Asking for higher taxes
I saw a great op-ed in the New York Times last week by Reed Hastings, the CEO of Netflix. It’s called “Please Raise My Taxes.” He proposes that government regulators should form a new tax bracket, taking 50% of salaries above one million dollars, rather than follow President Obama’s proposal of capping executives’ salaries at $500,000. I think this idea makes a whole lot of sense.
A salary cap sounds good, but it’s not actually helpful. Another NYT article recently pointed out that given the cost of living in Manhattan and the pressures of social expectations, it would actually put some families at the point of “selling their home in a fire sale,” despite how weird that seems. Of course, if all those salaries were capped, social expectations would change, and this isn’t the real problem. However, this salary cap would only apply to companies supported under TARP, and there are plenty out there that aren’t. All these highly-paid executives are extremely capable of finding other jobs when their current ones are suddenly a lot less high-paying. Offering high salaries is the way companies compete for the best CEOs. If you can’t pay at least as much as the other guys, you haven’t got a chance of getting top-notch management. It’s not good for the public’s investment to set these corporations up to fail, but that’s what salary caps are ultimately doing.
The higher tax bracket, on the other hand, gets plenty of benefits, but none of those harms. It allows companies to offer varying salaries to compete with each other. Additionally, this rule applies broadly to anyone making over a million dollars — whether their company is TARP-supported or not, whether they’re a CEO or a movie star or an athlete or a plumber named Joe. After all, it’s easy to make CEOs out to be the bad guys, but that’s not fair. People are generally paid according to how valuable their work is, and surely the head of a major investment bank is at least as valuable as the star of “Confessions of a Shopaholic.” Finally, of course, we have to remember that the government needs to be taking in more revenue somehow. That’s the main reason this nearly-trillion-dollar bailout is so terrifying: we were already $10 trillion in debt. The cap is more like scapegoating, blaming CEOs for being too greedy and decreeing how much they deserve to make. The tax increase actually addresses the underlying problem and increases government revenue. This is exactly where taxes ought to be raised if they have to be, because the marginal utility of money is much lower for the outrageously wealthy.
I think there are lots of good reasons to listen to Hastings’ proposal. But seriously, when someone’s begging the government to raise their taxes… that in itself is a pretty good indicator that there’s a solid case behind it.
Academia versus politics?
I’m thrilled about Obama’s pick of Steven Chu for Secretary of Energy. In case you haven’t heard, he’s an experimental atomic physicist and Berkeley professor, as well as current director of the Lawrence Berkeley National Laboratory. Oh, and he won a Nobel Prize. I’m glad that someone with scientific expertise — and lots of it! — will be in Obama’s cabinet.
I’ve been simultaneously entertained and saddened, though, by the stories surrounding Chu’s training for his confirmation hearings. Erika Lovley at Politico reports:
While Chu’s appointment is expected to be fairly non-controversial, statements he made as an academic could come back to haunt him. Murkowski and other lawmakers, who have scoured his record, plan to raise concerns over comments that suggest he supports a steady increase in the federal gas tax over 15 years to adapt the country to more efficient vehicles.
Obama opposes a gas tax hike now, an area where experts warn Chu must be careful not to contradict the president-elect.
“A lot of academics held that belief, but it’s not something we think Republicans will support,” said Robert Dillon, spokesman for Murkowski.
It seems that back in September, Chu told the Wall Street Journal, “Somehow we have to figure out how to boost the price of gasoline to the levels in Europe,” and they’ve just now gotten around to reporting on it. I understand that his views are more newsworthy now than they were before he was named Secretary of Energy, but perhaps for the same reason his advocacy will be tempered by the Democratic party platform. He’s not an idiot, guys.
More importantly, he’s right. Gasoline prices are ridiculously low in the US, especially when you compare to Europe. If the price is going to go up to $4 a gallon, it should be because of taxes, not because of sudden supply fluctuations. That way, the money goes to the government, which can spend it on research and innovation to help reduce the amount of gasoline we consume (or reduce other taxes to improve incentive structures), rather than oil companies, which will just use it to line the pockets of their CEOs.
Mostly, though, I just think it’s funny to hear that there is a consensus among energy experts and economists that a particular policy is the best, but that it’s not politically viable. Please, people, they’re called experts for a reason. Academia and politics shouldn’t be warring factions. Politicians should be listening to the people who have done the research and crunched the numbers, and should work on selling their recommendations to the public — rather than championing the public’s ignorant opinions in the face of mountains of evidence to the contrary.
New York’s soft drink tax
Last month, New York Governor David Paterson proposed adding an 18% statewide tax to non-diet sodas and sugary juice drinks. Though it does have some supporters, the plan has drawn plenty of criticism from nutritionists as well as small-government proponents. Fox News is even getting their fair and balanced panties in a twist about it. Despite all the criticism, I think it’s a great idea.
I know that nobody likes taxes. At the same time, though, most people like police and fire departments that are operational, public schools that can afford textbooks, and courthouses that can handle enough trials. The government needs to collect some tax revenue. The real question is, where should we take taxes from?
