The Republican Joint Economic Committee Does Public Finance

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November 14, 2012

The Republican Joint Economic Committee Does Public Finance

Or, "Just because you can?t prove that the top marginal tax rate has a large impact on economic growth doesn?t mean that it doesn't: just have faith!"

As readers will recall, recently a Congressional Research Service report on the impact of top marginal tax rates was ?disappeared? after pressure by the Republican leadership was exerted. [1] The report (mostly a survey of the literature) found no statistically significant impact of top rates on growth. Yet the Republican JEC (to differentiate it from the JEC under Robert Casey)would have us start from the null hypothesis of there being an effect, and only rejecting that (null) hypothesis when sufficient evidence was found against there being an effect.

Now, the JEC-Republicans have produced a report (well, more like a blogpost) that asserts that CRS should?ve studied the effective rate. Indeed, it may very well have been the case that CRS should?ve undertaken that study. After all, I think most of us think the effective rate is important. Oh, they actually did! (Gravelle, Marples, "Tax Rates and Economic Growth," Report R42111 (December 2011)).

Conclusion: I think the JEC-Republicans should critique the CRS report that addresses the topic the JEC-Republicans argue the CRS should?ve analyzed (and actually did), rather than the CRS report that addresses exactly what it says it address in its title. (After all, I assume that the JEC-Republicans have access to all the CRS reports.)

But I thank the JEC-Republican staff for the best laugh I have had today.

More on the ?disappearance? of the CRS report, by Bruce Bartlett.

Posted by Menzie Chinn at November 14, 2012 11:55 AM

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We'll have a chance to put it to the test when the $120,000 tax increases go through the Top 1%.

Posted by: Steven Kopits at November 14, 2012 01:05 PM

Still flogging that tendentious report, eh Menzie?

Posted by: Rich Berger at November 14, 2012 01:10 PM

Rich Berger: I would love for you to specifically identify which econometric or factual error is in the report, given the title of the report. Now, you can say that's not the report that should have been written -- that's your prerogative. But it's not a critique per se.

Posted by: Menzie Chinn at November 14, 2012 01:14 PM

Progressives are not going shut up until they extract their revenge on some fraction of the wealthy, so maybe this is a compromise.
Carney also left the door open to the idea of raising the threshold for extending the Bush-era tax cuts to $500,000 or $1 million. Obama drew the line at $250,000 in his proposal.
http://www.huffingtonpost.com/2012/11/13/obama-bush-tax-cuts_n_2124324.html?ir=Politics

Here is a much more sane approach that isn't motivated by revenge or jealousy.
According to the Tax Policy Center, if we cap itemized deductions at $50,000 and keep tax rates as they are today, we would raise $749 billion in tax revenue over ten years. Moreover, according to the TPC's distribution table, 96.2 percent of the extra revenue would come from the top quintile, with 79.9 percent from the top one percent.

http://gregmankiw.blogspot.com/2012/11/how-to-raise-tax-revenue-from-rich.html

However, entitlement reform must be part of the bargain. Otherwise, the rate of spending growth continues unabated and the lunacy of the progressive "solution" of rasing taxes to offset revenue shortfalls each time the economy slows will become obvious.

Posted by: tj at November 14, 2012 02:11 PM

I've decided retirement isn't for me since interest income is next to nothing.

Sorry about that, college grads.....

Posted by: Chickenpookie at November 14, 2012 02:39 PM

tj How many nano-seconds would it be before the fat cats and their lobbyists were pushing through new deductions? We've been down this road before. In theory the 1986 tax reform was a thing a beauty; an economist's dream. It only took a few short years before it morphed into a disaster that necessitated two huge rate increases in less than four years. Why do you think a 2012 version would end any different?

I'm not sure just what you mean by "unabated" spending. Try looking at the NIPA tables. Federal government spending on consumption and investment has been declining the last couple of years. Nondefense spending is just about where it was during the Reagan years. The "unabated" spending has been on the defense side of federal consumption and investment spending. If you want to look at spending that's driving the outyear deficits than look no further then healthcare. Remember that the next time you and CoRev parrot the Tea Party whine about Obamacare cutting $716B from Medicare.

