The Surprising Regressivity of Grocery Tax Exemptions

By Jared Walczak of The Tax Foundation. Excerpts:

"Key Findings

• Exempting groceries from the sales tax base reduces economic efficiency without achieving its objective of enhancing tax progressivity.
• The poorest decile of households experiences 9 percent more sales tax liability with a grocery tax exemption than they would if groceries were taxed and the general rate were reduced commensurately.
• Grocery tax credits provide actual progressivity at a lower cost than the broad exemption of groceries. Under a revenue-neutral expansion paired with a $75 per person credit, the poorest decile of households would save 31 percent on sales tax liability.
• Sales taxes are more stable and pro-growth than many other forms of taxation, especially income taxes, so policymakers have an opportunity to increase tax progressivity, enhance revenue stability, and improve economic competitiveness by taxing groceries, providing a credit, and using the remaining revenue from base broadening to cut income taxes."

 

"This narrative, however superficially compelling, is marred by several flaws. Most importantly, it either neglects or fails to appreciate the full impact of the universal policy of exempting from sales tax any purchases made using federal food-purchasing assistance programs, primarily the Supplemental Nutrition Assistance Program (SNAP), but also the more narrowly targeted Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). States’ receipt of federal grants to administer these Food and Nutrition Service-funded benefits is contingent upon exempting these purchases from sales tax, and all states do so—even if groceries are otherwise in the sales tax base. This policy alone dramatically reduces taxable consumption for the lowest income deciles.

Additionally, the conventional wisdom underestimates the degree to which higher consumption of groceries does scale with income. Higher earning households purchase not only more, but higher qualities of, groceries. Low-income households, in fact, are more likely to purchase taxable substitutes to what states classify as groceries, a category that traditionally only covers unprepared foods. For lower-income working families, prepared foods—rotisserie chickens, deli items, fast food, and more—are often more economically efficient than buying raw ingredients and making home-cooked meals, but prepared foods are taxed, whereas ingredients are exempt when states adopt a grocery tax exemption. The result is that a household in the fifth decile spends almost 70 percent more than a household in the first decile, and a household in the top decile spends over three times as much as a household in the lowest.

Finally, while low-income households spend more on groceries as a share of income than do the highest-income households, they do not necessarily spend more on groceries relative to other necessities. Compositional effects matter. If lower-income families spend moderately more on groceries, as a share of income, but substantially more on other household goods, then they will be worse off under a tax code which exempts groceries but with a higher rate than would be necessary were groceries included in the base. Given not only substitution effects—prepared foods for unprepared—but also, crucially, the exemption of SNAP and WIC purchases for many low-income households, this is not just a hypothetical but the reality for many families."

Study: Wealthy Claim Most Energy Credits

Federal government offers up to $7,500 in tax credits to purchase an electric vehicle

By Jeffrey Sparshott of the WSJ. Excerpts:

"The federal government offers up to $7,500 in tax credits to purchase an electric vehicle, part of a broader national policy to encourage efficient use of energy and curb carbon emissions.

Almost all of those benefits are going to the wealthiest U.S. households, according to an analysis by University of California, Berkeley, professors Severin Borenstein and Lucas Davis."

"“We find that the top income quintile has received about 90% of all credits,” they said."

The pattern is similar, though not as extreme, for other clean-energy tax incentives"

"From 2006 to 2012... tax credits totaled $18.1 billion. In that time, taxpayers with an adjusted gross income greater than $75,000 received about 60% of those credit dollars for energy efficiency, residential solar and hybrid vehicles, and about 90% for electric cars."

Henderson on Piketty, Part 4

From EconLog.

"Here's the next installment from "An Unintended Case for More Capitalism," my long review in Regulation of Thomas Piketty's Capital in the Twenty-First Century: 

How does Piketty handle this serious problem? [The problem that his proposed tax on capital would hurt labor?] He doesn't. The only behavioral response to a tax on capital that he discusses at length is that owners of capital would move to lower-tax countries. And to avoid that happening, he puts a lot of thought into how to form, essentially, a tax "cartel" in Europe. He would have countries in the European Union agree to tax capital, making it harder for people to move to lower-tax countries.

