Things to Tax

November 27, 2011

By PAUL KRUGMAN

The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?

And I don’t just mean a return to Clinton-era tax rates. Why should 1990s taxes be considered the outer limit of revenue collection? Think about it: The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?

Let me suggest two areas in which it would make a lot of sense to raise taxes in earnest, not just return them to pre-Bush levels: taxes on very high incomes and taxes on financial transactions.

About those high incomes: In my last column I suggested that the very rich, who have had huge income gains over the last 30 years, should pay more in taxes. I got many responses from readers, with a common theme being that this was silly, that even confiscatory taxes on the wealthy couldn’t possibly raise enough money to matter.

Folks, you’re living in the past. Once upon a time America was a middle-class nation, in which the super-elite’s income was no big deal. But that was another country.

The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals.

For example, a recent report by the nonpartisan Tax Policy Center points out that before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. According to the center’s analysis, restoring those high-income brackets would have raised $78 billion in 2007, or more than half a percent of G.D.P. I’ve extrapolated that number using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit.

It’s instructive to compare that estimate with the savings from the kinds of proposals that are actually circulating in Washington these days. Consider, for example, proposals to raise the age of Medicare eligibility to 67, dealing a major blow to millions of Americans. How much money would that save?

Well, none from the point of view of the nation as a whole, since we would be pushing seniors out of Medicare and into private insurance, which has substantially higher costs. True, it would reduce federal spending — but not by much. The budget office estimates that outlays would fall by only $125 billion over the next decade, as the age increase phased in. And even when fully phased in, this partial dismantling of Medicare would reduce the deficit only about a third as much as could be achieved with higher taxes on the very rich.

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And then there’s the idea of taxing financial transactions, which have exploded in recent decades. The economic value of all this trading is dubious at best. In fact, there’s considerable evidence suggesting that too much trading is going on. Still, nobody is proposing a punitive tax. On the table, instead, are proposals like the one recently made by Senator Tom Harkin and Representative Peter DeFazio for a tiny fee on financial transactions.

And here’s the thing: Because there are so many transactions, such a fee could yield several hundred billion dollars in revenue over the next decade. Again, this compares favorably with the savings from many of the harsh spending cuts being proposed in the name of fiscal responsibility.

But wouldn’t such a tax hurt economic growth? As I said, the evidence suggests not — if anything, it suggests that to the extent that taxing financial transactions reduces the volume of wheeling and dealing, that would be a good thing.

And it’s instructive, too, to note that some countries already have financial transactions taxes — and that among those who do are Hong Kong and Singapore. If some conservative starts claiming that such taxes are an unwarranted government intrusion, you might want to ask him why such taxes are imposed by the two countries that score highest on the Heritage Foundation’s Index of Economic Freedom.

Now, the tax ideas I’ve just mentioned wouldn’t be enough, by themselves, to fix our deficit. But the same is true of proposals for spending cuts. The point I’m making here isn’t that taxes are all we need; it is that they could and should be a significant part of the solution.

When Failure Is Good

November 17, 2011

By PAUL KRUGMAN

It’s a bird! It’s a plane! It’s a complete turkey! It’s the supercommittee!

By next Wednesday, the so-called supercommittee, a bipartisan group of legislators, is supposed to reach an agreement on how to reduce future deficits. Barring an evil miracle — I’ll explain the evil part later — the committee will fail to meet that deadline.

If this news surprises you, you haven’t been paying attention. If it depresses you, cheer up: In this case, failure is good.

Why was the supercommittee doomed to fail? Mainly because the gulf between our two major political parties is so wide. Republicans and Democrats don’t just have different priorities; they live in different intellectual and moral universes.

In Democrat-world, up is up and down is down. Raising taxes increases revenue, and cutting spending while the economy is still depressed reduces employment. But in Republican-world, down is up. The way to increase revenue is to cut taxes on corporations and the wealthy, and slashing government spending is a job-creation strategy. Try getting a leading Republican to admit that the Bush tax cuts increased the deficit or that sharp cuts in government spending (except on the military) would hurt the economic recovery.

Moreover, the parties have sharply different views of what constitutes economic justice.

Democrats see social insurance programs, from Social Security to food stamps, as serving the moral imperative of providing basic security to our fellow citizens and helping those in need.

Republicans have a totally different view. They may soft-pedal that view in public — in last year’s elections, they even managed to pose as defenders of Medicare — but, in private, they view the welfare state as immoral, a matter of forcing citizens at gunpoint to hand their money over to other people. By creating Social Security, declared Rick Perry in his book “Fed Up!”, F.D.R. was “violently tossing aside any respect for our founding principles.” Does anyone doubt that he was speaking for many in his party?

