Tuesday, February 26, 2013

The Sequester, the Comfortable and the Super-Rich

By Mike Dorf

With the sequester set to hit at the end of the week, readers might want to ask "how will the sequester affect me?"  Here's a useful state-by-state breakdown of some of the likely impacts of domestic spending cuts, but I think it's fair to say that as in most things, the impact will be felt most severely by those who can least afford it.

There are exceptions, however, and, in particular, one class of exceptions that are likely to be felt by an important group of voters: comfortable professionals like me and many readers of this blog.  How so?  Because air traffic controllers and TSA agents will be laid off, we can expect travel delays.  Or make that further travel delays beyond those we experience as normal these days.  I'll admit (to my shame) that practically my first thought when I read a list of projected cuts was this: "Hmm, I wonder whether I'll have to cut out early from the reception after my lecture next week in order to get to the Atlanta airport in time to wait in a longer-than-usual security line."

Was that thought enough to motivate me to call my Congressman?  Not yet, but one hopes that as the cuts from the sequester are increasingly felt by comfortable folks like yours truly, pressure will build on Congress to end it.

There is reason for pessimism.  After all, the most important constituency for Republicans is the super-rich, and they don't fly commercial at all.

But there's also reason for optimisim.  Presumably the cuts to air traffic controllers will even have an impact on corporate titans flying on private jets.

Moreover, the deal struck to avert the fiscal cliff reveals that the Republican Party represents the merely well-to-do as well as the super-rich, maybe even more than the super-rich.  President Obama's opening bid--the number on which he campaigned in both 2008 and 2012--was to raise taxes on incomes over $200k for individuals and $250k for couples.  But the negotations produced legislation that only raised taxes for incomes over $400k/$450k.  To be sure, in characteristic Democratic Party negotiating fashion, President Obama all but guaranteed that he would set the threshold there even before the bargaining began, but still, the question is why the Republicans took that particular deal.  Why fight for extra take-home money for people earning between $200k and $400k (and families between $250k and $450k), rather than sacrifice those mere doctors, lawyers and medium-sized business owners for tax benefits for hedge-fund managers and casino magnates with incomes in the hundreds of millions?

Conventional wisdom holds that the sequester was supposed to be a double-edged sword, with Democrats pained by the domestic spending cuts and Republicans pained by the military spending cuts.  But with a new breed of Republicans in Congress who care more about fiscal matters than about the military, observers worry that only Democrats are upset about the sequester.  However, if I'm right that Republicans care about the merely well-to-do at least as much as they care about the super-rich, then as the sequester drags on, and air travel becomes truly miserable, pressure will build for a deal.  And that's not even counting all of the pressure for a deal that will come from the misery that will occur if no new appropriation measure is enacted by March 27.

25 comments:

andy grewal said...

Yikes. Usually your posts are a lot more even-handed than this. I wonder if the wrong name was signed to this one.

Michael C. Dorf said...

Andy: Would you care to identify which of my claims here strikes you as lacking in even-handedness? You cannot seriously contest the proposition that the Republican Party looks out for the interest of high earners. The entire impasse in Washington over the last year and a half boils down to Republican resistance to President Obama's plans to impose higher taxes on the wealthiest Americans. Or perhaps you think it was somehow unfair of me not to add that Republicans SAY they oppose higher taxes on the wealthy out of concern for the jobs that these "job creators" supposedly create? If so, I disagree that it displays a lack of evenhandedness to decline to repeat political talking points. And if it does, then being "even-handed" as you use the term is no virtue.

andy grewal said...

"the most important constituency for Republicans is the super-rich, and they don't fly commercial at all."

This strikes me as exceptionally questionable, especially given that 99%+ of Republicans are not super-rich.

Also, although you obviously disagree with the proposition, a Republican may be against tax hikes on the wealthy out of concerns that they will move away (see CA and MD's problems) or invest elsewhere (multinationals have trillions of dollars trapped offshore). That is, one can be against massive tax hikes on the wealthy and still be concerned with the greater good, not merely the Rockefellers.

andy grewal said...

