Wealth Inequality vs Income Inequality

Posted on April 13, 2014 by jackheidel

The Yale Economist and Nobel Prize winner, Robert Shiller, has an article in today’s New York Times, “Better Insurance Against Inequality”, proposing that “taxes should be indexed to income inequality so that they automatically become more progressive – meaning that the marginal tax rate for the highest income people will rise – if income equality becomes much worse.”
We do know, of course, that income inequality is steadily increasing in the U.S. It is in fact essentially folklore that the top 1% of Americans is collecting a larger and larger share of the national income. Furthermore the French economist, Thomas Piketty, has recently shown that there is also “a relentless widening of disparity in wealth”.
Our democratic political system will surely respond in some way to this increasing gap between the rich and the poor. It is important to our future wellbeing to respond in a constructive manner. Today’s top tax rate of 39.6% is already very high and Mr. Shiller admits that the top rate would have to rise well over 75% in his plan.
Our biggest economic problem today is a stagnant economy. We badly need faster economic growth, in order to put people back to work and to bring in more revenue to shrink the deficit. Today what we need is lower tax rates, to put more money in the hands of people who will spend it, including potential entrepreneurs who will invest it in new businesses. Raising tax rates to address rising income inequality is therefore self-defeating as an economic strategy.
Rather let’s tax people’s financial assets after they have earned their money. A 1% wealth tax with a relatively high $10,000,000 personal exemption would bring in approximately $200 billion per year. $200 billion per year would enable us to pay down our deficit at a much faster rate as well as having a lot left over to begin an extensive infrastructure renewal program (for example)!

Why Debt Matters II. “Go for the Heart”

Posted on April 10, 2014 by jackheidel

The author and lecturer, David Horowitz, has just published a little pamphlet,”Go for The Heart: How Republicans Can Win” describing how conservatives are being outmaneuvered on the campaign trail.
“Year after year the Democrats’ campaign themes are monotonously familiar. They rely on scaring the voters by accusing Republicans of the same imaginary crimes: Republicans are a party that wages war on women, minorities, and vulnerable Americans. They don’t care about the vulnerable and the poor. Their policies inflict pain on working families to benefit the wealthy few.”
“ ’Caring’ is not one among many issues in a democratic election. It is the central one. Since most issues are complex and require too much information, voters care less about policy than about the candidates themselves. Above everything else they want to know who they can trust. Far more important to voters than a particular policy, they want a candidate or party who cares about them.”
“Behind Republican campaign failures lies an attitude that reflects an administrative rather than political approach to election campaigns. Such an approach focuses on policies for running the country and fixing problems rather than the political aspect of the electoral battle.”
In other words, fiscal conservatives must make a compelling moral case why it is so important to stop spending money that we don’t have.

By piling up more and more debt year after year, we are creating a huge burden for future generations. Is this the legacy we want to leave for our children and grand- children?
If we do not control the growth of entitlement programs, we are endangering their very existence. It’s ordinary people with average incomes who will need Social Security and Medicare when they retire. It’s our moral obligation to keep these programs sound for their sake!
Boosting the economy with lower tax rates has nothing to do with helping the rich. In fact, it’s the rich who benefit from the tax loopholes and preferences which must be eliminated to pay for these rate cuts to benefit the people who really need them!
Insisting on a work requirement for welfare recipients is demonstrating the tough love that they need to gain the dignity of becoming productive citizens. We need to give them a hand as well as a handout!

These are just a few examples of ways that conservatives can address the debt and deficit issues in a positive, and non-punitive, manner. Thanks to Mr. Horowitz I will attempt to take this approach consistently from now on.

Why Debt Matters

Posted on April 8, 2014 by jackheidel

The House Committee on Financial Services recently held a hearing on the topic “Why Debt Matters.” One of the speakers was David Cote, CEO of Honeywell International. He pointed out that the percentage of world GDP generated by the developed countries (the U.S., Western Europe, Canada and Japan) is predicted to decline from 41% in 2010 to 29% by 2030. High growth developing economies are expected to grow in GDP from 33% in 2010 to 47% in 2030. In order to compete in this new world we need an “American Competitiveness Agenda.”
Mr.Cote suggests eight components: debt reduction, infrastructure development, better math and science education, immigration reform, tort reform, stronger patent support, more energy generation and efficiency, and trade expansion. “To compete effectively on the increasingly competitive world stage, we have to have a strong balance sheet. We don’t have a strong balance sheet today and it will worsen over time with our current plan. … In 2025, just 11 years from now, we will be spending a trillion dollars a year just in interest.” And this is assuming no more recessions in the meantime!
Our public debt level today, at 72% of GDP, is higher than at any time in our nation’s past, except for during World War II when the survival of the free world was at stake. And while public debt will be 78% of GDP in 2023, which might not sound much worse than today, it is also projected to be much higher, 99% of GDP, by 2033. Is this really the legacy that we want to leave for our children and grandchildren?
Some people say that we should run even bigger deficits right now until we are fully recovered from the Great Recession. But this is what we’ve been doing for the past five years and it’s not working. How much longer do we wait until we change course?
It’s possible to shrink our deficits and speed up the growth of our economy both at the same time. This is what Mr. Cote is saying and what I am constantly talking about on this website!

