Possibly the best graph of the year

I think Jared Bernstein is trying to tell us something.


In terms of column inches, this can really help a blogger's productivity.

Tax Policy

From John Quiggin:

The wealth that has accrued to those in the top 1 per cent of the US income distribution is so massive that any serious policy program must begin by clawing it back.

If their 25 per cent, or the great bulk of it, is off-limits, then it’s impossible to see any good resolution of the current US crisis. It’s unsurprising that lots of voters are unwilling to pay higher taxes, even to prevent the complete collapse of public sector services. Median household income has been static or declining for the past decade, household wealth has fallen by something like 50 per cent (at least for ordinary households whose wealth, if they have any, is dominated by home equity) and the easy credit that made the whole process tolerable for decades has disappeared. In these circumstances, welshing on obligations to retired teachers, police officers and firefighters looks only fair.

In both policy and political terms, nothing can be achieved under these circumstances, except at the expense of the top 1 per cent. This is a contingent, but inescapable fact about massively unequal, and economically stagnant, societies like the US in 2010. By contrast, in a society like that of the 1950s and 1960s, where most people could plausibly regard themselves as middle class and where middle class incomes were steadily rising, the big questions could be put in terms of the mix of public goods and private income that was best for the representative middle class citizen. The question of how much (more) to tax the very rich was secondary – their share of national income was already at an all time low.

This is actually a very constructive addition to the discussion of how to finance government and society in general. When I was growing up, the general idea we had was that serious tax cuts had to focus on the middle class because that was where all of the money was. But 25% of the national income is a lot and it isn't clear that this type of extreme inequality is socially useful. Few people seem to suggest that we should impoverish the rich, but would it be a horrible world where the top 1% had 15% of the post-tax income?

When all of your studies are ecological

Consider this example:

By contrast, in England during the same period, the nobility and gentry didn’t conspire with the crown to exempt themselves from taxation. Instead, thanks to a number of factors—greater social solidarity, a keener sense of foreign threats, reforms that made the government itself less corrupt, and the principle of taxation only with the consent of Parliament—the wealthy of England willingly accepted higher taxes on themselves. As a result, government spending in England rose from 11 percent of GDP in the late seventeenth century to 30 percent during some years in the eighteenth century. That’s higher than U.S. federal spending today. These higher taxes on the wealthy in England, Fukuyama notes, “did not, needless to say, stifle the capitalist revolution.”

This is a persistent problem in the evaluation of programs: how do you determine the direction of causality in an ecological study? Did England become wealthy and thus feel free to raise taxes or did raising taxes allow England to prosper and become wealthy? The same issue arises with debating points made closer in time:

The idea that the economy will suffer if we modestly raise taxes on upper-income Americans is belied by recent history: we increased tax rates on the rich in 1993 and the economy created more than twenty-two million jobs; we cut them in 2001 and the economy created fewer than seven million jobs.

But it is clear that there were a lot of confounding variables between the two time periods. Still, it is interesting that most people seem to immediately see a link between raising taxes and lower economic growth. Why are we so sure about this link, given the weak relation seen historically?

It's a really challenging problem and, worst of all, one that data can't really help us with.

Implications of not raising the debt ceiling

Even Megan McArdle is asking hard questions about the debt ceiling and the consequences of paying just interest on the debt, medicare, social security and military salaries:

•You just cut the IRS and all the accountants at Treasury, which means that the actual revenue you have to spend is $0.
•The nation's nuclear arsenal is no longer being watched or maintained
•The doors of federal prisons have been thrown open, because none of the guards will work without being paid, and the vendors will not deliver food, medical supplies, electricity,etc.
•The border control stations are entirely unmanned, so anyone who can buy a plane ticket, or stroll across the Mexican border, is entering the country. All the illegal immigrants currently in detention are released, since we don't have the money to put them on a plane, and we cannot actually simply leave them in a cell without electricity, sanitation, or food to see what happens.
•All of our troops stationed abroad quickly run out of electricity or fuel. Many of them are sitting in a desert with billions worth of equipment, and no way to get themselves or their equipment back to the US.
•Our embassies are no longer operating, which will make things difficult for foreign travellers
•No federal emergency assistance, or help fighting things like wildfires or floods. Sorry, tornado people! Sorry, wildfire victims! Try to live in the northeast next time!
•Housing projects shut down, and Section 8 vouchers are not paid. Families hit the streets.
•The money your local school district was expecting at the October 1 commencement of the 2012 fiscal year does not materialize, making it unclear who's going to be teaching your kids without a special property tax assessment.
•The market for guaranteed student loans plunges into chaos. Hope your kid wasn't going to college this year!
•The mortgage market evaporates. Hope you didn't need to buy or sell a house!
•The FDIC and the PBGC suddenly don't have a government backstop for their funds, which has all sorts of interesting implications for your bank account.
•The TSA shuts down. Yay! But don't worry about terrorist attacks, you TSA-lovers, because air traffic control shut down too. Hope you don't have a vacation planned in August, much less any work travel.
•Unemployment money is no longer going to the states, which means that pretty soon, it won't be going to the unemployed people.

I think that this post highlights just how desperately we need to increase tax revenues. Even if we might one day repeal them in the face of a lower burden of government spending, the most logical equilibrium seems to be to pay more now and reduce taxes once we work out what we don't want the government to do.

I also have no patience for the dynamic Laffer Curve -- as Noah Smith so nicely pointed out, that line of argument rather suggests Sub-Saharan Africa should have emerged as the great power after the horrible tax policy of the European, Asian, and American nations. Taxes can have bad effects but so can persistent unemployment!

Online Retailers and Sales Tax

I am actually pretty sympathetic to the argument that not requiring online retailers to collect Sales Tax in all states is bad policy. But I had not thought of it as a social justice issue:

Whatever scheme we can come up with to collect lost sales tax is one more step towards a level playing field for brick and mortar retailers, and a re-funding of our cities, counties and states. It's not an enormous amount of money, but it's a step in the right direction. Online retailers got a free pass in the early days, a kind of nod for fledgling e-commerce. Unfortunately, monsters were created and none is bigger than Amazon, destroyer of worlds and loser of a billion dollars of their own capital. But hey, it's an Internet company, we're willing to look the other way for a decade or so while the new world order manifests. It's time to level the playing field and make everyone play by the same rules.

The article as a whole is worth reading.

I know a lot of people argue that the loss of physical book stores is not a tragedy. But it is not clear to me thast we should be subsidizing their competition, either. Nor is it a great idea to reduce government revenue at a time where margins are tight.

So maybe I am on California's side in this discussion.