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Senator Mike Lee and Rep. Paul Ryan have different approaches to tax reform, at least on the individual side. Lee would modestly cut the top rate and greatly expand the child tax credit. Ryan would sharply lower the top rate to a level not seen since the Coolidge administration. What both approaches, at least as currently outlined, have in common is a high likelihood of greatly adding to the budget deficit.
New Republic’s Brian Beutler predicts the two camps will resolve the philosophical impasse by basically combining the two approaches and accepting massive deficits: “Under the circumstances, the smart play isn’t for the reformicons to out-debate the supply siders, or to negotiate with them, but to buy them off. Give Ryan a big rate cut. Keep the middle-class child subsidies. Don’t bother paying for either, in full.”
Problem: The GOP doesn’t need a fantasy tax plan that is not only fiscally irresponsible but would never come close to becoming law. Recall Rudy Giuliani’s tax-cut plan from his 2008 White House run. It was twice as big as the original Reagan tax cuts and would have slashed or eliminated all manner of federal taxes including the income tax, capital gains tax, corporate tax, estate tax, and alternative minimum tax. On a straight-line basis, it would have cost more than $6 trillion over 10 years. Even with reasonable dynamic scoring, this bad boy was a big revenue loser. At the time, The Wall Street Journal called it “a bid for his party’s tax-cutting wing,” and that is certainly was. It was also completely unrealistic.
But I don’t see Beutler’s Big Rock Candy Mountain Compromise happening. First, once you put corporate tax reform into the mix, it becomes rather easy to see comprehensive reform that is, as Ramesh Ponnuru puts it, pro-market and pro-middle class, “pro-growth and pro-family” beyond Beutler’s crude combination.
Second, although Lee’s numbers may not add up right now, Howard Gleckman of the Tax Policy Center says, “it is easy to see how they could.” Indeed, Lee and Rubio are working on, according to Lee, “a new, comprehensive, pro-family, pro-growth tax reform proposal that we hope to introduce later this year.”
Third, voters are plenty aware of America’s debt problem and would be rightly skeptical of a “deficits don’t matter” approach to tax reform. Note that Mitt Romney in 2012 had a flashy tax plan that would have cut marginal rates by 20%, but he also tried to pay for it. While I don’t think a GOP plan needs to be TPC or CBO certified, it probably needs to be in the same zip code. And although liberals might love a 2016 GOP presidential candidate to propose a budget-busting plan that axes taxes for the rich and big companies and jacks them up on the middle class, I don’t see any of the serious contenders doing so.
Given America’s current fiscal situation and the great supply-side progress made on tax reform since 1980, sweeping tax reform is no easy task the days. But that problem is also an opportunity if Republicans add other issues to their pro-growth portfolio including anti-cronyist deregulation, education, and infrastructure.
Check out the top pieces we’re reading today on the economy, technology, education, and more.
1.) The latest from The Upshot is a piece by David Leonhardt called “A new reason to question the official unemployment rate.”
2.) Over at Real Clear Policy, Thomas Hopkins and James Broughel note that it’s high-time for effective regulatory reform.
3.) Under the ACA, minimum wage hike discourages work, says Preston Cooper at e21.
4.) At Education Next Julia Freeland writes, “Who are your teachers? New technology for humanity.”
5.) Brookings looks at retirement accounts as personal safety nets.
6.) Did you know: cell-phone data might help predict Ebola’s spread, according to the MIT Technology Review.
7.) From Harvard Business Review: employers aren’t just whining—the skills gap is real.
8.) Resources for the Future looks at the labor market impacts of the 2010 deepwater horizon oil spill and offshore oil drilling moratorium.
9.) How poor are America’s poorest? Find out in this Brookings paper on US $2 a day poverty in a global context.
10.) Courtney Collins at Mercatus has a new piece out on education titled “Reading, writing and regulations: A survey of the expanding federal role in elementary and secondary education policy.”
11.) From City Journal comes an article on a judge blocking a pension-reform measure in Ventura County.
Follow AEIdeas on Twitter at @AEIdeas.
View related content: Pethokoukis
Here is a really great Twitter debate, courtesy of Miles Kimball:
One key measure of job market health is the number of people working part-time for economic reasons (PTER) rather than by choice. Back in 2007, according to the Atlanta Fed, 61% of people working PTER the previous year transitioned into full-time work with the rest still working part-time either for economic reasons or by choice.
That job finding rate fell during the Great Recession and hasn’t improved since. In 2013, only 49% of the 2012 cohort of PTER people had found a full-time job. Why? Turns out that a greater share of PTER people are getting stuck:
The decline in finding full-time work is largely accounted for by the rise in the share of Pats who are stuck working PTER. In 2007, 18 percent of the Pats were still PTER after a year, rising to around 30 percent by 2011, where it has essentially remained. … People who find themselves working part-time involuntarily are having more difficulty getting full-time work than in the past, even if they stay employed. But it doesn’t seem that much of this can be attributed to any particular demographic or industry characteristic of the worker. The phenomenon is pretty widespread, suggesting that the problem is a general shortage of full-time jobs rather than a change in the characteristics of workers looking for full-time jobs.
