Marginal Utility

by Anonymous

I'm sure that many, many bloggers have offered their opinions on the likely consequences of the economic stimulus package for the economy. I don't have anything to add here, nor to I wish to trivialize the very real impact the recession is having on people's lives and livelihoods. But, I can't help but speculating about the consequences of the economic stimulus package on the livelihoods of number crunchers everywhere.

Unpack.

It's expected that roughly 20 million "extra" returns will be filed this year, out of a baseline of roughly 141 million returns. Most of the increase is likely to come from retirees whose income is too low for them to bother filing a return in a normal year. These additional returns at the bottom of the income distribution are sufficiently numerous to affect most inequality measures (except the 90:50 ratio).

The Great Data Swami predicts that as soon as the IRS data from 2007 are released, there will be glut of journalistic and quasi-journalistic social science articles pointing out the dramatic increase in levels of income inequality in 2007 relative to 2006.[1]

Within moments, left-leaning politicians will decry the accelerating pace of change in the gap between the haves and the have-nots. Paul Krugman will become a household name even outside the Times-select-reading elite.

Mere sound-bites later, right-leaning politicians will (a) claim that inequality statistics from the 2007 tax year are meaningless; (b) advocate for tightening the restrictions on the release of aggregate statistics from tax data, on the grounds such statistics violate Americans' unassailable [2] right to privacy; and (c) proclaim that research on income inequality is as wasteful of government funds as, well, research on gender or race. Those of us who study income inequality will no longer be able to use the words "income", "inequality", or "gini" in our proposal titles.

And with that, I'm off to put the finishing touches on my tax return.

[1] All of this assumes that the annual IRS data do not adjust for non-filers in their income estimates, or at least do not do so with much accuracy. Truth be told, I'm a CPS/SIPP gal myself, and have never used the IRS tax return data. If anyone less lazy than me knows more details about the IRS data, I'm all ears. Well, eyes, at least.

[2] Except for that whole wire-tapping homeland security bit.

Labels: Income Inequality, Tax Incentives

by Ken Houghton

UPDATE: See correction from Tom in comments. Oh well.

Reagan defenders are perpetually saying that, after he created massive deficits and a recession with the 1981 tax cuts, his people learned better, and all of the following tax cuts were "revenue-neutral."

I'll leave it to the folks at AngryBear to graph out the truth of that statement; suffice to say, the 1986 revision (discussed here and, most especially, here, to pick two from Divorced One Like Bush) has long been cursed by me. Generally, 1986 made it harder to get out of a poverty trap, and easier to maintain Generational Wealth without doing anything.*

But—or, probably, for example—the one thing that 1986 did was eliminate the first $250,000 per person on gains from the sale of real property.** And since there is no chance we will make anything near that limit, there is no chance that I will have to negotiate with the IRS over why we haven't didn't buy another house in the United States over the following two years.****

And, in part, we have RR to thank for it.

*If you believe either of those two is a good idea, please explain your theory of economic growth, and Why No One Will Publish It Except the AEI.

**Technically, I believe the ceiling was set lower, and raised either seven or ten years later.*** But Reagan set the standard for considering basic housing to be "an investment."

***Strangely, those try to cast some portion of the blame for the housing boom/bust on that Clinton administration action ignore that the standard was set by Their Leader.

****This, of course, assumes the current house can be sold.

Labels: Housing Bubble, mortgage, My home not native land, Tax Incentives

by Tom Bozzo

Apropos of (almost) nothing, Felix Salmon expresses some hope that President Obama will end the federal income tax deduction for state and local taxes, suggesting that as a policy matter, the deduction "really makes no sense" and making a progressive's case that — like itemized deductions generally — the benefits largely accrue to the well-to-do.

Now, the CBO study that Felix cites was commissioned by the "ranking member of the Senate budget committee," a.k.a. Sen. Judd Gregg, Republican of New Hampshire. Could he be a closet progressive tax-raiser? In late '04, we found Jonathan Weisman of the Washington Post reading the 2003 Economic Report of the President. It turns out that there's a political agenda to this tax policy change:

Then comes the Washington Post's Jonathan Weisman with the answer:

In crafting a broad [tax reform] agenda for his second term, Bush is trying to adhere strictly to economic theory...

