By Ajay Shah, on April 26th, 2013
In any country, various arms of government like to indulge in taxation of their own choice, and in setting up little treasuries that they control. However, it is quite clear that there must be only one treasury, and only one authority that determines taxation, through only one Finance Act.
In the Economic Times today, I have an article that applies this idea into analysing a recent proposal by DOT to impose an 8% tax on wireline broadband providers.
You may find some of the associated materials useful:
- Consultation paper issued by DOT on this in December 2012.
- National Telecom Policy, 2012.
- TRAI recommendations on broadband.
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By Ajay Shah, on April 12th, 2013
by Apoorva Gupta.
The recent announcement that dismantled the levy and monthly release mechanisms, in the sugar industry, will make the industry more efficient and competitive. But much remains to be done. This is a good time to look at the government interventions in this industry, the implications of recent decisions, and the way forward.
Major government controls
With an aim of offering farmers, firms, and consumers a fair deal, the government intervenes in production and distribution through various controls:
- Minimum price for cane: Under the Sugarcane (Control) Order, 1966 (SCO), the Central government announces a `Fair and Remunerative Price’ (FRP) to ensure a good return to farmers. The state governments announce a `State Advised Price’ (SAP) which has typically been higher than the FRP, thus making the FRP redundant. In 2010-11, the SAP was 47% higher than the FRP.
- Cane Reservation Area: To guarantee continuous and sufficient supply of cane to all mills, the area from which a mill can procure cane is reserved. It is also obligatory for the farmer to sell all produce to the mill in that area. The state has the power to reserve this area under the SCO.
- Minimum Distance Criterion: The Central government, under the SCO, has set a requirement of a 15 km. minimum distance between two mills to ensure supply of cane to all. States are authorised to increase this limit with prior approval from the Center. Punjab, Haryana and Maharashtra have a minimum distance requirement of 25 km.
- Levy Obligation: Under the Levy Sugar Supply (Control) Order, 1979, till recently, mills had to sell 10% of their produce to the government at a price lower than the market price, and this sugar was distributed through the public distribution system.
- Monthly release mechanism: The central government dictated the amount of sugar a mill could release each month in the open market, under the Essential Commodities Act, 1955 and the SCO. This allowed the government to control the prices of sugar in the market. In 2012, the release orders became quarterly.
- Trade Policy: To ensure national food security and contain price volatility, the government has historically used quantitative restrictions on export and import, depending on domestic and foreign conditions.
- Controls on by-products of sugar manufacture: Molasses is used to produce alcohol which is used in the production of potable alcohol, chemicals and blending with petrol. States impose restrictions on the movement of molasses, and artificially reduce the price for the benefit of liquor barons. The Center has not yet released a clear policy on pricing of ethanol for blending in petrol. The state also imposes restrictions on open access sale of power generated from bagasse.
- Compulsory jute packaging : The central government has made it compulsory for mills to pack 40% of the sugar produce in jute bags.
These controls add up to a comprehensive central planning system that blankets the sugar industry.
No one gains!
Each of these controls has created distortions.
#1: The minimum support price aims to ensure a fair price for cane to farmers, but on the contrary, it is the leading cause of accumulation of cane arrears (Rs 5495.04 crore for 2011-12 sugar season). The SAP is often not commensurate with the market price of sugar, making it hard for the mills to pay the farmers in time. Farmers shift to cultivation of a different crop because of delayed payments and this leads to shortages of cane. With lower production of sugar and higher market prices, the mills are able to reduce cane arrears and this incentivises the farmer to shift back to cane cultivation and the cycle is repeated. The graph below shows these fluctuations.
 The figure above shows cyclicality in total production, total cane arrears and the average PBDIT of a balanced panel of 50 sugar companies observed in the CMIE Prowess database. There is a direct relationship between the production of sugar and the cane arrears, and an inverse relationship between total production and firm profit. This cycle is characteristic of the present restricted industry industry. The price and supply of sugar are extremely volatile, even though consumption has been growing at a steady pace. The mills are often working under capacity and many small ones are shut down in the lean season since production is not economically viable. Farmers are burdened with delayed payments, and consumer welfare is reduced due to volatile prices.