View related content: Pethokoukis
Using an approach that compares differences across states between 2008 and 2011, we show that states increased their highway spending more than dollar-for-dollar in answer to the federal stimulus authorized by the American Recovery and Reinvestment Act. Without these extra funds, we estimate that national spending on highways would have declined roughly 20% between 2008 and 2011, on par with the decline in state tax revenues. Given the large multiplier effect from infrastructure spending that past studies have documented, the additional spending on highways likely had a significantly positive effect on economic activity.
Sometime soon, it seems, President Obama will announce he’s taking executive action on immigration, both legal and illegal. In a new note, Goldman Sachs speculates what those actions might be, exactly. Its informed guesses: (a) excluding dependents from the cap on employment based green cards, (b) recapturing employment-based green cards. (c) allowing dependents of H-1B visa holders to work. Overall, Goldman thinks these changes would expand the US labor force by by 170,000 to 375,000, “equivalent equivalent to 0.1% to 0.25% of the US labor force.”
Of course, much of the media and blogosphere attention concerns what the president will do about illegal immigration. Goldman speculates that Obama will expand upon his 2012 Deferred Action for Childhood Arrivals memorandum. Goldman:
It is unclear what the President might announce on this front, but it has been reported that the White House is considering extending similar protections to unauthorized immigrants whose children are US citizens or, more narrowly, to parents of enrollees in the DACA program. The former group could total 4.5 million, according to estimates from the Pew Center, while the latter would be no higher than 1.2 million based on DACA participation to date. While this could have an important effect on the authorized labor force in the US, these individuals are by definition already in the US and many are likely already working, so the actual effect on the labor market would likely be much smaller than these numbers suggest.
Europe’s $13 trillion economy — nearly a fifth of world GDP — failed to grow in the second-quarter, losing whatever smidge of momentum it had after escaping a double-dip recession. (Germany actually shrank.) Private consumption and investment are still below 2007 levels. French unemployment is at an all-time high, and a desperate and unpopular President Francois Hollande just formed a new government. Meanwhile, prices climbed just 0.4%, year over year, in July. And, as Business Insider’s Myles Udland recently noted with the following chart, “expectations of Eurozone inflation are at their lowest levels since the depths of the financial crisis in 2009.”
So what the the heck went wrong in Europe, and what continues to go wrong? Yes, the region has many structural, supply-side problems. But it wasn’t a debt crisis that caused what is, really, a long depression. That was a result, not a cause. Here is a really great explainer from Scott Sumner:
The ECB tightened monetary policy sharply in 2011. This caused NGDP growth to plunge, and the eurozone fell into a double-dip recession. Whenever you have a demand-side recession, some people will look at specific industries, and/or specific regions, to see what caused it. This is mistake. The US housing industry was hit hard in the recent recession, but didn’t cause it. The PIIGs were hit especially hard after 2011, but did not cause the eurozone recession. In any recession, there will be regional and industry variation in intensity, due to supply-side factors. But those specific factors cannot explain a generalized decline in NGDP growth for an entire currency zone. Only monetary policy can explain that. …
The ECB caused the double-dip recession—even new Keynesian models will tell you that. (After all, the ECB raised rates twice in 2011, so this wasn’t one of those zero bound issues.) Odd that Mario Draghi doesn’t understand that the ECB caused the NGDP growth collapse, and that debt crises are the result of NGDP growth crashes. That doesn’t make me very hopeful that the eurozone’s long nightmare will end anytime soon.
And, again, here is a favorite chart demonstrating the impact of those 2011 rate hikes:
Just like the Fed’s untimely 2008 tightening help turn a moderate US downturn into the Great Recession, the ECB did the trick in Europe. Except while the Fed eventually took extraordinary action to try and reverse its mistake, the ECB continues to dither.
View related content: Pethokoukis
Tax cuts are the defining economic policy issue of the modern GOP. As the late columnist Robert Novak once said, “God put the Republican Party on earth to cut taxes.”
But personal income tax rates today are way lower than they were before Reaganomics. And the national debt has soared in the 2000s and is headed toward crippling levels. These realities, along with current economic challenges such as middle-class wage stagnation and job polarization, are causing a rethink on the right concerning what tax reform should look like in the 2010s and beyond. Mike Lee, for one, would like a much bigger child tax credit to boost take-home pay for families. Paul Ryan would prioritize cutting the top personal tax rate to 25% from 40% to boost economic growth. (Ignore, for a moment, that the Lee plan would lower the top rate, too, just not as far as Ryan would prefer.)
