Tax Policy Fantasyland





Greg Mankiw sings the praises of the Value Added Tax, offering affection for the efficiency of its flat- and consumption-oriented nature:




My bottom line: If I could replace our current tax system (including the personal income tax, corporate income tax, payroll tax, and estate tax) with a VAT, I would gladly do it.




As long as we’re talking about hypothetical scenarios, I would join him if we’re allowed to throw state and local taxes into the mix as well. The thing of it is that once you consider state and local taxes, the US tax code is barely progressive at all:







In theory, I think the tradeoff between tax efficiency and tax progressivity could be quite the difficult dilemma. But what we’ve got, when considered overall, is a system with lots of inefficiency and almost no progressive impact. That, I think, makes the tradeoff easy. The VAT-only system wouldn’t be my first choice tax system by any means, but the case that it would be an improvement over the status quo seems very strong to me.




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on McCain

To appreciate this crowd’s spotless record of failure, consider its noisiest standard-bearer, John McCain. He made every wrong judgment call that could be made after 9/11. It’s not just that he echoed the Bush administration’s constant innuendos that Iraq collaborated with Al Qaeda’s attack on America. Or that he hyped the faulty W.M.D. evidence to the hysterical extreme of fingering Iraq for the anthrax attacks in Washington. Or that he promised we would win the Iraq war “easily.” Or that he predicted that the Sunnis and the Shiites would “probably get along” in post-Saddam Iraq because there was “not a history of clashes” between them.

What’s more mortifying still is that McCain was just as wrong about Afghanistan and Pakistan. He routinely minimized or dismissed the growing threats in both countries over the past six years, lest they draw American resources away from his pet crusade in Iraq.

Two years after 9/11 he was claiming that we could “in the long term” somehow “muddle through” in Afghanistan. (He now has the chutzpah to accuse President Obama of wanting to “muddle through” there.) Even after the insurgency accelerated in Afghanistan in 2005, McCain was still bragging about the “remarkable success” of that prematurely abandoned war. In 2007, some 15 months after the Pakistan president Pervez Musharraf signed a phony “truce” ceding territory on the Afghanistan border to terrorists, McCain gave Musharraf a thumb’s up. As a presidential candidate in the summer of 2008, McCain cared so little about Afghanistan it didn’t even merit a mention among the national security planks on his campaign Web site.

The key to understanding McCain’s strategic “thought” is that he loves war. Whichever war the United States of America seems mostly likely to start on any given day is the war he wants to start. Whichever war the United States of America seems mostly likely to escalate on any given day is the war he wants to escalate. The entire rest of his erstwhile worldview will just revolve around that. In the mid-nineties, he wanted to start a war against North Korea. In 1999, he wanted a land invasion of Serbia. But in 2002, he viewed North Korea’s nuclear program as no big deal (and certainly wasn’t mentioning the need to invade Serbia) because that might distract from the goal of invading Iraq. In 2006, he downplayed problems in Afghanistan to further his goal of sending more troops to Iraq. But now Afghanistan’s in the spotlight so we need to send troops there. But just last summer, he thought we needed to intervene in the war between Russia and Georgia.

It’s a consistent point of view in the sense that no matter the question, McCain’s answer is always “more war” but it doesn’t reflect any kind of coherent theory about national priorities or strategic issues. You never see people from the American Friends Service Committee brought on TV to talk about Afghanistan policy. But pacifists have a much stronger case to make on behalf of their approach than does the “all war all the time” crowd that continues to be treated by the media as possessed of vast credibility on these matters.

’ve been meaning to recommend Bruce Bartlett’s The New American Economy: The Failure of Reaganomics and a New Way Forward once it hit its official publication date. Consequently, I wound up letting weeks slip by after the publication date had arrived. But you should read this book, it’s a good one. His argument, in a sketch, is that conservatives should understand Ronald Reagan’s policies as a fix for a specific situation (stagflation) and not a Holy Writ to be followed at all times.




Here he is explaining why Europe isn’t a zero growth dystopia:




In America, people tend to think of their federal taxes as money down a rat hole and react accordingly. But in Europe, the people are more apt to feel they are simply paying for services with their taxes that Americans have to pay out of pocket.




