Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press.

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The NYT should have its presses washed out with soap. In an article about plans to impose work requirements for Medicaid it told readers:

"The ballooning deficits created by the budget deal that President Trump signed into law Friday and the recent tax bill are likely to add urgency to the party’s attempts to wring savings from entitlement programs."

This needs a big "what the f**k are you talking about?" The Republicans do everything they can to increase the deficit with tax cuts and additional spending for the military and now there is "urgency ... to wring savings from entitlement programs."

Sorry, not on this planet. The Republicans have made it as clear as they possibly can they don't give a damn about deficits. When a Republican says anything about deficits at this point, the only appropriate response is derisive laughter. They have zero right to be taken seriously and the NYT misleads its readers by implying otherwise.

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It is more than a bit painful to see the media all turn to the Peter Peterson-financed Committee for a Responsible Federal Budget (CRFB) as the experts on budget deficits right now. We can argue over whether the Republicans are pushing too far with their deficits when the economy is near full employment, but one thing that is not arguable is that we had needlessly austere federal budgets for the last decade.

While the austerity was largely attributable to the Republicans in Congress who had as their guiding principle opposing anything President Obama might do to boost growth and create jobs, the CRFB and other Peterson funded outfits provided them with intellectual credibility in pushing this position. They could pretend they were being responsible stewards of the Treasury as they were demanding cuts in a wide range of federal programs and nixing any new ones.

In reality, rather than helping our children as the CFRB and Republican deficit hawks claimed, they were keeping their parents out of work and permanently lowering the economy's productive capacity. Their policies are easily costing us $1 trillion a year in lost output (5.0 percent of GDP).

It is unfortunate that a long record of being disastrously wrong on budget policy is apparently a credential for getting taken seriously by major media outlets in debates over the federal budget.

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Here are a few small changes from the article in today's Post ("Massive infusion of spending ends era of restraint for federal agencies, Pentagon) telling readers how the new budget deal would increase the budget deficit.

"The deal signed into law by President Trump will pump more than $500 billion in additional money (1.2 percent of GDP) into domestic agencies and the Pentagon over two years, the biggest increase in spending in almost a decade. It ends months of budget squabbles and provides greater certainty for the government officials responsible for the military, disaster relief and domestic agencies."

...

"While Congress approved a 10 percent increase in spending for the Pentagon and domestic agencies — lifting the military budget to $700 billion this year (3.5 percent of GDP) and the domestic budget to $591 billion (3.0 percent of GDP) — appropriators on 12 different committees have to fill in many of the details."

...

"The nonpartisan Committee for a Responsible Federal Budget projects that the United States will have a $1 trillion budget deficit (5.0 percent of GDP) by next year — extremely high by historical standards — and that it will probably last for years."

...

"Some of the largest debates on Capitol Hill in the coming weeks — a complete budget is due by March 23 — are probably going to be over border security funding, $86 billion in disaster funding and $140 billion in emergency war funding." (The piece does not indicate whether these would be single year or multi-year appropriations, so it is not clear how large they are relative to the budget or the economy.)

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Hi everyone, this is CEPR, taking over Beat the Press for an important announcement. We're planning a party in honor of Dean's 18 years as CEPR's Co-Director and we'd love for you to come. February 26, 2018, Busboys and Poets 5th and K location, in Washington, DC.

Details can be found here.

Hope to see you there! Now, back to your regularly scheduled programming.

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In an NYT column advocating that companies spend more money on training their workers, former Yale president Richard Levin implicitly endorsed the Republicans' view that the economy will grow much more rapidly than projected by the Congressional Budget Office and most other forecasters. Levin bases his argument in part on an evaluation by McKinsey, a management consulting company, that up to half of all jobs could be automated over the next two decades.

If we do in fact see half of all current jobs eliminated, that would imply 3.5 percent annual productivity growth, a little better than the 3.0 percent rates we saw in the long Golden Age from 1947 to 1973 and again from 1995 to 2005. With even modest labor force growth, we would be looking at GDP growth of more than 4.0 percent. Even if the McKinsey numbers turn out to be overly optimistic on the rate of productivity growth, we should still be able to make the 3.0 percent GDP growth rate touted by the Republicans.

