Daily Archives: 6 December 2012

Welfare and Work Incentives

Posted on by
Reply

Casey Mulligan has a book out that looks hard at the Panic of 2008 and explores its causes.  The book is called The Redistribution Recession, and I strongly recommend it.  Here are some highlights.

In this way, the simple supply and demand model…explains 81 percent of the labor market contraction from 2007-Q4 and 2009-Q4, as long as it incorporates the labor supply effects of the expanding social safety net.  The remaining 19 percent of the contraction is “explained” by unmeasured market distortions—that is, still unexplained by the measured factors present in the model.

And

The (theoretical) effects of the reward to working can also be seen from the perspective of wages.  The more that the safety net pays for not working, the less reason people in low-wage jobs have to keep their job and the less reason unemployed people have to accept a low-wage job.  In this way, the safety net raises wages, to which employers respond by hiring less.”

And

When food stamp or unemployment programs pay more, the sacrifices that jobs require do not disappear.  The commuting hassle is still there, the possibility for injury on the job is still there, and jobs still take time away from family, hobbies, sleep, etc.  But the reward to working declines, because some of the money earned on the job is now available even when not working.

Note that, as long as the government involves itself in the economy through its penchant for social engineering/safety nets, this creates a feedback loop.  The safety net (the parts of which Mulligan enumerates, but which I use here expansively to include the entire suite of components) reduces the incentive to work by replacing monies lost from not working, thus driving up costs to employers of attracting workers he otherwise would be interesting in hiring, reducing employers’ hire rates, leading the government to try to further expand the safety net, further reducing work-seeking incentive, driving up labor costs,….

And

…studies: Hoynes and Schanzenbach (2012) show how potential participants stopped working or reduced their work hours when the food stamp program was introduced.  Studies of unemployment insurance find that program rules have a statistically significant effect on how many people are employed, and how long unemployment lasts.  Yelowitz’s research (2000) shows how a number of young single mothers found employment exactly when, and where, state-level Medicaid reforms increased their reward from working.

And so on.  Note that none of this is to disparage people who make use of the safety net; they’re behaving entirely rationally in an economic sense.  Mulligan’s purpose is only to show how incentives of safety nets work.

The Obama Tax Increases

Posted on by
Reply

Here’s a partial enumeration of the taxes which President Barack Obama is willing to blow up our economy in order to get.

Income tax: Across the board.  Top rate rises to 39.6% from current 35%, bottom 15% rate disappears.  Obama claims to be interested only in the top rates, but his evident lack of seriousness in his proposals counters this claim.  See the table below

Self-employment tax:  Rise from 2.9% to 3.8%.

Exemption Phase-Out: Otherwise allowable exemption amounts will be reduced by 2% for each $2,500 or part of $2,500 ($1,250 for married filing separately) that the taxpayer’s AGI exceeds the AGI threshold for the year based on the taxpayer’s filing status.

Itemized Deduction Phase-Out: Resumed income-based phase-out of these deductions: taxes, interest (except investment interest), charitable contributions, employee job expenses and other miscellaneous itemized deductions, etc.  Additionally, and independent of income (in the sense of a phase-out), the threshold for deductibility of medically related items rises from 7.5% to 10% of AGI.

Long-Term Capital Gains Rates Increase: See the table below

Coverdell Education Accounts: Dollar limit on contributions for any one beneficiary is reduced to $500 from $2,000, contributions can be made only by individuals; the income phase-out range for the annual contribution limit rises from twice the amounts for single filers to a hard $150,000-$160,000 for joint filers instead of simply; contributions for special needs students age 18 or over no longer allowed; qualifying expenses elementary or secondary school expenses no longer allowed; contributions to a Coverdell account and a Sec 529 Qualified Tuition Program no longer allowed in the same year; education credits in a year in which a Coverdell withdrawal is made no longer allowed.

American Opportunity Tax Credit: Disappears.

Child & Dependent Care Credit: Falls from $3,000 ($6,000 for two or more qualifiers) to 2,400 ($4,800 for two or more qualifiers).

Estate tax: Rise to 45% from current 35% (and from 0% just a couple of years ago) on everything above $3.5 million estate value, down from current $5.12 million exclusion.

Investment surcharge: An Obamacare tax for 2013 and beyond—higher-income individuals hit with an additional 3.8% Medicare tax on net investment income, including long-term gains and dividends.

Medical device tax: 2.3% on top-line revenues of companies making devices such as prosthetic limbs, pacemakers, and operating tables.  This is levied even if the respective company doesn’t earn a profit.

Employer Health FLEX-Spending Plan Contributions: Maximum amount available for reimbursement of incurred medical expenses in an FSA for a plan year cannot exceed $2,500, down from…unlimited.

Codification of the “economic substance doctrine“: Allows IRS to disallow tax deductions and other tax-minimizing plans solely on the IRS opinion that the matter lacks “substance.”