Recently Matt Talbot of Vox Nova offered up the following plan for tax reform:
I propose that there is a one-time, 20% federal tax on all financial assets over $2 million – assets in IRA’s and 401(k) plans would be exempt, provided the particular accounts were held on, say, September 15, 2008 (this would prevent using retirement accounts as an anticipatory shelter.) Yes, the stock and bond markets would take a hit; can’t be helped, and the stock market is way over-valued anyway, by historical standards. The stock market should be there to finance capital investment, not to enrich Wall Street greedheads.
In the comments my co-blogger Darwin had some negative things to say about this plan. Truthfully, though, I think that properly implemented a one-time wealth tax could work pretty well. In fact, I would say that the main problem with Matt’s proposal is that it is much too modest.
For one thing, as was noted in the comments to his post, restricting the tax to financial assets over $2 million excluding IRAs and 401(k)s is not going to raise much revenue. And the more exemptions you have in the system, the more likely it is that the rich will just hire tax attorneys to hide their assets and avoid the tax. To deal with these problems, I would make the wealth tax all-inclusive.
Since wealth inequality is much much greater than income inequality, this would be a highly progressive measure. However, without a lower limit, you might worry about the impact of this proposal on the poor. To offset this, I would institute a guaranteed minimum income. The minimum income level would have to be pretty low to avoid work disincentives and keep the plan fiscally responsible, but it would be high enough that even in the first year it would be enough for the poor to pay the tax. Unlike the wealth tax, the guaranteed minimum income program would be ongoing, and would be in addition to rather than instead of all existing federal assistance programs.
Going forward, I would replace corporate taxes at the federal level by raising the capital gains tax rate to 23%. Finally, I would simplify the tax code, eliminating all deductions and replacing the current bracket system with two brackets: 10% for income under $100k, 23% for above that.
Finally, to ensure that the rich don’t hide their assets to avoid the tax, I would deputize every store clerk in America as an IRS enforcement agent. Try as they might, wall street greedheads would not be able to avoid the tax. They could bury their gold in the backyard if they wanted, but as soon as they dug it up to buy a new yacht we’d get ‘em. Continue reading
Current fiscal and monetary policies in the United States and Europe risk increasing government control over national economies, resulting in weakened political strength throughout “the whole of the western world,” the Vatican’s top banking expert said.
Writing in the Jan. 14 edition of the Vatican newspaper, L’Osservatore Romano, Tedeschi warned of the growing influence of “Keynesian” economic theory on both sides of the Atlantic.
Governments on both sides of the Atlantic, he said, are committed to Keynes’ policy of increasing public debt to sustain levels of economic production, consumption, and employment.
He said artificially low interest rates are another key to the strategy of increasing spending and discouraging saving. With no incentive to keep money in the bank, those who would have otherwise been savers are pushed to spend.
“Zero interest rates factually equal a de facto transfer of wealth from he who was a virtuous saver (although not for Keynes) to he who has become virtuously (for Keynes) indebted,” he said. “Practically, it’s about a hidden tax on poor savers, a tax transferred to the wealthy, (that is), over-indebted states, business people and bankers.
Admittedly this sounds like a silly question, but it is effectively one that Kyle Cupp is asking over at Vox Nova:
Putting aside whether or not the theory actually works in practice, a question I don’t here wish to debate, does trickle-down economics embody what has been called in Catholic circles the preferential option for the poor?
I’m inclined to answer that it does not, that while helping to generate pools of capital at the top may benefit the poor through a process of “trickling down,” the theory itself embodies a preferential option for the rich.
Kyle wants us to put aside the question of whether “trickle-down” economics actually works, so for purposes of considering the question we can assume that trickle-down does make the poor a lot better off than any alternative. So what Kyle is really asking here is whether a preferential option for the poor might require us to make the poor worse off (e.g. by rejecting trickle-down economics). Continue reading
A copy of the decision is here. Two other federal district courts have previously upheld the individual mandate against constitutional challenge, and at least one suit remains pending.
It’s often claimed that the individual mandate is a necessary compliment to the provisions of ObamaCare banning denial of coverage based on pre-existing conditions and so forth. The idea is that if an insurance company can’t deny you coverage once you are already sick there is a strong incentive not to get coverage until you are already sick, which leads to a death spiral (that’s a technical term) of increased insurance prices and lower levels of coverage.
However, as Paul Starr noted back when the bill was being debated, there are ways of dealing with this problem that don’t involve a mandate:
The law could give people a right to opt out of the mandate if they signed a form agreeing that they could not opt in for the following five years. In other words, instead of paying a fine, they would forgo a potential benefit. For five years they would become ineligible for federal subsidies for health insurance and, if they did buy coverage, no insurer would have to cover a pre-existing condition of theirs.
