Or, “Just because you can’t prove that the top marginal tax rate has a large impact on economic growth doesn’t mean that it doesn’t: just have faith!”
As readers will recall, recently a Congressional Research Service report on the impact of top marginal tax rates was “disappeared” after pressure by the Republican leadership was exerted. [1] The report (mostly a survey of the literature) found no statistically significant impact of top rates on growth. Yet the Republican JEC (to differentiate it from the JEC under Robert Casey)would have us start from the null hypothesis of there being an effect, and only rejecting that (null) hypothesis when sufficient evidence was found against there being an effect.
Now, the JEC-Republicans have produced a report (well, more like a blogpost) that asserts that CRS should’ve studied the effective rate. Indeed, it may very well have been the case that CRS should’ve undertaken that study. After all, I think most of us think the effective rate is important. Oh, they actually did! (Gravelle, Marples, “Tax Rates and Economic Growth,” Report R42111 (December 2011)).
Conclusion: I think the JEC-Republicans should critique the CRS report that addresses the topic the JEC-Republicans argue the CRS should’ve analyzed (and actually did), rather than the CRS report that addresses exactly what it says it address in its title. (After all, I assume that the JEC-Republicans have access to all the CRS reports.)
But I thank the JEC-Republican staff for the best laugh I have had today.
More on the “disappearance” of the CRS report, by Bruce Bartlett.
We’ll have a chance to put it to the test when the $120,000 tax increases go through the Top 1%.
Still flogging that tendentious report, eh Menzie?
Rich Berger: I would love for you to specifically identify which econometric or factual error is in the report, given the title of the report. Now, you can say that’s not the report that should have been written — that’s your prerogative. But it’s not a critique per se.
Progressives are not going shut up until they extract their revenge on some fraction of the wealthy, so maybe this is a compromise.
Carney also left the door open to the idea of raising the threshold for extending the Bush-era tax cuts to $500,000 or $1 million. Obama drew the line at $250,000 in his proposal.
http://www.huffingtonpost.com/2012/11/13/obama-bush-tax-cuts_n_2124324.html?ir=Politics
Here is a much more sane approach that isn’t motivated by revenge or jealousy.
According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years. Moreover, according to the TPC’s distribution table, 96.2 percent of the extra revenue would come from the top quintile, with 79.9 percent from the top one percent.
http://gregmankiw.blogspot.com/2012/11/how-to-raise-tax-revenue-from-rich.html
However, entitlement reform must be part of the bargain. Otherwise, the rate of spending growth continues unabated and the lunacy of the progressive “solution” of rasing taxes to offset revenue shortfalls each time the economy slows will become obvious.
I’ve decided retirement isn’t for me since interest income is next to nothing.
Sorry about that, college grads…..
tj How many nano-seconds would it be before the fat cats and their lobbyists were pushing through new deductions? We’ve been down this road before. In theory the 1986 tax reform was a thing a beauty; an economist’s dream. It only took a few short years before it morphed into a disaster that necessitated two huge rate increases in less than four years. Why do you think a 2012 version would end any different?
I’m not sure just what you mean by “unabated” spending. Try looking at the NIPA tables. Federal government spending on consumption and investment has been declining the last couple of years. Nondefense spending is just about where it was during the Reagan years. The “unabated” spending has been on the defense side of federal consumption and investment spending. If you want to look at spending that’s driving the outyear deficits than look no further then healthcare. Remember that the next time you and CoRev parrot the Tea Party whine about Obamacare cutting $716B from Medicare.
The President is calling for $1.6 trn in tax hikes over the next decade, or $160 bn per year. Assuming this affect people with incomes over $250,000, that’s 3.9% of the country’s 118 million households, or 4.6 million households.
Here’s the math:
$250k income cut
— avg. $280k income in cohort (my estimate)
— Bottom 2.9% of Top 3.9% of HH
— 3,422,000 households in total
— Average incr. tax burden: $23,000 per year
— Share of gross income: 8.2%
$350k income cut
— avg. $450k income in cohort (my estimate)
— Bottom 0.9% of Top 1.0% of HH
— 1,062,000 households in cohort
— Average incr. tax burden: $40,000 per year
— Share of gross income: 8.4%
$2000k income cut
— avg. $4000k income in cohort (my estimate)
— Top 0.1% of HH
— 118,000 households in cohort
— Average incr. tax burden: $340,000 per year
— Share of gross income: 8.5%
These together would equal $160 bn in revenue per year.
