OCTOBER 24, 2011.
The Tax Reform Evidence From 1986
Experience implies that the combination of base broadening and rate reduction would raise revenue equal to about 4% of existing tax revenue.
By MARTIN FELDSTEIN
Congress's Joint Select Committee on Deficit Reduction is struggling to find $1.5 trillion in cuts over the next 10 years. This is a unique opportunity to use tax reform to reduce future budget deficits while lowering individual tax rates.
The Tax Reform Act of 1986, enacted 25 years ago last Friday, showed how a tax reform that includes lower rates can change incentives in a way that grows the tax base and produces extra revenue. The 1986 agreement between President Ronald Reagan and House Speaker Tip O'Neill reduced the top marginal tax rate to 28% from 50%. A conservative Republican and a liberal Democrat could agree to a dramatic reduction in top rates because the legislation also eliminated a wide variety of tax loopholes.
A traditional "static" analysis that ignores the response of taxpayers to lower tax rates indicated that those combined tax changes would leave total revenue unchanged at each income level. But the actual experience after 1986 showed an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates.
To measure that response, I studied a sample of individual tax returns (stripped of all identifying information) for more than 4,000 taxpayers provided by the U.S. Treasury Department. Because the sample contained the tax return of each individual for the years 1985 through 1988, I could compare the taxable income of individuals in 1985 with their taxable incomes in 1988, two years after their rates were lowered.
Taxpayers who faced a marginal tax rate of 50% in 1985 had a marginal tax rate of just 28% after 1986, implying that their marginal net-of-tax share rose to 72% from 50%, an increase of 44%. For this group, the average taxable income rose between 1985 and 1988 by 45%, suggesting that each 1% rise in the marginal net-of-tax rate led to about a 1% rise in taxable income.
This dramatic increase in taxable income reflected three favorable effects of the lower marginal tax rates. The greater net reward for extra effort and extra risk-taking led to increases in earnings, in entrepreneurial activity, in the expansion of small businesses, etc. Lower marginal tax rates also caused individuals to shift some of their compensation from untaxed fringe benefits and other perquisites to taxable earnings. Taxpayers also reduced spending on tax-deductible forms of consumption.
A similar picture emerged for the group of taxpayers who faced slightly lower marginal tax rates of 42% and 45%. The reduction to 28% raised the marginal net-of-tax share of this group by 25% and their taxable incomes rose by 20%, suggesting that each 1% rise in the marginal net-of-tax share raised taxable incomes by 0.8%, quite similar to the estimate for the group with the highest marginal tax rate.
The substantial sensitivity of taxable income to the taxpayer's marginal net-of-tax share has important implications for the effect of tax-rate reductions on total tax revenue. For a 10% across-the-board reduction in all tax rates, a traditional "static" analysis implies that revenue would fall to 90% of its previous level. But reducing a current 40% marginal tax rate by 10% to 36% raises the net-of-tax share to 64% from 60%, a rise of 6.7%. If that causes the taxable income of those at that tax level to rise by 6.7%, their taxable income would fall to only 96% of what it had been. In short, the behavioral response of taxpayers in this highest bracket would offset 60% of the static revenue loss.
The effect of taxpayer behavior on revenue is smaller in lower tax brackets. Calculations using the National Bureau of Economic Research's TAXSIM model, which calculates federal and state income tax liabilities from survey data, indicate that a 10% across-the-board reduction in all federal tax rates would reduce revenue by about 60% of what a static analysis would imply—i.e., that the behavioral response of taxable income to the lower marginal tax rates would offset about 40% of the static revenue loss.
These calculations have important implications for today's deficit-reduction debate. Broadening the tax base by limiting the use of tax expenditures (the special tax rules that substitute for direct government spending as a way to subsidize health insurance, mortgage borrowing and other things) could raise substantial revenue. Doing so doesn't require eliminating any of those tax expenditures. In a study of recent Treasury data, Daniel Feenberg, Maya MacGuineas and I found that limiting each individual's tax reduction from the use of tax expenditures to 5% of that individual's adjusted gross income would raise revenue equal to about 10% of current personal tax revenue.
