Obanomics

A conversation with Austan Goolsbee- Charlie Rose show

It is good in Down Under

Four year net policy decisions included in each Budget and Growth in government operating expenses


A new architecture for infrastructure


Corporate tax rates in Australia and the OECD 2008

Making provision for future priorities

IMF gives an A+ to Australia's economic management;

10. Fiscal policy focused on medium-term sustainability has delivered a sequence of surpluses that has eliminated commonwealth net debt. This leaves Australia with a strong fiscal position, an enviable situation by international standards. We support the strategy in the latest budget to save the revenue windfall from the commodity driven boom and thereby allow automatic stabilizers to support monetary policy. Saving some of the revenue from the commodity price boom in three new funds will take pressure off monetary policy in the near term and enable increased infrastructure investment over the medium term.

11. The reduction in public spending growth in the latest budget illustrates the government's commitment to help reduce inflation. With the upside risks to the outlook for inflation, more public spending restraint could be required and we encourage the authorities to identify areas where additional spending cuts could be implemented. In addition, positive revenue surprises should be saved to assist monetary policy until it is clear that inflation will decline. Given the uncertainty about how much of the increase in commodity prices will be permanent, saving the additional revenue in the near-term may avoid sharp changes in taxes and spending in the future.

12. The states have increased capital spending and their budget balance has shifted to a small deficit in aggregate, thereby adding stimulus to the economy. This highlights the importance of maintaining restraint at the commonwealth level.

13. To the extent that the improvement in the budget balance is structural, associated with permanently higher commodity prices, this should provide scope to reduce taxes or increase spending over the medium term. The governments' intention to achieve a positive balance over the medium term should increase public net worth, further strengthening the fiscal position. Our analysis suggests that a combination of lower labor and capital income taxes, along with increased public investment, will generate the largest economic gains. The gains from other options such as lower consumption taxes or higher public consumption are not as large. Despite the expected structural improvement in the medium term, significant long-term fiscal challenges remain, particularly in the area of healthcare spending, and early adjustments will be key to preserving fiscal sustainability.

Politics in America

Bryan Caplan on Fox

Econ Talks

Bryan Caplan Says Proposed Gas-Tax Cut Would Be `Placebo'

Bryan Caplan, an associate professor at George Mason University, talks with Bloomberg's Tom Keene from Fairfax, Virginia, about proposals by Senators Hillary Clinton and John McCain to suspend the federal tax on gasoline, the outlook for the presidential election and impact of the dollar's decline on oil prices.

Chris Anderson on Free

Lewis Black on Tax Rebate

'I wonder who I could invade with 600 dollars'- Lewis Black

Assorted Pakistan

Demand Analysis For Tax Reform In Pakistan
Angus Deaton and F. Grimard

Abstract: Pakistan, like many LDCs, derives most of government revenue from indirect taxation. However, the system of taxes and subsidies has grown up piecemeal over the years. Previous exercises in price reform for Pakistan have been forced to make very restrictive assumptions about consumer preferences, and have typically used demand systems that prejudge what are the desirable directions of price reform. In this paper, the methodology of Deaton (1988, 1991) is extended and applied to the 1984-85 Household Income and Expenditure Survey. A theory of quality variation based on separable preferences is developed, and the implications for welfare and empirical analysis laid out. The prices of oils and fats and of sugar do not vary very much in the survey data, and the symmetry and homogeneity restrictions from the theory play an important part in obtaining sharp estimates of own and cross-price elasticities. The parameter estimates suggest that there are significant cross-price elasticities between the high-calorie foods and the presence of these substitution patterns means that the effects of potential price reforms are quite different from those that would be estimated using the traditional assumptions. Based on demand patterns alone, it would be desirable to raise government revenue by raising the consumer price of rice. However, in Pakistan it is not generally possible to decouple the producer and consumer prices of rice.

