Is Capitalism in Crisis?

Posted on April 17, 2014 by jackheidel

The economist and public lecturer, Richard Wolff, gave an address in Omaha NE last night, entitled “Capitalism in Crisis: How Lopsided Wealth Distribution Threatens Our Democracy”. His thesis is that after 150 years, from 1820 – 1970, of steadily increasing worker productivity and matching wage gains, a structural change has taken place in our economy. Since 1970 worker productivity has continued to increase at the same historical rate while the median wage level has been flat with no appreciable increase. This wage stagnation has been caused by an imbalance of supply and demand as follows:

Technology has eliminated lots of low skill and medium skill jobs in the U.S.
Globalization has made it less expensive for low skill jobs to be performed in the developing world at lower cost than in the U.S.
At the same time as jobs were being replaced by technology and disappearing overseas, millions of women entered the labor force.
A new wave of Hispanic immigration has caused even more competition for low skilled jobs.

In addition, stagnant wages for the low skilled and medium skilled worker have been accompanied by an increase in private debt through the advent of credit cards and subprime mortgage borrowing. This enormous increase of consumer debt led to the housing bubble, its bursting in 2007-2008, and the resulting Great Recession.
Five years after the end of the recession in June 2009, we still have an enormous mess on our hands: a stagnant economy, high unemployment, massive and increasing debt and a fractious political process. How in the world are we going to come together to address our perilous situation in a rational and timely manner?
Mr. Wolff believes that capitalism’s faults are too severe to be fixed with regulatory tweaks. He also agrees that socialism has proven to be unsuccessful where it has been tried. He proposes a new economic system of “Workers’ Self-Directed Enterprises” as an alternative.
I agree with Mr. Wolff that capitalism is in a crisis but I think that it can be repaired from within. The challenge is to simultaneously give our economy a sufficient boost to put millions of people back to work and to do this while dramatically shrinking our annual deficits in order to get our massive debt on a downward trajectory as a percent of GDP. How to do this is the main focus of my blog, day in and day out!

Global Warming Is For Real II. How Do We Move Forward?

Posted on April 15, 2014 by jackheidel

The Intergovernmental Panel on Climate Change has just issued a new report, reported in yesterday’s New York Times, “Climate Efforts Falling Short, U.N. Panel Says”. The IPCC is saying that an intensive effort is needed in the next 15 years to prevent the global average temperature from rising more than 3.6 degrees Fahrenheit (2 degrees Celsius) above the preindustrial level. Since the U.S. and China are the biggest emitters of carbon, it is critical for the U.S. to show leadership on this issue.
One dramatic piece of evidence that global warming is real is the rapidly shrinking size of the artic polar ice cap measured at the end of each summer. In a previous post last December 8, I took note that at least 29 U.S. companies “are incorporating a price on carbon into their long range plans.” I also noted a report from the Congressional Budget Office which estimates that a tax on energy companies of $20 to emit a ton of CO₂ would raise $120 billion a year and raise the cost of gasoline by 10 to 15 cents per gallon.
The scene is clearly set. There is a serious threat to life on earth. We have a good estimate of what it will take to meet the threat and a specific time window for responding. We also know the approximate cost of a sensible plan for doing so. Can our democratic political system be moved to action?
A large energy tax like this will take a bite out of the economy. An attractive way of building support would be to make it part of broad based tax reform designed to stimulate the economy with lower individual and corporate rates offset by closing loopholes and eliminating deductions. In fact a carefully assembled package might be able to reduce carbon emissions, stimulate the economy (with lower tax rates) and raise revenue to pay down the deficit, all at the same time!
Is this too much to hope for?

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.

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!

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.

Do We Really Need a Wealth Tax?

Posted on March 20, 2014 by jackheidel

Our dire fiscal and economic problems are crying out for a bold solution. We need to simultaneously stimulate our economy to grow faster and create more jobs, raise sufficient tax revenue to pay for our growing spending commitments, and address a widening inequality gap which threatens to undermine the basic principles of a free and just society. How are we going to accomplish all of these tasks at the same time?
It seems to me that the best way is to thoroughly reform our income tax system based on the following principles:

Lower tax rates on marginal income to encourage more investment and entrepreneurship. Such changes can be made revenue neutral by eliminating deductions, loopholes and other tax preferences. This would apply to corporations as well as individuals.
Establish a new low percentage (1% – 2%) wealth tax with a relatively high personal exemption ($5 million – $10 million). This would bring in approximately $200 billion per year to be used for reducing the deficit. Equally as important it would be a visible sign that the wealthy are making a significant contribution towards solving our fiscal problem. This will make it more acceptable to lower marginal tax rates on income in order to boost economic growth.

Fiscal conservatives often oppose any increase in tax revenue because, they think, it is likely to be used for new spending rather than for lowering the deficit. One way to overcome this concern is to pass a Balanced Budget Amendment to the Constitution. This would make it much harder to increase spending. The problem is that it will be very hard for Congress to pass such an amendment and have it ratified by ¾ of the states.
But something has to be done. The longer we wait and the more debt we build up, the more painful it will be to extract ourselves when the next crisis occurs as it surely will.

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!

Does Tax Reform Have a Future?

Posted on March 9, 2014 by jackheidel

My post on February 27, “A Breath of Fresh Air” praises the new tax reform proposal from the House Ways and Means Committee which both lowers and consolidates tax rates in a revenue neutral way as well as greatly simplifying the tax code. It would be a big step in the right direction. But the Washington Post’s Robert Samuelson makes a good case in ”Does Tax Reform Have a Future?” that the House bill does not go far enough.
Mr. Samuelson argues that if we’re going to eliminate tax deductions and loopholes, and thereby alienate lots of special interest groups, in order to get lower tax rates, then we should avoid half measures and eliminate virtually all deductions in order to get the lowest possible rates. In other words, eliminate the mortgage interest deduction rather than just limiting it, eliminate deductions for charitable contributions as well as deductions for state and local taxes. Eliminate the deduction for employer provided healthcare (which by itself would go a long way towards reforming healthcare.)
Mr. Samuelson would retain only the Earned Income Tax Credit (which encourages low-income people to work) and also the tax preference for contributions to retirement accounts (without which most Americans wouldn’t save for retirement.)
We badly need broad based tax reform to stimulate our economy. Douglas Holtz-Eakin, the former director of the Congressional Budget Office, has estimated “Reforming Taxes, Goosing the Economy”, that even the imperfect House tax reform proposal would raise GDP by .5% annually for 10 years and create 500,000 new jobs each year over this time period.
Full-fledged tax reform, a la Samuelson, would provide an even greater stimulus but let’s at least do something to put the millions of unemployed and underemployed people back to work and reduce our staggering budget deficits!

It Does Not Add Up

Jack Heidel's blog on fiscal responsibility

Category Archives: pro-growth tax reform