…The tax code does less to reduce inequality than it did in the late 1970s. (2) Efforts to reduce inequality are not in tension with economic growth…. (3) There are policy options that can make the tax code more progressive that will have broad benefits for everyone…. There are many examples of changes that would be consistent with the literature. Two that are on the table right now would be Eliminating the “stepped-up basis” for taxation of bequests and expanding the Child Tax Credit…. Families passing along large estates to children… the potential damages that could have on the vitality of the economy… a loophole we should close… eliminating the carried interest loophole… transfer taxes, raising the ordinary income tax rates or limiting deductions and exclusions. We can also do a variety of things at the low end…. The Child Tax Credit… partially refundable for a set percentage of income (15 percent) over a set threshold (currently $3,000). The value of the tax credit has been increased and the threshold decreased, both temporarily, in recent years. I recommend making these reforms permanent…”
Category: Equitablog
The unfulfilled promise of tax credits as economic policy
The relative paucity of the modern welfare state in the United States is a well-known fact among researchers. Compared to rich countries in Europe, the United States spends far less on social insurance programs and other social programs such as education. But these large disparities decrease once the private-sector side of the U.S. welfare state is included in the analysis. Yale University professor Jacob Hacker calls this the “divided welfare state,” where in many instances the U.S. tax code is now the main vehicle for social policy in retirement, college savings, and housing.
How well has this “submerged state” worked? At least in these three areas, the effectiveness of the tax code, via deductions and credits, is questionable. Consider the state of the private-sector retirement system in the United States. Over the past 30 years, workers have come to rely more and more on defined contribution plans such as a 401(k) account. Workers who contribute to these voluntary plans are able to deduct the value of their contributions on their tax returns and reduce their taxable income. This means the value of the deduction is much higher for high earners and the tax savings from the deduction go disproportionally to those at the top of the income ladder.
Or consider the submerged state approach to high college tuitions. The cost of college is skyrocketing, leading to a proliferation of tax-sheltered savings plans. These plans, including the popular 529 savings plan, attempt to help families save enough money to pay for college. But the benefits from these plans go disproportionately to those at the top. A paper by University of Michigan economist Susan M. Dynarski finds that the benefits from tax-advantaged savings plans are highly and positively correlated with income. Those at the top are getting the most.
The mortgage-interest tax deduction is another example of policy being run through the tax code. The tax code allows homeowners to deduct the cost of the interest of their mortgage against their taxable income. The intended purpose was to encourage homeownership, which was viewed positively for a variety of reasons. But research finds that the value goes mostly to wealthier Americans while doing little to increase homeownership. If anything, it encourages those that already are buying a home to buy an even-bigger home.
To be sure, the creation of this network of tax credits and tax expenditures wasn’t without reason. Political realities necessitated the use of the tax code to achieve these ends. And these programs have done real good. But as the evidence shows, they are far from optimal.
The record of using the tax code to do tasks traditionally associated with the welfare state is clearly mixed. At best, it works like a Rube Goldberg machine that attacks a problem by hoping that a chain reaction will do the job. At worse, the machine doesn’t work for the broad majority of the population. The relevant question is now how to re-engineer it for future, more efficient use.