So the supercommittee brought together legislators who disagree completely both about how the world works and about the proper role of government. Why did anyone think this would work?

Well, maybe the idea was that the parties would compromise out of fear that there would be a political price for seeming intransigent. But this could only happen if the news media were willing to point out who is really refusing to compromise. And they aren’t. If and when the supercommittee fails, virtually all news reports will be he-said, she-said, quoting Democrats who blame Republicans and vice versa without ever explaining the truth.

Oh, and let me give a special shout-out to “centrist” pundits who won’t admit that President Obama has already given them what they want. The dialogue seems to go like this. Pundit: “Why won’t the president come out for a mix of spending cuts and tax hikes?” Mr. Obama: “I support a mix of spending cuts and tax hikes.” Pundit: “Why won’t the president come out for a mix of spending cuts and tax hikes?”

You see, admitting that one side is willing to make concessions, while the other isn’t, would tarnish one’s centrist credentials. And the result is that the G.O.P. pays no price for refusing to give an inch.

So the supercommittee will fail — and that’s good.

For one thing, history tells us that the Republican Party would renege on its side of any deal as soon as it got the chance. Remember, the U.S. fiscal outlook was pretty good in 2000, but, as soon as Republicans gained control of the White House, they squandered the surplus on tax cuts and unfunded wars. So any deal reached now would, in practice, be nothing more than a deal to slash Social Security and Medicare, with no lasting improvement in the deficit.

Also, any deal reached now would almost surely end up worsening the economic slump. Slashing spending while the economy is depressed destroys jobs, and it’s probably even counterproductive in terms of deficit reduction, since it leads to lower revenue both now and in the future. And current projections, like those of the Federal Reserve, suggest that the economy will remain depressed at least through 2014. Better to have no deal than a deal that imposes spending cuts in the next few years.

But don’t we eventually have to match spending and revenue? Yes, we do. But the decision about how to do that isn’t about accounting. It’s about fundamental values — and it’s a decision that should be made by voters, not by some committee that allegedly transcends the partisan divide.

Eventually, one side or the other of that divide will get the kind of popular mandate it needs to resolve our long-run budget issues. Until then, attempts to strike a Grand Bargain are fundamentally destructive. If the supercommittee fails, as expected, it will be time to celebrate.

Vouchers for Veterans

November 13, 2011

By PAUL KRUGMAN

American health care is remarkably diverse. In terms of how care is paid for and delivered, many of us effectively live in Canada, some live in Switzerland, some live in Britain, and some live in the unregulated market of conservative dreams. One result of this diversity is that we have plenty of home-grown evidence about what works and what doesn’t.

Naturally, then, politicians — Republicans in particular — are determined to scrap what works and promote what doesn’t. And that brings me to Mitt Romney’s latest really bad idea, unveiled on Veterans Day: to partially privatize the Veterans Health Administration (V.H.A.).

What Mr. Romney and everyone else should know is that the V.H.A. is a huge policy success story, which offers important lessons for future health reform.

Many people still have an image of veterans’ health care based on the terrible state of the system two decades ago. Under the Clinton administration, however, the V.H.A. was overhauled, and achieved a remarkable combination of rising quality and successful cost control. Multiple surveys have found the V.H.A. providing better care than most Americans receive, even as the agency has held cost increases well below those facing Medicare and private insurers. Furthermore, the V.H.A. has led the way in cost-saving innovation, especially the use of electronic medical records.

What’s behind this success? Crucially, the V.H.A. is an integrated system, which provides health care as well as paying for it. So it’s free from the perverse incentives created when doctors and hospitals profit from expensive tests and procedures, whether or not those procedures actually make medical sense. And because V.H.A. patients are in it for the long term, the agency has a stronger incentive to invest in prevention than private insurers, many of whose customers move on after a few years.

And yes, this is “socialized medicine” — although some private systems, like Kaiser Permanente, share many of the V.H.A.’s virtues. But it works — and suggests what it will take to solve the troubles of U.S. health care more broadly.

Yet Mr. Romney believes that giving veterans vouchers to spend on private insurance would somehow yield better results. Why?

Well, Republicans have a thing about vouchers. Earlier this year Representative Paul Ryan famously introduced a plan to convert Medicare into a voucher system; Mr. Romney’s Medicare proposal follows similar lines. The claim, always, is the one Mr. Romney made last week, that “private sector competition” would lower costs.

