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    Sales Tax Decisions

    May 2 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 436 Views

    A buttered bagel is a sandwich but not an unsliced bagel–unless you eat it in the store. Subject to the New York State sandwich tax, so too are burritos, wraps, BLTs and buttered rolls. 

    Plan to buy fudge? You will pay a sales tax in New York. Chocolate for baking? No tax. Potato chips and plain nuts are also tax-free but not honey-roasted nuts.

    Other tax decisions? According to the WSJ, in the U.K., for example, as of April, 2010, “dog food for ‘sheepdog breeds’ is taxed, but dog food for ‘working sheep dogs of any breed’ is not; food for greyhounds is taxed, food for ‘racing greyhounds’ is not.”

    And, in the U.K., sailors’ lifejackets are taxed because they are defined as adult clothing but “buoyancy aids” are not taxed.

    The Economic Lesson

    In the U.S., the personal income tax and social insurance taxes together total close to 85% of all taxes collected by the U.S. government. Corporate income taxes are a distant third at 8% while federal sales taxes are 3%.

    An Economic Question: Who do you think bears the incidence (pays for) the NYS buttered bagel tax? The seller, the buyer or both?

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    Medicare Math

    May 1 • Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically • 472 Views

    The ratio is 3 to 1. The “3” is how much Medicare recipients are receiving. The “1” is what they paid.

    Still though, you can see from this NPR report why most people call Medicare an entitlement.

    According to a study from the Urban Institute, an average worker starting Medicare in 2010 paid close to $55,000 in Medicare taxes. That same person’s lifetime Medicare benefit (from age 65 until death) is projected to total $161,000. You can see here how taxes and benefits for Medicare and Social Security vary between 1960 and 2030.

    Rather similar to other pay-as-you go systems, taxes from current wage earners pay for current Medicare recipients. And therein lies the problem. Baby boomers, who far outnumber all other generations, have just started turning 65. Meanwhile, birth rates are falling and longevity is rising.

    Solutions? Higher taxes? Lower benefits? Cost control? Privatization? More borrowing through U.S. bond sales to China and Japan?

    The Economic Lesson

    During 1965, President Lyndon Johnson called Wilbur Mills, chairman of the House Ways and Means Committee, and said, “Wilbur, I’ve just been looking through the polls here, and I’ve only got a few weaknesses, and the worst of them is that I’m not doing anything for the old folks. I need some help from you.
    The result? Congress passes Medicare Parts A and B.

    An Economic Question: Which new incentives would you suggest for the Congress, for Medicare recipients, and for healthcare providers to solve the Medicare problem?


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    Doha Deadlock

    Apr 30 • Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance • 500 Views

    Can you convince a Lubbock, Texas cotton farmer (or his Congressman) to forgo his (maybe $150,000) cotton subsidy? Probably not. After all, these U.S. government payments let him profitably compete in world markets.

    Correspondingly, would China say yes to a tariff free supply chain for the iPhone? Doubtful. After all, multinationals are providing a steady government revenue stream.

    Through the Doha (Qatar) Round of talks, 153 countries are negotiating hundreds of trade-related issues. The sponsor, the World Trade Organization (WTO), is concerned that the Doha Round could fail.

    So, instead of trying to get the US to eliminate payments to US farmers or to ask China to agree to lower tariffs, Plan B has been proposed. The new focus involves a basic trade infrastructure that includes road building in developing nations and sanitary standards.

    The Economic Lesson

    As Professor Timothy Taylor tells us, the World Trade Organization (previously known as GATT), has been immensely successful in lowering trade barriers. Since 1948, through 8 rounds of trade talks, they gradually achieved their goals.

    Now though, the Doha Round of talks has met resistance. Scheduled to conclude no later than January 1, 2005 and still continuing, the Doha goal of reducing agricultural tariffs and subsidies has been unsuccessful.

    What to do when you no longer have “low hanging fruit?” Look for different trees.

    An Economic Question: With “encourage comparative advantage and world trade” located at one side of a scale and “protect home industry” as the other end, what do you prefer?


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    Putin’s Economics

    Apr 29 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Thinking Economically • 470 Views

    Our story begins during February when Russian Prime Minister Putin decided to freeze gasoline prices. Oil companies had a predictable response.

    They left.

    Following the money, they redirected their supply to higher prices elsewhere. The result? Russian gasoline exports were 40% higher than last year at the same time.

    A second result? The Russians (almost) ran dry.

    So now, the Prime Minister is banning exports during May for “high octane petrol sold at the highest prices.” Also, he is upping export duties and cutting local sales taxes.

    The Economic Lesson

    Demand and supply graphs continue the story. With price our Y-axis and quantity the X-axis, draw an “X” as the lines on your graph. The downward sloping line is demand and the upward sloping line is supply. Next draw a horizontal line below equilibrium, the point where the demand and supply lines meet. This line, called a ceiling (because it stops prices from rising), illustrates why we get a shortage. The distance between the point that the ceiling crosses supply and the point that the ceiling crosses demand represents the size of the shortage. A shortage is precisely what Mr. Putin created.

    Now with export taxes, he is making supply more expensive. Then, typically, the supply curve shifts to the left and upward. And producers decide to supply less.

    An Economic Question: The Prime Minister’s goal is to make consumers happy. Will he be successful? Hint: Think about price and quantity.

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    Health and GDP

    Apr 28 • Developing Economies, Economic Debates, Economic History, Economic Thinkers, Households, Innovation, Labor, Macroeconomic Measurement • 463 Views

    We are taller, healthier, heavier, and living longer. In 1790, a typical Frenchman weighed 110 pounds. Now, the scale says 170. That 60-pound difference relates to a lot more than food.

    According to a new book from Nobel prize winning economist Robert Fogel and several colleagues, since 1700, as one generation became healthier and stronger, so too were their children. As the authors explain in their first chapter, “…increased health and longevity enable the members of that next generation to work harder and longer and to create the resources which can then, in their turn, be used to assist the next, and succeeding, generations to prosper.” (p. 2 in an Amazon preview)

    Connecting what we look like to what we have achieved is a fascinating thesis. Simple and yet complex, the book talks about height and weight and food and productivity, economics, biology, and technology. The NY Times tells us that it presents a wealth of data, potentially controversial conclusions, and implications for foreign aid. The Changing Body: Health, Nutrition, and Human Development in the Western World Since 1700 will be available during May. 

    The Economic Lesson

    Called anthropometric history, the history of human height has become an economic field of study. Economists use height data to form hypotheses about GDP.

    An Economic Question: During the 1930s, a typical life span was close to 60 years. Now, many of us will approach 80 and beyond. A result and a cause of increasing longevity, GDP positively interacted with better health. Now though, with baby boomers living longer, will our GDP growth diminish?

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