This fact is best illustrated by health care. Most Americans get health insurance through their employers. The cost reduced their cash wages by 7.9 percent on average in 2008 according to the Bureau of Labor Statistics. If we had national health insurance and insurers were entirely relieved of this expense, they could afford to pay their workers 7.9 percent more and be no worse off. If the payroll tax went up by 7.9 percent to pay for health insurance, it would all be a wash, but both taxes and government spending would be higher. [...] The second reason why taxes have less of an impact on incentives in Europe than one might expect is because European countries raise much more of their revenue from consumption taxes than the United States does.




Read the whole thing.




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amily Structure, Inequality, and Opportunity





There’s no doubt that shifts in family structure play a role in both inequality and in its inter-generational transmission. The gap in resources (but in terms of money, social capital, and parental attention) available to a child of two high-earning professionals, and those available to a kid raised by a lone working-class mom is much bigger than the gap that would exist if the inequality in earnings weren’t intensified by the difference in family structure.




That said, it was strange to read this from Sawhill & Haskins:




Actually, some other advanced economies offer more opportunity than ours does. For example, recent research shows that in the Nordic countries and in the United Kingdom, children born into a lower-income family have a greater chance than those in the United States of forming a substantially higher-income family by the time they’re adults. [...]




[A] more important reason for our lack of progress against poverty and our growing inequality is a dramatic change in American family life. Almost 30 percent of children now live in single-parent families, up from 12 percent in 1968. Since poverty rates in single-parent households are roughly five times as high as in two-parent households, this shift has helped keep the poverty rate up; it climbed to 13.2 percent last year. If we had the same fraction of single-parent families today as we had in 1970, the child poverty rate would probably be about 30 percent lower than it is today.




Now guess where they have more single-parent families than the United States?




Among 14 countries analyzed in the report by the National Center for Health Statistics, the percentage of all live unmarried births in the USA — 40% in 2007 — ranks somewhere in the middle. That’s up from 18% in 1980. The sharpest rise was from 2002 to 2007, the report found. Countries with a higher proportion of births to unmarried mothers include Iceland, Sweden, Norway, France, Denmark and the United Kingdom; countries with a lower percentage than the USA include Ireland, Germany, Canada, Spain, Italy and Japan.







Now I can think of some reasons you might say that notwithstanding the success the Nordic countries have had in creating a low-inequality, high-opportunity society despite low marriage rates that marriage promotion policies are still the right solution for the United States. But it does seem to me that if you’re going to write about why the U.S. falls short of Nordic levels of inequality, you can’t just turn around and start talking about marriage without even mentioning actual out-of-wedlock birthrates in Nordic countries. “We should have really high taxes like Denmark” is not a great political slogan for an American politician, but the facts are what they are—high opportunity countries are also highly egalitarian countries, and highly egalitarian countries get that way largely through high taxes and high levels of social services.




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Update It's worth being clear that a big part of the issue here is that in the Nordic countries it's quite common for committed couples raising children to just not be married. In the US a child whose mother isn't married is typically growing up without his or her father being present, which isn't the case in Sweden or Norway.

Of course, this isn't an unknown phenomenon in the United States either. And a successful marriage-promotion effort would, at the margin, presumably be inducing the most-committed couples — which is to say the most Nordic-style ones — to get hitched, not the least-committed ones.

Update And to further further clarify, the term "Nordic" actually obscures a bit here as Iceland has lots of American-style single-parent households.



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Today at 9:16 am









Who Cares What the Chamber of Commerce Thinks?



Traditionally, the U.S. Chamber of Commerce has had clout not just because it has a lot of money, but also because it seems like the collective voice of American business is something you should take seriously when considering issues of economic management. But as Daniel Gross observes, we tried it their way and the results sucked:


The Chamber of Commerce may not have ruled the country during the Bush years. But it had the next best thing: a Republican administration in the White House and Republican control of Congress for most of that period. [...] These policies, the Bush administration economic team promised us, would be superior to the ones that prevailed in the 1990s. And the proof would be in the numbers: jobs, market performance, income, wealth.


But it didn’t work out for anybody. By pretty much any measure, the years from 2001 to 2008 were lost ones. Job creation was extraordinarily weak by historical comparison. In September, on a seasonally adjusted basis there were 108.544 million private (nongovernment) payroll jobs, which is about the same number there were in June 1999. (To see the data, go here and then check “nonfarm private.”) 10 ten years, in other words, the private sector hasn’t created a single job. That’s pathetic, especially when you consider that the population grew 9 percent during those years, from 282 million in 2000 to 308 million today.


Or in chart form:




But though the Chamber-friendly Bush years were much worse economically than the Clinton years, the Bush years were pretty nice for the after tax income of well-compensated CEOs.


