Saturday, October 21, 2017

Your Favorite Tax Break Isn’t as Great as You Think

Tax specialists of different political leanings are in surprising agreement about the poor design of top breaks

By Laura Saunders of The WSJ. Excerpts:
"none of these beloved tax breaks rates higher than a B-minus, according to an informal survey of specialists at the Tax Foundation, the Tax Policy Center and the Committee for a Responsible Federal Budget. We asked them to grade the breaks for cost effectiveness and averaged the results."

"When it comes to the federal budget, these tax breaks matter because their forgone revenue comes to about $1.3 trillion annually, according to the Tax Foundation. That’s almost as much as the individual income tax raises"

There’s surprising agreement among tax specialists of different political leanings about the poor design of top breaks. They even agree about some fixes—unrealistic as these may be. Here are their thoughts.

Employer-provided health insurance and medical care. Employers embraced this break during World War II to circumvent wage controls. Now it’s a behemoth, costing $228 billion annually.
Critics give this break a D-plus, saying it helps drive up health-care costs, encourages overconsumption of medical care and impedes a market for individual insurance. Some workers don’t switch jobs because of health coverage.

Mr. Goldwein suggests replacing the current benefit with a tax credit—a fixed-dollar offset for each taxpayer. Initially it would lose the same revenue as the current break, but then grow more slowly than inflation.

Capital gains. The lower rate for long-term capital gains reaps praise for lessening double taxation of corporate profits and encouraging investment.

Critics say the benefit goes mostly to the top 1% and it’s an engine for tax shelters. The capital-gains exemption at death—the “step up”—prompts investors to refrain from selling. Grade: B-minus.
Kyle Pomerleau, policy director at the Tax Foundation, wishes taxpayers could get a tax deduction when they invest, but then owe tax on sales at ordinary rates—with no step-up at death. He thinks this would encourage investment and discourage manipulation.

State and local tax deductions. Opinions on these write-offs differ widely. Some experts grade them C-plus because they encourage state and local governments to provide services, while others give them a flat F, saying they unfairly subsidize locales with higher earners and higher taxes, encouraging bloated government. Average grade: D.

Len Burman, a Tax Policy Center economist and former Treasury Department official during the 1986 tax reform, opts for a C+. But even he would repeal them. In his dreams, he’d put the revenue in a federal “rainy day” fund to help states through temporary economic crises.

Mortgage interest deduction. Our experts all gave this break a D. They think it raises house prices, creating a barrier to entry, and encourages people to buy larger houses than they would otherwise.
Possible corrections: Limit the benefit to one home instead of the current two. In addition, encourage lower-income buyers by turning the deduction into a tax credit of, say, 15% of the interest on a mortgage of up to $500,000.

Charitable-donation deduction. This write-off gets a C-plus. While it encourages worthy charitable giving, some experts think it’s a double subsidy because nonprofits don’t pay taxes. The ability to donate appreciated assets, such as stock, without owing capital-gains tax also encourages gaming, critics say.

Several experts would restrict worthy causes to exclude, say, athletic teams or wealthy universities. This would be hard, because worthiness is often the eye of the beholder."

Globalization did not lead to an intensification of poverty-just the opposite

From Cafe Hayek.

"From pages 297-298 of the 2015 Fourth Edition of Douglas Irwin’s indispensable volume, Free Trade Under Fire (footnotes deleted; link added):
"Time and experience demonstrated that globalization did not lead to an intensification of poverty.  Instead, expanding world trade proved to be an escalator for bringing poor people out of poverty.  Between 1990 and 2011, the portion of the world’s population living in poverty fell from 36 to 15 percent, according to the World Bank.  The International Labor Office reported that the number of workers in the world earning less than $1.25 a day has fallen to 375 million in 2013 from 811 in 1991.  The past two decades have seen extraordinary progress in poverty reduction in the developing world.  Who should get the credit, the Millennium Development Goals of the United Nations and other international aid agencies?  Not quite.  As The Economist put it, “The MDGs may have helped marginally, by creating a yardstick for measuring progress, and by focusing minds on the evil of poverty.  Most of the credit, however, must go to capitalism and free trade, for they enable economies to grow – and it was growth, principally, that has eased destitution.”"

 

Friday, October 20, 2017

No factual evidence to support claims that many markets are becoming dominated by near-monopolies

Antitrust for Fun and Profit: The Democrats’ Better Deal (Part 3). Excerpt:
"This continues Part 1 and Part 2 of my critique of the arguments for aggressive antitrust activism offered in Steven Pearlstein’s Washington Post article, “Is Amazon Getting Too Big,” which is largely based on a loquacious law review article by Lina Kahn of the Google-funded “New America” think tank.

