Many top earners during the high-rate era, such as politicians Dwight Eisenhower and Ronald Reagan, entertainer Jack Benny and librettist Alan Jay Lerner, didn’t pay the top rates. In 1952, for example, when the top rate was 92%, the highest-earning 1% of taxpayers had an average rate of 32%, according to Elliot Brownlee, a tax historian and emeritus professor at the University of California, Santa Barbara.
“When top tax rates were high, there was always a large gap between the stated rates and what the highest earners actually paid as a percentage of their income,” says Joel Slemrod, an economics professor at the University of Michigan.
This one would not work today:
Gen. Dwight Eisenhower also successfully argued that $635,000 he earned from his 1948 memoir, “Crusade in Europe,” should be treated as a capital gain, saving him as much as $400,000 of tax, says Joseph Thorndike, a historian with Tax Notes magazine.
Here is the Laura Saunders WSJ piece.
India has long affirmative-action-like programs for members of scheduled castes, scheduled tribes and other backward classes (yes, that is the official name). The programs typically reserve a certain number of political seats, government jobs, and educational placements for members of historically disadvantaged and discriminated against groups, hence the the term reservations. Over time, the number of reservations has been increased and the category expanded to more and more groups. In fact, under a new reservation program just announced, virtually everyone will be covered by one reservation or another!
The new program will cover household income of less than 8 lakhs which is $11,000, far above India’s GDP per capita! The new program is meant to benefit middle and upper castes who have chafed under reservations for the historically discriminated against. The fact that the program is open to so many people, however, means that it’s really not much of a benefit at all.
Moreover, ultimately reservations mean very little if there aren’t private-sector, wealth-creating jobs which is India’s primary challenge.
The carbon tax idea makes perfect sense to me, and I have endorsed the proposal for some time, but why return the revenue to citizens in the form of dividends? It strikes me as economists thinking they know what makes good politics, something which economists are rarely good at. Arguably it makes the policy seem less important, and mainly about the dividend, in a slightly cynical, Chavez-like sort of way. Furthermore, it tries to make a carbon tax a free lunch, which it is not, no matter how great the longer-term gains. I don’t believe in economists tricking people, even though I will admit tricking people can be useful. The tricking is somebody else’s job! Finally, if the carbon tax is revenue-neutral, just sending money to everyone (in what proportions?) doesn’t give them anything in return as measured by real resources. Maybe it would give Jay Powell a slight headache, however, since he and others at the Fed would have to decide whether and how to do an offset, or not.
We economists are in any case not in charge, so let’s push for what is actually best. I would suggest using the revenue to either help solve the problem at hand (climate change, or whatever connected problems might be relevant), or simply to pay down the debt.
Can you identify the implicit leverage in that organization?
Most (not all) organizations have forms of leverage which are built in and which do not show up as debt on the balance sheet. Banks may have off-balance sheet risk through derivatives, companies may sell off their valuable assets, and NBA teams may tank their ability to keep draft picks and free agents in their future.
Or a university may have ambitious plans, or payroll commitments, which require an ongoing stream of tuition increases or admissions boosts, usually from out-of-state students.
None of this has to be a bad thing — many growing organizations should have leverage. Nonetheless leverage it is.
So take your favorite organization. Do you know where the hidden leverage is?
If not, you probably don’t understand it very well.
That is the topic of my latest Bloomberg column, here is one excerpt:
The real power here is held by government employees, especially those in critical jobs. Let’s say that more TSA screeners decided to walk off the job. It’s already the case that the TSA absentee rate has gone up to 7.6 percent, from 3.2 percent a year ago. It is possible to imagine screeners staying home in much greater numbers, thus crippling the entire nation. That could either force President Donald Trump’s hand or lead to a congressional override of a potential presidential veto.
As a rationale for showing up to work, “I’m helping both the TSA and my colleagues” can work for a while, because of both cooperative norms and peer pressure. But I don’t think it can hold things together for more than a few months. They may not have the right to strike, but federal employees can still gum up the works with high absenteeism and poor performance.
