The NYT ran an article noting that President Obama and many progressives seem prepared to let the Bush tax cuts remain in place for the vast majority of the population. The rationale is that most of the income gains of the last three decades have gone to those at the top of the income distribution. The piece points out that this decision could leave the government seriously short of revenue, concluding with a quote from former Obama administration economist, Jared Bernstein [a friend and co-author]:
“But ultimately we can’t raise the revenue we need only on the top 2 percent.”
Actually the seeming conundrum is not quite as bad as is portrayed here. The revenue projections from the Congressional Budget Office (CBO) and others assume that the upward redistribution of income does not continue. For example, CBO projected that the profit share of GDP would fall by almost 25 percent from 2011 to 2022 (Table 2-1). If it turns out that CBO is wrong (as it has been thus far) and the profit share of GDP continues to rise, then we will raise considerably more tax revenue from the current structure of taxes than CBO projects.
Alternatively, if CBO’s income projections prove correct, then the middle class will be seeing rapid growth in their real income. This means that they will be able to afford modest increases in their tax rates.
So the story here is not quite as dire as the article implies. As a simple rule, we can in fact raise all the revenue we need from the top 2 percent, if the top 2 percent have all the money.
The NYT ran an article noting that President Obama and many progressives seem prepared to let the Bush tax cuts remain in place for the vast majority of the population. The rationale is that most of the income gains of the last three decades have gone to those at the top of the income distribution. The piece points out that this decision could leave the government seriously short of revenue, concluding with a quote from former Obama administration economist, Jared Bernstein [a friend and co-author]:
“But ultimately we can’t raise the revenue we need only on the top 2 percent.”
Actually the seeming conundrum is not quite as bad as is portrayed here. The revenue projections from the Congressional Budget Office (CBO) and others assume that the upward redistribution of income does not continue. For example, CBO projected that the profit share of GDP would fall by almost 25 percent from 2011 to 2022 (Table 2-1). If it turns out that CBO is wrong (as it has been thus far) and the profit share of GDP continues to rise, then we will raise considerably more tax revenue from the current structure of taxes than CBO projects.
Alternatively, if CBO’s income projections prove correct, then the middle class will be seeing rapid growth in their real income. This means that they will be able to afford modest increases in their tax rates.
So the story here is not quite as dire as the article implies. As a simple rule, we can in fact raise all the revenue we need from the top 2 percent, if the top 2 percent have all the money.
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The Washington Post continues to ignore standard journalistic practices in its effort to push its agenda for cutting Social Security and Medicare. In an effort to maintain pressure on President Obama to reach a budget deal before the end of the year, when his bargaining power will be strengthened by the end of the Bush tax cuts, the paper inaccurately asserted:
“Economists have warned that going over the fiscal cliff — the set of sizable tax increases and spending cuts mandated to take place early next year — would throw the nation back into a recession.”
This is not true. The report that provides the basis for the linked article shows the impact on the economy of leaving the higher Clinton era tax rates in place all year, along with the budget cuts provided for in the 2011 budget agreement.
The report absolutely does not say that if the January 1 deadline is missed that the economy would go into a recession. This is an invention of the Washington Post and others who have an agenda to push.
The economic impact of having a higher tax withholding schedule in place for a week or two in 2013 would be minimal. There is no reason that spending need be changed at all if it seems that a deal between President Obama and Congress is imminent. In other words, there is no reason for people to be concerned about missing the January 1 deadline. It is unfortunate that the Post would misrepresent economic research to try to convince readers otherwise.
The Washington Post continues to ignore standard journalistic practices in its effort to push its agenda for cutting Social Security and Medicare. In an effort to maintain pressure on President Obama to reach a budget deal before the end of the year, when his bargaining power will be strengthened by the end of the Bush tax cuts, the paper inaccurately asserted:
“Economists have warned that going over the fiscal cliff — the set of sizable tax increases and spending cuts mandated to take place early next year — would throw the nation back into a recession.”
This is not true. The report that provides the basis for the linked article shows the impact on the economy of leaving the higher Clinton era tax rates in place all year, along with the budget cuts provided for in the 2011 budget agreement.
The report absolutely does not say that if the January 1 deadline is missed that the economy would go into a recession. This is an invention of the Washington Post and others who have an agenda to push.
