Barack Obama gave a fine speech at the Democratic National Convention on Thursday. But I’m troubled by what I see as its underlying economic philosophy.
As I listened to the speech by Barack Obama accepting the nomination of the Democratic Party for the U.S. presidency, I felt I was listening to a very gifted orator. I also thought I heard a cash register go ca-ching every time he finished a sentence.
I will eliminate capital gains taxes for the small businesses and the start-ups that will create the high-wage, high-tech jobs of tomorrow.
I will cut taxes– cut taxes– for 95% of all working families. Because in an economy like this, the last thing we should do is raise taxes on the middle-class….
I’ll help our auto companies re-tool, so that the fuel-efficient cars of the future are built right here in America.
I’ll make it easier for the American people to afford these new cars.
And I’ll invest 150 billion dollars over the next decade in affordable, renewable sources of energy– wind power and solar power and the next generation of biofuels….
I’ll invest in early childhood education.
I’ll recruit an army of new teachers, and pay them higher salaries and give them more support….
Now is the time to finally keep the promise of affordable, accessible health care for every single American. If you have health care, my plan will lower your premiums. If you don’t, you’ll be able to get the same kind of coverage that members of Congress give themselves….
Now is the time to help families with paid sick days and better family leave….
As the list of things Obama promised to do grew ever longer, I found myself increasingly wondering, What is the underlying understanding of how the economy works that would motivate such a list? All these steps require a commitment of resources. If we are to have more of these things, we must be planning to divert the resources to pay for them from somewhere else. Evidently there is a notion of some kind of existing inefficiency or misallocation of resources– money is currently being spent on things it shouldn’t be, and should instead be devoted to objectives on the above list. But how is the bill for all these nice things supposed to be paid?
Fortunately, in his speech Obama anticipated this natural question, and provided the following answer:
Now, many of these plans will cost money, which is why I’ve laid out how I’ll pay for every dime– by closing corporate loopholes and tax havens that don’t help America grow. But I will also go through the federal budget, line by line, eliminating programs that no longer work and making the ones we do need work better and cost less– because we cannot meet twenty-first century challenges with a twentieth century bureaucracy.
I’ll discuss that second point about government waste in a moment. But here’s my understanding of Obama’s central thesis– if funds could be diverted from corporate profits into the above wish list, then America would be better off.
According to Table F.102 in the Federal Reserve’s Flow of Funds Accounts, domestic nonfarm, nonfinancial corporate profits amounted to $1,037 billion in 2007. A third of that ($310 billion) is currently being paid as corporate profits taxes, and $487 billion is devoted to dividends, which are taxed directly as income of the shareholders. But doesn’t that leave $240 billion sitting around doing nothing worthwhile?
Not exactly. Those same institutions also spent $460 billion on net fixed investment in 2007 ($1045 in gross investment minus $585 billion capital consumption allowance), which was financed by a combination of the $240 billion in retained earnings and corporate borrowing. If after-tax corporate profits were lower, the only way to have the same level of investment is with greater corporate borrowing. Recalling Menzie’s recent picture on the empirical relation between the growth rates of corporate profits and investment, it seems unlikely that investment spending would remain the same if corporate profits were lower. And if it somehow did happen, I doubt that increased corporate indebtedness is a wise outcome to insist upon.
I raise this issue because I regard nonresidential fixed investment as the single most important economic variable that will influence America’s future prosperity.
As for the second part of the paragraph above indicating Obama’s plans to pay for his proposals, I agree with the senator that there is some waste in the federal budget. However, I’d caution against overstating the magnitude of what we should expect to achieve, and I would urge that any dollars saved be used to reduce the deficit before beginning any new programs.
At the top of my personal list of current expenditures that could be cut would be ethanol and agricultural subsidies.
What’s on your list, senator?
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He used to say that he would pay for his programs by dialing down defense spending, especially the Iraq war. That’s actually doable! Trying to get more taxes from corporations is not; they’re masters at tax avoidance.
JDH states:
“But here’s my understanding of Obama’s central thesis– if funds could be diverted from corporate profits into the above wish list, then America would be better off.”
That is scary… As usual, the devil is in the details.
To think that I even considered not voting for McCain. The more I learn about Obama the more I realize what a disaster he will be if elected. Excellent post.
Obama’s attack on the accumulation of capital is an attack on the wages of every workingman. More and better tools to work with means higher productivity and, therefore, higher wages. Obama is willing to attack the foundation of our prosperity for short-term political gain.
TempusFugit,
The US marginal corporate tax rate is 35%. JDH says that US corporations paid $310b in tax on $1037b in profit last year. What exactly makes you think that corporations are masters of tax avoidance?
JDH: I agree, eliminate ag and ethanol subsidies.
“I agree with the senator that there is some waste in the federal budget. However, I’d caution against overstating the magnitude of what we should expect to achieve”
Aren’t we ignoring the Elephant in the Room: the colossal, wasteful, and poorly accounted) Federal expenditure on war and military programs?
Very simple – just tax the fark out of the top 5%, squeeze em dry!
BTW, institute an immediate 50% wealth tax on the top 5%, that would bring in an estimated $2 trillion right off the bat!
Fred, I have very different data on corporate profits and taxes then the ones you are quoting.
I have 2007 profits before taxes of $7,507 B
and taxes of $1,866 for an effective tax rate of
24.9%.
where are your numbers from?
Spencer,
Profit and tax numbers as quoted in JDH’s post from Table F.102 in the Federal Reserve’s Flow of Funds Accounts.
And your numbers?
Spencer, my data are from Federal Reserve Flow of Funds Accounts, Table F.102, and refer just to domestic nonfarm nonfinancial. But I’m not sure how you get a $7 trillion figure by any definition.
Of course the key is how Obama’s plan compares with McCain:
Here for example is Brad Delong’s take:
As we’ve noted at Economists for Obama, (for example):
I think that when Obama takes office will have to confront the realities of his spending priorities with what is politically feasible (as Clinton had to in 1993)…but his policies are at least within the realm of possibility and are not laughable.
What does it mean to eliminate ethanol subsidies? Phase out the 51 cent blender credit?
I’m okay with that despite being a big ethanol user (see my blog, http://www.drunkenswede.blogpost.com)
As of close Friday, ethanol on the CBOT is almost 50 cents a gallon cheaper than unleaded on the NYMEX. Ethanol is at the point where it can stand on its own.
I would like to see the EPA not be as belligerant regaring non-flex-fuel vehicles running on ethanol blends higher than E10. A compromise where the blender credit is dropped, but the EPA backs off and lets everyone fuel with E20 through E40 would make me really happy.
