"The majority, and their families, are poor already before taxation hits them"

From Adam Smith's Lost Legacy:

"Stop Taxing the Poorest Incomes at 20 Per Cent

Joseph Stiglitz write in FT.com (via Economist’s View, Mark Thoma):

“Do not squander America’s stimulus on tax cuts

and

“Joseph Stiglitz: Just Say No to Tax Cuts”

“Do not squander America’s stimulus on tax cuts, by Joseph Stiglitz, Commentary, Financial Times”:

“As news of the US economy worsens, he worries about whether a stimulus could restart the economy ...”

“We are in uncharted territory in this crisis. But household tax cuts, except for
possibly the poorest, should have no place in the stimulus.”

Comment
It seems to me that Joseph Stiglitz does not emphasis the correct and moral policy. Across the board tax cuts may not be efficacious in the current climate, but the case for removing the poorest consumers from the taxation system is convincing. ( I AGREE WITH THIS IN GENERAL )

Raising the personal, non-taxable allowance from about £6k to £16k (even higher) would largely be passed on in spending and stimulate the economy fairly quickly.

Reducing tax rates in the higher income brackets may not have an such an immediate, or lasting, effect.

The poor spend; they do not save much as a group. Legends of poor-pensioner, miserly ‘millionaires’ are news, when revealed, because they are so rare.

The majority, and their families, are poor already before taxation hits them, if they have jobs, and raising the tax threshold will not make them rich; only a little less poor.

It’s not that this change would ‘solve’ poverty. The moral compulsion for removal is that paying income tax (20 per cent, thanks to the ‘Labour’ government) when they already very poor is itself immoral.( I AGREE )

Removal of the income tax from the very poor may mean that the richer would pay ‘proportionally’ more on their much larger incomes, which Adam Smith said was appropriate in other contexts, and not at the expense of the poor, ‘who are least able to supply it.’ [WN V.i.d.13: p 728; Edwin Canaan, 1937 edition, Random House, p 686]

posted by Gavin Kennedy at 3:16 PM 0 comments"

I agree with this post in principle, which is why I support a Guaranteed Income. However, a sales tax cut or payroll tax cut which will be phased out in the future does help the poor and give the better off an incentive to spend now. This doubly effective aspect of both of these tax cuts goes very far in recommending them.

"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.

I have to admit to being more worried about inflation than deflation. From The Bears's Lair, Martin Hutchinson gives one possible scenario:

"Even if inflation is declining gradually as output declines, it will not have time to become deflation in the 9-12 months before output reaches bottom – if we were about to experience Great Depression II the decline would be more prolonged, but we’re not. Once output has bottomed out, the inflationary picture changes radically. Budget deficits in the United States, the EU, China, India and Japan will be enormous, causing sharp rises in interest rates as government bonds “crowd out” the private sector. Money supply, which will have been increasing because of the very low nominal interest rates, will now be grossly excessive for the shrunken GDP.

Costs, which were held down by the wave of bankruptcies in the contraction, will once again increase as supply comes once again to balance demand. For one thing, higher interest rates and capital costs (through lower equity prices) will themselves produce a sharp upward ratchet effect on corporate break-evens, both in the US and more especially in emerging markets where capital will be scarce. Lower production volumes against which fixed costs can be amortized will also increase unit costs. The overall effect will be sharp upward pressure on prices -- those continuing to sell at a loss to keep the factory at its most efficient output level and workers employed will be rapidly driven out of business.

Inflation will thus resurge, both domestically and internationally, and will quickly reach the double-digit level at which central bank action to restrain it becomes unavoidable (amusingly, unexpectedly awful inflation figures are likely to appear before the January 2010 end of Fed Chairman Ben Bernanke’s term, forcing him to admit while still in office that his “deflation” warnings were hogwash.) Interest rates will gradually be forced upwards to inflation-plus-4% levels in the last months of 2009 and throughout 2010, producing a second “dip” of recession in 2011 and a non-inflationary recovery in 2012-13. The turn from economic decline (but not truly deflation) to inflation will be well indicated by the gold market, which can expect to surge as the economic bottom is approached.

