James Pethokoukis

Politics and policy from inside Washington

The “Millionaire’s Tax” — an idea for when you’ve run out of ideas

Nov 30, 2010 14:19 UTC

I am scheduled to go on CNBC later today to chat about the idea of a millionaire’s tax bracket. To me, this is a solution in search of a problem. You cannot deal with America’s long-term budget problems by raising taxes on the rich.  Even as a short-term fix,  it makes for poor policy. As the Tax Policy Center notes:

A study we conducted at the Tax Policy Center found that Washington would have to raise taxes by almost 40 percent to reduce — not eliminate, just reduce — the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate would jump from 10 to nearly 14 percent, and the top rate from 35 to 48 percent.

What if we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000? The top two income tax rates would have to more than double, with the top rate hitting almost 77 percent, to get the deficit down to 3 percent of GDP. Such dramatic tax increases are politically untenable and still wouldn’t come close to eliminating the deficit.

A few more from me:

1. You would also create new tax avoidance and income sheltering problems that would cut into the amount of revenue collected.

2. Higher marginal rates create a disincentive to work, save and invest.

3. This distracts from the real issue of cutting government spending.

4. Since this won’t really help the deficit or boost growth, the only reason to levy such a tax is a punitive one. And the reason punishing the rich helps America is what exactly?

COMMENT

We need to raise the taxes on Wall Street income.
Wall street produces no consumable products but pays the lowest tax rate at 15%. They need to pay their share.

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The debate has shifted …

Nov 23, 2010 15:55 UTC

James Capretta is dead on:

But what’s really important about the last month is not that any reform plan is about to pass. It’s that the terms of the budget, entitlement and health care debates have shifted dramatically, and very likely on a permanent basis. The fundamental elements of the Ryan Roadmap are sweeping tax reform; changes in health care which emphasize a marketplace and consumer choice; and modifications to retirement programs that reflect demographic reality. All of these elements can now be found in budget plans endorsed by prominent Democrats, including Democrats the president himself turned to find solutions to the nation’s budget problems. Consequently, it will be much harder in the future for Democrats to demonize these ideas as they have tried to do in the past.

COMMENT

Well, spending cuts are necessary… but it’s really the revenue side that’s hurting right now, and that’s a direct reflection of the housing situation (granted 8m fewer workers paying taxes – because they have been let go in the recession – makes a difference but not nearly as much). I think that a new revenue stream has to be discovered; cleaning up the tax code will help a lot, but honestly I think the rich owe it to America to be willing to do their part… not the marginally rich, but those earning more than $2m per year. Cuts, yes absolutely, but more revenues too… BOTH need to happen or we just need to cross our fingers that the housing market will go to the moon again.

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Just how much defense spending can be cut?

Nov 23, 2010 15:38 UTC

This chart from the Committee for a Responsible Federal Budget shows that while there may be some room to reduce defense spending, the instrument of choice should be a scalpel rather than a hatchet:

defense

COMMENT

Seems like 1% of GDP (from your chart) is going to war spending… so that’s $150B savings once the wars stop. Plus, pulling down troop numbers in Germany, Japan, South Korea are probably worth another $50B/yr. That’s an easy $200B a year savings. Seems worth it and easy to me… Maybe cutting back on building new/more aircraft carriers and submarines would knock off another big chunk of change too.

Also, I find it more than slightly disingenuous to compare current defense spending to Reagan-era defense spending, when the govt was actively and purposefully increasing military spending to intimidate Russia. I’d be curious to see how that chart looks going back to the 30s, through the depression, through post-Korea/pre-Vietnam decade, etc.

