…but additional chapters where the AS curve becomes a Phillips curve, and money targeting gives way to Taylor rules. The student ends up totally confused, if they ever get to those later chapters. And after the financial crisis, a new edition will have a chapter devoted to that crisis, but not much in earlier chapters will change. This is not the case with the third textbook by Wendy Carlin and David Soskice… a complete rewrite of their earlier ‘Macroeconomics: Imperfections, Institutions, and Policies’. Luckily all the features of that earlier book that I really liked are retained… a supply side based on imperfect competition… a core model (the 3 equation model) which dispenses with the LM curve, and replaces it with a ‘monetary rule’ curve… open economy analysis is now fully integrated with the 3 equation model…. But by far the most important change… [is] three chapters on the financial sector… banking… a wedge between the ‘policy’ interest rate and the interest rate relevant for the IS curve…. how the financial system can be a source of instability… the financial crisis of 2008…. Mark Gertler on the back cover writes: ‘This is an exciting new textbook. Overall, it confirms my belief that macroeconomics is alive and well’. That pretty well sums up my reaction.
Month: April 2015
Today’s Must-Must-Read: Matthew Yglesias: A Chart Obamacare’s Critics Have a Hard Time Explaining
…way lower than where it was when the company started counting. Every time one of these quarterly reports comes out, I hear from conservatives saying to me that of course a law that mandates the purchase of insurance and then subsidizes it will succeed in getting people health insurance. And I agree! But conservatives didn’t always. A year or two ago, people up and down the food chain from incredibly popular conservative media celebrities to incredibly obscure conservative think tank wonks were making the case that Obamacare wasn’t expanding coverage. Rush Limbaugh… Rich Lowry… an American Enterprise Institute health policy scholar…. A decline in the uninsured rate is, in part, a reflection of the growing strength of the economy and the accelerating pace of job creation…. [But] conservatives also predicted that Obamacare would destroy the economy. In a 2011 press conference, John Boehner used the phrase ‘job killing’ once every two minutes. Then in 2012 we had the best year of job creation since 2005. In 2013 we had an even better year of job creation. Then in 2014, we had an even better year, the best since 1999.
How to bypass U.S. estate taxes
Tomorrow is tax day, which comes amid a burgeoning debate around our annual payments to Uncle Sam. One particular fight has broken out this week over the estate tax— which affects only those Americans with estates worth more than $5.43 million per person or $10.86 million per married couple. This means the estates of 99.85 percent of all Americans will not be subject to the estate tax.
What’s more, this debate on estate taxes misses one critical point—that a loophole allows many of those who are wealthy enough to face estate taxes to largely bypass the law altogether. This is done through the clever usage of a complicated tax-preferred savings vehicle called a Grantor Retained Annuity Trust, or GRAT, which those at the tippy top of the U.S. wealth and income ladder use to pass on their estate to heirs without it being subject to the full estate tax.
Here’s a basic description of how GRATs work. The first step for the very wealthy is to place a large amount of assets into a GRAT, with instructions that the entire amount should be returned to them over a specified period of time (two annual payments over two years, for example). Because individuals are not taxed when gifting to themselves, no taxes are levied on the original value of the assets placed in GRATs. Any earnings in excess of the assets originally placed in these GRATs accrue to trusts that are bequeathed to specified beneficiaries.
When the GRAT is first set up, the U.S. Internal Revenue Service gives a “gift value” estimate, based on the IRS “Section 7520 Code,” of how much they expect the assets to increase in value. Once the term of the GRAT expires, the wealthy individual who set up the GRAT, the grantor, will have received the original contribution plus this theoretical interest. In December 2014, the 7520 code was 2 percent. So if an individual created a two-year GRAT in that month and put in $1 million, they should receive back the original $1 million contribution and 2 percent interest via annuity payments through December 2016. Any excess appreciation earned beyond the original contribution and IRS assumed rate of return can be transferred to beneficiaries—estate tax free.
