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“Benign Neglect” Tax Policy

April 18th, 2012 . by economistmom

Yesterday (on “Tax Day”) NPR’s Scott Horsley was wondering about the prospects for doing something better about the Bush tax cuts this year.  He got a similar reaction from me, NYC Mayor Michael Bloomberg, and the Tax Policy Center’s Bob Williams–although I got to pull out an expression I believe my mom first taught me, “benign neglect.” (My mom is going to have to remind me in what context she would throw out that term, frequently.)  From the transcript (please go to NPR site to hear the full audio):

The tax cuts championed by President George W. Bush a decade ago, and extended in 2010, are due to expire at year’s end. That would mean higher taxes at every level of income, as well as higher taxes on dividends, inheritance and capital gains.

“The biggest hits would be on the very wealthy,” says Williams. “Those are the people who’ve benefited most from the Bush-era tax cuts. But people at the very bottom would be hit as well.”

All of this will happen automatically unless Congress and the president act in concert to prevent it.

“It’s the do-nothing option,” says Williams. “If Congress does nothing, taxes go up automatically.”

Not everyone is alarmed by that.

New York Mayor Michael Bloomberg told CBS last month that taxes have to go up for everyone in order to put a dent in the federal budget.

“Most of this country is middle class. And that’s where most of the tax revenue is. So if you want to raise $4 trillion over the next 10 years, which gets you halfway — only halfway — to a balanced budget, everybody’s taxes have to go up,” said Bloomberg.

Action, Or ‘Benign Neglect’?

Economist Diane Lim Rogers of the deficit-watchdog Concord Coalition agrees that stemming the tide of red ink will require more tax revenue. But she sees some problems with letting the Bush-era tax cuts expire all at once.

“It wouldn’t be the worst thing that could happen,” says Rogers. “I think economists would prefer that instead of things happening out of benign neglect, that better things could happen out of good policymaking.”…

I don’t know why I said “economists” would prefer; heck, everyone should prefer that, as long as we have some faith in the role of government to promote the public good. I had elaborated to Scott that the economists’ problem with just letting the tax cuts all expire is that we have other options to raise revenue that economists would consider more efficient and just as or more fair.

I go on to talk about my second favorite tax topic after the Bush tax cuts: tax expenditures and the need to reduce them as a way of cutting government spending in a progressive manner.  I am still hopeful that after we go through all the other possible ways to reduce the deficit and realize we won’t accept much of them or that they don’t work, we’ll come back to the goal of pursuing sensible tax reform.

Who Are the Rich, and Why Should They Pay Higher Taxes?

April 16th, 2012 . by economistmom



Video streaming by Ustream

As we arrive at the federal tax filing deadline (this year on Tuesday, 4/17), it just so happens that Congress and the Administration have been thinking of different ways to raise tax burdens on the rich.  Last week I participated in a “Tax Day” event at the Tax Policy Center called “Should the Rich Pay Higher Taxes?” as one of the “four Ds” panel which also included TPC’s director Donald Marron, former CBO director and former McCain adviser Doug Holtz-Eakin (now president of American Action Forum), and economist rich guy (and a member of the “Responsible Wealth” coalition) David Levine.  The TPC has our handouts and a video of the event posted here.  (The video is also embedded above.)

TPC’s Howard Gleckman moderated the event (and blogged about it afterward, here) and at one point asked each of us “who is rich?”  I at first didn’t know how to answer that; “rich” is a relative concept that depends on one’s personal “baseline,” of course!  But then I circled back to the focus of the event–what the tax burdens of “the rich” should be–and I realized that in that context, all federal income taxpayers should be considered “rich,” in that we are all, all combined at least, paying too little in taxes.  Revenues as a share of GDP are far lower right now than the 18 percent historical average over the past several decades, which is too little anyway to produce economically sustainable budget deficits now and going forward (let alone enough to cover spending fully).  And although a lot of that currently-below-average level is because of the short-term but stubbornly persistent weakness in the economy (a cyclical phenomenon), projections show that even when the economy gets back to “full employment” and even when revenues/GDP recover back to and above the historical average (even under the policy-extended baseline, by the way), revenues are still not going to be enough to keep up with the growth in government spending–even if health reform (already in place and to come) successfully reduces the growth in Medicare spending.

