Tax Expenditures Have Policy Purpose

Yglesias points out that tax deductions have widespread popularity (not just favored by a narrow interest group) and would probably get replaced by an actual government expenditure if they were cut out:

The main point I would make ...is ...how hard tax reform is. This is often portrayed in DC as if it's primarily a political difficulty, like the problem is simply that politicians lack the gumption to take on the interests behind these tax breaks. But part of what we see here is that many of these really high-value tax breaks are integral elements of American social policy. Take the charitable deduction, for example. All governments in the developed world do a lot to subsidize things like universities and museums and other cultural institutions. In the United States, the availability of a tax deduction for charitable contributions is one of the main ways we do this. Rescinding the deduction and replacing it with more direct subsidy along European lines is a proposal that might make some sense (although I don't think I would favor it) but simply eliminating it in order to finance a tax cut would be an epochal change in education and cultural policy and not just a tax shift.

An even stronger version of this occurs with the health care tax deduction. Subsidizing employer-provided health insurance and then regulating it is not, in my view, a very smart way of providing health care insurance to people. But it is the way we've chosen to do it for the non-elderly non-poor population. To replace this way with some other way would be a great idea, to just eliminate it and replace it with nothing would be a disaster. The EITC and the Child Tax Credit are two of the main instruments of income redistribution in the United States. There's a case to be made for scrapping all of this stuff, but with the exception of the deduction for state and local income taxes I don't think you could do any of it without creating some kind of new replacement non-tax policy.

People Irrationally Pick Deadly Commuting

Commuting is the most dangerous thing that most people do every day.  But the biggest risks are not just having a wreck.  Annie Lowrey has a great article about the effects of commuting on health and well being at Slate. 

This week, researchers at Umea University in Sweden released a startling finding: Couples in which one partner commutes for longer than 45 minutes are 40 percent likelier to divorce.  ...People with long transit times suffer from disproportionate pain, stress, obesity, and dissatisfaction. The joy of living in a big, exurban house, or that extra income left over from your cheap rent? It is almost certainly not worth it. First, the research proves the most obvious point: We dislike commuting itself, finding it unpleasant and stressful. In 2006, Nobel laureate Daniel Kahneman and Princeton economist Alan Krueger surveyed 900 Texan women, asking them how much they enjoyed a number of common activities. Having sex came in first. Socializing after work came second. Commuting came in dead last.... A survey conducted last year for the Gallup-Healthways Well-Being Index, for instance,found that 40 percent of employees who spend more than 90 minutes getting home from work "experienced worry for much of the previous day." That number falls to 28 percent for those with "negligible" commutes of 10 minutes or less. Workers with very long commutes feel less rested and experience less "enjoyment," as well. ...Robert Putnam, the famed Harvard political scientist and author of Bowling Alone, names long commuting times as one of the most robust predictors of social isolation. He posits that every 10 minutes spent commuting results in 10 percent fewer "social connections." Those social connections tend to make us feel happy and fulfilled....The Gallup survey, for instance, found that one in three workers with a 90-minute daily commute has recurrent neck or back problems.... According to research from Thomas James Christian of Brown University, each minute you commute is associated with "a 0.0257 minute exercise time reduction, a 0.0387 minute food preparation time reduction, and a 0.2205 minute sleep time reduction."  ...According to research from Thomas James Christian of Brown University, each minute you commute is associated with "a 0.0257 minute exercise time reduction, a 0.0387 minute food preparation time reduction, and a 0.2205 minute sleep time reduction."  ...Researchers at the University of California–Los Angeles, and Cal State–Long Beach, for instance, looked at the relationship between obesity and a number of lifestyle factors, such as physical activity. Vehicle-miles traveled had a stronger correlation with obesity than any other factor. ...[The] average one-way commuting time has steadily crept up over the course of the past five decades, and now sits at 24 minutes (although we routinely under-report the time it really takes us to get to work).... How much would we need to be compensated to make up for the hellish experience of a long commute? ...Bruno Frey and Alois Stutzer, actually went about quantifying it, in a now famous 2004 paper entitled "Stress That Doesn't Pay: The Commuting Paradox." They found that for an extra hour of commuting time, you would need to be compensated with a massive 40 percent increase in salary to make it worthwhile.... Given the choice between that cramped apartment and the big house, we focus on the tangible gains offered by the latter. We can see that extra bedroom. We want that extra bathtub. But we do not often use them. And we forget that additional time in the car is a constant, persistent, daily burden—if a relatively invisible one.

Estimating Tax Elasticity and Peak of Laffer Curve

Rich people had an inelastic labor supply in the 1920s and 1930s. James Kwak:

Christina and David Romer’s new paper, “The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era,” is available as an NBER working paper
...They find an elasticity of taxable income with respect to changes in the after-tax income share of 0.19.  ...To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates.
Second, remember that this is a study of the super-rich: not the top 1%, but the top 0.05%. These are the people whom one would expect to have the highest income elasticity, precisely because they don’t need the marginal dollar. Elasticities tend to be lower for ordinary people because they need to cover their expenses.
Finally, the left-hand-side variable for the main regression is reported taxable income. Taxable income can change both because people are earning less income and because they are engaging in tax strategies to reduce their taxable income. As Emmanuel Saez, Joel Slemrod, and Seth H. Giertz conclude in “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review” (pp. 49–50):

while there is compelling U.S. evidence of strong behavioral responses to taxation at the upper end of the distribution around the main tax reform episodes since 1980, in all cases those responses fall in the first two tiers of the Slemrod (1990, 1995) hierarchy—timing and avoidance. In contrast, there is no compelling evidence to date of real economic responses to tax rates (the bottom tier in Slemrod’s hierarchy) at the top of the income distribution.