My non-flex-fuel vehicle runs 24/7/365 on E30.
Does Obama realize that startups that succeed will immediately become big and pay all their taxes at the top marginal rate? All innovation will end up taxed at the top marginal rate.
The underlying economic philosophy of Obama is much stronger than the underlying economic philosophy of McCain. The view that if we provide tax cuts to the wealthiest Americans since they are the ones that have would invest the marginal tax dollar that they are not taxed (Supply-side economics) is a relic of the 1980s. A time when there was not 15 other places around the world that the investor class could earn higher returns.
Then one has to consider what it would mean to pay for Obama’s programs with the Bush tax cuts. If those investors whose taxes would be raised were investing in the United States then it might prove damaging for the economy. But if these dollars would have otherwise gone to overseas investment, then any dollars going to making the labor force more productive, incentives for creating small businesses, or infrastructure development in the United States would be a good thing.
Lets also not forget that the CBO reports that 2/3 of corporations do not pay any taxes.
I see the same promises but come to a much more realistic conclusion, that these will only amount to small nudges away from current policy towards desired policy. The bigger the promise the smaller the effective incremental change. My fear is his pragmatism may overwhelm his desire for change and we end up with even less change than Clinton. Clinton promised most of these as well as they are merely standard democratic fare.
Does anyone have numbers on Obamas health care plan yet?
Pragmatism is the name of this game; blinded criticism should be left at the door. Keynesian economics with a 21 century ethos is clearly leading Obama to the historical conclusion that bigger corporations suffer more during economic downturns and leave many people negatively affected in a single swoop. Small business is the root of profit; profit is the root of benefits (health), increasing wages, industry and economic diversity, intellectual and innovative advancement, inner city growth. Maybe we should give the man, his team, and his message the real critique, applause and respect that they’ve earned. When was the last time youthful vision and a romantic renaisance of America and Americanism ‘made in America’ so bad for America?
Rest assured they will be much more paid for under Obama than McCain who never met a tax cut he didn’t like (except the one he was against before he was for it).
It seems to me if we get a more transparent banking and accounting system, close loopholes and foreign tax shelters, we will get an enormous amount of additional revenue while not raising rates.
There is so much money that doesn’t get taxed as income that gets used as income. Stop this capital gains vs income differential taxation. Tax it all at 25% and be done with it.
If all the American money in Lichtenstein, Switzerland and the Bahamas was accessible to taxation I’ll bet we wouldn’t have to wonder how Obama will pay for his wish list.
I really don’t get this post. Obama states that he wants to close corporate loopholes and tax havens. JKH replies that this means he wants to divert funds from corporate profits.
This obfuscates the fact that Obama’s goal is to make corporate reporting of profits more accurate and that this would result in an increase in reported profits. Presumably JKH means that by forcing corporations to report more accurately, Obama will effectively be taxing the same profits at a higher rate and that it is possible that corporate investment will be adversely affected. (This, one should note, implies that JKH thinks that the correct level of taxation for corporations is well below 35% and that the tax havens and loopholes that Obama wants to eliminate are not distorting the corporate tax system.)
Perhaps JKH is right that Obama’s plan would reduce corporate investment, but economists are really good at making predictions that don’t end up happening. Let us not forget that we live in an era where corporations have been having so much difficulty using their retained earnings that they spend vast amounts repurchasing their own shares. Who can be sure that it isn’t such non-investment activity that will be reduced by higher taxes?
I kind of let that list wash over me, and didn’t really pay attention … because I didn’t believe it was ever going to happen.
A President can’t simply enact such things. All he can do is send bills to Congress.
I really don’t know why he over-promised. It seems like it turned off more than it turned on, but does anyone really envision a Congress that would go along with all that?
Excellent & useful post, JDH, in every respect.
Obama is proof that to become the Democratic Party’s pick, one only needs to appeal to emotion. It sounds good to promise everything, and for the people who vote Democrat, that is all it takes to make them swoon.
Actual results won’t matter.
We are a terminally indisciplined country if we cannot freeze the entire federal budget ceiling for 4 years, allowing inflation to eat away at the real amount spent.
Freeze the federal budget for 4 years (at $3T or whatever it presently is). This will involve cutting some spending to accomodate an equal amount of spending, and thinning the federal payroll a little bit each year.
After 4 years, voila, the budget is balanced and spending as a percentage of nominal GDP is quite moderate.
But we can’t even do that….
JDH sounds like all the other concern trolls who have suddenly found their voice about deficit spending now that Democrats might be taking over the government and after remaining silent for years as the Bush administration racked up record deficits by giving tax cuts to the rich. We never heard any complaints about their intentional strategy of running up debt in order to roadblock any future hope of funding social programs. We didn’t hear much concern about how we were going to pay for the trillions wasted on an unnecessary war. We heard nary a word about the bats**tinsane religious belief that “tax cuts pay for themselves” over the last eight years and to this very day embraced by candidate McCain and his “economic advisors,” your distinguished colleagues in the economic academy. (Biologists have no qualms about calling out the bible creationists who attack evolution, but economists apparently consider it unseemly to be too harsh on their colleagues that promote equally unsound beliefs in public that are misguided at best and more realistically flat out dishonest. Professional courtesy, I guess.)
If Obama accomplishes any or all of his goals, regardless of debt spending, the country will be far better off than four more years of tax cuts and war that create nothing of benefit for society. The Republicans have been recklessly playing chicken with the budget, hoping to scare the Democrats from their social agenda. It is time the Democrats call their bluff and pass their agenda, forcing Republicans to accept tax increases. The Republicans certainly offer nothing to fix the critical problems of health care costs, energy independence or global warming.
I raise this issue because I regard nonresidential fixed investment as the single most important economic variable that will influence America’s future prosperity.
In this case why not give USA corporations a 100% tax credit instead of taxing them?
That would surely do wonders for their investments in China and India, creating a lot of jobs there. Because USA corporations have been disinvesting in the USA and investing in China and India as fast as they could, and indeed India and China’s prosperity has increased enormously in the past 10 years as USA corporations have increased their fixed nonresidential investments in those countries.
A modest proposal would be to raise taxes, let’s say to 50% of income under $50,000/y in the USA, as those taxpayers are low productivity workers who don’t contribute much if anything to fixed nonresidential investment, and use the money so raised to create a 100% tax credit for corporate profits and perhaps also for capital gains, to encourage fixed nonresidential investment by any corporation choosing to register in the USA.
