Conservatives have been going crazy over the fact that 47% of U.S. households owe no net Federal income tax. That statistic is correct. However, it is more like only 10% of U.S. households who owe no net Federal income and payroll taxes. The payroll taxes are flat taxes that fund Medicare and Social Security; in that sense, they are regressive in isolation (although as a whole the tax system is progressive, and could stand to be more progressive).
David Leonhardt debunks the 47% myth here in an editorial in the New York Times. This reckoning is before most state and local taxes. Conservatives think, and I agree, that everyone should pay taxes, even if it is just a nominal amount. It's a practice of citizenship, just like voting. However, The fact is that the vast majority of people do, in fact, owe net taxes. The U.S. has chosen to administer some tax credits through the tax system, like the Earned Income Tax Credit and, in the last year, the Making Work Pay tax credit as an economic stimulus measure.
Leonhardt's article is highly recommended, but I won't post it. I'll say instead that my wife and I had an adjusted gross income of $23,851 this year - only about 160% of the poverty level. We paid a total of $199 in Federal income taxes, net of the MWP credit. We aren't eligible for the EITC because we don't have children - the EITC limits are much lower than our income. We also paid a total of (I believe) $2,640 in Social Security and Medicare taxes. That figure works out to a tax rate of 12%. We are struggling to get by, but we are contributing towards our communities, and we expect our contribution to rise with our income in the years ahead. I have no beef if people making less than we do owe no net Federal taxes - most of them have children to feed. We ought not to tax people in poverty.
Showing posts with label taxes. Show all posts
Showing posts with label taxes. Show all posts
Wednesday, April 14, 2010
Monday, March 29, 2010
Health Reform Watch: The Tax Foundation: How Health Reform is Financed
The Tax Foundation is an anti-tax foundation in DC. I disagree with many of their positions. However, they do have an informative graph of how the taxes in the health reform bill break down.
Main Components in Net Cuts to Medicare ($416.5 billion)
Reductions in annual updates to Medicare FFS payment rates = $196 billion cut
Medicare Advantage rates based upon fee-for-service rates = $136 billion cut
Medicare Part D "donut hole" fix = $42.6 billion increase
Payment Adjustments for Home Health Care = $39.7 billion cut
Medicare Disproportionate Share Hospital (DSH) Payments = $22.1 billion cut
Revision to the Medicare Improvement Fund = $20.7 billion cut
Reducing Part D Premium Subsidy for High-Income Beneficiaries = $10.7 billion cut
Interactions between Medicare programs = $29.1 billion cut
Main Components in Other Provisions ($149 billion)
Associated effects of coverage provisions on revenues = $46 billion
Exclusion of unprocessed fuels from the cellulosic biofuel producer credit = $23.6 billion
Require information reporting on payments to corporations = $17.1 billion
Raise 7.5% AGI floor on medical expenses deduction to 10% = $15.2 billion
Limitations to the use of HSAs, MSAs, FSAs, etc. = $19.4 billion
Other Net Spending Cuts ($52 billion)
Education reforms = $19 billion cut, which is the difference between approximately $58 billion in spending reductions via reform of the student loan program and approximately $39 billion in greater spending on higher education programs, most notably Pell Grants
Community Living Assistance Services and Supports = $70 billion in cuts
Category is netted lower by increases in other health programs such as public health programs and spending on community health centers
Main Components in Net Cuts to Medicare ($416.5 billion)
Reductions in annual updates to Medicare FFS payment rates = $196 billion cut
Medicare Advantage rates based upon fee-for-service rates = $136 billion cut
Medicare Part D "donut hole" fix = $42.6 billion increase
Payment Adjustments for Home Health Care = $39.7 billion cut
Medicare Disproportionate Share Hospital (DSH) Payments = $22.1 billion cut
Revision to the Medicare Improvement Fund = $20.7 billion cut
Reducing Part D Premium Subsidy for High-Income Beneficiaries = $10.7 billion cut
Interactions between Medicare programs = $29.1 billion cut
Main Components in Other Provisions ($149 billion)
Associated effects of coverage provisions on revenues = $46 billion
Exclusion of unprocessed fuels from the cellulosic biofuel producer credit = $23.6 billion
Require information reporting on payments to corporations = $17.1 billion
Raise 7.5% AGI floor on medical expenses deduction to 10% = $15.2 billion
Limitations to the use of HSAs, MSAs, FSAs, etc. = $19.4 billion
Other Net Spending Cuts ($52 billion)
Education reforms = $19 billion cut, which is the difference between approximately $58 billion in spending reductions via reform of the student loan program and approximately $39 billion in greater spending on higher education programs, most notably Pell Grants
Community Living Assistance Services and Supports = $70 billion in cuts
Category is netted lower by increases in other health programs such as public health programs and spending on community health centers
Thursday, March 11, 2010
Vox EU: The Nordic Model in the Global Crisis
Several economics professors and advisors write on Vox EU about the Nordic model, which includes a comprehensive social safety net not tied to the fortunes of any particular company, a different and more cooperative labor model than the US, and significant government spending during the fiscal crisis. They argue that the Nordic model was a significant asset and enabled the region to recover far faster than the US. In addition, it enabled the Nordic countries to avoid bailing out unsustainable industries merely to preserve jobs.
There are two differences that the US cannot easily replicate. First, the US's public finance situation is more precarious; many Nordic countries had significant reserves built up. This is not an easy challenge for the US to address. Second, the Nordic countries made significant investments in education. The resulting high-skilled workforce finds it much easier to retrain and seek different employment. The US can and should increase its investments in education. Because many legal immigrants to the US have fewer skills and limited English proficiency, the US will have an additional challenge in ensuring that these immigrants are not left behind.
There are two differences that the US cannot easily replicate. First, the US's public finance situation is more precarious; many Nordic countries had significant reserves built up. This is not an easy challenge for the US to address. Second, the Nordic countries made significant investments in education. The resulting high-skilled workforce finds it much easier to retrain and seek different employment. The US can and should increase its investments in education. Because many legal immigrants to the US have fewer skills and limited English proficiency, the US will have an additional challenge in ensuring that these immigrants are not left behind.
Sunday, February 21, 2010
Nationmaster: Taxation as % of GDP in OECD countries
As the President starts assembling a bipartisan commission to deal with the deficit, and the Republicans continue to live under the misapprehension that cutting taxes will be all it takes to balance the budget, I thought it was instructive to post some international statistics from Nationmaster. My elementary HTML skills mean my table is not as nice as theirs, but the point is clear. Most other OECD countries tax their citizens at higher rates than the U.S. Some countries tax at much higher rates. And the U.S. is the most militaristic country of all those below: we probably spend more than all the others combined on defense and we engaged in one clearly unjust war and a complete boondoggle in the last 10 years (as well as one war that may well be a just one).
Total taxation as % of GDP in OECD Countries
| Country | Amount |
| Sweden | 54.6% |
| Denmark | 48.8% |
| Finland | 46.9% |
| Belgium | 45.6% |
| France | 45.3% |
| Austria | 43.7% |
| Italy | 42.0% |
| Netherlands | 41.4% |
| Norway | 40.3% |
| Germany | 37.9% |
| United Kingdom | 37.4% |
| Canada | 35.8% |
| Switzerland | 35.7% |
| New Zealand | 35.1% |
| Australia | 31.5% |
| Ireland | 31.1% |
| United States | 29.6% |
| Japan | 27.1% |
Saturday, February 20, 2010
Tax Policy Center: We can't just tax the rich to balance the budget
The Urban-Brookings Tax Policy Center reports that barring major changes to the tax structure or major spending cuts, it will not be feasible to balance the budget solely by raising taxes on Americans making more than $250,000.
If you wanted to limit the deficit to 3% of Gross Domestic Product (which is the sum of all that the nation produces) and if you wanted to raise only the top two tax brackets, you'd have to raise rates to72.4% and 76.8% respectively, from 33% and 35%. At this level, there would be considerable evasion of taxes, both through legal and questionable means. If you raised only the top three brackets, you would need to raise them to 52.6% (from 28%), 61.9% and 65.7%.
If you wanted to raise taxes on all Americans, you'd still need to raise the top rate to 52.1%. Each bracket would need to rise by 50% or so. All these are assuming the Administration's proposed tax policy, which includes letting all the Bush tax cuts expire. This would mean raising taxes on middle and working-class families.
First, this points to how critical health reform is. None of the Republican ideas aside from radically cutting government spending on Medicare and Medicaid do anything to bring costs down. The Democrats' proposals at least get us part of the way there.
Second, this points to the fact that we do need to consider other sources of revenue, such as a value-added tax, cap and trade revenues, or a carbon tax.
If you wanted to limit the deficit to 3% of Gross Domestic Product (which is the sum of all that the nation produces) and if you wanted to raise only the top two tax brackets, you'd have to raise rates to72.4% and 76.8% respectively, from 33% and 35%. At this level, there would be considerable evasion of taxes, both through legal and questionable means. If you raised only the top three brackets, you would need to raise them to 52.6% (from 28%), 61.9% and 65.7%.
If you wanted to raise taxes on all Americans, you'd still need to raise the top rate to 52.1%. Each bracket would need to rise by 50% or so. All these are assuming the Administration's proposed tax policy, which includes letting all the Bush tax cuts expire. This would mean raising taxes on middle and working-class families.
First, this points to how critical health reform is. None of the Republican ideas aside from radically cutting government spending on Medicare and Medicaid do anything to bring costs down. The Democrats' proposals at least get us part of the way there.
Second, this points to the fact that we do need to consider other sources of revenue, such as a value-added tax, cap and trade revenues, or a carbon tax.
Wednesday, February 03, 2010
Generations and entitlements
Conservatives in the U.S. have recently been pushing for entitlement reform. The two biggest entitlements in the U.S. are Social Security and Medicare. In addition, Sen. McCain called the stimulus bill a "generational theft". There seems to be a persistent line of thinking among conservatives that present generations, by running up debt that we cannot repay, are stealing from future generations.
In addition, David Brooks, the resident conservative columnist at the New York Times, tells a story about what he calls the Geezers' Crusade:
George Will, writing for the Washington Post, made a similar argument.
I myself am under 30 and I cannot deny the importance of investing in our young. And yet, it strikes me that this generational war rhetoric is off-base.
Most of the long-run U.S. deficit is attributable to the fact that health care has historically grown about 2% faster than Gross Domestic Product, and organizations like the Congressional Budget Office assume it will grow at about GDP + 1% in the future. None of that growth is because Medicare's benefit structure is excessively generous. For example, the Congressional Research Service and Watson Wyatt Worldwide estimate that Medicare only covers about 76% of its' beneficiaries' medical expenses, compared to a typical health plan sponsored by a large employer that covers an average of 80-84% of claims. (Employer-sponsored plans with HMOs cover an estimated 93% of claims because HMOs, which have greater restrictions on the providers you can use, can also negotiate better discounts.)
