Archive for November, 2010

Today’s Census data show another decline in the number of single-family houses under construction:

In short, completions are still outrunning starts.

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Today Eric Toder and Daniel Baneman of the Tax Policy Center released a preliminary analysis of the tax proposal put forward by the fiscal commission’s co-chairs Erskine Bowles and Alan Simpson. The centerpiece of their proposal is to eliminate almost all tax expenditures* except the earned income tax credit and the child tax credit and use the resulting revenues for a mix of deficit reduction and tax rate cuts (they also consider other options that would retain more tax expenditures). The proposal would also increase the fraction of wages subject to the Social Security tax, increase the gasoline tax by 15 cents per gallon, and make a few other changes.

The distributional impacts of the proposal depend greatly on what baseline you compare against. As my TPC colleague Howard Gleckman notes, if you use current policy (in which the 2001 and 2003 tax cuts remain in place and the alternative minimum tax is patched), then the Bowles-Simpson plan raises taxes on everybody:

The Bowles-Simpson proposal is indeed an across-the-board tax increase– and a fairly progressive one at that. In 2015, the lowest earners would face an average cut in their after-tax income of 3.4 percent or about $400. Middle-income households (those earning an average of about $60,000) would see their after-tax incomes fall by 4 percent or about $1,900. On the other end of the economic food chain, the top one percent of earners (who earn an average of about $2 million) would lose about $77,000 (5.3 percent) while the top 0.1 percent would see their after-tax incomes cut by nearly 8 percent, or close to $500,000.

Things look different if your baseline is current law–in which all the 2001 and 2003 tax cuts expire and the AMT remains unpatched. In that case:

[T]he distributional impact of the Bowles-Simpson plan would be quite different: While low-income households and the top one percent of earners would be hit with a tax increase, the upper middle class would enjoy a small tax cut averaging about 1 percent.

You can find all the details here.

* Added 11/17: As noted in a previous post, the concept of tax expenditures officially includes the lower tax rates paid on capital gains and dividends. So whenever you hear the phrase “eliminate tax expenditures”, that means not only eliminating deductions, credits, etc., but also taxing capital gains and dividends as ordinary income.

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In conjunction with its new deficit option game, the New York Times asked 16 budgeteers to write-up ideas for reducing the deficit. My assignment was to explain the rationale for reducing tax expenditures–the exclusions, exemptions, deductions, and credits that complicate the code and dramatically reduce the revenue that it raises:

The Office of Management and Budget has identified more than 170 such tax expenditures (these provisions are called “expenditures” because they essentially run spending programs through the tax code). The deductibility of state and local taxes, for example, runs almost $70 billion each year. Favorable tax treatment for life insurance savings is about $23 billion. Credits for alcohol-based fuels total almost $9 billion. And dozens of rifle-shot provisions benefit narrow interests, such as special tax rules for NASCAR venues.

In total, individual and corporate tax expenditures reduce revenues by more than $1 trillion each year. Congress should revisit each tax break to see if it produces sufficient economic and social benefits to justify its budgetary cost. Some provisions should make the grade (the earned income tax credit, for example). But many others should be restructured or cast into the dustbin of history.

Such housecleaning would help close the deficit, reduce wasteful spending disguised as tax cuts, simplify tax preparation for millions of households, and potentially make the tax code more progressive (since many tax expenditures are worth most to households in high tax brackets) – all without raising rates.

You may have noticed that the co-chairs of the President’s fiscal commission recently made tax expenditures a centerpiece of their proposal for both deficit reduction and tax reform. Tax expenditures are so expansive that the co-chairs decided an aggressive roll-back could both raise more revenue and finance substantial reductions in tax rates on wages, salaries, and other ordinary income (tax rates on capital gains and dividends would increase since their lower rates are counted as tax expenditures, a topic I will return to at a later date).

For the other 15 ideas for deficit reduction, see here.

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NYT: You Fix the Budget

Over at the New York Times, David Leonhardt, Bill Marsh, Shan Carter, Matthew Ericson, and Kevin Quealy have prepared a great online tool for analyzing federal budget options.

Your charge, if you choose to accept it, is to assemble a combination of spending cuts and tax increases that will adequately reduce the budget deficit balance the budget in 2030. To do so, you will need to find $1.355 trillion in budget adjustments.

I particularly like their decision to list cutting foreign aid in half ($17 billion) and eliminating earmarks ($14 billion) as the first two items. These are popular options in many circles, but they are small potatoes when it comes to the overall budget. Choose both options and you still have $1.324 btrillion to go.

