Sunday, December 30, 2012

The Times on Taxes

The New York Times' Sunday lead editorial (12/30) is simply breathtaking. The title is "Why the economy needs tax reform." It starts well,
Over the next four years, tax reform, done right, could be a cure for much of what ails the economy...
OK, say I, the sun is out, the birds are chirping, my coffee is hot, and for once I'm going to read a sensible editorial from the Times, pointing out what we all agree on, that our tax system is horrendously chaotic, corrupt, and badly in need of reform. Let's go -- lower marginal rates, broaden the base, simplify the code.

That mood lasts all of one sentence.
Higher taxes,...
Words matter. "Reform" twice, followed by paragraphs of "higher taxes," with no actual "reform" in sight. The Times is embarking on an Orwellian mission to appropriate the word "reform" to mean "higher taxes" not "fix the system."

Let's be specific. What is the Times' idea of tax "reform?"

tax capital gains at the same rates as ordinary income.... a restoration of the estate tax, higher tax rates or surcharges on multimillion-dollar incomes, and higher corporate taxes..
That's just to get started. Since, as the Times refreshingly admits,
..the new revenue would only slow the growth of the debt in the near term..
before the health care entitlement deluge hits,
... Mr. Obama would be wise to instruct the Treasury Department to start work on tax reform now, exploring carbon taxes, both to raise revenue and to protect the environment; a value-added tax,... and a financial transactions tax...
That's "reform?"

What will all those taxes do? The Times has a little bit of deficit reduction on its mind,
 More revenue would also reduce budget deficits, helping to put the nation’s finances on a stable path.
But with "reduce," "help," and "stable path," you can tell that eliminating deficits and paying off the debt are not a real high priority here. The Times has bigger fish to fry, starting with a red herring and ending with a red whale.
Higher taxes, raised progressively, could encourage growth by helping to pay for long-neglected public investment in education, infrastructure and basic research...
We've been spending more and more on education for years. While performance steadily declines. The trouble with schools is not lack of money.

Yes, infrastructure is crumbling, as a few New Yorkers may have figured out when their power went off, while their politicians -- and the Times -- instead of talking about burying electric lines and putting in a modern grid, wished instead to stem the rise of oceans and sugar in their soft drinks. But infrastructure spending is a tiny component of the Federal budget; we could support anyone's wish list without a Federal income tax.  Basic research spending could be doubled on about 10 minutes worth of Federal spending. Red herring.

The whale comes last:
Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge. 
The Times is arguing forthrightly for confiscatory taxation of income and wealth, in order simply to  reduce post-tax incomes. This isn't "redistribution," it's "off with their heads!"

Inequality of opportunity? No, President Obama's kids should not go to Sidwell Friends, they should go to DC public schools like everyone else?  Mayor Rahm Emanuel's kids shouldn't go to the University of Chicago Lab school (mine go there too, but I don't preach this stuff), they should have to go to Chicago public schools like everyone else? These are "economic and social advantages" arising from unequal income. Big ones, that motivate a lot of parents to work hard so they can afford the tuition.  French President Francois Hollande has a better idea: ban homework, so kids with smart parents can't get an advantage because they get help on homework. Too bad you can't ban homework in China and India. No concierge medicine either. Stand in line for medicaid like the rest of us.

And to accomplish this leveling, we'll just take money from "the rich" until all are equally impoverished.

Am I being alarmist? No. Read the sentence again, carefully. Words matter. What else can it possibly mean?

It's just astounding. When has a society ever grown, become prosperous, and raised opportunities for its citizens--of any background--by confiscatory taxation, transferring wealth to the State, with the deliberate aim of reducing the opportunities of a segment of its population? The examples I can think of -- French and Russian revolutions, the whole communist world -- ended rather badly.  Even more modest attempts, say postwar Britain, do not augur well. The evidence of Europe's current high-tax "austerity" (another word Orwellianly appropriated to mean "high taxes") and the weight of academic research (most recently from the IMF and Alberto Alesina) stand before us: Fiscal retrenchment led by higher marginal tax rates simply does not work.

Moving from outcome to opportunity, as the Times does, when has a society ever accomplished equal and plentiful opportunities by confiscatory taxation and heavy regulation? I can think of lots of societies that by these means became much less equal, with opportunity dependent on political and family connections, and thus out of reach of even the most talented and industrious people without connections. 

What of us naysayers? On taxing "capital gains at the same rate as ordinary income,"  
That is an indefensible giveaway to the richest Americans. Research shows that the tax breaks do not add to economic growth but do contribute to inequality. Currently, the top 1 percent of taxpayers receive more than 70 percent of all capital gains, while the bottom 80 percent receive only 6 percent.
Three more fish and a whopper.

We might start with the interesting assertion that any tax rate is a "giveaway." Who gives what to whom, dear Times?

"Research shows" is another fascinating choice of words.  "Research shows" means "all research shows," or "the consensus of research shows," without actually saying it. The facts are "some research shows," or in this case, really, "two unpublished papers we found on the web claim."

The links point to a report by the Congressional Research service and a one-page screed from the Urban Institute.  Both pieces of "research" simply plot the usual pointless correlations ignoring the hundreds of other causes, effects, and things not held constant. Aspirin causes colds you know: Look, there is a strong correlation between asprin-taking and colds. Neither one is even submitted let alone published in a refereed journal, which is no guarantee of anything but at least it's the minimum standard for "research." If this were indeed what constitutes "research,"  and "science,"  vast new funding for fundamental research in economics might well be warranted.