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Paul Ryan and the conservative economic mind

Nov 23, 2010 15:24 UTC

A member of the Bush White House once told me that the two key influentials when it came to conservatives/Republicans and economics were the Wall Street Journal editorial board and CNBC’s Larry Kudlow. Well, I think you can add a third name to that list: Rep. Paul Ryan. In a newspaper chat,  the GOP budget guru gives his two cents on the Fed:

Ryan is regarded by many as a rising star in the GOP and a Republican point man on economic issues. The controversy allows him to showcase his fascination with the arcane business of central banking. ”Monetary policy was always my first love,” he said.

Asked if the industries in his district have contacted him in favor of a cheaper dollar, Ryan said: “I’ve heard from manufacturers who want that. But it’s from people pursuing sort of a narrow view of interest. I had some manufacturers say it to me a couple of weeks ago in Kenosha, steel manufacturers.”

There’s no question that Ryan’s district is hurting. It includes three of the highest unemployment areas in the state, all with 10% unemployment or higher: Racine; Kenosha, where Chrysler shut an engine plant last month; and Ryan’s hometown of Janesville, where General Motors shuttered an assembly plant two years ago. The state’s only metro area with higher unemployment is Beloit, at 14.4%, which borders Ryan’s district. ”I won’t dispute that a cheaper dollar can help boost exports in the short term,” Ryan said. “But I don’t think it’s a good tradeoff to do so at the expense of inflation.”

To Ryan, the root of the problem is the Fed’s dual mandate, which calls on the central bank to promote employment as well as throttle inflation. Ryan said he has pushed for years to rewrite the Fed’s statutes in favor of a single mandate to control inflation and preserve the dollar as a store of value, making the Fed more like the European Central Bank.

Fighting inflation and boosting employment often are diametrical goals, he said. ”Basically the Fed is driving a car with two feet, one on the brakes and one on the gas pedal, and it’s a real jerky ride,” he said.

What’s fascinating about Ryan is that he keeps saying things that should get him into political trouble, but they don’t. He wants to rework Social Security. He wants to restructure Medicare. He  thinks a cheaper dollar is a bad idea.  And he won reelection with 68 percent of the vote in a district that Obama carried by four points. Good ideas expressed well and with conviction are powerful things.

Beyond tax cuts

Nov 22, 2010 17:43 UTC

Nick Schulz says Republicans need a broader policy portfolio than lower taxes and less spending:

Too often discussions of growth are overly abstract or narrow.  They tend to focus on a few policy prescriptions such as tax cuts or trade or education. These are important. But the discussion about growth is strangely detached from the particular and unique characteristics of the United States. Any serious growth strategy should acknowledge and leverage America’s attributes and advantages.

Nick then goes on to praise Joel Kotkin and his “continental strategy” for growth, which — best I can tell — centers around more infrastructure spending. But what is the free market way of approaching this so it does not turn into a supersized version of Boston’s Big Dig — build and privatize?

COMMENT

Roll the tax rates back to what they were in 1999, end the wars in Iraq and Afghanistan and trim the defense budget and you have a balanced budget or even a surplus. Keep in mind that the economy created better than 20 million jobs when the tax rates were at these level.

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Should Republicans refuse any tax increases?

Nov 22, 2010 17:40 UTC

Steve Moore and Richard Vedder think raising tax revenue in exchange for spending cuts is a mug’s game (via WSJ):

In the late 1980s, one of us, Richard Vedder, and Lowell Gallaway of Ohio University co-authored a often-cited research paper for the congressional Joint Economic Committee (known as the $1.58 study) that found that every new dollar of new taxes led to more than one dollar of new spending by Congress. Subsequent revisions of the study over the next decade found similar results.

We’ve updated the research. Using standard statistical analyses that introduce variables to control for business-cycle fluctuations, wars and inflation, we found that over the entire post World War II era through 2009 each dollar of new tax revenue was associated with $1.17 of new spending. Politicians spend the money as fast as it comes in—and a little bit more.

