A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Friday, March 26, 2010

Meager proposal to return to progressive taxation from Robert H. Frank

The belief that lower taxes lead to a stronger economy is deeply rooted in the American psyche. It is not rooted in evidence of any sort. High tax nations are the prosperous nations. In the U.S., tax cuts have not led to stability or prosperity. We have cited the 2008 tax cuts that were George W. Bush's glance at stimulus. But there were the huge tax cuts in 2001 and 2003 and the Reagan tax cuts that led nowhere.

Taken together, federal, state and local taxes are not progressive. They are, at best, flat. Part of this has to do with the sales taxes of many states, but more has to do with the patently regressive payroll taxes, not collected on incomes over about $90,000. Simply ending this cap would return the tax structure to some form of progressivity.

Combine this with the increasing evidence that lower taxes on high incomes increase incentives for fraud and waste, not innovation and harder work, and you have what we think is compelling logic for something big.

Yet here is the best we can get. A doofus idea to stimulate rich people's spending in down times by enacting an easily circumvented, convoluted consumption tax. And a second, better piece by Senator Jim Webb on getting back some of the bonuses big banks paid from the taxpayer bailout.
Hey, Big Spender: You Need a Surtax
Robert H. Frank
New York Times
March 19, 2010

LAST year’s stimulus spending is running out, yet unemployment stays stubbornly near 10 percent. And as state and local governments keep cutting their budgets, the economy desperately needs an additional spending boost. Concerned about growing federal deficits, however, many in Congress appear reluctant to act.

Their worries are misguided. Yes, deficits are bad, but protracted unemployment is far worse. Still, it seems unlikely that additional stimulus legislation can attract the supermajority now required to clear the Senate. And even without such legislation, huge budget deficits loom for years. In the long run, these deficits will impoverish our grandchildren, just as the deficit hawks assert.

But an effective remedy is at hand. A simple revision to current tax policy could spur an immediate burst of nongovernment spending that would help restore full employment without adding to the deficit. And this same revision would simultaneously create a relatively painless new revenue stream that would help balance future budgets.

What I have in mind is a surtax on extremely high levels of consumption. It would be enacted right away, but not take effect until unemployment again fell below 6 percent.

More than 99 percent of households would be exempt from this tax, which would be levied only on families earning more than $1 million who consume more than $500,000 annually.

These families would continue to report their incomes to the I.R.S., but also their annual savings, much as they now document contributions to tax-sheltered retirement accounts. Consumption would then be calculated as the difference between reported income and savings.

Once consumption topped $500,000, the families would be subject to the surtax. Rates would start low but rise as consumption grew.

(Here are a few more details: Loan repayments would be added to the savings total, thereby reducing potential tax liability. New borrowing, meanwhile, would be subtracted from savings, increasing the potential tax. For homeowners, annual housing consumption would be counted as the implicit rental value of their house, so a $500,000 purchase would not set off the tax.)

A progressive consumption surtax would produce immediate, off-budget economic stimulus by giving wealthy families powerful incentives to accelerate future spending. For example, a family that had been planning to build a new wing onto its mansion, or buy a yacht, would want to make those purchases now rather than be taxed on them later.

Stimulating a new luxury spending spree may not seem an ideal way to stimulate the economy. Far better, perhaps, would be for the government to repair dilapidated bridges and build high-speed trains. But unless someone can persuade 60 senators to support a huge new stimulus bill, this second option is foreclosed. Given our choices, it would be much better to provoke an additional burst of luxury spending than to let high unemployment linger for years.

Once it took effect, of course, a progressive consumption surtax would discourage luxury spending. Would that cause job losses down the road? No, because employment depends on total spending, not just consumption spending.

If the surtax were phased in gradually, it would shift spending from consumption toward additional savings and investment. In the long run, higher investment would increase economic growth and boost earnings across the income spectrum.

Is a progressive consumption surtax politically feasible? As we know, voters never respond warmly to any new taxes. But the looming retirements of the baby boomers will make it impossible to eliminate huge budget deficits by cutting government spending. We need more revenue.

And there is broad agreement among economists that if additional taxes are needed, consumption taxation is the way to go.

A progressive consumption surtax embodies important advantages over higher income tax rates or a national sales tax — other widely proposed sources of new revenue. Many economists warn that higher income tax rates would weaken incentives to save and invest. But because a progressive consumption tax would shelter savings from tax, it would have precisely the opposite effect. The problem with a national sales tax — or its close cousin, a value-added tax — is that it’s extremely regressive because the poor save at much lower rates than the rich .

More than a decade ago, shortly after the publication of my article advocating replacement of the income tax with a progressive consumption tax, I received a warm letter from Milton Friedman, the late Nobel laureate, who was the patron saint of small-government conservatism. Mr. Friedman began by disagreeing with my contention that additional public investment would yield high returns.

