Bowles-Simpson Commission

I think the commission has actually been fruitful as they have facilitated a national conversation on the deficit and I think have framed a very important issue: tax expenditures. The one area where I think the commission failed was on the revenue side. Their focus on getting rid of tax expenditures and lowering rates was quite good but I would have liked to see some other revenue options thrown into the mix like a securities transaction tax and a carbon tax.

Carbon Tax, not a VAT

I agree with Matt Yglesias that if there is gonna be a consumption tax it should be a carbon tax not a VAT. I think part of the reason that some are still enamored with a VAT is that it can raise a ton of money, probably more than a carbon tax. That said, a carbon tax should generate substantial revenues and also would more efficiently curb carbon emissions while not sacrificing any ground on efficiency to the VAT.

Reporters Should Not Be Allowed to Report Unless They Know the Difference Between the General Fund and the Unified Budget

This article makes the basic observation that raising the retirement age hurts the poor. This is a fair observation. Raising the retirement age is probably the most regressive means of putting SS into balance. It is probably also one of the most efficient (keeps people in the workforce longer + lower taxes). Anyhow, I don't think the Bowles-Simpson Commission's proposal of raising the retirerment age a whole 2 years over the next 65 years is all that draconian, but whatever. What really gets my goat about the article is this part:
"On its current path, Social Security is projected to run out of money by 2037, largely because of aging baby boomers reaching retirement. The longer action is delayed, the harder it will get to shore up the program."

Stephen Ohlemacher is probably blissfully unaware of his error. But he has mislead the public and this is typical of how the media treats discussions about social security, budget deficits, and our nation's finances more genearlly. In their ignorance the media has abbetted what would amount to accounting fraud in the private sector. Many will think I am crazy and will say, "but wait a minute, the author is right, there is the trust fund, we have prefunded Social Security to cover the gap between Revenues and Outlays that starts in 2018. That will take us till 2037." Here is the problem with that, every year, the federal government spends more than it takes in (except for a few years during the Clinton Administration).

Presently and since 1984 during the last go around of Social Security Reform, Social Security revenues have exceeded Social Security expenditures. What happens is that the government uses the surplus revenues to plug the gaps in its budget and then issues the Social Security Administration special issue bonds that bear interest (read: IOUs) for the money it borrows. This is where the general fund and the unified fund distinction comes into play. The General Fund does not look at Social Security outlays (but typically does count some of its revenues- to my mind the decoupling of revenues and expenditures in a pension fund is cooking the books). But to the extent it uses the surplus revenues it counts those as revenues. For example, just using some made up numbers, let's say in the current year for the US government to prefund social security it needs to collect $200 billion more than it spends in social security benefits. Now imagine that there is a general fund deficit of $200 billion. The government takes those $200 billion dollars and plugs it into the general fund. Instead of issuing debt to cover the general fund the government now has to issue debt to cover future expenditures to future social security recipients. Let's say that the size of the economy is $10 trillion dollars. Thus, in this scenario, the government by shfiting excess social security revenues away from prefunding the trust fund and into the general fund has not actually changed the fiscal picture. But what our moronic press corp would do is say that the government has balanced the budget deficit as there is no general fund deficit. However, there is a deficit, it has been shfited off the books, that is the unified deficit, and it is in my view the important number. In this scenario since the Social Security trust fund has been shortchanged by $200 billion (in a $10 trillion hypothetical economy) the unified budget defict would be 2% of GDP. The government is doing this even today**.

As I mentioned in the previous paragraph, when the government takes those excess social security revenues, it issues debt not assets to social security. Some say that Social Security trust fund possesses actual T-Bills. It doesn't though. Well, first, you can verify whether this is the case (click on this link), and it is not. Second, it wouldn't actually make a difference. A T-Bill is a form of debt that the government issues. You get a T-Bill in exchange for giving the government money. That T-Bill is backed by the taxpayer and at some point if you want to redeem it the government will have to raise revenues to pay you. So if the SSA were to in fact posess T-Bills it would be the functional equivalent of having an IOU as one part of the government would be issuing debt to another part of the government. The end result would be the same. The taxpayer would be asked to cover the debt.

Going back to the title of this post and how it relates to the earlier quote, my objection is the characterization of Social Security as being solvent until 2037 is essentially false. An accurate statement would be: 1. Social Security is solvent so long as social security revenues are equal to or greater than Social Security expenditures; 2. Social Security will continue to be solvent after social security revenues are less than social security expenditures if the taxpayer is willing to fund the difference. The second clause may or may not be true. So here would be my proposed revision:

"On its current path, Social Security is projected to run out of money by 2018, largely because of aging baby boomers reaching retirement and generations of fiscal mismanagement and creative accounting. We are past the point of no return, future benefits will be cut at the margins next decade and wholesale in the decades thereafter."

