My deficit eviceration plan

Finally got around to playing with the NYT's deficit reduction app, and here are my results.

I choose all the domestic spending cuts, almost all the military cuts (kept the F-35 and Osprey), and the majority of health and social security cuts.  I extended all the Bush-era tax cuts, but added a carbon tax and reduced the mortgage interest rate deduction.  And I'm especially fond of the Bowles-Simpson plan that zeros out tax expenditures to broaden the tax base while lowering rates--though I would want to lower rates even further than their proposal (since I'm saving so much on the spending side).

Ah well, we must allow ourselves to dream from time to time. Now back to the bleak art of the possible...

Greg Mankiw can afford higher taxes

...but they'll make him work less.

"You have been the victims of a terrible swindle"

In the interest of airing all perspectives, this is a letter from Berkeley professor Michael O'Hare to his students:

Welcome to Berkeley, probably still the best public university in the world. Meet your classmates, the best group of partners you can find anywhere. The percentages for grades on exams, papers, etc. in my courses always add up to 110% because that’s what I’ve learned to expect from you, over twenty years in the best job in the world.

That’s the good news. The bad news is that you have been the victims of a terrible swindle, denied an inheritance you deserve by contract and by your merits. And you aren’t the only ones; victims of this ripoff include the students who were on your left and on your right in high school but didn’t get into Cal, a whole generation stiffed by mine. This letter is an apology, and more usefully, perhaps a signal to start demanding what’s been taken from you so you can pass it on with interest.

Swindle – what happened? Well, before you were born, Californians now dead or in nursing homes made a remarkable deal with the future. (Not from California? Keep reading, lots of this applies to you, with variations.) They agreed to invest money they could have spent on bigger houses, vacations, clothes, and cars into the world’s greatest educational system, and into building and operating water systems, roads, parks, and other public facilities, an infrastructure that was the envy of the world. They didn’t get everything right: too much highway and not enough public transportation. But they did a pretty good job.

Young people who enjoyed these ‘loans’ grew up smarter, healthier, and richer than they otherwise would have, and understood that they were supposed to “pay it forward” to future generations, for example by keeping the educational system staffed with lots of dedicated, well-trained teachers, in good buildings and in small classes, with college counselors and up-to-date books. California schools had physical education, art for everyone, music and theater, buildings that looked as though people cared about them, modern languages and ancient languages, advanced science courses with labs where the equipment worked, and more. They were the envy of the world, and they paid off better than Microsoft stock. Same with our parks, coastal zone protection, and social services.

This deal held until about thirty years ago, when for a variety of reasons, California voters realized that while they had done very well from the existing contract, they could do even better by walking away from their obligations and spending what they had inherited on themselves. “My kids are finished with school; why should I pay taxes for someone else’s? Posterity never did anything for me!” An army of fake ‘leaders’ sprang up to pull the moral and fiscal wool over their eyes, and again and again, your parents and their parents lashed out at government (as though there were something else that could replace it) with tax limits, term limits, safe districts, throw-away-the-key imprisonment no matter the cost, smoke-and-mirrors budgeting, and a rule never to use the words taxes and services in the same paragraph.

Now, your infrastructure is falling to pieces under your feet, and as citizens you are responsible for crudities like closing parks, and inhumanities like closing battered women’s shelters. It’s outrageous, inexcusable, that you can’t get into the courses you need, but much worse that Oakland police have stopped taking 911 calls for burglaries and runaway children. If you read what your elected officials say about the state today, you’ll see things like “California can’t afford” this or that basic government function, and that “we need to make hard choices” to shut down one or another public service, or starve it even more (like your university). Can’t afford? The budget deficit that’s paralyzing Sacramento is about $500 per person; add another $500 to get back to a public sector we don’t have to be ashamed of, and our average income is almost forty times that. Of course we can afford a government that actually works: the fact is that your parents have simply chosen not to have it.

