Taxes on Tippy Tippy Top

U.S. Senator Elizabeth Warren told CNBC the other day: “I want these billionaires to stop being freeloaders … I want them to pick up their fair share.”

Are billionaires freeloaders? To get an idea, we can look at IRS data on the Top 400 taxpayers in the nation with the highest incomes.

The Top 400 paid $29.4 billion in federal income taxes in 2014, an average of $74 million each. These “freeloaders” together paid enough to more than fund the budgets of NASA and the EPA that year ($26 billion).

The Top 400 paid 2.13 percent of all federal income taxes in 2014. That share has trended upwards over time, as shown in the chart. Indeed, the Top 400 share of taxes has doubled from 1.04 percent in 1992, which is the first year of IRS data.

This top group is just 0.0003 percent of all taxpayers yet paid 2.13 percent of all income taxes. Rather than freeloading, it seems that this “tippy tippy top” group, as Warren calls it, is paying more than its fair share.

Bob Murphy on Free Banking in Canada

A few months after my April 2018 Soho debate with him concerning whether fractional reserve banking is damaging to an economy’s health, Bob Murphy gave a lecture on “Rothbardians vs. ‘Free Bankers’ on Fractional Reserve Banking.”

Bob devotes a substantial chunk of that lecture to elaborating upon what he considers shortcomings of my particular arguments in favor of free banking. Though he is generous enough to allow that my theoretical arguments are not quite a cinch to refute, he thinks rather less of the empirical evidence I offer in support of those arguments. In particular, he calls the evidence supporting my claim that the Scottish and the Canadian free banking systems were quite stable “very weak.”

So far as the Scottish episode is concerned, Bob’s claim rests mainly on the fact that, between 1797 and 1821, Scottish banks followed the Bank of England’s example, though without the statutory permission Parliament had granted it, of temporarily “restricting” specie payments. So far as he’s concerned, their having done so is ipso-facto proof of their having run roughshod over their creditors’ rights and reduced their welfare. In truth the story of the Scottish bank restriction, and the correct lessons to be drawn from it, are far less straightforward than Bob supposes. Having already devoted three longish posts to explaining what happened (here, here, and here), I leave it to my readers to decide whether the evidence I assemble in those posts suffices to exonerate the Scottish bankers, as I believe to be the case. I also continue to look forward to Bob’s own response to that evidence.

Encouraging Findings of the Trump Administration’s Report on Refugees and Asylees

In July 2017, the Department of Health and Human Services (HHS) produced the first rigorous accounting of the fiscal effects of refugees and asylees to the United States. The study gives the best insight so far into the economic assimilation of U.S. refugees into their adopted country. While the White House prohibited the official release of the report for political reasons, the New York Times in September 2017 obtained a copy of the draft. This post summarizes the report’s main findings:

  • While refugee and asylee high school graduation rates are lower than all U.S. adults, refugee and asylee college graduation rates are slightly higher.
  • Adult refugee and asylee full-time employment grows over time to be slightly higher than all U.S. adults.
  • Refugee and asylee poverty declines over time to be only 1 percentage point higher than all U.S. families.
  • Refugee and asylee median family income almost doubles over time from $32,539 to $59,433, virtually identical to the U.S. average.
  • Refugee and asylee Medicaid-CHIP participation rate halves over time to be only 1 percentage point higher than the U.S. population.
  • The U.S. refugee and asylee population paid $63 billion more in taxes than they received in benefits to all levels of government from 2005 to 2014.
  • The per capita annual net fiscal effect of each refugee or asylee was positive $2,205 compared to a national average of $1,848 from 2005 to 2014.
  • Refugees and asylees had a more positive fiscal effect because 81 percent were in their prime working years compared to just 63 percent of the U.S. population overall.
  • Refugee fiscal benefits were more than twice as great during years when the economy was growing quickly compared to the recession years.

Responding to Bruce Baker

Mathew Kelly and I provided a new ranking of state educational systems that was published as a Cato Policy Analysis in November of 2018. Our goal was to provide a ranking that did not treat all states as if their student populations were identical, unlike traditional state rankings. Instead, students of a particular ethnic group were compared across states and the state ranked based on its average of the group rankings. These rankings were further extended to provide evidence of how much student learning ‘bang’ states were getting for their expenditures (‘bucks’). Finally, we ran some regressions of state performance, measured in this manner, to see which factors appeared to be related to successful educational outcomes.

Rutgers University professor Bruce D. Baker responded to this work in a review published by the National Education Policy Center.[1] While scholars often feel gratified to see their work discussed by other academics, this gratification can turn to annoyance if the discussion becomes unreasonably hostile or unprofessional, especially when the discussion is filled with errors, as Baker’s discussion is. Fortunately, Baker’s commentary, though replete with nasty slights, mostly deals with questions that were already answered in our report, making my response easier.

Before responding to Baker’s critiques, however, some housekeeping items are in order. Baker reports several times that our study was published by the Reason Foundation as a “policy brief”. This is incorrect. We did publish a short article in the November 2018 issue of the monthly Reason Magazine which summarizes our results and methods and was written for a lay audience.[2] At the end of that Reason article we steered readers to the more complete, academic style article published as a Cato Policy Analysis on November 13th of that year, and Baker does reference this Cato report in his first footnote.[3] Nevertheless, he mislabels this Cato Policy Analysis as a Reason Policy Brief over a dozen times throughout his text. He refers over thirty times to our “reports” in the plural when we have only one academic style published report, the Cato Policy Analysis, which obviously replaces the prior working paper that we had uploaded on a working paper website.[4] Baker should know that academics routinely improve working papers into final published articles and that references should be made to the published article. This ‘housekeeping’ error is a minor issue in the larger scheme of things, but at a fundamental level it reveals a sloppiness that permeates Baker’s overall analysis.

