Author: Donald

Swedish Lessons for EU Bank Owners

Sweden is rightly admired for the way it handled its banking crisis in the early 1990s (and its ensuing fiscal challenges).

In yesterday’s Financial Times, Dag Detter looks back for some lessons for Europe as it struggles to resolve its current banking crisis:

When the Swedish banking system crashed in 1992, the government faced an  identical problem. Yet in the end, Sweden’s taxpayers came very well out of  their experience of bank ownership. How was this achieved, and what lessons can  be learnt for Madrid and the EU’s new bank resolution policy?

First, move fast. Spain and bankers have  been in denial about the scale of bad lending for too long. The Rajoy  government rightly came to office this year on a promise to force banks to write  down bad loans. The situation has predictably turned out to be much worse than  assumed, but their policy is the right one. Painful as it is, transparency on  the scale of bad debt is vital for the market to be confident that it  understands risk and uncertainty  in Spain and can therefore price it properly.

Catharsis can come only with a purge of bad assets. Banks should present  plans to handle problem assets, strengthen controls and improve efficiency. This  might require government or even supranational assistance in the orderly closure  of moribund institutions. In addition, “bad” bank parts must be demerged from  the “healthy” to facilitate recapitalisation. The state should never be left  holding the junk while the healthy part of a bank wriggles free.

Second, maintain commercial principles. In Sweden, each state bank investment  was made on what would have been commercial terms in a normal market, always  with the aim of maintaining competitive neutrality. The terms of the investment  must be structured in a way that gives the bank and its owners no grounds to  request more state funding than is necessary, combined with the incentives to  facilitate a swift exit. Yet it must be sufficient to ensure that the bank can  return to profitability without additional government assistance.

The whole piece is worth a read.

A Good Jobs Report

Today’s jobs data exceeded expectations. Payrolls expanded by 114,000 in September, in line with expectations, but upward revisions to July and August added another 86,000 jobs, so the overall payroll picture is better than the headline.

The big news, though, is that the unemployment rate fell to 7.8%. That’s big economically and symbolically. Indeed, it’s so big that conspiracy-mongerers are suggesting the BLS cooked the numbers to help President Obama get re-elected. Let there be no doubt: That’s utter nonsense.

Other numbers also indicate an improving job market: the labor force participation rate ticked up to 63.6%, the employment-to-population ratio rose 0.4 percentage points to 58.7%, and the average workweek increased by 0.1 hours. All remain far below healthy levels, but in September they moved in the right direction.

Despite the drop, unemployment and underemployment both remain very high, as well. After peaking at 10% in October 2009, the unemployment rate has declined a bit more than 2 percentage points. The U-6 measure of underemployment, meanwhile, peaked at 17.2% and now stands at 14.7%:

As you may recall, the U-6 measures includes the officially unemployed, marginally attached workers, and those who are working part-time but want full-time work. One anomaly in the September data is that the unemployment rate fell from 8.1% to 7.8%, but the U-6 remained unchanged at 14.7%. Why? Because the number of workers with part-time work who want full-time work spiked up from 8.0 million to 8.6 million.

How Much Would the Fiscal Cliff Raise Taxes?

Roberton William, Eric Toder, Hang Nguyen, and I are out with Toppling Off the Fiscal Cliff: Whose Taxes Rise and How Much?,  a detailed look at all the tax increases in the looming fiscal cliff. We have two basic messages.

First, the cliff is big, amounting to more than $500 billion in 2013, a 20+ percent increase.

Second, you can’t tell the players without a scorecard. Over the past dozen years, the snowball of temporary tax cuts (and, for 2013, the introduction of some new taxes) has grown to epic proportions. As a result, the cliff isn’t just about the 2001-03 tax cuts that grab most of the headlines. There are also the temporary cut in payroll taxes, the “extenders”, the expanded credits enacted in 2009, the current version of the estate tax, the AMT patch, and the start of new health reform taxes.

To make sense of it all, we had to divvy the pending tax increases up into nine categories. This chart shows how they would affect tax rates for households at different income levels:

Bottom line: People of all incomes will see their tax go up if we go completely over the fiscal cliff. But there are significant differences in which provisions matter most.

