Minneapolis says the crisis affects only financial firms but other companies can get along OK, but Boston says no, it really is a serious crisis for everybody tho it’s hard to see. The article is from a couple of weeks ago, one way or another recent declines in retail sales and employment seem to mean the crisis has become real. Maybe ’cause folks are worried about what the government will do next. Thanks to Tasgall for the link.
Category: Miscellaneous outrages
Maybe the rich do work harder…
…but part of what they work at seems to be under-reporting their taxable incomes. A paper (pdf) from economists Andrew Johns and Joel Slemrod estimates that folks with “adjusted gross income” below $50,000 understate their incomes by less than 7%, whereas those “earning” $200,000 to $1,000,000 understate by 21% or 22%. One reason is that the government monitors some types of income very strictly, whereas others are virtually unrecorded. So they estimate that 99% of the “tax liability” on wage and salary income actually shows up on the tax forms, compared to only 88% for capital gains, 48% for rent and royalty income and 28% for farm income. The research is based on 2001 tax year data.
It’s a bizarre subject to study. Researchers cannot know what “true income” actually is, but can only estimate it by looking at what IRS agents found in a sample of returns selected for intense audit. One intriguing assumption they make is that the IRS examiner’s ability to find hidden income is correlated with her pay grade.
Very high income taxpayers, over $2,000,000, are estimated to have a much lower propensity to underreport than their $200K to $1 million brethren. Do they hide less? Perhaps, but there remains “the plausible possibility that the misreporting of upper-income taxpayers is more sophisticated and thus harder to detect.”
All the estimates of under-reporting are looking at the tax laws as they actually exist, and do not consider the various special-interest loopholes to be anything other than part of the rules (pretending, of course, that someone actually understands the income tax code).
A surprising result follows from the “progressive” nature of the income tax: Even tho low income taxpayers hide relatively little income, their underreporting actually reduces their taxes by a much greater percentage than does that of the high income folks. [This is because, if your income is low, only a small part of it is actually subject to income tax.]
Taxing your genes
might be the logical application of the “ability-to-pay” principle in a technologically advanced society.
[W]e consider how progress in genetics – specifically, the proliferation of knowledge about the human genome – may influence the feasibility and desirability of a tax that is based on individual human endowments, or, to use the economist’s preferred term, a tax based on ability.
Too scary for me to read right now, but you can find the paper here. I hope it turns out to be an Onion satire, but I’m afraid it probably isn’t.
From the U of Michigan Office of Tax Policy Research.
Can you measure what doesn't happen?
If global warming is a problem, and if it can be restrained by reducing emissions of greenhouse gases, then Georgists suggest a tax on emissions would be the way to go. Proceeds of this tax can be used to reduce taxes on productive activity, benefitting everyone who works.
The alternative “cap and trade” approach gives existing polluters a tradeable right to pollute, tho not quite so much as they have been doing. These emitters can either clean up their operations, or buy credits from others who have reduced net emissions.
And that’s where the problem comes up, how do you measure emissions which didn’t occur? Today’s WSJ describes how some landfill operators can get credit for capturing methane emissions from their facilities. The fact that they might already be harvesting the methane and selling it is irrelevant, so WSJ considers that a “double-dip.” The article notes that not all landfills are eligible, only those small enough that they aren’t legally required to capture methane.
Describing the experience of one Pennsylvania landfill operator, WSJ notes “its first carbon-credit sale, netting $26,600 after paying $11,900 in fees and commissions…” 31% of the revenue goes to the traders. There’s the free market in action.
Another plan for easing the meltdown
This one comes from U of Chicago Prof Luigi Zingales. He wants homeowners to be able to swap part of their mortgage– equal to the percentage by which “house” prices declined in their zip code since the mortgage was issued– for a share of equity. Debt declines but equity increases. Homeowners would have the option to do this, or not, but if they do it then, when they sell, the bank (or whoever holds the mortgage) would get “50% of the difference between the selling price and the new value of the mortgage.” Zingales would limit this option to properties in zip codes where the Case-Shiller index shows a decline of at least 20%.
He proposes a sort of similar solution for banks. Holders of bank debt would be able to force the bank into bankruptcy, wiping out the existing stockholders but giving ownership of the bank to the debt holders. To avoid this happening to solvent banks, stockholders would have the option of paying their share of the debt and keeping their stock.
Zingales notes that both of his proposals are simple standard ways of doing what more often involves hordes of lawyers and complex negotiations. Foreclosure is a very expensive process, for both sides, and corporate bankruptcy is hardly simple.
It seems to me there’s another advantage, which is that this plan gets the incentives right. Those who wrote inappropriate mortgages will suffer a cost, but, if they were correct that “house” values are increasing they’ll eventually come out well. If they weren’t, they won’t. And stockholders who failed to keep control of bank management will also suffer.
The net result would be people staying in their homes, with manageable mortgages, and banks with enough equity capital to make loans. At virtually no cost to the general taxpayer, by the way. It’s not especially Georgist, and it does little to prevent a future repeat, but it’s a lot better than what is actually going to happen.
700-bank solution isn't better than nothing
Bob Matter’s thoughtful comments need a response, and I can’t figure out how to properly format one without doing a new post, so here it is.
1. Not enough to time to implement a plan of such scope.
There’s enough time to price and purchase opaque derivative securities but not to open 700 straightforward banks? There are so many out-of-work bank staff– and more to come. I agree that this is a considerable task, but there are lots of people who know how to do it, and would have started their own banks already if they could raise the capital.