Even an economist who likes Piketty's book and favors his tax on capital has pointed out its bad effects on economic well-being. In his New Republic review, MIT economist Robert Solow, who won the Nobel Prize in economics for his pioneering work on economic growth, wrote:

The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option. If a small class of owners of wealth--and it is small--comes to collect a growing share of the national income, it is likely to dominate the society in other ways as well.

Translation: if capital is taxed heavily, workers' well-being will not improve, but because a tax on capital will likely stem the increase in the share of income going to owners of capital, wealthy people will dominate the society less than otherwise. 

For Piketty and, presumably, Solow to calmly countenance the possibility of stagnating real wages just to keep capital's share from increasing, they would have to see some large problems with increasing inequality. Solow does not point out any such problems, which makes sense because his review is short. But Piketty, in over 600 pages, does not make a clear statement about why increasing inequality is a problem in a society where almost everyone's lot in life is getting better and better.

So let's fill in the gaps. How big a problem is wealth inequality? In my opinion, if people came by their money without cheating others and without getting special government favors, then there is no problem with those people becoming very wealthy. What really matters is inequality in consumption and, here, the differences between poorer Americans and wealthier Americans are probably as low as they have ever been. Most lower-income people have color televisions, cell phones, refrigerators, comfortable clothing, and three square meals a day. That was not true 60 years ago. Or take a longer view: In the mid-19th century, the poorest people in American were probably slaves. That was, of course, awful. The largely rich people who "owned" them could treat them very badly if they wanted to. And even if they did not want to, let me repeat that these poor people were slaves.

Or consider finer differences between the middle class and the wealthiest. You would have to look carefully--at least, I would--to see the difference in the quality of clothing that billionaires and those with a net worth of "only" $100,000 wear. Both can travel by jet, but the wealthier person can get there more quickly and easily on his private jet. The rest of us have to share space. The private jet is certainly nicer, but is that really a major social problem?"

The real culprit behind income disparity: the microprocessor

From Mark Perry of "Carpe Diem." Excerpts:

"From John Steele Gordon writing in today’s WSJ (“The Little Miracle Spurring Inequality“):

The great growth of fortunes in recent decades is not a sinister development. Instead it is simply the inevitable result of an extraordinary technological innovation, the microprocessor, which Intel brought to market in 1971. Seven of the 10 largest fortunes in America today were built on this technology, as have been countless smaller ones. These new fortunes unavoidably result in wealth being more concentrated at the top.

But no one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services—and lower prices—that the microprocessor made possible. Anyone who has found his way home thanks to a GPS device or has contacted a child thanks to a cellphone appreciates the awesome power of the microprocessor. All of our lives have been enhanced and enriched by the technology.

Today the microprocessor, the most fundamental new technology since the steam engine, is transforming the world before our astonished eyes and inevitably creating huge new fortunes in the process. The number of new economic niches created by cheap computing power is nearly limitless. Opportunities in software and hardware over the past 30 years have produced many billionaires—but they’re not all in Silicon Valley. The Walton family collectively is worth, according to Forbes, $144.7 billion, thanks to the world’s largest retail business. But Wal-Mart couldn’t exist without the precise inventory controls that the microprocessor makes possible.
The “income disparity” between the Waltons and the patrons of their stores is as pronounced as critics complain, but then again the lives of countless millions of Wal-Mart shoppers have been materially enriched by the stores’ staggering array of affordable goods. Just as the railroad produced many new fortunes, the Internet is producing enormous numbers of them, from the likes of Amazon, Facebook and Twitter. When Twitter went public last November, it created about 1,600 newly minted millionaires.

Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won’t be taken.

MP: By several statistical measures, it’s true that income inequality was lower in 1971 than in recent years. The Gini index of income inequality was 39.6% in 1971 and increased to 46.9% by 2010. The share of total income earned by the top 20% increased from 43.5% in 1971 to 51% in 2012. But would anybody give up all of the technological innovations that came from the microprocessor (GPS, smart phones, Internet, email, computers, calculators, iPods, iPads, iTunes, etc.), which naturally contributed to greater income inequality, to go back to income distribution of 1971 and live without the microprocessor-generated technological abundance that we all enjoy today?