Posted by: 2slugbaits at November 14, 2012 03:09 PM

The President is calling for $1.6 trn in tax hikes over the next decade, or $160 bn per year. Assuming this affect people with incomes over $250,000, that's 3.9% of the country's 118 million households, or 4.6 million households.

Here's the math:

$250k income cut
-- avg. $280k income in cohort (my estimate)
-- Bottom 2.9% of Top 3.9% of HH
-- 3,422,000 households in total
-- Average incr. tax burden: $23,000 per year
-- Share of gross income: 8.2%

$350k income cut
-- avg. $450k income in cohort (my estimate)
-- Bottom 0.9% of Top 1.0% of HH
-- 1,062,000 households in cohort
-- Average incr. tax burden: $40,000 per year
-- Share of gross income: 8.4%

$2000k income cut
-- avg. $4000k income in cohort (my estimate)
-- Top 0.1% of HH
-- 118,000 households in cohort
-- Average incr. tax burden: $340,000 per year
-- Share of gross income: 8.5%

These together would equal $160 bn in revenue per year.

Now, the deficit in October was $120 bn. So this tax increase would finance about 6 weeks of the deficit. Who finances the other 46 weeks?

Posted by: Steven Kopits at November 14, 2012 03:15 PM

The DOW is down now more than 1,000 points in less than a month.

Goodness, imagine how bad it would be if Romney had been elected!

Posted by: Steven Kopits at November 14, 2012 03:27 PM

"Goodness, imagine how bad it would be if Romney had been elected!"

Let me remember who was in office when the stock market, housing market and just about every other financial enterprise was collapsing or near collapse? I think it was that guy from Texas, what was his name? Darn how easy it is to forget great presidents who killed Osama and found the Iraq nuke weapons. Who was that guy?

Posted by: dilbert dogbert at November 14, 2012 06:01 PM

I made essentially the same criticism in a comment: I'd like to see effective rates analyzed. But the study looked at top marginal rates and accurately found they had no relation. So yeah.

Posted by: jonathan at November 14, 2012 06:20 PM

2slugs

It's clear that a key part of the Progressive strategy relies on creating loopholes in the tax code that favor the special interests of the Progressives - unions, greenies, etc. There is no other reason for the left to fight it as they do. Put some constraints in the legislation if you fear more loopholes will reappear in the future.

Let's assume Obama gets his entire tax rate increase on the "rich". Show me the math how you get the rest of the way to a fiscal solution that does not require another tax increase the next time the economy slips into recession.

Posted by: tj at November 14, 2012 06:46 PM

The 2011 CRS report does NOT use any legitimate measure of the effective marginal tax rate on labor or capital - which would incorporate federal, state, and local taxes for both individuals and businesses.

In the case of labor supply, the 2011 CRS report totally misstates the results of the Ohanian/Raffo/Rogerson study.

Posted by: Steve Robinson at November 14, 2012 06:52 PM

Kopits/tj we don't have an entitlement problem.

The Social Security trust fund, together with payroll taxes, is sufficient to cover program benefits for more than the next 20 years. Moreover, assuming no additional funding, currently scheduled payroll taxes can provide benefits equal to those now provided, even adjusted for inflation, for the indefinite future. Given all the real economic problems we truly must address now, there is no legitimate argument for even considering Social Security modifications until the economy is fully back on its feet and long-term costs and revenues can be more accurately projected.

The Medicare trust fund was actually ?going broke? when Pres. Obama took office, due in large to changes pushed through by the Bush administration. At that time, the trust fund was projected to be exhausted by 2016. However, the ACA (?Obamacare?), rather than taking the much vaunted $716 billion out of Medicare, actually added that amount to the Medicare trust fund; which is now projected to last until 2024. In one fell swoop, two thirds of the Medicare shortfall was eliminated. Eliminating the remaining one third could be even easier; for example, now that the ACA will protect older working Americans, we can in good conscience synchronize Medicare eligibility dates with those for Social Security. The relative ease of these Medicare fixes, and the fact that the small Social Security issues remaining are far beyond our legitimate planning horizon, why then all the hysteria about entitlements eating our children and grandchildren? In a word?TAXES.