Fortunately, that is not the case.  What real research concludes, as much as anything in economics concludes, is that capital gains taxes are about the easiest to avoid (see Buffett, Warren).  Real research shows that when capital gains rates were reduced in the 1980s, revenue increased. Real public finance, the rest of the world's tax systems, and the broad conclusion of just about everybody until the world lost its head in 2008, was that capital gains taxation is a bad idea.

And the whale: "Receive" capital gains? Dear Times, capital gains are not a check sent by great-grandma's trust fund. Let me educate you on where capital gains come from: People work, and earn money, and pay taxes on that money.  Rather than blow it all stimulating consumption demand, they save some of it, invest in stocks, or start businesses. When those investments pay off, they sell, and receive capital gains. A vast swath of retirees lives off capital gains, especially from their houses.Small business owners are "high income" in the one year they sell their businesses.

Words matter, again. "Receive" paints capital gains as passive receipts form a mysterious ill-gotten mountain of gold, ripe for plucking with neither tax avoidance, behavioral change, or economic consequence. That's just not how our world works, but very revealing of the Times' zero-sum, class-warfare worldview.

What about 
...higher corporate taxes..
Once again, one of the few things real "research shows," and  economists agree on pretty heartily, is that corporate taxation -- already higher in the US than the rest of the world -- is a silly idea. All corporate taxes are passed on to people, through higher prices, lower wages, or lower returns to investors, primarily the former two. Tax people when they get the money. And corporations are much better at evasion, lobbying, moving abroad, and structuring operation in silly ways to avoid taxes.

The value added tax -- the economist's favorite, if coupled with elimination of other taxes -- is famously "regressive," the modern term (here are those important little words again) for "everybody pays the same rate."  Value added is, in Europe (along with 30-40% payroll taxes) the middle class tax that pays for middle class benefits. What about that, dear Times?
a value-added tax, coupled with provisions to protect lower-income taxpayers from higher prices, to tax consumption and encourage saving;
This is just incoherent. If you're "protected from higher prices," you're not paying the tax. If we couple the VAT with a vast new income transfer program, adieu revenues.

At least we close with some humor. The VAT is there to encourage saving, while heavy taxation of interest, dividends, capital gains and estates, says just the opposite.

What about spending?
The big obstacle to comprehensive tax reform is the persistent Republican myth that spending cuts alone can achieve economic and budget goals. That notion was sounded rejected by voters during the election. Yet it still has adherents among many Republicans, which will make it that much harder for Congress to grapple with the bigger and more complex issue at the heart of tax reform: how to pay for government in the 21st century.

....All that [long list of taxes] would only be a start, because the new revenue would only slow the growth of the debt in the near term. After 10 years, the pressures of an aging population and health care costs would cause the debt to accelerate again.
Oh those evil Republicans, standing against "reform," and reusing to grapple with "how to pay for government." The size and scope of which is not under discussion. No, dear Times, it's not "the pressures of  an aging population and health care costs." It is the Federal Government's promises to pay for it all. Which are, apparently, fixed stars.

Technical regress in any area is sad. Once upon a time, when we talked about taxes, there was a modicum of economics involved. When we thought about raising or lowering a rate, we thought seriously about the inevitable avoidance and distortions.  The first question was, "if we pass this law, will x actually pay more money, or will he simply change behavior to avoid the tax?" The second question was, "will his change in behavior hurt the economy?" Before we talk about what's "fair" we talked about "what works."

And we knew the sign of the answer: distorting taxation raises less revenue than you think, and reduces economic prosperity. The only question is how much. We did not indulge in magical thinking that appropriating anyone's income would actually improve the economy, all on its own. We understood the damage, and tried to carefully balance the benefits of spending against that damage. This is how we got, for a while, to low marginal rates with a broad base (the latter since loopholed away), low capital gains, estate, and corporate taxes, and were headed messily towards a system that taxed consumption more than rates of return. 

As one glorious counterexample of all the Times' monstrous confusions:
a financial transactions tax, to ensure that the financial sector, whose profits have substantially outpaced those of nonfinancial corporations, pay a fair share
A transactions tax is the easiest thing in the world to avoid with financial engineering.  How do you begin to figure out the "fair share" that financial vs nonfinancial corporations should pay? How about mutual funds whose beneficiaries are impoverished union schoolteachers? 

Orwellian language, blatant mistruths, and magical thinking aside, however, I want to applaud this editorial. No, I'm not kidding.

The Times is saying, out loud, that if we are to have the regulatory and welfare state we have enacted, it must be paid for with huge middle class taxes, as well as confiscatory taxes on anyone who dares to save, invest, or start a business. This is refreshing honesty. Up until about November 3, all we heard from them is that reversing the Bush tax cuts on the rich would pay for it all. At least a few of its readers may wake up and say, "wait, we voted for this?"

Really, my main complaint is that they left out the "if," and its logical consequence, and any doubts that raising tax rates so massively might not produce the needed long-run revenue growth they hope for.

It is a mistake to dismiss this clear editorial. This isn't the Village voice, or the Berkeley Free Press. This is the New York Times. This is how a wide swath of our fellow citizens, and majority of our fellow voters, see the world.   This is the agenda. They could not have been clearer if they had said "first we annex Austria and move against Czechoslovakia. Then we invade Poland and swing North and West." Heed them.