#2 and #3: The cane reservation area and minimum distance requirement have fostered creation of monopolies. The farmer is obliged to sell his produce to a mill irrespective of its past payment record and cannot search for the best price for his produce. This gives monopoly power and artificial protection to firms, and helps inefficient firms to persist in the market. Currently, there are approximately 500 mills, some of which operate only in times when the cane is in surplus, produce as little as 500 tonnes of sugar in a year, and have a very low ratio of recovery of sugar from cane. Moreover, these controls do not allow high productivity firms to expand and achieve economies of scale, invest in increasing the acreage and sucrose content of cane.
#4 and #5: The levy obligation imposed a direct cost on mills to the tune of Rs.3000 crore in 2011-12. In 2011-12, the levy sugar price was Rs. 1904 per quintal, while the price of non-levy sugar was Rs. 2749 per quintal, excluding excise. The mills passed on these losses to consumers in the form of higher prices, and to farmers by delaying payments. The monthly release mechanism led to high inventory accumulation costs and made it hard for mills to manage cash flows. These two controls also incentivised mills to hoard inventory, increasing the administrative and litigation costs of implementing these controls.
#6: The abrupt and unanticipated trade barriers in the form of duties and outright bans, has not achieved the desired reduction in price volatility. Besides the dead weight loss of restricting trade, the unstable policy regarding export and import has reduced the ability of mills to foster long term contracts abroad.
#7 and #8: Mills lose money by selling molasses to liquor barons at an artificially low price. The unclear policy on ethanol pricing for oil marketing companies leads to unfulfilled contracts between sugar mills and OMCs and increases losses for both industries, since blending ethanol reduces the price of petrol for OMCs, and mills do not get revenues from the sale of molasses. The restriction on open sale of power generated from bagasse imposes an environmental cost. Compulsory packing in jute bags adds Rs 0.40 per kg of sugar. These policies, which try to develop one industry at the cost of another, eventually increase the cost for consumers and farmers.
Rangarajan Committee recommendations
The Rangarajan Committee was appointed to study the issues related to regulation of the sugar industry in early 2012. They recommended phased decontrol of the industry.
The recommendations include immediate removal of the levy obligation and monthly release mechanism, and phasing out of cane reservation area, minimum distance criterion and trade barriers over the next couple of years. Concerning cane pricing, the committee recommends that cane price should be a combination of FRP and a share in value of sugar. On international trade, they suggest that the current policy should be replaced by moderate duties not exceeding 5-10 percent. The need to deregulate the movement, pricing and quantitative restrictions on by-products of sugar, and abolish mandatory packaging or sugar in jute bags is also emphasised.
Recent decisions on decontrol
The Cabinet Committee on Economic Affairs has recently approved the removal of levy obligation and the monthly release mechanism (#4 and #5), as suggested by the Rangarajan Committee. The markets welcomed this decision, with a cumulative abnormal return of the CMIE COSPI Sugar Industry Index of 9% over the 2 days after the announcement. The spot price of sugar also spiked after the announcement. The market was over-exuberant at the partial decontrol of the industry and some of these gains have been reversed.
The implications of this partial decontrol are:
- Impact on finances: The removal of levy implies a direct increase in profit for mills of about Rs.3000 crore since they no longer have to sell 10% of the produce at significantly low prices. With the freedom to release stock, the mills will have choices about selling in India and abroad. The mills facing financial problems can liquidate their inventory when needed.
- Reduction in cane arrears: Mills with large cane arrears will now be able to release stock to make pending payments. But as elections come closer, there is a possibility that the SAP is increased and cane arrears accumulate. This will hurt the financial health of the firms.
