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September 15, 2012

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Posted: 15 Sep 2012 12:06 AM PDT

'Tax Cuts for Wealthy Linked to Income Inequality'

Posted: 14 Sep 2012 04:55 PM PDT

A report from the Congressional Research Service finds little support for the claim that tax cuts increase economic growth. They do, however, increase inequality:

Report: Tax Cuts for Wealthy Linked to Income Inequality, by Siobhan Hughes, WSJ: Just in time for the year-end debate over extending the Bush tax cuts for high earners: a new report concludes that tax cuts for the rich don't seem to be associated with economic growth.
The report, from the Congressional Research Service, finds that tax cuts for high earners can be linked to a different outcome: income inequality.
"The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced," according to the CRS report, circulated on Friday. ...
"As the top tax rates are reduced, the share of income accruing to the top of the income distribution increases; that is, income disparities increase," government researchers said.
CRS analysts also said that "capital gains and dividends have become a larger share of total income over the past decade and a half while earnings have become a smaller share." This phenomenon, the researchers said, suggests that labor may grab a larger share of the pie when the top individual and capital-gains tax rates are higher. ...
The implication, of course, is that allowing tax cuts to expire for high income individuals could decrease inequality without harming economic growth.

Romney's 'Mathematically Impossible' Tax Plan

Posted: 14 Sep 2012 11:56 AM PDT

Jon Chait explains the latest Romney blunder as he retreats "into incoherence":

Romney: My Magic Tax Plan Will Repeal Laws of Arithmetic, by Jonathan Chait: Let's stop this meme before it gets started. Mitt Romney did not say that a salary between $200,000 and $250,000 a year counts as "middle income." I suppose you could say he asserted that if you used the truth standards of the Romney campaign — which allow you to clip phrases to change their meanings or even to present a person quoting something he disagrees with as his own position — but those aren't truth standards I'd care to live by.
What Romney actually said, in his interview with George Stephanopolous, was that he would not raise taxes on people earning below that level. Here Romney is trying to wriggle out of a trap he blundered into. ...
What Romney's doing here is retreating into incoherence. TPC examined his promises — cutting rates by 20 percent, not raising taxes on investment income, and not reducing revenue below Bush tax cut levels — and found they could only add up if you raise effective tax rates on income under $250,000 a year. Feldstein found the same thing, despite his partisan attempt to present his finding as a vindication of Romney.
Now Romney is saying he won't raise taxes on any families earning less than a quarter million. But that just means his plan is completely mathematically impossible. ...
The basic problem for Republicans is that their highest policy priority is to cut the effective tax rate paid by the richest 1 percent of Americans, but the vast majority of the voters don't share that goal. ... But Republicans care so much about this goal that they won't give it up ... [and] this ultimately places them in the position Romney finds himself and Paul Ryan and George W. Bush have found as well — the only way they can get elected is to obscure the real trade-offs and make up a bunch of fake numbers.

Inequality and Savings

Posted: 14 Sep 2012 10:20 AM PDT

This is from Oya Celasun of the IMF:

How Inequality Affects Saving Behavior, by Oya Celasun: ...Recent research has focused on the link between income inequality and growth, but less attention has been paid to the link between inequality and savings. So ... our study looked at which types of households drove the aggregate saving rate down before the crisis and those that drove it up afterwards...
Saving patterns before the crisis ...Our key finding is that that households with consistently lower income growth experienced larger declines in their saving rates and a larger rise in their mortgage debt before the crisis. We also find that these types of households contributed significantly to the overall decline in the saving rate. ...
Our results suggest that households with disappointing income growth attempted to preserve their living standards in the boom years by tapping into their housing equity. Their decisions did not anticipate the impending correction in house prices, the weaker economy, and lower incomes. The easy availability of home equity financing allowed households with low income growth to at least temporarily "keep up with the Joneses"... With the subsequent housing crash, those households already suffering from lowest income growth found themselves more vulnerable, with high levels of debt. ...
Saving patterns after the crisis How did households fare after the crisis? We found that those more dependent on housing wealth and those with higher debt levels on the eve of the crisis indeed raised their savings sharply after the crisis. Yet, as this sharp correction started from very depressed and even negative saving rates, these households have not yet made meaningful progress in reducing debt and repairing their balance sheets. Hence, these households may face grim future consumption prospects.
Taken together, our results do suggest that the lower income growth for segments of the income distribution was linked to the drop in saving rates and growing indebtedness of American families. Moreover, households that entered the crisis with a more precarious wealth situation have made limited progress in rebuilding their net worth ... by actively saving out of their incomes. ...
Unless their incomes and house prices pick up robustly, many households will need sustained levels of higher savings to rebuild wealth, making it less likely for the American consumer to drive U.S. growth.

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