"rather than sacrifice those mere doctors, lawyers and medium-sized business owners for tax benefits for hedge-fund managers"

The carried interest rules, which I assume you are referring to, could not possible cover tax cuts for docs/MDs and so on. Adding Section 710 (which closes the loophole) may bring in about $1B or so to the Treasury, and may be justified as a matter of tax policy, but in no conceivable way is there a tradeoff between that statute and broad tax cuts for any slice of the population. Closing the carried interest loophole will give the bottom half at most about $10 each. Suggestions otherwise are not even-handed.

Michael C. Dorf said...

1) I was not referring to the carried interest rule. I was referring to rates overall. There is no reason, in principle, for setting the threshold for the max rate at $200k/$250k, $400k/$450k, $1 million, $10 million, or whatever.

2) I didn't say the super-rich are the ONLY Republican constituency, just the most important. Based on the policy positions the party favors, I stand by that assessment.

The fact that you disagree doesn't make my analysis unfair (a term I prefer to "evenhanded," with its suggestion that fairness entails repeating whatever positions happen to be current as though they are all equivalent).

andy grewal said...

Ok, even-handed enough. Er, fair enough.

Neil H. Buchanan said...

Good to see that this debate reached a point of agreement. I'll just add that there is zero non-anecdotal evidence that Maryland and California have driven away people with state tax increases. Maryland's "disappearing millionaires" turned out to be people who earned just above $1m before the Great Recession, and who earned less than $1m after the crash. They didn't move out of the state, they just were no longer millionaires. California's tax rate increases have been extensively studied, and the economists who have studied them have concluded that there is no statistical support for the claim that tax increases drove away millionaires.

andy grewal said...
This comment has been removed by the author.
andy grewal said...

Neil,

If high taxes in CA don't drive away some super rich, how do you explain that so many super-star athletes move from CA to FL (e.g. Tiger Woods) upon making it big?

Perhaps the effects in the aggregate are not so severe, and the possibility of millionaire flight should generally be ignored in setting state income tax policy. I don't agree with that approach, but I'm open to reviewing the evidence. At the same time, I think it's unfair not to acknowledge that, at the margin, some millionaires will relocate to avoid higher tax liabilities. Too many athletes have clearly done so to dismiss such evidence as merely anecdotal.

andy grewal said...

Also, it seems rather odd that those on the left will blast the "rich" for taking steps to avoid high taxes, but at the same time argue that high taxes do not cause capital or labor to move.

Scott Martin said...

Andy: Even if your assertions about millionaires leaving CA due to high taxes are true, the case does not generalize to federal income tax rates. There is presumably much more friction for businesses to relocate out of the country than for individual millionaires to relocate within it.

andy grewal said...

Scott: I think it's an empirical question. But my instincts actually run the other way. Someone who has grown up and built in life in LA might not be terribly inclined to move to FL for tax reasons, although some millionaires unquestionably do.

When it comes to relocating a business or decided where to start one (e.g., building a factory), it may be much easier and more sensible to specifically take into account tax rates in the local jurisdiction.

Neil H. Buchanan said...

andy grewal wrote: "I think it's unfair not to acknowledge that, at the margin, some millionaires will relocate to avoid higher tax liabilities. Too many athletes have clearly done so to dismiss such evidence as merely anecdotal."

Actually, the difference between anecdotal and non-anecdotal evidence is exactly why it is possible to dismiss the stories about athletes relocating. There is nothing unfair about refusing to credit claims of cross-border flight that do not show up in the data. Just because it seems intuitive that some marginal decisions will be made on tax grounds doesn't mean that they will be. That's what empirical analysis is for: testing our intuitions and suppositions.

andy grewal said...

If the "data" doesn't show that Tiger Woods is living in Florida and not in California, then the data is wrong.

Paul Scott said...

Tiger Woods is n=1. Maybe you can find a few more. When you find a statistically significant correlation or a predictive model that both works and establishes an increase in probability of flight with increased taxes, that will be something interesting to discuss. Millionaire "X" moved (even if (s)he stated her or his reason for moving) is not interesting.

andy grewal said...

Also, I'm skeptical that the studies actually show that no millionaire leaves because of higher taxes. In fact, researches from the New Jersey Department of the Treasury concluded that "the New Jersey 2004 millionaire tax is associated with a non-trivial loss of tax revenue." ((Cohen, Lai, and Steindel).

None of this demonstrates that millionaire's taxes should or shouldn't be adopted. But the idea that no rich person will respond to tax increases is too far-fetched to accept, especially when the persons making that argument also complain that the rich do too much tax planning.

andy grewal said...