- Volatility in prices: If mills release too much stock to reduce cane arrears or due to sheer inexperience with a free market, prices might plummet. The strategic moves of mills, rather than decisions of politicians and bureaucrats, will determine prices.
- Greater trading: Since cane is crushed seasonally and the mills have full freedom to release sugar, the trading on futures market will matter more. The futures market will become much more important in shaping decisions of everyone involved in sugar.
- Survival of the best: Until now the government regulated the amount of sugar released in the market, and the firms had no experience in thinking strategically. Reaching a Bayesian equilibrium will involve learning by doing, and creative destruction in the industry. Mills will require building up financial depth and skills in hedging using futures. Large firms, which have diversified into production of power and alcohol, will have an upper hand.
- Stability in acreage and cyclicality: The ability to manage cash flows would increase the security of payment to farmers, incentivising them to continue with cane cultivation. The mills and farmers (in the area reserved for them) might enter into contracts where the supply of cane is guaranteed, in return for timely payments. This can considerably reduce the amplitude of the sugar cycle and lead to an improvement in cane acreage.
- Impact on the growth of sector: With a better balance sheet, mills will be able to invest more. The global perception of the industry is going to change from highly regulated to partially decontrolled and this might give greater foreign investment. The freedom to release stock in domestic and foreign markets (provided export policy is not binding) will increase the international presence of mills.
Next steps
Of the list of eight controls, the government has removed two. Most of the pending controls come under the purview of the state governments and decontrol of this industry is now largely their task.
#1: Reforming the regulation of price is essential to reduce cyclicality in cane production, which is a leading cause of cane arrears and low profitability. The recommendation of the Rangarajan Committee on pricing of cane suggests that the farmer will be better off as he is protected from uncertainty in the market due to a guaranteed FRP, and also encourages him to invest in increasing the yield of cane for he has a share in the value.
#2 and #3: Abolishing the minimum distance requirement and the cane reservation area will lead to competitive bidding for cane and farmers would be able choose the best price on offer across an array of choices [analogy]. The increased competition to acquire cane might encourage mills to enter into long term contracts with farmers and offer them other benefits such as timely payments irrespective of the phase of the cycle, make them shareholders, and also assist in increasing cane yield. The inefficient firms are likely to perish with more competition in the market, leading to a more consolidated industry.
#6: Removal of trade barriers is likely to make trade more stable, foster global relationships between firms and make Indian firms internationally competitive. In the recent past, imports were duty free and export release orders were removed, suggesting that the government is slowly liberalising trade.
#7 and #8: Decontrolling movement, pricing and allocation of molasses can contribute significantly to the reduction of cyclicality in the sugar industry. In years of a bumper stock, cane can be used to produce molasses directly and can be distributed to all players at competitive prices. This will also make the sector more profitable. Co-generation from bagasse can become a reliable source of power. Removing restriction on sugar packaging will lead to a direct cut in costs of manufacturing.
Conclusion
The government needs to hasten the process of adopting the Rangarajan Committee recommendations. The job of the government is to focus on public goods, such as improved road and rail networks for the transportation of a heavy and perishable good like cane, improved irrigation facilities to reduce the dependence on monsoons and improved information dissemination for price discovery. Market forces will furnish higher efficiency and growth in the system by ensuring the survival of the best firms, fostering mutually beneficial contracts between the farmers and mills, and stabilising the price of sugar for the consumers.
Acknowledgements
This article has greatly benefited from suggestions from Dr. K. P. Krishnan, Dr. Ajit Ranade and Dr. G. S. C. Rao.
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By Ajay Shah, on March 1st, 2013
Taxation of transactions in India began with the equity market in 2004. Prior to 2008, the securities transaction tax (STT) was allowed as a rebate against tax liability against Section 88E of the Income Tax Act. This treatment was withdrawn by the 2008 Budget announcement. After that, STT became a substantial influence on the equity market. In understanding the consequences of the STT, there is an absolute perspective and there is a relative perspective.