The U.S. deficit isn't due to excessively generous entitlements. It's due to medical costs that are growing much faster than GDP. Advancements in technology are by far the biggest driver of medical spending growth, although growth in obesity rates are probably a close second.
People far wiser than I have said, health reform that brings spending growth down is entitlement reform. Social Security is not out of line with what other countries provide. Conservatives nervous about Social Security's effect on the budget would be better off arguing that the trust fund should be invested in a diversified portfolio of stocks and bonds like a pension fund, instead of having the U.S. government guarantee the trust fund's returns - indeed, one of the sample options that the National Academy of Social Insurance suggested to balance the trust fund was to gradually invest 40% of the trust fund in an S&P index fund.
Likewise, Medicare actually provides a smaller benefit than commercial insurance plans (albeit seniors are far more costly than working adults). Some seniors buy Medigap insurance, which is a private wrap-around product that covers some of Medicare's cost sharing. Cutting Medicare's statutory benefits is not the answer. Privatizing Medicare isn't the answer per se - the private companies would have to manage care far more efficiently than is presently done to overcome the hurdles that their higher administrative costs and marketing costs would impose. It would probably be impossible except for the best HMOs.
There are undeniable problems with the American education system. It is certainly true that at the state level, increasing Medicaid expenses are squeezing budgets. The second biggest item on state budgets (according to my memory) is education. Again, the solution is not to cut a critical safety net for the poor. The appropriate solution is health reform that drives down costs. The second appropriate solution may be for the Federal government to take on long-term care for the poor and/or to expand the use of long-term care insurance (possibly by starting a public long-term care plan like the CLASS Act).
To reiterate, the services that the U.S. provides for the elderly are not out of line with what other OECD countries provide. The services provided for the poor are probably worse. Those who think our entitlements are excessively generous are off-base. While some cuts may need to be made to the benefits (e.g. raising the retirement age slightly for Social Security), the Republicans' refusal to consider tax hikes along with benefit cuts necessarily means that benefits will have to be cut substantially. That would undermine the social compact that the government has made with its citizens and it should be off the table.
In addition, David Brooks, the resident conservative columnist at the New York Times, tells a story about what he calls the Geezers' Crusade:
The research paints a comforting picture. And the nicest part is that virtue is rewarded. One of the keys to healthy aging is what George Vaillant of Harvard calls “generativity” — providing for future generations. Seniors who perform service for the young have more positive lives and better marriages than those who don’t. As Vaillant writes in his book “Aging Well,” “Biology flows downhill.” We are naturally inclined to serve those who come after and thrive when performing that role.
The odd thing is that when you turn to political life, we are living in an age of reverse-generativity. Far from serving the young, the old are now taking from them. First, they are taking money. According to Julia Isaacs of the Brookings Institution, the federal government now spends $7 on the elderly for each $1 it spends on children.
Second, they are taking freedom. In 2009, for the first time in American history, every single penny of federal tax revenue went to pay for mandatory spending programs, according to Eugene Steuerle of the Urban Institute. As more money goes to pay off promises made mostly to the old, the young have less control.
Third, they are taking opportunity. For decades, federal spending has hovered around 20 percent of G.D.P. By 2019, it is forecast to be at 25 percent and rising. The higher tax rates implied by that spending will mean less growth and fewer opportunities. Already, pension costs in many states are squeezing education spending.
In the private sphere, in other words, seniors provide wonderful gifts to their grandchildren, loving attention that will linger in young minds, providing support for decades to come. In the public sphere, they take it away.
George Will, writing for the Washington Post, made a similar argument.
I myself am under 30 and I cannot deny the importance of investing in our young. And yet, it strikes me that this generational war rhetoric is off-base.
Most of the long-run U.S. deficit is attributable to the fact that health care has historically grown about 2% faster than Gross Domestic Product, and organizations like the Congressional Budget Office assume it will grow at about GDP + 1% in the future. None of that growth is because Medicare's benefit structure is excessively generous. For example, the Congressional Research Service and Watson Wyatt Worldwide estimate that Medicare only covers about 76% of its' beneficiaries' medical expenses, compared to a typical health plan sponsored by a large employer that covers an average of 80-84% of claims. (Employer-sponsored plans with HMOs cover an estimated 93% of claims because HMOs, which have greater restrictions on the providers you can use, can also negotiate better discounts.)
The U.S. deficit isn't due to excessively generous entitlements. It's due to medical costs that are growing much faster than GDP. Advancements in technology are by far the biggest driver of medical spending growth, although growth in obesity rates are probably a close second.
People far wiser than I have said, health reform that brings spending growth down is entitlement reform. Social Security is not out of line with what other countries provide. Conservatives nervous about Social Security's effect on the budget would be better off arguing that the trust fund should be invested in a diversified portfolio of stocks and bonds like a pension fund, instead of having the U.S. government guarantee the trust fund's returns - indeed, one of the sample options that the National Academy of Social Insurance suggested to balance the trust fund was to gradually invest 40% of the trust fund in an S&P index fund.
Likewise, Medicare actually provides a smaller benefit than commercial insurance plans (albeit seniors are far more costly than working adults). Some seniors buy Medigap insurance, which is a private wrap-around product that covers some of Medicare's cost sharing. Cutting Medicare's statutory benefits is not the answer. Privatizing Medicare isn't the answer per se - the private companies would have to manage care far more efficiently than is presently done to overcome the hurdles that their higher administrative costs and marketing costs would impose. It would probably be impossible except for the best HMOs.
There are undeniable problems with the American education system. It is certainly true that at the state level, increasing Medicaid expenses are squeezing budgets. The second biggest item on state budgets (according to my memory) is education. Again, the solution is not to cut a critical safety net for the poor. The appropriate solution is health reform that drives down costs. The second appropriate solution may be for the Federal government to take on long-term care for the poor and/or to expand the use of long-term care insurance (possibly by starting a public long-term care plan like the CLASS Act).
To reiterate, the services that the U.S. provides for the elderly are not out of line with what other OECD countries provide. The services provided for the poor are probably worse. Those who think our entitlements are excessively generous are off-base. While some cuts may need to be made to the benefits (e.g. raising the retirement age slightly for Social Security), the Republicans' refusal to consider tax hikes along with benefit cuts necessarily means that benefits will have to be cut substantially. That would undermine the social compact that the government has made with its citizens and it should be off the table.
Sunday, January 31, 2010
JFK's tax cut
As I said earlier, conservatives have recently been invoking President John F Kennedy's tax cuts. JFK did indeed propose to cut taxes, but that's not the whole story - this Slate article by David Greenberg argues that JFK aimed the tax cuts across the board:
If the JFK cuts increased the amount of the standard deduction, which is a flat amount that every taxpayer deducts from their gross income, this would have had a larger benefit to the low- and moderate-income people. The same is true for withholding rates - these are the amounts that are held back from each paycheck so that the Treasury gets a constant stream of money instead of one large payment on April 15.
Note also that while the top 12% of earners got 45% of the tax cuts, the taxes were cut from a confiscatory level. Bush's tax cuts benefitted the rich far more than that, and the rich were already taxed at a much lower rate. Conservatives should be very careful when invoking JFK.
When Kennedy ran for president in 1960 amid a sluggish economy, he vowed to "get the country moving again." After his election, his advisers, led by chief economist Walter Heller, urged a classically Keynesian solution: running a deficit to stimulate growth. (The $10 billion deficit Heller recommended, bold at the time, seems laughably small by today's standards.) In Keynesian theory, a tax cut aimed at consumers would have a "multiplier" effect, since each dollar that a taxpayer spent would go to another taxpayer, who would in effect spend it again—meaning the deficit would be short-lived.
At first Kennedy balked at Heller's Keynesianism. He even proposed a balanced budget in his first State of the Union address. But Heller and his team won over the president. By mid-1962 Kennedy had seen the Keynesian light, and in January 1963 he declared that "the enactment this year of tax reduction and tax reform overshadows all other domestic issues in this Congress."
The plan Kennedy's team drafted had many elements, including the closing of loopholes (the "tax reform" Kennedy spoke of). Ultimately, in the form that Lyndon Johnson signed into law, it reduced tax withholding rates, initiated a new standard deduction, and boosted the top deduction for child care expenses, among other provisions. It did lower the top tax bracket significantly, although from a vastly higher starting point than anything we've seen in recent years: 91 percent on marginal income greater than $400,000. And he cut it only to 70 percent, hardly the mark of a future Club for Growth member.
Yet the Kennedy-Johnson team saw the supply-side effects of the bill as secondary, if not incidental, to its main goal of prodding near-term growth. "The tax cut is good for long-run growth," said James Tobin, another economist on JFK's team, "only in the general sense that prosperity is good for investment." The immediate boost to the economy was the main goal. In fact, Nixon's economic adviser Herb Stein noted that the 1964 plan led to a diminished output-per-person-employed—a fact that could argue against the supply-side tenet that lower marginal rates would unleash the productivity of workers deterred from working harder because of overtaxation.
If the JFK cuts increased the amount of the standard deduction, which is a flat amount that every taxpayer deducts from their gross income, this would have had a larger benefit to the low- and moderate-income people. The same is true for withholding rates - these are the amounts that are held back from each paycheck so that the Treasury gets a constant stream of money instead of one large payment on April 15.
Note also that while the top 12% of earners got 45% of the tax cuts, the taxes were cut from a confiscatory level. Bush's tax cuts benefitted the rich far more than that, and the rich were already taxed at a much lower rate. Conservatives should be very careful when invoking JFK.
Wall Street Journal: Indiana embraces property tax cap despite pain
The Wall Street Journal has an article about how Indiana is pushing for caps on property taxes. Compared to the other major forms of state taxes, such as sales tax and income tax, property taxes are normally the least cyclical - meaning that when the economy is down, they don't vary as much as the other two because property tends to hold its value (the bubble aside). Capping property taxes is dangerous for the state's tax base, and it forces the state to shift its tax base towards the other two types of taxes and to fees:
Indiana lawmakers are moving to enshrine property-tax caps in the state constitution, despite cuts in fire, police and other local services the limits have caused.
The push marks the latest round in a revenue tug-of-war between state and local governments amid plunging tax collections nationwide. States, forced to cut their budgets, have often held back funds pledged to local governments. In response, some cities, towns and school districts have raised property taxes—their main source of revenue—to partially fill gaps.
But property-tax increases started raising the ire of residents even before tax revenue fell off. A 2007 spike in Indiana's property-tax bills, just as the recession was gathering steam, led to a "tea party" protest, the ousting of the mayor of Indianapolis and a 2008 law limiting property taxes, which as of Jan. 1 may be no more than 1% of the assessed valuation for residential homes, 2% for rental properties and farms, and 3% for businesses.
The effective tax rate for homes in 2007 ranged from 0.19% to 3.13%, and the cap is expected to save homeowners $404 million statewide in the current fiscal year.