In a speech... at the American Enterprise Institute, N. Gregory Mankiw, chairman of the White House Council of Economic Advisers, spoke repeatedly of "standard economic theory," "textbook economic theory" and "scholarly literature in economics" to bolster his arguments.

Well, that makes me feel a lot better. I won't be screwed as a payoff to even fatter cats, but simply as a matter of inexorable economic logic. Notes Weisman:

In the February 2003 Economic Report of the President, the White House held that the deductibility of state and local taxes -- especially property taxes -- "lowers the price of local public services" and unfairly favors local government services over privately provided services. [emphasis added and changed from the 2004 post]

And here's what I had to say about that:

It's true enough that the tax deduction for property taxes insulates me from the full brunt of my $7,690 property tax bill [those were the days!] in an amount determined by my marginal federal income tax rate. So I'll demand more services from the city than I would in the absence of deductibility because part of my would-be cost is effectively pushed off onto the upper-income Federal taxpayer. (Which is to say, I'm subsidizing my own consumption of local government services. I shall write myself an indignant letter.)

...[T]he ERP logic begs the question of whether it makes any sense to raise the price of local services. An almost equally well-known result of "standard economic theory" is that private interests will underprovide collective goods (law enforcement, for instance). For public services that are not quite pure collective goods, the question is whether we are actually over-consuming anything such that we should get a price signal to use less. For instance, given that roughly half of the Madison tax bill goes to the school district, is there really a problem that Madison's schoolchildren are getting "too much" primary and secondary education? Of course, since the quality and quantity of public services helps support Madison's high property values, there's some tradeoff between the size of our tax bills and our property wealth.

For another, the idea that it's "unfair" to support local provision of public services over private services -- which private firms may or may not deign to provide -- is a matter of religion and not economic theory... Does living on a 5,500-sq. ft. urban lot, without so much as an indoor parking space... and thus relying on the nearby public parks to burn off excess toddler energy, create a material unfair burden on Rainbow Play Systems, compared to the alternative of needing to provide my own "park" on a one-acre lot out in [exurban] Cardinal Point Estates? If your answer leans to the affirmative, please account for the cost of the non-private provision of the roads between the 'burbs and the rest of the world and re-answer.

The CBO raises a related issue of the extent to which there are regional or national spillovers for local expenditures:

• Whether the deduction is an efficient use of federal resources depends on the nature of the benefits from any services at the state and local level that it subsidizes.
  • To the extent that state and local taxes are payments by residents of those jurisdictions for services that they themselves receive from their state and local governments, the rationale for a federal subsidy is weak.
  • In contrast, if state and local taxes pay for services that have spillover benefits that are regional or national in nature, then a federal subsidy may be desirable to ensure that an adequate volume of such services is produced.

State and local taxes mostly pay for a few big things: public K-12 and higher education, transportation, health and welfare services, public safety, and community development. While the CBO director doesn't make the judgment, it should be obvious enough that the major expenditures have material "spillover benefits" and so the standard public goods argument for subsidy applies.

It's also perhaps worth remembering that, while its effect isn't included in the CBO calculations, lower-income taxpayers get an implicit state-and-local tax deduction via the federal standard deduction. I don't mean to say pity the poor upper-middle class, though. Rather, a proper "reform" would ideally address the entirety of the issue, which the deduction for itemizers isn't. To give Felix his due, I don't dispute the possibility that the tax system could be improved by applying generally lower rates to broader income. But a truly equitable, and socially efficient, solution would not only have to address the tax policy side of the issue, but also the local spending side — via, for instance, direct federal subsidies to replace the implicit subsidies from the current-law income tax. And good luck getting cloture on that.

Labels: Economics, PortfolioMarketMovers, Tax Incentives

by Ken Houghton

Thorsten Beck is smarter than I am. But he appears to be surprised by something I would consider intuitive:

Fourteen percent of firms in this sample rely exclusively on informal finance and the percentage goes up as corruption, complexity of taxation (but interestingly not tax rates) and property registration increase. [emphasis mine]

Why would this be confusing? Tax rates may change, but they are fairly stable for planning ROI. Confusion—additional uncertainty—makes rudimentary ROI calculations more problematic (if not more difficult).

