DWL

Apparently the editorial board at the New York Times doesn't understand Deadweight Loss. The say:

Voters don’t react positively when a candidate speaks incomprehensibly about taxes, as Mr. Romney did on “60 Minutes.” He said he would lower everyone’s tax rate by 20 percent but that everyone would wind up paying essentially the same taxes because he would limit unspecified deductions and exemptions. Even on its face, that makes little sense. If everyone will pay the same taxes, how does that stimulate growth or reduce unfairness? In fact, tax experts say the rate cut is such a huge benefit for the rich that it can’t be balanced by curbing their deductions. But listeners don’t have to do the math to calculate how fundamentally hollow the proposal is.

I'm not arguing that the cut in rates (and here I assume he was specifically referring to the top marginal rate) will actually be revenue neutral, though Feldstein and Rosen argue its feasible. Krugman and others suggest the cut in top marginal rates is too large to be offset by base broadening. I am suggesting, if it were possible it is easy to think about how that stimulates growth and reduces unfairness. Think of lower top marginal rates lowering the incentive to hide income as an example.

Professional Management

La Crosse recently had a referendum on having a professional manager/administrator. The current county Administrator, Steve O'Malley has taken some heat for advocating for the form of government. The paper ran a story saying Steve asked for an ethics ruling. One could argue that his professional code of ethics from the ICMA requires of him to advocate for professional management.

This research concludes that professional management delivers better fiscal outcomes for cities:

This article however, counters that the evidence is not always so clear.

Fat Tax

They have been discussed, but thus far seldom implemented. I'm talking about Fat Taxes. Although there are many proposed forms, from taxing high caloric foods to high fat foods, Denmark looks to be the first to tax foods with saturated fat. Denmark taxes fatty products - Telegraph

Starting from this Saturday, Danes will pay an extra 30p on each pack of butter, 8p on a pack of crisps, and an extra 13p on a pound of mince, as a result of the tax. The tax is expected to raise about 2.2bn Danish Krone (£140m), and cut consumption of saturated fat by close to 10pc, and butter consumption by 15pc. "It's the first ever fat-tax," said Mike Rayner, Director of Oxford University's Health Promotion Research Group, who has long campaigned for taxes on unhealthy foods. "It's very interesting. We haven't had any practical examples before. Now we will be able to see the effects for real." The tax will be levied at 2.5 per Kg of saturated fat and will be levied at the point of sale from wholesalers to retailers.

Apparently Hungary already has a version of the fat tax where they tax "unhealthy" levels of certain things.

Hungary at the start of this month imposed a tax is on all packaged foods containing unhealthy levels of sugar, salt, and carbohydrates, as well as products containing more than 20 milligrams of caffeine per 100 milliliters of the product.

The Incidence of Mandates

The general public has a sense of tax incidence. They know that sometimes they bear the cost of sales tax, or at other times you hear them say: "corporations just pass that on to consumers", when referring to the corporate tax. We know payroll taxes are generally born by the employee, not the employer. But many people do not understand the difference between legal and economic incidence. Lawmakers for example, seem to have issues with that.  Anyhow, here is a recent study that has an interesting conclusion:

A key issue surrounding employer benefit mandates is the incidence on workers through wages and employment. In this paper, we address this question using a pay-or-play policy implemented in San Francisco in 2008 that requires employers to either provide health benefits or contribute to a public option health plan. We estimate the impact on employment and earnings for the private sector overall, as well as for high impact sectors: retail and accommodation and food services. We develop a novel approach for individual case studies by combining both spatial discontinuity in policies and permutation-type inference using other MSAs. We find that, compared to control counties, employment and earnings patterns in San Francisco did not change appreciably following the policy. This was true for industries most affected by the mandate, as well as for overall private sector employment. The results are generally robust to inclusion of different control groups, county-specific time trends, and varying pre-periods. In contrast to the small effects on the labor market, we do find that about 25% of surveyed restaurants imposed customer surcharges, with the median surcharge being 4% of the bill. These results indicate that while little of the burden of the mandate fell on San Francisco workers, approximately half of the incidence of the mandate fell on consumers.

Budget Data

Visualizations of the federal budget from various sources:

The Washington Post.
The New York Times.
The Wall Street Journal.

Update.

I missed:
The Guardian.

Keeping Them Honest

Both sides of the political aisle are prone to exaggeration and convenient amnesia. Recent discussions of Obama's plan to allow the Bush tax cuts to expire have included references to socialism. Below you will find the historical top marginal income tax rates, color coded by party. Another take is here. [Data Source].