Now, the deficit in October was $120 bn. So this tax increase would finance about 6 weeks of the deficit. Who finances the other 46 weeks?
The DOW is down now more than 1,000 points in less than a month.
Goodness, imagine how bad it would be if Romney had been elected!
“Goodness, imagine how bad it would be if Romney had been elected!”
Let me remember who was in office when the stock market, housing market and just about every other financial enterprise was collapsing or near collapse? I think it was that guy from Texas, what was his name? Darn how easy it is to forget great presidents who killed Osama and found the Iraq nuke weapons. Who was that guy?
I made essentially the same criticism in a comment: I’d like to see effective rates analyzed. But the study looked at top marginal rates and accurately found they had no relation. So yeah.
2slugs
It’s clear that a key part of the Progressive strategy relies on creating loopholes in the tax code that favor the special interests of the Progressives – unions, greenies, etc. There is no other reason for the left to fight it as they do. Put some constraints in the legislation if you fear more loopholes will reappear in the future.
Let’s assume Obama gets his entire tax rate increase on the “rich”. Show me the math how you get the rest of the way to a fiscal solution that does not require another tax increase the next time the economy slips into recession.
The 2011 CRS report does NOT use any legitimate measure of the effective marginal tax rate on labor or capital – which would incorporate federal, state, and local taxes for both individuals and businesses.
In the case of labor supply, the 2011 CRS report totally misstates the results of the Ohanian/Raffo/Rogerson study.
Kopits/tj we don’t have an entitlement problem.
The Social Security trust fund, together with payroll taxes, is sufficient to cover program benefits for more than the next 20 years. Moreover, assuming no additional funding, currently scheduled payroll taxes can provide benefits equal to those now provided, even adjusted for inflation, for the indefinite future. Given all the real economic problems we truly must address now, there is no legitimate argument for even considering Social Security modifications until the economy is fully back on its feet and long-term costs and revenues can be more accurately projected.
The Medicare trust fund was actually “going broke” when Pres. Obama took office, due in large to changes pushed through by the Bush administration. At that time, the trust fund was projected to be exhausted by 2016. However, the ACA (“Obamacare”), rather than taking the much vaunted $716 billion out of Medicare, actually added that amount to the Medicare trust fund; which is now projected to last until 2024. In one fell swoop, two thirds of the Medicare shortfall was eliminated. Eliminating the remaining one third could be even easier; for example, now that the ACA will protect older working Americans, we can in good conscience synchronize Medicare eligibility dates with those for Social Security. The relative ease of these Medicare fixes, and the fact that the small Social Security issues remaining are far beyond our legitimate planning horizon, why then all the hysteria about entitlements eating our children and grandchildren? In a word—TAXES.
Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he extensively offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Between 1946 and 1981, income taxes averaged 12(+/-1)% of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %( and below). However, on budget expenses (which exclude Medicare and Social Security) have remained 12(+/-1)% of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security and Medicare trust funds. When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt before the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise any taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them “back” as income tax reductions, heavily weighted to the wealthy–who didn’t create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. Although the Republicans like to talk about those “47%” who in large part pay only payroll taxes as being supported and subsidized by those who pay income taxes, the truth is the opposite; ever since Reagan, income taxes have been subsidized by payroll taxes; and the failure to raise income taxes to pay back that subsidy, is to steal the money that middle-class workers have had taken out of their income to pay for their retirement.
Hence, the only problem we have with entitlements is paying back the money that we borrowed from the Social Security and Medicare trust funds. This requires that we raise income taxes in the short term to 12% to cover normal on budget expenses. And, as soon as the economy recovers, we must raise taxes above 12% to pay back the trust funds. This is why the Republicans refuse to discuss raising income taxes; they would much prefer to steal workers retirement funds, and reduce the entitlements paid for by them. We do not have an entitlement problem, we have a Republican problem.
