Tax Policy

This is Joseph

I am mostly out for a few weeks, but this is a very interesting piece:

Three or four decades later, scholars are able to look at the fruits of those policies and draw some conclusions. The same main technologies that exist in the United States and United Kingdom are also in use in Germany and Sweden. Those countries are also exposed to the forces of global trade and immigration. But inequality has grown much more sharply in the US and UK than it has in Germany and Sweden. And the main reason seems to be taxes.

and

Lower taxes on the rich straightforwardly engender inequality by giving rich people more money. But they also shift incentives. In the old days of 70 or even 90 percent marginal tax rates, it wouldn’t make much sense for executives to expend enormous amounts of time and energy trying to maximize the amount of money they can personally extract from a company in the form of salary. Instead, you might chase social prestige or other goals. And last but by no means least, tax cuts on investment income increase the extent to which wealth can mechanically beget more wealth as financial assets inherited from or gifted by parents simply earn their natural rate of return over time. 

I think that this gets at one of the key things we forget about economies, that there is not a natural or true economy that would function without interference (or at least nothing that would look like a modern economy).  Instead there are a series of choices that we make about how to distribute resources and create incentives. 

Now there is a moral argument about taxes being a taking.  But it is utterly unclear that you can have ultra-rich people without a strong state to defend them (the classical era and modern approach) or these individuals setting themselves up as warlords (the medieval approach).  That seems to also create a moral obligation for the the rich to contribute to supporting the society that makes their wealth possible.

It would be good to consider these issues more globally when discussing tax reform -- cuts to medicare to create tax cuts for top income earners really needs to be called out as a form of increasing inequality and not as a strategy for growth. 

The welfare state

This is Joseph

Matt Yglesias talks about the issues regarding opposition to the welfare state:

This is why thoughtful opponents of the welfare state have generally avoided making the argument that capitalism is good because it promotes human well-being. Since capitalism does promote human well-being, "capitalism promotes human well-being" sounds like a good argument in its favor. But it turns out that capitalism plus a large welfare state promotes human well-being even more. So you either need to embrace the welfare state (the correct answer) or come up with another justification of capitalism. One that frequently arises is what Greg Mankiw has referred to as the "just deserts" perspective in which "people should receive compensation congruent with their contributions" and we should aim for a society in which public policy ought to ensure that "every individual would earn the value of his or her own marginal product."

So if, for example, you are blind and inability to see makes it hard for you to earn a living in an unregulated market that's too bad for you. Your vision impairment means your ability to contribute to market production is limited, and therefore it is morally appropriate that your living standards be limited as well. By the same token, if a combination of genetics and childhood living conditions have left you with an IQ that is 2 standard deviations below average (this is about five percent of people) then, again, it's just the case that you deserve to have a much lower standard of living than society could provide for you if it were willing to do more redistribution.

Mankiw's moralized capitalism seems bone-chilling to me but I don't really think I can prove him wrong. It is, however, pretty trivial to see that Mankiwism isn't a Christian worldview.

This is really the major challenge of neo-conservative or libertarian thought.  You can argue that government is inefficient, but that is an argument for good government and not an argument for trying to create a self-fulfilling prophecy.  Proponents of the welfare state can easily argue that the focus should be on improving the role of government -- improving both efficiency and accountability. 

The only argument for the just desserts argument that I can think of (as absolute adherence to economic efficiency as the main determinant of human value seems like a dead end) is that it produces more economic efficiency on the long run.  The problem is that areas of very low levels of government do not create vast periods of economic growth.  You can have growth flourishing despite great conflict (see the American Civil War or the War of the Roses).  But when the state actually collapses (see the English Civil War or recent events in Syria), you end up with people like Hobbes arguing for more government. 

Nor have experiments with lesser versions of this worked out well.  The data is inconclusive with respect to tax cuts for the wealthy, but the trend is not supporting this mechanism. This makes it hard to figure out why this viewpoint is so generally popular.  After all, nobody is arguing that we should have a French Revolution or even massive taxes.  Instead, the current argument is whether we should redistribute wealth to look a little bit more like other industrialized nations.

Are we all missing an argument? 

