it was a fairly slow week for economic news, with the two major monthly releases, consumer prices & the trade defict, both showing moderation…and half the country’s economists were in Berlin at the INET shindig thrown by george soros, so there werent even the normal number of blog posts arguing about how many angels they could fit on the head of a pin, either…being that it was the second week in april there were quite a number of posts critical of our demented tax system, and likely not coincidentally, obama went on the campaign trail to tout his proposed “buffett rule”…so since we’re getting into the season where there’s more hot air than substance, maybe we ought to take a look at exactly what that buffett rule tax proposal is really about…you may recall that the idea for such a “millionaire’s tax” originated with its namesake, when warren buffett complained in an op-ed that those as rich as he dont pay their fair share, that under our existing tax structure, warren buffett was actually paying taxes at a lower rate than his secretary; this is, as you probably know, because capital gains are only taxed at 15%, whereas the top rate for earned income is 35%…as it’s often reported, the buffett rule would set a 30% minimum tax for those earning more than $1 million; but that’s really not quite the way it’s written in the bill that’s to go before congress next week; there is actually a phase in for amounts over a million, such that, for example, someone making $1,000,010 during the first year of the bill’s enactment (2013), their tax on the $1 million annually would be the same as it was previously (less whatever deductions & loopholes were applied), and they’d only pay 30% on the $10 in excess of a million, ie, the buffett rule would raise their entire tax $3…so sure, a handful of the ultra rich such as buffett himself may be “paying their fair share” if this is enacted, but the lion’s share of the 1% will escape the “buffett rule” relatively unscathed…and as a source of revenue, to reduce those deficits the politicians think are important, it falls way short too; the buffett rule would generate less than $5 billion a year, or less than the cost of 3 stealth 
bombers…worse than that, according to plans laid out in Obama’s budget, the buffett rule would replace the alternate minimum tax, which has run as a parallel tax to the regular income tax to insure that those earning above a certain threshold (changes yearly) pay at least a minimun flat rate; a recent study by the nonpartisan Tax Policy Center shows that repealing the AMT would cost the government roughly $1.2 trillion in revenues over the next decade; so although obama’s plan does shift some of the burden from the moderately rich to the super-rich, it does so at a great cost to overall revenues, and likely whatever programs may fall to the budget cutters in the future…but it does make a good campaign speech…
obviously, if we’re going to tackle the disparity between what the government receives in tax revenue, and what they spend, we’re going to have to get if from something other than a “buffett rule”; the easiest & most obvious would be to let the bush tax cuts finally expire at the end of the year; the ongoing costs of the two tranches of bush tax cuts have been estimated at $135 billion & $35 billion, shown as the dark orange wedge on the adjacent chart, but neither party has been willing to incorporate allowing that into their fiscal platforms, and we’re now hearing warnings about the “fiscal cliff” we’re heading for at year end, as the combination of legislated spending cuts & expiring tax cuts suck $600 billion out of the economy as it heads into 2013, which suggests the push will be on to have the bush cuts extended…another often mentioned target of tax reformers is the excessive number of tax expenditures in the tax code, which include various credits, deductions, deferrals, exclusions, exemptions, and preferential rates, but are really a back door way of spending through the tax code; the mortgage interest deduction is the most often mentioned, but there’s dozens such, which amounted to $1.18 trillion in fiscal 2011 and around $1.3 trillion this year; another possible source of revenue would be to tax wall street speculation; such a financial-transaction tax would deter short term & high frequency trading & encourage longer term investing, & is not without precedence; a transaction tax was in effect during previous periods in our history before 1966, well before wall street was being run as a parasitic casino with no socially redeeming value; estimates are that a financial-transaction tax would raise more than $150 billion a year…
but there’s even a better way than raising taxes and cutting spending to get our fiscal house in order, and that’s to get everyone who wants to work back to work…we saw last week that only 58.5% of the population is now employed, compared with 64.6% of us at the peak early in the last decade; just getting back to full employment brings 10% more taxpayers on-stream, and eliminates a number of recession-related government costs, such as unemployment compensation… and if we combine that with raising the minimum wage to $10 (or $12, as james galbratih advocates), which will lift the pay of 28 million of us (who as we’ve seen cant even afford rent), and likely increase half as many working just above the new minimum whose pay will increase as employers adjust their overall pay scales, we’ll be increasing the pay, and hence the taxes paid, of another 15% of the workforce…obviously, 11 million new jobs dont appear overnight, so we must start with a federal job guarantee, which has been widely discussed & promoted by MMT & Minskyite economists; such as australian