Opinion

Felix Salmon

The game theory of #mintthecoin

Felix Salmon
Jan 9, 2013 17:43 UTC

As Cardiff Garcia says, when it comes to #mintthecoin, “it’s important for advocates to define carefully what they’re actually calling for”. The basic matrix, as I see it, looks a bit like this:

Don’t mint the coin Mint the coin
Threaten to mint the coin Bluff Open Defiance
Don’t threaten to mint the coin Negotiate Last Resort

I’m in the bottom-left corner: Negotiate. That’s the job of the President of the United States: to negotiate with Congress, rather than to do tricksy, Constitutionally-dubious end-runs around it. Joe Weisenthal, to his credit, is also clear where he stands — he’s in the bottom-right corner. He doesn’t advocate using the threat of minting the coin as a negotiating tool; rather, he’s advocating that negotiations should happen as normal, and only in the very last resort, if all negotiations fail, should the coin be deposited at the Federal Reserve so as to avoid a catastrophic default.

One problem is that it’s very hard to keep the existence of the coin secret, especially if the executive-branch negotiators, who are going to be spending a lot of time with the representatives of House Republicans, know that they have it in their metaphorical back pocket. Basically, the existence of  a secret plan to mint a coin is functionally equivalent to a public threat to mint the coin, if the House Republicans find out about the secret plan. In that event, the Negotiate strategy becomes the Bluff strategy. And as Cardiff says, the Bluff strategy is really stupid:

For the Republicans, having Obama threaten to use the coin might be wonderful news because then they could force him to actually use it. By this reasoning, not only will the worst-case scenario of default be avoided, but they could then look forward to screaming “Dictator!” while accusing him of having used a legally questionable tactic (or at least of going against the intent of the law) and of running an end-around on the balance of powers (and actually they’d be right about this).

This argument would be ludicrously hypocritical, but unfortunately it would also play better publicly than the hypothetical White House defence. Which would probably sound something like this: “The Republicans backed me into a corner again, and despite my being the president who said that we should all put aside childish things, I ordered a shiny coin and called it a trillion dollars, which I’m allowed to do because of a poorly written amendment to a law that was undeniably meant for something else.” Not exactly a winning case.

The Open Defiance strategy — let’s just print the coin anyway, and thereby stop the House Republicans from using the threat of default as a negotiating tactic — looks pretty silly too, because you’re basically using a sledgehammer to crack what might ultimately be a pretty thin nut. At this point, it’s worth moving out of the econowonkosphere and into the even weirder world of Republican politics. Once we get there, we learn from the likes of Greg Sargent and Kim Strassel that the Republicans aren’t nearly as coherent on this issue as they were in 2011, and that, in Strassel’s words, there’s a good chance that “Round Two is already Mr. Obama’s”.

The grown-up Negotiate strategy, it turns out, actually has an incredibly high chance of success, while any other strategy risks creating massive political chaos. (I can easily, for example, see the Republican party refusing to support any nominee at all for key positions like Defense and Treasury and State, if Obama goes all scorched-earth with a Coin strategy.)

The Negotiate strategy is far from ideal, of course. Since the debt ceiling has been and will be reached many, many times, even something with a very high chance of success is statistically certain to fail eventually. So the obvious best-case scenario is to abolish the debt ceiling entirely, or, failing that, to raise it to, say, a few quadrillion dollars. But right now, when we’ve already reached the debt ceiling, is probably not the best time to try to negotiate such a thing. (In fact, any time there’s a Democrat in the White House is probably not the best time to try to negotiate such a thing.) For the time being, the executive branch should do what the executive branch has always done when the debt ceiling looms, which is to persuade Congress to raise it.

