inequality

The possibilities of a global basic income

PNRJ development economics, inequality, public policy, Uncategorized , , , , , , , , , , , , ,

JDN 2457401

This post is sort of a Patreon Readers’ Choice; it had a tied score with the previous post. If ties keep happening, I may need to devise some new scheme, lest I end up writing so many Readers’ Choice posts I don’t have time for my own topics (I suppose there are worse fates).

The idea of a global basic income is one I have alluded to many times, but never directly focused on.

As I wrote this I realized it’s actually two posts. I have good news and bad news.
First, the good news.

A national basic income is a remarkably simple, easy policy to make: When the tax code comes around for revision that year, you get Congress to vote in a very large refundable credit, disbursed monthly, that goes to everyone—that is a basic income. To avoid ballooning the budget deficit, you would also want to eliminate a bunch of other deductions and credits, and might want to raise the tax rates as well—but these are all things that we have done before many times. Different administrations almost always add some deductions and remove others, raise some rates and lower others. By this simple intervention, we could end poverty in America immediately and forever. The most difficult part of this whole process is convincing a majority of both houses of Congress to support it. (And even that may not be as difficult as it seems, for a basic income is one of the few economic policies that appeals to both Democrats, Libertarians, and even some Republicans.)

Similar routine policy changes could be applied in other First World countries. A basic income could be established by a vote of Parliament in the UK, a vote of the Senate and National Assembly in France, a vote of the Riksdag in Sweden, et cetera; indeed, Switzerland is already planning a referendum on the subject this year. The benefits of a national basic income policy are huge, the costs are manageable, the implementation is trivial. Indeed, the hardest thing to understand about all of this is why we haven’t done it already.

But the benefits of a national basic income are of course limited to the nation(s) in which it is applied. If Switzerland votes in its proposal to provide $30,000 per person per year (that’s at purchasing power parity, but it’s almost irrelevant whether I use nominal or PPP figures, because Swiss prices are so close to US prices), that will help a lot of people in Switzerland—but it won’t do much for people in Germany or Italy, let alone people in Ghana or Nicaragua. It could do a little bit for other countries, if the increased income for the poor and lower-middle class results in increased imports to Switzerland. But Switzerland especially is a very small player in global trade. A US basic income is more likely to have global effects, because the US by itself accounts for 9% of the world’s exports and 13% of the world’s imports. Some nations, particularly in Latin America, depend almost entirely upon the US to buy their exports.

But even so, national basic incomes in the entire First World would not solve the problem of global poverty. To do that, we would need a global basic income, one that applies to every human being on Earth.

The first question to ask is whether this is feasible at all. Do we even have enough economic output in the world to do this? If we tried would we simply trigger a global economic collapse?

Well,if you divide all the world’s income, adjusted for purchasing power, evenly across all the world’s population, the result is about $15,000 per person per year. This is about the standard of living of the average (by which I mean median) person in Lebanon, Brazil, or Botswana. It’s a little better than the standard of living in China, South Africa, or Peru. This is about half of what the middle class of the First World are accustomed to, but it is clearly enough to not only survive, but actually make some kind of decent living. I think most people would be reasonably happy with this amount of income, if it were stable and secure—and by construction, the majority of the world’s population would be better off if all incomes were equalized in this way.

Of course, we can’t actually do that. All the means we have for redistributing income to that degree would require sacrificing economic efficiency in various ways. It is as if we were carrying water in buckets with holes in the bottom; the amount we give at the end is a lot less than the amount we took at the start.

Indeed, the efficiency costs of redistribution rise quite dramatically as the amount redistributed increases.

I have yet to see a convincing argument for why we could not simply tax the top 1% at a 90% marginal rate and use all of that income for public goods without any significant loss in economic efficiency—this is after all more or less what we did here in the United States in the 1960s, when we had a top marginal rate over 90% and yet per capita GDP growth was considerably higher than it is today. A great many economists seem quite convinced that taxing top incomes in this way would create some grave disincentive against innovation and productivity, yet any time anything like this has been tried such disincentives have conspicuously failed to emerge. (Why, it’s almost as if the rich aren’t that much smarter and more hard-working than we are!)

I am quite sure, on the other hand, that if we literally set up the tax system so that all income gets collected by the government and then doled out to everyone evenly, this would be economically disastrous. Under that system, your income is basically independent of the work you do. You could work your entire life to create a brilliant invention that adds $10 billion to the world economy, and your income would rise by… 0.01%, the proportion that your invention added to the world economy. Or you could not do that, indeed do nothing at all, be a complete drain upon society, and your income would be about $1.50 less each year. It’s not hard to understand why a lot of people might work considerably less hard in such circumstances; if you are paid exactly the same whether you are an entrepreneur, a software engineer, a neurosurgeon, a teacher, a garbage collector, a janitor, a waiter, or even simply a couch potato, it’s hard to justify spending a lot of time and effort acquiring advanced skills and doing hard work. I’m sure there are some people, particularly in creative professions such as art, music, and writing—and indeed, science—who would continue to work, but even so the garbage would not get picked up, the hamburgers would never get served, and the power lines would never get fixed. The result would be that trying to give everyone the same income would dramatically reduce the real income available to distribute, so that we all ended up with say $5,000 per year or even $1,000 per year instead of $15,000.

