eliminate the payroll tax and replace it with a tax on consuming things harmful to the environment

From Free Exchange:

"The payroll tax keeps the retired off welfare

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Economist.com | NEW YORK

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Fiscal policy

HENDRIK HERTZBERG reckons the US should eliminate the payroll tax and replace it with a tax on consuming things harmful to the environment. It soundS like a happy idea, satisfying the agendas of both parties.

Liberals have been reticent, too. The payroll tax now provides a third of federal revenues. And, because it nominally funds Social Security and Medicare, some liberals regard its continuance as essential to the survival of those programs. That’s almost certainly wrong. Public pensions and medical care for the aged have become fixed, integral parts of American life. Their political support no longer depends on analogizing them to private insurance. Besides, the aging of the population, the collapse of defined-benefit private pensions, the volatility of 401(k)s, and pricey advances in medical technology mean that, no matter what efficiencies may be achieved, Social Security and Medicare will—and should—grow. Holding them hostage to ever-rising, job-killing payroll taxes is perverse.

Felix Salmon calls payroll taxes "horribly regressive" because they are a flat 15.3% (including employer and employee contributions) on income.

So what's wrong with that idea? The problem is the payroll tax is more of a forced savings scheme than a tax. The amount of taxes you pay, the number of years you pay, and average wage growth determine your benefit. Social Security is progressive because the lower your income, the higher your benefit relative to your contribution. If you are a low wage earner you can expect a high fraction of your average monthly income as your Social Security benefit. In this sense Social Security serves as both national insurance and as a form of welfare. Taking away the payroll tax and replacing it with a more "progressive" consumption tax puts an enormous burden on middle- to upper-income earners. An average wage earner already see less than a 2% return on their Social Security tax dollar. Scrapping the payroll tax entails completely changing how benefits are calculated. Would your benefit somehow be proportional to how much carbon you consumed as a worker?

I heard Amity Shlaes once say she does not like the idea of a payroll tax holiday because it eliminates any illusion that Social Security is an insurance scheme, rendering it entirely a welfare system (this brings the US one big step closer to being no better than Sweden). That sounds like what Mr Hertzberg is advocating. In that case it does not really address the death of defined benefit plans (whose demise shoud be welcomed anyhow) and 401(k) volatility, it just means we’ve created a huge welfare system. This does not address the savings needs of most of the population.

Now, I have always thought Social Security did a pretty lousy job by being both an insurance and a welfare system. If we overhaul the system the welfare component of it should be separate and the forced saving part can work in a myriad of funded ways. But, you cannot simply swap out a payroll tax for a consumption tax without changing the entire scope of a state pension. "

Me:

Don the libertarian Democrat wrote:

March 16, 2009 23:18

Just so we're clear about Sweden:

http://www.forsakringskassan.se/sprak/eng/pension/

"The pension is based on the income you have had during the whole of your life [from the age of 16 up to and including 1998]. If you have worked for a long time and earned a lot, you will receive a higher pension. Similarly, you will receive less pension if your income has been low."

And:

"Premium pension [Premiepension]

2.5 per cent of your pensionable income goes towards your premium pension. For those born between 1938 and 1953, this percentage is less. You may choose to invest your pension capital in any of the various funds registered with the Premium Pension Authority."

I'm for a Guaranteed Income as advocated by Milton Friedman and Charles Murray.

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged

From Economix. Doesn't this sound like a libertarian Democrat?:

"The Case for Small-Government Egalitarianism

By Edward L. Glaeser

Edward L. Glaeser is an economist at Harvard.

The stimulus debate badly needs the voices of that now-rare breed: Andrew Jackson’s intellectual descendant, the small-government egalitarian.( THE LIBERTARIAN DEMOCRAT )

Today, Franklin Roosevelt’s heirs — big-government liberals eager to right the wrongs of the world by expanding the size of the government — argue against small-government conservatives. The supposedly more progressive side wants the stimulus package to take the form of government spending, while their opponents want bigger tax cuts for businesses and more prosperous Americans.

