The alternative minimum tax

Here’s a nice summary of the Alternative Minimum Tax:

Let’s devise a politically inept income tax policy. We’ll begin by eliminating tax breaks people have been accustomed to for decades, such as those for qualified retirement accounts, and state and local taxes. Next, we’ll negate the child tax credit so that families with young children will be hit especially hard. Then, we won’t adjust for inflation, so that our tax will affect more people each year as their incomes grow along with the economy and inflation. We’ll tell people that they must calculate their taxes twice, using two different formulas — and finally we’ll add insult to injury by requiring them to pay whichever amount is higher.

The full story, available here, is chilling but worth reading in its entirety. Even the IRS has criticized the AMT:

Nina Olson, the IRS’s National Taxpayer Advocate, made this declaration last month: “It’s a horrible provision. We are really sorry about the impact of this tax, but it is not for us to rewrite the laws; it’s for Congress to act.”

It is estimated, however, that outright repeal would cost the Treasury $1 trillion between 2003 and 2012. So get ready for some ongoing tax increases, even if you hear that your taxes are being cut you might have to pay the AMT instead.

Hey, wait a minute…

Iraq is getting a flat tax of 15 percent, here is the full story. I’m all for this, but note that under Saddam very few Iraqis paid any income taxes at all, despite a published marginal rate of 45 percent.

You might now ask who will be exempt from the new taxes:

The 15 percent rate does not take effect until January. In the meantime, Bremer has abolished all taxes except for real estate, car sales, gasoline and the pleasantly named “excellent and first class hotel and restaurant tax.” Even while leaving these Hussein-era levies in place, Bremer exempted his coalition authority, the armed forces, their contractors and humanitarian organizations. Exempting occupation personnel leaves only the Iraqis to pay taxes, as well as journalists, business people and other foreigners.

I don’t mean to show lack of appreciation for those who are putting their lives on the line. But, symbolically speaking, I doubt if this is a worthwhile way to avoid additional expenditures.

Crony Statism

Johan Norberg provides some depressing information about the situation in Russia.

Russian President Vladimir Putin’s chief of staff, Alexander Voloshin, is said to have resigned. This is another sign that the so called power clan, “siloviki”, with its base in the FSB (former KGB) is strengthening its grips on power, and that both the liberal economists and the allies with former President Yeltsin are losing out. This is bad news for Russia. It all began with the brutal arrest of the oil magnate Mikhail Khodorkovsky this Saturday. The difference between Khodorkovsky and other oligarchs is not that he is more corrupt or unscrupulous, on the contrary, his oil company Yukos is renowned for being relatively transparent and law-abiding for a Russian company. The difference is that he has challenged Putin by supporting democratic forces, like the parties Yabloko and SPS. Before the arrest FSB also made a raid on Yabloko’s headquarters and stole their servers with their planning for the parliamentary election on December 7th. First the destruction of the free media in Russia and now this. It is no longer possible to call Putin’s Russia a democracy. It is more like a “democtorship” (“demokratur”), as the Swedish novelist Vilhelm Moberg once called a dictatorship with democratic rituals….

Addendum: More on the rise of the siloviki.

Choice theory and the devil: a puzzle

You are in hell and facing an eternity of torment, but the devil offers you a way out, which you can take once and only once at any time from now on. Today, if you ask him to, the devil will toss a fair coin once and if it comes up heads you are free (but if tails then you face eternal torment with no possibility of reprieve). You don’t have to play today, though, because tomorrow the devil will make the deal slightly more favourable to you (and you know this): he’ll toss the coin twice but just one head will free you. The day after, the offer will improve further: 3 tosses with just one head needed. And so on (4 tosses, 5 tosses, ….1000 tosses …) for the rest of time if needed. So, given that the devil will give you better odds on every day after this one, but that you want to escape from hell some time, when should accept his offer?

From CrookedTimber.org.

