Monday, February 22, 2021

Mainstreet Versus Wallstreet: Stocks Did Better Under Democrat Presidents (Workers Under Republicans)

Since the onset of Covid-19, Wallstreet, as captured by stock market indices, has significantly outperformed the overall U.S. economy. Since the fourth quarter of 2019 until the end of the fourth quarter of 2020, the Standard & Poor’s 500 index (S&P) soared by 14.6% as the overall U.S. economy (GDP) shrank by 1.2%. This has caused critics to argue that the responses of the Republican Whitehouse, and the Federal Reserve (Fed) to Covid-19, as well as other economic maladies, have benefited Wallstreet business interests at the expense of workers, and small businesses on Mainstreet. Is there merit in the critics’ argument? Figure 1 compares the ratio of the S&P stock average and employee compensation to GDP from 1985 to 2020. As presented, since reaching a low of 52,6% of GDP in 2014 in the Obama Administration, employee compensation has risen to 54.6% in 2019 (the latest data) in the Trump Administration. During this same period of time, the S&P stock average climbed from 11.1% to 15.4% of GDP. However, the Fed has been clearly on the side of the stock market by reducing interest rates during 2020. For example, the yield on the 6-month U.S. Treasury bond tumbled from an average 2.11% in 2019 to 0.37% in 2020. Table 1 compares the impact of 16 years of Democrat presidencies versus 20 years of Republican presidencies on stocks and workers. As presented in Table 1, stocks and business profits have expanded at a faster pace during Democrat presidencies, while worker compensation excelled under Republican presidencies. Likewise, the Fed appears to have been more supportive of stocks during Democrat presidencies than Republican presidencies by keeping interest rates lower. While differences between Democrat and Republican presidencies listed in Table 1 are not substantial, they are surprising and contrary to the popular narrative. Furthermore, differences may spring from many factors, just one of which is control of the White House.
Ernie Goss

Monday, January 25, 2021

Punishing Success by Raising Taxes: Biden’s Bite to Support Government Expansion

 

President Biden has promised to raise taxes on high income individuals to fund his planned rapid decade-long expansion in federal spending. His approach calls for raising the top income tax rate from 37% to 39.6%, limiting deductions for top earners, and boosting the long-term capital gains tax rate for high earners from 20% to 39.6%.
 
Table 1 below lists the 10 states with current highest income tax rates on additional income. As presented, a California high wage earner, or self-employed, keeps only $35.85 of every $100 of additional income. Importantly, these rates do not account for other taxes paid primarily by higher income individuals such as capital gains taxes, and do not consider Biden’s proposed cap on deductions for high income earners. The rates do include Medicare, and Social Security taxes.
 
Even before the Biden Bite, the top 5% of earners pay approximately 58% of federal income taxes. Likewise, the increase is ill-timed hitting earners in an economic downturn (i.e. a reverse stimulus). The Keynesians should be properly outraged, but don’t count on witnessing it.
 
In addition to funding a plethora of new government programs, proponents of the Biden Bite argue that these tax hikes will reduce income inequality as measured by the Gini Coefficient. The Gini Coefficient measures income inequality with the coefficient varying from zero (least income inequality) to 1.00 (maximum income equality).
 
Table 2 lists the ten states experiencing the greatest degree on income inequality. Four states with the highest income inequality are ranked in the top 15 states in terms of income tax rates. Calculating the correlation between top tax rates and the Gini Coefficients for the 50 states and D.C. indicates only a slight association between tax rates and the Gini Coefficients. However, the association is opposite to that argued by the Biden proponents. That is, states with higher tax rates on higher earners experience greater income inequality, not less.
 
This essay is based on state income tax data indicating that increasing the tax rate on higher income has not and will not reduce income inequality, and in fact may increase income inequality.

Taxing better educated, higher earners will instead further burden high earners which discourages initiative, reduces the motivation to improve human capital via education, and incentivizes tax avoidance and/or tax evasion. Furthermore, raising taxes at this time, offsets some of the positive impacts of stimulating the economy with higher consumer spending fueled by Stimulus I and II.


Table 1: Top tax rates for highest (rates are for income tax rates only, and do not include other Biden increase such as capital gains)

 

Current Top

Income tax rate

Biden addition

New top tax rate

1. California

64.15%

2.60%

66.75%

2. Hawaii

61.85%

2.60%

64.45%

3. New Jersey

61.60%

2.60%

64.20%

4. Oregon

60.75%

2.60%

63.35%

5. Minnesota

60.70%

2.60%

63.30%

6. D.C.

59.80%

2.60%

62.40%

7. New York

59.67%

2.60%

62.27%

8. Vermont

59.60%

2.60%

62.20%

9. Iowa

59.38%

2.60%

61.98%

10. Wisconsin

58.50%

2.60%

61.10%

Notes: Iowa’s income tax rate allows the deductibility of federal income taxes and is thus somewhat lower than that listed.