Sales Tax

The Tax Foundation has updated their data on state and local sales tax here.

Privatizing Education

Steve Yamarik helps to make the case for privatizing education. Schooling offers no positive externalities .

Estimating Returns to Schooling from State-Level Data: A Macro-Mincerian Approach

In this paper, we use information from U.S. states to determine the social return to schooling. We estimate a macro-Mincerian model where aggregate earnings (or income) depend upon physical capital, labor, average years of schooling and average labor force experience. We find that the social return to U.S. schooling is 9 to 16 percent, which matches estimates of the private return found in the labor literature. Our results therefore provide evidence that U.S. schooling is indeed productive, but generates no positive externalities.

Tax Math

Higher taxes are most likely in our future, regardless of who we elect:

Douglas Holtz-Eakin, a former Director of the Congressional Budget Office and current chief McCain economic advisor, is an honest man--which means he's something of a liability on the Straight Talk Express. A few months ago, he admitted to my colleague, Michael Scherer, that Barack Obama's economic plan would reduce taxes for most people. And now, in a forthcoming book by Fortune columnist Matt Miller, he makes it clear that the next President is going to have to raise taxes.

"If you do nothing on the spending side, you're going to have to raise taxes whether you're a Republican, a Democrat or a Martian," he tells Miller...and then he immediately makes it clear that the "spending side" part of the argument is nothing more than a political fig-leaf.

And the futures market is also betting on rising taxes according to Mankiw.

The top income tax rate is now 35 percent. According to the betting at Intrade, the probability that the top income tax rate in 2011 will exceed 38 percent is 0.87. Call this P(tax hike).

Barack Obama has made such a tax hike part of his campaign promises, and there is no reason to think the Congress won't deliver for him. So let's assume Obama is certain to get the tax hike if he wins. That is, P(tax hike / Obama) = 1.0. (If this assumption is wrong, and this conditional probability is less than one, then my conclusion below would be even stronger.)

According to Intrade, the probability of Obama being the next president is 0.53. Call this P(Obama). And P(McCain) = 0.47.

Now we can calculate the probability of a tax hike conditional on McCain winning. It comes from the formula

P(tax hike)
= P(tax hike/Obama) P(Obama) + P(tax hike/McCain) P(McCain),

and plugging in the above numbers. It tells us that

P(tax hike / McCain) = 0.74.

Property Taxes

We recently finished the semi-annual consumer sentiment survey for the 7 Rivers Region. The upcoming September meeting concerns the Wisconsin Way initiative. In preparation we asked our participants some of the questions that have been asked around the state. In particular we asked:

When you think about the property taxes you or your landlord pay on the home in which you live and the services you receive for those taxes would you say property taxes in Wisconsin (or your state of residence) are much too high, somewhat too high, about right, somewhat too low or much too low?

I've joined the following answers and created a word cloud.
a. Much too high
b. Somewhat too high
c. About right
d. Somewhat too low
e. Much too low
f. Other

The fact that you can not find Much Too Low or Somewhat Too Low in the graphic is not a mistake.

Porn's Financial Woes

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Hollywood Subsidies

La Crosse was initially in the running to become one of the locations for the new Johnny Depp "Public Enemies" movie. Wisconsin was chosen for several reasons, one of which was probably the newly passed tax considerations. Maybe we should look at the evidence and research done by other states. This headline says it all:

Rich stars pocket subsidies, state says
The analysis by the Department of Revenue this week estimated that at least half the film-industry payroll spending will go to out-of-town residents, mainly actors, directors, and producers commanding salaries of more than $1 million each. The Revenue Department assumes they will spend only a fraction of their paychecks in Massachusetts, limiting the benefits to the local economy.

The Revenue Department noted its analysis is consistent with a 2005 report on Louisiana's film tax subsidies, which estimated 60 percent of spending eligible for tax credits would go out-of-state. And when The Providence Journal reviewed records for a Wesley Snipes film subsidized by Rhode Island, it found just $1.9 million of the $11 million in production expenses went to local residents and vendors - less than the $2.65 million in tax credits issued to support the 2006 movie, "Hard Luck."

But in this week's report, the Revenue Department found the subsidies probably wouldn't generate enough money in income taxes and other revenue to offset the cost of the incentives, forcing the state to cut other government spending. Assuming $100 million a year in incentive spending, the state said it would only be able to recoup $18 million to $23 million in other tax revenue.

