The Tax Policy Center’s verdict on Herman Cain’s ‘999’ plan is in, and it’s not pretty for the vast majority. Last Sunday, Cain claimed on Meet the Press that his plan would lower taxes on most Americans. Analysis of the plan proves otherwise. The average household would see an $836 tax increase, with 84 percent of households paying more, relative to current tax policies. In this case, that’s what ‘broadening the base’ entails: more households paying much more in taxes.

Mr. Cain said the elderly wouldn’t be made worse off, because the elimination of capital gains taxes would offset the new taxes levied on their consumption, again a wildly unfounded claim. It turns out that 86 percent of elderly households would see a tax hike, which is unsurprising because fewer than 10 percent of households will even pay capital gains taxes this year, again according to TPC. If the vast majority is getting hosed, who’s reaping the benefit?

I recently characterized the ‘999’ plan as the inverse of the so-called ‘Buffett Rule’ that millionaires and billionaires shouldn’t be paying a lower effective tax rate than middle-class households. TPC’s distributional analysis demonstrates just this. The chart below depicts effective tax rates under current policy (blue) and the ‘999’ plan (red) across various cash income ranges.

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Under a progressive tax code, effective tax rates should rise with income. TPC treats the ‘999’ plan effectively as a 23.6 percent flat sales tax, which is in fact the final phase of Mr. Cain’s tax plan (TPC’s wonky explanation here and Howard Gleckman offers a more accessible explanation here). Upper-income households consume less of their income than middle-class families, hence lower effective tax rates and a regressive tax code. (Note: the tax code is less progressive than the blue bars suggest because the federal tax code is layered on top of regressive state and local taxes, as Citizens for Tax Justice notes in this report.)

Under ‘999,’ average tax rates would begin to fall for households with income exceeding $200,000. Households with income exceeding $1 million would see their effective tax rate roughly halved from 32.9 percent to 17.9 percent, for an average tax break of $455,000, relative to current tax policies. The top 0.1 percent of filers—those with incomes of roughly $2.7 million and above—would get an average tax cut of $1.4 million, as Jared Bernstein depicts nicely. This is where the benefit of eliminating wealth taxes (i.e., capital gains, dividends, and estate taxes) really kicks in; the highest-income 0.1 percent will pay 49 percent of all capital gains taxes this year.

The American consumer is in no position to lead the economy to recovery. Lower-income and middle-class Americans are burdened by mortgage debt and lost housing equity, underemployment, and a decade of falling real median income. In this context, I fail to see how jacking up taxes and slashing disposable income for 84 percent of the population constitutes responsible tax reform, much less a jobs plan. It’s more along the lines of kick ‘em when they’re down.

Mr. Cain’s ‘999’ plan amounts to highway robbery, not a jobs plan. It’s simple, all right, simply a massive redistribution of after-tax income up the earnings distribution.

RedState.org blogger Erik Erickson has launched a counterattack to the Occupy Wall Street’s “we are the 99 percent” campaign. Erickson’s retort: “Suck it up you whiners. I am the 53 percent subsidizing you so you can hang out on Wall Street and complain.”

What’s he talking about? This 53 percent figure refers to the share of all households who pay federal income taxes. Far too many people, hearing this statistic, miss the crucially important adjectives “federal” and “income” and take it to mean that nearly half of American households pay no taxes at all. This is clearly wrong. Essentially every adult in the country pays taxes. They pay federal excise taxes when they buy gasoline, they pay state sales taxes when they buy clothes and electronics, they pay local property taxes if they own a house, and they pay federal payroll taxes on every dollar of income they earn – unless they’re lucky enough to earn over $107,000, when Social Security taxes revert to zero.

Federal income taxes, in fact, accounted for only 37 percent of federal taxes and just 20 percent of total federal, state, and local taxes paid in 2010. So why have conservative activists like Erickson tried to privilege the income tax over others? Well, mostly because they’re hoping people think this refers to all taxes. But conservatives particularly dislike the federal income tax because it’s pretty much the only significant part of our tax code that remains progressive – though less so after a decade of Republican-backed tax cuts. (The most progressive federal tax, the tax on large estates and gifts, has been eviscerated over the last decade.)

