Wintery Knight

…integrating Christian faith and knowledge in the public square

The long-term impacts of the Romney and Obama economic plans

From the Tax Foundation. (H/T Tom)

Excerpt:

Over the past several weeks, Tax Foundation economists have published a series of studies that analyze the long-term economic and distributional effects of the tax plans outlined by President Barack Obama and Governor Mitt Romney. These comprehensive assessments were done using the Tax Foundation’s Tax Simulation and Macroeconomic Model, which measures how changes in tax policies affect the economic levers that determine economic growth, workers’ incomes and the distribution of the tax burden, says the Tax Foundation.

The candidates’ tax plans would have a starkly different impact on the economy.

  • The Romney plan, which would reduce tax rates on individuals and corporations, would increase gross domestic product (GDP) 7.4 percent over the long run.
  • The Obama plan, which would raise tax rates on individuals, would reduce GDP 2.9 percent over the long run.

These very different futures are the direct consequence of the candidates’ very different approaches to taxing the inputs of production, i.e., capital and labor.

  • Obama would raise taxes on investors, which would reduce the capital stock by 7.5 percent.
  • Romney would reduce taxes on investors, which would increase the capital stock by 18.6 percent.
  • Obama would raise taxes on labor, which would reduce the wage rate by 2.3 percent and hours worked by 0.7 percent.
  • Romney would reduce taxes on labor, which would increase the wage rate by 4.7 percent and hours worked by 2.9 percent.

[...]Tax Foundation’s analysis indicates that for every dollar of tax revenue raised under the Obama plan, the economy loses $10. Under Romney’s plan, for every dollar of tax revenue lost, the economy gains $8.

And more from the Tax Foundation. (H/T Tom)

As a follow-up to the Tax Foundation’s recent assessment of the macroeconomic effects of Governor Mitt Romney’s tax plan, Tax Foundation Senior Fellow Stephen Entin now turns his attention to measuring the macroeconomic effects of President Barack Obama’s tax proposals.

[...]The model results:

  • President Obama’s tax plan would gradually reduce the level of gross domestic product (GDP) by nearly 3 percent, relative to the baseline projection, over five to 10 years.
  • Labor income would be lower by a similar amount, driven down by fewer hours worked and lower wages per hour.
  • The reduction in hours worked, about 0.75 percent, would be the equivalent of about a million jobs lost in today’s economy, with those still employed earning roughly 2.28 percent lower wages.
  • Alternatively, one could view the result as losing four million jobs at unchanged pay levels.
  • The plan would also trim the capital stock by about 7.5 percent (or over $2 trillion in lost investment in plant, equipment and buildings, things that drive productivity, wages and hiring).

The study also measured the economic and distributional effects of President Obama’s corporate tax plan and the tax changes contained in the Affordable Care Act beginning in 2013. The results found that these proposals would lower economic growth while substantially lowering workers’ wages and incomes. Ultimately, President Obama’s tax plans would be very harmful for the nation’s long-term economic outlook.

Do you like prosperity? Would you like to have a job? Would you like to be able to buy things for your friends and family? Would like to be able to give to charities? Then vote for Mitt Romney!

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How well did tax hikes for the rich work in California?

Economist Art Laffer explains in Investors Business Daily.

Excerpt:

According to a new report from the Golden State’s Franchise Tax Board, the top 1% of earners paid $25.7 billion in state income taxes in 2007. Two years later, the most recent for which data are available, that figure dropped by half — to $12.3 billion.

Researchers note that the economic downturn contributed to this drop. But that’s not the only cause. A huge number of high-income taxpayers have simply left the state.

Between 1992 and 2008, California suffered a net loss of 869,000 tax filers. About 3.5 million moved into California, while 4.4 million left.

Those that left were disproportionately wealthy. The average adjusted gross income for people leaving the state over that period was $44,700. Meanwhile, the average person moving into California posted income of just $38,600.

So California lost wealthier, more productive residents. And poorer, less-productive folks took their places — some of them, at least.

Smothered under a growing thicket of taxes and regulations, the Golden State’s entrepreneurs and top earners have sought friendlier climes — taking their incomes and the taxes they pay with them.

For many people, moving out of California is equivalent to getting a big raise — because their tax rates plummet. Of the top nine states Californians are flocking to, the average top personal income tax rate is 3.44%. California’s is nearly triple that, at 10.3%.

Also, among those nine states, the corporate tax rate averages 4.59% vs. California’s 8.84%. And their combined state and local tax burden is 9%, versus California’s 11%.

Similarly, if tax rats get to be too high, people will just work harder at getting their capital out of the country. In the case of businesses, they will stop hiring people here and instead open factories and plants in other low-tax countries. It’s socialism that causes outsourcing – taxing and regulating businesses causes them to leave or expand elsewhere.

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Would the Buffett Rule “stabilize our debt and deficits”?

