Category Archives: Economic Policy

Analyses: The Republican Tax Bill

Published / by stevec

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Concerning media reporting on the republican tax bill, I am appalled by the lack of homework especially by television media. For the most part they seem to be parroting press releases. That is what motivates this post. I plan to update this post as information becomes available,

1. For a good summary read Robert Reich, The Huge Tax Heist.

2. A NYT Nov 2 Editorial, A Tax Plan for a New Gilded Age. My summary follows:

A. The primary goal of this bill is to slash taxes on corporate profits to 20 percent, from 35 percent.

Credible economists believe the benefits of the cuts would accrue nearly exclusively to shareholders and executives.

about $70 billion a year, or 35 percent of the benefits, would flow to foreign investors who own shares in American companies, according to Steven Rosenthal at the Urban-Brookings Tax Policy Center.

B. The bill would also lavish benefits on real estate partnerships, hedge funds and other pass-through businesses, which send their profits directly to their owners without taxes being withheld

Republicans want those business owners to pay taxes of just 25 percent on that income, rather than ordinary rates, which go up to 39.6 percent. Republicans argue that this will benefit small businesses. In fact, a large majority of small-business owners already have personal tax rates below 25 percent.

C. On personal income taxes, Republicans say they are simplifying and cutting taxes for most people. But that is not really true. They propose reducing the number of tax brackets to four, from seven, while raising the lowest bracket to 12 percent, from 10 percent. They want to double the standard deduction but eliminate personal exemptions. One new benefit that could help many families would be a $300 tax credit for tax filers and their dependents who are over 17, like an aged parent. Strangely, it would end after five years. By contrast, the bill’s cuts to corporate and other business taxes would be permanent.

The changes that could affect middle-class families the hardest include the elimination of the deduction for state and local income taxes. And the property-tax deductible would be capped at $10,000. Many people in high-tax states, like California, New Jersey and New York, would be especially hard hit.

One particularly hardhearted change would eliminate the deduction for medical expenses, which is primarily used by people with serious and chronic illnesses. Gone, too, would be important tax credits and deductions for college tuition and interest on student loans.

D. Unsurprisingly, the tax bill contains a couple of provisions that are designed to benefit the Trumps and others like them. It would get rid of the alternative minimum tax, which is paid primarily by upper-income families with lots of deductions. This tax accounted for a vast majority of the income tax Mr. Trump paid in 2005, according to a leaked copy of his return. The Trumps would also benefit from the bill’s proposed estate tax changes. That tax currently applies to inherited wealth above $5.5 million. Republicans would exempt wealth up to $11 million starting next year and eliminate the tax after six years. That would benefit the heirs of just 0.2 percent of people who die every year, but cost the government $269 billion over a decade.

3. A NYT Editorial by Paul Krugman, Trump’s $700 Billion Gift to Wealthy Foreigners. My summary:

Why is Donald Trump planning to give away $700 billion — that’s billion, with a “b” — to foreigners, no strings attached? You probably didn’t know that he’s planning to do this. In fact, he himself almost surely has no idea that he’s planning to do this. But it would be one clearly predictable consequence of the tax “reform” he and his congressional allies are trying to pass.

… the benefits from cutting corporate taxes would overwhelmingly flow into after-tax profits rather than wages, especially in the first few years and probably for a decade or more. And this in turn means that the main beneficiaries would be stockholders, not workers.

[in addition] these days there’s a lot of cross-border investment. In particular, as Steven M. Rosenthal of the Tax Policy Center notes — in a paper I found revelatory — around 35 percent of U.S. equities are now owned by foreigners, triple the level during the Reagan years.

What this means is that around 35 percent of a tax cut from an administration that proudly uses the slogan “America first” — $700 billion over the next decade — wouldn’t even go to Americans. Instead, it would be a windfall to wealthy foreigners, who would probably gain a lot more from the tax cut than U.S. workers. Oh, and it makes all that talk about allies not paying their “fair share” sound kind of silly, doesn’t it?

