Republican politicians and business groups keep telling us that business investment and hiring is being held back by uncertainty over future regulations and taxation. For instance, Maine Senator Susan Collins said in introducing her bill to put a moratorium on all new regulations:
“Businesses, our nation’s job creators and the engine of any lasting economic growth, have been saying for some time that the lack of jobs is largely due to a climate of uncertainty, most notably the uncertainty and cost created by new Federal regulations.”
Her view has been repeated by others – like House Majority Leader Eric Cantor and the Chamber of Commerce. This story is also being told by some of the dissenters on the Federal Reserve Board’s Federal Open Market Committee, as Mike Konczal recently reported. Nobel Laureate Robert Lucas just made this argument in a Wall Street Journal interview, but he at least had the decency to note, “I have plenty of suspicions but little evidence.”
In a recently released paper, I present evidence that if you examine what employers are actually doing in terms of hiring and investment, this story about regulatory (or tax) uncertainty driving current job trends does not hold up. Private sector job growth has been weak in each of the last three recoveries and the current recovery’s private job growth matches up with the early 1990s recovery and is far better than that of the 2001 recovery. Investment in equipment and software has been stronger in this recovery than in the prior two recoveries. Last, weekly work hours are still substantially below those prior to the recession: uncertainty about future regulations cannot explain why employers do not increase work hours of currently employed workers to meet current demand for goods and services. A reasonable explanation for this work hours puzzle is that those sales opportunities do not actually exist, i.e., demand is lacking.
If you also examine what employers and their economists are saying in private surveys, you find that what businesses actually identify as their challenges does not fit this story either. In other words, what the heavily politicized trade associations in Washington (like the Chamber) are saying does not correspond to the real challenges facing both large and small businesses.
The National Federation of Independent Business (NFIB), which describes itself as “the leading small business association representing small and independent businesses,” does a regular survey of small businesses. One question that has been asked since 1973 is, “What is the single most important problem your business faces?” The answer choices are inflation, taxes, government regulation, poor sales, quality of labor, interest costs, health insurance costs, the cost of labor, and other matters. Interestingly, the single largest response is “poor sales,” the choice of 30 percent of respondents since President Obama was sworn in (averaging the 10 quarters between early 2009 and Spring 2011). That seems to accord with slack demand as the key concern of small businesses.
However, I was on a radio panel discussion with an economist from the Heritage Foundation who acknowledged this fact, but then highlighted that taxes and regulation were the next highest concerns identified in the NFIB surveys—evidence, he claimed, that tax and regulatory uncertainty were also preeminent. And, he correctly cited the data. In the Obama years, some 13.9 percent of small businesses identified government regulation and another 20.8 percent identified taxes as their primary problem, the leading answers after “poor sales.” I was fortunate enough to obtain the entire historical series (back to the fourth quarter of 1973) on this question from the NFIB so I could put this in historical perspective, constructing the averages for each presidential term as shown in the figure below:
It turns out that small businesses have always complained about regulation and taxes and not especially so under Obama. For instance, the share concerned about regulation under Obama (13.9 percent) is not substantially higher than under George W. Bush (9.9 percent and 11.0 percent) or Ronald Reagan’s second term (12.8 percent). There is also less concern about regulation under Obama than under Bill Clinton or George H.W. Bush. Recall also that there was rapid employment growth in the second Clinton term, so high concerns about regulation (which rose steadily from Reagan’s first term to their highest level in Clinton’s first term) are not necessarily associated with poor employment growth.
There’s a similar story on taxes. Sure, there are 20.8 percent of respondents on average in the Obama years who see taxes as the primary problem facing their business. Yet, that intensity of concern about taxes is not all that different than under George W. Bush and is less than the presidential terms from the first Reagan term through Clinton’s second term. It is hard to find a recent spike in concern about regulations or taxes that supports a story of escalating uncertainty or fears of regulations holding back the economy.
There is a striking set of graphics in yesterday’s New York Times that explores “The Nation’s Unemployment Landscape.” A series of three maps of the United States shows state level unemployment rates when the recession began in Dec. 2007, when it ended (according to the Business Cycle Dating Committee, National Bureau of Economic Research) in June 2009, and the most recent state unemployment data, showing state unemployment rates in Aug. 2011. Accompanying the maps are a series of line graphs showing the unemployment rates in the 11 states with the highest current unemployment rates (from Illinois’ 9.9 percent unemployment rate to Nevada’s crippling 13.4 percent unemployment rate).
There are several noteworthy stories to highlight in these maps and graphs, and some important caveats that may not be readily apparent from these visual aids. The first story is that for most states, there has been very little change – positive or negative, since the end of the recession over two years ago. This simple fact alone highlights the fact that the “recovery” has been very weak, and from the perspective of working families, essentially non-existent. As one would expect given that national unemployment rates have improved very little since the end of the recession (from 9.5 percent in June 2009 to 9.1 percent in Aug. 2011), some states are doing slightly better, others slightly worse than in June 2009.
Of the 11 states with the highest current unemployment rates, Michigan alone has a generally positive story to tell (and even that story comes with a cautionary footnote). Since June 2009, Michigan’s unemployment rate has fallen from 13.8 percent to 11.2 percent (still two percentage points above the national average). What accounts for this relatively positive news for Michigan, transitioning from being the state hardest hit by the recession to a state experiencing a relatively successful recovery? The successful bailout of the auto industry by the Obama administration and specifically, the turnaround by General Motors, which deserves considerable credit for boosting the Michigan economy while showing that government intervention, and even dabbling in what could properly be considered industrial policy, actually works to improve the well-being of working Americans.
Unfortunately, even Michigan’s story is tainted by a recent, though widespread upward blip in unemployment rates. Of the 11 states highlighted in the Times piece, eight show a clear recent increase, in most cases erasing much of the progress made since the end of the recession. In approximately half of the 11 states, unemployment rates in Aug. 2011 were clearly higher than they had been in June 2009. Among the 11 states, only Michigan’s rate is clearly an improvement over the June 2009 rate (the balance showing little change).
The focus on unemployment rates rather than job growth in the Times piece is a wise one, discouraging political grandstanding based on selective cherry-picking of economic data. Texas Governor Rick Perry has been outspoken, touting the so-called Texas Miracle. State unemployment data show one way in which this mythical economic tale is misleading. In Aug. 2011, Texas’ unemployment rate of 8.5 percent stands nearly double the Dec. 2007 rate of 4.4 percent, and also above the June 2009 rate of 7.7 percent. While it’s true that over this time period the Texas economy has added many new jobs, the rate of job growth has only just begun to keep up with the growth in population over this time. The Texas based Center on Public Policy Priorities notes that the Aug. 2011 unemployment rate of 8.5 percent marks the 24th consecutive month of unemployment at 8 percent or higher. Moreover, they provide data showing a jobs shortfall – the number of jobs needed to return to pre-recession unemployment rates – of over 633,000.
The other dimension lacking from the story of job creation concerns the quality of jobs created, a topic on which I’ll focus greater attention in my next post.
Last week, President Obama spoke in Ohio and pressed Congress to boost federal investment in the nation’s infrastructure. This serves as a great time to reiterate all the reasons why boosting infrastructure investments is a no-brainer:
1) Our infrastructure is terrible. More than one in four bridges are structurally deficient or functionally obsolete, indicating that the Minnesota bridge collapse wasn’t an isolated event. The American Society of Civil Engineers conclude that we need to double our investment in surface transportation infrastructure just to keep it from literally crumbling beneath our feet.
2) Win the future. Public investments such as infrastructure are vital to long-run economic growth and fuel higher incomes and living standards for decades. A recent and comprehensive review of the literature on this topic finds that a sustained 1 percent increase in public capital growth rate translates into a 0.6 percentage-point increase in the private-sector GDP growth rate.
There’s an even stronger case for doing it now:
3) It creates jobs. Regular readers of this blog won’t need to be reminded that millions of Americans are still suffering under the worst jobs crisis since the Great Depression. Job creationh as become an economic, political, and moral imperative. Infrastructure investments create jobs now, when we need them most.
4) A LOT of jobs. Infrastructure creates 16 percent more than a payroll tax holiday, nearly 40 percent more than an across-the-board tax cut, and over five times as many as temporary business tax cuts. We need to squeeze as much job creation out of each dollar of cost, and infrastructure certainly passes the test.
5) It’s targeted. The construction industry has been disproportionately hammered by the recession and has even greater unemployment levels than the economy as a whole.
6) We’ve got cheap financing. The recession has precipitated a capital flight to safety, with the safest assets being U.S. government bonds. That has made the cost of borrowing insanely cheap (10-year Treasuries hit a record-low last week), with real interest rates actually negative. Capital markets are actually paying us to borrow their money.
7) We’re getting great deals. During economic downturns, infrastructure projects are less costly as many contractors are competing for work amidst slack labor and capital markets. Many states actually had difficulty getting Recovery Act infrastructure funds out the door because contract bids kept coming in below the states’ original estimates.
8) Delay costs money. Deferring maintenance of our infrastructure saves money in the short run, but costs much more in the long run. It’s certainly cheaper to repair a bridge than to rebuild it after its collapse.
9) There’s no one else. States governments are facing nearly $150 billion in shortfalls in this fiscal year and the next, and, unlike the federal government, states generally cannot run deficits. Adding to this situation, fiscal relief from the Recovery Act has petered out, falling from $127 billion over the last two years to only $6 billion over the next two years. Local governments face equally difficult fiscal challenges. At this point in time, only the federal government can make these needed investments.
Economic policy tends to be pretty complex stuff, but this is a BIG exception. We need infrastructure work, we need jobs, the price is low, and we’re being given nearly free money to do it. All we lack is the political will.
