Tag Archives: American Enterprise Institute

U.S. Income Inequality and Household Demographics

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Income inequality is a hot political issue today and I have frequently discussed it on this blog.  In particular, the chart just below shows that income inequality is only slightly worse since 1979, after government transfers and federal taxes are taken into account.


The AEI scholar, Mark Perry, has analyzed the 2016 annual report from the Census Bureau on “Income and Poverty in the United States” and points out the very strong correlation between income inequality and household demographics.


For example:

  • The mean number of earners per household increases steadily from a low of .43 in the lowest income households to 2.04 in the top income households.
  • The marital status of householders. The share of married-couple households is only 17.3% in the bottom income quintile and then increases steadily to 76.5% for the top income quintile.
  • The age of householders. In the lowest income quintile only 42.4% of households included individuals in the prime earning years of ages 35-64, while 69.9% of households in the top quintile include individuals in this group.
  • The work status of householders. Only 18% of the lowest earning quintile households included an adult who was working full time, as compared to 77.7% of top earning households.
  • The education of householders. Only 14.6% of lowest earning households had a family member with a college degree and this percentage rose steadily to 64% for top earning households.

Conclusion. Household demographics are very highly correlated with household income. Specifically, high-income households have a greater average number of income-earners than households in the lower-income quintiles.  Individuals in high-income quintiles are far more likely to be well-educated, married, working full-time and in their prime working years. It is also true that individuals and households can and do move up and down the income quintiles as these key demographic variables change.

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Why the U.S. Should Adopt a (Revenue Neutral) Carbon Tax

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As I have discussed previously, the evidence for global warming is overwhelming.  I had hoped that President Trump would publicly recognize this scientific reality and decide to stay in the Paris Climate Agreement.  Nevertheless, it will take more than three years for the U.S. to completely withdraw.
But in or out of the Paris Agreement, the best way for the U.S. to show leadership on this critical issue is to adopt a (revenue neutral) carbon tax.  The American Enterprise Institute has just issued a comprehensive report  on the desirability and feasibility of doing this.


Here is the gist of the AEI argument:

  • $40 per ton is often taken to be the social cost of carbon in the atmosphere. A carbon tax at this level would raise the cost of gasoline by 36 cents per gallon.
  • A carbon tax is a consumption tax. Taxing consumption rather than income promotes economic growth. The revenue neutral offset would likely be an income tax such as the payroll tax or corporate income tax.
  • A carbon tax need not disadvantage the U.S. globally since a border adjustment tax could be imposed on imports from countries without a carbon price regime.
  • Replacing arbitrary regulations. The primary carbon-reduction regulations currently in effect are the 1) Corporate Average Fuel Economy (CAFE) standards for vehicles and 2) Clean Power Plan which limits power-sector carbon emissions at the state level. Leaving carbon abatement decisions to carbon producers is far more efficient than leaving it up to regulators.
  • Growing public acceptance. 84% of registered voters, including 72% of Republicans, support actions to accelerate the development and use of clean energy. Even 49% of conservative Republicans say that “Americans will make major changes to their way of life to address climate change.”

Conclusion. For the U.S. to adopt a carbon tax would be an even stronger statement of world leadership than participating in the Paris Agreement.

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Getting American Health Care Straightened Out II. Medicare

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One of the major problems facing the United States today is the high cost of healthcare. We spend almost 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country.  A big reason for the high cost is the low out-of-pocket consumer spending on health services in the U.S. 
My last post discusses a general plan, involving catastrophic health insurance and health savings accounts, for getting the overall cost of healthcare under control.

capture82Once we have a handle on the overall problem, we then need to focus on the cost of the Medicare entitlement program for retirees.  The problem here is easy to understand.  In just 15 years enrollment in Medicare will increase to over 80 million beneficiaries from 57 million today.  Likewise there are 3.1 workers per beneficiary today and there will be only 2.4 in 2030 (see above chart).

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The second chart demonstrates that Medicare will be the major component of increases in federal spending in the coming years (with the other entitlements of Social Security and Medicaid following right behind).
So the question is: how do we control Medicare spending within the context of overall health-care reform?  Here is a proposal from James Capretta of the American Enterprise Institute:

  • Medicare recipients would receive fixed payments toward the coverage option of their choice, based on their age, income and health status. The traditional Medicare program would be one of the choices. Enrollees choosing less costly coverage options would see a reduction in their premiums.
  • Premium payments would be comparable to subsidies and tax credits received from the reformed Affordable Care Act.
  • Privately run managed care plans provide benefits at far less cost than traditional Medicare. Beneficiaries would share in the savings.

Conclusion. It needs to be emphasized as strongly as possible that the point of Medicare reform is to lower costs to both individuals and the government, sa that Medicare can be preserved indefinitely into the future.