4. The Atlantic: How Trump’s Corporate-Tax Plan Could Send American Jobs Overseas. My summary (read the Atlantic article for a detailed example):

The Trump-GOP plan will also propose a minimum tax rate on foreign income, according to multiple reports. But whereas Obama’s plan (which ultimately didn’t become law) assessed a company’s taxation in each country individually, the Trump framework would come up with an average for all foreign earnings combined, a so-called “global minimum.”

This might seem like a small difference, but the design of their global minimum tax creates perverse incentives for companies to offshore jobs and shift profits to tax havens—outcomes that a per-country minimum tax would avoid.

This is a big flaw in Trump’s plan: The more an American company moves its profitable [US] operations to countries that have tax rates of 20 percent or higher—often rich countries that are seen as America’s economic competitors—the more that company can shift profits to tax havens without paying taxes on those profits. And the more that U.S. companies already take advantage of tax havens, the bigger the incentive they will have to offshore operations to other advanced countries: This provision of the GOP plan encourages companies to blend income from low-tax countries with that from higher-tax countries, completely avoiding paying money to the U.S. government.

Taking From The Poor & Giving To The Rich

Published / by stevec

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Trump will sign any healthcare legislation that the Republicans send him. He has no empathy. He does not care.

The republicans likewise have no empathy. They do not care. They are in the pockets of the insurance industry and wealthy. Their healthcare bill is a terrible piece of legislation.

  • It will discriminate against the poor, elderly and sick.
  • I will facilitate a tax break for the wealthy.
  • It will allow insurance to cherry-pick based on pre-exisiting conditions.

Consider this: The administrative costs of government-run Medicare is about 1%. In contrast insurance takes 10 to 20 percent off the top for the task of distributing money to healthcare providers.

This 10 to 20 percent cost is huge given that healthcare is between 1/6th and 1/5th of the national economy (between at least 3 trillion and 3.6 trillion of our 18 trillion dollar economy). By going to a single payer system, and getting the insurance industry out of the money-transfer business, the system would save at least something like $300  to $400 billion annually in pure administrative costs.

$300 to $400 billion looks like a pretty good improvement over the current insurance based system! And it does not include other health policy efficiency improvements like allowing negotiation with big pharmacy for better deals on prescriptions.

Paul Ryan’s Healthcare Bill

Published / by stevec

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I just listened to Paul Ryan’s Power Point presentation on health care. Lots of words, not much content. The content that is there is scary. He claims their replacement for the ACA will:

  • lower costs
  • give consumers more choices
  • give patients more control
  • provide universal access

It may provide universal access in principal but only if you can afford the costs. It will be great for the wealthy but not for the rest of us. For the wealthy it will lower their costs (reduced taxes) and they already have choices and control. But what about the rest of us?

One of his graphics provides a fundamental health insurance principle – Those who are sick are subsidized by the lucky healthy folks.

If you buy the premise that we all have a right to healthcare then it is either done through insurance or a single payer. If the government pays the bill we all pay into the system through our taxes. If through insurance those who are sick must be subsidized by the healthy or the sick cannot afford insurance – the risk of getting sick is handled by spreading the risk. The Republican plan is neither of these.

The Republican approach appears to be doing three things:

  1. Separating out the sick and giving them refundable tax credits to buy insurance. This would certainty make it cheaper for everyone else, but more expensive for the sick, especially if the tax credits are not sufficient to cover their healthcare costs.
  2. Financing healthcare through health saving accounts. This to me is privatizing a system so that individuals are left to their own devices to save for future healthcare costs. This sounds like an abrogation of the principle that all have a right to healthcare. It provides healthcare but only up to a point. If you happen to be unlucky and get a disease that exceed the limits of your health savings you are out of luck – in our rich country it is up to you to deal with healthcare, no public good here.
  3. The other thing that the Republicans are attempting is to drastically reduce Medicaid. This would eliminate healthcare for a large group of poor people.