Diane Ravitch is a glass half-empty kind of gal, while I suffer from excessive Panglossian tendencies. In the spring of 2007, we made a bet. The payoff is dinner at the River Café, at the foot of Brooklyn Heights, overlooking New York harbor and the Manhattan skyline, tucked neatly under the lights of the Brooklyn Bridge.
Four and a half years ago, we surveyed the damage being done to American education by NCLB, the “No Child Left Behind” iteration of the Elementary and Secondary Education Act:
- conversion of struggling elementary schools into test-prep factories;
- narrowing of curriculum so that disadvantaged children who most need enrichment would be denied lessons in social studies, the sciences, the arts and music, even recess and exercise, so that every available minute of the school day could be devoted to drill for tests of basic skills in math and reading;
- demoralization of the best teachers, now prohibited from engaging children in discovery and instead required to follow pre-set instructional scripts aligned with low-quality tests;
- and the boredom and terror of young children who no longer looked forward to school but instead anticipated another day of rote exercises and practice testing designed to increase scores by a point or two.
Diane morosely predicted that, despite this evident disaster, NCLB would certainly be reauthorized with its destructive testing and accountability provisions intact. After all, she moaned, it had the support of elites from both parties, the Washington think tanks, the big foundations, and the editorial boards of the New York Times, Washington Post, and other influential media outlets. No serious opposition was visible. How could the law not be continued? Indeed, she worried, its supporters were so removed from the reality of classrooms, so impervious to evidence, they could well decide to intensify requirements that schools chase phony test score gains to the exclusion of all else.
I smugly responded, “not a chance.” The NCLB accountability system is so self-evidently calamitous that its principles will never survive congressional reauthorization. Don’t pay attention to elite opinion, I said. The internal contradictions of a law that orders all children nationwide to perform above-average are so explosive that any attempts to “fix” them (as policymakers were then vowing to do) would never be able to claim a congressional majority, no matter how obstinate NCLB’s supporters might be.
For example, I said to Diane, consider the law’s absurd demand to prohibit the normal variability of human ability so that all children, from the unusually gifted to the mentally retarded, must achieve above the same “challenging” level of proficiency by 2014. The only way states could fulfill this requirement would be to define “challenging proficiency” at such a low level that even the least talented of students could meet it. NCLB enthusiasts would then cry “foul” and insist that a reauthorized law allow Congress to dictate a national proficiency standard. But this, in turn, would make the law unacceptable to supporters who had gone along in 2002 only because they felt assured that federal intrusion into state control of education would be limited. Or if, instead, NCLB proponents attempted to mollify critics by giving schools more flexibility – for example, by permitting them to escape condemnation for not meeting impossible academic benchmarks by citing other measures, like attendance rates or parent satisfaction – the NCLB enthusiasts would balk at this backdoor way of “leaving children behind.”
There is no way out of this impasse, I assured Diane. NCLB will limp along past its 2007 expiration date, with no possible map for reauthorization, with temporary annual continuing resolutions while proponents fruitlessly attempt to conceive of ways to climb out of the holes into which they had dug themselves. Eventually, I told Diane, by 2016 we’ll still be requiring all children to be proficient by 2014, and declaring virtually every school in the country to be failing. At some point, I predicted, some Secretary of Education will have no choice but to issue waivers from the law’s requirements to every state in the country while the law itself remained on the books, an embarrassing monument to policy foolishness.
Everything I predicted has now come to pass, and I should be able to call Diane’s hand and collect my dinner at the River Café. But I’m afraid I must concede. I won the bet on technical points, but Diane won on the merits. The glass really is half-empty, maybe more so.
What I had not anticipated was that a Secretary of Education (Arne Duncan, it turned out to be) would use his authority to grant waivers to states (now all of them) unable to meet NCLB’s requirements, conditioning the waivers on states’ agreements to adopt accountability conditions that are even more absurd, more unworkable, more fanciful than those in the law itself. Mr. Duncan’s philosophy has been revealed: if a policy fails, the solution should be to do more of it.
So the secretary is now kicking the ball down the road. States will be excused from making all children proficient by 2014 if they agree instead to make all children “college-ready” by 2020. If NCLB’s testing obsession didn’t suffice to distinguish good schools from failing ones, states can be excused from loss of funds if they instead use student test scores to distinguish good teachers from bad ones. Without any reauthorization of NCLB, Mr. Duncan will now use his waiver authority to demand, in effect, even more test-prep, more drill, more unbalanced curricula, more misidentification of success and failure, more demoralization of good teachers, and more needless stress for young children.
The Obama administration is presenting its waiver proposal as the grant of new “flexibility” to states. Yes, perhaps. If states agree to implement Mr. Duncan’s favored reforms of evaluating teachers by student test scores and expanding charter schools, and if states promise to meet even more impossible “college ready” standards established by the federal government, the secretary will let them figure out on their own how to do it.
Some Republicans have complained. The secretary, they say, cannot do an end run around Congress by implementing his own more extreme version of No Child Left Behind, when he has been unsuccessful in getting Congress to enact these very same proposals into the law itself. But these critics, most of whom supported NCLB in 2002, have only themselves to blame. They initially wrote into the law the right of a secretary to issue waivers based only on his or her own personal fantasies about what constitutes a state pledge to “increase (sic) the quality of instruction … and … improve academic achievement” – to be precise, in NCLB‘s Title IX, Part D, Sections 9401(b)(1)(i) and (ii).
And Arne Duncan has gotten away with this before. Here, Democrats should be ashamed. In Feb. 2009, when the American Recovery and Reinvestment Act (the ARRA, or “stimulus” bill) was enacted, Republicans charged that the law had little to do with job creation or economic growth, but was only a subterfuge for the Obama administration to make social policy without congressional debate. Mostly, the Republican charge had no merit but in the case of education policy, it hits the mark. The secretary has been distributing $5 billion in ARRA grants only to states that entered and won his “Race to the Top” competition by promising to raise standards even higher than those unachievable under NCLB. These so-called stimulus funds are not distributed to states with the highest unemployment rates but to those that outbid others by promising to establish data systems to evaluate teachers based on students’ math and reading scores, be most ruthless in firing teachers and principals in schools with low scores, and replace them with the most rapid expansion of charter schools.
The Duncan policies, like NCLB, will eventually implode. But the damage being done to American public education has now gone on for so long that it will have enduring effects. Schools will not soon be able to implement a holistic education to disadvantaged children. Disillusioned and demoralized teachers who have abandoned the profession or have retired are now being rapidly replaced by a new generation of drill sergeants, well-trained in the techniques of “data-driven instruction.” This cannot easily be undone.
Some state education officials have murmured intents to refuse the Duncan waiver conditions, and dare him then to withhold federal education dollars. But there is little indication that these officials will follow through, or that others will join the resistance. Most states will meekly apply for the Duncan waivers. Courage is in short supply among education and policy leaders.
So Diane, start perusing the menu. My victory on points is to no avail. I owe you dinner.
The State Department announced today in the Federal Register that its Bureau of Educational and Cultural Affairs (ECA) will be conducting “on-site reviews” of 14 of the biggest sponsors involved in the Summer Work Travel (SWT) program, the largest category in the J-1 visa Exchange Visitor Program. “Sponsors” are the private sector entities to whom the State Department has outsourced the management functions of the J-1 program. Sponsors profit from fees paid by the student participants, and then contract with employers and staffing companies across the country that ultimately hire the J-1 students in a variety of industries, for example at national parks, amusement parks, restaurants, drug stores, canneries and factories. Last year, 132,000 foreign students from around the world came to the U.S. to work for four months in the Summer Work Travel program, making it one of the largest guestworker programs in the U.S.
EPI has previously detailed the numerous problems inherent in the entire J-1 program. The allegations that led to the recent strike by J-1 student workers at the Hershey Chocolate Company in Pennsylvania are clear examples – and have resulted in a handful of federal investigations. Thus, I welcome any review or evaluation of the program and the entities involved. Nevertheless, I am puzzled by today’s notice.
The Department claims that it will conduct these on-site reviews in order to “enhance its continued oversight and monitoring of designated sponsors” because it intends “to evaluate regulatory compliance” with the new regulations that went into effect in July. If that were truly what the Department intended to accomplish – then this notice in the Federal Register, and this type of “review” instead of an actual investigation – is far from the best way to determine whether the program is functioning properly.
Why issue a public notice that affords all sponsors one-to-three months to prepare for an impending on-site review? Is this just a PR stunt?
And then there’s the substance of the on-site reviews, which is baffling. Before the actual on-site review takes place, which will last two business days, each sponsor will be notified in writing, and will have 10 business days to respond to requests for documents, and to prepare for the visit. If the State Department is supposed to be the cop on the J-1 beat (which it should be), then this is an odd way to uncover misbehavior. Giving the sponsors two full weeks to cover up, delete or destroy any evidence of wrongdoing will not help the State Department get to the bottom of it.
Also, many of the serious problems that occur in the program happen at the workplace – not the sponsor’s corporate headquarters – and are potential violations of labor and employment laws. The administrative functions and roles of the sponsors are less important than whether the J-1 student has been paid the minimum wage or was working in a safe environment. Thus, it would make much more sense to conduct surprise, on-site reviews of the employers where the J-1s are actually employed. That way the State Department could evaluate whether the students are safe and are being treated fairly – and if they’re not, the ultimate responsibility would fall on the sponsors, whose job it is to oversee and ensure that the employers are flying straight. If they’re not, then both the employer and sponsor should be kicked out of the program.
