AEI Tax Forum

Chris Edwards, Photo by Peter Holden for AEI   Photo by Peter Holden Photography for AEI

I was a panelist at an American Enterprise Institute forum today discussing the proliferation of federal tax credits, particularly for low-income families.

AEI scholars Kevin Hassett, Larry Lindsey, and Aparna Mathur have a draft paper that looks at the idea of consolidating current individual credits into one supercredit. The idea would be to simplify the system and reduce the economic distortions created by these credits, which are valued at about $170 billion in 2009.

My observations included:

  • Obama’s Make Work Pay credit is valued at about $60 billion per year, much of which is “refundable.” (That means it is partly a spending increase not a tax cut). Coincidentally, Obama’s proposed tax hikes for higher-income individuals are also about $60 billion per year. So Obama is damaging the economy with “Make Work Not Pay” tax increases at the top in order to fund dubious work incentives at the bottom. It makes no economic sense.
  •  The AEI scholars provide interesting calculations about how we could make the $170 billion of redistribution in these credits simpler. That’s fine as far as it goes, but I’d like to end the redistribution altogether. Let’s provide a large basic exemption in the tax code for folks at the bottom, but we don’t need any complex credits. Instead, let’s repeal federal policies that damage the budgets of struggling families at the bottom, such as import barriers that raise the price of clothing and federal milk cartels that raise the price of  dairy products.
  • Here’s my compromise redistribution plan. Let’s chop the $170 billion in tax credits in half and use the extra funds to cut the corporate income tax rate. With a purely static calculation, that would allow cutting the corporate rate  from 35% to 25%. Assuming some behaviorial feedbacks, the $85 billion in credit savings would easily allow us to reduce the corporate rate to 20% or so.
  • What do corporate taxes have to do with the workers who currently get all these tax credits? As Hassett and Mathur explained in a 2006 paper, corporate tax cuts would increase investment, improve productivity, and that in turn would raise wages of average American workers. We don’t need President Obama’s fancy new Make Work Pay credits. Instead, we need to cut the corporate tax rate to make the economy boom and raise worker’s wages and incomes in the private marketplace.

What’s Government Good For?

Those of us who are critical of government usually admit that there are a few tasks that government must perform.  Run the roads, for instance.  Yes, toll roads can work well, but it’s hard to figure out a truly private system of , say, city streets.  I realize that some people might view me as being a hopelessly antiquated “policy libertarian” unable to see the possibilities of creative and entrepreneurial people.  But that’s just the way I am.

Still, I’m starting to wonder.  At least, it looks like maybe anarchy on the roads might be better than strict government regulation.  Reports the Times of London:

What would happen if traffic lights were suddenly switched off? Would there be gridlock or would the queues of frustrated drivers miraculously disappear?

People in London are about to find out the answer in Britain’s first test of the theory that removing lights will cure congestion.

For six months, lights at up to seven junctions in Ealing will be concealed by bags and drivers will be left to negotiate their way across by establishing eye contact with pedestrians and other motorists.

Ealing Council believes that, far from improving the flow of traffic, lights cause delays and may even increase road danger. Drivers race towards green lights to make it across before they turn red. Confidence that they have right of way lulls them into a false sense of security, meaning that they fail to anticipate hazards coming from the side. The council hopes that drivers will learn to co-operate, crossing junctions on a first-come first-served basis rather than obeying robotic signals that have no sense of where people are waiting.

Westminster City Council is also considering a trial but has yet to identify likely junctions.

Ealing found evidence to support its theory when the lights failed one day at a busy junction and traffic flowed better than before. Councillors have approved a report which recommended that they “experimentally remove signals since experience of signal failure showed that junction worked well”.

The Conservative-controlled council has won the support of Boris Johnson, the Mayor of London, who is responsible for all 5,000 sets of lights in the capital through Transport for London.

One shouldn’t take Ealing’s lesson too far.  However, the experience suggests that one should never assume that the way things are done are the way they must be done.  We should always be willing to take a fresh look and rethink the status quo, even if we end up deciding that the status quo really is the best approach.

Teachers in the Money

A few months ago, I wrote a report that busted two pervasive education myths: that student loan burdens are crushing recent graduates, and that teachers get paid peanuts. In the paper, I itemized first-year public school teacher salaries in districts around the country, and pointed to Bureau of Labor Statistics research showing that teachers work significantly less time for their salaries than do most other professionals. Even accounting for time teachers work beyond their contracted hours – grading papers at home, meeting with students after school, etc. – teachers work on average 18 fewer minutes a day than other professionals. And that figure does not include summer and other vacations – it is only for the contracted school year.  Perhaps most important, at least when it comes to earnings, I noted that that free time can be used to pursue additional employment.

