Taxing the group with the lowest marginal propensity to consume won't fight inflation much, but it does match a long-term Dem agenda item to a current problem so there's that.
I assume that "the rich" goes well beyond the billionaire class - Elon Musk's marginal propensity to consume has got to be zero. In fact, when Musk gives to charity that is likely to fuel inflation, if the recipient actually uses the money buys stuff. Its tough to do the right thing when you're rich!
Well. If "the rich" means "incomes over, eg, $400k" I guess it would reduce demand a bit. If the new tax revenue is $1 trillion over ten years, we can call it $100 billion per year. *IF* the aggregate MPC among the newly taxed is 20%, that is a $20 billion reduction in demand in 2023. Not a lot on a $23 Trillion economy, but its something.
(FWIW, I liked the tax on unrealized capital gains before it became fashionable, but it always struck me as re-shuffling savings from private to public, not a demand management lever. That heresy was one of my first steps on the road to becoming a Biden Republican, I guess.)
Not to get all Laffer Curve on you, but will higher taxes on the rich actually raise much revenue? To some extent we get away with high marginal tax rates because high achievers have other motives besides money (if I was Bill Gates I would have retired into decadent luxury some time around Windows 95). But I suspect most investment decisions are based on unsentimental number crunching and if a higher tax rate causes a deal to not pencil out then there will be no deal.
A common argument for redistribution is that that low-income people spend a higher fraction of income on on consumption, so that produces a net-positive effect in the economy. So you'd expect that increased taxes on the rich would reduce consumption (and thus inflation) less than a broader tax increase. Of course this alone isn't a reason for any particular distribution, but if that's the motivator now it does seem relevant.
"But the excess of demand is real, it’s worth addressing, and it’s better to address it partially through fiscal policy rather than exclusively with higher rates." I agree, but NOT becasue it makes the Fed's job easier -- it can deal with inflation either way -- but that it's better for the real economy in the long run to reduce demand for both investment AND consumption goods with taxes than to reduce the demand for only investment goods through interest rates,
Taxing the rich is good IF it's done in a reasonable way. First rule it to focus on people not businesses. Taxing businesses is just an imprecise way of taxing owners regardless of their income levels, so abolish busines taxes and tax the owners directly (except as needed to tax owners not subject to US taxations) while passing business income through to owners. Second is not to treat capital income more favorably than other income (except that capital gains should be indexed before being taxed as ordinary income and not be marked up on inheritance). Third is to substitute a VAT for the capped wage tax that (does not quite ) finances SS and Medicare.
But will raising taxes on the rich materially impact inflation? Empirically, we know that Individual income tax cuts directed at lower-income individuals have a larger stimulus effect than cuts directed at higher income individuals, other things equal. Data also show that the fraction of income saved rises as income rises.
In short, ARP significantly stimulated demand because it was targeted to lower- and middle-income Americans. However, I’m not convinced that taxing the rich will actually cool that demand all that much. The reality is that the rich, because they’re rich, do not materially change consumption in response to things like inflation or increased taxation.
I’m not saying I don’t think it’s a good idea to tax the rich. But I don’t think passing it off as an anti-inflation measure is likely to persuade Manchin, Sinema, or a single tax-averse Republican to support such legislation.
Taxing more to reduce the deficit is great. Collecting it from the rich is even better.* But It will not reduce inflation. [Although a lot of people claim to think it will and if that's the lie that's necessary to pass the bill, felix culpa.]
Is it AMT/Progressive Consumption Tax time? Something the progressive left loves to complain about is how Bezos, Musk, et al. get away without paying capital gains taxes by borrowing against their future value. A progressive consumption tax that took all forms of income - all savings with a $60K/$120K exemption + CTC as an AMT could be a way to tax the wealthy.
I've been developing an intuition that it makes sense to pay for programs targeting the poor by taxing the rich, but that universal programs (or program for the middle class) should be paid for by more broad-based taxes. Maybe those more in the know can let me know if this makes any economic or political sense.
I'm one of that tiny minority of people that thinks perennial high deficits are a problem. Like climate change, it's not a problem now, but eventually it's going to blow up. So I've long favored tax hike generally combined with government reform to get more value out of the dollars we do spend. So I'm on board with your argument in general here.