Indeed, absolute equality is worse than the system of income distribution under Soviet Communism, which still provided at least some incentives to work—albeit often not to work in the most productive or efficient way.

So let’s suppose that we only have the income of the top 1% to work with. It need not be literally that we take income only from the top 1%; we could spread the tax burden wider than that, and there may even be good reasons to do so. But I think this gives us a good back-of-the-envelope estimate of how much money we would realistically have to work with in funding a global basic income. It’s actually surprisingly hard to find good figures on the global income share of the top 1%; there’s one figure going around which is not simply wrong it’s ridiculous, claiming that the income threshold for the top 1% worldwide is only $34,000. Why is it ridiculous? Because the United States comprises 4.5% of the world’s population, and half of Americans make more money than that. This means that we already have at least 2% of the world’s population making at least that much, in the United States alone. Add in people from Europe, Japan, etc. and you easily find that this must be the income of about the top 5%, maybe even only the top 10%, worldwide. Exactly where it lies depends on the precise income distributions of various countries.

But here’s what I do know; the global Gini coefficient is about 0.40, and the US Gini coefficient is about 0.45; thus, roughly speaking, income inequality on a global scale recapitulates income inequality in the US. The top 1% in the US receive about 20% of the income. So let’s say that the top 1% worldwide probably also receive somewhere around 20% of the income. We were only using it to estimate the funds available for a basic income anyway.

This would mean that our basic income could be about $3,000 per person per year at purchasing power parity. That probably doesn’t sound like a lot, and I suppose it isn’t; but the UN poverty threshold is $2 per person per day, which is $730 per person per day. Thus, our basic income is over four times what it would take to eliminate global poverty by the UN threshold.

Now in fact I think that this threshold is probably too low; but is it four times too low? We are accustomed to such a high standard of living in the First World that it’s easy to forget that people manage to survive on far, far less than we have. I think in fact our problem here is not so much poverty per se as it is inequality and financial insecurity. We live in a state of “insecure affluence”; we have a great deal (think for a moment about your shelter, transportation, computer, television, running water, reliable electricity, abundant food—and if you are reading this you probably have all these things), but we constantly fear that we may lose it at any moment, and not without reason. (My family actually lost the house I grew up in as a result of predatory banking and the financial crisis.) We are taught all our lives that the only way to protect this abundance is by means of a hyper-competitive, winner-takes-allcutthroat capitalist economy that never lets us ever become comfortable in appreciating that abundance, for it could be taken from us at any time.

I think the apotheosis of what it is to live in insecure affluence is renting an apartment in LA or New York—you must have a great deal going for you to be able to live in the city at all, but you are a renter, an interloper; the apartment, like so much of your existence, is never fully secure, never fully yours. Perhaps the icing on the cake is if you’re doing it for grad school (as I was a year ago), this bizarre system in which we live near poverty for several years not in spite but because of the fact that we are so hard-working, intelligent and educated. (And it never ceases to baffle me that economists who lived through that can still believe in the Life-Cycle Spending Hypothesis.)

Being below the poverty line in a First World country is a kind of poverty, but it’s a very different kind than being below the poverty line in a Third World country. (I think we need a new term to distinguish it, and maybe “insecure affluence” or “economic insecurity” is the right one.) A national basic income could be set considerably higher than the global basic income (since we’re giving it to far fewer people), so we might actually be able to set $15,000 nationally—but to do that worldwide would use up literally all the money in the world.

Raising the minimum income worldwide to $3,000 per person per year would transform the lives of billions of people. It would, in a very real sense, end poverty, worldwide, immediately and forever.

And that’s the good news. Stay tuned for the bad news.

Something is wrong with the corporate income tax

PNRJ inequality, public policy, Uncategorized

JDN 2457369

The US corporate income tax is clearly not working.
While at one time the corporate income tax took in almost as much revenue as the personal income tax, those days are long gone. In 1934 the personal income tax took in $420 million and the corporate income tax took in $364 million, (adjusted for inflation that’s $7.4 billion and $6.5 billion—still remarkably small! Taxes in the US used to be extremely low; now they are merely quite low). Today, the personal income tax takes in $1.39 trillion while the corporate income tax only takes in $320 billion. As you can see in the graph below (brought to you by Truthful Politics), while personal income tax revenue as a portion of GDP has been about the same since WW2, corporate income tax revenue has been steadily declining.

revenue_sources_GDP

Part of the problem is that it is so easy for corporations to hide their assets offshore; an estimated $2 trillion is currently held in corporate offshore accounts, almost all of it there to avoid US corporate tax.