Cities already are laying off police officers and firefighters, as well as raising business fees, because the caps have reduced local tax revenues. The state Farm Bureau, which advocates for farmers, has raised concerns that homeowners are getting the biggest tax breaks despite using the most local-government services. Some companies dislike the caps because they set property-tax rates for businesses at three times the rate for homes.
Yet the proposed constitutional amendment is popular with Indiana residents, who will vote on the measure in November. A survey last month from Ball State University in Muncie, Ind., found that 64% of voters favor the amendment. Even the mayors of some cities hit hard by the measure support it.
...
Some legislators worry it is too soon to install the property-tax formula in the state constitution, because the caps only took full effect Jan. 1. "If we should find out three years down the road that the process needs to be changed, we will be at a great disadvantage," said state Sen. Vi Simpson, a Democrat from Ellettsville who opposed the amendment.
When lawmakers imposed the caps, they raised the state sales tax to 7% from 6%, directing that extra revenue be used to fund schools. But sales-tax revenue has declined so much during the recession that Gov. Mitch Daniels, a Republican, is ordering public schools to cut $300 million, or 3.5%, from their budgets.
The city of Muncie, with about 65,000 residents, was forced by the property-tax caps, disappearing industry and other revenue-shrinking factors to cut 32 firefighters—or about 29% of the department—and close two of seven fire stations. The city has stopped dispatching fire trucks to nonemergency medical calls.
Mayor Sharon McShurley, a Republican, said Muncie must cut $3 million to $8 million from its budget over two or three years because of the property-tax caps. Last year, Muncie's budget was $19 million, down $5 million from the previous year, as the caps were phased in.
Yet Ms. McShurley, who was elected in 2007, favors the caps. A shrinking budget has forced city hall to become more efficient, she said, by automating payroll deposits and giving all city employees email access. "It's a first for a lot of people, thinking about city government having to get smaller," she said.
Indiana lawmakers are moving to enshrine property-tax caps in the state constitution, despite cuts in fire, police and other local services the limits have caused.
The push marks the latest round in a revenue tug-of-war between state and local governments amid plunging tax collections nationwide. States, forced to cut their budgets, have often held back funds pledged to local governments. In response, some cities, towns and school districts have raised property taxes—their main source of revenue—to partially fill gaps.
But property-tax increases started raising the ire of residents even before tax revenue fell off. A 2007 spike in Indiana's property-tax bills, just as the recession was gathering steam, led to a "tea party" protest, the ousting of the mayor of Indianapolis and a 2008 law limiting property taxes, which as of Jan. 1 may be no more than 1% of the assessed valuation for residential homes, 2% for rental properties and farms, and 3% for businesses.
The effective tax rate for homes in 2007 ranged from 0.19% to 3.13%, and the cap is expected to save homeowners $404 million statewide in the current fiscal year.
Cities already are laying off police officers and firefighters, as well as raising business fees, because the caps have reduced local tax revenues. The state Farm Bureau, which advocates for farmers, has raised concerns that homeowners are getting the biggest tax breaks despite using the most local-government services. Some companies dislike the caps because they set property-tax rates for businesses at three times the rate for homes.
Yet the proposed constitutional amendment is popular with Indiana residents, who will vote on the measure in November. A survey last month from Ball State University in Muncie, Ind., found that 64% of voters favor the amendment. Even the mayors of some cities hit hard by the measure support it.
...
Some legislators worry it is too soon to install the property-tax formula in the state constitution, because the caps only took full effect Jan. 1. "If we should find out three years down the road that the process needs to be changed, we will be at a great disadvantage," said state Sen. Vi Simpson, a Democrat from Ellettsville who opposed the amendment.
When lawmakers imposed the caps, they raised the state sales tax to 7% from 6%, directing that extra revenue be used to fund schools. But sales-tax revenue has declined so much during the recession that Gov. Mitch Daniels, a Republican, is ordering public schools to cut $300 million, or 3.5%, from their budgets.
The city of Muncie, with about 65,000 residents, was forced by the property-tax caps, disappearing industry and other revenue-shrinking factors to cut 32 firefighters—or about 29% of the department—and close two of seven fire stations. The city has stopped dispatching fire trucks to nonemergency medical calls.
Mayor Sharon McShurley, a Republican, said Muncie must cut $3 million to $8 million from its budget over two or three years because of the property-tax caps. Last year, Muncie's budget was $19 million, down $5 million from the previous year, as the caps were phased in.
Yet Ms. McShurley, who was elected in 2007, favors the caps. A shrinking budget has forced city hall to become more efficient, she said, by automating payroll deposits and giving all city employees email access. "It's a first for a lot of people, thinking about city government having to get smaller," she said.
Saturday, January 30, 2010
Orszag and Stiglitz: Tax cuts are not automatically the best stimulus
The Center on Budget and Policy Priorities posted a 2001 article by Peter Orszag, currently at the Office of Management and the Budget, and Joseph Stiglitz, a Nobel prize-winning economist, who argue that tax cuts are not always the best thing to do in the recession. This is relevant because Scott Brown, who won the Senatorial election in Massachusetts, correctly pointed out that John F. Kennedy did indeed propose cutting taxes during the 1960 recession - albeit his tax cuts took too much time to have an impact and they mainly hit after the recession, and Kennedy seems to have wanted a spending program as well.
Orszag and Stiglitz argue in response to a 2001 Bush administration official who suggested tax cuts in response to the 2001 recession:
In other words, when you cut taxes to businesses unconditionally, they are more likely to save the money in a recession than to spend it. Business tax cuts should be tied to investment or hiring. When you cut taxes to higher-income households, they are also more likely to save the additional money than to spend it. These are supply-side interventions. Supply-side economics (hat tip to Wikipedia holds that economic well-being should be maximized by removing or minimizing barriers to producing goods and services - barriers such as taxes.
What is effective is spending measures that are immediate:
Increased funds for food stamps and Medicaid also fall into this category. These have been the fastest-acting parts of the most recent stimulus bill.
Conservatives will tell you that increased government debt crowds out private spending - in other words, one dollar of government spending which is financed through taxation prevents private industry from spending that dollar. The private sector might see a higher rate of return on that dollar than the government. This view has some validity when the economy's resources are being fully utilized, but not in a recession:
In other words, to counter a recession, you have to get demand for goods and services back up - and the federal government is the last entity left standing with the power to buy stuff in a recession.
Not long ago, I believe that Rowan Williams, Archbishop of Canterbury, was wondering why the government was spending money to stimulate the economy so that people could buy more useless junk in a recession. Hadn't we learned enough from our materialistic past, he wondered (I'm paraphrasing). That is indeed a critically important question that the church needs to help our society explore. However, when the rich sneeze, the poor catch a cold - paraphrased from when America sneezes, African-Americans get a cold. Recessions always affect vulnerable groups more severely than everyone else, and we need to get out of the recession.
Orszag and Stiglitz argue in response to a 2001 Bush administration official who suggested tax cuts in response to the 2001 recession:
The principal reason that Mr. Hubbard's arguments are misguided — and the main reason the Administration's package would be relatively ineffective as a stimulus measure — is that they largely ignore the central feature of a recession: lack of demand. In a recession, the primary problem is that the nation's firms face a reduction in demand for their products — not that they lack available workers, equipment, or anything else needed to produce goods and services. Indiscriminately injecting cash into such firms through tax breaks, without linking the tax breaks to new business activity, would do little if anything to address the underlying difficulty.
Firms that are faced with reduced demand for their products lay off workers, regardless of how much cash they have. The managers of firms have a fiduciary responsibility to maximize their profits, and in the face of reduced demand for their product, firms therefore typically reduce costs by cutting back on production, which triggers layoffs. As the number of unemployed workers increases, a downward economic spiral can occur. Households with unemployed workers, facing a sharp decline in their incomes, cut back on spending and further reduce the demand for products. That, in turn, leads to additional layoffs. This harmful cycle, by which an economic slowdown can build into a more serious recession, can be arrested or broken by boosting demand for the goods and services that American companies produce. Only when a company faces renewed demand for its products will it end the process of shedding workers and begin to create new jobs. As a result, the primary objective of a stimulus package should be to spur spending on these products.
In other words, when you cut taxes to businesses unconditionally, they are more likely to save the money in a recession than to spend it. Business tax cuts should be tied to investment or hiring. When you cut taxes to higher-income households, they are also more likely to save the additional money than to spend it. These are supply-side interventions. Supply-side economics (hat tip to Wikipedia holds that economic well-being should be maximized by removing or minimizing barriers to producing goods and services - barriers such as taxes.
What is effective is spending measures that are immediate:
An effective stimulus package consequently should expand the aggregate demand for goods and services in a timely way. Mr. Hubbard notwithstanding, there is little question that increases in government expenditures can be quite effective in boosting aggregate demand and thereby stimulating the economy in the short run.
Temporary expansions in unemployment insurance, for example, would spur increased consumer spending. Households in which a worker is laid off experience a significant decline in income. They thus are likely to spend a high percentage of any additional income they receive while out of work. The extra spending on unemployment benefits that a temporary expansion of unemployment benefits provides thus has a direct economic benefit — it keeps more workers employed at firms that produce the products the unemployed workers purchase with their additional cash. Temporary expansions in unemployment insurance consequently are a "win-win" proposition: They are quite effective in helping more people keep their jobs during an economic downturn, and they also assist those who are unfortunate enough to have lost their jobs.
Increased funds for food stamps and Medicaid also fall into this category. These have been the fastest-acting parts of the most recent stimulus bill.
Conservatives will tell you that increased government debt crowds out private spending - in other words, one dollar of government spending which is financed through taxation prevents private industry from spending that dollar. The private sector might see a higher rate of return on that dollar than the government. This view has some validity when the economy's resources are being fully utilized, but not in a recession:
The notion that a dollar spent by the government "crowds out" one dollar of spending by private businesses is correct only when the economy's resources are fully utilized; in that case, additional demand on those resources by the government necessarily reduces the demands that can be placed on them by the private sector. But when the economy's resources — our workers and plants and equipment — are not fully utilized, government spending does not displace private-sector resources on a dollar-for-dollar basis. Indeed, during an economic downturn, government spending can "crowd in" additional private-sector activity by spurring overall demand and thereby making it more likely that firms will be willing to make new investments. Mr. Hubbard's argument about government spending fully crowding out business spending thus is puzzling; it would be valid only if the economy were fully utilizing its resources, which is clearly not the case now.
The latest data [Editor: remember, this is 2001, but the story is similar today], for example, show that the capacity utilization rate — the proportion of plant and equipment capacity being used in production — fell to 74.8 percent in October, its lowest level since 1983. Furthermore, any implication that the economy is fully utilizing its resources would be inconsistent with another statement Mr. Hubbard makes — namely, that "the economy needs help now."
In other words, to counter a recession, you have to get demand for goods and services back up - and the federal government is the last entity left standing with the power to buy stuff in a recession.