I didn’t think so….."

What do the Piketty data problems really mean?

Great post from Tyler Cowen.

"In some ways the new FT criticisms may not matter much, although I think not in a way which is reassuring for Piketty.  There were already several major problems with Piketty’s analysis and also empirics, including what Alex has called the asset price problem.  He wrote:

According to four French economists, Piketty’s measure of the capital stock is greatly influenced by the Europe-US housing bubble that preceded the financial crisis.

Adjusting for that factor seems to make the main results go away, and that is a purely empirical problem which has not been answered, at least not yet.

Another pre-existing empirical problem is that 19th century data seem to indicate that a “Piketty world,” even if we take it on its own terms, far from being a disaster, would likely be accompanied by rising real wages and declining consumption inequality, albeit rising wealth inequality.

That hasn’t been answered either, although a few people have suggested (without serious back-up) that if wealth inequality is going up that has to lead to political problems, or problems of some kind or another, and thus it can’t be something we can approve of or accept with equanimity, because inequality is really really bad, and therefore Piketty is somehow right anyway.  That’s a weak response to begin with and furthermore it doesn’t fit the available data.

Empirically, inheritances aren’t nearly as important as Piketty seems to suggest.
On Twitter Clive Crook wrote of the:

…distance between treacherous data and super-bold conclusions an issue at the outset. This underlines the point.

Now, when you cut through the small stuff, the new empirical problem seems to be that UK revisions, combined with a population-weighted series for Europe, contradicts Piketty’s claim of rising wealth inequality for Europe.   I would call that a serious problem.  I am not impressed by the “downplaying” responses which focus on coding errors, Swedish data points, and the other small stuff.  Let’s face up to the real (new) problem, namely that robustness suddenly seems much weaker.  You can’t argue that population-weighting is “the right way to do it,” but it is an entirely plausible way to estimate the wealth inequality trend.  If Piketty’s results don’t survive population weighting (and what are apparently the superior UK numbers), that suggests the overall rise in European wealth inequality is not very robust to how the pie is carved up and also that it is not backed by dominant, “rule the roost” sorts of forces.

It should be noted that Piketty’s response to the new criticisms was quite weak.  Maybe he’s not to be blamed for what was surely a rapid and caught-off-guard response, and perhaps there is more to come, but it doesn’t reassure me either.  He also should have run it by a PR person first (for instance, don’t start your response with a sentence ending in an exclamation point.)

That said, don’t focus on Piketty.  When evaluating debates of this kind, never ever confuse a) is he right? with b) “how much should we raise/lower the relative status of the author as a result of the new exchange”?  So responses like “he made all his data freely available,” or “he admits all along how complicated this all is,” address b) but not the more important a).  And if you are seeing people focus on b) rather than a), they have a problem themselves.  On empirical grounds it does seem we have another reason for thinking Piketty’s central claim isn’t quite right, at least not for the reasons he sets out, and perhaps not quite right altogether.

Addendum: Ryan Avent has a good survey of some key issues and responses."

In some ways the new FT criticisms may not matter much, although I think not in a way which is reassuring for Piketty.  There were already several major problems with Piketty’s analysis and also empirics, including what Alex has called the asset price problem.  He wrote:

According to four French economists, Piketty’s measure of the capital stock is greatly influenced by the Europe-US housing bubble that preceded the financial crisis.

Adjusting for that factor seems to make the main results go away, and that is a purely empirical problem which has not been answered, at least not yet.
Another pre-existing empirical problem is that 19th century data seem to indicate that a “Piketty world,” even if we take it on its own terms, far from being a disaster, would likely be accompanied by rising real wages and declining consumption inequality, albeit rising wealth inequality.
That hasn’t been answered either, although a few people have suggested (without serious back-up) that if wealth inequality is going up that has to lead to political problems, or problems of some kind or another, and thus it can’t be something we can approve of or accept with equanimity, because inequality is really really bad, and therefore Piketty is somehow right anyway.  That’s a weak response to begin with and furthermore it doesn’t fit the available data.
Empirically, inheritances aren’t nearly as important as Piketty seems to suggest.
On Twitter Clive Crook wrote of the:

…distance between treacherous data and super-bold conclusions an issue at the outset. This underlines the point.