The US corporate income tax has some unique features that set it apart from the corporate taxes of most other countries.
One, the rate of the US corporate tax is exceptionally high. That’s highly unusual; for almost every other sort of tax, the US tax rate is among the lowest, particularly when you compare with other First World countries. The United States was in a sense founded upon the idea of not paying taxes, and we have upheld that ideal for two centuries and counting.

Two, the US has a worldwide corporate tax system, whereas most countries have a territorial corporate tax system. In theory, this means that US corporations are required to pay tax on all their profits, wherever they are made, while most countries only require you to pay tax on profits you made in that country.

But wait—didn’t I just say that corporations hide trillions of dollars offshore to avoid US corporate tax? How can they do that, if they’re required to pay tax on all worldwide profits?

In a word? Loopholes.

Two that are particularly popular are inversion and transfer pricing. I won’t bore you with all the details, but basically inversion is when a US company pretends to be owned by a foreign company (I mean, I guess they are legally owned, but only on paper—real leadership rarely changes), so that their profits are now accounted in that foreign country; transfer pricing is a system by which corporations “buy” services from their subsidiaries in other countries, usually at ludicrously high prices in order to justify saying that they took a loss but their subsidiaries (which are not legally US corporations) made huge profits.

Of course, those are far from the only loopholes. There’s a long and ever-expanding list, as loopholes are like the Hydra: Cut off one head and two more shall emerge. For each loophole we close, lobbyists are hard at work creating two more. We must kill it with fire as Hercules did—burn out the entire corporate tax (and lobbying!) system as we know it and make something new.

In fact, most of the money corporations supposedly have “offshore” is actually being stored and spent here in the US. The “accounts” are offshore, but the actual cash, or more likely the actual encrypted servers that store the numbers (for that is what almost all of our money is nowadays—numbers in encrypted servers), are all here in the US. In the rare case that the money itself is actually elsewhere, they just take loans using it as collateral and spend the loan money here—because corporate debt payments are tax-deductible.

So this argument I see a lot that we need a “tax holiday” to encourage corporations to bring their money home and create jobs here is ridiculous. No, they’re already creating any jobs they were planning on creating (which of course they do only on the basis of expected consumer demand).

This money is already being used for everything it would be used for. The only distortion that corporate tax avoidance causes is a lack of tax revenue.

Now, there are two possible ways we could solve this problem in corporate tax reform.

The first is the tack Bernie Sanders takes, and it’s actually one of the few things I strongly disagree with him about. Bernie Sanders plans to reform the corporate tax system in a manner that will force corporations to actually pay taxes on their profits, closing most of these loopholes that allow them to avoid taxation.

The second is the one I favor, and for once I find myself agreeing with the American Enterprise Institute. We should eliminate the corporate tax entirely, and replace it with a higher tax rate on dividends and capital gains. I even rather like their idea of linking the tax rates on capital gains to the tax rates on ordinary income, so there is no longer any incentive to make your income be (or look like—carried interest) capital income instead of labor income.

Now, when I say that I agree with the American Enterprise Institute against Bernie Sanders, an explanation is surely in order. Normally quite the opposite is the case.

Well, first of all I also agree with the business writers in The Atlantic and The New York Times on this one, which should make my view a bit less surprising. But still, I should explain why many liberal economists think that the corporate income tax needs to disappear, since the common perception is that the corporate income tax affects the very rich, and normally liberal economists are all about raising taxes on the very rich in order to raise revenue while minimizing the harms of taxes.

And indeed I am all about raising taxes on the very rich—indeed, my proposed tax plan is the most progressive tax system this side of Eisenhower.

The problem is, we’re not sure if the corporate income tax actually does that.

I created my tax incidence series in large part to make this one fundamental point: The the person who writes the check is not necessarily person who actually pays the tax.

For personal income taxes, we understand their incidence relatively well. While we do think they create some small distortions in the economy as a whole, in general labor is inelastic enough that the burden of a personal income tax falls largely upon the person receiving the income. This makes income taxes a good means of actually redistributing income from one person to another. It’s very hard to disincentivize income; at most we might disincentivize work, and in a country that has twice as many unemployed people as job openings it’s hard for me to see how we have a problem with insufficient work incentives. If the Beveridge Curve ever gets so high up that we actually have more job openings than people looking for jobs, okay, then we can start talking about work incentives. It hasn’t happened at least in my lifetime.

Many economists argue that consumption is an even better thing to tax than income, because they want to increase the savings rate; but I am increasingly convinced that this is not actually a useful thing to do, and indeed that the savings rate is almost literally meaningless. (Perhaps in a future post I’ll talk about why I think so.) I will say this, however: Sales taxes have extremely well-understood incidence. They are the thing that our tax models were originally developed to handle, and they handle it very well. We can predict quite accurately what the effect of increases in sales taxes (or taxes on particular goods, such as alcohol) will be on consumer choices. Their predictability is a reason to recommend them, but in my opinion not sufficient to justify widespread use of sales taxes rather than income taxes.