Not long ago, I believe that Rowan Williams, Archbishop of Canterbury, was wondering why the government was spending money to stimulate the economy so that people could buy more useless junk in a recession. Hadn't we learned enough from our materialistic past, he wondered (I'm paraphrasing). That is indeed a critically important question that the church needs to help our society explore. However, when the rich sneeze, the poor catch a cold - paraphrased from when America sneezes, African-Americans get a cold. Recessions always affect vulnerable groups more severely than everyone else, and we need to get out of the recession.
Wednesday, January 27, 2010
The New Republic: Why DC's Skinny Bag Tax Works So Well
Lydia DePillis writes for TNR.
Over the weekend, The Washington Post took a look at how D.C. residents are adapting to a new five-cent tax on plastic bags that went into effect on January 1. It turns out that shoppers are now taking extreme measures to avoid paying that extra nickel—even schlepping groceries in their arms if they didn’t bring a backpack. The fee may drive people crazy, and the Journal may grumble about “bureaucracy,” but it actually seems to work: Stores report giving out half as many bags as they did before they started charging for them. And the reason seems to be rooted in how our brains operate:
"When it goes from zero to even a very small charge, it can feel very bad," said Dan Ariely, an economics professor at Duke University. "It creates a very small financial burden but a very big emotional reaction."
This reminds me of a Tom Friedman column from back in the summer, when the Waxman-Markey bill was dragging its way across the finish line in the House. Friedman hated the "Rube Goldberg" contraption that survived after umpteen amendments and concessions, but said legislators should pass it anyway. "If the U.S. government puts a price on carbon," he reasoned, "even a weak one, it will usher in a new mindset among consumers, investors, farmers, innovators and entrepreneurs that in time will make a big difference—much like the first warnings that cigarettes could cause cancer. The morning after that warning no one ever looked at smoking the same again."
The reaction to the bag tax here in D.C. suggests Friedman might be onto something. You don't even need a large price signal to have an effect—indeed, getting too ambitious too early could engender a revolt. Last fall, for instance, Seattle voters rejected a 20-cent bag tax. If proponents had only aimed lower, like D.C. did, the measure might have passed, and they would have then gotten some impressive reductions in bag use. Instead, they got nothing—which is what we can expect if a climate bill fails to pass this year, as well.
Over the weekend, The Washington Post took a look at how D.C. residents are adapting to a new five-cent tax on plastic bags that went into effect on January 1. It turns out that shoppers are now taking extreme measures to avoid paying that extra nickel—even schlepping groceries in their arms if they didn’t bring a backpack. The fee may drive people crazy, and the Journal may grumble about “bureaucracy,” but it actually seems to work: Stores report giving out half as many bags as they did before they started charging for them. And the reason seems to be rooted in how our brains operate:
"When it goes from zero to even a very small charge, it can feel very bad," said Dan Ariely, an economics professor at Duke University. "It creates a very small financial burden but a very big emotional reaction."
This reminds me of a Tom Friedman column from back in the summer, when the Waxman-Markey bill was dragging its way across the finish line in the House. Friedman hated the "Rube Goldberg" contraption that survived after umpteen amendments and concessions, but said legislators should pass it anyway. "If the U.S. government puts a price on carbon," he reasoned, "even a weak one, it will usher in a new mindset among consumers, investors, farmers, innovators and entrepreneurs that in time will make a big difference—much like the first warnings that cigarettes could cause cancer. The morning after that warning no one ever looked at smoking the same again."
The reaction to the bag tax here in D.C. suggests Friedman might be onto something. You don't even need a large price signal to have an effect—indeed, getting too ambitious too early could engender a revolt. Last fall, for instance, Seattle voters rejected a 20-cent bag tax. If proponents had only aimed lower, like D.C. did, the measure might have passed, and they would have then gotten some impressive reductions in bag use. Instead, they got nothing—which is what we can expect if a climate bill fails to pass this year, as well.
Monday, January 25, 2010
Heritage Founation: VAT - no easy fix for the deficit
The conservative Heritage Foundation highlights the ways that a value-added tax can be gamed:
The shortfalls in the EU's VAT collections average 12%, or just a bit over the IRS estimate of the U.S.' tax shortfall under current law. The Heritage Foundation of course argues that this means the U.S. should not raise a VAT, but they would say that about any tax. I still think a VAT should be on the table, but advocates will need to ensure the integrity of the tax.
1. False Claims of Taxes Paid. Businesses create false invoices for the purchase of inputs they never bought and get bigger deductions for taxes paid than they are entitled to.
2. Credit Claimed for Non-Creditable Purchases. Typically, VATs have a variety of rates and exemptions. For example, basic needs such as food, medicine, and clothing often receive preferential VAT rates or outright exemptions from the tax, as do certain industries considered economically vital or politically sensitive.
Businesses that sell both VAT-exempt and non-exempt items have an incentive to allocate the purchase of supplies they use to produce exempt items toward the production of non-exempt items. This improper shifting increases the business's tax refund because it allows them to claim deductions on their tax returns for the taxes paid on inputs where there should be none. This fraud is common because it is difficult for authorities to prove which supplies the business used to produce the different products.
3. Bogus Traders. Businesses are set up exclusively to produce VAT invoices so other businesses can claim refunds on taxes they never paid.
4. Hidden Sales. Professional service providers, such as doctors and lawyers, often engage in this kind of fraud. They offer relatively high-value services, but their purchases from other businesses are relatively low cost. They charge their unknowing customers full price and collect the proper amount of VAT on the sale. But to the authorities, they show that they charged a lower price. The service provider forwards to the government less tax than it collected from its customers and pockets the difference.
It is always hard for tax authorities to determine the actual sales of an intangible good like a service. Many state and local governments in the United States often forego levying sales tax on most services because of this difficulty. Moreover, service providers and individuals can circumvent the tax by agreeing to use cash or barter transactions. This avoids a paper trail altogether and makes it nearly impossible for authorities to prove abuse.
The shortfalls in the EU's VAT collections average 12%, or just a bit over the IRS estimate of the U.S.' tax shortfall under current law. The Heritage Foundation of course argues that this means the U.S. should not raise a VAT, but they would say that about any tax. I still think a VAT should be on the table, but advocates will need to ensure the integrity of the tax.
Friday, January 08, 2010
Republican governors playing tax games
There's a strain of thought among some conservatives that taxes are bad per se, that just about anything government does except maybe for public works, public safety and national defense is bad. Most people do not share that strain of thought - there are roles, especially with the provision of public goods where the government will provide better benefits and provide them to a broader population than the private sector would on its own.
For that reason, Democrats and moderate Republicans need to beware of attempts by Governors Tim Pawlenty (Minnesota) and Rick Perry (Texas) to sabotage their states' tax systems.
As reported by the Wall Street Journal, Pawlenty is pushing caps on public spending:
Pawlenty's idea is particularly insane because in a recession, a state's revenue declines significantly - and under his cap system, that would permanently lock a state into a lower level of spending going forward, no matter whether the economy improved. This is particularly pernicious, because the programs that states run or fund, such as public healthcare, education and criminal justice, all have costs that are growing faster than GDP. The way to cut those costs is not to starve funds from needed services.
As reported by the Wonk Room blog on Think Progress, Governor Rick Perry of Texas wants to require a two-thirds majority in the legislature to pass a budget. This requirement has caused incredible difficulties in California, where the Republican minority has stalled any attempt to raise taxes in good times or bad. This undermines the ability of the legislature to actually govern and should be opposed by conservatives and liberals alike. Indeed, Bruce Bartlett, a former Bush administration official, is quoted in the article as saying:
Bartlett has previously spoken in favor of a value-added tax; although these taxes are regressive on their own, they raise revenue very efficiently. If the tax structure as a whole is progressive, then progressives should accept them.
For that reason, Democrats and moderate Republicans need to beware of attempts by Governors Tim Pawlenty (Minnesota) and Rick Perry (Texas) to sabotage their states' tax systems.
As reported by the Wall Street Journal, Pawlenty is pushing caps on public spending:
Mr. Pawlenty has proposed an amendment to the Minnesota constitution that would limit spending during any two-year budget period to the amount of revenue collected during the previous budget cycle. At a Republican fund-raiser in New Hampshire on Dec. 16, the governor also pushed the idea of an amendment to the U.S. Constitution that would force Congress to pass, and the president to sign, a balanced budget.
"Government spending in the country and in many states is progressing at an unsustainable, irresponsible and reckless pace," Mr. Pawlenty said in an interview this week. "The bathtub is overflowing onto the floor, and the first thing we need to do is shut off the faucet."
Pawlenty's idea is particularly insane because in a recession, a state's revenue declines significantly - and under his cap system, that would permanently lock a state into a lower level of spending going forward, no matter whether the economy improved. This is particularly pernicious, because the programs that states run or fund, such as public healthcare, education and criminal justice, all have costs that are growing faster than GDP. The way to cut those costs is not to starve funds from needed services.
As reported by the Wonk Room blog on Think Progress, Governor Rick Perry of Texas wants to require a two-thirds majority in the legislature to pass a budget. This requirement has caused incredible difficulties in California, where the Republican minority has stalled any attempt to raise taxes in good times or bad. This undermines the ability of the legislature to actually govern and should be opposed by conservatives and liberals alike. Indeed, Bruce Bartlett, a former Bush administration official, is quoted in the article as saying:
There are legitimate differences between responsible conservatives and liberals on how to deal with taxation, but as one of those responsible conservatives, Bruce Bartlett, wrote, the right has to “accept the necessity of higher revenues.” “Instead of opposing any tax hike, I think it makes more sense for conservatives to figure out how best to raise the additional revenue that will be raised in any event,” he added.
Bartlett has previously spoken in favor of a value-added tax; although these taxes are regressive on their own, they raise revenue very efficiently. If the tax structure as a whole is progressive, then progressives should accept them.
Wednesday, December 09, 2009
Taxes on millionaires continue to fall
Martin Sullivan of tax.com reports that, based on IRS data, net income tax rates for millionaires in the US have fallen over the last 10 years; in 2007, they were at 22.1%. This data does not include the effect of state and local taxes, although it does include capital gains and dividend taxes (the reduced rates for these probably drove a large proportion of the fall in tax rates).
However, Catherine Rampell indicates on the NYT Economix blog that the very rich actually pay less in taxes than the rich. This is likely due to the low capital gains and dividend taxes and it needs to be rectified.
However, Catherine Rampell indicates on the NYT Economix blog that the very rich actually pay less in taxes than the rich. This is likely due to the low capital gains and dividend taxes and it needs to be rectified.
Social Security actuaries report the effects of several reform options
After the US gets health reform and climate change done, Social Security is likely to be one of the items on the table. Social Security is a big part of the retirement system, and it also provides insurance against disability, death of a spouse and other contingencies. Although notions of an entitlement crisis are overblown, Social Security does have financing challenges.
