Thursday, September 27, 2012

Redistribution is not Compassion, Taxes are not Charity

Robin Hood Misunderstood

The legend of Robin Hood is sometimes cited as an example, mistakenly summarized as "Take from the rich and give to the poor!" That is not what Robin Hood did, though.

Robin Hood fought the corrupt sheriffs of Nottingham and Derby. What made these men corrupt? They collected unreasonably high taxes from the residents of the two shires. Prince John of the stories also raised taxes, not only on the poor but also on the wealthy nobility. Those who were loyal to the prince, however, received "favors" (lower tax rates) and were more likely to have the crown prince buy goods from them. (Crony capitalism, anyone?)

The way the system worked at the time, the sheriff was the tax collector and law enforcement in a region. He paid to retain the post, using tax money and fines to fund the annual payment to the royal court and to pay off local nobility for their support.

Robin Hood fought unfair taxes and tax breaks given to the fortunate few. You have to understand the legend properly to appreciate it.

The reason Robin Hood, himself a member of the landed class, opposed the prince in the various legends is that he was unwilling to pledge loyalty to a corrupt government. He was a loyal supporter of King Richard, the Lionheart, and a defender of Christian values.

When someone calls redistribution of tax dollars "Robin Hood" policy, that's simply inaccurate. Unfortunately, I've used the saying, too, when describing state educational funding laws known as "Robin Hood Laws" because they take from rich neighborhoods to give funding to poor neighborhood schools. Such misuses of the "Robin Hood" label contribute to misunderstanding what is compassion. It associates wealth with the immoral villains of legends.

Whichever Robin Hood legend you enjoy, there's little doubt that his personal goal was to return to the nobility and restore his family honor. Poverty was not celebrated by Robin Hood — but he did fight the corruption and confiscatory taxes that were creating poverty.

Redistribution is not Compassion

One of the "memes" going around Facebook is a virtual poster that reads: Really, You Call It "Redistribution?" — We Call It "Compassion!"

People are confusing a basic concept, and it annoys me. Conflating taxes with charity leads to a loss of freedom, since it turns "charity" into an act of majority (or bureaucratic) rule.

Taxes are not voluntary, while charity must be an act of free will. Charity is altruistic, at some level, even if there is some enlightened self-interest. Taxes are collected under the threat of government force. There's little voluntary about paying taxes, especially when most taxes are deducted from paychecks before you can even consider if you want to pay.

When I attempt to explain to students that "charity" must be an ethical act involving free will, some attempt to argue that taxes are free will — we elect representatives and therefore taxes are a choice of the group. The majority decides to use taxes in a particular way, making it somehow more ethical.

I am not a believer in direct democracy; Tyranny of the Majority is quite real. Tax policies easily become a tool of such mob mentality. It is easy to play the populist, arguing for taxes on the rich, because the rich is a minority group. It's the equivalent of the villagers carrying pitchforks and torches towards the mansions.

But, you might argue, plenty of wealthy people are arguing for higher taxes. They understand compassion.

Fine, let them donate to charities or pay additional taxes. Make a "gift" donation to the federal government if you're so eager to pay additional taxes. That's easy enough to do:

Don't argue that "I'll pay more if others pay more." Doing what is ethical should never be based on what others do. Again, I don't care what a majority wants or does. If you only do what the majority will do, that's not much of an ethical core.

If you believe government should expand the welfare state safety net, then say so. Don't call it charity or compassion, though. Compassion is not taking wealth from one person to give it to another. Compassion is you, giving your own money, possessions, and time to a charity.

What should government do? What should the divisions between local, state, and federal responsibilities be? What is the role of real charity in our society? What is the role of family?

We need to have some serious discussions as a nation about what it means to be charitable and why so many of us want to replace charity with federal redistribution of wealth. When we demand redistribution, what are we also implying about income and wealth? What is implied matters a great deal.

Sadly, I fear we have lost trust in charity. But, why would we trust government to be any better at solving problems? Experience should teach us that the most likely result will be a government led by people claiming to be populists, while lining their own pockets.

If you really want to be like Robin Hood, practice charity and personal good deeds. Keep in mind Robin Hood was a symbol of tax revolt, not higher taxes on the rich.

