ES EN
Menu Menú

Publications

Publicaciones

Search Publications

Buscar publicaciones

Filters Filtro de búsqueda

to a

clear selection Quitar los filtros

none

Article Artículo

Cuomo and New York State Take the Lead in Fighting Back Against Republican Tax Plan

One of the major changes in the Republican tax plan that became law at the end of last year was a limit of $10,000 on the deduction for state and local income taxes. This was explicitly designed as an attack on liberal states like California and New York, which provide relatively high quality services for their residents, and therefore have higher taxes. Many Republicans openly boasted that these states would face pressure to reduce their taxes, and therefore also cut funding in areas like education and health care, if state and local taxes were not deductible for all of their residents.

Republicans may exaggerate the effect of imposing a higher tax burden on these states. (For those keeping score, there was already a net outflow of money from states that tend to vote Democratic to those that vote Republican.) However, there is no doubt that it is harder for state and local government to raise revenue in a context where state and local taxes are not fully deductible than in a context where they are. In other words, Republicans are absolutely right in believing that they are hurting the finances of liberal states.

There have been various plans put forward to counter the Republican tax plan, but New York’s governor, Andrew Cuomo, is taking the lead with his proposal for an employer-side payroll tax that will substitute for a portion of the state income tax. This is a way to preserve the deductibility of a substantial portion of the tax revenue the state raises.

Cuomo proposes to have a 5 percent payroll tax on wage incomes in excess of $40,000. This tax would be phased in over a three-year period. It would also be voluntary so that companies did not want to go this route would not be required. Workers at companies that did go the payroll tax route would be subject to a different tax schedule that took account of the payroll tax paid by their employer.

CEPR / February 12, 2018

Article Artículo

Bitcoin, Efficient Markets, and Efficient Financial Sectors

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.

CEPR / February 09, 2018

Article Artículo

Why Did the Market Crash? More Effort to Explain What Didn't Happen

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.

CEPR / February 07, 2018