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This of course raises the one real problem he cited. You need a modern electrical grid that can move the power from where the wind is to where the cities are. And he didn’t really see any technical challenges to doing this. He said Denmark has a grid that’s just fine and we could build one in America to if the money and political will existed. Indeed, despite Denmark’s heavy use of wind power he seemed to view us as having a more promising set of fundamentals—basically large amounts of empty space where there’s wind and you could put up wind turbines.

inship on Inequality





Scott Winship has an interesting, but slightly bizarre, post about inequality trends in the United States. He writes as if he’s debunking liberal claims about growing inequality. But, in fact, his post seems to me to support the liberal position. In particular, he pretends not to realize that an important school of right-of-center thought holds that there’s been no increase in inequality whatsoever. Winship shows that this is wrong.







In particular, he shows that while there’s room for disagreement about exactly how large the magnitude has been, there’s been a substantial increase in the share of national income going to the top one percent. The growth in inequality in the United States is often—usually by centrist sorts—exclusively attributed to college preparation issues or graduation rates, but the concentration in the top one percent is hard to understand in those terms. My read of this data, which I think is a pretty conventional liberal understanding, is that increased taxes on high-income individuals can make most people better off by either paying for more and better public services or else reducing the need to cut Medicare benefits in the future.




At any rate, Winship is very good with numbers but always seems overwhelmingly more interested in annoying liberals than in rectifying social problems. But what he’s shown here is that even a pretty serious effort to debunk the Pittkey-Saez inequality data that liberals like to cite shows that their main conclusions are pretty unassailable. There’s a separate issue of should we care (Will Wilkinson makes the case that we shouldn’t here) or should we care as much as some liberal say we should. But the basic facts seem pretty clear.




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many current doctors chose their profession hoping to earn lucrative pay, which they might not be able to do in a nonprofit clinic. But across the economy, we see talented professionals whose career choices are driven by concerns far broader than pay. Many top graduates from elite law schools, for example, turn down lucrative positions in corporate law to work for public-interest groups paying a third as much.




Doctors who choose to work in nonprofit clinics seem to view their professions more as a calling than as a job. There is evidence that when medicine was less adversarial than it is now, American doctors were both happier and more respected, even though their incomes were much lower. Doctors elsewhere also remain satisfied and respected, though they are paid less than their American counterparts.




In time, medical schools will be able to attract plenty of talented people willing to accept positions under the Mayo model, where they would spend more time healing patients and less time fighting insurers. Any of the current health reform bills would help start this transition.




Maybe yes maybe no. But one salient fact about both other countries and the United States of the past is that there was much less inequality in general. A doctor in 1963 had a much lower income than a doctor in 2009, but he was closer to the top of the income distribution. Frank’s excellent Falling Behind is largely about the interplay of rising inequality and status competition, so he doesn’t need me to point this out, but I bet that relative income point is important. Which I think is less a reason to be pessimistic about health reform than it is yet another reason to think that higher taxes on the very rich are a good idea (a component of the House bill, I note).




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d Financial Innovation Cause Deng Xiaoping’s Economic Reforms?





Eugene Fama makes a curious claim on behalf of financial innovation since 1980:




But suppose we buy into the more common negative current view of finance. There is still a big open question. Beginning in the early 1980s, the developed world and some big players in the developing world experienced a period of extraordinary growth. It’s reasonable to argue that in facilitating the flow of world savings to productive uses around the world, financial markets and financial institutions played a big role in this growth. Despite any role of finance in the current recession, are the market naysayers really ready to argue that worldwide wealth would be higher today if financial markets and financial institutions didn’t develop as they did?




A banker in Frankfurt put this same point to me, apparently believing it’s a brilliant argumentative trump card. In reality, it’s a bit nuts—it’s relying on a post-1980 boom that didn’t happen. The United States didn’t start growing faster in 1980:







The claim you’re supposed to make on behalf of the post-1980 US economy isn’t that it’s grown faster (it hasn’t!) but that it’s been less variable than was growth in the early postwar decades. That’s why the term “Great Moderation” was termed. Except in the wake of the current bust, it’s clear that no such decrease in variation was actually achieved. Growth has been the same as it was before, and yet median income growth has been substantially slower. In Europe and Japan growth post-1980 has been much worse than growth was in the previous decades.









