Roads, Taxes and Rationality

There’s no shortage of news being made and problems to be addressed, but the world seems a bit quite these days. Maybe the president has something to do with it:

Biden’s words . . . have been counted along with his on-camera appearances and total one-third of those notched up by the previous president at the equivalent stage (The Guardian).

It clearly helps that there are rational people in charge of the federal government for a change, “rational” in the sense that they’re trying to fix problems instead of ignoring them or making them worse. 

An excellent example is the problem of America’s “crumbling infrastructure”. The two words, “crumbling” and “infrastructure”, have been tied together for decades, like “manicured lawns”, “well-heeled lobbyists”, “potent symbols” and “hot topics”. Everybody agrees the country’s roads, bridges, dams, school buildings, electrical grid, etc. need work and it will cost a lot of money to modernize them. I just typed in “infrastructure” and got:

The cost to fix America’s crumbling infrastructure? Nearly $2.6 trillion, engineers say (CNN).

So it isn’t a surprise that Biden is announcing a big infrastructure plan tomorrow (unlike his predecessor, the orange guy, who kept promising a tremendous infrastructure plan to go along with his miraculous health insurance plan, neither of which ever materialized.)

Nor is it a surprise that Republicans won’t want to pay for it. From the Washington Post’s “Plum Line” blog:

New details are emerging about the massive infrastructure plan that Democrats will present this week, and it poses a problem for Republicans. This is exactly kind of government spending voters from both parties support — every member of Congress would happily have a new bridge in their district.

But if it passes, it will be another victory for President Biden. So Republicans have to find a way to convince voters it’s a terrible idea, which they’ll attempt through a series of misleading arguments.

Here’s the latest on the package, from The Post:

Biden’s plan will include approximately $650 billion to rebuild the United States’ infrastructure, such as its roads, bridges, highways and ports, the people said. The plan will also include in the range of $400 billion toward care for the elderly and the disabled, $300 billion for housing infrastructure and $300 billion to revive U.S. manufacturing. It will also include hundreds of billions of dollars to bolster the nation’s electric grid, enact nationwide high-speed broadband and revamp the nation’s water systems to ensure clean drinking water, among other major investments, the people said.

Those all seem like worthy goals. So how will Republicans argue against them?

One way will revolve around fearmongering about deficits and tax hikes. Another will seek to cherry-pick from the package to portray it as stuffed with wasteful boondoggles.

On the first, Biden is expected to ask congressional Democrats to roll back parts of his predecessor’s tax cuts for the wealthy and corporations, and to increase taxes on profits that corporations shelter offshore.

And Senate Minority Leader Mitch McConnell (R-Ky.) is already balking. “If you want to do an infrastructure bill, let’s do an infrastructure bill,” is McConnell’s latest line. “Let’s don’t turn it into a massive effort to raise taxes on businesses and individuals” [i.e. corporations and rich people].

The Republican game runs as follows. They say they support infrastructure repair in principle (which is true of some). But, they add, they don’t support paying for it either by driving up the deficit or with tax hikes that will kill jobs (as McConnell suggested).

Never mind that Republicans exploded the deficit with the very tax cuts for the rich and corporations that Democrats want to partly reverse, or that Republicans are pretending doing this would raise taxes on workers, or that the claim that tax hikes kill jobs has been perpetually proven wrong. . . .

Meanwhile, you will surely hear the name “Solyndra” bandied about, in reference to what happened the last time a Democratic administration boosted green energy infrastructure (an even bigger component of Biden’s plan).

Republicans are already making the case that last time millions in taxpayer dollars were squandered on green energy jobs that never materialized. They are road-testing a new slogan about what’s coming: “Solyndra Syndrome.”

But that actually points to how Democrats should respond to this attack. Because the truth is very different from what Republicans would have you believe.

Solyndra was indeed a failure: As part of a federal program to support promising companies, the Obama administration gave a $535 million loan to the firm. But their solar panel technology struggled to compete against low-cost panels from China, and the company eventually went bankrupt.

But the whole point of the loan program was to take risks, in the knowledge that some of them wouldn’t work out. And other loans paid off spectacularly well.

You may have heard of another up-and-coming green tech company that got a $465 million loan at around the same time, enabling it to start making passenger cars. It’s called Tesla. It paid back its loan with interest, and today has more than 70,000 employees.

Republicans spent years trying to turn the Solyndra failure into a scandal. What they didn’t mention is that despite the loss the government took on it, the program that funded that loan quickly turned a profit, eventually earning billions.

So that part of the Obama Recovery Act was a success, even though Republicans convinced many people it was a failure. The reality tells the opposite story, and Democrats should say so.

Beyond all that, . . . Democrats have a good way to call the Republicans’ bluff: Renew the push for a boost in funding for the Internal Revenue Service, so it can start hauling in the huge piles of revenue that will likely to go uncollected in coming years — much from the wealthy and corporations.

