Tuesday, November 30, 2010
Tax Cuts to expire
Jobless aid loss could choke economic growth
This article describes the issue and possible consequences involving the cutting of unemployment benefits in the near future. Some of the consequences that economic analysts believe could occur in the next year if benefits ran out include: “1. Economic growth could fall almost 1%; 2. 1 million people could lose their jobs, 3. Hundreds of thousands more could fall into poverty.” 1
It is estimated that in 2009, unemployment checks kept 3.3 million people from falling into poverty. If unemployment benefits stopped, 2 million people would lose their benefits by Christmas. 1
The timing of this decision is crucial. Bush-era tax cuts are set to expire on December 31, and congress is currently in the process of working to extend these tax cuts. If they were not extended, “marginal income tax rates will rise across the board, tax credits that benefit families will be slashed, and rates on capital gains and dividends will increase.” 2 While this will likely not affect many receiving unemployment benefits, it represents a significant burden to employed individuals.
The economic impact of both of these decisions is quite significant. Unemployment benefits help supplement the income of individuals not currently working, and according to The Congressional Budget Office, “every $1 spent on unemployment benefits generates up to $1.90 in economic growth” because jobless tend to spend every dollar they receive. 1 Tax cuts help the employed, but when compared to unemployment benefits, tax cuts are believed to generate less economic benefit because taxpayers tend to save a larger amount of their budget. As we discussed class the other day, lower taxes for individuals and businesses stimulates economic growth, because when entrepreneurs benefit, wages benefits, which helps out the economy.
Both programs have an impact on the government budget deficit, which is currently at $1.3 trillion. Unemployment benefits would increase this deficit by about $5 billion per month, while it is estimated that permanently extending the Bush-era tax cuts could result in $5 trillion in foregone revenue in the next decade. 2
So what gives? Do you extend tax cuts, but kill unemployment benefits, which will hurt the economic growth, but help the currently employed? Do you let the Bush-era tax cuts run out, and extend unemployment benefits, which will further strain the currently employed, but continue to provide relief to the unemployed and economic growth? Do you do both?
I think you have to do both, and it appears that both are on the brink of being passed. While I do not want the federal budget deficit to increase anymore, the consequences of not extending each would result in serious impact on the future state of our economy. If tax cuts were not extended, the average family would pay $2,600 in additional taxes annually 2 which would further hurt economic growth, pushing more people into unfavorable financial situations. If unemployment benefits are not extended, economic growth will take a huge hit, and many more people will fall into poverty. In the current state of our economy, it is almost unfathomable to not extend both.
Federal Pay Freeze: Is this an example of efficiency?
My question is, will this two year freeze be an example of efficiency if President Obama’s plan passes or a political move that will not have much impact to our current deficit crisis? My answer is no, I think it is just a political move that will not have a great economic impact. My reasoning is primarily because efficiency is a Pareto Optimal allocation of resources. Right now we, the United States of America, are too far in debt, an astonishing $13.8 trillion and counting. Something more effective needs to be done to counter this downward spiral. For us, as Americans, we need to advise our congressmen to take more aggressive action regarding the national debt. Once we develop a real plausible solution on how to get ourselves out of the large hole of debt we dug ourselves into then we may be on track to a more efficient government, but we are not there now. I think we are too inefficient as a administration to sustain any kind of plan to save and/or eventually cut a chunk out of the $13 trillion in debt we currently have. Also, it is not enough to make minor cost cutting changes that will not have any noticeable impact in the current debt figure. We need to do better national economic planning from here on if we want to reverse the out-of-control national budget deficit and stabilize America's economy.
Weisman, J., & Paletta, D. (2010, November 30). Federal Pay Freeze Planned. Retrieved from Wall Street Journal: http://online.wsj.com/article/SB10001424052748704584804575644630815574018.html?mod=WSJ_hp_MIDDLENexttoWhatsNewsTop
There were two ballot measures on the recent November election that I thought related somewhat to our class, Amendment 60 and Proposition 101. I found an article, “Election Preview: Amendments 60 and 61, Proposition 101,” that discussed what these measures would mean for our economy.
This article described Amendments 60 and 61 and Proposition 101. None of these ballot measures passed in the election. Amendment 60 would have cut property taxes, Amendment 61 would prohibit the state government from borrowing, and Proposition 101 would lower the state income tax and cut certain taxes and fees.
