Tag: Taxation

Four items for the Fiscal Cliff negotiations

Fiscal Cliff negotiators: tax alcohol; tax tobacco; tax carbon; eliminate “carried interest.”

1. A phased-in, but ever-rising, greenhouse gas tax or carbon tax. (Raises revenue, protects the planet.)

2. Tripling the federal alcohol tax. (Raises about $15B/yr. in revenue, prevents violent crime - including about 600 homicides per year - and auto accidents, protects health, prevents birth defects.)

3. Tripling the federal cigarette tax, with half the proceeds from each state going back to that state if its local tobacco taxes are at least half the national average. (Raises about $8B/yr. in federal revenue and gives about the same to the states, protects health, discourages interstate smuggling.)

4. Treating “carried interest” as ordinary income rather than capital gains. It’s only a couple of billion bucks a year, but let’s make the Republicans vote either for or against continuing to give Mitt Romney and his ilk big gifts.

What frustrates me no end is that the first three are obviously efficiency-increasing as well as revenue-raising, and yet I have no confidence that they will even be on the table.

Update In response to comments:

1. Taxes on driving need to cover four aspects of cost: contribution to global warming, conventional air pollution, congestion, and roadbed wear & tear. (You might add a fifth: contribution to energy imports and thus to the global importance of the Middle East.) A greenhouse-gas tax, or more narrowly a carbon tax, covers only global warming. Conventional pollution should be covered by an annual registration fee based on the product of a vector of pollutants-per-mile times total miles driven. Congestion should discouraged by a per-minute or per-mile charge for being on crowded roadways at crowded hours (or parking in congested places), collected by a GPS-enabled Smartpass. Roadbed wear-and-tear goes roughly as miles driven times the square of the vehicle weight; again, that could be an annual fee.

2. High tobacco taxes produce illicit markets, and the need for enforcement. Not the end of the world. The cost of enforcement is covered many times over by the revenue collected, with the health benefits as a free extra. Tripling the federal tobacco tax would add about 20% to the price of a beer: not enough to generate much of a black market, but enough to somewhat suppress drinking by heavy drinkers and those without much disposable income, including many teenagers.

21% of GDP: taxes v. health reform

Warren Buffet has a piece to today’s NYT calling for higher taxes and disputing the notion that this will reduce investment. Matt Miller (@mattmillernow) noted this morning via twitter that the most consequential aspect of Buffet’s piece is his call for federal spending to be capped at 21% of GDP.

Continue reading “21% of GDP: taxes v. health reform”

Medicare Part D in the Fiscal Cliff negotiations

Want to cut wasteful federal spending? Negotiate drug prices under Medicare Part D.

Republicans are floating three ideas to make cuts to the Affordable Care Act as part of a fiscal deal. Since they’re Republicans, all of the ideas they’re floating are horrible: less money for community health and prevention (because sicker is better), cutting the subsidies (because the middle class needs another financial hit right now) and slicing into the Center for Medicare and Medicaid Innovation (because it’s essential to maintain all of the existing inefficiencies in health-care delivery).

So here’s an alternative. I’m not enough of a health-policy wonk to know exactly how many tens of billions of dollars a year it would save, but the answer is “a bunch.” Allow the government to negotiate with pharmaceutical companies for discounts under Medicare Part D, just as every other large buyer of pharmaceuticals - health insurers and health-care systems - does. The only reason that doesn’t happen now is that Bush the Lesser and some of his Congressional buddies were in the pocket of Big Pharma, and wrote a specific ban on the practice into the law.

What was done by law can be changed by law. The administration of such a program would be complex, but the legislation would be simple, and the savings immediate.

Footnote I agree with commenters a previous post that the fiscal cliff is entirely an artificial, political problem. But that doesn’t make it an imaginary problem.