We also looked at different time periods (e.g., 1947-2009 vs. 1959-2009), different financial data (fiscal year federal budget data, as well as calendar year National Income and Product Account data from the Bureau of Economic Analysis), different lag structures (e.g., relating taxes one year to spending change the following year to allow for the time it takes bureaucracies to spend money), different control variables, etc. The alternative models produce different estimates of the tax-spend relationship—between $1.05 and $1.81. But no matter how we configured the data and no matter what variables we examined, higher tax collections never resulted in less spending.

Well, certainly the budget can be brought into balance without tax increases. Americans for Tax Reform does it over the short term (5-7 years) by pretty much freezing spending (at 2008 levels) for everything but Medicare and Social Security. So, too, Rep. Paul Ryan with his Roadmap for America’s Future. But what about the politics? Does this assume no compromise with Democrats? If compromise is needed, what do the Rs offer? Defense cuts? But perhaps the solution is to offer a more pro-growth tax system with restructured entitlements. More revenue from more growth + less social insurance spending.

COMMENT

I (and I think many others) have no problems with tax breaks for small business because they really do drive jobs in America. What really rubs a lot of people the wrong way is tax breaks for multi-national mega-corps that have no interest in supporting America or growing in America – to them the grass is greener in emerging markets like BRIC countries and they want to put their profits to work there. Maybe some kind of tax-credit for healthcare on new employees (and partial for existing employees) could be worked out?… that would help stem the big complaint I hear from small businesses.

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Chris Christie’s presidential campaign speech

Nov 22, 2010 16:51 UTC

Just substitute “America” for “New Jersey” and replace “North Carolina,”  ”Florida” and “Virginia” with “China” and it works pretty well (via New York Magazine):

It was another day in October, another town hall, this time at a South Brunswick firehouse. For 90 minutes, anticipation had been building for a display of rhetorical fireworks. But the meeting’s last question came from a 10-year-old girl who was inviting the governor to speak at her school, and the Christie staffers seemed resigned to leaving the town hall without a moment in the bag. But then Christie did something unexpected. He created another type of moment.

He launched into a reverie about wanting to give the girl the same “great New Jersey life” he and others have had. “As I look out in the crowd, I think most of us have lived a little life, and we probably lived it here,” he said in a voice that was softer than his usual bellow. “And we’re still here, which means we love this place, because there’s no good financial reason for us to be staying. New Jersey is an actor, a player in our lives. And I want this to be that place for her.” Christie told of how he was able to raise his family in New Jersey not far from where he grew up, so his parents could be involved in the lives of his four children, and how he worried that opportunity might not be available to others in the future “because they simply will not be able to afford it. They’ll be forced to make the choice to go someplace else, where it’s easier to find a job, where it’s less expensive to live, where they’re going to build a new life that’ll be apart from us.” He continued, “I don’t want our generation to be the one that has to hear about the great North Carolina life that our children and grandchildren have, the great Florida life they have, the great Virginia life they have, and have to wonder, If we had done the tough things we needed to do, could they have stayed here.”

As Christie spoke, the firehouse fell completely quiet, save for the hum of the ventilation system. A silver-haired woman a few seats down from me dabbed at her eyes. “And so we’ve got a choice to make,” Christie said. “We can bury our heads in the sand, we can surround ourselves with the creature comforts that life in New Jersey has provided to us … or at this moment in our history, we can say, ‘To hell with that, it’s hard, I’m going to have to sacrifice something,’ but I want this state to be a place where my kids and grandkids can grow up and have the great life that I had.”

Replacing Larry Summers …

Nov 22, 2010 16:07 UTC

From the White House’s perspective, the ideal replacement for Larry Summers as chief economic brain would be a female chief executive who could reach out to Republicans and the business community without irking liberals. Buzz about the candidacy of Roger Altman, the founder of investment bank Evercore, shows how difficult it may be for President Barack Obama to land that dream candidate.

The only thing more challenging than filling that job spec might be finding another Summers. He’s a brilliant academic and former Treasury Secretary who handled emerging market crises in the 1990s. As director of Obama’s National Economic Council, he’s been less a dispassionate coordinator of policymaking than the president’s maximum economist during a time of extreme financial tumult.