I really don’t expect anything good to come of this entire episode.
The best paper I have read in a long time is Hopenhayn, Neira and Singhania’s From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share. HNS do a great job at combining empirics and theory to explain an important fact about the world in an innovative and surprising way. The question the paper addresses is, Why is dynamism declining? As you may recall, my paper with Nathan Goldschlag, Is regulation to blame for the decline in American entrepreneurship?, somewhat surprisingly answered that the decline in dynamism was too widespread across too many industries to be explained by regulation. HNS point to a factor which is widespread across the entire economy, declining labor force growth.
Figure Two of the paper (at right) looks complicated but it tells a consistent and significant story. The top row of the figure shows three measures of declining dynamism: the rise in concentration which is measured as the share of employment accounted for by large (250+) firms, the increase in average firm size, and the declining exit rate. The bottom row of the figure shows the same measures but this time conditional on firm age. What we see in the bottom figure is two things. First, most of the lines jump around a bit but are generally flat or not increasing. In other words, once we control for firm age we do not see, for example, increasing concentration. Peering closer at the bottom row the second thing it shows is that older firms account for a larger share of employment, are bigger and have lower exit rates. Putting these two facts together suggests that we might be able to explain all the trends in the top row by one fact, aging firms.
So what explains aging firms? Changes in labor force growth have a big influence on the age distribution of firms. Assume, for example, that labor force growth increases. An increase in labor force growth means we need more firms. Current firms cannot absorb all new workers because of diminishing returns to scale. Thus, new workers lead to new firms. New firms are small and young. In contrast, declining labor force growth means fewer new firms. Thus, the average firm is bigger and older.
HNS then embed this insight into a dynamic model in which firms enter and exit and grow and shrink over time according to random productivity shocks (a modified version of Hopenhayn (1992)). We need a dynamic model because suppose the labor force grows today, this causes more young and small firms to enter the market today. Young and small firms, however, have high exit rates so today’s high entry rate will generate a high exit rate tomorrow and also a high entry rate tomorrow as replacements arrive. Thus, a shock to labor force growth today will influence the dynamics of the system many periods into the future.
So what happens when we feed the actual decline in labor force growth into the HNS dynamic model (calibrated to 1978.) Surprisingly, we can explain a lot about declining dynamism. At right, for example, is the startup rate. Note that it jumps up with rising labor force growth in the 1950s and 1960s and declines after the 1970s.
The paper also shows that the model predictions for firm age and concentration also fit the data reasonably well.
Most surprisingly, HNS argue that essentially all of the decline in the labor share of national income can be explained by the simple fact that larger firms use fewer non-production workers per unit of output. That is very surprising. I’m not sure I believe it.
If HNS are correct it implies a very different perspective on the decline in labor share. In the HNS model for example non-competitive factors do not play a role so there’s no monopoly or markups . Moreover, if the decline in labor share is caused by larger firms using fewer non-production workers then this is surely a good thing. In their model, however, there is only one factor of production so declining labor share means increasing profit share which I find dubious. If production and non-production labor are distinguished it may also be that declining non-production share will redound to production labor so the labor share won’t fall as much. Nevertheless, the ideas here are intriguing and the results on dynamism, which are the heart of the paper, do not rely on the arguments about the labor share.
Dozens of air traffic controllers are keeping Austin-Bergstrom International Airport functioning smoothly through the longest government shutdown in US history — and all without a paycheck.
Friday was the first payday since the shutdown began and while hundreds of thousands of federal workers can expect to be paid for the work they put in during the shutdown, they are not receiving paychecks until it ends. Tuesday marks Day 25 of the shutdown.
Austin pilots want to do what they can to help their aviation fellows who are affected by the shutdown.
“Those controllers have always had my back, during the normal flights and the rare times that I’ve had a slight abnormal flight that caused me concern,” Ken VeArd said, a longtime pilot.
VeArd recently posted on social media asking his fellow pilots to help him give back to ABIA’s controllers.
“I just made a post saying this is what I am thinking about doing and before I knew it, it just got out of control,” he said. “Whether you need diapers, milk or eggs, or even if all you need is a six pack of beer,” VeArd hopes it’s the small things that will make a difference.