My previous blogs found no factual evidence to support claims of Pearlstein and Kahn that many markets (which must include imported goods and services) are becoming dominated by near-monopolies who profit from overcharging and under-serving consumers.

Yet the wordiest Kahn-Pearlstein arguments for more antitrust suits against large tech companies are not about facts at all, but about theories and predictions.

Kahn makes a plea for preemptive punishment based on omniscient futurism. “The current market is not always a good indication of competitive harm,” she writes.  Antitrust enforcers “have to ask what the future market will look like.” But how could antitrust enforcers’ predictions about what might or might not happen in the future be deemed a crime or a cause for civil damages?  If the law allowed courts to levy huge fines or break-up companies on the basis of prosecutors’ predictions of the future, the potential for whimsical damages and political corruption would be almost limitless.

We have already experienced extremely costly federal (and European) antitrust cases based largely on incredible predictions about “what the future market will look like” – mostly obviously in the cases against IBM and Microsoft.

IBM was the subject of 13 years of antitrust “investigation” (harassment) before the suit was finally dismissed “without merit” in 1982.  My first article about antitrust was a 1974 critique of the IBM case in Reason magazine which remains the best explanation (aside from this book) of what I mean about antitrust being “for fun and profit.”

Pearlstein imagines “it was the government’s aborted prosecution of IBM … that made Microsoft possible.”  But IBM’s decision to offer three operating systems for the PC and allow Microsoft to sell MS-DOS to Compaq had nothing to do with the government’s antitrust crusade against IBM.  That crusade was a well-funded project of Control Data, Honeywell, NCR and Sperry Rand – competitors of IBM’s who hoped to do better in court than they had with customers."

In the long run, all of the factor owners' loss from a capital income tax is a loss to labor

From David Henderson.

"In the long run, all of the factor owners' loss from a capital income tax is a loss to labor (the area below the horizontal dashed line is negligible; see A below). Therefore, in the long run, capital-income tax revenue is a LOWER BOUND on labor's loss. Furman and Summers have it backwards.
This is from Casey Mulligan, "Furman and Summers revoke Summers' academic work on investment," October 18, 2017.

This is Casey's comment and analysis on the current controversy over whether Kevin Hassett's claim of large increases in wages due to corporate tax cuts make sense.

It's a technical argument and you might not follow all of it. Here's one paragraph that might help:

Why would labor bear all of the burden in the long run? Well, ask Larry Summers back when he used to be an academic studying these matters. His 1981 Brookings paper, which even today is an article commonly used by me and others to teach this in graduate school, says so on page 81 equation (7). The left-hand-side of that equation is a perfectly elastic long-run supply of capital: it says that the supply curve in my picture is, in the long run, properly drawn as horizontal. See also Lucas (1990, p. 303, equation 4.3).

But if you don't know this literature somewhat, the above paragraph might not help you much. So let me explain in simpler words by noting that the key assumption in the above is the assumption of a perfectly elastic long-run supply of capital. Why would it be perfectly elastic? Because capital is quite mobile across countries, so when one country's government cuts it tax rate on capital, that draws in capital from around the world.

Why does this matter? The greater the stock of capital, the higher is the ratio of capital to labor, and, therefore, the higher is the marginal product of labor, and, finally, the higher is the real wage.
Here's Mulligan again, with some of the important parts of the technical argument:

Using a Cobb-Douglas aggregate production function with labor share 0.7, and a 50% capital-income tax rate (combining corporate, property, and the capital components of the personal income tax), I get a Furman ratio of 350%. With a 40% tax rate instead, the Furman ratio is 233% (algebra here; these refer to modest tax-rate reductions -- not going all of the way to zero). If the current CEA said 250%, then it got Furman's ratio much closer than Furman did, who puts it less than 100%."

Thursday, October 19, 2017

Free Markets Make the World a Better Place

Economic growth, capitalism, improves standards of living, health, life expectancy.

By Marian Tupy. He is a policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity.

"Last Friday, the Cato Institute hosted a forum on a new book, Neil Monnery's Architect of Prosperity: Sir John Cowperthwaite and the Making of Hong Kong. Sir John Cowperthwaite was the financial secretary of Hong Kong between 1961 and 1971, as well its financial under-secretary between 1951 and 1961. As such he has contributed to establishing the policies—small government, low taxes, fiscal probity and free trade—which are credited for turning a poor backwater of the British Empire into one of the richest places on earth.

When I asked Monnery, the British author of the book, to put Hong Kong's success in context, he noted that in the years following the end of World War II, Hong Kong's per capita income was one third of that in Britain. By the time of the British transfer of the territory to China in 1997, incomes in the two countries were the same. Today, the average inhabitant of Hong Kong is over 30 percent richer than the average Briton.



