Topic: Tax and Budget Policy

Foolishness High as an Elephant’s Eye…

Kudos to the New York Times for Sunday’s article critically examining the United States’ dubious infatuation with ethanol. A sample:

For all its allure, though, there are hidden risks to the boom. Even as struggling local communities herald the expansion of this ethanol-industrial complex and politicians promote its use as a way to decrease America’s energy dependence on foreign oil, the ethanol phenomenon is creating some unexpected jitters in crucial corners of farm country.

A few agricultural economists and food industry executives are quietly worrying that ethanol, at its current pace of development, could strain food supplies, raise costs for the livestock industry and force the use of marginal farmland in the search for ever more acres to plant corn… .

But many energy experts are also questioning the benefits of ethanol to the nation’s fuel supply. While it is a renewable, domestically produced fuel that reduces gasoline pollution, large amounts of oil or natural gas go into making ethanol from corn, leaving its net contribution to reducing the use of fossil fuels much in doubt.

The article is not without its faults; for instance, it gives an uncritical airing of the opinion that American agriculture should be used for “food first, then feed” for livestock, “and last fuel.” (If the economics are such that demand for ethanol is more intense than the demand for corn chips, then why shouldn’t U.S. corn go to ethanol? Of course, that’s an enormous “if.”) Still, the NYT article is a very welcome departure from the claptrap on ethanol offered by other media.

Clive Crook on the Massachusetts Plan

Clive Crook writes (note: link probably will expire in a month),

How to do national health reform worthy of the name? First, and most important, create a level playing field tax-wise for individuals and firms, so that nobody has a financial incentive to prefer employer-provided insurance to the individually purchased kind. You could do this by extending Connector-style tax relief to all taxpayers, or by abolishing it for employers. Abolition would be better. It would raise a lot of revenue (which will be needed in my plan) and would jolt people into changing their insurance arrangements.

Second, the free-rider problem makes the case for an individual mandate compelling, in my view. Massachusetts is right about that. And the mandate, in turn, makes health subsidies for the poor, which would be desirable in any case, unavoidable… . But to avoid the enormous problems of enforcing and administering the mandate … give everybody a voucher sufficient to buy stripped-down, Connector-style coverage.

Third, impose one other global restriction on insurance companies: If they offer a policy to anyone, they must offer that same policy to everyone, regardless of age, sex, current health, and other risk factors. Again, the Connector has provisions of this kind. This would preserve the risk-pooling feature of private insurance, while still allowing vigorous competition on price and offering.

I strongly disagree with the third point. As I pointed out here, it is these sorts of regulations that aggravate the problem of the uninsured in the first place. Force insurance companies to offer the same policy to everyone at the same price, and naturally health insurance will be a bad deal for young, low-risk people. Like Massachusetts, you will end up with a problem of such people being uninsured. As I said in my talk, the Massachusetts plan at best solves a problem that was created by regulation in the first place. Listen to the talk.

It’s Not Just Wages

Why do U.S. companies set up shop in countries such as China? Aside from trying to penetrate foreign markets, most people assume it’s the relatively low-cost labor abroad.

But the head of Intel Corporation, Craig Barrett, testified to Congress yesterday that relative tax costs are crucial to their choices regarding global investment locations.

Barrett said that “a critical issue we must now consider when deciding where to locate a new wafer fabrication plant is that it costs $1 billion more to build, equip, and operate a factory in the U.S. than it does outside the U.S. The largest portion of this cost difference is attributable to taxes.”

Why are taxes the biggest cost for Intel? As Barrett pointed out, “Semiconductor manufacturing is extremely capital intensive,” thus taxes on profits are a more important issue than wage levels.

Barrett noted that when Intel builds a plant in China, the firm get “a five-year tax holiday, followed by 50% of the normal tax rate for five more years. These are in comparison to the U.S., with its 35% corporate tax rate, lack of investment incentives, and relatively uneconomic and uncompetitive depreciation treatment.”

A story in the Wall Street Journal yesterday (sorry, subscriber-only site) noted that even Germany is now planning to sharply cut its corporate tax rate because of competitive pressures. That would leave United States with easily the highest corporate rate in the industrial world.

Sorry, We Can’t ‘Grow’ Our Way out of the Social Security Problem

Many economists and lawmakers — especially conservatives — argue against tax hikes as solutions to entitlement shortfalls, saying the hikes would be counterproductive. According to this argument, higher taxes would retard growth, reduce federal revenues, and worsen entitlement shortfalls. 