Most taxes besides federal income taxes are flat or regressive, meaning that lower-income households pay a higher share of their income in these taxes than the rich. Citizens for Tax Justice has a great report that points out that the tax system as a whole is nearly flat – meaning that households across the income distribution are paying about an equal share of their income in taxes.

The 47 percent that pay no federal income tax that Erickson thinks he’s subsidizing are a mix of current taxpayers that just happen to have not made enough income in the current year to have income tax liability, and former income taxpayers (retired households), as explained in this post. Unlike other taxes, the federal income tax intentionally exempts subsistence levels of income from taxation, largely through the standard deduction and personal exemption. The tax code also provides an extra standard deduction for retirees, who face high costs of living, and exempts some Social Security income from taxation. Because of this, and because the effect of the earned income tax credit (EITC – first introduced in the Nixon administration and expanded under both the Clinton and George W. Bush administrations) is to offset payroll tax liability for low-earners, it is true that 18 percent of households (mostly retirees and very low-earning families with children) will face no net federal taxes on income this year. Is it really so offensive that retirees and families with very low incomes are not paying this particular tax?

One wonders where this hilarious attempt to cherry-pick tax stats to divide the world into the virtuous and undeserving will end. According the Tax Policy Center, 90 percent of tax units will pay no capital gains or dividends taxes this year – does this make the rest of us freeloaders? But wait, eliminating all taxes on capital gains and dividends is a prime goal of conservative policymakers – are they trying to replace the undeserving freeloaders with virtuous freeloaders?

Or, are they just trying to mislead people who are angry (with good reason) about the outcomes the economy is producing and threatening to pin some outrage where it actually belongs?

Eons ago, in blogtime, Ezra Klein wrote an excellent piece on policymaking in the face of the Great Recession and its aftermath. It’s a long piece with plenty to recommend, but I’ll just spend some time lingering over his reliance on the now-famous finding of Carmen Reinhart and Ken Rogoff (and the IMF) that recessions accompanied by financial crises tend to be followed by much slower and less robust recoveries.

This finding is true and useful but far too often misinterpreted. There is nothing inherent in the economics of financial crises that makes slow recovery inevitable – they just require that policymakers figure out how to engineer more spending in their wake, same as in response to all other recessions.

Rather, the real problem they pose to policymakers is that engineering such spending increases in the wake of financial crises often requires policy responses that seem unorthodox or radical relative to the very narrow range of macroeconomic stabilization tools that enjoy support across the ideological spectrum. To put this more simply – they require policymakers do more than watch the Federal Reserve pull down short-term interest rates. For decades, all recession-fighting was outsourced to the Fed’s control of short-term “policy” interest rates – this despite the fact that in the U.S. this recession-fighting tool hasn’t actually been all that successful since the 1980s (see Table 2 in this paper).

The best response to a recession that is either so deep or so infected by debt-overhangs that conventional monetary policy is not sufficient, is simply to engage in lots of fiscal support – think the American Recovery and Reinvestment Act (ARRA) – but (as Ezra notes) much, much bigger in the case of the Great Recession.

But, this kind of discretionary fiscal policy response to recession-fighting (and jobless-recovery fighting) had fallen deeply out of favor in the same decades that saw increasing reliance on conventional monetary policy[1]. In fact, advocating fiscal policy that was up to the task of providing a full recovery in the wake of crises that defanged conventional monetary policy somewhere along the way got labeled radical, rather than simply nuts-and-bolts economics.

Further, this rejection of discretionary fiscal policy was done on very thin analytical reeds – essentially the fear was that it took too long to debate, pass, and see an effect from fiscal policy – and that if the recession was “missed” in real-time by policymakers, we would end up providing lots of fiscal support to an already-recovered economy – and might even cause economic overheating that would lead to runaway inflation and interest rate spikes.

This fear led to the strange mantra in the debate over fiscal stimulus in 2008 that policy had to be targeted, temporary and timely – which basically ruled out most things but tax cuts. But, given that the last three recessions have seen extraordinarily sluggish return to job-creation in their wake, this timely obsession was clearly misplaced (and, plenty argued so in real-time).

So we’ve come to what is, I think, a big gap in Ezra’s piece – the repeated (and correct) insistence that the political system just couldn’t accommodate what nuts-and-bolts economics indicated was needed (i.e., large-scale fiscal support) for a full recovery without examining just how we found ourselves with a political system that has become deeply stupid about fighting recessions and jobless recoveries. Read more

There are now two competing proposals to fix America’s aging public school buildings and, coincidentally, give jobs to thousands of construction and maintenance workers. One will work; the other won’t.

