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Friday, October 15, 2010

Paternalism and Soda (scroll down for Rosser's letter)

Ezra Rosser is wrong (Letters, October 12, 2010: A24).

Through its massive agricultural subsidies of almost $4 billion per year for corn, the US government keeps the price of soda, laced with corn syrup, low for all of us.

The Paralysis of the State

I agree with David Brooks that unfunded public (and private) sector pensions are a major problem that must be faced sooner rather than later (The Paralysis of the State, New York Times, October 12, 2010: A25).

There are however two points with which I must take issue. First is his statement that public sector workers average $14.00 more than private sector workers; traditionally the gap has been in the other direction with private sector workers earning a premium over public sector workers. This reversal is not due to the irresponsible generosity of public sector employers; rather it is due to the fact that private sector wages have stagnated due to top management of private sector employers (and especially the very top managers) having reaped in their pay an benefit packages all the gains in productivity that have been achieved in America over the past decade.

Secondly, under the traditional model, the lower public sector wage was balanced by enhanced job security and good pensions. Security is gone especially at the state and local level. These pensions are not undeserved, they compensate for years when the wage gap was in the opposite direction.

As citizens we need to do two things: We must ensure that pension funds for state and local governments be merged so as to minimize administrative costs and increase the actuarial benefits that come from a larger pool of pensioners; we must also make sure that, once there is an economic recovery, we raise taxes to properly fund these benefits.

Mankiw's Motivation

I do not think that Mr. Mankiw writes for money (I Can Afford Higher Taxes, But They'll Make Me Work Less. New York Times Sunday Business, October 10, 2010: page 3).

I believe that he writes to share his ideas with the rest of us. He accepts speaking engagements so that he can influence senior corporate executives and government officials. He speaks and writes so that, ever so slightly, he can influence the economic policy of our country. He writes so as to leave a name for posterity.

Money is merely a by-product of of his activity. His motivation is intrinsic. If the group making the invitation was influential enough, I am sure he would speak to them for free.

Cahill Baker Plot

The revelations of the Baker Campaign's interactions with Cahill's top aides will hurt Charlie Baker's candidacy (Cahill accuses ex-aides of plot to help Baker, Boston Globe, October 8th. 2010: A1).

He positioned himself as an ethical outsider who would go up to Beacon Hill and eliminate all the unsavory deals that lurk in the halls of the State House.

He is now implicated in one of the least savory deals of the past decade. To whom will his adherents turn?

Sent to Boston Globe

Friday, October 1, 2010

What are we fighting about? The impact of the Bush tax increases on the small business owner

What are we fighting about? The impact of the Bush tax increases on the small business owner.
The Republicans are claiming that allowing the Bush tax cuts to elapse will have an adverse impact on small business owners who do not incorporate; so they enter their business income on their personal 1040 Tax Form. The critics of the Administration's plan claim that it will reduce the small business owner's propensity to hire new employees and reduce their propensity to invest in new equipment.
These claims are false.
What is taxed is income. A firm's income is calculated after wages have have been paid to employees and after deductions have been taken for investments in equipment, land, and buildings. So taxes come after these deductions, so an increased tax (on net income) can have absolutely no direct impact on an owner's propensity to hire or to plow money back into the firm.
There is however a modest indirect impact. According to the National Association of Manufacturers, the average small business makes a profit of $600,000.
Under the present tax regime with 33% and 35% as the top two rates, if the owner filed jointly with a spouse and there was no other income, the tax owed would be $180,293.81. Under the new tax regime with a 36% rate for income over $250,000 and a top rate of 39.6%, the owner would pay $194,415.33, an increase of about $14,000.
If the owner wanted to maintain his or her current level of after-tax income, he or she would have to increase the firm's profit to about $620,000. In a firm that generates these levels of profit, $20,000 dollars is not going to have much impact on hiring and investment decisions.
For firm's below the average, the impact would be even smaller. It is only when firms get to make profits above $2,000,000 that we get into serious money: to maintain that lifestyle, the owner would need to increase profits by $100,000.0 so this might impact hiring or investment decisions.
So the truth is, allowing the tax cuts on incomes over $250,000 to expire will have little impact on most small businesses only on highly profitable firms and very rich owners will the impact be even noticeable!

Letter in Cambridge Chronicle, Sept 30, 2010.