I haven’t worked through this one formally, but I have the sinking feeling that the correct answer is to choose an awfully long (infinite?) period of torment. Think about it. Waiting another day adds only slightly to suffering, viewed as part of a potentially very large total. But you improve your odds of escape by a considerable amount. Your best chance of getting out of the paradox is to have a very high discount rate and a very low level of risk aversion, noting of course that under some utility functions this combination of features cannot be made to fit together.

By the way, if you are into this kind of thing, Will Baude has an excellent post explaining the St. Petersburg Paradox.

Radar improves the quality of wine

Yup, that”s right. And yes, new ideas do come first to California, at least in this case.

Scientists at the University of California at Berkeley are using ground penetrating radar (GPR), a tool better known for its military uses, to help winemakers create tastier, more uniform wines.

“GPR is an electromagnetic signal that travels in the ground. What we do is try to understand how fast that signal travels and that tells us a lot about the moisture content of the soil,” said Susan Hubbard, a hydrogeophysicist at University of California, Berkeley, and staff scientist at Lawrence Berkeley National Laboratory.

Understanding soil moisture is a critical part of the art and science of winemaking. Cabernet Sauvignon and other red wine grapes prefer drier soil. Chardonnay and other white wine grapes do better in moist soil. But growers say the timing, and the amount of water given to the vines can make the difference between an average and an outstanding crop.

Read here for the full story.

Let’s not forget, the initial French advantage in winemaking was based on technology, albeit of a more informal sort. If the French don’t keep on innovating, they will be left behind.

Newspapers in small countries

Consider this list of newspapers per capita. This is the number of papers, not how many people read papers. Here is the top ten:

1. San Marino 108.19 per 1000000 people
2. Gibraltar 36.08 per 1000000 people
3. Andorra 29.24 per 1000000 people
4. Macau 21.65 per 1000000 people
5. Greece 19.45 per 1000000 people
6. Norway 17.9 per 1000000 people
7. Bermuda 15.63 per 1000000 people
8. Estonia 11.3 per 1000000 people
9. Switzerland 11.09 per 1000000 people
10. Latvia 10.99 per 100000 people

Rounding out the top fifteen are Iceland, Cyprus, and Malta, along with such giants as Sweden and Finland. And note the gap between the frontrunner, San Marino, and number two; San Marino has almost three times as many newspapers per capita.

The United States is not in the top sixty-seven and does not stand on the list at all, it appears not to be in the database. A separate data source lists America as having 1,228 daily newspapers, which if correct would put us in per capita terms at number 28, between Mauritius and Bolivia. Why so low? Well, we rely on TV more, we have more concentrated media (most cities have only one daily paper, and perhaps smaller countries like the gossipy element that follows from a large number of small circulation newspapers.

Note: I have modified the initial version of this post, due to helpful comments from Frank Quist.

Drug reimportation

Most libertarian economists oppose drug reimportation, on the grounds that the resulting lower prices would harm the incentives for R&D. Richard Epstein provides a good statement of this case, with links to the relevant debates, including some libertarian dissenters, such as Ed Crane and Roger Pilon, both of Cato.

I have wondered, however, whether libertarians ought to reconsider their opposition to reimportation. Recall that the libertarian position paints the FDA as a significant obstacle to drug research.

I suspect that allowing drug reimportation would, in the long-run, break down the authority of the FDA. Once Americans are looking to abroad for medicines, the flood gates will be opened. They will want to buy medicines from Mexico, Europe, and indeed from all over the world. These medicines, of course, will not have met with FDA approval. It is not a matter of pure logic that legal reimportation would lead to this broader class of imported drugs, but I think it is what the political equilibrium would look like. Illegal drug importation is already on the rise; legal reimportation would legitimize and publicize the overall idea of getting drugs from other countries.

So, if we allow reimportation, the FDA will either have to become much stronger, and more intrusive (in conjunction with other governmental agencies, such as customs perhaps), or the FDA will cede much of its effective power, while likely keeping its nominal powers. But in the long run it is hard to see how to enforce restrictions on drug importation, especially once reimportation is legal. Drugs don’t take up much space, and the exact nature of their content is not easily tested. You can have a customs dog sniff for pot, but that same dog cannot tell whether a drug is of pure quality of adulterated, or is something else altogether. If libertarian think that the FDA does more harm than good, perhaps they should welcome reimportation as moving us toward a greater reliance on markets.

