How to Really Wreck the Economy

Robert Barro

Dr. Robert J. Barro's prescription for "How to Really Save the Economy" would save it for only 20% of the people, if that many. His standard for a good idea is: if it benefits persons with annual incomes exceeding 2 million dollars, then it's a good idea.


Where Dr. Barro's prescription breaks down is in the definition of what is an economy. If an economy is the thing that produces GDP, and if a growing GDP is a saved economy, then Dr. Barro's prescription may well grow the economy by increasing the incomes of the very wealthy. If the incomes of the wealthy increase fast enough, then the people with incomes less than $2 million can have their incomes stagnate or even decline a bit, because the GDP will still grow, and by this definition the economy will have been saved.


But if the definition of an economy is the engine of production and distribution by which all persons obtain the goods and services they need, then Dr. Barro's prescription is for "How to Really Wreck the Economy", because the poorer 80% of the people would not benefit from his prescription, and many of them would be worse off.


Dr. Barro is wrong or partially wrong on all six counts:



1. Increasing the ages of eligibility for Social Security and Medicare.
This would enable workers to spend more of their lives working without necessarily increasing their lifetime incomes. For persons with incomes greater than $2 million per year, few of whom have to work in any case, Social Security and Medicare are trivial sources of income.


2. Phase-out deductions for mortgage interest rates, state & local taxes, and employer expenses for health care.
Without deductibility of employee's health expenses, most businesses will discontinue health care benefits. Since 20% of the income of the very wealthy comes from businesses, this helps the wealthy. But it increases the burden of health care costs for the employees of the business. Medical costs are a trivial part of the incomes of the very wealthy. Also, for people who have three or four houses, and for people who can pay cash for a house, the mortgage interest deduction has no value.


3. Lower marginal income tax rate for individuals.
If the marginal rate drops below 25%, then capital gains and dividend income will be taxed at zero percent, according to the tax law on these kinds of income. Since 60% of the income of the very wealthy comes from investment income, this benefits the wealthy who pay a 15% rate on capital gains and dividends under current law. The wealthy have had lower marginal rates for the last ten years, and the lower rate hasn't saved the economy yet, so it's hardly evident that lowering marginal rates will save the economy. Also, labor will still be taxed at non-zero rates.


4. Reverse the excessive spending practices of the Bush & Obama administrations.
The excessive spending in the Bush years for the subsidy of war profiteers and pharmaceutical companies was prolific, unwise and unnecessary. The deficit spending in the Obama years is for Keynesian sustenance of the workers. Even Keynes didn't expect that deficit spending would do more than halt the decline until business people felt confident of undertaking new ventures. The Obama expenditures keep the hull of the lifeboat intact. Obama proposes spending on public schools. But then, what is the future of the public schools in America to a person whose children attend private schools in Switzerland? Obama proposes extending unemployment compensation. And unemployment compensation is a trivial component in the incomes of the very wealthy.


5. VAT.
Dr. Barro would impose a nationwide Value-Added-Tax, increasing the cost of milk and shoes and gasoline for a family that hasn't enough money to buy gasoline to make the drive to work and shoes for the 7-yr old who has outgrown her old pair and milk for the baby. But wealthy people don't face decisions like this, since the cost of food and shoes and gasoline is a very small part of their incomes. In fact, any expenditure to which VAT would apply is but a small part of the incomes of the very wealthy, since most of their incomes is invested. VAT would take a significant part of the incomes of the poor, and a trivial part of the incomes of the very wealthy.


6. Abolishing corporate & estate taxes.
Estate taxes apply only to the estates of a few very wealthy people, and once the deceased's estate has suffered the tax haircut, there remains what 80% of the population would describe as a very substantial piece of wealth. Abolishing the corporate income tax would allow the wealthiest people to have their lawyers and accountants reconfigure their income streams to flow through their personal corporations. It's only a matter of paperwork. For 80% of the population, to continue their income as a corporation instead of as a human, they would have to forgo such protections as labor laws afford, provided they could persuade their employer to go along with the deal, even for a reduced level of income. For most workers, the opportunity to receive their income through their corporation simply won't exist in any practical way. So reducing the corporate income tax to zero gives the wealthiest persons a way to reduce their personal income tax to zero, with little or no benefit for the workers.




Sources:


Robert J. Barro, How to Really Save the Economy, New York Times (September 11, 2011)
http://www.nytimes.com/2011/09/11/opinion/sunday/how-to-really-save-the-economy.html


Keynes, J. M., The World's Economic Outlook, The Atlantic (May 1932, downloaded August 27, 2011) http://www.theatlantic.com/past/docs/unbound/flashbks/budget/keynesf.htm


Internal Revenue Service, Publication 17 (2010), Your Federal Income Tax, 8. Dividends and Other Distributions, Qualified dividends, http://www.irs.gov/publications/p17/ch08.html#en_US_2010_publink1000171584


Internal Revenue Service, Publication 17 (2010), Your Federal Income Tax, 16. Reporting Gains and Losses, Capital gain tax rates,
http://www.irs.gov/publications/p17/ch16.html#en_US_2010_publink1000172517


Internal Revenue Service, Publication 17 (2010), Your Federal Income Tax, Publication 17 - Additional Material, 2010 Tax Computation Worksheet—Line 44,
http://www.irs.gov/publications/p17/ar02.html#en_US_2010_publink1000175003


Daniel Brockman, Share of Income (June 9, 2010), http://daniel-brockman.blogspot.com/2010/06/share-of-income.html


Daniel Brockman, Distribution of Income by Source in 2009 (August 21, 2011), http://daniel-brockman.blogspot.com/2011/08/distribution-of-income-from-investments.html