Tuesday, April 15, 2008

Incentives Count--For Congress Too!

"Some self-styled conservatives have lately been suggesting that Republicans not overemphasize renewing the pro-growth Bush tax rate cuts. Instead, they argue, conservatives should focus on family-oriented tax credits for rearing children, education and health care. Authors such as Ramesh Ponnuru, Ross Douthat and Reihan Salam emphasize the encouragement of 'human capital formation,' as opposed to investment in physical capital. ... This could be a recipe for stagnation. Ending many deductions and fringe benefits would greatly expand taxable income. ... If the tax change is revenue neutral, and much of the revenue is devoted to large tax credits for families with children, then other taxpayers must pay a higher tax bill. ... We know from decades of economic modeling, and observing the revenue feedback when taxes are changed, that each added dollar Washington collects, then spends or gives away (for goods and services, entitlements or tax-transfers), costs the public about $2.50. ... The new 10% bracket is not 'at the margin' for most taxpayers, and so it has little supply-side incentive effect on work or saving. ... From the standpoint of today looking forward, the marriage penalty and child credit provisions of the 2001 tax cut would cost more to extend than would the 15% tax rates on dividends and capital gains. ... If the argument is that many people are no longer interested in tax rate reductions, that's because past increases in tax credits took millions of households off the income tax rolls. The bottom half of the income distribution pays barely 3% of the income tax. ... For people who pay no income tax, general government is practically a free good. ... A large expansion of family-friendly credits would make matters much worse and could tilt the political balance irrevocably toward runaway government. To be sure, it is fair to ask if a large tax credit for children constitutes an investment in human capital. ... The real problem is that government is too big. ... The true pro-family solution is less government, not more. And the likely outcome of taking millions more people off the tax rolls is more government, not less", Stephen Entin (SE) at the WSJ, 9 April 2008.

I agree with SE. Our current tax system of rates, credits, phaseouts and AMT has 90+% of the population pay virtually no tax. Further, it encourages resource misallocations in my opinion, in encouraging our least capable to go to college and have more children than they can otherwise afford. Contrast our policy with China's "one-child" policy. A contrasting opinion is: a 2 April 2008 post and related comments at http://www.economiclogic.blogspot.com/. Tax increases will never balance the budget. They will only lead to new spending programs like No Child Left Behind.


Buzz Saw said...

I wish I could be a fly on the wall fifty years from now to see what becomes of this country.

joe said...

There’s something galling about this efficiency of capital argument.
The economy would grow more, faster if the rich got richer and the poor got poorer kind of thing. Just galling.
If we, the moneyed interests, could just control ALL of the money, and we wouldn’t need to pay for pofolks kids to go to college, or to not go to college and have, if you will, kids, which means, even more pofolks.
All that government-run socialism.
We need a larger debate about whether the nation’s money supply belongs to those who will use it to create nefarious instruments of finance to the supreme betterment of the fewer.
Or, whether the deposit base of the people ought to be the tool of those who would rather do things like ensuring domestic tranquility – like through job-creation for Americans, like securing the blessings of economic liberty for the masses and not the few, like promoting the general welfare of the people, by seeing that roads and bridges get built, and that the environment gets protected.
To some of us, that is not the recipe for stagflation, but for prosperity.

Independent Accountant said...

What are you saying? What policy do you favor? Do you believe I favor "the moneyed interests" controlling "all the money"? I favor subjecting banks to the same laws as the rest of us. If they make bad loans, let them not "eat cake", but go bankrupt.
I disfavor sending many kids to college. I believe we have too many kids in college today. Thomas Sowell wrote an article about just this at www.nationalreview.com, on 28 November 2007. Many college students cannot absorb a college education. There was a vigorous debate about college education that began in about 1953 when Arthur Bestor, then a University of Illinois History Professor began writing about it. The debtate went into high gear in 1957 when Sputnik was launched and Admiral Hyman Rickover got involved. Vance Packard wrote about college as a "signalling" device of little economic value in I believe the "Status Seekers", which he wrote in about 1959. I need to check that date.
The debate about "whether the nation's money supply belongs to those who will use it to create nepharious instruments of finance" has been with the Republic since Jefferson and Hamilton.
I do not believe Congress can promote job creation better than the capital markets. Look at the ethanol fiasco! About 23 years ago the "Atari Democrats" pushed the position they could better select growth industries than the capital markets. Good luck!
As for poor folks, apparently Congress believes we need more of them. Look at our immigration policy.
What does "securing the blessing of economic liberty for the masses" mean? I believe it was Lenin who asked "what should be done"? I ask you that.

Independent Accountant said...

Packard wrote "The Staus Seekers" in 1959. Lenin wrote, "What is to be done?" in 1902. I excerpted Andrew Jackson's 1832 veto speech in my 24 December 2007 post.
I ask you Lenin's question.