Archive for the ‘Taxation’ Category

The Government Deficit and the Fed

April 13, 2017 1 comment

The Federal Reserve recently announced an increase in the interest rate which it sets. This has implications for the government deficit which may not be well understood by the average person so I thought that it might make sense to discuss the connection between the Federal Reserve and the government deficit. What this discussion reveals is that the Fed has been helping to finance the government deficit in the U.S.

The Consolidated Government Budget Constraint

There is a relationship between the government and the Fed known as the Consolidated Government Budget Constraint that is written below.

Spending + Interest Payments + Net Transfer Payments =

Tax Receipts + Change in the Stock of Debt + Change in the Monetary Base

The items on the left side of the equal sign are the uses of the government’s funds. Spending refers to the fact that the government buys goods and services, it makes interest payments to the holders of government debt, and it makes transfer payments to individuals in the economy. The right side of the equation is the list of sources for the government’s spending. It receives tax payments, it issues or retires bonds, and the last item reflects bond purchases or sales by the Federal Reserve. It is these last two items that reflect the connection between the Fed and the government deficit. Read more…

Serious Policymaking

June 24, 2016 Leave a comment

Much of the political behavior we see is theater or, even worse, buffoonery.  I simply tune it out because it is almost always a waste of time to observe the latest actions or comments by politicians. There is a notable exception to this unfortunate reality and that is the policy proposals recently generated by Speaker Paul Ryan and others in the House of Representatives.

This program is called “A Better Way” and the proposals cover many issues that need to be addressed. The documents that were prepared are too broad to be completely discussed here but I urge readers to read the documents for themselves because they are worth reading and considering. Here let me just mention their proposals about taxes, called A BetterWay-Tax-Snapshot.

The tax code is a disgrace. It is riddled with carve-outs for favored groups, complicated by political attempts at central planning or social engineering (e.g., we need more people in houses so we give a write-off for mortgage interest), and is full of vagaries that invite abuse by the IRS. I have stated elsewhere that when a tax code is clear regarding what is taxable, there is little room for bureaucrats to grind an axe against individuals or organizations they dislike. One aspect of the Ryan-proposed tax overhaul is a vast simplification of the tax code which I heartily endorse. But there are other aspects of the proposal that have merit.

The press has reported on several so-called “tax inversions” where companies merge in order to cut their tax bills. The response by many politicians has been typical. The politicians create the incentives that cause the mergers to occur, then the politicians complain about the actions they induced. Now it has been reported that a complex set of new regulations are being prepared by the U.S. Treasury designed to stop these mergers. So this provides yet another example of complexity added to an already-complex tax code providing employment for lawyers and accountants. The Ryan proposal reduces the corporate tax rate which reduces the incentives for these mergers to occur. Firms should merge because it increase their efficiency which raises the wealth of the stockholders, not because of tax policies that may actually reduce economic efficiency.

Finally, the proposal cuts personal marginal income tax rates while eliminating many deductions used by taxpayers to cut their tax bills. The marginal tax rate (MTR) is the additional tax incurred when an additional unit of pre-tax income is earned. These tax rates are a crucial part of the incentives faced by the public and there is comprehensive evidence that a lower MTR raises labor supply which will increase economic activity. This should move in the direction of reversing the low labor force participation rates we have seen and increase real GDP or economic growth.

There might be elements of this proposal or the others that have been offered in A Better Way with which I and others might quibble but these are thoughtful proposals that would correct many of the problems faced by the U.S. I hope that these documents will be read and pondered by all serious voters troubled by the state of the U.S.

The Wisdom of a Balanced-Budget Amendment

December 4, 2015 2 comments

I read in the local newspaper today that there is some discussion going on in the Michigan state legislature regarding the federal government deficit. Specifically, there is a coalition of states that has begun to form that would force the federal government to convene a constitutional convention only concerned with the adoption of a balanced-budget requirement imposed on the federal government. Michigan is apparently discussing whether the state should be a part of that coalition. This development is a very good one for reasons that I will sketch below.

By allowing government deficits to exist, there has been a perversion of government policy that may well destroy our country in the future. It is all too often observed that government programs exist mainly to line the pockets of politically-connected groups, thereby enhancing the reelection prospects of the politicians handing out the subsidies. There is an enormous list of these programs. The Export-Import Bank, farm subsidies, ethanol programs, and many more (see a previous post for others) do nothing for the welfare of the country but the recipients of these programs benefit mightily. As the late Milton Friedman said many years ago, the benefits of these programs benefit a few who lobby furiously to get them, but the costs are diffuse, spreading across many people. And so the cost to each person is small and may not even be recognized by the individual bearing these costs. As a result, it is all too easy for the government to borrow to finance yet another vote-buying scheme. All it has to do is borrow to finance any new such spending program since raising tax rates may anger taxpayers.

The problem is that the United States is heading for an explosion of its entitlement costs that has been noted many times by economists (I wrote on this previously here). No economist that I know thinks that the U.S. can finance several trillion dollars in deficits and so, when these occur in the future, what is to be done?

