Tag Archives: jobs

A Few More Musings on Taxes and an Economy

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James Pethokoukis, writing for AEIdeas, has a thought.

First, some rough background:

From 2009-2012, revenue as a share of GDP has averaged 15.4% of GDP vs. 13.9% from 1948-1951 and 18.1% overall in the postwar era.

Then,

Imagine if we a) kept all the expiring 2001 and 2003 tax cuts, b) started indexing the Alternative Minimum Tax for inflation so it wouldn’t hit more and more taxpayers.

How would that affect tax revenue? The Congressional Budget Office tells us:

Under that scenario, revenues from 2013 to 2022 would average about 18 percent of GDP, which is equal to their 40-year average.

Indeed, we would be back to the postwar average of 18.1% by 2016.

I would argue that the AMT, which began life as a special assessment against all of 155 particularly hated-by-Progressives successful Americans, should be abolished altogether, but that’s a topic for another post.

Here are a couple of other numbers.  US GDP was $15.1 trillion in 2011, while Federal income tax collections ran to $1.273 trillion, or 8.5% of GDP (my number differs from Pethokoukis’ because I’m only considering individual and business income taxes and leaving out Social Insurance, ad valorem, and other taxes).  In 2007, US GDP was $13.3 trillion, while Federal income tax collections ran to $1.534 trillion, or 11.5% of GDP (yes, that’s a 17% drop in Federal income tax collections in the third year of the failed recovery).

Plainly, if the Feds just got out of the way of our economy, stopped demanding ever more taxes, stopped spending our money on failed “investments,” stopped paying essentially well-meaning individuals for not working, our economic recovery would push income tax revenues up those missing three per centage points—and having returned to 11.5% of GDP, Federal income tax revenues would approximate $1.7 trillion—a rise of nearly $500 billion in the first year.  And that’s just a static analysis.  At that rate of increase every year, the Feds would be getting a whole lot more in income tax revenue by 2016—again a static analysis.  Imagine the increase from a dynamic analysis, which would include all the feedback loops from economic growth—like individual spending, business growth, jobs increases for those currently on the Feds’ dole, etc.

Another thought: from the Tax Foundation, via the TaxProf, comes this:

[W]hat does the academic literature say about the empirical relationship between taxes and economic growth?  …the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.  In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth.  Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.  …

[T]he lesson from the studies conducted is that long-term economic growth is to a significant degree a function of tax policy.  Our current economic doldrums are the result of many factors, but having the highest corporate rate in the industrialized world does not help.  Nor does the prospect of higher taxes on shareholders and workers.  If we intend to spur investment, we should lower taxes on the earnings of capital.  If we intend to increase employment, we should lower taxes on workers and the businesses that hire them.

Why, with all that revenue enriching the Feds coffers, we could look forward to actually paying down/off our national debt, and then across the board reductions in income tax rates.

Except that tax revenues (partly) fund incumbents’ vote pandering “welfare” programs.

The Future of American Youth?

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In France, we’re seeing the impact on the nation’s youth of their government-managed economy, magnified by the union-driven difficulty (near impossibility, actually) of getting rid of extraneous labor (or even bad workers).  Spiegel Online International offers some insight.

Kafui Affram doesn’t feel at home in either environment, not in the suburb where the 22-year-old still lives in his childhood room in his parents’ little house [or in Paris, his suburb’s parent city].

Still living with his parents.  Just like America’s youth, especially in the Age of Obamacare.

Some 23 percent of the country’s 18- to 24-year-olds live in poverty, according to a study by the National Institute for Youth and Community Education (INJEP).

The poverty rate for America’s youth as recently as 2009 was 20%.  It’s not going to improve any time soon; the unemployment rate for America’s youth was 17.1% in July 2012, at the height of the summer season for employing our youth, and the unemployment rate for their parents has been hovering around 10% for the last four years after factoring in the effect of our shrinking labor participation rate.  Then,

Youth unemployment in France has been high for some time, but it has now climbed to 26%.  For decades, regardless of their political affiliation, lawmakers have been promising to create a better situation for young people.  But exactly the opposite has happened.  Labor laws protect those who already enjoy steady jobs, while the economic crisis and recession have limited the number of new jobs created.