Actuaries at the U.S. Social Security Administration, led by Stephen Goss, provided an approximate report on several options to reform Social Security given by the National Academy for Social Insurance. When reading the options chart, the actuarial balance of the trust fund is presently -2.00% of taxable payroll; the trust fund needs to be fully funded for 75 years, and that means that it's presently short by 2% of the total taxable amount of pay in the US. The US only levels payroll taxes on salaries up to $106,800 or so.
For example, reducing the cost of living adjustment by 1% (it's presently linked to the CPI) would eliminate about 75% of the current deficit. That option would have a very bad effect on Social Security recipients. Alternatively, raising payroll taxes by 2.2% in 2010 and beyond would eliminate the entire deficit and more. Taxing every cent of earnings and still crediting them for Social Security benefits would eliminate most of the deficit. Taxing 90% of all earnings, which is the historical level, would eliminate about a quarter of the current deficit.
The options are scored as if each one were enacted separately; in real life, several options could interact to produce a different effect.
Actuaries at the U.S. Social Security Administration, led by Stephen Goss, provided an approximate report on several options to reform Social Security given by the National Academy for Social Insurance. When reading the options chart, the actuarial balance of the trust fund is presently -2.00% of taxable payroll; the trust fund needs to be fully funded for 75 years, and that means that it's presently short by 2% of the total taxable amount of pay in the US. The US only levels payroll taxes on salaries up to $106,800 or so.
For example, reducing the cost of living adjustment by 1% (it's presently linked to the CPI) would eliminate about 75% of the current deficit. That option would have a very bad effect on Social Security recipients. Alternatively, raising payroll taxes by 2.2% in 2010 and beyond would eliminate the entire deficit and more. Taxing every cent of earnings and still crediting them for Social Security benefits would eliminate most of the deficit. Taxing 90% of all earnings, which is the historical level, would eliminate about a quarter of the current deficit.
The options are scored as if each one were enacted separately; in real life, several options could interact to produce a different effect.
Monday, December 07, 2009
NYT Economix blog: How much national debt is too much?
Catherine Rampell of the NYT Economix blog examines the question of how much national debt is too much. The bottom line is, given the United States financial strength and its history of actually repaying its debt (unlike some emerging markets countries), the US still has some leeway. Of course, that does not mean the US can afford to be careless:
My colleague Graham Bowley and I have an article today about which countries — besides Dubai — are considered vulnerable to debt problems in the near future. Latvia and Greece, for example, are two countries that economic analysts say may be at risk for default in the coming years.
How can you tell which countries are really in trouble?
You might look to the country’s ratio of government debt to gross domestic product, one significant indicator for vulnerability to default that Graham and I mentioned in the article.
In Latvia, for example, general government debt is expected to reach 48.6 percent of gross domestic product next year, according to recent projections from Moody’s Investors Service.
But compared to some other countries, that number doesn’t look so bad. I’ve embedded below a selection of other high- and middle-income countries that Moody’s sent us. Click the plus sign to zoom in. [Editor: the plugin is on the NYT site itself.]
In the United States, general government debt will reach an expected 99.3 percent of G.D.P. in 2010. In Japan, the comparable number is a whopping 223.4 percent. And yet you don’t hear about too many investors fretting about whether either of these two countries will collapse tomorrow.
So why the double standard?
Carmen M. Reinhart and Kenneth S. Rogoff’s new book “ This Time Is Different,” which chronicles 800 years of financial crises, provides some context. Their second chapter, titled “Debt Intolerance,” shows that historically, the thresholds for default are much lower for many emerging markets.
Default has often occurred in countries that had debt-to-G.D.P. levels well below the 60 percent ceiling imposed by Europe’s Maastricht Treaty, which was intended to protect the euro from government defaults.
There are multiple explanations for why emerging markets are likely to default at lower levels of debt than more developed countries are. For one, emerging markets are more likely to borrow in a currency other than their own. That means they can’t use inflation as a tool to devalue their debt levels if they run into trouble, and so are more likely to get out of debt problems by restructuring their debt or defaulting outright.
Professors Reinhart and Rogoff also found that — just as you would judge a friend’s creditworthiness based on his history of deadbeat-ness — with countries, default history matters a lot. On page 30 they write:
So how much debt is too much debt? The magic number varies by country, based on a whole host of factors including the strength of a country’s institutional structures (can politicians make the hard decisions on where to cut spending and how to raise revenue?) and its prior track record on debt repayment.
My colleague Graham Bowley and I have an article today about which countries — besides Dubai — are considered vulnerable to debt problems in the near future. Latvia and Greece, for example, are two countries that economic analysts say may be at risk for default in the coming years.
How can you tell which countries are really in trouble?
You might look to the country’s ratio of government debt to gross domestic product, one significant indicator for vulnerability to default that Graham and I mentioned in the article.
In Latvia, for example, general government debt is expected to reach 48.6 percent of gross domestic product next year, according to recent projections from Moody’s Investors Service.
But compared to some other countries, that number doesn’t look so bad. I’ve embedded below a selection of other high- and middle-income countries that Moody’s sent us. Click the plus sign to zoom in. [Editor: the plugin is on the NYT site itself.]
In the United States, general government debt will reach an expected 99.3 percent of G.D.P. in 2010. In Japan, the comparable number is a whopping 223.4 percent. And yet you don’t hear about too many investors fretting about whether either of these two countries will collapse tomorrow.
So why the double standard?
Carmen M. Reinhart and Kenneth S. Rogoff’s new book “ This Time Is Different,” which chronicles 800 years of financial crises, provides some context. Their second chapter, titled “Debt Intolerance,” shows that historically, the thresholds for default are much lower for many emerging markets.
Default has often occurred in countries that had debt-to-G.D.P. levels well below the 60 percent ceiling imposed by Europe’s Maastricht Treaty, which was intended to protect the euro from government defaults.
There are multiple explanations for why emerging markets are likely to default at lower levels of debt than more developed countries are. For one, emerging markets are more likely to borrow in a currency other than their own. That means they can’t use inflation as a tool to devalue their debt levels if they run into trouble, and so are more likely to get out of debt problems by restructuring their debt or defaulting outright.
Professors Reinhart and Rogoff also found that — just as you would judge a friend’s creditworthiness based on his history of deadbeat-ness — with countries, default history matters a lot. On page 30 they write:
[O]nce a country slips into being a serial defaulter, it retains a high and persistent level of debt intolerance. Countries can and do graduate, but the process is seldom fast or easy. Absent the pull of an outside political anchor (e.g., the European Union for countries like Greece or Portugal), recovery may take decades or even centuries.
So how much debt is too much debt? The magic number varies by country, based on a whole host of factors including the strength of a country’s institutional structures (can politicians make the hard decisions on where to cut spending and how to raise revenue?) and its prior track record on debt repayment.
Center on Budget and Policy Priorities: In a recession, it is better for states to raise taxes than to cut spending
Nicholas Johnson of the Center on Budget reminds us that in a recession, it's less bad for states to raise taxes rather than to cut spending. When a state raises taxes, 90% of the money might have been spent in the absence of the tax and 10% saved, or some other combination thereof. However, when a state cuts its spending, 100% of the money would otherwise have been spent. States should raise taxes to confiscatory levels, but the debate about cutting spending or raising taxes is a no-brainer.
The recession is making it difficult for states to maintain balanced budgets, as nearly all of them are required to do by law. Roughly two-thirds of the states have already reduced spending and/or raised revenue to bring their budgets for the current fiscal year into balance, and additional states have indicated they will need to do so to maintain budgetary balance for the current fiscal year and/or the next fiscal year. The budget gaps that will need to be closed in the rest of this fiscal year and the next two years could be in the range of $350 billion or more.[1]
The combination of a weak economy and projected budget shortfalls is posing a major challenge for state policymakers: How can they balance their states’ budgets with the least possible harm to already damaged state economies? One answer is to draw down reserve funds, if possible. Another answer is to seek assistance from the federal government. Those options will help, but are unlikely to solve all of states’ problems. Most states will have to either (a) cut spending, (b) raise taxes, or (c) enact a combination of tax increases and spending cuts to keep budgets in balance.
Some state-level policymakers contend that the weakness of the economy means that a state should rely solely on cutting spending, rather than raising taxes. But this one-dimensional approach is not based on sound economics.
Two highly regarded economists — Nobel Prize winner Joseph Stiglitz of Columbia University, and Peter Orszag, now the director of the Congressional Budget Office — wrote during the last recession that spending cuts could actually be more harmful for a state’s economy during a recession than tax increases. This assertion still holds true; Stiglitz recently reiterated the point in a letter (co-signed by 120 other economists) to New York’s governor David Paterson.[2]
In their earlier analysis (the full text of which is available at http://www.cbpp.org/10-30-01sfp.htm), Stiglitz and Orszag wrote:
As legislatures approach their 2009 sessions and begin to consider how to balance their budgets in difficult economic times, they should take seriously the Stiglitz-Orszag admonition that tax increases, particularly tax increases on higher-income families, may be the best available option.
End Notes:
[1] Elizabeth C. McNichol and Iris J. Lav, “State Budget Troubles Worsen,” Center on Budget and Policy Priorities, available at http://www.cbpp.org/9-8-08sfp.htm.
[2] The text of the letter, dated December 13, 2008, is available at http://www.fiscalpolicy.org/FPI_Release_EconomistsOnFiscalPolicy_December2008.pdf
[3] Peter Orszag and Joseph Stiglitz, “Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?” Center on Budget and Policy Priorities, revised November 6, 2001.
The recession is making it difficult for states to maintain balanced budgets, as nearly all of them are required to do by law. Roughly two-thirds of the states have already reduced spending and/or raised revenue to bring their budgets for the current fiscal year into balance, and additional states have indicated they will need to do so to maintain budgetary balance for the current fiscal year and/or the next fiscal year. The budget gaps that will need to be closed in the rest of this fiscal year and the next two years could be in the range of $350 billion or more.[1]
The combination of a weak economy and projected budget shortfalls is posing a major challenge for state policymakers: How can they balance their states’ budgets with the least possible harm to already damaged state economies? One answer is to draw down reserve funds, if possible. Another answer is to seek assistance from the federal government. Those options will help, but are unlikely to solve all of states’ problems. Most states will have to either (a) cut spending, (b) raise taxes, or (c) enact a combination of tax increases and spending cuts to keep budgets in balance.
Some state-level policymakers contend that the weakness of the economy means that a state should rely solely on cutting spending, rather than raising taxes. But this one-dimensional approach is not based on sound economics.