Of course, the full paper includes much more. Here’s the abstract:

The fiscal cliff threatens an unprecedented tax increase at year end. Taxes would rise by more than $500 billion in 2013—an average of almost $3,500 per household—as almost every tax cut enacted since 2001 would expire. Middle-income households would see an average increase of almost $2,000. Policymakers are rightly concerned about the potential impact on families and the economy of such a sudden tax increase and are considering proposals to delay, repeal, or offset parts of the cliff. To inform that discussion, this report provides a detailed look at the revenue, distributional, and incentive effects of these increases. Almost 90 percent of Americans would see their taxes rise if we topple off the cliff. For most households, the two biggest increases would be the expiration of the temporary cut in Social Security taxes and the expiration of the 2001/2003 tax cuts. Households with low incomes would be particularly affected by the expiration of tax credits expanded or created by the 2009 stimulus. And households with high incomes would be hit hard by the expiration of the 2001/2003 tax cuts that apply at upper income levels and the start of the new health reform taxes. Taken together, the scheduled changes would significantly increase the marginal tax rates that can influence behavior. Average marginal tax rates would increase by 5 percentage points on labor income, by 7 points on capital gains, and by more than 20 points on dividends.

So You Think You Can Fix the Corporate Tax System?

Almost everyone in Washington wants to lower the corporate tax rate. President Obama wants to go from today’s 35 percent down to 28 percent. Governor Romney and Ways and Means Chairman Camp want to get to 25 percent.

There’s just one problem: paying for it. To offset the costs of cutting rates, policymakers will need to roll back tax preferences, each of which has powerful defenders.

To illustrate the challenges, the Committee for a Responsible Federal Budget just released a nifty corporate tax reform calculator that shows how your revenue goals and willingness to cut tax preferences affect what tax rate you have to accept.

Bottom line: going low is harder than it sounds.

Five Myths about the 47 Percent

Each Sunday, the Washington Post runs an opinion piece debunking five myths about a topic in the news. Bill Gale and I penned today’s, addressing five myths about the 47 percent of households who pay no federal income tax in any given year. Here is the Cliff Notes version:

Myth #1: Forty-seven percent of Americans don’t pay taxes. “This oft-heard claim ignores the many other taxes Americans encounter in their daily lives.”

Myth #2: Members of the 47 percent will never pay federal income taxes. In fact, households often move in and out of the 47 percent, primarily because of changes in their income.

Myth #3: Many high-income people game the system to pay no income tax. Gaming certainly happens, but “it has essentially nothing to do with who does and doesn’t pay income taxes … the vast majority of people who pay no federal income tax have low earnings, are elderly or have children at home.” They aren’t scheming millionaires.

Myth #4: The 47 percent vote Democratic. Many low-income folks don’t vote at all; many seniors vote Republican.

Myth #5: Tax increases are the only way to bring more of these households onto the [income] tax rolls. Rolling back tax breaks like the child credit would, of course, be one way to reduce the ranks of the 47 percent, if one were so inclined. But don’t forget economic growth. Faster job creation and growing incomes would help move some households up the income scale and out of the 47 percent.

The full version is here.

No Surprise: Electronic Medical Records Help Doctors Bill More

In 2000, I was CFO of a health software startup in Austin, Texas. Our product: an innovative electronic medical record oriented to a doctor’s actual workflow. It was a good idea then, and it’s a good idea today. But one of the biggest hurdles (besides classic startup execution issues and the bursting of the tech boom) was how to get doctors to adopt it.

Even if it integrated perfectly into a doctor’s routine, there was the small issue of paying for thousands of dollars of hardware and software and, we hoped, a little bit of profit for us and our investors. Even if we could get insurers and medical suppliers to defray some costs, we would still need doctors to reach into their own pockets.

After a bit of research, it was obvious that the best way to drive adoption would be to design the EMR so that it boosted doctor earnings. There are, of course, good and bad ways to do that. The good ways help doctors avoid undercoding (i.e., mistakenly billing too little) or remind them to do appropriate, health-improving, billable activities  (e.g., “Mrs. Jones has diabetes, so consider checking her eyes and toes.”) The bad ways … well, you don’t need to be Neil Barofsky to realize that there are myriad ways that doctors could game the system. Our goal was to stay on the right side of that line.

But as a New York Times article by Reed Abelson, Julie Creswell, and Griffin Palmer makes clear, that clearly isn’t true for everyone:

[T]he move to electronic health records may be contributing to billions of dollars in higher costs for Medicare, private insurers and patients by making it easier for hospitals and physicians to bill more for their services, whether or not they provide additional care.