As late as 1960, people in Hong Kong enjoyed lives that were four years shorter than those in Britain. Today, they live four years longer than their British counterparts. Economic growth, we concluded during our discussion, is key not only to rising standards of living, but also to health and life expectancy. Put plainly, the richer the country is, the better the hospitals and higher the quality of care and the environment that it can afford to buy.


That got me thinking about the region I came from and the changes that Central Europe underwent since the fall of the Berlin Wall, the 28th anniversary of which we will commemorate on November 9. Following the end of the communist period, the region went into an economic recession, as unproductive industries shut down and millions of people lost their jobs. Life expectancy started to decline, which opponents of market reforms saw as proof positive of capitalism's deleterious consequences for people's welfare.

Revisiting the life expectancy statistics some three decades later, a different picture emerges. Between 1960, the first year for which World Bank data is available, and 1989 (i.e., a period of 29 years), life expectancy in the Czech Republic, Hungary, Poland and Slovakia rose by 1.33, 1.46, 3.36 and 1.05 years respectively. Between 1989 and 2015 (i.e., a period of 26 years), it increased by 7.1, 5.68, 6.44 and 5.24 years respectively. The post-communist dip in life expectancy, such as it was, proved to be small and temporary.

Further afield, post-communist depression was much more pronounced in the Baltic countries, which is, in retrospect, unsurprising. These economies, being parts of the Soviet Union, were much more heavily distorted than their neighbors to the west. In other words, a deeper restructuring was necessary.

Yet, the relationship between economic growth and life expectancy still holds. In the 31 years between 1960 and 1991 (i.e., the year of the dissolution of the U.S.S.R.), life expectancy in Estonia and Lithuania, rose by 1.47 and 0.52 years respectively, while in Latvia it fell by .75 years. Between 1991 and 2015 (i.e., a period of 24 years), life expectancy rose by 7.33 years in Estonia, 2.97 years in Lithuania, and 5.02 years in Latvia.

All in all, a switch from socialism to capitalism appears to be good for the health and longevity of the citizenry."

Is Piketty’s Data Reliable?

From Alex Tabarrok.
"When Thomas Piketty’s Capital in the Twenty-First Century first appeared many economists demurred on the theory but heaped praise on the empirical work. “Even if none of Piketty’s theories stands up,” Larry Summers argued, his “deeply grounded” and “painstaking empirical research” was “a Nobel Prize-worthy contribution”.

Theory is easier to evaluate than empirical work, however, and Phillip Magness and Robert Murphy were among the few authors to actually take a close look at Piketty’s data and they came to a different conclusion:
We find evidence of pervasive errors of historical fact, opaque methodological choices, and the cherry-picking of sources to construct favorable patterns from ambiguous data.
Magness and Murphy, however, could be dismissed as economic history outsiders with an ax to grind. Moreover, their paper was published in an obscure libertarian-oriented journal. (Chris Giles and Ferdinando Giugliano writing in the FT also pointed to errors but they could be dismissed as journalists.) The Magness and Murphy conclusions, however, have now been verified (and then some) by a respected figure in economic history, Richard Sutch.

I have never read an abstract quite like the one to Sutch’s paper, The One-Percent across Two Centuries: A Replication of Thomas Piketty’s Data on the Distribution of Wealth for the United States (earlier wp version):
This exercise reproduces and assesses the historical time series on the top shares of the wealth distribution for the United States presented by Thomas Piketty in Capital in the Twenty-First Century….Here I examine Piketty’s US data for the period 1810 to 2010 for the top 10 percent and the top 1 percent of the wealth distribution. I conclude that Piketty’s data for the wealth share of the top 10 percent for the period 1870 to 1970 are unreliable. The values he reported are manufactured from the observations for the top 1 percent inflated by a constant 36 percentage points. Piketty’s data for the top 1 percent of the distribution for the nineteenth century (1810–1910) are also unreliable. They are based on a single mid-century observation that provides no guidance about the antebellum trend and only tenuous information about the trend in inequality during the Gilded Age. The values Piketty reported for the twentieth century (1910–2010) are based on more solid ground, but have the disadvantage of muting the marked rise of inequality during the Roaring Twenties and the decline associated with the Great Depression. This article offers an alternative picture of the trend in inequality based on newly available data and a reanalysis of the 1870 Census of Wealth. This article does not question Piketty’s integrity.
You know it’s bad when a disclaimer like that is necessary. In the body, Sutch is even stronger. He concludes:
Very little of value can be salvaged from Piketty’s treatment of data from the nineteenth century. The user is provided with no reliable information on the antebellum trends in the wealth share and is even left uncertain about the trend for the top 10 percent during the Gilded Age (1870–1916). This is noteworthy because Piketty spends the bulk of his attention devoted to America discussing the nineteenth-century trends (Piketty 2014: 347–50).
The heavily manipulated twentieth-century data for the top 1 percent share, the lack of empirical support for the top 10 percent share, the lack of clarity about the procedures used to harmonize and average the data, the insufficient documentation, and the spreadsheet errors are more than annoying. Together they create a misleading picture of the dynamics of wealth inequality. They obliterate the intradecade movements essential to an understanding of the impact of political and financial-market shocks on inequality. Piketty’s estimates offer no help to those who wish to understand the impact of inequality on “the way economic, social, and political actors view what is just and what is not” (Piketty 2014: 20).
One of the reasons Piketty’s book received such acclaim is that it fed into concerns about rising inequality and it’s important to note that Sutch is not claiming that inequality hasn’t risen. Indeed, in some cases, Sutch argues that it has risen more than Piketty claims. Sutch is rather a journeyman of economic history upset not about Piketty’s conclusions but about the methods Piketty used to reach those conclusions."