The Buffett Tax (click for larger image)

The Buffett Tax (click for larger image)

The Wall Street Journal assesses Obama’s claims about the Buffett Tax.

Excerpt:

Forget Warren Buffett, or whatever other political prop the White House wants to use for its tax agenda. This week the Administration officially endorsed what in essence is the Obama Rule: Taxes must be high simply to spread the wealth, never mind the impact on the economy or government revenue. It’s all about “fairness,” baby.

This was long apparent to those fated to closely watch the 2008 campaign, but some voters might have missed the point amid the gauzy rhetoric about hope and change. Now we know without any doubt. White House aides made it official Tuesday in their on-the-record briefing on the new federal minimum tax that travels under the political alias known as the “Buffett rule.”

The policy goal is to impose an effective minimum tax of 30% on the income of anyone who makes more than $1 million a year. When President Obama first proposed this new minimum tax he declared that the rule “could raise enough money” so that we “stabilize our debt and deficits for the next decade.”

Then he added: “This is not politics; this is math.” Well, remedial math maybe.

The Obama Treasury’s own numbers confirm that the tax would raise at most $5 billion a year—or less than 0.5% of the $1.2 trillion fiscal 2012 budget deficit and over the next decade a mere 0.1% of the $45.43 trillion the federal government will spend. When asked about those revenue projections, White House aide Jason Furman backpedaled from Mr. Obama’s rationale by explaining that the tax was never intended “to bring the deficit down and the debt under control.”

So if it doesn’t do what Obama says it’s supposed to do, what would really do?

The Buffett rule is really nothing more than a sneaky way for Mr. Obama to justify doubling the capital gains and dividend tax rate to 30% from 15% today. That’s the real spread-the-wealth target. The problem is that this is a tax on capital that is needed for firms to grow and hire more workers. Mr. Obama says he wants an investment-led recovery, not one led by consumption, but how will investment be spurred by doubling the tax on it?

The only investment and hiring the Buffett rule is likely to spur will be outside the United States—in China, Germany, India, and other competitors with much more investment-friendly tax regimes. The Buffett rule would give the U.S. the fourth highest capital gains rate among OECD nations, according to a new study by Ernst & Young, to go along with what is now the highest corporate tax rate (a little under 40% for the combined federal and average state rate). That’s what happens when politicians pursue fairness over growth.

When you make it less attractive for people with capital to invest their capital here at home then they will take their capital and invest it abroad. What Obama’s proposal accomplishes is to outsource jobs – the exact thing that he is always complaining about. It’s higher taxes and more regulation, especially EPA regulation, that causes capital (and consequently jobs) to move overseas. If you want capital to come into America, you lower the tax rates.

In other news, the Obama administration is suing a company owned by Warren Buffett for unpaid taxes.

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New paper on income inequality: Does taxing the rich hurt the middle class?

Aparna Mathur (right)

Aparna Mathur (right)

Here’s an article by Indian economist Aparna Mathur.

She writes (in part):

In a recent paper that I co-authored with Kevin Hassett, we explored the effect of high corporate taxes on worker wages. The motivation for the paper came from the international tax literature (summarized by Roger Gordon and Jim Hines in a 2002 paper1) that suggested that mobile capital flows from high tax to low tax jurisdictions. In other words, in any set of competing countries, investment flows are determined by relative rates of taxation. The current U.S. headline rate of corporate tax is 35 percent. The combined federal and state statutory rate of 39 percent is second only to Japan in the OECD. With Japan set to lower its statutory rate later this year, the U.S. rate will soon be the highest in the OECD and one of the highest in the world. What effect do these high rates have on worker wages?

When capital flows out of a high tax country, such as the United States, it leads to lower domestic investment, as firms decide against adding a new machine or building a factory. The lower levels of investment affect the productivity of the American worker, because they may not have the best machines or enough machines to work with. This leads to lower wages, as there is a tight link between workers’ productivity and their pay. It could also lead to less demand for workers, since the firms have decided to carry out investment activities elsewhere.

Our paper was one of the first to explore the adverse effect of corporate taxes on worker wages. Using data on more than 100 countries, we found that higher corporate taxes lead to lower wages. In fact, workers shoulder a much larger share of the corporate tax burden (more than 100 percent) than had previously been assumed. The reason the incidence can be higher than 100 percent is neatly explained in a 2006 paper by the famous economist Arnold Harberger.2 Simply put, when taxes are imposed on a corporation, wages are lowered not only for the workers in that firm, but for all workers in the economy since otherwise competition would drive workers away from the low-wage firms. As a result, a $1 corporate income tax on a firm could lead to a $1 loss in wages for workers in that firm, but could also lead to more than a $1 loss overall when we look at the lower wages across all workers.