Combining that base broadening with a 10% cut in all tax rates would be revenue neutral in a traditional static analysis. But the experience after the 1986 tax reform implies that the combination of base broadening and rate reduction would raise revenue equal to about 4% of existing tax revenue. With personal income-tax revenue in 2011 of about $1 trillion, that 4% increase in net revenue would be $40 billion at the current level of taxable income, or more than $500 billion over the next 10 years.
The Joint Select Committee should insist on counting that revenue as the starting point for a serious deficit reduction plan.
Mr. Feldstein, chairman of the Council of Economic Advisers under President Ronald Reagan, is a professor at Harvard and a member of The Wall Street Journal's board of contributors.
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EUROPE IS NOW LEVERAGING FOR A CATASTROPHE / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )
October 23, 2011 5:21 pm
Europe is now leveraging for a catastrophe
By Wolfgang Münchau
It is time to prepare for the unthinkable: there is now a significant probability the euro will not survive in its current form. This is not because I am predicting the failure by European leaders to agree a deal. In fact, I believe they will. My concern is not about failure to agree, but the consequences of an agreement. I am writing this column before the results of Sunday’s European summit were known. It appeared that a final agreement would not be reached until Wednesday. Under consideration has been a leveraged European financial stability facility, perhaps accompanied by new instruments from the International Monetary Fund.
A leveraged EFSF is attractive to politicians for the same reason that subprime mortgages once appeared attractive to borrowers. Leverage can have different economic functions, but in these cases it simply disguises a lack of money. The idea is to turn the EFSF into a monoline insurer for sovereign bonds. It is worth recalling that the role of those monolines during the bubble was to insure toxic credit products. They ended up as a crisis amplifier.
Technically, the EFSF monoline insurer would provide a first-loss tranche insurance for government bonds up to an agreed percentage. It sounds like a neat idea, until the recipients of the insurance realise their sovereign bonds have turned into hard-to-value structured products. One of the factors that will make them hard to value is the incalculable probability that France might lose its triple A rating. In that case, the EFSF would automatically lose its own triple A rating – which is derived from that of its guarantors. The EFSF’s yields would then rise, and the value of the insurance would be greatly reduced. The construction could ultimately collapse.
Leveraging also massively increases the probability of a loss for the triple A-rated member states, who ultimately provide the insurance. If a recipient of the guarantee were to impose a relatively small haircut – say 20 per cent – the EFSF and its guarantors would take the entire hit. Under current arrangements, they would only lose their share of the haircut.
The simple reason why there can be no technical quick fix is that the crisis is, at its heart, political. The triple A-rated countries have left no doubt that they are willing to support the system, but only up to a certain point. And we are well beyond that point now. If Germany continued to reject an increase in its own liabilities, debt monetisation through the European Central Bank and eurobonds, the crisis would logically end in a break-up. There is no way the member states of the eurozone’s periphery can sustainably service their private and public debts, and adjust their economies at the same time.
Each of Germany’s red lines has some justification on its own. But together they are toxic for the eurozone. The politics is not getting any easier. The behaviour of the Bundestag underlines the political nature of the crisis. Last month’s ruling of Germany’s constitutional court strengthened the role of parliament. But it also reduced the autonomy of the German chancellor, who now has to seek prior approval by the Bundestag’s budget committee before negotiating in Brussels. This power shift will not prevent agreements, such as the one currently negotiated, but it will make it harder to co-ordinate policy in the European Council on an ongoing basis.
The way eurozone leaders have been handling the crisis ultimately vindicates the German constitutional court’s conservatism in its definition of what constitutes a functioning democracy. Policy co-ordination among heads of state is both undemocratic and ineffective. A monetary union may require more than just a eurobond and a small fiscal union. It may require a formal, if partial, transfer of sovereignty to the centre – that includes the rights to levy certain taxes, impose regulation in product, labour and financial markets, and to set fiscal rules for member states.
Under normal circumstances, European electorates would not accept such a massive transfer of sovereignty. I would not completely exclude the possibility that they might accept it if the alternative was a breakdown of the euro. Even then, I would not bet on such an outcome. Current policy is leading us straight towards this bifurcation point, which may only be a few weeks or months away.
The biggest danger now is the large number of politicians drawing red lines in the sand, and the lack of even a single EU authority willing and capable of cutting through them. Given the multiple uncertainties, there is no way to attach any precise probabilities to any scenarios. But clearly, the chance of a catastrophic accident is bigger than merely non-trivial. The main consequences of leverage will be to increase that probability.