After making my point about how much time teachers work for their salaries relative to other professionals, and noting that teachers can make more bucks with the extra time they have available, I pursued the point no further. But a New York Post article today shows just how much overtime pay intrepid public school teachers, at least in New York City, can make.

At the top end, a teacher at the High School of Telecommunication Arts and Technology made $60,000 developing a data analysis system for numerous schools. That brought his total compensation to $141,159 for 2007-08. A teacher at Chelsea Career & Technical Education HS took in $52,001 of OT teaching night classes at another high school, bringing his total earnings to $152,050 (his base salary was $100,049).  And the Post offers several other examples.

Now, some people will read this blog entry as an attack on the big earners in NYC and teachers generally. They will be wrong: What these teachers did to earn their extra dollars might have been worth every penny, I don’t know, and they very likely put in much more time than other professionals to earn all their dough.  This does, though, just strengthen the almost irrefutable point I made in my report: On an hourly basis, teachers get salaries comparable to other professionals, and the fact that teachers work many fewer hours to get those salaries gives them significant time to earn extra dough. Sometimes, a LOT of extra dough.

If You Like Fannie Mae, You’ll Love Auto Mac

While Bank of America and Citi grabbed most of the attention in the recently released bank “stress tests”  one of the biggest capital holes to be filled is that of GMAC, which under the stress test’s relatively light assumptions will need to raise another $11.5 billion in capital.

As one of the smaller of the stressed tested banks, and having almost no trading and counterparty risk – and hence little or no systemic risk, GMAC would hardly seem the candidate for any additional bailout funds.  Were GMAC to fold, our financial markets would hardly notice.  Who might notice is our auto manufacturers.

Just as easy credit inflated our housing market, it was easy credit – who can forget 0% financing – that lead the auto sales boom of the early 2000’s.  Just as many see Fannie and Freddie – along with help from the Federal Reserve – as leading us to a housing recovery, many also see GMAC as being at the heart of any recovery in the auto industry.

Given the state of the auto industry and the increasing level of defaults on auto loans, the safe bet is that GMAC will have a tough time rasing the needed $11.5 billion from non-governmental sources.

Once the government becomes a majority owner of GMAC, its only a matter of time until its focus shifts from re-bulding its financial health to expanding the American Dream of auto-ownership.

Good News! Recession Cuts Trade Deficit in Half!

The latest U.S. trade numbers were released this morning, and the news reports so far have predictably focused on the fact that the U.S. trade deficit in March expanded modestly compared to February.

The real story behind the numbers, however, is that U.S. imports and exports continue to decline. Compared to the month before, U.S. exports of goods fell another $3.0 billion, while imports fell by $1.6 billion.

If we go back a full year, the drop in trade is staggering. Between March of 2008 and March of 2009, U.S. exports of goods and services fell by 17 percent, and imports fell an even steeper 27 percent. As a result, the goods and services deficit is less than half of what it was a year ago.

Critics of trade such as CNN’s Lou Dobbs are always harping that if we could only reduce our dependence on imports, and along with it the trade deficit, Americans would enjoy higher wages and more plentiful jobs.

Well, we’ve managed in the past year to reduce imports by more than a quarter and cut the trade deficit by more than half. Are we feeling any better?


Getting Our Terminology Straight

Dave Hornstein takes Martha Gore to task for describing Barack Obama’s health care reform plan as “nationalized health care.” “Let’s get our terminology straight,” Hornstein argues. “Nationalized or socialized medicine is a health care system that is publicly financed and delivered, such as Great Britain’s National Health Service.  That is not part of Obama’s proposal or the Single Payer plan.”

Yes, let’s get our terminology straight. Socialized medicine exists to the extent that government controls medical resources and socializes the costs. What matters is who controls the money. Whether we nominally call doctors or hospitals private or public doesn’t matter. If they’re getting most of their checks from the government, that’s who’s in control.

If government controls the resources, it’s socialized medicine. The government can funnel the money through insurers and keep all the doctors and hospitals private and it would still be socialized medicine. If they have the money, they run the show. Everything else is just window dressing.

For more, see here.