Musical evening, based on trade

Last night my wife and I saw Cesare Evoria in concert, she is the closest today’s world has to a Billie Holiday or Ella Fitzgerald. Here is one of her best CDs.

As you may know, Evoria is from Cape Verde, one of the most musically creative spots on the planet. Cape Verdean music draws from traditions of Portuguese song, Brazilian samba, and American jazz, among other styles. Bittersweet and lovely at the same time. Note that this unique musical culture draws on remittances for its finance; remittances constitute more than 20 percent of Cape Verde’s gdp. Cape Verdeans migrate to Massachusetts, Portugal, France and the Netherlands. According to some estimates, there are 500,000 Cape Verdeans abroad, and about 350,000 in Cape Verde. This is yet another example of the cultural benefits of trade and migration.

Addendum: Here is an update on what is going on in Cape Verde, with respect to economic development.

I don’t make macroeconomic predictions myself

Ray Fair is a prominent macroeconomic forecaster. He tells us:

Real Growth and the Unemployment Rate: The predicted growth rates for the next four quarters are 4.1, 3.6, 3.5, and 3.4 percent, respectively. The unemployment rate is predicted to fall to 5.6 percent by the middle of 2004.

Inflation: Inflation as measured by the growth of the GDP deflator (GDPD) is predicted to rise to 2.5 percent by the middle of 2004.

Here is the whole memo. The link is from Econopundit.com. Here is Paul Krugman telling us not to be too happy about today’s announced quarterly 7.2 growth rate, Brad Delong adds to Krugman’s concerns. Andrew Sullivan gets his digs in on Krugman.

Here is a thoughtful defense of macroeconomic forecasting. Here is a more critical view of forecasting, closer to my own view.

My take: You can squabble about the numbers all you want, at this point the Bush people have to be pretty happy.

What do Scandinavians export?

It is commonly known that Sweden and Norway stand among the top five nations for foreign aid per capita.

It is less commonly known that, in per capita terms, they are among the top five arms exporters in the world.  Here is the whole list, along with a color-coded map.

And who is number one on the list?  Macedonia.  The U.S. is number ten, France number seven.

From Nationmaster.com, a valuable data source, growing by the day.

Do you want to know cinema attendance per capita?  The U.S. is number two, just behind Iceland.  Georgia is number six, and Lebanon is number ten.

Suicide and multiple equilibria

I don’t aim to be the cynical economist that Tyler writes “might suggest social stigma for suicide, rather than forgiveness” but it is frightening how easy it seems to be to jump to the sad equilibrium. The story of suicide among young boys in Micronesia (I recommend Malcolm Gladwell’s The Tipping Point for a discussion but will cite some online material) illustrates how actions and social attitudes reinforce one another. As the action becomes more common, perhaps reaching a “tipping point”, condemnation declines, and the action increases even further. Here, from one of the researchers who first documented the story, is a chilling description of suicide in Micronesia:

As suicide has gained familiarity among youth, the act itself has become increasingly more acceptable or even expected. Suicides appear to acquire a sort of contagious power. One suicide might serve as the model for successive suicides among friends of the first victim. There has been an apparent increase in suicides among very young children, aged 10-14. Evidently the idea of suicide has become increasingly commonplace and compelling, and young children are now acquiring this idea at earlier ages.

Another of the earlier researchers writes:

Love songs mention suicide, youths discuss the subject openly among themselves and at times make suicide pacts with one another, and youngsters express admiration of those who have taken their own lives and are mourned so terribly by their families and friends. What is even more shocking, however, is that a number of adults in our communities seem to share the belief that these young people have died altruistic and even heroic deaths. If the majority of Micronesians really believe that suicide is an honorable option, then this paper is thoroughly useless and all of us had better resign ourselves to continuing high rates of suicide in the future. Young people, after all, are very quick in sensing the basic values of their elders. If they get the impression that we ourselves honor suicide, then they will be only too happy to oblige by hanging themselves.