Not surprisingly, many savvy grantors will put assets in GRATS that have a good chance of increasing exponentially more than assumed rate of return set by the IRS. Many of the original Facebook founders, for example, put their pre-IPO Facebook stock into GRATs—and then saw their value increase well beyond the predicted IRS rate. Or consider gambling magnate Sheldon Adelson, who set up GRATs during the Great Recession of 2007-2009 using much of his Las Vegas Sands Corp. stock, which had plummeted in value. Because the stocks’ value rebounded as the U.S. economy recovered, he was able to shelter a half a billion dollars for his heirs, none of which will be taxed.
Even if the initial value of the GRAT does not increase to these degrees, giving heirs $100,000, let’s say (which, relative to some GRATS, is actually small), grantors can continuously reinvest their money in GRATS again and again until they die. And doing so is court approved. A 2000 U.S. tax court ruling found that Audrey Walton’s (part of Walmart Stores, Inc.’s Walton family) GRAT was indeed legal as long as the grantor is alive. If grantors die during the term of their GRATs, all the assets are indeed subject to the inheritance tax (making a short-term, two-year GRAT a popular option among older grantors).
The Obama administration proposes to discourage such practices by requiring a 10-year minimum term on GRATs, but the probability of enacting any kind of restriction in the current political climate is slim. Very wealthy Americans are not obligated to report how much each GRAT passes on to heirs. But one estimate puts the amount that bypassed the estate tax at $100 billion since 2000.
The estate tax was originally enacted in 1916 in order to break up the oligarchic power base created during the Gilded Age of the late 19th century. The soaring wealth gap was not squashed altogether, although it was greatly diminished in part through the economic transformation instigated by World War II. Yet the estate tax has provided a relatively consistent stream of government revenue ever since. What’s troubling, though, is the loophole’s contribution to today’s widening wealth gap, which is at its highest point since the 1920s.
There is a valid debate to be had over the degree to which the estate tax can help alleviate rising wealth and income inequality in the United States, but it remains somewhat irrelevant if the premise on which that debate is based—the existence and enforcement of an estate tax for the wealthiest families—is far too easy to circumvent through the use of GRATs or other similar loopholes.
How to bypass U.S. estate taxes
Tomorrow is tax day, which comes amid a burgeoning debate around our annual payments to Uncle Sam. One particular fight has broken out this week over the estate tax— which affects only those Americans with estates worth more than $5.43 million per person or $10.86 million per married couple. This means the estates of 99.85 percent of all Americans will not be subject to the estate tax.
What’s more, this debate on estate taxes misses one critical point—that a loophole allows many of those who are wealthy enough to face estate taxes to largely bypass the law altogether. This is done through the clever usage of a complicated tax-preferred savings vehicle called a Grantor Retained Annuity Trust, or GRAT, which those at the tippy top of the U.S. wealth and income ladder use to pass on their estate to heirs without it being subject to the full estate tax.
Here’s a basic description of how GRATs work. The first step for the very wealthy is to place a large amount of assets into a GRAT, with instructions that the entire amount should be returned to them over a specified period of time (two annual payments over two years, for example). Because individuals are not taxed when gifting to themselves, no taxes are levied on the original value of the assets placed in GRATs. Any earnings in excess of the assets originally placed in these GRATs accrue to trusts that are bequeathed to specified beneficiaries.
When the GRAT is first set up, the U.S. Internal Revenue Service gives a “gift value” estimate, based on the IRS “Section 7520 Code,” of how much they expect the assets to increase in value. Once the term of the GRAT expires, the wealthy individual who set up the GRAT, the grantor, will have received the original contribution plus this theoretical interest. In December 2014, the 7520 code was 2 percent. So if an individual created a two-year GRAT in that month and put in $1 million, they should receive back the original $1 million contribution and 2 percent interest via annuity payments through December 2016. Any excess appreciation earned beyond the original contribution and IRS assumed rate of return can be transferred to beneficiaries—estate tax free.
