Thursday, October 25, 2018

How the Clean Water Act has served the environment and the economy

How the Clean Water Act has served the environment and the economy

David Keiser, Joseph S. Shapiro 24 October 2018

Over the last 20 years, the president or the Supreme Court of the US have restricted, reinstated, and then restricted again Clean Water Act protections for roughly half of US waters. Two Supreme Court decisions in the 2000s – SWANCC and Rapanos – removed the Clean Water Act's protection for wetlands, intermittent streams, and many other waters. The Obama administration's Waters of the United States Rule reinstated these protections, and a 2017 executive order by the Trump administration sought to revise or rescind this rule. 

The 1972 Clean Water Act has a strong rationale. Before 1972, many US rivers were polluted to the extent that they would catch fire, and the 1969 fire on the Cuyahoga River in Cleveland, Ohio provided impetus for the passage of the Clean Water Act.

Despite this, the Clean Water Act has been controversial, for two reasons. First, there is no clear evidence that the Clean Water Act has decreased pollution, or even whether water pollution has fallen(Adler et al. 1993). Second, some argue that the Clean Water Act's costs have exceeded its benefits. These costs have exceeded $1 trillion in total (in 2014 dollars). That is more than $100 per person, per year. 

Most analyses have concluded that the Clean Water Act's benefits are smaller than its costs. This includes studies by the Environmental Protection Agency (Lyon and Farrow 1995, Freeman 2000, USEPA 2000a, USEPA 2000b, Keiser et al. forthcoming). This contrasts with analyses of the Clean Air Act, which often find benefits much larger than its costs (USEPA 1997). 

Analyses of the Clean Water Act have been hampered by three challenges:

  • limited data on water quality,
  • the difficulty of inferring values for clean water by observing human behaviour, and
  • separating effects of the Clean Water Act from effects of other changes in policy and the economy. 

We have tried to shed light on these controversies using the most comprehensive set of files on water pollution and its determinants in either academia or government (Keiser and Shapiro, forthcoming). These include 50 million water pollution readings from more than 240,000 monitoring sites in the continental US, from 1962 to 2001. Also we use detailed records on each of 35,000 grants the federal government gave cities in order to improve the treatment of municipal wastewater.

The analysis finds three sets of results.

Water pollution 

Most measures of water pollution declined between 1962 and 2001, though the rate of decline slowed over time. For example, the share of waters unsafe for fishing fell by about 12% between 1972 and 2001 (Figure 1). 

Figure 1 Share of waters not fishable, 1962–2001

Source: Keiser and Shapiro (forthcoming).

Wastewater treatment

The analysis investigates the effect on water pollution of $650 billion in grants that the federal government gave cities to improve wastewater treatment plants. In most cities, sewage and other wastes flow through a network of underground pipes to a plant that treats the waste before discharging it to a river, lake, or other body of water. Upgrading these treatment plants so that ambient water pollution would decrease was a major goal of the Clean Water Act. 

To measure the effects of these grants on pollution, our research compares pollution upstream of a treatment plant that received a grant to pollution downstream of the plant. We did this in years before and after the grant was received, and in plants receiving grants in early or late years. 

These grants substantially decreased water pollution. The average grant project, which cost around $30 million, decreased the probability that downstream waters were unsafe for fishing by about half a percentage point (Figure 2). This benefit extended about 25 miles downstream and lasted for about 30 years. The research also studies these grants' cost-effectiveness. It finds that, using these grants, it cost about $1.5 million per year to make one mile of a river safe for fishing.

Figure 2 The effects of Clean Water Act grants on share of waters not fishable

Source: Keiser and Shapiro (forthcoming).

Home values

The analysis finds some evidence that these grants increased home values within a 25-mile radius around the waters that were cleaned up. The aggregate change in home values, however, was around one quarter of the total cost of these grants.

Figure 3 Ratio of change in housing values to grant costs by county

Source: Keiser and Shapiro (forthcoming).

There are several reasons why this ratio of measured benefits (change in home values) to costs of around 0.25 may understate the true benefit-cost ratio. People may inaccurately perceive the (especially health) benefits these grants provide. This ratio does not count benefits to people who live more than 25 miles away from the rivers, and it abstracts from changes in sewer fees and local taxes. 

One interpretation is that the benefits of these Clean Water Act grants would exceed their costs if the benefits not captured in the housing market analysis exceeded the benefits captured here by a ratio of more than three-to-one. Current research is investigating whether existing analyses have underestimated the benefits of cleaning up rivers to this degree, for example by ignoring health benefits, and so whether the benefits of these investments are greater or less than their costs.

Policy implications

On one hand, Clean Water Act grants largely concluded by 1988. This new analysis stops in 2001, and the waters targeted by these Supreme Court and federal rules is far from a random sample, because they focus on wetlands and intermittent streams while the new analysis studies all rivers. In this sense, the new results do not directly measure any consequences of these current policy changes.

Nonetheless, there are two ways this work may inform current policy debates. 

  • The Clean Water Act has decreased US water pollution. This finding is clearest for pollutants that the Clean Water Act targeted, while the analysis finds less improvement in pollutants primarily from agricultural sources that the Clean Water Act traditionally has not regulated. Thus, removing Clean Water Act protections may increase US water pollution, particularly in areas with municipal and industrial discharges. 
  • The estimated change in home values due to Clean Water Act grants was smaller than the grants' costs (see Figure 3). This estimated ratio is larger for grants to more densely populated areas. The Clean Water Act, unlike the Clean Air Act, imposes similar water pollution regulations on most US surface waters. These findings are consistent with the idea that targeting water pollution regulations so that they focus on waters that are particularly important for social welfare could increase the ratio of benefits to costs of these regulations. 

Efficient environmental policy balances the benefits and costs of pollution control. For policies such as air pollution regulation, available evidence suggests that the benefits of existing regulation justify its costs. For water quality regulation, available evidence is incomplete, but suggests that re-targeting environmental investments could at least improve their net social benefits.  

References

Adler, R W, J C Landman, and D M Cameron (1993), The Clean Water Act 20 Years Later, NRDC.

Freeman, A M (2000), "Water Pollution Policy", chapter in Public Policies for Environmental Protection, RFF.

Keiser, D A, C L Kling, and J S Shapiro (forthcoming), "The low but uncertain measured benefits of US water quality policy", Proceedings of the National Academy of Sciences.

Keiser, D A and J S Shapiro (forthcoming), "Consequences of the Clean Water Act and the Demand for Water Quality", Quarterly Journal of Economics.

Lyon, R M and S Farrow (1995), "An Economic Analysis of Clean Water Act Issues", Water Resources Research 31: 213–223.

USEPA (1997), "The Benefits and Costs of the Clean Air Act, 1970 to 1990", USEPA discussion paper.

USEPA (2000a), A Benefits Assessment of Water Pollution Control Programs Since 1972: Part 1, The Benefits of Point Source Controls for Conventional Pollutants in Rivers and Streams: Final Report, USEPA.

USEPA (2000b), A Retrospective Assessment of the Costs of the Clean Water Act: 1972 to 1997: Final Report, USEPA.


--
John Case
Harpers Ferry, WV
Sign UP HERE to get the Weekly Program Notes.

Wednesday, October 24, 2018

Wage roundup: Amplifying new work on an important topic. [feedly]

Wage roundup: Amplifying new work on an important topic.
http://jaredbernsteinblog.com/wage-roundup/

There's been some interesting wage analysis in recent days and the findings are worth collecting and amplifying. Some of what follows is technical, but the punchlines are straightforward:

–As I've always stressed up in these parts, tight labor markets are especially beneficial to lower-paid workers.

–Even so, wage inequality remains alive, well, and connected to the recent boom in corporate profitability.