  1. Why is it that a VAT will encourage savings, while higher capital gains taxes will not do the opposite?

    1. A VAT is a tax on consumption but a capital gains tax is a tax on saving.

    2. A VAT is a tax on adding value to goods. The more stages of production that raw materials go through to reach their final state of production, the more the final good is taxed. For instance a motor vehicle or an airplane would be taxed more heavily than a gallon of milk. A value added tax is not a tax on consumption. It is a tax on the purchase of any good irrespective of what stage that good is at.

      For instance, raw steel may be formed into steel pipe or sheet metal as an intermediate good. That sheet steel or pipe is then sold to make finished goods. The intermediate good is taxed when it is sold and then the finished good is taxed after that.

      Likewise, a capital gains tax (as currently legislated) is not a tax on saving. It is a tax on the sale of a capital good when the sale price of the good exceeds the purchase price of the good. A capital gains tax is a tax on gains made from buying and reselling capital goods. For a capital gains tax to be an actual tax on savings and investment it would need to be assessed on unrealized gains. Otherwise it is just like any other income tax.

    3. A good thing about VAT is that it is hard to evade. In a country where tax evasion is a problem, VAT could be a stable source of revenue. In Germany they have a 19% VAT, in Poland 24%. It is not a progressive tax, though, so it hits the poor hard. This can be remedied, however, with tax credits or exemptions.

    4. Frank...

      So a tax on the purchase of a good is not a consumption tax and a tax on the return to saving is not a tax on saving? With economic analysis like this it is no wonder the economy is a mess.

    5. TX_ECNMST

      "According to mainstream economists, only the FINAL purchase of goods and services by individuals constitutes consumption, while other types of expenditure — in particular, fixed investment, intermediate consumption, and government spending — are placed in separate categories (See consumer choice)."

      A tax on the realized returns to saving and investment is not the same as a tax on saving and investment itself simply because

      1. The owner of the savings / investment vehicle can sell at his / her discretion (most of the time - see distressed selling for over leveraged investors)
      2. The tax code cuts both ways - gains are taxed but losses in part are deductible

      I am not sure what economic school of thought you are coming from and so if you stipulate there should be no capital gains tax I would counter that there should be no leveraged buyers of capital goods. Neither is a workable solution for reasons that should be obvious.

    6. Under the system of a VAT a gallon of milk is taxed more than an airplane because a gallon of milk costs $5 and an aiplane costs $5million.

      Yes, a VAT is a tax on added value, at each step of the way. The hay famer adds value as he turns hay seed into hay. And, the dairy farmer buys the hay and adds value in turning into milk (with the help of a cow). And the marketer adds value turning one large container of milk at the dairy to many gallon and half gallon contianers of milk at the store. The price of the milk reflects the total value added. The VAT could be collected at each stage, but every coutry that has implemented a VAT has charged it at the time of final sale.

    7. Anonymous:

      "VAT that is charged by a business and paid by its customers is known as output VAT (that is, VAT on its output supplies). VAT that is paid by a business to other businesses on the supplies that it receives is known as input VAT (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable outputs. Input VAT is recovered by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government."

    8. Frank:

      It's the difference between knowing the definition of a consumption tax (or VAT or anything else you can look up on wikipedia) and understanding the implications of the tax. The latter doesn't require my adherence to any school of thought.

  2. the hungerford paper is more than that, it is a somewhat championed paper by the democrats because congress had it retracted. it has been mentioned at least once in the comments section here and even krugman had a post on it:

    i emailed mr hungerford about one of his regressions and his defense was that he tried many other regressions and none of them came out the other looks like an honest but incompetent attempt

    my favorite part of the paper is that the charts are all in levels while the regressions are in differences.

  3. Godwin's Law operated pretty quickly that time. We did not even have to wait for the comments. :-)

    America was not reduced to a howling post apocalyptic wasteland by the Clinton tax increases. The wealthy were not reduced to indentured servitude. As I recall those years were rather pleasant for almost everyone. Others may have different memories.

    You say: "All corporate taxes are passed on to people, through higher prices, lower wages, or lower returns to investors, primarily the former two." If you believe that (and I accept that you do), then you will accept that corporate taxes are "primarily" a mechanism to collect taxes from workers and consumers and if that is the case then why not accept a democratic decision that that mechanism be used.

    If I were in charge of tax reform my priorities would be:
    1) close review of transfer pricing on international transactions
    2) elimination of tax schemes like Double Irish and Dutch Sandwich
    3) recognition that "carried interest" is income, not capital gains
    4) close review of the impact of derivatives on income reporting in the United States.

    1. "why not accept a democratic decision that that mechanism be used"

      The mechanism is very inefficient and distorts decisions more than a more direct tax.

      Your tax reforms are not a bad start but are just eliminating special treatment for some taxpayers. Why not scrap it all and create a rational tax code along the lines suggested in this blog, for example?

      It seems to me that economists on the left downplay the importance of the distortions that arise from all of the special provisions in the tax code, or regulations or any other government involvements in the economy.

    2. Those glorious Clinton years some are recalling as the glory years when high tax rates caused economic growth, the rest of us are remembering as the internet bubble- a unique and unsustainable period of growth.

    3. "The mechanism is very inefficient and distorts decisions more than a more direct tax."

      I doubt that. What more direct taxes do you propose?

      "Why not scrap it all and create a rational tax code along the lines suggested in this blog, for example?"

      I do not think that Professor Cochrane has laid out the principles of a tax code he would consider "rational". In this current post he advocates eliminating capital gains taxes, a suggestion I disagree with, and does not appear to make any other proposals for reforms he would like to see. On this blog generally, Professor Cochrane appears to advocate lower taxes generally and much lower government spending.