Another problem with State’s review is that officials will not be speaking with or interviewing the actual J-1 student participants about any problems they may have had with the program or their particular sponsor. As I’ve learned anecdotally from some colleagues who advocate on behalf of J-1 student workers, when State conducts an investigation regarding a particular complaint, its investigators almost never speak with the J-1 worker or the employer. Instead, they only speak with the sponsor, who has a financial interest in avoiding sanctions by State. This conflict of interest makes it highly unlikely that the sponsor will be a zealous advocate for the J-1 worker who may have suffered abuse, or that the sponsor will be forthcoming with any evidence that would make it look bad. Officials of well-established sponsors which have been in business for decades also have established relationships with the State Department staff, which can create inappropriate expectations between the investigator and the subject of the investigation. Ideally, the investigation would be at arms length. These visits will give sponsors an opportunity to personally lobby the Department about the final regulations, which have not yet been issued, and indeed on page 3, the Department admits as much, saying that these on-site reviews are “an opportunity for sponsors to provide feedback” about the rules generally.
The State Department’s review of some of the sponsors in the J-1 Summer Work Travel program could have been a step in the right direction, but by publicly notifying and giving sponsors time to prepare for it, and by not reviewing work sites or interviewing employers and J-1 student workers, the actual value of this action might prove to be negligible.
I was asked by the Congressional Black Caucus for their “For the People” Jobs Commission to discuss the needs of and challenges confronting groups such as the chronically unemployed, the underemployed, new labor force entrants, and formerly-incarcerated individuals in the current labor market. One point I made was that a tight labor market—a labor market with strong job growth and low unemployment—benefits all groups.
I illustrated this point with the example of black youth—new labor force entrants—over the 1989-2000 and 2000-2007 business cycles. The business cycle from 1989 to 2000 had strong job growth; the business cycle from 2000 to 2007 had weak job growth.
For black 16-to-24 year olds who were not enrolled in school, the strong job growth over the 1989-2000 business cycle shaved 3.7 percentage points off their unemployment rate. This decline in the black youth unemployment rate was three times as large as the 1.2 percent decline in unemployment for white youth.
In contrast, the weak job growth of the 2000-2007 business cycle added 1.5 percentage points to the black youth unemployment rate. While the 1989-2000 business cycle put 72,000 black youth into jobs, the weak 2000-2007 business cycle reduced the number of black youth employed by 29,000. These comparisons provide an important reminder that macroeconomic policy strongly affects disadvantaged groups. Robust job creation not only benefits Americans generally, it also provides benefits specifically for black youth and other groups with challenges finding work.
While the country faces a jobs deficit of over 11 million jobs and a national unemployment rate of 9.1 percent, it will be difficult to improve employment outcomes for the chronically unemployed, the underemployed, new labor force entrants, and formerly-incarcerated individuals. We need strong job creation to put us in the best position to help these groups.
Today marks the one-year anniversary of several elements of the Patient Protection and Affordable Care Act, notably the provision allowing young adults up to age 26 to stay on or join their parents’ employer-sponsored health insurance policy.
Several folks blogged about this last week, notably Health and Human Services Secretary Kathleen Sebelius, Sara Collins, Tracy Garber, and Karen Davis of the Commonwealth Fund, and writer Jonathan Cohn. They all cited the newly released Census data on health insurance, which detailed how the uninsured rate for young adults, 18-24, fell between 2009 and 2010 and, in fact, this was the only age group with a statistically significant decline in their uninsurance rate. They argued that the health insurance provision allowing young adults to stay on or join their parents’ employer-sponsored health insurance policy is to credit for this up-tick in coverage.
This week, Kevin Sack of the New York Times, wrote a piece reiterating their points, with more recent data through March 2011 from the National Health Interview Survey. While there’s much hand-waving about how we can credit health reform for the increase in health insurance coverage among young adults, it’s relatively easy to compare health insurance numbers with labor market statistics to find compelling evidence of initial signs of health reform success.
In this figure, I compare changes in the employment rates and the rate of employer-sponsored health insurance for various age groups between 2008 and 2009. As you can see, employment rates fell for each group as did employer-sponsored health insurance. This is not surprising given the fact that most people find health insurance on their own job.
Next, I compare these same changes in employment rates and health insurance rates for various age groups between 2009 and 2010. As you can see, the job-market didn’t do young adults any favors. In fact, their employment rate actually fell further than any other age group. Given the close relationship between labor market outcomes and employer-sponsored insurance, we would expect declines in coverage for all groups. What we see instead is that employer-sponsored health insurance actually rose among young adults, while it fell for all other groups.
So, how many young adults took advantage of this new provision? A back of the envelope estimate of what young adult coverage rates would have been if the 2008-09 relationship between employment and insurance had held for 2009-10 would be a 1.1 percentage point drop in insurance rates for young adults in 2010. Instead, we see here that insurance rates actually rose by 0.6 percentage points instead of falling by 1.1 percentage points — basically, this means that up to 490,000 young adults may have obtained coverage in 2010 because of the health reform provision.
Given the fact that the labor market continued to decline for young adults, my guess is that a closer look at the Census micro-data would confirm the fact that a greater number of young adults are gaining dependent coverage through their parents’ policies. Even without that added analysis, these figures alone are compelling evidence in support of the argument that health reform is beginning to work.
UPDATE 9/26: Looks like the TPC has “retracted” the estimates below citing an error “which involved rollover distributions from 401(k)s and similar retirement plans, caused us to significantly overstate the income of some high-income taxpayers and thus understate the tax rates they paid.” I don’t know how much of a difference this will make, but I suspect that the overall distribution will only be moderately effected, and only at the very top. I’ll post the new results when the TPC makes their correction.
The table below, adapted from a Tax Policy Center table here, shows the effective federal tax rate people pay in different income categories. (The “effective” rate is simply the total taxes paid divided by income, and will be lower than the statutory marginal rate because there are a variety of deductions, credits, and tax preferences in the code.)
See below as I’ve added some color to the table to help show how rates vary with income levels. Darker reds represent lower effective rates, and darker greens represent higher rates.
Paul Krugman (and others) have used this data to demonstrate that even though, on average, millionaires pay a higher effective rate than the average of those in the middle, there are still many millionaires that pay less than most in the middle class. For example, at least 25 percent of millionaires pay a lower effective rate (12.6 percent or below) than most people making between $40,000 and $50,000 (13.1 percent or higher).
When interpreting the Buffet principle, we need to decide what rate to use to set as a minimum rate for millionaires. For example, do we want millionaires to pay on average more than the middle on average? If so, we’re already there.
Or do we want to ensure that all millionaires pay more than the middle-class pays on average? If so, then we need to change the tax code so that millionaires pay something like a minimum of 13 percent, if we set the “middle-class” at the $30,000-$75,000 range. This would mean an increase for about a quarter of millionaires.
Or do we want to ensure that all millionaires pay at least as much as just about anyone in the middle class? In this case, the target would be closer to a 25 percent effective tax rate, increasing taxes on about half of millionaires.
The spirit of the Buffet rule is clearly not the first category – the outrage stems from the fact that some significant fraction of millionaires do indeed pay less than a large share of the middle. This points to policy changes that would indeed increase revenue from many of those at the top (at least a quarter, and perhaps as much as half or more) that have found ways to lower their tax share to levels that are below many in the middle class.
This morning the U.S. Census Bureau released state and local data on poverty levels, income, and health insurance coverage from the 2010 American Community Survey (ACS). Echoing the national trends seen in the Census Bureau’s recent release from the Current Population Survey, many states and communities are still feeling the lingering effects of the Great Recession.
Median annual household income fell in 35 of the 50 states and the District of Columbia between 2009 and 2010, with the remaining 15 states showing no change in median household income whatsoever. According to the ACS, the nationwide median income fell by 2.2 percent, but the median income dropped by more than 5 percent in seven states: Alaska (5.2 percent), Arizona (5.8 percent), Connecticut (6.1 percent), Idaho (5 percent), Nevada (6.1 percent), Oregon (5.5 percent), and Vermont (6.1 percent).
Only 20 states now have a median annual household income above the national figure of $50,046. Maryland and New Jersey have the highest median household incomes, both above $67,000. Mississippi, West Virginia, and Arkansas have the lowest median incomes, all of which are below $40,000.
Additionally, the distribution of income became more unequal in nine states over the past year. While income inequality did decrease for three states—North Dakota, West Virginia, and Texas—this change provides little consolation. North Dakota and West Virginia saw no change in median income—West Virginia’s median income remains the second-lowest in the country—and Texas’ median income decreased by one percent. In other words, income inequality went down in these three states either because gains at the bottom of the income distribution equaled the losses at the top, or in the case of Texas, the state on the whole simply became poorer.
The survey’s poverty and child poverty numbers are also frighteningly high. The national poverty rate is at 15.1 percent, but it runs as high as 20.4 percent and 22.4 percent in New Mexico and Mississippi, respectively. The percentage of children living in poverty is at or above 20 percent in 24 states and the District of Columbia.
The data also show that some elements of the safety net have played an important role at helping families bearing the brunt of the recession. Reliance on cash assistance income has increased over the last year. In seven states, at least one in every 25 households relies on cash assistance. In both Maine and Alaska, more than 5 percent of families receive cash assistance. At the same time, in 35 states, more than 10 percent of households receive food stamps. Nationwide nearly 12 percent of households are food stamp recipients.
Finally, the data also shows that in 20 states, more than 15 percent of people do not have health insurance coverage. The highest proportion of uninsured people is in Texas, where nearly one in four residents (23.7 percent) lacks health insurance, including 14.5 percent of children.
The Great Recession may technically be over, but today’s release is a clear reminder that America’s communities are still struggling. See the full ACS release here.
