CBO Study Undercuts Piketty’s Analysis feedly

—-
CBO Study Undercuts Piketty’s Analysis
// Tax Foundation – Tax Foundation’s “Tax Policy Blog”

The Congressional Budget Office (CBO) has released its annual study on the distribution of household income and federal taxes. (See here.) The numbers are for 2011 (latest available data.) A valuable feature of the study is that CBO estimates the amounts and distributional effects of government transfers and federal taxes, in addition to looking at market income.

In CBO’s terminology, market income refers to labor, capital, and other income earned in markets. Before-tax income is market income plus federal, state, and local transfers. After-tax income is before-tax income minus federal taxes.

The CBO data confirm and quantify what most people know in general: the size and distributional impact of transfers and taxes are huge.

Dividing households into quintiles (fifths), CBO estimates that, on average, transfers and taxes increase household income by $8,600 for the bottom quintile, $12,500 for the second quintile, and $9,100 for the middle quintile. Meanwhile, transfers and taxes reduce household income by $700 for the fourth quintile and by $46,500 for the highest quintile. (See table.) In percentage terms, government transfers and taxes, on average, raise household income by 55 percent in the bottom quintile, by 42 percent in the second quintile, and by 18 percent in the middle quintile, but cut it by 1 percent in the fourth quintile, and by 20 percent in the top quintile.

Average Household Income, Transfers, and Taxes, by Before-Tax Income Group in Dollars, 2011
Lowest Quintile Second Quintile Middle Quintile Fourth Quintile Highest Quintile
Market Income 15,500 29,600 49,800 83,300 234,700
Government Transfers 9,100 15,700 16,500 14,100 11,000
Before-Tax Income 24,600 45,300 66,400 97,500 245,700
Federal Taxes 500 3,200 7,400 14,800 57,500
After-Tax Income 24,100 42,100 59,000 82,600 188,200
Source: Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2011

Government transfers are large in all quintiles because they include Social Security and Medicare as well as numerous means-tested programs. But they are greatest relative to income in the lower and middle quintiles. Federal taxes are likewise strongly redistributional. CBO’s computations include all major federal taxes (individual income, corporate income, payroll, and excises). CBO also reports the distribution of the individual income tax by itself, and that is even more progressive.

CBO also examines the distribution of income using a more sophisticated gauge known as the Gini index. The Gini index can vary from 1 to 0, with 1 indicating total inequality and 0 meaning complete uniformity.

As shown in the figure, inequality appears to have edged up over time, but it is always much lower after accounting for government transfers and taxes. According to the Gini index, income inequality after transfers and taxes is actually lower now than it was in 2000.

CBO’s analysis forcefully demonstrates that any distributional study which ignores how much the government already redistributes will be incomplete and potentially misleading.

This brings us to a distributional study that has received enormous attention in the last year: Thomas Piketty’s Capital in the Twenty-First Century. In his book Piketty draws a dark picture of soaring inequality. He insists radical tax increases are needed to correct the problem. However, unlike CBO, Piketty leaves out government transfers and taxes. Hence, when he declares that inequality is returning to levels last seen in the Belle Epoch of a century ago, he is omitting government income redistribution. Income redistribution was miniscule then, but it is massive today.

Many observers have faulted Piketty for failing to acknowledge how much redistribution currently takes place. (For example, see a recent critique by Gramm and Solon discussing this and other problems.) CBO’s findings confirm there is much less inequality than Piketty claims. (Piketty has also been faulted on numerous additional grounds. For two examples among many, see here and here.)

It is peculiar that someone who wants to sharply increase taxes and government spending to achieve greater income and wealth leveling omits all that the government is already doing. In any event, it is clear from the CBO study that Piketty’s before-transfers, before-taxes numbers do not reflect reality. While CBO does not directly criticize Piketty’s work, it does not need to. The numbers speak for themselves.

—-

Shared via my feedly reader

Daniel J. SmithSent via iPhone


Patents Do Not Increase Productivity feedly

—-
Patents Do Not Increase Productivity
// Marginal Revolution

James Pethokoukis points us to this graph in the CBO’s new report on innovation. Patenting is way up but total factor productivity has barely budged. 112414patent

Boldrin, Allamand, Levine, and Ornaghi show something similar cross-sectionally, namely that the industries with the most patents are not the industries with the biggest increases in labor productivity. At best there is only a slight positive relationship between patents and labor productivity (see the paper for more).

Patents&Prod

—-

Shared via my feedly reader

Daniel J. SmithSent via iPhone


The Grumpy Economist: Behavioral Political Economy

http://johnhcochrane.blogspot.com/2014/11/behavioral-political-economy.html?spref=tw&m=1

Daniel J. Smith
Sent via iPhone


Are Public Sector Jobs Recession-Proof? Were They Ever? — by Jason L. Kopelman, Harvey S. Rosen feedly

—-
Are Public Sector Jobs Recession-Proof? Were They Ever? — by Jason L. Kopelman, Harvey S. Rosen
// National Bureau of Economic Research Working Papers