Monday, September 24, 2012

Robert J. Samuelson: Romney’s chance to challenge the welfare state - The Washington Post

Robert J. Samuelson: Romney’s chance to challenge the welfare state - The Washington Post

I wish the Republicans had nominated someone with at least some rhetorical skills, and ideally someone with a genuine sense of the American Dream from hard-earned experience. Mitt Romney? He might be the worst thing to happen to the GOP's public image since George W. Bush.

When Romney described 47 percent of Americans, he was ruining a discussion we must have a nation:
There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that's an entitlement. And the government should give it to them. And they will vote for this president no matter what…These are people who pay no income tax.
More than 50 percent of Americans receive some level of federal aid. Robert Samuelson addresses this in his Washington Post column:
Actually, the share of people who receive federal benefits exceeds Romney’s 47 percent. Based on its Survey of Income and Program Participation (SIPP), the Census Bureau estimates that in mid-2011 — the latest available figures — the number of people with benefits came to 149.8 million, or 49 percent of the population. But this figure is too low, because SIPP doesn’t include several major programs (farm subsidies and college loans and grants). With these, the total probably exceeds 50 percent. 
The big programs are well-known. In 2011, Social Security had 49.6 million recipients and Medicare 45.6 million, most of them overlapping. There were 5.2 million Americans with unemployment compensation and 3.2 million with veterans’ benefits. An estimated 107.2 million people received “means-tested” benefits available to those with low incomes. Medicaid had 80.5 million beneficiaries, food stamps 48.3 million and WIC (Women, Infants, and Children) 23.1 million. Among households with means-tested benefits, almost a third received three or more.
Plus, there are state programs aiding an overlapping number of people. When half a nation receives money from the government, that money has to have come from the other half, either directly or through opportunity costs.

Can we have a nation dependent on redistribution of wealth? Samuelson argues this is a debate we need to have, but likely will not. President Obama doesn't want to tell anyone we need to cut spending on the "safety net" that has expanded well beyond its intended role. Giving out money is too popular to suggest cutting federal redistribution programs.
Dealing with it [dependency] ought to define the next president’s mission. Somehow, he must question the status quo without insulting the roughly 150 million Americans who receive federal benefits. Who deserves support and why? How much and under what conditions? Unless we ask these questions and find grounds for trimming some benefits, the budget impasse will continue and risk dangerous outcomes: a future financial crisis; crushing tax increases; or draconian cuts in programs (defense, research, highways) that aren’t payments to individuals.
And we cannot argue that the safety net has been roughly the same size since the 1960s, or even the 1980s. The safety net has expanded like a cancer. As Samuelson writes:
In 2011, payments to individuals were 65 percent of federal spending, up from 26 percent in 1960. America has created a welfare state, whether Americans admit it or not.
We have a welfare state even if we cannot admit it to ourselves. Our politicians, especially the president, seem incapable of telling voters the truth: we are broke because so many citizens want "help" that wouldn't have existed two or three decades in the past. Sorry, but everyone is not entitled to something. Entitlement is a mindset that needs to change, or it will lead to fiscal and cultural ruin.

If you want to read a rather black and white view of redistribution, one that lacks nuance, you should give this Thomas Sowell column a read. I agree with its basic premise, but it ignores how much "redistribution" is part of the American tradition — at least for the last 100 years.

Friday, September 21, 2012

Study: Tax Cuts for the Rich Don’t Spur Growth - U.S. Business News - CNBC

Study: Tax Cuts for the Rich Don’t Spur Growth - U.S. Business News - CNBC

I have written several times about tax rates, especially the historical levels of taxation and how those rates of yesteryear are often misunderstood or misrepresented.

While the "90 percent" tax rate was the top marginal rate for a few years, it was also during a time when everything and anything seemed to be deductible. The effective rate for top-income earners has been relatively consistent. This means that rates, overall, have had little economic effect. When rates are increased, so are those magical loopholes (deductions) and when rates are lowered, Congress has had a tendency to close loopholes.

I've long argued that a simple tax code, with minimal loopholes/deductions is the best approach. It might leave some accountants and tax attorneys looking for new lines of work, but that's a small price to pay for a sane tax code.