Things to Read at Night on March 2, 2015
Must- and Shall-Reads:
- Bull Market: A collection of finance and business writing :
- “A $300 million mandatory appropriation for a new Local Housing Policy Grants program… to create a more elastic and diverse housing supply… establish a learning network that would provide ongoing capacity building to the organizations and entities to facilitate shared learning opportunities and disseminate best practices…. [NIMBYism] is… officially On The Radar Of People Who Matter…” :
- Ending the Creditor’s Paradise: What would you tell six hundred leading German social democrats about their party’s handling of the Eurocrisis? :
- Thoughts on a Post-King Health Insurance Market :
- One Wrong Sentance After Another :
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The Failure of Macroeconomics: “My beef is with macroeconomics. Olivier Blanchard, the IMF’s chief economist, recently wrote: ‘We in the field did think of the economy as roughly linear… fluctuating, but naturally returning to its steady state….’ Blanchard went on to observe that… macroeconomists… [saw] extreme tail risk events… as a thing of the past in developed countries…. Central banks could prevent or stop market ‘panics’ by flooding the place with liquidity. If you get the policy settings right, linear models will work…. The financial crisis drew to our attention… finance…. No industry that can cause such havoc when it goes wrong should ever be regarded as irrelevant or superficial…” : -
Obamacare and Long-Term Competitiveness: “The long-term economic consequences of uninsuring the many children now insured under the new health law are clear… the importance of early childhood health care for the least advantaged kids among us–on their future workforce productivity, their contributions to our national tax base, their educational attainment, and their declining use of government income supports…. Mirror the… research… I conducted with… Sandra Decker… and Wanchuan Lin…. Medicaid coverage for children born between 1985 and 2005 resulted in a better health trajectory for those kids as they because adolescents and young adults…. What will happen if less-well-off kids today do not get the affordable health care they need to become successful contributors to our economy over the coming decades?…. Children who gained public health insurance in the 1980s and 1990s… the federal government will have recouped at least 56 cents for each dollar spent on childhood health care…. Better public health care among low-income children in the 1980s and 1990s resulted in higher graduation rates from high school and college for these kids…. We already know the empirical long-term economic benefits of expanded health care for those least able to afford it–and can say with strong confidence that taking away health insurance for these five million now covered under Obamacare would harm our economy.” : -
Wealth, Inequality, and the ‘Me? I’m Not Rich!’ Problem: “The real action is at the tip-top, or the tippetty-tip-top. Think not the 1% but the 0.1% or even 0.01%…. The problem might be political rather than economic. The soar-away wealth of those at the pinnacle of the distribution can start to make the people just below them feel distinctly middle-class. I’ve just played the part of Straight Man Scholar in a sketch on “The Daily Show” poking fun at the struggles of those only just scraping into the top 1% with a family wealth of $4 million or more. “Daily Show” correspondent Hasan Minhaj became a faux class warrior on behalf of those struggling to get by with just one or two homes and having to share a private jet…” : -
Game On: “Bottom Line: The Fed’s confidence in the US economy is driving them closer to policy normalization. The labor market improvements are key – as long as unemployment is falling, confidence in the inflation outlook is rising. The more important message, however, is as the timing of the first rate hike draws closer, the level of uncertainty is rising. And it is not just about the timing of that rate hike. The Fed is sending a clear message that the subsequent path of rates is also very uncertain, and they don’t think that uncertainty is being taken seriously by market participants. In their view, financial markets are too complacent about the likely path of interest rates.” : -
The Strange Urge to Raise Rates: “Monetary policy attracts crazy people like moths to a flame: goldbugs, 100-percent-reserve-banking types, amateur historians who think they know exactly what happened when Diocletian ruled Rome…. The obsession with raising interest rates among economists who used to seem sensible…. Up to a point, Feldstein has followed the now-usual arc…. We’re talking about conservatives with vast faith in the wisdom of markets, who somehow are completely sure that markets will make terrible decisions due to low interest rates, and require paternalistic monetary policy to keep them on the strait and narrow. What really strikes me about Marty’s latest… is the muttering that there must be some sinister hidden agenda…. that central banks are operating under… a desire to help finance budget deficits. It’s very, very strange, and distressing.” : -