Intellectual Property

We have not talked about copyright for a while, but this is an evergreen point:

More recent characters never enter the public domain because a handful of 1930s-vintage characters—Mickey Mouse, Batman—are owned by corporations that are still powerful today and have successfully lobbied congress to retroactively extend copyright terms. What we ought to do is go back to a sensible regime of finite copyright—perhaps the lifespan of the author or 50 years, whichever is longer—so that creators can still benefit from their works but that new generations of characters will enter the mythic realm of the public domain.

 I think the piece here that is underappreciated is the retroactive nature of the copyright extension.  There is no way that extending copyright on Batman (today) will provide incentives to people in the 1930's to create more comic book characters. 

I don't know where the right balance is.  Matt proposes something vaguely sensible above, although one may be tempted to quibble with what is the correct period of protection.  But infinite copyright isn't going to really serve the original public policy goals of intellectual property protection, and should definitely be rethought. 

This is a really big deal

From Yglesias

Most low-income Americans aren’t poor at all by global standards, so evidence from successful anti-poverty programs in the developing world are difficult to apply to domestic poverty. That’s why it’s so telling and fascinating that a study on the cognitive downsides of poverty would find identical results in New Jersey and Tamil Nadu. Much work on domestic poverty rightly emphasizes the idea of skills and “human capital” needed to navigate a complicated modern economy. This naturally leads to a focus on education, whether in the guise of various school-reform crusades or the push to bring high-quality, affordable preschool to more households. But adults need help, too, and the perception that poor adults—as opposed to presumably innocent children—are irresponsible often leads to reluctance to treat adults as adults who are capable of deciding for themselves how best to use financial resources.

This paternalistic notion that we should be relatively stingy with help, and make sure to attach it to complicated eligibility requirements and tests, may itself be contributing to the problem of poverty. At home or abroad, the strain of constantly worrying about money is a substantial barrier to the smart decision-making that people in tough circumstances need to succeed. One of the best ways to help the poor help themselves, in other words, is to simply make them less poor.

The causal ordering here is really important.  We see this dilemma with other variables that are difficult to randomize.  So, for example, it isn't 100% clear if lack of exercise contributes to obesity or if being heavy makes one less likely to exercise.  It can make a big difference in public policy if the causal arrow reverses direction (or if there is a positive feedback loop that goes between the two variables).

In this case, there seems to be evidence that making a stingier and more complex welfare state increases the long run poverty via decreased decision making due to financial stress.  If this is borne out in other context then it totally changes the optimal policy responses to poverty. 

Infrastructure that requires no new tech

Matthew Yglesias on low tech solutions:

It's no hyperloop, but here's one way we could make the trip from New York to Washington, DC much faster. It's called a "passenger train" and all you need to do is instead of relying on existing tracks build whole new tracks that go more or less straight. And instead of slowing the train down by stopping in Baltimore and Wilmington and Trenton and such you'll just traverse a bunch of jurisdictions without actually providing them any service.

What is ironic is that these jurisdictions that are bypassed may still be better off.  All you need to do is have small express trains to either Washington, DC or New York (whichever is closer).  Two fast trains may well be better than one slow train that is always stopping.  It even fits the Mark P principle that it can be done now with currently available technology.  No need to hope that technological break-throughs will continue at a historical pace to allow the technology to become viable one day . . .

Urban Sprawl

Mark Thoma's site has a link to Paul Krugman's discussion of the association between sprawl and low social mobility.  It appears that if you do a plot of urban density versus social mobility of the lowest quintile to the highest quintile you get a very surprising linear relation: as density drops it looks like persistent inequality rises.  Paul Krugman is appropriately skeptical that this is the whole story:

Is the relationship causal? You can easily think of reasons for spurious correlation: sprawl is associated with being in the sunbelt, with voting Republican, with having weak social safety net programs, etc.. Still, it’s striking.

Matt Yglesias adds additional data about what happens with kids who move into high density urban areas as well as a few other possible explanations:

So what drives this? The study does not really make a high-powered effort to draw strong causal inferences. But the study does show that kids who moved into a high-mobility area at a young age do about as well as the kids born in high-mobility areas, but kids who move as teenagers don't. So there seems to be a factor that isn't parent-driven. The authors report that tax policy, the existence and affordability of local colleges, and the level of extreme local wealth do not appear to be strong correlates of intergenerational mobility. Metro areas where the poor are geographically isolated from the middle class have less intergenerational mobility, while metro areas with more two-parents households, better elementary and high schools, and more "civic engagement" (measured through membership in religious and community groups) have more.