Wednesday, October 18, 2017

CNN Smears Sensible EPA Decision

The agency's administrator, Scott Pruitt, simply followed the law and allowed a company to submit a proposal.

By John Stossel of Reason.
"Did you happen to catch CNN's latest smear?

Anderson Cooper's show recently featured a "two-part exclusive" that claims Donald Trump's EPA director had conspired with the CEO of a mining company to "withdraw environmental restrictions" so the company could dig "the largest open pit mine in the world in an extremely sensitive watershed in wild Alaska."

The report was enough to horrify any caring person. CNN showed beautiful pictures of colorful salmon swimming in Bristol Bay, and the reporter intoned dramatically, "EPA staffers were shocked to receive this email obtained exclusively by CNN which says 'we have been directed by the administrator to withdraw restrictions'... Protection of that pristine area was being removed."

No! A "pristine" area and gorgeous salmon were about to be obliterated by a mine!

I would have believed it, except I happened to report on that mine a couple years ago.

I knew that the real scandal was not EPA director Scott Pruitt's decision to "withdraw the restrictions"; it was what President Obama's EPA did to the company's mining proposal in the first place.

Zealots at the EPA had conspired with rich environmental activists to kill the mine before its environmental impact statement could even be submitted.

This was unprecedented.

The House Committee on Oversight and Government Reform later concluded: "EPA employees had inappropriate contact with outside groups and failed to conduct an impartial, fact-based review."

Now, appropriately, Pruitt undid that censorship of science.

But CNN, implying devious secrecy said, "according to multiple sources, he made that decision without a briefing from any of EPA's scientists."

Shocking!

But Pruitt didn't require opinions from scientists. He didn't approve the mine. He didn't make a science decision. He simply followed the law and allowed a company to submit a proposal.

Also, despite CNN's repeated depictions of salmon on Bristol Bay, it turns out that the proposed mine would not even be on the Bay. It would not even be 10 miles away, or 20 miles away, or even 50 miles. The proposed mine would be about 100 miles away.

Did CNN mention that? No. Never. We asked CNN why. And why not point out that the mining company is just being allowed to start the EPA's long and arduous environmental review? They didn't get back to us.

Of course, explaining that wouldn't fit CNN's theme: Evil Trump appointee ravages environment.

Their reporter did at least speak with the mine's CEO, Tom Collier, who tried to explain.

"It's not a science—it's a process decision."
 
But the reporter, Drew Griffin, wouldn't budge. He called Collier "a guy who wants to mine gold in an area that many scientists believe will destroy one of the most pristine sockeye salmon sporting grounds in the whole world."

By the way, Collier isn't an evil Republican-businessman-nature-destroyer. He's a Democrat who once ran environment policy for President Bill Clinton and Vice President Al Gore. CNN never mentioned that either.

Instead the reporter implied evil collusion: "This looks like the head of a gold mine went to a new administrator and got him to reverse what an entire department had worked on for years."

Here at least the report was accurate. Obama's environmental department did try to kill that mine for years. They colluded with groups like the Natural Resources Defense Council (NRDC), one of America's wealthiest environment groups.

The NRDC is mostly made up of anti-progress lawyers who want no mines built anywhere. Don't believe me? I asked NRDC spokesman Bob Deans:

STOSSEL: There are some mines where NRDC says, great, go ahead?
DEANS: It's not up to us.
STOSSEL: Are there any?
DEANS: It's not up to us to green light mines...
STOSSEL: Are there any you don't complain about?
DEANS: Yeah, sure.

So I asked him for some names. He and the NRDC still haven't provided any.

If these zealots and their sycophants in the media get their way, America will become a place with no mining, no pipelines, no oil drilling, no new ... anything.

The acronym used to make fun of anti-development attitudes used to be NIMBY—Not In My Back Yard. Now it's BANANA: Build Absolutely Nothing Anywhere Near Anybody."