As often happens, the “gold bugs” will turn out to be right in the end, even if their performance during 2008 has been dreadful – for those that survive, 2009 is likely to be a banner year. Deflationists will proclaim each slowing inflation figure in the early months of 2009 to be evidence for their case, though in reality those months will see not true deflation but simply slowing inflation accompanied by sharp descent into recession. However in the long run, monetarists will prove to have been right – and the decade of excessive money supply expansion from 1995-2008 will impose its final penalties on the unfortunate US and global public. Monetarists will also have the satisfaction of knowing that higher real interest rates will have become inescapable, and that overexpansion of money supply will never happen again – until some future generation of idiots has forgotten the economic history of these decades."

My concerns are the debt/deficit and rising interest rates to service it down the road. I don't say that I see a disaster or, indeed, a scenario quite as dire as this, but I think that, once we get through this nightmare, we are going to have to quickly deal with this problem.

Part of the problem is that I, too, see the need for a stimulus and tax cuts to combat this aversion and flight from risk. So, count me in as one causing the problem, but who will battle at least as hard to get us out of it down the line.

"I am no expert on swaps (to put it mildly) but it sure seems like the current move is driven by something other than fundamentals."

Brad Setser hits the Trifecta:

"Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ““Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors”

That's right. Investors are buying bonds with basically no interest in order to avoid risk, and hedge against deflation. Make sense?

"Suffice to say that surge in Treasuries — and rise in credit spreads — isn’t a good sign. Investors (including central banks) aren’t willing to accept anything that just has an implicit government guarantee — let alone debt with real risk. Right now they want nothing less than the full faith and credit of the US government."

That's right, they won't lend money to corporations ( Buy bonds ), slowing the economy, by reducing lending and causing the interest rates that these corporations need to offer to get a loan to skyrocket.

"I am no expert on swaps (to put it mildly) but it sure seems like the current move is driven by something other than fundamentals. A negative swap spread — according to the FT – implies that “investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.” That doesn’t seem consistent with what the rest of the market is telling us …"

I agree. There's a total disregard for fundamentals because of the Fear and Aversion to Risk. It's a downward bubble, if you will.

Now we need to figure out how to combat it. One way, according to Buiter, is to force banks to lend, however fearful they are. Rebecca Wilder and I favor cutting taxes. We'll see.

"I could come up with a pretty good list of tax rate cuts financed by spending cuts that would increase economic growth."

A very succinct and potent discussion of the connection between cutting taxes and economic growth by Gerald Prante on the Tax Policy Blog:

"If Bernstein's standard for "high" economic growth is that a tax cut pay for itself, I would agree that no major tax rate cut at today's tax levels is going to promote that much of economic growth. (I'm referring to major federal taxes, as I'm sure there is somewhere out there in a state that lower tax rates would pay for itself...say on a cigarette tax or something where there is huge border activity. Also if you consider certain prohibitions to be implicit taxes, repealing them and in effect cutting tax rates would pay for themselves.)

But Bernstein's position seems to be like many on the left, which is a lexicographic preference for government always getting bigger, and he's trying to act as if it's a free lunch. It's very similar to the view of those on the right who say that government is a waste and should be starved of all revenue. The fact of the matter is that the optimal size of government > 0, but it's optimal size is not 100 percent of the economy (and there would be substantially lower economic growth if that was the case).

There are some government spending items currently in existence that are not worth their costs to taxpayers. Then again, there are some hypothetical government spending items that do not exists right now that would be worth additional tax dollars. The secret is finding which spending items are worth their costs and only funding those, and raising the necessary revenue in the best possible way that meets various criteria (such as equity and efficiency).

It is one of the paradoxes for those who seek to rally support for starving the beast (even if it worked say at the state level under a balanced budget rule). You are starving a beast because you view the beast as too wasteful and not looking out for the best interest of the taxpayer. But whose to say that when you starve it, it's going to devote its now more limited resources to the best interest of the taxpayers. It may starve you in return of the services you and those who you seek to garner support from value most (since you already believe that it doesn't look out for your own interests), thereby not getting rid of the programs at the margin that aren't worth their costs to taxpayers but instead getting rid of the programs that are worth their costs."

Any tax must be looked at and judged by the conditions of the economy, what the money is needed for, the level of debt, etc. Even if you believe in limited government, there is no getting away from analyzing the effects of particular taxes and whether or not they are worth it, even to you. In our complicated economy, it's a hellishly hard thing to do, but there's no way around it. There's not even an easy way to judge simplifying taxes or tax rates, without discussing what you need the money for, and whether the simplification gets you to where you want to go.

Any tax or government expenditure needs to be examined on its own.