–In earlier periods, unemployment rates as low today's would have generated faster wage growth. The reasons for today's under-performance are likely slack, slow productivity growth, and weak worker bargaining clout.

This first figure, from my great pal Larry Mishel and Julia Wolfe, uses high quality administrative data to reveal key aspects of the real annual earnings' story over the past few decades. The top line shows that the average earnings of the top 1 percent—about $720,000 in 2017—are up 157 percent since 1979, compared to 22 percent for the bottom 90 percent (2017 avg: $36,000). FTR, the top 0.1 percent were up 343 percent over these years (2017 avg: $2.8 million).

Moreover, and this is really telling, there are but two periods in the figure when the average for the bottom 90 goes up: the full employment latter 1990s and around 2015. The latter was a year of weirdly low inflation (about zero), so that's anomalous. But that positive slope in the latter 90s confirms the importance to this discussion of very low unemployment. In fact, unemployment is even lower today, but I'll get to that in a moment.

The other important pattern in the figure is the sawtooth movements for the top 1 percent around 2000 and 2007. If you follow the stock market, and particularly the patterns in capital gains realizations, those spikes are familiar, but why should they show up in paychecks? The answer is that in these data come right off W2 wage filings, which include exercised stock options. The diverse pattern between the top and bottom lines in the figure underscores the narrow reach of stock market gains.

But why aren't middle and lower-wage workers seeing much in terms of wage gains these days? This is the topic of very thorough bit of work by Ernie Tedeschi in the New York Times. Ernie goes over pretty much every reason you could come up with regarding the question just posed; here are some of the findings I found most germane:

–If you look solely at unemployment, you'd think the job market is at full capacity. If you look at more broad indicators, you might not be so convinced.

–Low inflation tends to correlate with slower nominal wage growth, but the gap in wage growth between now and 2000—the last time we were at full employment—is only partially explained by slower price growth.

–Contrary to claims by Trump's CEA, as Larry and I showed a while ago, benefit growth can't be crowding out wage growth, because nonwage comp isn't outpacing wages (we showed the nonwage share of comp has been flat in recent years; we also argued, as does Ernie, that demographic change doesn't explain the wage-growth gap).

–Slow productivity is surely in the mix, but it's only a partial explanation.

Let's pause for some analysis of that last point, as productivity is key to this debate (and key to living standards), but sometimes gets short shrift. Also, advocates of this explanation, of which I am one, sometimes argue that it is a more binding constraint than is necessarily the case.

A recent paper by Janet Yellen, which Ernie cites as well, introduces a model that I've sort of replicated (I'm using some different data and not imposing some of the constraints she does on the model's coefficients, though the results I'm about to show are similar if I do so). Yellen's model includes slack, inflation, and productivity growth. All three variables significantly drive nominal wage growth, but here's some evidence that slowing productivity growth helps to explain the gap which is the focus of Ernie's report.

I've run the model using my "mash-up" wage series (five different series combined, so as to avoid cherry-picking) through 2010 and then forecasted forward using the actual values for the independent variables. The first figure shows that the model does a decent job of predicting wage growth out-of-sample. Most notably, even with the decline in unemployment (actually, the gap between unemployment and CBO's estimate of the natural rate), this version of the model does not predict faster wage growth 8 years after the estimation period.

But if I exclude productivity growth (the Yellen model employs a smooth trend in productivity growth), a clear overshoot occurs. It's not a huge effect, for the record, but it's there.

To be clear, I could have done the same exercise with inflation and slack but economists have focused on slow productivity growth because it is, as I show in this post, an essential indicator of potential (average) wage growth, and its slowdown is therefore a real constraint on living standards more broadly.

However, as I also stress in the link just above, the role of bargaining power must not be overlooked in this productivity discussion. Even at low productivity growth, wages can grow more for some groups than others (distribution within the national wage share of income), and the wage share of national income, which has tanked in recent years, can rebalance in favor of workers. In fact, that dynamic is attractive from the Fed's perspective, as it supports non-inflationary wage growth.

The final recent wage report to bring to your attention comes from researchers at Goldman Sachs (no link); it focuses on the distribution of wage pressures as the job market tightens up. Their table below makes a point I've long stressed: the less you earn, the more tight labor markets help you. The coefficient on slack (top row) is 2x that for low-wage as upper-middle-wage workers, and it is insignificant for high-wage workers. Note also, as in the Mishel/Wolfe chart above, the correlation between corporate profits and high-wage growth.

The other important finding from their regressions is the structural downshift of the model's parameters in the post-2010 period, though not for low-wage workers (state minimum wage increases are likely in play here). The last figure shows that using the parameters from their full model predicts average wage growth close to 4 percent by late next year. But if the prediction is made based on the more recent, diminished correlations, then wage growth hardly budges from its current pace, even as they predict the unemployment rate to fall significantly below today's levels.

Source: GS Research

Putting it all together, tight labor markets are as important as ever, though slow productivity growth and weak bargaining clout are still, even at 3.7 percent unemployment, operating as wedge between growth and broadly shared prosperity. The policy implications point towards the importance of patience at the Fed and more collective bargaining (and much better labor policies, including minimum wages/overtime, but that's for another post). Workers need both tight labor markets and the power to steer more of the benefits of a full capacity economy into paychecks, not profits.

VISIT WEBSITE
 -- via my feedly newsfeed

Monday, October 22, 2018

An important correction: The U.S. does have a carbon tax. But it needs some serious attention. [feedly]

An important correction: The U.S. does have a carbon tax. But it needs some serious attention.
http://jaredbernsteinblog.com/an-important-correction-the-u-s-does-have-a-carbon-tax-but-it-needs-some-serious-attention/

'm am avid listener to the NY Times podcast, The Daily, and I much enjoyed, if that's the right word given the difficult topic, last Friday's show on the urgency of pushing back on climate change. The show included an insightful discussion with recent Nobel laureate William Nordhaus on the importance of taxing carbon.

But somewhere in there (not in the Nordhaus section), it was asserted that the U.S. federal government does not tax carbon. In fact, such a tax exists: it's the federal gas tax. Given that this is the carbon-tax-that-time-forgot, I can understand the mistake (the reporter was probably thinking about more sweeping, new taxes on carbon emissions). But there are two strong reasons for raising it. One, to more accurately price the social cost of carbon consumption, and two, to pay for our eroding transportation infrastructure.

The federal gas tax has been stuck–in nominal terms!–at 18.3 cents per gallon since 1993. It hasn't been adjusted for consumer inflation, for the increased cost of transportation maintenance, for the improved fuel efficiency of today's fleet, or for the slower growth over the past decade in total miles driven (see the figure below, showing a 12-month rolling average of total vehicle miles driven, in billions; people traveled a lot less in the downturn, such that miles driven are down by 480 billion relative to the pre-2007 trend; that's good for the climate; bad for the trust fund coffers).

To be clear, those last two factors are roundly welcomed. But they also mean we're collecting a lot less than we should be, which besides under-pricing carbon, is why a) the federal transportation trust fund is always broke, and b) our roads and mass transit suffer from persistent under-investment, especially in state that haven't picked up some of the slack (the average state gas tax is 24 cents/gallon).

The tax analysts at ITEP do an excellent job of following this issue, but it is one that should be far more prominent. They calculate that to keep pace with the factors just noted, the federal gas tax today would need to be about 50 cents/gallon.

Since the federal gas tax was introduced in the 1930, this is the longest we've gone without raising it. Even President Reagan raised the damn thing (from 4 to 9 cents, in 1983)! As I document here, every once and a while, grown-up politicians propose an increase, often a bipartisan one. (BTW, as electric vehicles become more common–they don't use gas; they do use roads–a per-mile user fee may be necessary to support transportation infrastructure).