The first, the one that would be effective, was proposed by President Obama and introduced by Connecticut Rep. Rosa DeLauro (H.B. 2948) and Ohio Sen. Sherrod Brown (S. 1597). Fix America’s Schools Today! (FAST) is a straightforward federal grant program that would send $25 billion directly to state education agencies and local school districts by formula, accounting for need, and permitting them to hire contractors to make repairs, do deferred maintenance, and make improvements in public K-12 school buildings and facilities. We estimate it could put 250,000 people back to work.

On Oct. 12, Virginia Senators Jim Webb and Mark Warner introduced the second, more complicated yet very limited bill to rehabilitate only the nation’s ‘historic’ schools, The Rehabilitation of Historic Schools Act of 2011. According to their press release, Virginia Gov. Bob McDonnell and U.S. House Majority Leader Eric Cantor also support their proposal.

As my colleague, Jared Bernstein, wrote in his blog last week, it’s good to see bipartisan support for fixing up our public school buildings. And it’s true that, as Jared pointed out, “the first step towards fixing a problem is recognizing the problem and taking responsibility for it.”

Unfortunately, the Webb-Warner Historic Schools Rehabilitation Tax Credit plan is so limited in scope that it would accomplish little in terms of either job creation or school modernization.

Their plan offers developers a federal tax credit to enter into public/private partnerships with states and school districts to help pay for modernization of schools that are on the National Register of Historic Places.

Private partners would have to purchase the historic public school building and then lease it back to the school district. As part of the sale-lease-back agreement they would modernize the historic schools using the incentive of the federal tax credit to reduce the overall cost.

However, unlike FAST, the tax credit program is small, convoluted, and slow. The President proposed rehabbing 35,000 school buildings, but there are fewer than 1,000 public schools on the National Register of Historic places. The policies, approvals, and agreements needed for school districts to enter into developer partnerships (the kind of bureaucratic and legal red tape politicians normally deplore) add a level of complexity that will take time and limit the impact on both school repairs and jobs. And poorer school districts – the ones that need help the most — just won’t be able to make use of a tax credit—they need a grant to make these repairs.

School repair and modernization shouldn’t depend on the desire of developers to secure tax credits. We ought to be simplifying the tax code, not adding to its loopholes. Having recognized both the need to improve our educational infrastructure and a federal role, Webb, Warner and Cantor should join with the president in supporting FAST.

At the very least, even if they’re wedded to using the tax code to fund school modernization, they should expand their vision beyond a few hundred historic buildings.  The problems of unemployment and substandard school infrastructure are far too big for such a narrow solution.

All politicians say they want to protect the middle class, but who belongs to the middle class? The Census Bureau puts the median household income at a shade under $50,000, and a broad definition (leaving out the bottom and top twenty percent) gets you a range of about $20,000 to $100,000, ignoring differences in household size and regional cost of living.

But the definition of “middle class” seems to expand or contract depending on the context. When it comes to shielding taxpayers from tax increases, the “middle class” tends to extend well above the $100,000 threshold. For example, the Alternative Minimum Tax is “patched” by Congress each year in the name of protecting the middle class, even though roughly three-fourths of the forgone revenue comes from households making more than $100,000. Similarly, while campaigning for president, Barack Obama famously pledged not to raise taxes on married couples with incomes under $250,000 or single taxpayers with incomes under $200,000.

But when it comes to Social Security cuts, the middle class seems to shrink. The co-chairs of the president’s Fiscal Commission, for example, proposed cuts for the “most fortunate” that reduced benefits for Social Security’s prototypical medium earner (a worker earning around $43,000 in 2010) by 19 percent. Though some of this would come from across-the-board cuts like a lower cost-of-living adjustment, even targeted (“progressive”) cuts would fall on those earning as little as $38,000.

Why go after middle class retirees? One reason is that there are few wealthy retirees and they don’t receive much in Social Security benefits. Only 7 percent of Social Security beneficiary “units” 62 and older had incomes above $100,000 in 2008 (this includes single retirees and married couples). Even if these upper-income retirees all received close to the maximum benefit of around $35,000, it’s hard to achieve substantial savings without going lower down the income scale or eviscerating benefits for higher-income retirees, who earned them through years of contributions and already rebate some through the income tax system.