And there is a genuine underlying fiscal issue. In the short term, we need fiscal stimulus to get the economy back on track. But in the longer term we can’t keep spending more than 20% of GDP in federal programs and taking less than 20% of GDP in federal taxes. There are lots of good places to get revenue (carbon taxes, other pollution taxes, spectrum fees, financial-transactions taxes), and several places to make beneficial cuts, not because we’re “borrowing from China” but because we’re wasting money and in some cases doing active damage: e.g., defense, agriculture, ethanol, water projects. There are also obvious places where we could usefully spend more money (e.g., research, early childhood education, lead removal, paying federal civil servants enough to compete for top talent, replacing regressive state and local taxation). Not urgent, but important.

Avoiding the fiscal cliff: Why not a GHG tax?

Economically sensible and politically bulletproof once it passes: what’s not to like?

1. The Federal government needs some revenue in medium and long term but we still need fiscal stimulus in the short term.
2. The planet needs a decrease in greenhouse-gas (GHG) emissions.
3. The right way to control GHG emissions is to tax them.
4. The ideal GHG tax would phase in slowly to allow the economy to adjust.
5. A phased-in tax is also easier politically, because the pain is mostly in the future: i.e., after the next election, whenever that is.
6. But when the time comes for the tax to start or increase, the political pressure to avoid that could become intolerable: cf. the Alternative Minimum Tax and the “Doc Fix” under Medicare.
7. If economic decision-makers don’t believe - or at least aren’t sure - that the tax will kick in and rise as promised, the benefit of the phase-in is lost.
8. Therefore, you want a phased-in GHG tax that is politically bullet-proof.
9. While a GHG tax has attractive efficiency features, distributionlly it’s more or less a value-added tax: it hits poorer people harder because they spend a larger fraction of their incomes.
10. Social Security and (especially) Medicare are a big part of the long-term budget problem.
11. They are also political sacred cows.
12. The Social Security tax is regressive: it’s on labor income only, and capped.

Therefore, I propose a steep but slowly phased-in GHG tax dedicated to the Social Security and Medicare trust funds, tied to the elimination of payroll tax on the first $X of annual income. The formula relating X to the GHG revenue stream would depend on how much additional revenue the feds need in the long term.

But the key point is the political one. If reducing the GHG tax as it’s about to hit means either raising payroll taxes or raiding the trust funds, Congress won’t want to do it. That would make the phase-in credible.

I know this isn’t on the table in the current negotiations. What I don’t know is why.

Tax reform grand bargaining

So everyone is prattling away with their grand bargain ideas on tax reform, etc. so I will re-up the basic idea at the heart of the tax reform I proposed in my book Balancing the Budget is a Progressive Priority:

  • A tax reform that resulted in fewer rate brackets: 12, 22 and 28 were the marginal rates proposed by the Fiscal Commission that could be obtained with a capping of deductions and exemptions (you could substitute the Romney notion of a general cap, or we could pick winners and losers; this post has examples).
  • Ending the corporate income tax and
  • Raising the top personal income tax rate above the 28 percent noted above while making dividends and capital gains normal income. I am unsure of how much higher the top individual rate should be raised, and there would obviously have to a full reform of the individual tax code to keep individuals from becoming corporations and being very creative about avoiding tax (the general idea would work with whatever the top individual rate would otherwise be)

Continue reading “Tax reform grand bargaining”

Convergence of forces

John Boehner has committed the house majority to accept new revenues under the “right conditions”.  The California legislature has a 2/3 D majority in both houses, which means it can actually raise taxes, and the CA electorate that pulled the legs out from under its government a third of a century ago voted to increase taxes.  The presidential candidate who wants to raise taxes on the rich won. The American public evidently views those who take without giving back as morally culpable: when Romney blithely and wrongly tarred half the population with that brush, voters despised him for it.