The idea for this opt-out comes from an analogous provision in Germany, which has a small sector of private insurance in addition to a much larger state insurance system. Only some Germans are eligible to opt for private insurance, but if they make that choice, the law prevents them from getting back at will into the public system. That deters opportunistic switches in and out of the public funds, and it helps to prevent the private insurers from cherry-picking healthy people and driving up insurance costs in the public sector.
For whatever reason, the Democrats choose not to head this advice, and didn’t include any alternative to the mandate in the bill, even as a fall back measure. This means that, if the mandate is ultimately found unconstitutional, there will be nothing in the law to prevent the “death spiral” scenario. Granted, this can always be passed in the future, but this may not be as easy to do depending on the political environment at that time. Why the Democrats didn’t do this is a mystery to me.
One argument commonly made by inflation hawks is that inflation is bad because it is a tax on savers. The idea being that since inflation erodes the purchasing power of a dollar, those who keep their money in a savings account will end up being able to buy less with that money down the road if there is inflation than if there is not. There is an element of truth to this idea, though if inflation is expected there are ways to deal with the problem, such as offering higher interest rates for savings accounts.
A propos of David’s post earlier to day, however, it occurs to me that there is a flip side to the inflation taxes savings argument, namely that disinflation (i.e. lower than expected inflation) functions as a tax on the unemployed. When a certain amount of inflation is expected over the coming years, this ends up getting built into people’s wage demands, contracts, loans, etc. If inflation is approximately 2-3% a year for several decades, then people will come to expect a raise of at least 2-3% a year to cover the increase in the cost of living, and they will get upset if this doesn’t happen, even if inflation is significantly below 2-3% (on election day I met a man who was angry he had been denied a cost of living raise in his Social Security for 2009, even though there was deflation that year).
If expected inflation doesn’t appear, there won’t be enough money for businesses to pay their workers and will have to cut either wages or employment. But since workers hate nominal wage cuts (even where these don’t translate into real wage cuts), employers tend to respond to this situation by laying people off rather than spreading the pain around. The result is that during inflationary or disinflationary periods real wages tend to increase (since prices are falling while wages remain constant in nominal terms) and so does unemployment. Functionally this acts as a kind of wealth transfer from the unemployed to those who still have jobs. Thus, tight money is a tax on the unemployed.
So I’ve been reading Fintan O’Toole’s Enough is Enough: How to Build a New Republic on my Kindle recently. I know what you’re thinking: why would someone read a book about how to make Irish politics more left-wing when he is neither 1) Irish nor 2) left-wing? And it’s true, I have a problem; I need help.
But leave that aside for now. I’m currently on a section in which O’Toole rails against the large place the Catholic Church has in providing health care in Ireland. It seems that the Irish bishops have actually had the temerity to oppose increased government involvement in health care, as this would interfere with the Church’s role. For example, in 1948 the Bishops opposed a government plan to provide free health care to children and new mothers. O’Toole quotes Bishop Cornelius Lucey of Cork laying out the Church’s view on the part the state should play in health care:
What should we expect from the State? Help to enable us to help ourselves. Thus, instead of providing directly through its own agencies free housing for all, free health services for all, free school meals for all, etc., it should rather see to it that these are available and that people can afford to pay for them. Thus the real answer to the problem of the man who cannot afford medical care for his wife and children is not a free mother and child service for all, but a rise in wages – or cut in taxes – sufficient to enable him to pay.
Milton Friedman couldn’t have said it better himself.
I note this because you sometimes hear it said that American political culture is fundamentally protestant, and that Catholics who believe in limited government are somehow buying into protestant individualist notions. Correct me if I’m wrong, though, but my impression is that Ireland circa 1948 was pretty Catholic.
There’s an old saying, which I’ve seen attributed to every from Daniel Patrick Moynihan, to the effect that while a man is entitled to his own opinion he is not entitled to his own facts. This saying would seem to be particularly relevant to current arguments about the Federal Reserve and monetary stimulus. As I noted in my last post, some commentators have been warning for years that the Fed’s actions would cause a return to the high inflation of the 1970s, if not to 1920s Germany. Yet more than two years on, this inflation has failed to materialize.
If the case for increased monetary stimulus could be summed up in one picture, it would be the above chart. For the last several decades, nominal spending in the U.S. has increased at a fairly steady rate, and businesses and individuals acted in the expectation that this trend would continue. Contracts were written, debts undertaken, and business ventures began under the assumption that there would be roughly 2% inflation per year. The lower total spending means that there is not enough money flowing through the system to fulfill these contracts and pay back these debts, which the result that you get lots of defaults, unemployment, and less economic growth. Monetary stimulus, such as the Fed’s QEII program, is aimed at returning nominal spending to trend, leading to lower unemployment, fewer defaults, and higher economic growth. Continue reading
What does the fact that, so it now seems, the TARP program will only end up costing taxpayers $25 billion tell us about the merits of the program? According to Jonathan Chait, this low price-tag makes the program “one of the most successful policy initiatives in American history.” This is a bad argument. If, as its proponents claim, TARP really did stave off a second Great Depression, then it would have been one of the most successful policy initiatives in American history even if it had cost taxpayers the full $700 billion. On the other hand, if TARP wasn’t necessary, then it likely wasn’t worth it even at the cost of only $100 per American.