Not surprisingly, many savvy grantors will put assets in GRATS that have a good chance of increasing exponentially more than assumed rate of return set by the IRS. Many of the original Facebook founders, for example, put their pre-IPO Facebook stock into GRATs—and then saw their value increase well beyond the predicted IRS rate. Or consider gambling magnate Sheldon Adelson, who set up GRATs during the Great Recession of 2007-2009 using much of his Las Vegas Sands Corp. stock, which had plummeted in value. Because the stocks’ value rebounded as the U.S. economy recovered, he was able to shelter a half a billion dollars for his heirs, none of which will be taxed.
Even if the initial value of the GRAT does not increase to these degrees, giving heirs $100,000, let’s say (which, relative to some GRATS, is actually small), grantors can continuously reinvest their money in GRATS again and again until they die. And doing so is court approved. A 2000 U.S. tax court ruling found that Audrey Walton’s (part of Walmart Stores, Inc.’s Walton family) GRAT was indeed legal as long as the grantor is alive. If grantors die during the term of their GRATs, all the assets are indeed subject to the inheritance tax (making a short-term, two-year GRAT a popular option among older grantors).
The Obama administration proposes to discourage such practices by requiring a 10-year minimum term on GRATs, but the probability of enacting any kind of restriction in the current political climate is slim. Very wealthy Americans are not obligated to report how much each GRAT passes on to heirs. But one estimate puts the amount that bypassed the estate tax at $100 billion since 2000.
The estate tax was originally enacted in 1916 in order to break up the oligarchic power base created during the Gilded Age of the late 19th century. The soaring wealth gap was not squashed altogether, although it was greatly diminished in part through the economic transformation instigated by World War II. Yet the estate tax has provided a relatively consistent stream of government revenue ever since. What’s troubling, though, is the loophole’s contribution to today’s widening wealth gap, which is at its highest point since the 1920s.
There is a valid debate to be had over the degree to which the estate tax can help alleviate rising wealth and income inequality in the United States, but it remains somewhat irrelevant if the premise on which that debate is based—the existence and enforcement of an estate tax for the wealthiest families—is far too easy to circumvent through the use of GRATs or other similar loopholes.
Things to Read on the Evening of April 13, 2015
Must- and Should-Reads:
- : Income inequality: poverty falling faster than ever but the 1% are racing ahead
- >: “Free trade in the financial markets does not lead to Pareto efficient outcomes. And, as we have learned only too painfully; pain on Wall Street leads to pain on Main Street. Monetary policy cannot ensure financial stability and stable prices with only one instrument. We must manage the risk composition of the central bank’s balance sheet as well as its size…”
- : Digital Locability and Interocular Trauma: CEOs say the dumbest things, part xxxx
- Today’s Must-Must-Read: : Who Is Right About the Equilibrium Interest Rate?
- : The Eurozone’s False Recovery
- : Critique of the Gotha Programme
- : Creating skilled workers and higher-wage jobs
- Must-Read: : Work Makes Fritos
- Must-Read: : EconoSpeak: Jeffrey Sachs’ Feeble Defense of David Cameron
- : Monsters Together: Review of Roger Poorhouse, “The Devils’ Alliance”
- : “You know what they say about ETFs… (REALLY good shorting vehicles for hedge funds and smart money in general.) And you know what they say about ETF launches… (If we build it to satisfy the shorting needs of the smart money, the long dumb money will surely come…)”
Might Like to Be Aware of:
- : The Full-Stack Employee
- : “Don’t Lecture Me; I’m Trying to Learn!”; How Effective Are Lecture-Based Classes?
- (1939): “Seventy [five] years ago… a monumental military parade took place in the Polish city of Brześć. In view of the militarist spirit of the age there is nothing unusual in this. What is unusual is that the parade was held not by the Polish army, but by the Soviet Red Army and the Nazi German Wehrmacht–together…”
- : Bryan Davis Says He Can Make 20-Year-Old Rum in 6 Days
Over at Grasping Reality: John Maynard Keynes (1934): Is the Economic System Self-Adjusting?