Of course this growth has nothing to do with the Republican tax cut, the McKinsey projections long predate Trump's election. But they do indicate that the prospect of 3.0 percent growth is not absurd, many respectable types use this sort of assumption as the basis for their NYT columns.

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John Quiggin had a good piece in the NYT, pointing out how the sky-high valuations of Bitcoin undermine the efficient market hypothesis that plays a central role in much economic theory. In the strong form, we can count on markets to direct capital to its best possible uses. This means that government interventions of various types will lead to a less efficient allocation of capital and therefore slower economic growth.

Quiggin points out that this view is hard to reconcile with the dot-com bubble of the late 1990s and the housing bubble of the last decade. Massive amounts of capital were clearly directed towards poor uses in the form of companies that would never make a profit in the 1990s and houses that never should have been built in the last decade.

But Bitcoin takes this a step further. Bitcoin has no use. It makes no sense as currency and it is almost impossible to envision a scenario in which it would in the future. It has no aesthetic value, like a great painting or even a colorful stock certificate. It is literally nothing and worth nothing. Nonetheless, at its peak, the capitalization of Bitcoin was more than $300 billion. This suggests some heavy-duty inefficiency in the market.

Quiggin is on the money in his analysis of Bitcoin and its meaning for the efficient market hypothesis, but it is worth taking this line of thinking in a slightly different direction. The purpose of the financial sector is to allocate capital. In principle, we would want as small a financial sector as possible, just like we would want a small trucking sector.

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NYT Magazine had an interesting piece on the experience of a woman and her family who were forced out of the Cabrini-Green housing project in Chicago when it was torn down in 2010. The article tells readers that she was unhappy to be forced to leave an apartment that had been her home for more than two decades and where she had raised 13 children. The experience of her and her family in the public housing to which they were relocated proved disastrous, and she ended up dying a seemingly preventable death less than four years later.

While the story presented here is, in fact, tragic, the piece misleadingly implies that Cabrini-Green residents were better off before the high-rise complex was destroyed. This may have been true for some, but that is not likely the case for most of the people who left the project.

A recent re-analysis of data from the "Moving to Opportunity" study conducted in the 1990s found large improvement in school graduation rates and other outcomes for children who left housing in areas of high poverty. A more recent analysis, of outcomes for people who left public housing when the Robert Taylor homes on Chicago's south side were destroyed, found even larger effects. 

The story of Annie Ricks, the woman featured in the NYT piece, is indeed horrible. It reflects the way low-income people, and especially low-income black people, are treated in the United States. But it is absurd to imply that housing projects like Cabrini-Green were somehow good living arrangements for people. This doesn't mean that at least some of the former residents would not find these projects better than their alternatives, but it is irresponsible to suggest that, in general, this is the case when there is clear evidence showing the opposite.

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My modest additions to five paragraphs of the NYT article on the budget deal:

"The deal would raise the spending caps by about $300 billion over two years (3.5 percent of projected spending), according to a congressional aide. The limit on military spending would be increased by $80 billion in the current fiscal year (2.0 percent of spending) and $85 billion in the next year (1.9 percent of spending), which begins Oct. 1, the aide said. The limit on nondefense spending would increase by $63 billion this year (1.5 percent of spending) and $68 billion next year (1.6 percent of spending).

The deal will cause federal budget deficits to grow even larger, on top of the effects of the sweeping tax overhaul that lawmakers approved in December. But because the agreement gives both parties what they wanted most, the deficit impact appears to be of little concern. Defense Secretary Jim Mattis, White House Press Secretary Sarah Huckabee Sanders and Speaker Paul D. Ryan all quickly embraced it.

From the increase in domestic spending, Mr. Schumer said the deal includes $20 billion for infrastructure (0.2 percent of spending [all calculations assume a two-year figure]), $6 billion for the opioid crisis and mental health (0.07 percent of spending), $5.8 billion for child care (0.07 percent of spending) and $4 billion for Veterans Affairs hospitals and clinics (0.05 percent of spending). It also includes disaster relief for areas hit by last year’s hurricanes and wildfires.