The economic impact of having a higher tax withholding schedule in place for a week or two in 2013 would be minimal. There is no reason that spending need be changed at all if it seems that a deal between President Obama and Congress is imminent. In other words, there is no reason for people to be concerned about missing the January 1 deadline. It is unfortunate that the Post would misrepresent economic research to try to convince readers otherwise.
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At least the first $250,000 of gains is exempt for individuals and $500,000 for couples. For this reason, the Post is likely off the mark in telling readers about middle class homeowners rushing to sell their homes to take advantage of the lower capital gains tax rate.
A couple would have to have a gain of at least $500,000 for this to be an issue. That would imply a gain that is a bit less than three times the median house price nationally. That doesn’t sound like a middle class couple. Furthermore, the tax would only apply to the margin over $500,000. That means that a couple selling a home for a gain of $510,000 or $520,000 would be little affected by plausible rises in the capital gains tax rate since they would only pay the higher rate only on the amount over $500,000.
[Correction: The piece is clearly referring to investment properties. I was confused by the sentence:
“The new limit would hit the wealthy hardest, but in regions such as the Washington area that have high housing prices, it would also hit many homeowners who do not view themselves as rich.”
However, the discussion before and after this sentence is obviously referring to investment properties which would be subject to the capital gains tax.]
At least the first $250,000 of gains is exempt for individuals and $500,000 for couples. For this reason, the Post is likely off the mark in telling readers about middle class homeowners rushing to sell their homes to take advantage of the lower capital gains tax rate.
A couple would have to have a gain of at least $500,000 for this to be an issue. That would imply a gain that is a bit less than three times the median house price nationally. That doesn’t sound like a middle class couple. Furthermore, the tax would only apply to the margin over $500,000. That means that a couple selling a home for a gain of $510,000 or $520,000 would be little affected by plausible rises in the capital gains tax rate since they would only pay the higher rate only on the amount over $500,000.
[Correction: The piece is clearly referring to investment properties. I was confused by the sentence:
“The new limit would hit the wealthy hardest, but in regions such as the Washington area that have high housing prices, it would also hit many homeowners who do not view themselves as rich.”
However, the discussion before and after this sentence is obviously referring to investment properties which would be subject to the capital gains tax.]
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Paul Krugman had an interesting column today calling attention to the rise in the profit share of income. The point is that we seem to be seeing rapid improvements in productivity growth (he cites the progress in the development of robots) that are drastically reducing the demand for labor. Yet all the gains from these improvements seem to be going to owners of capital as the labor share of output has been falling sharply.
The distributional issue raised by Krugman is extremely important, both for workers who are not seeing gains in living standards, and also for the economy as a whole, since a continual upward redistribution of income will lead to stagnation as a result of inadequate demand. However, it is worth noting that the concern that rapid productivity growth will lead to less demand for labor is 180 degrees at odds with the often repeated concern that productivity growth will be inadequate to sustain rising living standards in the future.
Even Krugman raised the latter concern when discussing a new paper by Robert Gordon suggesting that productivity growth was coming to a halt. However it features much more prominently in the whining over demographics that are a constant feature of national policy debates.
This is one where a baseball bat might be necessary. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs. Let’s try that again. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs.
It is possible for too much productivity growth to be a problem, if the gains are not broadly shared. It is also possible for too little productivity growth to be a problem as a growing population of retirees imposes increasing demands on the economy. But, it is not possible for both to simultaneously be problems. (For fans of arithmetic, I just did the numbers on this. It is highly unlikely that lack of productivity growth will be a problem since even very weak rates of growth will swamp the impact of demographics.)
Paul Krugman had an interesting column today calling attention to the rise in the profit share of income. The point is that we seem to be seeing rapid improvements in productivity growth (he cites the progress in the development of robots) that are drastically reducing the demand for labor. Yet all the gains from these improvements seem to be going to owners of capital as the labor share of output has been falling sharply.
The distributional issue raised by Krugman is extremely important, both for workers who are not seeing gains in living standards, and also for the economy as a whole, since a continual upward redistribution of income will lead to stagnation as a result of inadequate demand. However, it is worth noting that the concern that rapid productivity growth will lead to less demand for labor is 180 degrees at odds with the often repeated concern that productivity growth will be inadequate to sustain rising living standards in the future.
Even Krugman raised the latter concern when discussing a new paper by Robert Gordon suggesting that productivity growth was coming to a halt. However it features much more prominently in the whining over demographics that are a constant feature of national policy debates.