Response to a Persistent Critic

Posted on April 6, 2014 by jackheidel

You keep saying that we need lower tax rates to boost the economy but what makes you think this will help? Businesses are sitting on piles of cash. They have plenty of money to invest in expansion. What they need are more customers. The basic problem is not enough demand for more goods. This is what is holding back the economy. It doesn’t much matter what the tax rates are. If the demand and customers are there, businesses will spend their own money or borrow as much money as they need, at low interest rates, to produce all the products they can sell. Anonymous Critic

I have several responses to this criticism:

First of all I want to make it clear that all cuts in tax rates must be offset by shrinking or eliminating tax preferences. So there will be no loss of tax revenue. Two thirds of all taxpayers take the standard deduction and will therefore automatically benefit from lower tax rates. This will put tens of billions of new dollars into the hands of middle class wage earners who will spend most of this money because they have tight budgets. This will give the economy a big boost.
As I discussed in my blog post from October 26, 2013 “Where are the Jobs? II. How to Create More of Them,” most net new job creation comes from businesses less than one year old, the true “startups.” New business owners are typically not wealthy, with lots of personal tax deductions. They need all the financial resources they can muster. Lower tax rates will save them money and therefore help them get their new business going.
In general, tax deductions such as for mortgage interest, municipal bond interest payments, state and local taxes, etc. benefit the wealthiest tax payers. Therefore the lowering of tax rates, offset by shrinking tax deductions, represents a shift of funds from the wealthier to the less wealthy. This will at least slow down the increase of inequality which afflicts the modern world.

Conclusion: Lower tax rates will put more money in the hands of people who will spend it, thereby boosting the economy by creating more demand, provide support for entrepreneurs starting new businesses (which will create more jobs) and lessen income inequality. All in all this represents major progress!

Soaring Profits, Too Few Jobs and Low Interest Rates

Posted on April 3, 2014 by jackheidel

“Low interest rates aren’t working, but we need a debate about what will,” declares The Wall Street Journal’s William Galston yesterday in “Soaring Profits but Too Few Jobs”. “Corporate profits after taxes in the fourth quarter of 2013 rose to an annual level of $1.9 trillion – 11.1% of GDP, a postwar high. Meanwhile, total compensation – wages and benefits – fell to their lowest level of GDP in at least 50 years.”
“Businesses are sitting on tons of cash . . . and they’re choosing to invest their capital in hardware, rather than hiring. The reason: they believe that investing in technology is likely to have a better effect on sales than hiring more people.” Furthermore, “today’s (low) interest- rate regime lowers the cost of capital – and therefore of capital investment relative to labor.”
Meanwhile,” Republicans are banging away at the Affordable Care Act while Democrats are busy scheduling votes on a grab bag of subjects designed to boost turnout from the party’s base in the fall elections. The economic problems we face are getting lost in the partisan din.”
We are in a very tough situation. Raising interest rates might give a marginal boost to hiring more workers over capital investment but it will also greatly increase interest payments on our massive and rapidly increasing national debt. And meanwhile we have a stagnant economy with millions of people either unemployed or underemployed. What should we do? How about

Boosting the economy with lower individual and corporate tax rates, paid for by cutting back on tax preferences. This will especially help small businesses grow and hire more employees. It will also encourage multinational corporations to bring their foreign profits back home for reinvestment.
Addressing rising income and wealth inequality by establishing an annual 1% wealth tax on individual assets in excess of $10 million. This will raise about $200 billion per year and could be used to set up a huge infrastructure improvement program to put millions of people back to work.

Interest rates will eventually return to normal levels of 5% or so and this will create a big squeeze on the federal budget. So we also need to get federal spending under control as soon as possible. But this is a separate issue.
Just boosting the economy and putting people back to work while addressing inequality in a very visible way will get us started on a path to recovery.