Menzie,
I love your stuff, and am very grateful to you for posting it. But, to parse “I think the JEC-Republicans should critique the CRS report that addresses the topic the JEC-Republicans argue the CRS should’ve analyzed (and actually did), rather than the CRS report that addresses exactly what it says it address in its title”, you need a machete. Isn’t there an easier way of saying it, like “the Republicans should have analyzed what was there, instead of pretending it wasn’t and making a straw man”?
2slugs Never mind. I found the math in today’s WSJ. Obama’s plan is the same thing he offered earlier in the year.
The math shows that it closes $1 trillion++ annual deficits by about $160 billion per year.
Even though the left abhors limiting deductions, the plan goes after the charitable contribution deduction.
Where’s the math for another 75% or so of the fiscal gap?
This plan essentially takes the trajectory of spending associated with 2 wars and several stimulus plans during the period 2000 – 2009 and attempts to protect it by raising tax rates.
Let’s go back to the spending trajectory that existed in the mid to late 90’s. It’s much flatter. Eyeballing the total government expenditure trajectory, it appears we would be close to budget balance right now had we remained on that trajectory, and that’s without raising a single tax rate from where they are today. Seems more like a spending problem than a tax problem.
Wait, did I really see Rich B make an accusation of tendentiousness? There are really only two ways to go with a response. One is “I don’t think that work means…” you know the rest. The other is that Rich is projecting. Since the internet makes it so ease to look words up, I’m going to assume Rich is not having a Vizzini moment, and that his own tendentiousness leads him to see tendentiousness in others.
Dilb –
Romney was not President in 2008. Bush was. Now, have I particularly defended Bush in the past?
Having said that, what’s your narrative? President Bush allowed banks to make bad loans, which destroyed the US economy, and also that of the UK, France, Spain, Germany, Hungary, Italy, Greece, Spain, Portugal, Japan (?), Ireland and Iceland (among others).
But he did not succeed in destroying the economies of Canada, Norway, or Australia, nor Brazil, China, Indonesia, Mexico, Argentina, Bolivia, Ecuador, Nigeria, South Africa, the Philippines, Vietnam, Sri Lanka, India, Pakistan, Iran, Yemen, Egypt, Sudan, or Mozambique, among others.
And this explains why, five years later, the US still has trillion dollar deficits, even though the AIG securities–a key driver of this crisis–have been sold by the US government at a profit. And it explains why Europe is going back into recession, and Japan looks to be going into recession, and maybe the US, too. So a couple of trillion dollars of dodgy US mortgages which had to be marked down by perhaps half is able to do this to the global economy five years out–but only to the OCED economies, because their governance was clearer weaker than governance in emerging markets.
That’s your narrative?
There is a very common ploy used to distract attention from good ideas. The ploy is to insist that the good idea solve more of a problem than is possible, or that it solve problems it cannot solve. tj has repeatedly insisted that folks here show how to close the entire deficit as a response to tax increases that would close part of the deficit. Sort of like demanding that an effective treatment for tuberculosis also cure leukemia.
A more reasonable logic goes something like this – if the deficit is a problem, then reducing the deficit must be a good thing. If a method of reducing the deficit – one which does no serious harm to national interests in the process – doesn’t completely eliminate it, that method is still worth adopting. That’s it, the whole story. The rest of the deficit may need to be addressed, but that can be left to other measures.
taxes are bad!
BMZ:
You say that Social Security is solvent for the next 20 years. In the next breath, you state that the SS trust fund needs to be paid back from the Treasury.
You got that half right.
The SS trust fund has lent $2.7 trillion to the Treasury over the years to pay for current expenses.
Thus, the excess payroll dollars that were in the trust fund are no longer there – they were lent to the Treasury.
That is why the $2.7 trillion in the trust fund is called intragovernmental debt, not intragovernmental equity.
All that remains are promises to pay back the SS trust fund, not the monies to do so.
The monies to do so are provuded by general revenues, which is an immediate budget expense, raises the deficit, and raises the debt held by the public.
Is that what you call a solvent trust fund?
Don Levit
Julian Silk: Apologies. I was trying to be witty, and paraphrase former SecDef Rumsfeld’s comments regarding equipment deficiencies in the Iraq invasion. You are right — would’ve been clearer the way you stated it.