Hospitals received $1 billion more in Medicare reimbursements in 2010 than they did five years earlier, at least in part by changing the billing codes they assign to patients in emergency rooms, according to a New York Times analysis of Medicare data from the American Hospital Directory. Regulators say physicians have changed the way they bill for office visits similarly, increasing their payments by billions of dollars as well.

The most aggressive billing — by just 1,700 of the more than 440,000 doctors in the country — cost Medicare as much as $100 million in 2010 alone, federal regulators said in a recent report, noting that the largest share of those doctors specialized in family practice, internal medicine and emergency care.

For instance, the portion of patients that the emergency department at Faxton St. Luke’s Healthcare in Utica, N.Y., claimed required the highest levels of treatment — and thus higher reimbursements — rose 43 percent in 2009. That was the same year the hospital began using electronic health records.

The share of highest-paying claims at Baptist Hospital in Nashville climbed 82 percent in 2010, the year after it began using a software system for its emergency room records.

…

Some experts blame a substantial share of the higher payments on the increasingly widespread use of electronic health record systems. Some of these programs can automatically generate detailed patient histories, or allow doctors to cut and paste the same examination findings for multiple patients — a practice called cloning — with the click of a button or the swipe of a finger on an iPad, making it appear that the physicians conducted more thorough exams than, perhaps, they did.

Critics say the abuses are widespread. “It’s like doping and bicycling,” said Dr. Donald W. Simborg, who was the chairman of federal panels examining the potential for fraud with electronic systems. “Everybody knows it’s going on.”

I contain to believe that EMRs will eventually transform health care for the better. But the idea that they would instantly lead to cost savings always struck me as naive. As the NYT article illustrates, the killer app for doctors–both the vast majority of legit ones and the nasty minority of scammers–is to find a way to boost their revenues and profits.

About the Famous 47% Figure (and Its 46% Cousin)

My most popular blog post, by a long shot, was this one in July 2011 explaining why almost half of Americans paid no federal income tax. If you are interested in some context behind Governor Romney’s now famous remarks about the 47 percent (TPC calculated it as 46 percent for 2011), please check it out.

One item I didn’t mention in that post is that the number of taxpayers not paying federal income tax should decline over time. As the economy recovers, higher incomes will boost the fraction of households that pay federal income tax.

 

 

 

Who Pays the Corporate Income Tax?

Corporations pay income taxes in an administrative sense: they write checks (or send electrons) to the IRS. But corporations can’t actually bear the burden – they are just legal entities, not living and breathing human beings.

So who ultimately bears the burden of corporate income taxes? Shareholders? Employees? Customers?

Economists have struggled with this question for decades. When Mick Jagger dropped out of the London School of Economics in the 1960s, for example, he allegedly complained that “economists can’t even tell if corporations pay taxes or pass them on.”

We’ve made some progress since then. Over at the Tax Policy Center, my colleague Jim Nunns summarizes what economists have learned over the past five decades and describes TPC’s new approach to distributing the corporate income tax.

As Jim reports, our best estimate is that workers bear 20 percent of the corporate income tax,  shareholders bear 20 60 percent, and investors as a whole bear 60 20 percent.

Workers bear some of the corporate income tax because capital can move around the world. All else equal, the corporate income tax encourages some capital to locate abroad rather than in the United States. That reduces worker productivity (since they have less capital with which to work) and thus reduces worker wages and benefits. As a result, some of the corporate tax burden falls on workers.

Investors in general bear the majority a portion of the corporate income tax for a similar reason. When you tax corporations, you encourage capital to flow out of corporate equities and into other investments, including corporate debt and non-corporate businesses. That flow reduces the rates of return that investors earn in those other asset classes as well. Much of the corporate income tax thus gets passed on to investors in general, not just corporate shareholders.

Shareholders alone, finally, bear the portion of the corporate income tax that falls on “super-normal returns” — i.e., the returns they get in excess of a normal rate of return.

If any readers know Mick Jagger, please send him a link to the study. Maybe it will finally give him some satisfaction.

P.S. For another overview, see this TaxVox post by Howard Gleckman.

Update 9/16: I accidentally reversed the all capital vs. shareholder shares in the original version of this post. Apologies.