Table 2: Ten states with the greatest income inequality

State

Total

Current top tax rate

2018 Gini coefficient

1. District of Columbia

59.80%

0.524

2. New York

59.67%

0.513

3. Connecticut

57.84%

0.501

4. Louisiana

56.85%

0.494

5. California

64.15%

0.491

6. New Mexico

55.75%

0.489

7. Florida

50.85%

0.489

8. Massachusetts

55.85%

0.488

9. Alabama

55.85%

0.486

10. Arkansas

57.45%

0.485





Thursday, December 17, 2020

Will Biden Forgive Student Loans? Why Not Automobile Loans?

 A kettle of progressive Democrats is demanding that President-Elect Biden issue an executive order extinguishing student debt in the first week of his reign. Past and present students currently owe $1,700 billion (yes that is $1.7 trillion). Since 2006, student debt has expanded by 253.4%, while income to pay the debt has advanced by one-third that pace, or 79.8%. But there are clear problems and benefits of such action.

 
Wrong Beneficiaries? It has been well documented that income inequality has soared over the past five decades as college educated incomes rose at a much faster pace than workers that did not earn a two-year, or four-year degree.

Except during the Trump Administration, the top 20% of income earners received a greater share of income than the bottom 80% of earners. Furthermore, higher education institutions have sucked up much of the rocketing student debt in the form of higher tuition and fees which, since 2006, expanded at 2.5 times the rate of growth in prices of other consumer goods and services.
 
Fairness? This month, 45 million of the U.S. population owed approximately $38,000 per individual. Thus, the remaining 284 million Americans either have paid off their student debt, or never received a student loan. How fair will the many view shifting $1.7 trillion to the favored few? Furthermore, any delay in making an executive decision, either yes, or no, will only incentivize student debtors to further delay payments, and even ramp up their borrowing.
 
Productivity? Economic theory postulates that higher productivity begets higher income. The latest Bureau of Labor Statistics data show that a college graduate earns 71.0% more than a high school graduate without any college experience. Thus, other factors unchanged, encouraging more individuals to earn their college degree will stimulate higher productivity and economic growth.
 
Economic Stimulus? It is argued that forgiving $1.7 trillion in student debt will help pull the economy out of the current recession. However, the multiplier of providing $1.7 trillion in direct payments to consumers that spend the funds on goods and services will be between 0.08 and 0.23, compared to 0.36 for small business aid, and 0.60 for unemployment benefits, according to the Committee for a Responsible Federal Budget.
 
The question for the Biden Administration is, will the stimulative productivity impact of debt forgiveness offset the many negatives of such a move?  This economist has serious doubts.
Ernie Goss

Tuesday, November 10, 2020

Thursday, October 15, 2020

Read Biden’s Lips: “More New Taxes” What Is a Fair Share of Taxes?

 



In an effort to bolster the likelihood of his election, presidential candidate, George H.W. Bush proclaimed “Read my lips, no new taxes” at the 1988 Republican National Convention. In sharp contrast, 2020 Democrat presidential hopeful, Joe Biden essentially shouted, “Read my lips, more new taxes.” Biden argues that the U.S. economy needs more spending, and requires more taxes.

He bases his tax hike plan on three factors or allegations: 1) the Trump 2017 tax cuts hurt the economy, 2) high income earners should pay a greater and a “fairer” share of taxes, and 3) the U.S. economy needs more than $5 trillion in additional federal spending over a decade to pay for his proposed new spending programs.

Are Biden’s assertions accurate?
 
1) Trump tax cuts hurt economy.  Biden and his team allege that the December 2017 tax cuts reduced tax collections to levels jeopardizing growth with consequent massive fiscal deficits. However, for the two years after the tax cuts, total federal government receipts climbed by 5.3% compared to a much slower 2.2% for the two years prior to the 2017 tax cuts.
As a result of the slashing of the corporate income tax rate, corporate tax collections fell by 11.4 in the two years after the 2017 cuts. However, this decline is smaller than the 25.4% fall for the two years prior to the 2017 cuts. Furthermore due at least in part to the corporate tax reductions, business investment soared by 11.9% for the subsequent two years in contrast to 4.7% for the two years preceding the 2017 tax cuts. 
 
Moreover, economic performance, as measured by GDP, accelerated after the tax cuts from 9.7% for 2017-19 compared to 5.9% for 2015-17. Furthermore, the Census Bureau reported in September that the median household income advanced by a massive 6.8% in 2019—the largest annual increase on record. Biden is clearly wrong on this count.
 
2) High income earners do not pay their fair share.  According to the National Taxpayers Union, the top 1% of income earners in 2017 netted 21% of the nation’s adjusted gross income, but paid 38% of U.S. personal income taxes. On the other hand, bottom half of income workers netted 11% of the nation’s wages, but they paid only 3% of personal income taxes. In fact, fully 32% of filers in 2017 paid no income tax. From the perspective of high income earners, Biden is likely wrong again. 
 