Read more…

What Do the Children Know?

November 20, 2015 Leave a comment

As reported in the news media recently, there have been a series of student protests on university campuses. A number of grievances have been reported (although some of these are so vague that I have no idea what they really are) but one issue in particular caught my attention. That concerns student loans and there appear to be demands by some students that all student loans should be paid off by someone other than the students who borrowed the money. Specifically, there was an interview on one news outlet with a student “leader” where this student issued a demand that all students loans should be paid off by the rich, however defined.

This got me to thinking.  Does the student know the size of the stock of student loan debt and does he or she know if the incomes of the rich are large enough to pay off student loans? A little bit of data helps answer those questions. Read more…

Ballot Initiatives and Michigan Roads

April 3, 2015 2 comments

Michigan voters will soon be asked to vote on a sales tax increase and other measures partly designed to raise additional revenue for the repair of state roads which are widely regarded to be in poor condition. These initiatives seem to me to be a sign of government incompetence or an inability of government to function to serve the interests of the voters.  In California, a state where these ballot proposals have often occurred, the traditional explanation is that the legislature is unable to function because it is so polarized and, as a result, the voters must step in to get things accomplished that ought to be done by the state government. But there is another aspect of the Michigan ballot which is troubling.

“Logrolling” is a word used to describe a practice in government of attaching laws with weak support to a bill containing other policies with strong support. The idea is to get a weak law passed which would not pass on its own. This seems to happen regularly at the federal level. And so one additional aspect of the Michigan ballot measure will contain an expansion of tax subsidies using the Earned Income tax credit which I suspect is a feature of the state tax code that would not garner widespread support.

I intend to vote against the Michigan ballot proposal despite the fact that I, like most voters, agree that state roads are poorly maintained. My reasons are as follows.

  1. I regard road maintenance as a responsibility of government. If the Legislature can’t meet this basic responsibility, why do I need them?
  2. Voters cannot be well-informed about budget matters compared to politicians. We solve an agency problem when we vote, electing agents (politicians) to represent the interests of the principals (the voters) in the state. Policymaking done by voters can’t possibly be better-informed than when policies are implemented by the managers that we elect. I simply don’t have the time to do the job of politicians that we elect. Poor policies are more likely to occur when ballot initiatives are used.
  3. A sales tax is a poor way to fund roads. User fees are the proper way to do this and so taxes on gasoline are a better way to fund road maintenance.
  4. I am suspicious of the logrolling that is in the ballot proposal. I find it most interesting that there seems to be little discussion of the proposal outside of the road maintenance aspect of it.
  5. Finally a message needs to be sent to the Legislature. Do your job. Or perhaps we need a new set of politicians serving the interests of the voters.

So far, polls show that the ballot proposal is not supported by the majority of taxpayers in the state. I hope this is still true when the vote is actually done. This ballot proposal s a monument to the low quality of government in Michigan.

The Corruption in a Democracy

October 9, 2013 1 comment

In watching the reporting on the government shutdown, I could not help but be reminded of a comment made by a friend that the ancient Greeks did not regard democracy as a viable form of government. The reason for this view was that the Greeks believed that democracies were inherently corrupt because members of the public would gain access to the public purse by bribing politicians, in one way or another, for subsidies that would line the pockets of the public. The Democrats, and many Republicans, regard all of government spending to be untouchable. In my opinion, many of the spending programs of the government are vote-buying schemes and these are excellent examples of the corruption described by the ancient Greeks. Consider just a few of these spending programs that politicians defend. Read more…

Corporate Tax Reform

August 6, 2013 1 comment

There is now talk of tax reform in Washington. Both the personal and corporate tax codes are under discussion and the President has also signaled his interest in the reform of the corporate tax code. Here is a suggestion courtesy of, you guessed it, Milton Friedman (I will post a reference if I can find it). Eliminate it entirely and tax the income through the personal income tax code.

Corporations are treated for tax purposes as though they are taxable entities separate from households but this is clearly not the case. Corporations are assets owned by households (the stockholders) just as houses and bonds are assets owned by households. Except for firms, we do not have a separate tax code for stocks, bonds, and the other assets owned by households although there are tax differences based upon the source of our income. The income earned by a firm is owned by the stockholders but the stockholders allow the management to decide how much of it is retained or passed out to the owners as dividends. Taxing corporate income through the personal tax code does not end the taxation of corporate income. It does eliminate the transaction costs imposed on society of all the tax machinery in place to tax corporate income. So in this system, corporations determine taxable income and then apportion it to each unit of stock which gets reported on the personal returns of the stock owners. Think of the the resources that would be freed up in firms that could be devoted to wealth creation.

I sometimes think of the government as running a lawyer relief service since we continue to be burdened with more and more laws and regulations. Eliminating the tax code that exists for corporations would remove a big chunk of that burden. Isn’t it wonderful to think of all the accountants and lawyers that would be out looking for a job if this reform were carried out?

Categories: Fiscal Policy, Taxation
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A blog by John B. Taylor

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