Now, we know that neither tax cuts nor modest increases at the higher end have any statistically significant effect. Consider the following from CNBC:
The CRS [Congressional Research Service] study looked at tax rates and economic growth since 1945. The top tax rate in 1945 was above 90 percent, and fell to 70 percent in the 1960s and to a low of 28 percent in 1986. 
The top current rate is 35 percent. The tax rate for capital gains was 25 percent in the 1940s and 1950s, then went up to 35 percent in the 1970s, before coming down to 15 percent today — the lowest rate in more than 65 years.
The problem with the top marginal rates is that they don't reflect reality. As I've written in the past:
Allow me to introduce you to Hauser's Law. Published in 1993 by William Kurt Hauser, a San Francisco investment economist, Hauser's Law suggests, "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." This theory was published in The Wall Street Journal, March 25, 1993. For a variety of reasons, we seem to balance tax collections within a narrow range. 
Since 1945, U.S. federal tax receipts have been fairly constant in terms of Gross Domestic Product (GDP), with taxes ranging from 15 to 20 percent of GDP.  
Why does this consistency happen, even with high top marginal rates? Because members of Congress seem to know that higher rates requires "compromises" to pass and be signed into law. Also, there really is a point at which people will move money or change it from income to another form of compensation (bonuses, stock options) to avoid taxes.

As I explained in 2011:
As a result of deductions and exclusions, even the theoretical maximum Real Rate of taxation at 60% in 1944 overstates taxation dramatically. The reality? On earned income, the richest U.S. taxpayers paid close to 40 percent of their earned incomes in taxes in 1944. We simply didn't count much of the compensation as taxable income.
Which takes me back to the CNBC article on rates and the economy. If top marginal rates are meaningless, as I have tried to demonstrate, then raising or lowering the rates should have minimal affect on the economy. Sure enough, that's what the Congressional Research Service discovered. Rates at the top didn't matter to the macro economy.
Lowering these rates for the wealthy, the study found, isn't aligned with significant improvement in any of the areas it examined. Pushing tax rates down had a "negligible effect" on private saving, and while it does note a relationship between investing and capital gains rates, the correlations “are not statistically significant,” the study says. 
“Top tax rates,” it concludes, “do not necessarily have a demonstrably significant relationship with investment.”
Not "demonstrably significant" tells us quite a bit. Our tax system is a complex, rigged system, but that's not what this study addresses. What this study tell us is that top income earners are less influenced by marginal rates than politicians of either party might want us to believe. If marginal resulted in more spending and investment, we'd see an economic boom with lower rates. If higher top rates caused people to save and reduce "taxable income" then we'd see a stalled economy when top rates were highest.
The study said that lower marginal rates have a “slight positive effect” on productivity while lower capital gains rates have a “slight negative association” with productivity. But, again, neither effect was considered statistically significant. 
At the same time, liberals have argued higher rates and more government spending produce growth. That's the neo-Keynesian position. But, there's little evidence that it was higher taxes that produced any post economic boom. Instead, other factors were more likely to have created economic growth that coincidentally paralleled higher tax rates (and more deductions, so no real change in effective rates, anyway). As CNBC reports:
Do higher taxes on the rich lead to faster economic growth? Not necessarily. The paper says that while growth accelerated with higher taxes on the rich, the relationship is “not strong” and may be “coincidental,” since broader economic factors may be responsible for that growth.
For example, I have long argued that the boom after World War II had only minimal relation to taxes, unions, or any other internal policies of the U.S. Government. The cold reality is that we were the only major nation not in ruins and that let us thrive until other nations emerged.

When you have no competition, of course you thrive.

The boom of the late 1990s had more to do with technological innovation (and an enthusiasm bubble) than any government policies. There was, for any number of reasons, a tech boom that had been 30 years in the making.

What I will argue is that during a boom you can (and maybe should) have higher revenues. During the 1990s, we reduced the annual deficit (though it was never a surplus, but that's another discussion). In a boom, you should pay off debts, invest in new ideas, and prepare for the next downturn. But, we don't seem to be good at planning ahead.

As always, I argue for a "flatter" tax, fewer loopholes, and serious cuts to government programs. If we won't "cut" in real dollars, then we need to freeze spending — and I mean a real freeze — in return for closing loopholes to increase revenues. What we should not do is raise rates and close loopholes at the same time. Raising effective tax rates would be a serious shock to this economy.

Sadly, I have little faith in Congress or any president to do what needs to be done. Spending is too easy, and reforming the tax code seems an impossible task for politicians. Yet, we know you could reform the code to collect exactly 20 percent of GDP, without any dedications. Imagine a three-rate system, simple and clean. But, it's much easier to scream "Tax the rich!" or "The freeloaders are drowning us!"