The incidence of corporate income tax, on the other hand, is almost completely unknown. A substantial amount of research has gone into trying to understand corporate income taxes, but it is still not entirely clear who bears the primary burden of the corporate income tax, whether it is the owners of a corporation, its employees, or its customers. Because, pace Citizens United, corporations are not actually people. Corporations do not experience utility that can be raised or lowered. The money they make ultimately goes to actual human beings, and it’s those actual human beings we are interested in taxing.

To see this, think about what happens when we impose a tax on a corporation’s profits. One possibility is that their behavior is completely inelastic: They’ll just keep doing exactly the same thing they were doing, only now making less profit. But does that seem likely? No, it’s far more likely that they’re going to try to find some way to avoid the tax, or at least reduce how much they have to pay. They’ll use offshore banking and clever accounting methods to make it look like they have less profit than they really do. Even worse, they may even change the way that they run their company—producing fewer products or raising prices, laying off employees or reducing wages. They may decide not to make investments they otherwise would have, or overspend on capital they don’t actually need just for the tax deduction. All of these activities create real distortions in the economy and cause deadweight loss; and the harm they cause to employees or consumers could be much larger than the pain they impose on the owners of the corporation.

If we knew which of these strategies corporations would take, then we could predict the outcome and base our tax policy on that. But at present we are unable to do that. In fact, all of these strategies are probably employed by various corporations, and what we most care about is the aggregate effect—but we are currently unable to predict even that.

Indeed, given that they have so many options, it is most likely that the owners of corporations do not bear the burden of corporate income taxes. As you may recall from my tax incidence series, the person who bears a tax is the one who is least elastic; that is, the one who changes their behavior in response to the tax the least. This is likely to be the one who has the fewest alternatives—and employees and consumers have far fewer alternatives than corporate executives do. Indeed, employees probably have the fewest alternatives, and are likely the most inelastic; thus, they are probably the ones who actually bear the burden of the corporate income tax. And most inelastic of all are the employees at the bottom of the ladder (or should I say primate hierarchy), people like interns, janitors, and cashiers.

It may be counter-intuitive, but it is most likely true: By eliminating the corporate income tax, we will most likely create jobs and raise wages, especially for the people at the bottom. Janitors and cashiers may be the ones who feel the largest increase in pay.

There is a legitimate concern that raising capital gains rates could even have a similar effect. Under certain assumptions, the Atkinson-Stiglitz Theorem famously says that taxes on capital income cannot be used to redistribute wealth because they will impose more cost on workers than they raise in revenue for the transfer. They would reduce inequality only at the cost of reducing overall income, which clearly isn’t what we want. That would actually violate the Difference Principle, the seminal contribution to the theory of distributive justice we owe to John Rawls.

But the assumptions of that theorem are highly unrealistic, as I discussed in an earlier post. With a realistic idea of how capital income is actually allocated (I honestly can’t bear to say “earned” in this context), it becomes fairly obvious that taxes on capital income create minimal, if any, real distortions on hiring and investment. While corporate profits are fairly closely tied to the actual production and distribution of goods, capital income most assuredly is not. A corporate income tax takes money away from a corporation such as Apple or Boeing (well, not Apple or Boeing in particular, since they avoid it expertly; but the corporations that aren’t big enough to avoid corporate taxes are largely ones you’ve never heard of—yet another reason they’re unfair), who then most likely take it from their employees or their customers. A capital gains tax takes money away from people who bought and sold shares of Apple and Boeing, possibly thousands of times per second, people who most likely don’t even work there, have nothing to do with any decisions those companies have ever made, and may not even buy any of their products. I think you can see why in the latter case the decisions of the company are a lot less likely to be distorted.

It’s also harder to avoid capital gains taxes (albeit by no means impossible), especially if they are structured properly without loopholes. Thus, the same nominal rate on capital gains instead of corporate profits would likely raise a great deal more revenue.

In short, the corporate income tax is not working; I say we get rid of it altogether.

Means, medians, and inequality denial

PNRJ inequality, public policy , , , , , , , , , , , , , , ,

JDN 2457324 EDT 21:45

You may have noticed a couple of big changes in the blog today. The first is that I’ve retitled it “Human Economics” to emphasize the positive, and the second is that I’ve moved it to my domain http://patrickjuli.us which is a lot shorter and easier to type. I’ll be making two bite-sized posts a week, just as I have been piloting for the last few weeks.

Earlier today I was dismayed to see a friend link to this graph by the American Enterprise Institute (a well-known Libertarian think-tank):

middleclass1

Look! The “above $100,000” is the only increasing category! That means standard of living in the US is increasing! There’s no inequality problem!

The AEI has an agenda to sell you, which is that the free market is amazing and requires absolutely no intervention, and government is just a bunch of big bad meanies who want to take your hard-earned money and give it away to lazy people. They chose very carefully what data to use for this plot in order to make it look like inequality isn’t increasing.

