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Wednesday, July 11, 2012

Miles Kimball Answers My Open Letter

       Finally, success! LOL My question to him was basically why is he a "Supply Side Liberal" I mean I too am a liberal. but of course I'm not Supply Side as I read that as largely about tax cuts for the rich. I tend to be skeptical about supply side arguments-what about the demand side.

      One thing he points out is that I use the term "demand side" in something of a different way by calling myself a "demand sider."

      Usually, as he says, the term refers to the issue of generating jobs by raising consumer demands. What I mean by saying I'm a Demand Sider is just that I'd like to cut taxes for the nonrich and I imagine these tax cuts would create jobs by raising demand. Here is the meat of Miles' reply:

      "Mike is absolutely right that the poor and middle class pay substantial amounts of sales taxes and taxes on earnings such as Social Security taxes. When people want to argue that the tax system is unfair to the rich, they often skew things by only talking about the income tax. But a key point to make here is that almost all countries that devote a higher fraction of GDP to government spending than the U.S. tax the middle-class a lot through a national sales tax or a value added tax (VAT) which is a lot like a sales tax except that it is harder to evade because much of the tax is collected from companies long before the good gets to the final consumer. The European model, in particular, is to tax the middle-class heavily in order to give benefits to the middle class. I believe that the resultant tax distortions are why so many Europeans work many fewer hours per year than Americans. They used to work roughly the same amount as Americans when they had lower tax rates. (These are facts that Ed Prescott has made much of.)" 

     "Why not just tax the rich to pay for benefits for the middle class? The basic problem is that there aren’t enough rich people. I found this video by Tyler Durden etertaining and revealing on this topic. I can’t verify what he says exactly, though I think the basic point is right. You have to include at least the upper middle class in your tax in a big way, or you can’t get enough extra revenue to do a big expansion of social programs."

     "So the “demand side” is a big source of potential revenue, if by that you mean some kind of sales tax of VAT tax. But to get a lot of revenue, you have to include people who don’t think of themselves as rich, and whose acquaintances might not even think of them as rich. Maybe we should do it anyway, but it won’t feel like what people imagine a tax on the rich would feel"

       http://blog.supplysideliberal.com/post/26987558050/reply-to-mike-saxs-question-but-what-about-the-demand#disqus_thread

       He certainly gives some decent answers-one of my frustrations is that most Supply Siders aren't good at explaining their dislike of taxes on the rich and indifference to taxes on the nonrich.

       Europe as a paradigm is problematic. I myself don't really want to raise taxes on the middle class even the upper middle class don't seem to me to be undertaxed. I do think that the rich and corporations are-if you go by the effective tax rate. If you were to raise the top MTR back to 39.6% and raise both the capital gains and dividends tax back to that level it would raise significant revenue. Whether it would raise enough revenue by itself, it would be a start.

      I do wonder if these tax distortions in Europe explain France's high unemployment rate. Of course, the Europeans are richer than us in another sense-leisure. Are they better off? It's not an easy question. I'm not really advocating it-what the Argentina experience with their version of the Job Guarantee seems to suggest is that most people would rather work for adequate income than sit home for that same income.

     I'd say at best that if Europe isn't optimum we aren't either. I do think the President's desire to raise taxes on the rich and the millionaire's tax is a start.

     As to his point on demand stimulus Miles thinks monetary policy should do most of the heavy lifting:

     "What about the demand side as a source of jobs? (This is a more typical meaning of “demand-side.”) Here, my answer is that, despite the floundering of policy makers lately, it is fundamentally easy to get enough aggregate demand. On this, just click the sidebar link on the June+ 2012 table of contents and look at all the posts on monetary policy and short-run fiscal policy, together with the recent post on evidence that Federal Lines of Credit should work: “Brad DeLong and Joshua Hausman on Federal Lines of Credit.” (My post “Dissertation Topic 1: Federal Lines of Credit (FLOC’s)” is also useful, but is pretty heavy.) The bottom line is that monetary policy can provide plenty of aggregate demand, and if the Fed won’t do what it takes, we can use Federal Lines of Credit and the change in the timing of Federal payments to the states for Medicare that I talk about in “Leading States in the Fiscal Two-Step” to get enough aggregate demand without adding too much to the national debt. So, you wouldn’t know it from the news or from big chunks of discussion in the blogosphere, but getting enough aggregate demand is the easy problem. Raising aggregate supply while getting the revenue we need is the hard problem."

      I'm still fairly skeptical of monetary policy as solution to most of our problems. I think that monetary policy is more about providing the system with liquidity than being a direct stimulus for the real economy. But will check out some of his proposals.