3) Biden's economy needs new tax collections. The Wall Street Journal reported that Biden’s spending proposal would “total $5.4 trillion in new spending over the next 10 years” based on an analysis by the Penn Wharton Budget Model, a nonpartisan group.  “This is the largest proposed spending increase by a presidential nominee since George McGovern,” says Kent Smetters, a Wharton economics professor who oversees the budget model project. Biden is correct here.

Ernie Goss

Thursday, September 17, 2020

High Tax States Lose Representation in Congress: 2017 Tax Law and Pandemic Reinforce Population Trends

Peter Rex, Founder and CEO of Rex Teams recently announced that, "I'm moving my business headquarters off the West Coast." We tried San Francisco and Seattle. "Both were wonderful in their own ways, especially in natural beauty and personal friendships. But both have become hostile to the principles and policies that enable people to live abundantly in the broadest sense."
 
Rex joins a parade of individuals and businesses that are relocating from high tax states to low tax states due to 1) 2017 Tax Law that eliminated the deductibility of state and local taxes, 2) Post Covid-19, companies allowing employees to work from locations of their choice, and 3) Individuals and businesses avoidance of large urban centers with higher crime rates and economic lockdowns.  
 
The accompanying table lists the 10 states experiencing the greatest population gains, and the 10 states suffering the largest population losses.
 
The global pandemic has further enhanced the economic prospects of the gaining states, which experienced an average increase in insured unemployment rates between mid-March, and the end of August of 7.4% compared to a much higher average of 9.9% for the ten losing states.  
 
Many of the unemployed in high tax states will seek the more job friendly employment prospects in low tax states. Furthermore, the data show that the population gainers' average state and local tax rate was 7.82%, and the population losers' average state and local tax burdens was 9.5`%.  
          
Importantly, 7 of the 10 gaining states voted Republican in the last presidential election, and 7 of 10 losing states voted Democrat in the same election. In addition to invigorating the economies of low tax states, this migration will have the bonus impact of increasing the representation in Congress of destinations with lower state and local tax rates.
 
The table below reflects reapportionment post-2020 Census:

  • The 10 states with the highest population gains collectively will add 7 congressional representatives.
  • The 10 states with the largest population losses will lose 5 congressional representatives.
























Friday, July 17, 2020

COVID-19 Death Rates Fall as Infections Rise: State Shutdowns Hurt Economies, but Not COVID-19

The media and politicians are fixating on the rapid rise in COVID-19 infections. As a result, many medical experts, politicians and pundits are calling for shutdowns of state economies experiencing the greatest growth in infections. 

Before taking this drastic action, two questions should be examined: 1) will the latest infections generate the negative outcomes as in previous months and 2) will the negative economic impacts of shutdowns exceed the positive health outcomes from economic lockdowns?

The latest CDC data show that deaths per 10,000 infections have declined from 1,315 on March 7 to 8.9 on July 7. From this data, some assert (but it's not yet proven) that higher infection rates are due to:
  1. the opening up of state economies, which has encouraged young individuals, who are less likely to suffer negative health consequences from COVID-19, to continue with normal living, and 
  2. an increase in testing rates that now uncover individuals with the infection, but little or no negative health outcomes.  
  3. lower deaths are due to older individuals with other health issues to take greater precautions in daily living (e.g. social distancing), 
  4. improved treatment of COVID-19 illnesses.
Others argue a lag exists between infections and deaths with today's soaring infection rates leading to zooming death rates ahead. However, the accompanying chart shows that death rates are clearly trending lower even after controlling for the delay between infection and death declining from 267 April deaths per 10,000 March infections to 34 June deaths per 10,000 May infections.

Did State Lockdowns Work?  The 42 states and D.C. that implemented shelter-in-place directives experienced a 10.1% increase in their insured unemployment rates between the first week in March until the second week in June compared to a lower 6.6% increase during the same time period for the 9 states that did not shut down. Using simple linear regression, it is concluded that each 30 days of shutdown was associated with a one percentage point increase in the insured unemployment rate. In terms of infections and deaths per 10,000 for March - June, shelter-in-place states experienced median infection rates of 60.0 compared to a higher 73.6 for non-shelter-in-place states, while non-shelter-in-place states suffered a lower death rate of 1.2 compared to 2.4 for shelter-in-place states. None of the differences were statistically significant.

Summary  In the back-of-the-envelope calculations in this essay it was concluded that while COVID-19 infections are expanding dramatically yet COVID-19 death rates month ahead death rates per infection are in fact declining. 

Furthermore, it is concluded that shelter-in-place, while having a statistically significant impact on increasing insured unemployment rates, had no statistically significant impact on COVID-19 infection rates or death rates. (All analysis available on request ernieg@creighton.edu).