    4. "apocalyptic wasteland by the Clinton tax increases."

      A return to Clinton tax rates are a small minority of what's called for here by the NYT: VAT,carbon taxes, on and on. I think you know this, and misdirect intentionally by summarizing it all as "Clinton tax rates". If the NYT can fabricate why not you too.

    5. The 1993 Clinton Tax Increase Did Not Lead to the Budget Surpluses of the Late 1990s
      02/10/11 by Daniel Mitchel  [edited]
      === ===
      Proponents of higher taxes claim that Bill Clinton’s 1993 tax increase was a big success, citing budget surpluses that began in 1998.

      This is not supported by the data. In February of 1995, 18 months after the 1993 tax increase, President Clinton’s Office of Management and Budget projected deficits for the next five years under existing policy (a “baseline” forecast). OMB estimated that future deficits would be about $200 billion and would slightly increase over 5 years. The Clinton Administration admitted that it did not expect a budget surplus, with numbers in agrement to the OMB.

      Why was there a surplus in the late 1990s? The OMB's Historical Tables reveal that this was the result of genuine fiscal restraint. Total government spending increased by just 2.9% over a four-year period in the mid-1990s. This restraint produced the surprise of big budget surpluses.

      In addition, [a Republican controlled] Congress and the White House agreed on a fairly substantial tax cut in 1997.
      === ===

      So, tax increases didn't work as expected, but spending restraint, debt reduction, and a tax cut produced a surprise surplus and increased prosperity. So, by all means, let's follow Clinton's actual history: limit spending increases to .75% yearly, and cut taxes.

      Clinton's tax remark
      === ===
      10/19/95 - New York Times
      Speaking at a campaign fund raiser in Houston, Mr. Clinton said: "Probably there are people in this room still mad at me at that budget because you think I raised your taxes too much. It might surprise you to know that I think I raised them too much, too."
      === ===

  4. I am still baffled as to why capitol gains (and dividends) should be taxed at a lower rate than other forms of income.

    I would like to see a tax system with no deductions at all and with all sources of income taxed at the same rate.

    Why wouldn't that work? I realize it is not politically feasible, but at least it is a worthy goal.

    1. The argument for reduced taxes on capital gains that I accept is that capital gains include an element of inflation and pure inflationary gains should not be taxed. The problem of inflation could be dealt with by factoring out inflation (using whatever inflation measure is being used for social security) from the gain and taxing the rest as income or by making some other allowance for inflation tied to how long the investment has been held.

      The argument on dividends is that they represent corporate income that has already been taxed in the hands of the corporation. There is some merit in the view that taxing dividends as ordinary income would constitute double taxation. Canada has moved to a system of taxing dividends where they try to make the after tax position of the taxpaying recipient the same as it would be if the original corporate income had been earned directly by the taxpayer and taxed at the taxpayer's tax rate for ordinary income.

    2. Investment is an important component of economic growth. Taxing capital lowers investment and lowers growth. Taxing labor income distorts the decision to work but also distorts the decision to invest in human capital which may also lower growth. The most efficient tax (ignoring lump sum taxes), in terms of creating the least distortions, is a consumption tax.

    3. Matt,
      This video may be helpful:

    4. I feel much the same way. I'd like a tax form that says

      1. How much did you make last year?
      2. Multiply by [insert % here]
      3. Pay this amount.

      No incentives, no favors, no picking winners and losers. IOW, no tax-induced distortions.

      I'd go for replacing it with a VAT but with almost half the country paying no federal income tax you'd effectively be placing a new tax burden on the lowest earners (and also some of the highest, like GE). Demographically it ain't gonna happen.

    5. The reason capital gains taxes are a bad idea is that they treat similarly situated people (whether rich or poor) differently based on whether or not they save. If you and I both make $200k per year, and you save half, while I blow it all in high living, the net present value of my consumption is higher than yours, other things equal. In other words, savers are taxes more than similarly situated spendthrifts.

      We should tax WAGES and/or CONSUMPTION (in the long run, they are necessarily equal), with zero taxes on capital, including taxes on cap gains, dividends, corporate income, etc.

    6. There 6 arguments that I can think of for the differential treatment of earned income and capital gains.

      1. In a system of annual graduated rates, capital gains, which represent income deriving over long periods, will be taxed at a higher rate than they would have been if they had been spread out. This argument had more force in the pre-Reagan era when rates went as high as 92%

      2. Capital gains are income with no limit, but capital losses in excess of capital gains can only be deducted up to a maximum of $3,000, a number that has not changed in a very long time.

      This asymmetry in treatment of losses and gains would be totally unacceptable if it were not for the favorable treatment of gains.

      3. The constitution authorizes Congress to tax income. It does not authorize Congress to tax capital. Furthermore, taxing capital is eating the seed corn. Always a bad idea. admittedly, there is boundary line issue between income and capital. A day trader in stocks has no particular claim that his gains are capital. They are the rewards of his labors, the very definition of income. At the same time, and by the same token, a man who builds a business over a lifetime of hard work has created capital. Distinctions need to be made and lines need to be drawn, but the first example does not justify taxing the second.

      4. The system of taxation provides no adjustment for inflation. The capital gains tax was not invented to mitigate that issue. It arose at a time when the US used a constitutional currency and inflation was not a major problem. But, it does mitigate the impact of inflation.

      We bought our house for $300,000 in 1986 when the CPI was 110. If we sold it today for $900,000 while the CPI is 230. we would have a gain of $600,000 in raw numbers, but it would be an economic gain of only $273,000. Paying tax at the lower rate mitigates the lack of an adjustment for inflation.