No Pole Tax

While I was away the Texas Pole Tax was defeated. From Vice Squad:

Remember Texas's "pole tax," the $5 per customer fee applied to strip clubs in January? Turns out that a state judge has ruled the tax to be a violation of the First Amendment. The Attorney General intends to devote more public funds to appealing the ruling, while other supporters of the tax are investigating reforms to the legislation that would help it pass constitutional muster. (Incidentally, I haven't read the court opinion, but I am surprised that a case decided on free speech grounds also seems to hinge (if the published reports are correct) on the earmarking of the revenues from the tax.)

Florida Helping Seniors

Florida is contemplating a pole tax to help seniors.

It’s not often that 77-year-old women and strip clubs are mentioned in the same breath, but state Rep. Rick Kriseman made just such a connection.

If passed, Kriseman’s “Personal Needs” bill would levy a $1 surcharge on admission to adult-entertainment clubs and similar businesses. The money would be diverted to the personal-needs allowances of seniors on Medicaid in nursing homes, state-run mental hospitals and developmentally disabled centers.

Kriseman, D-St. Petersburg, said the inspiration for the bill came from a 77-year-old female constituent of his.

“A woman by the name of Cecilia brought this problem to my attention,” Kriseman said via telephone last week from his St. Petersburg office. “Seniors have very little money for when they go on field trips … if they want to get their hair done. And when they go out to eat, they’re going to places like McDonald’s because they can’t afford anything else. That’s not a knock on McDonald’s, but it’s probably not the healthiest food for our seniors to eat.”

Kriseman said seniors on Medicaid currently receive $35 a month for all of their personal needs — toiletries, fast food, movie tickets — a figure that has remained the same for 20 years. Kriseman’s bill would double that allowance to $70 a month.

State Sen. Dave Aronberg, D-Greenacres, said he’d have to study the particulars more closely before passing final judgment, but that it sounds like a good idea on the surface.

“I’m normally not in favor of tax increases, but these difficult budgetary times call for creative solutions, and this is certainly worth discussing,” Aronberg said. “To me, it sounds like a racy Robin Hood — take from the strippers and give to the seniors.”

Kriseman’s original bill would have done just that. A closer look, however, showed that adult-entertainment services were already subject to a sales tax, so he amended the bill from taxing such services as lap dances to attaching a surcharge to admission fees.

“There are additional surcharges on things such as alcohol and cigarettes, and I thought that a $1 surcharge on admission to adult-entertainment clubs was high enough to fund the increase for seniors, yet not so high that club owners were going to argue that it would kill their business,” Kriseman said.

Kriseman’s bill defines adult-entertainment services as “private shower shows; peep shows; nude, semi-nude, or topless waitressing; lap, friction, couch, or table dancing; erotic massages or performance; nude photo sessions; and personal escort services.”

Representatives from Fantasy’s at the Beach in Fort Myers Beach, and Lookers and Escapades Gentlemen’s Club in Fort Myers could not be reached for comment.

Kriseman bristled when asked what he thought about his bill commonly being referred to as the “stripper tax.”

“I don’t care for it at all,” he said. “This is about personal needs and getting our seniors the dignity they deserve. It’s already been 20 years since the last increase, and to make them wait another year, two years or five years wouldn’t be right.”

To become law, Kriseman’s bill must be approved by the House and Senate. The next legislative session runs March 4 to May 2.

“If it doesn’t pass then, it won’t happen this year,” Kriseman said. “If that’s the case, I’ll reintroduce it at a later date.”

Texas Taxes

Somehow my preparation for the ASSA meetings distracted me from this piece of news:

In what some have dubbed the "pole tax," the Lone Star State will require its 150 or so strip clubs to collect a $5-per-customer levy, with most of the proceeds going to help rape victims. The tax goes into effect on New Year's Day.
....
The strip clubs are suing to block the tax, which state officials estimate will raise more than $40 million a year, based on liquor sales figures. If accurate, the estimate suggests at least 8 million people a year go to Texas strip clubs to get a lap dance or watch women pole-dance in a G-string.

I should point out the estimates imply there are 8 million visits, that does not mean 8 million unique visitors. From the NHSLS data I find the average number of visits for someone who has gone to a strip club is approximately 4.45 yielding 1,797,753 unique visitors. Though this may even be skewed upward as the median number of visits is 2.