As the Daily podcast stressed, there are policy makers who increasingly realize we must tax carbon, though especially in the age of Trump, they tend not to speak up much in this country. Moreover, it's typically easier to add to an existing tax than introduce a new one.

Of course, I admit that it's awfully hard to imagine a federal gas tax increase getting anywhere these days. But we've got to try, and we certainly can't forget that it exists!

 

Source: DOT, Fed Highway Admin.


 -- via my feedly newsfeed

Recovery Radio:Recovery Radio: After the Emergency Room, Then What

John Case has sent you a link to a blog:



Blog: Recovery Radio
Post: Recovery Radio: After the Emergency Room, Then What
Link: http://recovery.enlightenradio.org/2018/10/recovery-radio-after-emergency-room.html

--
Powered by Blogger
https://www.blogger.com/

Mexico’s Hopeful New President [feedly]

Mexico's Hopeful New President
http://prospect.org/article/mexicos-hopeful-new-president

The election of the left populist Andrés Manuel López Obrador as president of Mexico is a historic breakthrough for progressives there. It could also offer progressives in the United States a path out of their own political stalemate on immigration and trade.

In his third run for president, 64-year-old "AMLO" broke open the piñata of Mexican politics that had been tightly sealed by neoliberal oligarchs since the early 1980s. He won 31 of the 32 Mexican states, taking 53 percent of the total vote. His coalition, led by the political party he organized just four years ago, swept to control in both houses of the Mexican Congress.

As in his past campaigns, López Obrador was demonized in most of the media as a Latin American caudillo like Hugo Chavez, who would bring Venezuela-type chaos, or the Mexican version of the despised Donald Trump.

The comparisons are pure propaganda; López Obrador has no connection with the military, has spent his life in democratic politics, and could not be less like Trump. From a family of small shopkeepers, he began his political career by defending the land rights of the indigenous poor in his native Tabasco. Since then, he has been a relentless critic of what he calls the "mafioso" Mexican elite, whose greed has spread corruption and tolerated violence throughout the country. He has a modest lifestyle, driving a five-year-old car, flying coach, and promising to cut the president's salary and sell the presidential plane.

Unlike Trump, he is also an astute and pragmatic politician. As mayor of Mexico City between 2000 and 2005, he ran a competent and innovative government—launching programs that ranged from helping the poor and elderly to building elevated highways to ease the congestion that was choking local commerce. He left office with an 85 percent approval rating.

Within days of his election as president, he met with business leaders who had bitterly opposed him, plunged into the practical issues of the upcoming transfer of power in December, and appointed a cabinet of people with recognized experience and expertise—a majority of whom are women.

Yet, as different as they are, López Obrador and Trump are products of a similar historical context. They represent, respectively, left- and right-wing populist/nationalist responses to the economic insecurity and social disruption of corporate-driven globalization.

The similarities end there. Trump is a monstrous parody of capitalist imperialism—bullying, greedy, and unstable—who brazenly uses the presidency to promote his personal business deals in dozens of countries. He plays to his political base with xenophobic rants, while personally profiting from cheap immigrant labor on his worksites and at his homes.

By contrast, López Obrador's nationalism is rooted in a long struggle for democratic control over Mexico's economic and social development.

After 20 years of civil conflict following the Mexican Revolution of 1910, the country's exhausted warring factions established a system of broadly representative one-party rule. The system was autocratic, inward-looking, mildly socialist, and consciously distanced from the United States, which had dominated—and dismembered—Mexico over the previous century. The system brought 50 years of peace, steady economic growth, and decreasing inequality to the nation.

But in the early 1980s, the international energy-price bubble burst, plunging oil-exporting Mexico into an economic crisis. Infected by the market-fundamentalism of the Reagan-Thatcher era, a new generation of politicians allied with U.S. business interests opened up Mexico to the global economy. Their instrument was the North American Free Trade Agreement with the United States and Canada, which in turn became the model for the global deregulation of trade and investment that swept the world over the next two decades.

Not surprisingly, NAFTA failed to deliver on the promise of its backers that it would reduce Mexican immigration in the United States. President Clinton also argued that allowing U.S. companies to produce in Mexico would prevent them from going to China. NAFTA, he claimed, would create a growing middle-class job market—and middle-class consumers for American goods—in Mexico. In a similar vein, then-Mexican president Carlos Salinas de Gortari asked Americans, "Do you want our tomatoes or our tomato pickers?"

But these promises turned out to be so much political bait and switch. Instead of a North American strategy for global competition, NAFTA turned out to be a Wall Street strategy to undercut the bargaining position of labor in all three countries. A half-dozen years after NAFTA took effect, Clinton opened up the United States to goods from China in exchange for opening up China to American investors. The privileged U.S. access promised to Mexico was undercut by even cheaper Chinese labor. Many Mexicans—echoing the bitterness of downsized U.S. industrial workers—will tell you that Clinton stabbed them in the back.

Compared with their experience in the previous era, Mexicans since NAFTA have seen slower growth, widening inequality, and less personal safety. As writer Jorge Castañeda Gutman, who later became foreign minister, acknowledged at the time it was adopted, NAFTA was "an agreement for the rich and powerful in the United States, Mexico, and Canada, an agreement effectively excluding ordinary people in all three societies."

(AP Images)

López Obrador on October 17, 2018

Deregulating the flow of money and goods across the border also turned what had been a modest, illegal business smuggling marijuana into the United States into a huge criminal industry that now encompasses trans-shipping cocaine and heroin from South America and synthetic drugs from the Far East. Narco-traffickers expanded into extortion, robbery, and kidnapping. Drug money infiltrated the courts, the police, and the military. Only 7 percent of the country's crimes are reported, chiefly because of fear of the police. Of those reported, less than 5 percent result in convictions. During the recent elections, at least 145 candidates and political activists were assassinated.

In 2008, the Pentagon started providing aid to the Mexican military to take over the leading role in combating the cartels. But the military is untrained for police work, unaccountable to civilian authority, and itself laced with narco-corruption. Human rights violations have escalated. Last spring, the Mexican government was caught using surveillance systems paid for by the United States to spy on its political opponents. By any measure, the U.S. intervention has been a complete failure; in 2017, the murder rate in Mexico reached its highest level since the government started keeping records 20 years ago.

 

WHILE ILLEGAL IMMIGRATION to the United States tripled between 1990 and 2013, a weak U.S. recovery from the crash of 2008 combined with Obama's tougher border policies have since reduced the flow from Mexico. Trump's brutal tactics have taken a further toll. Yet the flow continues; in the first seven months of 2018, the number of undocumented people arrested or turned back at the southern border rose by 140,000 over the same period a year ago. A growing share has come from Honduras, Guatemala, and El Salvador, where the combination of criminal violence and chronic poverty is even greater than in Mexico.

Lost in this debate is the uncomfortable reality that Guatemala, Honduras, and El Salvador have long been de facto colonies of U.S. corporate and military interests. For well over a century, we have intervened in the region to support the reactionary business oligarchs and generals who have brutally suppressed both development and democracy.

This is not just ancient history. In 2009, when the elected president of Honduras, himself a member of the oligarchy, outraged the Honduran establishment by attempting a few mild education and labor market reforms, he was kidnapped by U.S.-trained armed forces, taken to a U.S. base, and shipped out of the country. Secretary of State Hillary Clinton supported the coup, following up with increased aid to the Honduran military and the corrupt government it protects. When protesters demonstrated against this year's rigged election, the military police fired live ammunition at them, killing at least 20 of the demonstrators.

The dirty little secret of migration across our southern border is that it has benefited elites on both sides. The Mexican and Central American oligarchs get to send their most ambitious and energetic—and therefore the most frustrated and politically dangerous—working people out of the country. The U.S. business class gets a large supply of ambitious, energetic, cheap labor. And as the recent numbers suggest, wall or no wall, desperate people will keep finding a way in.