It’s worth adding a meta-media note here, too. The #mintthecoin meme has successfully migrated from the outer reaches of the econoblogosphere into a fair amount of mainstream media coverage, and as a result it has actually started to be taken seriously outside the Beltway. And even, in a few cases, inside the Beltway too. But be clear, this is absolutely a media-driven meme: people talking about it are not talking about an actual political proposal which an important number of serious DC politicians genuinely want to implement. As I say, it’s a Flying Spaghetti Monster thing — it’s a ticklish thought experiment, nothing more. Many media organizations are having a lot of fun with it, and that’s their right. But, especially in this case, it’s important not to mistake media coverage for reality.

COMMENT

Frankly, I don’t understand. How is minting a coin any different from having some private bank enter the number 1 trillion into a computer and then using that number to buy T-Bills (which are themselves electronic) from a primary dealer? If you’re entering numbers in a computer in the first place, what does interest matter? ZIRP is assured into infinity so who cares what the interest cost is? All the coin idea does is prevent banks from collecting interest on that portion of the debt. It doesn’t reduce the debt – it wouldn’t even reduce the deficit since you KNOW they’re going to spend whatever they “coin”.

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The global cost of fiscal indecision

Felix Salmon
Dec 31, 2012 16:28 UTC

Happy fiscal cliff day! The fiscal prognosis is, amazingly, probably fuzzier today than it has been in weeks: the only thing that seems certain is that no one has a clue what’s going to happen, especially in the House. But amidst the chaos of the intraday news chase, I think two broader stories have failed to get the attention they deserve.

The first is that we have now officially reached the debt ceiling. Naively, I had assumed that any fiscal-cliff deal would automatically include raising the debt ceiling — after all, after going through the present legislative nightmare, who’s going to have any appetite for another one immediately afterwards? And yet, astonishingly, it seems as though even if the fiscal cliff does manage to get averted, the debt ceiling will remain in place, and raising it will require its own separate legislation.

The second broad narrative is the slow death of the Grand Bargain. If and when we do get some kind of fiscal cliff deal, it will be a patched-together hodgepodge of policies designed with exactly one goal in mind: finding a piece of legislation which is capable of getting, somehow, through Congress. It will not be a shiny new tax code which radically rethinks US fiscal policy to put us on a healthy long-term footing: instead we’ll just get something better than the fiscal-cliff alternative of doing nothing at all.

So if you were hoping that the cliff might finally give us the opportunity for a deep rethink of something like the mortgage-interest tax deduction, or even tax expenditures more generally, think again. And other reforms are similarly not going to happen. For instance, Bob Pozen and Lucas Goodman have a sensible idea: pay for a reduction in the corporate income tax rate by allowing corporations to deduct only 65% of their interest expenses.

It’s fun to look at Pozen’s idea side-by-side with that of Cromwell Coulson: Coulson proposes that we tax dividends at the same rate that we tax income, but that we also allow all dividends to be tax-deductible to corporations.

The point in both cases is that both dividends and interest payments are ways of returning capital to people who funded the company, but debt is more systemically dangerous than equity is. So why structure the tax code to make debt more attractive than equity?

This was exactly the kind of debate that the fiscal cliff was supposed to engender: after many years of a “permanent temporary tax code”, we’d finally be forced to implement the kind of profound fiscal revamp that all politicians agree is needed.

And yet, we have failed. The solution to the fiscal cliff will be just as tenuous and temporary as anything which went before it, and will include nothing radically new. The legislative process in the US makes all fiscal policy extremely path-dependent, and the degree of dysfunction in Congress makes any path at all extremely rocky and tenuous. No matter how attractive the final destination, the further away it is, the more likely it is that you simply can’t get there from here.

The result is complete idiocy like running up against the debt ceiling, or raising taxes on pretty much every income-earning American, despite the fact that nobody wants either thing to happen.

If you look at legislatures around the world over the past five years or so, they have all — consistently — proved either reluctant or incapable of making big fiscal decisions when necessary: this is one reason why central bankers have become so incredibly important to the world economy. I don’t know if this is some kind of bug which is found in mature democracies, but the problem is real, and it’s global. And I suspect that even if it doesn’t cause another recession in the US, it’s ultimately going to shave many trillions of dollars off global GDP in the years to come.

