Monthly Archives: October 2007

More on the Rangel Tax

Greg Mankiw on the Rangel tax plan:

Thus, as a first approximation, the plan increases the progressivity of the tax code by redistributing income from the very rich (e.g., CEOs, hedge fund managers, superstar athletes and actors) to the upper middle class (e.g., doctors, lawyers, congressmen).

Buffett Favors Tax Hikes

Warren Buffett is not happy with the amount of taxes he pays:

The United States’ second-richest man has delivered a blunt message to the Bush administration: he wants to pay more tax.

Warren Buffett, the famous investor known as the “Sage of Omaha”, has complained that he pays a lower rate of tax than any of his staff – including his receptionist. Mr Buffett, who is worth an estimated $52bn (£25bn), said: “The taxation system has tilted towards the rich and away from the middle class in the last 10 years. It’s dramatic; I don’t think it’s appreciated and I think it should be addressed.”

During an interview with NBC television, Mr Buffett brandished an informal survey of 15 of his 18 office staff at his Berkshire Hathaway empire. The billionaire said he was paying 17.7% payroll and income tax, compared with an average in the office of 32.9%.

Of course, this could be fixed by installing a flat tax and eliminating deductions.

Also, Mr. Buffett, the Treasury Department does accept donations.

The Success of Global Capitalism

Alvaro Vargas Llosa writes:

Is global capitalism making the poor even poorer, or is it in fact rescuing millions of people out of their misery?I recently had the chance to participate in a series of debates here about this issue organized by Foreign Policy magazine and Letras Libres, a Mexican cultural publication  Nothing I heard at that meeting changed my conviction that the glass is half-full despite the doomsayers who predict horrific calamities. 

The essay is excellent, but the fact that we still need to have this debate is somewhat silly. Too often, we are stuck on the debate regarding the distribution of income when discussing the success of capitalism.  However, the distribution of income is a flawed measurement and represents the conditions only at a given point in time.  Such analysis does not measure advancement and success over a longer period of time.  Similarly, this analysis regards income as the only variable for measuring one’s standard of living.

It is a shame that more people do not read Schumpeter.  If they did, they would understand why capitalism and economic growth actually benefit those at the bottom by providing them with goods and services that previously only the rich could afford.  And perhaps more importantly, it does this without coercion, force, or central authority to direct it.

Economics and Private Contractors

Tyler Cowen discusses the use of military contractors:

It is easy to rail against contractors for holding money above loyalty to country; Halliburton, for instance, has been a target of this criticism. But money isn’t the real issue. Few Americans would join the armed services without pay, and most American weapons are made by the private sector for profit.

Furthermore, privateers, private ships licensed to carry out warfare, helped win the American Revolution and the War of 1812. In World War II, the Flying Tigers, American fighter pilots hired by the government of Chiang Kai-shek, helped defeat the Japanese. Today, many of our allies receive payment, either implicitly or explicitly, to support American efforts. War is, among other things, an economic undertaking, so the profit motive in military affairs isn’t always bad or ignoble.

When it comes to supplying troops, or protecting high-ranking officials, private military contractors often offer greater flexibility and rapidity of response. The employees, many of whom are former soldiers or operatives, tend to have more experience than current, mostly younger soldiers.

For more on this topic, check out Alex Tabarrok’s “The Rise, Fall, and Rise Again of Privateers.

The Broken Window Fallacy

With every disaster, there is always someone who makes a comment like this:

“In the odd nature of economic accounting, this will probably be a stimulus,” said Alan Gin, a University of San Diego economist. “There will be a huge amount of rebuilding in the next couple of years, financed by insurance payments.”

Somewhere, Bastiat is frowning.

HT: Mises.org

The Rangel Tax Plan

From Dow Jones:

Corporations would see their top tax rate cut to 30.5% from 35% under a tax plan unveiled Wednesday by House Ways and Means Committee Chairman Charles Rangel, D-N.Y., to fellow committee members.

Rangel plans to publicly announce the plan Thursday morning.