Two highly regarded economists — Nobel Prize winner Joseph Stiglitz of Columbia University, and Peter Orszag, now the director of the Congressional Budget Office — wrote during the last recession that spending cuts could actually be more harmful for a state’s economy during a recession than tax increases. This assertion still holds true; Stiglitz recently reiterated the point in a letter (co-signed by 120 other economists) to New York’s governor David Paterson.[2]
In their earlier analysis (the full text of which is available at http://www.cbpp.org/10-30-01sfp.htm), Stiglitz and Orszag wrote:
“[E]conomic analysis suggests that tax increases would not in general be more harmful to the economy than spending reductions. Indeed, in the short run (which is the period of concern during a downturn), the adverse impact of a tax increase on the economy may, if anything, be smaller than the adverse impact of a spending reduction, because some of the tax increase would result in reduced saving rather than reduced consumption. For example, if taxes increase by $1, consumption may fall by 90 cents and saving may fall by 10 cents. Since a tax increase does not reduce consumption on a dollar-for-dollar basis, its negative impact on the economy is attenuated in the short run. Some types of spending reductions, however, would reduce demand in the economy on a dollar-for-dollar basis and therefore would be more harmful to the economy than a tax increase….
“Basic economy theory suggests that direct spending reductions will generate more adverse consequences for the economy in the short run than either a tax increase or a transfer program reduction. The reason is that some of any tax increase or transfer payment reduction would reduce saving rather than consumption, lessening its impact on the economy in the short run, whereas the full amount of government spending on goods and services would directly reduce consumption….
“The more that the tax increases or transfer reductions are focused on those with lower propensities to consume (that is, on those who spend less and save more of each additional dollar of income), the less damage is done to the weakened economy. Since higher-income families tend to have lower propensities to consume than lower-income families, the least damaging approach in the short run involves tax increases concentrated on higher-income families. Reductions in transfer payments to lower-income families would generally be more harmful to the economy than increases in taxes on higher-income families, since lower-income families are more likely to spend any additional income than higher-income families. Indeed, since the recipients of transfer payments typically spend virtually their entire income, the negative impact of reductions in transfer payments is likely to be nearly as great as a reduction in direct government spending on goods and services.
“For states interested in the impact only on their own economy rather than the national economy, the arguments made above are even stronger. In particular, the government spending that would be reduced if direct spending programs are cut is often concentrated among local businesses…. By contrast, the spending by individuals and businesses that would be affected by tax increases often is less concentrated among local producers — since part of the decline in purchases that would occur if taxes were raised would be a decline in the purchase of goods produced out of state. Thus, more of the reduction in purchases that results from tax increases than from government budget cuts falls on out-of-state goods (relative to in-state goods), lessening the adverse impact of a tax increase on the state economy. Reductions in direct government spending consequently could have a larger adverse impact on a state's economy than tax increases, which have a stronger adverse impact on out-of-state goods and services.
“The conclusion is that, if anything, tax increases on higher-income families are the least damaging mechanism for closing state fiscal deficits in the short run. Reductions in government spending on goods and services, or reductions in transfer payments to lower-income families, are likely to be more damaging to the economy in the short run than tax increases focused on higher-income families. In any case, in terms of how counter-productive they are, there is no automatic preference for spending reductions rather than tax increases.”[3] [emphases added]
As legislatures approach their 2009 sessions and begin to consider how to balance their budgets in difficult economic times, they should take seriously the Stiglitz-Orszag admonition that tax increases, particularly tax increases on higher-income families, may be the best available option.
End Notes:
[1] Elizabeth C. McNichol and Iris J. Lav, “State Budget Troubles Worsen,” Center on Budget and Policy Priorities, available at http://www.cbpp.org/9-8-08sfp.htm.
[2] The text of the letter, dated December 13, 2008, is available at http://www.fiscalpolicy.org/FPI_Release_EconomistsOnFiscalPolicy_December2008.pdf
[3] Peter Orszag and Joseph Stiglitz, “Budget Cuts vs. Tax Increases at the State Level: Is One More Counter-Productive than the Other During a Recession?” Center on Budget and Policy Priorities, revised November 6, 2001.
Monday, November 30, 2009
What are tax expenditures and who benefits from them?
A tax expenditure is the amount of money that a government forfeits by giving a tax break for a certain activity or transaction. In the U.S., tax expenditures include the ability to deduct mortgage insurance from your income, the reduced tax rates on capital gains and dividends and the fact that the value of health insurance that your employer provides for you is excluded from your income. In terms of economics, a tax expenditure is the same thing as an actual subsidy, because the government could have taxed the activity or transaction and used the money for something else.
The Urban-Brookings Tax Policy Center provides information on the 12 largest tax expenditures in the U.S. The largest tax expenditure is the one for health insurance.
Tax expenditures are also not distributed progressively, meaning that the bulk of tax expenditures benefit the richest, rather than the poorest Americans. This should be weighed against the fact that a number of Americans pay zero or negative net taxes (the latter if they are recipients of the Earned Income Tax Credit). Our friends at the Tax Policy Center also provide an article discussing the distribution of the expenditures. Overall, all tax expenditures benefit those in higher income groups. If tax expenditures were eliminated, the after-tax income of the bottom quintile would decrease by 6.5% (mainly due to the elimination of the child tax credit and earned income tax credit). In contrast, the income of the top quintile would decrease by 13.5%.
The Urban-Brookings Tax Policy Center provides information on the 12 largest tax expenditures in the U.S. The largest tax expenditure is the one for health insurance.
Tax expenditures are also not distributed progressively, meaning that the bulk of tax expenditures benefit the richest, rather than the poorest Americans. This should be weighed against the fact that a number of Americans pay zero or negative net taxes (the latter if they are recipients of the Earned Income Tax Credit). Our friends at the Tax Policy Center also provide an article discussing the distribution of the expenditures. Overall, all tax expenditures benefit those in higher income groups. If tax expenditures were eliminated, the after-tax income of the bottom quintile would decrease by 6.5% (mainly due to the elimination of the child tax credit and earned income tax credit). In contrast, the income of the top quintile would decrease by 13.5%.
Wednesday, November 11, 2009
Tax Policy and Justice
The late Monsignor Edward Ryle, a Catholic priest, has an interesting commentary about tax policy and justice.
Msgr. Ryle reminds us that the goods of the earth are meant for all people. The Catholic Church, despite its staunch opposition to anything that smacks of socialism, does in fact teach that the right to private property is not absolute. Private property is essentially under a "social mortgage", as the late Pope John Paul II said; it serves a higher, social function. One of the documents promulgated at Vatican II said that "The right to have a share of earthly goods sufficient for oneself and one's family belongs to everyone." High degrees of inequality in the distribution of income and wealth are intrinsically unjust.
Lastly, government is the entity that is charged with seeking and assuring the common good of a nation state. Governments need to levy taxes to do that. They are to be guided by the principle of distributive justice and proportionality - the poor are to receive more in benefits, the rich are to be taxed more. The Catholics teach that while taxes can't be "confiscatory", there is a moral obligation for individuals to pay taxes. Furthermore, Ryle quotes the theologian Bernard Haring:
In the Virginia governor's election, Bob McDonnell, the Republican candidate, ran against Creigh Deeds, a moderate Democrat. Virginia is doing pretty well as a state, but the roads need improvement. Traffic congestion, especially in Northern Virginia, is a big problem. Deeds mostly swore that he would not raise taxes - except he said he might raise gasoline taxes, which was not really raising income taxes. McDonnell swore straight up that he would not raise taxes at all. Both candidates swore that they would fix the roads.
McDonnell won. Personally, I regard this as unfortunate. I joked to my friends that there was no way he could fix the roads "unless he cuts Medicare. Wait, I meant Medicaid. Then again, he'd probably cut Medicare if he could." (Medicare cannot be cut by any state legislation, although Medicaid certainly can.) Perhaps that was uncharitable of me. But as I blogged earlier, Virginia's government runs quite efficiently. There is no pot of money that will magically appear to fix the state's roads. The governor and legislator will need to raise taxes or cut other programs - it's that simple. Today's Republican party is completely against raising taxes - even Arnold Schwarzenegger, a moderate Republican, swore he would not raise taxes to solve the worst state budget crisis in the whole country. Governor Donald Carcieri, the Republican governor of Rhode Island, has sworn to cut business taxes and has made moves to cut social services.
The Urban-Brookings Tax Policy Center shows that US taxes take about 27% of the country's GDP - 9% lower than the mean among OECD countries (i.e. mainly Western European countries). In other words, there is room to raise taxes. I am not saying that we can or should pay for our needs solely by taxing the rich - in fact, I've cited evidence to the opposite in the past. What I am saying is that a dogmatic aversion to raising taxes on those who can afford it and funding programs that serve the needs of the poor and the broader community is poor theology and bad policy.
Msgr. Ryle reminds us that the goods of the earth are meant for all people. The Catholic Church, despite its staunch opposition to anything that smacks of socialism, does in fact teach that the right to private property is not absolute. Private property is essentially under a "social mortgage", as the late Pope John Paul II said; it serves a higher, social function. One of the documents promulgated at Vatican II said that "The right to have a share of earthly goods sufficient for oneself and one's family belongs to everyone." High degrees of inequality in the distribution of income and wealth are intrinsically unjust.
Lastly, government is the entity that is charged with seeking and assuring the common good of a nation state. Governments need to levy taxes to do that. They are to be guided by the principle of distributive justice and proportionality - the poor are to receive more in benefits, the rich are to be taxed more. The Catholics teach that while taxes can't be "confiscatory", there is a moral obligation for individuals to pay taxes. Furthermore, Ryle quotes the theologian Bernard Haring:
There is not only the sin of tax-evasion by trying to escape tax payment; there is frequently the greater injustice of blocking proper legislation through powerful pressure groups and through cooperation in these sins because of individual and group selfishness.
The most abominable tax crimes are committed by members of the legislating bodies who, for personal benefits, back the already over-privileged groups to the detriment of the less-privileged and of the welfare of all.
In the Virginia governor's election, Bob McDonnell, the Republican candidate, ran against Creigh Deeds, a moderate Democrat. Virginia is doing pretty well as a state, but the roads need improvement. Traffic congestion, especially in Northern Virginia, is a big problem. Deeds mostly swore that he would not raise taxes - except he said he might raise gasoline taxes, which was not really raising income taxes. McDonnell swore straight up that he would not raise taxes at all. Both candidates swore that they would fix the roads.
McDonnell won. Personally, I regard this as unfortunate. I joked to my friends that there was no way he could fix the roads "unless he cuts Medicare. Wait, I meant Medicaid. Then again, he'd probably cut Medicare if he could." (Medicare cannot be cut by any state legislation, although Medicaid certainly can.) Perhaps that was uncharitable of me. But as I blogged earlier, Virginia's government runs quite efficiently. There is no pot of money that will magically appear to fix the state's roads. The governor and legislator will need to raise taxes or cut other programs - it's that simple. Today's Republican party is completely against raising taxes - even Arnold Schwarzenegger, a moderate Republican, swore he would not raise taxes to solve the worst state budget crisis in the whole country. Governor Donald Carcieri, the Republican governor of Rhode Island, has sworn to cut business taxes and has made moves to cut social services.