This Modest Proposal would have the double advantage of punishing the lazy parasites who contribute too little to the GDP of USA (tax poverty into history!), and increasing the rewards for fixed nonresidential investment by USA registered companies making those investments anywhere in the world.
🙂
How come the prof. didn’t compare Obama’s proposal with McCain’s? After all, that is our true measure of opportunity cost, not the financing difficulties of Obama’s proposal.
JDH: “I raise this issue because I regard nonresidential fixed investment as the single most important economic variable that will influence America’s future prosperity.”
Do you lean in any particular direction on how that might best be done? For example, attempting to increase national saving?
“I raise this issue because I regard nonresidential fixed investment as the single most important economic variable that will influence America’s future prosperity.”
More importantly, do you have any support for this proposition which is central to your view of the importance of limiting corporate tax increases? From the chart, non-residential fixed investment looks cyclical. It seems to go up with prosperity and down during recessions. Therefore it does not seem that such investment is somehow propelling us out of recessions.
This makes sense. In euphoric times, such as those engendered by the Bush administration and their lapdogs at the Fed, businesses go crazy “investing” in all kinds of dumb ideas. Only when reality sets in do people start really evaluating what actually makes money. Of course, in the long run, if you do not encourage investment in job creating industries (as opposed to say banks and financial institutions) then there is not enough people around making money to actually buy anything.
I know all of us elites like to think that the world revolves around our choices and that we are entitled to special protections to encourage our endeavors. However, that is not really true. Investment follows the creation of potential markets. Not the other way around. We need a strong middle class to support the upper class.
I simply don’t believe that the cost of Obama’s (or McCain’s) initiatives can be financed by changing the tax code or eliminating “waste.”
On waste, first, the President does not and probably will not have the authority to do line vetoes. He either accepts the package or not. It’s possible Obama with a Democratic Congress could change that, but the rule has generally served us well by preventing too much executive power. Second, it may be pork he wants to end, but one man’s (or woman’s) waste is often another man’s necessity.
More importantly, I think it will take an FDRian “New Deal” set of measures (like those on Obama’s list) to restore the economy to healthy growth. And that will result in greater budget and national debt. The key point is whether the steps will facilitate economic growth–such as investments in infrastructure and human capital–or just spend money (by the trillions) to wage unneeded wars.
On the income side, more tax breaks for the wealthy not only adds to the debt burden, but further spreads the divide between the ultra wealthy and the rest of us. “Trickle down” means bread crumbs for the masses. We need to ease the burden of taxes on those who can least afford it and give them a chance to raise their standard of living at least modestly.
According to the BEA, current GDP is about $14.3 trillion. How could anyone think profits were over 50% of GDP?
Fantastic article. Obama had a great response to the costs question. This is just one reason why he truly stands a chance to become president!
One ‘low hanging’ source of funds (besides Iraq)?
Ration healthcare!
Why do people continue to fail to grasp the non-linear nature of healthcare spending, where 5% of people spend over 50% of the money?
For in the same way improving the fuel efficiency on the less efficient cars (moving them from 12 mpg to 14 mpg) saves more fuel than improving relatively efficient cars (say from 24 mpg to 40 mpg), so too does rationing spending on the most expensive patients saves far more than reducing spending on patients who do not spend much money. It also has the added political expediency that most people are not in the high spending group.
Yet sadly we seem unable to get past the emotional “what if they ration healthcare on me or my family” (which of course we must) to get to the more honest dialogue many European countries have already reached… both parties seem equally guilty of inciting emotions on this issue (“how can you be so heartless or “life needs protection at all costs”, etc…)
Areas for consideration of healthcare rationing:
1. Ration care on people with SEVERE irreversible dementias or SEVERE irreversible brain injuries (think Terry Shivo) which respected scientific organizations feel unlikely medicine will have any cure for within (say) 10 years (understand these organizations can be as wrong in predicting the future as economists are, but we need some sense we are trying and people we trust are watching this for abuse by the healthy).
2. Ration the cardiac surgeries for patients with similar tremendous birth defects which include SEVERE cognitive impairment (with same ‘watch clause’ as 1.)
3. Limitations on care for patients with advanced cancers of extremely poor prognosis (again with same ‘watch clause’ as 1)
4. Limitations (again limitations, not ‘cutting people off’) on care for medical complications from severe mental health disorders (examples might include limitations on medical expenditures for complications from a 10th suicide attempt, limitations on the number of heart valves replacements intravenous drug use are allowed, etc…) (again with same watch clause as 1)
Jim, you are correct, the choice is ours on how we spend our money. We must ration somewhere (well maybe not if foreigners continue to lend use the money necessary to avoid making these tough choices, all the while making similar rationing decisions on their own citizen, who knows?)
Yet most people remain misinformed on what rationing means and how a country might actually do it (as they seem misinformed on how we actually spend our current healthcare dollars)
FYI– If you have ever wondered why Japan is able to offer its citizens so many more advanced diagnostic tests and procedures (MRIs, arthroscopies, etc…) than America, yet still spend a smaller % GDP on healthcare (when everyone is already old to boot!), it is clearly because they already ration care this way.
They do not ‘ignore’ their citizensthey simply make rationing decisions we seem unable to make– but which most people I know seem to agree on when they have 1 on 1 discussions with friends.
Anyway, this would get my vote for a place to look for extra money.
Lord, I don’t see how you can interpret the promise to “pay for every dime” of the above expansive list “by closing corporate loopholes and tax havens” as anything other than a commitment to substantially increase the total revenue collected from the corporate income tax.
Joseph, the claim that cutting the tax rate leads to an increase in total tax revenue has been made much more by politicians than by economists. Certainly here at Econbrowser, I believe that every single post you will find on this subject since our beginning three years ago has repudiated such a claim and been critical of the federal budget deficits.
Lerxst and others, I disagree that the only question on the table should be a comparison between Obama’s and McCain’s plans. There is also room for discussion as to whether the proposals above are good ideas. But to the extent one does choose to frame this entirely as a choice between the two candidates, surely it’s appropriate to do so conditional on the understanding that, regardless of who wins the presidency, both the House and the Senate will have heavy Democratic majorities in 2009.
I think you are letting your imagination run wild. The tax cuts are neutral. Alternative energy will be paid for from energy taxes. Carried interest will be taxed. War expenses will be trimmed back. The economy will perk up providing more revenue. Most of the other spending will be quite modest despite pretensions otherwise. Haven’t we all heard ad nauseum corporations don’t pay tax?
Normally I read this site and I cannot tell what side of the political spectrum JDH is coming from. This however sounds like Republican talking points.