COMMENT

Nice read, Felix. The game is emotions. The term ‘fiscal cliff’ implies doom. If that does not work we face the dreaded ‘recession’ word. Frightening. Yes, it is a sign of the times. And we are all emotional pansies jerked around by the latest fear we decide to accept.

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Don’t fight a tax on deductions

Felix Salmon
Dec 17, 2012 05:47 UTC

James Stewart has a long attack this weekend on the one idea from the presidential campaign which managed to receive genuine bipartisan support: the cap on deductions. He’s a first-rate reporter and columnist, so it’s worth going into some detail about all the different places he’s wrong.

Stewart starts off his column by summing up his two main arguments against a cap on deductions:

Without addressing larger tax preferences, like a lower rate on capital gains, it does almost nothing to cure the so-called Buffett problem, in which Warren Buffett’s secretary pays a higher effective rate than her billionaire boss. It doesn’t even raise much revenue.

Saying that a cap on deductions doesn’t cure the Buffett problem is a bit like saying that some random bit of Dodd-Frank doesn’t solve too-big-to-fail, or wouldn’t have prevented the 2008 financial crisis. It’s true, but it’s irrelevant. You can’t approach the current fiscal negotiations with the idea that solving the Buffett problem is a necessary precondition for any fiscal-policy tweak: you’d never get anywhere if you did. The task right now is to come to an agreement on a set of policies which will raise revenues and cut expenditures; a cap on deductions does exactly that. And what’s more, while it won’t mean Warren Buffett paying a higher tax rate than his secretary, it will at least reduce the distance between them.

As for the idea that a cap on deductions “doesn’t even raise much revenue” — well, that’s in the eye of the beholder. The dog not barking here is that Stewart never actually comes out and say how much money a cap on deductions would raise. Here are the numbers, from the Tax Policy Center: a cap at $50,000 would raise more than $700 billion over ten years, while a cap at $25,000 would raise some $1.2 trillion. That’s real money. Even if you exempt charitable donations from the cap, you’re still raising almost $500 billion at the $50,000 level, and more than $800 billion with a $25,000 cap.

Stewart is at least honest about the main reason he opposes this cap:

It would hit people like me: taxpayers in higher brackets who rely on earned income as opposed to investment income or an inheritance, who give to charity and live in a high-tax state. Assuming a $35,000 limit on itemized deductions, my federal tax last year would have risen to 27 percent of my adjusted gross income, from 22 percent.

Stewart talks about his own personal tax rate a lot in his column; he must think it’s of great interest to the rest of us. Interestingly, he always talks about his tax rate as a percentage of his adjusted gross income, which is surely a lot higher than his tax rate as a percentage of the total amount of money he makes every year. (As a self-employed professional, Stewart can take a large number of expenses, including housing expenses, and deduct them from his income before calculating any tax at all.)

Stewart’s point is absolutely correct, as far as it goes. The three major deductions are state and local taxes; mortgage interest payments; and charitable contributions. So people who spend a lot of money on those three things every year — people like Stewart — are going to be precisely the people who are most hit by a cap on deductions.

At the same time, however, Stewart is rich, and everybody knows that the rich are going to have to pay more in taxes, one way or another. Indeed, Stewart says he’s OK with that: he claims that he “wouldn’t mind paying more” in taxes, just so long as the top 400 taxpayers in the country all paid more in taxes as well.

But here’s the thing — they would! According to Stewart’s own calculations, the taxable income of the top 400 taxpayers would rise by $32 million, on average, while their overall tax rate could go up to 25% from 20%. Seems like a big hike to me. But because that 25% is lower than Stewart’s own 27%, he’s decided that we’d be better off not capping deductions at all.