The deal also includes $4.9 billion — two years of full federal funding — for Medicaid in Puerto Rico and the United States Virgin Islands (0.06 percent of spending), helping to avoid a looming Medicaid shortfall. There is additional money to repair infrastructure, hospital and community health centers severely damaged by Hurricanes Irma and Maria.

The relief aid also includes $28 billion in community development block grants (0.33 percent of spending), including $11 billion for Puerto Rico (0.13 percent of spending), with $2 billion of that going to repair the power grid (0.02 percent of spending). About 30 percent of Puerto Ricans — more than 400,000 customers — still don’t have electricity more than four months after Hurricane Maria. Puerto Rico requested $94.4 billion in aid after the storm."

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It seems the world's financial markets have stabilized for now, but we're still seeing all the pieces that were written with the expectation of a further plunge that were already in the pipeline, such as this front page piece in the NYT. I don't mean to mock all these writings. The market certainly could take another plunge since prices are high, but they do provide a useful way to see the extent to which people are focused on real versus imagined fears.

As I have noted elsewhere, the obsession with inflation is clearly overblown. Not only is it not visible in the data, it is not visible in people's expectations. As investors were supposedly dumping stock because of inflationary fears, the gap between the interest rate on government bonds and inflation-indexed bonds barely budged. This gap should be a pretty good measure of inflationary expectations and presumably, there is considerable overlap between the people who invest in the stock market and people who invest in the bond market.

Apart from inflation, there is another aspect of the higher wage growth reported last Friday that did not get as much attention. Actually, there was not much of a jump in wages in any case. The year-over-year change in the average hourly wage was reported at 2.9 percent. Twice in the last two years, it has been 2.8 percent. The increase in the average hourly wage for production and non-supervisory workers, a group that includes more than 80 percent of the workforce, was just 2.4 percent.

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Yes, boys and girls, it's time to play "Why Did the Market Fall?" This is when you get to blame who or whatever you like for the big plunge in the market that began last Friday (now largely reversed).

I want to blame the partial unwinding of the Affordable Care Act, which is likely to leave millions more uninsured and tens of millions paying more for their health care. I have a friend who wants to blame her uncle's bad breath. Then there is Andrew Sorkin at the NYT who tells us that investors fear that Donald Trump's tax cuts will succeed all too well, causing a boom which will generate inflation.

So the Sorkin story is that we get a big uptick in demand from the tax cuts, which will push the economy above its potential level of output creating a good old-fashioned wage-price spiral. That will mean higher interest rates and therefore lower stock prices.

If we want to test this one we can look at measures of investors' expectations of inflation. On January 31, just before the plunge, the yield on 10-year Treasury bonds was 2.72 percent. The yield on an inflation-indexed 10-year bond was 0.61 percent, implying a gap of 2.11 percentage points. On Friday, the day of the first big plunge, the yield on the 10-year Treasury bond rose to 2.84 percent, while the yield on the inflation-indexed bond rose to 0.7 percent, giving a gap of 2.14 percentage points.

That's 0.03 percentage points more than before the crash. Do we really want to say that an increase in the expected rate of inflation of 0.03 percentage points will sink the market? Of course, the gap was back down to 2.10 percentage points at the end of the day on Monday, so it's not clear what happened to investors' fears that the Trump tax cuts would spur inflation.

Okay, we get that Sorkin is apparently very fearful of inflation and presumably thinks the Fed has to be very vigilant on the inflation watch. He doesn't even care if he lacks the evidence to make his case.

(It is worth noting that if the Trump tax cuts "work" it is supposed to be by spurring a flood of new investment. That should increase productivity growth, which would relieve inflationary pressures. So if Sorkin has a vision of Trump's tax cuts causing inflation, he seems them "working" in a different way than has been advertised.)

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I have to disagree with Paul Krugman on his assessment of the current state of the economy. While I would agree with most of his comments about the state of the stock market and housing market, and also the competence of the Trump administration, I think he is wrong in saying that we are at or near full employment.

There are a few points to be made here. First. Krugman rightly notes the aging of the population pushing down the overall labor force participation rates. However, employment-to-population rates for prime-age workers (ages 25 to 54) are still below pre-recession levels and well below 2000 levels. The falloff is pretty much across the board, applying to both men and women and both more educated and less educated workers (not all by the same amount) suggesting that a supply-side explanation is not likely. In other words, there is reason to believe that if there were more demand, more people would be working.

