Kevin Drum - February 2013

Who Pays the Corporate Income Tax?

| Tue Feb. 19, 2013 3:42 PM PST

Who pays the corporate income tax? Corporations, obviously. That's like asking who's buried in Grant's tomb. One way or another, though, actual people have to ultimately pay the tax. Consumers pay it if companies respond to corporate taxes by raising the price of their products. Workers pay the tax if corporations respond by lowering wages. Shareholders pay the tax if it simply eats into profits and lowers share prices.

But which is it? Bruce Bartlett reports today that the March issue of the National Tax Journal has four articles that address this question. Here are the answers:

  • Article #1: Shareholders pay 100 percent.
  • Article #2: Shareholders pay 100 percent.
  • Article #3: Shareholders pay 40 percent, workers pay 60 percent.
  • Article #4: Shareholders pay 82 percent, workers pay 18 percent.

The old saw says that if you ask ten economists about something, you'll get 11 answers. By simple arithmetic, this suggests that if you ask four economists, you'll get 4.4 answers. But in this case we only got three. Not bad!

So what's the real answer? By using the blogger's expedient of simply averaging all the responses, it looks like shareholders end up paying 80 percent of the corporate income tax. That's probably close enough for water cooler arguments, anyway.

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Janet Yellen Explains Why Our Recovery Has Been So Weak

| Tue Feb. 19, 2013 12:32 PM PST

Ezra Klein points to an interesting speech last week from Janet Yellen, vice chair of the Federal Reserve. The question she's addressing is why our recovery from the 2008 recession has been so anemic, and the answer comes in the form of three "tailwinds." The first one is both the most important and the one that we have the greatest control over: fiscal stimulus.

History shows that fiscal policy often helps to support an economic recovery....For example, following the severe 1981-82 recession, discretionary fiscal policy contributed an average of about 1 percentage point per year to real GDP growth over the subsequent three years.

However, discretionary fiscal policy hasn't been much of a tailwind during this recovery. In the year following the end of the recession, discretionary fiscal policy at the federal, state, and local levels boosted growth at roughly the same pace as in past recoveries, as Exhibit 3 indicates. But instead of contributing to growth thereafter, discretionary fiscal policy this time has actually acted to restrain the recovery....Negotiations continue over the extent of spending cuts now due to take effect beginning in March, and I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past.

The full speech is here. Ezra has a nice summary here. The bottom line is simple: we're doing this to ourselves by actively implementing negative stimulus rather than positive stimulus. I still don't know whether this is the result of ignorance or deliberate malice—maybe it's both—but for the past four years we've been held hostage by ancient economic ideologies that should have died during the Great Depression. And we're continuing to pay the price.

Simpson-Bowles 2.0 and Its Sacred Cows

| Tue Feb. 19, 2013 11:45 AM PST

All morning I've been trying to decide whether I should care about the release of Simpson-Bowles 2.0. As you can guess from its name, this is yet another plan for deficit reduction from the folks who failed to get bipartisan agreement for their first plan.

So in one sense: who cares? Deficit reduction plans are a dime a dozen. There's really nothing special about releasing a fact sheet with a bunch of numbers that add up to some other number. Anyone can do that.

On the other hand: for some reason, Simpson and Bowles get more media attention for their deficit reduction plans than most other people. So I guess we have to take it seriously whether we want to or not.

So far, though, that's not really possible. There's literally no detail in the summary they released today, so there's nothing much to praise or complain about. I'm happy to see them agree that deficit reduction should be done slowly. I'm happy to see them agree that low-income workers and retirees should be protected from benefit cuts. I'm happy to see them agree that the federal tax code should remain at least as progressive as it is now. I'm happy to see them focus on healthcare costs, which really are the driver of most of our future budget problems. And I'm happy to see them name check farm subsidies and highway funding. But without details, it's impossible to say anything further.