But, a couple things annoy me. First, anyone who claims we should "tax the rich" should be required to define who is "rich." Secondly, I think there needs to be an argument that taxing whoever you think is "rich" will actually reduce demand and therefore inflation. Reduced income by the rich will likely lead to reduced demand for luxury goods, but it's not clear it will do much for meat, gas and used car prices.
In short, any tax proposal depends on the details and advocates need to show their work.
Secondly, I think this is a political fantasy. No politician is going to vote to raise taxes in an election year, particularly politicians that are vulnerable (ie. Democrats).
Here in Colorado, thanks to TABOR, Colorado taxpayers will get a $400 refund ($800 for joint filers) thanks to record receipts. Now, Democrats normally hate TABOR and wish and have tried to get around it many times over the years. But this year, they are moving the payment of this refund forward to before the mid-term elections. Normally people would get this TABOR refund in early 2023, but the Democratically -control legislature and Gov. Polis are moving that up to this September and the ant-TABOR talk is mostly gone except from the most left-wing Democrats who represent the deepest blue areas here.
So while I agree that tax increases should be on the table, our politics is what it is and no politician who is remotely vulnerable is going to commit political seppuku by supporting tax increases this year.
And one other thing to consider is interest payments. You are one of those who previously argued that borrowing is cheap/free, so the federal government should do more of it. While it's great that your position has changed with circumstances, the problem is that our previous borrowing is only cheap and free only as long as interest rates remain low. And they aren't going to remain low.
One thing that I think hasn't been sufficiently addressed is how the inevitable increase in interest payments is going to affect the federal budget once interest payments on the debt start ballooning.
Finally, this:
"Where I fault Manchin — and moderate politicians from both parties more broadly — is that he’s been very passive despite being the pivotal player in American politics. "
misses the fundamental problem which is the lack of regular order in Congress. Leadership has given up on regular order and is trying to run the Congress and Senate like we are in a parliamentary system where the bills are crafted in secret by leaders who present them for a vote without going through the regular order committee process. Plus, Manchin was not passive - he gave a detailed description of what he would support, as you noted, back in June.
I love Joe Biden and I think he has been unfairly maligned in many situations (e.g., the withdrawal from Afghanistan) but the one thing I would never have predicted of him or his administration is that his major legislative priority would have failed (so far) because of his inability to negotiate a deal with critical senators.
It seemed like his entire career was heading to the successful passage of BBB or some version of it. And then . . . ?
If there are intense and potentially successful negotiations going on behind the scenes smartly being kept from the prying eyes of the media, then great. But I get the feeling that nothing is happening. WTF?
1. This piece barely mentions, let alone attempts to address, the real political problem with raising taxes on the rich: Kyrsten Sinema, whose twin political goals are 1) getting rich and 2) making sure the rich pay less taxes.
2. I get thinking Schumer erred by keeping his deal with Manchin secret. But Manchin kept that number secret, too. He watched everyone set the table, light the candles, and sit down to eat, THEN he announced the menu was not to his liking and flipped the table over.
This also ignores that Manchin signed onto a parallel-track process for BBB and infrastructure, which progressives insisted upon to prevent Manchin getting what he wanted (just infrastructure) and leaving the rest of the Party with blueballs. Then House moderates convinced Pelosi to vote on infrastructure separately anyway, and after it passed, Manchin starts "negotiating" on BBB, by which I mean making ridiculous counteroffers and suggesting the child tax credit should be cut back because the lazy poors will just spend it on drugs. Manchin didn't draw a line in the sand, publicly, until mid-December. So, yes, he negotiated in bad faith for 6 weeks, wasting everyone's time. He could have gone public with that number at any time; the secrecy is his fault, too, not just Schumer's.
3. The political reform bill Dems were voting on was the compromised political reform bill your folk hero Joe Manchin negotiated. So if it "left most of the threats to American democracy unaddressed", that's who to blame.
The problem is raising taxes on the rich to reduce the deficit is, how do you sell it to everyone else as making their lives better. And, how to prevent middle-income voters from thinking they're the ones getting their taxes raised.
I say this after just after having a long conversation with someone who thinks Trump is an idiot, but votes for Republicans solely because he doesn't want his taxes raised.
3) A Biden tax increase would likely increase them again
I guess this is probably all fine, but it would be nice if increases were targeted at people paying like 20% (capital gains and inheritances, I guess?)
Possibly one should count the employer side of payroll tax as well, although I didn’t. Possibly there are other taxes I should count as well (sales tax? idk)
I’m not sure if the parameters are saved by the link. Trying filling in household income $3,000,000 and zip code 10020 (not my actual numbers but illustrative).