In other words, ...U.S. history shows that when you raise taxes on the rich, they don’t stop trying to make money: they just pay their lawyers and accountants more to avoid paying taxes. The solution to that is a simpler tax code with fewer exclusions and deductions.

 

Land Tax

Financial Times:

“Roads are made, streets are made . . electric light turns night into day. . . To not one of those improvements does the land monopolist. . . contribute, and yet by every one of them the value of his land is enhanced. . . ”
Who do you think said this? Karl Marx? Paul Krugman? ...The correct answer is Winston Churchill... He was speaking in support of the controversial Lloyd George Budget of 1909 – the one that was thrown out by the House of Lords and led to the Parliament Act that permanently clipped the powers of that House.
The most disputed part of that Budget was not the income tax or social security measures, which captured historians’ attention, but the proposal for a land tax... Back in 1909 preparations for such a tax duly went ahead, including the necessary survey of land ownership. The work was suspended by the war and never resumed. Meanwhile Lloyd George had been thrown out of office and Churchill defected to the Conservatives.
Half measures to capture the “development value of land” were attempted by the 1945 Labour government but abandoned...
Yet, far from being an outrageous Bolshevik idea, the case for a land tax is one of the oldest and least disputed propositions in economic thought. The underlying theory was developed at the beginning of the 19th century by the highly respectable David Ricardo. Many chancellors have said that they would jump at a tax that had no disincentive effects on work or enterprise but had a strong redistributive element. The problem was that the amount of preliminary work required would take more than one parliament and any credit for the measure would redound to their successors.
A land tax is one of those subjects – basic income is another – which divides commentators into a great majority who never mention it, and a minority who talk of nothing else. The result is to give supporters a cranky appearance...
The basic point is that the supply of land, with rare exceptions such as reclamation in the Netherlands, is fixed. But because of its scarcity owners can command an income over and above the normal return to the enterprises placed upon it. Gross UK trading profits of non-financial and non-oil corporations are running at over £200bn per year or about 20 per cent of gross domestic output. Some part of this – we do not know how much – is not true profit but the return on land.
There is one way in which the supply of usable land can increase. That is when land, previously off limits, is newly released by local [zoning] authorities for development. The consequent increase in value, say some land tax campaigners, is created by “the community”, which is entitled to a share... But ...the case for a land tax is valid even for land which always was available for development or which remains in agricultural use.
The Mirrlees review of the tax system..., accepted the case for a land tax, but worried that it was difficult to distinguish between the value of the land and that of buildings placed upon it. The difficulty is exaggerated. Property developers ...have no worries on the issue. After all if two buildings with very similar characteristics sell at very different prices, the difference can be reasonably attributed to land values. The Mirrlees review recommended that a land tax should be used to replace business [tax].
... Land taxes of a modest kind exist in several countries, but do not yield nearly enough to replace all other taxes, as envisaged by the 19th-century reformer Henry George. ...Doubtless some of the tabloids would present a land tax as a threat to the ordinary homeowner with a modest garden. We need to prepare for this in advance. Just as income tax is only levied above a threshold, there would have to be similar thresholds for a tax on land. If politicians really want to think about the unthinkable, as they sometimes claim, here is a place to start.

debt-financed kindergarten

Should primary education be financed the same way that we finance college?  College finance is nowhere near a privatized free-market because the government guarantees and subsidizes the loans, but compared to the socialism of kindergarten, college is much more free-market.  Do some NPV calculations to try to assess the value of K-12 education.  And do some calculations to see what the debt burden would be for kids graduating from high school with a debt-financed education.

Taxes on the Wealthy and Growth

Do taxes on the wealthy reduce economic growth?  That is the typical Republican talking point (via Michael Linden) 

Speaker John Boehner (R-OH): “What some are suggesting is that we take this money from people who would invest in our economy and create jobs and give it to the government. The fact is you can't tax the very people that we expect to invest in the economy and create jobs.”
Former Massachusetts Gov. Mitt Romney: “With over 20 million people who are unemployed or who have stopped looking for work, the last thing we should be doing is raising taxes on job-creators, entrepreneurs, and small business owners across America.”
John Boehner, again: “A tax hike would wreak havoc not only on our economy’s ability to create private-sector jobs, but also on our ability to tackle the national debt.”

 Perhaps they are right, but the historical record seems to indicate that other factors are more important:

 What about the impact of elite's tax rates on economic growth?  Most Republicans believe that cutting taxes on the wealthy will boost growth (via Michael Linden)  :

Speaker John Boehner: "We've seen over the last 30 years that lower marginal tax rates have led to a growing economy, more employment and more people paying taxes.”
Sen. Jim DeMint: "But we also need to just cut the top marginal rate for individuals and corporations so that we're more competitive and companies can look way out in the future and know they'll have a competitive tax rate.”
Club for Growth: “To stimulate GDP growth, a tax cut has to cut the marginal tax rates upon which the decision makers in the economy base their decisions to work and, above all, to invest.”

Again, the effects cannot be the most important thing: