your tax philosophy is based on the notion that government revenue cannot be allowed to decrease, or that tax rates may never go down. The problem is government spending. That should be limited and reduced, and then set tax policy as fairly and efficiently as possible, to raise the revenue needed for that reduced spending level.

John said...

It does seem to be a nasty catch 22 of sorts:

- Do the people have too little money?
- Create more government programs and raise taxes.
- Do the people have too little money?
- Create more government programs and raise taxes.
- Do the people have too little money?
- Create more government programs and raise taxes.
- Do the people have too little money?
- Create more government programs and raise taxes.
- Do the people have too little money?

Then the Liberals wonder why...

John said...

From MP:
"Only a Problem for a few Unworthies: Remember that the Great Recession was only a problem for people with too much debt and too little liquidity..." Unless, that is, you happened to be working in an industry that was hit by the recession. I'm sure there were any number of, say, construction workers who had relatively little debt who suffered mightily when the housing market crashed. Of course, that was their fault for not having had jobs that enabled them to save enough for sufficient liquidity to get them through perhaps several years of underemployment.

After all, any negative consequences sustained by individuals in our highly personalized economy is the fault of the person who is hit, right?" RB


"The reality is that there are sunny days, rainy days, beautiful Fall days, frigid Winter days and very stormy days. People who spend their lives in shorts drinking mojitos, and do not invest in an umbrella and coat are bound to get wet and very cold at times.

When they are very cold and wet, is it the weathers fault?

Like the weather, the economy cycles and people should prepare for this. I personally was hoping it may hurt folks a bit more so they would have learned the importance of work, saving, investing, etc. I know the Great Recession did wonders for generation of my Grandparents.

Do you think people learned from their errors?
Or did we bail the economy out too quickly with borrowing?" G2A

Sean said...

"OK, Sean, would you accept the wording that the US has the THIRD highest STATUTORY corporate tax rate in the world? That there are all these loopholes, etc, is simply a sign that the tax system is riddled with corruption, created by lobbyists and campaign contributions."

Sure, I can go with that.

"Eliminate the corporate tax and all that corruption goes away"

No, it just moves somewhere else.

"Sean, if I may, it seems your tax philosophy is based on the notion that government revenue cannot be allowed to decrease, or that tax rates may never go down."

That's not true at all. Conceptually, I am all in favor of eliminating the above-described nonsense in the tax code and lowering rates across a broader base. Government revenue should be based upon how much it costs for government to do what it needs to do. Is there waste in government that should be cut? Yeah, absolutely.

We obviously differ on our conceptions of what government needs to do. But unlike some on my side of the aisle, I'm not one who blithely assumes that we can just always raise taxes (a similar blindness exists on the other side of the aisle as it comes to tax cuts).

The problem with most tax "reform" proposals is that they don't tend to look at the tax system as a whole. The stool analogy is overused, but it has some merit. If you cut (or grow) one leg of the stool too much, the stool no longer stands. You need a taxation system that has a blended source of inputs, so that like a stock portfolio, it can weather the tough times without huge swings that cause dramatic policy shifts.


John said...

"You need a taxation system that has a blended source of inputs, so that like a stock portfolio, it can weather the tough times without huge swings that cause dramatic policy shifts."

I knew you would understand !!! That is what the wise retirees and soon to be retirees should have been doing !!! Excellent !!! :-)

John said...

Sean,
By the way, the politifact article I linked to above discusses your position.

Does the U.S. have the highest corporate tax rate in the free world?

Even after making adjustments they agreed that the answer is Mostly True

jerrye92002 said...

Sean, I have to apologize for not recognizing you as one of those rare creatures I call a sensible liberal. I am sure we will disagree about what government should be doing, but agree that the taxes to support that spending level (as well as the spending itself) should be as fair and as efficient as possible.

The problem with our tax system is that there are taxes everywhere, on everything, and for each subsystem of taxes there are loopholes, exclusions, exemptions, additions, etc to where it is absolutely impossible for the overall system to be "fair," even if we could identify such an ideal. With that said, what do you think about the FAIR tax?

Sean said...

There are a lot of things not to like about the fairtax.