The Steep Path Forward for Unionization: “[Did] past research underestimated the role of the decline of unions in the rise of economic inequality[?]… Bruce Western… and Jake Rosenfeld… finds that about one-fifth to one-third of the increase in wage inequality can be explained by declining union membership…. Florence Jaumotte and Carolina Osorio Buitron…. Adam Ozimek… [however] makes a very important observation. How exactly will unions return to prominence?… What could make employment at unionized firms grow relatively faster compared to non-union firms?… Freeman… believe[s] that such an outcome is unlikely…. Yet… Freeman notes that increases in unionization rates in the past have come from large and sudden increases in union membership…. Increased unionization in the United States would almost certainly reduce wage and income inequality. But the pathway to a higher rate is steep. A sudden jump seems the only way up. But what will cause or even allow such an increase? That remains to be seen.” :
Should Be Aware of:
- “I’m still quietly reeling from Leonard Nimoy’s death on Friday…. One of the trellises on which I grew my character is gone, really gone…. my leaders and teachers are washing away before my eyes…” :
- The 7 Best Star Trek Episodes Featuring Leonard Nimoy :
- Larry Kudlow and the Failure of the Chicago School :
- GOP Economist Larry Kudlow: Bush Tax Cuts Worked Brilliantly :
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Star Trek is great, and Leonard Nimoy’s Spock was the greatest thing about it: “His lack of insight into human concepts of humor and fun could be, of course, extremely funny. But in the hands of Stark Trek’s writers, Spock’s commitment to logic over emotion was the pinnacle of heroism rather than its antithesis. He deduced an ethic of rigorous utilitarianism and lived and died according to a profoundly moral code…. Spock’s intelligence, bravery, courage, and good judgment don’t win him the universal admiration of his crewmates or of the world. But he did earn their respect, and over time he accomplished most of what he set out to do…. Over time, that turned Spock into something of a cliché. But he was an original in the 1960s, and Leonard Nimoy’s skill in defining the character helped define an entire genre of characters for generations to come…. Star Trek is beloved for good reasons, and Nimoy’s Spock is at the top of what made it great. : -
Stages of the Bubble: “And here’s a trip down memory lane: ‘A national severe price distortion seems most unlikely in the United States’ — Alan Greenspan, October 2004. ‘Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong in predicting sky-high mortgage rates. So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.’ — Larry Kudlow, June 2005. ‘I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out…. I think the worst of this may well be over.’ Alan Greenspan, October 2006. ‘The housing market is at or near the bottom.’ Henry Paulson, April 2007.” (2008): -
Whatever the Problem Is, Jim Webb Is Not the Solution: “Charles Pierce half-defends Jim Webb…. ‘There is no question that the Democratic party has done a god-awful job of explaining to white working people who’s screwing them and why. Most of the people who have tried that have found themselves marginalized, and not always by Republicans, either. Senator Professor Warren is one of the few of them who has managed to explain these matters in such a way that they are both easily understood, and in such a way that she doesn’t sound like she’s talking down to anyone.’… If Jim Webb can come up with concrete ways of broadening Democratic appeal to the Southern white working class, that would be great, although it would be better if he’d pass them along to someone who’s serious about running for president…” :
In Lieu of a Focus Post: March 2, 2015
While I found things sufficiently intriguing to be worth a focus post today, I have not been able to get one into good enough shape to pass the quality bar imposed by my internal quality censor.
Therefore: In lieu of a focus post: Nick Bunker, Adam Ozimek, and Richard Freeman; Frances Coppola and Olivier Blanchard; Cosma Shalizi; Paul Krugman and Marty Feldstein; Tim Duy; Richard Reeves; and Janet Currie–all of whom are greatly worth paying detailed and careful attention to, and are among those whom one disagrees with at one’s intellectual peril:
My teacher the vir illustris Richard Freeman always said that unions in America surged upwards in tsunamis, and then were gradually eroded over time. Whatever union rank-of-file elected union leaders to do and whatever union leaders did, maximizing the growth opportunities of the firms in which they worked was not among them. And Richard went on to say that the surges were unpredictable save in a negative sense: the economic and the political fundamentals both had to be right for struck sparks to turn into bonfires of organization, and predicting when sparks would be struck was beyond our capacity. This is what Adam Ozimek and Nick Bunker have been discussing: Yes, a more unionized America would be a less unequal America, but minor changes in labor laws are likely only to affect the rate of erosion, and the stars aligning on the politics would require the stars aligning on the economic bargaining power of labor as well. And that seems—to Adam, to Nick, and to me—very difficult to envision, welcome as it would be (to me and Nick, at least).