May I suggest that JDH read Obama’s proposals rather than listen to the speech and try and derive the proposal from that. The speech is intended to rail against the current administration and the distrust of big companies. Political speeches should never be interpreted like one is sitting in a seminar.
It seems to me from reading the real proposals that he pays for his programs by doing two things: cut war expenditure as much as possible, and taxing the upper 1% a at a much higher marginal rate. As far as an economist goes, we should be relatively silent about distributional concerns unless they cause serious incentive problems, which I doubt it will for this group.
As economists we know that smart infrastructure investment is a net revenue gain (unless we are myopic, but we have seen what that does in recent times). Work by Heckman tells us that early childhood education is a huge net gain. Hoxby tells us that falling teacher quality is mostly related to pay compression (pay based on tenure rather than merit), leading one to believe that Obama’s merit pay proposal has some merit.
Of course in a speech Obama is not going to say that he is going to raise taxes on voters, but it is politically popular to say he will raise them on corporations. In my view of his policy it does not seem like that is the meat of how he will balance his proposals.
Tom, you said increasing productivity leads to increased wages. Should happen, has not. How much has productivity per hour gone up in the last 8 years, and yet inflation adjusted wages have gone down.
Lord, the figures I cite show that domestic nonfarm nonfinancial corporations alone paid $310 billion in corporate income tax in 2007. That doesn’t include property taxes, employer social security contributions, or excise taxes. Who’s telling you (ad nauseum, no less) that corporations don’t pay tax, and why are you listening to them?
ABR, if it is “politically popular to say he will raise [taxes] on corporations,” how can it be a “Republican talking point” for me to say that raising taxes on corporations is a bad idea? Those Republicans must not have much savvy as to which points they talk about, I guess.
Or perhaps you are saying that quoting, verbatim, the list of things Obama says he’s going to do is to recite “Republican talking points.”
Let’s see… $2 Trillion Credit/Housing fiasco, $1 Trillion search for WMDs and “coming out” party for Bin Ladin.
And you’re worried about ethanol and agricultural subsidies? I’d like to see them go, too, but get some perspective about which party is fiscally conservative.
“Does anyone have numbers on Obamas health care plan yet?”
It will cost one week of the Iraq war(and save lives rather then killing).
I think I may have been too hasty calling your argument a talking point.
My interpretation of your argument is that Obama’s plan is impossible to implement responsibly using only revenues gained from corporate tax code reshuffling. Here I agree with you.
The problem I have is that your argument seems to imply that tinkering with the corporate tax is the only way the plan intends to attempt to pay for new policy. Here I will concede that indeed the speech mentions only this. So, if you are critiquing the speech then I have no qualms with your argument. It is, however, not the case that what the speech mentions is the only way (or even the main way) the proposed policy attempts to pay for new programs.
From what I can tell using the Brookings Institute analysis and the Wall Street Journal analysis (unfortunately both have bias concerns), there would be tax increases across the board, with a big chunk of revenue coming from large marginal income tax increases on the upper 5% of income earners. I do not have much of an opinion if these tax changes are good or bad, but it seems that these should be the focus of scrutiny and not the corporate tax.
I partially agree with your deficit reducing statement. My only concern would be that the rate of return on a dollar for certain programs (early childhood education for instance) may dwarf the gain from reducing the deficit by one dollar, assuming that the probability of total monetary collapse is small.
I trust your analysis over almost all economists, so I would be very interested to hear your opinion of the full plan.
This post is as deliberately disingenuous as the what Greg Mankiw typically posts, for reasons cited eloquently by many above.
If you wonder which side of the political spectrum JDH resides on, recall (as Gustav comes a-calling) that JDH’s first response to Katrina was to use it to argue for less regulation on gas formulations.
I’m confused.
“According to Table F.102 in the Federal Reserve’s Flow of Funds Accounts, domestic nonfarm, nonfinancial corporate profits amounted to $1,037 billion in 2007. A third of that ($310 billion) is currently being paid as corporate profits taxes,”
This looks close to the statutory rate, but on Economists View and Krugman’s blog, they have claimed that this statutory rate is uninformative because corporations manage to avoid a lot of taxes. A claim that the actual rate of 6 per cent is made by Linda Beale. Is it that corporate profits are much larger than $1,037 billion, and this figure is just some `taxable’ number.
Help!
Student, alternatively you can look at the federal budget, e.g., Table B-80 in the Economic Report of the President, which gives total total federal receipts from corporation income taxes for 2007 as $342.1 billion. My guess is that you have simply misremembered or misunderstood something that Krugman or Thoma may have said.
Mine are not theoretical numbers. We are talking about actual tax dollars collected.
Perhaps we should just follow the conclusions of Larry Bartel’s new book, “Unequal Democracy”, profiled here: http://www.nytimes.com/2008/08/31/business/31view.html?em
As the article notes, between 1945 and 2005, for all but the top 5% income earners, inflation-adjusted family income grew significantly faster under Democratic presidents than Republican presidents. Moreover, that additional income to 95% of Americans as a result of the faster growth significantly exceeded the amount of tax savings they may have enjoyed under Republican presidents.
So before those reading this post believe that John “Seven Homes” McCain who is in that lucky 5% group is proposing an economic policy that will fatten their paychecks more than Obama’s, you ought to at least read the article.
Under the “big government, high-taxes” model, we had ( of course) high taxes, big government spending, more recessions, growth of government, and stagflation. We have had tremendous wealth and job creation in the last twenty-seven years since we lowered taxes and moved to a low-inflation growth economy, along with few recessions.
George Bush’s tax cuts did not balloon the deficit, the spending by the Republicans is what ballooned it so much; it was shrinking in 2007, and is likely growing again because of the housing crash. And George Bush had no more to do with the housing crash than Clinton had to do with the Dot Com crash in 2000. But a real-estate crash hits an economy HARD, and combined with high oil prices, that causes problems.
I do not believe Obama should increase taxes on the top 5%. If you are a hardworking professional who makes say $260K a year, when the Bush tax cuts expire, you will pay a 39% federal income tax, 12% Social Security tax, state tax (which are increasing), country or municipal tax, sales taxes, etc…almost 60% of your income to the government. I do not believe the taxpayer should have to pay for the government’s mistakes, or that successful people should have to hand over so much of their income to give out benefits to the lesser-acheivers, or wealth redistribution.
What worries me further is these entitlements he is promising. Once you start giving the middle-class entitlements, it is impossible to remove them, no matter howm uch they end up costing.