The media, of course, would like to frame this policy disagreement as an emerging ideological and spiritual death match among conservatives and Republicans. The reformocons/reformicons vs the supply siders. Begun, the Tax War has.
But war, either civil or uncivil, is unnecessary. For starters, and the media usually misses this, both sides understand that the business tax code is terribly anti-growth and uncompetitive. Deeply cutting the corporate tax rate, ending business tax breaks, and allowing businesses to write off the full cost of their investments immediately are among the ideas with wide support. And here is Ramesh Ponnuru on how to best blend these competing though complementary approaches to individual tax reform:
You can’t draw up a realistic budget with a top tax rate of 25 percent and a large child credit. (You might not be able to draw up a realistic budget with a top rate of 25 percent even without the credit.) You probably can, however, draw up one with a lower top rate than we have today and better treatment for investment — including parents’ investment in the next generation. Because that mix of policies would leave many millions of middle-class families ahead, it may well be easier to enact than a plan that concentrates solely on reducing the top rate. Supply-siders, that is, might achieve more of the rate reduction they seek if they embrace the credit.
Combining these ideas, as Senators Lee and Marco Rubio of Florida are now trying to do, seems like the obvious sweet spot for Republicans. It would allow them to be both pro-business and pro-middle class, pro-growth and pro-family. And if Chairman Ryan came on board, the party would find itself in a new friendly agreement.
Yes, the healing power of “and” in action. I wrote pretty much the same thing the other day. It’s an approach the average person might say makes so much sense, the politicians would never go for it. But a tax plan to shore up two key American institutions, the family and the private sector, really makes too much sense to ignore. And then we can move on to ideas for reforming and repairing healthcare, education, entitlements, the safety net infrastructure, financial regulation, internet regulation, energy regulation, patent and copyright law, the Federal Reserve …
Some eyeopening stats from “How to jumpstart the Eurozone economy by Francesco Giavazzi and Guido Tabellini:
At the end of 2013, private consumption in the Eurozone was 2% below its 2007 level, [while] private investment was 20% below the 2007 level … In the US, by contrast, GDP and private consumption are 6–7% above where they were six years ago, and investment too is above its pre-crisis level.
I call this the QE Difference. So what should the euro zone do now? Giavazzi and Tabellini suggest a helicopter drop:
• All countries should enact a large tax cut, say corresponding to 5% of GDP. • They should be given several years (say three or four), to reduce the budget deficit created by this tax cut, through a combination of higher growth and lower expenditures. • To finance the additional deficits, members states should issue long-term public debt with a maturity of say 30 years. This extra debt should all be bought by the ECB, without any corresponding sterilisation, and the interest on the debt should be returned to the ECB shareholders as seigniorage.
But this seems to be a temporary move, reversed over three or four years. And that may be probematic. Here is David Beckworth on the issue of permanent vs. temporary monetary action:
In other words, we should not be surprised that the Fed’s QE programs have not packed more of a punch. U.S. monetary authorities have clearly indicated the programs are temporary. (QE3, though, has added some permanency with its data-dependent nature and appears to have offset much of the 2013 fiscal drag.) We should also, then, not be surprised that Abenomics–which has signaled a permanent expansion of the monetary base–is doing so much better than the original Bank of Japan QE program of 2001-2006. Finally, we should also not be surprised as to why FDR’s 1933 decision to go off the gold packed such a punch. It permanently raised the monetary base. All of these experiences paint a picture of the relationship between the expected permanency of monetary base injections and aggregate demand growth. … So stop worrying about whether large scale asset purchases or helicopter drops are more effective. This is the wrong debate. Instead, start worrying about how we can change the Fed’s target to something like a NGDP level target.
My baseline case here is that innovation is a key driver of productivity. Startups are critical to innovation both in the new goods/services they generate, and the competitive pressure they put on incumbents to improve. And the more game-changing the innovation the better. Not surprisingly then, I find “Firm growth dynamics: The importance of large jumps” by Yoshiyuki Arata to be bang on:
Radical innovations involve the development or application of something fundamentally new that creates a wholly new industry or causes a complete transformation of the market structure. In our model, the radical innovations correspond to large jumps. Radical innovations are critical to the long-term growth of firms and differ significantly from incremental innovation.
Firms that dominate the existing market but lag behind in competition for radical innovation often fail to maintain their leading positions Small firms that engage and succeed in radical innovation usually bring down giants and gain the leading position in the market.
Thus, radical innovation (or large jumps) is a key element in the long-term success of a firm. … Moreover, radical innovation is an engine of economic growth. It revolutionises existing markets or opens up whole new industries. As Schumpeter (1942) states, “Creative destruction is the essential fact about capitalism.”