In absolute terms, suppose you embark on a spot-futures arbitrage and do an early unwind. In this, you buy shares (pay 10), sell futures (1.7) and then reverse yourself (10). Your tax burden is 21.7 basis points. This is a lot of money when compared with the typical bid-offer spread of the Nifty futures which is around 0.5 basis points. The dominant cost faced in doing spot-futures arbitrage is taxation.
In relative terms, there are two issues. The first is an intra-India comparison between equities and commodities. When activity on the equity market was taxed, eyeballs and capital moved to commodities trading. Commodity futures trading has grown by 3.5 times after 2008, while equities activity has stagnated. Most policy makers think this was an undesirable effect, particularly given the fact that India can free ride on global price discovery for non-agricultural commodities but must foster liquid markets in its own equities.
And then, there is an international dimension. When the activities of non-residents in India are taxed in any fashion, they favour taking their custom to places like Singapore, which practice `residence-based taxation’ where the tax base comprises the activities of residents only. We got a sharp shift in equities activity towards locations outside India.
Putting these absolute and relative perspectives together, from 2008 onwards, equity market liquidity has fared badly. This yields an elevated cost of equity capital.
The budget speech has done two things. First, it has dropped the STT rate on futures on equity underlyings from 1.7 basis points to 1 basis points. This is helpful for certain kinds of trading strategies but not for others (e.g. the spot-futures arbitrage described above will gain little). HF strategies that do not involve the spot market will particularly benefit – e.g. imagine an options market maker who does delta neutral hedging on the futures market. Second, it has introduced taxation for non-agricultural commodity futures on an identical basis to the equity futures (i.e. at 1 basis points).
This will have the following interesting implications:
- Capital and labour in securities firms will be less inclined to be in non-agricultural commodity futures. It will tend to move towards agricultural commodity futures, currency futures and equity futures.
- The comparison between offshore venues and the onshore market will move in favour of the onshore market for certain kinds of trading strategies.
- The bias in favour of equity options will reduce; some business will move to equity futures.
- The pricing efficiency of futures will go up.
In this environment, there seems to be a fair arrangement between the equity futures and commodity futures. Conditions seem to be unfair with the equity spot (too high), equity options (too low) and currency derivatives (too low). The next moves on this may appear in July 2014 when the new government unveils its next budget.
One more announcement of the budget speech concerns currency futures: it was stated that FII activity on currency futures will commence. This will also give more activity on currency futures; we now have two reasons for expecting more activity on currency futures (the taxation of commodity futures and the entry of FII order flow). However, the shifting of FII order flow will be a slow process, and a lot of time will be lost on their due diligence of the exchange, safety of the clearinghouse, and so on. While, in the long run, removing capital controls against FII order flow in India is a good thing, it is not an effect that will kick in quickly. Apart from this, most of the action will take place fairly quickly, in early April.
Future finance ministers will need to navigate the difficult landscape of gradually scaling down taxation of transactions while retaining low taxation of capital gains (which has unfortunately come to be seen as a linked issue in the Indian discourse). Along this path, the first priority should be to remove distortions. Our first priority should be to achieve a low rate, a wide base, and the minimal distortions. Reduced rates will always yield welfare gains. The Budget 2013 announcement makes progress on two things (reduction from 1.7 to 1, and reduced distortions between equities and non-agricultural commodities). There is much more waiting to be done: integrating currencies and fixed income, bringing sense to options, and getting away from the very high rates on the equity spot market.
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By Simon Grey, on January 18th, 2013
It’s apparently unpleasant:
American workers are opening their first paychecks of the year and finding an unpleasant surprise: The government’s take has gone up.
A temporary cut in Social Security withholdings gave Americans hundreds of extra dollars to spend over the past two years. But Congress allowed that break to expire during the wrangling over the fiscal cliff, meaning that Social Security taxes have reverted to 6.2% of salary from the temporary 4.2%.