Menzie
I have heard that there are people gullible enough to believe that Santa Obama’s goodies can be paid from exclusively by the “rich”. Can you believe that?
Levit:
All over the world there are “solvent” funds which own US government bonds (just like the SS trust fund). Their solvencies depend on the United States honoring those bonds(just like the SS trust fund). The bottom line is: as soon as the economy recovers, we must raise income taxes above 12% to pay back the trust funds. This is why the Republicans refuse to discuss raising income taxes; they would much prefer to steal workers retirement funds, and reduce the entitlements paid for by them. We do not have an entitlement problem, we have a Republican problem.
I recommend the eye opening program entitled “Park Avenue: Money, etc.” that ran on the PBS program Independent Lens. It gave a superb look into the extreme inequality of incomes and life styles in the very plutocratic USA. It should (but unfortunately will not) be seen by anyone concerned with what the USA is all about. I find it bizarre to see members of the 99% excusing the excesses of the 1%.
Sure, Rich. Just like I can imagine there are people gullible enough to belive that Hillary Clinton is going to bring in the UN to confiscate all the guns.
“Now, the JEC-Republicans have produced a report (well, more like a blogpost) that asserts that CRS should’ve studied the effective rate.”
From their analysis (not a blogpost):
“When it comes to economic growth, what matters most are the effective
marginal tax rates on labor and capital. Effective rates reflect the interaction
between statutory rates, credits, and deductions for individuals and businesses, as well as the distribution of income. Marginal rates measure the additional taxes paid on additional income earned. Thus, the effective marginal tax rate determines the after-tax return to labor and capital, which
affects the incentive to work, save, and invest. The top rate affects the economy only to the extent that it affects the effective marginal tax rate.”
Guess you failed to read it very carefully.
kharris
There is a very common ploy used to distract attention from good ideas. The ploy is to insist that the good idea solve more of a problem than is possible, or that it solve problems it cannot solve. tj has repeatedly insisted that folks here show how to close the entire deficit as a response to tax increases that would close part of the deficit.
Progressives, the word says it all. They progressively move the ball closer and closer to their goal line. I’m fine with using a piecemeal approach, but for the sake of TRANSPARENCY, I’d rather see the entire game plan ahead of time. Weved had years to solve this problem, surely someone has put together a comprehensive and reasonable plan by now?
There is another very common ploy called “overselling” or “delusion”.
“If we right away say 98 percent of Americans are not going to see their taxes go up — 97 percent of small businesses are not going to see their taxes go up,” he (Obama) said. “If we get that in place, we’re actually removing half of the fiscal cliff.”
“Half gone” poof! In other words, those tax increases are going to shave about $500 Billion per year off of our $1 Trillion per year deficit. But don’t worry, it’s all good. Only the rich will notice the higher tax rate, and they have no impact on GDP. (sarc)
Uh-Oh…Simpson and Bowles cite Obamacare as one of the major items on the spending side that need a haircut.
http://www.cnbc.com/id/49845816
“That’s your narrative?”
romney policies were just bush policies.
Rich Berger: Your comments seem a bit more unhinged in general these days. I hope you are well, given you seem to have bought into the “gifts” meme.
In any case, if 1060 words, three graphs and a table counts as an “analysis” in your mind, then don’t go into academia (Or serious policy analysis for that matter)!!! So my question stands — why didn’t they go to the trouble of doing a blogpost (“analysis” in your mind) of the other CRS report?
Menzie-
I asked a very simple question – do you think that a $1 Trillion+ deficit can be eliminated by raising taxes on the rich? You seem so hot on the case when Romney’s plan was being critiqued. He at least had a plausible plan. Barky’s plan – sheer fantasy. Barky’s budgets – none.
Eventually, fantasy collides with reality and the voters are revealed as chumps.
Rich Berger: First, I don’t recall the President claiming to eliminate the entire budget deficit. Second, the impact is $800 bn (not including interest costs) over ten years; not the entire deficit, but given the nearly imperceptible impact on growth, seems a reasonable policy to implement. In other words, the completion of a long journey begins with the first step. In my view, separate from the Administration’s, I would say we need additional tax revenue, perhaps through even higher rates on higher incomes, and elimination of tax expenditures. Buy my book — you’ll see which ones I think need elimination.