This is profoundly myopic. I can see how on a philosophical level it makes sense to ask the top 400 taxpayers in the country to pay a higher tax rate than James Stewart. But the top 400 taxpayers are, by definition, a highly exceptional bunch, who spend millions of dollars a year on tax-avoidance strategies. It might or might not be possible to construct a tax regime which makes the top 0.0001% pay a higher tax rate than James Stewart, but I really don’t think that failure to do is reason to do nothing at all.

Maybe realizing that he’s on to a losing argument here, Stewart shifts course at this point, describing the deduction cap as “a stake aimed at the heart of the charitable deduction”. And once again, the dog doesn’t bark: he quotes lots of people who work in the non-profit sector, saying that this move would reduce the amount of money that people give to charity. But not once does he hazard a guess at the amount by which charitable giving might decline; indeed, he quotes Patrick Rooney, of the Center on Philanthropy at Indiana University, as saying that he hasn’t studied that question.

Rooney has studied similar questions, however. For instance, his institute looked at the effect of capping the deduction at 28%, even for taxpayers with a higher marginal tax rate. That tweak would reduce charitable giving by some $2 billion per year, they found — but it would raise ten times that amount in new tax revenues.

And when the CBO recently looked at various different ways of changing the charitable tax deduction, they came to much the same conclusion:

In each case that CBO examined, the reduction in the subsidy (and thus the increase in revenues) would exceed the reduction in charitable contributions, whether measured in dollars or as a percentage change.

If there’s one constant when it comes to the charitable deduction, it’s this: its opponents love to get quantitative, while its defenders generally refuse to talk numbers at all. For instance, check out Bob Shiller’s column this weekend: despite the fact that he’s a fine economist, he never once talks costs and benefits, instead relying on general principles such as the one saying that “income that is freely given away should not even be considered as taxable income”. And then compare Dick Thaler, or any of the many other critics of the charitable deduction: they ground their arguments in reality, rather than in the clouds.

So when Stewart starts saying that capping deductions will hurt the poor, on the grounds that the poor go to hospitals and museums, and those hospitals and museums are reliant on charitable donations — well, take it all with a pinch of salt. And move on to Stewart’s next argument, which revolves around the deductibility of state and local taxes:

According to the Census Bureau, state taxes per capita in 2011 ranged from $3,491 in New York to $1,674 in South Dakota. For many higher-income taxpayers in high-tax states, state and local taxes alone would exceed the cap limit, completely depriving them of the mortgage and charitable deductions.

This is an interesting use of the word “many”. If the cap was put at $25,000, that would be more than seven times the average state taxes in the state with the highest taxes in the union. If the cap was at $35,000, it would be more than ten times New York’s average state taxes. So yes, if you pay ten times the average amount of taxes in your state, and if you live in New York, then you might use up all of your cap with state taxes alone. You’ll excuse me if my heart doesn’t bleed.

Stewart concludes by reiterating that he would rather see other people pay more in taxes, rather than himself — especially people who rely less on income and more on capital gains. I’m inclined to agree with him, on a policy level: I too would like to see unearned income taxed at the same rate as earned income. But the fact is that all the big deductions — charitable, mortgage-interest, even state and local taxes — are bad public policy. We should cap them, at a high level if necessary, and then bring down the cap over time, until it reaches zero. That, in turn, will help income tax rates to converge on capital-gains tax rates, again over time. Few things in fiscal policy happen overnight. But capping deductions is a step in the right direction. And Stewart should embrace that, rather than fighting it.

COMMENT

“Would those dollars have a greater impact for good if spent on pre-k for 4 year-olds?”

Elizabeth Seton Academy in Boston, an independent Catholic school serving inner-city families, would be thrilled to have a small fraction of that $500k. The total sum would take 25 girls all the way from 9th grade into college.

So yes, there are ways to spend that money for greater impact. I agree that our medical system should explore hospice care as an alternative — can be better for patients, families, and the taxpayer. Life is measured by the quality of the days, not the number of days.