 

AS IF THE PROBLEMS OF inequality, violence, and corruption on López Obrador's plate when he takes office were not enough, there awaits the foul-mouthed Donald Trump, still demanding that Mexico pay for his border wall, which no Mexican politician could possibly do.

But neither can any Mexican leader avoid dealing with Trump. López Obrador, like his progressive counterparts in Canada, originally opposed NAFTA. Leftists in both countries feared that greater integration with the United States would weaken their already fragile national independence. As the humiliating submission of their leaders to Trump's arrogant demand for a renegotiation of NAFTA showed, they were right.

After 24 years of integration under NAFTA, the economies of both Mexico and Canada are much more dependent on their larger neighbor. Mexico especially relies on the U.S. for imports of basic foods and gasoline, and it sells 80 percent of its exports in the United States. López Obrador is fully aware that tearing up the treaty now would plunge Mexico into a depression from which it would take years to recover, and doom his plans for turning the country toward a social democratic future.

López Obrador has been arguing that the central issue is not how the United States treats undocumented Mexican immigrants, but the maldistribution of income and wealth that drives them out of Mexico. The priority should not be making it easier for Mexicans to leave their country, he says, but making it possible for them to stay.

To do this, he has laid out an ambitious plan of economic development along social democratic lines, terming policies of the past a failure. After his election, he declared that neoliberalism was finished in Mexico. His plan includes:

  •  Increasing public social spending, particularly in education and pensions for the destitute elderly,
  •  Raising private incomes with higher minimum wages and reform of corrupt labor unions,
  •  Job creating investments—especially in the impoverished south—in water, transportation, energy, and the targeted expansion of new industries, including exporting to the world's rapidly legalizing marijuana markets.

At the same time, he must make visible progress against the widespread criminal violence and official corruption. As a first step, he wants to de-militarize the war on drugs, sending the army back to its barracks while reforming and professionalizing the civilian police.

This is a huge task, and he will be opposed by powerful international, as well as national, interests—including Wall Street investors, the Pentagon and its contractors who are close to the Mexican military, and the right-wing ideologues both in Mexico and in the U.S. administration and Congress. To have a chance of pulling it off, López Obrador needs time and political space—and minimal interference from the U.S. government.

His immediate need is to get the current negotiations over NAFTA out of the way, even before he takes office. Fortunately for him, the lame-duck Mexican president Enrique Peña Nieto has already reached a deal with Trump, who has informed Congress that he will sign it before December 1.

(AP Images)

Luisa María Alcalde Luján

Given Trump's unstable personality, nothing is certain. Canada has not yet joined, and even some Republicans have questioned whether Trump could base a deal with Mexico alone on his authority from Congress to renegotiate the three-nation agreement. But there is little reason to think that the spineless Republicans in Congress won't ultimately give him whatever he asks for.

Moreover, although it is hard for progressives to acknowledge that anything Trump does is positive, the proposed amendments in the deal with Mexico are an actual improvement for workers on both sides of the border. First, they weaken the rights of corporate investors to sue governments for policies that might reduce future profits. Second, they require Mexico to pass legislation ensuring workers' rights to secret ballots in union elections. Third, they mandate that the share of North American content in autos and parts that cross borders without tariffs be raised from 62.5 percent to 75 percent. Fourth, they stipulate that 45 percent of autos be produced by workers making at least $16 per hour, which if finally incorporated into NAFTA could represent a historic breakthrough for making wage levels a part of trade treaties.

The deal does not do much to strengthen enforcement of these new rules. But this could change. López Obrador's designated labor minister, Luisa María Alcalde Luján, is smart, energetic, and committed. She comes from a network of activists (including her parents) that for years has dedicated itself to cleaning up union corruption and promoting worker rights—something that has been totally absent from Mexican governments of the past.

Despite Trump's threats, there is nothing in the deal about building a wall or requiring Mexico to impede emigration to the United States. Trump, of course, is still assuring his base that, somehow, in some unspecified way, his wall will be built and Mexico will pay for it.

 

IN ADDITION TO dealing with the unstable and dangerous mega-power to the north, López Obrador must deal with the violence and chaos spilling over in the form of displaced immigrants from Central America. In a letter to Trump, he suggested that both Mexico and the United States work together on a new project of social and economic development for the region.

No one can expect Trump to take this seriously. But López Obrador's ideas, and the fact that he will be president of Mexico for six years, could kick-start progressives into a desperately needed rethink of America's global priorities.

It is not just Mexico that needs a new internal development path. Rising inequality, chronic trade deficits, and shrinking opportunities for the majority of Americans over the last three decades reflect a dysfunctional economy that is competing in the world by lowering wages and living standards at home.

To escape the downward spiral of low-wage competition, both the United States and Mexico need to rebuild their capacity to compete in the world on the basis of high quality and efficiency. To do this they need time—and each other. Mexico needs stable access to American investment and technology. And the United States needs Mexico and Central America—both to create a larger close-in market for American goods and to limit the forced immigration from south of the border that is a major, if not the major, subject of the nativist demagogy that breeds the reactionary politics clogging our path toward a social democratic future.

NAFTA created a continental market. U.S. trade with Canada and Mexico is almost double its trade with China. People and culture now flow across the borders. What NAFTA has lacked is a democratic politics that would make it work for the ordinary people who were left behind by the original deal.

Opposition to the original agreement in all three countries created what might have been a foundation for that politics. But after critics failed to stop it, the left embraced other concerns. In the United States, the anti-free-trade movement moved on, reaching its peak in the 1999 protests against globalization in Seattle. Today, it has been elbowed out of the trade discussion by Trump. Its internationalist human rights vision has often been misappropriated by policymakers of both parties as a justification for disastrous military interventions.

(AP Images)

Andrés Manuel López Obrador on September 29, 2018, in Mexico City

What goes on in Mexico and Central America has much more impact on the daily lives of more Americans than events almost anyplace else. But among U.S. foreign policy networks, stretching from Congress and federal bureaucracies to academia and multinational corporations, the world south of the Rio Grande is a policy backwater. The media tell us more about who is going to jail in Turkey and China than who is murdered in El Salvador or Mexico.

 

THE IDEA THAT MARKET TIES among nations help create a more peaceful and just world is not wrong. What is wrong is that the neoliberal model systematically erodes the democratic governance necessary to make it work.

With the ascension of López Obrador to Mexico's presidency, the rise to influence of a new generation of progressive Democrats in their party in the United States, and the existing substantial base for progressive politics in Canada, there may be an opportunity for social democrats in all three countries to work together toward transforming NAFTA into a North American economy in which rising living standards for all who live there take priority over profit opportunities for global investors.

The first task is to strengthen cross-border ties among progressives. Within the Mexico/Central American diaspora, there is already a great deal of collaboration on immigration and environmental issues across the border. And, despite their own domestic struggles, some U.S. and Mexican labor unions have cooperated in joint organizing along the border. One recent example of trinational cooperation is the story of Napoleon Gomez, a labor leader prosecuted by the Mexican government on fake charges after he criticized the callous indifference of a powerful mining corporation to a disaster that killed 65 miners in Coahuila. The American steelworkers union helped Gomez flee the country, and Canadian trade unions gave him refuge in Canada. After the Mexican Supreme Court finally dismissed all of the charges against him, he was elected in July to the Mexican Senate as a member of López Obrador's party.

Strengthening such links among continental progressives should be a major priority for American progressives over the next few years. But they need to see progressive movements to our south not just as objects of charitable political help, but as essential partners. There is no social democratic future possible in the U.S. without a strong democratic union movement. But workers on both sides of the border need each other to succeed. Given the ongoing integration of economies, a strong union movement here is not possible without one there.