Here’s a more impartial way of looking at the situation, the most obvious, pre-theoretical way of looking at inequality: What has happened to mean income versus median income?

As a refresher from intro statistics, the mean is what you get by adding up the total money and dividing by the number of people; the median is what a person in the exact middle has. So for example if there are three people in a room, one makes $20,000, the second makes $50,000, and the third is Bill Gates making $10,000,000,000, then the mean income is $3,333,333,356 but the median income is $50,000. In a distribution similar to the power-law distribution that incomes generally fall into, the mean is usually higher than the median, and how much higher is a measure of how much inequality there is. (In my example, the mean is much higher, because there’s huge inequality with Bill Gates in the room.) This confuses people, because when people say “the average”, they usually intend the mean; but when they say “the average person”, they usually intend the median. The average person in my three-person example makes $50,000, but the average income is $3.3 billion.

So if we look at mean income versus median income in the US over time, this is what we see:

median_mean

In 1953, mean household income was $36,535 and median household income was $32,932. Mean income was therefore 10.9% higher than median income.

In 2013, mean household income was $88,765 and median income was $66,632. Mean household income was therefore 33.2% higher than median income.

That, my dear readers, is a substantial increase in inequality. To be fair, it’s also a substantial increase in standard of living; these figures are already adjusted for inflation, so the average family really did see their standard of living roughly double during that period.

But this also isn’t the whole story.

First, notice that real median household income is actually about 5% lower now than it was in 2007. Real mean household income is also lower than its peak in 2006, but only by about 2%. This is why in a real sense we are still in the Second Depression; income for most people has not retained its pre-recession peak.

Furthermore, real median earnings for full-time employees have not meaningfully increased over the last 35 years; in 1982 dollars, they were $335 in 1979 and they are $340 now:

median_earnings

At first I thought this was because people were working more hours, but that doesn’t seem to be true; average weekly hours of work have fallen from 38.2 to 33.6:

weekly_hours

The main reason seems to be actually that women are entering the workforce, so more households have multiple full-time incomes; while only 43% of women were in the labor force in 1970, almost 57% are now.

women_labor_force

I must confess to a certain confusion on this point, however, as the difference doesn’t seem to be reflected in any of the measures of personal income. Median personal income was about 41% of median family income in 1974, and now it’s about 43%. I’m not sure exactly what’s going on here.

personal_household

The Gini index, a standard measure of income inequality, is only collected every few years, yet shows a clear rising trend from 37% in 1986 to 41% in 2013:

GINI

But perhaps the best way to really grasp our rising inequality is to look at the actual proportions of income received by each portion of the population.

This is what it looks like if you use US Census data, broken down by groups of 20% and the top 5%; notice how since 1977 the top 5% have taken in more than the 40%-60% bracket, and they are poised to soon take in more than the 60%-80% bracket as well:

income_quintiles

The result is even more striking if you use the World Top Incomes Database. You can watch the share of income rise for the top 10%, 5%, 1%, 0.1%, and 0.01%:

top_income_shares

But in fact it’s even worse than it sounds. What I’ve just drawn double-counts a lot of things; it includes the top 0.01% in the top 0.1%, which is in turn included in the top 1%, and so on. If you exclude these, so that we’re only looking at the people in the top 10% but not the top 5%, the people in the top 5% but not the top 1%, and so on, something even more disturbing happens:

top_income_shares_adjusted

While the top 10% does see some gains, the top 5% gains faster, and the gains accrue even faster as you go up the chain.

Since 1970, the top 10%-5% share grew 10%. The top 0.01% share grew 389%.

Year

Top 10-5% share

Top 10-5% share incl. cap. gains

Top 5-1% share

Top 5-1% share incl cap. gains

Top 1-0.5% share

Top 1-0.5% share incl. cap. gains

Top 0.5-0.1% share

Top 0.5-0.1% share incl. cap. gains

Top 0.1-0.01% share

Top 0.1-0.01% share incl. cap. gains

Top 0.01% share

Top 0.01% share incl. cap. gains

1970

11.13

10.96

12.58

12.64

2.65

2.77

3.22

3.48

1.41

1.78

0.53

1

2014

12.56

12.06

16.78

16.55

4.17

4.28

6.18

6.7

4.38

5.36

3.12

4.89

Relative gain

12.8%

10.0%

33.4%

30.9%

57.4%

54.5%

91.9%

92.5%

210.6%

201.1%

488.7%

389.0%

To be clear, these are relative gains in shares. Including capital gains, the share of income received by the top 10%-5% grew from 10.96% to 12.06%, a moderate increase. The share of income received by the top 0.01% grew from 1.00% to 4.89%, a huge increase. (Yes, the top 0.01% now receive almost 5% of the income, making them on average almost 500 times richer than the rest of us.)

