Friday, August 03, 2012

Response to A Follower

Here is a link to Benjy Sarlin's piece regarding the Romney Tax Plan (which doesn't exist in actuated form yet (but who does? Me? You? Alas!))  But, to get at the source, the Tax Policy Center is the place to go.

As for my response, here are some initial thoughts:

1) Income tax decrease across the board and eliminating loopholes is a good idea for any tax policy.  Loopholes funnel consumer income into things that they may not otherwise purchase without the tax benefit.  Decreasing the income tax, financed by getting rid of loopholes, should serve to allow consumers to reallocate their spending in a way that makes them better off in terms of welfare, even if they are no longer allowed to write off certain purchases. 

2) Any tax plan designed to address the budget deficit probably has to include government spending reductions and tax increases on the middle class.  There aren't enough wealthy people to only tax them and succeed in reducing the deficit to any great degree.  So an increase in taxes on the middle class is the result of too much government spending and they should be willing to vote for someone who acknowledges that it's time to pay for the government's past largesse.

3) For the first time since this data has been kept, the Congressional Budget Office has found that the middle class is a "net recipient of government largesse."  The middle class of one of the wealthiest nations on earth is now receiving handouts from the wealthier class.  The middle class does not need handouts.  Greg Mankiw notes (yes, he is an adviser for Mitt Romney, but 2+2=4 whether you worship at Paul Krugman's feet or not): "The most surprising fact to me was that the effective tax rate is negative for the middle quintile.  According to the CBO data, this number was +14 percent in 1979 (when the data begin) and remained positive through 2007.  It was negative 0.5 percent in 2008, and negative 5 percent in 2009.  That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess."

4)  The Tax Policy Center that put together the proposals did so using pieced together emails and comments made on the campaign trail: " The Tax Policy Center (TPC) has completed a preliminary analysis of the Romney plan, based on information posted on the campaign website and email exchanges with campaign policy advisors. Because we have received no details on proposals to reduce tax preferences, the TPC analysis does not include those proposals."  In other words, no plan has been submitted, so far they are just going off of random bits of information put together here and there.

5) Lastly, as noted earlier, it is not a bad idea to get cut income taxes and finance it by getting rid of loopholes (tax expenditures).  Every time a middle class person fills out a tax return and takes a deduction they are enjoying a tax expenditure.  Yes, the wealthy have a lot, but so do the middle class.  These loopholes are very distortionary in that they twist the market for goods and services by placing incentives on purchasing some items and not others.  If you've ever said, or heard said, "I want to buy a home so that I can write off the blah, blah, blah."  Then you've seen these loopholes at work.  Get rid of as many of them as you can and just give people their money back so they can spend on what they choose.

6) Truly last.  Any argument that at its foundation rejects any tax policy because it reduces tax on the rich is a non-starter for me.  I think that when capital flows freely, it flows to the place where it earns its highest return.  Wealthy people tend to generate high returns.  That doesn't mean that the government can't collect revenue and construct safety nets for the poor.  The government tends to be very bad at this job and typically use this mission as a means to justify a lot of unnecessary and restrictive regulation far beyond its optimal scope.


JJC said...

Okay. Let me think about this. I need to read up on recent classifications of the middle class. At first blush, it seems to me that #4 is talking about trickle-down economics - which doesn't necessarily work the way we want it to. But I have little to no idea about economics - I'm trying to figure it out. The bit about where the "plan" came from - I figured that out. I also think - all the tax payers need to pay for the deficit. Now is not really the time to cut taxes. At the same time the middle class needs those loopholes. We need the middle class to buy houses. Right? To me, it seems, the middle class gets the biggest squeeze. We don't qualify for food stamps or health assistance - but we don't have enough money to not worry about it. It really does seem like it's better to be filthy rich or really poor. Just some thoughts ..... Thank you for writing that out - that is super helpful.

Michael Garrison said...

JJC: Did you mean #6 in regards to trickle down economics? If so, first let me say that I don't think any economist recognizes a thing called "trickle down economics." I believe that's a political convention made up to impugn one party or another. Some may argue that decreasing taxes on the wealthy doesn't improve GDP, but then those same might argue that the government should increase spending to stimulate the economy. These are really just two sides of the Keynesian coin...decreasing taxes and increasing spending both have stimulative effects. One might argue that if the budget deficit is too high, these stimulative effects disappear. One could also argue that these stimulative measures cause interest rates to go up which reduces private investment which could dampen economic growth and counteract the original stimulative measures. At any rate, trickle down economics is just a shot at people who say we should decrease the taxes on the wealthy during a recession, which is a standard Keynesian line of reasoning. These same people then cite Keynes to justify increases in government spending such as unemployment benefit increases, higher in-kind transfers, etc.

You mention that now is not the time to cut taxes, but most people on the left are arguing for just that to stimulate the economy. To cite too high of a deficit as a reason to not cut taxes further is to suggest austerity. Some economists would agree and some wouldn't.

Regarding needing the middle class to buy houses...I don't know, what should they buy? It seems that they should buy whatever they want to buy. Building incentives into a system that causes people to alter their behavior away from their natural preferences has the tendency to distort and misshape an economy and lead to bubbles. The loopholes should be done away with but the income tax lowered so the net change in consumer welfare is close to zero, but bearing in mind that now consumers purchases will reflect their true preferences and not be distorted by misplaced incentives.

Regarding the middle class, it will always exist, it's just who lies between the richest and poorest. One person tried to tell me that the middle class was disappearing, which is mathematically impossible. And yes, they don't have enough money to not worry about things, but too much to need things to be given to them. All in all, they're doing fantastic, from a historical perspective, given their quality of life, the variety of consumer goods they have available, and their education and vocation options.

One way to move from middle to upper class is to go back in time and major in science, technology, engineering, or math (STEM!!). But, there are not enough STEM majors to have made time travel possible yet...see the problem?