I also found on the internet a fine rant by the engaged and thoughtful femina spectabilis Frances Coppola attacking another one of my teachers, the vir illustris Olivier Blanchard, saying that his:
call for policymakers to set policy in such a way that linear models will still work should be seen for what it is–the desperate cry of an aging economist who discovers that the foundations upon which he has built his career are made of sand. He is far from alone…
It’s not quite that bad: a more charitable reading of Olivier is that he wants to make the point that heart attacks have little in common with the common cold, and that do get out the defibrillator pads when the patient shows up with the sniffles will probably not end well. Nevertheless, I always thought that the MIT Economics Department made a hideous mistake when it decided not to replace Charlie Kindleberger with another financial-macro institutional historian, and that it then doubled down on that when it refused to pay what people—cough, cough, Anne McCants for example—were worth in order to get them to teach its students the institutionalist and Minskyite history that would have kept so many of its ex-students from being deaf and blind as 2008 approached.
On my own hard disk, I continue to circle around the problem of revising my teaching and lecturing materials on the economics of the government budget, but mostly, I admit, still spinning my wheels. And the kha-khan Cosma Shalizi smacks me down for seeing the Federal Reserve as afflicted by intellectual errors rather than as a prisoner of Gramscian top 0.1% hegemony and the revolving door. He has a point, a definite point. In a good world the Janet Yellens and the Charles Evanses would be the vital center of the Federal Reserve, not its left wing.
In a closely-related piece, Paul Krugman tries to untangle why so many center-right and right-wing economists are so resistant to the elementary logic of Hicks (1937) and the IS-LM model—even those who, like Marty Feldstein, teach the IS-LM model to their students, and teach it very well (after all: he taught it to me). My view is that there is a deeper problem: it made sense for those of my great-great grandfathers who were rich to be hard-money guys. It made no sense for my rich grandfather to be—although he was. And it really makes no sense for my contemporaries to be. Yet an astonishing share of the rich among them are. A great puzzle.
Let me also note the estimable Tim Duy continue to watch a failure to communicate. Financial markets think that the Federal Reserve will either delay the interest-rate liftoff for at least another year or two or, if they do lift-off, find themselves reversing course within eighteenth months to try to restart a stalled economy. The Federal Reserve thinks financial markets have lost their moorings with reality, and that it will soon be appropriate to raise interest rates in a strengthening economy in which secular stagnation considerations are at best third-order.
Richard Reeves harps upon an issue that has long concerned me. Back in the 1970s a top 0.01%er had about four times the income of a top 1%er. Today a top 0.01%er has sixteen times the income of a top 1%er. If you think—as I do—that the principal source of utilitarian satisfaction among the top 1%ers is their sense that they have “made it”, the fact that they now know people whose income bears the same relationship to theirs as their income bears to two-earner households making minimum wage is very unsettling. That was not try forty years ago, when even the top 0.01%ers were for the most part in the same consumption and life-style universe as the top 1%ers, or the top 5%ers for that matter. Our rich today feel poor—and are angry—because the existence of our superrich demonstrates that they really have not “made it” here in America.
Last, Janet Currie points out that the damage from a ruling adverse to the government in the King v. Burwell ObamaCare subsidies case is likely to carry a very heavy cost in terms of societal well-being along private health, public health, and economic growth dimensions. Fifty years ago Ronald Reagan argued against Medicare on the grounds that once we had Medicare we would find it financially unaffordable unless we drafted doctors into a low-wage socialist National Health Corps commanded by the Surgeon General, and that mass labor conscription could not be far behind. Ronald Reagan was, I think it is now generally agreed, overfearful and overwrought. And how you in any way enhance human freedom by causing an adverse-selection meltdown of the health-insurance markets those who do not work for large bureaucracies must buy in remains beyond me…
Evening Must-Read: Nick Bunker: The Steep Path Forward for Unionization
…Bruce Western… and Jake Rosenfeld… finds that about one-fifth to one-third of the increase in wage inequality can be explained by declining union membership…. Florence Jaumotte and Carolina Osorio Buitron…. Adam Ozimek… [however] makes a very important observation. How exactly will unions return to prominence?… What could make employment at unionized firms grow relatively faster compared to non-union firms?… Freeman… believe[s] that such an outcome is unlikely…. Yet… Freeman notes that increases in unionization rates in the past have come from large and sudden increases in union membership…. Increased unionization in the United States would almost certainly reduce wage and income inequality. But the pathway to a higher rate is steep. A sudden jump seems the only way up. But what will cause or even allow such an increase? That remains to be seen.