   

14 comments:

  1. Mike, (F1)
    Nice post. Another question with regard to European labor, is how much leisure is tied to lower unemployment? In other words, are some European countries "sharing" the work, and keeping unemployment levels lower by doing so? I think Germany is, and some of the Scandinavian countries, too.
    Raising rates on upper income levels, capital gains and dividends would be a start to the road to recovery. Raising the tax withholding on SSI and Medicare/Medicaid would also be helpful and seen as fair by the middle class if corporate and upper bracket rates go up.
    Nanute (F2) lol

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  2. Nanute my friend! You're back from your vacay. Yet I got that post out of Miles. I agree with all your ideas of course.

    I do wonder about France in partiuclar-their unemployment is so high. Naturally the Right blames it on the welfare state, taxes, etc.

    You should see my new piece about Ryan Avent, I really got into it with that whole Modeleled Behaviour hive on twitter!

    My phone is off. Next week should be better-hopefully my unemployment will be back on and I'm supposed to start working with my brother.

    In the meantime I don't know if you're in the mood to go hang out with Popeye-he's such a nice guy and it will make me feel better during such a broke week for me.

    I know we can't go every week-unless you want to lol-but this week in partiuclar would be an opportune time.

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  3. Mike,
    Congrats on getting the reply from Miles! While I agree with his basic points on tax policy, I think the discussion still misses some other major issues such as tax expenditures. These account of nearly $1 trillion a year in effective federal spending and IMO are fairly regressive.

    Separately, there are countless regulations that alter the demand/supply for goods without directly subsidizing industries. For example, there are numerous ways in which debt is effectively subsidized relative to equity. While I disagree with Miles' view about the ease in creating aggregate demand through monetary policy, I also disagree that creating demand by encouraging households to re-leverage would solve any mid-to-long term problems. In my view, the effect of private credit creation and private/household debt levels remains a meaningful blind spot for MMs.

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  4. Hey Woj! Good to talk to you again. I read your blog and left a few comments-don't know if you ever read them.

    You think tax expenditures are regressive? You mean SS and Medicare? I agree the taxation for them is regressive-is this what you have in mind?

    Let me ask you what I asked Miles-don't know if he put my comment yet but what do you think accounts for the conisistently elevated levels of French unemployment over the last 20 years.

    Is his theory right-tax distortions and lack of incentive to work rather than more leisure.

    It seems to me the argument over leisure makes more sense in Europe has they have a strong safety net and unemployment benefits. Here in the US no one who isn't rich can afford "leisure."

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    1. Mike,
      Yes, thank you for the comments and I actually responded in the past couple days (I was on vacation and without internet the prior week, hence sorry for the delay).

      As for the specific tax expenditures, I was not implying SS and Medicare. For 2010-2014, the top 3 are exclusion of employer provided health care, the home mortgage interest deduction and preferential rates for dividends and capital gains (http://www.washingtonpost.com/r/2010-2019/WashingtonPost/2011/08/19/National-Politics/Graphics/Top%2010%20Largest%20Tax%20Expenditures.pdf). You mention the mortage interest deduction being for the middle class but I believe the actual benefits largely accrue to the top 5% (I'll try to find that source).

      I agree with Miles' that Republicans have gotten way out of hand with views on taxes/spending (and was taught by Diane Lim Rogers, another Reuplican who recognizes this fact).

      As for France, I have to be honest in stating my knowledge of their laws and regulations is not great. That being said, I tend to agree with Miles' (and your) basic theory about distortions. Universal healthcare and stronger safety nets that allow for retirement at much earlier ages are certainly set up as an incentive for leisure over work, as well as preventing poverty.

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  5. I agree that we should cut back on a lot of "tax expenditure." The Republicans have gone way beyond being against taxes because of incentive effects to being against things because they are called "taxes." Often, a "targeted tax cut" is more or less equivalent to spending, but to many Republicans, if it is called "spending" it is bad, but if it is called a "tax cut"it is good. People who are serious about incentive effects, like Greg Mankiw, are for carbon taxes and other Pigou taxes, but most Republicans are against them.

    On the way to the airport, I was talking to my cab driver about the need for high taxes on soda pop, which is wreaking havoc with Americans' health. Such taxes have good incentive effects by getting people to do less of something they should probably do less of, but most Republicans would be horrified by a soda pop tax, both because it is a "tax" and because they would say it is part of the "nanny state." I think people need help making good choices, especially in the area of eating and drinking.

    Mike, you left of the end of my key sentence: "Raising aggregate supply while getting the revenue we need is the hard problem."