When I listen to Ryan and think about what he is proposing, it is pretty clear that the only people who would benefit are those who are wealthy (lower taxes) and congressmen who already have gold-plated healthcare.

Healthcare and Coal Mining Employment

Published / by stevec

I don’t know why I try to write posts. All I have to do is read Krugman and add links to his posts. Here are are two of the latest (coal mining employment has been on my to-do list. Krugman beat me to it – he is the man):

The Republican Replacement for the Affordable Care Act

Let’s Fix The Coal Mining Employment Problem

 

 

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It Is Not Just About Trump’s Inadequacies

Published / by stevec

Here is more from my favorite Keynesian, Paul Krugman:

It goes without saying that Donald Trump is the least qualified individual, temperamentally or intellectually, ever installed in the White House…

But the broader Republican quagmire — the party’s failure so far to make significant progress toward any of its policy promises — isn’t just about Mr. Trump’s inadequacies. The whole party, it turns out, has been faking it for years. Its leaders’ rhetoric was empty; they have no idea how to turn their slogans into actual legislation, because they’ve never bothered to understand how anything important works.

Take the two lead items in the congressional G.O.P.’s agenda: undoing the Affordable Care Act and reforming corporate taxes. In each case Republicans seem utterly shocked to find themselves facing reality.

Read the full New York Times  op-ed by Krugman

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More Popular Than Trump

Published / by stevec

What is more popular than trump? Watch this video from UltraVilolet:

From  UltraViolet via Facebook

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Trump’s Speech To Congress

Published / by stevec

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Long on rhetoric short on specifics. The speech was clearly scripted. Looking more “presidential” but just a few hours earlier signing an executive order to gut clean water rules.

I watched this on public television. The talking heads there, sans one, gave Trump a thumbs up for it being a good speech. They must have had a special hearing filter. It is revealing to watch the speech with the sound turned off. The body language is revealing. Another source of straight information is tweets by Nicholas Kristof, My Take on Trump’s Address to Congress.

The Trump agenda is a disaster. He is going to kill people with heath care changes, the economy is going to suffer with his trade war and anti-immigration policies, the budget deficit is going to explode, and his national security and diplomacy actions are truly scary.

The Republicans support of Trump shows just how little Republicans care about the economy and our democracy. Their statesmanship is nonexistent.

Krugman Links – Updated Feb 4

Published / by stevec

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Donald the Menace Feb 3

Building a Wall of Ignorance Jan 31

Making The Rust Belt Rustier Jan 27

Border Tax Two-Step Jan 27

Reagan, Trump, and Manufacturing Jan 25

The Opposite of Carnage Jan 21

 

 

 

 

Trump’s Voodoo Economics

Published / by stevec

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Lets see: reduce taxes at all levels and for corporations; increase defense and infrastructure spending. Where is the money going to come from? According to “The only way he can square higher infrastructure and defense spending with tax cuts is voodoo economics.”

Both Reagan and George W Bush tried tax cuts without reducing spending. Neither turned out well. Trickle down economics did not work. They both blew up the deficit.

Here are the facts.

  1. We have a progressive tax system where the upper class shares a large part of the federal tax burden. Reducing tax rates will reduce tax revenues.
  2. We have few degrees of freedom for reducing spending considering that over 70 percent of federal revenue goes to defense, benefits for federal employees and veterans, social security, and Medicare and Medicaid. Much of this 70+ percent is non-discretionary.
  3. In the current economic environment lowering taxes will have little positive impact on economic growth. Further because  of 1 and 2 it surely will increase the deficit.

Our Progressive Tax System

The Tax Policy Center (Urban Institute and Brookings) provides detailed statistics the on US tax burden. The average effective tax rates of the “Expanded Cash Income Group” is very progressive with an average rate of 20 Percent for all groups and the top 1% and 0.1% paying 33 and 35 percent respectively. The Individual Income tax and Corporate Income tax are also progressive. The Payroll tax is not.