Every time the government taxes something, it changes the incentives for doing that thing. Income taxes make working less valuable, because they lower the wages you receive. Sales taxes discourage making purchases. Property taxes discourage owning property. (All these things are really only visible at the margins. Imagine that you have five dollars in your pocket and you want to buy a sandwich that costs $4.95. After sales tax, you can’t afford it anymore. Now, instead of thinking about how much cash you have on you right now, think of it in terms of a long-term budget, and you’ll get the idea.) If we want people in society doing a certain thing, or we want to make sure they are able to, we should keep taxes low on it. That’s why many places don’t tax groceries; they’re a necessity of life. Inversely, if we want people to stop doing something, we ought to tax it as high as is feasible. That’s why cigarette taxes exist, and why there should be a higher tax on gasoline. Taxes allow consumers to consider the externalities of their behavior. The tax is like adding on the social cost of people’s behavior, spread out over each individual act of consumption.
It’s bad that so many Americans are obese. According to Governor Paterson, nearly one in four New Yorkers fits that description. This puts a burden on New York’s medical resources, both in terms of time and space and in terms of funds available for government healthcare assistance. Therefore, it makes sense for New York to disincentivize obesity. They’re not locking people up in prison for it. Just making it a little less appealing.
If a tax can be used to achieve some social good like this, it means other taxes can remain lower (or can be lowered, depending on the current state of things). It seems to me that it’s a win-win situation. Better health in society, better allocation of taxes. Some people (like our friends at Fox News) think that this is cynical and hypocritical. Steven Milloy writes, “Combating obesity is not grounds for the tax; it is, instead, camouflage for it — and not very good camouflage at that.” This is a serious mischaracterization. What happens is, either New Yorkers drastically reduce their soft drink intake, which is a good thing, or New York makes a bunch of its tax revenue off a negative behavior rather than a positive one like working or buying groceries, which is also a good thing. No one is camouflaging anything.
Now, some of the criticism has been more along the lines of, “This isn’t enough.” It’s true that reducing the amount of soda you drink won’t instantly put you at your ideal weight. There are other types of food that are bad for you. Exercise still matters. However, this sounds to me like arguing that if you have anvils crushing both your feet, it’s not worth it to try to move the one on the right. Doing something in this case is still helpful, even though it isn’t everything.
Gas tax holiday still dumb
So, one of the sad things about starting this blog when we did was that I missed out on the chance to make fun of the idiotic gas tax holiday idea. Luckily for me, McCain brought it up again today, and I just can’t resist. I know I am far from the first to be amazed by how bad an idea this is, and by now most people with a brain understand it’s unwise. I don’t think, however, that the sheer magnitude of idiocy represented in this idea has fully sunk in, so I thought I’d add my two cents.
The main problem people seem to have with the proposal is that it is too small to have any meaningful effect and as such is more of a political ploy than a serious policy proposal. (The federal gas tax is 18.4 cents, which results in an average of somewhere around $30/month in savings for most people.) This is a totally valid criticism, but it’s answered reasonably easily with something along the lines of “Sure, it’s not enough to really solve the problem, but that doesn’t mean it isn’t at least a small help, and if the Washington elites [read: Obama] really cared about the little guy, they’d do every little thing they could.” Everyone knows that the attention on this minor proposal is political, but that doesn’t mean they’ll oppose the proposal. People are also worried (at least with McCain’s version — Clinton’s taxes oil companies to make up the difference) that it’ll either increase the deficit or reduce funding for transit. McCain, of course, plans to avoid this by magically pulling money out of “wasteful spending”. This is the apparently unlimited pool of money, of which the only specific item he’s labeled is earmarks — which he’s also going to use to pay for tax cuts, which he massively over-represents, and large portions of which are totally infeasible to cut. To add a bit of hilarity, in Tennessee, where he brought up the idea today, if this magical fiscal maneuver doesn’t work out and federal transportation money gets cut, the state gas tax automatically increases to make up the difference.
So, great, it’s a meaningless and ineffective campaign promise that has no hope of being passed. That’s dumb, but by no means unique. The real problem here is that whatever effect it does have will actually be incredibly harmful to the country. First, recognize that even the $30/month in savings will never happen, for reasons anyone who’s ever taken freshman economics will understand. Say the tax is eliminated, and prices fall that incredibly drastic 18.4 cents. The price producers receive for selling the gas won’t change (since the extra 18.4 cents previously went to the government, not them), so supply will remain unchanged, but the price consumers have to pay would be lower. That means the amount consumers want to buy will increase. Since previously supply and demand were at equal quantities, and now demand has increased, there will be a shortage. Markets solve shortages with upward pressure on prices, so the price will rise until there is no longer a shortage. In most markets this happens because the higher price partly lowers demand and partly increases supply, and the price would come to rest somewhat below the original price for savings, albeit by less than 18.4 cents. However, this is a somewhat unique circumstance, since the supply of gas is limited by the bottleneck of US refineries, which are already working near maximum capacity. That means in the short term supply can’t increase, so the shortage has to be eliminated entirely through a decrease in demand, which means lowering demand back to where it was before the tax decrease, which means raising the price up to where it was before the tax decrease… which means no savings. There will be plenty of extra profit for oil refineries, though. In the long term, this would mean people would build more refineries, and the price would go down some, but this tax break is only temporary, so it won’t even have that effect.
The consequences only get worse from there, though. Read more