Except for one wee thing. Ezra Klein, bless his heart, managed to figure out the ratio of spending cuts to tax increases (it's buried on page 3, in the phrase "and another quarter from tax reform") and then compare it to Simpson-Bowles 1.0. And guess what? Despite their brave talk about both sides needing to "put their sacred cows on the table," they've apparently decided that conservatives should put a whole lot fewer of their sacred cows on the table than they suggested in their first plan. The chart on the right tells the story. In SB 1.0, deficit reduction was moderately evenly divided between spending cuts and tax increases. In SB 2.0, they've suddenly decided it should be 75 percent spending cuts. That's despite the fact that spending cuts have already been 75 percent of the deficit reduction we've done so far.

Why? Beats me. I guess they figure that conservative sacred cows are a little more sacred than liberal ones. Or something. But even if you take deficit reduction seriously in the first place, this sure makes it hard to take Simpson-Bowles 2.0 seriously as a plan.

UPDATE: Ezra made a correction to the chart, so I've updated the post to reflect that. The new chart shows the spending cuts in SB 1.0 more accurately. When you account for interest savings, they amount to $3.8 trillion, not $2.9 trillion.

Quote of the Day: Not Even Wrong

| Tue Feb. 19, 2013 10:52 AM PST

From Mike Konczal, via Twitter:

This statement is not clear enough to be wrong.

The topic at hand appears to be something about the EITC and the demand for low-skill labor. I'm not entirely sure, actually. Nonetheless, it seems like a valuable phrase to keep in mind for future arguments.

Coming Attractions Are Now a Honeypot of Extra Money

| Tue Feb. 19, 2013 10:38 AM PST

Among other things, here's one reason why I see fewer movies than I used to:

As they rose in value, the total number of trailers shown before a movie started going up. Three or four was the norm a decade ago. Regal and AMC theaters now run six or seven before every feature.

Turns out this is mostly because big theater chains now get paid for running trailers, so more trailers = bigger profits. I did not know that.

Obama, DC Press Corps Locked in Mutual Loathing Pact

| Tue Feb. 19, 2013 10:30 AM PST

Over at Politico today, Jim VandeHei and Mike Allen have a long piece about press corps unhappiness with their access to President Obama. Their timing is unfortunate, coming just a day after the press corps embarrassed itself by coming completely unglued over....

....their lack of access to Obama's golf date this weekend with Tiger Woods. Seriously:

The frustrated Obama press corps neared rebellion this past holiday weekend when reporters and photographers were not even allowed onto the Floridian National Golf Club, where Obama was golfing. That breached the tradition of the pool “holding” in the clubhouse and often covering — and even questioning — the president on the first and last holes.

Yep. They "neared rebellion" not over OLC memos or drone strikes or FOIA tardiness or leak prosecutions, but over their inability to ask Obama questions—tough ones! penetrating ones!—before and after he hit the links. Sheesh.

I wish I knew what to think about this. Does Obama keep a very, very tight rein on press coverage? Yes, he sure seems to. In fact, every president seems to keep a slightly tighter grip on the reins than the previous one. I'm not very happy about that.

At the same time, the reporters interviewed for this piece seem to be weirdly upset over the fact that the Obama White House uses Twitter and Facebook and releases lots of its own photos. But why is this a problem? It's 2013, guys. Why shouldn't a president communicate with the public using whatever mediums the public happens to consume? Over the past century, that's evolved from whistle-stop tours to radio to TV to Facebook, but so what? Why should reporters be unhappy about this?

They also complain that although the president gives lots of interviews (674 in his first term compared with 217 for George Bush), they're mostly with local outlets, not with the national reporters "who are often most likely to ask tough, unpredictable questions." I'd have more sympathy for this if national reporters really did ask lots of tough, unpredictable questions, but I'm afraid I'm mostly on Obama's side on this one:

The president’s staff often finds Washington reporters whiny, needy and too enamored with trivial matters or their own self-importance....Obama and his team, especially newly promoted senior adviser Dan Pfeiffer, often bemoan the media’s endless chase of superficial and distracting storylines.

