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Republicans Mike Lee and Marco Rubio have sketched out an ambitious tax reform plan to boost business spending and increase take-home pay for America’s beleaguered middle-class families.
The two US senators outline their thinking in a Wall Street Journal commentary with key elements including: (a) slashing the 35% corporate tax rate and allowing businesses to immediately deduct investment and expenses; (b) reforming or eliminating personal tax breaks that primarily help the rich while creating a two rate system of 35% and 15%; (c) eliminating the marriage penalty and reducing the parent penalty — accomplishing the latter via an expanded child tax credit applicable against income taxes and payroll taxes.
Lee and Rubio, summing up: “… our proposal would make it easier for Americans to find jobs and easier for businesses to create them. It would help restore upward mobility at the bottom of our economy and fair competition at the top. And it would restore equal opportunity to working parents, America’s ultimate investor class.”
And the proposal intends to do all those things by, in effect, removing or paring a variety of damaging government distortions that are particularly harmful in an economic era of wage stagnation, heightened global competition, increasing automation, and continuing job polarization.
Now much criticism, no doubt, will be directed at the plan’s lack of specificity on base broadening and how it will make the numbers balance. On the right, however, many critics won’t like the plan because it isn’t their dream tax plan. (And if there is one thing I’ve learned after years of writing on tax reform is that pretty much everyone on the right has a dream tax plan.) It isn’t a 15% flat tax or a 23% Fair Tax or a 9-9-9 plan.
But developing a real-world tax reform plan — one that boosts family incomes, makes American companies more competitive, invests in human and business capital, simplifies the code, increases GDP growth, and achieves revenue neutrality without unrealistic assumptions — is tricky business. The Lee and Rubio plan — at least as outlined — already ticks a lot of those boxes. The senators have fashioned a pro-growth, pro-family, pro-innovation plan rooted in economic and political reality that deserves serious consideration as a key element in any agenda for reenergizing the American economy.
View related content: Pethokoukis
Check out the top pieces we’re reading today on the economy, family, technology, and more.
1.) In The Wall Street Journal, Senators Mike Lee and Marco Rubio write on a pro-growth, pro-family tax reform.
2.) The National Bureau of Economic Research has a new paper out on demographics and entrepreneurship.
3.) Did you know: Ebola cases could reach 1.4 million, C.D.C. estimates, according to NYTimes.
5.) A recent Urban Institute publication looks into what happens to housing assistance leavers.
6.) Alan S. Blinder goes behind the Fed’s doveish turn on rates in his WSJ op-ed.
7.) From the St. Louis Fed: the issues with new unemployment insurance claims as a labor market indicator.
8.) How much does it cost to be a parent? Isabel Sawhill discusses at RCM.
9.) ‘Someday’ is now for solar and wind power, says Lazard in this IEEE Spectrum piece.
10.) According to the Harvard Business Review, the salary gap between stingy and generous companies is growing.
11.) In their blog post for Education Next, John Bailey and Tom Vander Ark suggest it’s time to reimagine school information.
12.) Richard A. Epstein, at the Hoover Institution, writes on the vogue of ‘social responsibility.’
13.) How much do Medicare cuts reduce inflation? the San Francisco Fed asks.
Check out the top pieces we’re reading today on the economy, technology, education, and more.
1.) Quartz has the 17 most important economic charts of this week.
2.) UN predicts new global population boom, reports the MIT Technology Review piece.
3.) Climate change is an opportunity to dramatically reinvent the economy, according to this interview with Naomi Klein in The Atlantic.
4.) Here are 3 key questions about the slowdown in emerging markets from Sweta Saxena in iMF direct.
5.) Urban Institute provides a new view of the housing boom and bust.
7.) Google works with NASA to test cars without backup drivers, says IEEE Spectrum.
8.) “The exurbs are starting to make a comeback, signaling that the housing market’s recovery is slowly spreading beyond major cities,” notes Kris Hudson in WSJ.
9.) From Brookings come the top 10 global hometowns of America’s foreign students. Guess which city is number one.
10.) With the new health law, shopping around can be crucial, comment Margot Sanger-Katz and Amanda Cox in The Upshot.
