Future of the Flat Tax

Robert Shapiro has an interesting article in Slate today on the future of basic tax reform:
The Flat Tax, Flat-Lined – Republicans usually love tax reform. Now that they control Washington, why are they scared of it?.
I do take issue with one paragraph about the benefits of reducing various tax provisions…
Broadening the base means ridding the tax code of the special deductions, credits, exemptions, and allowances that currently shield about half of all income from federal income tax. Trading off a simpler code for lower rates makes macroeconomic sense. Eliminating lots of deductions, credits, and so on would reduce the tax code’s influence over how the economy allocates its resources, which is good for growth.
First, this statement assumes that the various “deductions, credits, exemptions, and allowances” are purely the result of special interest influences. If, on the other hand, these provisions were Pigouvian in nature — that is, set-up to encourage socially beneficial behaviors (like a tax credit for R&D) or discourage socially bad behavior (like polluting) — then getting rid of them would not be a good idea from an efficiency perspective. Certainly, there is a mix of special interests and Pigouvian tax adjustments in the tax code.
Second, while I might be willing to swallow that ridding the tax code of these provisions might raise the level of production, it is harder to believe that these provisions would have any major impact on growth.
Shapiro also sees one area of inertia in the system:
The first obstacle for any basic tax reform, including a flat tax, is that people value what they have relatively more than what they will receive in the future….Think of support for tax reform as an investment in which you give up deductions or credits today to get lower rates that will spur the economy and raise your income in the future. But people discount the future gains, and rightly so, because the income shielded by tax preferences in the present can earn returns, while there is no certainty that the higher future income will ever arrive.
Personally, I think that the reluctance to give up the deductions is a result of what is called “loss aversion.” Loss aversion is the idea that people weight more heavily an actual loss than the equivalent absence of a potential gain (the idea is associated with the Behavioral Economics sub-field – for similar work, see recent Nobel prize winner D. Kahneman).

Filed under: Economics, Policy, Politics

Krugman’s influence

If you are a regular Krugman reader, you might be interested in this long story in The Washington Monthly.
“Comparative Advantage” by Nicholas Confessore: “How economist Paul Krugman became the most important political columnist in America.”

Filed under: Economists

John Rawls 1921-2002

John Rawls died yesterday…
Economists should be familiar with the Rawlsian social welfare function. According to the “Rawlsian view” social welfare is at its greatest when we’ve maximized the miniumum welfare of everyone in the society.
In other words, the collective well-being is determined by the person who is the worst-off in the society.
(For more, see Evaluating NAFTA – an article I wrote several years ago.)

Harvard Gazette: John Rawls, influential political philosopher, dead at 81
[snip]
Charles Fried, the Beneficial Professor of Law at Harvard, said of Rawls, “He was the dominant figure in political and moral philosophy in the second half of the 20th century. He developed an approach to the questions of moral and political philosophy which was substantive and analytic at the same time, proposing concrete answers to many questions.”
In “A Theory of Justice,” Rawls sets forth the proposition that “Each person possesses an inviolability founded on justice that even the welfare of society as a whole cannot override. Therefore, in a just society the rights secured by justice are not subject to political bargaining or to the calculus of social interests.”
[snip]

Filed under: Economists

Unemployment benefits set to expire.

The Washington Post reported that the House of Representatives has put off extending unemployment insurance for over 800,000 workers whose coverage ends December 28th. As a result, checks will not be sent out at least until Congress reconvenes in January.
Both the House and the Senate had approved different bipartisan versions of bills to extend benefits (the Senate version was drafted by an unlikely pair of senators: H. Clinton (D) and D. Nichols (R)). However a final vote never happened.
I might suggest that Congress shouldn’t be paid either for the period after December 28th and before they themselves return to work.

From the Center on Budget and Policy Priorities:
All Unemployed Workers Will Lost Temporary Federal Help on December 29 Unless House Acts on Friday, revised 11/21/02
On Friday, November 22, the House of Representatives will have one last chance to prevent the federal temporary unemployment benefits program from expiring on December 28. The Senate has adjourned for the year, and the only option left for continuing this program is for the House to adopt bipartisan Senate legislation to extend this program for three months.
[snip]
If the House fails to act, the consequences for the unemployed will be immediate and dramatic:
* At the end of the year an estimated 830,000 jobless workers who will be receiving these benefits will have them cut off immediately.
* Starting on December 29, an additional 95,000 jobless workers per week will run out of state unemployment benefits without finding a job and get no temporary federal unemployment assistance.[1]
* By the end of March, a total of 2.1 million jobless workers will not receive temporary benefits who would receive them under the Senate bill. (See Table 1 for state-by-state data.)
[snip]
Finally, letting the TEUC program expire is precisely the wrong step to take when there is widespread agreement about the need for more, not less, economic stimulus. Letting the program expire will diminish economic demand among unemployed workers.
[snip]

Filed under: Economy, Policy, Politics

SSI and Medicare budgetary woes

In case you’ve forgotten or have been distracted lately, there is still a looming Social Security and Medicare problem…