While the 4.1 percent unemployment rate is low by the standards of the last 45 years, it is worth noting that other major economies (e.g. Japan and Germany) now have far lower unemployment rates than almost any economist thought plausible just four or five years ago. I don't see any reason to believe that the US unemployment rate can't fall to 3.5 percent, and possibly even lower, without kicking off an inflationary spiral.

As evidence in the other direction, Krugman cites the quit rate, the percentage of workers who quit their job. He notes that this is almost back at pre-recession levels and not much below 2001 levels (the first year for which data are available). While this is true, much of the story here is a composition effect. A much smaller segment of the labor force is in sectors with low quit rates like manufacturing and the government. A larger share are in high quit rate sectors like restaurants and professional and business services. 

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Before anyone starts jumping off buildings, let me give you a few items to think about.

1) The stock market is not the economy. It moves in mysterious ways that often have little or nothing to do with the economy. In October of 1987, it plunged more than 20 percent in a single day. GDP grew 4.2 percent in 1988 and 3.7 percent in 1989. The market did recover much of its value over this period, but we don't know whether or not it will recover the ground lost in the last week either.

2) The market has gone through an enormous run-up over the last nine years. The current level is more than 230 percent above its 2009 lows. That translates into an average nominal return of more than 14.0 percent annually, before taking into account dividends.

The gains have been even more rapid over the last two years. Even with the recent drop, the market is more than 40 percent above its February 2016 level. Most people would have considered it crazy to predict the market would rise by 40 percent over the next two years back in February 2016. In other words, people who have invested heavily in the stock market have nothing to complain about. If they didn't understand that it doesn't always go up then they should keep their money in a savings account or certificates of deposit.

3) This plunge is not in any obvious way linked to higher interest rates. We can say that because interest rates have not risen that much. The yield on 10-year Treasury bonds stands at 2.71 percent. (It fell sharply today as the market was plunging.) That compares to about 2.4 percent a year ago. It's pretty hard to tell a story that a 0.3 percentage point rise in long-term interest rates will sink the stock market and the economy. The yield had been less than 1.8 percent two years ago.

4) The plunge in markets is worldwide with markets in Europe and Asia also sinking sharply. This undercuts the blame Trump story unless the theory is that Trump is so bad he is going to sink the whole world economy. Also, the markets are still above the levels they were at when Trump took office, so this is really not a good theory for Trump critics to embrace.

In short, calm down. The economy is not going to collapse. If you have less money in your 401(k) than you did last week, just remember: you have far more than you expected to have last year.

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Heather Long had a column in the Washington Post telling us that "it feels like 2006." As someone who did his best to warn of impending disaster in 2006, I can say that it doesn't look at all like 2006. It is frustrating, but perhaps not surprising, that the economics profession and economic reporters have done their best to learn absolutely nothing about their enormous mistakes at that time. (Fortunately for them, economics is not an area where people are held accountable for the quality of their work, so this failure cost almost no one their job or even led them to miss a scheduled promotion.)

The basic story of real world 2006 was that the impending disaster was not hidden. It did not require some super-sleuth to figure out what was wrong. It required access to widely available government data and knowledge of third-grade arithmetic.

We had an unprecedented run-up in nationwide house prices. The national average had risen by more 70 percent since 1996, after adjusting for inflation. This followed a century in which house prices had just moved in step with inflation. And, this was a nationwide story. It was not just a few hot housing markets on the coasts, prices were soaring in Chicago, Minneapolis, and even Detroit.

Furthermore, this run-up was clearly not connected with the fundamentals of the market. Unlike the last five years, nothing was going on with rents. They were just rising in step with the overall rate of inflation. Furthermore, we already were seeing record vacancy rates even before the collapse of the market. In short, we had a gigantic neon sign hanging over the housing market saying "bubble."

I should also add that the bad loans fueling the bubble were hardly a secret either. The National Association of Realtors reported that more than 40 percent of first-time homebuyers put down zero or less (they borrowed to cover closing or moving costs) on their homes in 2005. And, there was widespread talk of "NINJA" loans, which stood for no income, no assets, no job.