1.) Consolidating all federal tax collections down to the point of final purchase creates a tremendous risk of avoidance. And the rate -- 30%+ in traditional sales tax terms -- is high enough that folks will go to significant lengths to get around it. In a value-added tax, you're collecting some tax at every step along the way, so even if you miss a step along the way, the government still gets a substantial chunk of the revenue. Studies have shown that the rate of sales tax avoidance shoots way up when the tax rate starts getting around 10%, and we're talking about a rate 3x higher.

2.) Passing responsibility for collecting a federal tax down to the states is risky as well. The states have no particular incentive to ensure federal compliance.

3.) Even after accounting for the "prebate", the typical taxpayer in the bottom 80% comes out worse under the fairtax than today's system.For those in the top 20% -- and particularly those at the very top of the scale -- it's a huge benefit.

4.) Families with children are disadvantaged under the fairtax, as the "prebate" for children is lower than adults. A single parent with two children would get a smaller prebate than a married couple with no children, despite the fact that the typical single parent/two child family would have a higher consumption baseline than the married couple.

5.) The prebate calculation -- based on poverty level -- is compromised by the fact that the poverty level isn't anywhere near a living wage.

6.) The idea of taxing government spending in the fairtax is flawed, and designed as a mechanism to artificially lower the rate. Government spending at all levels would represent about 20% of the fairtax base. While it ends up being something of a wash at the federal level, applying the fairtax to state and local government purchases adds the tax to their spending without giving them a corresponding revenue increase. While states and localities may cut some spending as a response, some tax increases at that level are inevitable, which essentially means that states and localities would be financing an artificially low federal tax rate.

7.) Application of the fairtax in the housing market would have devastating effects on new construction. Of course, you could try to equalize the treatment of new and existing housing, but those would have real impacts as well. Either you could take the tax off of new construction, which would then require a rate increase to maintain revenue neutrality, or you would have to charge owners of existing homes tax on imputed rent.

jerrye92002 said...

Very detailed and reasonable objections; thank you. But they do not square with what I know about the FAIR tax.

1) Having a retail sales tax is how we AVOID tax avoidance. It doesn't matter where you get your income-- theft, drug dealing, a rich uncle-- you pay the tax, and everybody pays the same rate.

2) to the contrary, the States get a "cut" of the tax collected as payment for administering the program. They also get a direct "subsidy" if they choose to conform their tax system to it, with lower administrative costs and a broader, less-volatile income stream.

3) That may be so at the extremes, but I don't think it's a realistic criticism. Unless someone earns and spends the maximum covered by the prebate, they actually take in more money than they would have spent in taxes. And the current tax code reaches down to somewhere below the poverty level, so these folks should be better off. At the other end, because of the prebate that everybody gets, the tax is perfectly progressive based on the amount spent. Those living "high on the hog" will pay a lot of taxes, while those who save, invest or give to charity pay less. It creates that situation where decisions are not being made based on tax consequences.

4) I know the prebate is based on "family size." I don't know that family makeup enters into it. You could be right, but I don't see why kids are NOT cheaper than adults.

5) As far as I know, the prebate calculation is based on the poverty level, but substantially exceeds it. It is intended to cover "necessities" which, by definition, would be that "living wage." What should be noted, too, is that it is ultimately more fair because everybody pays the tax and has "skin in the game." It's just that we slip it back in your pocket if you really couldn't afford it.

6) I think what you are overlooking is that governments, as well as everybody else, won't be paying the tax in addition to the price of goods, because the tax at each stage of production-- in essence the VAT we already have-- has been hidden and, once removed, will make this tax "price neutral."

7) And that applies to housing as well. There is no FAIR tax on the sale of "used" homes and new homes in "existing inventory" are not taxed, either, because all those taxes were already built in to the price. A NEW home, on the other hand, incurs no tax on the materials your builder buys, because it is not a retail sale, so those costs are not built into the sale price. However, when the home is sold, you will pay the same price as the existing home right beside it except that 23% of what you pay will be sales tax. The same tax you would pay otherwise, but no longer hidden.

And you haven't talked about all the advantages of the FAIR tax, which probably offset many of these concerns.