As a detached (UK) observer, it seems clear to me that the US needs to raise more in tax. Apparently there are many worthwhile public projects such as infrastructure and early education, and even conservatives who advocate cutting spending seem to end up favouring spending more on war (which I am not necessarily criticising) or financial bailouts. Borrowing only forestalls expenditure.
Now since taxing income, capital gains etc discourages enterprise, my suggestion (for the UK as well as the US) would be to increase inheritance tax. Much of current wealth represents a windfall from various bubbles, and taxing inheritance should not undesirably distort the recipient’s behaviour. Assuming that there is some tax-free allowance before inheritance tax applies, I cannot imagine that raising inheritance tax would cause much hardship.
No doubt many would be inclined to dismiss such a proposal as “politically impossible”, but I do not think that a economics blog is the right place to rule out ideas on such grounds. If politicians dislike policies recommended by economists because they might be unpopular, let the politicians be seen to be responsible for that choice. I would be interested to know if readers agree that increasing inheritance tax would make economic sense?
I did make a mistake on my profits numbers — I took the sum of the four quarters rather than the average so both my profits and tax numbers are both four times what they should be. The correct number is $1,877 B for profits and $467 B for taxes.
But they are from the national accounts and the point that the effective tax rate is only 24% is still correct. The effective tax rate is now half of what it was 50 years ago it has been falling almost consistently for most of the post WW II era.
Using statutory tax rates is making an argument about a tax rate that essentially no one pays.
Your own chart directly contradicts your argument.
You show corporate profits this cycle at record levels and may be the strongest cyclical rebound on record.
On the other hand your chart shows that capital spending was one of the weakest on record.
Moreover, this was a time when the effective corporate tax rate was plunging.
This entire cycle I’ve been using exactly this chart to display that capital spending was unusually weak this cycle despite all of the Bush tax cuts designed to encourage capital spending.
It’s been 35 years since I took tax at ISU. Are dividends still deductible from corporate income?
Good analysis Professor.
My general question to those who are enamored with Obama’s plan to pay for all of this is “If he knew about so much waste in government why didn’t he do anything while he was in the Senate?”
I think we all know that there is enormous waste in the federal government, but I think we also realize that it is inherent in the system. There is absolutely nothing that will stop this endemic government waste other than turning it over to the more efficient free market.
Okay… do you think most American’s are buying Obama’s promises? He talks about change, but he is NOT saying anything different.
What I heard was empty promises. Tax the rich corporations, but keep more them from moving overseas. Is he an idiot?
Give 95% of us a tax break and lower our health care cost, (even if we are already covered)? Yea Right!
Obama’s platform is a joke. More big goverment and more wasteful spending. His campaign slogan should be:
“I’m from the government, and I’m here to help.”
If he does what he says, (not likely), spending will be out of control, budget deficits will make Bush’s record look good and corporations will need to leave the U.S. just to stay competitive.
God help us.
To JDH and others who think U.S. Corporations should pay more taxes:
I work for a fortune 100 company who is moving more operatons outside the U.S. because our key U.S and international competitors pay lower taxes than us.
The fact with profits are: “You don’t spent what you make… you spend what you keep.” And more and more companies are adding a percent or two to the bottom line by avoiding the already too high U.S. corporate taxes.
We have to compete, so we are moving out of the U.S. If Obama does what he says, companies like us will move even faster.
Large corporations avoid paying taxes by having an army of legal professionals that can combat any new legislation. So whatever modifications Obama wants to make to close “loopholes” will just create more work for the tax lawyers to find new “loopholes”. Maybe thats the whole point, create more work for his lawyer buddies 🙂 In the primaries Skadden Arps opened entire conference rooms to help Obama phone bank – hum, I wonder why they would do that?
JDH,
In “Obamanomics” (New York Times Magazine. Written by columnist David Leonhardt) from two Sundays ago (August 24, 2008) Leonhardt implies to me that the Obama tax plan is all about the redistribution of wealth.
The Obama camp implies that this plan is allegedly necessary to enable an individual who does not own wealth to benefit from the wealth of others.
The question I have is one of fairness.
It is possible to have a younger family, where one partner is paying back student loans and another is borrowing to start a business, earn over 250K and get penalized under the Obama plan for engaging in wealth creation.
This is unfair… Why???
Another older couple could be earning just under 250K but be far more wealthy than the first couple because they own a better home with all the amenities.
Wealth creation is penalized while accumulated wealth is not…
That explains Buffett, Gates, Rubin, the heads of Wall Street, and all the other rich fat cats I’ve failed to mention fawning over Obama’s plan.
They’ve made their fortunes…
What are the odds that if wealth was aggressively taxed that the aforementioned fat cats would howl?
Supply-side economics is dead. We all admit the economy is demand driven when we observe the middle class spending habits. Fear strikes every investor and business when Americans stop spending.
The debt is another issue. Tax cuts produce less revenue. So simple an idiot can understand. But some pseudo intellectuals maintain magical higher profits will appear out of nowhere.
We need a tax increase from the rich and big business to balance the books. We need to keep the consumer spending stabilized, with tax relief an option, until the next cycle of consumer driven demand develops. Consumers will need to work off some debt and stabilize net worth issues associated with the housing crisis first.
But remember, all economies are driven by demand. You can build it, but if no one buys it, you have wasted your time, effort and money.
Also remember that a reasonable businessman will not create jobs nor increase salaries when there is no increasing demand for his products or services. You can throw all the money you want at Wall Street, but business will not expand until the consumer spends.
Dick F,
As a UK citizen, my experience of US government is limited (to contact with the US Treasury), but I am sceptical about claims that waste is endemic in the US public sector. Successive UK governments have used that argument to claim that they can do more for less, and it never turns out like that. If you really believe that the US government is wasteful, perhaps you should stand for some public office.
But even if the public sector is inefficient, that should not stop taxing and spending to get useful work done that is best done by the public sector, such as levees for New Orleans and education for the poor. I suspect that the USA is now being held back by prejudice against “big government”. Few would argue that dealing with a national emergency like a war or natural disaster is not a job for the government. Perhaps the rise of China etc represents such an upheaval.
I think the Professor was much too kind to Obama’s program. It’s boilerplate tax-and-spend with misdirection as to who will ultimately bear the burden of the increased taxes. Yes, we’re overspending but defense expenditures look like they will be increasing, not decreasing, based on the initiation of other countries hostile to our interests.
No poor man ever gave me a job and I’m a bit too prideful to seek government work again. That leaves either the well-to-do or corporations. If the government takes too much of their wealth or cash flow, what’s left to cover my payroll check?