Unemployment insurance (UI) benefits in this economic downturn have helped cushion the blow of job loss for millions of families. A case in point: the Census Bureau estimates that 3.2 million people, including nearly a million children, were kept out of poverty by unemployment insurance in 2010 (see slide 25 here). But could the extensions of UI benefits over the last three years have at the same time made the labor market substantially weaker by providing a disincentive for unemployed workers to return to work quickly, as some economists (perhaps most famously here) have claimed?
The answer is a resounding no. In the most careful study to date on the effects of UI extensions on job search in the Great Recession, Jesse Rothstein finds that the unemployment rate in Dec. 2010 would have been about 0.3 percentage points lower if UI benefits hadn’t been extended. The unemployment rate that month was 9.4 percent, up from 5 percent in Dec. 2007, an increase of 4.4 percentage points. Thus, according to Rothstein’s findings, a very small fraction – 0.3 out of 4.4 — of the increase in the unemployment rate during the Great Recession and its aftermath can be attributed to the UI extensions. And a few additional points make the case even clearer:
- Rothstein shows that at least half of the extension-induced increase in the unemployment rate comes from the fact that workers who receive UI are less likely to give up looking for work. Keeping people in the labor force actively seeking work is arguably a good outcome of UI benefits — and could actually increase the share of the long-term unemployed that later finds a job — but it raises the measured unemployment rate. His estimates imply that less than 0.2 percentage points of the 4.4 percentage point increase in the unemployment rate over the Great Recession was due to an extension-induced reduction in the rate at which workers get a new job, which is the disincentive effect policy makers are actually concerned about. Moreover, even that may be a good thing — a small UI-induced increase in the time it takes for an unemployed worker to get a new job is an asset of the UI program to the extent that it affords unemployed workers the needed space to find a new job that matches their skills and experience or keeps individuals and families from making inefficient choices just to put food on the table and pay bills.
- Furthermore, while Rothstein documents a small UI-induced reduction in the rate at which extension-recipients find a new job, that may not translate into a higher unemployment rate, due to what he calls “congestion in the supply side of the labor market.” He is unable to account for it in his paper, but the intuition is straightforward. Job opportunities plummeted in the Great Recession. From the spring of 2009 through the end of 2010, there were at least five unemployed workers per job opening (see Chart 1 here). In fact, there were (and are) fewer job openings than workers receiving extended UI benefits. There are simply not enough jobs to go around, extensions or no. Extensions have likely affected the mix of the unemployed, with a slight shift of jobs from UI-recipients to other job-seekers, as recipients have more room than non-recipients to take time to find a job that matches their and their family’s needs. But given the lack of job openings, it is a significant leap from a small reduction in the rate of job finding for recipients to an increase in the unemployment rate.
- Finally, Rothstein’s paper looks only at the microeconomic effect of UI extensions on job search and reemployment for recipients. It doesn’t say anything about the macroeconomic effect. Spending on UI extensions is an extremely effective mechanism for injecting money into the economy since the long-term unemployed are, almost by definition, strapped for income and very likely to immediately spend their UI benefits. This spending creates demand for goods and services and generates jobs. In 2010, spending on UI benefits for the long-term unemployed was supporting around 620,000 jobs (see Table 1 here). All else equal, these 620,000 jobs lowered the unemployment rate by around 0.4 percentage points, (and all of that reflects new jobs, not workers dropping out of the labor force). Putting the micro- and macro-estimates together, there is no doubt that the extensions of unemployment insurance benefits in recent years have not increased the unemployment rate. There is also no doubt that these benefits have provided a lifeline to laid-off workers and their families during a time when job-finding prospects are brutally weak.
Last week, we highlighted that the vast majority of gains in wealth since 1983 accrued to the top 5 percent of households and actually declined for the bottom 60 percent. Perhaps the statistic that best illustrates the disparity is median wealth, which is the wealth of the household that has more wealth than half of households and less than the other half. If gains had been equal from 1983-2009, the typical household’s wealth would have risen to $100,900, up $29,000 from $71,900 in 1983. Instead, median wealth declined 13.5 percent to $62,200.
It is also sobering to examine the racial difference in wealth trends. Wealth for the median black household has nearly disappeared, falling from $6,300 in 1983 to $2,200 in 2009 – a decrease of more than 65 percent. This means half of black households have less than $2,200 in wealth. Among white households, median wealth has fallen substantially since 2007, but at $97,900, remains higher than the 1983 level of $94,100. White median wealth is now 44.5 times higher than black median wealth.
Racial disparities in income and unemployment have been exacerbated by the Great Recession, and the persistent high unemployment ahead of us will do more damage unless we create more jobs now.
This post just highlights one of many wrongs – it’s hand-wringing over Fed actions that might “erode the already weakened U.S. dollar.” Weakening the dollar is just what the U.S. economy needs to do to support a real economic recovery. Since the phrase “weak dollar” is a PR disaster, let’s just call it a “competitive dollar,” or even a “lean and mean dollar;” but, whatever you call it, it’s necessary if we want net exports to be a contributor to overall growth rather than a drag.
The figure below shows the contribution of net exports to GDP growth since 2000 – an overvalued dollar has led trade flows to be a consistent drag on growth for pretty much the entire period except for the Great Recession – when spending on everything (including imports) plummeted and led trade to be a stabilizing force.
So, to recap – the GOP Congress is against fiscal support to the economy, is against monetary support, and thinks a lean and mean dollar is a bad thing. That’s three-for-three in arguing against the only policies we have that can create jobs and lower unemployment in the near-term. It’s going to be a very long election season indeed for Americans looking for work.
Republican leaders in Congress are trying to push the Federal Reserve towards inaction (and simultaneously demonstrating why the Fed was designed to be somewhat independent from Congress) via a stern letter to Chairman Ben Bernanke and the rest of the Federal Open Market Committee. (Read full text below).
In an effort to help my former colleagues at the Fed, I’ve put together some quick pointers to answer the demands from the letter, namely the following:
“Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.”
Obviously, they should feel free to elaborate…
1. “Goals:” To increase the growth rate of GDP, reduce unemployment, and prevent a deflationary spiral that would damage the recovery or create a double-dip recession.
2. “Direction for success:” Not sure what the heck this means. But the theory is that monetary intervention — through an interest rate channel or other — will lead to greater business investment and consumer spending, yielding more demand, higher GDP, and lower unemployment consistent with the overall goals in No. 1.
3. “Ample data proving a case for economic action:” Fourteen million people unemployed and the unemployment rate at 9.1 percent. Zero payroll employment growth in August. A jobs gap of 11 million. GDP growth of 1 percent in 2011Q2; 0.4 percent in 2011Q1. Employment/population at 58 percent. A staggering 4.3 unemployed workers for every job opening. Poverty at 15 percent. Median incomes fell by over $1,000 in 2010, have fallen by over $3,000 since 2007, and are lower than they were in 1997. Shall I go on?
4. “Quantifiable benefits to the American People:” More jobs, higher incomes, lower poverty, more innovation and investments, higher corporate profits, more hot dogs consumed at baseball games, lower mortgage rates. The Fed’s got better macro models, I’ll let them do the actual quantification.
Full text of letter:
Dear Chairman Bernanke,
It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people.
It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate. To the contrary, there has been significant concern expressed by Federal Reserve Board Members, academics, business leaders, Members of Congress and the public. Although the goal of quantitative easing was, in part, to stabilize the price level against deflationary fears, the Federal Reserve’s actions have likely led to more fluctuations and uncertainty in our already weak economy.
We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.
Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers. The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy if measurable outcomes cannot be demonstrated.
We respectfully request that a copy of this letter be shared with each Member of the Board.
Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor
While there are numerous job creation proposals that would meaningfully lower unemployment, some lawmakers are pushing counterproductive policies disguised as job creation packages. The proposed repeat of the corporate tax repatriation holiday is one such wolf in sheep’s clothing. The repatriation holiday would allow U.S. multinational companies to return foreign profits at a tax rate of 5.25 percent instead of the 35 percent corporate tax rate, repeating a 2004 corporate tax holiday that failed to produce its intended effects. Today, non-financial U.S. businesses are sitting on over a trillion dollars in cash but still aren’t hiring; increasing aggregate demand, not the supply of corporate cash, is the solution to jobs crisis.
A recent report by the Center on Budget and Policy Priorities details why another repatriation holiday would fail to create jobs, counter-productively push investment and jobs overseas, and add to the long-term budget deficit. Firms used the 2004 tax holiday predominantly to boost share prices,
and many of the firms actually laid-off thousands of American workers shortly after repatriating billions of dollars at the lower rate.
Dharmapala, Foley, and Forbes (2009) estimate that every dollar of repatriated foreign earnings was associated with a 92 cent payout in stock repurchases and dividend payments even though these were explicitly prohibited (money is fungible). Inflating the S&P 500 amounts to corporate welfare, not a jobs program.
So why would lawmakers double-down on this failed experiment in corporate tax policy? A recent report by NDN argues that a repatriation holiday will generate $8.7 billion over the next decade. This finding (and the entirety of the report) rejects the Joint Committee on Taxation’s estimate that a second repatriation holiday would result in $78.7 billion of lost revenue over a decade. The NDN report arrives at a different conclusion by stripping out JCT’s behavioral assumptions that (1) repatriation would fall several years after the holiday, and (2) that firms would reorganize, shifting earnings to foreign markets and patiently waiting for the next repatriation holiday.
Regardless of past evidence related to the 2004 repatriation holiday, you cannot extrapolate behavior from a onetime to repeated event. The 2004 repatriation holiday was sold as a one-time-only event. If companies are now led to believe that every 5-8 years they can bring foreign earnings back at a negligibly low tax rate, they would be foolish to repatriate any income at the 35 percent statutory rate.
