Romney wants to raise your taxes

Some analysis of Mitt Romney’s tax plan, via Matt Yglesias:

Mitt Romney has a problem. Like every Republican presidential candidate since Ronald Reagan, he wants to enact a large tax cut. That’ll cost the government a lot of revenue. So he’s been saying he’ll pay for it by “broadening the base” and eliminating tax deductions. The problem is that as the Tax Policy Center has found, this means most people will actually end up paying higher taxes under Romney’s plan. Households earning less than $200,000 a year will, on average, see their taxes raised.

Team Romney’s new argument of the day is that the TPC failed to account for the fact that the Romney tax agenda will supercharge growth. The problem is that the TPC did in fact consider this, going so far as to use the very tax cut friendly model developed by Harvard economist Matthew Weinzierl in partnership with his colleague Greg Mankiw, an economist, Romney advisor, and Bush administration operative. The numbers just don’t add up.

Because Yglesias is a Keynesian, he takes this in the direction of arguing Romney should just run a deficit, since a deficit is what the economy needs right now. And Yglesias is probably right that it would help (though there are better things to spend a deficit on). But I think that’s the wrong point to emphasize here.

The right point to emphasize is that Romney’s platform revolves around screwing over most of America to for the benefit of rich guys like himself. There are a lot of anti-Romney stories out there floating around, but isn’t this the big point the swing voters need to here? That Romney wants to raise their taxes?

  • ‘Tis Himself

    Inequality in the US has been widening for dec­ades. We’re all aware of the fact. I won’t run through all the evidence here, except to say that the gap between the 1% and the 99% is vast when looked at in terms of annual income, and even vaster when looked at in terms of wealth—that is, in terms of accumulated capital and other assets. Consider the Walton family: the six heirs to the Walmart empire possess a combined wealth of some $90 billion, which is equivalent to the wealth of the entire bottom 30% of US society. (Many at the bottom have zero or negative net worth, especially after the housing debacle.) Warren Buffett put the matter correctly when he said, “There’s been class warfare going on for the last 20 years and my class has won.”

    When one interest group holds too much power, it succeeds in getting policies that help itself in the short term rather than help society as a whole over the long term. This is what has happened in America when it comes to tax policy, regulatory policy, and public investment. The consequence of channeling gains in income and wealth in one direction only is easy to see when it comes to ordinary household spending, which is one of the engines of the American economy.

    It’s no accident that the periods in which the broadest cross sections of Americans have reported higher net incomes—when inequality has been reduced, partly as a result of progressive taxation—have been the periods in which the US economy has grown the fastest. It’s likewise no accident that the current recession, like the Great Depression, was preceded by large increases in inequality. When too much money is concentrated at the top of society, spending by the average American is necessarily reduced—or at least it will be in the absence of some artificial prop. Moving money from the bottom to the top lowers consumption because higher-income individuals consume, as a fraction of their income, less than lower-income individuals do.

    In our imaginations, it doesn’t seem as if this is the case, because spending by the wealthy is so conspicuous. But consider someone like Romney, whose income in 2010 was $21.7 million. Even if Romney chose to live a much more indulgent lifestyle, he would spend only a fraction of that sum in a typical year to support himself and his family in their several homes. But take the same amount of money and divide it among 500 people in the form of jobs paying $43,400 apiece and almost all of the money gets spent.

    The relationship is straightforward and ironclad: as more money becomes concentrated at the top, aggregate demand goes into a decline. Unless something else happens by way of intervention, total demand in the economy will be less than what the economy is capable of supplying—and that means that there will be growing unemployment, which will dampen demand even further. In the 1990s that “something else” was the tech bubble. In the first dec­ade of the 21st century, it was the housing bubble. Today, the only recourse, amid deep recession, is government spending—which is exactly what those at the top are now hoping to curb.