To offset the cost of the lower tax rate, the plan would alter a number of business tax provisions, according to lawmakers, congressional staff and lobbyists familiar with the plan as outlined Wednesday night.

The plan will repeal a tax deduction for domestic manufacturers. It will prevent companies from using an accounting method known as last-in, first-out, or LIFO, that can cut their taxes during times of rising prices. Repealing LIFO could result in a substantial tax for companies currently using the method, but aides briefed on the plan say the change would be phased in over eight years, thereby blunting the initial impact.

The plan would also require companies to defer deductions for certain expenses of foreign subsidiaries of U.S. companies until the money is repatriated to the U.S.

[...]

Middle and upper-middle income families would benefit under the plan by a repeal of the alternative minimum tax starting Jan. 1, 2008.

Upper-income families, however, would pay for that repeal with a 4% surtax on incomes above $150,000 for a single earner or incomes above $200,000 for a married couple. That surtax would grow to 4.6% for incomes above $500,000.

The surtax will also make possible an expansion of the earned income tax credit, an increase in the standard deduction, and an increase in the value of the child tax credit for those earning too little to owe federal income taxes.

A third section of the plan would address a number of pressing tax issues, including a temporary patch of the alternative minimum tax prior to Jan. 1, 2008, and the extension of a number of expiring tax provisions.

[...]

Part of the cost of the third section of the bill would be offset by taxing carried interest paid to financial managers as regular income and not as capital gains. While some said the change wouldn’t apply to real estate investment trust managers, a source familiar with the plan said all industries are included.

The good:

  • The lowering of the corporate income tax. This isn’t as low as I would prefer, but still a step in the right direction.
  • The elimination of the AMT.
  • The closing of corporate welfare loopholes. Angry lobbyists are a good thing.

The bad:

  • This new surtax on high income earners is absurd. I am opposed to this tax on philosophical grounds, but more importantly, the bar is set too low for such a surtax regardless of one’s political philosophy. By including those with incomes above $200,000, you are placing an increased tax on many small business owners.
  • Taxing carried interest as earned income. I would be okay with this provision if we eliminated the tax on dividends and capital gains for everyone else…

This bill is unlikely to become law by any stretch of the imagination, but nevertheless, this bill is important because it provides a glimpse of the debate regarding tax policy in the next few years including during the next presidential election.

What Will A-Rod Get?

Our friend J.C. Bradbury writes:

The Yankees have ten days beyond the World Series to sign Alex Rodriguez to an extension, so there is a decent chance that this will get settled very soon. (I think that the Yankees and A-Rod will part ways, but I will not be surprised if he stays.) So, I thought it would be a good time to go ahead and make a prediction as to what he will get. And I invite you to do so as well in the comments.

I’ve run a few numbers based on his performance over the past few seasons, his expected aging decline, and the anticipated rise in revenues over the course of the contract.

My prediction: 7 years, $244 million; approximately $34.8 million/year.

You can submit your prediction in the comments on his site for a chance to win a copy of his excellent book, The Baseball Economist.

Free Trade Consensus

Dan Klein writes:

Adam Smith said the division of labor is limited by the extent of the market. He saw that productivity increases when work is subdivided and specialized. But specialization only makes sense if the market is big enough to reward the investments and risks in specialized production.

Free international trade increases the extent of the market. International buyers and sellers thicken the market, and make the markets for specialized goods more competitive and reliable. That’s what makes further specialization justified in the minds of entrepreneurs. They go forward with specialization, and they enhance productivity. They make things used by people the world over.

That’s why we all gain from increases in the extent of the market. Large, thick, international markets invite the productivity investments, and the result is better stuff at lower prices for all of us.

Read the whole thing.

Also, for those interested, I have previously written about the division of labor here.

DeLong Podcast

Brad DeLong is podcasting. The podcasts mostly consist of his lectures with a few other discussions thrown in. I haven’t yet made it through those on political economy, but I highly recommend those on economic history.

His latest is a discussion with Tyler Cowen and Greg Clark regarding Clark’s book “A Farewell to Alms.”

Questioning Chinese Growth

Our friend Bryan Caplan questions the Chinese growth story.