Monday, June 16, 2008

I am not favorably impressed by Paul Krugman's latest Op-Ed

Basically I think he doesn't recognise the genius of Barack Obama's fiscal proposals. It is almost odd as he presents the facts needed to make the argument that Barack Obama has found the antidote to Bush's poision pill and then refuses to make the inference which to me sounds obvious.

Roughly Krugman has two objections
1) Obama is not increasing the income tax enough and is using some of the increase in taxes on families making over $250,000 per year to pay $500 per individual $1,000 per family (to families which make up to $70,000 IIRC). This leaves too little money to pay for health care reform

2) Obama is proposing increasing the payroll tax on individuals who make over $250,000. This is not needed for Social Security so it shouldn't be done.

In other setting Krugman has objected that claims that a policy strengthens social security are tricks as we can't trust politicians with the trust fund which they treat just as if it were the general fund.

The three criticisms add up to exactly zero. Krugman complains that, under Obama's proposals there will be too little money in the general fund, too much money in the trust fund and, besides, there is, in practice no difference between the two.

I think that, given the facts, and, in particular the facts as presented by Krugman, it is obvious that Obama plans to use the payroll tax increase to pay for health care reform.

If Krugman is right that it is not needed for social security this is fine. If the social security system is really in crisis, the Obama would be making a mistake.

The thing which is actually weird is that Krugman suggests that Obama is too unwilling to break with Bush and his evidence is the two proposals to
take more money from people with individual wage and salary income over $250,000 year and to give a phased out sum to lower income households and individuals.

I don't see how anyone can perceive that pair of policies as Bushlike.

To me it seems clear that Obama is using the Republican's tricks against them (without by the way repeating their lies and misleading claims). the way to increase taxes without getting people angry is to say the increase is in FICA and will go to the trust fund (it worked for Reagan who is a famous tax cutter in spite of signing the largest tax increase in history into law). Then treat the trust fund as if it is the general fund.

This is an antidote to the poison pill. I think it is the only available antidote.
I don't see how anyone who is as smart as Krugman can fail to see what Obama is doing and why.

update: Over at economists view I wrote the above (and more) in a comment thread.

Bruce Webb criticized my reasoning.

Bruce Webb says...

"Paul Krugman's argument here is utter nonsense. He argues that Obama is too similar to Bush because, compared to Krugman, he wants to increase taxes on extremely rich people -- people whose individual wage and salary income is over $250,000 a year "

Waldman, "extremely rich people" do not draw most of their income from wages and salary to begin with, instead they draw it on returns on capital, returns which are not subject to FICA. To the extent we really see the extent of Obama's plan it looks to sock a particular small band of upper income wage workers, which as far as I can see would be the professional class, while giving the investor class a free pass. I don't see what is 'progressive' about handing the bill for universal health coverage to doctors and lawyers while giving hedge fund managers a free pass. The whole thing is loopy, it is not Krugman's argument that is "nonsense".

Not to mention that increasing the flow of tax through the Trust Fund simply provides a backdoor source of cheap borrowing for the General Fund with the additional benefit of masking General Fund deficits via the Unified Budget. Under Social Security's current financial system boosting the flow of funds does nothing for longterm solvency absent other changes in overall finance which don't seem to be on the table.

If we really want progressive taxation we need to do it on the income tax side and extend it to all income. Why would we focus on wages and not total income to start with?

I replied to Bruce Webb

We disagree about the definition of extremely rich. I consider anyone with income over $250,000 a year extremely rich. People with wage and salary income over $250,000 a year have total income over $250,000 a year. If they have zero capital income and no one else in their family has any income at all and the family is *still* in the top 2% of the income distribution. I call that "very rich".

I would have listed explanation 5 if I didn't think that Krugman is too smart to make such a mistake. Someone (not Krugman) might say that Obama is making a mess taking from the middle class (the payroll tax increase) and giving to the middle class (the income tax cuts). This pseudo-argument is based on the approximation that people in families which make under $ 70,000 are the same set of people as people who make over 250,000 not counting capital income all by themselves (the middle class) *and* on the additional assumption that a proportional tax and a poll tax are both "not progressive" and so about the same.

I don't consider people whose total family income is in the top 1% middle class. You are criticizing Obama because, although he is only taxing the very rich, among the very rich the burden isn't on the very richestest.

Also, by the way, you are either vastly overstating your claim of fact or using most to mean over 50%. As shown by a Piketty and Saez (warning huge spreadsheet 37% of the income of the richest 0.01 % of US tax units was wage and salary income in 2005. That is greater than the share of their income which is capital income (25.9%). It is almost exactly equal to the share of entrepreneurial income (37.1%). Entrepreneurial income. Much of entrepreneurial income is subject to FICA (clearly less of it will be once lawyers redefine to avoid the new payroll tax on the rich).

I don't at the moment see capital gains of the richest 0.01% so I will move down to the richest 0.1 %. Wage and salary income is about one third of their total income plus capital gains. Wage Salary and business income is about two thirds of their total income plus capital gains. Depending on FICA treatment of business income (and how it will change as they avoid paying FICA) the tax base for the increase in FICA is either one third or two thirds of the total income plus capital gains of the richest 0.1%. It is just not all all true that super duper ultra rich people wouldn't pay super duper immense amounts more given the FICA increase.

Now I can't say how avoidance will be attempted and prevented, but your objection to my objection to Krugman was stated in the present indicative, that is not what would be true in the future if the Obama plan were implemented but what is true now. You are right only if the actual distribution of business income into FICA and non FICA paying is extreme *and* means any fraction over 0.5.

Like the "middle class" equivocation a common gross error in thought (I am not speculating if anyone in that thread made that error) is the "most" equivocation. People sometimes argue that "most" is true of something using the over 0.5 definition then draw inferences from the "roughly 100%" re-definition. The implicit argument is that if 51% of something is x, then it is an OK approximation to assume that 100% of something is x in further calculations. Stated this way, it seems to be a crazy thing to do. It is a crazy thing to do. It is also done extremely frequently.

I keep going on and on

Robert Waldmann says...

More generally, I am not saying that Obama's proposal is perfect as policy (some compromises must be made to uhm you know win elections not to mention get bills through congress). I too would like a tax on personal income over 250,000 even more than extending FICA to FICA taxable income over 250,000.

I am certainly not saying that Obama will be able to make the USA a perfect place (guy who talked about health care mammoth). I am just saying that Krugman's criticisms of Obama's proposal cancel out, add up to nothing and refute each other.

Consider Krugman's implicit counter-proposal. Disclaimer: I do not say that Krugman is making this counter-proposal or that he would, just that a mechanical application of corrections corresponding to his criticisms would be as follows.

Criticism 1) eliminating Bush's cuts for families making over 250,000 a year is not enough of an income tax increase.

mechanically responding one would take more from families making less than $250,000.

Criticism 2) The Obama tax cut is not affordable

mechanically responding would be like imposing a tax increase compared to Obama's proposal which ismore regressive than a poll tax (because the tax cut phases out as income increases).

Criticism 3) extending FICA to individual FICA taxable income over $250,000 is a bad idea

Mechanically responding would mean taking less from families whose total income summed over all income recipients and over labor and capital income is over $250,000 (unless the other spouse has a loss making small business which manages to get total income under $250,000 that is except for a very very few families).

Thus Krugman says that Obama is trapped by Bush and makes criticisms such that, if one mechanically corrected Obama's alleged mistakes, one would liberate oneself from Bushism by taxing people who make less than $250,000 more and by taxing people who make more than $250,000 less.

This argument is simple arithmetic. It should not be controversial.

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