Evening Must-Read: Frances Coppola: The Failure of Macroeconomics
…Olivier Blanchard, the IMF’s chief economist, recently wrote:
We in the field did think of the economy as roughly linear… fluctuating, but naturally returning to its steady state….
Blanchard went on to observe that… macroeconomists… [saw] extreme tail risk events… as a thing of the past in developed countries…. Central banks could prevent or stop market ‘panics’ by flooding the place with liquidity. If you get the policy settings right, linear models will work….
The financial crisis drew to our attention… finance…. No industry that can cause such havoc when it goes wrong should ever be regarded as irrelevant or superficial…. Yet macroeconomists regarded… financial institutions… as so unimportant that they could safely be ignored. Representative agent models, flawed though they are, at least attempt to explain the behaviour of households and firms: but the behaviour of banks, and things that don’t call themselves banks but do bank-like things, stayed under the radar… made it impossible for mainstream economists to understand the significance of the build-up of credit that led to the financial crisis. The warnings came principally from people outside mainstream economics, particularly the followers of Hyman Minsky….
The most influential people in macroeconomics have spent their lives developing theories and models that have been shown to be at best inadequate and at worst dangerously wrong. Olivier Blanchard’s call for policymakers to set policy in such a way that linear models will still work should be seen for what it is–the desperate cry of an aging economist who discovers that the foundations upon which he has built his career are made of sand. He is far from alone…. Macroeconomics has indeed failed… because of confirmation bias and selection bias among macroeconomists. Who would have thought it?
The Budget: Distant Past, Near Present, and Far Future
How should it change? What does it say that no longer needs to be said? What does it not say that now needs to be said? Zimbabwe!: Here is a piece of currency, a dollar bill. It is from Zimbabwe. It is for $100,000,000,000,000 Zimbabwean dollars…
“The Cossacks Work for the Czar!”
…but averting the prospect of unemployment getting too low, and encouraging the election of Republican presidents–see http://utip.gov.utexas.edu/papers/utip_42.pdf. (It would be good to update that paper with another ten years of data.) The phrase ‘executive committee of the bourgeoisie’ comes to mind…
Evening Must-Read: Janet Currie: Obamacare and Long-Term Competitiveness
…the importance of early childhood health care for the least advantaged kids among us–on their future workforce productivity, their contributions to our national tax base, their educational attainment, and their declining use of government income supports…. Mirror the… research… I conducted with… Sandra Decker… and Wanchuan Lin…. Medicaid coverage for children born between 1985 and 2005 resulted in a better health trajectory for those kids as they because adolescents and young adults…. What will happen if less-well-off kids today do not get the affordable health care they need to become successful contributors to our economy over the coming decades?…. Children who gained public health insurance in the 1980s and 1990s… the federal government will have recouped at least 56 cents for each dollar spent on childhood health care…. Better public health care among low-income children in the 1980s and 1990s resulted in higher graduation rates from high school and college for these kids…. We already know the empirical long-term economic benefits of expanded health care for those least able to afford it–and can say with strong confidence that taking away health insurance for these five million now covered under Obamacare would harm our economy.
Evening Must-Read: Richard Reeves: Wealth, Inequality, and the ‘Me? I’m Not Rich!’ Problem
…The problem might be political rather than economic. The soar-away wealth of those at the pinnacle of the distribution can start to make the people just below them feel distinctly middle-class. I’ve just played the part of Straight Man Scholar in a sketch on “The Daily Show” poking fun at the struggles of those only just scraping into the top 1% with a family wealth of $4 million or more. “Daily Show” correspondent Hasan Minhaj became a faux class warrior on behalf of those struggling to get by with just one or two homes and having to share a private jet…”