But Obama doesn’t necessarily need a Summers sequel at the halfway point of his presidency. With Republicans flooding Capitol Hill, the final two years of his term likely won’t see many big policy initiatives. Frankly, Obama needs a political symbol that shows Corporate America’s leaders he views them as more than just background staging for photo ops.

Ideally, he’d find that figure outside of Wall Street, which many in his liberal base blame for the economic crisis. Also, given that the Treasury Secretary and chair of the Council of Economic Advisers are now both men, adding a high-profile female to the economic team might be preferable. And just in case the Republicans want to play ball, a reputation as a deficit hawk would be a great kicker.

Two potential choices, and former CEOs, Anne Mulcahy of Xerox and Ann Fudge of Young & Rubicam, either passed or were dropped from the initial shortlist. Fudge seemed a natural – not least because her work on Obama’s debt panel has impressed Republicans. Remaining short-listers have also major drawbacks. Former NEC chair Laura Tyson has no business experience other than serving on the board of Morgan Stanley. Jared Bernstein, the chief economic adviser to Vice President Biden, comes from a union-backed think tank. Moreover, many CEOs privately profess concern about the unglamorous nature of the staff job.

So, by comparison, Altman makes some sense. Although from Wall Street, he’s built a successful mid-sized firm, met a payroll, successfully created wealth and served in President Bill Clinton’s Treasury. He’s also expressed concern about Obama’s relationship with business, most recently in a Wall Street Journal op-ed that read like a NEC job application. Altman may offer one other plus: He’d probably take the gig.

Paul Ryan’s pro-market healthcare reform

Nov 19, 2010 16:41 UTC

Rep. Paul Ryan, along with fellow Obama deficit panel member Alice Rivlin, has put together a plan to cut the growth of government healthcare spending. This is the heart of it:

A new Medicare program should be created for future retirees (those who first become eligible by turning 65 on or after January 1, 2021). The new Medicare program would provide a payment – based on what the average annual per-capita expenditure is in 2021 – to purchase health insurance. The payment would grow annually at a rate of GDP +1 percent.

The annual payment would be adjusted by income, with high-income seniors receiving a reduced payment and low-income seniors receiving extra support. The payment would also be geographically rated and adjusted for health risk. In addition to a higher Medicare payment amount, low-income “dual-eligibles” would also receive a fully funded account from which to pay out-of-pocket expenses.

In order to receive the Medicare payment, a beneficiary would select a plan from a newly created Medicare Exchange. Health plans which choose to participate in the Medicare Exchange must agree to offer insurance to all Medicare beneficiaries, thereby preventing cherry picking and ensuring that Medicare’s sickest and highest cost beneficiaries receive coverage.

For those now enrolled in Medicare, or becoming eligible before 2021, the traditional fee-for-service Medicare program would continue. Premiums for the current program would be held harmless from the effects of the creation of the new Medicare program.

This plan is based on the Medicare fix outlined in Ryan’s fantastic Roadmap for America (as translated by the Congressional Budget Office).

Starting in 2021, new enrollees would no longer receive coverage through the current program but, instead, would be given a voucher with which to purchase private health insurance. In 2021, when enrollees would first receive the voucher, the average voucher for 65-year-olds would be worth $5,900 (in 2010 dollars). The voucher would be adjusted to reflect the age and health status of enrollees. If all Medicare beneficiaries (including older people with higher average expenditures) were to receive a voucher in 2021, the average voucher amount would be $11,000 (in 2010 dollars). …  The amount of the Medicare voucher … would be indexed to grow at a rate halfway between the general inflation rate, as measured by the consumer price index for all urban consumers (CPI-U), and the rate of price inflation for medical care, as measured by the consumer price index for medical care (CPI-M). Using that blended rate, CBO estimates that those amounts would increase at an average annual rate of 2.7 percent for the next 75 years, in comparison with the average annual growth rate of nearly 5 percent that CBO expects for per capita national spending for health care under current law.

