Economics @ ITT

The Truth about the Economy in 2 Minutes, Fifteen Seconds

Posted in economics, macroeconomics by ittecon on June 17, 2011


Former Labour Secretary, Robert Reich, describes the economy in about 2 minutes.

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Response to Sustainable Taxation

This post is a response to Alex Zorach’s original post on sustainable taxation. He gives additional perspective on other pages of his site.  In his post, he takes the position that sustainability should be a key component in a well-considered tax policy. Follow the links above to read his position, and then read this response. My response is written to Alex, so where I use the pronoun you, I am referring to him.

It is generally accepted that a tax system needs to possess the following attributes, which in summary are equitability, adequacy, simplicity, exportability, and neutrality.

A tax system needs to be equitable, by which we mean fair. Fair is a loaded term, and subject to personal bias based on one’s particular worldview. That said, there are two ways to look at equity: vertically and horizontally. By vertical equity, I mean from top to bottom—up and down the income and wealth scales, from rich to poor. By horizontal equity, I mean to ask, do taxpayers in a given strata under similar conditions have a similar burden.

Vertical equity is addressed by how progressive or regressive the employed tax system is. The system may be progressive, regressive, or proportional. These terms are in common use, so I won’t define them here.

Horizontal equity is assessed, say, by looking at two neighbours in the same demographic group, earning similar income, with similar wealth accumulation and measuring their respective tax burdens. One would expect them to be comparable. I might also compare across some other class such as wage-earners versus investors or natural persons versus corporations to ensure there is no built-in systematic bias toward one group

A tax system needs to be adequate to meet the needs it was designed for. If I need to fully fund a new infrastructure project that costs $100,000,000, then the tax base needs to support this amount. Since federal taxers need to support on-going programmes that might ebb and flow with business cycles, a good system needs to adjust accordingly.

Simplicity speaks for itself. A simple taxation scheme should have the added benefit of being comparatively cheaper to administer and likely easier to asses compliance.

Exportability is the concept that some persons outside of a jurisdiction benefit by services provided in a jurisdiction. Foreign firms and tourists benefit by utilising local services, and so should contribute to the local economy.

Neutrality or efficiency says that taxes should minimise economic impact, so that microeconomic decisions are made not made on the basis of tax policy. Unfortunately, this may be at odds with macroeconomic goals. Taxes do create incentives and disincentives, but as with anything economic, we need to look at the value proposition.

To these, you add sustainability. To some extent, I feel this is a subset of adequacy.

In your position paper, you state that you have “have heard the argument from some conservatives and libertarians that it is not good, proper, or ideal to think about incentives when designing a tax system.” Clearly, these people are not economists because fundamental to a good taxation scheme is to evaluate incentives.  You also mention fairness, which, as I mention as well, is a subjective concept. One perspective of fairness is the Western productivity standard that says “to each according to what he or she produces” versus that Marxian view that says that says “to each the same.”

Regarding simplicity, we are in agreement, and moneyed interests vis-à-vis corporate lobbyists effectively write tax policy, and there are to varying degrees trade-offs between simplicity and fairness.

Now I comment directly on your ideal tax system as I summarise in turn.  First, you support the elimination of individual and corporate taxes, and then you offer alternatives:

Carbon (Fossil Fuel) Tax: I presume you are taxing this on the basis of sustainability, and it is a negative externality. I don’t feel that it would be simple to monitor or measure this at the extraction level. You cite disincentivising buring natural gas off. Who is measuring this burn off in order to assess a tax?

Disposal of Resources: Clearly, evasion would be the incentive created here. If I can dispose of the items illegally or export them to another jurisdiction, I can evade the tax. Moreover, one person’s trash is another’s treasure vis-à-vis recycling. The United States already exports trash to other countries such as China. These countries reconstitute the materials into products they that export back to the US.

Political Contributions: This fails to meet the adequacy standard. Besides as the Citizens United case recently tells us is that an entity can simply advertise in proxy for the politician on the basis of free speech. In kind and indirect contributions of this nature would not be covered.

Holding Cash: This is all well and good, but one only needs to store cash offshore, which many already do. All this will do is tax the people without the wherewithal to export their wealth.

Fines and Penalties: Again, we fine and penalise all sorts of activities, but it is hardly adequate to support a four trillion dollar national budget.

Even if we were to assess all of these, I do not see how this would even close to support any significant needs.

As for the less radical proposal, I think it is important to earmark Social Security and Medicare, though in principle, they could be rolled into income tax and treated differently on the collection side, but a rose by any other name… I adamantly agree on removing any caps on income. Social Security reform is a political red herring and not key to any serious economic discussion. Medicare is a different story.

It is as important to tax interest, dividends, and capital gains at the same rate as earned income. Much tax revenue is avoided by this legerdemain. This meets the simplicity and equity requirements.

Regarding simplicity, deductions need to be severely curtailed—starting with home mortgages. Deductions are a surreptitious means to subsidise behaviour. A more open and honest way is through direct subsidies.

I don’t understand how taxing income shifts “the burden away from wage earners,” as this would be the crux of those affected. I don’t believe that saying that payroll taxes are “a major barrier to employment” makes it so.  I have been involved in hiring decisions in small and medium sized businesses, and I have never heard a discussion that went something like, “Gee, I’d love to hire that person, if only it weren’t for that dreaded payroll tax and FICA/HI.” This is ideological subterfuge and is not a true economic consideration. When a business is considering the cost of a human resource, the question is how much gross salary (including payroll taxes) and benefits do I have to pay to get another worker. If the marginal cost of hiring that is less than the marginal contribution, the hire is made.

20 Facts About US Inequality that Everyone Should Know

Posted in economics by ittecon on June 4, 2011

The Stanford Center for the Study of Poverty and Inequality presents 20 Facts About U.S. Inequality that Everyone Should Know.

What do Economic Models Tell Us about Elections?

Posted in economics, employment by ittecon on June 4, 2011

Nate Silver’s article explains the relationship between GDP, inflation, and the election of the incumbent party’s candidate for president.