Amendment 60 wanted to reduce property taxes, which we learned in class are inefficient, and reduce the market value of homes. These property taxes are used for funding for Colorado school districts, which would need to replace the tax revenue funding with money from the state. Because people voted against this Amendment, it shows that there is a lower “excess burden” to Colorado consumers by taking taxes from homeowners than from some other form of taxation. It also shows that voters would not view it as efficient to take funding from other state allocations to replace funding for schools. Property tax incidence is paid by homeowners, so a majority of homeowners must be willing to take on this burden if they did not vote to decrease property taxes.
Proposition 101 would have lowered state income taxes, which would cause hourly paid workers to have an increased incentive to work more hours, since they would keep more of their hourly wages. However, it would probably not have this effect on salaried workers, since they do not make more money by working more hours. They would make a higher income if they paid less income tax, but would not have incentive to work more.
It would also make a difference in what income levels the people have who see a tax decrease. Since we learned in class that the majority of taxes are paid by the highest earning workers, the economy would see the most change if the group of the top 20% highest income earners that we looked at in class saw their income taxes decrease. For the lower levels of income earners that pay very little in taxes, their behavior will not change dramatically from the decreased tax. Both groups receive the same benefits from the government receiving the taxes, so those who will not see as much decrease in taxes they pay would vote against this Proposition.
Proposition 101 would also lower car registration fees, and telephone taxes and fees other than 911 fees. It seems strange to me that there is even a tax or fee on 911 calls. Since public safety is a public good, it should be provided for free for everyone by our government. If the government sees the 911 calls as price inelastic, they may assume that people will make a 911 call no matter what price is charged. They are assuming that people will not change their behavior and decide not to make a 911 call when they charge a price for that call. This is highly unlikely from an economic viewpoint, so there may in fact be people who choose to face danger without police help because there is a 911 fee. This seems like a government failure to me that they are charging a fee for public safety.
Roeder, Tom. “Election Preview: Amendments 60 and 61, Proposition 101.” October 2010. http://www.gazette.com/articles/proposition-106755-measures-amendments.html
Taxes Don't Matter (And Bill Gates can Fly)
Anybody else imagining John Crichton from Farscape shouting out "Taxes don't matter!" in that same voice he used in the episode where he was saying that about crackers? ...No? Just me? Crap. Moving on.
I almost fainted when I read this one particular article in BusinessWeek today. Not because of what the writer said--he was just reporting. No, it's because I actually agreed with a politician. (...Mostly.) Wait, what?
Apparently, the Senate minority leader said that "[n]owhere will you find a study or survey which indicates that raising taxes on small businesses with over $1 million in income will create jobs or help spur the economy." I have no idea how a survey could indicate something like that even if it were true, and you should always use "that" instead of "which" to introduce a restrictive relative clause, but other than that--holy crap, I agree with a politician. Did someone in Washington say something reasonable, or am I just infected with something?
Well, I haven't kicked any puppies today, so I'm going to just assume it's not that the centrifugal force sucked out my soul on that kiddy ride the other day.
Democrats and Republicans are duking it out over more than one thing these days, but with the Bush tax cuts set to expire pretty soon, taxes are one of the big issues they're drawing blood over (okay, the article says they're trying to reach a "bipartisan agreement," but we all know that political "agreement" really involves an impromptu boxing match... or a shank). Apparently, President Obama opposes making permanent the tax cuts for those earning more than $200,000 individually or $250,000 as a couple, and other politicians have suggested that maybe we could compromise and only increase taxes on taxpayers (including businesses) earning over $1 million. This is essentially implying that the rules of how taxes affect people and businesses doesn't apply to the "rich." Which makes sense, right? Just like how the law of gravity only affects Bill Gates when he wants it to.
Wait, that's not right? Bill Gates isn't richer than God and can't turn off gravity? ...Have I been deceived all these years?
Fine, well, if Bill Gates can't fly, then rich people and wealthy businesses paying higher taxes doesn't magically have no effect on the economy. So let's look at individuals first--leave the businesses for later. Obviously, $200,000 or $250,000 is filthy stinking rich and therefore should be punished for daring to not be poor and miserable, or at least average inundated-in-debt middle class (this is what I have gathered from listening to politicians). But there's an issue here. Taxation causes inefficiency, and the more you tax, the worse it gets. "Nonsense," the politician exclaims! "Why, how could it possibly do that? Taxes fund government, and government is the most efficiently efficient thing that every functioned efficiently!"
