A Bit More on Humpty-Dumpty, Magic, and False Trade-Offs
Jason Furman believes I misread his post and Gene's. I don't believe I did. Gene labeled his tax proposal a "Flat Tax Incentive." The intellectual property right in this label clearly belongs to Robert Hall and Alvin Rabushka. If Gene didn't mean for readers to make the association to their Flat Tax he should have called his idea something else.
I freely grant that Gene's change in the tax treatment of savings would be a (modest) improvement for some working people. It might even be a palatable way of getting rid of the breaks for upper-income savings that now infest the tax code. Fine! But Gene persists in selling this proposal as a boon for savings and an aid to growth.
The change would not increase private savings. Why not? Because low income people do not have income to save. Lowering the "price of saving" is ineffective when the cash coming in barely covers the bills. (You could as well offer low-income citizens, say, a discount on caviar; they still wouldn't buy very much.)
Since Gene's proposal wouldn't do much for savings then even by his argument it wouldn't be any good for growth.
Meanwhile Jason wrote that we could "probably increase economic growth" by scrapping the current tax structure and substituting a poll tax. That is the mistake I referred to in my post. Jason now acknowledges that he did not mean "probably increase economic growth." He meant, in my words, "probably improve economic efficiency and obtain a one-time increase in the level of output." Friends, this is not a trivial distinction!
Now Jason writes that he does not really think efficiency gains from flat taxes are especially probable. Fine! We agree! But then, why raise the issue in the first place?
Jason's first title framed the issue of a trade-off between equity and efficiency in stark and provocative terms. In his second post he states flatly that "in some cases" the values conflict. But he presents no evidence, and describes no such case. The study he cites is silly, since changes that small could never be detected in real data.
(As for the textbook models he mentions, the less said the better. Jason himself almost surely does not take them seriously for any policy purpose. In contrast, the old Solow model was taken very seriously, and captures the basic view still held by most mainstream economists.)
Meanwhile, my professional work presents compelling (in my view) evidence that more egalitarian countries tend to be more efficient. This work is based on comparisons mainly between North America and Europe, and I invite discussion of it. Since Jason seems to have no evidence to present, how about having a look at mine? http://utip.gov.utexas.edu/papers/utip_25rv3.pdf
I do not spurn efficiency gains. To the contrary, I'm for them! But for every tax proposal with its "minuscule" impact, I ask: is the gain as large as that from full employment? The answer is always no. And being a dreary pedant, I can only ask again and again: If you want efficiency, why not focus on full employment? Jason, Gene?
Jason counters with his second title: "Can We At Least Agree To Support Wealth Creation for Working Families?" Fine, I'm in favor of that. But, to repeat, reducing the price of a luxury--in this case, private cash savings--is a poor way to go about it.
Are there better ways? Sure! Let's talk about them.
- Raise the minimum wage. This is a proven winner for working Americans, especially women. Senator Kennedy has just introduced the Minimum Wage Act of 2005, to increase the minimum wage to $7.25. Let's get behind it, shall we?
- Support the right of workers to form a union. The AFL-CIO has a proposal for an Employee Free Choice Act. Check it out at http://www.aflcio.org/joinaunion/voiceatwork/efca/ I'm for it. Jason? Gene?
- Increase Social Security benefits. Social security benefits are wealth! Social Security wealth is distributed to every working American on a truly progressive formula. It is by far the best means the country has ever devised to build wealth and security for working Americans and their surviving spouses and children. The Social Security System should of course be protected. But if you want additional wealth creation for working Americans, why not use this channel? Why not, say, credit a modestly restored estate tax to an expanded benefit? Jason? Gene?
- Universal health insurance. Anyone awake during the debate over the recent bankruptcy bill knows that health crises cause bankruptcy. Want a win-win for the wealth of working Americans? Let's protect them all from this source of disaster. Jason? Gene?
- Protect home equity. How do working Americans build wealth in the real world? As we all know, they do it by buying a home. If they are prudent, patient and lucky, they then keep their debt below the appreciation in their equity. It's a great system, and it works pretty well. Any thoughts on how to improve it? How about steps to expand it to millions of others, including many minorities, who do not own their homes? Jason? Gene?
Comments (8)
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It doesn't seem fair that a fair number of homeowners own more than one home. As the number of homes is a limited resource.
