Maybe a great deal of money viewed by an individual, but trivial when compared to the cost of building a new fab or auto factory. Sure, any new venture requires some capital, but industrial ones used to require a great deal more. The trend in electronics is to leverage these capital requirements over lots of customers. This lowers the risk substantially. It also has meant that production has moved off-shore.
Aren’t you assuming here that the mix of goods and services is the same on both ends? Sure, the transfer itself is fine, but, to use an old stereotype, if the receiver of the money lights a cigar with it, it is far less beneficial than if the receiver is a consumer.
As for taxes, it is possible to raise taxes so high as to cause nonoptimal behavior, but raising them back to the level they were during the '90s boom is unlikely to do that.
I believe Obama’s plan is revenue neutral. Anyone saying this is harmful is implying that the rich can just use the money better than the poor.
BTW, I just remembered stories from a few years ago saying that VC funds had lots of money they couldn’t spend, due to a paucity of good ideas. (Not true now.) This is another example of where more investment money does not necessarily lead to more productivity.
I believe that CEO salaries are high due in large part to the “tournament effect,” which is that a high salary for the person at the top motivates people at the bottom to become the person at the top. Therefore, the CEO’s salary is tied to value creation by everyone down the chain.
The goods and services available will not have changed simply by a transfer, even if we transfer goods directly. If the person who receives the tranfer finds it more pleasing to stuff dollar bills into a mattress it still doesn’t matter, as we have increased his happiness in proportion to how we’ve made someone else unhappy. (If we haven’t, then economic activity will take place until such a result arises. This is the operation of the market.)
Practical taxes are distortive, yes. I’m just trying to make sure the terms of the discussion are clear. Insofar as taxes are a transfer they are not a problem. Transfers are a moral question. Insofar as the mechanism for collection and type of taxes are open, this is an economic question. This is why I agree wholeheartedly with a point by Sam: the benefits and costs need to be described.
For example, a head tax (poll tax) is not distortive in that it has no deadweight loss associated with it. A sales tax is distortive in that it encourages people to avoid them (mainly by not buying something for $21 that they would have bought for $20). If we are increasing the sales tax to fund better state parks, one of the costs is going to be decreased consumption. To the extent that this can be predicted, it should be mentioned along with all the benefits of a better park system, so that a more informed choice can be made.
If it were so, a transfer will not change this. The poor will just give their money back to the rich, if this is the case. That said, it is almost certainly not the case.
Sounds like a Ponzi scheme.
Actually though, I would say that “Bubble Up” economics could show promise.
The government could focus their efforts on the incentives facing, say, 100,000 of the richest Americans.
Or they could direct their attention towards the middle class and the other 300 million citizens.
Which method would promote more growth is an empirical question.
That said, recall post #11, where I divided economic policies into 3 parts.
Over the longest durations, I’d say that investments in education and to a lesser extent infrastructure could pay off both from the perspective of growth and equity. At the same time, I should concede that in the US improving K-12 education is more difficult than expanding college opportunities.
But the point remains: sensible supply side policies do not necessarily involve tax cuts for the rich. Furthermore, the empirical case for supply-side high-end tax cuts is pretty thin. In fact, it’s so thin that it’s rarely presented.
As for cutting taxes while maintaining spending levels, that should deliver some combination of growth repression and trade deficit.
M4M, what would you proffer as a good example of sensible supply side policies?
What? No. A Ponzi scheme is where money is collected for an investment but no investment is actually made. The money collected from earlier subscribers is paid to later subscribers to get more subscribers, and at some point the scheme operator leaves town or is caught.
I’m just saying that the salary paid to CEOs is not just on account of the CEO’s services, it’s really partially in payment for the services of everyone else in the oranization (because they are all trying to be the CEO). Therefore, when you are looking for the value that was created for the bajillion dollars paid to some CEO, you can’t just look at what the CEO did, you have to look at what everyone else down the chain did.
snerk You’ve never worked in a big company, have you? In most companies, 99% of the people at the bottom could never be the person at the top, either not having education or not having the right education. You think the high salaries of the financial services CEOs motivated the IT guys?
There have been plenty of articles on how the CEOs get their big bucks. Try to read some some day.
You do know what a Ponzi scheme is, and I agree that this isn’t one.
If this were true, you’d expect that salaries in the corporation would rise along with the CEOs. In fact, except for the C-level execs, this does not happen. Plus, all too often there is no value for the bazillion dollars. The companies market value declines, and the CEO still makes out.
Now you are right that CEOs don’t do it by themselves - however they get compensated that way.
I’d like to see a cite for this.
According to Wikipedia, it is true that the bottom 30% owe no income taxes. However, a single person earning $15,000 would owe taxes on the amount over the standard deduction. Surely this income would fall in the bottom 30%, so I still find it difficult to believe this assertion.
Here’s a starter. It doesn’t answer the question exactly, since the cutoff is the bottom 50% (not the bottom 30%), but you can see from Table 6 that the bottom 50% in total paid only 3% of income tax in 2006.
You can also see from Table 6 that the take from income tax is getting more and more progressive over time.
So we have bottom 50% = 3%. I’m still searching for bottom 30% = 0. I’ve seen it many times in Op-ed pieces in the WSJ, but I’ll hold off on that cite for now and keep searching for primary-source data independent of opinion.