The pie has been getting bigger, which is a good thing. But the rich are getting an ever-larger piece of that pie, and the piece the very rich get is expanding at an alarming rate.

It’s certainly a reasonable question what is causing this rise in inequality, and what can or should be done about it. By people like the AEI try to pretend it doesn’t even exist, and that’s not economic policy analysis; that’s just plain denial.

How about we listen to the Nobel Laureate when we set our taxes?

PNRJ core principles, financial fraud, inequality, macroeconomics, public policy , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

JDN 2457321 EDT 11:20

I know I’m going out on a limb here, but I think it would generally be a good thing if we based our tax system on the advice of Nobel Laureate economists. Joseph Stiglitz wrote a tax policy paper for the Roosevelt Institution last year that describes in detail how our tax system could be reformed to simultaneously restore economic growth, reduce income inequality, promote environmental sustainability, and in the long run even balance the budget. What’s more, he did the math (I suppose Nobel Laureate economists are known for that), and it looks like his plan would actually work.

The plan is good enough that I think it’s worth going through in some detail.

He opens by reminding us that our “debt crisis” is of our own making, the result of politicians (and voters) who don’t understand economics:

“But we should be clear that these crises – which have resulted in a government shutdown and a near default on the national debt – are not economic but political. The U.S. is not like Greece, unable to borrow to fund its debt and deficit. Indeed, the U.S. has been borrowing at negative real interest rates.”

Stiglitz pulls no punches against bad policies, and isn’t afraid to single out conservatives:

“We also show that some of the so-called reforms that conservatives propose would be counterproductive – they could simultaneously reduce growth and economic welfare and increase unemployment and inequality. It would be better to have no reform than these reforms.”

A lot of the news media keep trying to paint Bernie Sanders as a far-left radical candidate (like this article in Politico calling his hometown the “People’s Republic of Burlington”), because he says things like this: “in recent years, over 99 percent of all new income generated in the economy has gone to the top 1 percent.”

But the following statement was not said by Bernie Sanders, it was said by Joseph Stiglitz, who I will remind you one last time is a world-renowned Nobel Laureate economist:

“The weaknesses in the labor market are reflected in low wages and stagnating incomes. That helps explain why 95 percent of the increase in incomes in the three years after the recovery officially began went to the upper 1 percent. For most Americans, there has been no recovery.”

It was also Stiglitz who said this:

“The American Dream is, in reality, a myth. The U.S. has some of the worst inequality across generations (social mobility) among wealthy nations. The life prospects of a young American are more dependent on the income and education of his parents than in other advanced countries.”

In this country, we have reached the point where policies supported by the analysis of world-renowned economists is considered far-left radicalism, while the “mainstream conservative” view is a system of tax policy that is based on pure fantasy, which has been called “puppies and rainbows” by serious policy analysts and “voodoo economics” by yet another Nobel Laureate economist. A lot of very smart people don’t understand what’s happening in our political system, and want “both sides” to be “equally wrong”, but that is simply not the case: Basic facts of not just social science (e.g. Keynesian monetary policy), but indeed natural science (evolutionary biology, anthropogenic climate change) are now considered “political controversies” because the right wing doesn’t want to believe them.

But let’s get back to the actual tax plan Stiglitz is proposing. He is in favor of raising some taxes and lowering others, spending more on some things and less on other things. His basic strategy is actually quite simple: Raise taxes with low multipliers and cut taxes with high multipliers. Raise spending with high multipliers and cut spending with low multipliers.

“While in general taxes take money out of the system, and therefore have a deflationary bias, some taxes have a larger multiplier than others, i.e. lead to a greater reduction in aggregate demand per dollar of revenue raised. Taxes on the rich and superrich, who save a large fraction of their income, have the least adverse effect on aggregate demand. Taxes on lower income individuals have the most adverse effect on aggregate demand.”

In other words, by making the tax system more progressive, we can directly stimulate economic growth while still increasing the amount of tax revenue we raise. And of course we have plenty of other moral and economic reasons to prefer progressive taxation.

Stiglitz tears apart the “job creator” myth:

“It is important to dispel a misunderstanding that one often hears from advocates of lower taxes for the rich and corporations, which contends that the rich are the job producers, and anything that reduces their income will reduce their ability and incentive to create jobs. First, at the current time, it is not lack of funds that is holding back investment. It is not even a weak and dysfunctional financial sector. America’s large corporations are sitting on more than $2 trillion in cash. What is holding back investment, especially by large corporations, is the lack of demand for their products.”

Stiglitz talks about two principles of taxation to follow:

First is the Generalized Henry George Principle, that we should focus taxes on things that are inelastic, meaning their supply isn’t likely to change much with the introduction of a tax. Henry George favored taxing land, which is quite inelastic indeed. The reason we do this is to reduce the economic distortions created by a tax; the goal is to collect revenue without changing the number of real products that are bought and sold. We need to raise revenue and we want to redistribute income, but we want to do it without creating unnecessary inefficiencies in the rest of the economy.