The Mexican and Central American left does not need eager U.S. progressives rushing to help them reform their countries. Far more useful is an American left inspired to press long-neglected questions about the behavior of its own. Our own left would do well to focus on why the United States maintains military bases in Central America that have nothing to do with U.S. national security, and why the United States aids the Mexican army and police with military technology that often ends up in criminal hands.

The current alliance among progressives, moderates, and establishment neoconservatives to rid our country of Donald Trump is a practical necessity. But no progressive should be lulled into thinking that the social democratic vision of the Sanders/Warren wing of the party is compatible with the bipartisan "deep state" goal of restoring America's post–World War II role as world policeman and de facto board chair of global corporate capitalism.

It's time for another strategy. And for American progressives, the place to begin is here in our own North American neighborhood.

López Obrador has suggested the next step, but he cannot do it alone.


 -- via my feedly newsfeed

The “silver spoon” tax: how to strengthen wealth transfer taxation


The "silver spoon" tax: how to strengthen wealth transfer taxation

About the authorLily L. Batchelder is a professor of law and public policy at New York University School of Law.


Wealth transfer taxes are a critical policy tool for mitigating economic inequality, including inequality of opportunity. They are also relatively efficient. This essay summarizes why and how wealth transfer taxes should be strengthened. Reform options that our next President should consider include increasing the wealth transfer tax rate, broadening the base, repealing stepped-up basis, addressing talking points against wealth transfer taxes with little or no factual basis, and converting the estate and gift taxes into a direct tax on the recipients of large inheritances.

Why wealth transfer taxes
should be preserved and expanded

For those concerned about economic inequality, taxing wealth transfers is a critical policy tool, mitigating inequality in ways that other taxes cannot. Inheritances represent roughly 40 percent of all wealth1 and about 4 percent of annual household income.2 Bequests alone total about $500 billion per year.3

There are two types of inequality that policymakers should care about. The first is within-generation disparities in income, wealth, or other measures of economic well-being. Both income and wealth inequality are extremely high in the United States. The top 1 percent of households receives 15 percent of all income and holds 35 percent of all wealth.4Wealth transfers increase within-generation inequality on an absolute basis (See Figure 1), but not on a relative basis. This is because of what economists call regression to the mean.5 Someone who earns $100 million per year, for example, is likely to have a child whose income is slightly lower, even including the child's inheritance. Conversely, someone who earns $10,000 per year is likely to have a child whose income is slightly higher than her own.

Figure 1

But equally important is a second type of inequality: inequality of economic opportunity. A child whose parents earn $100 million will, on average, be radically better off than a child whose parents earn $10,000. The United States has one of the highest levels of opportunity inequality among its competitors.6 In the United States, a father on average passes on roughly half of his economic advantage or disadvantage to his son. Among most of our competitors, the comparable figure is less than one-third, and for several it is less than one-fifth.7

Delivering equitable growth

Previous article:Consumer credit, Kyle Herkenhoff and Gordon Phillips
Next article:Monetary policy, Alan Blinder

Financial inheritances worsen this inequality of life chances dramatically. Indeed, 30 percent of the correlation between parent and child incomes—and more than 50 percent of the correlation between the wealth of parents and the wealth of their children— is attributable to financial inheritances.8 This is more than the impact of IQ, personality, and schooling combined.

Increasing the progressivity of income and payroll taxes would go a long way toward addressing both of these types of inequality.9 But it would leave significant holes if not accompanied by stronger taxes on wealth transfers. Under current law, for example, if a wealthy individual bequeaths assets with $100 million in unrealized gains, neither the donor nor the heir ever has to pay income or payroll tax on that $100 million gain. In addition, the recipients of large inheritances never have to pay income or payroll tax on the value of inheritances they receive, whether attributable to unrealized gains or not.10

Some argue that any income or payroll tax previously paid by a wealthy individual on gifts and bequests they make should count as tax paid by the heir. But they are two separate people. When a wealthy individual pays his assistant's wages out of after-tax funds, we don't think the assistant has thereby paid tax on their own wages. In short, today the income and payroll taxes effectively tax unearned income in the form of inheritances at a zero rate.

Wealth transfer taxes play an important role in partially addressing this inequity of excluding inherited income from the income and payroll tax bases.11 But inherited income is still taxed at less than one-quarter of the rate on income from work and savings. (See Figure 2.)

Figure 2

A fairer tax system would tax income in the form of large inheritances at a higher rate than income from work. Recipients of large inheritances are better off than people who earn the same amount of money by working. In economist-speak, they have no "opportunity cost;" they have not had to give up any leisure or earning opportunities in order to receive the inheritance. All else equal, it is therefore fairer for them to pay more taxes, not less. But all else is not equal. Heirs of large inheritances also typically have a huge leg up in earning income if they choose to work—with access to the best education, influential family friends, interest-free or low-interest loans, and a safety net if they take risks that don't pan out. This further strengthens the case for taxing inheritances at a higher rate.

More progressive income and payroll taxes cannot address this inequity in the tax system and ensure that large inheritances are taxed at higher rates than wage income.12 The same is true of proposals to adopt a tax on wealth as opposed to wealth transfers.

Importantly, bipartisan experts agree that wealth transfer taxes are largely borne by the heirs of large estates, not their benefactors.13 As a result, it would be more accurate to call wealth transfer taxes "silver spoon" taxes, not "death" taxes as their opponents prefer.

In addition to playing a critical role in making the tax system fairer, wealth transfer taxes are relatively efficient. It is an article of faith among estate tax opponents that wealth transfer taxes harm the economy because they discourage work and saving among very wealthy individuals. But in order to have these effects, the wealthy would need place a high value on the amount their heirs will inherit after-tax when making work and saving decisions. In fact, a large body of empirical research finds this is not the case, and that the amount that the affluent accumulate for wealth transfers is relatively unresponsive to the wealth transfer tax rate.14

People with very large estates typically have saved for multiple reasons. They may enjoy being wealthy, with the prestige and power that it confers while they are alive. They may have saved to have enough for their retirement needs, including unanticipated health expenses. And they may, of course, have saved to give to their children. But the empirical evidence to date suggests the first two motivations are so strong that the wealthy do not reduce their saving by all that much if they expect their estate to be taxed at a high rate. Put differently, a lot of the reason why people save is to have wealth while they are alive, which wealth transfer taxes do not affect.

Moreover, any negative incentive effects of wealth transfer taxes on wealthy donors are at least partially offset by their positive incentive effects on the next generation. Such taxes induce heirs to work and save more because heirs do not have as large an inheritance to live off of as a result.15 Wealth transfer taxes also improve business productivity. Several studies have found that businesses run by heirs perform worse because nepotism limits labor market competition for the best manager.16

For all these reasons, wealth transfer taxes may be more efficient than comparably progressive income and wealth taxes17—in addition to playing a unique role in mitigating inequality of economic opportunity.

How to strengthen
wealth transfer taxes

There are two main components of the wealth transfer tax system: the estate tax on bequests and the gift tax on wealth transfers made during life.18 In 2016, transferors are entitled to a lifetime exemption of $5.45 million ($10.9 million per couple). If their combined gifts and bequests exceed this threshold, the excess is taxed at a rate of 40 percent. Transferors also can exclude $14,000 in gifts each year to a given heir from ($28,000 per couple), meaning such gifts don't even count toward the lifetime exemption. Currently only 0.2 percent of estates owe any estate tax.19

OPTION #1: RAISE THE RATE

The simplest way to strengthen wealth transfer taxes would be to raise the rate. Restoring the 2009 estate tax parameters (a $3.5 million exemption and a 45 percent rate) would raise $160 billion over 10 years.20Also raising the rate to range from 50 percent to 65 percent to the extent that estates exceed $10 million to $1 billion would raise about $235 billion over 10 years instead.21

At a minimum, large inheritances should be taxed at the top marginal tax rate that applies to labor income—roughly 50 percent when one includes state and local income taxes.22 But a higher rate would be fairer and more efficient. The optimal tax rate on extremely large inheritances is estimated to be between 50 percent and 80 percent.23

Reducing the lifetime exemption amount also is worth considering, but it should be a lower priority. A higher rate focuses wealth transfer taxes on the wealthiest heirs and limits compliance costs.