The noticeable lightening of paychecks as consumers remain tentative threatens to put a drag on economic growth. The effect for companies is that the hit is likely to cement a frugal attitude that led consumers to cut back on eating out and shift to less-expensive store brands.
Now, I actually support a payroll tax increase. I think people who receive any form of government benefits should actually pay for them (yes, I know this is a crazy belief), and I think that the increase in tax rates is small enough and marginal enough that it will lead to increased revenues, thereby hypothetically reducing the deficit.
Of course, a higher tax burden means more economic malaise. But then, that’s simply the inevitable cost of the government living beyond its means. Bills must be paid, even by governments. If people don’t want higher taxes, they should vote for politicians who actually reduce spending. If people are unwilling to do vote for budget cuts, then they shouldn’t complain about higher taxes.
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By Simon Grey, on January 15th, 2013
Quelle surprise:
The tax this year will increase by two percentage points, to 6.2 percent from 4.2 percent, on all earned income up to $113,700.
Indeed, for most lower- and middle-income households, the payroll tax increase will most likely equal or exceed the value of the income tax savings. A household earning $50,000 in 2013, roughly the national median, will avoid paying about $1,000 more in income taxes — but pay about $1,000 more in payroll taxes.
That tax rates are nominally increasing, or that effective tax rates are not decreasing, should come as no surprise. Government spending must be funded somehow, and the only three possible options for raising revenue are taxation, inflation, and borrowing. The federal government must have money in order to do what it does, and that money must come from somewhere. To think that the federal government can spend close to $4 trillion without imposing any costs on anyone except “the rich”—itself a nebulous, ill-defied concept—is simply ludicrous. And to those who complain about the tax burden they must inevitably bear, I simply ask: what government services do you no longer want provided for you? If you want the government to do something for you, you must—you will—pay for it. Thus, any complaints about taxes, if they are serious, must be accompanied with complaints about spending.
By Simon Grey, on January 11th, 2013
Ross Douthat speaks it:
Alas for liberals, the tax debate isn’t that simple, because it’s taking place in the context of immense projected future deficits and a welfare state that seems unsustainable without substantial increases in revenue. Given these realities, fairness and progressivity are necessarily less important to liberalism over the long run than simple dollar figures, and the American left actually has a long-run incentive to make the federal tax code less progressive, because only a broader base can keep the liberal edifice solvent in the long run. [Emphasis added.]
While it may be quite pleasant to imagine that the tax code can be used to arbitrate fairness across social classes (a bullshit concept if there ever was one), the simple reality is that taxes have only one fundamental purpose: revenue. That’s it.
Taxes exist to generate revenue to the government. Thus, while it may be pleasant to imagine soaking the rich with a 90% income tax rate—in the name of fairness, of course—the reality is that this attempt at soaking the rich will inevitably lead to a decrease in tax revenues for the very simple reason that people simply do not like having large portions of their income taken away from them by jack-booted parasites. Thus, in the long run, the tax code must conform to fiscal reality instead of nebulous concepts of social fairness. The liberal vision of social fairness is literally unaffordable, and this must inevitably be reflected in the tax code.
The more rational approach to taxation is exactly what Douthat recommends: increase the tax base and keep rates lower. This would effectively mean lowering marginal tax rates on the wealthy and actually imposing real income taxes on the bottom two brackets. This won’t be fair, per the liberal definition, but it will ensure that the government remains funded. Of course, once poor moochers have teeth in the game, they may decide that they don’t want to pay the government for overpriced, substandard services. But then, those who are poor often tend to be short-sighted and foolish, and so it is also conceivable that they will learn nothing from history, and thus condemn themselves to a life of dependency. But at least they’ll have skin in the game.
By Simon Grey, on December 19th, 2012
Turns out it’s neither cheap nor labor:
“In 2010, 36 percent of immigrant-headed households used at least one major welfare program (primarily food assistance and Medicaid) compared to 23 percent of native households,” summarizes the document which was published by the Center for Immigration Studies and examines a wide variety of topics relating to immigration. Click HERE to read the full report.