I’m writing this to you because you are the victims of this enormous cheat (though your children will be even worse off if you don’t take charge of this ship and steer it). Your education was trashed as California fell to the bottom of US states in school spending, and the art classes, AP courses, physical education, working toilets, and teaching generally went by the board. Every year I come upon more and more of you who have obviously never had the chance to learn to write plain, clear, English. Every year, fewer and fewer of you read newspapers, speak a foreign language, understand the basics of how government and business actually work, or have the energy to push back intellectually against me or against each other. Or know enough about history, literature, and science to do it effectively! You spent your school years with teachers paid less and less, trained worse and worse, loaded up with more and more mindless administrative duties, and given less and less real support from administrators and staff.

Many of your parents took a hike as well, somehow getting the idea that the schools had taken over their duties to keep you learning, or so beat-up working two jobs each and commuting two hours a day to put food on the table that they couldn’t be there for you. A quarter of your classmates didn’t finish high school, discouraged and defeated; but they didn’t leave the planet, even if you don’t run into them in the gated community you will be tempted to hide out in. They have to eat just like you, and they aren’t equipped to do their share of the work, so you will have to support them.

You need to have a very tough talk with your parents, who are still voting; you can’t save your children by yourselves. Equally important, you need to start talking to each other. It’s not fair, and you have every reason (except a good one) to keep what you can for yourselves with another couple of decades of mean-spirited tax-cutting and public sector decline. You’re my heroes just for surviving what we put you through and making it into my classroom, but I’m asking for more: you can be better than my generation. Take back your state for your kids and start the contract again. There are lots of places you can start, for example, building a transportation system that won’t enslave you for two decades as their chauffeur, instead of raising fares and cutting routes in a deadly helix of mediocrity. Lots. Get to work. See you in class!

Naturally I agree that California is an ungovernable mess, broken by a referendum system that allows simultaneous popular demand for services and lower taxes.

Rather than raising taxes, I would like to see California's public sector spending pared down to the level of (let's say) Texas.  Important services like Oakland's 911 could be re-funded if we cut enough handouts and nonessential services from elsewhere.

Professor O'Hare complains of teachers' "mindless administrative duties" and insufficient support from real school administrators and staff.  But why not just do away with half these administrative demands?  Let's spend less money on education and administration; get the government out of the business of directly employing teachers and administrators.  Privatize everything with charter schools and vouchers, allowing families to choose the schools they consider best.  You know, a market in choice and competition rather than this state-run bureaucratic nightmare with a monopoly on public funds and unionized teachers who can't be fired for poor performance.

Dismantling the left's rhetoric

Keith Hennessey does a fine job.

Meanwhile on the road to serfdom

NRO:

It's Cost of Government Day! This year, Americans needed to work fully 231 days to pay for the total cost of government — from January 1st to today. You've been working for the government all year.

It's not a new tax!

Except when it is.

Taxation and migration

A.S. at The Economist explains that people move to Texas because the taxes are low:

IN THE ten years I’ve lived in New York I forgot how to drive. Lately I’ve been spending lots of time in Austin, Texas. Enough so that I’ve had to start driving again. When you go many years without driving, it becomes terrifying. So to refresh my skills I took lessons with a wonderfully patient and brave woman who has taught driving in Austin for nearly thirty years. I expected to be one of her few adult students, but no. My instructor claimed in the past few years the number of adult students increased exponentially, not quite rivalling the number of teenagers. Most are tech workers who come from all over the world, drawn by the vigorous labour market. Adult driving students struck me as a rather interesting economic indicator. It doesn’t tell us anything we didn’t already know. Migration statistics reveal that people are moving in droves to Texas. Why? Jobs and no state income taxes. High earning New Yorkers and Californians can take home between 9% and 11% more of their income by moving to Texas. Every trip down I speak to at least one bitter New Yorker/Californian fed up with high taxes and cost of living.

Yglesias responds:

Well . . . maybe. Texas certainly is growing rapidly, and it does have a relatively healthy labor market. But even though a lot of people are moving to Texas, it seems to me that California’s population is also growing at an impressive clip:




I suspect A.S. is being somewhat misled by this fascinating interactive tool which charts domestic migration only and thus gives the impression that certain places are experiencing massive net population flight when in fact they’re just attracting a lot of immigrants.