Tax experts say that due to IRS budget cuts and resulting lax enforcement, as much as $7.5 trillion in revenue could go uncollected over the next decade, a good deal of it from wealthy actors who are well resourced to evade payments. They also say netting even a fraction of that could bring in gobs of new revenue.

Sen. Ron Wyden (D-Ore.), the chairman of the Finance Committee, says Democrats should renew this push, tied to the debate over infrastructure, by arguing for more funding for IRS enforcement, and for reforms improving its efficacy:

The absolute bare minimum Republicans should get behind is ensuring the IRS has resources and trained staff to collect taxes that are currently owed. They won’t have any credibility if their position is that not only can there be no new revenue, but we also can’t do significantly more to collect revenue that’s owed.

Unquote.

Republicans won’t have any credibility? That’s never bothered them before.

Cutting Taxes for the Rich Simply Helps the Rich (Duh)

Some counterintuitive ideas are fine. Others counterintuitive ideas are stupid (and self-serving).

A counterintuitive idea popular among conservatives is that helping the rich makes them productive while helping the poor makes them lazy. Another is that cutting taxes on the rich increases what the government collects in taxes. Sure it does!

From CBS News:

Tax cuts for the wealthy have long drawn support from conservative lawmakers and economists who argue that such measures will “trickle down” and eventually boost jobs and incomes for everyone else. But a new study from the London School of Economics says 50 years of such tax cuts have only helped one group — the rich.

The new paper by [two British economists] examines 18 developed countries — from Australia to the United States — over a 50-year period from 1965 to 2015. The study compared countries that passed tax cuts in a specific year, such as the U.S. in 1982 when President Ronald Reagan slashed taxes on the wealthy, with those that didn’t, and then examined their economic outcomes. 

Per capita gross domestic product and unemployment rates were nearly identical after five years in countries that slashed taxes on the rich and in those that didn’t, the study found. 

But the analysis discovered one major change: The incomes of the rich grew much faster in countries where tax rates were lowered. Instead of trickling down to the middle class, tax cuts for the rich may not accomplish much more than help the rich keep more of their riches and exacerbate income inequality, the research indicates.

“Based on our research, we would argue that the economic rationale for keeping taxes on the rich low is weak” said a co-author of the study. “In fact, if we look back into history, the period with the highest taxes on the rich — the postwar period — was also a period with high economic growth and low unemployment.”

Unquote.

But not to worry, conservatives! Facts have a well-known liberal bias.

Let Them Eat Cake, But Raise Their Taxes

Newly-elected Alexandra Ocasio-Cortez (aka AOC) is the youngest person in Congress. She is becoming very well-known. Last week, she was asked about funding the Green New Deal, the plan to eliminate U.S. carbon emissions and move away from fossil fuels within ten years. This is what she said:

Once you get to the tippie-tops, on your $10 millionth dollar, sometimes you see tax rates as high as 60% or 70%. That doesn’t mean all $10 million dollars are taxed at an extremely high rate. But it means that as you climb up this ladder, you should be contributing more.

Right-wingers immediately screamed that a tax rate that high would be the equivalent of slavery. They didn’t bother to point out that she was referring to the “marginal” tax rate, the percentage at which income over a certain threshold is taxed. That’s very different from taking 60% or 70% of someone’s entire income.

The economist Paul Krugman explains why the 60% or 70% marginal rate is an excellent idea:

The right’s denunciation of AOC’s “insane” policy ideas serves as a very good reminder of who is actually insane.

The controversy of the moment involves AOC’s advocacy of a tax rate of 70-80 percent on very high incomes, which is obviously crazy, right? I mean, who thinks that makes sense? Only ignorant people like … um, Peter Diamond, Nobel laureate in economics and arguably the world’s leading expert on public finance…. And it’s a policy nobody has ever implemented, aside from … the United States, for 35 years after World War II — including the most successful period of economic growth in our history.

To be more specific, Diamond, in work with Emmanuel Saez — one of our leading experts on inequality — estimated the optimal top tax rateto be 73 percent. Some put it higher: Christina Romer, top macroeconomist and former head of President Obama’s Council of Economic Advisers, estimates it at more than 80 percent.[

Where do these numbers come from? Underlying the Diamond-Saez analysis are two propositions: Diminishing marginal utility and competitive markets.

Diminishing marginal utility [i.e. the value of something at the margin] is the common-sense notion that an extra dollar is worth a lot less in satisfaction to people with very high incomes than to those with low incomes. Give a family with an annual income of $20,000 an extra $1,000 and it will make a big difference to their lives. Give a guy who makes $1 million an extra thousand and he’ll barely notice it.

What this implies for economic policy is that we shouldn’t care what a policy does to the incomes of the very rich. A policy that makes the rich a bit poorer will affect only a handful of people, and will barely affect their life satisfaction, since they will still be able to buy whatever they want.