      5. The system of corporate taxation is based on a illusion that corporations are persons apart from their owners and managers. Thus if a corporation makes $1 of taxable income, it keeps $0.65. If it pays the $1 dividend in when there is no preference for dividends, the stockholder gets to keep $0.42. The lower rates for dividends and for capital gains mitigate the over-taxation of corporate profits.

      6. Capital gains are usually optional. Property owners can hold their property instead of selling it. Taxing capital gains at high rates will discourage owners from selling and reduce revenue. Lowering capital gains rates encourages sales and increases revenues.

      I am sure there a couple of other arguments, and that they will come to me after I hit the publish button.

    7. Sam gives a great explanation. Just to state it another way, investment income has already been effectively taxed at the ordinary income rate. In order to earn investment income, I have to earn ordinary income first and then invest it. When my ordinary income is taxed, that limits the quantity I am able to invest and commensurately reduces my investment income.

      Think about it numerically: if I earn $100 in year 1, save it all, and earn 10% annual interest, I have $110 in year 2. If a 20% tax on ordinary income is introduced, I save $80 in year 1 and have $88 in year 2, or exactly 80% of what I had before the tax. Taxing my interest income at 20%, in addition to my ordinary income, would have left me with only $86.40, or 78.5% of what I had before the tax. The 20% tax in the latter scenario really amounts to a 21.5% tax.

      Like Sam said, you can contrast this with someone who doesn't save at all and see that they are indifferent to the tax on interest income; they face a 20% effective tax rate under both scenarios. The tax on interest income penalizes the saver, and is therefore likely to discourage saving.

    8. The problem with not taxing capitol gains and dividends is that wealthier people who can afford to defer income can escape taxation completely.

    9. "The problem with not taxing capitol gains and dividends is that wealthier people who can afford to defer income can escape taxation completely."

      Matt, did you not read anonymous's comment? They don't escape taxes. Taxes on investment income introduce an additional burden that discourages investment and encourages consumption.

      If we in this country worried less about hosing people who are successful and instead encouraged everyone to follow their lead, we would be a far happier and more prosperous nation. Fretting about how to take from other people is no way to live a life.

  5. The entitlement society will now never be stopped.

    The American economic pie is doomed to grow at only a fraction of the new global economic powers - all of which are embracing capitalism more than Obama America. Obama will focus on dividing a shrinking pie, that is shrinking due to his policies.

    Perhaps these socialist changes are inevitable for all societies, as they decay from political and moral sloth, but it's very sad to see for America.

    1. You are right. The welfare state cannot be stopped. The reason for its emergence is democracy. The only way to stop it is to prevent the middle class and the poor from voting. An attempt to convince the majority of people to vote against their own economic interests failed last November. Attempts to disenfranchise some voters failed as well. So taxes are going up. But the historically low taxes have failed to deliver the prosperity their advocates had promised and instead delivered the Great Recession. On the other hand, when Government seized control over the economy in the 1940s, Japan and Germany were beaten, almost full employment was achieved, taxes were raised, prosperity lasted until 1970s, and Maynard Keynes was watching.

    2. The reason for its emergence is democracy.

      Even more sadly, the United States is not supposed to be a democracy. Democracy was never the goal of the founders who understood that it's pure mob rule. Democracy was the goal of the Communist Manifesto. Oh, well. America was nice while it lasted.

    3. Pathetic, this stupid socialist pines for the days of total government control and a war economy. High taxes, big government, lots of wasteful spending, big deficits, increasing regulations, Sure that's the path to prosperity.

    4. You are missing my point. The point I am making is that the economy is primarily demand-driven. Using the war as an excuse to seize the control of the economy, Government engaged im massive wealth redistribution, but not because of ideological reasons, but to increase demand. Increased demand led to increased supply and robust growth (people had money to buy stuff). New regulations prevented any aggregate demand shocks like we had in 2008. Socialism would mean seizing the means of production like, say, nationalizing Apple. I don't want that, because history shows that it had failed in several countries.

    5. "But the historically low taxes have failed to deliver the prosperity their advocates had promised and instead delivered the Great Recession."

      Historically low taxes? That certainly depends on your historical timeline. It also depends on your views on what various tax rates delivered in terms of prosperity.

      Do you want to go back to the 70% top marginal rate of the 1970s? You'll also have to accept the 70s economy.

      My guess is that you're talking about the dreamy economy of the 1990s with its 39.6% top marginal rate. Well, come on now, that's hardly different than our current top rate. It's certainly not different enough for you, or anyone, to make claims about what such a small difference will do to a $15 trillion economy.

      My idea of reasonable historical rates is from the pre-1913 years...when the top marginal rate in the US We seemed to have pretty good growth in some of those years. If you insist, I'd probably accept the 1913-1915 rates (top marginal rate of 7%).

      The idea that income should be taxed, when nearly everyone agrees that taxes reduce whatever is being taxed, is crazy. Which is why nobody should be surprised that most governments love taxing income.

    6. "You are missing my point. The point I am making is that the economy is primarily demand-driven."

      Oh, the tired old Keynesian underconsumptionist meme married to an argument that intent makes all the difference. So, your argument is nonsense wrapped in utter nonsense.

    7. The economy is NOT demand driven. Demand is a constant. Humans always want more of everything. What interferes with demand is fear, uncertainty, lack of money, lack of credit, lack of jobs.