For example, Stephen Moore in his June 12 Wall Street Journal column “Don’t Know Much About History…” alludes to a presumed beneficial impact of faster (wage) growth on the financial problems of entitlement programs. Unfortunately, that presumption is incorrect, especially as regards Social Security.

The claim that faster wage growth would reduce Social Security’s financial shortfall is an artifact of the standard (but flawed) 75-year-ahead Social Security financial projections that count payroll taxes through that period but ignore benefit obligations those taxes would create beyond the 75th year. The projections make it look as though robust wage growth would shrink the gap between Social Security revenues and obligations. But the picture changes over a longer timeframe.

The Social Security trustees have in recent years begun publishing estimates of the present value of Social Security’s financial shortfall in perpetuity. This is the correct measure to use in assessing the impact of faster wage growth on Social Security’s financial status because it is comprehensive — it accounts for all future taxes and benefits. Unfortunately, the trustees do not provide any analysis of how sensitive the perpetuity measure is to changes in various underlying assumptions. 

Whether faster economic growth would improve or worsen Social Security’s actuarial deficit depends on the balance between two opposing forces: demographics and wage growth. 

Concerning demographics, as retirees grow more numerous relative to workers, Social Security’s finances would worsen — which is easy to see if benefits depend on current wages. 

Concerning wages, in each time period, benefits mostly depend on past wages. That’s because under current Social Security laws, once a person’s benefit level is determined at the time of retirement, its real value remains constant during the rest of the person’s retirement years because it is indexed to prices. (The real value of benefits would grow were post-retirement benefits indexed to wages instead.) Because current benefits depend mostly on past wages, faster growth in current wages won’t lead to a proportionate increase in current benefits. Benefits would begin to grow faster only after a considerable time lag. Hence, faster wage growth magnifies the financial advantage associated with this time lag and reduces Social Security’s actuarial deficit.

It has been shown that in the case of U.S. Social Security, the force of worsening demographics dominates: The system’s actuarial deficit (i.e., the ratio of the present value of the system’s financial shortfall to the present value of the payroll tax base when both are calculated in perpetuity) increases with faster wage growth — a result opposite to that obtained under 75-year-ahead calculations. 

Thus, based on a comprehensive measure, the view that faster wage growth would deliver us from our Social Security problem is misguided. But many have repeatedly cited it to argue against reforming the program, e.g., Sen. John Kerry during his 2004 presidential bid. 

The Social Security debate would be better served if we put this view in its rightful place: the trash bin.

Of course, the conclusion should not be that we should strive for slower wage growth to improve Social Security’s finances! Mr. Moore’s distaste for growth-retarding tax hikes is correct. But the negative implications of faster wage growth for Social Security’s finances do not provide any purchase for his argument. Indeed, the twin imperatives of maintaining high economic growth and resolving Social Security’s financial shortfall indicate — even more strongly — that reforms should be weighted more heavily toward future benefit cuts rather than tax hikes.

I Voted for What?

Rep. John McHugh (R-NY) is an important man in Congress. He serves on the House Armed Services Committee and chairs its Military Personnel Subcommittee which spends $85 billion annually.

Whether he knows how that money is spent is an open question. The Hill reported today that McHugh voted for a defense authorization bill that included a provision “he said he philosophically opposed.” (The provision overrode a federal court’s decision in a dispute between National Guard members and the government about who should pay for correspondence courses).

McHugh apparently had not read the defense authorization bill. Never mind, everyone does it, as The Hill reports, “It is no secret that some — if not most — lawmakers vote on bills that they do not read in their entirety.” McHugh notes that “hundreds and hundreds” of provisions come through, and he relies on his staff “for judgment on more routine matters.”

Members of Congress are elected to work on behalf of their constituents. How can they do that if they don’t read the bills they pass? It is true that the government is so large that supervising how well past laws are being implemented, much less reading bills, takes a lot of time and effort. Maybe more time and effort than even a hard-working member has.

Here’s a thought for members of Congress: maybe the fact that you don’t read the bills you vote for means the government has grown well beyond anyone’s control. Maybe — and this will be shocking to you — the government is too big.

Common Misconflations

A recent Ezra Klein post is a much more interesting read when decoded using this key:

U.S. health care sector ≠ free market

For-profit ≠ free-market

Non-profit ≠ public provision

Non-profit ≠ tax-exempt

Chuck Grassleyfree-marketeer

Public provision ≠ better medical care

VA ≠ superior care

(Okay, so the Chuck Grassley one is not so common.)