The “conditions” are now right: I add to the foregoing the occurrence of a climate-change-mediated catastrophe unprecedented in US history, along with a basso continuo ostinato of drought, steady sea-level rise, melting of the arctic sea ice, glacier retreat and all the rest.  What did James Inhofe say about Sandy? This would be an excellent time to do as Bob Frank advises: tax bad things and not good things,  and one of the worst things is the takers who use up the finite capacity of the atmosphere to process CO2 without paying a dime for it.  Everything Romney wants to believe about retirees who paid their social security taxes all their lives (not to mention sales tax this very week) is wrong about them, but right about us: takers and free-riders.  More if you light your house with coal electricity and drive a big car when you don’t have to, less if you bike to work and happen to live where your power comes from a dam or a nuke, but takers, all of us.

Every economist wakes up in the morning with a little prayer that more things should be sold at their real marginal cost, but the survival of an inhabitable planet is being sold way below cost and we’re using up too much of it.  Economists are praying from the right missal here.  Many have a little too much faith in getting this particular price right: properly responding to global warming, even with a atmosphere user fee working its incentive magic throughout human affairs, still requires government to provide things like bike paths and trams.  But the moral case and the technical case for what I prefer to call a “carbon charge” - because that’s what it is, a user charge for services you consume and therefore deny to others - are perfectly aligned.  We’ve wasted two decades hoping for a magic bullet climate policy that requires no heavy lifting by anyone and maybe will make a fortune for an existing interest group: denial? cap and trade? clean coal? biofuels subsidies and mandates?  Understandable hope, but doomed like all magical thinking. If we don’t get the prices right, and we expect the whole economy to flout the law of demand…well, better think about selling that coastal property.

California has been out front with climate policies and would be an excellent place to pilot a carbon charge.  Twenty dollars a ton, increasing at 5% per year for a couple of decades would be not bad. And nationally: unless he can’t read election results, Boehner should find it easy to get a lot of his caucus behind a revenue measure that doesn’t have to be called a tax (my framing is not a quibble or a verbal trick).

 

My favorite quote from sort-of-supportive academic study of Romney tax plan

“But I imagine that doing so [making the numbers work] would not be mathematically impossible.

My last post noted that Governor Romney has proposed a 20-percent cut in federal incone tax rates, and that the numbers don’t add up. Josh Barro*-not exactly a left-winger-posted a withering analysis here. The Romney campaign responded as follows:

There’s just one problem; Barro isn’t the first person to analyze Governor Romney’s tax plan using IRS data from 2009. In fact, Harvey Rosen, the John L. Weinberg Professor of economics and business policy at Princeton University and a public finance expert, also based his analysis on the same data but came to the opposite conclusion. Governor Romney’s tax plan works and the math adds up.

In fact, no fewer than six independent studies have confirmed the soundness of the Governor’s tax plan. Rather than wasting time trying to discredit the proposals of the Republican nominee, perhaps Mr. Barro and other journalists should investigate President Obama’s tax reform package. Or, more accurately, his lack of one.

I’ll let you read  Barro’s even more devastating response to the “six independent studies” remark. For starters, four of the six “studies” are blog posts or op-eds.

I have read Harvey Rosen’s short paper. It’s worthwhile reading, despite some problems that Barro notes. It’s produced with nowhere near the technical sophistication or detail of the Tax Policy Center’s original microsimulation-based critique. Despite Rosen’s breezy tone, I read his numbers to say the numbers don’t really work. Or rather the numbers might possibly work if one is willing to (a) reduce the tax ceiling to $100,000, and/or (b) assume supply-side growth effects regarding lowered marginal tax rates, and definitely (c) whack fundamental structures of the tax code which are so politically entrenched that Romney and Ryan are afraid to go near them right now. Here’s my favorite quote from Rosen’s paper:

In case you have trouble reading this, it says: “I imagine that doing so [making Romney’s numbers work based on current 2013 tax law and protecting people with incomes below $200,000] would not be mathematically impossible.” This not-so-ringing endorsement is from perhaps the most credible economic study cited by the Romney campaign itself to show the validity of its plan.