So why not tax them at 100 percent? The answer is that this would eliminate any incentive to do whatever it is they do to earn that much money, which would hurt the economy. In other words, tax policy toward the rich should have nothing to do with the interests of the rich, per se, but should only be concerned with how incentive effects change the behavior of the rich, and how this affects the rest of the population.

But here’s where competitive markets come in. In a perfectly competitive economy, with no monopoly power or other distortions — which is the kind of economy conservatives want us to believe we have — everyone gets paid his or her marginal product. That is, if you get paid $1000 an hour, it’s because each extra hour you work adds $1000 worth to the economy’s output.

In that case, however, why do we care how hard the rich work? If a rich man works an extra hour, adding $1000 to the economy, but gets paid $1000 for his efforts, the combined income of everyone else doesn’t change, does it? Ah, but it does — because he pays taxes on that extra $1000. So the social benefit from getting high-income individuals to work a bit harder is the tax revenue generated by that extra effort — and conversely the cost of their working less is the reduction in the taxes they pay.

Or to put it a bit more succinctly, when taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue.

And that’s something we can estimate, given evidence on how responsive the pre-tax income of the wealthy actually is to tax rates. As I said, Diamond and Saez put the optimal rate at 73 percent, Romer at over 80 percent — which is consistent with what AOC said.

An aside: What if we take into account the reality that markets aren’t perfectly competitive, that there’s a lot of monopoly power out there? The answer is that this almost surely makes the case for even higher tax rates, since high-income people presumably get a lot of those monopoly rents.

So AOC, far from showing her craziness, is fully in line with serious economic research. (I hear that she’s been talking to some very good economists.) Her critics, on the other hand, do indeed have crazy policy ideas — and tax policy is at the heart of the crazy.

You see, Republicans almost universally advocate low taxes on the wealthy, based on the claim that tax cuts at the top will have huge beneficial effects on the economy. This claim rests on research by … well, nobody. There isn’t any body of serious work supporting G.O.P. tax ideas, because the evidence is overwhelmingly against those ideas.

Increasing marginal rates as income rises is called “progressive” taxation. It’s fair and practical. Republicans are against it, preferring a “flat” tax, where all income is taxed at the same rate. A flat tax let’s the rich keep more of their income. They say it’s fair and simple, but that’s not why they’re for it.

Suckers!

Although Trump voters, on average, had higher incomes than Clinton voters, many of his supporters were and continue to be working class or even poor (and predominantly white, of course). He may have been rich, the epitome of a city slicker, but millions of average people (also known as “suckers”) believed that he’d fight for them.

From Ezra Klein of Vox:

Tax cuts for wealthy Americans have long been the fulcrum atop which Republican Party politics rests. But Donald Trump was supposed to be a different kind of Republican. On 60 Minutes, for instance, Trump said he would raise taxes on “the very wealthy,” and warned that the plan would cost him “a fortune” in higher taxes.

“My whole life I’ve been greedy, greedy, greedy,” Trump said in January of 2016. “I’ve grabbed all the money I could get. I’m so greedy. But now I want to be greedy for the United States.”

The whole Trump pitch was that he was a cutthroat businessman who knew the tricks, had paid off the politicians, had made his billions, and now was going to use his accumulated knowledge to unrig the system, to make it benefit you, the little guy. American politics, he said, was corrupted — by special interests, by self-dealing politicians, by weak negotiators. He was going to fix it all. And many believed him.

In Trump’s inaugural address he said, “What truly matters is not which party controls our government, but whether our government is controlled by the people. January 20, 2017, will be remembered as the day the people became the rulers of this nation again. The forgotten men and women of our country will be forgotten no longer.”

This rhetoric continued after the election: Both Trump’s Treasury secretary and the director of his National Economic Council said the plan wouldn’t cut taxes on the rich. As recently as a few weeks ago, Trump told Senate Democrats, “The deal is so bad for rich people, I had to throw in the estate tax just to give them something.”

In reality, by 2027, 62.1 percent of the tax bill’s benefits go to the top 1 percent, and 42.3 percent of the benefits go to the top 0.1 percent [while millions of lower income taxpayers will see their taxes increase].

The moral of this story is: Never trust a con man when he says he’s on your side.

(But if you insist on trusting a con man, don’t inflict him on the rest of us.)

One of Those Charts

The last time we had a big overhaul of the federal tax code was in 1986. Back then, the poorest 90 percent of the population owned 3 1/2 times as much as the richest 1/10th of 1 percent. I’ll say that again. In 1986, the net worth of the least wealthy 90% of Americans was 3.5 times the net worth of the richest 0.1%.

That’s not the America we live in today. As of 2013, the richest 1/10th of 1 percent owned as much as the poorest 90 percent. To repeat: the net worth of the richest 0.1% was the same as the net worth of the poorest 90%. 

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I’m sure the red line goes even higher now and the blue line goes lower. We should keep this astounding economic inequality in mind when we have the opportunity to vote eleven months from now. That will be eleven months after the Republicans ram through another overhaul of the tax code, one that helps the richest Americans get even richer.