Following our paper, several academic economists substantiated our results, using different data sets and applying varied econometric modeling and techniques. Some examples of these studies include a 2007 paper by Mihir A. Desai and C. Fritz Foley of Harvard Business School and James Hines Jr. of Michigan University Law School, a 2007 paper by R. Alison Felix of the Federal Reserve Bank of Kansas City, a 2009 paper by Robert Carroll of The Tax Foundation, and a 2010 paper by Wiji Arulampalam of the University of Warwick and Michael Devereux and Giorgia Maffini of Oxford.3 A recent Tax Notes article that I co-authored summarizes these various studies and also the lessons from the theoretical literature on the topic. The general consensus from theory and empirical work is that while we may argue academically about the size of the effect, there is no disagreement among economists that a sizeable burden of the corporate income tax is disproportionately felt by working Americans. On average, a $1 increase in corporate tax revenues could lead to a dollar or more decline in the wage bill.

Conservatives and liberals have the same goal. We both want to help the poor. Liberals think that taking money from the rich and giving it to the poor helps, but all it does it cause the rich to move their capital and jobs elsewhere, leaving the poor poorer. Conservatives let the rich keep their money and encourage them to risk it trying to make more money by engaging in enterprises that create wealth – creating products and services from less valuable raw materials. In a socialist system, the rich get poorer, but so do the poor. In a capitalist system, the rich get very rich, but the poor also gain more wealth. That’s what happens when corporations like Apple make IPads out of junky raw materials. That’s how wealth is created – by letting people who want to make things keep more of what they earn. We all benefit from encouraging people to make new things and provide value for their neighbors.

Related articles

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Richard Epstein explains why economic inequality is required in order to promote innovation

My friend Matt, who blogs at The Conscience of  a Young Conservative, posted this on Facebook.

Epstein explains how the profit motive creates economic value that raises the standard of living of all people, who are able to exchange their money for valuable products and services that they did not create. He explains how wealth redistribution is wasteful and harmful to economic growth.

(Found here)

Now let’s look at some myths that Christians believe about economics.

We need to understand basic economics

Christian philosopher Jay Richards explains basic economics.

Excerpt:

THE ZERO-SUM GAME MYTH.

There are three kinds of games: win-lose, lose-lose, and win-win. Win-lose games, like basketball, are sometimes called “zero-sum games.” When the Celtics and the Bulls compete, if the Celtics are up, then the Bulls are down, and vice versa. The scales balance. It’s a zero-sum.

Besides lose-lose games, which most of us avoid, there are positive-sum, or win-win, games. In these games, some players may end up better off than others, but everyone ends up at least the same if not better off than they were at the beginning.

Millions of people think that the free trade in capitalism is a dog-eat-dog competition, where winners always create losers. This is the zero-sum game myth, which leads many to think that the government should somehow redistribute wealth. While some competition is a part of any economy, of course, an exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game. When I pay my barber $18 for a haircut, I value the haircut more than the $18. My barber values the $18 more than the time and effort it took her to cut my hair. We’re both better off. Win-win.

THE MATERIALIST MYTH.

A similar myth leads people to think of the economy as some fixed amount of material stuff—money in safes or gold bars in a vault. Since two firms competing for one customer can’t both get the customer’s money, we might think the whole economy looks that way: wealth itself isn’t created, it’s merely transferred from one party to another.

A common image of this “Materialist Myth” is a pie. If one person gets too big a slice, someone else will get just a sliver. To serve it fairly, you have to slice equal pieces.

This isn’t how a free economy works, however. Over the long run, the total amount of wealth in free economies grows. We can create wealth that wasn’t there before. The “pie” doesn’t stay the same size. Under capitalism, someone can get wealthy not merely by having someone else’s wealth transferred to his account, but by creating new wealth, not only for himself, but for others as well.

THE GREED MYTH.

Friends and foes of capitalism often claim that it is based on greed. Writer Ayn Rand even claimed that selfishness is a virtue (see the accompanying feature article). But greed is one of the seven deadly sins. If capitalism is based on it, then Christians can’t be capitalists.

In truth, Adam Smith and other capitalist thinkers did not believe this “Greed Myth.” Rather, Smith argued that capitalism, unlike static economies, channels even greedy motives into socially beneficial outcomes. “In spite of their natural selfishness and rapacity,” Smith wrote, business people “are led by an invisible hand…and thus without intending it, without knowing it, advance the interest of the society.”3

Rather than inspire miserliness, capitalism encourages enterprise. Entrepreneurs, including greedy ones, succeed by delaying their own gratification, by investing their wealth in creative but risky ventures that may or may not pan out. Before they ever profit, they must first create.

In a fallen world, we should want an economic system that not only channels greed into productive purposes, but unleashes human ingenuity, creativity, and willingness to risk as well.

I think Christians who don’t understand economics really need to make the effort to understand the basics. I recommend Robert Murphy’s “The Politically Incorrect Guide to Capitalism” and Thomas Sowell’s “Basic Economics“. If you want to see how economics works together with Christianity, then you also want Jay Richards “Money, Greed and God” and Wayne Grudem’s “Politics According to the Bible“.

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