Matt mentions two factors (correctly, in my opinion) that are aggravating inflation right now: the pandemic and the invasion. While it can be proper to use typical inflation reducing measures (raise taxes, reduce spending, raise interest rates), if we really want to get to the root of stopping the inflation, it seems to me we should also address the root of the cause.
Unfortunately, for the invasion there's no good quick answer beyond "let Putin run over Ukraine" or "get NATO involved and risk nuclear war". Biden and the Democrats should probably start working on political messaging to justify why the status quo is best even in the face of inflation, because Republicans, be they Putin-friendly or Putin-adversarial, will likely try to exploit that discontent.
But for the pandemic? We should be flooding the world with mRNA vaccines to put this thing in the rearviewmirror for good and in every corner.
What more is there to do to flood the world with mRNA vaccines? There’s the hard work of building out rural distribution lines in Africa. And the even harder work of convincing hesitant people that it’s a good idea to get vaccinated. Not to mention the hardest work of getting China to start using western vaccines. But I don’t think there are many places where there is any other bottleneck.
Getting China with the program seems like the aggravating factor that needs the most attention. If they're going to be obstinate with nationalism, just covertly give them the recipe and let them brand it in whatever pro-China branding they want instead of making them reverse engineer it.
Fosun Pharma's had the Chinese license for Pfizer/BioNTech since March 2020, with permission to manufacture locally since December 2020 and plans for a 15-year joint venture filed in May 2021. Whatever the reason is for China's obstinance, not having the recipe isn't it.
This was specifically a problem for Taiwan: Fosun's license covers Taiwan, so they couldn't buy from Pfizer and had to try quietly getting it secondhand from other countries.
Taxing the group with the lowest marginal propensity to consume won't fight inflation much, but it does match a long-term Dem agenda item to a current problem so there's that.
I assume that "the rich" goes well beyond the billionaire class - Elon Musk's marginal propensity to consume has got to be zero. In fact, when Musk gives to charity that is likely to fuel inflation, if the recipient actually uses the money buys stuff. Its tough to do the right thing when you're rich!
Well. If "the rich" means "incomes over, eg, $400k" I guess it would reduce demand a bit. If the new tax revenue is $1 trillion over ten years, we can call it $100 billion per year. *IF* the aggregate MPC among the newly taxed is 20%, that is a $20 billion reduction in demand in 2023. Not a lot on a $23 Trillion economy, but its something.
(FWIW, I liked the tax on unrealized capital gains before it became fashionable, but it always struck me as re-shuffling savings from private to public, not a demand management lever. That heresy was one of my first steps on the road to becoming a Biden Republican, I guess.)
https://justoneminute.typepad.com/main/2019/01/elizabeth-warrens-wealth-tax-contains-the-germ-of-a-decent-idea.html
Not to get all Laffer Curve on you, but will higher taxes on the rich actually raise much revenue? To some extent we get away with high marginal tax rates because high achievers have other motives besides money (if I was Bill Gates I would have retired into decadent luxury some time around Windows 95). But I suspect most investment decisions are based on unsentimental number crunching and if a higher tax rate causes a deal to not pencil out then there will be no deal.
A common argument for redistribution is that that low-income people spend a higher fraction of income on on consumption, so that produces a net-positive effect in the economy. So you'd expect that increased taxes on the rich would reduce consumption (and thus inflation) less than a broader tax increase. Of course this alone isn't a reason for any particular distribution, but if that's the motivator now it does seem relevant.
"But the excess of demand is real, it’s worth addressing, and it’s better to address it partially through fiscal policy rather than exclusively with higher rates." I agree, but NOT becasue it makes the Fed's job easier -- it can deal with inflation either way -- but that it's better for the real economy in the long run to reduce demand for both investment AND consumption goods with taxes than to reduce the demand for only investment goods through interest rates,
Taxing the rich is good IF it's done in a reasonable way. First rule it to focus on people not businesses. Taxing businesses is just an imprecise way of taxing owners regardless of their income levels, so abolish busines taxes and tax the owners directly (except as needed to tax owners not subject to US taxations) while passing business income through to owners. Second is not to treat capital income more favorably than other income (except that capital gains should be indexed before being taxed as ordinary income and not be marked up on inheritance). Third is to substitute a VAT for the capped wage tax that (does not quite ) finances SS and Medicare.
