Taxes

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American Declaration of Independence: Ideology or Economy?

February 20, 2012 in Economics - General | No comments

On this President’s Day, let’s revisit America’s founding document: the Declaration of Independence.  The Declaration of Independence includes broad ideological statements such as “We hold these truths to be self-evident, that all men are created equal,” and claims that the British have violated “certain unalienable rights.”

But were the real reasons for the American Revolution economic?  According to to Lynd and Waldstreicher, the answer is yes.  Wilson Quarterly reports:

“Scholars tend to view the ideological arguments for independence as building to a critical point and preoccupying the colonists thereafter. That’s inaccurate, Lynd and Waldstreicher write: From the mid-18th century right up to the signing of the Declaration, Americans objected to a myriad of British imperial policies principally on economic grounds. The antitax sentiment of the Boston Tea Party in 1773 is well known, but Americans also protested British attempts to requisition resources during the Seven Years’ War (1756–63), imperial currency manipulation that left the colonies strapped, and prohibitions on trade with the French West Indies, along with many other policies.”

The authors claim to make the strongest case for their course of action, these early Americans subsumed their economic frustrations within a broader argument for sovereignty based on the violation of rights.

In today’s Presidential races, we also see economic arguments couched in ideological terms.  Obama’s argument to raise taxes is delivered under a fairness argument.  President Obama says it’s the ‘height of unfairness‘ that the very wealthy can pay a lower percentage of their income in federal taxes than many in the middle class.

Tea Party candidates that argue for lower taxes do so using the language of “fiscal responsibility, constitutionally limited government, and free market economic policies.”

The take-away is that political rhetoric–both now and in colonial times–often is used to justify fundamentally economic arguments.

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Do we need less democracy?

September 27, 2011 in Public Policy, Taxes | No comments

In The New Republic, Peter Orzag argues that to fix our budget mess, we need less democracy.  Specifically, he argues that implementing the following four recommendations more consistently would improve the budget situation.

  1. Progressive tax code
  2. Permanently link taxes to the unemployment rate
  3. Backstop rules
  4. Independent institutions

I have my doubts…

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How much of your income goes to Medicare and Social Security?

June 8, 2011 in Taxes | 3 comments

15.3%.

Does that seem a little high?  If you check your paycheck, the amount of money that is actually deducted from your paycheck for Social Security and Medicare is only 7.65%.  Employers, however, pay an equal amount of taxes on your behalf (i.e., an additional 7.65%).  Previous studies have indicated that all taxes employers pay on employees behalf is funded through lower employee earnings.  In other words, if the employer didn’t have to pay these taxes, your salary would be 7.65% higher.  Ouch!

Here is the breakdown of what where your payroll tax deductions are going.

OASDI HI Total
Employees 6.20 1.45 7.65
Employers 6.20 1.45 7.65
Combined total 12.40 2.90 15.30

 

Notes that OASDI (Old Age Survivors and Disability Insurance) is Social Security and HI (Hospital Insurance) covers only for Medicare beneficiaries’ Part A  (i.e., hospital) medical costs.

Source: A SUMMARY OF THE 2011 ANNUAL REPORTS

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An Oxygen Tax

February 17, 2011 in Economics - General, Taxes | 1 comment

The UK  explored selling or leasing forest land to private interests, but encounter some public backlash.

“The plans were intended to give the private sector, community and charitable groups greater involvement in woodlands by encouraging a “mixed model” of ownership.

But critics argued it could threaten public access, biodiversity and result in forests being used for unsuitable purposes.”

Should the government own forests?  In general, I would say no.  If private firms or organizations would want to pay to access these forest, they should be able to do so.  Some of the businesses who buy the land may want to harvest trees or start building apartment buildings.  Others may want to create eco-tourism sites or private NGOs could buy the land to maintain it in its natural state.  Regardless, individuals, firms, or organizations with the highest willingness to pay should be able to purchase the property.

Once exception may be the production of oxygen.  Trees produce oxygen for the whole country.  However, oxygen is generally non-excludable.  Thus, by cutting down trees, businesses who decide to deforest land impose an externality on others, especially if there are few forests left.

To solve this problem, the government would create an oxygen tax.  The tax would basically mandate that you need to have a certain number of trees per acre on your land or else you would pay the tax.  This could apply to all land, not just forests.  With the cost of apartments in central London, it is of course optimal to simply pay the tax and create dense neighborhoods.

The oxygen tax is not without its flaws.  If the tax is based on the number of trees on the property, one could simply buy lots of young trees to avoid the tax.  Young, smaller trees, however, will not produce as much oxygen as larger older trees.  One could estimate the aggregate biomass of trees on any property, but this would of course require regulators to ensure that people don’t lie about the biomass on their property.

Is the oxygen tax a good idea?  If deforestation becomes severe enough, it may be.