Now, when you cut through the small stuff, the new empirical problem seems to be that UK revisions, combined with a population-weighted series for Europe, contradicts Piketty’s claim of rising wealth inequality for Europe.   I would call that a serious problem.  I am not impressed by the “downplaying” responses which focus on coding errors, Swedish data points, and the other small stuff.  Let’s face up to the real (new) problem, namely that robustness suddenly seems much weaker.  You can’t argue that population-weighting is “the right way to do it,” but it is an entirely plausible way to estimate the wealth inequality trend.  If Piketty’s results don’t survive population weighting (and what are apparently the superior UK numbers), that suggests the overall rise in European wealth inequality is not very robust to how the pie is carved up and also that it is not backed by dominant, “rule the roost” sorts of forces.
It should be noted that Piketty’s response to the new criticisms was quite weak.  Maybe he’s not to be blamed for what was surely a rapid and caught-off-guard response, and perhaps there is more to come, but it doesn’t reassure me either.  He also should have run it by a PR person first (for instance, don’t start your response with a sentence ending in an exclamation point.)
That said, don’t focus on Piketty.  When evaluating debates of this kind, never ever confuse a) is he right? with b) “how much should we raise/lower the relative status of the author as a result of the new exchange”?  So responses like “he made all his data freely available,” or “he admits all along how complicated this all is,” address b) but not the more important a).  And if you are seeing people focus on b) rather than a), they have a problem themselves.  On empirical grounds it does seem we have another reason for thinking Piketty’s central claim isn’t quite right, at least not for the reasons he sets out, and perhaps not quite right altogether.
Addendum: Ryan Avent has a good survey of some key issues and responses.
- See more at: http://marginalrevolution.com/marginalrevolution/2014/05/what-do-the-piketty-data-problems-really-mean.html#sthash.vHgd7K36.dpuf

Obama Mis-Represents Adam Smith On The Minimum Wage

See Barack Obama, Adam Smith, and the Minimum Wage by Timothy Taylor of "The Conversable Economist." Taylor is managing editor of the Journal of Economic Perspectives. Excerpt:

"In a speech earlier this week on economic mobility, President Barack Obama quoted Adam Smith in support of a higher minimum wage. Given that minimum wage laws were not a hot topic in 1776 when The Wealth of Nations was published, I went looking for context.

Here's the comment from the transcript of President Obama's speech:

[I]t’s well past the time to raise a minimum wage that in real terms right now is below where it was when Harry Truman was in office. (Applause) This shouldn’t be an ideological question. It was Adam Smith, the father of free-market economics, who once said, “They who feed, clothe, and lodge the whole body of the people should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged.” And for those of you who don’t speak old-English -- (laughter) -- let me translate. It means if you work hard, you should make a decent living.

The quotation appears in Book I, Chapter 8, of The Wealth of Nations. I quote here from the ever-useful version of the book at the Library of Economics and Liberty website. At no point in the chapter is Smith considering the advantages of a minimum wage; however, he points out that in the politics of the time, there were occasionally political proposals to hold wages lower. He argues that the real standard of living for common workers--that is, what a common worker can afford to buy--has been rising, in large part due to technological improvements. Obama's proffered quotation comes up when Smith is explaining that this increase in real wages over time should not be viewed as a cause for concern."

Taylor goes into alot more detail. He finishes with

"There is always an embarrassingly high risk of anachronism when applying eighteenth-century writing to modern policy arguments. After all, Adam Smith was writing before the start of the Industrial Revolution and the two centuries of transformative economic growth that have followed, and he was writing before the development of arguments about how wages are linked to the marginal productivity of labor. But frankly, it is ridiculous to cite Adam Smith in support of minimum wage legislation"