The document breaks down the immigrant families by country of origin and gives specific types of welfare and percentages of the families that used it in 2010. An average fewer than 23 percent of native households use some type of “welfare” which is specifically defined in the study. 36 percent of households headed by immigrants use some type of welfare. Families headed by immigrants from specific countries or areas of the world range from just over 6 percent for those immigrants from Great Britain to more than 57 percent of those from Mexico using some type of welfare. [Emphasis added.]
From now on, I’m going to call bullshit on people who tell me how hard-working and thrifty Mexicans are. If that’s the case, why are 57% of Mexican immigrants receiving money from the federal government of the United States? Why are the taxes of American citizens being used to pay for people from shithole third world countries?
Also, I’m going to call bullshit on dumbass economists who insist that what we need is more cheap labor from Mexico. Hint: labor isn’t actually cheap if it’s federally subsidized. The savings of cheap Mexican labor are apparently illusory. What cheap labor really amounts to is federal subsidy scam.
What we’re seeing now is nothing more than a government that is forcing its citizens to pay for their cultural, economic, and social suicide.
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By Simon Grey, on December 11th, 2012
There are a lot of people calling for raising taxes. Tom Coburn (a Republican, it should be noted) is in favor of increasing tax revenue by raising nominal rates on the wealthy. Daniel Berger thinks it’s unfair that the rich (himself excepted, of course) don’t pay their fair share. These two stories, then, reveal the two main arguments for increase tax rates on the wealthy: increasing revenue and making society fairer. Unfortunately, these two arguments have nothing to do with reality.
It’s surprising that anyone seriously thinks that raising relatively high tax rates to an even higher level will automatically lead to higher revenues. Britain tried this last year by raising the top income rate on millionaire earners to 50% and saw a £7 billion decrease in tax revenue. California attempted to create the highest state income tax in the nation and saw its revenue fall as well. Furthermore, federal tax revenues actually increased after the Bush tax cuts. Clearly, the argument that increasing revenue is as simple as raising tax rates is demonstrably false.*
What’s interesting, though, is that a progressive tax system doesn’t actually alleviate unfairness (aka inequality). California and New York, for example, have two of the most progressive tax codes, relative to other states. They also have a surprising amount of income inequality, relative to other states. Of course, correlation is not causation. But the absence of correlation should certainly indicate the absence of causality (since the theory is that progressive tax rates reduce income inequality, the complete absence of this theory in practice should lead to the conclusion that this theory is complete and utter bunk).
Why it is the case that progressive tax rates don’t lead to greater income equality is difficult to discern. Perhaps it is the case that, in response to increased taxes, the moderately wealthy leave while the uber-wealthy stay. Perhaps there is a connection between progressive tax rates and expansive regulation, with said regulation tending to benefit the wealthy. Perhaps the progressive tax system is a mirage of nominally tax rates coupled with lots and lots of loopholes. Perhaps God hates progressive and loves nothing more than a good joke at their expense. Perhaps the elite exploit progressive naiveté for gain. Whatever the case may be, it appears that it’s time to refrain from arguing that progressive tax rates make things fair.
At any rate, it should be clear that the two main reasons for increasing nominal tax rates are nothing more than crap. Raising rates doesn’t increase revenue, nor does it make things more fair. Now, let’s stop pretending that it does.
* Of course, this doesn’t mean that decreasing tax rates necessarily leads to a revenue increase. The Laffer curve suggests that there is a revenue-optimal tax rate between 0% and 100%. Where this specific point is for federal revenue is unknown, but history suggests that revenue will not generally exceed 20% of GDP, and that optimal tax rates generally tend to be below 50%. My personal opinion is that, assuming a highly simplified tax code (one or two collection points and few to zero loopholes), the optimal tax rate will be in the low to mid twenty percent range.
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By Simon Grey, on December 5th, 2012
A certain retarded clown* is calling for raising taxes onthe rich:
Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.
