Topic: Health Care & Welfare

Higher Marginal Tax Rates Reduce Income Mobility, Especially at the Bottom

Calls for higher tax rates often suffer from a myopic focus on the one percent, but these proposals largely fail to acknowledge that tax rates, and the incentives they create, influence work decisions for everyone.  Nowhere is narrow focus more evident than the tax proposals from the two rivals for the Democratic nomination. Bernie Sanders has proposed more than $19 trillion in new taxes over the next decade, and Hillary Clinton’s own plans only look modest by comparison. My colleague Alan Reynolds briefly alluded to a recent paper from Mario Alloza of University College London that examines the relationship between tax rates and income mobility. He finds that higher marginal tax rates reduced mobility over the period analyzed, particularly for people with low incomes or less education. These findings imply that proposals to significantly increase taxes could make it harder for people at the bottom of the income distribution to work their way up.

Alloza looks at panel data between 1967 and 1996 to examine whether tax rates affect the probability of staying in the same decile in the following two years. He examines different scenarios including pre-tax, post-tax and post-tax and transfer. Most of the paper focuses on federal taxes, but he also examines a case where state and payroll taxes are included as well. Increases in the marginal tax rate are associated with a reduction in short-run relative income mobility. Households are roughly 6 percent more likely to stay in the same income quintile when the marginal tax rate is increased by one percentage point. This mechanism holds for all of the different tax and transfer scenarios. Even accounting for the impact of transfers and benefits, higher rates curbed the upward mobility of people at the lower end of the income distribution. This suggests that the impact of tax rates on income mobility is not confined to redistribution effects, but the changes in labor market incentives.

These effects are even more pronounced for people with low-income or less than a college degree. Tax changes focused on compressing the income distribution by taking more from those at the top could also make it harder for these people at the bottom to climb the economic ladder. When Alloza restricts his sample to non-college households, he finds that a one percentage point increase in the marginal tax rate increases the probability of moving down to lower deciles by roughly one percent, increases the likelihood of remaining in the same decile by roughly the same amount, and reduces the probability of moving up to a higher income decile by almost one and a half percent. For households in the lowest income decile, an increase in the marginal tax rate reduces their probability of moving up to a higher decile by almost one and half percent in the post-tax and transfer scenario.  Higher marginal tax rates reduce the mobility for these groups in particular.

These results provide more evidence that taxes matter for all people when they make decisions about work. Higher tax rates limit income mobility by changing work incentives, particularly for people near the bottom of the income distribution. Public policy should not further reduce the scope of opportunity for these people, and increasing tax rates would likely do just that.  

John Kasich’s ObamaCare Duplicity

Ohio governor and GOP presidential hopeful John Kasich says he opposes ObamaCare. Yet somehow, he has managed to embrace the law in every possible way. He wanted to implement an Exchange, even if it was clearly unconstitutional under Ohio law. He denounced the Medicaid expansion’s “large and unsustainable costs,” which “will just rack up higher deficits…leaving future generations to pick up the tab.” Then he went ahead and implemented it anyway. Worse, he did so unilaterally, after the Ohio legislature passed legislation prohibiting him from doing so (which he vetoed). When Republican legislators and pro-life groups filed suit to stop him, Kasich defended his power-grab all the way to the Ohio Supreme Court. 

Kasich’s defense of his record on ObamaCare has been…less than honest. Just one example: in a town hall meeting in South Carolina last night, Kasich railed against how ObamaCare increases the cost of health care at the same time he boasted he has constrained Medicaid spending in Ohio. In fact, Kasich’s unilateral Medicaid expansion not only increased the cost of Medicaid to taxpayers nationwide, but according to Jonathan Ingram of the Foundation for Government Accountability, it “has run $2.7 billion over budget so far [and] is set to run $8 billion over budget by 2017.” 

For more examples of Kasich’s ObamaCare duplicity, see my new four-part (yet highly readable!) series at DarwinsFool.com:

 

States Optimistic About Economic Futures Are More Economically Free

New data from Gallup suggests that residents in US states with freer markets are more optimistic about their state’s economic prospects. In their 50-State Poll, Gallup asked Americans what they thought about the current economic conditions in their own state as well as their economic expectations for the future. North Dakota (92%), Utah (84%), and Texas (82%) top the list as states with the highest share of residents who rate their current economic conditions as excellent or good.  In stark contrast, only 18% of Rhode Island residents, 23% of Illinois residents, and 28% of West Virginians rate their state’s economic conditions as excellent or good. Similarly Americans most optimistic about their state’s economic futures include Utah (83%) and Texas (77%) while states at the bottom include Illinois (34%) and West Virginia (36%).

What explains these stark differences in economic evaluations and expectations across US states? Could differences across states in economic freedom, such as government regulations on business, tax rates, government spending, and property rights protection, be part of the story?

Figure 1: Relationship Between State Economic Freedom Scores
and Residents’ Evaluations of Current Economic Conditions

 

 Source: Economic Freedom Index 2011, Freedom in the 50 States; Gallup 50-State Poll 2015

On Supreme Court Nominations, ‘Recovering Lawyer’ Hillary Clinton Making Stuff up for Partisan Advantage

Under the header, “Obama is president until January 20, 2017. It’s his job to nominate a justice, the Senate has a responsibility to vote,” Hillary Clinton’s Facebook page issues the following statement:

Nearly everything Clinton says here is either misleading or just untrue.