For evidence of how true this is, check out John Cook's serial tweeting of every inane question that Mike Allen lobbed at President Bush during a May 2008 interview. Start here and work your way down. It's not a pretty sight.

What to think? I'd like the president of the United States to make himself more available for tough questioning on a routine basis. However, I'd also like a national press corps that pays enough attention to policy that it can ask tough questions and then keep drilling down when they're getting brushed off. But most of them don't. They ask predictable questions based on whatever the opposition party happens to be kvetching about at the moment, and that represents the limit of what they can do. I'm pretty sure you could give Mike Allen a ten-hour interview with the president and he still wouldn't be able to nail him down on a tough policy question of any importance. He either doesn't care, doesn't have the background knowledge to do it, or both.

What to do? Obama is right: the DC press corps is hardly worth engaging with on subjects of any substance. But the DC press corps is also right: he should make himself available anyway. If reporters don't lay a glove on him, that's their problem, not his.

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The Odd Case of Liability and Small Airplanes

| Tue Feb. 19, 2013 8:49 AM PST

Back in 1994, Congress passed the General Aviation Revitalization Act. Under this law, small airplane manufacturers were no longer liable for accidents in planes more than 18 years old. So how did that affect the behavior of pilots? Alex Tabarrok has a new paper out that looks into this:

Our estimates show that the end of manufacturers’ liability for aircraft was associated with a significant (on the order of 13.6 percent) reduction in the probability of an accident. The evidence suggests that modest decreases in the amount and nature of flying were largely responsible. After GARA, for example, aircraft owners and pilots retired older aircraft, took fewer night flights, and invested more in a variety of safety procedures and precautions, such as wearing seat belts and filing flight plans. Minor and major accidents not involving mechanical failure—those more likely to be under the control of the pilot—declined notably.After GARA, for example, aircraft owners and pilots retired older aircraft, took fewer night flights, and invested more in a variety of safety procedures and precautions, such as wearing seat belts and filing flight plans. Minor and major accidents not involving mechanical failure—those more likely to be under the control of the pilot—declined notably.

I don't know anything about this, and I'm not qualified to judge the paper. But if it's correct, it sure does suggest a counterintuitive view of human nature. At one level, the obvious response is: Hey, incentives matter! Make pilots responsible for their own behavior, and they become more careful. What's so counterintuitive about that? But at a deeper level, think about what this implies. We're supposed to believe that once the ability to sue over an (extremely unlikely) accident was taken away, pilots actively decided to fly less, wear seat belts more, and replace their old equipment. Really? The prospect of dying didn't do the trick, but the prospect of not being able to sue did? This really doesn't fit my mental model of human behavior. That's especially true given this comment from Alistair Cunningham:

If you look back at the lawsuits that did take place, they were rarely pilots suing, they were the families of deceased pilots egged on by what almost every pilot I’ve ever met would consider as parasitic lawyers. They tended to be awarded large payouts by sympathetic juries who saw only a poor grieving family and a rich distant corporation, and who didn’t understand that the overwhelming majority of general aviation accidents are the pilot’s fault.

If that's the case, then liability would be expected to have no effect at all on pilots themselves.

I'm not really trying to take sides here. Like I said, I'm not qualified to judge the paper (which I haven't read). But I would say that if this conclusion holds up, we should see similar behavior in lots of other areas, with legislative changes that affect remote consequences having significant and measurable effects on immediate behavior. Do we?

Privately Run Medicare Plans are Really Expensive

| Mon Feb. 18, 2013 10:20 PM PST

Austin Frakt draws my attention today to a new article about the administrative costs of Medicare. Exciting stuff! Long story short, Kip Sullivan of the Minnesota chapter of Physicians for a National Health Program wants everyone to understand just what's involved in figuring out the true administrative costs of Medicare. The cost of collecting payroll taxes is one frequently overlooked element, for example. More interestingly, though, there's a large and growing gap between the overhead calculations of the Medicare Trustees and those of the National Health Expenditure Accounts. Why is that?