Of course, this claim is patently untrue. It’s like Krugman just makes up facts to suit his fancy.
Along the way, however, we’ve forgotten something important — namely, that economic justice and economic growth aren’t incompatible. America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.
Now, I’m no apologist for rich people, especially since a lot of them benefit from and continuously lobby for greater government goodies. However, Krugman’s argument for increasing income taxes on the rich is nothing more than nonsense on stilts.
In the first place, a good number of wealthy people don’t actually get wealthy strictly through income. Instead, they rely on capital gains from their investments. Warren Buffett doesn’t actually make billions of dollars every year; rather, he becomes wealthier because his holdings increase in value. In fact, Warren Buffett’s salary is only around $100,000 per year (though he does earn more than this due to having other sources of income). If he stuck solely with his Berkshire-Hathaway salary, he would fall squarely in the middle tax bracket. His proposal for increasing income taxes on the wealthy, then, wouldn’t even apply to him.** Thus, Krugman’s call for increasing the marginal tax rate on the wealthy might not even have any effect on the wealthy because some of the wealthy aren’t even in the highest tax bracket.
Second, it isn’t even clear that the tax code is good at providing economic justice. As noted in a prior link, the wealthy never really paid that much in taxes even when the marginal rate was 91%. Now, if the effective rate of taxation for the highest tax rate tops out at, say, 35%, then there really is not much point to having a nominal rate higher than 35%, except to make less wealthy people that are inclined to jealousy feel better about sticking it to the man. In other words, Krugman is more concerned about symbolism than reality. Who cares what the rich actually pay when it appears that they are paying 91% of their income in taxes.*** Of course, closing deduction loopholes for those in the highest tax bracket would also increase their tax burden. Why doesn’t Krugman recommend this policy? Because Krugman is far more concerned about symbolism over substance and, quite simply, raising rates is sexier than closing off loopholes. Really, Krugman is nothing more than an instigator of class warfare.
Finally, it should be noted that the fundamental purpose of taxation is to raise revenue. Economic justice and other platitudinous bullshit can certainly be ancillary to this, but revenue should be the primary focus of any discussion on taxes. Now, as anyone familiar with the Laffer Curve knows—and hopefully this would include Nobel-Prize-winning economists—raising nominal tax rates does not necessarily lead to increased revenue. In fact, a brief look at the history of tax revenue would suggest that, no matter what the tax rates are, the federal government will be hard-pressed to collect more than 20% of GDP in tax revenue. As such, proposing ridiculously high tax rates even though they will likely lead to lower revenue in spite of being in the middle of a recession and facing a spending deficit of over $1 trillion is an incredibly irresponsible thing to do.
* Paul Krugman, obviously.
** Note: as I said above, he does earn more than $100k in a given year. However, the sources of his other earnings are unclear, so I’m not sure if they would all be taxed as income or possibly as capital gains, etc.
*** And, with the US tax code using marginal tax rates, the nominal 91% rate for the highest earners is itself misleading, since the 91% rate would apply to earnings over a certain threshold. (E.g. you could have a 10% tax rate on the first $60k you earn and then have a 91% tax rate on all earnings above $60k, which makes for an effective tax rate of less than 91%).
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By Christopher Briem, on October 26th, 2012
So maybe I need to get into a daily digit type of routine. Of late there is a round of news around the state how municipalities are going to use their shale gas impact fee windfall. Here is the Inky’s version: PA towns savor drilling impact-fee checks.
How much of a windfall is it? According to the news, a total of $204 million is being distributed to local governments across the commonwealth. A big number yes?
For perspective the revenue for local governments alone across Pennsylvania amounted to $63 billion in 2010 alone. So the ratio of the new windfall to that revenue base gives me……..
update: I overestimated. So only 60% of the 204 million goes to local governments. So it is $122 million being distributed to local governments. The ratio works out to be: 0.19%.
If you really want to play with numbers, that $ amount is equivalent to the fines from just 10 red light cameras like this one in DC.
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