economist bill mitchell, and the economists at UMKC, who blog at new economic perspectives; Dr Randy Wray has an ongoing series of 45 blogposts there detailing such a program…although i’m not as well versed on the mechanics of it as i should be, we can think in terms of something analogous to FDR’s CCC as a starting point, getting work done that the country need done anyhow, such as infrastructure…once everyone’s working, a virtuous cycle brings the private sector back in to respond to the increased demand & the federal job program would wind down…& this isnt just a wild idea from a handful of fringe economists, either; even conservative economists brad delong & larry summers have recently collaborated on a paper showing that under current conditions, such expansionary fiscal policy would be self-financing; their paper was reviewed by economists at Brookings & they agreed with their math…and getting everyone back to work and contributing solves a number of other problems as well; if we raise the minimum wage (senator Tom Harkin of iowa, chairman of the labor committee, has already introduced a bill to raise it to $9.80) and return to full employment, both social security and medicare will stop drawing down their trust funds, as they will once again be funded entirely out of payroll cashflow; in addition, once the everyone working at a decent wage, young people will be able to move out of their parent’s basements, and those who’ve doubled up will again be in the market for housing, which will ultimately put a floor under falling real estate prices, and may even save the banks from having to mark those depressed loan assets to market…
as i mentioned in opening, the BLS released consumer price data for March this week; the consumer price index for urban consumers (CPI-U) increased 0.3% in March on a seasonally adjusted basis, with rising gasoline prices offsetting a decline in household energy prices leading to an 0.9% increase in the energy index; the food index rose 0.2%, led by price increases for meats, poultry, fish, and eggs…year over year headline CPI came in at 2.65%, and the year over year core-CPI (which excludes food & energy) increased 2.26%; this core inflation index was once more important, because it had been used by the Fed in setting monetary policy; however, early this year the Fed switched to using the the annual change in the price index for personal consumption expenditures as its inflation gauge, so this index is now more of interest to consumers…wholesale prices for march were also reported this week, & the producer price index also rose a seasonally adjusted 0.3% over last month’s reading; one third of the increase was attributed to prices for light motor trucks; increased prices for soaps & detergents were also mentioned in the release as driving wholesale prices…the Dept of Commerce also reported the trade deficit for february; exports of $181.2 billion and imports of $227.2 billion resulted in a deficit of $46.0 billion, down from $52.5 billion in january, which was below economists expectations; the decline in imports was a combination of less oil imports and less imports from China, as oil averaged $103.63 per barrel, down a tad from january’s $103.81…oil import costs have already been reported to have increased 4.3% in March, so we’re likely to see this trade deficit increase again with the next report…also of note this week, freddie mac reported that the 15 year fixed rate mortgage set a new all-time record low of 3.11%, and the 30 year fixed-rate mortgage came close to a record with an average of 3.88%…interesting, because just a couple weeks ago, after interest rates on long treasuries had risen weekly for about a month, we saw all the inflation & debt bears come out of the woodwork with their typical “they’re going to the sky & we’re all gonna die” posts…
the final returns on our March heatwave came in this week, and needless to say, it was the warmest March in US recorded history, and smashed a plethora of other records as well; over 15,000 high temperature records were set, with 7,755 record high day temps and 7,517 record high overnight lows; at 21 weather stations, the overnight low topped the previous daytime high for the date & location, & high temperature records for the entire country outnumbered lows for the month 35 to 1…NOAA has a day by day animation showing how & where the records were set… temperatures for the month averaged 8.6F degrees above normal over the entire country; in 118 years of weather record keeping, only january 2006 had a greater departure from normal…the 25 states you see in red on the adjacent map from NOAA all set new 118 year high records, additionally, the states on the map indicated in orange had monthly temperatures ranking among their 10 warmest in that 118 year national record; only the three west coast states did not experience a warmer than normal march, with washington alone recording below normal temperatures…this month also capped the warmest, or one of the warmest, winters in US history, depending on how you measure it; the 3 month period ending march was by far the warmest 1st quarter in history, 6F above normal for the quarter, but take out the march heat, and even the december thru february period came in as the 4th warmest winter on record, which followed on the heels of a 2011 summer which was the second warmest on record…& even though april’s temperatures to date have been above normal, & record high temperatures for april have been running two to one over lows, the average temperatures over these past two weeks have yet to surpass the highs set during the middle two weeks of march…
(the above is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)
r.j.'s space 