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  6. Hey Miles! I wil correct that-oops! It is an important point you made too.

    Which tax expenditures would you want to cut is the sticking point. My feeling is I don't want to give up the EIC for the working poor or the mortgage interest deduction for the middle class. Of course those two are two of the biggest tax expenditures.

    I would be for getting rid of the expenditure for corporate jets or Chevron.

    What you say about soft drinks is a tough one Miles! I live in the belly of the beast on soft drinks-NY.

    Recently we made news due to Mayor Bloomberg;s comments-though I live in Nassau not NYC but close enough. It would effect me when I go to the city.

    I'm not sure how I feel about it. I know the Mayor's heart is in the right place. But it does seem like too much government power in a way. Yet the Republicans have gotten so strident about what he said that I'm almost like "whatever" Its as if 'they are against it I'm for it or at least not against it"

    Your idea for the tax would be another way to go. Of course I love my soft drinks and drink way too much of it.

    So I'm conflicted which is what I guess we see often when we try to take these things to their logical conclusions.

    This is more a tax for a social purpose like a carbon tax or a cigarette tax. For my part I think we need much more revenue but I also think that a lot of people are overtaxed as it is. Basically the people I think aren't is the rich and wealthy corporations and investors.

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  7. Miles I also asked you this at your blog but do you think tax distortion is behind the elevated French unemployment rate?

    Did Prescott have proof that the taxes of the rich aren't enough to fund the welfare state?

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  8. Mike,
    I left a post at Miles' place yesterday, and it's still not posted. I think it is kind of hard to have a dialogue when it takes too long for comments to post. It is the same over at Brad DeLong's place. Maybe that's the intent?

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  9. Yeah Miles said he might consider taking the moderation lock but he hasn't yet.

    I've never got a comment over at Delong's printed. He did put me on his twitterstorm once. Now if I can just get him to do that again...

    In fairness to Miles he did leave a comment as you can see above so that doesn't sound like a guy running from dialouge!

    Again my phone is down until next week so we have to converse only via comments for now.

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  10. Nanute just asked Miles about it. I pointed out ur point that it's hard to get a discussion going with such a time lag for comments to be published

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  11. It's a bit frustrating, because American economic bloggers always refer to Europe as a whole. But Europe is nothing more than some treaties and a continent.
    On the economic side, there are 30 different countries, where everything that matters is different: tax, welfare, education and even work culture. The only common thing is the currency, shared by 17 countries.
    If you want to find the causes of unemployment in Europe, you must not compare Europe with the US (not relevant, since Europe is in this case just an aggregate), but you need to run a cross-section among European countries.

    If you would run such a cross-section, my best guess is that you would find the following causes for (structural) unemployment:
    - flexibility of labor market
    - educational system
    - level of centralization of the political system
    - red-tape

    Working time or welfare may play a role, but they're certainly not dominant.

    Regarding cyclical unemployment, it's got probably much to do with currency fluctuations (or non-fluctuations for those countries that are part of the euro).

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  12. Zorblog you make a lot of sense. Understand I'm not trying to blame welfare-quite the opposite.

    As an American you see welfare is much weaker here and what little we have they want to destroy and hold up "sclerotic Europe" as a cautionary tale.

    I'm just trying to get the facts to better give the lie to their propaganda/

    It does seme that the common currency has proved to be a real straitjacke. Evidently this is exactly as Mundell had planned it.

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  13. "Why not just tax the rich to pay for benefits for the middle class? The basic problem is that there aren’t enough rich people. I found this video by Tyler Durden etertaining and revealing on this topic. I can’t verify what he says exactly, though I think the basic point is right. You have to include at least the upper middle class in your tax in a big way, or you can’t get enough extra revenue to do a big expansion of social programs."

    You can look at Emmanuel Saez's webpage elsa.berkeley.edu/~saez to get a link to his non-lazy research on the top incomes.

    The math is pretty simple if you just do it in terms of number of digits (like "six figure salary" = O(10^6) or just think "6").

    There are about 10^5 really high-earning families, they earn 7-figure or 8-figure incomes. On the other hand there are 10^8 Estadounidenses total, and Estadounidenses want to live on 10^5 dollars per year.

    Here is an important number to keep in mind: 65 million US tax filers make over $40k per year. In other words if you start at the middle middle class and work upwards you're still only working with 65 × 10^6 people who support everyone in the US (kids, parents, elderly medicare/ss, themselves, etc) which is 350 million humans.

    So ... how are you going to get a large enough fraction of 10,000 earners to support 100,000,000 people year after year at a level of $20,000? Basically, you can't.

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