Taxes

Its important to be able to discern truth from fiction or at least filter out the ideology. David Leonhardt helps in his column on taxes.

The top earners pay a bigger share of the government tab than in the past because their incomes have risen so sharply — even more sharply than their tax bills. (Mr. Fleischer was able to claim the opposite by looking only at income taxes.)

The affluent, in short, are paying less in taxes on every dollar they earn but earning many more dollars.

And despite what some politicians say, not even conservative economists believe tax cuts are self financing. There is no such thing as a free lunch. As James Surowiecki points out:

How much of an impact tax rates have—and how high taxes have to get before they have an impact—is a subject of much debate in economics, but it’s inarguable that they do matter. What supply-siders have done is start with that reasonable idea and extrapolate it to unreasonable lengths.

It’s the comparison between actual tax revenue in 2007 and what tax revenue would have been in 2007 had there been no tax cuts in 2001. And studies that make these types of comparisons—including one by Bush’s own Treasury Department that looked at the tax cuts’ impact on economic growth—find that government revenues would be greater had taxes not been cut.

I use to call myself a supply sider, but stopped years ago when the tax cut nuts laid claim to the name.

Death Tax

Keith and I did another Sunday debate, this time on the estate tax. You'll find my piece here and Keith's here.

And here is my piece for posterity:

Estate tax fails to meet standards of a ‘good tax’
By TAGGERT J. BROOKS / La Crosse
As I write this, I’m looking at a Web cam image of my parents on a cruise ship in the Mediterranean. They are busy spending my inheritance on expensive trips like this one. My father, an accountant by training, tells me he is just trying to avoid the estate tax. A tax which I oppose on principle, even though my dad is making sure it will never affect me.

Afew confessions to make: In 2006 you won’t need to file an estate return unless your gross estate exceeds $2 million. Even then, you may not pay a tax if you qualify for certain deductions. Estimates are that only the wealthiest 2 percent of Americans will be subject to the estate tax, but that doesn’t mean the other 98 percent of Americans shouldn’t care.

Because, as economists are often wont to say, who pays the tax (as in from whom the tax is collected), is not necessarily the same as the person who pays (as in who is affected by) the tax. Not only are the heirs affected, but so is everyone else in our economy, through slower economic growth.

I am not arguing that we should not pay taxes. Rather I’m arguing that this particular tax does not meet the standards of a good tax. I know “good tax” sounds like an oxymoron, but a good tax is simple, easily understood, seldom changes, is neutral to different choices and promotes economic growth.The estate tax fails at least the last two principles since it treats saving and wealth accumulation differently depending on how much you have saved. It does not treat the savings over $2 million as it does the first $2 million. And in so doing it discourages economic growth by discouraging capital accumulation.

Let’s say I had another set of parents, a more austere couple, they eschew the globetrotting for a life of ramen noodles and coupon clipping so that they can provide me and my future family with a financial safety net. Why should the government impose a tax on them that they will not impose on my actual parents?Why would a fair tax system penalize someone for self-sacrificing behavior intended to make their children and grandchildren better off? Why are we penalizing those who live frugally and through their frugal behavior are laying the seeds of economic growth for the rest of us to enjoy? Not only should we not discourage that behavior, we should probably do more to encourage it.

As anybody who has noticed the rising amount of U.S. debt held by foreigners should realize, it is not occurring because typical Ameri-cans save too much, but because they are saving too little. So let’s not penalize people for saving more.

If it’s the deficit that worries you, find somewhere else to raise revenue or, better yet, cut spending. I offer the expenditures in Iraq as a starting place because I know Keith would agree with me on that one.

Keith argues that private wealth accumulation is due to our public institutions and markets and therefore should be taxed more heavily. Keith is confused. I’d like to point out that our system of progressive taxation will not be affected by eliminating the death tax, in fact it will be improved as there will be more incentive to accumulate wealth for your children rather than pass your current income on to them now when they are likely to be in a much lower tax bracket.

It’s not clear that the tax is very effective at raising revenue either. Wealthy Americans can afford to hire accountants, lawyers, and estate planners to figure out ways to avoid paying the estate tax. Even though this might be one of the nicer things lawyers do for people, it isn’t a very productive use of society’s resources. So, Keith, please join me in setting those lawyers free — and encouraging economic growth for all — by ending the estate tax.

Taggert J. Brooks teaches economics at the University of Wisconsin-La Crosse.