The place where growth really has been much better since 1980 than it was before is China. This is not a fact to be neglected. Chinese growth has been very rapid, and very consistently maintained. And a very large number of people live in China, people who started this process being very poor. The past 30 years’ worth of economic growth in China have done an enormous amount to improve human welfare.




But the cause of this turnaround pretty clearly wasn’t financial deregulation in the developed world. It was policy shifts in China—the process, commenced by Deng Xiaoping, of moving away from central planning and joining the global economy. This doesn’t strike me as even remotely debatable. When we look at impressive growth over the past 30 years were looking at policy shifts in China, the success of container shipping, and to an extent shifts in developed world trade policy.




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Update Paul Krugman brings a better chart "From Angus Maddison’s dataset":



Finance doesn't deserve the credit for the post-1980 growth acceleration in the developed world because no such acceleration happened.



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Despite what people sometimes say, until the recession hit it’s not actually the case that America was becoming a country where “we don’t make things.” More goods were being made abroad, but more goods were also being made here. Beyond the ups-and-downs of the trade cycle, manufacturing employment is being undermined by increasing productivity in the manufacturing sector. That’s good—more stuff to go around—but it means that the manufacturing share of employment will tend to decline over the long run no matter what happens with the price of the dollar.


The short term fluctuations around the trend are, however, really big. Imports, exports, and currency values matter a lot. A so-called “weak dollar” means manufacturing jobs and an economy brought back into balance.


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There are all kinds of nutty people in the world, but these kinds of things are the wages of a conservative leadership and media that’s consistently tried to drum-up opposition to health care reform not by opposing things that are actually in the bill, but with demagogic opposition to completely fabricated provisions.


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onomic crisis, this is simply not in the cards.

What, then, is Plan B? If we are unwilling to pay the price for a serious civilian capability–and admit that foisting the job of development and political assistance on the military is a bad idea–the only option is to alter our basic strategy. We could find a way to thwart Al Qaeda and other terrorists without trying to re-engineer weak states. We could, in other words, get out of the counterinsurgency and stabilization business. This is not an attractive option and entails many risks. But it does reflect reality. Ultimately, it may be better than a strategy based on a capability that exists only in our minds.

From the BLS:

Nonfarm business sector labor productivity increased at a 9.5 percent annual rate during the third quarter of 2009, the U.S. Bureau of Labor Statistics reported today.

Rapid productivity growth is, ceteris paribus, a good thing. It implies that the economy could be expanding very rapidly, raising living standards for all. What’s happening, however, is that productivity is growing considerably faster than GDP. That’s great for profits, but implies an extended period of very bad labor market conditions—terrible for the unemployed, and generally lousy for wage-earners.

the course of an exchange yesterday with Rich Yeselson about the deficit and the prospects of more stimulus, Marc Ambinder wrote:

Telling Democratic leaders and the White House to ignore Evan Bayh’s pleas for deficit reduction just isn’t going to work. In general, my sense is that the White House does not believe that Obama has the credibility to make the argument that government has to spend even more.

I’m not really sure why Obama would lack the credibility necessary. His job approval split is at 50-41 and has been basically stable at that level for a couple of months. That’s not the best job approval rating in the world, but it’s pretty good.

But does “credibility” really matter? Probably not. Insofar as the issue is that Evan Bayh doesn’t want to vote for more debt, then the question is whether he can be persuaded on the merits. I, personally, find Christina Romer and Larry Summers pretty persuasive. But as far as I know, they’re not actively trying to persuade anyone because the White House is afraid that if they try to persuade key legislators they might fail. That’s circular. There seems to be some feeling that the President has an obligation to act like he’s a Prime Minister and not bring proposals to the floor unless he’s sure they can pass, even though he doesn’t have a Prime Minister’s ability to coerce people into voting for his bills. But that’s not how our system works and there’s little reason to believe that trying and failing would somehow turn out much worse than simply refusing the try.

insurance and force millions of Americans into a government-run system.”




For people who receive health insurance through their employers, which is to say the vast majority of the Americans who currently have health insurance, the House bill would change very little. Or, rather, the biggest change would simply be the confidence that if, in the future, you cease to get health insurance from your employer (maybe you’ll lose your job or want to change jobs) that you’ll still be able to get health care. What’s more, of the minority of Americans who would be getting health care through the new “exchange,” the majority will probably sign up for private health insurance and everyone will have the option of doing so. If the government-run public plan is, for whatever reason, vastly more appealing than the private options then it will dominate. But if you believe the government can’t run health care well, there’s no reason to think that will happen. Whatever you think of that, though, the basic fact is that even if the public option does dominate the exchange most people will still have private employer-provided insurance.