 So clearly it would be a mistake to over-interpret these data. But they do have one major policy piece embedded into them -- it makes absolutely no sense to subsidize sprawl as a positive good.  It may not be worth it to try and discourage it, but generally there are a lot of laws (think zoning laws and car centered transportation grids) that implicitly subsidize sub-urban communities.

There are still pieces to be considered -- like does the poorest quintile do objectively better or worse in the low social mobility environments (you can justify low mobility if everyone is better off as a result).  However, the two extremes in Paul Krugman's graph are Atlanta (low density and mobility) and Los Angeles (high density and mobility).  It's not 100% clear that it is better to be poor in California than Georgia, but it isn't like it is far worse in California so far as I can tell.  Maybe Mark can weigh in here? 

But this all points to a big picture that urban planning is actually a much bigger deal than I had previously realized. 

The 401(k) world

There has been some real tough reflection on tax expenditures recently.  I have always seen 401(k) and IRA savings vehicles as being a better than average idea for using this approach.  It's sure better than tax advantaging investment income, which is very interesting in the abstract but in the real world seems to flow to the best off. 

But people are making some solid points about whether this is really a good idea or not.  If they don't work to incentivize the right behavior on the part of either consumers or vendors than maybe they are not an ideal retirement savings approach.

James Kwak:

The first is that they go overwhelmingly to people who don't need them -- like my wife and me. As two university professors living in Western Massachusetts, where the cost of living is low, we make more than we need to support our lifestyle. We max out our defined contribution plans every year, and because we're in a relatively high tax bracket (28%, I think), we save thousands of dollars a year on our taxes. This is the problem with most subsidies that are delivered as tax deductions. Their cash value depends on the amount you can deduct and on your marginal tax rate. In this case, fully 80 percent of retirement savings tax subsidies goes to households in the top income quintile. (See Toder, Harris, and Lim, Table 5.)

The second problem is that these tax incentives don't work. They don't cause people to save more. In my case, the amount we save is just our income minus our consumption, and our consumption isn't affected by the tax code. If there were no tax subsidy, we would save the same amount and just pay more in taxes. And it's not just us. A recent and widely discussed paper by Raj Chetty, John Friedman, Soren Leth-Petersen, Torben Heien Nielsen, and Tore Olsen looked at what happened when the Danish government reduced tax subsidies for retirement savings by rich people. The short answer is that decreases in retirement savings were almost perfectly matched by increases in non-retirement savings. The overall effect, they estimate, is that for every dollar in tax subsidies, total savings go up by one cent. The other ninety-nine cents is just a handout to people who would have saved anyway.

Matt Yglesias

Middle class retirement savings isn't like that. We know roughly how much people need to put away in order to retire with a standard of living they'll be comfortable with. And we definitely know what kind of investment vehicles are most appropriate for middle class savers. And we have abundant evidence that, left to their own devices, a very large share of middle class savers will make the wrong choices. What's more, because of the nature of the right choices it's obvious that the dominant business strategy for vendors of middle class investment products is to dedicate your time and energy to developing and marketing inferior products, since the essence of superior products in this field is that they're less remunerative.
 

The most convincing part is the whole question of how 401(k) plans are designed to reduce consumer choice and the resulting incentive to offer inferior products.  After all, the employer setting up the 401(k) has little incentive to make sure that difficult to spot fees don't eat up other people's money. 

The alternative, at this point, is social security.  I am very sympathetic to arguments that assets are just claims and that providing for the elderly ultimately turns into a resource sharing problem.  The difference appears to be that social security would divide the resources we put towards older adults more equitably than tax-advantaged savings plans do. 

Misleading graphics

This infographic has been coming under criticism from the usual suspects.  The group that got hit the worst was the married couple with two children making $650,000 per year.  According to the census bureau, in 2009 the median income for a household was $49,777.  So there is a tax increase of 3.3% on couples making 13 times the median US household income. 

Needless to say, this really doesn't reflect the likely impact of these tax law changes on the typical American (it is just to easy to ask hard questions about the representativeness of a single mother who makes $260K/year). 