Paul, you can check out the NJ govt researchers report here:

http://www.state.nj.us/treasury/economics/documents/taxflight.pdf

Also, I would emphasize again that the fact that some rich people leave doesn't establish that millionaire taxes shouldn't be adopted. But it's not evenhanded, er, fair, to pretend that some won't.

Paul Scott said...

Andy,
I appreciate to the study. I would only note that it stands almost alone in its conclusions, but is monumentally better quality than "Millionaire X left California."

The study purports to account for housing price increases, but over the same data, this study published in National Tax Journal comes to the opposite conclusion (it notes that the flight from NJ of those effected by the 2004 tax was no different from those not effected).


http://www.stanford.edu/~cy10/public/Millionaire_Migration.pdf


One immediate question that comes to mind is whether the three authors of the paper you linked are appointees of Governor Christie. I don't know one way or the other, but I do know that regression analysis (used by both papers - and used by most of the soft "sciences" (economics likes to pretend it is a science because it uses a lot of math ;) )) is particularly susceptible to bias, this is particularly true as the variable examined become more numerous.

In any event, while much better than anecdotal evidence, the NJ government report goes strongly against the grain of most published research in this area. But furthermore, while of interest to the issue of "millionaire" state taxes, flight must be less of a concern, or at the very least a much different concern, than "millionaire" federal taxes.

andy grewal said...

Paul,

Steindel and Cohen seem to have very impressive backgrounds and they seem to have served both Democrats and Republicans. Cohen, in fact, was the Policy Director for New York Democrats.

http://www.state.nj.us/treasury/economics/about.shtml

I can't find much info on Lai -- his LinkedIn profile is walled off to me.

In any event, I would guess that Sociology professors from Stanford and Princeton would be far more likely to be ideologically motivated than these two dedicated public servants.

But all of this is really besides the point. I thought Mike's post was unfair because he thinks it inconceivable that a Republican would oppose tax increases for any reason other than fidelity to millionaires.

When I talk to my (very few) conservatives friends in the academy or elsewhere and discuss economic or tax policy, we do not discuss how we can ensure that Donald Trump gets another mansion. Although Mike (and perhaps Neil) might not believe it, a person can hold a good faith position that higher taxes can trigger substantial deadweight losses and other undesirable things, and that these other things should be considered in setting tax policy. Again, this does not mean that a MM tax shouldn't be adopted, but the risk of millionaire flight is both consistent with the NJ study and with common sense.

Michael C. Dorf said...

Andy: In a (far-too-long) thread that began with your accusing me of unfairness, you might want to be more careful to characterize my position fairly. I never said anything like what you now accuse me of thinking: that it is "inconceivable that a Republican would oppose tax increases for any reason other than fidelity to millionaires."

My original post said that "the most important constituency for Republicans is the super-rich." That is fully consistent with many rank-and-file Republicans who are not super-rich also supporting Republican views on taxes.

My first comment said that "the Republican Party looks out for the interest of high earners." That is also consistent with some people of modest means supporting Republican candidates because of what they imagine are the pie-growing effects of low taxes on the wealthy.

My next comment, in number 2, said more or less what I'm saying now.

After that, I dropped out of the thread.

So I have no idea why you attribute to me an obviously stupid view that I have not come close to endorsing. Of course I'm aware that there aren't enough super-rich voters to elect Republican candidates unless those candidates also draw substantial support from other voters who either think that they too will benefit from policies that benefit the super-rich or accept such policies because they care more about other issues (such as social issues) as to which their views are closer to the Republican party line.

Anyway, this thread has now played itself out. Let's move on.

andy grewal said...

Mike,

Thanks for your follow up. You'll have to forgive me for employing some exaggeration. Discussions in the blog comments section are no fun unless you at least somewhat mischaracterize your opponent's statements.

In any event, I apologize if I caused any irritation. I'm not sure why this particular post lit a fire in my belly, but you're right, the issue has been exhausted by now. Thanks for organizing this blog.

Jeff G. said...

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Also, I'm skeptical that the studies actually show that no millionaire leaves because of higher taxes. In fact, researches from the New Jersey Department of the Treasury concluded that "the New Jersey 2004 millionaire tax is associated with a non-trivial loss of tax revenue." ((Cohen, Lai, and Steindel).
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