The health of social security is contingent on the ability to redeem the bonds in the Trust Fund. The ability to redeem the bonds in the trust fund is tied to the health of government's finances more generally. If publicly held debt were low, issuing new debt to fund social security wouldn't be an issue. However, the Government's finances are piss poor and deteroriating and we are just beginning to work our way through the baby boom. The media in pretending that there is some imaginary pot of gold out there that is gonna cover the next two decades of Social Security expenditures. They have been unwitting accessories in cooking the government's books.

* I am not entirely sure if this is accurate for 2009-10 as the social security revenues are depressed as a function of the recession.

Tax Reform

Equity Private over at Dealmaker makes an argument for tax reform.  I agree that the time is ideal for tax reform in the sense that those interests typically aligned against tax reform are currently quite weak, such as tax preparers, accountants, and especially the mortgage industry (which accounts for one of the largest deductions/perversions of our tax code in the form of the mortgage interest tax deduction).  That said, I am doubtful anything will happen anytime soon, and that's a shame.

Consumption Taxes

Alan Krueger proposes implementing a consumption tax in a couple years for deficit reduction. It will be interesting to see what happens with regards to tax reform. At this point there are several different moving pieces that will or could affect taxes: the expiration of the bush tax cuts, climate change legislation, and health care (what to do with the tax exemption for employer provided plans). Add to that mix there will be some desire to increase revenues above and beyond what the current tax structure allows, obviously allowing some of the Bush tax cuts will do something but not as much as one thinks (provided Obama maintains his pledge not to raise income taxes for those who earn less than $250k).

Securities Transaction Tax

Bob Herbert has a column pimping a securities transaction tax.  I blogged the tax earlier, though, the revenue estimates I quoted were purely for revenues raised from stock transactions.  Herbert, citing Dean Baker, estimates that a tax on all manners of securities transactions (bonds, commodities, futures, derivates, etc.) would raise in excess of $100 billion.  One of the challenges for the foreseeable future will be to raise revenues and it is important to do so in an efficient manner as possible.

Tax on Securities Transactions

I don't know why this hasn't occurred.  Presently there is a tax on securities transactions of .0033%.  Setting it at .5% would raise roughly $65 billion.  Such a tax shouldn't have a negative impact on US financial markets competitiveness as other major exchanges such as the UK and Hong Kong levy a similar fee.  Here is a CRS study on a Securities Transaction Tax.

How to Reduce Carbon Emissions: EuroStyle

"The cost of the average used car in Europe is now cheaper than the cost of gasoline to drive it for a year."

The carbon taxes in Europe are vastly higher than they are here.

hat tip: Tim Harford

Taxation of Carried Interest Again

I posted awhile back on this subject. Hedge Fund managers earn a commission as part of their compensation, astronomical compensation. This income is treated as a capital gain instead of income, thus, their considerable earnings are taxed at 15% instead of 35%. There was talk about closing this loophole but Sen. Charles Schumer (D-NY and chair of the Finance committee and Democratic Senate Campaign Committee) has nixed such legislation. Professor Bainbridge has a very astute observation about the politics of this situation:

"I continue to predict that the Democrats will not pass hedge fund tax increases this term. It’s not just that the hedge fund industry has bought off key players. Instead, as I explained the other day: We normally think of interest group politics in terms of the interest group using campaign contributions to purchase some result. Where the interest group is fixed on avoiding a change in the status quo, however, the balance of power shifts to the politicos who can use threats to the status quo as a way of extracting funds from the threatened group on an ongoing basis. You don’t let the goose that gives golden eggs go after just it gives you just one egg, after all. Instead you turn it into, so to speak, the gift that keeps on giving."

Carbon Tax Center

Yes, there is an honest to goodness Carbon Tax Center. It has a website and it may actually have a physical existence, like brick and mortar.

Cap and Trade Abroad

China and Brazil are talking about the possibility of implementing a cap and trade system. It will be interesting to see if this amounts to anything. If either country does, especially China, the pressure on the US to follow will be immense.

Big Tax Bill In The Works

Charlie Rangel is trying to push together a major tax bill. I don't think anything will happen this year but it is likely to shape the contours of the tax debate in '09.

Lotteries: A Tax on the Poor That Doesn't Pay

The NY Times has a good if depressing article on lotteries. Lotteries typically fund public education but there are two major drawbacks: 1. poor people primarily purchase lottery tickets; 2. Only about 30% of lottery proceeds end up being dedicated to public education.

Tom Friedman's Wet Bag Of Shit, Er, Column

Tom Friedman who has been waging jihad against GM has now directed his attention East towards Toyota (East as in the Rising Sun). Toyota's sin, they made the Prius and have since tried to brand themselves as Green friendly even as they roll out a bevy of new gas guzzlers. What GM and Toyota are doing is responding to consumers who until recently have sought to surround themselves with as much steel as possible. This was a sensible tendency in the context of cheap energy prices. Now gas prices are rising and consumer demand is shifting.