[note -- label typo corrected]

Hat tip to Yglesias

Mark and I have been hard on Matt Yglesias lately.  But this post was a really clever idea.  He took Kevin Drum's idea that lead was responsible for a rise in violent crime and asked "if this explanation is correct then what else must be true?".  Since impulse control is also linked to high school graduation he plotted high school graduation (which has been unexpectely rising) and sees the same pattern as with violent crime. 

Now nothing rules out a confounder that affects both of these outcomes.  I worry about simple explanations for complex phenomena.  But it was a clever idea to try and falsify the hypothesis by looking at things that should be related to violent crime.  And, if there was going to be a candidate for such a broad level of toxicity, a substance implicated in brain damage going back to classical Rome isn't a bad choice. 

Matt Yglesias -- Defending the indefensible

[I've been off line most of the week so instead of participating in the discussion on the Students First report card, I am, with apologies for the length, putting down my reaction in one big, ugly lump]

At some point in the past year, it became impossible to mount a serious defense of Paul Ryan. There had always been cracks in the facade -- numbers that didn't add up, unlikely claims, extremist quotes -- but most of these could be ignored and those that couldn't were invariably excused that Ryan was sincere, he was a serious budget guy and he was getting us to discuss important policy questions.

Eventually though, the discrepancies started to accumulate, and by the time we got the specifics (or non-specifics) of the Ryan budget and the close scrutiny of the campaign, the standard excuses simply weren't sufficient. This left a large number of journalists with a difficult choice: distance themselves from a politician they had invested great emotional and reputational capital in; or invest still more in increasingly strained defenses. The most memorable example of the first was William Saletan's amusing break-up letter. The most embarrassing example of the second probably comes from James Stewart.

In many ways, Michelle Rhee has occupied a Ryan-like niche in the education. Both started out as camera-friendly media darlings with highly marketable bipartisan appeal and reputations as serious problem-solvers. In both cases there were, from the beginning, troubling details that undercut these reputations but at the time these details never got much traction. As with Ryan and fiscal responsibility, criticizing Rhee was often read as indifference towards the education gap.

But, as they did with Ryan, nagging questions started to accumulate. There were incidents that seemed to show Rhee abusing her authority. There were questions about cheating under her watch. There was increasingly pointed anti-teacher rhetoric. There was the aggressive pursuit of self-advancement.  At each stage, more of Rhee's liberal supporters started getting uncomfortable.

For many, such as the New Republic's Seyward Darby, the tipping point came when Rhee partnered with Florida's Rick Scott. Before Scott, Rhee's liberal supporters had taken the position had been that she was tough on teachers, but reluctantly, and only because it was necessary in order to improve education. With Scott these outcomes were reversed. He was willing to pursue a "reform" agenda if it hurt a faction he saw as hostile.

The alliance with Scott and similar figures alienated some supporters on the left, but it still allowed the possibility that Rhee was acting in good faith. With the release of the Students First state report card, even that is gone. There is not even a pretense that this is about anything other than promoting Rhee and her allies. The Washington Post had a good summary.

In Rhee’s grading system, the D.C. school system that is implementing the reforms she instituted got a higher grade than the states of Maryland and Virginia — which consistently are at or near the top of lists of high-performing states — and Virginia. Maryland got a D-plus. Virginia got a D-minus. The District? The urban system with the highest achievement gap in the country? It got a C-plus. 

The states that got the highest score handed out — a B minus — were Florida and Louisiana. No surprise there.

Florida’s reform efforts were spearheaded more than a decade ago by then-Gov. Jeb Bush, who was the national leader in these kinds of reforms. The school accountability system that Bush set up, the Florida Comprehensive Assessment Test, is scandal-ridden, but he still travels the country promoting his test-based reform model.

Louisiana is the state where Republican Gov. Bobby Jindal instituted a statewide voucher program that gave public money to scores of Christian schools that teach Young Earth Creationism, the belief that the Earth and the universe were created by God no more than 10,000 years ago. Kids learn that dinosaurs co-existed with humans. That’s the state that got Rhee’s top grade.

A quick digression on some good indicators of when a metric has been cooked:

1. It reaches an unexpected, even unbelievable conclusion in the favor of the person designing the metric;

2. It leaves out important variables;

3. And leaves in other variables only tangentially related to the central question;

4. It uses an odd, difficult to justify weighting scheme, making certain factors dominant for no apparent reason.

This report is not only cooked till it's charred; it also flies in the face of Rhee's own rhetoric on tests and accountability. It is, in a word, indefensible, but just as Ryan had James Stewart, Rhee has Matt Yglesias.

