Tag Archives: economics

Tax Reform, CBO Scoring, and Revenue Neutrality

Posted on by
1

The Senate passed a non-binding (more’s the pity on the “non” part) resolution to have the CBO score tax proposals dynamically in addition to its traditional—and utterly misleading—static scoring methodology.

Static scoring assumes the idiocy of, as The Wall Street Journal put it, that

people work nearly as much at a 60% income tax rate as they do with a 30% rate, and investors don’t care all that much if the tax on capital gains is 15% or 30%.

“This often leads to crazy results.”  You betcha [emphasis in the original].

In January 2003, for example, the modelers predicted that capital gains revenues would be $68 billion in 2006 and $73 billion in 2007.  In May 2003 Congress cut the capital gains tax rate to 15% from 20%, and in its revised budget forecast in August 2003 CBO estimated that the rate cut would reduce revenues to $65 billion in 2006 and $69 billion in 2007.

CBO wasn’t even close.  Actual capital gains revenue rose despite the lower tax rate to $109 billion in 2006 and $126 billion in 2007, thanks to faster economic growth and a greater incentive for investors to cash in their gains at the lower rate.

But here’s a larger problem.  The opinion piece then goes on to say

Tax reform done right should be revenue neutral using standard CBO static analysis, but a dynamic model would predict a large revenue windfall from the overall increase in investment and economic efficiency.  As part of a budget deal, those extra tax dollars that Democrats crave could be earmarked for deficit reduction.

That’s certainly a fine use of the windfall, but why, exactly, must tax reform be revenue neutral—statically or dynamically scored—in order to be “done right?”

The political imperatives involved for neutrality are painfully obvious, so that can’t be what the WSJ was talking about; let’s leave that aside.

Why, indeed, must tax reform be revenue neutral?

Why We Protect Inventions

Posted on by
Reply

The Indian Supreme Court has rejected the idea of patent protection for Novartis’ drug Glivec, saying that an active ingredient in Glivec was well-known prior to the development of the drug.  Those worthies also rejected Novartis’ argument that the innovation that deserved patent protection was their transformation of that active ingredient into a “beta crystal” form, which made it a viable treatment for cancer.

Never mind, said the Court, India doesn’t feel like patenting this and making it harder for an Indian company to profit from the foreign Novartis’ work.

Novartis isn’t alone in this strait.

India’s patent office last year ordered Germany’s Bayer AG to issue a license allowing an Indian generics company to copy its patented cancer drug Nexavar and market it at one-thirtieth the cost.

And

In November, India’s government approved caps on a third of the country’s drugs, up from 18% under a previous regime—a level of price control not seen since the 1970s.

Novartis had this on the wisdom of further investment in India:

If innovation is rewarded, there is clear business case to move forward.  If it isn’t rewarded and protected, there isn’t.

And

We’ll continue to build our business, but we will certainly be cautious in investments in R&D and innovation in India.  And until the climate for intellectual property and the ecosystem is fully in place, I don’t think any investment in R&D will take place here.

Well, NSS.  It’s time for the Indian government to figure this out, too.

The Party of Stupid

Posted on by
Reply

New York Branch.

As the quid pro quo for agreeing to Governor Andrew Cuomo’s demand for his higher minimum wage, the New York Senate Republicans browbeat him into accepting a tax credit for businesses who hire at that new minimum wage.

Leaving aside the anti-hiring outcomes of minimum wage increases, as a result of this foot-shooting everyone in New York now gets to pay a piece of that higher wage, not just the businesses and their customers.

Brilliant, guys.

Don’t Return to the Go-Go Days

Posted on by
Reply

But do accelerate mortgage lending regardless of credit risk.  That’s the conflicting position Fed Governor Elizabeth Duke seems to be taking.

She doesn’t want to return to the days of easy mortgages that obtained in 2005-2006, a run of money that the graph below illustrates.

But she adds

But I also don’t think it would be a good idea to go back to the quite restrictive credit conditions of the early 1980s[.]

Hmm….

The Wall Street Journal points out that

[t]he drop in purchase mortgages—loans for buying a home rather than refinancing an existing loan—has been most pronounced among borrowers with low credit scores.  Originations have dropped by 30% for borrowers with credit scores above 780 between 2007 and 2012, but they’ve dropped by 90% for borrowers with credit scores between 620 and 680.

And

[T]he trend…”has disturbing implications for potential new households” because younger borrowers typically have credit scores that are more than 50 points below older borrowers[.]

What does this mean?  It means that poorer credit risks have a harder time getting loans than better credit risks.  What’s the downside of that?

Is Duke still holding out for the CRA debacle that anyone should be able to get easy credit for no better reason than that they exist?

The problem, says Duke, is that the economy may actually be worse off if the pendulum stays stuck at too tight….  The ability of newly formed households that are more likely to have lower incomes and credit scores to get loans “will make a big difference in the shape of the recovery[.]  Without first-time homebuyers, the move-up market will be sluggish, new and existing home sales will be more subdued, and purchase mortgage volumes will return only slowly.”

But this is a static view.  A dynamic analysis shows pretty clearly that this is just a path to a new equilibrium, at which point the pipeline of first-time buyers will be back at a “normal” level; they’ll just be older, with better incomes, and with those two characteristics established, more stable, and so better, credit risks.

Owning a home is certainly the American dream, and it remains a worthy dream.  But it’s not an inalienable right.  Those who work hard, develop good credit—and manage their finances so as to maintain that good credit—do get mortgages today.  Those who don’t haven’t done anything to earn the same rewards as those worked hard.

It’s just that simple.  Even a Federal Banker ought to be able to keep up with that.

More Obama Sequester

Posted on by
Reply

Recall that the Department of Transportation under President Barack Obama warned a week or two ago that nearly 150 control towers at small regional airports will close down, ostensibly due to sequester budget cuts.  DoT also warned of furloughs at major airports, cynically noting that resulting delays could be “very painful for the flying public.”

To alleviate this, Senator Jerry Moran (R, KS) proposed replacing the $50 million of Obama Sequester cuts from the FAA with savings from unspent balances, a kind agency slush fund that all agencies squirrel away against various exigencies, and by reducing other low-priority spending.

Enter, stage left, Senate Majority Leader Harry Reid (D, NV).  He pulled Moran’s amendment and refused to allow it to come to the floor for a vote.

Thus, as The Wall Street Journal puts it,

…in the weeks ahead travelers will likely experience the frustration of flight delays, cancellations and closed airports.  It won’t happen by accident or out of fiscal necessity, but because Washington Democrats refuse to prioritize federal spending.