The clear impact of another repatriation holiday would reduce the expected effective tax rate for foreign earnings, inducing companies to shift more operations overseas.
Economists care about moral hazard for a reason. The moral hazard associated with repeating the repatriation holiday—leaps and bounds beyond that of the first holiday—risks decreased investment and employment in the United States while exacerbating long-term budget deficits (the ones that matter). JCT’s behavioral concerns are well founded and cannot be ignored. Consequently, this policy would be bad for employment and bad for the federal budget.
Ellen Schultz’s new book, Retirement Heist, illustrates in lurid detail the failure of the American model that relies on employers to provide “fringe” benefits that may actually be life-or-death necessities. Like Michael Moore’s Sicko, which focused on health insurance shenanigans, Schultz doesn’t focus primarily on the have-nots (in this case, the roughly half of all American workers not covered by any kind of retirement plan), but rather on the erstwhile haves: people who thought they had jobs with good pension and retiree health benefits.
In the postwar decades, the system worked reasonably well for many middle-class workers. But by the Gordon Gekko 1980s, corporations realized they had a lot to gain by reneging on these promises. More precisely, the executives of these companies had a lot to gain, since their compensation was increasingly tied to short-term gains at the expense of the companies’ long-term health and reputation, a connection Schultz doesn’t quite make.
Schultz is one of the best reporters around when it comes to exposing corporate malfeasance, and Retirement Heist, despite its depressing subject matter, is a page-turner. Schultz and her former Wall Street Journal colleague Theo Francis, for example, were behind the “Dead Peasants” story Moore covered in Capitalism, a Love Story. If Capitalism left you wondering how the scam worked (how do companies profit from taking out life insurance policies on their employees?), this and myriad other tactics are detailed in her new book.
Schultz’s muckraking is first rate, but her analysis can occasionally be off. For example, she chastises corporate pension funds for supposedly low-balling rate-of-return projections in the go-go 1990s, when realized returns on pension fund assets were much higher than the 9 percent projections. Later in the book, she zings public funds for doing the opposite, using projections that (while lower than historical returns) are higher than the risk-free Treasury rate. While she’s hardly alone in picking on the public funds, I respectfully disagree.
The Washington Post’s editorial board was quick to rebuke President Obama’s recommendations to the Select Joint Committee on Deficit Reduction for not going far enough:
“The president’s plan would leave the debt at an unhealthy 73 percent of gross domestic product. The Simpson-Bowles plan would reduce that number to 65 percent, a still high but far less troubling level.”
What is driving this debt target of 65 percent, or 60 percent for that matter? Numerology comes to mind, as does austerity for austerity’s sake.
Let’s be clear – addressing the jobs-crisis is the most important near-term necessity – and if doing so drives the debt to greater than 60, 65 or 73 percent of GDP (or any other magical number), that’s fine.
Over the medium-term, stabilizing the trajectory for the debt-to-GDP ratio is a reasonable goal. But, there is no evidence at all that stabilizing it at 73 percent is more dangerous or troubling than any other number. (Click here for wonky footnote).
Reducing public debt-to-GDP by another 8 percentage points in 2021 would reduce annual debt service by roughly 0.3 percentage points of GDP. On the other hand, the steps required to achieve this fiscal contraction will also reduce economic activity in an economy that is years and years away from full employment. In fact, the economic activity suppressed by a fiscal contraction needed to achieve the Post‘s totally arbitrary target by 2021 would see foregone tax revenues and increased safety spending that would surely lead to a more than 0.3 percent of GDP deterioration in the budget. And millions of job-years lost to unemployment.
Our long-term budget blueprint Investing in America’s Economy, as adapted for the Peter G. Peterson Foundation’s Solutions Initiative, stabilized debt-to-GDP at 77 percent in 2021 and 82 percent by 2035. We thought investing $2.5 trillion over the next decade to put America back to work building a more competitive economy was more important than embracing austerity and targeting an arbitrary debt level. And again, there is no serious evidence that can be brought to bear suggesting that we’re wrong.
Footnote: Much of the policy rationale for targeting a lower debt ratio comes from Carmen Reinhart and Kenneth Rogoff’s paper Growth in a Time of Debt, which argues that economic growth becomes hindered when government debt exceeds 90 percent of GDP, but this research fails to identify causality. Slow growth can just as easily account for higher debt accumulation. And as my colleagues John Irons and Josh Bivens explain in this paper, the Reinhart and Rogoff results are inapplicable to the United States because the data sample is entirely sensitive to the post-war demobilization, in which economic contraction was driven by large spending cuts, not contemporaneously high debt. Stripping out 1945 and 1946 from the sample yields 2.8 percent average growth for all other years in which government debt exceeds 90 percent of GDP. (Note: their specification uses gross government debt rather than the more applicable measure—debt held by the public, which dictates market interest rates and any crowding out effects—so the 90 percent threshold isn’t an apples-to-apples comparison with the public debt levels discussed above.)
Debt hysteria yanked the national policy focus away from the economic recovery, toward the counterproductive debt ceiling debacle. The policy debate is finally pivoting back to job creation, but it should never have strayed, as is demonstrated by the abysmal 0.7 percent growth in the first half of this year and recent jobs reports. When it is time to think about longer-run fiscal problems, solutions should be informed by actual evidence, not hand-waving about debt targets that sound “troubling” for some ill-defined reason.
And how is the austerity camp faring in Europe? This week’s leader in The Economist finally proclaimed austerity a massive failure: “Sharply cutting budget deficits has been the priority—hence the tax rises and spending cuts. But this collectively huge fiscal contraction is self-defeating. By driving enfeebled countries into recession it only increases worries about both government debts and European banks.” This sounds a lot like Reinhart and Rogoff’s causality reversed. Whoops.
One of the persistent criticisms of President Obama’s fiscal plan is that it counts war spending reductions as savings. Basically, the Congressional Budget Office calculates its defense baseline in part by taking the most recent war supplemental (technically called Overseas Contingency Operations, or OCO) and assuming that amount—adjusted for inflation—will be spent each year over the foreseeable horizon. This adds up to about $1.73 trillion over 10 years. The president’s proposal, however, includes only $653 billion in OCO spending over 10 years, for a savings of about $1.1 trillion.
Some critics, however, allege that these savings cannot be counted because the CBO OCO baseline itself isn’t realistic, therefore the savings are not “real.” For example, the Committee for a Responsible Federal Budget (CRFB) argues that counting these savings is a “budget gimmick” that the president uses to “inflate his savings.” According to this critique, another baseline for OCO expenditures should be used—either the president’s budget request or the CBO’s drawdown policy option—which would lower the baseline and make it practically impossible to generate budget savings from reducing war spending.
All due respect to CRFB and the other critics, but this criticism is silly. The CBO OCO baseline isn’t “unrealistic”—rather, it represents the costs of President Bush’s aggressive invasion-centered approach to foreign policy extended into perpetuity. President Obama is, thankfully, in the process of trying to change America’s approach to foreign policy, drawing down troops from Iraq and Afghanistan and moving toward a more multilateral, patient, diplomatic, and most importantly, less expensive approach. Furthermore, the fiscal plan proposes to cap OCO spending, thereby making sure those savings are realized.
President Obama’s foreign policy approach costs less money than President Bush’s, and the budget outlook should reflect those savings.
This week, House Republicans are continuing with their repeated criticisms of EPA regulations as a threat to the economy, and are about to vote on legislation calling for a new panel to study the cumulative effect of certain EPA rules and delaying, perhaps indefinitely, the implementation of two key rules. This stonewalling approach is misguided: the combined costs of the EPA rules advanced by the Obama administration are not a threat to the economy. Once fully in effect:
- The cumulative compliance costs of EPA rules finalized so far during the Obama administration will amount to between 0.04 percent and 0.07 percent of the economy
(Unless otherwise noted, all the findings in this post can be found in my report from last week).
- The cumulative compliance costs of rules finalized or proposed (assuming all rules proposed so far are finalized) by the Obama EPA will amount to between 0.11 percent and 0.15 percent of the economy.
It is entirely implausible that compliance costs that comprise such a small share — about one-one thousandth — of the economy can have a huge effect on the economy’s direction, but that is what EPA opponents have been asserting for some time. The proposition that these rules are a serious concern for the economy is especially unlikely when one considers:
- The rules would yield significant economic benefits — ranging from increased productivity by healthier workers or consumer savings due to greater fuel efficiency — that partly or in some cases fully offset the compliance costs.
- The costs of EPA rules are often overstated by the government itself (see pages 21-23 of this EPI report from April).
- The rules are phased in over several years, facilitating necessary compliance.
While the overall economic effects of these rules will be negligible, the health benefits will be profound, saving tens of thousands of lives and dramatically reducing respiratory diseases and heart attacks. When these health benefits are quantified in dollars, the EPA rules finalized and proposed so far by the Obama administration have net benefits that could exceed $200 billion a year.
To be sure, some important EPA rules may yet be proposed by the Obama administration, and their costs, and their benefits, should also then be considered. But the evidence to date is clear: the hue and cry over the effect of EPA regulations on the economy is a counterproductive distraction. The lopsided attention to this topic is making it harder for the nation and Congress to focus on the changes in policies that could actually significantly improve the employment situation.
President Obama’s Super Committee proposal makes the case for $1.6 trillion in new revenue from tax reform that would lower tax rates, close loopholes such as the ones that exist for oil and gas companies, roll back the Bush tax cuts for upper-income earners, and restore fairness in the tax code. Included in this package of revenue policies is something the president has dubbed the “Buffett Rule,” which states that people making over $1 million should not pay lower taxes than those in the middle class.