...Let's ignore that last sentence and the brain trauma it points to for now. Yes it does, and there are reasons. Now, assuming efficiency in the markets for most goods,--which, without government involvement or a source of market failure like externalities, one should assume,--scarce resources are allocated efficiently, so we don't have too few child car seats and too many nuclear-powered cat-massaging car seats (you know you missed it). Markets are pretty good at that. But throwing taxes into the mix messes this up--because taxes reallocate resources. Yeah, taxes don't reallocate resources the same way that, say, a government mandate that every car must come equipped with a built-in nuclear-powered cat-massaging car seat would, but they mess with consumer sovereignty something awful. Normally, the consumers determine the allocation of resources based on how much they're willing to pay for how many of whatever the good in question is. The producers don't determine it--they have to adjust to it. They can make ten million fuzzy pink pens, but if people are only weird enough to buy a million of them, well, those resources aren't going to keep going to those extra nine million fuzzy pink pens--and that company will be very much out of business (and inundated in pink fluff). It's the people buying the pens who determine how many will end up being made, and thus, how much of the resource pie gets allotted to that industry. But when the government taxes income, the consumer doesn't have as much money to consume with. That means his ability to determine where those resources go is reduced--and it doesn't matter which consumer's ability is reduced, it still mucks up the allocation. You then get government choices substituted for consumer choices, because now the government has money to bid resources away from what the people want to what the government thinks they should want. And ta-da, suddenly you really do have millions of units of nuclear-powered cat-massaging car seats being made, fuzzy pink pen demand be damned.
Taxing businesses more may be even worse. For one thing, that $1 million figure isn't profit--it's gross. Never mind that businesses grossing that much money still have, oh, what do you call them, expenses? Including workers' paychecks? Yeah. Nothing bad could possibly come from taxing away the money they were using to pay their employees with, not in a country where we're constantly fussing over the unemployment rate. On top of that, it's not just little start-ups that take entrepreneurial risks--big businesses do, too. The higher the taxes, the less potential pay-off the business sees. The less potential pay-off the business sees, the less likely it is to undertake the risk. When businesses don't undertake the risk to expand or try new things, they don't need more labor, and when nobody needs more labor, nobody bids up wages. Big bad business isn't the only one taking a hit when its taxes are increased. It trickles down to workers and consumers, and it's not due to spite, either, so stop imagining that big companies have the eye of Sauron perched atop their corporate headquarters.
Ideally, we wouldn't have any income taxes--and as soon as I say that, the eye of Sauron perched atop the Capitol Building turns to me with its evil, burning gaze. So before I skip town, one last thought: it doesn't matter who or which company is having taxes hiked, it messes up the same economy. Or, and this could be the case, Bill Gates really can fly like Superman and the economy is only affected by taxes on the poor or middle-class and I don't have to change my whole worldview now holy crap please please be true.
Now where did I leave my fuzzy pink pen?
"Obama, Hill leaders to meet: taxes, treaty on tap" by Jim Kuhnhenn. http://www.businessweek.com/ap/financialnews/D9JQIDGG2.htm
Look, I have a marginally useless skillset!
Keeping that in mind I start to think about one reasoning or more importantly a validation that I have heard for unemployment benefits. This reason is closely related to the increased productivity that is gained through specialization. For example a computer engineer who has comparative advantage in working with computer IT systems is laid off as part of the regular business cycle. So he begins to look for work. Now he hasn’t’ been a very thrifty individual and his personal savings quickly runs dry, out of desperation he takes a job as an IT help desk tech. A job where he produces something of less value but could readily find a position. One train of thought would say that he is being under utilized in this role and that Unemployment benefits allows him to subsist for a longer time while he finds a position that allows him to meet his full comparative advantage potential as a systems engineer. However what this doesn’t take into account is the consumption of or a demand for his position as a systems engineer. If the demand doesn’t exist then what he can produce doesn’t hold value for someone else. And if he had comparative advantage over others within that field they would be the ones being hired last or being fired first. This new position for him we have to deem is what he has comparative advantage in at that moment. Not only based on his skill set and ability to produce but also on how other’s value his production. To each his ability, no more and no less, but also of how that ability is valued by everyone else and in comparison to everyone else.
Thus based on this new line of though unemployment benefits would maybe make sense if we simply wanted to produce the most possible without a thought to how that production is valued. But that would seem sort of ridiculous, what good is producing 1000 widgets if no one wants widgets. So if we’re stuck with unemployment benefits, maybe we should treat them in the theoretical way we discussed with social security in class, as ‘insurance’ for unemployment based on a means test and in a manner that would not incentivize intentional unemployment. We have some of that now but it’s far from what it could be.