      Growth is caused by business investment. When that happens it gives people cash and jobs, and it send other signals that things are getting better, so that they spend more.

      That is the core of everything that is wrong with your economics. you have the cause and effect backwards.

    8. By demand I mean the actual willingness AND ability to buy things. I think your definition of demand is different. You define demand something like a desire to own stuff. I agree that, based on your definition, demand would be approximately constant. But economists don't define demand this way (ask John). For example, I would like to buy a beach house in Hawaii. Well, I cannot afford it. So I cannot increase demand for beach houses in Hawaii. I pulled up a definition of demand from Wikipedia: "In economics, demand is an economic principle that describes a consumer's desire and willingness to pay a price for a specific good or service." To be willing to pay a given price for something I want, I have to have. enough money (or credit). Without demand, investors will not produce stuff. If you own a business, you can prosper only if your customers have money to buy your products or services.

    9. Without demand, investors will not produce stuff.

      This is where you begin to make mistakes. Your production is an expression of your demand. In order to consume, you must produce something that can be exchanged for the the things you desire. See: Say's Law.

      If you own a business, you can prosper only if your customers have money to buy your products or services.

      Incorrect. You can prosper only if you produce the things your customers are willing to make the necessary trade-offs to acquire. Your customers will always be constrained by scarcity and will always be forced to make trade-offs.

    10. I do not disagree with your definition, that is the standard economic definition of demand. What I am saying is that it is a wrong and unhelpful way of looking at it. Again, demand follows investment. People have to have a feeling that things are improving and have to have money in their pockets before making big purchases.

      It is business investment that is the engine of growth, not demand. Demand is a symptom, a lagging indicator. Uncertainty, like the type perpetuated by the current Fed policy, and Fiscal policy is what destroys business investment, that and costly regulations and taxes.

  6. Dear Prof. Cochrane:

    For a very long time, I too was upset by editorials in the NYTimes, even the ones that were labeled as such.

    Last month, in the wake of the election, I needed to reduce my stress level. I cancelled my subscriptions to the NYTimes and the Wall Street Journal.

    Not only is my stress level down, but I have saved $1,000/yr and 2 hrs/day.

    I have gone back to my favorite activity reading history. I feel much better.

    Highly recommended.

    1. Many years ago I called NYT to cancel my subscription. The publication had plucked my last nerve. The customer service rep insisted on a reason. I politely told her I really didn't want to give her my reason and asked to please cancel it and that the reasons are personal and irrelevant. Despite my protestations, She haughtily insisted that I was obligated to give a reason or she couldn't cancel the subscription. So I told her the truth: I'd had my fill of communist propaganda in Pravda before I immigrated to the United States. She hung up on me without another word. But!....the subscriptions was canceled. Now, it seems I'll have to cancel my subscription to the United States next.

  7. “A great civilization is not conquered from without until it has destroyed itself within. The essential causes of Rome’s decline lay in her people, her morals, her class struggle, her failing trade, her bureaucratic despotism, her stifling taxes, her consuming wars.” Will Durant, "Caesar and Christ", Epilogue

    Check, check, check, check, check, and check.

    (I would add "currency debasement")

  8. Mitt Romney failed to articulate this message clearly. The public will respond to common sense arguments. Milton Friedman showed this. Romney offered blather and few specifics on policy. It is no surprise that he lost. Does this really imply that Obama and Democrats have won the "size of government" argument?

    A strong appetite for fiscal conservatism still exists among voters, in spite of how the NYT would like to paint things. Senate Republican candidates were hurt during the campaign on social issues, while House Republicans fared quite well. November was not a watershed moment. I believe a stronger Presidential candidate would have beaten Obama.

    1. "Mitt Romney failed to articulate this message clearly."

      The Romney campaign had hundreds of millions of dollars to spend on economists, pollsters, focus groups, speech writers and advertising. Romney is smart and articulate and had direct access to the media at will. What happened is that the campaign made strategic choices about how best to articulate the message.

      I suggest that a "clearer" articulation of the message would have gotten Romney an even lower percentage of the vote.

    2. All that $ and brainpower doesn't matter. What's lacking is Romney's personal inability to communicate. No money can fix that.

  9. The Criminal Mind
    08/20/10 - Richard Fernandez - A Comment by Tcobb [edited]
    === ===
    I met career criminals as a defense attorney.
    •   Although smart, they could not contemplate the future where they might be caught.
    •   The victims were always supposed to believe their lies. How dare the victims not believe?
    •   They believed that everything was somebody else’s fault.

    To what extent do the behavioral patterns of our current ruling class mirror that of career criminals?
    === ===

    The Political Dictionary: Liberal Economics
    === ===
    Money falls from heaven for everyone to use. But, the immoral and sneaky rich gather more than their share. The government's purpose is to redistribute the money the way God intended. Or, if you wish, the way Gaia, or the Tooth Fairy intended.

    Taxes remove the excess income of the rich and give it to the voting poor, through a fair and organized bureaucracy. The rich oppose this action by selfishly and spitefully decreasing employment. Government responds by increasing grants and spending, to boost employment. The government incurs a deficit while it discovers the secret formula for creating the jobs that the rich are hiding.
    === ===

    1. Job creating rich are being robbed blind by lazy workers, who constantly demand higher wages and vote themselves new benefits. The workers do not realize, that the benefits they receive, paid for by the job creators, make them more and more dependent on the Government. They should give up their unreasonable demands, and promptly agree to abolish Social Security, Medicare, Medicaid, unemployment insurance, public education, minimum wage, Pell grants, food stamps, welfare benefits, and housing assistance. Taxes should be cut on jobs creators and fund only defense, justice, Congress, and the Office of the President. The tax code should be regressive, rewarding job creators and penalizing regular workers. Those, who do not make more than $1,000,000 should not be allowed to vote or run for public office so they could not vote themselves benefits. Every citizen should be required by law to own and carry a firearm for self defense. Any country which passes the reforms outlined above is guaranteed to achieve rapid economic growth, low poverty, no unemployment, low crime rates, long life expectancy, and generally very happy, healthy, well educated, and prosperous society.