He’s been buying $20 gift cards from H-E-B for the controllers.
“My biggest concern with this thing is that we try to do something nice for our air traffic control friends and it turns out to be a problem, we don’t want to make problems any worse than it is,” VeArd said. “So we capped it at $20.”
In 1974, Paul Samuelson wrote Challenge to judgement, a searing critique of money managers. Samuelson challenged the money managers to show that they could beat the market. He concluded that “a respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business.” Samuelson hoped for something new:
At the least, some large foundation should set up an in-house portfolio that tracks the S&P 500 Index — if only for the purpose of setting up a naive model against which their in-house gunslingers can measure their prowess.
Inspired by Samuelson, John Bogle created the first index fund in 1976 and it quickly…failed. In the initial underwriting the fund raised only $11.3 million, which wasn’t even enough to buy a minimum portfolio of all the stocks in the S&P 500! The street crowed about “Bogle’s folly” but Bogle persevered and in so doing he benefited millions of investors, saving them billions of dollars is fees. As Warren Buffet said today:
Jack did more for American investors as a whole than any individual I’ve known. A lot of Wall Street is devoted to charging a lot for nothing. He charged nothing to accomplish a huge amount.
The creation of the index fund is a great example of how economic theory and measurement can improve practice. Our course on Money Skills at MRU is very much influenced by Bogle. Tyler and I recommend index funds and Vanguard in particular. In the videos and in our textbook we present data from Bogle’s book Common Sense on Mutual Funds. Here’s the first video in the series.
The Center for the History of Political Economy at Duke University will be hosting another Summer Institute on the History of Economics this summer from June 10-19, 2019. The program is designed for students in graduate programs in economics, though students in graduate school in other fields as well as newly minted PhDs will also be considered.
Students will be competitively selected and successful applicants will receive free housing and a booklet of readings. We are also able to provide limited travel support. The deadline for applying is March 1.
We are very excited about this year’s program, which will focus on giving participants the tools to set up and teach their own undergraduate course in the history of economic thought. There will also be sessions devoted to showing how concepts and ideas from the history of economics might be introduced into other classes. The sessions will be run by Duke faculty members Bruce Caldwell and Jason Brent, who will be joined by Steve Medema of the University of Colorado–Denver. More information on the Summer Institute is available at our website, http://hope.econ.duke.edu/
- Latest: Eurozone industrial production shrank 1.7% in November
- Worst decline in almost three years.
- Introduction: China’s exports fell 4.4% in December
- Biggest fall in exports in two years as slowdown gathers pace
Here is the link, developing…
We study the influence of television translation techniques on the worldwide distribution of English-speaking skills. We identify a large positive effect for subtitled original version broadcasts, as opposed to dubbed television, on English proficiency scores. We analyze the historical circumstances under which countries opted for one of the translation modes and use it to account for the possible endogeneity of the subtitling indicator. We disaggregate the results by type of skills and find that television works especially well for listening comprehension. Our paper suggests that governments could promote subtitling as a means to improve foreign language proficiency.
That’s from TV or not TV? The impact of subtitling on english skills, a clever study with a useful finding.
I cannot help but note that our Principles of Microeconomics and Principles of Macroeconomics videos at MRU (and linked to in our textbook) are subtitled in English, Spanish, Hindi, Arabic and other languages so perhaps we can help teach languages as well as economics.
Here is the Bloomberg link, here is a sentence from Noah on AOC:
Her proposal, which would make the tax structure similar to the one the U.S. had in 1921, is pretty much symbolic — a way of expressing disapproval of inequality, while kicking off a lively discussion of income taxes and redistribution.
We do not all agree.
That is the new and highly comprehensive book by Sheilagh Ogilvie, and it is likely to stand as one of the more important works of economic history from the last decade. Here is one opening summary bit:
…my own reading of the evidence is that a common theme underlies guilds’ activities: guilds tended to do what is best for guild members. In some cases, what guilds did brought certain benefits for the broader public. But overall, the actions guilds took mainly had the effect of protecting and enriching their members at the expense of consumers and non-members; reducing threats from innovators, competitors, and audacious upstarts; and generating sufficient rents to pay off the political elites that enforced guilds’ privileges and might otherwise have interfered with them.