A Libertarian Argument for Bernie Sanders?

Will Wilkinson notes that there is a libertarian argument for Bernie Sanders. I’m not sure I buy the precise point Wilkinson is making. Sanders says he wants to make the United States more like Finland, Sweden, and Denmark. And those countries do indeed rank higher than the United States in the Cato Institute’s Human Freedom Index, compiled by my colleagues Ian Vásquez and Tanja Porčnik. But Sanders wants to emulate those countries in the ways they are less free than the United States (i.e., expanding government transfers), not in the ways they are more free (taxes and regulation). I think this powerful Sanders ad featuring Eric Garner’s daughter Erica is a much better libertarian argument for Sanders.

How David Brooks Created Donald Trump

Donald Trump, David Brooks (Credit: AP/John Locher/Nam Y. Huh/Photo montage by Salon)

The ugliness of this year’s presidential race makes The New York Times’ resident erstwhile conservative David Brooks wistful for Barack Obama. The irony is that David Brooks, Barack Obama, and their respective tribes bear much of the responsibility for the rise of Donald Trump.

“I miss Barack Obama,” Brooks laments, because “over the course of this campaign it feels as if there’s been a decline in behavioral standards across the board.” Brooks cites Hillary Clinton’s emails and some other stuff, but everyone knows he’s talking about The Donald. “Many of the traits of character and leadership that Obama possesses, and that maybe we have taken too much for granted, have suddenly gone missing or are in short supply. The first and most important of these is basic integrity. The Obama administration has been remarkably scandal-free.” By the time he’s done, Brooks upgrades Obama’s integrity to “superior.”

We all have difficulty seeing our blind spots. That’s why we call them what we call them. But Brooks’ obliviousness here is awe-inspiring.

Donald Trump has risen to the top of the GOP presidential field by appealing to resentments stoked by both political tribes. Even Brooks is even doing it, right there in his column.

Trump is riding resentments Obama has stoked by ruling as an autocrat. Rather than accept that voters elected a Republican Congress for the purpose of restraining his ambitions, Obama famously boasted he can act without Congress, because “I’ve got a pen and I’ve got a phone.”

He has repeatedly circumvented the democratic process and he knows it, as when he boasts, “I just took an action to change the law.” When challenged, he tries (with some success) to intimidate courts into writing tortured opinions in his favor. Still his executive overreach has been on the losing end of more unanimous Supreme Court rulings than either of his two immediate predecessors. Even allies admit he plays fast and loose with the rule of law.


When a president doesn’t play by the rules, he is telling his political opponents their votes don’t matter. That breeds resentment.

The Fundamental Fallacy of Redistribution

The idea that government could redistribute income willy-nilly with impunity did not originate with Senator Bernie Sanders. On the contrary, it may have begun with two of the most famous 19th Century economists, David Ricardo and John Stuart Mill.   Karl Marx, on the other side, found the idea preposterous, calling it “vulgar socialism.”

Mill wrote, “The laws and conditions of the production of wealth partake of the character of physical truths.  There is nothing optional or arbitrary about them… . It is not so with the Distribution of Wealth.  That is a matter of human institution only.  The things once there, mankind, individually, can do with them as they like.”[1]

Mill’s distinction between production and distribution appears to encourage the view that any sort of government intervention in distribution is utterly harmless – a free lunch.  But redistribution aims to take money from people who earned it and give it to those who did not.  And that, of course, has adverse effects on the incentives of those who receive the government’s benefits and on taxpayers who finance those benefits.

David Ricardo had earlier made the identical mistake. In his 1936 book The Good Society (p. 196), Walter Lippmann criticized Ricardo as being “not concerned with the increase of wealth, for wealth was increasing and the economists did not need to worry about that.” But Ricardo saw income distribution as an interesting issue of political economy and “set out to ascertain ‘the laws which determine the division of the produce of industry among the classes who concur in its formation.’

Lippmann wisely argued that, “separating the production of wealth from the distribution of wealth” was “almost certainly an error. For the amount of wealth which is available for distribution cannot in fact be separated from the proportions in which it is distributed… . Moreover, the proportion in which wealth is distributed must have an effect on the amount produced.” 

The third classical economist to address this issue was Karl Marx.  There were many fatal flaws in Marxism, including the whole notion that a society is divided into two armies – workers and capitalists.[2]  Late in his career, however, Marx wrote a fascinating 1875 letter to his allies in the German Social Democratic movement criticizing a redistributionist scheme he found unworkable.  In this famous “Critique of the Gotha Program,” Marx was highly critical of “vulgar socialism” and considered the whole notion of “fair distribution” to be “obsolete verbal rubbish.”  In response to the Gotha’s program claim that society’s production should be equally distributed to all, Marx asked, “To those who do not work as well? … But one man is superior to another physically or mentally and so supplies more labor in the same time, or can labor for a longer time… . This equal right is an unequal right for unequal labor… It is, therefore, a right to inequality…”