This is one where a baseball bat might be necessary. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs. Let’s try that again. If you are concerned that a falling ratio of workers to retirees is going to make us poor then you are not concerned that excessive productivity growth will leave tens of millions without jobs.
It is possible for too much productivity growth to be a problem, if the gains are not broadly shared. It is also possible for too little productivity growth to be a problem as a growing population of retirees imposes increasing demands on the economy. But, it is not possible for both to simultaneously be problems. (For fans of arithmetic, I just did the numbers on this. It is highly unlikely that lack of productivity growth will be a problem since even very weak rates of growth will swamp the impact of demographics.)
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The NYT reported that a new round of lawsuits could potentially cost banks hundreds of billions in damages and penalties from fraudulently marketing bad mortgages. The piece warned readers:
“Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life.”
Actually it is quite unlikely that the outcome of these suits would have a noticeable effect on the housing market. These suits may affect the asset position of major banks however they will not affect the incentives to issue proper mortgages going forward.
At the moment, the spreads between the interest rate on mortgages and the interest rate paid on mortgage backed securities are near record highs, which means that banks have enormous incentive to issue mortgages. If some of the major banks suffer big losses as a result of these suits it will not reduce these incentives. Therefore banks will still be anxious to make mortgage loans. Furthermore, since mortgages involve relatively quick turnarounds between the issuance of a mortgage and selling it in the secondary market, even banks with impaired capital are likely to still find mortgage issuance to be a very profitable endeavor.
The NYT reported that a new round of lawsuits could potentially cost banks hundreds of billions in damages and penalties from fraudulently marketing bad mortgages. The piece warned readers:
“Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life.”
Actually it is quite unlikely that the outcome of these suits would have a noticeable effect on the housing market. These suits may affect the asset position of major banks however they will not affect the incentives to issue proper mortgages going forward.
At the moment, the spreads between the interest rate on mortgages and the interest rate paid on mortgage backed securities are near record highs, which means that banks have enormous incentive to issue mortgages. If some of the major banks suffer big losses as a result of these suits it will not reduce these incentives. Therefore banks will still be anxious to make mortgage loans. Furthermore, since mortgages involve relatively quick turnarounds between the issuance of a mortgage and selling it in the secondary market, even banks with impaired capital are likely to still find mortgage issuance to be a very profitable endeavor.
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I’m not kidding, it’s right here. The piece expresses great disappointment that markets have not plummeted in response to the budget deadlock telling readers:
“Despite daily warnings about the effects of the fiscal cliff — tax increases and budget cuts that could cripple the economy — the markets seem supremely convinced that all will be fixed before the Dec. 31 deadline.”
Of course it is bizarre that the article would connect the “Dec. 31 deadline” with the markets’ calm since in fact almost nothing happens if this deadline is missed. The economic consequences of waiting until the first weeks in January to get a deal are virtually zero. The markets likely know this, even if no one has told the folks at USA Today.
I’m not kidding, it’s right here. The piece expresses great disappointment that markets have not plummeted in response to the budget deadlock telling readers:
“Despite daily warnings about the effects of the fiscal cliff — tax increases and budget cuts that could cripple the economy — the markets seem supremely convinced that all will be fixed before the Dec. 31 deadline.”
Of course it is bizarre that the article would connect the “Dec. 31 deadline” with the markets’ calm since in fact almost nothing happens if this deadline is missed. The economic consequences of waiting until the first weeks in January to get a deal are virtually zero. The markets likely know this, even if no one has told the folks at USA Today.
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That seems unlikely as it ran another shrill front page piece warning about the need to “tame” the national debt. Newspapers would ordinarily use a word like “reduce” in their news section, saving phrases like “tame the national debt” for the opinion pages.
The piece is also highly misleading by insisting there is an urgency to arriving at a deal before the end of the year. There is no obvious reason that it is important to have a deal by December 31 rather than the first or second week in January. While the Post includes the comments from politicians who say a deal is “vital” and even asserts this as a fact in the headline to the jump page, it excludes the views of members of Congress who think it would be perfectly reasonable to allow the deadline to pass and put together a deal with the new Congress.
It is worth noting in this context that President Obama’s bargaining position would be substantially improved after January 1. For this reason it is understandable that Republicans and people who want to see large cuts to Social Security and Medicare would want to force a deal before the end of the year.