And yes she really does show this, with a remarkable assemblage of data. For instance:
…the 14 guilds in Table 2.4 devoted an average of 28 per cent of their expenditures to lobbying. However, the average was 45 per cent across the five poor guilds and just 14 per cent across the eight rich ones.
Guild mastership fees could not be paid off in a couple of weeks of work. Across these 1,102 observations, the average mastership fee consumed 276 days’ wages for a labourer, 215 days for a journeyman, and 1543 days for a guild master.
Operating licenses were expensive too (pp.125-126). There are more “Ands”:
Guild entry barriers pushed people into illicit production, as emerges from 14 per cent of observations in Table 3.15.
Guild members whose trades stagnated could not legally diversify to other guilded work…
On top of that, guilds typically restricted the training of women and would not let them enter the relevant sectors. And:
The amount of attention guilds devoted to product quality in their ordinances does not suggest they regarded it as a major concern.
Ouch! Ogilivie also concludes, and demonstrates using data, that guilds did not promote human capital accumulation or innovation. The various revisionist defenses of guilds, as produced over the years, basically seem to be wrong.
You can pre-order the book here.
What is rural? What is urban? Different countries use different definitions and sometimes there are multiple definitions within a country. In India, as Reuben Abraham and Pritika Hingorani write, the same state can be 16% or 99% urban depending on the definition..
In India, only “statutory towns” are considered urban and have a municipal administration — a definition that officially leaves the country 26 percent urban. State governments make the decision using widely differing criteria; demographic considerations are peripheral at times. The Census of India provides the only other official, and uniform, estimate. Its formula uses a mix of population, density and occupation criteria, and pegs India at 31 percent urban.
Such estimates can be misleadingly low. For instance, Kerala is statutorily only 16 percent urban. Yet the census sees the well-developed southern state as approximately 48 percent urban. If we use a population cutoff of 5,000 residents as Ghana and Lebanon do, or even Mexico’s threshold of 2,500 people, Kerala’s urban share leaps to 99 percent, which is more consistent with ground reality.
So what? A rose by any other name smells as sweet but definitions matter for policy and resource flows:
The consequences of underestimating the urban share of the population are dire. Resources are badly misallocated: By one estimate, over 80 percent of federal government financing still goes to rural development. This reduces incentives for politicians, especially rural ones, to change the status quo. Tens of millions of Indians who live in dense, urban-like settlements are governed by rural governments that lack the mandate and the money to deliver basic services. In India, urban governments are constitutionally required to provide things such as fire departments, sewer lines, arterial roads and building codes. Local bodies in rural areas aren’t.
In addition, urban planning becomes particularly haphazard when cities grow but aren’t defined as such. How can roads, water lines, sewage lines and metros be arranged when a city is governed by multiple rural units?
As satellite data clearly show, most cities extend well beyond their administrative limits, and dense, linear settlements spread out of those cities along transit corridors. This growth is unregulated and unplanned, marred by narrow roads, growing distance from major thoroughfares, limited open space and haphazardly divided plots.
…what appears to be a single economic unit is now governed by a multitude of rural and urban jurisdictions, with no mechanism to coordinate on mobility, public goods or municipal services. It’s difficult and expensive to retrofit such cities with proper infrastructure and services.
…the value of wealth taxes depends sensitively on the interest rate…If the interest rate is 2%, then the tax rate is “only” 1/0.02 = 50%. If the interest rate is 5%, then the tax rate is 1/0.05 = 20%. I suspect these taxes were put in place in a time of higher interest ares and nobody is really thinking about the effect of lower rates.
That is from John Cochrane, with other points of interest about tax incidence at the link.
By the way, non-inflation-indexed capital gains are in part a wealth tax, so current higher interest rates are lowering the burden of that tax to some degree.