OPTION #2: REPLACE THE ESTATE AND GIFT TAXES WITH AN INHERITANCE TAX

A more fundamental improvement would be to replace the estate and gift taxes with an inheritance tax. The lifetime exemption for the estate and gift taxes applies to the amount transferred, not the amount inherited by the heir. Suppose Richie Rich is an only child and receives $5 million in bequests from each of his parents and stepparents. Under current law, the $20 million he inherits is exempt from estate and income taxes because each bequest is under the exemption. But under an inheritance tax, the exemption would be based on how much he receives instead.

I propose requiring heirs of large inheritances to pay income tax plus an inheritance surcharge on amounts they inherit above a large lifetime exemption. If the lifetime exemption were $2.1 million and the surcharge were 15 percent (roughly equal to the maximum payroll tax rate) then such an inheritance tax would raise roughly $200 billion more over 10 years than the current estate tax. Dialing the rates up or the exemption amount down could raise more revenue. (See Figure 3.)24 To state the obvious, $2.1 million is a lot of money. An individual who inherits $2.1 million at age 21 can live off her inheritance for the rest of her life without anyone in her house ever working and, on average, her annual household income will still be higher than about 7 out of 10 American families.25

Figure 3

There are several advantages of an inheritance tax relative to an estate tax. First, it would more equitably allocate wealth transfer taxes among heirs. Both types of taxes are borne by wealthy heirs and not their benefactors. But not all large inheritances come from the largest estates, and some small inheritances come from relatively large estates.

In addition, the type of inheritance tax outlined here would apply different rates to heirs based on their total income. As a result, about 30 percent of the burden of the inheritance tax in dollar terms would fall on different heirs than under a revenue-equivalent estate tax.26 While roughly one-third of heirs burdened by the estate tax have inherited less than $1 million, none would owe any inheritance tax.27

These differences should not be taken as a fundamental critique of the estate tax. It is overwhelmingly borne by the recipients of large inheritances: Less than 4 percent of the revenue comes from individuals inheriting less than $1 million. Its burdens are just allocated among the recipients of large inheritances less precisely than under an inheritance tax.

A second, and perhaps even more important, advantage of an inheritance tax is that it could better align public understanding of wealth transfer taxes with their actual economic effects. The structure of an estate tax makes it easy for opponents to characterize it as a double tax on the frugal, generous entrepreneur who just wants to take care of his family after his death. In fact, nothing could be further from the truth. The estate tax is actually the only tax that that ensures wealthy heirs pay at least some tax on their large inheritances—even if at a much lower rate than their personal assistants. But this imagery is powerful. Perhaps as a result, most countries around the world that historically had estate taxes have repealed them, while those with inheritance taxes have not.28

The structure of an inheritance tax makes the inequities of our current system clearer. It simply requires wealthy heirs to pay income tax on their large inheritances just as all American workers pay tax on their earnings. Even with a surcharge, wealthy heirs would still typically pay a lower rate of tax on their inherited income than workers pay on a similar amount of labor income because of the large exemption, which workers cannot claim on their wages.

There are ancillary advantages of an inheritance tax as well. It would be simpler because it permits a wait-and-see approach for split and contingent transfers, rather than requiring taxpayers and the Internal Revenue Service to guess upfront what portion of the transfer will ultimately go to tax-exempt individuals or charities. At the margin, it could induce the wealthy to share their estates more broadly. And it is clearly administrable. Inheritance taxes are far more common than estate taxes cross-nationally.29

OPTION #3: REPEAL STEPPED-UP BASIS

Regardless of whether the estate tax is expanded or replaced with an inheritance tax, policymakers should repeal stepped-up basis.30 This is the provision that completely exempts all accrued gains on bequeathed assets from income and payroll taxes, by "stepping up" the basis of asset to its fair market value when it is transferred.

President Obama has proposed repealing stepped-up basis, subject to several carve-outs including an exemption for the first $100,000 in accrued gains ($200,000 per couple).31 Together with raising the capital gains rate to 28 percent, this proposal would raise $210 billion over 10 years and significantly more over time as it fully phases in.32 While not technically an estate or gift tax reform, repealing stepped-up basis would accomplish all the same objectives as strengthening those taxes. It is highly progressive because inheritances are distributed so unequally and accrued gains are distributed even more unequally.33

The U.S. Department of the Treasury estimates that 99 percent of the revenue raised would come from the top 1 percent and 80 percent from the top 0.1 percent.34 It helps ensure that large inheritances are taxed at a rate closer to income from working. And it is highly efficient. Indeed, repealing stepped-up basis is even more efficient than raising wealth transfer tax rates because it reduces current law's "lock-in" incentives to hold on to underperforming assets purely for tax reasons.

If repealing stepped-up basis is not an option then the next best solution would be to apply carryover basis to bequests.35 This would allow heirs to delay paying income tax on accrued gains on their inheritances indefinitely. But heirs would at least need to pay the associated income tax when they ultimately sell the asset. As a result, it would reduce lock-in incentives, but not by nearly as much as stepped-up basis repeal. It would also raise significantly less revenue.36

OPTION #4: BROADEN THE WEALTH TRANSFER TAX BASE

A number of smaller reforms to broaden the wealth transfer tax base should also be pursued. Many of these proposals, such as limiting gaming around grantor-retained annuity trusts, are in President Obama's budget. Together, these budget proposals would raise $17 billion over 10 years.37 The next President should also finalize the current Administration's recently issued regulation addressing loopholes using valuation discounts, and ensure that Congress does not repeal it.38

An additional option worth considering is harmonizing the tax treatment of gifts and bequests. Currently gifts are often tax-advantaged because of the annual gift tax exclusion, the lack of present-value adjustments when calculating the lifetime exemption, and the fact that the top rate on very large gifts is effectively 29 percent, compared to 40 percent for bequests.39 Cutting the other way, bequests are tax-advantaged because they are eligible for stepped-up basis while gifts are not. These countervailing incentives create substantial tax planning costs, traps for the unwary, and inequities between similarly situated heirs. These problems could be largely addressed by repealing stepped-up basis, indexing the value of gifts to a market interest rate when calculating the lifetime exemption, and taxing gifts at the same rate as bequests.40

OPTION #5: ADDRESS STRAWMAN ARGUMENTS AGAINST WEALTH TRANSFER TAXES

Finally, policymakers should consider addressing talking points against wealth transfer taxes that resonate but have little or no basis in fact. A prime example is family farms. A principal rallying cry against the estate tax has long been that it forces families to sell their farms. But neither the American Farm Bureau nor The New York Times has been able to identify a single instance of this happening, even when the exemption was much lower.41

To counter this argument, one option is to adopt the proposal by former Senate Finance Committee Chairman Baucus (D-MT) to allow taxpayers to defer indefinitely any estate tax payments due on farm land at a market interest rate, provided the farm continues to be actively managed by the family.42 Because it is so rare for such farms and ranches to be subject to the estate tax, the proposal would only cost $5 billion over 10 years.43

To be clear, this proposal should only be considered if it is includes all the guardrails in the full Baucus proposal and interest accrues at a market interest rate. Otherwise, it could become a large loophole and reduce the number of farms owned and actively managed by families as opposed to passive investors in large corporations.