That seems unlikely as it ran another shrill front page piece warning about the need to “tame” the national debt. Newspapers would ordinarily use a word like “reduce” in their news section, saving phrases like “tame the national debt” for the opinion pages.
The piece is also highly misleading by insisting there is an urgency to arriving at a deal before the end of the year. There is no obvious reason that it is important to have a deal by December 31 rather than the first or second week in January. While the Post includes the comments from politicians who say a deal is “vital” and even asserts this as a fact in the headline to the jump page, it excludes the views of members of Congress who think it would be perfectly reasonable to allow the deadline to pass and put together a deal with the new Congress.
It is worth noting in this context that President Obama’s bargaining position would be substantially improved after January 1. For this reason it is understandable that Republicans and people who want to see large cuts to Social Security and Medicare would want to force a deal before the end of the year.
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The fact that the United States can borrow long-term at very low interest rates indicates that actors in financial markets are not concerned about large U.S. budget deficits. Odds are that these people recognize that the large current deficits are the result of the economic collapse that followed in the wake of the bursting of the housing bubble. They probably also know that if the deficit were smaller it would just mean slower growth and higher unemployment.
Given this reality, it is interesting how the Post could know that:
“$4 trillion in deficit reduction over the next decade [is what] both sides believe is necessary.”
We all know what the politicians in both parties are saying, but of course politicians often do not say what they actually believe. It would be interesting to know how the Post has determined what the leadership of the two parties actually believe about the economy.
The fact that the United States can borrow long-term at very low interest rates indicates that actors in financial markets are not concerned about large U.S. budget deficits. Odds are that these people recognize that the large current deficits are the result of the economic collapse that followed in the wake of the bursting of the housing bubble. They probably also know that if the deficit were smaller it would just mean slower growth and higher unemployment.
Given this reality, it is interesting how the Post could know that:
“$4 trillion in deficit reduction over the next decade [is what] both sides believe is necessary.”
We all know what the politicians in both parties are saying, but of course politicians often do not say what they actually believe. It would be interesting to know how the Post has determined what the leadership of the two parties actually believe about the economy.
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Newspapers are supposed to be in the business of informing readers. It’s hard to see what information was provided when an article on the tax increases associated with the Affordable Care Act (ACA) told readers:
“Among the most affluent fifth of households, those affected will see tax increases averaging $6,000 next year, economists estimate.”
It’s difficult to know what this is supposed to mean. The most affluent fifth of households would be around 26 million households. If the tax increases amounted to an average of $6,000 per household that would come to $156 billion a year. However the next paragraph tells us that the projected tax take is $318 billion over ten years. This implies a tax hit on these families that is less than one-fifth as large. (The same tax would produce considerably more revenue ten years out than next year.)
Presumably the piece means that the tax will affect a narrow subset of the top quintile and that this narrow subset (mostly people with income over $200,000 a year), will see an average increase in taxes of $6,000 a year. The Tax Policy Center puts the number of tax filing units (roughly households) affected as 2.8 million. It should have been possible to more clearly describe the impact of the tax increases associated with the ACA.
[Thanks to David Maynard for calling this to my attention.]
[Correction: An earlier version said “26,000 million households,” which several readers called to my attention. Robert Salzberg provided the Tax Policy Center number.]
Newspapers are supposed to be in the business of informing readers. It’s hard to see what information was provided when an article on the tax increases associated with the Affordable Care Act (ACA) told readers:
“Among the most affluent fifth of households, those affected will see tax increases averaging $6,000 next year, economists estimate.”
It’s difficult to know what this is supposed to mean. The most affluent fifth of households would be around 26 million households. If the tax increases amounted to an average of $6,000 per household that would come to $156 billion a year. However the next paragraph tells us that the projected tax take is $318 billion over ten years. This implies a tax hit on these families that is less than one-fifth as large. (The same tax would produce considerably more revenue ten years out than next year.)
Presumably the piece means that the tax will affect a narrow subset of the top quintile and that this narrow subset (mostly people with income over $200,000 a year), will see an average increase in taxes of $6,000 a year. The Tax Policy Center puts the number of tax filing units (roughly households) affected as 2.8 million. It should have been possible to more clearly describe the impact of the tax increases associated with the ACA.
[Thanks to David Maynard for calling this to my attention.]
[Correction: An earlier version said “26,000 million households,” which several readers called to my attention. Robert Salzberg provided the Tax Policy Center number.]
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