Conservatives Need to Take Income Inequality More Seriously

Posted on April 1, 2014 by jackheidel

Americans are currently having a lengthy discussion about income and wealth inequality. A contribution by the Manhattan Institute’s Diana Furchtgott-Roth, “The Myth of Increasing Income Inequality”, points out, for example, that

The lowest 20% income quintile only has 1.7 persons per family unit while the highest quintile has 3.1 persons per family unit.
In 1970, 18% of households had only one person as compared with 27% of households in 2012.
In 1970 62% of women were married compared with 52% of women in 2012.

Clearly each of these factors will increase income disparities between households. Another recent study, from the National Bureau of Economic Research “Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility”, concludes that, although the rungs of the income ladder have grown further apart, the chances of climbing from lower to higher rungs has not changed.
But from a public perception point of view the Pew Research Center’s recent report, “Most See Inequality Growing, but Partisans Differ over Solutions”, is much more significant. It points out that:

54% of all Americans say that taxes should be raised on the wealthy and corporations in order to expand programs for the poor.
Only 35% believe that lowering taxes on the wealthy to encourage investment and economic growth would be a better approach.
Unfavorable opinions of the Tea Party have increased from 25% in 2010 to 49% today.
The public has more confidence in Democrat’s handling of healthcare by a 45% to 37% margin.
Just 42% to 38% favor Republicans in handling the economy.

My conclusion from all of this data is that fiscal conservatives need to do a much better job of showing sympathy and concern for those who are struggling at the lower ends of the income scale. Success in implementing the sound policies which are needed to turn things around depends on accomplishing this!

How Do We Break Out of Our Economic Rut?

Posted on March 30, 2014 by jackheidel

The U.S. economy is in a rut. On the one hand, growth is stagnant, unemployment is high and huge deficits are leading to massive debt. On the other hand our population has an increasing number of retirees and also an increasing number of low income (often immigrant and minority) service workers. These groups demand more services in the form of entitlements and social welfare programs. In a democracy these needs are hard to deny. Is it possible to better stimulate the economy, alleviate inequality and shrink deficit spending at the same time? I believe it is!

Stimulating the economy. The best way to do this is to lower both individual and corporate tax rates in a revenue neutral way by eliminating, or at least greatly reducing, tax preferences. Faster growth of GDP will both reduce unemployment and bring in more tax revenue and thereby lower the deficit.
Reducing inequality. I join many others to propose a large scale, government funded, infrastructure development program, badly needed for its own sake, but also as a way of putting hundreds of thousands, if not millions, of people back to work. However, and this is essential, it has to be paid for by a major new source of revenue. My own preference is to establish a new tax, on the assets of very wealthy people, say with a net worth of $10,000,000 or more. An asset tax of between one and two percent per year would bring in several hundred billion dollars and also represents a highly visible way of reducing inequality without adversely affecting the economy.
Shrinking the Deficit. One of the biggest problems with many federal programs is that there is neither built in quality control nor cost control. There is little incentive for either Congress or federal bureaucrats to set priorities and control costs. A good way to change this system is to devolve many federal programs back to the states where such controls do exist. I will have more to say about this in future posts.

Big changes are needed at the federal level to get our economy back on track and put people back to work. There are ways to do this and we simply need leaders with enough vision and determination to get the job done!

The Long Run and the Short Run

Posted on March 23, 2014 by jackheidel

“I agree with you that something must be done now. The trick is what will work the best in the short term to trigger the agreement between the fiscal conservatives and the modern liberals to cut costs and balance the budget that we both agree on. We can agree to disagree on the solution details but I hope you are successful in achieving the short term goals you are working tirelessly on.
Just as big a question is what will work the best in the long run to prevent it from happening again. I will continue to work on changing the intellectual environment that I see as a precondition to solidifying your short-term gains and preventing a re-occurrence.”
These are the words of my Omaha libertarian friend, David Demarest, with whom I have an ongoing dialogue. He wants to cut back and limit the scope of government. I’m willing to have a more expansive government as long as we’re willing to pay for it.
The secret to solving many of our current problems (stagnant economy, high unemployment, massive debt, increasing inequality) is to grow our economy faster. The best way to accomplish this is by boosting investment and entrepreneurship with broad-based tax reform, by lowering tax rates for both individuals and corporations, paid for by eliminating deductions and closing loopholes.
But some people think that lowering tax rates means lower taxes on the rich. To counteract this perception, and at the same time to raise additional tax revenue to lower the deficit, I propose to levy a new wealth tax of 1% of assets with an exemption of $10 million per person to make sure that the tax only applies to the “truly wealthy.”
I believe that a program along these lines is the best way to get our economy back on track. But, at the same time we need to figure out how to avoid falling back into another slow growth, high debt trap anytime soon.
A good way to achieve long run protection is with a balanced budget amendment. It would need to be flexible, allowing for emergencies, and also phased in over several years to allow citizens and legislators time to make the necessary adjustments to spending and taxes.