Conclusion

Wealth transfer taxes play a critical role in mitigating economic disparities, especially inequality of opportunity. The proposals offered here would soften the relative advantages of being born at the very top while leaving more than 99 percent of financial gifts and bequests unaffected.44

At the same time, these reforms options would raise a significant amount of revenue that could be used to mitigate the barriers to economic mobility that children from low- and middle-income families face. Effectively, they could fund a form of social inheritance through investments that partially make up for such families being unable to fund large financial wealth transfers to their children. The hundreds of billions of dollars raised could be used to fund universal pre-Kindergarten, expand the child tax credit for low- and middle-income working parents with young children, or increase the wage subsidy provided by the Earned Income Tax Credit for childless, frequently young adults. These proposals are estimated to significantly improve infant health, heighten academic achievement, boost labor force participation, and increase lifetime earnings for children from relatively disadvantaged backgrounds.45

President Franklin Delano Roosevelt once said "inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our government." The same could be said today. Rather than falling near the bottom among our competitors on this score, we can recommit to creating a society where one's financial success depends relatively little on the circumstances of one's birth. A first step is to start taxing extraordinarily large inheritances like we tax good, old hard work.

(I am grateful to Len Burman, Michael Graetz, Chye-Ching Huang, and Wojciech Kopczuk for helpful suggestions. All errors are mine.)



END NOTES

1 James B Davies and Anthony F. Shorrocks, "The Distribution of Wealth," chap. 11 in Handbook of Income Distribution, ed. Anthony B. Atkinson and Francois Bourguignon (Amsterdam: Elsevier, 2000); Edward N. Wolff and Maury Gittleman, "Inheritances and the Distribution of Wealth or Whatever Happened to the Great Inheritance Boom?," Journal of Economic Inequality 12 (2014): 439; Thomas Piketty and Gabriel Zucman, "Wealth and Inheritance in the Long Run," chap. 15 in Handbook of Income Distribution, ed. Anthony B. Atkinson and Francois Bourguignon, vol. 2B (Oxford: Elsevier 2015): 1334-42. While inheritances as a share of wealth has been rising in recent decades in several countries, it is unclear whether this is true in the U.S.

2 Lily L. Batchelder, "What Should Society Expect from Heirs? A Proposal for a Comprehensive Inheritance Tax," Tax Law Review 63 (2009): 20. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1274466

3 Ibid. $500 billion after adjusted for growth. David Joulfaian and Kathleen McGarry, "Estate and Gift Tax Incentives and Inter Vivos Giving," National Tax Journal 57 (2004): 439 tbl.5. Including transfers during life would increase this figure by about 8-16 percent.

4 Congressional Budget Office, The Distribution of Household Income and Federal Taxes, 2013, (June 8, 2016); Linda Levine, An Analysis of the Distribution of Wealth Across Households, 1989-2010 (CRS Report No. RL33433) (Washington, DC: Congressional Research Service, 2012): 4 tbl.2.

5 Batchelder, "What Should Society Expect from Heirs," 25, fig. 4. See also Edward N. Wolff, "Inheritances and Wealth Inequality, 1989‒1998," American Economic Review, 92, no. 2 (2002): 260–64.

6 See Miles Corak, "Income Inequality, Equality of Opportunity, and Intergenerational Mobility," Journal of Economic Perspectives 27, no. 3 (2013): 79–102.

7 Ibid.

8 Samuel Bowles, Herbert Gintis, and Melissa Osborne Groves, "Introduction," in Unequal Chances: Family Background and Economic Success (Princeton, NJ: Princeton University Press, 2005), 18-19. Financial inheritances account for 30 percent of the parent-child income correlation, while parent and child IQ, schooling, and personality combined only account for only 18 percent. Adrian Adermon, Mikael Lindahl, and Daniel Waldenström, "Intergenerational Wealth Mobility and the Role of Inheritance: Evidence from Multiple Generations," (working paper, July 26, 2016 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2831960). Bequests and gifts account for at least 50 percent of the parent-child wealth correlation, while earnings and education account for only 25 percent.

9 Lower levels of inequality are correlated with higher levels of relative intergenerational economic mobility. See Corak, "Income Inequality." However, this is less true when changes in inequality occur just in the upper tail of the economic distribution. See Raj Chetty, et al., "Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility," National Bureau of Economic Research Working Paper No. 19844 (2014): 11. This implies that, in order to improve relative economic mobility, more progressive taxes need not just to raise revenue from the wealthiest but also increase income after taxes and transfers for low- and middle-income households.

10 If it is saved, the earnings on those savings will be taxed, but not the amount inherited.

11 For 2016, the differential would be even larger because of cuts to the estate tax, the expiration of the high-income Bush tax cuts, and the tax increases on high-income households in the Affordable Care Act. Other income tax cuts (such as expansions to tax credits for low- and middle-income families) would partially but not fully offset these increased income taxes on the wealthy since 2009.

12 As explained below, more progressive income and payroll taxes could address this inequity if broadened to repeal exemptions specifically for inheritances.

13 "As a first approximation, it would make more sense to distribute the burden of the tax to the estate's beneficiaries rather than to the decedent." N. Gregory Mankiw, Remarks, National Bureau of Economic Research Tax Policy and the Economy Meeting from Council of Economic Advisers (Nov. 4, 2003) http://scholar.harvard.edu/files/mankiw/files/npc.pdf. For an explanation of why this is the case, see Lily L. Batchelder and Surachai Khitatrakun, "Dead or Alive: An Investigation of the Incidence of Estate Taxes and Inheritance Taxes" (working paper, 2008). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1134113

14 For a review of the empirical evidence on this issue, see Batchelder, "What Should Society Expect from Heirs," 41-44; Wojciech Kopczuk, "Taxation of Intergenerational Transfers and Wealth," chap. 6 in Handbook of Public Economics, vol. 5 (Amsterdam: Elsevier, 2013): 337-341.

15 See Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, "The Carnegie Conjecture: Some Empirical Evidence," Quarterly Journal of Economics108, no. 2 (May 1993): 413–35; Jeffrey R. Brown, Courtney C. Coile, and Scott J. Weisbenner, "The Effect of Inheritance Receipt on Retirement," Review of Economics and Statistics 92, no. 2 (2010): 425–434.

16 See Francisco Pérez-González, "Inherited Control and Firm Performance," American Economic Review 96, no.5 (2006): 1559–88. For more studies see Batchelder, "What Should Society Expect from Heirs," note 251.

17 The empirical evidence is far from conclusive on this point and, when comparing the efficiency of different tax bases, it is important to compare comparably progressive taxes. But to a provide a rough sense, a review of the literature the elasticity of taxable income with respect to the net-of-tax income tax rate concluded that "the best available estimates range from 0.12 to 0.40." Emmanuel Saez, Joel Slemrod, and Seth H. Giertz, "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature 50 (2012): 42. In contrast, a review of the literature on the elasticity of estates to the net-of-tax estate tax rate concluded "all these papers estimate a similar baseline elasticity of net worth/reported estate estimates with respect to the net-of-tax rate of between 0.1 and 0.2." Kopczuk, "Intergenerational Transfers," 365. Several caveats are in order. These elasticities include avoidance responses as well as real behavioral changes. They are not strictly apples-to-apples because one is a stock and one is a flow. The taxable income elasticities include both capital and labor income and are not limited to the top of the income distribution. Nevertheless, they suggest that, as a first pass, wealth transfer taxes may be more efficient than comparably progressive income and wealth taxes. All of this is not to say that income taxes on high earners are as inefficient as some believe. Indeed, Saez et al., conclude in their review that "there is no compelling evidence to date of real economic responses to tax rates… at the top of the income distribution." Saez, Slemrod, and Giertz, "Elasticity of Taxable Income," 42.

18 There is also a "generation-skipping" transfer tax on transfers to heirs who are two generations younger than the donor.