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The stock market tumbled by 2.0 percent on Friday. Given that the top 1.0 percent hold a grossly disproportionate share of stock wealth, this means they took a big hit. Are we more equal as a society now?

Those who like to focus on wealth measures on inequality would have to say yes. And if the market continues to fall (not a prediction, but it certainly is possible that the correction will continue) then we will see a further gain on the inequality front. Suppose it falls 30 to 40 percent, bringing price-to-earnings ratios closer to historic averages. Will the country then look much different than it does today?

I'm inclined to say no, at least if the distribution of income has not changed. To my view, the major story on inequality over the last four decades has been the more than doubling of the share of income that goes to the 1.0 percent, from less than 10 percent in the 1970s to slightly more than 20 percent today. The top 0.1 percent have been the biggest gainers in this picture.

Wealth has not always followed the same pattern since so much of the wealth of the rich is tied up in stock. We had two big plunges in the stock market during this period, 2000 to 2002, when it fell by more than half, and again between 2007 and 2009. It's hard to see how the poor and middle class were doing any better at these troughs in wealth (2002 and 2009) than they were when wealth was at its peaks before the crashes.

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The NYT had a very good piece pointing out that the bonuses promised by many corporations following the tax cut are often less consequential than they appear. For example, many companies highlighted their maximum bonus amount. This was often a figure (e.g. $1,000) that went to a full-time worker who had been with the company for twenty years or more. At a company like Walmart, very few of their workers would have been there for twenty years and many are part-time. This means that the typical worker would receive much less than the hyped $1,000 bonus.

However, the most remarkable aspect of the bonus game is the fact that a bonus could be tax deductible in 2017 even if it was not paid until 2018. This inexplicable (on policy grounds) quirk in the tax code gave corporate America an enormous incentive to announce bonuses at the end of last year since bonuses announced in 2017 cost much less money than bonuses or pay increases announced and paid in 2018.

If a company like Walmart or AT&T gave its workers $100 million in bonuses or pay increases in 2018 it would cost the company $79 million in after-tax profits, given the new 21 percent corporate tax rate. However, if the same $100 million bonus was announced before the end of 2017 it would only cost the company $65 million in after-tax profits since it could be deducted in a year when the tax rate was 35 percent. (These calculations assume that the companies actually pay the marginal tax rate.)

This means, in effect, that the government would have been paying these companies $14 million to announce a bonus before the end of the year. Since we all believe that companies respond to incentives, it should not be surprising that many announced bonuses before the end of 2017.

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As I have pointed out repeatedly, the Republicans story about how their corporate tax cut will benefit everyone hinges on the idea that it will kick off a huge round of new investment. In their telling, investment is hugely responsive to tax rates. This means their tax cut will spark an investment boom. The higher levels of investment will increase productivity, which will eventually lead to higher wages.

We got our first weak test of this story with the Commerce Department's release of advanced data on capital goods orders for December. As I pointed out, these are orders, not deliveries, so fast-moving companies should have been able to get some in before the end of the month.

Even though the tax bill was not signed until almost the end of the year, its passage was virtually certain by the middle of the month. Furthermore, the outlines had been known since Labor Day, so unless a corporation's management was sleeping on the job, they had four months to plan their response.

As it turned the initial release showed a modest 0.1 percent drop in new orders for capital goods. Today the Commerce Department released its full report on manufacturing orders for January, with more complete data. This showed a 0.5 percent drop in orders for non-defense capital goods (0.4 percent, excluding aircraft).

Perhaps we will see a different story in future months, but so far it doesn't look like corporate America is feeling inspired to undertake an investment just yet.

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Mick Mulvaney, the acting director of the Consumer Financial Protection Bureau (CFPB), effectively decided to incentivize ripoff schemes by taking away the enforcement powers of the CFPB division that is charged with blocking such schemes. As fans of free markets everywhere know, if it possible to make money by designing deceptive financial products that rip off low- and moderate-income people, profit-maximizing companies will do it.

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An NYT article noted that people are more likely to work at home now than in the early part of the last decade and that this is reducing energy usage. Near the end, the piece included this paragraph:

"In addition, between 2003 and 2012 the number of part-time workers in the United States almost doubled, from 4.6 million part time workers to 8.3 million, many of whom are involuntarily part-time workers. “The number of people who are spending time at work is going to go down because you’re sort of swapping out a full-time worker for a part-time worker,” said Dr. Simon. That may be good for energy use, but not necessarily so great for the employee’s wallet."