So if “the rich” are defined as those who can afford and ought to be expected to pay higher income taxes, then “the rich” really has to be much more broadly defined than “people like David Levine” (who are multi-millionaires).  And if you watch the video of the TPC event, we all pretty much agreed on the premises that: (i) we need more federal revenue; (ii) “the rich” can manage higher tax burdens the best (and should be asked first); and (iii) David definitely qualifies as “rich.”  We had more differences in opinion over: (i) how much more revenue we need (and implicitly, what the right size of government is); (ii) how that revenue should be raised in terms of base-broadening vs. rate-raising reforms; (iii) what the right basis of taxation is–income or consumption; (iv) if David’s wealth comes more from his high productivity and hard work, or more from good luck; and (v) if raising tax rates on people like David will cause them to not work so hard, or if it just means they will not be as “lucky” in terms of their tax burdens.

David is practically begging to make him, and other millionaires like him, pay higher taxes, and feels the best (maybe easiest) way to do so is in the latest legislative version of the “Buffett Rule”–which basically imposes another “alternative minimum tax” to brute-force effective tax rates on the incomes of the rich to be at least 30 percent, without changing (improving) the definition of taxable income.  I and Donald agreed that David can afford to face a much larger tax bill, but that it would be better (more economically efficient and better for supply-side incentives) if his burden were raised by paring back the tax subsidies David receives via, for example, itemized deductions and the preferential tax rates on capital gains and dividend income.  Doug also agreed that the best way to raise tax burdens on the rich is to reduce tax expenditures rather than raise marginal tax rates, but he did not count the preferential rates on capital income as a tax expenditure (because he advocates consumption as the right basis of taxation), and also probably would not agree with me and Donald on how much revenues/GDP need to rise.  And all of us, being economists, agree that in theory and all else constant, higher marginal tax rates can discourage the incentives to increase the supply of productive resources (via working and saving) to the economy.  But if there’s one thing that economist and rich guy David made clear in telling of his own personal experience with wealth and taxes, it’s that even for really rich people, the economist-labeled “income effects” of taxes–the effects of having more or less after-tax income–are typically far bigger than the economist-labeled “substitution effects” of taxes–the effects of marginal tax rates on relative prices which cause people to substitute away from taxed or higher-taxed activities and into untaxed or lower-taxed ones.  I feel that conservatives (like Doug) who want lower marginal tax rates tend to over-sell the empirical significance of those substitution effects, yes, but liberals (even rich ones like David) tend to forget that as long as some substitution effects exist, it’s better to raise tax burdens by broadening the tax base (in a progressive manner) than by raising the top marginal tax rate.

So, the TPC event made clear that “yes, the rich should pay higher taxes.”  But it also highlighted where the challenges to achieving fundamental tax reform will be, in coming to agreement about who exactly is “rich,” and how exactly they will be made to pay more in taxes. We have far more work to do regarding federal tax policy than what is currently being debated–in a very narrow sense–about the “Buffett Rule.”

The Problem with Parties and Prostitutes

April 16th, 2012 . by economistmom

gsa-vegas-party-needs-your-taxdollars

(Cartoon by Rick McKee of the Augusta Chronicle.)

The headline stories in today’s papers about the GSA’s parties and the Secret Service’s prostitutes are unfortunate, particularly as they coincide with the federal tax-filing deadline.  One’s enthusiasm or just plain willingness to pay one’s legal tax liability is directly related to one’s trust of the government–the assurance that we “get our money’s worth” in the taxes we pay into the public sector.

These examples are egregious displays of the classic “waste, fraud, and abuse” that Americans fear permeates the government, yet both are very “small” compared with most of what the government does and most of what it commands and spends in our society’s resources.  In theory, these incidents should not affect our society’s ability to raise an amount of revenue adequate to pay for the size and shape of the government we all desire.  In practice, however, they no doubt will–because Americans, greatly encouraged by the politicians who serve them, love dwelling on the small, scandalous, and fleeting stuff, especially when it distracts away from the large, difficult, and persistent stuff.

(I’ll have more to say about the rich guy paying the taxes in the above cartoon, later today.)