While trimming benefits for high-income retirees doesn’t get you very far, a modest payroll tax increase on high-income workers does. Currently, earnings above $106,800 are exempt from Social Security taxes. Taxing all earnings equally would all but eliminate Social Security’s long-run shortfall. Alternatively, removing the cap on the employer side and indexing it to cover 90 percent of earnings on the employee side (as it did in the early 1980s when Social Security was in long-term balance) would close around 70 percent of the shortfall if benefits are based on the employee contribution. This has the advantage of neither raising employee taxes nor creating outsize benefits.

Despite strong public support for lifting or eliminating the payroll tax cap, politicians like Texas Governor Rick Perry insist on keeping alive the idea that the projected Social Security shortfall can and should be closed by “means testing” benefits for high-income retirees. Going after AARP-card-carrying Lexus drivers living in gated communities (as Fiscal Commission co-chair Alan Simpson characterized opponents of benefit cuts) may sound like a good idea until you realize how elastic class categories are. In fact, even those of us who drive old Chevy Prizms and live in rental apartments had better watch out.

In an eloquent veto message of a school accountability reform bill last weekend, California Governor Jerry Brown articulated an alternative to the narrow standardization of schooling and the promotion of misleading quantitative test score measures that have characterized American education in the last generation.

Most observers recognize that as government increasingly held schools and teachers accountable primarily for the math and reading test scores of their students, schools inevitably narrowed their curricula to minimize attention to other important educational outcomes, substituted test preparation and test taking skills for real learning, and even engaged in cheating to meet politically determined targets.

Some policymakers have recently attempted to address these problems by advocating accountability for “multiple measures.” Their reasoning has been that the corruption of education that results from a near-exclusive focus on basic skills in math and reading can be ameliorated if other indices can be added to accountability systems to supplement the math and reading test scores. This was the goal of the California bill, sponsored by liberal Democrats, and sent to Brown for signature.

But because other important outcomes of education – like character, inquisitiveness, citizenship, civic awareness, historical reasoning, scientific curiosity, good health habits – cannot be standardized like math and reading scores, proponents of “multiple measures,” like the California senators who crafted the bill, are left with adding indices like attendance rates, parent satisfaction, graduation rates, the number of students taking advanced placement courses, and the like. But this does little to divert schools’ obsession with math and reading test scores, since they remain the only academic outcomes that count.

As Brown observed, “adding more speedometers to a broken car won’t turn it into a high-performance machine.”

In his veto message, Brown recalled an aphorism of Albert Einstein: “Not everything that counts can be counted, and not everything that can be counted, counts.” The bill, Brown said, “nowhere mentions good character or love of learning. It does allude to student excitement and creativity, but does not take these qualities seriously because they can’t be placed in a data stream.”

Brown invited the legislature to work with him to devise a truly workable accountability system for education, one that relies on qualitative evaluations by “panels [that] visit schools, observe teachers, interview students, and examine student work.”

The Broader, Bolder Approach to Education campaign has advocated such a system, and described it in more detail in a statement issued by nationally prominent educators and policy experts. The system is also described in Grading Education: Getting Accountability Right. If the panels that Brown advocates are constituted with appropriate experts in curriculum and instruction, and include members of the public as observers, they have the potential to finally provide citizens with the ability to distinguish effective from ineffective schools in their state and communities.

It is encouraging that California State Senator Darrell Steinberg responded to Brown’s veto message with a willingness to work with him to design such an accountability system. Should they succeed, it could signal that some in the nation may finally be ready to turn away from a well-intentioned but destructive reduction of schooling to the standardized tests that can, at best, measure only a small aspect of education.

High-profile education “reformers” in Washington, D.C., New York, and Chicago have asserted over the past decade that test-based accountability, whether for teachers (D.C. and N.Y.) or schools (Chicago) is key to student improvement. They have accused those who note the well-documented impact of poverty on academic achievement of “making excuses.”

Ten years in, what do they have to show for these resource-consuming “no excuses” initiatives? The answer seems to be very little, and maybe less than that. Recent reports on Chicago and Washington schools find little improvement in student achievement overall, with the white-black and rich-poor achievement gaps reformers promised to close actually widening in some cases. In New York, rewards for high-performing teachers proved so ineffective in raising test scores that the city abandoned them.