On Socialist President François Hollande and his program for creating of “future jobs,” Affram says,

We’re used to politicians constantly coming up with new ideas.

Yeah, we’ve heard that, too, and from the same sort of source.  With the same degree of confidence that Affram has:

I know I should be optimistic and have goals, but it’s mostly all just bleak.

Of Jobs Reports

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The latest Jobs report came out last week, and the unemployment rate fell to 7.7%.  We haven’t been this well off in years.  Or have we?  James Pethokoukis, writing for AEIDeas, took a closer look.

First, a graph that’s been run in several places before, repeated in Pethokoukis’ article, and here:

You remember this.  It compares President Barack Obama’s…claims…about the unemployment rate under his Recovery Plan vs his projection of unemployment absent his plan with the actual unemployment rate.  The data in the latest Jobs report add to this [emphasis in the original].

The two-tenths drop in the unemployment rate was because people gave up looking for work. The labor force participation rate fell to 63.6% from 63.8% in October.  If it had just held steady since then, the unemployment rate would be back over 8%.  Indeed, if the LFP rate was just where it was in November 2011, the unemployment rate would be 8.3%.  Some 542,000 Americans left the labor force just last month.

If labor force participation was at its January 2009 level, the unemployment rate would be a whopping 10.7%.  Now, some of the drop in the LFP is due to demographic reasons, primarily the aging of the US population.  But even taking that into account would give you a much higher unemployment rate than 7.7%.  If you go by the pre-recession CBO forecast of the 2012 LFP rate, the unemployment rate would be 10.4%.

In November, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $23.63.  Over the past 12 months, average hourly earnings have risen by 1.7%.  Unfortunately, inflation—as measured by the consumer price index—has risen by 2.2% over the past year, meaning average hourly earnings have fallen by 0.5% in real terms.

And

The number of long-term unemployed remains at a sky-high 40.1%, the same as in August.

As the next graph illustrates.

Yet the Progressives in DC think this is proper.

Gimme

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Collis P Huntington, President of the Southern Pacific Railroad (among others) is reputed to have said

Whatever is not nailed down is mine.  What I can pry loose is not nailed down.

Via Spirit of Enterprise comes this AEIDeas article of charts illustrating the attitude from a different perspective.  Below, some of those charts.

The rate of entitlement growth per capita has been nearly twice as fast as per capita income growth for the last fifty years

Note: Derived by author on the basis of data on official transfers, price changes, and population change. Sources: US Bureau of Economic Analysis, US Dept. of Labor, US Census International Data Base

And

In the 1960s, the federal government spent $2 on governing for each $1 it spent on entitlement transfers. Today that ratio has completely flipped:

Sources: Derived from: Federal government entitlement transfers: Bureau of Economic Analysis, Federal Budget Outlays: White House Fiscal Year 2012 Historical Tables

And

Here’s where the money goes:

Sources: Bureau of Economic Analysis, US Department of Labor, Bureau of Labor Statistics, consumer price index

And

As the Welfare State has expanded, Americans are working less.

Source: Bureau of Labor Statistics, One Screen database, Labor Force Statistics, Series “LNU01300001”, “LNS12300001”

And there’s this from The Daily Caller:

After accounting for federal taxes, the median hourly wage drops to between $21.50 and $23.45, depending on a household’s deductions and filing status.  State and local taxes further reduce the median household’s hourly earnings. By contrast, welfare benefits are not taxed.

Now it’s the culture of dependency which the Progressives have created that is making the demand.  And President Barack Obama is prying ever more loose, actively abetted by an increasingly pliant Republican Party.

Welfare and Work Incentives

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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.