    2. This would be funny if it wasn't to an extent true.

      What is telling however is the compulsory gun ownership thing. Goes to show that to some of us, the only 2 options are prohibition and compulsion. Freedom is absent from that list.

  10. While I agree that no, we can't dismiss this editorial, I refuse to be hopeless.

    These views are held by large fraction of somewhat educated elite. No, they are not evil. They, like us, want themselves and their children to succeed, not at the expense of others, but on their own merit. Perhaps they are just mistaken about the sources of prosperity and confused about everything else.

    A relatively prosperous, upwardly mobile society can afford confusion and errors and fragmented education and bad judgement of the elite, so confusion and errors permeate during the good times. A society in crisis reasonably quickly demonstrates that bad policies and poor judgment lead to bad outcomes.

    They have what they think they want. Perhaps they will have more of it. That we all will have to cope with it is inevitable in democracy.

    We need not to despair but think.

    1. I do not share your optimism. It is pretty much lights out for the USA. If we are lucky we may achieve a slow and steady relative decline with stagnant growth and high unemployment. That is the BEST case scenario.

  11. The WW2 bit was not really necessary?

  12. You know, just the other day (December 26) I wrote the following (excerpted from more) in the comment section to this blog.

    “Of course, these taxes will not be enough because these "conspirators" have no real plan or even intent to cut back on spending. So, there will be a lot more sitting down and conspiring to figure out how taxes can be raised even more in yet another round. A number of people are now sitting down dreaming of how much more government we could have if only we could add a VAT on top of (not instead of) everything else and conspiring as to how that might be made possible. I think the same group is discussing new taxes on financial transactions, among many other things. These folks have even conspired to "educate" the public that all these new taxes are not only not bad for the economy, they will help the economy grow.

    I can’t help feeling a bit smug knowing in advance what those folks at the New York Times are “conspiring” about. It’s sad nonetheless.

    BTW, the editorial was published 12/30; not 11/30 as indicated in the first line of Cochrane's post. Which reminds me: Happy Fiscal Cliff!

  13. John, Great post as usual. In your first sentence, correct date to 12/30 from 11/30. Andrew

  14. If any of the policies so favoured by Pravda on the Hudson come to pass, the most talented and productive people in this country will face the same choices immigrants TO this country have faced in centuries past. With their potential constrained here, they will leave to find a place where it is less constrained. A brain drain not unfamiliar to other parts of the world immiserated by identical policies.

    Those who remain will not strain themselves in a forced toil to improve a stranger's lot. The very productive can maximize their income with far less sweat. And they will always be richer. Inequality does not disappear because money is by far not the only currency and in the socialist utopias so favoured by the dimwitted NYT staff. It is by far the most accessible and least important.

    You Americans will face your Communist Revolution in your own unique American way. Good luck with that. I used to be proud of my adopted country. Not only am I ashamed of it now, but I can't wait to leave.

    1. "With their potential constrained here, they will leave to find a place where it is less constrained. ... I used to be proud of my adopted country. Not only am I ashamed of it now, but I can't wait to leave."

      Good luck with that. Where are you going to go? Canada? Europe? Where do you say the opportunities are better and people are freer?

    2. I keep getting that question, but my answer is that it depends on what you're looking for, what business you want to be in and what's important to you. Sorry, but I don't have a pat answer. I can only answer that question for myself and I won't share that answer in a public forum.

      In the past, the U.S. used to be the freest place on earth in practically every way. Coming here was a no-brainer. Now, the U.S. has slipped steadily on the economic freedom index and it's not doing great on personal freedoms either (note FATCA, Patriot Act, etc.)

      Singapore, for one. Yeah, I know you can't smoke pot or chew gum there and the culture is more conformist, but you might be willing to trade that for economic freedom, very low taxes and a functional bureaucracy with a political body that doesn't fan the flames of envy. If Singapore is not for you, then try Switzerland, with its far more decentralized government and competing Cantons. Or New Zealand, or....the list grows.

      But, you can't actually believe that as the U.S. slides into (what I believe will be) a sclerosis worse than Europe's it will remain the best country to live in, do you? By definition, it won't. It is also, btw, a country almost as difficult and expensive to leave as the Soviet Union. Do it before you earn more than $114K/year or accumulate any assets.

    3. Estonia, Finland, Switzerland

  15. Good fun, but you missed one. In "greater progressivity would reduce rising income inequality, and with it, inequality of opportunity," the taxes are about outcomes, not opportunities. Opportunities, in fact, might be harder to find.

    1. Dave: Thanks for the comment. Yeah, the Times' idea that confiscatory taxation gives equality of "opportunity" is an interesting new idea in the chorus looking for reasons to defend more progressive taxation. I took them at their word, which sent me on the riff about the great inequality of opportunity presented by the horrible education to which most poor people are consigned. But maybe they had something else in mind.