According to Sullivan, the Treasury’s calculation of administrative costs does not include those incurred by Medicare Advantage and private, Part D (drug) plans....The trustees’ and NHEA measures were fairly close until the 1980s. Then they diverged as enrollment grew in Medicare Advantage and its predecessor programs. In 2006, Part D drug plans became available and the two types of administrative costs diverged further still. As traditional Medicare’s administrative costs went down, those of private plans grew.

The chart below shows what happened. When Medicare was run traditionally, overhead was fairly low and getting lower (dashed blue line). Then private plans were introduced and total overhead costs started to flatten (black line). By 1997, total overhead was about 1.4 percentage points higher than traditional Medicare alone. In that year, Medicare Advantage was introduced, and by 2005 the gap had widened to 2.1 percentage points. Then privately run prescription drug plans were introduced, and now the gap is 4.5 percentage points.

In the case of prescription drugs, it's possible that higher overhead is justified by the lower overall program costs we get from having a lot of competing plans. In the case of Medicare Advantage, it's just pure waste. We have higher overhead and higher overall costs, with very little benefit to show for it. As Sullivan says, this should "long ago have triggered inquiries within Congress and the US health policy community as to whether the higher administrative costs associated with the growing privatization of Medicare are justified."

Software Patents: A Test Run for Bipartisan Cooperation?

| Mon Feb. 18, 2013 3:09 PM PST

Ramesh Ponnuru writes in the New York Times today that Republicans need to stop idolizing Ronald Reagan's policies, which were great in the 80s but no longer address the problems we face now. The truth is that income tax rates are low enough already and the Fed has inflation well under control. Today we have to deal with growing income inequality and rising healthcare costs. The answer, Ponnuru suggests, can be found in things like lower payroll taxes, child tax credits, reforming the tax subsidy for employer health insurance, and adopting NGDP level targeting at the Fed. And this:

The Republican economic program of the 1980s also fought against government-imposed restrictions on economic activity: decontrolling energy prices, for example. Today we should target different restrictions. Software patents have become a source of unproductive litigation that entrenches large tech companies and inhibits creativity. Republicans shouldn’t support those patents. Economic growth has to trump corporate executives’ campaign donations.

As usual, when the subject is anything other than abortion, Ponnuru makes some sharp points. Most of them, however, the Republican Party isn't really ready to hear yet. But what about that last one? There are, obviously, some powerful corporate interests who really don't want to see us make changes to our intellectual property regime. And I suppose that dooms any effort at patent reform. Still, this is something that a lot of liberals would like to see happen, and as Ponnuru points out, it's also a good fit for a party that wants to see less economic regulation and more entrepreneurship. Surely there ought to be at least some chance of a bipartisan effort here?

For what it's worth, it's also something that lends itself fairly well to talk radio mockery. They patented a button? Rounded corners? WTF? It seems like there are some real possibilities there for anyone of either party who's more interested in getting something useful done than in scoring partisan points. I'm not sure how many of those we have these days, but surely at least a few?

John McCain Goes All-In on Benghazi "Cover-Up"

| Mon Feb. 18, 2013 8:55 AM PST

Hoo boy, has John McCain lost it. Yesterday, on Meet the Press, he blathered on for a while about all the unanswered questions he supposedly has regarding Benghazi—most of which have been answered, of course—and then accused President Obama of a "massive cover-up." David Gregory interrupted McCain and asked the question that regular readers know has also been nagging at me from the start: "What is the cover-up? Of what?" Here's McCain's McCarthy-esque spluttering when Gregory challenged him:

Do you care....do you care, David....do you care, David....do you care....I'm asking you, do you care....I'm asking you, do you care whether four Americans died?

....You said there's a cover-up. A cover-up of what? A cover up of what?

Of the information concerning the deaths of four brave Americans.

So that's that. When he's challenged about the ridiculous cover-up charge, which has never made sense from the start, McCain's answer is to accuse Gregory of not caring about the deaths of four brave Americans. Welcome to the modern Republican Party.