Second is the Generalized Polluter Pays Principle, that we should tax things that have negative externalities—effects on other people that are harmful. When a transaction causes harm to others who were not party to the transaction, we should tax that transaction in an amount equal to the harm that it would cause, and then use that revenue to offset the damage. In effect, if you hurt someone else, you should have to pay to clean up your own mess. This makes obvious moral sense, but it also makes good economic sense; taxing externalities can improve economic efficiency and actually make everyone better off. The obvious example is again pollution (the original Polluter Pays Principle), but there are plenty of other examples as well.

Stiglitz of course supports taxes on pollution and carbon emissions, which really should be a no-brainer. They aren’t just good for the environment, they would directly increase economic efficiency. The only reason we don’t have comprehensive pollution taxes (or something similar like cap-and-trade) is again the political pressure of right-wing interests.

Stiglitz focuses in particular on the externalities of the financial system, the boom-and-bust cycle of bubble, crisis, crash that has characterized so much of our banking system for generations. With a few exceptions, almost every major economic crisis has been preceded by some sort of breakdown of the financial system (and typically widespread fraud by the way). It is not much exaggeration to say that without Wall Street there would be no depressions. Externalities don’t get a whole lot bigger than that.

Stiglitz proposes a system of financial transaction taxes that are designed to create incentives against the most predatory practices in finance, especially the high-frequency trading in which computer algorithms steal money from the rest of the economy thousands of times per second. Even a 0.01% tax on each financial transaction would probably be enough to eliminate this particular activity.

He also suggests the implementation of “bonus taxes” which disincentivize paying bonuses, which could basically be as simple as removing the deductions placed during the Clinton administration (in a few years are we going to have to say “the first Clinton administration”?) that exempt “performance-based pay” from most forms of income tax. All pay is performance-based, or supposed to be. There should be no special exemption for bonuses and stock options.

Stiglitz also proposes a “bank rescue fund” which would be something like an expansion of the FDIC insurance that banks are already required to have, but designed as catastrophe insurance for the whole macroeconomy. Instead of needing bailed out from general government funds, banks would only be bailed out from a pool of insurance funds they paid in themselves. This could work, but honestly I think I’d rather reduce the moral hazard even more by saying that we will never again bail out banks directly, but instead bail out consumers and real businesses. This would probably save banks anyway (most people don’t default on debts if they can afford to pay them), and if it doesn’t, I don’t see why we should care. The only reason banks exist is to support the real economy; if we can support the real economy without them, they deserve to die. That basic fact seems to have been lost somewhere along the way, and we keep talking about how to save or stabilize the financial system as if it were valuable unto itself.

Stiglitz also proposes much stricter regulations on credit cards, which would require them to charge much lower transaction fees and also pay a portion of their transaction revenue in taxes. I think it’s fair to ask whether we need credit cards at all, or if there’s some alternative banking system that would allow people to make consumer purchases without paying 20% annual interest. (It seems like there ought to be, doesn’t it?)

Next Stiglitz gets to his proposal to reform the corporate income tax. Like many of us, he is sick of corporations like Apple and GE with ten and eleven-figure profits paying little or no taxes by exploiting a variety of loopholes. He points out some of the more egregious ones, like the “step up of basis at death” which allows inherited capital to avoid taxation (personally, I think both morally and economically the optimal inheritance tax rate is 100%!), as well as the various loopholes on offshore accounting which allow corporations to design and sell their products in the US, even manufacture them here, and pay taxes as if all their work were done in the Cayman Islands. He also points out that the argument that corporate taxes disincentivize investment is ridiculous, because most investment is financed by corporate bonds which are tax-deductible.

Stiglitz departs from most other economists in that he actually proposes raising the corporate tax rate itself. Most economists favor cutting the rate on paper, then closing the loopholes to ensure that the new rate is actually paid. Stiglitz says this is not enough, and we must both close the loopholes and increase the rate.

I’m actually not sure I agree with him on this; the incidence of corporate taxes is not very well-understood, and I think there’s a legitimate worry that taxing Apple will make iPhones more expensive without actually taking any money from Tim Cook. I think it would be better to get rid of the corporate tax entirely and then dramatically raise the marginal rates on personal income, including not only labor income but also all forms of capital income. Instead of taxing Apple hoping it will pass through to Tim Cook, I say we just tax Tim Cook. Directly tax his $4 million salary and $70 million in stock options.

Stiglitz does have an interesting proposal to introduce “rent-seeking” taxes that specifically apply to corporations which exercise monopoly or oligopoly power. If you can actually get this to work, it’s very clever; you could actually create a market incentive for corporations to support their own competition—and not in the sense of collusion but in the sense of actually trying to seek out more competitive markets in order to avoid the monopoly tax. Unfortunately, Stiglitz is a little vague on how we’d actually pull that off.