Another complaint I have for BOTH sides is the recent mealy mouth “all of the above” energy policy. Guess it is some progress politically speaking but we can’t afford to over-invest in bad ideas with low payback and under-invest is the better ones. Governance is about making choices.
BTW, it is extremely uncivil to immediately dismiss the comments of others as “talking points.” It is a form of ad hominum fallacy implying that the commenter is unable to conceive a independent thought of value. Either address the argument with facts or counterarguments or keep quiet. REAL “talking points” are distillations of real arguments.
Anyway, that’s MY talking point.
Fine post, makes sense, Professor.
Obama advocated closing corporate tax “loopholes”. Tax preferences (loopholes) most likely result in inefficient resource allocation. Would additional educational spending and lower spending for ethanol (whether through corporate credits or the excise exemption) result in more or less efficient spending? If one is opposed to the excise tax preference for ethanol (as I am) then why a blanket approval of various corporate income tax preferences?
That’s a good point, Sonia. But I see no way that “every dime” of the laundry list could be funded by “closing loopholes” unless we are talking about a huge increase in the net revenue received from corporate income taxes and a consequent huge reduction in after-tax profits.
Spencer, the fact that the blue and red lines occasionally diverge hardly “contradicts” my claim that there is a clear empirical connection between the two. And are you claiming that, (1) as a statement of fact, if there were a huge additional reduction in after-tax profits, we would see a big increase in issuance of corporate debt so as to produce no change in the level of fixed investment, and (2) as a statement of policy, such an increase in corporate indebtedness would be a desirable objective?
RandyMiller, I do not believe that common stock dividends have ever been counted as an expense.
Professor,
Thanks for your response. I’m certainly not questioning your numbers, I’m just trying to reconcile things I have read. Here is one of the posts I mentioned:
http://economistsview.typepad.com/economistsview/2008/08/the-greek-menac.html
Student, the 6% number is asserted not by Thoma but does indeed appear in a quote he reproduces from a blog called ataxingmatter. I could not find information on the credentials or even the name of the author of that blog, nor did I see any substantiation or references as to how this 6% number is arrived at. The number would appear to be patently absurd. If the $310 billion tax paid on nonfarm nonfinancial domestic corporate income in 2007 represents 6% of their profits, that would make their profits $5.2 trillion in an economy whose total GDP is only $13.8 trillion. Maybe somebody somewhere got that number for some other year assuming things like depreciation costs = 0. But I see no good reason to give it any credibility.
The other statements in the URL you cite note that there is a difference between the statutory and average effective corporate income tax rates. Yes there is. That’s really neither here nor there for any of the points I made.
The effective average Federal Corporate tax rate was roughly 23% in 2007 (FY 07 corporate income tax receipts of $370 billion versus economic profits of $1.6 trillion for calendar year 07 (CBO reported data F.Y. 09 Budget). Profits and profits taxes have been an exceptionally large share of GDP in recent years and are expected to be a slightly smaller share of GDP in the next few years (CBO and others). Funding major new programs would require an increase in personal income tax or a VAT and a BTU or Carbon tax could be added to the mix. Closeing “loopholes” corporate or otherwise, improving compliance and cutting “waste” won’t do it and neither will reducing earmarks. Although all these measures would be helpful. I for one am ready to see an increase in my income tax to support a more secure safety net.
Here is a graph of who pays income taxes by tax bracket. What you will notice is that the top tiers of income tax payers have been assuming a larger share of the tax burden throughout Bush’s Presidency. Its not linear, but the trend is clear. So when Obama brings up the politics of envy and claims the rich aren’t “paying their fair share”, realize that it just isn’t true.
http://www.ntu.org/main/page.php?PageID=6
Professor,
Thanks again for responding. I agree that 6 per cent number looks strange, and like you I could not find anything to back it up.
I think the effective rate does matter to your analysis up to a point. If corporate taxes are effectively near zero, then the marginal dead weight loss of a tax increase is not large. Having said that, I know capital taxes are generally not a good idea and their optimal rate in standard models is generally zero.
Student, as I originally pointed out, corporate income taxes collected currently exceed $300 billion, which is not “effectively near zero”.
RebelEconomist,
I am not sure you understood me. Most things done by government cost more. There is more overhead and there are no market controls on materials and labor because source of funds is not from the project being done but from taxpayers, many of whom will never benefit from the expense. This is endemic to government meaning the very nature of government will always be inefficient.
I am very active in politics and along these lines I vote for those who I believe will move more of the socialized costs of society out of government.
I agree with you that the military is one area where government is necessary, but I totally disagree with you on the levees for New Orleans. I encourage you to investigate the system used to maintain the levees and how much money was spent and where. You will find that money they should have been used for infrastructure funded wild parties and other personal expenses of those who had the responsibility of maintaining the levees. If the levees had been subject to the free market the companies that maintained them would have them so that they could resist because if they did not the companies would be out of business with huge lawsuits.
The government insulates others from the discipline of the market and is itself insulated from the discipline of the market. This is why is is not good at doing what can be done in the market.
To look at just one item in Obama’s list, it seems to me that now is a perfect time to provide incentives for fossil fuel firms to invest in alternative sources (including nuclear). Shifting incentives would be a good start. I see no reason why we need to continue to provide preferential tax treatment for what amounts to business development and operations in a very mature industry.
Everybody,
The war costs 4% of the federal budget.
Deficit spending is 17% of the federal budget.
Cutting 100% of spending for the wars in Iraq and Afganistan would leave another $300B to be cut.
Anonymous at September 2, 2008 08:15 AM (Dick F.?),
I presume that levees are ultimately funded out of taxation, regardless of whether the work itself is performed by the state or contracted to the private sector. If so, then raising taxes to pay for more slobs to work on the levees might have been a more straightforward way of getting them finished than hiring a more efficient private sector contractor to work within the existing budget. The best should not be allowed to become the enemy of the good.
“here’s my understanding of Obama’s central thesis– if funds could be diverted from corporate profits into the above wish list, then America would be better off”
JDH, here’s the flaw in your understanding, as I perceive Barack’s statements.
“I’ve laid out how I’ll pay for every dime– by [1]closing corporate loopholes and tax havens … But I will also [2]go through the federal budget, line by line, eliminating programs that no longer work . . .”
JDH, you focused on [1], but we all know there is much more opportunity in [2}. Lets start thinking about [2] with reduced funding for the Iraq misadventure. We could go on from there (alcohol subsidies, etc.), but there is really no need to because everything mentioned in Barack’s speech can be paid for by reduced funding for Iraqi mis-adventures. Apparently you missed it, but he has talked about this idea before.