We use data from the Displaced Worker Survey supplements of the Current Population Survey from 1984 to 2012 to investigate the differences in job loss rates between workers in the public and private sectors. Our focus is on the extent to which recessions affect the differential between job loss rates in the two sectors. Our main findings include the following: First, taking into account differences in characteristics among workers does not eliminate sectoral differences in the likelihood of losing one’s job. After accounting for worker characteristics, during both recessionary and non-recessionary periods, the probability of job loss is higher for private sector workers than for public sector workers at all levels of government. Second, the probability of displacement for private sector workers increased during both the Great Recession and earlier recessions during our sample period. Third, it is less straightforward to characterize the experience of public sector workers during recessions. Job loss rates sometimes increased and sometimes decreased, depending on whether the employer was the federal, state, or local government. The impact of the Great Recession on displacement rates for public sector employees was somewhat different from that in previous recessions. Fourth, the advantage of public sector employment in terms of job loss rates generally increased during recessions for all groups of public sector workers. Thus, the answer to the question posed in the title is that public sector jobs, while not generally recession-proof, do offer more security than private sector jobs, and the advantage widens during recessions. These patterns are present across genders, races, and educational groups.
—-

Shared via my feedly reader

Daniel J. SmithSent via iPhone


Jonathan Gruber and How the President Went from Critic to Supporter of Taxing Health Benefits feedly

—-
Jonathan Gruber and How the President Went from Critic to Supporter of Taxing Health Benefits
// Tax Foundation – Tax Foundation’s “Tax Policy Blog”

Back in 2008, one of the Tax Foundation’s tasks was to fact-check the fiscal policy statements by the candidates. We documented a lot of the misleading rhetoric and advertisements that came from both sides. Personally, most of the work we did is forgotten, but one area of the 2008 campaign that is hard to forget is then-candidate Barack Obama’s constant criticism of John McCain’s health care plan. I was reminded of this again this week as the Jonathan Gruber story made headlines.

One of President Obama’s oft-repeated criticisms of his opponent was that McCain’s health care plan would “tax health benefits for the first time ever.” This criticism was featured in a very popular Obama television ad. This ad was so popular that the Washington Post claimed earlier this year that it is the “single most-aired political ad in the last 10 years.”

In speeches, then-candidate Obama called McCain’s plan “radical,” while Biden mocked it, saying, “They want to tax your health-care benefits; I am not making this up.”

Fast-forward two years to when the Affordable Care Act is passed by Congress and signed by President Obama. One of the provisions of the law is the so-called “Cadillac tax,” which is a 40 percent excise tax on high-cost health insurance plans scheduled to go into effect in 2018. Legally, the tax is to be paid by the insurance companies. (See here for an explainer of this provision of the law from Kaiser.)

So how in a span of two years did Barack Obama go from being Paul Revere warning that McCain was coming to tax your health benefits to turncoat president whose biggest achievement was a law that taxed your health benefits?

Enter MIT economist Jonathan Gruber. Gruber, one of the nation’s leading economists on both tax policy and health care policy, was advising the president and others crafting what would become the Affordable Care Act. Like most economists (left and right), Gruber viewed the fact that employer-provided health care benefits were not subject to income tax as an undesirable policy worthy of changing given that such a policy encourages excessive health care consumption and drives up health care costs.

But President Obama was kind of in a quandary. His health care experts such as Gruber were advising that he pursue a proposal that he had just a year ago demagogued during the election. Numerous post-election stories (see here and here) documented this dilemma, pointing out how many left-leaning health care experts were uncomfortable with candidate Obama’s barrage of attacks against that specific provision of McCain’s plan. They, after all, knew that this was a policy issue that President Obama should probably address as president as part of any health care reform.

So what was the president and his team to do? The recently unearthed videos of Gruber shed some light on how they decided to get themselves out of this pickle — take advantage of the “stupidity” of the American public on economic policy matters, most notably the question of tax incidence.

In one of the videos, Gruber spoke about how to go after the aforementioned exclusion of employer-provided benefits: “The only way we could get rid of it was first by mislabeling it, calling it a tax on insurance plans rather than a tax on people when we all know it’s a tax on people who hold those insurance plans.”

Gruber is admitting that the administration was taking advantage of the fact that the American public doesn’t understand the difference between the legal incidence of a tax and the economic incidence of a tax. That is, while a tax may legally be imposed on one party, it may end up primarily costing a different party as it is passed forward (or backwards) to the other party.

As CNN’s Jake Tapper noted, the White House messaging team was told to sell the Cadillac tax as being a tax on the insurance companies and not a tax on individuals. When then-Press Secretary Robert Gibbs was asked at a White House briefing whether or not the Cadillac tax violated President Obama’s campaign promise not to raise taxes on families making less than $250,000 per year, Gibbs responded: “I would disagree with your notion that it is a tax on an individual since the proposal is written as a tax on an insurance company that offers a plan.” The questioner then followed up raising the point that the insurance companies would likely just pass these costs along to the consumer, which Gibbs responded by saying “I’m not an insurance company broker.”

Looking back, this episode reflects two sad realities about the political economy of taxation in the United States. First, the American public doesn’t understand tax policy issues very well. And second, politicians will exploit this lack of understanding in campaigns and policy making by deliberately misleading the American public in order to win elections and get their policies enacted.

—-

Shared via my feedly reader

Daniel J. SmithSent via iPhone


Business In America Illustrated | Tax Foundation feedly

—-
Business In America Illustrated | Tax Foundation
http://taxfoundation.org/article/business-america-illustrated
—-
Shared via my feedly reader

Daniel J. Smith
Sent from my iPad


feedly

—-

http://object.cato.org/sites/cato.org/files/serials/files/regulation/2014/10/regulationv37n3-9_7.pdf#page=1
—-
Shared via my feedly reader

Daniel J. SmithSent via iPhone


Follow

Get every new post delivered to your Inbox.

Join 41 other followers