The missing movement, small-government egalitarianism, would favor tax cuts, but only if they were aimed at ordinary Americans.( I AGREE TO AN EXTENT. THEY WOULD BE MY LARGEST CUTS, BUT CUTS FOR INVESTMENT MAKE SENSE. )

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged( THAT'S OUR SYSTEM, YES. ). Was the Interstate highway system such a boon for the urban poor? Has rebuilding New Orleans done much for the displaced and disadvantaged of that city? Small-government egalitarianism suggests that direct transfers of federal money to the less fortunate offer a surer path toward a fairer America.( THAT'S WHY I FAVOR A GUARANTEED INCOME. )

Political divisions have not always pitted big-government egalitarians against small-government conservatives.

At the start of the 19th century, the fans of big government, like Alexander Hamilton and Henry Clay, saw public projects as a means of strengthening the nation rather than reducing inequities. Their policies, such as tariffs and canals, often enriched the prosperous more than the poor. Conversely, the post-Era of Good Feelings Democratic Party was built around Andrew Jackson’s small-government egalitarianism. Jackson’s fight against the prosperous Philadelphian Nicholas Biddle and the Second Bank of the United States epitomized his desire to reduce privilege by reducing the size of government.

In the 20th century, President Woodrow Wilson campaigned on a “New Freedom,” opposing Teddy Roosevelt’s big-government Progressivism. While Roosevelt wanted the government to manage monopolies, Wilson wanted trust-busting and less protectionism. Wilson perceptively noted the dangers of too much government: “If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now?”

Current American political discourse labels people as either anti-government or pro-equality, but wanting to help the poor should not require the abandonment of sensible skepticism about expanding the size of the state. Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.( I AGREE ON BOTH POINTS )

Today, the New Deal’s heirs are vociferously arguing that more( I SAY SOME, BUT LESS. ) of the stimulus package needs to be spent on public works rather than tax cuts. The big-government skeptics point out that the government can’t spend hundreds of billions of dollars on infrastructure projects both wisely and quickly. Good infrastructure spending doesn’t happen on a dime, and applying a “use-it-or-lose-it” rule to speed up spending will lead to a lot of waste. The country could certainly invest more, in both human and physical capital, but that spending should follow the rule that benefits must exceed costs( THIS IS ESSENTIAL. ). Good investments need plenty of time to plan and implement, which pretty much rules them out as good fiscal stimulus. Moreover, since many of these projects will disproportionately benefit the prosperous, many of them can be financed with user charges( FINE ).

Yet skepticism about vast public works does not necessarily lead towards Alf Landon-like antipathy towards stimulus, or towards tax cuts for big businesses and the wealthy. A quite plausible alternative, which is partially present in the president-elect’s proposal, is for the fiscal stimulus to primarily take the form of payroll tax cuts for poor and middle-income Americans. Those are, after all, the people who are most likely to spend the money quickly.

Targeted tax aid for poorer Americans would be far more egalitarian than most kinds of infrastructure spending, such as broadband technology. Sensible infrastructure projects wouldn’t disproportionately employ the least-skilled Americans. Forgoing the payroll tax for households earning less than $75,000 a year is surer progressivism than bridge-building.

Economics has little say about how egalitarian society should be. That is a question for moral philosophers and the democratic process( POLITICAL ECONOMY ). However, economics does tell us to choose efficient means of redistribution, and cash transfers almost always involve less waste than the alternatives( I AGREE ). Reducing the payroll tax not only avoids the problems inherent in trying to spend infrastructure money quickly, but it can also directly target aid to the poor, who need help more and will spend the cash more quickly. Now that’s the kind of small-government egalitarianism that would have appealed to Andrew Jackson."

I disagree on two points:
1) I favor a sales tax cut over a payroll tax cut, but I do like the payroll sales tax cut over any other proposed option.
2) I favor tax cuts for investment. The primary problem we are currently fighting is the fear and aversion to risk, which such targeted tax cuts might help.

Otherwise, I'm in general agreement. Too bad he's never heard of a libertarian Democrat.