19 Joint Committee on Taxation, History, Present Law, and Analysis of the Federal Wealth Transfer Tax System (JCX–52–15), (March 16, 2015): 25, tbl.2. https://www.jct.gov/publications.html?func=startdown&id=4744

20 Joint Committee on Taxation, Description of Certain Revenue Provisions Contained in the President's Fiscal Year 2017 Budget Proposal (JCS-2-16), (July 21, 2016). https://www.jct.gov/publications.html?func=startdown&id=4936

21 Frank Sammartino et al., "An Analysis of Senator Bernie Sanders's Tax Proposals," (Tax Policy Center, March 4, 2016 http://www.taxpolicycenter.org/publications/analysis-senator-bernie-sanderss-tax-proposals). Specifically Senator Sanders's proposal would raise the estate tax rate to 50 percent for estates between $10 million and $50 million ($20 to $100 million per couple), to 55 percent for estates between $50 million and $500 million ($100 million and $1 billion per couple), and to 65 percent for estates to the extent they exceed $500 million ($1 billion per couple).

22 This assumes a top state income tax rate of 6.6 percent. Tax Policy Center, "Individual State Income Tax Rates 2000-2015," (February 16, 2015 http://www.taxpolicycenter.org/statistics/individual-state-income-tax-rates-2000-2015). Actual top state income tax rates range from 0 percent to 13.3 percent.

23 Batchelder, "What Should Society Expect from Heirs," 39–46, 50; Thomas Piketty and Emmanuel Saez, "A Theory of Optimal Inheritance Taxation," Econometrica 81, no. 5 (2013): 1851–86.

24 I have grossed up the exemptions in Batchelder, "What Should Society Expect from Heirs" for inflation, and the revenue estimates to account for the top income tax rate having risen from 35 percent to 39.6 percent since 2009 (estimates ignore FICA and SECA).

25 $2.1 million would produce inflation-adjusted annual income of about $102,000 to age 102, assuming a 5% real rate of return. The 60th percentile of household income was $72,000 in 2015 and the 80th percentile was $117,000. Bernadette D. Proctor, Jessica L. Semega, and Melissa A. Kollar, "Income and Poverty in the United States: 2015," (United States Census Bureau, September, 2016): 31, tbl. A-2. This example considers the expected, not guaranteed, consumption potential of such an heir. In order to guarantee income exceeding the 80th percentile household every year, the heir would need to purchase an annuity, which would presumably entail a lower rate of return.

26 Batchelder, "What Should Society Expect from Heirs," 76.

27 Batchelder and Khitatrakun, "Dead or Alive," 41, tbl.A14. 37% when lifetime exemption was $3.5 million.

28 Batchelder, "What Should Society Expect from Heirs," 117–18.

29 Ibid., 51.

30 For further discussion of this proposal, see David Kamin, "Taxing Capital: Paths to a Fairer and Broader U.S. Tax System," (Washington Center for Equitable Growth, August, 2016): 23–24; Laura E. Cunningham and Noël B. Cunningham, "Commentary: Realization of Gains Under the Comprehensive Inheritance Tax," Tax Law Review 63 (2009): 271–83.

31 Department of the Treasury, "General Explanations of the Administration's Fiscal Year 2017 Revenue Proposals," February 2016: 156. The proposal would also exempt all gains on the sale of tangible personal property, and would effectively establish a $500,000 per-couple exemption for gains on residences.

32 JCT, "President's FY 2017 Budget Proposal;" Kamin, "Taxing Capital," 23.

33 James Poterba and Scott Weisbenner, "The Distributional Burden of Taxing Estates and Unrealized Capital Gains at Death," in Rethinking Estate and Gift Taxation, ed. William G. Gale, James R. Hines Jr., and Joel Slemrod (Washington, D.C.: Brookings Institution Press, 2001): 439–40. Untaxed accrued gains compose 36% of the value of all bequests, but 56 percent of bequests over $10 million.

34 Executive Office of the President and U.S. Treasury Department, The President's Plan to Help Middle-Class and Working Families Get Ahead, (April, 2015): 35, https://www.whitehouse.gov/sites/default/files/docs/middle_class_and_working_families_tax_report.pdf. The distributional effects would be somewhat less concentrated if household pre-tax income was defined to include the portion of the gain accrued in the current year, rather than the full gain realized under the proposal—or if the burden of the tax was allocated to the heir(s).

35 Carryover basis currently applies to wealth transfers during life.

36 Congressional Budget Office, Budget Options (March, 2000): 311–12. This report estimated that replacing stepped-up basis with carryover basis would raise 61% of the revenue raised from repealing stepped-up basis.

37 JCT, "President's FY 2017 Budget Proposal."

38 See Estate, Gift, and Generation-Skipping Transfer Taxes, 81 Fed. Reg. 51413 (proposed August 4, 2016). For example, Sens. Rubio, Moran, and Flake have proposed legislation blocking the regulation. Protect Family Farms and Businesses Act, S. 3436, 114th Cong. (2016).

39 Unlike the estate tax, the gift tax applies to the after-tax transfer. For example, the gift tax is $40 on a pre-tax gift (above the lifetime exemption) of $140, for a tax rate of 29%.

40 For further potential base broadeners, see Paul L. Caron and James Repetti, "Revitalizing the Estate Tax: 5 Easy Pieces," Tax Notes 142, (2014): 1231–41.

41 David Cay Johnston, "Talk of Lost Farms Reflects Muddle of Estate Tax Debate," New York Times, April 8, 2001 http://www.nytimes.com/2001/04/08/us/talk-of-lost-farms-reflects-muddle-of-estate-tax-debate.html?_r=0; Michael J. Graetz and Ian Shapiro, Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth (Princeton, NJ: Princeton University Press, 2005): 32–40. According to the Tax Policy Center, only about 20 small business and farm estates owed any estate tax in 2013, and their average estate tax rate was 4.9%. Chye-Ching Huang and Brandon DeBot, "Ten Facts You Should Know About the Federal Estate Tax," (Center on Budget and Policy Priorities, March 23, 2015) http://www.cbpp.org/research/federal-tax/ten-facts-you-should-know-about-the-federal-estate-tax.

42 The Middle Class Tax Cut Act of 2010, S.A. 4727 to H.R. 4853, (proposed December 2, 2010). https://www.congress.gov/amendment/111th-congress/senate-amendment/4727/text

43 Joint Committee on Taxation, Estimated Budget Effects of the Revenue Provisions Contained in the Senate Amendment to H.R. 4853 (JCX-53-10), (December 2, 2010).https://www.jct.gov/publications.html?func=startdown&id=3713

44 Fewer than 0.3 percent of estates exceed $3.5 million. Tax Policy Center, "Baseline Estate Tax Returns; Current Law and Multiple Reform Proposals, 2011-2021," T11-0156 (June 1, 2011) http://www.taxpolicycenter.org/model-estimates/estate-tax-distribution/baseline-estate-tax-returns-current-law-and-multiple-reform. The inheritance tax proposal would similarly apply only to the most wealthy. Among those receiving a bequest, 99.1 percent inherit less than $1 million and 99.9 percent inherit less than $2.5 million. Batchelder, "What Should Society Expect from Heirs," 110, tbl. A1.

45 Chuck Marr, Chye-Ching Huang, Arloc Sherman, and Brandon DeBot, "EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children's Development, Research Finds," (Center on Budget and Policy Priorities, October 1, 2015) http://www.cbpp.org/sites/default/files/atoms/files/6-26-12tax.pdf; Executive Office of the President and U.S. Treasury Department, The President's Proposal to Expand the Earned Income Tax Credit, (March, 2014). https://www.whitehouse.gov/sites/default/files/docs/eitc_report_0.pdf






--
John Case
Harpers Ferry, WV
Sign UP HERE to get the Weekly Program Notes.