The Grumpy Economist: Behavioral Political Economy

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

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

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

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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.

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Business In America Illustrated | Tax Foundation feedly

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Business In America Illustrated | Tax Foundation
http://taxfoundation.org/article/business-america-illustrated
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Daniel J. Smith
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feedly

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http://object.cato.org/sites/cato.org/files/serials/files/regulation/2014/10/regulationv37n3-9_7.pdf#page=1
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Do Successful Tax Evaders Supply A Positive Externality? feedly

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Do Successful Tax Evaders Supply A Positive Externality?
// Cafe Hayek

(Don Boudreaux)

Here’s a letter to the Washington Post:

On Wednesday, 51 governments agreed to share financial information in order to reduce tax evasion (“51 countries sign deal in tax evasion crackdown,” Oct. 30). Britain’s Chancellor of the Exchequer, George Osborne, roundly approves, proclaiming that this new treaty “strikes a blow on behalf of hard-working taxpayers.”

Not so fast. While this treaty unquestionably strikes a blow on behalf of tax-collectors such as Mr. Osborne, it’s less obvious that this treaty helps taxpayers. Consider the U.S.: In 31 of the 67 post-war years from 1946 to 2013, Uncle Sam’s budget deficit rose (or budget surplus shrunk) when his tax receipts increased.* This fact means that Uncle Sam almost as often as not responds to each dollar of additional tax revenue by increasing his spending by more than a dollar – thus imposing a heavier tax burden on future taxpayers.

Of course, this reality doesn’t prove that governments are institutionally prone to treat a rise in tax receipts as an invitation to hike spending excessively rather than to lower the tax burden on non-evaders. But it should give serious pause to those who blithely assume that more revenue extracted from tax evaders will necessarily reduce the burden of taxes borne by non-evaders.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

* See Table 1.1 here.

Alberto Mingardi, writing over at EconLog, has more. And don’t miss Dwight Lee’s insightful 1997 short essay on this taxing matter.

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Quotation of the Day… feedly

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Quotation of the Day…
// Cafe Hayek

(Don Boudreaux)

… is from pages 38-39 of the manuscript of Deirdre McCloskey‘s extensive and insightful review of Thomas Piketty’s Capital in the Twenty-First Century; (quoted here with Deirdre’s kind permission) (original emphasis; footnote excluded):

The usual way, especially on the left, of talking about poverty relies on the percentage distribution of income, starting fixedly for example at a relative “poverty line.” As the progressive Australian economist Peter Saunders notes, however, such a definition of poverty “automatically shift[s] upwards whenever the real incomes (and hence the poverty line) are rising.” The poor are always with us, but merely by definition, the opposite of the Lake Wobegon effect – it’s not that all the children are above average, but that always there is a bottom fifth or tenth or whatever in any distribution whatsoever. Of course.

[The Saunders citation is: Peter Saunders, “Researching Poverty: Methods, Results, and Impact,” Economic and Labor Relations Review, Vol. 24, June 2013, pp. 205-218.]

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