Where the Tax Money Goes

The Tax Policy Center reported that “In fiscal year (FY) 2014, about 60 percent of federal spending paid for programs not subject to regular budget review, while just over a third covered discretionary programs for which Congress must regularly appropriate funds. Less than a tenth went for interest on government debt.”

Mandatory spending covers outlays that are controlled by laws other than appropriations acts. Almost all such spending is for “entitlements,”  Discretionary spending covers programs that require appropriations by Congress.  Defense accounts for 50 percent of discretionary spending and Domestic accounts for 46 percent.

The Center on Budget and Policy Priorities provides detailed statistics on where our federal tax dollars go. A picture is worth a thousand words.

 

Government Spending, Tax Rates and Economic Growth

Here the Trump policy folks need to learn some John Menard Keynes. There are times when increased government spending and reduced taxes are good. There are times when they are bad. See Krugman for a formal model and explanation. The Great Depression and 2008 were periods where government stimulus was badly needed (lots of unemployment and lack of demand where private firms were not increasing production in response to essentially zero cost of borrowing).

2017 is no such a period. We are now near full employment. Increased spending and lowering taxes will not be offset by increased growth. Resources are already nearly fully employed. In the near term it is likely that significant government fiscal expansion might provide needed infrastructure but at a cost of increased debt and perhaps inflation.

Longer term I do not see anything in the Trump plans that invest in domestic productivity. For that we need to grow human capital. Our history teaches us that immigration and education are keys to productivity and economic growth.

In Summary

The economic outlook is not great. The inmates are running the institution. They want quick fixes, instant gratification and lower taxes for their rich friends. They want to appear to be doing something positive when in fact their actions will be negative. The deficit is going to grow and  it is likely that prices are going to rise.

All of this is going to be made worse by Trump’s move away from globalization — closing our borders and imposing tariffs and the potential resulting trade wars with our neighbors, Canada and Mexico, with China and with Western Europe.

 

 

 

 

Trump and Manufacturing Employment

Published / by stevec

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If you think that Trump’s actions, to keep manufacturing in the US, are going to have a significant impact on manufacturing employment, don’t hold your breath. If you think these actions will help the economy you are wrong.

The reasons are twofold:  structural change in manufacturing processes worldwide and the negative impacts of tariffs and the resulting trade wars.

Structural Change

Manufacturing employment is falling worldwide. This is due to robotics and automation. See Bloomberg: Why Factory Jobs Are Shrinking Everywhere. Also see Slate : Nothing Will Bring Back Manufacturing Employment.

So Trump keeps a few plants from moving offshore and saves a few domestic jobs. But, because these plants are mostly automated, employment is not affected very much. Further it is likely that their production is no more efficient and perhaps less efficient than than if the plants were moved overseas:

Costs are one of the main reason for moving a factory offshore. But if it is cheaper here owners keep it here. This is born-out by the Bloomberg article which reports that “the U.S. has become the second-most-competitive manufacturing location among the 25 largest manufacturing exporters worldwide.” This is good news but there is bad news. Since 1970 employees working in manufacturing have fallen from more than a quarter to one in 10 and these jobs are not coming back. Automation is not going away.

Tariffs & Trade Wars

In addition to structural change in manufacturing, imposing tariffs on foreign production in order to protect domestic industries and motivate companies to produce in the US has serious short and long run consequence: The tariffs potentially result in trade wars that according to Krugman disrupt the existing economic structure, which is built on elaborate international supply chains.

…In the long run, a new structure with shorter chains would be built. But in the meantime, some industries, some factories, would end up becoming sudden losers — in the US as well as in developing countries.

The Bottom Line

The Trump policies will have minimal effects on employment and will surely reduce economic growth. They are in fact Fake Policy. It would be far more productive to focus on how to retrain and reemploy the workers who have been moved out of manufacturing because of the automation that is occurring here and worldwide.