You missed the forest for the [1] tree.
I’m interested in several of the tangential questions raised in this post:
1) Regarding the rationing of health care – how much money is actually available here? How much more would be available if the US paid global-average (or even G8-average) prices for care rather than US-prices? Further to this, what drives these US-specific prices? (As an expat working for a US multinational drug company, I’ve been particularly perplexed by our tolerance of this flagrant market inefficiency.)
2) Regarding an inheritance tax – what are the primary arguments against such a tax? Is it simply the philosophical argument that those who have created/amassed such wealth should be allowed to spend it as they see fit?
3) What are the arguments for treating dividend income and capital gains income for individuals differently than wage income?
4) What is the motivation for the myriad of personal income tax rebates and credits, even the most obvious – interest deduction. What is the economic argument for encouraging indebtedness?
Professor,
Again, thanks for your response! I’m not sure whether you think I’m disagreeing with you or not. I’m not.
$300 billion is not a small number.
You said:
“The other statements in the URL you cite note that there is a difference between the statutory and average effective corporate income tax rates. Yes there is. That’s really neither here nor there for any of the points I made.”
This is the only thing I’m nit picking about. If the statutory rate is 35 per cent, but nobody pays it, then a small increase in the tax paid will have a small marginal deadweight loss (let’s abstract from the difference between average and marginal for the moment). $300 billion does indicate, however, that someone is paying something. I wasn’t questioning that.
How about the hundreds of billions being used to bail out Wall Street Financial institutions?
Let those who took bad risks fail rather than protect them. Protect the poor 45 million Americans without Health Insurance instead of bankers?
After all, when times were good the banks kept their excess profits…
I have to break with the Republican Party on inheritence taxes.
The threshold for the tax should be set higher than it is now since the justifications for this tax are two-fold:
1) prevention of sloth – rich kids to the second and third generations should see that they have to take advantage of their patrimony if they want to keep their social position
2) prevention of plutocracy – inherited wealth can be a danger to democracy. A self-made man has at least shown discipline and focus. Do we want Bill Gate’s grandson to become the richest man in the country upon his birth?
What would be a good base exclusion? I’d guess maybe $50 million.
The downside of inheritance taxes is the tax-avoidance schemes like foundations. Some of these institutions have become extremely damaging to American society and have NO accountability to their fellow citizens. They can easily be captured and the donor’s death and put to ill-use.
1. The argument against an inheritance tax is that this tax acts as a disincentive to work and produce. People are less likely to work hard and create business if the fruits of their labor go to the government rather than their own families. If we have a large inheritance tax, then the smartest people in the country will either not work as hard. This means they will create less business, and there will be less jobs and wealth for the rest of us. Or, they will leave the country and work in another country which does not tax them as much. They will take with them their money and their entrepreneurial talent which means we will have less capital to build industry here in America.
2. The second argument against the inheritance tax is that the money rich people have is typically invested in companies which are used to create jobs for the rest of us. This money is essential in providing capital for private businesses to grow. If this money is taken from them and given to the government, then this means that there will be less money available to the private sector, the pool of savings would be reduced, and interest rates would have to rise.
Jeffrey,
The problem I have with both of your arguments is that you do not consider the alternative. Part of my introductory argument above in favour of increased inheritance tax is that it would represent less of an incentive than income or capital gains taxes etc. Anyway, the effect on those who expect to inherit (I am sure that you can think of some celebrity examples!) should also be taken into account.
As for the base, I would just treat bequests as another form of income, to be taxed accordingly (albeit perhaps spread over a number of years).
Jeffrey makes some valid arguments against inheritance taxes. the one about taking cash out of the private sector and transferring it to the government is a very powerful one.
Here’s a case where a democratic compromise is the right course (like the abortion issue.)
OH YES BARACK OBAMA PROMISED TO TAKE AMERICA TO ANEW LEVEL WHAT PLANS DOES HE HAVE FOR AFRICA AND THE WHOLE WORLD AND TO THE AMICAN’S ARE YOU READY TO SUPPORT BARACK FOR THE CHANGE HE IS ADVOCATING FOR? BY HAGGAI
Taxes are good, they prevent deficits. Deficits are bad, they produce a total indebtedness that can destroy a country’s currency. Together, they probably point to a weak economy. Simple but so true, don’t you think?
Consumers are 86% of the economy. Consumer Purchases create businesses and jobs. Not the other way around. Think this through. There has to be discretionary income to spend in order for a sale to take place and for a business to even exist.
The chicken did come before the egg actually in an evolutionary scenario. This is not rocket science here. It is as basic as you can get.
An agrarian system requires excess capital such as grain produced by an individual. Then a carpenter business can be started and a table sold in exchange for the excess grain. Now you have created one business and one job.
No amount of business stimulation will jump start an economy that lacks consumer spending. Why? Because good businessmen will know the climate does not justify production and expansion. A good businessman will see the risk, risk that he does not want to foolishly take. Las Vegas anyone?
I would like to take on the idea that consumption is the most important factor in an economy. I would like to demonstrate my argument using Robinson Crusoe trapped on an island. Lets say that by using his hands, he can catch 4 fish in 12 hours. Now, he can build a fishing spear in 8 hours and using this spear he can catch 8 fish in 12 hours. In order to build this capital good (the spear) he would need to reduce his consumption of either fish, or his leisure time. After he builds the spear, he becomes richer, he can now produce more fish with less time. The point is that in order to set aside the time to build the spear, he needs to spend less time consuming either fish or leisure. It is not consumption that ended up increasing his standard of living, but the act of not consuming and dedicating a part of his time to producing capital goods that finally increased his standard of living.
Now if we take this analogy to our modern economy. At any given point in time, we have a fixed amount of time and resources that we can use to produce goods, just like Crusoe. We can us these resources to produce either consumer goods, or capital goods (tractors, factories) which can be used to produce more consumer goods in the future. If we want to become wealthier in the future, we need to consume less in the present and dedicate a part of our current resources into building capital goods. Building capital goods can only happen when we consume less. In fact, the less we consume and the more we save, the more resources become available for building capital goods. The higher the national savings rate, the larger the savings pool becomes. Having a larger pool of savings reduces the interest rate and makes it easier to produce capital goods.