Zakat and Inequality: Some Evidence from Pakistan

This paper presents empirical evidence on the extent to which zakat---a form of religiously-mandated charity under Islam---achieves its intended objective in Pakistan. Detailed income and expenditure data from Pakistan's Household Income and Expenditure Survey for 1987-88 are used to construct two income distributions---one containing the distribution of income which would have obtained if relevant forms of charity were not given, and one containing the distribution of income which obtains under a regime in which such charitable giving takes place. Atkinson-Kolm-Sen (AKS) ethical relative indices of income inequality are computed for Pakistan and each of its four provinces, for each of these two income distributions, and are compared over a range of parameter values. Evidence is found that zakat does redistribute from the better off to the worse-off, and so achieves some reduction in measured income inequality in Pakistan. Both intra-province and inter-province components of over-all inequality decline, though the amount of change is generally small. These conclusions are shown to be robust to a wide range of normative values the investigator may select.

An Islamic Perspective on Inequality in Pakistan;

This paper examines the distribution of income in Pakistan, and in each of its four provinces, from an explicit and formal Islamic perspective. A cardinally significant Atkinson--Kolm--Sen relative index of inequality reflecting that perspective is proposed and computed from the full HIES data series for the years 1984-85, 1985-86, 1986-87, and 1987-88. There is evidence of a significant decline in overall inequality in Pakistan from 1984-85 to 1987-88, but the level of inequality remains very high. Inter--province and inter--urban/rural differences in inequality profiles within Pakistan and each of its provinces are found to be generally less significant than intra--province and intra--urban/rural differences.

Soft earmarks and Hard earmarks

How to spot a soft earmark? Easy. The language is that of a respectful suggestion: A committee “endorses” or notes it “is aware” of deserving programs and “urges” or “recommends” that agencies finance them.

That was how taxpayer money was requested last year for a Christian broadcasting group to build a shortwave radio station in Madagascar, a program to save hawks in Haiti, efforts to fight agriculture pests in Maryland and an “international fertilizer” center in Alabama that assists farmers overseas.

After hard earmarks figured into several Congressional scandals and prompted criticism of wasteful spending from government agencies and watchdog groups, Congress cut back on their number last year and required disclosure of most of them. (There were more than 10,000, costing nearly $20 billion last year, according to the Congressional Research Service.)

But soft earmarks, while not a new phenomenon, have drawn virtually no attention and were not included in the ethics changes — and current ones under consideration — because Congress does not view them as true earmarks.

Their total cost is not known. But the research service found that they amounted to more than $3 billion in one spending bill alone in 2006, out of 13 annual appropriations bills. And the committee that handles the bill, which involves foreign operations, has increasingly converted hard earmarks to soft ones.

“This shows that even though lawmakers now have to disclose their pet projects, we’re not getting a full accounting of earmarks,” said Ryan Alexander, director of Taxpayers for Common Sense, a group in Washington that tracks earmarks. “We may just be looking at the tip of the iceberg.”

Representative Jeff Flake, Republican of Arizona, said he did not believe gentler language changed anything when it came to pork-barrel spending.

“No matter what you want to call it, an earmark is an earmark,” said Mr. Flake, a longtime foe of earmarks. “If Congressional leaders don’t believe that soft earmarks are earmarks, then I think that makes the case as to why we need tougher reforms in place.”

Soft earmarks are included in a number of spending measures, but they tend to occur more frequently in spending bills that give money to the State Department, the United States Agency for International Development and other foreign aid programs.

Federal agencies are not required to finance soft earmarks. However, officials have traditionally felt obliged to comply with such requests.

“Soft earmarks, while not legally binding, frequently come with an implicit threat: If you don’t take our suggestions, we will give you a hard earmark next,” said Andrew Natsios, former administrator of A.I.D. in the Bush administration.

In its report, the Congressional Research Service said agencies also could face budget cuts if they did not finance soft earmarks.

-Pork Barrel Remains Hidden in U.S. Budget

Doing Business in Small Islands

Interesting post from World Bank's Doing Business blog;

In Mauritius, it takes only 7 days. Mauritius, the best performing SIDS economy, ranks 27th on the ease of doing business, while Guinea Bissau is at 176 out of 178 countries.

The government that took office in July 2005 embarked on a bold economic reform program aimed at moving Mauritius from reliance on trade preferences to global competitiveness. Over the last two years Mauritius has reformed in 7 of the 10 areas Doing Business measures—one of the most dedicated government reform efforts that the project has seen worldwide. Out of 18 reforms affecting business regulations in SIDS introduced between April 2006 and June 2007, 6 were implemented by Mauritius.