So successful citizens are moving to low tax states while less well off immigrants head to high welfare states. Is anyone surprised?

I'm all for open immigration, but I'd much rather live with a red state's economy. As should anyone who's interested in a healthy labor market with low taxes and welfare. Among people who feel the same, the Economist's point stands.

Alas, the problems with Texas are certainly not economic—rather, they are called Texans.

Tea party ad

Woohoo.

PA tax amnesty ad

Apparently it's real.

Important sentences

"..a VAT is neither blessed nor evil. It is a tool. We can use it to advance a larger government, a more efficient tax system or some combination of the two."

—Greg Mankiw in the Times.

"...America's not very good at dealing with slow-moving crises, even with slow-moving solutions. We're much better at waiting until a crisis happens, acting quickly, and then putting together commissions to find out why nobody saw it coming."

—Derek Thompson, Atlantic Business.

Don't fear the invisible tax?

Derek Thompson on The Value Added Tax: What You Need To Know

Conservatives also worry that "invisible" taxes like a VAT would enable the government to grow bigger. The evidence does not agree. "Tax visibility is empirically unrelated to the amount of taxation and government spending," economist Casey Mulligan concluded.

Well, there goes one of my worries.

The art of taxation

Alex at Marginal Revolution:

In Mexico, visual artists can pay their taxes with art works.

That's the deal Mexico has offered to artists since 1957, quietly amassing a modern art collection that would make most museum curators swoon. As the 2009 tax deadline approaches, tax collectors are getting ready to receive a whole new crop of masterworks...

There's a sliding scale: If you sell five artworks in a year, you must give the government one. Sell 21 pieces, the government gets six. A 10-member jury of artists ensures that no one tries to unload junk.

Under the program, the Ministry of Finance and Public Credit now owns 4,248 paintings, sculptures, engravings and photographs by Diego Rivera, Rufino Tamayo, Leonora Carrington and other masters.

Click on "Colecciones Pago en Especie" at apartados.hacienda.gob.mx/cultura/index.html to see the art works which have been used to pay taxes since the program began.

The Mexican government accepts all styles of painting for the program so, unlike in America, in Mexico you can have taxation without representation.

Groan.

George Will on the VAT

Column: "When liberals advocate a value-added tax, conservatives should respond: Taxing consumption has merits, so we will consider it—after the 16th Amendment is repealed."

In a perfect world...

Update: Well, shows what I know.

What if Republicans proposed a revenue-neutral carbon tax?

Yglesias considers.

Taxes per person

Greg Mankiw compares the U.S. to other countries.

Yglesias is not impressed.

Deficit curbing fiscal commission: Deal or No Deal?

(cross posted at Library Grape)

As a reminder, here are charts of the fiscal mess we're headed for under current policy:

To sum up: the baseline scenario has discretionary spending gradually reducing, Social Security remaining about constant, and existing medical entitlements alone ballooning to an absurd 13% of GDP by 2050.

Well before then, near 2025 total debt will cross 100% of annual GDP, the ugly situation Greece finds itself in today that's been trashing the euro in recent trading.

Rather than candidly floating specific, politically perilous proposals such as a liberal analogue to Republican Paul Ryan's proposed budget, President Obama is looking to offload the work to a bipartisan "fiscal commission". The plan was to pass this legislatively and require Congress to vote on the resulting proposals. In the past, some Senate Republicans have been supportive of this idea, but they shamelessly joined in obstructing it. The president will now appoint the commission by executive order, so I assume this means Congress can't be required to vote on any resulting proposal.

Still, Greg Mankiw explores ideas for what we might come up with:

If you were a member of the fiscal commission, what would you try to achieve?

The answer for liberals is easy: They want to raise taxes to fund the existing, and even an expanded, social safety net, while politically insulating the Democrats as much as possible from the charge of being the "tax and spend" party. President Obama can then campaign in 2012 that he did not break his no-taxes-on-the-middle-class pledge, but rather a bipartisan group broke it. That is, the President wants to take credit for fixing the fiscal situation but duck responsibility for having imposed higher taxes.

