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    An Optional Income Tax

    May 18 • Economic Debates, Government, Households, Innovation, Macroeconomic Measurement • 509 Views

    What if you could decide whether to pay an income tax?

    Boston University economist Laurence Kotlikoff has a plan that gives us a choice. His basic message, though, is that Congress had better start to think creatively because our current system is “dysfunctional.” With a new approach, we can create better incentives.

    Hoping to prove that neither liberal nor conservative ideas will work, he starts by explaining why an income tax and a sales tax are similar. Both affect our purchasing power and purchasing decisions. One just happens beforehand because it limits what we can spend while the other is after because it makes purchases more expensive. You can read his 3 billion steak example (!) here.

    He calls his plan the purple tax because it combines a red state philosophy (with revenue primarily coming from a sales tax instead of an income tax) and a blue state approach (dependence on an income tax for most revenue). Red + Blue = Purple. The purple tax plan lets people decide whether they want to pay a sales tax or a “wealth” tax. You can see the details here.

    The Economic Lesson

    Sometimes, when you look at something different, you can better judge something that is familiar. By considering the purple tax, you can see our current tax system as just an alternative approach.

    The most typical tax approaches include revenue coming from individual income, corporate income, and the VAT. Smaller categories are estate taxes, capital gains, sales taxes, and tariffs.

    An Economic Question: The proposal for the purple tax plan says that it will “help the economy save, grow, produce jobs, and deliver high wages.” After looking at a summary here or the plan here, decide whether you agree.

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    Bailout Fatigue

    May 17 • Demand, Supply, and Markets, Economic Debates, Economic History, Economic Thinkers, Financial Markets, Government, International Trade and Finance • 355 Views

    Yesterday, in a 94-0 vote, the U.S. Senate said it had bailout fatigue. No, they were not referring to Fannie Mae or General Motors. They meant Greece.

    This is the connection:

    By selling government securities, Greece had borrowed money to fund massive spending. When it appeared that Greece might not pay back the money they borrowed, they received bailout money.

    Here the U.S. enters the picture. Approximately 2/3 of the Greek bailout money came from the European Union and 1/3 from the International Monetary Fund (IMF). As a leading member of the IMF, U.S. money is a part of the $40 billion that so far has been allocated to the Greek bailout

    This takes me to 2 questions:

    1. How much money is involved? This 2009 congressional research document indicates the outlay is very small although a larger loan guarantee to the IMF could be involved.

    2. If one purpose of the IMF is to preserve financial stability, wouldn’t nations with troubled finances most need their help? 

    The Economic Lesson

    At the Bretton Woods (New Hampshire) Conference, in 1944, as World War II was ending, the IMF was proposed. The next year, it was established. With 29 original members, the IMF’s basic goal was worldwide financial stability and cooperation. During 1947, France was the first country to borrow from the IMF. (John Maynard Keynes attended the Bretton Woods Conference.)

    An Economic Question: Explain why you support or oppose the Senate vote.

     

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    Looking at the Debt Ceiling

    May 16 • Government, Households • 304 Views

    Today, at this moment, we might be hitting the debt ceiling.

    During the past 11 years, Congress has voted to raise the debt ceiling 10 times. In 2000, the ceiling was approximately $6 trillion; in 2011, it was just above $14 trillion. The whole story is here, in a congressional research report.

    Now, Congress has to vote again. But first, they have to decide if and how spending cuts will relate to a debt ceiling agreement. House Speaker John Boehner has proposed at least $2 trillion in cuts that would be “achieved on a time frame no longer than the life of the debt-limit increase.”

    What is $2 trillion? Divided equally among everyone in the U.S., it is approximately $6,666.66. (Where Does the Money Go? Your Guided Tour to the Federal Budget Crisis, p. 46).

    The Economic Lesson

    In terms of the federal budget, this excellent Washington Post federal budget interactive chart gives us some idea of what $2 trillion means. Total annual spending is $3.7 trillion. $2 trillion would be close to 2 1/2 times what we spend annually on Social Security ($770 billion a year) or 25 times the international affairs budget ($75 billion a year). For other spending categories, you can look here.

    An Economic Question: Citing revenue and spending, explain why the debt ceiling had to be increased 3 times between 2008 and 2009. (Hint: the recession).

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    Creative Incentives

    May 15 • Businesses, Demand, Supply, and Markets, Innovation • 456 Views

    In his New Yorker Magazine article on creativity, Malcolm Gladwell describes Mick Jagger, the musician, and Gary Starkweather, an optical engineer, as gentlemen who pour out countless ideas and develop an endless stream of products. For Jagger, the product is his music while one of Starkweather’s ideas became the laser printer.

    Gladwell points out, though, that for creativity to work, it also needs discipline. He suggests that for Jagger, Keith Richards provided the discipline. For Starkweather, Xerox was a source of constraint. 

    Gladwell’s insight? As demonstrated by this slideshow about the mouse, sometimes a good idea has to unfold through many years, multiple places and different people to evolve into something useful and affordable.

    The Economic Lesson

    Americans tend to be risky consumers. We used electric power in our homes before it was entirely safe, we bought the first computers, we drove millions of cars before they were perfected. Explained by James Surowiecki in the New Yorker, because we are willing to buy new products, businesses have the incentive to be creative.

    In our economic tool kit, incentives belong at the top.

    An Economic Question: Remembering that profits are an important incentive for business firms, why might they have the incentive to control and encourage creativity?

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    A Medicare Check-up

    May 14 • Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically • 395 Views

    We could say that Medicare is currently a bit ill and the prognosis is not good. Last year it received some “medicine” through the Affordable Health Care Act but its caretakers, the Medicare trustees, question whether the treatment will work.

    Submitted to Congress yesterday, here is the 2011 annual report from the Medicare trustees.

    A Washington Post article explains what all of this means.

    1. Passed during 1965, Medicare is a “federally administered health insurance program authorized… to cover the cost of hospitalization, and some related services, for most people over age 65.” (p. 249)

    2. Funding for Medicare comes from a payroll tax of 2.9% of our paychecks. Before the end of 1993, maximum earnings of $135,000 were taxable. In order to increase Medicare’s revenue, on January 1, 1994, the cap was removed.

    3. Medicare needed more revenue because of the baby boomers. The extra money would be needed when the baby boomers swamped the system.

    4. The baby boomers, who just started turning 65 this year, represent a surge in the population. Born after World War II until the mid-1960s, their numbers far exceed any other demographic group. And that is the problem.

    5. This year according to the annual report from the Medicare trustees who oversee its finances, more money was spent than received in Medicare taxes. Consequently, they had to dig into the Medicare trust fund. Since 2008, they needed trust fund money and project continuing to need it until 2024 when it will have nothing left.

    The Economic Lesson

    Totaling close to $272 billion, the Medicare trust fund is composed of U.S. treasury securities. In 2010, they had to redeem $32.3 billion in securities “to cover the shortfall of income relative to expenditures.” (p.4) The shortfall related to less tax revenue because of the recession and rising medical costs.

    An Economic Question: Economists usually say that we tend to think at the margin. Rather than all or nothing, usually, we do a little bit more or a little bit less. Where? At the margin. For Medicare everywhere we look, we see concern at the margin. Explain why older Americans, younger Americans, physicians, drug companies and Congress each have a different concern at the margin.

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