The way a country becomes rich is by accumulating a large stock of capital goods. The reason why America is richer than China per capita is because America has a higher ratio of capital goods per person than China has. This means that America produces more per capita than the average Chinese. It is the fact that America produces more that makes the country rich. The reason China is becoming richer faster, is because the Chinese are saving more and thus accumulating capital at a faster rate than we do. It is the fact that the Chinese save that makes them rich, spending does not make them rich.
An economy will always sell everything it produces. If GM finds it made too many cars one year, they will simply reduce the price to the market clearing level and all of the cars will be sold. The government should never worry about stimulating demand. Companies can stimulate demand on their own by lowering prices. If a company lowers prices too much so that they are now losing money, then this is a signal that the company is not producing a good that society wants, or that the company is producing the good inefficiently. That company will then produce less of the good next year and more resources can be dedicated to producing goods that are in greater demand.
Aw, but a man is not an island unto himself. Sorry, had to use that phrase. You are assuming that the Chinese created their miracle on their own like good capitalists.
US consumers through US corporations, such as Wal-Mart, artificially stimulated the Chinese economy with demand for products from outside their borders. Our purchasing ability enabled the Chinese business community to expand.
There is less in the way of US consumer resources now, unfortunately. The whole thing is contracting in a catch 22. Back to the indebtedness issue and your lack of savings statements.
GM, Toyota, Nissan and the like will all see profits decline, not because they are all inefficient, but from a slow down in consumer spending. The consumer is tapped out. And I will go beyond savings and say that excessive indebtedness destroys wealth. Borrowing from the future without the ability to repay is disruptive to an economy to say the least. Argentina? Russia?
The most basic of economic theory started with Mercantile economics. Countries realized the importance of controlling the flow of money and commodities into and out of their national borders. It was a matter of self-interest for the local economies.
China’s self-interest seems to be the winner today. They have executed Merchantile economics rather well with favorable exchange rates and trade surpluses.
OBAMA’S ECONOMICS ARE DANGEROUS !!!
Unemployment at 6.1% simply reinforces McCain’s argument that if you raise taxes on businesses, they will have to cut back their work force in order to keep their doors open. In the short run, Obama’s desire to raise taxes on businesses, and give the money to struggling Americans sounds good … but, it panders to people’s desire for hand outs and immediate gratification … for, in the long run, this kind of bad judgement is like eating the goose that lays the golden eggs … or, like eating your seed crop, instead of using the seeds to grow more crops. Raising the taxes on businesses is the best way to dramatically increase unemployment in America.
Howard, MCBUSH’S ECONOMICS ARE DANGEROUS !!!
Unemployment at 6.1% simply reinforces Obama’s argument that if you cut taxes on Big Business, they will cut back their work force in order to preserve their UNTAXED wealth. Giving the money to big business so they will hire another employee sounds good….but, it panders to the these rich special interest lobbyists for re-election purposes…. for in the long run, this kind of bad judgment is like giving away the farm(take it all)…or, aborting the child that will care for you in old age. Huge Deficit Tax burdens without jobs is the best way to create a depression.
“”–For in the same way improving the fuel efficiency on the less efficient cars (moving them from 12 mpg to 14 mpg) saves more fuel than improving relatively efficient cars (say from 24 mpg to 40 mpg),–“”
Let’s say both cars travel 300 miles in a weeks time.
Car A, 12mpg, uses 25 gallons.
Car B, 24 mpg, uses 12.5 gallons.
Car A + B use a total of 37.5 Gallons.
Car A, more efficient 14 mpg, uses 21.43 gallons.
Car B, 24mpg, uses 12.5 gallons.
Efficent car A + car B = 33.93 gallons total.
Car A, 12 mpg, uses 25 gallons.
Efficient Car B, 40 mpg, uses 7.5 gallons.
Car A + Efficent car B = 32.5 Gallons.
33.93 verse 32.5.
Nice way to prove yourself wrong.
GO OBAMA!!!!!!!!! HE RULES. SO MUCH BETTER THAN McKINE
Anon Sept 8, 8:41 AM:
What? Your presentation is horrible and your conclusions confusing.
To present the numbers better:
Car A does 12 MPG, car a does 14.
Car B does 24 MPG, car b does 40.
Assume each does 300 miles in a week.
Car A consumes 25 gallons. 25 x 12 = 300.
Car a consumes 21.4 gallons. 21.4 x 14 = 300 (approx.).
This represents a saving of 3.6 gallons.
Car B consumes 12.5 gallons. 12.5 x 24 = 300.
Car b consumes 7.5 gallons. 7.5 x 24 = 300.
This represents a saving of 5 gallons.
There. Isn’t that much clearer? Yeesh. Your maths may be correct but your presentation skills quite frankly suck.
Besides which, the gas guzzler has achieved roughly three quarters (well, 72%) of the fuel saving of the efficient model with less than half the percentage increase in efficiency and a relatively miniscule increase in actual efficiency: Combine this with a comparison of how many people actually drive each type of car and you’ll find that the easiest, fastest way to make a large impact on the amount of fuel used to run cars in the First World is indeed to increase the efficiency of the gas-guzzlers- even by a small amount.
The cost of reducing the fuel consumption of already-efficient cars is much greater than that of reducing the fuel consumption of a car that wasn’t particularly efficient to start with: There’s much more margin to make gains, the gains can be made much more cheaply and the impact of those gains will range far more widely.
A wealth tax at about $500 per $1,000,000 in assets would work. Any more than that and the wealthy would flee the country. Over a typical lifetime, a the total amount of revenue would be about equal to a death tax.
Of course, in the usual “soak the rich” type electorate, there would soon be pressure to raise the amount. It would take a constitutional amendment to prevent a wealth tax from rising.
Besides which, the gas guzzler has achieved roughly three quarters (well, 72%) of the fuel saving of the efficient model with less than half the percentage increase in efficiency and a relatively miniscule increase in actual efficiency: Combine this with a comparison of how many people actually drive each type of car and you’ll find that the easiest, fastest way to make a large impact on the amount of fuel used to run cars in the First World is indeed to increase the efficiency of the gas-guzzlers- even by a small amount.
The cost of reducing the fuel consumption of already-efficient cars is much greater than that of reducing the fuel consumption of a car that wasn’t particularly efficient to start with: There’s much more margin to make gains, the gains can be made much more cheaply and the impact of those gains will range far more widely.
————
No.
The people that are going to buy the new efficient cars are those actively purchasing the new cars every year, which in turn puts every vehicle at the highest efficiency.
Those older cars with very small mpg will be tossed over in the next 5 years and the driver will be behind a new Badly efficient car. It’s easier to just start fresh than to try and retrofit. You have to think a little more longterm than 2-3 years……..