On the other hand, some people rent homes, and there needs to be a landlord in these cases.
I'm coming from the perspective of living at present in a ski/lake resort town, and more than half of our neighbors are "weekenders" who's home is a vacation home. Since the price of homes in Calif has gone up a lot the last 5 years or so, some of these weekenders also employ the services of a rental agency company which will rent their home to skiers and vacationers some weekends, although the majority of the time these homes sit unoccupied.
I don't have a problem with movie stars having vacation homes, or the super rich. But I am concerned regarding the number of non movie star types, homeowners who i don't think even fall into the "upper class" really, more seeming to be upper middle class, who own more than one home. Some do it instead of buying stocks or bonds as well of course.
Does anyone have any input on this? Any data? Whether the problem is out of hand or not really a problem (since there is also a need for landlords in the housing market?)
Obviously economics 101 (supply and demand) might suggest to say the least, that home prices would be lower, more affordable to all, if every homeowner had only one home.
November 9, 2005 12:22 AM | Reply | Permalink
Obviously economics 101 (supply and demand) might suggest to say the least, that home prices would be lower, more affordable to all, if every homeowner had only one home.
Not really, since second homes are generally in vacation/resort or small towns, not in the burban areas where home demand is high. There might be some case in the sense of people who own homes in CT and FL and switch between them seasonally.
But, since mortgages on second homes are not tax-deductible, those who own second homes truly can afford it. They are not getting a free ride from the gummint on that second unit. Those who rent them out part of the year may get some tax savings, though.
I favor so-called sin taxes, but I don't see how you can classify and regulate buying a second home in the same manner -- the home is investment, not consumption.
mp
November 9, 2005 4:42 AM | Reply | Permalink
Did you read my post on your earlier thread? Work by esteemed economists like Neumark and Wascher have shown that nat'l wage floors in the US are relatively ineffective anti-poverty measures. More targeted Living Wage laws are more effective at reducing poverty, despite also having some of a disemployment effect. And so If we do increase the wage-floor, we should use randomization like that used in Mexico for Progressa, to test its anti-poverty effects.
The Basic Income Guarantee program would be a more effective anti-poverty program than the current measures and could make it so we could scrap Social Security as an anti-poverty program and replace it with a forced-savings program or something. It also could negate the need for us to have significant wage floors.
We could also help pay for the BIG program with illegal immigrant labor, since they'd be paying in for the program but not receiving the transfer. And, given that the transfers would increase worker bargaining power and lead to a general reduction in the hours of labor they want to supply to the market, low-skilled wages should rise so that they will still be desirable for illegal immigrants even after paying 36% plus on income taxes.
dlw
November 9, 2005 9:29 AM | Reply | Permalink
"Not really, since second homes are generally in vacation/resort or small towns, not in the burban areas where home demand is high. There might be some case in the sense of people who own homes in CT and FL and switch between them seasonally."
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well it's certainly the case within those small towns / vacation/resort towns, since the minimum wage service workers have higher housing prices, i know as i live in such a town.
but yes this is a good point, since there are few good jobs in these towns. still we should google and track to see if the stats are changing drastically or not regarding 2nd homeownership i think. it's helpful to construction workers of course but not to other consumers if the trend is moving towards more and more 2 home owners with the possible exception if the 2nd home is rented out full time.
I think you are incorrect though regarding tax deductions on mortgage interest on 2nd homes though, since the Bush Administration is considering eliminating that (which i would favor.) I don't think I favor the first proposal the Bush Administration is favoring though, putting a ceiling on the amount of the mortgage where interest can be written off, unless the ceiling is very high like in the 1.5 million dollar area. Capping it at $400,000 seems to harm Blue state homeowners rather than Red state homeowners to me. (as the going rate in much of california now for a home, in the popular areas anyways, is about $700,000, for example.)
I actually may be on to something though, googling:
http://www.freddiemac.com/news/finance/commentary/sp-comm_080105.
html
November 9, 2005 9:38 AM | Reply | Permalink
http://mortgage-x.com/brochure/deductions.htm
My hyperlink on the previous post didn't work for some reason, i've lost it, but here's another one above which shows that you can deduct mortgage interest on the 2nd home as long as the total mortgage isn't above 1.1 million which i think is the ceiling on mortgages that can be deducted.