Everyone knows that Ronald Reagan reduced income taxes (more than one half for the wealthy); what is less commonly understood is that he extensively offset this by raising payroll taxes(more than double for most self-employed). Today, most American families pay more in payroll taxes than they do in income taxes. Between 1946 and 1981, income taxes averaged 12(+/-1)% of normalized GDP. Reagan reduced income taxes to near 9%. Clinton increased them back to 12%; and Bush/Obama reduced them again to 9 %( and below). However, on budget expenses (which exclude Medicare and Social Security) have remained 12(+/-1)% of normalized GDP throughout. The deficit in income taxes has been financed by borrowing, largely from the Social Security and Medicare trust funds. When Clinton raised income taxes back to 12%, this eliminated the on budget deficit. The CBO projected that this, plus the Social Security and Medicare surpluses, was enough to pay off the entire US debt before the Social Security/Medicare trust funds would have to be amortized for beneficiary payments, all without having to raise any taxes to pay for the amortization of those trust funds. Like Reagan before him, Bush took those excess payroll tax receipts and gave them ?back? as income tax reductions, heavily weighted to the wealthy?who didn?t create those surpluses in the first place. By doing this, Bush guaranteed that income taxes would have to be raised in order to amortize the trust funds. Although the Republicans like to talk about those ?47%? who in large part pay only payroll taxes as being supported and subsidized by those who pay income taxes, the truth is the opposite; ever since Reagan, income taxes have been subsidized by payroll taxes; and the failure to raise income taxes to pay back that subsidy, is to steal the money that middle-class workers have had taken out of their income to pay for their retirement.

Hence, the only problem we have with entitlements is paying back the money that we borrowed from the Social Security and Medicare trust funds. This requires that we raise income taxes in the short term to 12% to cover normal on budget expenses. And, as soon as the economy recovers, we must raise taxes above 12% to pay back the trust funds. This is why the Republicans refuse to discuss raising income taxes; they would much prefer to steal workers retirement funds, and reduce the entitlements paid for by them. We do not have an entitlement problem, we have a Republican problem.

Posted by: bmz at November 15, 2012 04:49 AM

Menzie,

I love your stuff, and am very grateful to you for posting it. But, to parse "I think the JEC-Republicans should critique the CRS report that addresses the topic the JEC-Republicans argue the CRS should?ve analyzed (and actually did), rather than the CRS report that addresses exactly what it says it address in its title", you need a machete. Isn't there an easier way of saying it, like "the Republicans should have analyzed what was there, instead of pretending it wasn't and making a straw man"?

Posted by: Julian Silk at November 15, 2012 05:36 AM

2slugs Never mind. I found the math in today's WSJ. Obama's plan is the same thing he offered earlier in the year.

The math shows that it closes $1 trillion++ annual deficits by about $160 billion per year.

Even though the left abhors limiting deductions, the plan goes after the charitable contribution deduction.

Where's the math for another 75% or so of the fiscal gap?

This plan essentially takes the trajectory of spending associated with 2 wars and several stimulus plans during the period 2000 - 2009 and attempts to protect it by raising tax rates.

Let's go back to the spending trajectory that existed in the mid to late 90's. It's much flatter. Eyeballing the total government expenditure trajectory, it appears we would be close to budget balance right now had we remained on that trajectory, and that's without raising a single tax rate from where they are today. Seems more like a spending problem than a tax problem.

Posted by: tj at November 15, 2012 06:02 AM

Wait, did I really see Rich B make an accusation of tendentiousness? There are really only two ways to go with a response. One is "I don't think that work means..." you know the rest. The other is that Rich is projecting. Since the internet makes it so ease to look words up, I'm going to assume Rich is not having a Vizzini moment, and that his own tendentiousness leads him to see tendentiousness in others.

Posted by: kharris at November 15, 2012 06:13 AM

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Source: http://www.econbrowser.com/archives/2012/11/the_republican.html

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