11.) Bitcoin is plunging again, according to Quartz.
12.) Urban Institute has a new report out on federal expenditures on children through 2013.
Charles Blahous makes a number of great points in an e21 essay on the fiscal future of Medicare — and the US budget. While it is true, as a recent New York Times piece notes, that the Medicare spending projections has declined quite a bit since 2006 (see above chart), the program’s financial problems are still enormous. The whole piece is worth reading, but this is a particularly noteworthy bit given all the attention on the need to reduce health cost inflation:
Health cost inflation is not and never was the biggest problem projected for Medicare; population aging was, and that problem remains. It is helpful to slow excess health cost growth but Medicare’s biggest source of financial strain is the sheer number of people coming onto its rolls. CBO estimates that only 33 percent of the growth in all major federal health program spending projected through 2039 is due to excess cost growth, population aging being a bigger factor. This is especially true for Medicare specifically because it serves the senior population.
One of my favorite policy heuristics: “The history of big bank failure is a history of the state blinking before private creditors” – Andrew Haldane. Which leads me to this reality-based analysis by Adam White via his review of Tim Geithner’s book:
Geithner criticizes Dodd-Frank, too—but from precisely the opposite direction. He argues that Dodd-Frank gives the Fed and the Treasury too little discretion, not too much. He likes the SIFI-designation process but complains that it should be handled by the Fed, not by the interagency Financial Stability Oversight Council. More significantly, he approves of the “Orderly Liquidation Authority” but regrets that Congress combined it with a new limit on the Fed’s power to bail out individual companies. The Fed’s primary tool in the crisis, he explains, was Section 13(3) of the Federal Reserve Act, which empowered the Fed, in “unusual and exigent circumstances,” to lend directly to borrowers unable to obtain credit elsewhere. Dodd-Frank nominally pares back this power, by requiring that such lending be directed not to individual firms, but rather with “broad-based eligibility,” to prevent regulators from bailing out individual, politically favored banks. According to Geithner, this limit on Fed discretion, coupled with other limits on the FDIC’s power to backstop banks, “will hinder the response to the next crisis.”
Geithner’s criticism of these statutory limits is less surprising than his earnest suggestion that the statutes actually limit anything. Throughout the crisis, Geithner and his colleagues consciously pushed their authority as far as possible—if not by exceeding statutory limits on their powers (which he argues they never did) then by interpreting those statutes as generously as possible. We can trust his successors to interpret Dodd-Frank’s new “restrictions” with similar creativity, especially when a variety of commentators (including Richmond Federal Reserve Bank president Jeffrey Lacker, Harvard Law School financial systems professor Hal Scott, and House Financial Services Committee chairman Jeb Hensarling) argue that the amendment leaves more than enough room for the Fed to bail out specific firms.
Venture capitalist Peter Thiel makes a great point in a Q&A with MIT Technology Review that reflects on economic dynamism and large companies (a favorite theme of mind):
Can technology companies that start out bold stay that way when they become established? Many large computing companies get cautious.
You have to think of companies like Microsoft or Oracle or Hewlett-Packard as fundamentally bets against technology. They keep throwing off profits as long as nothing changes. Microsoft was a technology company in the ’80s and ’90s; in this decade you invest because you’re betting on the world not changing. Pharma companies are bets against innovation because they’re mostly just figuring out ways to extend the lifetime of patents and block small companies. All these companies that start as technological companies become antitechnological in character. Whether the world changes or not might vary from company to company, but if it turns out that these antitechnology companies are going to be good investments, that’s quite bad for our society.
Where are top income tax rates heading? The answer may depend on how Americans view the rich and the reasons behind high-end income inequality. Are the 1% and 0.1% and 0.01% pretty much deserving or undeserving?
Or to put it another way: if you believe — mostly — that macro forces such as technology and globalization have boosted top incomes by allowing highly talented and educated individuals to manage or perform on a larger scale, then you might be less inclined to support higher top marginal rates. But if you believe the “rich getting much richer” phenomenon is mostly driven by compliant corporate boards overpaying CEOs and a breakdown of social norms against exorbitant pay, then you might favor sharply higher tax rates.