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The employment emergency is over

Felix Salmon
Dec 7, 2012 15:41 UTC

 

This is the US unemployment rate, from Calculated Risk. Today’s jobs report was a very positive one: not only did job creation exceed all expectations, but unemployment fell too, to 7.7%. For the first time, the unemployment rate is lower than it was when Barack Obama took office, in January 2009.

The employment recovery is now 33 months old, and as strong as it’s ever been. We’re still a long way from achieving pre-recession levels of employment, but the fact is that it’s hard to maintain a sense of crisis and emergency for this much time: if you live with anything for more than a couple of years it becomes normal. (Which is one reason why Europe, which has a structurally much higher unemployment rate than the US, doesn’t consider itself to be in a permanent jobs crisis.)

The levels in the employment report are still scary. 7.7% is high in absolute terms, and both the employment-to-population ratio and the labor force participation rate are much lower than they should be. America should have millions more people at work than it does, and there’s a very strong case, looking at levels alone, for further economic stimulus to help us further in the right direction.

But there’s something oxymoronic about the concept of a permanent state of emergency. And in terms of how strong the recovery feels, first derivatives are just as important as levels: if unemployment has fallen from 8.7% to 7.7% in the past year, that feels better than an economy where unemployment has risen from, say, 6.1% to 7.1%. When the temporary payroll tax cut was passed, unemployment was higher than it is now, and it was rising; clearly we’re in a much better spot now than we were then.

The best-case outcome from the fiscal negotiations now taking place between Barack Obama and John Boehner is that they move us out of the “permanent temporary” tax code and into a world where everybody knows what tax rates are and what they will be. Putting expiry dates on tax cuts is a gimmick, and while there’s a case for doing that kind of thing in the middle of a major crisis, we’re really not in the middle of a major crisis any more. It took far too long for the unemployment rate to start falling, and it has been falling far too slowly. But “unemployment should be falling faster” is not a crisis.

With any luck, then, the resolution to the fiscal-cliff debate will be a set of tax policies that both sides agree on, along with a clear date when they will be fully in force. I’m thinking January 1, 2014. The key number to look at will be total federal taxes as a percentage of GDP: it needs to be high enough to be able to run a mature modern democracy. Then, once you have a clear and permanent tax code as your primed canvas, you can start having a sensible conversation about government expenditures: where they need to come down, and which areas of the economy need some stimulus. Even if spending-related stimulus is no more effective than tax-cut-related stimulus, it’s still a better option, because it allows you to leave the tax code alone.

If Obama’s first term was about doing whatever was necessary to get us out of the biggest crisis in living memory, his second term should be dedicated to building strong and permanent foundations for the economy going forward. America’s fiscal architecture is a key part of that — indeed, it’s the key part. So if the payroll cut disappears, along with all other temporary bells and whistles, that’s fine. What’s good for the economy now will also be good for the economy next year, and the year after, and the year after that. Let’s structure any a deal so that it can work forever. And then, if there are temporary political and economic issues which need addressing, let’s tackle them through means other than the tax code.

COMMENT

Please, sir – send me a pair of the rose-colored glasses you are wearing. The ACTUAL unemployment rate when factoring in the under-employed and those who have stopped looking for work is about 14%.

Recovery? Most of the jobs now touted are part-time or temporary or seasonal, minimum wage with no benefits. The employment always is greater during the holidary season when stores need more employees – TEMPORARY employees who will not be kept on after the holidays.

It is a “wait and see” time – when you wait and see what the numbers will be in January, February and March. Plus, more companies are cutting hours for employees – even Walmart is doing this. Not pessimistic – just realistic in my views of the “wonderful” employment numbers.

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Why does the Fed chair need to be American?