Whoops. Didn’t include the link.
As a general rule, you want compensation to increase the furthur you go up the ladder to reflect the increasing difficulty and responsibility of the job.
Compensation for CEOs, investment bankers and certain lawyers, however, is not just a product of market forces as it is with the rank and file employees. For the most part, they are managing large financial transactions and tend to make sure they are taken care of as part of the transaction, regardless of the outcome.
Let me put in some preliminaries:
We should beware of easy fixes: I doubt whether we will see a return of the 1947-1967 era.
For reasons of clarity, I’m going to ignore political considerations in this post. Therefore, these are not policy proposals as stated.
Some sensible supply side policies, to advance potential output.
- A stable economic environment makes it easier for executives making investment decisions.
1a. Therefore, countercyclic fiscal policy is a good thing. That means budget surpluses during good times and deficits during recessions.
1b. Don’t tinker with tax code continuously. If rates stay constant for year to year, that helps with business planning and it encourages executives to put less resources into lobbying and more into productive activities.
1c. Tax reform is more important than tax cuts. Eliminating deductions and lowering the rates is generally a good thing, since it reduces distorting and wealth-draining behavior. 1986 tax reform was more significant than the 1981 tax cuts (no cite, no substantiation: consider this a half-assed claim).
1d. Maintain at least a low corporate tax rate. A rate of zero would create incentives to produce economically dubious tax shelters.
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Improve infrastructure, but subject it to strict cost/benefit tests. At the very least, it would be nice to order the projects from most to least productive, then choose the top ones.
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More to the point, the President should play small ball. The Washington press corps hated it when Clinton would launch his little $100 million initiates. But really, setting up a process where better projects get funded and losers are eliminated is a good thing. An example might be Clinton’s increased funding for tuberculosis programs. There had been a rise in the incidence of the disease among the homeless during the 1980s, and there was some indication that (IIRC) certain measures would prove cost effective.
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Inefficient health care systems spend a lot on administration – indeed in the US a huge amount is devoted to getting somebody else to pay the bill. Here’s some data from an old post of mine:
From the Statistical Abstract
country Health Care Expenses Life Expectancy
as a share of GDP 1999 at Birth 2001 vs US (check math)
US 12.9% (#1!) 77.3
Australia 8.6 79.9 +2.6
Canada 9.3 79.6 +2.3
France 9.3 78.9 +1.6
Germany 10.3 (1998) 77.6 +0.3
UK 6.8 77.8 +0.5
Japan 7.5 80.8 +3.5
Switzerland 10.4 (#2!) missing from table
There are plenty of countries with higher life expectancy but cheaper medical care systems. And all of them have universal health care.
US Health care reform, potentially at least, could provide more health for less money.
In general, instead of vilifying government, subject the programs to scrutiny. I mean heck, it’s not like private institutions are perfect, as shown by the current financial clusterf*%k.
The standard response to this claim is that the bottom 30% pay plenty in social security / medicare / unemployment insurance taxes at the federal level and sales taxes at the state level.
That’s not the final word of course. The next time Congress considers adjustments to the tax code, I trust that we’ll debate the issue here. These are the other standard sources of data and analysis:
I want to respond to Erislover. Transfer payments always and everywhere decrese economic efficiency and make us all (at least in the short term) poorer. They cannot do otherwise, since by definition they move money from a more efficient area to an area which must be les efficient, if it is even an “economic” area at all.
This may or may not be desirable for other reasons, but economics cannot be one of them.
That’s like saying technological progress is inefficient because it changes the status quo.
In any case, it’s called the second fundamental theorem of welfare economics. I’m not just making it up.
(This is welfare in the well-being sense, not the institutional sense.)
Agree completely with 1a-c. Agree with half-assed assessement on 1c. If I add my half ass to your half ass, we get a full ass. That seems like progress, somehow.
Agree with 1d. Concur that there will always be some risk of evasion. Probably some sliding scale where corporate taxes don’t go to zero, with some simplification of existing wage tax structure, we’ll probably be fine. That’s a half-assed assertion (I still have half of an ass left, remember!) I think we can waste more time and counterproductive energy worrying about the small (but headline-grabbing) % of people who raise our ire by avoiding taxes. My gut belief is that a reasonable marginal tax rate of 25% or so at the high end is quite acceptable to most people.
Love the theory behind 2. I think this needs a lot of noodling. Otherwise it turns into a pork-fest. Congress has tried cost-benefit analyses before.
My latest thought project is government funded capital investment in highways, bridges, etc. with an obligation to sell to the private sector within some fixed timeframe after completion. Say, 5 years or so for big projects. Full disclosure throughout on engineering specs (since the private sector will bear operating liability once they buy it), contractor bidding, parameters required for operation (e.g. open 24/7) etc. With enough disclosure upfront you could even start the bidding for the sale before the project starts. That way the government gets price signals on what these things are actually worth, what companies will charge the citizenry for use, etc. The public gets a better idea of what their tax dollars are being used for, and potentially, what revenue sources are generated from them.
Like 3, in general. I love the test-and-control method as a rule. Not sure why this needs to be a federal issue. Couldn’t it be a state or local issue? Wonder if it could somehow be operated like 2, above.
I will reserve comment on 4 for a while.
Thanks for the response.