So where are we today? In a new Harvard Business Review essay, Roger Martin argues that American attitudes toward taxation and the rich have moved through four historic eras. From 1932 though 1981, for instance, top tax rates rose from 25% to a high of 94%. During that period, high incomes were thought to be something obtained by owning assets rather than through work. Martin: “According to the theory, most rich people were basically rentiers and their income from owned assets could — and should — be taxed at very high rates with no adverse impact on their behavior or the economy.”
Since then, a different economic theory and attitude has held sway, resulting in much lower top tax rates (even with the Obama tax hikes.) Recognizing that the US had become a knowledge-driven economy, “lawmakers finally abandoned the prewar assumption that all rich people were rentiers and recognized that at the prevailing rates talented people were being put off work.” So taxer were lowered to encourage more work.
So will the current era continue? Martin doubts it:
In times of crisis, America has shown that it asks the super-rich to pay a lot more than the rich and I think this will happen based on the feeling that it is a time of economic crisis in America. Also, although applying a rich-as-rentier theory (implying tax rates in the 70% plus range for high incomes) isn’t really fit for purpose in a talent-driven economy, it’s also not justifiable to have a maximum rate that doesn’t distinguish between a mid-level executive and a hedge fund manager.
My bet is that the Fifth Era will look a lot like the early Third Era — after the height of the Great Depression but before the inception of WWII. That is, $10 million earners paying in the 75% range, $1 million earners in the 50% range and $500,000 earners in the 35% range.
How high or low the rates of the Fifth Era structure will be will depend, I think, on whether talent is seen as engaging primarily in trading value or primarily in creating value for their fellow citizens (in terms of better products and services and more jobs). If it is the former, they will be taxed more highly as unworthy rentiers and there will be little concern for incentive effects. If the latter, they will be taxed as important economic assets whose incentives must not be dampened. Right now, sentiment is trending more in the former direction than in the latter — a perception that the talented people on the Forbes 400 list have done little to dispel.
I will admit that given the financial crisis, Occupy Wall Street, and the incessant media coverage of the income inequality issue, Martin’s conclusion may intuitively feel right. Then again, national Democrats aren’t running on raising top tax rates further. Nor would I expect Hillary Clinton to do so in 2016. I doubt left-liberal pols think America is ready to embrace pre-Reagan tax rates (although left-liberal economists have given them the academic go-ahead.) Left-wingers can’t even do that in France.
Indeed, polls don’t suggest any unusual urge to sock it to the rich. Take a look at these two Gallup surveys. The first, from earlier this month, shows banks — I would guess that people see rich bankers as less deserving than tech entrepreneurs — with a net positive approval rating. The second, from last year, shows that while Americans favor income redistribution, not any more than they did 30 years ago despite rising high-end inequality:
People have mixed feelings about inequality, what’s driving it, and how it’s affecting the economy and their chances for success. I think people buy into the talent-driven explanation yet also think the game might be rigged for some at the top. That is certainly how I view it, given a world of both technological change and Too Big To Fail (plus other cronyist policies). But at this point, growth rather less inequality seems to what voters prefer. And while they may not think tax cuts for the rich help growth, they don’t yet think massive new tax hikes will help either (via GlobalStrategyGroup).
I’ve used the above chart a lot. It shows the gap between actual GDP and potential GDP. It represents trillions in missing economic growth caused by a failure of the US economy to return to its previous trend growth path.
The cost of the Two Percent Economy is staggering, and it’s a big reason — along with quiescent inflation — that “market monetarists” have been in no hurry to see the Federal Reserve do less. In fact, many would prefer the central bank do more — or, actually, do different. But at this point, economist Lars Christensen thinks it’s time to look forward and forget about returning to the pre-crisis trend level. From his blog post (worth reading in full):
The discussion about the Mankiw rule illustrates two problems in common monetary policy thinking. First there remains a major focus on the US labour market. The problem of course is that we really don’t know the level of structural unemployment and this is particularly the case right now after we in 2008 got out of whack. Second, while inflation clearly has remained below 2% since 2008 we don’t know whether this is due to supply side factors or demand side factors.
