Economy

Economic Daily Outlook

TUESDAY, APRIL 24, 2012

 

ECONOMICS:

OPINION: High Tax Rates Won’t Slow Growth (Wall Street Journal)

By Peter Diamond and Emmanuel Saez

The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? Because U.S. income concentration is now so high, the potential tax revenue at stake is large.

But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate?

The Laffer Curve is used to illustrate the concept of taxable income “elasticity,”—i.e., that taxable income will change in response to a change in the rate of taxation. Top earners can, of course, move taxable income between years to subject them to lower tax rates, for example, by changing the timing of charitable donations and realized capital gains. And some can convert earned income into capital gains, and avoid higher taxes in other ways. But existing studies do not show much change in actual work being done.

According to our analysis of current tax rates and their elasticity, the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70% (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.

 

REGULATION:

Senate Unexpectedly Delays Vote on Credit Union Bill (American Banker)

By Kevin Wack

In a victory for banks, the Senate’s Democratic leadership has unexpectedly delayed consideration of a bill that would allow credit unions to expand their business lending.

The measure had been expected to come to a vote in the Senate as early as this month, and lobbyists from both the banking and credit union industries have been in the midst of furious efforts to wrangle votes.

But a spokesman for Democratic Sen. Charles Schumer told American Banker on Monday that the vote will not happen until at least the second half of the year.

Fallon cited a busy Senate schedule, including postal reform legislation and a cyber-security bill, in explaining the delay.

The bill, which is co-sponsored by Democratic Sen. Mark Udall and Republican Sen. Rand Paul, would raise the cap on business lending from 12.25% of a credit union’s assets to 27.5%.

Credit unions say the legislation will make it easier for small businesses to get loans, which will create jobs, while banks argue that it will benefit only a relatively small number of non-profits while also adding risk to the credit union industry.

 

HEALTHCARE:

Social Security’s financial forecast gets darker; Medicare’s outlook unchanged (The Washington Post)

By N.C. Aizenman

Surging energy prices and a slower-than-expected economic recovery have worsened the financial outlook for Social Security compared with last year, while the picture for Medicare remains grim but essentially unchanged, according to annual forecasts released by the government Monday.

The trustees overseeing Social Security reported that the program’s trust fund will be depleted by 2033 — three years earlier than projected last year. After that, incoming Social Security tax revenue will cover only three-fourths of the benefits scheduled to be paid out through 2086, requiring Congress to either increase taxes or reduce benefits.

The fiscal health of Social Security declined even more precipitously according to another, somewhat technical measure. This statistic reflects the difference over the next 75 years between projected benefits and the expected annual income of the American workers whose taxes will finance them. This measure reached its worst level since the early 1980s, when the trust fund’s imminent insolvency prompted Congress to enact a variety of changes.

At a news conference to release Monday’s reports, administration officials and program trustees took turns urging Congress to come up with the kind of bipartisan solution that has long eluded it.

 

ENERGY:

Signs of cheaper gas could brighten Obama campaign (Reuters)

By Allister Bull

New signs of lower U.S. gas prices could give a boost to President Barack Obama’s re-election hopes and blunt a potent weapon that Republicans have used to attack him.

News on Monday of a month long delay in the planned closure of the largest refinery on the U.S. East Coast was the latest sign rocketing gasoline prices may have peaked.

Government data later showed national U.S. gasoline prices have fallen for three straight weeks after surging earlier in the year, cooling fears they might hit $5 a gallon this summer.

Industry experts say keeping Sunoco’s Philadelphia refinery open will ease supply concerns and help underpin a gradual decline in gasoline prices.

 

That, in turn, would ease a burden on the U.S. economy that Republicans have seized upon as one of their best bets of thwarting Democrat Obama’s bid for re-election.

 

EDUCATION:

Obama to Address Student-Loan Rates (Wall Street Journal)

By Jared A. Favole and Carol E. Lee

Latching on to rising concern over student-loan debt, President Barack Obama will spend much of the next week urging Congress to stop interest rates on the loans from doubling.

The effort will kick off Friday with remarks by Education Secretary Arne Duncan and continue into next week with speeches by Mr. Obama at the University of North Carolina at Chapel Hill, the University of Colorado at Boulder and the University of Iowa.

White House officials are hoping that the effort will resonate with young voters—who they believe are key to the president’s re-election chances. The push also fits into the president’s campaign theme of trying to ensure that Americans of all backgrounds get a chance for success.

Interest rates on federal student loans are set to double to 6.8% on July 1 unless Congress steps in. For each year that Congress allows the rate to double, the White House said, the average student with these loans racks up an additional $1,000 in debt.

Student-loan debt appears to have surpassed $1 trillion last year, according to a preliminary finding by the Consumer Financial Protection Bureau. Rising student-loan rates and debt don’t just affect borrowers. Economists have said rising student-loan debt could force people to delay other purchases, such as a home.

 

FOREIGN POLICY:

Economic Gloom Deepens Europe’s Political Crisis (Wall Street Journal)

By Marcus Walker and Charles Forelle

The Dutch government fell amid a dispute over budget cuts, underscoring the growing difficulty Europe’s leaders face against a darkening economic picture, massive debts, angry voters and volatile financial markets.

On Monday, Dutch Prime Minister Mark Rutte became the latest euro-zone leader to fall victim to the region’s economic funk, tendering his resignation after failing to win enough backing in parliament for measures to cut the country’s budget deficit. The leaders of Greece, Portugal, Ireland, Spain and Italy also have been forced out recently as the region’s economy worsens.

Dutch Prime Minister Mark Rutte and his cabinet have resigned after failing to reach agreement on reducing the country’s budget to meet European guidelines. Charles Forelle reports on Markets Hub. Photo: Reuters.

Around Europe, many voters, politicians and investors are fretting about economic weakness and high debts, and searching for the right balance between growth and fiscal discipline. A divide is growing between a German-led camp that argues that there is no alternative to austerity for all, and critics who say the strategy is pushing the euro zone into a downward spiral.

Sagging economic data, including a purchasing managers’ index on Monday that suggested the euro zone is stuck in recession, are adding to the evidence that deep budget cuts alone aren’t working.

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