Taxes

Incentives and Economics

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A few years ago I went to Norway and had a great time. In this post I described how expensive everything was in Norway due to their highly valued currency (tied to oil riches) combined with the relentless decline of the US dollar (tied to ZIRP and other dubious economic moves). In the simplest terms, a fast food meal or a beer in Norway cost over $20 USD which is complete madness.

Business Insider discussed the Scandinavian economic experiment, where high taxes are applied to goods and services in order to fund a vast social safety net. From the article:

In Norway, a burger and fries at a fast food joint will set you back $23. A six-pack of warm grocery-store beer is nearly $30.
These hefty price tags are due, in part, to high wages for low-skilled service jobs. But high taxes play a role too.
Most products have a 25 percent value-added tax, which means that $5.50 of the cost of that burger goes to fund Norway’s generous social programs.
As a visitor, you get little for the added price. But, as a resident, your daily spending helps to fund an expansive package of benefits, including health care, child care, high-quality education, pensions, and unemployment insurance.

Some are now proposing this high-cost method, with large taxes embedded in everyday prices, as a solution to the inequity in incomes and wealth that is discussed widely in politics and economics today.

From the perspective of someone who is highly interested in economics and tax policy, my two rules of thumb are:
1) that the tax policy raise the money that it intends to raise
2) that the tax policy not significantly distort economic activity

Any society that implements high taxes such as Norway needs a comprehensive surveillance model in order to collect these taxes. It is difficult to avoid taxes that are broadly assessed on fast food, for instance, because each corporate location will set up cash registers and controls to remit these taxes onto the state. The same types of processes can be installed in liquor stores, formal bars and nightclubs, grocery stores, and restaurants.

In a less-homogeneous society such as the USA, we already have major problems with tax evasion on cigarettes and likely liquor, and these are in responses to our sales taxes. The problems would be compounded if we placed value added taxes on all goods at a higher level and on services such as restaurants, hair care, etc… Smuggling would become rampant and informal or barter methodologies would increase in size and scope. These sorts of costs would have to be applied across the USA or some areas would become uncompetitive and see an out-migration of economic activity, starting with incremental additions (no one has opened a new manufacturing plant in Illinois in years, for instance) and eventually leading to the lock, stock and barrel out migration of existing industries (such as the exodus of car manufacturing out of the Midwest and California to the American South).

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Picketty’s Introduction

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Thomas Piketty has written a monster of a book, Capital in the Twenty-First Century. I find myself in strange agreement with Brad DeLong, that the collective conservative response is weak. I had a patch of time that left me twiddling my thumbs waiting for some pretty long database operations to finish over the past four days. So I went and decided to fisk the book. I just finished the introduction. It took four posts, Part I, Part II, Part III, Part IV and overran the spare time I had available from a database import and indexing task by about 12 hours.

Now I know why the criticism is so weak. Piketty is a target rich environment and doing a line by line analysis is simply exhausting. But it’s the only way to be sure.

Income inequality: Social justice or crony capitalism?

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The political movement Occupy Wall Street has shaped the tax and spending proposals of the Obama administration’s budget and political debate on the premise that our capitalist economic system is rigged to favor the top-earning “one percenters.” But income inequality can result either from capitalism or politics, each for better or worse.

Historically, political elites focused on enriching themselves at the expense of the general public: In 1773 patriots threw the tea into Boston Harbor of the East India Tea Company, granted a “royal charter” in 1600. The U.S. system was founded not just on the principles of democracy but on limited government complementing private market capitalism that encouraged individuals to “pursue happiness” — accumulate wealth — on merit rather than political connections. Support for the less fortunate was provided by family members, religious and other charitable organizations.

Believing (wrongly) that class envy against the new economic elites — innovative entrepreneurs — would cause revolution, Karl Marx offered the socialist alternative “from each according to his ability, to each according to his need” with politics supplanting merit. Despite totalitarian methods universally employed by governments seriously pursuing the socialist model leading to the murder of tens of millions, one historian recently concluded that communism reduced workers “to shiftless, work-shy alcoholics.”

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Paying Higher Taxes Can be Very Profitable (rerun)

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(Originally posted in January 2010now an April perennial)

Chevy Chase, MD, is an affluent suburb of Washington DC. Median household income is over $200K, and a significant percentage of households have incomes that are much, much higher. Stores located in Chevy Chase include Tiffany & Co, Ralph Lauren, Christian Dior, Versace, Jimmy Choo, Nieman Marcus, Saks Fifth Avenue, and Saks-Jandel.

PowerLine  observed that during the 2008 election season, yards in Chevy Chase were thick with Obama signsand wonders how these people are  now  feeling about the prospect of sharp tax increases for people in their income brackets.

The PowerLine guys are very astute, but I think they’re missing a key point on this one. There are substantial groups of people who stand to benefit financially from the policies of the Obama/Pelosi/Reid triumvirate, and these benefits can greatly  outweigh  the costs of any additional taxes that these policies require them to pay. Many of the residents of Chevy Chasea very high percentage of whom get their income directly or indirectly from government activitiesfall into this category.

Consider, for starters, direct employment by the government. Most Americans still probably think of government work as low-paid, but this is much less true than it used to be. According to  this, 19% of civil servants now make $100K or more. A significant number of federal employees are now making more than $170,000. And, of course, the more the role of government is expanded, the more such jobs will be created, and the better will be the prospects for further pay increases.

If one member of a couple is a federal employee making $100K and the other is making $150K, that would be sufficient to allow them to live in Chevy Chase and occasionally partake of the shopping and restaurants. But to make the serious money required to  really  enjoy the Chevy Chase lifestyle, it’s best to look beyond direct government employment and pursue careers which indirectly but closely benefit from government activity…which are part of the “extended government,” to coin a phrase.

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The Depression may be here.

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I have believed for some time that we were entering another Depression. I have previously posted about it.

The Great Depression did not really get going until the Roosevelt Administration got its anti-business agenda enacted after 1932. The 1929 crash was a single event, much like the 2008 panic. It took major errors in economic policy to make matters worse. Some were made by Hoover, who was a “progressive” but they continued under Roosevelt.

I posted that statement earlier and it got a rather vigorous rebuttal. I still believe it, however. I think a depression is coming soon. What is more, I am not the only one. Or even only one of two.

The second article preceded the election of 2012 but is still valid.

When employment hit an air pocket in December, most analysts brushed off the dreadful jobs number as an anomaly, or a function of the weather. They chose to believe Ben Bernanke rather than their lying eyes. It’s hard to ignore a second signal that the U.S. economy is dead in the water, though: on Monday the Institute for Supply Management reported the steepest drop in manufacturing orders since December 1980:

fredgraph

In January, only 51% of manufacturers reported a rise in new orders, vs. 64% in December. Not only did the U.S. economy stop hiring in December, with just 74,000 workers added to payrolls; it stopped ordering new equipment. The drop in orders is something that only has occurred during recessions (denoted by the shaded blue portions of the chart). The Commerce Department earlier reported a sharp drop in December orders for durable goods. In current dollars, durable goods orders are unchanged from a year ago, which is to say they are lower after inflation.

So, the economy stopped hiring, even at the poor pace the past five years have seen, but business also stopped buying.

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