Good luck.

* As Vivian Darkbloom notes in the first comment, I originally misread the goal for this exercise. The graphic refers to closing the budget gap, which I mistook as budget balance. David Leonhardt’s accompanying blog post makes clear that the goal is essentially getting down to a sustainable deficit level, which is an easier target.

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Scott Adams recommends a unique budget process reform:

There’s a TV show I’d like to see, perhaps on public television, or on the Internet. The premise is that the President of the United States sits in a room with economists and prepares his three-slide PowerPoint presentation to the voters on the topic of raising taxes versus cutting spending to balance the budget.

Now add Judge Judy, or someone with a similar skill set, to run the meeting and cut off the participants when they don’t offer brief answers to clear questions. Also include several economist/researchers who are there to verify the accuracy of any assertions made during the meeting.

During the course of the show, as Judge Judy (for example) nails down certain facts, the facts are put on the PowerPoint slide for viewers to keep track of what is settled. When enough facts are assembled for a verdict, Judge Judy and the President discuss what they have learned until the President arrives at a conclusion that is consistent with the facts. And if the data doesn’t point in a conclusive direction, the President would be free to make his decision on some sort of principle, such as fairness, or practicality. At least the decision process would be transparent.

Adams was motivated by his (quite correct) observation that Americans aren’t familiar with key budget facts:

I thought of this idea after reading the comments to my recent blog about the national debt. It’s clear that no citizen has enough information to justify an opinion on raising taxes versus cutting spending. Everyone, including me, seems to have a handful of questionable factoids and some dogma. That’s it.

I somehow doubt the President will sign up for this form of reality of TV. Which is unfortunate. Judging by this year’s uninspired lineup, primetime would benefit from some economists playing with PowerPoint.

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I love taxi medallions.

As an example for my microeconomics students, not as policy.

Just last week, I used New York City’s medallion system to show how an entry barrier — the requirement that each yellow taxi have one of a limited number of medallions — could create profits in an otherwise viciously competitive industry.

How much profit? Well, according to the most recent data from the city’s Taxi and Limousine Commission medallions for independent cab drivers traded at between $610,000 and $620,000 in October. If you figure 8% as a reasonable rate of return of this asset, that translates into almost $50,000 in pure profit each year from driving a cab, thanks to the entry barrier.

Good exam question: Who gets that profit? Hint: It isn’t the cab driver, who either has to lay out $600,000+ for a medallion or lease one at perhaps $50,000 per year.

Of course that profit comes at the expense of taxi riders, who face a double whammy: they pay more for the cab rides they can get, and they end up taking fewer cab rides (the latter effect is known as a deadweight loss – society loses the benefit of the cab rides that would have happened without the medallion system).

Given that background, I was horrified to learn from Matt Yglesias that taxi drivers in Washington DC are lobbying Vincent Gray, the city’s new mayor, to introduce a medallion system. Yglesias quotes Alan Suderman of the Washington City Paper thusly:

Derje Mamo, a taxi driver who helped run transportation for the mayor-elect’s campaign, said cabdrivers already are pushing Gray to reshape the Taxicab Commission and allow for the creation of a medallion system. A medallion or certification system would limit the number of cabs operating in the city. Proponents of such a system argue that too many taxis are flooding D.C. streets. ‘He’s got one year, that’s it,’ Mamo said.”

As Yglesias notes, this is a really bad idea. There’s no reason to believe that there are too many cabs on DC streets (except, of course, from the view of cab drivers who hate the competition), and in some neighborhoods there may well be too few. A more plausible concern, as some commenters on his blog note (but I can’t link to because of some glitch), is that current taxi fares might be a bit too low. Taxi fares are still a new thing in DC–until 2008 the city had a zone system that many passengers, myself included, found bewildering–and it may be that the initial levels weren’t set exactly right. If Mayor Gray wants to do something for the cabdrivers, he should ask the Taxicab Commission to ponder whether some upward tweaks to fares might induce some extra supply that passengers would value.

Update: For further discussion, please see this later post.

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October was another solid month for America’s railroads, according to the Association for American Railroads. October traffic was 11% higher than the depressed levels of a year ago:

Intermodal traffic (think trailers and containers) is up 14% over 2009, thus returning to 2008 levels:

Carloads (think bulk materials like coal, grains, minerals, and chemicals plus autos) are up almost 9%:

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