Monday, November 29, 2010
The United States government performs many services that it should avoid according to the criterion of efficiency, yet the one task that people assign to the government no matter what criteria they are viewing the world through is where the United States government is failing. The WikiLeak debacle continues to plague our country as one secret after another is leaked online. The succession of revealed secrets shows that the government is failing to act to prevent security leaks. Secretary of State Hilary Clinton has said action will be taken against the perpetrators, but no force has been put behind her words. Without force to deter them, other groups may find that the benefits outweigh the cost of divulging national secrets. The federal government should worry less about debatable functions of the government and focus on protecting our country by prosecuting those involved with the WikiLeaks.
It has been argued that the WikiLeaks contained only information that should have been part of the public domain in the first place, but the type of information revealed is not the issue that is at stake. No matter what type of information it is, if it is labeled as confidential the failure of the government to keep it that way shows weakness. The government, by saying something is private, promises to protect that information. The failure of the government to protect information and punish those who reveal it, makes the country look weak from a security standpoint. Being unable to stop arguing about trivial matters and uphold the rule of law sends the message that American barriers are lax.
Lake, Eli. “WikiLeaks: Armenia sent Iran Arms Used to Kill US Troops.” The Washington Times. November 29, 2010. Web.
Carroll, Conn. “Morning Bell: Just Another WikiLeak On An Already Sinking Ship.” The Heritage Foundation. November 29, 2010. Web.
As stated in class, wealth is a choice. If a person cannot accumulate any wealth due to creditors swarming them with demands and lack of access to resources, this could be a tough yet successful choice. It takes a long time to recover wealth after filing for bankruptcy. On the bright side, this article explains how these people have rebuilt their lives because of this choice. Without it, wealth might not come at all.
To raise or not to raise
According to a recent article I read, most of the incoming freshman class of 85 republicans ran their campaigns promising to lower the federal deficit and stop “big government spending” while also slamming their opponents for previously raising the federal debt limit. Now many of those same freshmen are calling the idea of raising the debt limit further awful and many are hoping congress does not soon vote to raise the debt limit even more.
Of course it may seem like a good idea to them to take a stand against further increases in the federal deficit, after all they will be living up to their campaign promises. But considering the federal deficit in 2009 was about 1.4 trillion dollars, or about 41% of the total federal government spending, not increasing the deficit limit would mean that at some point in the next year the government will lose a huge portion of their revenues and the question will become, how do we pay for government programs on 40% less revenue.
No one wants to be responsible for telling the American people that we’ve suddenly stopped funding the U.S. military and Social Security, which together account for about 43% of spending. So ultimately congress is going to have to raise the debt limit as a short term fix, so long as there is continuing debate about how to deal with the deficit. Congress currently seems content on both leaving tax rates the same (by extending the bush tax cuts) and not cutting too much spending (because no one can agree on what to cut), so something is going to have to happen and absent making the really tough choices of actually cutting spending or raising taxes…or both, the deficit isn’t going away.http://www.csmonitor.com/USA/Politics/2010/1118/Poison-vote-looms-for-tea-party-freshmen-Raise-the-national-debt-limit
Taxes, Taxes, and More Taxes
Obama wants to extend the taxes for people who make less than 200,000 and married people making 250,000 dollars a year. It would seem that these strict income numbers don’t cover costs of living in different areas. Surely a person living in Colorado Springs making 200,000 a year is doing quite well for themselves and may not need the tax cuts, but 200,000 in New York or other large cities may need more to have the same lifestyle. This leads me to the idea that this tool to measure an income level may be too small a factor and should include other measurements. My last thought on this is why is there inequality for married couples? Shouldn’t the income for a married couple be 400,000 not 250,000? The government and taxes seems to be a broken system. They tax unequally for married and income level. They give tax breaks for having children, buying homes, and numerous other thing. Just a matter fact to reveal how overly complicated government and taxes have become; taxes are different for a bull versus a steer. The government should step back and look at the tax system they have created and simplify it to an easier more manageable system that everyone can understand. Like the tax that takes the same percentage from everyone, like the one we discussed in class.
“How Congress' tax-cut decision may affect economy”
By JEANNINE AVERSA
Sunday, November 28, 2010
In many ways it is easy to see the points made by Mendelsohn and I agree that the wealthy should not be taxed differently merely because they have a higher income. In fact taxes should be kept low for all to encourage any one person, or group to possibly start a company. Although I may not completely understand what Mendelsohn is saying in one of his quotes "Portrayal of the wealthy as selfish opportunists while characterizing small business owners/job creators as "the backbone of our economy" is a fallacious". I disagree on this point many of the wealthy group he is talking about came from what he classifies as small business owners. That is the main goal of those owning a business for it to expand and to become wealthy. I think it is also time to point out that by giving tax cuts or extending them you are going to get a plethora of results from each individual. One person may choose to take their new disposable income and save it, and another may chose to spend it on any number of things each with different results. Still others would take it and make an investment or in other words take a risk, and that risk may either pay off or it may fail depending on other factors such as demand for it. If that investment pays off then that persons wealth or their company will grow creating the potential for jobs. Overall tax cuts or lower taxes certainly play a role in job creation, but it is not an easy one to one formula. However when times are tough for so many people to find jobs it presents a tool for solving this problem.
