The tax break everyone likes

Mar 4, 2014 23:28 UTC

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President Obama has released his budget for the 2015 fiscal year; you can read Shane’s massive guide to that 1656-page document here. The most striking detail, Shane writes, is Obama’s proposed expansion of the Earned Income Tax Credit, which provides direct cash transfers to low and moderate-income workers; the official case for the increase is made by the chair of Obama’s Council of Economic Advisors, Jason Furman, in the journal Democracy.

Tim Fernholz says that Obama is tackling income inequality “with a twist of the tax dial.” Zachary Goldfarb has the details: the proposal would effectively double EITC so that many working families would get 15.3 cents back on every dollar they earn up to $6,570, for a maximum of $1,005. The current rate is 7.65 cents, for a maximum of $503. Jackie Calmes adds that the proposal raises the annual maximum income levels to qualify for the EITC, and lowers the minimum age to 21 from 24 (though students still don’t qualify). It also makes the EITC more generous for childless workers, an idea that MIT economist David Autor told Calmes “just makes a lot of sense”.

This is all projected to cost about $60 billion, and Obama proposes to pay for it by closing the carried interest loophole and various other tax loopholes used mainly by the wealthy. David Wessel points out that many of the same loopholes are closed in David Camp’s tax reform plan.

Indeed, the EITC itself has broad bipartisan support. Jonathan Chait writes that it is a poverty-fighting method that Republicans have long favored: in fact, they have been proposing it for a while (see the AEI, Glenn Hubbard, and Marco Rubio). In January, Greg Mankiw wrote that “what is most disappointing about the president’s proposal [to increase the minimum wage] is that the federal government has the option of using the much better Plan A. It is called the earned-income tax credit”.

The EITC has proved to be one of the most effective tools for both fighting poverty and encouraging work. People are only eligible for the EITC if they are employed. According to the Center for Budget and Policy Priorities, “EITC expansions between 1984 and 1996 accounted for more than half of the large increase in employment among single mothers during that period”. A paper by Molly Dahl at the CBO found that women who were encouraged to find work in order to qualify for the EITC advanced in their jobs and saw their incomes rise, at least in the few years that the researchers studied.

James Pethokoukis doesn’t have any specific arguments against the EITC increase, but is generally wary of a budget that increases the federal tax burden to 19.2%. “In the history of the American Republic, the total federal tax burden has only once topped 19% during peacetime”, he writes. — Shane Ferro and Ryan McCarthy

On to today’s links:

The Fed
3 big questions about the Fed’s ability to keep the financial system safe – David Wessel

Facebook
Facebook wants to get into the drone business – TechCrunch

Wonks
Free money for everyone: the Fed should have “the power to hand out checks to the American people” – Ryan Cooper
Economists say Paul Ryan misrepresented their research – Rob Garver

Charts
RadioShack is doomed, and so are traditional retailers – Derek Thompson

Alternative Currencies
The most dangerous man in bitcoin: US attorney Preet Bharara – Max Chafkin

Bad Data
The problem with living wills: we can’t accurately forecast our own desires – Jerome Groopman and Pamela Hartzband

Oxpeckers
“Choire and Alex are tired, broken men who have taken this thing as far as it can go” – The Awl
Jonah Peretti on what BuzzFeed can learn from the history of journalism – Medium

Trends
Airlines try to make elite status mean something – Matthew Klein

Study Says
Social media activism satisfies people’s need to look good in front of their friends – Org Theory

Hilarious
“Sign right here—when the flood waters hit, you’ll see how Allstate responds” – McSweeney’s

Your Dystopian Future
DRM for coffee – Robinson Meyer

Alternative Currencies
Japan is going to regulate and tax Bitcoin like shiny rocks and other commodities – Nikkei

Equals
Is there a gender gap in tech salaries? (hint: yes) – Guan Yang

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Default scenario

Oct 7, 2013 21:56 UTC

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It’s week two of the government shutdown, and with 10 days to go before we hit the debt ceiling, there is one big question as to what would happen if the US defaulted on its debt. Is it merely bad for the US’s image — or would it initiate economic apocalypse?

Yalman Onaran says a US default would be worse than the Lehman bankruptcy, noting that it “will be an economic calamity like none the world has ever seen”. Stephen Gandel identifies four different reasons to freak out over the possibility of default. All four revolve around the fact that a lot of market systems are based on the assumption Treasuries won’t default, and no one is quite sure what happens if they do. The Treasury Department, meanwhile, is set up to make its payments on time and in full, and its payments are not prioritized.

On the other side of the debate, Nick Cawley points out that the markets remain relatively calm. Treasury yields are at the lowest they have been in two months, likely because while payments may be delayed, investors are reasonably certain they will eventually get their money. “Keep calm, carry on and watch out for U.S. Treasurys to push higher”, he writes.

But hitting the debt ceiling is about a lot more than missing a payment to creditors. Where the government shutdown mostly affects discretionary spending (think National Parks and furloughed workers), a default would start to affect mandatory spending programs like Social Security and Medicare. Brad Plumer takes a deep dive into whether the — or exactly how — the Treasury Department can prioritize who to pay in the event that the US breaches the debt ceiling, and still avoid a default. The short answer: it’s incredibly complicated and may not be possible. Furthermore, “to acknowledge that payment prioritisation is possible would enable the Republicans to force the president to use it”, says Cardiff Garcia.

Paul Krugman thinks hitting the debt ceiling will be a disaster, even if the economy manages to avoid a Lehman-like catastrophe:

[The government] would be forced into savage spending cuts, around 4 percent of GDP, that wouldn’t just cause hardship (Surprise! No Social Security for you this month!) but amount to a severely contractionary fiscal policy, sending us into recession if it lasted any length of time.

–Shane Ferro

On to today’s links:

Good Points 
The “non-essential” parts of the government that are shut down are actually quite essential – Mike Konczal

Bold Moves   
Not just a safety net, but a floor: the Swiss might give every adult a guaranteed income – Reuters

The Oracle 
Warren Buffett’s Berkshire made $10 billion lending to firms during the crisis – WSJ

Long Reads   
“Life swaps,” “creators” and how San Francisco’s entrepreneurial culture is changing the country – Nathan Heller

Twitter   
At what price Twitter? A wonky guide to its IPO valuation – Aswath Damodaran
Twitter could be valued at $20 billion after it starts trading – Bloomberg

Billionaire Whimsy 
What happens when two billionaires rescue America’s biggest union-owned bank – Max Abelson

Questions to Which the Answer Is No One Knows
“Why is the Fox newsroom full of absurdly giant iPads?” – Gizmodo

Hope/Change/Etc.
“Obamacare may well be the best thing Washington has done for American small business in decades” – James Surowiecki

Alpha
Renowned investor concludes Steve Jobs just wasn’t that nice – Business Insider

Charts
The US loan-to-deposit ratio is at its lowest level in 30 years – Sober Look

Wonks
Raise your hand if you know how the Treasury’s payment system works – Cardiff Garcia

Twitter
“Twitter can be a magical wealth-creation machine powered mostly by hot air” – David Carr

Pivots
JP Morgan wants to get into the dissertation advisory and review business – Inside Higher Ed

Billionaire Whimsy
Bill Gates invests in fake meat – Fast Company

Bitcoin
An analysis of Silk Road’s impact on Bitcoin – Genesis Block

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