Several readers suggest that the 2012 tax law baseline provides a fairer baseline than the 2013 tax law does. That’s a fair point. Below is Rosen’s results table with both baselines listed. The numbers look a bit better with the 2012 baseline. But my point stands. Under any scenario, one would neeed to fundamentally wack the tax code and hope for aggressive growth effects for the numbers to work. The first is just not going to happen. I doubt the second one would happen, either. This is not a credible plan, even if one has a relatively sympathetic analyst explore what it takes to make the numbers work.

The one substantive contribution Romney has made is the suggestion to cap deductions (and perhaps exemptions). I think this is an excellent idea. Continue reading “My favorite quote from sort-of-supportive academic study of Romney tax plan”

Broaden the base. Don’t touch the rates.

My own politically DOA tax plan. Impose a dollar-cap on deductions and exemptions for items such as health insurance coverage. And then stop there..

Governor Romney has proposed cutting federal income tax rates by 20 percent, and paying for this by removing various loopholes and deductions. The math doesn’t add up, which is a problem. Even if the revenue numbers did work, “broaden the base, lower the rates” provides a seductive but poor guide to tax policy.  The approach is appealing. It brings back memories of the 1986 tax reform, a high point of policy-wonk legislative excellence.  In its time, that bill was a genuine triumph of bipartisan policymaking to improve tax policy. Every competent microeconomic student should be able to explain why the deadweight loss associated with taxes is reduced when one can impose low rates on a broad base of income.

Unfortunately, that approach provides a poor guide for today. The fruit is less ripe for the picking. Today’s marginal tax rates are lower than they were a quarter-century ago. Moreover, even if one managed to broaden the tax base, various loopholes and deductions for individuals and corporations would find their way back into the tax code. That’s exactly what happened to the 1986 tax reform. It was well-crafted as a piece of static policy. It was not well-designed to mobilize friendly constituencies or to construct institutional defenses that would make that worthy law politically sustainable.

Perhaps a transparent dollar cap on deductions-the most interesting policy idea Romney has proposed-would work better. Yet as Eric Patashnik’s terrific book Reforms at risk: What happens after major policy changes are enacted makes clear, the overall approach pursued in 1986 politically unravelled. The most likely outcome today would be to lower the rates, and then to gradually allow new tax breaks into the code, balloon the deficit, and frame political debate around the idea that marginal tax rates must be as low as possible.

As Tim Noah observes here, we need to raise taxes, not reform them. Since I’m not running for anything, I can announce a politically DOA tax plan. Let’s put in a dollar-cap on deductions and exemptions for items such as health insurance coverage. And then let’s just stop there. We need the money.

Voluntary, as in “You’ve Been Volunteered”

Here’s a new wrinkle in the ever-popular saga “Taxation of the Tax Exempt”:  members of the Scranton City Council threaten to withhold zoning changes from owners of tax-exempt property unless they make “voluntary” PILOTS (Payments In Lieu Of Taxation).   I’m certainly open to the notion that non-charitable tax-exempt organizations should have to pay property taxes, even as I acknowledge that the definition of  “charitable” remains contested.

But let’s settle these issues in open political debate, with nonprofits able to make their case that they are truly charitable, and/or that their contribution to the public good entitles them to property tax exemption whether or not they’re charitable in some strict definition of the word.  Just for the sake of being reality-based, let’s not torture the concept of “voluntary” by suggesting that a payment extorted in return for rezoning is somehow a free-will contribution to the public fisc.

Cross-posted to nonprofiteer.net

Paul Ryan runs out of time

Chris Wallace nails him on the fuzzy math of his tax plan.

And running room.

Chris Wallace - Chris Wallace!- nails Ryan on the fuzzy math of his tax plan.

Ryan’s response: “I don’t have the time. It would take me too long to go through all of the math.”

So the only remaining question is whether the moderator of the VP debate has as much integrity as a Fox News anchor.

Footnote Looks as if even Fox has decided to put a little pre-emptive distance between itself and the Romney train wreck.