"As for me, I think dropping money out of a helicopter is looking better and better"

Greg Mankiw with a good post:

Let the Rent Seeking Begin ( HOW CAN IT STOP. THAT'S OUR SYSTEM. AND, HERE'S THE RUB, OUR INVESTMENT CLASS LOVES IT )


The Institutional Economics blog points to this story:

The Association of Zoos and Aquariums (AZA) today called for shovel-ready zoo and aquarium infrastructure projects to be eligible for Federal stimulus funding....Many zoos have their roots in the Great Depression, when the Federal Work Projects Administration (WPA) helped build many zoos across America. ( I DON'T LIKE ZOOS, BUT I UNDERSTAND WHY PEOPLE DO )

Of course, this lobbying is part of the political process ( UNDERSTATEMENT ). Whether the AZA gets the money it wants for new zoos will be up to the new administration and Congress. I am sure that the Obama transition team is now carefully evaluating many hundreds of billions of dollars of proposed spending projects and will, over the next few weeks, determine precisely which of these pass a cost-benefit test ( YES PLEASE ).

As for me, I think dropping money out of a helicopter is looking better and better( CARE TO JOIN THE HELICOPTER CLUB? ). (Or, more seriously, consider my federalist fiscal stimulus.)"

I prefer a Sales Tax Decrease or Payroll Tax Decrease.

"*It is the Minsky effect that is the real kicker here."

Arnold Kling also lines up with the Payroll Tax Cut:

"Mark Zandi says

A payroll tax holiday and a permanent payroll tax credit would be effective tax cuts, particularly if designed to help harder-pressed lower- and middle-income households and smaller businesses.

Tyler Cowen also favors payroll tax cuts. I like the idea because there is minimal time lag, it lowers the price of labor, and it keeps the government out of picking winners and losers in terms of industries.

I have zero faith in econometric estimates of the Keynesian multiplier. I think that today's asset-deflation economy is too different from most of what we have observed over the past fifty years for econometrics to be of any help."

I tend to agree that history is not much help here at all, except as a narrative to help us get through this mess. I'm fine with the Payroll Tax Cut, but I'm still stubbornly pushing my Sales Tax Cut Idea.

"Logic suggests that the multiplier today is large. It more likely to be closer to 3 (or above) than to 1.

1. Interest rates on Treasuries are so low that printing Treasuries is tantamount to printing money. ( True )

2. Unless the fiscal stimulus is really stupidly targeted, there should be few supply bottlenecks. The demand increase will go mostly to output and hardly at all to prices. ( Agree )

3. Investment is more likely to be "crowded in" by stronger demand than crowded out by higher interest rates. ( Agree )

4. We are likely to see a strong "Minsky effect." That is, higher income should increase wealth and improve balance sheets. This will stimulate spending by both businesses and consumers.*" ( Agree )

Logic=It makes sense to me.

"Having said all that, it is still a bit strange to think of a larger government deficit as a stimulus. If I wrote myself a check for $5000, obviously that would not be a stimulus. If I wrote my daughter a check for $5000 and said that it was coming out of her inheritance, we are saying that would be a stimulus. At a national level, what we are doing is writing checks to our children and taking it out of their inheritance. And, yes, I do think that under present circumstances that will be a net stimulus."

I'm glad he agrees.

Let's look at "stimulus":

1. Something causing or regarded as causing a response.
2. An agent, action, or condition that elicits or accelerates a physiological or psychological activity or response.
3. Something that incites or rouses to action; an incentive: "Works which were in themselves poor have often proved a stimulus to the imagination" (W.H. Auden).

[Latin, goad.]

I don't know, it does seem to be a stimulus, in that it is intended to incite or rouse spending. Where the money comes from seems secondary to the purpose.

"*It is the Minsky effect that is the real kicker here.

Let E be expenditure and let Y be income or GDP. Suppose that without the Minsky effect, we have:

E = $100 + 0.5Y
E = Y

The multiplier is 2, and Y = $100/(1-0.5) = $200.

Now, introduce a Minsky effect, where wealth is denoted by W.

E = Y
W = 5Y
E = $100 + 0.5Y + 0.08W

Now, E = $100 + 0.5Y + 0.08(5Y)

= $100 + 0.9Y

and the multiplier is 10, so that Y = $1000"

Can we introduce the Minsky Effect into my bank account?

