There are many reasons to object to the Republican tax cut plan. Most importantly, the corporate tax cut is likely to primarily benefit shareholders, with little impact on investment; the elimination of the estate tax is a gift to the very richest people in the country; and the 25 percent tax rate for rich people on the income they receive from pass-through businesses is both a huge gift to the very rich and an enormous growth incentive for the tax shelter industry.
But one complaint is largely ill-founded. The limit of the mortgage interest to payments on $500,000 in principal is not likely to have much negative impact on middle-income households. While the NYT tells us that people buying “starter houses” in places like New York City and Silicon Valley are likely to be hit, this impact is likely to be minimal. This can be seen with a bit of arithmetic.
Ife we assume that someone buys a home with 10 percent down, then a $500,000 mortgage would go along with a house that sold for $555,000. According to the Case-Shiller indices, this would put you well into the top third of houses in the New York City commuter zone. (The cut-off is $480,000 in the most recent data.)
Furthermore, it is only the interest on the principle above this amount which is no longer tax deductible. Suppose someone has a $600,000 mortgage (enough to buy a $670,000 home, assuming a 90 percent loan to value ratio). They would be able to deduct the interest on $500,000 in principle, but not the last $100,000. If they paid a 4 percent interest rate on their loan, this would be $4,000 in lost deductions. If they are in the 25 percent bracket, this would amount to an increase of $1,000 in their taxes.
While this amount is not trivial since this person is paying $24,000 a year in mortgage interest alone (taxes and principle almost certainly raise housing costs above $40k a year), their income is almost certainly well over $100k a year, so this is not a moderate-income household. Furthermore, as the principal is paid down, a greater portion of the interest is tax deductible, as the outstanding principle falls to the $500,000 cutoff. In short, it does not make sense to claim this limit is a big hit to middle-income households, even in areas with high-priced housing.
There are many reasons to object to the Republican tax cut plan. Most importantly, the corporate tax cut is likely to primarily benefit shareholders, with little impact on investment; the elimination of the estate tax is a gift to the very richest people in the country; and the 25 percent tax rate for rich people on the income they receive from pass-through businesses is both a huge gift to the very rich and an enormous growth incentive for the tax shelter industry.
But one complaint is largely ill-founded. The limit of the mortgage interest to payments on $500,000 in principal is not likely to have much negative impact on middle-income households. While the NYT tells us that people buying “starter houses” in places like New York City and Silicon Valley are likely to be hit, this impact is likely to be minimal. This can be seen with a bit of arithmetic.
Ife we assume that someone buys a home with 10 percent down, then a $500,000 mortgage would go along with a house that sold for $555,000. According to the Case-Shiller indices, this would put you well into the top third of houses in the New York City commuter zone. (The cut-off is $480,000 in the most recent data.)
Furthermore, it is only the interest on the principle above this amount which is no longer tax deductible. Suppose someone has a $600,000 mortgage (enough to buy a $670,000 home, assuming a 90 percent loan to value ratio). They would be able to deduct the interest on $500,000 in principle, but not the last $100,000. If they paid a 4 percent interest rate on their loan, this would be $4,000 in lost deductions. If they are in the 25 percent bracket, this would amount to an increase of $1,000 in their taxes.
While this amount is not trivial since this person is paying $24,000 a year in mortgage interest alone (taxes and principle almost certainly raise housing costs above $40k a year), their income is almost certainly well over $100k a year, so this is not a moderate-income household. Furthermore, as the principal is paid down, a greater portion of the interest is tax deductible, as the outstanding principle falls to the $500,000 cutoff. In short, it does not make sense to claim this limit is a big hit to middle-income households, even in areas with high-priced housing.
Read More Leer más Join the discussion Participa en la discusión
The Washington Post reported that Republicans in Congress are now considering making their tax cuts temporary, so as to reduce their cost over the 10-year budget horizon. The paper neglected to mention that this change would completely undermine the basis for the claim that the tax cut will lead to boom in investment and growth.
This alleged boom is the basis for both the claim that the average family would get $4,000 from the tax cut and that additional growth would generate $1.5 trillion in revenue over the next decade. As I pointed out yesterday, the projection of an investment boom was never very plausible in any case, but for it to make any sense at all, the tax cuts have to be permanent.
The Republicans’ argument was that lower tax rates would increase the incentive for companies to invest. But if companies anticipate that the tax rate will return to its current level after a relatively short period of time, then the tax cut will provide little incentive. This means there is no basis for the assumption of a boom.
In the case of a temporary tax cut, the claim that average families will see a $4,000 dividend from higher pay makes no sense. And the claim of a $1.5 trillion growth dividend can be seen for what it is: a number snatched out of the air to claim the tax cut won’t increase the deficit.