So one big difference between the Ryan Roadmap and Ryan-Rivlin is that the growth rate for the Medicare payment/voucher is higher under Ryan-Rivlin. Also, the  Ryan Roadmap is more aggressive on raising the age for Medicare eligibility. Compare the two. First, the Roadmap:

The age of eligibility for Medicare would increase incrementally from 65 (for people born before 1956), as it is under current law, to 69 years and 6 months for people born in 2022 and later.

Now Ryan-Rivlin:

In 2021, begin raising the Medicare eligibility age to correspond to OASDI normal retirement age (2 months per year beginning in 2021 and stopping at age 67).

Now both the Ryan Roadmap and Ryan-Rivlin are far preferable to Obamacare and the modified-Obamacare plan outlined in Bowles-Simpson which relies on government technocrats to lower costs rather than market forces. Here is how Ryan-Rivlin compares to the status quo:

ryanrivlin

A huge improvement, but the Ryan Roadmap would lower health spending to roughly 5 percent of GDP in 2050 — half of Ryan-Rivlin –which is why the Roadamap’s long-term budget chart looks like this:

ryanchart

A 91 percent tax rate? Really?

Nov 18, 2010 19:35 UTC

So is the liberal Democratic position that tax rates don’t really matter? First comes a deficit reduction plan put forward by Rep. Jan Schakowsky would reduce the budget deficit by $427 billion in 2015 by raising taxes by $283 billion, cutting defense by $111 billion and only ever-so-slightly trimming nondefense discretionary spending by $8 billion and Medicare by $17 billion. She doesn’t do a long term analysis because unless you cut entitlements or jack taxes through the roof (and ignore the subsequent economic impact), the numbers won’t work.

Then we have this amazing op-ed in the LA Times by one Moshe Adler:

What did the new president do about the economy? President Clinton in 1993 proposed to raise the highest marginal tax rate immediately from 31% to 39.6%.  … In the seven years that followed, the unemployment rate decreased steadily, every single year, until it reached 4% in 2000. .. The highest tax rate is currently 35%, and if the George W. Bush tax cuts are allowed to expire, this rate will return to 39.6%. But charging the same tax rate for all levels of income above $380,000 is unfair. The highest marginal tax rate should be what it was during the Eisenhower years — 91% — and one way to reach it would be in steps of, say, a 1% increase for every $1-million increment in family incomsecond million would be taxed at 40.6%, and the third at 41.6%. A family whose income exceeds $53 million a year would pay the maximum rate of 91% on each dollar above this sum.

Again, when Clinton signed his tax increase in August 1993, the economy had been growing for 10-straight quarters and was able to power through the tax hikes. Clintonomics started on third base and Adler thinks it hit a triple. As for raising top rates to 91 percent? Look, even Paul Krugman doesn’t advocate that. There is a mountain of evidence, both from academic research and historical experience, that suggests such a move would crush economic growth and leave America in a poor competitive position. Fun fact: Tax rates are way lower today than in the 1950s and yet tax revenue as a share of the economy is just as high. Guess the Laffer Curve does work after all.

COMMENT

The reason the 91 percent rate was sustainable is because they could easily get half of that back if they proved they reinvested it in America. That’s why so many off-shoots and subsidiaries sprang up. This of course was long before the greedy got greedier and outsourcing became a factor. The bottom line is, is that we need to preserve the American lifestyle as it once was as much as possible or we will be joining the likes of Chinese and Indian societies sooner than we think. Of course, these guys are not passing us and our children as people may be trying to lead us to believe. People still prefer living in the U.S. than any other country. Additionally, many other countries only report their top third student’s test scores, while many states in America report them all; including learning disabled and those without a command of the English language.

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