Considering a Wealth Tax for the U.S.

Posted on March 18, 2014 by jackheidel

What should a country do when it has

Massive accumulated debt and annual deficits predicted to grow indefinitely.
A rapidly growing population of retirees heavily dependent on expensive entitlement programs such as Social Security and Medicare.
A national Congress which is unwilling to make significant spending cuts for fear of offending powerful constituent groups.
Growing income inequality and wealth inequality.
A stagnant economy and high unemployment which makes inequality worse.
An inefficient income tax system which does not take in enough tax revenue to pay the bills.

The best response by far is to implement broad-based, pro-growth, tax reform. I have often discussed how to make major changes to our current income tax system. I have also described an attractive way to introduce a consumption tax, the so-called Graetz Plan.
Another way to reform taxes is to introduce a wealth tax. The economist Ronald McKinnon has described a way to do this in a Wall Street Journal column, “The Conservative Case for a Wealth Tax”. His plan is to implement a federal wealth tax in addition to the federal income tax. It would consist of a flat tax of about 3% imposed on household wealth in excess of a $3 million exemption which would exclude 95% of the population. In addition to bringing in a significant amount of new revenue each year, which is its principal objective, it would serve the purpose of making a flatter, pro-growth, income-tax system more palatable to people who are concerned about inequality, and therefore to a much wider audience.
The economics journalist, Daniel Altman, recently reported in the New York Times, “To Reduce Inequality, Tax Wealth, not Income” that American household wealth totaled more than $58 trillion in 2010. The most recent issue of Forbes Magazine reports that there are now 492 billionaires in the U.S. with a total wealth of $2.3 trillion. A 2% tax on the wealth of just these billionaires alone would raise $46 billion. A 0.5% tax on the wealth of all Americans would raise $290 billion annually. These examples show that a “moderate” wealth tax could bring in a significant amount of new tax revenue which would make a big dent in shrinking our annual deficit.
We have to do something and do it quickly. The problem will occur when interest rates return to their normal level as they surely will before long. When this happens, interest payments on our national debt will sky rocket. It’s going to be painful regardless, but let’s try to head for the softest landing we can manage!

Wealth and Taxation

Posted on March 16, 2014 by jackheidel

As I reported in my last blog post a few days ago, wealth inequality in the United States and the rest of the developed world is growing rapidly and is likely to get much worse in the foreseeable future. This is happening because income from wealth, i.e. the return on investment, typically grows faster than wages and GDP. As income inequality also grows, and top wage earners have more and more money to invest, then the gap between investment income and wage income will become even wider. There is nothing wrong with this and the more money that is reinvested in our economy, the faster it will grow and the more jobs that will be created.
At the same time that huge new wealth is being created we have an archaic tax system in the U.S. which is not only incredibly complicated and inefficient, but also discourages investment because the top individual and corporate rates are so high. And it doesn’t collect enough tax to pay our bills. We have huge deficits already and the CBO says that they’ll just keep getting worse.
Making government operate more efficiently with less spending is highly desirable but will only go so far. Every government program has a constituency of supporters who complain when their own program is targeted for cuts. And the biggest and most expensive, the entitlement programs of Social Security and Medicare, have the largest constituency of all, over 50 million retirees at the present time and growing rapidly as the baby boomers retire at the rate of 10,000 per day.
This huge crunch can only be resolved by fundamental tax reform. Several different ways have been proposed to do this:

Reform the current income tax system by broadening the base, lowering rates and eliminating deductions and loopholes to pay for it. The problem with this approach is that no one wants to give up their own deductions (for mortgage interest, charitable contributions, employer provided healthcare, state and municipal taxes, etc.)
Introduce a consumption tax such as the Graetz Plan which I described in my January 7, 2014 post. It would establish a 14% Value Added Tax on consumption, supplemented by a lower but still progressive tax on incomes over $100,000. It would avoid being regressive on low wage workers by using an Earned Income Tax Credit to offset the Payroll Tax.
Introduce a wealth tax.

Sorry, I’m over my (self-imposed) word limit already. I’ll describe a possible wealth tax in my next post!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

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