Copyright The Financial Times Limited 2011.
October 23, 2011
By JOEL E. COHEN
ONE week from today, the United Nations estimates, the world’s population will reach seven billion. Because censuses are infrequent and incomplete, no one knows the precise date — the Census Bureau puts it somewhere next March — but there can be no doubt that humanity is approaching a milestone.
The first billion people accumulated over a leisurely interval, from the origins of humans hundreds of thousands of years ago to the early 1800s. Adding the second took another 120 or so years. Then, in the last 50 years, humanity more than doubled, surging from three billion in 1959 to four billion in 1974, five billion in 1987 and six billion in 1998. This rate of population increase has no historical precedent.
Can the earth support seven billion now, and the three billion people who are expected to be added by the end of this century? Are the enormous increases in households, cities, material consumption and waste compatible with dignity, health, environmental quality and freedom from poverty?
For some in the West, the greatest challenge — because it is the least visible — is to shake off, at last, the view that large and growing numbers of people represent power and prosperity.
This view was fostered over millenniums, by the pronatalism of the Hebrew Bible, the Roman Empire, the Roman Catholic Church and Arab thinkers like Ibn Khaldun. Mercantilists of the 16th through the 18th centuries saw a growing population as increasing national wealth: more workers, more consumers, more soldiers. Enlarging the workforce depressed wages, increasing the economic surplus available to the king. “The number of the people makes the wealth of states,” said Frederick the Great.
In the late 19th and early 20th centuries, pronatalism acquired a specious scientific aura from social Darwinism and eugenics. Even today, some economists argue, incorrectly, that population growth is required for economic growth and that Africa is underpopulated.
This view made some sense for societies subject to catastrophic mortality from famines, plagues and wars. But it has outlived its usefulness now that human consumption, and pollution, loom large across the earth.
Today, while many people reject the equation of human numbers with power, it remains unpalatable, if not suicidal, for political leaders to admit that the United States and Europe do not need growing populations to prosper and be influential and that rich countries should reduce their rates of unintended pregnancy and help poor countries do likewise. With the globalization of work, the incentive for owners of capital today to ignore or not address rapid growth in the numbers of poor people remains as it was for the kings of yore: lower wages for workers at any level of skill offer a bigger economic surplus to be captured.
But just as pronatalism is unjustified, so are the dire — and discredited — prophecies of Thomas Malthus and his followers, who believed that soaring populations must lead to mass starvation.
In fact, the world is physically capable of feeding, sheltering and enriching many more people in the short term. Between 1820, at the dawn of the industrial age, and 2008, when the world economy entered recession, economic output per person increased elevenfold.
Life expectancy tripled in the last few thousand years, to a global average of nearly 70 years. The average number of children per woman fell worldwide to about 2.5 now from 5 in 1950. The world’s population is growing at 1.1 percent per year, half the peak rate in the 1960s. The slowing growth rate enables families and societies to focus on the well-being of their children rather than the quantity.
Nearly two-thirds of women under 50 who are married or in a union use some form of contraception, which saves the lives of mothers who would otherwise die in childbirth and avoids millions of abortions each year — an achievement that people who oppose and people who support the availability of legal abortions can both celebrate.
But there is plenty of bad news, too. Nearly half the world lives on $2 a day, or less. In China, the figure is 36 percent; in India, 76 percent. More than 800 million people live in slums. A similar number, mostly women, are illiterate.
Some 850 million to 925 million people experience food insecurity or chronic undernourishment. In much of Africa and South Asia, more than half the children are stunted (of low height for their age) as a result of chronic hunger. While the world produced 2.3 billion metric tons of cereal grains in 2009-10 — enough calories to sustain 9 to 11 billion people — only 46 percent of the grain went into human mouths. Domestic animals got 34 percent of the crop, and 19 percent went to industrial uses like biofuels, starches and plastics.
Of the 208 million pregnancies in 2008, about 86 million were unintended, and they resulted in 33 million unplanned births. And unintended births are not the whole problem. Contraceptives have been free since 2002 in Niger, where the total fertility rate — more than seven children per woman in mid-2010 — was the world’s highest. Women in Niger marry at a median age of 15.5, and married women and men reported in 2006 that they wanted an average of 8.8 and 12.6 children, respectively.