Friday, November 19, 2010
Is Wealth Chosen?
Monday, November 08, 2010
Take Home Midterm 2
Sunday, November 07, 2010
This brings us to the hearing that occurred this past week. In light of the petition for certiorari, the Supreme Court heard arguments concerning the validity and necessity of such a law and its influence by and over the First Amendment. Although we will have to wait until June of next year to receive their ruling, let us consider the impact of such a law were the Supreme Court to overturn the prior decisions.
First, is there a market failure? In its current state, most forms of entertainment media including video games receive content ratings through either the Motion Picture Association of America, the Entertainment Software Rating Board, or the self-policing of the Recording Industry Association of America (the famous "Parental Advisory" sticker). These policies are intended to assist parents in terms of consumer information as to what is contained in what they are purchasing: If they do not want their kids exposed, they can use the ratings provided to either make an immediate decision or to strive for more information before purchase. It is not illegal to actually sell or rent any of these forms of entertainment media prior to the attempt made by this California law. Although there have been some cases where violent crimes have been explained away by the accused under the guise of the influence of video games, they are not all that common. And, if the self-policing attitudes of the corporations do indeed provide sufficient information for the consumer, why exactly should the governments, either state or federal, get involved?
If such a law is passed, I do agree with the concerns voiced over its impact on not only the sales of video games but of their creation as well. Innovation and imagination may be stifled on an unprecedented level. As Justice Scalia commented, "I'm concerned about the producer of the games who has to know what he has to do in order to comply with the law. [...] a law that has criminal penalties has to be clear. And how is the manufacturer to know whether a particular violent game is covered or not?" So, why would a publisher take a project if they knew that it may cause a media uproar and thus become difficult to sell? And what of the rights of those individuals that do not find issues with such media? Will it eventually become illegal for a parent to purchase the game for their child if they choose to do so due to the possibility that it exposes others' children by association? The law could easily and unintentionally strip the consumer/ citizen of consumer rights and drastically alter their senses of responsibility.
Furthermore, the vagueness of the standards used in determining what exactly is violent or deviant behavior requiring such censorship causes concern in many individuals due to the impact such a Supreme Court decision could have on the other forms of entertainment media. Justice Ginsberg asked, "What about films? What about comic books? Why are video games so special?" If we are to accept that it is the government's role to police both producers and retailers of violent video games, will we eventually see similar censorship of movies, further censorship of music, and possibly even literary works? Although the argument for such censorship revolves around a moral and ethical obligation towards the protection of minors and their upbringing, I simply fail to see how such a potentially harmful step regarding the market for entertainment mediums cannot be addressed by the parents themselves. And if we keep slapping stickers on the front of products, we might soon be incapable of telling what it is we're even looking at.
Friday, November 05, 2010
Wednesday, November 03, 2010
Amendments 60 & 61
Amendment 60 would require utility companies to pay about $440,000 in property taxes over a six year period. On the surface, this may seem somewhat innocent, but the money has to come from somewhere, and we know from the trickle-down effect that this money will come from us. In addition, Amendment 61 would hinder utility's capability to fund the southern delivery sytem pipeline becaus borrowing of any kind would be harder and more expensive. The amendments will enforce new higher property taxes on water and electric infrastructure under Colorado Springs Utilities which will in due time mean higher utility bills for citizens.
Monday, November 01, 2010
Private accounts for social security?
We recently discussed the dire situation of social security in class and discovered that within a few years we will no longer be able to cover social security benefits with payroll taxes and from then until about 2040 the social security system will have to cover benefits by redeeming Treasury securities. After that the only way that social security will be viable is to ether reduce payouts to recipients or get the money from somewhere else. Of course there have been other proposed fixes for Social Security such as creating private accounts for people to receive their funds from in the future. This idea is criticized by many for a variety of reasons the chief among which is that private accounts could lose money because of instabilities in the stock market or other markets. No one disputes that social security is headed in to a bad place the dispute is just how it should be fixed, I for one think that if it manages to increase (or leave neutral) the future benefits for recipients without causing undue stress on future generations Private accounts would not be a bad thing.