But will raising taxes on the rich materially impact inflation? Empirically, we know that Individual income tax cuts directed at lower-income individuals have a larger stimulus effect than cuts directed at higher income individuals, other things equal. Data also show that the fraction of income saved rises as income rises.
In short, ARP significantly stimulated demand because it was targeted to lower- and middle-income Americans. However, I’m not convinced that taxing the rich will actually cool that demand all that much. The reality is that the rich, because they’re rich, do not materially change consumption in response to things like inflation or increased taxation.
I’m not saying I don’t think it’s a good idea to tax the rich. But I don’t think passing it off as an anti-inflation measure is likely to persuade Manchin, Sinema, or a single tax-averse Republican to support such legislation.
Taxing more to reduce the deficit is great. Collecting it from the rich is even better.* But It will not reduce inflation. [Although a lot of people claim to think it will and if that's the lie that's necessary to pass the bill, felix culpa.]
Is it AMT/Progressive Consumption Tax time? Something the progressive left loves to complain about is how Bezos, Musk, et al. get away without paying capital gains taxes by borrowing against their future value. A progressive consumption tax that took all forms of income - all savings with a $60K/$120K exemption + CTC as an AMT could be a way to tax the wealthy.
I've been developing an intuition that it makes sense to pay for programs targeting the poor by taxing the rich, but that universal programs (or program for the middle class) should be paid for by more broad-based taxes. Maybe those more in the know can let me know if this makes any economic or political sense.
I'm one of that tiny minority of people that thinks perennial high deficits are a problem. Like climate change, it's not a problem now, but eventually it's going to blow up. So I've long favored tax hike generally combined with government reform to get more value out of the dollars we do spend. So I'm on board with your argument in general here.
But, a couple things annoy me. First, anyone who claims we should "tax the rich" should be required to define who is "rich." Secondly, I think there needs to be an argument that taxing whoever you think is "rich" will actually reduce demand and therefore inflation. Reduced income by the rich will likely lead to reduced demand for luxury goods, but it's not clear it will do much for meat, gas and used car prices.
In short, any tax proposal depends on the details and advocates need to show their work.
Secondly, I think this is a political fantasy. No politician is going to vote to raise taxes in an election year, particularly politicians that are vulnerable (ie. Democrats).
Here in Colorado, thanks to TABOR, Colorado taxpayers will get a $400 refund ($800 for joint filers) thanks to record receipts. Now, Democrats normally hate TABOR and wish and have tried to get around it many times over the years. But this year, they are moving the payment of this refund forward to before the mid-term elections. Normally people would get this TABOR refund in early 2023, but the Democratically -control legislature and Gov. Polis are moving that up to this September and the ant-TABOR talk is mostly gone except from the most left-wing Democrats who represent the deepest blue areas here.
So while I agree that tax increases should be on the table, our politics is what it is and no politician who is remotely vulnerable is going to commit political seppuku by supporting tax increases this year.
And one other thing to consider is interest payments. You are one of those who previously argued that borrowing is cheap/free, so the federal government should do more of it. While it's great that your position has changed with circumstances, the problem is that our previous borrowing is only cheap and free only as long as interest rates remain low. And they aren't going to remain low.
One thing that I think hasn't been sufficiently addressed is how the inevitable increase in interest payments is going to affect the federal budget once interest payments on the debt start ballooning.
Finally, this:
"Where I fault Manchin — and moderate politicians from both parties more broadly — is that he’s been very passive despite being the pivotal player in American politics. "
misses the fundamental problem which is the lack of regular order in Congress. Leadership has given up on regular order and is trying to run the Congress and Senate like we are in a parliamentary system where the bills are crafted in secret by leaders who present them for a vote without going through the regular order committee process. Plus, Manchin was not passive - he gave a detailed description of what he would support, as you noted, back in June.
I love Joe Biden and I think he has been unfairly maligned in many situations (e.g., the withdrawal from Afghanistan) but the one thing I would never have predicted of him or his administration is that his major legislative priority would have failed (so far) because of his inability to negotiate a deal with critical senators.
It seemed like his entire career was heading to the successful passage of BBB or some version of it. And then . . . ?
If there are intense and potentially successful negotiations going on behind the scenes smartly being kept from the prying eyes of the media, then great. But I get the feeling that nothing is happening. WTF?
secret congress!