…which none of us can deny is the outstanding conundrum of today. We all agreed that, whatever the best remedy may be, we must reject all those alleged remedies that consist, in effect, in getting rid of the plenty. It may be true, for various reasons, that as the potential plenty increases, the problem of getting the fruits of it distributed to the great body of consumers will present increasing difficulties. But it is to the analysis and solution of these difficulties that we must direct our minds.
Assessing the Affordable Care Act
Anybody get to this? What was said that was unexpected?
April 14, 2015 :: 9:00 AM – 12:00 PM EDT :: Brookings Institution
Washington, DCThe Patient Protection and Affordable Care Act (PPACA), most commonly known as the Affordable Care Act (ACA), is one of the most important pieces of legislation enacted into law and implemented by the federal government in a generation. The ACA is also one of the most complex and comprehensive efforts to reform the American health care system and reduce costs. Now that the ACA is five years old, how successful has the law been in meeting its primary goals? What has been its efficacy in transforming American health care? What have been the major outcomes and unintended consequences? And what might the future hold for this law, given today’s political environment and a pending, major U.S. Supreme Court decision that could determine the ACA’s fate? On April 14, Governance Studies at Brookings will host a forum to examine the ACA five years after its passage…
Bruce Bartlett’s Complete History of the Laffer Curve from Ibn Khaldun to Ronald Reagan
If you haven’t read Bruce Bartlett’s complete history of the Laffer Curve, you should. The upshot is that you do not need special circumstances for high tax rates to be capable of inflicting significant damage on the underlying economy. But you do need exceptional circumstances to actually get a free lunch out of the Laffer Curve…
Bruce Bartlett:
- The Laffer Curve, Part 1: “The Laffer Curve… economist Norman Ture, who worked closely with Rep. Jack Kemp, probably had more to do with popularizing the idea of a tax cut that could pay for itself than economist Arthur Laffer did…”
- The Laffer Curve, Part 2: “The Laffer Curve from the Middle Ages through the 19th century. It begins with the work of Muslim philosopher Ibn Khaldun in the 14th century, whose work came to the attention of economist Robert Mundell in 1971. Mundell brought it to the attention of journalist Jude Wanniski of the Wall Street Journal. Ronald Reagan mentioned Khaldun by name on 11 different occasions as an influence on his thinking…. Jonathan Swift… observed in 1728 that higher tariff rates often led to a decline in revenue. Adam Smith, David Hume, Alexander Hamilton, Jean-Baptiste Say and James Madison are just a few of those who cited Swift…. [In] 19th century tariff history and notes that discussions of the revenue impact of changes in rates of duty often invoked Laffer Curve arguments…”
- The Laffer Curve, Part 3: “Treasury Secretary Andrew Mellon often invoked Laffer Curve arguments in the 1920s. In the 1930s, economists John Maynard Keynes and Joseph Schumpeter made such arguments. In the 1960s, John F. Kennedy used the Laffer Curve to justify his 1963 tax proposal…”
- The 1981 Tax Cut After 30 Years: What Happened to Revenues? by Bruce Bartlett :: SSRN: “The Reagan tax cut. Republicans often assert that it was so expansionary that there was no revenue loss, something the Reagan administration itself never claimed…. The tax cut lost a lot of revenue, but helped the economy transition from high inflation to low inflation at an unexpectedly low economic cost…”
- Reagan’s Forgotten Tax Record: “Although Ronald Reagan is best known for cutting taxes, he also enacted many tax increases both as president and governor of California…. Reagan’s tax increases… were quite substantial…”
Ezra Klein of Vox.com vs. Tom Standage of The Economist
Basically, however much money http://vox.com asks me for, I will pay it gladly. Not so with http://economist.com.
Here’s why:
…Everything I wrote, I wrote in the hopes that someone else would take it and try to use it on their site, with a link back to my site. The lesson of that, to me, was that writing on the internet is a positive-sum endeavor: I was creating content that helped other people make their sites better, and in using that content, they were helping me grow my site. Vox’s approach to aggregation–which Nate Silver criticized today on Twitter–is informed by that. Our policy, to our staff, is simple: any time we use work created by someone else, we need clear attribution to the original author and a link back to the source. When appropriate, we should do more than that: we should add to the conversation with new facts, ideas, or reporting.