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Proposal from the National Commission on Fiscal Responsibility and Reform

November 11, 2010 in Public Policy, Taxes | 1 comment

Yesterday, the National Commission on Fiscal Responsibility and Reform released a proposal for reducing the national debt. The full report can be found here and relies on five key pillars. These are:

  1. Enact tough discretionary spending caps and provide $200 billion in illustrative domestic and defense savings in 2015.
  2. Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.
  3. Address the “Doc Fix” not through deficit spending but through savings from payment reforms, cost-sharing, and malpractice reform, and long-term measures to control health care cost growth.
  4. Achieve mandatory savings from farm subsidies, military and civil service retirement.
  5. Ensure Social Security solvency for the next 75 years while reducing poverty among seniors.

I will review each of these topics in turn.
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Estimating the elasticity of health insurance offering for firms: Part II

May 25, 2010 in Health Insurance, Taxes | 1 comment

How does the price of health insurance affect the probability that a firm will offer health insurance to their workers?  A previous post provides a variety of estimates of the elasticity of firm health insurance offering with respect to premiums.  A more recent article by Gruber and Lettau (2004) needs to be added to this mix.

This paper uses data from the 1983-1995 National Compensation Surveys to determine that “there is a moderately sized elasticity of insurance offering with respect to after-tax prices (-0.25), and a larger elasticity of insurance spending (-0.7). We also find that the elasticities are driven primarily by small firms, for whom the elasticity is larger.” Additionally, the authors claim that if the tax subsidy to employer-provided health insurance were eliminated, 15 million fewer workers would be offered health insurance.

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Health Insurance Subsidies (a.k.a Higher Marginal Tax Rates)

March 3, 2010 in Public Policy, Taxes | No comments

The health reform bills currently propose introduce health insurance subsidies for individuals who do not qualify for health insurance provided by the government.  The goal of these subsidies is to make health insurance more affordable for the lower and middle class. The subsidies gradually decrease for higher income levels.

In “Obama’s Prescription for Low-Wage Workers,” Michael Cannon notes that one also can see these subsidies as increasing the marginal tax rate.  For instance, let us John makes $16,000 and has a 25% income tax rate.  Under the new health reform bill, John would also receive a subsidy to purchase health insurance.  Let us assume the subsidy is $5000.  Thus, his after tax income is $17,000 [(1-.25)*16,000+5000].

What happens if John has the option to work at a new job that pays him $20,000?  Of course, he will earn more income but his health insurance subsidy will also decrease.  If the health insurance subsidy decreases to $3,500, then his after tax income in your new job is now $18,500 [(1-.25)*20,000+4000].  Although John’s gross income increased by $4000 when taking the new job, his after tax income only increased by $1500.  This is in a marginal tax rate of 62.5%.  In fact, Mr. Cannon’s research finds that mandates and subsidies impose effective marginal tax rates on low-wage workers “averaging between 53 and 74 percent.”  When marginal tax rates are high, extra hours worked lead to a smaller increase in after-tax income.  Thus, the labor supply decreases.

One thing Mr. Cannon ignores, however, is the current Medicaid poverty trap.  Poor individuals are eligible for Medicaid.  However, if they get a better job paying them more money, they may lose their Medicaid eligibility.  Poor individuals may refuse to take better paying jobs to keep their Medicaid coverage.

Once the subsidies are implemented, however, poor individuals will be more likely to take a better-paying job since they can receive subsidies to buy private health insurance even if they lose their Medicaid coverage.  The high marginal tax rates are more likely to affect the labor supply of the lower-middle class and middle class individuals.  These individuals are in the same scenarios as John is above.  Higher pre-tax earnings will not necessarily translate into significantly larger after-tax earnings.  I predict that the higher marginal tax rates Mr. Cannon mentions will decrease the labor supply most for individuals in the middle class.

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Is licensing tax preparers a good idea?

January 7, 2010 in Regulation, Taxes | 3 comments

The USA Today writes that “the IRS has proposed a broad initiative that would require hundreds of thousands of tax preparers to register with the government, pass a competency exam and adhere to ethical standards.”  This sounds like a good idea as it will safeguard individuals from unscrupulous tax preparers.  But who will this truly benefit?

If you want a high quality tax preparer, there are many reputable companies that can prepare your taxes.  These tax preparers will be well trained and you’ll pay more for them.  Firms have an incentive to maintain this quality so their customers continue to require their services.  If quality is above average over the long run, they can build a reputation and charge higher prices.  Thus, for individuals who already have high quality tax preparation, there is no benefit.  In fact, there could be an increase in cost to these individuals if the government standards require additional training that does little to improve quality.

This idea will most certainly hurt poor immigrants.  When I was in college, I spent my Saturdays in the spring doing tax preparation for immigrant farm workers in Kennett Square, PA.  I worked for a non-profit legal firm.  I receive training on the basics of tax preparation.  Because most of these migrant workers had little assets and no mortgage, doing their taxes was simple.  If an individual had a more complex tax return (e.g., if they had a mortgage), I would refer them to the supervising lawyer.  The migrant workers received their tax preparation for free since we were volunteers.  However, this practice may not continue into the future.