The Buffett rule is less a specific policy and more of a guiding principal, the concept of which could not come at a more appropriate time. While our income tax code includes six marginal tax rate percentages, the highest-income taxpayers often end up paying lower marginal rates than those in the middle class, because 1) tax subsidies tend to disproportionately benefit high-earners, and 2) the rate at which capital gains and dividends are taxed is much lower than the rate at which wage income is taxed. This is why Warren Buffett pays a lower tax rate than his secretary.
In fact, the highest income households are enjoying some of the lowest taxes in generations. Since 1979, our overall average tax rate has fallen slightly, but for those at the top of the income ladder, the rate has fallen dramatically. While average tax rates went from 22.2 percent of income in 1979 to 20.4 percent of income, for the top 1 percent of households the rate has fallen from 37 percent of income to 29.5 percent of income, a reduction of over a fifth. It’s even more pronounced for the highest income earners: the tax rate for the top 400 households (average income $350 million!) fell from 26.4 percent in 1992 to 16.6 percent 15 years later, a nearly 40 percent reduction.
The diminished tax burden on high income earners has both expanded our deficit and helped make us a more unequal society. The Buffett rule is long overdue.
Note: Updated figures show that for 2008, the top 400 paid an average tax rate of 18%. This chart reports 2007 numbers because that is the most recent year the Congressional Budget Office offers information for both the top 1% of households and the average tax rate.
President Obama outlined a fairly progressive federal budget proposal for the Super Committee this morning, calling for upfront job creation, more revenue from high-earners, and preserving our commitments to children, the disabled, and the elderly. The proposal represents a balanced and progressive approach that addresses the root causes of our budget deficits, namely the Great Recession, a decade of ineffective and unfair tax cuts, and a decade of unfunded wars. Here’s a quick summary:
— $447 billion for the American Jobs Act
— $1.2 trillion in discretionary cuts (already enacted under the Budget Control Act)
— $1.1 trillion from drawing down troops overseas
— $577 billion from cuts to mandatory programs: about 40 percent are Medicare savings (mostly reducing overpayments), 10 percent are Medicaid/SCHIP savings, and the rest are from agricultural subsidies, federal employee benefits, and recalibrating government fees and program oversight
— $1.6 trillion, including $900 billion from allowing the Bush tax cuts to expire for high-earners and capping tax subsidies
— $436 billion in interest savings
There are many things in here for progressives to like. First, it focuses on job creation, including in the proposal the American Jobs Act that the president released last week. That’s as it should be—a continued downturn makes fiscal balance near impossible. The first step of the Super Committee must be getting the economy back on track, and the AJA is a good start.
Second, the proposal moves toward a more fair and equitable tax code. The guiding principle for reform is the so-called “Warren Buffet rule,” which holds that middle-class Americans shouldn’t be paying a higher tax rate than high-income Americans. Beyond addressing fairness, the proposal acknowledges that considerably more revenue is needed; the alternative spending-cuts-only approach would unacceptably force the brunt of deficit reduction on the backs of poor and working families. Furthermore, the president also issued a veto threat against any legislation that affects Medicare benefits without also including additional tax revenue from high-earners and corporations, a welcome sign that the president actually intends to use his constitutional powers as leverage in the coming negotiations.
Third, the proposal includes savings from winding down the wars in Iraq and Afghanistan. This reflects the fact that the wars in Iraq and Afghanistan are extremely expensive (nearly $1.3 trillion has already been appropriated for these wars over the last decade), and drawing them down entails substantial savings.
Fourth, the proposal generally takes the right approach to reforming health programs, doubling down on the health care reforms in the Affordable Care Act. On Medicare, it focuses on health provider savings while maintaining the commitment to seniors. The Medicaid savings are less positive, as they could shift costs to states and even undermine health care reform. But these proposals stand in stark contrast to the House Republican plan to turn Medicare into a voucher program—leaving seniors to fend for themselves in predatory, broken insurance markets—and cut Medicaid in half over the next two decades.
And fifth, the proposal does not cut Social Security, a recognition of the fact that the program does not impact the deficit over the long run. The president took a firm position that any Social Security reform must be done on a separate legislative track, one that focuses not on deficit reduction but rather on protecting it for future generations.
The outlined budget proposal would provide a counterweight to the lopsided discretionary spending cuts from the Budget Control Act and flip federal fiscal policy from being an obstacle to a force for economic recovery. This budget outline would also stabilize deficits and begin to reduce debt as a share of the economy in a balanced manner consistent with commitments to a fair tax code and economic security programs for children and seniors. Hopefully, the Super Committee will mirror this dual focus of strengthening the economy today and improving the long-term fiscal outlook in a balanced fashion.
As we have pointed out numerous times before, our country is currently experiencing – thanks to the Great Recession and weak recovery – a large jobs shortfall of around 11.2 million jobs. This includes 6.9 million jobs lost since Dec. 2007, plus 4.3 million jobs needed to keep up with population growth that weren’t created because of the downturn.
Presidential candidate Mitt Romney has recently addressed this jobs shortfall, coming out with a jobs plan that he claims would create 11.5 million jobs.
But would Romney’s plan actually create jobs anywhere close to this scale? “Believe in America,” his plan, is heavier on ideological rhetoric than it is on direct job creation solutions. In fact, nowhere in the 160 page plan could I find a stated job creation number – 11.5 million is a number Romney has quoted in public appearances, but it does not appear anywhere in his plan. The math doesn’t just appear to be fuzzy – it appears to be nonexistent. Not surprisingly, attempts to contact the Romney campaign for specifics on the 11.5 million miracle number went unanswered.
So what does Romney’s plan actually propose doing? He makes the George W. Bush-era tax changes permanent, at a cost of around $3.8 trillion over the next decade, and cuts the corporate income tax rate. He repeals the Affordable Care Act and financial regulatory reform. He pursues free trade agreements and creates something called the Reagan Economic Zone, which would basically be a partnership “codify[ing] the principles of free trade at the international level.” He goes after the NLRB and certain labor practices, focuses on private-sector job training, and promises to increase the legal immigration of highly skilled individuals. Finally, he promises to pursue a balanced budget amendment and a strict spending cap, both irresponsible policies that would make it extraordinarily difficult for the government to respond to economic crises. (Sweeping tax cuts coupled with a balanced budget requirement would also force big spending cuts, thereby reducing employment).
So Romney’s plan is really more of a conservative wish list of supply-side policies for stimulating long-term economic growth than a plan to put Americans back to work today or next year (or the year after next). And he relies on assumptions that don’t have a whole lot of foundation – for instance that trickle-down economics works or that it’s unhealthy for the federal government to ever run deficits. He also assumes that giving corporations lower tax rates will create more jobs, even though corporations are currently sitting on $1.12 trillion in cash and liquid investments, and waiting for demand to increase before hiring again. Romney then turns these supply side policies into a boost in near-term activity (4 percent per year for four years, versus 3.4 percent in the Congressional Budget Office’s economic projections). This better-than-expected growth is somehow translated into jobs numbers, without letting us see the math.
He also isn’t clear about what his jobs number means. Is it jobs created in addition to the number of jobs our economy is currently projected to create, or is it total jobs created? This is sort of an important point to clarify. In his speech Romney does say “new jobs,” but in reality a job is new both if it is projected to be created and if it is created on top of the number of jobs already projected to be created. Over four years, 11.5 million jobs breaks down into roughly 240,000 jobs created per month. Though significantly better than recent job creation, 240,000 jobs per month is a fairly modest target. In an economy coming out of a recession, monthly jobs numbers should be more on the order of 300,000–350,000 – something Romney’s plan would likely fall shy of accomplishing (again, it comes down to a short-term vs. long-term policy focus).
Richard Trumka, president of the AFL-CIO and a member of EPI’s Board of Directors, summed up Romney’s jobs plan by saying it can be reduced to two sentences: “Let rich people have a lot more money. And remove regulations and they’ll create jobs.” If we’ve learned anything from eight years of this tactic (2001-2008), it’s that this two-pronged strategy simply doesn’t work.
Sometimes, it’s worth documenting the obvious. A recession causes income losses for families pretty much across the board, but much more so the lower your income. That is, a recession drives up inequality between the top and the middle and the middle and the bottom. The primary driver of this inequality is that unemployment and reduced work hours hits those with low and middle earnings the hardest. We can see that by looking at changes in family incomes along with changes in their earnings and work hours, as we do by income in the figure below for families with children (under 18 years old).
Remember, income includes all the sources of income a family receives, such as: transfer income (e.g., unemployment compensation); dividend, interest or rental income; or earnings. Plus, a family’s earnings depend upon how many people in the family work, how much they work in a year (weeks per year and hours per week) as well as the level of their hourly wages.
The income losses from 2007 to 2010 were pervasive with those in the upper fifth losing 4.3 percent and larger (6.6 percent) losses in the middle and much larger losses (11.2 percent) for the bottom fifth. This is well known, or should be. This inequality is driven by the difference in reduced working time, as family work hours shrunk by 14.0 percent, 11.9 percent and 4.3 percent, respectively, for families in the lowest, middle and upper fifths. Not surprisingly, the pattern of reduced family earnings across income fifths corresponds to that of reduced work hours.
The implications are straightforward. Policies which generate jobs and greater work hours are key to reversing the income declines. Doing so is imperative for the broad middle class but will be especially important for the lowest income families who have seen their work opportunities and their incomes fall the most.
David Brooks writes a column with a pretty common theme: macroeconomics as morality tale. His overarching claim is that government is powerless to fight unemployment and near the end he sneers at those who expect some help from policymakers – “Many voters seem to think that government has the power to protect them from the consequences of their sins.”