One thing I do agree with Stiglitz on is the use of refundable tax credits to support real investment. Instead of this weird business about not taxing dividends and capital gains in the hope that maybe somehow this will support real investment, we actually give tax credits specifically to companies that build factories or hire more workers.

Stiglitz also does a good job of elucidating the concept of “corporate welfare”, officially called “tax expenditures”, in which subsidies for corporations are basically hidden in the tax code as rebates or deductions. This is actually what Obama was talking about when he said “spending in the tax code”, (he did not invent the concept of tax expenditures), but since he didn’t explain himself well even Jon Stewart accused him of Orwellian Newspeak. Economically a refundable tax rebate of $10,000 is exactly the same thing as a subsidy of $10,000. There are some practical and psychological differences, but there are no real economic differences. If you’re still confused about tax expenditures, the Center for American Progress has a good policy memo on the subject.

Stiglitz also has some changes to make to the personal income tax, all of which I think are spot-on. First we increase the marginal rates, particularly at the very top. Next we equalize rates on all forms of income, including capital income. Next, we remove most, if not all, of the deductions that allow people to avoid paying the rate it says on paper. Finally, we dramatically simplify the tax code so that the majority of people can file a simplified return which basically just says, “This is my income. This is the tax rate for that income. This is what I owe.” You wouldn’t have to worry about itemizing your student loans or mortgage payments or whatever else; just tally up your income and look up your rate. As he points out, this would save a lot of people a lot of stress and also remove a lot of economic distortions.

He talks about how we can phase out the mortgage-interest deduction in particular, because it’s clearly inefficient and regressive but it’s politically popular and dropping it suddenly could lead to another crisis in housing prices.

Stiglitz has a deorbit for anyone who thinks capital income should not be taxed:

“There is, moreover, no justification for taxing those who work hard to earn a living at a higher rate than those who derive their income from speculation.”

By equalizing rates on labor and capital income, he estimates we could raise an additional $130 billion per year—just shy of what it would take to end world hunger. (Actually some estimates say it would be more than enough, others that it would be about half what we need. It’s definitely in the ballpark, however.)

Stiglitz actually proposes making a full deduction of gross household income at $100,000, meaning that the vast majority of Americans would pay no income tax at all. This is where he begins to lose me, because it necessarily means we aren’t going to raise enough revenue by income taxes alone.

He proposes to make up the shortfall by introducing a value-added tax, a VAT. I have to admit a lot of countries have these (including most of Europe) and seem to do all right with them; but I never understood why they are so popular among economists. They are basically sales taxes, and it’s very hard to make any kind of sales tax meaningfully progressive. In fact, they are typically regressive, because rich people spend a smaller proportion of their income than poor people do. Unless we specifically want to disincentivize buying things (and a depression is not the time to do that!), I don’t see why we would want to switch to a sales tax.

At the end of the paper Stiglitz talks about the vital difference between short-term spending cuts and long-term fiscal sustainability:

“Thus, policies that promote output and employment today also contribute to future growth – particularly if they lead to more investment. Thus, austerity measures that take the form of cutbacks in spending on infrastructure, technology, or education not only weaken the economy today, but weaken it in the future, both directly (through the obvious impacts, for example, on the capital stock) but also indirectly, through the diminution in human capital that arises out of employment or educational experience. […] Mindless “deficit fetishism” is likely to be counterproductive. It will weaken the economy and prove counterproductive to raising revenues because the main reason that we are in our current fiscal position is the weak economy.”

It amazes me how many people fail to grasp this. No one would say that paying for college is fiscally irresponsible, because we know that all that student debt will be repaid by your increased productivity and income later on; yet somehow people still think that government subsidies for education are fiscally irresponsible. No one would say that it is a waste of money for a research lab to buy new equipment in order to have a better chance at making new discoveries, yet somehow people still think it is a waste of money for the government to fund research. The most legitimate form of this argument is “crowding-out”, the notion that the increased government spending will be matched by an equal or greater decrease in private spending; but the evidence shows that many public goods—like education, research, and infrastructure—are currently underfunded, and if there is any crowding-out, it is much smaller than the gain produced by the government investment. Crowding-out is theoretically possible but empirically rare.

Above all, now is not the time to fret about deficits. Now is the time to fret about unemployment. We need to get more people working; we need to create jobs for those who are already seeking them, better jobs for those who have them but want more, and opportunities for people who have given up searching for work to keep trying. To do that, we need spending, and we will probably need deficits. That’s all right; once the economy is restored to full capacity then we can adjust our spending to balance the budget (or we may not even need to, if we devise taxes correctly).

Of course, I fear that most of these policies will fall upon deaf ears; but Stiglitz calls us to action:

“We can reform our tax system in ways that will strengthen the economy today, address current economic and social problems, and strengthen our economy for the future. The economic agenda is clear. The question is, will the vested interests which have played such a large role in creating the current distorted system continue to prevail? Do we have the political will to create a tax system that is fair and serves the interests of all Americans?”