The problem comes when we do it poorly–and in those cases, we deserve to get called out. Take the post that frustrated Silver. The attribution there was clear…. The post went on to argue with Silver…. This wasn’t just aggregation…. The graphic itself included a FiveThirtyEight watermark…. But the post didn’t include a link. This was carelessness, not malice, but it’s a violation of Vox’s internal standards…. Silver’s right to be upset… He has my apologies….
Aggregation has been around a whole lot longer than Google. Time magazine, for instance, began its life as an aggregation shop…. If you read Alan Brinkley’s biography of Henry Luce, you’ll find a furor that feels very familiar…. I helped to create Know More, a site dedicated to aggregating in a more ethical way. We wanted a way to make clear that even when something is aggregated well, that doesn’t mean there’s not much more information at the source… a big ‘Know More’ button that would lead people back to the original source to, well, learn more….
While aggregation has always been a clear service to readers, it can be enormously frustrating to writers…. But aggregation, when done correctly, offers value to the original source…. This informs Vox’s policies…. We want people to talk about our work, put it elsewhere, spread the Vox word. We’re currently working on products that will make it even easier for other sites to use our work…. This stuff is complex, and we don’t always get it right. So if you ever feel Vox isn’t using your work in the way you’d want, email me at ezra@vox.com and let me know. Our intention is always to do things in a way that is positive-sum, and if you ever feel we’re failing that ideal, we want to know, and we’ll work with you to change it.
…Espresso is again meant to be the daily desert-island briefing…. What we wanted to be was forward-looking — to give you the feeling of being ahead of the news, ‘this is what’s coming up today, and look out for this.’ Another aspect of it is… that we don’t do links…. If you want to get links you can get them from other people. You can go on Twitter and get as many as you like. But the idea was… you can get to the end of it without worrying that you should’ve clicked on those links in case there was something interesting…. We’ve clicked on the links already and we’ve decided what’s interesting, and we’ve put it in Espresso.
That’s the same that we do in the weekly as well–we’re not big on linking out. And it’s not because we’re luddites, or… don’t want to send traffic…. It’s that we don’t want to undermine the reassuring impression that if you want to understand Subject X, here’s an Economist article on it–read it and that’s what you need to know. And it’s not covered in links that invite you to go elsewhere. We’ll link to background, and we’ll link to things like white papers or scientific papers and stuff like that. The idea of a 600-word science story that explains a paper is that you only need to read the 600-word science story–you don’t actually have to fight your way through the paper. There is a distillation going on there.
That’s a big thing that we’re focusing on. How else can we apply the same values–which is the distillation and the finishability, the trend-spotting and the advocacy–how else can we apply them to new areas? So we have various things that are on the boil…
Now I read something like this from the very sharp Tom Standage, and my visceral reaction is strong and threefold:
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Whatever the Economist wants to do, it will do it without my subscription or–if I remember to fire up AdBlock before visiting its website–the ability to sell my eyeballs to anyone.
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Whatever the Economist wants to do, it will do it without any links back from me to them. My links are reserved for fellow gift-exchange participants in a merit-of-ideas-based positive-sum game–not for people whose business model is rather parasitic.
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In fact, I hope the Economist fails: the world is full enough of cocksure people suffering from the Dunning-Kruger effect, and the Economist’s business model seems to be to create as many more of them as it can via providing its readers with the knowing false “reassuring impression” that a 600-word Economist article is all someone needs to know.
Is this reaction on my part too extreme? Irrational? I don’t think so. What would you do with a butcher whose business model was explicitly, publicly, and proudly to rig its scales so that they registered 15 oz. as a full lb.?
It seems to me that is what Tom Standage is promising to do…
Over at Grasping Reality: Ibn Khaldun on the Laffer Curve
Over at Grasping Reality: : Muqaddimah:
36. Taxation and the reason for low and high tax revenues): It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments…