Taxing the RIch at the State Level

Article in the weekend edition of the Wall Street Journal talks about states that rely on taxing the rich for most of their revenues suffered significant declines in revenue as a result of the last recession. Incomes of the wealthy tend to be more volatile than for other people. Much of this is due to the fact that most wealthy people have substantial income from equity markets. A sharp fall in the stock market reduces their incomes a lot. For example, the article reports that earnings of the top 1% of households in California fell by more than twice as much as the rest of the state's population. In New York the top 1% of earners paid 41% of the state's income taxes in 2007, compared to 25% in 1994. A result is that when the economy declines, state tax revenues decline even more. The federal government increasingly is relying on tax receipts from the top earners. The problems associated with volatility are less at the federal level, but increasing. Taxing the rich sounds good to many, but there are costs. Once again, there are not free lunches.

GE Avoids Paying Taxes

A front page article in the New York Times concerns how General Electric managed to pay zero corporate income taxes in 2010 even though its profits from U.S. operations was $5.1 billion. It's total profit was $14.2 billion, with the difference not repatriated to the U.S. One can imagine the hue and cry this may cause among liberals, but I think all of us should be concerned.

Taxes distort decision making; there is virtually no way to prevent that. But the U.S. tax code distorts at so many levels it is hard to know the final effects. From the high rate on repatriated profits, to the high corporate tax rate, to tax credits for some activities--the code encourages firms to spend huge amounts of money on lawyers and tax accountants to understand and take advantage of the code. But, that isn't all. The article shows that GE often takes the initiative in lobbying for tax breaks. They have a lot of lobbyists and utilize them. The article ends with a quote from Gary Sheffer, a G.E. spokesman, "We are a diverse company, so there are a lot of issues that the government considers, that Congress considers, that affect our shareholders. So we want to be sure our voice is heard."

I do not object to lobbying since it is difficult to see how a representative democracy would operate if people cannot make their views known to their representatives. Of course, corporations are not people, but the shareholders and workers are.

The recent task force that made recommendations on ways to reduce the deficit argued for lowering of rates but reducing loopholes and tax breaks. I enthusiastically endores such a plan. On the other hand, I am somewhat pessimistic or cynical. If Congress enacted a simplified tax code for both individuals and corporations that eliminated tax deductions and credits for every item Congress has thought needed support, we would have a better system. But, I would expect that breaks, loopholes, credits and other distortions would creep back in over time, so that a decade from now it would look a lot like the current code.

Government Debt Receiving Attention.

Two items of interest related to federal government deficits are available today. The first is a letter written by ten former chairs of the president's Council of Economic Advisers. The ten include four who served democratic presidents and six who served republican presidents.

A second is a ranking of countries provided by the Comeback America Initiative. A video of his interview on CNBC is also available.

Alfred Kahn Dies

Alfred Kahn died Dec. 27 of cancer. He was 93. I had several opportunities to hear Kahn give a presentation or to talk with him. Once, when I was at Miami University and the other times at LSU. Kahn was the most complete economist I ever met. He worked in the area of regulatory economics, a subject I taught at both the undergraduate and graduate level while at LSU. He knew the theory, he knew the empirical evidence, and he was a practioner of regulation, both in public utility regulation in New York and heading up the CAB under Pres. Carter. He was partially responsible for deregulation of airlines--an act that made airline travel affordable for families. Because of his experience deregulating airlines, he was asked to advise former Communist nations after the collapse of the Soviet empire.

Kahn taught at Cornell University and his daughter married a graduate student in English who ended up teaching at LSU. Consequently, we were able to have him make a couple of presentations when he would be visiting his grandchildren in Baton Rouge. On one occasion, he spoke to a group of faculty about his advising former Communist beaurocrats about "deregulating" their economies. I asked him if he planned on visiting Russia some time. His response was, "No." He added that he would rather go to Italy for the 25th time than go to Russia for the first time. He said that a proud moment in his life was when an Italian asked him what part of Italy he was from. (No German has ever asked me a similar question.)

Another strength of Kahn as an economist was his willingess to learn and to change his mind. An example is that when deregulating airlines, Kahn thought a gradual approach was best. He later concluded that that had been wrong because a slow process created new vested interests. He concluded that a rapid change was better.

I consider Alfred Kahn to be an excellent example to anyone who aspires to be an economist.

Notes on Lehman Bankruptcy

Very interesting post on a blog that I never heard of before. This is the kind of information difficult to know unless one is an insider or one who researches the minute details of regulations and laws.

Krugman on Scrooge

Paul Krugman had a column shortly before Christmas in which he compared Scrooge to many Republicans. He notes that Charles Dickens' Christmas classic is actually a left-wing tract. However, I wonder if he endorses all of Dickens' work. According to the excellent book, HOW THE DISMAL SCIENCE GOT ITS NAME, Dickens wrote BLEAK HOUSE as an antidote to UNCLE TOM'S CABIN, with the purpose of showing that the suffering of white factory workers was more severe than the suffering of black slaves. Like Thomas Carlyle, who coined the term "dismal science" in an article entitled, "On the Negro Question," Dickens believed that whites were superior to blacks and that enslavement of blacks apparently was fine. I recognize that endorsing one opinion of a particular writer doesn't imply that one endorses all the opinions, but since Krugman is so quick to tarnish with a broad brush, maybe it is justified in this case.

Current Policy as Reason for Concern

Christina Romer's column in Sunday's New York Times offers her judgment on the affect that uncertainty is having on the economic recovery. She discusses several concerns that are in the popular press and on shows like SquawkBox. These concerns are the fate of the Bush tax cuts, and environmental regulation. (I think she leaves out some though). She argues the biggest concern is uncertainty over the health of the economy. Her solution for resolving this uncertainty is a reaffirmation from the president, Congress, and the Fed that they will do whatever is necessary to create jobs. Fiscal and monetary policy must be expansionary, but a plan for tackling the long-term budget problems should be developed also.

It appears she is calling for additional fiscal stimulus. She is sticking with a Keynesian approach for the current state of the economy. But, she is ignoring the housing market. The wealth of most households is impacted more by changes in the value of their homes than in their portfolios. Further, housing is part of the real economy. The inventory of houses still exists, defaults and foreclosures continue to occur, and many others are still under water. The housing market is no where close to a new equilibrium as yet. I believe both Romer and those still in the Obama Administration are focusing on the wrong solutions because they misinterpret the problem.

Ben Bernanke was on 60 Minutes last night. He defended Fed policy, including the current round of quantitative easing. He noted that the Fed can change interest rates on very short notice so that they can reverse their policy when the time is right. When asked how confident he was that the Fed could achieve the necessary reversal at the right time, he replied, "100 percent." I hope and trust that this comment was for the sake of public confidence. If he literally is that confident in the Fed's ability to turn quantitative easing around and that they can know when the proper time to do so, then I am very nervous. Economists have no reason for such hubris. When we think that we can control the economy or fine tune the economy, or act like engineers, it is time to panic.