All of my discussion here is based on the Cato Policy Analysis, which is the complete finalized published work, not a short magazine article or an unpublished working paper.

Efficient “Central Bank Digital Currency” Is a Fantasy

In January I had the pleasure of participating on a panel on “The New Financial System: Decentralized?” at the Blockchain Economic Forum in Davos, Switzerland. (Video of the panel is here.) The panel was preceded by a talk by Prof. Nouriel Roubini of the NYU Stern School of Business (video here; all quotes below are my own transcriptions). In his talk Roubini made remarkable claims for what he called a “central bank digital currency.”

A terminological clarification is immediately needed: the “central bank digital currency” that Roubini and other economists advocate is not in fact a currency. Their proposals are for transferable account balances, not for media that circulate peer-to-peer like coins or paper notes without requiring any new ledger entries. Roubini himself points out, no doubt correctly, that central banks have no incentive to issue a digital cryptocurrency or a token that would pass anonymously or pseudonymously in peer-to-peer transactions, not going through the interbank clearing system but rather validated by a distributed-ledger system.

Because the proposals for transferable account balances make “digital currency” a misnomer, I suggest that we more accurately call them proposals for “central bank retail accounts” or CBRA.

The primary version of CBRA that Roubini discusses would allow ordinary households and businesses to open checking accounts on the central bank’s balance sheet. (At present only approved financial institutions and the US Treasury have accounts on the books of the Federal Reserve System.) In his words:

Suppose you create a digital central bank currency. Effectively what does it mean? … It’s a centralized ledger where all the transactions occur. … [E]very individual has also an account with the central bank and therefore access to the balance sheet of the central bank the same way Citibank or JP Morgan or any other commercial bank does. … So if I had to give you money, I could do it by transferring through the balance sheet of the central bank … the same way the banks do in the interbank system.”

I put aside for now one objection to CBRA: If checkable deposits become central bank liabilities, the loanable funds they provide will no longer be allocated by the competitive private banking system, but rather by the government, which is a recipe for inefficiency and cronyism. I will assume, as Roubini at one point suggests, that the Federal Reserve will conduct wholesale auctions to lend the funds back to the commercial banks. We can then focus only on the provision of checkable deposit services.

The DUI Externality

In January, I published “How ‘Market Failure’ Arguments Lead to Misguided Policy.” One major criticism I had of the way “externalities” are talked about in public debate was policymakers ignoring that supposed “corrections” for these “market failures” could induce behaviors with their own external costs.

Consider a bill proposed in the Oklahoma house by Rep. Merleyn Bell (D-Norman).

He is concerned about the costs emanating from driving under the influence (DUI) of alcohol. He wants to raise funds to subsidize deterrents, such as stop-checks on roadways. But rather than raise alcohol taxes, which would affect all consumers, he wants to “price in” the externality by imposing costs on those travelling at times when people are more likely to drink. The way he suggests doing so is baffling, however: adding a 20 percent supplement to rideshare surge pricing for companies such as Uber and Lift. Surge pricing, of course, tends to occur at weekends and after sports events and concerts.

Now, it doesn’t take a genius to work out a big problem here.

Raising the price of using ride-share services will reduce the quantity of ride-share services demanded. On the margin, that probably means fewer ride-share drivers themselves under the influence of alcohol. But I suspect those whose livelihoods depend on driving are among the least likely to DUI in the first place.

No, the overwhelming effect of raising rideshare surge prices will be to deter consumers from using those services. That means those who’ve been out drinking for the weekend will be more likely to drive themselves home or get in the car of someone else who has been drinking, increasing the risk of DUI-related costs and negating any deterrent from the spot-checks.

Corporate CEOs—Some of America’s Hardest Workers

It has become fashionable for Washington politicians to bash corporate executives—their decisions, their motivations, and their personal earnings. But when you hear anti-corporate rhetoric, keep in mind that politicians themselves are often very flawed people. And remember that corporate executives have intense job demands and deliver huge work efforts that keep our economy humming.

Michael Porter and Nitin Nohria of Harvard Business School looked in detail at the daily activities of a sample of corporate CEOs and reported their findings in a recent Harvard Business Review article:

Running a large global company is an exceedingly complex job. The scope of the organization’s managerial work is vast, encompassing functional agendas, business unit agendas, multiple organizational levels, and myriad external issues. It also involves a wide array of constituencies—shareholders, customers, employees, the board, the media, government, community organizations, and more. Unlike any other executive, the CEO has to engage with them all. On top of that, the CEO must be the internal and external face of the organization through good times and bad.

… CEOs are always on, and there is always more to be done. The leaders in our study worked 9.7 hours per weekday, on average. They also conducted business on 79% of weekend days, putting in an average of 3.9 hours daily, and on 70% of vacation days, averaging 2.4 hours daily. As these figures show, the CEO’s job is relentless.

About half (47%) of a CEO’s work was done at company headquarters. The rest was conducted while visiting other company locations, meeting external constituencies, commuting, traveling, and at home. Altogether, the CEOs in our study worked an average of 62.5 hours a week.

Why such a grueling schedule? Because it is essential to the role.

… The success of CEOs has enormous consequences—good or bad—for employees, customers, communities, wealth creation, and the trajectory of economies and even societies. Being a CEO has gotten harder as the size and scope of the job continue to grow, organizational complexity rises, technology advances, competition increases, and CEO accountability intensifies.

Do corporate CEOs make mistakes? Of course, they are human. But they are very productive humans who work within a market system that generally channels their talents into producing better products at lower costs for our benefit.

Politicians are also human, but their goals are often not so productive. As James Madison lamented in 1787, legislators may have three different motivations: “1. ambition 2. personal interest. 3. public good. Unhappily the two first are proved by experience to be most prevalent.”