Michelle Rhee’s tenure as D.C. Public Schools Chancellor provides a stark example. Rhee invested $4 million in her new teacher evaluation system in 2009 and fired 1,000 educators in her 3 ½ years based heavily on test scores biased in favor of wealthier students. Current status? A stubborn achievement gap and apparently rampant cheating. In schools serving lower-income students especially, high stakes have also likely led to the substitution of real learning for test prep, to those students’ detriment. 

Two D.C. schools illustrate the strong correlation between test score disparities and the concentration of low-income students. In a January Washington Post article, Bill Turque notes that at Horace Mann Elementary School, with a 73 percent white student body and only 4 percent of students qualifying for free or reduced-price lunch, around 90 percent of students meet or exceed district achievement standards. Across town at Stanton Elementary School, where 85 percent of students qualify for free or reduced priced lunch, only 9 percent of students met or exceeded 2011 math and reading standards.

Rhee’s regime of test prep for students and tough accountability for teachers did little to narrow these gaps because it ignored the more complex and challenging issue of poverty. Ineffective teachers and principals clearly impede learning. But the variation in teacher quality is overwhelmed by the variation in social and economic conditions that promote (or limit) children’s readiness to learn. The failure of a small-carrot large-stick approach to attaining teacher “excellence” should give serious pause to the certainty of “reformers” like Michelle Rhee. It also challenges their assertions that acknowledging the effects of lack of early childhood education, excess mobility, family stress, and poor health on student outcomes amounts to “excusing” teachers. Rather, the “no excuses” crowd must stop excusing itself.

Fiscal year 2012 kicked off on Oct. 1 to an economy roughly $1 trillion (-6.2 percent) below potential economic output—the level of economic activity that would be associated with full employment and industrial capacity utilization. This economic slack has significant consequences for the budget deficit because revenues are lower and more Americans rely on the social safety net.

Recently, the Congressional Budget Office estimated that this portion of the budget deficit attributable to economic weakness is $340 billion this fiscal year (FY2012). In other words, if the unemployment rate were closer to 5 percent, the budget deficit would be around a third lower than its projected level ($973 billion, or 6.2 percent of GDP). CBO’s methodology and older estimates can be found here.

While sizable, these estimates understate the impact of the recession on the budget by only focusing on economic variables and ignoring deliberate legislative efforts to prop up the economy. Objectively stimulative provisions in last December’s tax and insurance compromise added $124 billion to this year’s deficit (in addition to the $299 billion added to the deficit by extending current tax policies), the Recovery Act added $49 billion, and supplemental stimulus extensions (UI, helping states with their Medicaid bills, and a teachers’ jobs fund) added $1 billion. Similarly, tax deal stimulus added $157 billion to last year’s deficit, the Recovery Act added $163 billion (net of the alternative minimum tax patch, which wasn’t stimulus), and supplemental stimulus extensions added roughly $47 billion to last year’s deficit.

Adjusting the budget deficit (less cyclical contributions) for these legislative decisions, the effective impact of the recession is closer to $699 billion last year and $514 billion this year, or about 54 percent of last year’s actual budget deficit and 53 percent of this year’s deficit.

Even adjusting for legislated economic support underestimates the impact of the recession, because many economically sensitive projections, such as decreased revenue from capital gains realizations, show up in CBO’s ‘technical revisions’ rather than the cyclical economic revisions. Technical revisions are residual non-legislative, non-economic changes in projected receipts and mandatory outlays, influenced by factors such as the distribution of tax filers through income brackets or effective tax rates. Kitchen (2003) finds that economic and technical revisions demonstrate a statistically significant and close relationship, particularly with personal income receipts. Since the start of the recession, technical revisions to CBO’s budget outlook have cumulatively added $139 billion to the FY2011 budget deficit and $246 billion to the FY2012 deficit.

Stripping out the combined impact of cyclical economic factors, stimulus legislation, and technical revisions, this year’s structural deficit would be $223 billion, or 1.4 percent of GDP. Last year’s structural deficit would have been $446 billion, or 3.0 percent of GDP. Put differently, a host of recession-related factors account for at minimum half and upwards of 65 percent of last year’s deficit and 77 percent of this year’s deficit.