He quickly added, however, that if the government did need additional revenue, a progressive consumption tax would be the best way to raise it. He enclosed a reprint of a 1943 article from the American Economic Review in which he had advocated a progressive consumption tax to pay for the war effort.

THE University of Delaware economists Larry Seidman and Ken Lewis estimate that a progressive consumption tax could generate $50 billion or more in additional revenue annually. Such a tax would not cause painful sacrifices because, beyond a certain point, additional consumption serves needs that are almost completely socially determined.

When all C.E.O.’s build bigger mansions, for example, they are simply raising the bar that defines how big of a mansion a C.E.O. needs. If a progressive consumption surtax induced all of them to postpone those additions, nothing important would be sacrificed. And if top earners spent less on mansions, so would people just below them, and so on, all the way down the earnings ladder.

If that’s not creating money out of thin air, it’s pretty close.

Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.

How to reward taxpayers who bailed out Wall Street
Senator Jim Webb
Washington Post
March 21, 2010

On Sept. 19, 2008, Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke convened a conference call with the Democratic caucus of the U.S. Senate. We were starkly told that the liquidity of our financial system was frozen by a plethora of toxic assets and that if we did not immediately appropriate $700 billion the world economy would, within weeks, descend into a cataclysmic free-fall.

Ten days of frantic briefings and negotiations followed. I talked with people across the philosophical spectrum and heard conflicting advice, but the bottom line was: The crisis is real. On Oct. 1, 2008, the Senate voted to fund the Troubled Assets Relief Program (TARP).

I decided to vote favorably after being reassured by Senate Democratic leaders that we would examine excessive executive compensation, work to reregulate the financial sector and include the American taxpayer on the upside of any recovery.

The financial sector recovered rather quickly, but not without a vast amount of help.

The time has come to include taxpayers in the rewards of a recovery that would never have happened without their money.

Billions of dollars in bonuses paid recently to financial-sector executives are a direct result of the TARP bailout and generous Federal Reserve policies constructed during the crisis. These firms have had toxic assets removed from their balance sheets and have benefited from interest rates near zero as the Federal Reserve opened its "discount window." A July 2009 report to Congress indicated that the guarantee of support from the Fed was in the neighborhood of $6.8 trillion. In short, the top-tier managers in these companies had enormous backup from taxpayers.

As we are all painfully aware, this economic crisis wiped out jobs, assets and retirement accounts. It is not fair, as we pick up the pieces, that our middle class is the last to be made whole.

Recognizing this, I offered a one-shot amendment to recent "tax extenders" legislation, designed to give taxpayers a place on the upside of the recovery of the financial system that they so clearly enabled. This amendment, which Sen. Barbara Boxer principally co-sponsored, provided for a one-time 50 percent tax on bonuses in excess of $400,000 paid to executives of Fannie Mae, Freddie Mac and any other financial institution that received at least $5 billion through TARP. The tax would apply only for the excess amount of the bonuses (and not on basic income) of monies earned in 2009 and compensated in 2010. At a time of huge deficit spending, this "fairness tax" would recover $3.5 billion to $10 billion.

After predictable lobbying by the financial sector, the amendment was not even allowed a vote on the Senate floor. Why? Because this issue, like others involving true economic fairness, is political poison. Voting in favor of a "windfall profits" tax, however narrowly defined, incurs the wrath of key political donors. But voting against it would increase the anger of working people who know they are not being fairly treated. And so, after a bit of political hand-wringing, the issue disappeared from view.

I do not favor recurring taxes on windfall profits. They are usually difficult to define in a rough-and-tumble economic culture designed to reward inventiveness and the willingness to take risks. But this situation is different. The risks were mitigated, if not eliminated. There is no risk or inventiveness to reward. These executives got lucky, to the exact degree that our middle-class taxpayers got the shaft.

Entrepreneurial risk-taking is an engine for growth in our economy and should be justly rewarded. But our middle class, which seldom has direct access to power, deserves the full protection of our leaders. In this case, bailed-out executives should be eternally grateful that they are receiving not only full compensation but also extremely generous bonuses. And our political leaders should have the fortitude to require that bonuses in excess of $400,000 be shared with American workers who may not even own stock but who were required to invest their tax dollars into TARP to stabilize the economy.

The writer is a Democratic senator from Virginia.

1 comment:

  1. Why bother with a complicated consumption surtax? Just return to a progressive income tax with reductions in consumption taxes to increase the slope of the tax curve. Income taxes are simpler to collect and harder to avoid, remember it was the tax man that got Al Capone.

    Also a rational person who had a steady and high income would reduce spending to the $500,000 limit and save the rest. It could simply end up in funds accumulating until the next president abolished it and then they would spend to all then without incurring the tax. Or they could simply move it offshore outside the reach of the taxman. All that will happen is that people will hunt for ways around this tax.