But we have a lot of evidence about how private-sector competition in health insurance works, and it’s not favorable. The individual insurance market, which comes closest to the conservative ideal of free competition, has huge administrative costs and has no demonstrated ability to reduce other costs. Medicare Advantage, which allows Medicare beneficiaries to buy private insurance instead of having Medicare pay bills directly, has consistently had higher costs than the traditional program.

And the international evidence accords with U.S. experience. The most efficient health care systems are integrated systems like the V.H.A.; next best are single-payer systems like Medicare; the more privatized the system, the worse it performs.

To be fair to Mr. Romney, he takes a somewhat softer line than others in his party, suggesting that the existing V.H.A. system would remain available and that traditional Medicare would remain an option. In practice, however, partial privatization would almost surely undermine the public side of these programs. For example, one problem with the V.H.A. is that its hospitals are spread too thinly across the nation; this problem would become worse if a substantial number of veterans were encouraged to opt out of the system.

So what lies behind the Republican obsession with privatization and voucherization? Ideology, of course. It’s literally a fundamental article of faith in the G.O.P. that the private sector is always better than the government, and no amount of evidence can shake that credo.

In fact, it’s hard to avoid the sense that Republicans are especially eager to dismantle government programs that act as living demonstrations that their ideology is wrong. Bloated military budgets don’t bother them much — Mr. Romney has pledged to reverse President Obama’s defense cuts, despite the fact that no such cuts have actually taken place. But successful programs like veterans’ health, Social Security and Medicare are in the crosshairs.

Which brings me to a final thought: maybe all this amounts to a case for Rick Perry. Any Republican would, if elected president, set out to undermine precisely those government programs that work best. But Mr. Perry might not remember which programs he was supposed to destroy.

Andy Rooney; thanks…

Here Comes the Sun

November 6, 2011

By PAUL KRUGMAN

For decades the story of technology has been dominated, in the popular mind and to a large extent in reality, by computing and the things you can do with it. Moore’s Law — in which the price of computing power falls roughly 50 percent every 18 months — has powered an ever-expanding range of applications, from faxes to Facebook.

Our mastery of the material world, on the other hand, has advanced much more slowly. The sources of energy, the way we move stuff around, are much the same as they were a generation ago.

But that may be about to change. We are, or at least we should be, on the cusp of an energy transformation, driven by the rapidly falling cost of solar power. That’s right, solar power.

If that surprises you, if you still think of solar power as some kind of hippie fantasy, blame our fossilized political system, in which fossil fuel producers have both powerful political allies and a powerful propaganda machine that denigrates alternatives.

Speaking of propaganda: Before I get to solar, let’s talk briefly about hydraulic fracturing, a k a fracking.

Fracking — injecting high-pressure fluid into rocks deep underground, inducing the release of fossil fuels — is an impressive technology. But it’s also a technology that imposes large costs on the public. We know that it produces toxic (and radioactive) wastewater that contaminates drinking water; there is reason to suspect, despite industry denials, that it also contaminates groundwater; and the heavy trucking required for fracking inflicts major damage on roads.

Economics 101 tells us that an industry imposing large costs on third parties should be required to “internalize” those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production. Fracking might still be worth doing given those costs. But no industry should be held harmless from its impacts on the environment and the nation’s infrastructure.

Yet what the industry and its defenders demand is, of course, precisely that it be let off the hook for the damage it causes. Why? Because we need that energy! For example, the industry-backed organization energyfromshale.org declares that “there are only two sides in the debate: those who want our oil and natural resources developed in a safe and responsible way; and those who don’t want our oil and natural gas resources developed at all.”

So it’s worth pointing out that special treatment for fracking makes a mockery of free-market principles. Pro-fracking politicians claim to be against subsidies, yet letting an industry impose costs without paying compensation is in effect a huge subsidy. They say they oppose having the government “pick winners,” yet they demand special treatment for this industry precisely because they claim it will be a winner.

And now for something completely different: the success story you haven’t heard about.

These days, mention solar power and you’ll probably hear cries of “Solyndra!” Republicans have tried to make the failed solar panel company both a symbol of government waste — although claims of a major scandal are nonsense — and a stick with which to beat renewable energy.

But Solyndra’s failure was actually caused by technological success: the price of solar panels is dropping fast, and Solyndra couldn’t keep up with the competition. In fact, progress in solar panels has been so dramatic and sustained that, as a blog post at Scientific American put it, “there’s now frequent talk of a ‘Moore’s law’ in solar energy,” with prices adjusted for inflation falling around 7 percent a year.