The Urban-Brookings Tax Policy Center shows that US taxes take about 27% of the country's GDP - 9% lower than the mean among OECD countries (i.e. mainly Western European countries). In other words, there is room to raise taxes. I am not saying that we can or should pay for our needs solely by taxing the rich - in fact, I've cited evidence to the opposite in the past. What I am saying is that a dogmatic aversion to raising taxes on those who can afford it and funding programs that serve the needs of the poor and the broader community is poor theology and bad policy.
Monday, November 02, 2009
Maine residents: Please vote down TABOR
There have been several Taxpayer Bill of Rights, or TABOR, initiatives in the US. Colorado ran one successful one - successful in that the measure was approved on the ballot. The initiative passed in around 2001 and froze the state's level of government spending (although it was indexed to inflation). The folks who sold this bill of snake oil to the public said it would prevent the uncontrolled growth of state government. However, they essentially froze the state's spending levels at 2001 levels. Iris Lav of the Center on Budget and Policy Priorities explains how the Colorado initiative has severely constrained funding for many very necessary public services. She explains why Maine voters should not approve a similar measure on their ballots today - they would essentially freeze state spending levels at basically recession levels, and would create a Japan-like situation in the state.
On October 12, the Maine Heritage Policy Center released a report that touted Colorado’s prosperity and claimed that its prosperity was the result of TABOR – ostensibly “refuting” the Center on Budget and Policy Priorities work showing that TABOR has been detrimental to Colorado. (Question 4, a TABOR nearly identical to Colorado’s, is on the ballot this November in Maine.)
The Maine Heritage report is misleading in several respects, both on data about the Colorado economy relative to Maine’s, and with respect to the quality of life in Colorado.
Income Growth Since 2001 Has Been Higher in Maine than Colorado
Colorado’s economy, hamstrung with TABOR, was not able to recover strongly from the last recession. Although one would not know it from the Maine Heritage report, the incomes of Maine residents actually have been growing faster than the incomes of Colorado residents since 2001.
The Maine Heritage Policy Center uses a highly misleading “index” to portray personal income and population growth in Colorado and Maine. The use of the index implies that growth was the same in 1990 and then took off more quickly in Colorado because of TABOR. As explained in Center on Budget and Policy Priorities reports, Colorado’s economy was particularly strong in the 1990s because of heavy investment by the military and the federal government in the state, and the high level of education of its residents.[1] Both of those conditions pre-existed TABOR and boosted economic growth. A careful economic study showed that TABOR did not cause Colorado’s economic success in the 1990s. [2]
AVERAGE ANNUAL PER CAPITA PERSONAL INCOME GROWTH IN COLORADO AND MAINE
1992 - 2000 2000-2005 2005 – 2008
Colorado 5.89 2.42 4.06
Maine 4.51 3.47 4.73
TABOR has, however, harmed Colorado’s economy since 2001, when TABOR prevented the state from recovering adequately from the recession. Incomes grew more slowly in Colorado than in Maine during the first half of the decade. Coloradans voted to suspended TABOR in 2005, but the state still has had trouble recovering. Overall, per capital personal income growth has been higher in Maine than in Colorado since 2000 – both in the post-recession period during which Colorado’s TABOR was in effect, and after its suspension.
Health, Education, and Child Well-Being Are Stronger in Maine than Colorado
The Maine Heritage Policy Center asks, “What do Mainers get for…higher government spending [than Colorado]?” There is a simple answer. Mainers get a state in which the well-being of all residents is important. Maine’s government spending is particularly important to the children of the state.
KIDS COUNT, a national survey of the well-being of children supported by the Annie E. Casey Foundation, ranks Maine 12th in the country in child well being. Colorado is ranked 22nd.
Some 7 percent of Maine’s children under age 18 lack health insurance, as compared to nearly twice as high a share, 14 percent, in Colorado. In Maine, there is a priority on using public funds to ensure that children have access to affordable, quality health care. [3] Access to early and continuous health care plays a vital role in children’s healthy development, as well as in the amelioration of physical and behavioral health conditions that can impair children’s passage through infancy, childhood, and adolescence.[4] Public insurance covers only 19 percent of children in Colorado but 33 percent of children in Maine.
In Colorado, K-12 student to teacher ratio is nearly 50 percent larger than Maine’s K-12 schools..[5] Evidence shows that reducing class size, particularly for younger children, has a positive effect on student achievement and an especially strong impact for disadvantaged children.[6]
In 2006, Colorado ranked 50th in the country in state per pupil support for higher education. Maine ranked 23rd. [7]
Some 17.2 percent of all Colorado residents lacked health insurance coverage, compared to 10.9 percent in Maine.
If, as the Maine Heritage Policy Center claims, Colorado’s government spending is growing at reasonable rate, one has to ask why Colorado is serving its citizens so poorly.
End Notes:
[1] See Karen Lyons and Nicholas Johnson, “Education and Investment, Not TABOR, Fueled Colorado's Economic Growth in 1990s,” Center on Budget and Policy Priorities, March 2006 and “Fact Sheet: TABOR Will Not Improve Maine’s Business Climate,” Center on Budget and Policy Priorities, October 2009.
[2] See Therese J. McGuire and Kim S. Rueben, “The Colorado Revenue Limit: The Economic Effects of TABOR,” Economic Policy Institute, March 2006, http://www.epi.org/publications/entry/bp172/.
[3] Based on 2008 data from the U.S. Bureau of the Census, American Community Survey.
[4] Sara Rosenbaum and Paul Wise, Crossing The Medicaid–Private Insurance Divide: The Case Of EPSDT, Health Affairs 26:2 (March-April 2007) pp. 382-393.
[5] National Center for Education Statistics, 2008 tables and figures, Table 66. Data is for 2006.
[6] For a brief review of the literature see http://www.aft.org/topics/classsize/
[7] Congressional Quarterly, State Fact Finder, 2007.
On October 12, the Maine Heritage Policy Center released a report that touted Colorado’s prosperity and claimed that its prosperity was the result of TABOR – ostensibly “refuting” the Center on Budget and Policy Priorities work showing that TABOR has been detrimental to Colorado. (Question 4, a TABOR nearly identical to Colorado’s, is on the ballot this November in Maine.)
The Maine Heritage report is misleading in several respects, both on data about the Colorado economy relative to Maine’s, and with respect to the quality of life in Colorado.
Income Growth Since 2001 Has Been Higher in Maine than Colorado
Colorado’s economy, hamstrung with TABOR, was not able to recover strongly from the last recession. Although one would not know it from the Maine Heritage report, the incomes of Maine residents actually have been growing faster than the incomes of Colorado residents since 2001.
The Maine Heritage Policy Center uses a highly misleading “index” to portray personal income and population growth in Colorado and Maine. The use of the index implies that growth was the same in 1990 and then took off more quickly in Colorado because of TABOR. As explained in Center on Budget and Policy Priorities reports, Colorado’s economy was particularly strong in the 1990s because of heavy investment by the military and the federal government in the state, and the high level of education of its residents.[1] Both of those conditions pre-existed TABOR and boosted economic growth. A careful economic study showed that TABOR did not cause Colorado’s economic success in the 1990s. [2]
AVERAGE ANNUAL PER CAPITA PERSONAL INCOME GROWTH IN COLORADO AND MAINE
1992 - 2000 2000-2005 2005 – 2008
Colorado 5.89 2.42 4.06
Maine 4.51 3.47 4.73
TABOR has, however, harmed Colorado’s economy since 2001, when TABOR prevented the state from recovering adequately from the recession. Incomes grew more slowly in Colorado than in Maine during the first half of the decade. Coloradans voted to suspended TABOR in 2005, but the state still has had trouble recovering. Overall, per capital personal income growth has been higher in Maine than in Colorado since 2000 – both in the post-recession period during which Colorado’s TABOR was in effect, and after its suspension.
Health, Education, and Child Well-Being Are Stronger in Maine than Colorado
The Maine Heritage Policy Center asks, “What do Mainers get for…higher government spending [than Colorado]?” There is a simple answer. Mainers get a state in which the well-being of all residents is important. Maine’s government spending is particularly important to the children of the state.
KIDS COUNT, a national survey of the well-being of children supported by the Annie E. Casey Foundation, ranks Maine 12th in the country in child well being. Colorado is ranked 22nd.
Some 7 percent of Maine’s children under age 18 lack health insurance, as compared to nearly twice as high a share, 14 percent, in Colorado. In Maine, there is a priority on using public funds to ensure that children have access to affordable, quality health care. [3] Access to early and continuous health care plays a vital role in children’s healthy development, as well as in the amelioration of physical and behavioral health conditions that can impair children’s passage through infancy, childhood, and adolescence.[4] Public insurance covers only 19 percent of children in Colorado but 33 percent of children in Maine.
In Colorado, K-12 student to teacher ratio is nearly 50 percent larger than Maine’s K-12 schools..[5] Evidence shows that reducing class size, particularly for younger children, has a positive effect on student achievement and an especially strong impact for disadvantaged children.[6]
In 2006, Colorado ranked 50th in the country in state per pupil support for higher education. Maine ranked 23rd. [7]
Some 17.2 percent of all Colorado residents lacked health insurance coverage, compared to 10.9 percent in Maine.
If, as the Maine Heritage Policy Center claims, Colorado’s government spending is growing at reasonable rate, one has to ask why Colorado is serving its citizens so poorly.
End Notes:
[1] See Karen Lyons and Nicholas Johnson, “Education and Investment, Not TABOR, Fueled Colorado's Economic Growth in 1990s,” Center on Budget and Policy Priorities, March 2006 and “Fact Sheet: TABOR Will Not Improve Maine’s Business Climate,” Center on Budget and Policy Priorities, October 2009.
[2] See Therese J. McGuire and Kim S. Rueben, “The Colorado Revenue Limit: The Economic Effects of TABOR,” Economic Policy Institute, March 2006, http://www.epi.org/publications/entry/bp172/.
[3] Based on 2008 data from the U.S. Bureau of the Census, American Community Survey.
[4] Sara Rosenbaum and Paul Wise, Crossing The Medicaid–Private Insurance Divide: The Case Of EPSDT, Health Affairs 26:2 (March-April 2007) pp. 382-393.
[5] National Center for Education Statistics, 2008 tables and figures, Table 66. Data is for 2006.
[6] For a brief review of the literature see http://www.aft.org/topics/classsize/
[7] Congressional Quarterly, State Fact Finder, 2007.
Wednesday, September 30, 2009
NYT: An Anti-Tax Argument That's Hard to Swallow
Randy Cohen, writing on the Ethicist blog at the New York Times, debunks the argument that taxing sugary soft drinks is unethical (he makes no arguments about whether it's good tax or health policy).