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How to Get Our Economy Back on Track III. Tax Reform

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Both political parties, both presidential candidates, most prominent economists and economics journalists, in other words, most opinion makers, favor faster economic growth. I have had several recent posts on this topic, here and here, pointing out especially the need to increase the rate of growth of worker productivity which in turn is heavily influenced by the rate of new business investment.
One of the most valuable policy changes in this respect is tax reform, with lower marginal rates paid for by closing loopholes and shrinking deductions. The Republican House of Representatives has developed an excellent plan, “A Better Way,” which includes such extensive tax reform.

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The American Enterprise Institute has recently analyzed the House plan and describes the positive impact it would have on our economy:

  • Simplification. The seven current individual tax rates would be reduced to just three: 12%, 25% and 33%. All deductions would be eliminated except for mortgage interest and charitable contributions. The standard deduction would be almost doubled. A 50% exclusion for capital gains, dividends and interest income would lower those tax rates in half.
  • Business taxes. The corporate tax rate would be cut from 35% to 20%, again by eliminating most deductions, and a territorial system adopted whereby taxes are only paid in the country where business is conducted. Immediate expensing for new investment would replace multiyear depreciation.
  • Effects. Base broadening by eliminating deductions will add 6.5 million new taxpayers. The number of taxpayers taking the standard deduction will increase by 37 million (from 70% to 95%). Total tax revenue will decrease by $227 billion over ten years. The effective marginal tax rate is slightly lower for most income groups.

Conclusion. The overall lower tax rates will boost economic growth. The ten year loss of tax revenue, while relatively small, is still a detriment and should be eliminated by shrinking the remaining mortgage interest deduction (which primarily benefits the wealthy).

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How to Improve Obamacare and Lower It’s Costs

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I have been making the case for some time now that the rapidly increasing costs of U.S. health care, especially for the entitlement programs of Medicare and Medicaid, is the fundamental cause of our exploding national debt, and therefore these costs must be curtailed.  The only way to fix this problem is for Americans to have more “skin in the game” regarding these costs.
Capture10My last post, “The Inherent Instability of Obamacare,” discusses the separate but related problem that the Affordable Care Act is actuarially unsound because it misprices the basic risks involved in health insurance.  This is why costs on the exchanges are going up so fast which, in turn, leads to fewer enrollees.
A good way to address this double whammy of problems is to use a plan developed (mostly) by the American Enterprise Institute in December, 2015.  The main features are:

  • ACA Mandates, for both individuals and employers, would be abolished.
  • Retain tax preferences for employer-paid premiums, with an upper limit comparable to the cost of catastrophic health insurance.
  • Provide refundable tax credits to households without access to employer coverage, gradually replacing subsidies provided by ACA exchanges.
  • Persons with pre-existing conditions would have continuous coverage protection.
  • Medicare would migrate to a defined contribution, refundable tax credit model as above, with eligibility gradually rising to age 67.
  • Medicaid would be financed with block grants to the states and would supplement the refundable tax credit model.
  • Health Savings Accounts, to accompany high deductible plans, would be encouraged with a one-time federal tax credit matching enrollee contributions.
  • Health Care for Veterans would be integrated into mainstream care.

Summary. Abolishing the mandates means that coverage levels and price would be actuarially determined in the market place. Equal tax credits for insurance and help in setting up health savings accounts ensure fairness and widespread accessibility.  The overall free market model will guarantee both low cost and the greatest possible degree of flexibility, innovation and quality of care.

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A Balanced and Sensible Anti-Poverty Program

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The American Enterprise Institute’s Robert Doar recently testified before the U.S. Senate Committee on the Budget with ”Back to Work: How to improve the prospects of low-income Americans”.  His recommendations are based on the four principles:

  • Work requirements as a condition of public assistance.  The work first approach has been shown to have better outcomes with regard to attachment to the labor force than even approaches which focus on training and education.
  • Robust work supports for those who are working at low wages.  The Earned Income Tax Credit accomplishes this and should be extended to childless adults.
  • Business growth and investment.  Policies that raise the cost of doing business and deter growth do little to create what the poor need most: jobs.
  • Foster married, two-parent families.  We need to mitigate marriage penalties in public assistance programs and we need to be honest about the consequences for children of single parenthood.

Mr. Doar points out that 10.2 million American’s are unemployed at the present time, 3.6 million have been jobless for more than 27 weeks, 7.3 million are involuntarily working part-time and 837,000 workers are so discouraged that they have stopped looking for work.  Labor force participation has dropped from over 66% in 2007 to 63% today while the poverty rate has risen from 12.5% to 15%.
CaptureRaising the minimum wage will not help the job prospects of most poor Americans.  Only 11.3% of individuals who would benefit from raising the minimum wage are living below the poverty line.  The Congressional Budget Office estimates that raising the minimum wage to $10.10 per hour would lead to 500,000 people losing their jobs.  CBO also estimates that the Affordable Care Act will reduce full-time employment by 2.3 million by 2021.  Given the strong anti-correlation (see the above chart) between labor participation and poverty, this means that the poverty rate may go higher yet.
The conclusion to draw from this excellent poverty synopsis (with lots of references) is that there are intelligent and effective ways to fight poverty and also much poorer ways to try to do it.  Good intentions are not enough!