I’m not much for the religious rhetoric, but if I had to identify any particular group of voters who had sinned, I’d argue that they have indeed been protected from the “consequences of their sins” by government.
I presume, though, that the sins Brooks has in mind is the big increase in household debt associated with the housing bubble? Again, if we’re identifying sinners, I’d nominate first the policymaking elites who didn’t just fail to see the housing bubble – they saw it and urged households to pile up more debt to keep it going. And I don’t see those guys facing severe consequences, outside of some mockery.
More important than the fact that his moral compass doesn’t seem to distinguish well between malefactors versus victims of the financial crisis, Brooks has the economics all wrong. Yes, household spending and residential construction collapsed when home prices fell, and the rest of the economy followed. What’s the “consequence” of this that government is allegedly unable to protect against? Less spending. Period.
Is the government really incapable of spending? It wasn’t that long ago that Brooks was lamenting the rise in spending in recent years. Or is it that government spending, unlike private spending, somehow doesn’t create jobs? But it does.
Brooks hand waves about how financial collapses in the past have led to long and brutal downturns as evidence that government is powerless. Actually, that’s just evidence that governments foolishly listened to counsels like Brooks in the past. We now know (or we should know) better.
William Gale, co-director of the Tax Policy Center, has dusted off a five-year-old plan to convert tax deductions for retirement savings into flat-rate refundable credits. Gale’s new proposal, like the one he co-wrote in 2006 with Jonathan Gruber and Peter Orszag, would make 401(k) subsidies less skewed toward high-income households.
In the new paper, Gale proposes a version that would raise tax revenues by $450 billion over 10 years by reducing the proposed government match from a revenue-neutral 30 percent to a revenue-raising 18 percent. These savings, which would come primarily from cutting tax breaks for households in the top income quintile, could stave off deeper cuts to other government programs or fund the president’s proposed jobs bill.
This seems like a no-brainer, and from a pure policy perspective, it is. Current tax breaks are very poorly targeted. For the same dollar contribution to a 401(k), high-income taxpayers in the 35 percent tax bracket get a tax break that’s three-and-a-half times larger than the tax break received by moderate-income taxpayers in the 10 percent bracket. Combined with the fact that high-income households can afford to save more, the result is that an estimated two-thirds of these tax breaks go to households in the top 20 percent of the income distribution. And since most high-income households are already saving, they can simply steer funds into tax-favored accounts, which is why “tax break” rather than “tax incentive” is the more accurate term.
Gale touts his plan as a progressive one, and in a sense it is, since it would reduce the cost of a highly regressive tax break while potentially easing the pressure on essential government programs. But there’s a difference between “less regressive” and “progressive.” Most of the subsidies would still flow to high-income households who can afford to save more and who also tend to get more help from their employers.
An 18% government match will not change the fact that high-fee, high-risk, 401(k)s are not an affordable retirement vehicle for low-income or even middle-income families. And since the funds are still taxed when they’re tapped for retirement, the value of the tax break remains tied to investment returns. (It helps to think of the tax break as a no-interest loan from the government, the value of which depends on how much you make investing the funds). This also tends to favor higher-income households who can afford to take on more risk.
If Gale’s plan isn’t a solution to the retirement crisis facing our country, isn’t it at least an improvement over the current system? Certainly, as long as it’s not oversold. Tweaking a broken system can forestall more far-reaching reforms. (This might partly explain why Orszag, in his new role as a Citigroup vice chairman, is still free to tout the plan). A more imminent concern is the fact that Gale promoted his plan at a recent Senate hearing as a way to help soften the blow of what he characterized as unavoidable Social Security cuts.
It’s also too bad that Gale proposed a lower government match rather than reducing the contribution limit. The 2001 Bush tax cuts increased the contribution limit from $10,500 to $15,000 and introduced a higher “catch-up” contribution for older workers (these limits are now indexed for inflation). Few middle-class households can afford to contribute $10,500, let alone the current limit of $16,500 (or $22,000 for those 50 and older). Lowering these limits but keeping the 30 percent match would be more progressive and have a real incentive effect, as middle-income households might actually increase their retirement saving, as opposed to high-income households simply shifting money around.
Happy birthday, economic meltdown! (Original title changed to make sure nobody actually thought I was genuinely enthusiastic about the economic crisis…)
Yesterday marked three years since Lehman Brothers filed for bankruptcy – the high-water mark of the financial crisis. Over the next six months, the stock market declined by nearly 40 percent and the economy lost 4.2 million jobs – a pace of job-loss not seen since (at least) the Great Depression.
This episode has firmly tied together the financial crisis and the jobs-crisis in most Americans’ mind. But we should actually be a little more careful about doing this. The economy had already been in recession for eight-and-a-half months before Lehman’s bankruptcy (having shed 1.2 million jobs in seven straight months of losses) and had already swallowed one stimulus package (the Economic Stimulus Act, passed in Feb. 2008 and signed into law by President George W. Bush) with just a small hiccup before continuing its way down. The unwinding of investment bank Bear Sterns (not to mention hundreds of smaller commercial banks) had been done in a more “orderly” manner six months before (it was sold to J.P. Morgan in March 2008) but job losses just accelerated after this. So maybe the subsequent economic damage wasn’t all about Lehman?
In fact, both Wall Street’s meltdown and the American jobs crisis are casualties of the bursting of the housing bubble. The 35 percent decline in home prices between the beginning of 2006 and 2009 damaged banks’ holdings of mortgage-backed securities, which famously caused so much havoc on Wall Street.
But the economic damage inflicted by the bubble’s burst spread far beyond banks’ balance sheets. These same home price declines erased about $8 trillion in household wealth and consumer spending collapsed by over $400 billion as a result. The glut of unsold homes (who wants to buy an asset that is diving in value?) led to another $400 billion contraction in the residential building sector. Basically, these two effects, combined with the collateral damage they caused (state and local government cutbacks as tax revenues plunged and a pullback of other business investment as firms saw sales dry up) meant that the economy was staring (at least) a $1 trillion hole in overall demand for goods and services square in the face. And this hole, along with policy responses that were insufficient, can easily explain the depth of the recession we had without any reference at all to what was happening in the financial markets on Wall Street.
So was the Lehman blow-up and associated panic all just a side-show to the issue of jobs? That’s probably too strong. There’s serious economic literature arguing that financial market seize-ups can have significant effects on the non-financial economy. So maybe instead of the $1 trillion hole that we ended up, with the economy would have had a $2 trillion hole had policymakers allowed financial markets to completely shutter (hence shutting down credit even for still-viable businesses and households).
Maybe. However, we know the story of how policymakers reacted to the financial market distress: with near unlimited willingness to put public funds on the line and great deference to incumbent players. And, this mostly worked – there is little evidence that financial markets are actually providing a great impediment to U.S. recovery (this is not to say that an alternative set of policies to alleviate financial market distress couldn’t have also worked – and with less danger that by coddling incumbent players that we’ve just reassured them that no matter how poorly or riskily they do their jobs they’ll be bailed out again).
So how did policymakers react to the crisis left over after the ambitious financial market response – that $1 trillion hole in the economy caused by the purely non-financial sector fallout of the housing bubble? With measures that were clearly seen as insufficient in real-time. Wouldn’t it have been nice if policymakers had been as assertive in making sure that the job-market was healthy as they were in making sure that financial markets were healthy? If one was cynical you might think that the economic struggles of rich bankers are more important to policymakers than the struggles of ordinary workers.
For more than 75 years, the National Labor Relations Board has had the power to protect employees in their right to organize by ordering employers to return operations that the employer moved in retaliation for the exercise of protected rights. This power has always been recognized and has been exercised by Republican appointees, including, in 1987, those of President Reagan, who ordered an employer that refused to bargain in good faith to return work to a warehouse operation it had closed (Century Air Freight).
Yet the Chamber of Commerce and the House Republican leadership want people to think that the NLRB affirming this same anti-retaliatory principle in the Boeing case is something extraordinary, that it is a new assertion of government power by the Obama administration, which is bending over to do a favor for its union friends. Accordingly, House Republicans are advancing legislation that would overturn long-established labor law and prevent the NLRB from “ordering any employer to close, relocate or transfer employment under any circumstances.”
The media have failed to point out that these assertions of newly exercised, politicized authority are objectively false, and instead, have given full expression to the campaign of inaccuracies and misstatements. Even Steven Greenhouse in the New York Times falls into this trap, though he does point out that moving work to retaliate against the exercise of protected rights is illegal.
To get to the actual facts of this matter, I am printing the section of the NLRB General Counsel’s report from 2006 that deals with the NLRB’s power to restore the status quo when work has been relocated in violation of the National Labor Relations Act. The author was Arthur F. Rosenfeld, who served as General Counsel from June 2001 to Jan. 2006, and who was not just a George W. Bush appointee, but had served as counsel to Senate Republicans on the committee with jurisdiction over the NLRA and the NLRB.
Mr. Rosenfeld stated: “We typically seek an order restoring the prior operation and prohibiting similar conduct in the future. Such relief is necessary because, when these actions unlawfully eliminate all or large portions of an operation and the jobs of unit employees, they undermine the status of an incumbent union or one seeking recognition.”
So is Obama’s NLRB overreaching and creating some new extraordinary power for the government? Clearly not. Even under Republican administrations, ordering an employer to move work back after it had been relocated illegally was “typical.”
