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MSW on income inequality

Michael Sean Winters Thrusday column hit three recent articles on income inequalty. You can see his reaction at http://ncronline.org/blogs/distinctly-catholic/income-inequality-debate-.... My comments follow:

Cowen of GMU is of the von Mises school of libertarian economics. They are the kind of folks who think that every labor agreement is freely negotiated between the business owner and the worker. This is quaint, but wrong. He is correct that High IQ people found companies and do innovations - it is not true that all the innovators in big companies get direct rewards for their inventions - often they get $1000 while the company absorbes the return - although these tend to be high salaried workers. It is the CEO, however, that gets the lion's share of the rewards, often from a compensation committee made up of his friends. Pay and management in most firms is hierarchical - and this means that the system sets pay, not any bargain between worker and owner - especially when the proxy for the owner is a CEO who gets more if you get less. The Reagan tax cuts made that possible, by the way. It used to be that a CEO who raked in too much would see it all go to Uncle Sam in taxes. Lower those rates and the incentive comes in to cheat the workers. Its not about the CFOs, as Myerson implies, or even the shareholders, who get a normal profit. Its the CEO.

Chuck Lane does us all a favor by sharing Michael Graetz latest article on tax reform. (Full Disclosure - Michael and I occassionally talk about these things, though my comments are my own). Michael points out the same thing I have been saying, that 1986 was different and that Chairman Camp's proposal, while a great classroom exercise in tax reform, has not constitutency. From what I remember of 1986 - there was a great deal of unrest among voters on the large tax shelters rich people used to pay no or few taxes (kind of like the ones corporations use now). 1986 fixed that - although sadly it left a dangerous loophole for second mortgage interest which introduced the concept of "cashing out equity." That led us full tilt into 2008.

Michael's tax plan is the latest iteration of the one he published in a book "100 Million Unnecessary Returns" whose purpose was to stop most households from having to file taxes. The money they would have filed in taxes would go into paying a Value Added Tax - and poorer people would get a rebate to pay those taxes through either an EFT card or as a rebate in their paychecks against their Social Security Taxes (the taxes would be credited, but they would still get the bonus, like the EITC. The progressivity remains in the system through income taxes for the top 20% of filers. Aside from the prebates, items like the Child Tax Credit would come through the same rebates. Indeed, he would also do what I propose (and sadly, Catholic Charities USA has not mentioned in their agenda) - expand the credit! Graetz would lower the corporate tax rate - which may stop inversions - but what will be most effective will be the VAT - because unlike todays wage based taxes, it also taxes profit. If the government gets the profit through the VAT, there is no reason to do an inversion to prevent the profit from being captured. VATs are the most unavoidable things, which is why the GOP hates them.

Kim Daniels offers an interesting analysis of the newest Ryan Plan on poverty. Let me add a few things. First, Ryan is is Cowen's camp of von Mises economists and always will be - which is something he needs to hide better because it makes him unattractive to those who are picking the Chair of Ways and Means (since it also means he is probably as much of a gold bug as Ron Paul - and no one would put Paul on as W&M Chair). It would be good if Ryan adopted Michael Graetz's plan (which is similar to my plan, but not the same - I also direct social insurance taxes to private accounts holding employer voting stock - and you thought liberals were afraid of the VAT!). In truth, Obama would veto any radicalism Ryan would propose, so not much will come out of his committee if he gets it. Ironically, the whole proposal to have case managers serve as a kind of one-stop shop is essentially current law. We already have One-Stop Centers under the Workforce Investment Act and most states already have a single form for SNAP, TANF, Medicaid and all the rest (sadly, housing is still its own feifdom). Its a decent idea that Obama will sign, but it is not revolutionary.

As for Obama, whom MSW seems to delight in bashing nowadays, regardless of how much Valerie Jarrett would make the campaign about pelvic issues, the Middel East seems to be catching up. Of course, if she succeeds in getting local elections to be about the Trap Laws enacted in Virgnia, North Carolina and Texas, and attempted elsewhere, it will not look good for the GOP - especially as the Federal Courts will likely invalidate these measures beforehand. While the best thing for workers would be a really big tax rate increase on the rich (even if it actually cuts down on revenue), I don't see anyone proposing and voting on it any time soon - certainly not until the GOP is kicked out of the Speakership and kept out of the Majority Leader's desk. Unless the pelvic issues work, gridlock will continue. Still, Obama got a lot of what he wanted on the inequality front already. The American Tax Relief Act of 2013 essentially ratified his tax proposal from 2008, with the Affordable Care Act going even further on the rich.

While he still has a Buffett Rule proposal on the floor, it won't go anywhere. Most of the Buffett effect was taken care of in the ATRA and ACA. The only other thing he could do is one of the things I propose - credit the employer contribution to Social Security equally for each worker (as in regardless of wage) and take off the cap - or better yet, fund it with a consumption tax so both labor and profit are taxed. That would essentially tax Buffett as much as his Secretary in percentage terms, if not more overall. Still, there is not constituency for this among liberals, like Henry Aaron of Brookings (who I shared my plan with - and believe me, he responded) - because equalizing the benefit gives the program the stink of welfare, which makes it vulnerable - and he hates personal accounts - even socialistic ones.