"we can use this found money to encourage people to create jobs, or we can use it to encourage people to use more gasoline"

Via Greg Mankiw, a post on Time from Michael Kinsley that I like:

"The only good economic news lately has been the collapse of oil prices. At the beginning of July, just five months ago, the price of a barrel of was more than $140. By the beginning of December, it was down to about $45. That's a drop of more than two-thirds. In the U.S., we consume about 15 million bbl. of crude a day. The saving of $95 per bbl. adds up to more than $500 billion a year. That's big--enough to bail out the auto industry 15 times."

In fact, it's acted as a kind of stimulus.

"Of course, we've been through this before. The price of oil shoots up; we start using less; reduced demand sends the price down; we start using more; pretty soon it's shooting up again. This time, though, it does feel different. It seems as if Americans have made a real and fundamental commitment to consuming less energy. That is not so much out of idealism as it is the good side, for a change, of our short attention span. When the price of gasoline shot past $4 per gal., it was both shocking and reassuring. Economists had long wondered what price it would take to get our attention. This, at last, was it. Yet $4 gas turned out not to be the end of the world. Although it was devastating for some people--and it surely accelerated our plunge into recession, which is affecting all of us--we adjusted more easily than one would have thought possible. And we kept on adjusting, even as the price of oil plummeted. (See pictures of the recession of 1958.)

Will this change in behavior last? Or will we return to our wastrel ways as we climb out of recession and the reality again sinks in that gas is cheap? The one sure way to prevent this second scenario from happening is not to let gas get cheap again. Yes, this is yet another plea for that hoary notion: a big energy tax. Just five months ago, we were essentially paying a tax of $95 per bbl. That's the difference between what oil cost then and what it costs now. This was a "tax" whereby the revenue went into the pockets of oil producers--about two-thirds of them foreign countries and one-third fellow Americans. Isn't there something better to do with the money?

This idea always comes up and never goes anywhere. That's partly because of our general loathing of taxes and suspicion of Washington and partly because the idea tends to come up when energy prices are rising and people find it hard to believe that it would be good if they rose even more. But a couple of things are different now. First, we have experienced the high energy prices that people in most of the rest of the world already live with, and we know we can live with them too. Four-dollar gasoline is no longer unthinkable."

This is my position. We should try it now while the price of gas is low.

"Second, this is the perfect moment for the other part of many proposals for an energy tax, which is to give the money back to people by lowering the payroll tax. The payroll tax, or FICA, collects about 15% of your wages or salary--half from you and half from your employer. It is expected to bring in close to a trillion dollars in 2009. Using our windfall from plummeting crude-oil prices alone, we could cut the FICA tax by more than half. Including other forms of energy would bring in even more. (See pictures of oil.)

FICA is, in effect, a tax on job creation. It applies to the very first dollar earned by a minimum-wage worker, but most of it tops out at an annual income of about $100,000 and doesn't apply at all to income from investments. For most Americans holding jobs, FICA now takes a bigger chunk of their income than the income tax itself. And yet it rarely enjoys the tender concern of tax-cutting Republicans, who prefer to concentrate on tax breaks for capital gains. Cutting the FICA tax in half, for workers and for employers, would make it more affordable for employers to hire--or avoid layoffs--while giving everyone who makes less than $100,000 a 7.5% raise to spend and stimulate the economy even further. People making more than $100,000 would get a tax cut too--as big as anyone else's, though a smaller percentage of their incomes.

One argument against all this is that FICA finances Social Security payments, and the connection between money in and money out helps keep Social Security secure. There's a simple answer: among the many problems we now face, the danger that a majority in Congress will gang up against Social Security benefits must surely rank low.

It comes down to this: in the terrible storm of economic misery, we suddenly have a half-trillion-dollar windfall. As unemployment heads toward double digits, we can use this found money to encourage people to create jobs, or we can use it to encourage people to use more gasoline. It's a pretty easy choice, don't you think?"

I'm fine with this, but I like cutting sales taxes better, along with targeted tax cuts for investment. But I'll take this.