Felix Salmon
Nov 26, 2012 18:16 UTC

Today’s rapturously-received news that Mark Carney, a Canadian, will be the next governor of the Bank of England reminded me of this tweet from Charles Kenny:

As far as I can tell, absolutely everybody thinks that Carney is the best possible person for the Bank of England job, and that it’s an absolute triumph for UK chancellor George Osborne that he managed to persuade Carney to change his mind and accept it.

Much the same can be said of Stanley Fischer, who’s done a fantastic job running the Bank of Israel. Indeed, in general, high-profile public-sector jobs tend to be done better when they’re done by foreign nationals. The logic is simple: if you’re choosing from a global pool of candidates rather than simply a national pool of candidates, you’ll end up with a better person at the end.

Which raises the obvious question: why is such a move still unthinkable in the US? There are lots of big jobs coming up here: Treasury secretary, SEC chairman, Fed chairman — and all of them are going to go, automatically, to US nationals. Think about it this way: Mark Carney is the best central banker in the world, and he would be an amazing replacement for Ben Bernanke. What’s more, given the choice, he would surely plump for the Fed over the Bank of England. So it’s reasonable to assume that if the US wanted him, they could have had him.

In England, everybody has cheered the choice of Carney as inspired — but if the same announcement had happened in the US, there would be an immediate chorus of boos. Apparently US exceptionalism is so deeply ingrained in the national psyche that not only must everybody always believe that the US is the greatest nation on the planet, it is also necessary to believe that all the greatest people on the planet were born here too. (Except Jesus, maybe.)

It’s obvious that the leadership of the world’s most important international financial institutions — the World Bank and the IMF — should go to the best-qualified candidate, rather than whomever happens to have been chosen for the job by the US and Europe respectively. But the fact is that the same is true for the world’s most important national financial institutions as well. If England can have a Canadian central bank chief, why can’t the US pick a Brazilian? Arminio Fraga for the Fed! It would be inspired.

COMMENT

Forgive me for still not being over having lost the election but permit me to repeat one of the few thoughts Mitt managed to communicate to the electorate.

“There are superior cultures in the world and ours is one.”

Even my friends at Fox News now understand the demographic trends at this point. We know the Latino citizens want their friends and family in and if we don’t welcome them with open arms we’ll never again win a national vote. Fine.

We do need to remember though that as politically incorrect as it might be to say out loud… there is a REASON several billion people would like to move to The US, Northern Europe, Canada and Australia.

Charles Kennedy is nothing less than childish as it pretends that the Earth can support 7 billion western lifestyles instead of 1.

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Taxes: Why tinkering beats wholesale overhaul

Felix Salmon
Nov 19, 2012 19:48 UTC

The fiscal debate which is just beginning in Washington is the political equivalent of trench warfare: the two sides have strongly-held positions, and the confrontations are going to be held on a thousand different fronts. In the end, there will be some tax-code changes here, some spending cuts there — but the baseline is the status quo, and the further that a plan deviates from the status quo, the less likely it is to get adopted.

Fiscal policy, in other words, is like healthcare policy: it’s path-dependent. There are lots of things that in an ideal world virtually everybody would like to see the end of; the mortgage-interest tax deduction is only the most obvious. But you can’t get there from here. What’s more, it’s incredibly difficult to get anything brand-new into the mix. I would love to see a carbon tax, and a financial-transactions tax, and a wealth tax — all of them are more attractive than an income tax, and some combination of them would be much better. But the point is that we’re not starting from scratch, which means that according to the rules of politics, we basically have to go to work only with the tools we have.

And yet, every time there’s a big problem, thinkers start coming out with big solutions. Bloomberg View, for instance, has a classic QTWTAIN headline: “Could 18th Century’s ‘Sinking Fund’ Solve Fiscal Cliff?” And at the NYT, Daniel Altman proposes this:

American household wealth totaled more than $58 trillion in 2010. A flat wealth tax of just 1.5 percent on financial assets and other wealth like housing, cars and business ownership would have been more than enough to replace all the revenue of the income, estate and gift taxes, which amounted to about $833 billion after refunds. Brackets of, say, zero percent up to $500,000 in wealth, 1 percent for wealth between $500,000 and $1 million, and 2 percent for wealth above $1 million would probably have done the trick as well.

