Wednesday, August 31, 2011

The Flaws with Investment Centric Economic Thinking

After writing as much as I have recently on taxes I can't help but comment on a few articles in the NY Times today.  I'll admit upfront that this coverage may be an example of selection bias in the news, I couldn't find similar coverage of candidate's views on taxes in any of the more conservative sources I checked.*

The first article is a NY Times editorial on some candidates talking about tax rises on the poor.  This is absurd, US labor force participation has been falling since peaking in 1997-2000 and it is not at all controversial to point out raising taxes on these groups will lead to declining employment.  This is the last thing we need right now.  This is particularly wrong headed since the US is a naturally high participation rate economy, in a comparison of 10 countries the BLS found that we had the highest participation rate between 1992 and 2000, by 2002 Canada had overtaken us, by 2007 both Canada and Australia had, and by 2010 Sweden can be added in as a tie.  Now, I don't think this is all policy but I do think it helps to indicate that the Bush tax cuts focused on the wealthy didn't help and tax raises on the poor to help fund this will just exacerbate the situation.

The second article was on how tax evasion by companies was becoming a big area of emphasis to increase profits, some CEOs were making more than their company's Federal tax payments.  Not a lot of deep information here but it does indicate that the complexity of our tax code is extremely problematic and that it already favors the successful to such a degree that we must be far into the realm of diminishing returns to potential investment from this favorability.

The third, and most disturbing, article is on Huntsman's suggested tax changes.  I wanted to like Huntsman, but after this I can't.  He suggests:

There, aides said he will repeat his call for a tax code with dramatically lower individual and corporate tax rates, an end to taxes on capital gains and dividends and the elimination of the alternative minimum tax.
But in exchange, Mr. Huntsman will say the tax code needs to be stripped of all loopholes, deductions and tax giveaways, a step that would make the changes neutral in terms of how much money would flow into the government’s coffers.

Being in the middle of some reading on taxes I have to say this would be disastrous.  While I agree with the need to strip deductions and that rates should be lower to account for this we need more revenue to close the deficit, saying taxes would be dramatically lower would offset much, if not all, of the deficit reduction benefits.  More generally, our big problem right now is employment, growth wasn't doing so bad until the recession.  While whether or not this policy would increase growth is disputable there's no dispute that it would lower employment.  Shifting the tax burden away from capital and towards labor will activate many of those disincentives to work that I tend to go on about, such as in yesterday's post.  This policy would so heavily favor capital over labor that companies would have an incentive to eliminate labor in favor of capital even in some cases where this would be inefficient before taxes.  I have some idea of what economic theory is behind this, but it's madness and contradicts empirical findings on taxation.  

We need to have a real debate about taxes in this country; we have one of the most inefficient tax codes in the developed world.  But to do this we have to address what we actually know about taxes and the mixed effects they have, it's not just a trade off between taxes and growth but also a trade off regarding employment, labor and capital ratios, income inequality (and associated effects on politics as well as growth), human capital vs. physical capital, human capital vs. employment, etc.  Right now, this debate looks like the tax discussion is in its most damaging potential form with any action more likely to do greater harm than good.  Even sensible reforms, like lowering rates and eliminating loopholes, is being combined with other tax reforms that would do more than enough damage to make up for the gain.  It's frustrating.

*I am also reminded of how annoyed I am at the increasing number of restrictions on which articles are viewable at the Wall Street Journal.  It used to be part of my daily news read but too little is available today. This is made worse by the fact that unlike most major papers they are not available (or were not, it has been a while since I checked) on LexisNexis so I can't even get it that way.

[Edited for clarity and for errors]

1 comment:

  1. I'm guilty of not having followed Huntsman's positions since he announced his candidacy. What you just pointed out makes me want to despair, as he was my last hope for technocratic moderation in the Republican race. My gut tells me to continue supporting him over most of the rest of the nonsense going on in the race, but the statements you've highlighted are... more than disappointing.