But what if you are conservative? This is harder. You can try to stick to your no-tax-increase pledge. The problem is that doing so would require spending cuts larger than are politically realistic. If I were king, I bet I could find sufficient spending cuts. But I am not expecting to be anointed any time soon. If the fiscal commission is going to succeed, tax increases will have to be part of the deal.

A reasonable position is, perhaps, that the commission should not succeed. After all, it is the president's responsibility to put out a budget. The one he just released is, as I argued in my recent Times column, not a sustainable one at all. He just passed the buck to the fiscal commission. Perhaps conservatives should not allow him to do that but, instead, should try to force him to put out a sustainable budget on his own. After all, isn't that Peter Orszag's job?

But let's suppose that you are a conservative and you want the fiscal commission to succeed. You will have to agree to higher taxes as part of the bargain. But what should you aim to get in return? Here is my list.

1. Substantial cuts in spending. Ensure that the commission is as much about shrinking government as raising revenue. My personal favorite would be to raise the age of eligibility for Social Security and Medicare. Do it gradually but substantially. Then index it to life expectancy, as it should have been from the beginning.
2. Increased use of Pigovian taxes. Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue. He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.
3. Use of consumption taxes rather than income taxes. A VAT is, as I have said, the best of a bunch of bad alternatives. Conservatives hate the VAT, more for political than economic reasons. They should be willing to swallow a VAT as long as they get enough other things from the deal.
4. Cuts in the top personal income and corporate tax rates. Make sure the VAT is big enough to fund reductions in the most distortionary taxes around. Put the top individual and corporate tax rate at, say, 25 percent.
5. Permanent elimination of the estate tax. It is gone right now, but [will be reinstated soon, and] most people I know are not quite ready to die. Conservatives hate the estate tax even more than they hate the idea of the VAT. If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

One thing is clear: The Democrats in Congress would hate the five demands above. But that is precisely the point. The fiscal commission is giving the Democrats something of very high value: political cover from a major tax hike. If Republicans are going to give them that, they should get something very big in return. If the conservatives on the commission could achieve my five goals above, it might be a deal worth talking about.

Let's make this a bit more concrete. Suppose our goals definitely involve:

1. Reducing future projected deficits to something manageable, like under 1-2% of GDP within a few years time, and keeping it there.
2. Raising any necessary new revenue with a new, European-style VAT.
3. Pigovian carbon pricing (cape and trade, or a carbon tax) is off the table initially; anything we agree to later will simply lower the overall VAT commensurately.

The price for agreement will be along the lines Mankiw describes above:

1. The retirement age will be gradually (over the next ~10 years) increased to something like 70+ and thereafter pegged to life expectancy.
2. Distortionary taxes like the individual and corporate income rates will be capped at a figure like 25%.
3. Permanent elimination of the estate tax.

So, bleg: what's your negotiating position with respect to the above? Can we make a deal?

Bad framing on the excise tax

Ezra Klein explains...

A lot of the arguments over the excise tax are getting caught in a bad, and even slightly dishonest, sales job from its supporters. Sen. John Kerry's blog post defending the policy, for instance, isn't playing it straight. Saying it won't tax employees is a distinction without a difference: It will tax insurers, which will add the tax into the cost of their plans, and employers will either choose different plans or pass the cost on to employees. Similarly, saying it will affect only "3% of premiums in 2013" is designed to obscure the fact that it will hit a lot more policies in 2020. But this is one of those cases when bad arguments mask a good policy, rather than the other way around.

Health benefits should be taxed. There's no reason the system should make a dollar in employer-provided health insurance worth more than a dollar in wages. That's a straight incentive for employers to spend more and more on health insurance, which is contrary to the needs of the country right now. The excise tax begins to expose a small portion of employer-provided health-care costs to taxes. Meanwhile, someone who doesn't get employer-provided health care and buys their own insurance is getting taxed on every dollar they spend on health care.