By the way, Romney had a plausible plan? Please, stop smoking that stuff, even if it might now be legal where you live.
Don Levit Social Security does not increase the debt held by the public. When the Trust Fund runs a surplus the Fund loans to the general Treasury. In the absence of that surplus the debt held by the public would have been larger. Eventually the Treasury has to pay back that loan, but that doesn’t increase the debt over what it would have been. For example, if the on-budget deficit is $1 and the Trust Fund runs a surplus of $1, then the current year unified deficit is $0. Of course, eventually the Treasury will have to repay that $1 to the Trust Fund just as it would have to repay an ordinary bond held by the public. When the Treasury repays that debt the general fund will have a $1 deficit. But that is exactly what the deficit would have been in the absence of Social Security. Social Security had zero effect on the debt.
Having said all that, there are two qualifications. First, the Trust Fund earns interest on those bonds, and that interest raises the debt. But the same is true of paying interest on bonds held by the public. Second, the FICA tax holiday is creating a burden on the debt, but that is an exceptional case and not part of the larger Social Security framework.
Social Security may well need some fixing because long term there probably is a shortfall to promised benefits. Maybe that shortfall should be addressed or maybe it should just be allowed to happen. You can make a good case either way; but however you come down on the issue it doesn’t have any effect on the debt held by the public.
Now Medicaid and parts of Medicare are completely different. Those entitlement programs have a big effect on the debt and we need to address the economic forces that are propelling those costs. But Medicare and Medicaid are not Social Security and you shouldn’t confuse them. Fixing Social Security does not do anything to help the larger debt problem.
tj Erskine Bowles and Alan Simpson are a couple of jokers. Why would you take what they say seriously? The CBO initiallly found that Obamacare reduced the deficit. They relooked things and concluded that the savings were likely to be slightly larger than they originally estimated. Of course, the clueless WSJ op-ed page misinterpreted CBO’s report and concluded that CBO was saying Obamacare would increase the deficit. Sounds like you get your news from the print version of Fox News.
Obviously there is no way that we can close the fiscal gap by just raising taxes on the rich; but just because we can’t entirely eliminate the fiscal gap is not an argument against raising taxes. Half a loaf is better than nothing. Even a quarter loaf is better than nothing. Especially when the opportunity cost of increasing taxes on the rich is very low. I disagree with Obama’s call for making the middle class tax cuts permanent. We should extend those middle class tax cuts for another year or so, but once the economy has rebounded the middle class should start paying higher taxes. And the middle class will pay higher taxes.
Menzie,
Notwithstanding its title, the 2011 CRS report was not an economic analysis of effective tax rates.
The charts and tables primarily focus on the top statutory rate, just like the 2012 report. (There are some references to effective rates, but they are not measured correctly.)
The major difference between now and then was that no one paid any attention to the 2011 report; whereas the 2012 report was featured in the Washington Post, New York Times, and on, and on….
So you are comparing 10 years of increases to a single year’s deficit? Laughable , if it were not so sad.
Rich is being a sad sack. 8(
The same people who think it is worth it to eliminate the NEA and subsidies for PBS like it’s gonna make any difference cry like he does when anyone brings up a small tax increase on the top bracket.
How about it takes a balanced aproach of both revenue and spending cuts? And you gotta start somewhere so taxing the rich is a pretty easy place to start?
I come to this site about once a month for a laugh. The Menzie Chinn posts never fail to disappoint. Taxes make no difference??? Have you ever heard of the Laffer Curve? There are 2 tax rates that will bring in zero taxes, they are 0% and 100%. Obviously, there is some point in between that is optimal. Clearly, the tax rate makes a difference. I’ll come back next month for another laugh. HA.
pavan: yes, you’re the fellow cites approvingly Rush Limbaugh and Greg Mankiew (interesting spelling) in the some post. I hope you’ve by now figured out how not to divide jobs in extistence at an instant by total dollars expended over a time period. Given your chronic sheer innumeracy, I’m not surprised you get a laugh out of regression analysis.
Interesting. So we halve the deficit to $500 billion a year for ten years. After 10 years the National Debt is $21 billion. what is the presumptive GDP figure to keep our asses afloat?