There is of course a way around these problems – nominal GDP level targeting – and as I have argued in a recent post it in fact looks as if the Fed has followed a 4% NGDP level target rule since July 2009.
That would not have been my preferred policy in 2009, 2010 or 2011 as I would have argued that the Fed should have done a lot more to bring the NGDP level back to the pre-crisis trend-level. However, as time has gone by and we have had numerous supply shocks and some supply adjustments have gone on for nearly six years I have come to the conclusion that it is time to let bygones be bygones. We can do little to change the mistakes of six years ago today. But what we – or rather what the Fed can do – is to announce a policy for the future, which significantly reduces the likelihood of repeating the mistakes of 2008-9.
Therefore, the Fed should obviously announce a NGDP level target policy. Whether the Fed would target a 4% or a 5% path for the NGDP level is less important to me. It would be the right policy, but it would also be a pragmatic way around dealing with uncertainties regarding the state of the US labour markets and to avoid having supply side shock distorting monetary policy decisions.
That is reality talking. The Fed is winding down QE and will begin nudging up rates next year (hopefully avoiding a repeat of the Fed’s 1936-37 mistake). From this point on, I suppose, better to focus on crisis avoidance through smarter, rule-based, market-based monetary policy. That, and faster potential GDP growth through supply-side reforms in areas such as taxation, regulation, and education.
View related content: Pethokoukis
Check out the top pieces we’re reading today on the economy, technology, education, and more.
1.) These charts from Quartz show how innovation is turning around American manufacturing.
2.) Ending teacher tenure would have little impact on its own, says this paper by Matthew Chingos from Brookings.
3.) James Bessen at Harvard Business Review comments that workers don’t have the skills they need—and they know it.
4.) According to Pew, Americans have a dim view of trade’s impact on jobs and wages.
5.) At Education Next, Laurence Steinberg asks, is character education the answer?
6.) MIT Technology Review looks at turbocharging photosynthesis to feed the world.
7.) From the National Bureau of Economic Research: Experimental evidence on distributional effects of Head Start.
8.) Carbon pricing–good for you, good for the planet, writes Ian Parry at iMF direct.
9.) Here’s how insurers are finding ways to shift costs to the sick, according to Charles Ornstein in The Upshot.
10.) Robert Pondiscio, in his Education Next post, discusses where the Common Core is not controversial.
11.) A working paper from the Mercatus Center deals with removing roadblocks to intelligent vehicles and driverless cars.
12.) This Brookings memo by Stuart Butler looks at “prizes for saving: the social mobility case.”
What went wrong with clean tech? Just why did Solyndra go bankrupt? Some critics would point to the $150 billion in Washington spending on the sector as distorting incentives or warping market forces. In his excellent new book, “Zero to One,” venture capitalist Peter Thiel says many over-hyped startups failed — he notes that 40 solar firms tanked in 2012 alone — because they originally neglected to answer one of seven key business questions:
1.) “Can you create breakthrough technology instead of incremental improvements?”
2.) “Is now the right time to start your particular business?”
3.) “Are you starting with a big share of a small market?”
4.) “Do you have the right team?”
5.) “Do you have a way to not just create but deliver your product?”
6.) “Will your market position be defensible 10 and 20 years into the future?”
7.) “Have you identified a unique opportunity that others don’t see?”
Failing to answer even one of these question can doom a new venture, according to Thiel. And too often cleantech firms couldn’t answer any — “and that meant hoping for a miracle.” (Tesla, Thiel adds, goes seven for seven.) For Solyndra, the problem was one of engineering:
A great technology company should have proprietary technology an order of magnitude better than its nearest substitute. But cleantech companies rarely produced 2x, let along 10x, improvements. Sometimes their offerings were actually worse than the products they sought to replace. Solyndra developed novel, cylindrical solar cells, but to a first approximation, are only [a fraction’ as efficient at flat — they simply don’t receive enough sunlight. The company tried to correct for this deficiency by using mirrors to reflect more sunlight to hit the bottoms of the panels, but it’s hard to recover from a radically inferior starting point.