The Washington Post reported that Republicans in Congress are now considering making their tax cuts temporary, so as to reduce their cost over the 10-year budget horizon. The paper neglected to mention that this change would completely undermine the basis for the claim that the tax cut will lead to boom in investment and growth.
This alleged boom is the basis for both the claim that the average family would get $4,000 from the tax cut and that additional growth would generate $1.5 trillion in revenue over the next decade. As I pointed out yesterday, the projection of an investment boom was never very plausible in any case, but for it to make any sense at all, the tax cuts have to be permanent.
The Republicans’ argument was that lower tax rates would increase the incentive for companies to invest. But if companies anticipate that the tax rate will return to its current level after a relatively short period of time, then the tax cut will provide little incentive. This means there is no basis for the assumption of a boom.
In the case of a temporary tax cut, the claim that average families will see a $4,000 dividend from higher pay makes no sense. And the claim of a $1.5 trillion growth dividend can be seen for what it is: a number snatched out of the air to claim the tax cut won’t increase the deficit.
Read More Leer más Join the discussion Participa en la discusión
A NYT article reported on a commitment by its president, Xi Jinping, to raise everyone in China above its official poverty level of 95 cents a day by 2020. According to the piece, 43 million people in China now fall under this income level.
While the piece implies this would be a difficult target for China to make, the cost would actually be quite small relative to the size of its economy. If it were to hand this amount of money (95 cents a day) to each of these 43 million people, it would cost the country $14.9 billion annually. This is just over 0.05 percent of its projected GDP for 2020 of $29.6 trillion. This target would still leave these and many other people very poor but if this is what China’s government is shooting for, there is little reason to think it will not be able to meet the target.
The article also says that China’s slowing growth will make reducing poverty more difficult. While it is harder to reduce poverty with slower growth rather than faster growth, China’s economy is still projected to be growing at more than a 6.0 percent annual rate, which is faster than almost every other country in the world.
A NYT article reported on a commitment by its president, Xi Jinping, to raise everyone in China above its official poverty level of 95 cents a day by 2020. According to the piece, 43 million people in China now fall under this income level.
While the piece implies this would be a difficult target for China to make, the cost would actually be quite small relative to the size of its economy. If it were to hand this amount of money (95 cents a day) to each of these 43 million people, it would cost the country $14.9 billion annually. This is just over 0.05 percent of its projected GDP for 2020 of $29.6 trillion. This target would still leave these and many other people very poor but if this is what China’s government is shooting for, there is little reason to think it will not be able to meet the target.
The article also says that China’s slowing growth will make reducing poverty more difficult. While it is harder to reduce poverty with slower growth rather than faster growth, China’s economy is still projected to be growing at more than a 6.0 percent annual rate, which is faster than almost every other country in the world.
Read More Leer más Join the discussion Participa en la discusión
The Washington Post told readers that the Republican tax plan:
“…will aim to slash corporate tax rates, simplify taxes for individuals and families and lure the foreign operations of multinational firms back to the United States with incentives and penalties.”
While there is no plan at the moment, the reports to date have said the Republicans want to shift to a territorial tax under which companies don’t pay U.S. tax on their foreign profits. If this is true, their proposal will increase the incentive to shift operations overseas, or at least to have their profits appear to come from overseas operations.
It is worth noting that the concern expressed about future deficits in this piece is referring to a largely meaningless concept. If we are concerned about the commitment to future debt service payments then we should be looking at debt service payments, which are now near historic lows relative to the size of the economy.
We should also be asking about the burden the government creates by granting patent and copyright monopolies. This presently comes to close to $370 billion annually (more than twice the debt service burden) in the case of prescription drugs alone. This is the gap between what we pay for drugs, currently around $450 billion a year, and the price that would exist in a free market without patents and related protections, which would likely be less than $80 billion. The full cost of these protections in all areas is almost certainly at least twice the cost incurred in prescription drugs.
The Washington Post told readers that the Republican tax plan:
“…will aim to slash corporate tax rates, simplify taxes for individuals and families and lure the foreign operations of multinational firms back to the United States with incentives and penalties.”
While there is no plan at the moment, the reports to date have said the Republicans want to shift to a territorial tax under which companies don’t pay U.S. tax on their foreign profits. If this is true, their proposal will increase the incentive to shift operations overseas, or at least to have their profits appear to come from overseas operations.
It is worth noting that the concern expressed about future deficits in this piece is referring to a largely meaningless concept. If we are concerned about the commitment to future debt service payments then we should be looking at debt service payments, which are now near historic lows relative to the size of the economy.
We should also be asking about the burden the government creates by granting patent and copyright monopolies. This presently comes to close to $370 billion annually (more than twice the debt service burden) in the case of prescription drugs alone. This is the gap between what we pay for drugs, currently around $450 billion a year, and the price that would exist in a free market without patents and related protections, which would likely be less than $80 billion. The full cost of these protections in all areas is almost certainly at least twice the cost incurred in prescription drugs.