Here is the relevant section of Rosenfeld’s 2006 GC Memorandum:
3. Subcontracting or other change to avoid bargaining obligation
These cases involve an employer’s implementation of a major entrepreneurial-type decision that adversely affects unit employees: for example, subcontracting or relocating entire plants, departments, or product lines. Such changes can be discriminatorily motivated, i.e., designed either to interfere with a union organizational campaign or to escape from an incumbent union, and thus violative of Section 8(a)(3).7 The change can also be independently violative of Section 8(a)(5) if undertaken without satisfying an employer’s bargaining obligation to an incumbent union. We typically seek an order restoring the prior operation and prohibiting similar conduct in the future. Such relief is necessary because, when these actions unlawfully eliminate all or large portions of an operation and the jobs of unit employees, they undermine the status of an incumbent union or one seeking recognition. Moreover, an interim restoration order preserves the Board’s ability to issue (and courts to enforce) a final order restoring operations without it being too burdensome for the respondent because of the passage of time or the prior alienation of the old facility or equipment.Based upon these considerations, courts have granted interim restoration of operations in these situations. See, e.g., Maram v. Universidad Interamericana de Puerto Rico, Inc., 722 F.2d 953 (1st Cir. 1983); Aguayo v. Quadrtech Corporation, 129 F. Supp.2d 1273 (C.D. Ca. 2000). In certain cases the courts have granted a less drastic interim remedy of preventing the sale or alienation of a facility pending a Board decision. See, e.g., Hirsch v. Dorsey Trailers, Inc., 147 F.3d 243 (3d Cir. 1998). See also Dunbar v. Carrier Corp., 66 F. Supp.2d 346 (N.D.N.Y.), stay denied 66 F. Supp.2d 355 (N.D.N.Y. 1999).
The single case authorized by the Board in this category during the reporting period involved the discriminatory relocation of unit work. The case was successfully resolved with a Board settlement.
We know that children are disproportionally impacted by unemployment and underemployment. EPI has already looked at the total number of children who live in families with at least one unemployed or underemployed parent ( see this snapshot, or this paper).
Given the importance of early childhood development, we should be very concerned with the well-being of young children and how they are impacted by parental unemployment. Having an unemployed parent increases the risk for disruptions in nutrition, housing, and education–all of which are important for brain development specifically and a child’s future more generally.
The figure below shows the percentage of children living in a family with at least one unemployed parent, with a further breakdown of the share of children aged from 0 to 5. The chart shows 2010 (the most recent data available) compared with pre-recession levels in 2007, and also a breakdown by race.
The data shows that kids overall are more likely to be impacted by unemployment, and that children 5 and under are even more at risk. In 2010, 7.5 million children (10.6 percent of all children) lived in a family with at least one unemployed parent. Of those, 2.8 million (11.4 percent of all similarly aged children) were children 5 years old and younger. This is about twice as many children at this age who lived in a family with at least one unemployed parent in 2007, prior to the recession. About 1.2 million of these children 5 and under live in single-parent families where their parent is unemployed.
The impact also varies by race and ethnic status, with children between the ages of 0-5 in black families facing unemployment at twice the rate (18.5 percent of all similarly aged children) as white families (9.1 percent); and Hispanic families (13 percent) are also above the national average.
With children overall, and especially younger kids, being hit hard by unemployment, spurring job creation is not just good policy in the short-run, but is essential for our nation’s long-run economic health.
It was great to see President Obama challenge congressional Republicans to do something real about jobs. His jobs bill, submitted to Congress Monday, would support 2.3 million new jobs and provide continuing support for another 1.6 million jobs. But his plan requires congressional approval, which is about as likely as a World Series appearance for Washington’s sub-.500 Nationals this year.
With unemployment at 9.1 percent, our economy desperately needs at least 11 million new jobs now just to get the unemployment rate down to pre-recession levels. We cannot allow the political stalemate in Washington to stand in the way of a full set of bold job creation initiatives. The president should take immediate, executive action that will directly support the creation of up to 2.25 million export jobs by eliminating unfair currency manipulation by China and other countries.
The administration wants to stimulate exports, and that’s a good idea, but if and only if it improves the trade balance. Growing exports support domestic employment but growing imports displace domestic jobs; meaning that we need policy changes to boost net exports. The president included an oft-repeated promise in his speech last week that he will soon send legislation to Congress to implement Bush-negotiated free trade agreements with South Korea, Colombia and Panama. Passage of those FTAs would be a terrible idea because all past evidence indicates that FTAs are not an effective tool for improving the U.S. trade balance and stimulating net job creation.
If the president was serious about boosting net exports he would take significant action to stop the currency management of our trading partners that has hamstrung the competitiveness of U.S. producers. He has the authority to do this without Congress – and swift and independent action could help to create millions of new jobs over the next 18 to 24 months.
The best estimates are that currency intervention by our trading partners (i.e., buying U.S. dollar-denominated assets to boost the value of the dollar and keep their own currency artificially cheap) raises the cost of U.S. exports – both to the intervening countries (China is the most important one) as well as to every country where U.S. exports compete with goods coming from there. China’s currency intervention has also compelled Hong Kong, Singapore, Malaysia and Taiwan to follow similar policies in order to protect their relative competitiveness and to promote their own exports.
In a recent report on the benefits of revaluation, I showed that full revaluation (28.5%) of the yuan and other undervalued Asian currencies would improve the U.S. current account balance by up to $190.5 billion, increasing U.S. gross domestic product by as much as $285.7 billion, adding up to 2.25 million U.S. jobs, and reducing the federal budget deficit by up to $857 billion over 10 years.
This revaluation done quickly would be a win-win – it would help workers in China and other Asian countries by reducing inflationary overheating and increasing workers’ purchasing power in those countries.
There are several different actions that can be taken by the Obama administration to put pressure on China. First, it can and should identify China and the other countries listed above as currency manipulators when the Treasury releases its Semiannual Report on International Economic and Exchange Rate Policies in mid-October. This would trigger mandatory negotiations which could result in sanctions if the issues are not resolved. Secretary Tim Geithner has consistently refused to name China or any other country as a currency manipulator, despite all available evidence to the contrary. The administration could also file complaints with the World Trade Organization (WTO) about China’s currency manipulation and request dispute resolution.
The administration could also endorse China currency legislation that has been introduced in both the House and the Senate. The Currency Reform for Fair Trade Act (HR 639, S 328) was passed by an overwhelming majority of both Democrats and Republicans in the House in 2010, but the bill died in the Senate. The scope of the bill is a bit limited – only 3 percent of Chinese imports would be affected – making it something of a rifle shot; larger artillery may be needed to persuade China that it’s in its own interests to revalue.
The mere threat of a large, across-the-board tariff on imports from China may be sufficient to persuade China that the time has come for a major revaluation that would benefit both countries. In 2005, Senators Charles Schumer and Lindsey Graham introduced legislation (S. 295) that would have imposed a 27.5 percent tariﬀ on all imports from China if it failed to revalue within 180 days. This legislation was approved by the Senate (by a veto-proof margin of 67-33) but not by the House. Even so, shortly after its passage, China allowed its currency to rise for the first time in more than a decade. The currency ultimately appreciated by 20 percent, until the onset of the great recession in late 2007, when it was again tied to the dollar. China will respond to the threat of severe external pressure – especially since their policy of intervention has clear downsides for them as well.
The U.S. needs at least 11 million jobs to eliminate excess unemployment. Fiscal policy, if it can be enacted, is a good start, but the task before us is huge. We need a job strategy that pulls every available policy lever. The best place to start is with exchange rates—a lever that can be pulled by President Obama even if Congress refuses to help.
Progressives believe the highest-income households should contribute more revenue; conservatives counter that the bottom half of earners should be paying more. When pressed about the need for revenue and shared sacrifice, House Majority Leader Eric Cantor recently lamented that nearly half of Americans don’t pay federal income taxes. Texas Governor Rick Perry went further, decrying this result of the tax code an “injustice.” This is a misleading grievance demonstrating a misunderstanding of the tax code: more than four in five households pay federal taxes and the role of the income tax is to adequately fund government without pushing more families into poverty.
While 46 percent of Americans won’t pay federal income taxes this year, 82 percent of households will pay federal income taxes and/or social insurance payroll taxes—predominantly Social Security and Medicare contributions. Payroll taxes are a tax on earned income and cannot be ignored because they are both regressive and substantial. Lower-income households pay higher average social insurance tax rates than upper-income households and these taxes brought in $865 billion last budget year (40 percent of all revenue).
A recent Tax Policy Center report explains that the basic structure of the tax code accounts for half of the 46 percent of households owing no income tax, while tax expenditures (preferences and credits) eliminate remaining income tax liability for the other half. The income tax code intentionally spares subsistence levels of income from taxation, hence the standard deduction ($5,800 for single filers and $11,600 for married joint filers) and personal exemption ($3,700). Of the households made nontaxable by tax expenditures, 44 percent pay no income tax because of special tax treatment for the elderly and 30 percent pay no income tax because of credits for children and poor workers.
Of the narrow 18 percent of households paying neither income nor payroll taxes, 57 percent are elderly households and 38 percent are non-elderly households with less than $20,000 in income. There simply isn’t much income here for taxes to collect: the lowest earning 20 percent of households (earning under $20,500 in 2007 dollars) received only 4 percent of pre-tax income in 2007, compared with 19 percent captured by the top 1 percent of households (earning above $352,900).
Broadening the tax base so that substantially more tax filers pay income taxes would require reducing the personal exemption, standard deduction, extra standard deduction for the elderly, exclusion of some Social Security benefits from taxation, child tax credit, or earned income tax credit. (Alternatively, higher employment and more evenly shared income gains would raise the number of households paying income taxes).
Forcing a higher tax burden on those with little to live on is a twisted concept of shared sacrifice, particularly when poverty has climbed to a 17-year high and recent income losses have been most pronounced at the bottom of the earnings distribution (see Figure H in this EPI analysis). Tax policy should instead focus on where the income gains have been concentrated over the last three decades.