The Impact of Social Security and Medicare on the Federal Budget
Summary
The difference between the income and expenditures credited to the trust funds of the Social Security and Medicare programs, the nation’s two largest social insurance programs, is often viewed as a measure of the impact that those programs have on the financial condition of the federal government. Under the Congressional Budget Office’s latest budget projections for the next 10 years, those trust funds are estimated to run sizable surpluses. However, those surpluses reflect more than an excess of dedicated revenues over spending. A substantial portion results from internal transfers between Treasury accounts–credits from the general fund of the Treasury to the trust funds. Thus, although the trust fund surpluses may accurately reflect the programs’ spending authority, using them to gauge the programs’ budgetary impact distorts their net effects.
That distortion, which is large, obscures the growing strains that the programs are placing on the government’s finances. When the intragovernmental transfers are excluded, instead of running a combined surplus of $3.3 trillion over the next 10 years, the two programs are expected to run a deficit of $96 billion. Similarly, from 2003 to 2026, instead of running a cumulative surplus totaling $6.5 trillion, as estimated by the Social Security and Medicare trustees, the programs would run a cumulative deficit totaling $6.6 trillion.
Expressed as a percentage of the nation’s gross domestic product, spending for the programs under the trustees’ projections would rise from 6.7 percent today to 12.1 percent in 2040, while revenues for the programs would hover around 7 percent. Trust fund accounting, which by law includes intragovernmental transfers, masks much of that widening gap and thus the growing amount of resources that may have to be drawn from the economy to cover the programs’ expenditures.
The looming fiscal strains are not a temporary phenomenon caused by the retirement of post-World War II baby boomers over the next few decades. They reflect a growing imbalance driven by currently prescribed entitlements as well as long-lasting and powerful demographic trends that could have major unfavorable consequences for the economy. Enacting changes to the Social Security and Medicare programs sooner is better than enacting them later because future beneficiaries would have longer to prepare, because the revisions could be less drastic, and because the changes could enhance economic growth.

Filed under: Policy

Economic Indicators

While looking for the recent housing starts data (down 11.4%!!) I stumbled on a new government website.
It looks like the BEA / Census Bureau has put together economicindicators.gov. with links to recent data updates. I can’t say I’m too pleased with the layout of the site – but it does have a number of links to recent data.

Filed under: Economics

Letters for Yellowstone

Here’s an interesting story from the NY Times on the decision to allow snowmobiles in Yellowstone: Flooded With Comments, Officials Plug Their Ears
Apparently, a flood of messages were sent to Washington DC to comment on proposed policy changes.
From a political economy perspective, it is a nice illustration of how political participation, in this case, letter writing, goes up as cost declines.
Email availability and “AutoTurf” campaigns (form letters written by advocacy groups and sent by members) have greatly reduced the cost of commenting on policy. As a result, the government is getting more comments.
However, there is a downside. Since it is cheaper to send the messages, each message carries less weight in the mind of the policymaker. If someone cares enough to spend 30 minutes writing a letter and the cash for a stamp, they might care more about the issue than someone spending 20 seconds sending an email.
Thus a paradox of participation, as the cost of communicating declines, there will be more messages sent, however, the total value to the policymaker of that communication might decline as well.
In the case of the snowmobiles, the Interior Department said they had received 360,000 comments, 80 percent of which want to ban snowmobiles (NYTimes).
The result? A new policy allowing for a 35 percent increase in the number of snowmobiles.

Filed under: Economics, Policy, Politics, Technology

Away

Just a quick note. I will not be updating very much over the next 2-3 days. My father is getting a hip replaced, so I’ll be otherwise occupied…

Filed under: Website

House Districts and Income

Brad DeLong has an interesting table of house representation sorted by district income.

O Beautiful for Extremely Large Economic Gaps: Archive Entry From Brad DeLong’s Webjournal
Democrats now represent 12 of the 20 highest-income congressional districts–and 16 of the 20 lowest-income congressional districts.

Filed under: Politics

Swimming Economists

Arnold Kling has a recent article on the on the freshwater / saltwater debate and the current Nobel Prize.
I think that there is likely to be a nice synthesis between the two views – one that models people as “rational” in the sense that they optimize something. It’s the “something” that is the trick; and behavioral and experimental economics are trying to work that out.
For example – according to a simple cost-benefit analysis it is “irrational” to vote, since the odds of affecting the outcome are tiny. However, I would view the vote decision as rational once we allow people to receive some psychological benefit from participating in the democratic process.
In this view, rational optimizing models fail empirically not because people are non-rational, but rather because the choice problem is not fully or correctly specified.
Others, I know, disagree with me. Some think that economic analysis is good in some areas (like perhaps financial markets) but not-so-good in others where people are likely to act less rational (like deciding whom to date, or deciding what to do on a Friday night). My view is just that the individuals’ optimization problem is harder to specify in the later case.
Of course this probably leaves me – as Kling suggests – with “unpronounced aquatic tendencies,” when it comes to economic theory.

TCS: Tech – Sweetwater vs. Saltwater
However, the economics profession divides on a number of issues. This year’s Nobel Prize, awarded to Vernon Smith and Daniel Kahneman, may prove to be the most controversial in its 34-year history. In general, I would expect that Saltwater economists (from Berkeley, MIT, and Harvard, near the oceans) would approve, while Sweetwater economists (from Chicago, Minnesota, and Rochester, near the Great Lakes) would not.
This year’s Nobel laureates are known for evaluating the validity of two sacred assumptions in economics: the assumption that individuals optimize and the assumption that real-world markets lead to competitive outcomes. Kahneman has found systematic exceptions to the assumption that individuals optimize. Smith uses human experimental subjects to simulate market behavior, and on occasion his simulations have found that different market structures lead to different outcomes.

Filed under: Economics