Read More Leer más Join the discussion Participa en la discusión
The Republicans are telling us that cutting in the corporate tax rate will lead to a big $4000 pay increase for ordinary workers. The story goes that lower taxes will lead to a flood of new investment. This will increase productivity and higher productivity will be passed on to workers in higher wages.
That’s a nice story, but the data refuse to go along. My friend Josh Bivens took a quick look at the relationship across countries between corporate tax rates and the capital-to-labor ratio. If the investment boom story is true, then countries with the lowest corporate tax rate would have the highest capital-to-labor ratio.
Josh found the opposite. The countries with the highest capital-to-labor ratios actually had higher corporate tax rates on average than countries with lower capital-to-labor ratios. While no one would try to claim based on this evidence that raising the corporate tax rate would lead to more investment, it certainly is hard to reconcile this one with the Republicans’ story.
Just to consider all the possibilities. Josh looked to see if there was a relationship between the change in the tax rate and change in the capital-to-labor ratio. Here, also, the story goes the wrong way. The countries with the largest cuts in corporate tax rates had the smallest increase in their capital-to-labor ratios.
The implication of this simple analysis is that there is no reason to believe that cuts in the corporate tax rate will have any major impact on investment. It will simply mean more money in the pockets of shareholders, with little if any gain for ordinary workers. The moral here is that workers best not go out and spend their promised $4,000 tax cut dividend just yet.
The Republicans are telling us that cutting in the corporate tax rate will lead to a big $4000 pay increase for ordinary workers. The story goes that lower taxes will lead to a flood of new investment. This will increase productivity and higher productivity will be passed on to workers in higher wages.
That’s a nice story, but the data refuse to go along. My friend Josh Bivens took a quick look at the relationship across countries between corporate tax rates and the capital-to-labor ratio. If the investment boom story is true, then countries with the lowest corporate tax rate would have the highest capital-to-labor ratio.
Josh found the opposite. The countries with the highest capital-to-labor ratios actually had higher corporate tax rates on average than countries with lower capital-to-labor ratios. While no one would try to claim based on this evidence that raising the corporate tax rate would lead to more investment, it certainly is hard to reconcile this one with the Republicans’ story.
Just to consider all the possibilities. Josh looked to see if there was a relationship between the change in the tax rate and change in the capital-to-labor ratio. Here, also, the story goes the wrong way. The countries with the largest cuts in corporate tax rates had the smallest increase in their capital-to-labor ratios.
The implication of this simple analysis is that there is no reason to believe that cuts in the corporate tax rate will have any major impact on investment. It will simply mean more money in the pockets of shareholders, with little if any gain for ordinary workers. The moral here is that workers best not go out and spend their promised $4,000 tax cut dividend just yet.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
The NYT had a very informative piece on the prospects for the labor market changes being pushed through in France by its new president Emmanuel Macron. While the background explaining the proposed changes and their rationale was useful, the article included one important item that is seriously misleading. It said that nearly one in four young people in France is unemployed.
This figure is referring to the unemployment rate for French youth (ages 15–24), which the OECD reports as 24.6 percent. However, this figure is the percent of the labor force who are unemployed, not the percent of the population. The labor force is defined as people who are either employed or report to be looking for work and are therefore classified as unemployed.
In France, many fewer young people work than in the United States because higher education is largely free and students get stipends from the government. As a result, the employment rate for French youth is 28.3 percent, compared to 50.1 percent for the United States. If we look at unemployment as a share of the total youth population, the 8.7 percent rate in France is not hugely higher than the 5.8 percent rate in the United States.
Youth unemployment is still a serious issue in France (as it is the United States), but not quite as serious as the one in four figure may lead people to believe.
The NYT had a very informative piece on the prospects for the labor market changes being pushed through in France by its new president Emmanuel Macron. While the background explaining the proposed changes and their rationale was useful, the article included one important item that is seriously misleading. It said that nearly one in four young people in France is unemployed.
This figure is referring to the unemployment rate for French youth (ages 15–24), which the OECD reports as 24.6 percent. However, this figure is the percent of the labor force who are unemployed, not the percent of the population. The labor force is defined as people who are either employed or report to be looking for work and are therefore classified as unemployed.
In France, many fewer young people work than in the United States because higher education is largely free and students get stipends from the government. As a result, the employment rate for French youth is 28.3 percent, compared to 50.1 percent for the United States. If we look at unemployment as a share of the total youth population, the 8.7 percent rate in France is not hugely higher than the 5.8 percent rate in the United States.