    Economists refer to the “rent seeking problem.” In economic jargon the word “rent” was originally used, and still is, to describe what someone received for the use of a piece of land—it’s the return obtained by virtue of ownership, and not because of anything one actually does or produces. This stands in contrast to “wages,” for example, which connotes compensation for the labor that workers provide. The term “rent” was eventually extended to include monopoly profits—the income that one receives simply from the control of a monopoly. In time, the meaning was expanded still further to include the returns on other kinds of ownership claims. If the government gave a company the exclusive right to import a certain amount of a certain good, such as sugar, then the extra return was called a “quota rent.” The acquisition of rights to mine or drill produces a form of rent. So does preferential tax treatment for special interests. In a broad sense, “rent seeking” defines many of the ways by which our current political process helps the rich at the expense of everyone else, including transfers and subsidies from the government, laws that make the marketplace less competitive, laws that allow CEOs to take a disproportionate share of corporate revenue, and laws that permit corporations to make profits as they degrade the environment.

    The magnitude of “rent seeking” in our economy, while hard to quantify, is clearly enormous. Individuals and corporations who excel at rent seeking are handsomely rewarded. The financial industry, which now largely functions as a market in speculation rather than a tool for promoting true economic productivity, is the rent-seeking sector par excellence. Rent seeking goes beyond speculation. The financial sector also gets rents out of its domination of the means of payment—the exorbitant credit- and debit-card fees and also the less well-known fees charged to merchants and passed on, eventually, to consumers. The money it siphons from poor and middle-class Americans through predatory lending practices can be thought of as rents. In recent years, the financial sector has accounted for some 40% of all corporate profits. This does not mean that its social contribution sneaks into the plus column, or comes even close. The crisis showed how it could wreak havoc on the economy. In a rent-seeking economy such as ours has become, private returns and social returns are badly out of whack.

    In their simplest form, rents are nothing more than re-distributions from one part of society to the rent seekers. Much of the inequality in our economy has been the result of rent seeking, because, to a significant degree, rent seeking re-distributes money from those at the bottom to those at the top.

    But there is a broader economic consequence: the fight to acquire rents is at best a zero-sum activity. Rent seeking makes nothing grow. Efforts are directed toward getting a larger share of the pie rather than increasing the size of the pie. But it’s worse than that: rent seeking distorts resource allocations and makes the economy weaker. It is a centripetal force: the rewards of rent seeking become so outsize that more and more energy is directed toward it, at the expense of everything else. Countries rich in natural resources are infamous for rent-seeking activities. It’s far easier to get rich in these places by getting access to resources at favorable terms than by producing goods or services that benefit people and increase productivity. That’s why these economies have done so badly in spite of their seeming wealth. It’s easy to scoff and say: We’re not Nigeria, we’re not Congo. But the rent-seeking dynamic is the same.

    Okay, lecture over. You can wake up now.

    • Zme


      A superb comment. I’ve been trying (in vain) to articulate this for many years…first as a “this will soon be corrected concern” during the 80s, and later as a full blown “why are you dumb shits still supporting the class that’s causing your problems” during the last 10 years.

      I have never reached the level of clarity and “voice of gentle reason” that you have with this post. Thank you…I shall probably copy/paste it (with attribution, of course) and use it in oral arguments with T/P acquaintances many times in the next few months.

  • Kevin

    “Because Yglesias is a Keynesian, he takes this in the direction of arguing Romney should just run a deficit, since a deficit is what the economy needs right now.”

    This proposal is not supported by Keynesian economics. Keynesian economics supports a raise in government spending since the government can spend all the money that it earns via taxation. The last party to give money to would be the wealthy since they have the lowest propensity to consume (i.e. they save a higher percentage of their income). This gives the least benefit to the economy.

    • Chris Hallquist

      Yglesias certainly doesn’t think deficit-financed tax cuts for the rich are the best way to stimulate the economy, here I assume the point is they’re better than doing nothing.

      Though I may be misreading Yglesias, and this is just an example of how he thinks we should be running a deficit when the Fed has access to negative real interest rates.

      • Kevin

        While it would be nice for the government to decrease taxation and maintain social programs through increasing the deficit, its just not a realistic solution. The trade-off for these tax cuts is the decrease of government programs that 1. Employ people and 2. Consume goods. This would essentially be exchanging something that has a good multiplier effect with something that has a bad multiplier effect. Taking this into consideration, perhaps doing nothing is the best strategy.

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