Michelle Rhee is a controversial figure, and anything her advocacy organization, Students First, does is going to attract a lot of derision. But having had the chance to play around with their "report card" on state policy, I think there's a lot to like here.

The best thing about it, really, is just that they did it. Importantly it's a report card assessing the state of education policy in different places, not outcomes. ... Only two states score above C+ on their ratings—Louisiana and Florida—and student learning outcomes in those states are far from the best in the nation. If Louisiana starts making a lot of progress in closing the gap with, say, Maryland, then that'll be powerful evidence for the Students First approach. But if it doesn't, then you get the reverse.
...
In policy terms, the most interesting thing about the Students First report is probably its treatment of charter schools. ... The Students First perspective more wisely dings states that make it too hard to open charters but also dings states (like, say, Arizona) that do much too little to hold charter schools accountable for performance.

You should probably read the whole thing (it's less than 300 words) but this gets at the gist. The entire piece is pretty much just a pander and two short, flawed arguments.

Let's start with the "powerful evidence" argument. Yglesias here treats the report card as not really being a measure of school quality (he doesn't have much choice since the score is actually inversely related to school quality), rather a measure of where schools fall on a policy spectrum so we can basically treat their score as an independent variable when evaluating these policies by comparing score with improvement.

It's worth noting that Rhee's site introduces the report card as follows "We hope this helps reveal more about what states are doing to improve the nation’s public education system so that it serves all students well and puts each and every one of them on a path toward success." Here and elsewhere, Rhee clearly means that the states with better scores are doing a better job. This doesn't align very well with Yglesias's argument.

More to the point though, the argument doesn't hold up even in isolation. The idea of providing a useful indicator would only make sense if we scored the schools at the beginning of implementation of the policies. Instead we have a collection of initiatives with varying start dates, most a few years old, some dating back to Jeb Bush. Perhaps as bad, Yglesias leaves the time frame open (always a bad idea) in a situation where a shake-up in the achievement rankings for any reason will tend to favor states at the top of the Students First list. (Louisiana can't really go that far down.) Any kind of causal inference drawn from a change in one of these top scored states would be meaningless.

The only other specific Yglesias can come up with is that the report supposedly requires schools to hold charter schools accountable for performance. Putting aside the obvious "accountable for performance" irony, this claim is a bit difficult to accept at face value given the related question of holding private institutions that receive state money accountable. Remember, Louisiana is Rhee's top ranked state despite a voucher system notorious for its lack of accountability:

The school willing to accept the most voucher students -- 314 -- is New Living Word in Ruston, which has a top-ranked basketball team but no library. Students spend most of the day watching TVs in bare-bones classrooms. Each lesson consists of an instructional DVD that intersperses Biblical verses with subjects such chemistry or composition.

The Upperroom Bible Church Academy in New Orleans, a bunker-like building with no windows or playground, also has plenty of slots open. It seeks to bring in 214 voucher students, worth up to $1.8 million in state funding.

At Eternity Christian Academy in Westlake, pastor-turned-principal Marie Carrier hopes to secure extra space to enroll 135 voucher students, though she now has room for just a few dozen. Her first- through eighth-grade students sit in cubicles for much of the day and move at their own pace through Christian workbooks, such as a beginning science text that explains "what God made" on each of the six days of creation. They are not exposed to the theory of evolution.

"We try to stay away from all those things that might confuse our children," Carrier said.

Other schools approved for state-funded vouchers use social studies texts warning that liberals threaten global prosperity; Bible-based math books that don't cover modern concepts such as set theory; and biology texts built around refuting evolution.

That's it. Out of the "lot to like" here, Yglesias can only come with a flawed we-can-see-how-we're-doing argument and a highly suspect claim about accountability. Less than three hundred words total and he's clearly scraping bottom to put those together.

This whole affair is a case study in how bad ideas lodge themselves in the discourse through journalistic convergence and superficiality, the fetishizing of balance, and the inability of otherwise smart, responsible people to admit (perhaps even to themselves) that they've been proven wrong.

update: link added.