2. Too much added expense. 700 more buildings to rent, heat, light, and maintain, 700 sets of phone lines to pay for, computers, personnel, etc. etc.
We have a banking infrastructure in place now. There is plenty of vacant commercial space pretty much throughout the country. Of course there will be a cost, but each bank is a billion-dollar institution before they even take a deposit; they could spend 1/10th of 1% for physical facilities and startup staff.
3. Even this plan would ultimately lead to failure. The core problem of allowing private ownership of real property needs to be addressed. Until that time we will just keep repeating the boom-bust cycle. Interested parties can read the solution to today’s financial “crisis” in _Progress and Poverty_ by Henry George.
Henry George explains the root cause of economic meltdowns, and they will not be avoided until something like his proposal is put into effect. If he were here today, what would he propose as a way out of this depression?
I claim only that my proposal is far better than what the authorities propose. I don’t claim that it is better than doing nothing, which would result in considerable inconvenience but probably a quicker recovery than what we’ll get.
What’s really encouraging now is how much opposition is appearing to the whole idea of any bailout. I wish that meant it was unlikely to happen.
Privatizing Federal patents
NASA has engaged a Chicago company, Ocean Tomo, to auction off “a suite of 25 patents.” This is considered to be transferring technology to the private sector. I guess an auction is better than sleazy private deals. The main point to remember is that a patent is not the right to use an invention, it is only the right to prevent others from doing so. (via slashdot)
Unbroken record on overtaxing those who use land…
…and undertaxing those who just sit on land, waiting for its value to rise.
The 2006 data are now published, and once again the Cook County Assessor has overassessed houses (and the lots they occupy) in Chicago relative to vacant land. As in the previous year, data from actual sales show that, as a percentage of sales price, assessments on houses (including land) average 50% higher than assessments on vacant land. This is the reverse of the legal requirement, under which real estate which includes houses is supposed to be assessed at a 1/3 lower percentage of value than vacant land.
This amounts to is a further penalty on homeowners (and owners of condo’s, and 2-4 flats, too), as owners of vacant land aren’t carrying their legal (let alone fair) share of the tax burden.
Is Cook County uniquely corrupt or incompetent in this regard? Other Illinois counties do not even pretend to assess residential parcels at a lower percentage of value than vacant parcels. Rather, they are obligated to assess everything at the same percentage of value. In most cases where data are reported, however, the assessment as a percentage of sales price is considerably lower for vacant parcels than for improved real estate.
Source: Data compiled by the Illinois Department of Revenue, which can be seen here (look at the “ratio” links under “property tax.”
Nobody understands the income tax
That’s what Albert Einstein is reputed to have said, tho I’ve never found it documented. He might have meant that nobody understands the logic of a tax system that penalizes productivity and “put[s] a premium upon unscrupulousness and a tax upon conscience.” More likely he meant that no one understands how to calculate it. A recent prominent example could be Charles Rangel, who maybe really didn’t understand that he had to pay taxes on the income from renting his Dominican villa.
But today’s a twofer, because we also have a report that “[s]ome of the country’s biggest investment banks and brokerage firms…marketed allegedly abusive transactions that helped foreign hedge-fund investors avoid billions of dollars in U. S. taxes…” The big news isn’t that they cheated, but that they got caught. I bet they’ll be a lot more careful in the future.
The income tax is inherently difficult to administer. Many very smart people spend their working hours figuring out ways to avoid taxes. Other smart people spend their working hours figuring out how to eliminate the ways discovered by the first group of smart people. (Later those in the second group join the first group, whose work is more lucrative.)
Meanwhile, we ordinary taxpayers have to deal with more and more complexities, most inserted by the second group in a futile attempt to stop the first group.
Fairness in school funding
The Reader’s Ben Joravsky is one of many in the media making a big hoopla about how Chicago Public Schools spend a lot less per pupil than New Trier High School does ($10,049 vs. $20,811, according to Joravsky). Leaving aside the question of whether more money results in better education, some basic facts seem to be getting lost here.
(1) Comparing Chicago’s k-12 district to New Trier’s high school district isn’t meaningful. High schools always spend more than elementary schools, per pupil. I’m not going to try to explain why, tho it seems high school teachers are paid better than elementary school teachers. and maybe more specialized equipment and smaller classes are needed.
(2) Compared to most other districts, Chicago is wealthy. Since advocates say the main reason for the disparities is that some districts have a bigger tax base (more assessed value of real estate per student) than others, we’d think that Chicago’s tax base must be pretty poor. Sure, New Trier’s tax base is more than seven times as much, per student, as Chicago’s. That leaves plenty for them to share with the elementary feeder districts.
But how does Chicago compare to the 394 other K-12 districts in Illinois? Chicago’s $165,380 per student is higher than 92% of the other K-12 districts. And that’s even after allowing for the scandalous TIF extractions that have Joravsky rightfully concerned. (Check my work with the figures from here. Look on the left side under “file type” and download the xls spreadsheet.) Most of the K-12 districts have a tax base of less than $100,000/student.
(3) Disparities of local tax base can be remedied without raising income or sales taxes. If for some reason it’s necessary to increase state funding for local schools, that can be done without raising the income tax or sales tax. Wealthier districts could be required to “donate” part of their revenues to poor districts. Or the statewide real estate tax can be resurrected. Ideally, it would exclude improvements from the tax base.