This has already led to rapid growth in solar installations, but even more change may be just around the corner. If the downward trend continues — and if anything it seems to be accelerating — we’re just a few years from the point at which electricity from solar panels becomes cheaper than electricity generated by burning coal.

And if we priced coal-fired power right, taking into account the huge health and other costs it imposes, it’s likely that we would already have passed that tipping point.

But will our political system delay the energy transformation now within reach?

Let’s face it: a large part of our political class, including essentially the entire G.O.P., is deeply invested in an energy sector dominated by fossil fuels, and actively hostile to alternatives. This political class will do everything it can to ensure subsidies for the extraction and use of fossil fuels, directly with taxpayers’ money and indirectly by letting the industry off the hook for environmental costs, while ridiculing technologies like solar.

So what you need to know is that nothing you hear from these people is true. Fracking is not a dream come true; solar is now cost-effective. Here comes the sun, if we’re willing to let it in.

Oligarchy, American Style

 

November 3, 2011

By PAUL KRUGMAN

Inequality is back in the news, largely thanks to Occupy Wall Street, but with an assist from the Congressional Budget Office. And you know what that means: It’s time to roll out the obfuscators!

Anyone who has tracked this issue over time knows what I mean. Whenever growing income disparities threaten to come into focus, a reliable set of defenders tries to bring back the blur. Think tanks put out reports claiming that inequality isn’t really rising, or that it doesn’t matter. Pundits try to put a more benign face on the phenomenon, claiming that it’s not really the wealthy few versus the rest, it’s the educated versus the less educated.

So what you need to know is that all of these claims are basically attempts to obscure the stark reality: We have a society in which money is increasingly concentrated in the hands of a few people, and in which that concentration of income and wealth threatens to make us a democracy in name only.

The budget office laid out some of that stark reality in a recent report, which documented a sharp decline in the share of total income going to lower- and middle-income Americans. We still like to think of ourselves as a middle-class country. But with the bottom 80 percent of households now receiving less than half of total income, that’s a vision increasingly at odds with reality.

In response, the usual suspects have rolled out some familiar arguments: the data are flawed (they aren’t); the rich are an ever-changing group (not so); and so on. The most popular argument right now seems, however, to be the claim that we may not be a middle-class society, but we’re still an upper-middle-class society, in which a broad class of highly educated workers, who have the skills to compete in the modern world, is doing very well.

It’s a nice story, and a lot less disturbing than the picture of a nation in which a much smaller group of rich people is becoming increasingly dominant. But it’s not true.

Workers with college degrees have indeed, on average, done better than workers without, and the gap has generally widened over time. But highly educated Americans have by no means been immune to income stagnation and growing economic insecurity. Wage gains for most college-educated workers have been unimpressive (and nonexistent since 2000), while even the well-educated can no longer count on getting jobs with good benefits. In particular, these days workers with a college degree but no further degrees are less likely to get workplace health coverage than workers with only a high school degree were in 1979.

So who is getting the big gains? A very small, wealthy minority.

The budget office report tells us that essentially all of the upward redistribution of income away from the bottom 80 percent has gone to the highest-income 1 percent of Americans. That is, the protesters who portray themselves as representing the interests of the 99 percent have it basically right, and the pundits solemnly assuring them that it’s really about education, not the gains of a small elite, have it completely wrong.

If anything, the protesters are setting the cutoff too low. The recent budget office report doesn’t look inside the top 1 percent, but an earlier report, which only went up to 2005, found that almost two-thirds of the rising share of the top percentile in income actually went to the top 0.1 percent — the richest thousandth of Americans, who saw their real incomes rise more than 400 percent over the period from 1979 to 2005.

Who’s in that top 0.1 percent? Are they heroic entrepreneurs creating jobs? No, for the most part, they’re corporate executives. Recent research shows that around 60 percent of the top 0.1 percent either are executives in nonfinancial companies or make their money in finance, i.e., Wall Street broadly defined. Add in lawyers and people in real estate, and we’re talking about more than 70 percent of the lucky one-thousandth.

But why does this growing concentration of income and wealth in a few hands matter? Part of the answer is that rising inequality has meant a nation in which most families don’t share fully in economic growth. Another part of the answer is that once you realize just how much richer the rich have become, the argument that higher taxes on high incomes should be part of any long-run budget deal becomes a lot more compelling.

The larger answer, however, is that extreme concentration of income is incompatible with real democracy. Can anyone seriously deny that our political system is being warped by the influence of big money, and that the warping is getting worse as the wealth of a few grows ever larger?

Some pundits are still trying to dismiss concerns about rising inequality as somehow foolish. But the truth is that the whole nature of our society is at stake.