The Issue
Proposals to tax sugary drinks as a way to fight obesity and finance health care reform have found support from medical experts and some interest from President Obama while meeting resistance from the beverage industry in general and the Coca-Cola C.E.O. Muhtar Kent in particular. “I have never seen it work where a government tells people what to eat and what to drink,” he told the Rotary Club of Atlanta last month. “If it worked, the Soviet Union would still be around.” Is this sort of argument so dubious, and does it come from the maker of products so damaging, that Muhtar Kent should be dragged off in handcuffs — or worse?
The Argument
I am an expert on neither tax policy nor nutrition, but it is worth examining a few of the arguments against taxing sugary drinks as examples of the reasoning all of us can encounter when making moral choices or weighing the issues of the day or confronting a bumptious uncle at Thanksgiving.
Muhtar Kent’s assertion is fishy because it confuses a positive and a negative. The various plans under consideration do not tell us what we should drink; they are concerned with what we should not drink — sugary beverages, what critics call “liquid candy.” Urging people not to drive short distances is different from saying they should reach the corner store by hopping. Urging people not to drink cola is different from pressuring them to drink cat pee.
And of course our government does tell people what to eat and has for years. Perhaps “tell” is too coercive a term — no federal food police pound on your door at dinnertime demanding to see your broccoli. But “strongly recommend” is apt. Kent should check out the Department of Agriculture’s food pyramid at the delightfully titled MyPyramid.gov or visit nutrition.gov where jackbooted thugs engage in tyrannical meal planning — O.K., there are no jackboots and no thuggery, but there are some tasty menus. (The recipe for cranberry-nut muffins looks delish.)
Our government, as many a nation does, also tells people what to eat in other ways, both directly, by creating menus for public-school cafeterias and military mess halls, and indirectly, influencing our diets through farm policies, tariffs, trade agreements and food regulation.
(Kent’s further assertion, his evocation of the Soviets, is entirely meretricious, deploying the familiar debater’s tactic of deprecating something by linking it to what is widely reviled. The Beatles are bad because Pol Pot liked “Hey, Jude.” Bowling is evil because Satan plays — he’s on a team with John and George.)
It is commonplace for a democracy to concern itself with the nutrition of its citizens. What is rightly and vigorously debated — by, for example, the writer Michael Pollan, the documentary film “Food, Inc.,” the National Cattlemen’s Beef Association or the American Academy Of Pediatrics — is not if government should involve itself in such things, but how. That’s politics in the best sense.
Kevin W. Keane, senior vice president for public affairs of the American Beverage Association, says it is wrongheaded to single out soda: “When it comes to losing weight, all calories count, regardless of the food source.” This is specious, akin to saying that when I have only partial responsibility, I have no responsibility. If I was the triggerman on that bank job, I couldn’t beg for a break because I wasn’t also the lookout and the getaway driver and the caterer. (Are bank robberies catered? Must you pack a lunch? A very healthful lunch?)
Assuredly, many factors affect our weight. But it doesn’t follow that because a policy fails to address all of them, it should not address any. That the feds devote few resources to going after counterfeiters who mint fake quarters doesn’t mean they should decline to pursue those who run off $20 bills.
What’s more, the multiple causes of a problem need not share equal significance. Studies suggest that sugary beverages are a key contributor to obesity. In its analysis, the Center on Budget and Policy Priorities notes that “Americans consume about 250-300 more daily calories today than they did several decades ago, and nearly half of this increase reflects greater consumption of high-sugar soft drinks.” So there’s a case to be made for giving serious consideration to a soda tax even if other steps are not taken.
Such errors of reasoning might be seen as intellectual, not moral, failings, but it is difficult to extend that benefit of the doubt to Americans Against Food Taxes, which describes itself as “a coalition of concerned citizens — responsible individuals, financially strapped families, small and large businesses in communities across the country.” As was reported in The Times, A.A.F.T. looks like a veiled industry organization; calls to a media contact listed on the group’s Web site go to the American Beverage Association. This smells like Astroturf, or corporate lobbyists posing as a grass-roots organization. It is entirely suitable for interested parties to participate in public debate; it is not suitable to conceal who’s doing the debating.
Now, I, too, engaged in some forensic high jinks, I’ll admit. There are no actual proposals out there that call for a guillotine to be erected on the Washington Mall and for Muhtar Kent’s head to be separated from his. But to pose the question as I did is not deceit but a rhetorical device: I assume that readers recognize hyperbole. Of course Kent should not be executed. Most moralists agree that a punishment must be proportional to the transgression (although it’s often hard to agree on the terms). Nor should Kent even be imprisoned. I’d reserve that penalty for those who produce inarguably toxic products — the senior executives of tobacco companies, for instance. But it would be a fine thing if Kent and his cohort were ordered into a class on critical thinking, much as a traffic-court judge can send recalcitrant speeders to driver-improvement school.
Editor: I will note that imposing a federal tax on sugary soft drinks (i.e. non-diet sodas and fruit juices to which sugar or high-fructose corn lobby syrup has been added) will mean that food stamp recipients will no longer be able to buy them with food stamp dollars. This seems reasonable. However, one would need to be cautious in expanding a tax to all unhealthy foods. One should not presume that the poor don't know how to eat well; many of the poor work long hours, which may mean they lack time to prepare meals from scratch. At minimum one would need to modify the food stamp regulations.
For non-US readers, food stamps are a supplemental nutrition assistance program (actually, the program is now called SNAP). The benefits are funded solely by the Federal government. It is administered by the individual states; theoretically, the states don't have any incentive to impose barriers to people getting benefits, since it does end up being free money for the state and its residents.
The Issue
Proposals to tax sugary drinks as a way to fight obesity and finance health care reform have found support from medical experts and some interest from President Obama while meeting resistance from the beverage industry in general and the Coca-Cola C.E.O. Muhtar Kent in particular. “I have never seen it work where a government tells people what to eat and what to drink,” he told the Rotary Club of Atlanta last month. “If it worked, the Soviet Union would still be around.” Is this sort of argument so dubious, and does it come from the maker of products so damaging, that Muhtar Kent should be dragged off in handcuffs — or worse?
The Argument
I am an expert on neither tax policy nor nutrition, but it is worth examining a few of the arguments against taxing sugary drinks as examples of the reasoning all of us can encounter when making moral choices or weighing the issues of the day or confronting a bumptious uncle at Thanksgiving.
Muhtar Kent’s assertion is fishy because it confuses a positive and a negative. The various plans under consideration do not tell us what we should drink; they are concerned with what we should not drink — sugary beverages, what critics call “liquid candy.” Urging people not to drive short distances is different from saying they should reach the corner store by hopping. Urging people not to drink cola is different from pressuring them to drink cat pee.
And of course our government does tell people what to eat and has for years. Perhaps “tell” is too coercive a term — no federal food police pound on your door at dinnertime demanding to see your broccoli. But “strongly recommend” is apt. Kent should check out the Department of Agriculture’s food pyramid at the delightfully titled MyPyramid.gov or visit nutrition.gov where jackbooted thugs engage in tyrannical meal planning — O.K., there are no jackboots and no thuggery, but there are some tasty menus. (The recipe for cranberry-nut muffins looks delish.)
Our government, as many a nation does, also tells people what to eat in other ways, both directly, by creating menus for public-school cafeterias and military mess halls, and indirectly, influencing our diets through farm policies, tariffs, trade agreements and food regulation.
(Kent’s further assertion, his evocation of the Soviets, is entirely meretricious, deploying the familiar debater’s tactic of deprecating something by linking it to what is widely reviled. The Beatles are bad because Pol Pot liked “Hey, Jude.” Bowling is evil because Satan plays — he’s on a team with John and George.)
It is commonplace for a democracy to concern itself with the nutrition of its citizens. What is rightly and vigorously debated — by, for example, the writer Michael Pollan, the documentary film “Food, Inc.,” the National Cattlemen’s Beef Association or the American Academy Of Pediatrics — is not if government should involve itself in such things, but how. That’s politics in the best sense.
Kevin W. Keane, senior vice president for public affairs of the American Beverage Association, says it is wrongheaded to single out soda: “When it comes to losing weight, all calories count, regardless of the food source.” This is specious, akin to saying that when I have only partial responsibility, I have no responsibility. If I was the triggerman on that bank job, I couldn’t beg for a break because I wasn’t also the lookout and the getaway driver and the caterer. (Are bank robberies catered? Must you pack a lunch? A very healthful lunch?)
Assuredly, many factors affect our weight. But it doesn’t follow that because a policy fails to address all of them, it should not address any. That the feds devote few resources to going after counterfeiters who mint fake quarters doesn’t mean they should decline to pursue those who run off $20 bills.
What’s more, the multiple causes of a problem need not share equal significance. Studies suggest that sugary beverages are a key contributor to obesity. In its analysis, the Center on Budget and Policy Priorities notes that “Americans consume about 250-300 more daily calories today than they did several decades ago, and nearly half of this increase reflects greater consumption of high-sugar soft drinks.” So there’s a case to be made for giving serious consideration to a soda tax even if other steps are not taken.
Such errors of reasoning might be seen as intellectual, not moral, failings, but it is difficult to extend that benefit of the doubt to Americans Against Food Taxes, which describes itself as “a coalition of concerned citizens — responsible individuals, financially strapped families, small and large businesses in communities across the country.” As was reported in The Times, A.A.F.T. looks like a veiled industry organization; calls to a media contact listed on the group’s Web site go to the American Beverage Association. This smells like Astroturf, or corporate lobbyists posing as a grass-roots organization. It is entirely suitable for interested parties to participate in public debate; it is not suitable to conceal who’s doing the debating.
Now, I, too, engaged in some forensic high jinks, I’ll admit. There are no actual proposals out there that call for a guillotine to be erected on the Washington Mall and for Muhtar Kent’s head to be separated from his. But to pose the question as I did is not deceit but a rhetorical device: I assume that readers recognize hyperbole. Of course Kent should not be executed. Most moralists agree that a punishment must be proportional to the transgression (although it’s often hard to agree on the terms). Nor should Kent even be imprisoned. I’d reserve that penalty for those who produce inarguably toxic products — the senior executives of tobacco companies, for instance. But it would be a fine thing if Kent and his cohort were ordered into a class on critical thinking, much as a traffic-court judge can send recalcitrant speeders to driver-improvement school.
Editor: I will note that imposing a federal tax on sugary soft drinks (i.e. non-diet sodas and fruit juices to which sugar or high-fructose corn lobby syrup has been added) will mean that food stamp recipients will no longer be able to buy them with food stamp dollars. This seems reasonable. However, one would need to be cautious in expanding a tax to all unhealthy foods. One should not presume that the poor don't know how to eat well; many of the poor work long hours, which may mean they lack time to prepare meals from scratch. At minimum one would need to modify the food stamp regulations.
For non-US readers, food stamps are a supplemental nutrition assistance program (actually, the program is now called SNAP). The benefits are funded solely by the Federal government. It is administered by the individual states; theoretically, the states don't have any incentive to impose barriers to people getting benefits, since it does end up being free money for the state and its residents.
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