George W. Bush: Please Don’t Put My Name on Those Tax Cuts!

April 11th, 2012 . by economistmom

The former president may speak more eloquently than we’ve heard him speak before about his tax policy (perhaps taking some talking points from Paul Ryan?), but the bad news is that simply re-labeling the tax cuts as, for example, the (now) “Obama tax cuts,” won’t make those claims of wonderful supply-side growth effects suddenly come true. (Here is a CNN story on yesterday’s speech.) But the new presidential ownership of the bulk of the tax cuts–and the continued campaign promises by all candidates to keep the bulk of them (warts and all)–still assures us that they’ll largely persist in our future.

Despite the (L)Injury, Still (L)Inspirational More Than (L)Insane

April 10th, 2012 . by economistmom

jeremy-lin-from-csm-column

My latest (and last, btw!) column in the print Christian Science Monitor, which was belatedly posted on their website last week.  Let me know what you think–especially if you are an Asian American who is the child of immigrant parents or if you are otherwise in a family still grappling with the cultural differences between Asia and America.  My own take on it was (L)inspired by my 13-year-old, bball-playing son Johnny’s new-found (half-)”Asian pride”–as he himself labeled it.  The CSM editor had to revise the opening sentence between the print and online versions, to account for Lin’s season-ending injury.  Here’s that latest version, reprinted in full:

It says something about the improbable season of Jeremy Lin that in two months he has gone from bench warmer to injured NBA star whose injury and six-week absence might keep the New York Knicks from making the playoffs.

Then again, everything about Lin has been improbable since he stepped onto a basketball court Feb. 4 and led the woeful and depleted Knicks to the first game of a seven-game winning streak. An Asian-American Harvard graduate – with a degree in economics to boot – was suddenly outscoring NBA stars. Commentators quickly dubbed it “Linsanity” – noting how odd it seemed that an Asian-American was the hottest thing in pro sports.

As an Asian-American, I have another word for his rocket-fueled season: inspirational. The bucking of the Asian-American stereotype is likely to have a positive effect, not only on the attitudes of non-Asians toward Asians but also on the aspirations of Asian-Americans themselves.

Many ethnic groups are stuck with worse stereotypes in America, but even the generally positive bias surrounding Asians can operate as a straitjacket. Asian-American kids are expected to be good at academics, especially math and science, and to excel at rote assignments, carrying them out obediently, politely, and responsibly. People believe we excel in our quantitative precision more than through any creativity or social skills – certainly not by dribbling a basketball!

These messages don’t come just from American society. They often come from our parents, especially immigrant parents. They raise us to be very motivated in school and steer us away from social, athletic, or most artistic pursuits because such activities are typically viewed as detracting from, rather than complementary to, the main goal of academic excellence.

It’s understandable why Asian immigrant parents (and immigrant parents generally) might raise their born-in-America kids that way. It’s a safe way to help one’s children integrate into and succeed within American society, since these precisely defined goals in academic subjects are less culturally and socially dependent. Someone who can solve math problems in Asia can solve them in America, too.

My own parents (my dad from South Korea, my Chinese mom from the Philippines, and both PhD chemists) raised me that way, and, like many Asian parents who hold their kids to very high standards, they meant well. But I would have never become an economist were it not for the distributional requirements in college that required me to take at least some social science classes – those subjects my parents somewhat dispara­gingly labeled “soft” (not “hard”) sciences.

No matter what one’s cultural background, branching out beyond our stereotypes and “comfort zones” can be good for us. As The New York Times’s David Brooks has explained in his book “The Social Animal,” developing our “human capital” as fully as possible depends on nurturing qualities that go far beyond our ability to score high on standardized tests.

Children are more likely to grow up to be successful adults the more opportunities they have to try different things – even things that parents might not expect their kids to be that good at. I tell my own children that if they do what they truly love, the money will follow – simply because loving what you do is the best way to do it really well.

Yes, Asian-American parents might have a harder time than other parents in “thinking outside the box” and allowing, and even encouraging, their kids to expand their horizons beyond the math-and-science-type academics. But that’s why Lin’s breakthrough is more than just “Linsanity.” His success – in the NBA of all places – is potentially a game changer for Asian-Americans.