    2. I think this argument isn't so new. I don't know if there will be fewer opportunities, but what does it matter if we have equality of opportunity if we will equalize outcomes via taxation anyway?

    3. John: taxation could in theory give greater equality of opportunity. It just depends on what the money raised is spent on. Do you deny that a Swedish child raised in a single mother household today has greater opportunities than a U.S. child raised in the same kind of household?

    4. But that's not what they said. Go read it. They did not say we should raise taxes in the most efficient manner and then spend it on "equality of opportunity" (leaving aside whether that even works.) They said that making the tax system more "progressive" -- taking money away from rich people -- is a good idea in and of itself.

    5. While forgotten, a principle and proper purpose of taxes is to reduce the income and property of classes of people so as to reduce their political and social power and influence. That is why taking money away from rich people is a good idea in and of itself.

      Second, progressive taxes offset rent seeking.

      Third, you keep talking about how bad education is for poor people. Since the rich spend more for education than the poor ----

    6. You actually think that high statutory rates, with an absurdly complex code and a swiss cheese of deductions, reduces abuses of political power and influence, and reduce rent seeking? Good luck with that one.

    7. John,
      I understand the marginal utility of income argument for a progressive tax system and wondered if this is the reason you believe a progressive tax is a good idea? I favor a flat tax with very low rates and few deductions, if any, so that everyone has some "skin in the game."
      Also, do you think we are in a political equilibrium of high taxes, increased government spending, and onerous regulation that will be difficult if not impossible to change?

  16. "Greater progressivity would reduce rising income inequality, and with it, inequality of opportunity that is both an economic and social scourge."

    If you asked the citizens of the US in 1930s if they would accept as a cost of today's standard of living, 1% of the population being fabulously more wealthy than the other 99%, but that all 100% will enjoy a standard of living fabulously better than that of the 1930s, I think most people would gladly accept.

    1. You are probably right about your hypothetical but it is unlikely that the hypothetical trade off you suggest existed or is necessary.

      The fabulous advances in the middle class standards of living happened before inequality exploded. As inequality grew after 1980, middle class incomes stagnated. The connection, if any, between stagnation and inequality will be the subject of differences of opinion but the concurrency is a matter of historical record.

      Given the very low risk free rate of return in the capital markets (the real risk free rate being currently negative) and the current excess corporate cash and bank reserves it is unlikely that we need to do anything to encourage the accumulation of capital (particularly passive capital) by the wealthy.

  17. The value-added tax it's a wonderful thing! You would like to have one if you ruled the country, seriously! - It's cost efficient to collect; you can change the rate pretty easily because, being quite egalitarian in a sense, it doesn't really concentrate benefits and costs to any particular constituency; it helps to blur the government's fiscal position in boom years; it can also provides some cover for the central bank to not achieve its inflation target - and, bonus on top of all that, you get to keep all the other revenue taxes! As a famous American once said, why so negative? :)

  18. Argentina today is exactly doing what the NYT said. You have to add inflation and black economy and you will have the hole picture. Is this USA´s future?

  19. A few weeks ago, a colleague pointed out a reference to the conclusion of the Congressional Research Service study to support his conclusion that "tax rates don't matter." I replied with the following comments.

    Not to be picky or technical, but the analysis from the Congressional Research Service seems to have some major shortcomings: the equations estimated for the private investment ratio and per capita gdp growth don't explain anything (the F tests suggest that), with the likely reason being that the independent tax variables are the changes in the tax rates, which = 0 for the vast majority of the observations. When your independent variabe doesn't change, mathematically it is very unlikely you can any identify any change in the dependent variable. Your regression is trivial. Additionally, the investment ratio regression misses probably the most significant explanatory variable: expected return or income (or cash flow) from the investment. Statistically, when a regression suffers from misspecification due to a missing relevant variable, all coefficient estimates are biased, meaning the expected value of your estimated coefficients don't equal the true, unknown value. Hence, the most one might be able to say is that the real coefficient isn't 0, i.e. they do have an effect. You just can't say whether it's positive or negative based on the given regression. So my conclusion is you can't say anything about the effect of tax rates on investment growth based on the study.

  20. I don't follow your argument. If you want to investigate how investment growth depends on tax rates, tax rates cannot be constant. In fact, we know that they fluctuated over the years (step-like changes). So there is a problem with your reasoning. While it is true that most of the time taxes were constant, when they changed, it was impuls-like change. So during the time period after the change, one can investigate the effects it had on, say, investment, GDP. It is like kicking a ball. The actual kick lasts perhaps a second, but the effect lasts longer.

  21. I just checked out NYT's advertising rates. Using their logic, with regards to 'tax reform', I must point out that because of the fundamental unfairness of their regressive advertizing rates, bigger wealthier companies (maybe even those 1% companies) are able acquire more exposure to the markets than my tiny start-up sole proprietorship. NYTs advertising rates should only be based on my ability to pay, say some industry-recognized advertizing budget rate of 5% of net revenue. No company, large or small, should have to pay more than 5% of their net revenue for advertising in the NYT. And all companies should be able to get the same size ad spread. Otherwise this advertising thing is simply unfair to little companies. I might even say that the purchase price of copy of the NYT ( I was going say "this fish wrapper, but am aiming at politeness) should be based on one's ability to pay, not on some arbitrary regressive purchase price heavily influenced by the NYT's established, unfairly balanced towards the 1% companies, arbitrary and capricious, advertising revenue. Tongue firmly in cheek, I wouldn't advertise in the NYT even if their full page ads were free. I wouldn't want many of their readers as my clients.


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