Positive assessments of TARP seem to typically assume that the alternative to TARP would have been doing nothing (actually many opponents of TARP also tend to assume this). But this is not plausible. If Congress had decisively rejected TARP, it’s not like Bernanke was going to pull a Ray Patterson and book a cruise to Fiji. Instead we likely would have had an earlier bigger QE I. The overall economy would have ended up roughly in the same place, except that Wall Street would have borne a larger share of the pain.
This, at any rate, is the view of a number of iconoclastic economists on both the left and right. Continue reading
There’s been a bit of discussion about the nature of libertarianism on the blog recently, and as the resident pseudo-libertarian, I thought I would re-state where I come down on the matter (this is based largely on an older post I did on the subject, which sadly is now lost in the cyber-ether).
To understand where I am coming from, one needs to make a distinction between political positions held as a matter of moral principle, and those held as a matter of prudence. Take the issue of torture. One might oppose the use of torture on the grounds that it’s not a good way to get information from suspects, or because by using torture on the enemy you risk retaliation by the enemy on your people, etc. Alternatively one might believe that torture is just immoral, and you should do it regardless of whether or not it is effective.
Call the first type of objection to torture “pragmatic” and the second “principled.” (A person might object to torture on both pragmatic and principled grounds, in which case the opposition would be principled, though buttressed by pragmatic considerations). Dividing the justifications for various political positions into principled or pragmatic can be sometimes tricky, but the basic idea is, I hope, intuitive enough.
A principled libertarian, as I use the term, is someone who holds libertarian political beliefs for principled reasons. Taxation is theft, my body, my business, etc. In my experience, when you say libertarian this is what people think of. Continue reading
By monetary economist Scott Sumner:
1. The Fed isn’t really trying to create inflation.
The Fed doesn’t directly control inflation; they influence total nominal spending, which is roughly what Keynesians call aggregate demand. Whether higher nominal spending results in higher inflation depends on a number of factors, such as whether the economy has a lot of underutilized resources. But it’s certainly true that for any given increase in NGDP, the Fed would prefer more RGDP growth and less inflation. Even after QE2, the Fed still expects less than 2% inflation for years to come. If the Fed had any marketing sense, they’d be telling the public they are trying to boost recovery by increasing national income, not increasing the cost of living. It would also have the virtue of being true.
2. “But doesn’t economic theory teach us that printing lots of money creates high inflation?”
In general that is true. But there are three important exceptions:
1. If the monetary injections are expected to be temporary, the inflationary effect is far smaller. The Japanese central bank did lots of QE in 2003, but pulled much of the money out in 2006 when deflation ended. It worked in preventing high inflation, indeed it may have worked too well.
2. If interest rates are near zero, the public demands more liquidity. The Fed can supply that liquidity with little impact on the price level.
3. If the Fed pays interest on reserves, then the quantity theory of money (more money means more inflation) doesn’t necessarily hold. They recently started paying interest on reserves, and that’s one reason why the big injections from 2008 didn’t have an inflationary impact. The Fed can adjust the rate as necessary, and indeed in my view a lower IOR would be more effective that QE2. Continue reading
Last week I mentioned in the comments to this post that I think most political and financial problems are fundamentally technical rather than moral and cultural in nature. Several people took exception to this idea, so I figured I should probably try to elaborate a bit on what I meant.
Start with a historical example. During the 14th century, European society was rent asunder by the Black Death. Between a third and half of people died, and the resulting turmoil caused serious political, economic, and social upheavals. As Wikipedia notes, many governments “instituted measures that prohibited exports of foodstuffs, condemned black market speculators, set price controls on grain and outlawed large-scale fishing,” none of which stopped the spread of the disease. Given the vast amount of suffering, it’s only natural that many people concluded that the causes of the Black Death were fundamentally moral or cultural in nature. Many people argued that human sinfulness, greed, pride, etc., had caused God to turn his back on Western society, whereas others sought to blame the outbreak on a specific group, such as the Jews. Today, of course, most people recognize that the cause of the plague was less a matter of morality than of hygiene. But if you were to tell an average 14th century European that the plague was being caused by fleas from rats, he would likely think you were naively trivializing the issue. Continue reading