No one defends this system in principle. They only defend it in practice. The excise tax has its opponents, but none of them say we should make food, or broadband Internet, tax free as long as it is provided by employers -- even though those things are also important! You don't even hear them demanding that the bill make non-employer-provided health care tax free. No one, in other words, is interested in expanding this system to other sectors, or even to the rest of the health-care sector. But given that this subsidy is worth about $250 billion a year, it's got a lot of defenders.

As a final note, the excise tax is a substitute for simply capping the employer tax exclusion. The swap came about because the politics of the excise tax are superficially better: Rather than taxing "workers" or "businesses," you're taxing "insurers." But insurers pass the cost along, of course. And the excise tax is more regressive than capping the exclusion. If you cap the exclusion, people get taxed at their normal marginal tax rate, which is virtually nothing for low-income workers. The excise tax, by contrast, is a flat surtax of 40 percent, no matter what your income. in this case, making the tax sound more populist also made it substantially more regressive.

The era of big government will be over

 Some progressives are admitting it.

Link blag

David Frum wonders if conservatives can govern.

Dish reader draws a lesson from Fort Hood. Another differs. American Muslim reaction here.

Library Grape: Catholic diocese channels Christ's love, threatens to stop feeding the poor if gays marry.

TMV: Can we please just tax the churches already?

Politico: The Republican National Committee's health insurance plan offers coverage for "a fundamental assault on innocent human life".

TPM has a Lou Dobbs slideshow retrospective. Krugman writes: "Until now it really has seemed as if there was nothing, nothing at all, that someone on the right could say and do that would make them unacceptable in polite company. Now it at least seems that there is a line somewhere."

Fallows: more than a hundred TSA agents have gone undercover...cleverly disguised as TSA agents! (he follows up)

Police arrest twenty-five dangerous deviants in Chicago.

Headline to appreciate: "Irish priest kidnapped in Philippines released by MILF"

Unlike every other document on the Web, this page is in final form and completely finished. *grin*

Math is beautiful.

This guy can juggle. So can this one.

Soldiers and their dogs.

The dead zone: implicit marginal tax rates on the working poor

A look at our awful system:



Mises Daily explains:

At A, the marginal tax rate is quite high, essentially because of the generosity of the package of cash and noncash benefits provided to those on welfare. At B, the marginal tax rate is relatively low (!) because of the Earned Income Tax Credit (EITC). From B to D, we (or, rather, the working poor) are in the Dead Zone, with implicit marginal tax rates mostly exceeding 100 percent.

How stupid and evil must our elected representatives be to do this to the working poor! Actually, this being a democracy, there is nobody to blame but the electorate. Especially the left-liberal do-gooders. Since Milton Friedman developed the negative income tax, waaay back in the 1950s, there can be no excuse for any educated person to not be aware of the fact that taxes and means-tested benefits destroy the lower classes' positive incentive to work.

At C, the implicit marginal tax rate is momentarily "only" 75 percent. This is because, in the face of losing other means-tested benefits while the federal income tax kicks in, the children of the household still qualify for the State Children's Health Insurance Program (SCHIP). The lull in the onslaught is momentary, however, ending as soon as that prop is removed from the household.

At D, the family is finally done with jumping through the hoops to qualify and remain qualified for the give-away programs. Now all it has to concern itself with is paying taxes. But there is no rest for the weary because, at E, the child tax credit phases out.

In the above scenario, I describe the effects of the tax and subsidy programs of the government with respect to a hypothetical family of three, consisting of one adult and two minors, with a focus on the working poor. I could just as well have talked of a middle-class family with one or more children of college age, and how means-tested financial aid programs such as the Pell Grant and federally subsidized loans make fools of those who save for college; or how Medicaid's rules for nursing-home eligibility make those who save for retirement into fools; or how bringing back the pre-Reagan tax rates will make utter fools of families in which the wife and husband both work.

Everywhere, the government's desire (meaning the left-liberal do-gooders' desire) to be generous to the poor is destroying the positive incentives to work and to save that are so necessary for a well-functioning economy. What they have done to Detroit, and are doing to New Jersey, they will do to the entire country.

(via Marginal Revolution)