Note that one could tell similar stories in the United States about divorce, having children out of wedlock, welfare dependence etc. (also teenage suicide at a local level).

Here is a graph of suicide rates in Micronesia indicating a massive increase in a few short years in the early 1970s. The tipping theory generates credence when we note that virtually all the suicides take a similar, ritualistic form involving hanging.
suicide.bmp

Lynne Kiesling has moved house

Here is her new blog address, the simpler www.knowledgeproblem.com. Lynne is one of the smartest and most articulate bloggers out there. Her basic focuii are energy, electricity, environment, telecom, and infrastructure more generally, but she covers many areas of interest. Here is one of her recent posts about the FCC and media deregulation.

Speaking of the FCC, I was quite taken by this quotation from Clay Shirky:

Yesterday, the FCC adjusted the restrictions on media ownership, allowing newspapers to own TV stations, and raising the ownership limitations on broadcast TV networks by 10%, to 45% from 35%. It’s not clear whether the effects of the ruling will be catastrophic or relatively unimportant, and there are smart people on both sides of that question. It is also unclear what effect the internet had on the FCC’s ruling, or what role it will play now.

What is clear, however, is a lesson from the weblog world: inequality is a natural component of media. For people arguing about an ideal media landscape, the tradeoffs are clear: Diverse. Free. Equal. Pick two.

I’ll jettison equal. I’d rather have the chance to learn from Lynne’s blog, whether or not it has the drawing power of network television. And on the numerical comparison, well, we can only keep our fingers crossed.

How much do advertisements save you?

Naomi Klein argues that ads are a rip-off, a perversion of culture, and should be ignored or boycotted whenever possible. The well-known “Adbusters” group continues the campaign, calling for “Creative Resistance.”. Here is a useful article about the whole movement.

It is less commonly recognized that ads support free speech. No, I don’t mean that the ad itself is free speech, although this of course is true. Rather ads subsidize the free speech of others.

A simple example makes the point. A full issue of Forbes, without ads, would cost about $9.

The figure is taken from Why Not?, by Barry Nalebuff and Ian Ayres, click here for more information on the book and their web site.

An hour of network television, without commercials, would cost an additional 32 cents an hour to finance. This seems like less of a good deal to me, I would rather pay the 32 cents to eliminate the ads (that’s only 16 cents per Seinfeld episode!), but then again, I am not a typical viewer. I wouldn’t watch much TV, with or without the ads, and that is one reason why we have them, even in this age of cable TV. The people who are truly bothered by ads move to other forums, such as books, that stick few advertisements in your face.

More on remittances

1. Almost one Mexican in five receives remittances from relatives working in the United States.

2. These payments help feed, house, and educate at least a quarter of the 100 million people in Mexico.

3. The total sent amounts to about $14.5 billion for this year.

4. Some 450,000 Mexicans entered the United States illegally last year.

The New York Times notes:

Most of the money is spent on food, clothing and housing. But Mr. Suro said a growing portion was invested in small business or helped to pay for high school and college educations.

Across much of central Mexico, where men and women have migrated to the United States for so many decades that crossing the border has become more a rite of passage than an escape from poverty, remittances exceed state public works budgets and pay to build roads, schools, water systems and baseball stadiums.

In recent years the United States and Mexico carried out reforms aimed at making it easier and more affordable for migrants to transfer money home. Companies like Western Union cut the fees they charged for wire transfers, halving the cost of transferring money, and American banks have begun allowing illegal immigrants to open accounts so relatives at home can withdraw funds from automatic teller machines.

Bravo, I say. I have spent a good deal of time in rural Mexico and I can attest that these funds make an enormous difference in the lives of millions. By the way, Daniel Drezner offers insightful commentary on my earlier post on remittances.