Youth unemployment is still a serious issue in France (as it is the United States), but not quite as serious as the one in four figure may lead people to believe.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
It seems the folks reporting on the third quarter GDP forgot to do their homework. The articles touted the 3.0 percent growth figure, which was somewhat stronger than generally expected. However, much of the basis for this stronger than expected growth was a pick-up in inventory accumulations that added 0.73 percentage points to the growth rate in the quarter. The growth in final demand was just 2.3 percent.
It is common to look at final demand growth, which excludes inventory changes, both because the inventory numbers are highly erratic and also are not sustainable. No one thinks that the pace of inventory accumulation will continue to increase at anything like the pace in the third quarter. This point is important since if we are trying to determine the underlying growth path of the economy, it is far more likely to reflect the rate of growth of final demand than a GDP number that is inflated (or deflated) by big changes in inventories.
One potentially very important item that seems to have been missed in the coverage of third quarter GDP was the pick-up in productivity growth implied by the GDP data. Output in the non-farm business sector rose at a 3.8 percent rate in the quarter. With hours worked in the private sector increasing by less than 1.0 percent, this likely means a rate of productivity growth close to 3.0 percent. This would be a huge uptick from the 0.7 percent rate we have seen the last five years.
Productivity data is highly erratic so a single quarter’s data should always be viewed cautiously. But an uptick in productivity growth has to start somewhere and if this is the first sign, it is a really huge deal. More rapid trend productivity growth would be far more important than whether the GDP growth rate in the quarter was 3.0 percent or 2.0 percent.
It seems the folks reporting on the third quarter GDP forgot to do their homework. The articles touted the 3.0 percent growth figure, which was somewhat stronger than generally expected. However, much of the basis for this stronger than expected growth was a pick-up in inventory accumulations that added 0.73 percentage points to the growth rate in the quarter. The growth in final demand was just 2.3 percent.
It is common to look at final demand growth, which excludes inventory changes, both because the inventory numbers are highly erratic and also are not sustainable. No one thinks that the pace of inventory accumulation will continue to increase at anything like the pace in the third quarter. This point is important since if we are trying to determine the underlying growth path of the economy, it is far more likely to reflect the rate of growth of final demand than a GDP number that is inflated (or deflated) by big changes in inventories.
One potentially very important item that seems to have been missed in the coverage of third quarter GDP was the pick-up in productivity growth implied by the GDP data. Output in the non-farm business sector rose at a 3.8 percent rate in the quarter. With hours worked in the private sector increasing by less than 1.0 percent, this likely means a rate of productivity growth close to 3.0 percent. This would be a huge uptick from the 0.7 percent rate we have seen the last five years.
Productivity data is highly erratic so a single quarter’s data should always be viewed cautiously. But an uptick in productivity growth has to start somewhere and if this is the first sign, it is a really huge deal. More rapid trend productivity growth would be far more important than whether the GDP growth rate in the quarter was 3.0 percent or 2.0 percent.
Read More Leer más Join the discussion Participa en la discusión
Fareed Zakaria pushes the pet myth of the arithmetically challenged elite (yes, that is probably redundant) that the federal debt is limiting spending for many important ends in his column this morning.
“It is politically paralyzed, unable to make major decisions. Amidst a ballooning debt, its investments in education, infrastructure, and science and technology are seriously lacking.”
Arithmetic fans would evaluate this assertion by looking for evidence that the debt is causing problems such as high interest rates and inflation and creating a large debt service burden.
The opposite is the case, with long-term interest rates still under 2.5 percent compared to more than 5.0 percent in the surplus years of the late 1990s. Inflation remains under the Fed’s 2.0 percent target and has actually been trending downward this year. And, debt service is less than 1.0 percent of GDP (net of interest rebated by the Fed), compared to over 3.0 percent in the 1990s.
In short, there is no evidence that debt is limiting our ability to spend more in these and other areas. There is a strong case that fears over the debt, raised by folks like Zakaria, are limiting our ability to invest for the future.
Fareed Zakaria pushes the pet myth of the arithmetically challenged elite (yes, that is probably redundant) that the federal debt is limiting spending for many important ends in his column this morning.
“It is politically paralyzed, unable to make major decisions. Amidst a ballooning debt, its investments in education, infrastructure, and science and technology are seriously lacking.”
Arithmetic fans would evaluate this assertion by looking for evidence that the debt is causing problems such as high interest rates and inflation and creating a large debt service burden.
The opposite is the case, with long-term interest rates still under 2.5 percent compared to more than 5.0 percent in the surplus years of the late 1990s. Inflation remains under the Fed’s 2.0 percent target and has actually been trending downward this year. And, debt service is less than 1.0 percent of GDP (net of interest rebated by the Fed), compared to over 3.0 percent in the 1990s.
In short, there is no evidence that debt is limiting our ability to spend more in these and other areas. There is a strong case that fears over the debt, raised by folks like Zakaria, are limiting our ability to invest for the future.
Read More Leer más Join the discussion Participa en la discusión