In addition to misstating these facts, Tanner says that the idea of a public option negotiating rates with health care providers is “the health care equivalent of negotiating with Tony Soprano.” It strikes me as strange to analogize a government-purchasing arrangement to a sham negotiation with a violent criminal organization. The federal government regularly negotiates with providers of goods and services. Police departments buy cars and guns and uniforms. Government offices buy light bulbs and computers and pieces of paper. Highway authorities buy cement and steel. There are definitely different kinds of issues and problems with public sector contracting activity, but “resemblance to mob extortion” isn’t among them.




The health reform being contemplated in congress involves substantially increases taxes in order to spend substantially more money. I don’t expect Cato Institute personnel to support such a program. But this kind of wild distortion doesn’t help anyone understand what’s happening. The fact of the matter is that congress is proposing just about the most small-c conservative way of pursuing universal coverage you can imagine.




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why people are so comfortable ignoring it.




One issue, however, may be that it’s not very accessible. So I’d like to offer a preliminary recommendation to anyone interested in deepening their understanding of American politics to check out Richard Valelly’s edited volume Princeton Readings in American Politics. This is academic work, so it’s a bit slow-going and I certainly haven’t read it cover-to-cover yet (full disclosure: I got sent a free copy by PUP) but what I have read has been interesting. And as you can see from the table of contents it covers a nice broad range of important topics in US politics.




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mentions a new book that sounds interesting. He observes that we like to think of the United States as a land of opportunity, “but a new book, Creating an Opportunity Society, by Ron Haskins and Belle Sawhill of the Brookings Institution proves otherwise.”




That’s what we like to think, but a new book, Creating an Opportunity Society, by Ron Haskins and Belle Sawhill of the Brookings Institution proves otherwise. They took a close look at intergenerational mobility and found that 42% of American men with fathers in the bottom income quintile remain there as compared to: Denmark, 25%; Sweden, 26%; Finland, 28%; Norway, 28%; and the United Kingdom, 30%. They present a wealth of new and old research evidence to support the conclusion that if you’re born poor in America, you’re likely to remain poor.




This basic result has been known for quite some time, at least in liberal circles (conservatives like Greg Mankiw believe the U.S. is ruled by a genetic aristocracy). And the interpretation seems pretty clear. The high level of income inequality in the United States leads to highly unequal opportunities for American children, whereas the low levels of income inequality in Nordic countries lead to more equal outcomes.




Davis says the book “is not a liberal polemic,” but I’m not really sure where else any analysis of this issue would lead you. One of the co-authors, Ron Haskins, has definite conservative credentials so I’ll be interested to see what kind of conservative ideas are in here, but “make America more like Sweden” doesn’t strike me as a very promising foundation for bipartisanship.




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more at clubhouse job-seekers than regular people.

New Yorkers’ Democratic-ness is all about national politics. It’s about supporting candidates like Barack Obama and opposing people like Sarah Palin. But locally, New Yorkers believe in the old adage about there being no Democratic or Republican way to pick up the garbage. They want what works, and they suspect that the local Democratic party can’t and won’t.

The problem with the way we do things in our urban politics is that it is largely true that there’s no Democratic or Republican way to cope with municipal issues, but it’s not true that municipal governance is all about non-ideological managerial competence. Rather, our political parties are organized around systematic ideological disagreements about the most important issues in federal politics. But lots of issues that are extremely important in city politics aren’t that important in federal politics.

There is a forum in which these policy disputes are supposed to be resolved—the ballot box. After an election, the country needs a well-staffed executive branch. Putting the squeeze on an administration by holding up its appointees is a way of holding the interests of the whole country hostage to a petty agenda. When Regina Benjamin’s nomination to be surgeon general was held up through the end of October it wasn’t primarily Obama or Benjamin herself who suffered, it was the government’s ability to inform people about how to deal with the swine-flu epidemic.




If the rules allowing these holds didn’t exist, nobody would be crazy enough to suggest implementing them. So they ought to be done away with. Senators of both parties like the power it gives them, but it’s power that’s acquired not so much at the expense of the president as at the expense of effective government and common sense. The days when norms of courtesy could be counted on to prevent holding from getting out of control. Appointees confirmed by the relevant committee should be voted on by the full Senate.




I’ll probably be waiting a long time for this to happen, but it’s still true….




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