Friedman then goes on to complain that the industry has sought to water down CAFE regulations (fuel mileage standards). Well of course they have. And why shouldn't they? Why should GM or Ford or Toyota bear all of the costs related to curbing emissions? It is the consumers who need to emit less carbon. I understand why politicians would like to scapegoat auto manufacturers, after all, outside of Michigan there isn't much danger in doing so. However, opinion makers don't face the same pressure, which maybe vests with them the responsibility to grow a pair and not act like simpleminded wankers. While on the subject of politicians from Michigan, Friedman also singles out Rep. John Dingell (D-MI) for trying to undermine CAFE standards. That is true but Rep. Dingell has proposed a sensible carbon tax, which is an eminently preferable and more just policy. Maybe Friedman could have written a column about Dingell's legislation instead of this wet bag of shit.

Note: Wet Bag of Shit is a term coined by ManGina, er, Mandingo. A contributor emeritus to this blog.

Pipe Dream

I was reading a bit over at the Financial Times about a global warming conference Bush summoned with all of the other big polluters (side note: in German the word for polluter is umweltverschmutzer, which amounts literally to something like earth dirty maker). Bush seems to have transitioned from the earth ain't warming, to the earth is warming but it is unclear what the causes are, to ok, the science is settled. Now I don't think there is much likelihood Bush will actually do anything substantive (like a revenue neutral carbon tax) other than maybe propose another alternative energy R&D tax credit or a tax deduction for purchasing a energy efficient domestically produced washers or other electronic appliances (maybe Maytag is a political contributor to the bushes). But I think maybe there is a chance that he would like to leave office with some warm fuzzies and after the unmitigated disaster that this administration has been (read: Iraq, Katrina, Gonzalez, etc.), something like climate change would allow for a bold bipartisan action to put a prettier patina on Bush's legacy. That said, I am not holding my breath.

Obama Launches a Lead Balloon

Obama is putting out a trial balloon on raising the cap for payroll taxes. Currently only the first $97k of income is subject to payroll taxes. The cap is indexed for inflation. Now it is certainly true that Social Security needs either more cash, fewer obligations, or a mixture of both. My objection with raising the cap on payroll taxes right now is that this would provide Congress with an additional $1 trillion over ten years to piss away. If past is prologue, Congress will take the additional revenues and use it to plug gaps in the general budget. The net result will be that people will be taxed at a higher level ostensibly to shore up social security without the intended end being satisfied. This is the virtue of personal accounts, it keeps the money out of congress's hands.

Ramesh Ponnuro On Republican Tax Proposals

Ramesh Ponurro has a great op-ed over at the NY Times on how the republican candidates are botching the tax issue.

Sullivan Wrong on Part of Obama Tax Plan

From the AP:

"The IRS would send prefilled tax forms to 40 million workers who take the standard deduction and have a bank account. They would simply have to sign and return it, which Obama estimates would save more than $2 billion in tax preparer fees, 200 million hours of work and "an incalculable amount of headache and heartburn."

Andrew Sullivan's blog title reads- "Obama's Tax Pander." The first line of his post reads- "He'll get the government to do your taxes for you!" I don't think this is all that controversial. A lot of Americans don't itemize because they have nothing to deduct. The government has already witheld their taxes and computed the liability. The reason why one might oppose such a policy is that you don't want people completely detached from the effects of fiscal policy. That said, this doesn't seem all that controversial to me.

Obama's Tax Plan, Part 1

Here is Obama on the Mortgage Interest Deduction:

"Today, we have a mortgage interest deduction, but it only goes to people who itemize on their taxes. Like so much in our tax code, this tilts the scales toward the well-off. Only a third of homeowners take advantage of this credit."

Ok, I'm with him on that. Tax deductions will always benefit those who are taxed the most, the wealthy. But read on.

"I’ll create a mortgage interest credit so that both itemizers and non-itemizers get a break. This will immediately benefit 10 million homeowners in America. The vast majority of these are folks who make under $50,000 per year, who will get a break of 10 percent of their mortgage interest rate. For most middle class families, this will add up to about $500 each year. This credit will also extend a hand to many of the millions of Americans who are stuck in the subprime crisis by giving them some breathing room to refinance or sell their homes."

How about instead of instituting fairness through more complexity in the tax code do it through simplicity, scrap the mortgage interest deduction. Is subsidizing home-ownership more compelling than say, health care? Or wage subsidies so that people can make their own choice on how to spend their money?

"Upward Redistribution to the Rich"

Over at TPM Cafe's book club Jonathon Chait spoke of the Bush tax cuts as an "upward redistribution to the rich". I find this positively orwellian. The implication is that the government is taking the money from somebody (middle class or the poor) to pay the rich when in fact they are simply taking less money from the rich. There are conceivably instances where the government redistributes from the poor or the middle class to the rich, some have argued that Social Security is mildly regressive (the tax is a flat tax, it's capped, and the rich live longer), but income taxes don't fit this description. What Chait really means is that the Rich should have less of their money so that the government can spend more on goodies (education, health care, farm subsidies, whatever) to benefit the middle class or lower income folks. In fact, I find the whole business of labeling taxes and the like as a redistribution a bit misleading as it presumes an original distribution. It is not as if one day we awake with our bank accounts full of our yearly allowance, rather, our income, savings, and debts are the function of millions of independent transactions.