If the government requires everyone who prepares taxes to pass through an onerous training program, fewer volunteers will decide to participate in free tax clinics.  Many non-English speaking Americans may not fill out their taxes themselves.  Further, the non-profit’s scope of their program will likely decrease if they have to pay for additional training for all their staff. 

Also, how will the government guarantee people will act ethically?  Will they give them a test of what is ethical?  Will they ask nicely ask people not to do a bad job?  

In short, licensing tax preparers is a bad idea.

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Financing Reform…with Taxes on Tanning Salons?

December 21, 2009 in Current Events | No comments

The N.Y. Times reports that Democrats in the Senate are nearing the 60 votes needed to pass a health reform bill.  To do this, Democrats have made a number of concessions.  These include: abandoning a public option, prohibiting abortion coverage, and of course, long-term-care insurance to people with severe disabilities, new services for pregnant teenagers, financial breaks to nonprofit insurance companies, and of course extra Medicaid money to Nebraska.

How will the government pay for these additions?  There are new sources of revenue.  This include taxes on high income individuals, taxes on profitable health insurance companies, and taxes on tanning salons.  The tax on tanning salon replaces a proposed tax on cosmetic surgery.

People in favor and against a single payer system should be disturbed by these developments.  Single payer advocates likely are disturbed that there is no public options and that there are so many giveaways to special interest groups.  Those against a single payer option will be upset that at the seeming inevitability that government involvement in health care will increase.

Your lowly Healthcare Economist is also perturbed. A single payer system could work efficiently, lower cost and expand coverage.  Despite lots of ideological rhetoric, having a government bureaucrat reviewing your claims for reimbursement would not be much different than having a health insurance bureaucrat doing the same.  As I predicted, however, getting to the single payer system will inevitably involve handouts to interest groups.  Even if a single payer or government regulated health insurance system was ideal at the outset, lobbying would likely corrupt the system.  

The major problem with the current system is that if you lose your job (possibly because you are sick), then you also lose your health insurance.  The proposals on the table have the benefit of expanding health insurance to more individuals.  However, these same proposals offer little to decrease–or even slow the growth–of the cost of health insurance.  Proposals to tax tanning salons isn’t the type of real reform that is needed.

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Can the government create jobs?

December 10, 2009 in Economics - General, Public Policy, Taxes | 2 comments

On Tuesday, President Obama unveiled a plan to use repaid TARP monies to fund a job creation program.  The question is, can the government actually create jobs?

Initially, one would say yes.  If the government hires more workers, this is job creation.  If the government hires more contractors, this is job creation.  If the government gives subsidies to businesses to increase employment, this is job creation.  Isn’t it?

One must first wonder where the government is getting the money to pay for the job creation programs.  Let us assume that it is from taxpayers.  In this case, the government is taking money from individuals to ‘create jobs.’  However, by increasing taxes, consumers have less money to spend on goods and services.  When consumers buy less stuff, firms will cut jobs.  The net effect likely will be a wash.  The government ‘creates’ jobs by paying money itself and destroys jobs by raising taxes.

What if the government funds the job creation with debt?  If the debt is only purchased by Americans, we have the same problem.  Consumers purchase government debt rather than buying products.  Again the net effect is likely a wash.

Now let us think expand our thinking.  Assume we live in a global economy where foreigners buy our bonds.  In this case, the government may be able to create jobs somewhat in the short run .  Foreigners will have less money to buy American exports if they buy our bonds, but likely only a fraction of foreigners income is spent on American goods.  Thus, the extra money the government receives from foreigners can create American jobs in the short run.  Subsequent generations, however, will have to pay back the loans from foreigners in the form of higher taxes.  Thus, increased job creation now comes at the expense of decreased job creation in the future.

Let us also think about business cycles in the creation of jobs.  The U.S. just went through a bad economic downturn.  Individuals and firms were saving more and buying/investing less.  Thus, firms had a smaller market to which they could sell goods.  If the government taxes (or borrows) from individuals and firms, and decides to spend all this money on ‘job creation,’ employment could actually increase.  Currently, the marginal propensity to spend will likely be higher for the government than for consumers or firms.  However, increased marginal propensity to consume implies a decreased marginal propensity to save.  With lower savings rates, there are fewer funds available to investors to invent new ideas, invest in new technologies and provide the foundation for long-run technical growth.  Interest rates will rise.  Currently, the Federal Reserve has held down interest rates by printing more money, but this will likely cause inflation in the near- to medium-term.

As any economist knows, there is no free lunch.  The government may be able to create jobs in the short run to counteract dips in the business cycle, but these debts must be repaid in the long-run.  Thus, in the long-run the government does not create jobs.  Innovative individuals and firms create jobs.  Further, this post has not even discussed the problem that the government will likely misallocate funds and may hire the wrong type of workers for long term economic growth.

If the government really could create jobs in the long-run, then the government might be able to maximize job growth by spending ad infinitum.

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