It seems evident that, at the margin, a firm would feel more secure making an investment decision based on a known, say, 30% effective tax rate than making a decision that depends on subsequent rangling, even if the most probable effective tax rate is slightly lower than 30%).

What am I missing?

Labels: Economic Development, investment strategies, Tax Incentives

by Tom Bozzo

A correspondent asks:

I'm searching for economic advice. If I were to create a national holiday meant to coincide with the stimulus package being planned in Washington, when would be a good time to have the holiday?

It's not so much an economic question, and I dunno. Perhaps, like "Love Day" from The Simpsons [*], it should fill in the gap between established spending opportunities. In one of many cases of life imitating The Simpsons, many of those gaps have been filled — as Easter, for one thing, is being marketed increasingly as Christmas II rather than Chocolate Bunny Time. Otherwise, I don't think windfall opportunities for the Mobility are consistently timed enough to locate the day that's the statistical middle of them.

Any thoughts?

(Cross-posted at Scatterplot)

------------------------------------------

[*] Not to be confused with "Love Day" (2004) from Blue's Clues [**], though I've wondered whether that's a deliberate wink at parents trapped in front of the Tube with their toddlers.

[**] And I never thought I'd say it, but Dora the Explorer makes Blue's Clues look like Twin Peaks.

Labels: Bushonomics, Tax Incentives

by Ken Houghton

Via Mark Thoma, the Tax Foundation discusses the timing of births (somehow without considering that eighteen years out might be a better time in one's earnings life cycle to take a deduction).


But the 'graf that catches attention is this one:

A similar issue is scheduled to take place 23 months from now with the estate tax. Under current law, it will be nonexistent in 2010, but will come back in full force in 2011. This could possibly lead to some difficult decisions having to be made in December 2010 regarding the value of one's living a few extra months or years relative to the financial gain to heirs of a zero estate tax bill.

Now where have we seen that before?

Paul Krugman in the NYT 30 May 2001 ("Bad Heir Day," via the PKarchive):

There's a scene in the 1966 British comedy "The Wrong Box" in which the son of an irascible plutocrat pushes his father's wheelchair along the top of a cliff, responding with a dutiful "Yes, father" to each outpouring of verbal abuse. Then the old man waves his hand at the industrial landscape below, and declares, "When I'm gone, all this will be yours." "Yes, father," replies the son — and pushes him off the cliff.

That scene came back to me as I delved further into the absurd piece of tax legislation that a House-Senate conference devised and that George W. Bush triumphantly signed last weekend. The Bush tax plan was always peculiar: in order to hide the true budget impact, its authors delayed many of the biggest tax cuts until late into the 10-year planning period; repeal of the estate tax, in particular, was put off to 2010. But even that left the books insufficiently cooked, so last week the conferees added a "sunset" clause, officially causing the whole bill to expire, and tax rates to bounce back to 2000 levels, at the beginning of 2011.

So in the law as now written, heirs to great wealth face the following situation: If your ailing mother passes away on Dec. 30, 2010, you inherit her estate tax-free. But if she makes it to Jan. 1, 2011, half the estate will be taxed away. That creates some interesting incentives. Maybe they should have called it the Throw Momma From the Train Act of 2001.

UDATE: Anonymous in comments notes that the Tax Foundation has been hitting this issue since late 2005, with this giggle, and three substantive pieces.

The Tax Foundation is, of course, shocked to discover what Krugman and his readers have known for nearly seven years.

Labels: Bushonomics, life cycle, Tax Incentives

by Ken Houghton

Lawrance G. Lux, friend of a gentleman farmer:

The multitude of Farmers confront a technologically controlled Market for their Needs; be it Equipment, Seed, Fertilizer, Transportation, or Finance. Farmers have for years called for more Fuel-efficient, smaller, less-Expensive equipment suited to their actual Needs. Check the Market for how closely the incorporated Suppliers have listened to their Demands. [emphasis mine]

Any resemblance to the general market for motorized vehicles is left as an Exercise to the Reader, who is advised to also click-through the link above to see the practical changes Lux suggested to the Farm Bill.

Labels: Tax Incentives, Trains Planes and Automobiles

by Ken Houghton

from the NYT via The Sainted Constance at Deep Genre, solving a mystery posed a few days ago by John Crowley:

The upscale Urban Baby store became a pawnshop offering 30-day loans.

