Todd Suomela's Library tagged taxes →  View Popular

Again, it is good to be a Republican in today's south. Or it seems good. But the fortunes made in this era on real estate are fortunes built on sand, and right now the sand is running out of the hourglass. For a generation, throughout the south, wealth has been based on control of government, the extension of highways into the exurbs and the passing off of necessary costs to those who were stuck in the cul de sacs when development moved onward.

Real wealth lies in cities, where you can actually go around a block, where there are choices on which route to take, and where government builds the infrastructure necessary for you to build real wealth, by building up instead of outward. Trade happens in cities, not in exurbs, and even exurban factories depend for their existence on government to extend infrastructure and organize government.

The nut of the problem traces all the way back to Jimmy Carter’s choice of tax credits as the vehicle for subsidizing renewable energy. Direct grants would have been simpler. But Congress had recently changed the federal-budget process to keep closer track of how much money was being spent. It suddenly became easier to spend indirectly, by manipulating the tax code. Although no one realized it at the time, Carter’s decision to use tax credits lit the very long fuse on a bomb that detonated last fall and nearly took down the entire renewable-energy industry in America.

The trouble with tax credits is that in order to make use of them, you must owe taxes, and most start-ups struggling toward profitability do not. So while a company looking to build a wind or solar facility would qualify for valuable benefits, it had no means of realizing this “tax equity.” The work-around was to partner with someone who did, someone large enough to finance a $500 million facility and profitable enough to incur a large tax bill. Having witnessed two decades of busts and bankruptcies, traditional U.S. banks wanted no part of this. European banks, going by their more positive experience, were comfortable funding large renewable projects, but didn’t qualify for U.S. tax credits. The perversity of the government’s incentives demanded a big balance sheet, huge profits, and an indifference to risk.

One important form of private waste is caused by garden-variety market failures like congestion and pollution. This type of waste yields easily to simple disincentives like carbon taxes, gasoline taxes, and congestion fees.

A less widely recognized but far larger form of private waste stems from "positional arms races," which are well illustrated by the familiar metaphor in which everyone stands up to get a better view, yet no one sees any better than before. It is the same with many forms of consumption. Hedge-fund managers need a 40,000-square-foot house and Gulfstream jet only because their peers have them. Evidence suggests that if top earners all spent less on such things, their lives would be no less fulfilling than before. And like the waste that stems from pollution and congestion, the waste caused by positional arms races can be curtailed sharply by a relatively simple change in tax policy.

If we had perfect information, the ideal remedy for positional waste would be to tax different goods in proportion to the extent to which their use generates negative side effects. In practice, we lack the detailed information necessary to implement this remedy. But a steeply progressive tax on each family's total annual consumption would serve almost as well.

The amount a family consumes each year is simply the difference between what it earns and what it saves. Under a progressive consumption tax, people would report their income to the Internal Revenue Service as they do now and also their annual savings, much as they currently document contributions to 401(k) and other retirement accounts. The difference between these two amounts, less a large standard deduction -- say, $30,000 for a family of four -- would be the family's taxable consumption. Rates would start low, perhaps only at 10 percent. In this illustration, a family that earned $50,000 and saved $5,000 would have a taxable consumption of $15,000 and pay only $1,500 in tax. By comparison, it would pay about twice that amount under the current income tax.

As taxable consumption rises, the tax rate on additional consumption would also rise. With a progressive income tax, marginal tax rates cannot rise too far without threatening incentives to save and invest. Under a progressive consumption tax, however, higher marginal tax rates actually strengthen those incentives.

The answer isn't rocket science. As Nobel prize-winning economist Joseph Stiglitz says, "Reductions in government spending on goods and services (are) likely to be more damaging to the economy in the short run than tax increases focused on higher-income families."

That's because government cuts automatically decrease the consumptive spending programs that broadly stimulate the economy whereas tax increases, when aimed at the wealthy, more often impact funds socked away in savings. "The more that the tax increases (are) focused on those with lower propensities to consume (i.e., the rich)," Stiglitz notes, "the less damage is done to the weakened economy."

I think a good tax clawback





• would apply to employees of all firms that have received public capital and that are unable to repay that capital prior to some reasonable deadline several months in the future (so that healthy banks persuaded by Paulson to accept money can be excluded).

• would tax compensation paid (or accrued) to individuals during the period of the credit bubble, maybe from January 1, 2004 to December 31, 2008.

• would apply to all forms of compensation (not just bonuses), but only above some fairly high floor. (In a previous post I suggested $200K, but I think that's too low. $500K or $1M would be better.)

• would apply at a high rate, but one that is arguably not confiscatory or punitive. 50%, maybe 60%, would be reasonable. 90%? No.

• would be justified in terms of cost-sharing between taxpayers and highly compensated employees when weakness of a systemically important firm occasions public financial assistance.

3) The complexity of the issues at the heart of the crisis
paralyzes the political processes’ ability to deal with them
intelligently. I have no doubt that, by the time this saga ends,
we will all know what happened to every penny of that $165
million in bonuses and each have our opinion of the morality of
it.

I doubt seriously we will ever understand the morality of
the $173 billion payment that is the far more serious issue. For
instance, Goldman Sachs, which received about 8 percent of the
pile, or $13 billion, has claimed publicly that the money was,
to them, a matter of indifference, as Goldman had hedged itself
against a possible collapse of AIG -- by making bets against
AIG.

Since the beginning of the crisis I’ve wondered why the
government has found neither the will nor the way to attack the
root of the problem -- the people who borrowed money to buy
homes they shouldn’t have bought.

Now I think I understand. It would be too simple. People
would understand a lot of small payments to the guy down the
street who doesn’t deserve them, and become outraged. Far better
to throw trillions at opaque corporations, the inner workings of
which no one still really understands.