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This analysis shows just how sensitive the budget is to economic activity and employment. Unfortunately, the economy faces a big drop off in deliberate fiscal support between last year and this year. Goldman Sachs recently estimated that under current law, U.S. fiscal policy will shave 1.8 percentage points from GDP growth in calendar year 2012 (or one percentage point even if the payroll tax cut is extended). We estimate that the debt ceiling deal’s initial spending cuts, coupled with failure to extend the payroll tax cut and UI, would shave 1.5 percent off growth and lower employment by 1.8 million jobs in 2012.

Congress needs to change course and enact more economically supportive policy to put millions of Americans back to work and improve the fiscal outlook.

Researchers from the UC Berkeley Institute for Research on Labor and Employment released a paper today that shows clearly and persuasively that the state budget crisis that continues to cripple most states has been caused by the bursting of the housing bubble and the persistent recession (and very weak recovery), not as many contend, by the presence of public sector unions.

The authors, labor economist Sylvia Allegretto, Ken Jacobs, and Laurel Lucia, connect the dots: the economy fell off a cliff and unemployment hit double digits, simultaneously increasing demands for state services and decimating state tax systems reliant on income and consumption, and then political opportunists lined up to identify scapegoats for widespread state revenue crises. Allegretto et al.’s paper separates the research data wheat from the political rhetoric chaff.

Step one shows that state and local government employment has remained remarkably consistent over the past 30-plus years, hovering between 14 percent and 15 percent as a share of total non-farm employment. During the recession, it bumped slightly above 15 percent primarily because the denominator, total employment, shrunk dramatically. Can the current acute fiscal distress be blamed on steady public sector employment? Hardly.

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As seen in the map, there is considerable variation between states in the share of total employment comprised of state and local government employees. The states with the largest share of state and local government employees may surprise some – it’s generally not states that are normally associated with “big government.” Moreover, in step two, the authors demonstrate that there is no statistical correlation between higher public union density and share of public sector employment.

Steps three and four show that public sector compensation as a share of state budgets has actually declined over the past two decades, and summarizes new research (including IRLE research, The Truth About Public Employees in California: They are Neither Overpaid Nor Overcompensated) showing that public sector employees are not overcompensated.

Having demonstrated that public sector workers are not to blame for state fiscal woes, the authors drill down to the real cause of state fiscal distress – the bursting of the housing bubble. They find that regardless of public sector union strength, “house price declines [resulting from the bursting of the housing bubble] were, to a large extent, a central reason why state budgets are in such dire straits.”

The real take-away of this paper – “It’s the economy, stupid!” – highlights the path needed to further revive state fiscal conditions. Putting American workers back to work will breathe new life into both income tax revenues and state sales taxes. It’s time to focus on the real crisis facing America, rather than being distracted by so many paper tigers.

Last night, Congress passed a free trade agreement for the first time since 2007. In fact, it passed three.

Behind vast Republican support, the House and Senate approved trade deals with Colombia, Panama and South Korea. This came, of course, one day after Senate Republicans killed President Obama’s jobs bill. These trade agreements should be a boon for jobs, right?

Not so fast. Robert Scott, EPI’s Director of Trade and Policy Manufacturing Research, estimates that 214,000 net U.S. jobs will be lost or displaced in the first seven years under the FTAs with Colombia and South Korea.

“With 14 million unemployed, these deals will only further burden our domestic economy, which is already teetering on the brink of another recession,” wrote Scott in a statement today.

Supporters of the FTAs, however, claim the deals will create tens or hundreds of thousands of U.S. export jobs. That would sound great if it wasn’t so naive.

As Scott points out in this week’s snapshot, trade both adds to and subtracts from the demand for workers. While the growth of exports supports domestic employment, the increase of imports displaces American jobs. Scott says counting export jobs while ignoring imports is like “trying to run a business while ignoring expenses.”

In 1993, the Clinton administration also had high hopes for job creation when the U.S. and Mexico signed the North American Free Trade Agreement. They claimed NAFTA would “create an additional 200,000 high-wage jobs related to exports to Mexico by 1995.”

Before NAFTA, the U.S. had a trade surplus with Mexico. By 2010, the U.S. had a trade deficit with Mexico and had lost or displaced 682,900 jobs. Free trade, anyone?