The problem is choosing 2012 as an endpoint. The labor market has tightened considerably since 2012. The percentage of workers who report working part-time because they could not find full-time jobs is the same now (3.5 percent) as it was in 2003.

Strangely, the piece ignores the much larger number of workers who choose to work part-time. (The workers say they choose to work part-time, that's how we know.) In the most recent data, this number stood at 21.1 million workers or 13.9 percent of the labor force.

This is also roughly the same as the share in 2003, but the endpoints conceal an important pattern. Voluntary part-time had dropped considerably until 2014 when the main provisions of the Affordable Care Act. The number of people choosing to work part-time rose from 18.9 million in 2013 to 20.9 million last year, an increase of 10.6 percent. This is presumably due to the fact that people were now able to get insurance without working at full-time jobs.

 

Addendum

I thought I would add the link to our paper showing that the rise in voluntary part-time is almost entirely among young parents, the people who we would expect health care insurance to be most important to. Also, just to give numbers here, taking averages for the last three months (single month data is erratic) the number of people reporting that they are working part-time for non-economic reasons rose by 291,000 from the last three months of 2011 to 2012, then fell by 38,000 the following year. In the first year the ACA was fully in effect it rose by 1,043,000.

 

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The Commerce Department gave us more news today indicating that manufacturing isn't bouncing back like Donald Trump promised. The Commerce Department released its data on construction spending for December.

It turns out that construction of manufacturing plants is down by 11.7 percent from its December 2016 level. It was running at $60,595 million annual pace in December of 2017, down from a $68,624 pace in December of 2016. This probably shouldn't be a surprise given the $50 billion (0.26 percent of GDP) increase in the size of the trade deficit, but it does go against President Trump's promises about bringing back manufacturing.

Another noteworthy change was a drop in construction spending on power plants of 10.8 percent. Also, spending on religious facilities fell by 8.3 percent.

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Some folks may have been impressed with Donald Trump's plan for $1.5 trillion in infrastructure spending over the next decade. This is both because they have little sense of the size of the economy and also because they don't realize that he is not proposing for most of this spending to come from the federal government.

While he didn't lay out a specific plan, past documents indicate that he wants the federal government to increase spending by $200 billion, with the rest coming from state and local governments, as well as private investors. Since GDP is projected to be almost $240 trillion over the decade, Trump is proposing to spend an amount equal to a bit more than 0.08 percent of projected GDP.

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An important provision of the new federal tax code was the capping of the deduction for state and local taxes at $10,000. This was an explicit hit at states like New York and California, which have relatively high tax rates in order to provide relatively high-quality services in areas like education and health care. These states also tend to vote Democratic in national elections.

One way that these states can partially get around this cap is by replacing a portion of the state income tax with an employer-side payroll tax. This can be in such a way that almost no one would end up paying more in state taxes, but they would effectively be able to still deduct their taxes from their federal income taxes.

The way a payroll tax works is that an employer pays it on the worker's wage. If a worker gets paid $50,000 a year and we impose a 5 percent employer-side payroll tax, then the employer would pay $2,500 on this worker's pay.

Economists generally believe that employer-side payroll taxes come out of wages. Employers don't care whether they have to pay the money to the worker or to the government, they will pay the same amount in either case. (To make the transition as easy as possible, it should be done in two or three steps, which would mean that workers would more likely be foregoing pay increases rather than looking at actual cuts in pay.)

In this case, the new payroll tax would lead to a reduction in this worker's pay of $2,500 to $47,500. But if the worker had been paying 5 percent of their wage to the state income taxes, they are in the exact same position as they had been in previously. They have $47,500 income after the money paid to the state in taxes.

The big difference comes when they pay their federal income tax. If they getting paid $50,000 and are unable to deduct their state taxes from their income, they will pay federal taxes on the full $50,000. However, with the employer side payroll tax, they will only pay income tax on the $47,500 they get paid by their employer. This will save them from paying income tax on $2,500 and also Social Security and Medicare taxes on this money.

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