On Yours Truly

From Miles Kimball, my first dissertation advisee.

Economics Teaching Conference

Later this week, registration will open for the 17^th Annual Economics Teaching Conference sponsored by the National Economics Teaching Association (NETA) and Cengage. This conference will be held virtually on Thursday, October 28 and Friday, October 29. I am one of the speakers.

Readers of this blog have an opportunity to register now using this link.

A Magic Trick from Biden's Economists

A magician tricks his audiences by distracting them. While people focus on something that is attractive but irrelevant (a shiny object, the magician's beautiful assistant in a skimpy outfit), the magician can more easily hide his deception.

In a new CEA blog post, the Biden economics team does something similar. It asks what the average tax rate of the 400 wealthiest families would be if unrealized capital gains were included in the measure of their income.

This is a mildly interesting question. But why is the Biden team taking the time from their busy schedules to ask it? Because they want to convince you that the rich aren't paying their fair share in taxes.

The problem is that this question has little connection to the policies now being discussed. As I understand it, the essence of the plan under consideration is not a tax on the unrealized capital gains of the 400 richest families. Instead, the plan aims to raise the corporate tax rate, which in turn is paid by the many shareholders, workers, and customers of the companies. (Economists debate the relative incidence.) In addition, the plan aims to raise the tax rates applied to the already-taxed income earned by people making more than $400,000 a year. I would guess that this latter group includes about 1.5 million taxpayers. Needless to say, 1.5 million is a much larger number than 400. And the finances of the 400 are in no way representative of the finances of the 1.5 million.

Don't get distracted by this shiny object.

Let CBO estimate before you legislate

In my recent Times column on the expanded social safety net, the following passage was cut in the editorial process, but it is an important point, which I am afraid is being lost in the Congressional rush to get something done:

Team Biden says they won’t pass the bill onto future generations in the form of higher public debt. Whether that’s true is hard to say. The Congressional Budget Office and Joint Tax Committee have not yet scored the bill because it hasn’t been written. Let’s hope that Congressional leadership is patient enough to let the scorekeepers do their jobs before bringing the legislation up for a vote.

Follow-up references

In my most recent Times column, I did not have the space to fully explain the body of work that follows up on the Prescott hypothesis that higher tax rates explain lower work effort and national incomes in Western Europe. For interested readers (that is, the more nerdy ones), here are a some relevant references together with brief excerpts (emphasis added):

1. Steven Davis and Magnus Henrekson

"Lastly, let us return to the recent studies by Prescott (2002, 2003), which consider the output, employment and welfare consequences of personal taxes in an equilibrium model with one production sector and a simple labor-leisure choice for the representative household. Our evidence supports the view that tax rate differences among rich countries are a major reason for large international differences in market work time. At the same time, however, our evidence strongly suggests that labor and consumption taxes operate with powerful effect on several margins: substitution between legal and underground activity, substitution between home and market production, the mix of market production activity, and the composition of market expenditures."

2.  Indraneel Chakraborty et al. 

"Americans work more than Europeans. Using micro-data from the United States and 17 European countries, we document that women are typically the largest contributors to the cross-country differences in work hours. We also show that there is a negative relation between taxes and annual hours worked, driven by men, and a positive relation between divorce rates and annual hours worked, driven by women. In a calibrated life-cycle model with heterogeneous agents, marriage and divorce, we find that the divorce and tax mechanisms together can explain 45% of the variation in labor supply between the United States and the European countries."

3. Alberto Alesina et al. 

"Our punch line is that Europeans today work much less than Americans because of the policies of the unions in the 1970s, 1980s, and part of the 1990s and because of labor market regulations. Marginal tax rates may have also played a role, especially for women's labor force participation, but our view is that in a hypothetical competitive labor market without unions and with limited regulation, these tax increases would not have affected hours worked as much. Certainly micro evidence on the elasticity of labor supply is inconsistent with a mainly tax-based explanation of this phenomenon, even though social multiplier effects may help in this respect."

4. Raj Chetty et. al.

"Based on our reading of the micro evidence, we recommend calibrating macro models to match Hicksian elasticities of 0.3 on the intensive and 0.25 on the extensive margin and Frisch elasticities of 0.5 on the intensive and 0.25 on the extensive margin. Hence, it would be reasonable to calibrate representative agent macro models to match a Frisch elasticity of aggregate hours of 0.75. These elasticities are consistent with the observed differences in aggregate hours across countries with different tax systems."

As I noted in my column, economists disagree about the how far the tax-based explanation goes. A reasonable reading of the literature is that lower labor effort and incomes in Europe are likely due to a combination of higher tax rates, stronger unions, and greater regulations.

On the Debt Limit

Remember this?

Mr. President, I rise today to talk about America’s debt problem. The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies....

Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘‘the buck stops here.’’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.

That was Senator Barack Obama opposing an increase of the debt limit in 2006, when government debt was 35 percent of GDP. Now it's 98 percent.

Of course, not raising the debt limit in 2006 would have been bad policy, as not raising the debt limit now would be. My own view is close to that of Jason Furman and Rohit Kumar, who advocate repealing the debt limit entirely, so we don't regularly have these artificial legislative crises.

But I recognize that is unlikely. And as long as we have a debt limit, politicians will use it to play politics. That is what Senator Obama did in 2006, and for better or worse, that is what Senate Republicans will likely do over the next few weeks. The open question is what political advantage they will get from doing so.

Biden's Leaky Bucket

 Click here to read my new guest essay in The New York Times.