The Bush Admin is considering changing the tax law so that you can only write off on your first home (i would support this for the reasons we are discussing.)
But they are also considering a much worse proposal to bring the ceiling way down, to the level the FHA insures mortgages, which i have a feeling is a way to stick it to Blue states overall, but i'm not sure about this. I don't think it would hold much political capital this 2nd proposal. There are other proposals as well which were shown on that first link i've lost.
November 9, 2005 9:49 AM | Reply | Permalink
On the flat tax, what would the percentage on this be? Maybe it's been mentioned in the posts or comments, and I missed it.
James, I like your five ways to support wealth creation for working families. I haven't had much to say here, because I don't have expertise in these matters, but I think you have made your case for these five suggestions on a simple enough level that even I can understand.
November 9, 2005 9:57 AM | Reply | Permalink
Yes, you are right about the second mortgage, here is the relevant IRS document. I don't know why I thought that had been eliminated in the tax "reform" of '86.
Because we own a home, I'm ambivalent about the mortgage interest deduction, but generally, my feeling is that it is a huge gov't subsidy to those who least need it. I also feel that it warps the economy by providing an incentive for people to buy homes that they don't need and/or can't afford, because they see the mortgage deduction as savings.
Many economists and financial advisors have pointed out that purchasing a home is a money loser if you don't plan to stay in the home for a significant period of time. But, this advice is not widely heard nor heeded.
So, in my opinion, getting rid of the deduction would be a good thing in the long run because it would encourage more sensible housing choices and reshape the housing market accordingly.
I could even give an example: my mother and her husband lived in an apartment for 15 years, and invested the money they saved from not making mortgage payments and housing upkeep into the stock market, with the result that they had sufficient savings and earnings that they were able to retire at 55, build a home on the Carolina coast and divide their time between there and Europe for the next 20 years.
My wife and I bought a home priced way below "what we could afford" and at our current payment schedule, anticipate that it will be paid off in 15 years. As we plan to live there until retirement, it makes sense as an "investment," whereas many buyers apparently buy a house as a kind of self-indulgence, "because I can." There's a huge housing boomlet in my town, and I have seen the "For Sale" signs go up and down on some of the newly-built homes in one or two years.
mp
November 10, 2005 4:44 AM | Reply | Permalink
I hope so, because the other side sure knows what it wants, and theirs is an agenda of continuing unmitigated pain for most working Americans.
The paper Galbraith links to, "Unemployment, Inequality and the Policy of Europe: 1984-2000," [PDF] is very much worth a look, even for non-specialists. One of it's key claims directly contests, in a novel way (it was new to me at least), the coventional wisdom that market efficiency and social equity are at odds.
Galbraith and Garcilazo find that larger regional pay inequalities partly drive higher regional rates of unemployment--especially among geographically less-mobile populations (e.g., women and the young). The short version goes something like this: where the pay differential between "good" jobs and not-so-good jobs is greatest, job seekers are driven to hold out longer for one of the "good" jobs, pushing up overall unemployment.
The neat thing about this argument is that the wage level of those not-so-good jobs is largely set by government policy (e.g, by the minimum wage, or the level of benefits attached to work of any kind). So here is a case where it looks like the more equitable policy (raising social minima) will also lead to more efficient market outcomes (higher capacity utilization).
This is what I love about the seemingly almost-lost art of Keynesian analysis. There was a day, my progressive friends, not so very long ago really, when the left was confident, not only that its policy aspirations were more just than those of the right, but that they also knew better how to run a modern economy at peak efficiency.
In fact, its hard to imagine the existence of the policies that helped create the modern American middle class, without taking into account that underlying confidence on the part of those who developed those policies, and those who convinced political leaders, and the public, that they would work.
For most of my adult life, that confidence has been not much more than a memory. Since Reagan and Thatcher, the basic assumption, shared by an awful lot of very smart people on the left, has been that one needed first to start from the resurgent right's premises about economic efficiency and growth, and then find a way to wedge social justice into the resulting picture.
But suppose that isn't right at all. Suppose that, for whatever reason, the left only temporarily lost its hold on the thread linking social justice to efficient market outcomes, but that the thread is still there, waiting to be picked up again, if we will but entertain the possibility.
It'd be a damn shame not to find out if such a satisfying possibility were true.
November 10, 2005 8:58 PM | Reply | Permalink