Serious discussions aren't going to happen, though.

Monday, September 17, 2012

Krugman Confuses iPhones with Broken Windows

Paul Krugman is at it again, either intentionally misleading readers or demonstrating an odd lack of familiarity with an economic theory. I'm assuming he is misrepresenting the theory he discusses and is misleading readers.
Broken Windows and the iPhone 5 11, 2012

There's been some buzz about a report suggesting that the iPhone 5 could, all by itself, give a significant boost to the US economy.
The key point is that the optimism about the iPhone's effects has nothing (or at any rate not much) to do with the presumed quality of the phone, and the ways in which it might make us happier or more productive. Instead, the immediate gains would come from the way the new phone would get people to junk their old phones and replace them. 
In other words, if you believe that the iPhone really might give the economy a big boost, you have — whether you realize it or not — bought into a version of the "broken windows" theory, in which destroying some capital can actually be a good thing under depression conditions.
No, you have not bought into the "Broken Windows" theory of economics. First, it is not a theory but is instead a famous fallacy about economic activity and what is called opportunity costs within an economy. Second, and this is a major point, most people predicting economic gains from the iPhone do, in fact, assume that many of the purchasers are seeking "happiness" and increased productivity.

How can Krugman seriously claim that the iPhone sales will have "not much" to do with quality, happiness, and productivity? People don't form lines at Apple Stores and phone carriers because they consider the iPhone merely another smartphone. When I finally moved from a standard phone to an iPhone, it was a huge improvement.

I use the maps feature to navigate, the on-screen coupons at various stores, the email when I'm away from my computer, and various fitness applications that have helped me lose 40 pounds. Seems to me that the phone has improved my life, significantly. And I know I am not alone among iPhone users.

Updating my phone wasn't merely a matter of tossing away the old phone. I recycled the old phone, which seems reasonable, and the choice to buy a new phone was not easy. My wife and I count pennies. We don't toss away money simply to have the latest and coolest toys. Because we live in a new city, in a new state, one of my options was a GPS — which the phone has. I couldn't seem to locate any useful maps, strangely enough.

What Krugman calls the "Broken Window Theory" assumes you are replacing one thing with a like thing — not upgrading, not gaining anything.

The broken window fallacy was a parable told by French economist Frederic Bastiat. His theory was that destruction alone does not add to an economy. For example, a tornado might cause a building boom in its wake, but what is built does not add to an economy. Instead, rebuilding redirects funds that would have been spent on new items and improvements to existing houses.

In Bastiat's parable, a man's son breaks a window. Obviously, the man will have to pay to replace it. The villagers debate what has happened and determine the boy has performed a service! The man will have to pay for a new window, the installation of the new window, and any taxes. The glazier (glass specialist) will earn money, therefore, and spend that money.

Bastiat demonstrates that serious analysis reveals the Broken Window Fallacy. When he broke a window, the man's son has redirected the father's income. Instead of purchasing new shoes, better meals, or investing in his own business, the father has to spend money on an item he doesn't want to buy and would not normally need to buy. The broken window helps the glazier, but it definitely does not help the father of the boy. Replacing a window that has already been purchased is a maintenance cost — beneficial in the short-term only, and it takes money from other industries the father might have supported.

Read more:

I buy a new computer every four to six years. This is not merely a "broken window" example. The new computers run new software, usually much faster. What once took me hours can then take minutes. Features like wireless networking, memory card readers, and more, have make me more productive. The costs are recouped, because I value my time. The more I can do for myself, the better.

Maybe Krugman wouldn't find a new computer or a new phone useful, but that doesn't mean his assumption that many of us are replacing items for no good reason is correct. It seems like a leap to me and probably to many iPhone owners. Apple sells easy-to-use products that do increase user productivity. They aren't selling windows… pardon the pun.

[UPDATE 17 September 2012]

A colleague reminded me of the "Broken Windows Theory" as applied to crime rates and studies of urban gentrification. As a neighborhood is improved aesthetically, the crime rate falls. Malcolm Gladwell has written about this, and there are many studies of the theory.

If anything, new iPods and iPhones might lead to a slight increase in theft. At least, that's been the experience of my students.