And this is truly an Economics post:

The filmmakers chose New Haven to take advantage of generous tax credits Connecticut began doling out to production companies last year as well as Yale’s historic campus....Film activities have skyrocketed since Connecticut began its tax credit program, which gives qualifying productions back 30 percent of costs. The state reported $52 million worth of film production in the first six months of the program, last July to December, compared with $750,000 during the six months before that, according to The Associated Press. With more costs becoming eligible today, some expect the total to top $300 million this year.

Zero-sum calculations table:

1. To the extent that films are made that would not otherwise have been, this is an expansion of the pie. However, any film that becomes makeable solely because of a tax break (in the context of an overall budget) is unlikely to be justifiable on strictly economic grounds.
   
2. To the extent that films would have used a CT setting anyway, there is a loss of tax dollars. Given the data, this appears to be a nominal amount (just under 1.5%).
   
3. The films still have to pay for location use, and, to some extent, may use local talent as extras, transportation (taxi drivers), and other tasks, at least some of whom will pay taxes and/or spend the money locally.
   
4. To the extent that the films would have been made anyway, the films are selecting CT over MA or NYC or Chicago or some other location. So there has been a shift of just over $50 million between economies, but no net gain to U.S. GDP, except to the extent that either
   
   1. the work would have been done in Canada, Europe, or some other location or
      
   2. people in CT spend more of their income than others, so that the multiplier effect might produce a second- or third-order effect.

As the Urban Babys of today become the pawn shops of yesteryear become the pawn shops of tomorrow, taxes and transfers remain something that can be made to appear optimal.

Labels: Economics, just life, Tax Incentives

by Ken Houghton

Via Calculated Risk:

The next time GM explains that its pensioners need to take a hit, it won't be because car sales have fallen.

It will be because of their subprime mortgage lending:

General Motors Corp. will inject $1 billion into GMAC, its former finance arm said on Tuesday, a capital infusion needed to complete the sale of the automaker's majority stake in the face of escalating defaults in the U.S. mortgage market.

Under terms of its sale to a group led by Cerberus Capital Management, GM had guaranteed a minimum book value of $14.4 billion when the sale closed at the end of November.

It's not that adding equity to ResCap wasn't a good idea:

GMAC's ResCap unit, which specializes in housing finance, reported $48 billion in subprime loans -- about 76 percent of its mortgage portfolio as of year end.

ResCap increased its allowance for loan losses to 2.17 percent at year-end from 1.55 percent a year earlier and reported a spike in nonperforming loans to 10.5 percent of its mortgage portfolio.

but the result is that Private firm is being compensated by public share-, debt-, and lienholders of GM. And the private firm wins twice:

GMAC said it earned $1 billion in the fourth quarter of 2006, compared with $112 million a year earlier. The results included a $791 million tax benefit from its conversion to a limited liability company.

Translation: that's another $791 million that GM pensioners and others will have to pay into the general fund.

In a related matter (from comments at CR), Master Financial Inc. has "cease[d] its wholesale loan origination operation including accepting new applications for mortgage loans and funding loans in its pipeline."

A coworker noted:

Their web site brags about a feature called their “30 second desk.” Maybe some approvals actually needed more than 30 seconds of attention in retrospect.

Labels: deficit, mortgage, subprime, Tax Incentives

by Ken Houghton

We have Toles on 26 February.



We have Thoma, with the full articles here (11 Feb) and here (20 Feb). Excerpts:

I would be very pleased to find out that growing inequality is not a problem. However, despite the attempts of Alan Reynolds and a few others to argue otherwise, the preponderance of evidence and of professional opinion clearly indicates that inequality has been rising since 1988, and that the trend toward widening inequality has been present for much longer than that. The question is what, if anything, to do about it. If we can get past the attempts to cloud the issue, perhaps we can proceed to more important discussions. [11 Feb]

There is a role for skeptics, but there is also a time to accept that the preponderance of evidence points in one direction and to begin to think about and implement corrective measures. I believe an important question is how we respond to inequality – will it be through progressive taxation, minimum wage legislation, changes in the structure of health care, investments in education and retraining programs, wage insurance and so on, or will we do nothing? [20 Feb]

I report. You decide.

Labels: Economics, Economists View, Income Inequality, Mark Thoma, Tax Incentives, Tom Toles