1. This piece barely mentions, let alone attempts to address, the real political problem with raising taxes on the rich: Kyrsten Sinema, whose twin political goals are 1) getting rich and 2) making sure the rich pay less taxes.
2. I get thinking Schumer erred by keeping his deal with Manchin secret. But Manchin kept that number secret, too. He watched everyone set the table, light the candles, and sit down to eat, THEN he announced the menu was not to his liking and flipped the table over.
This also ignores that Manchin signed onto a parallel-track process for BBB and infrastructure, which progressives insisted upon to prevent Manchin getting what he wanted (just infrastructure) and leaving the rest of the Party with blueballs. Then House moderates convinced Pelosi to vote on infrastructure separately anyway, and after it passed, Manchin starts "negotiating" on BBB, by which I mean making ridiculous counteroffers and suggesting the child tax credit should be cut back because the lazy poors will just spend it on drugs. Manchin didn't draw a line in the sand, publicly, until mid-December. So, yes, he negotiated in bad faith for 6 weeks, wasting everyone's time. He could have gone public with that number at any time; the secrecy is his fault, too, not just Schumer's.
3. The political reform bill Dems were voting on was the compromised political reform bill your folk hero Joe Manchin negotiated. So if it "left most of the threats to American democracy unaddressed", that's who to blame.
The problem is raising taxes on the rich to reduce the deficit is, how do you sell it to everyone else as making their lives better. And, how to prevent middle-income voters from thinking they're the ones getting their taxes raised.
I say this after just after having a long conversation with someone who thinks Trump is an idiot, but votes for Republicans solely because he doesn't want his taxes raised.
"Well, he framed me for armed robbery, but man, I'm aching for that upper class tax cut."
--Krusty The Clown
It’s frustrating to me that:
1) I pay roughly half my income in taxes
2) Trumps tax cuts actually increased my taxes (by repealing SALT)
3) A Biden tax increase would likely increase them again
I guess this is probably all fine, but it would be nice if increases were targeted at people paying like 20% (capital gains and inheritances, I guess?)
"1) I pay roughly half my income in taxes"
That sounds highly unlikely - care to share the numbers?
I guess the important context is I make 7 figures of W-2 income and live in NYC. That gets you a tax rate around 50% (for example: https://smartasset.com/taxes/new-york-tax-calculator#D0JL2LRBj0)
Possibly one should count the employer side of payroll tax as well, although I didn’t. Possibly there are other taxes I should count as well (sales tax? idk)
Your link doesn’t support your claim.
https://smartasset.com/taxes/new-york-tax-calculator#bBJsAAGfLm
I’m not sure if the parameters are saved by the link. Trying filling in household income $3,000,000 and zip code 10020 (not my actual numbers but illustrative).
I think that Democrats harvesting most of the campaign contributions from rich people might have something to do with this.
Matt mentions two factors (correctly, in my opinion) that are aggravating inflation right now: the pandemic and the invasion. While it can be proper to use typical inflation reducing measures (raise taxes, reduce spending, raise interest rates), if we really want to get to the root of stopping the inflation, it seems to me we should also address the root of the cause.
Unfortunately, for the invasion there's no good quick answer beyond "let Putin run over Ukraine" or "get NATO involved and risk nuclear war". Biden and the Democrats should probably start working on political messaging to justify why the status quo is best even in the face of inflation, because Republicans, be they Putin-friendly or Putin-adversarial, will likely try to exploit that discontent.
But for the pandemic? We should be flooding the world with mRNA vaccines to put this thing in the rearviewmirror for good and in every corner.
What more is there to do to flood the world with mRNA vaccines? There’s the hard work of building out rural distribution lines in Africa. And the even harder work of convincing hesitant people that it’s a good idea to get vaccinated. Not to mention the hardest work of getting China to start using western vaccines. But I don’t think there are many places where there is any other bottleneck.
Getting China with the program seems like the aggravating factor that needs the most attention. If they're going to be obstinate with nationalism, just covertly give them the recipe and let them brand it in whatever pro-China branding they want instead of making them reverse engineer it.
Fosun Pharma's had the Chinese license for Pfizer/BioNTech since March 2020, with permission to manufacture locally since December 2020 and plans for a 15-year joint venture filed in May 2021. Whatever the reason is for China's obstinance, not having the recipe isn't it.
This was specifically a problem for Taiwan: Fosun's license covers Taiwan, so they couldn't buy from Pfizer and had to try quietly getting it secondhand from other countries.