Human demands on the earth have grown enormously, though the atmosphere, the oceans and the continents are no bigger now than they were when humans evolved. Already, more than a billion people live without an adequate, renewable supply of fresh water.
About two-thirds of fresh water is used for agriculture. Over the coming half century, as incomes rise, people will try to buy agricultural products that require more water. Cities and industries will demand more than three times as much water in developing countries. Watershed managers will increasingly want to limit water diversion from rivers to maintain flood plains, permit fish to migrate, recycle organic matter and maintain water quality.
Water shortages are projected to be significant in northern Africa, India, China, parts of Europe, eastern Australia, the western United States and elsewhere. Climate changes will increase the water available for agriculture in North America and Asia but decrease it in Africa, Latin America and the Caribbean. Similar stories could be told about land, overfishing and carbon and nitrogen emissions to the atmosphere.
Where is this taking us? The coming half century will see huge shifts in the geopolitical balance of numbers, further declines in the number of children per woman, smaller but more numerous households, an increasingly elderly population, and growing and more numerous cities.
The United Nations Population Division anticipates 8 billion people by 2025, 9 billion by 2043 and 10 billion by 2083. India will have more people than China shortly after 2020, and sub-Saharan Africa will have more people than India before 2040.
In 1950, there were nearly three times as many Europeans as sub-Saharan Africans. By 2010, there were 16 percent more sub-Saharan Africans than Europeans. By 2100, according to the Population Division, there will be nearly five sub-Saharan Africans for every European.
In some ways, the growth in the numbers of people matters less than the growth in the numbers of households. If each household has its own refrigerator, air-conditioner, TV and car, the average energy demand for a given number of people goes up as the average number of people in a household goes down.
The urban population of developing countries is expected to grow by a million people every five days through at least 2030, while the rural population falls. Many cities will eat into prime agricultural land unless they grow in density, not extent. And nearly half of urban population growth by 2015 will occur in cities of fewer than half a million people.
The coming revolution in aging is well under way in the more developed countries. It will go global in the next half century. In 1950, for each person 65 and older, there were more than six children under 15. By 2070, elderly people will outnumber children under 15, and there will be only three people of working age (15 to 64) for every two people under 15 or 65 and older. Pressures to extend the “working age” beyond 65 will grow more intense.
Is economic development the best contraception? Or is voluntary contraception the best form of development? Does the world need a bigger pie (more productive technologies) or fewer forks (slower population growth through voluntary contraception) or better manners (fewer inequities, less violence and corruption, freer trade and mobility, more rule of law, less material-intensive consumption)? Or is education of better quality and greater availability a key ingredient of all other strategies?
All these approaches have value. However much we would like one, there is no panacea, though some priorities are clear: voluntary contraception and support services, universal primary and secondary education, and food for pregnant and lactating mothers and children under 5.
These priorities are mutually reinforcing, and they are affordable. Providing modern family planning methods to all people with unmet needs would cost about $6.7 billion a year, slightly less than the $6.9 billion Americans are expected to spend for Halloween this year. By one estimate, achieving universal primary and secondary education by 2015 would cost anywhere from $35 billion to $70 billion in additional spending per year.
If we spend our wealth — our material, environmental, human and financial capital — faster than we increase it by savings and investment, we will shift the costs of the prosperity that some enjoy today onto future generations. The mismatch between the short-term incentives that guide our political and economic institutions and even our families, on one hand, and our long-term aspirations, on the other, is severe.
We must increase the probability that every child born will be wanted and well cared for and have decent prospects for a good life. We must conserve more, and more wisely use, the energy, water, land, materials and biological diversity with which we are blessed.
Henceforth we need to measure our growth in prosperity: not by the sheer number of people who inhabit the earth, and not by flawed measurements like G.D.P., but by how well we satisfy basic human needs; by how well we foster dignity, creativity, community and cooperation; by how well we care for our biological and physical environment, our only home.
Joel E. Cohen, a mathematical biologist and the head of the Laboratory of Populations at Rockefeller University and Columbia University, is the author of “How Many People Can the Earth Support?”
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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