In other words, don’t simply add a wealth tax into the mix, but abolish the heart of the tax code at the same time, and use only a wealth tax to try to replace all that lost revenue. He starts with those tax revenues, divides them into an estimate for household wealth, and presto — out the other side comes a solution to all our problems, which would slow the rise of inequality, deliver a tax cut to the majority of American families, and probably improve motherhood and apple pie at the same time.

As I say, I like the idea of a wealth tax. (My proposal: 1% of all wealth over $5 million, each year.) It would diversify the tax base, it would give the rich an incentive to take more risks with their investments, and by definition it would only be paid by people who can afford it. But administering such a thing would be a nightmare, and it’s always best to lower oneself into such waters gently. After all, the IRS has had decades to learn how people avoid income tax; it hasn’t even started to imagine all the different ways they could avoid a wealth tax.

Jill Lepore, in the latest issue of the New Yorker (although sadly not online), has an interesting history of the US tax code, explaining how the antitax tradition, which is rooted in slavery, has weirdly and yet consistently failed to really gain traction in practice. She concludes:

What’s surprising, given how much money and passion have been spent to defeat a broad-based, progressive income tax over the past century, and how poorly it has been defended, is that it has endured—testimony, perhaps, to Americans’ abiding sense of fairness.

The US tax code is already progressive. It could do with higher rates at the top end and lower marginal rates at the bottom end, but in terms of broad architecture it works pretty well — especially in the way that Americans have to pay tax on their global income. America’s fiscal problems come just from the fact that we raise too little money in taxes, rather from the fact that the taxes we do have are in any fundamental way ill-conceived.

Altman’s idea, much like Herman Cain’s 9-9-9 plan, is more than just unrealistic: it deliberately jettisons the one upside we have, which is a decades-long tradition whereby Americans pay income taxes in payment, as Oliver Wendell Holmes put it, “for civilized society”. Income taxes are easy to collect, and for most of us on payroll they’re collected automatically and largely invisibly — by the time we get our paychecks, the taxes have already been paid. We have a smoothly-functioning machine, with tax rates which can be adjusted quite easily. Adding new gears to the machine — a carbon tax, for instance — might make sense in theory, although it’s hard. But dismantling the machine entirely and rebuilding something brand new? That is a very bad idea indeed.

COMMENT

Altman’s suggestion that the entire income tax (and the tax expenditures that go with it) be replaced with a net wealth tax is very tempting, but it leaves the job killing payroll taxes in place. My thinking is that there would be more bang for the buck if we eliminated the payroll taxes and lowered (and flattened) the income tax rate producing the same revenue. While an 8% income tax rate would not be materially different from the approximately 7.5% employee share of the payroll tax, the elimination of the employer’s share of the payroll tax would encourage job creation and also favor U.S. jobs over foreign workers. This revenue neutral solution to unemployment and social security funding deserves a serious look.

Only the U.S. Supreme Court can resolve the Constitutional question but as an attorney I note that most legal scholars believe that a net wealth tax would not require a “direct tax” apportionment (see Fixing the Constitutional Absurdity of the Apportionment of Direct Tax by Calvin H. Johnson, 21 Constitutional Commentary 295, 2004). A major boost to the legal argument also came with the Supreme Court’s recent approval of a tax on the failure to obtain health insurance (not a penalty) without apportionment because it, like a net wealth tax, is not the kind of “direct” or “indirect” tax envisioned when the constitution was drafted. In other words, new types of taxes are not subject to the constitutional apportionment requirement. Moreover, a net wealth tax is generally used as a replacement for estate and capital gains taxes which do not require apportionment. Read more at TaxNetWealth.com.

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