Reforms pays off. Over the past two years, Mauritius's economy has enjoyed a steady increase in the annual growth rate – from 2.2% in 2005 to 5.4% in 2007. This is consistent with Doing Business research finding - a hypothetical improvement on all aspects of the Doing Business indicators to reach the level of the top quartile of countries is associated with an estimated 1.4 to 2.2 percentage points in annual economic growth. This is after controlling for other factors, such as income, government expenditure, investment, education, inflation, conflict, and geographic regions.

Reforms are also associated with faster job creation. In Mauritius, overall the unemployment rate dropped by 1.1% from 9.6% in 2005 to 8.5% in 2007. Doing Business research also shows that women and young workers benefit the most from reforms. Mauritius is no exception. Female unemployment was reduced by 2% from 16.4% in 2005 to 14.4% in 2007.

Clinton Fact of the Day

The former president has earned $51,855,599 from speeches since leaving the White House. In 2007 alone, former President Clinton earned more than $10 million in speaking fees. The income from his two books, “My Life” and “Giving,” totals $29.6 million. Senator Clinton earned $10.5 million in book income over the period from her book “Living History.”

The Clintons paid $33,783,507 in federal taxes during this period and made $10,256,741 in charitable contributions, according to a summary of the seven years provided by the campaign.

See also TaxProf coverage.

Optimal Disaster Insurance

On the Optimal Design of Disaster Insurance in a Federation
by Timothy J. Goodspeed and Andrew F. Haughwout

Abstract: Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments are responsible for investing in infrastructure designed to reduce vulnerability to natural and man-made hazards. This division of responsibilities – regional governments providing protection from disasters and federal government providing insurance against their occurrence – leads to the tension that is at the heart of our analysis. We explore these tensions building on the model of Persson and Tabellini (1996). We show that when the federal government is committed to full insurance against disasters, regions will have incentives to underinvest in costly protective measures. We derive the structure of the optimal second-best insurance system when regional governments choose investment levels non-cooperatively and the central government cannot verify regional investment choices. Surprisingly, second-best transfer levels (and the corresponding regional investment levels) can be greater or less than their first-best counterparts, depending on the relative probability of a disaster. If the probability of a disaster is low, secondbest transfers will be designed to reward regions that succeed in avoiding disasters and punish those that do not, thereby giving regions an incentive to increase investment in protective infrastructure. However, this raises the further question of whether the central government can credibly commit to such a scheme, and we find that ex-post an optimizing central government will decrease transfers if a region provides protective infrastructure that increases its expected future income, generating a soft-budget constraint for regions. This provides an additional incentive for regions to underinvest in protective infrastructure. We discuss these results in light of recent disaster policy outcomes in the US.

Tax Policy in Down Under

THE Rudd Government should scrap dividend imputation credits and instead reduce the company tax rate by about a third if it wants to increase investment in Australia, according to a tax expert and former Labor government adviser.

Nicholas Gruen, chief executive of Lateral Economics and Peach Home Loans, said dividend imputations — which allow companies to pass on to shareholders the benefit of Australian tax paid on profits — cost $20 billion a year but did not substantially improve a company's cost of capital.

Speaking at the Committee for Economic Development of Australia's tax forum in Canberra yesterday, Dr Gruen said imputation credits were an inefficient form of tax expenditure.

"The evidence suggests that it doesn't increase share prices," he said. "If you got rid of dividend imputations and spent the $20 billion on reducing company tax rates, you would make the shares much more attractive to foreign shareholders … The price would go up a lot and the cost of capital would go down."

Dr Gruen, who worked as an economic adviser to John Button as industry minister and John Dawkins when he was treasurer, said the $20 billion in tax revenue gained could then be used to lower the company tax rate from 30% to about 19%.

The Corporate Tax Association's executive director, Frank Drenth, and PriceWaterhouseCoopers partner Tim Cox expressed reservations about scrapping the system, saying dividend imputations helped the Tax Office monitor whether companies paid tax.

The forum also included a panel discussion on how to increase workforce participation. Australian National University research fellow and economist Andrew Leigh said Government should consider earned-income tax credits, which are used in the US and Europe. The credits are paid to low-income earners to provide incentives to work.

Ann Harding, director of the National Centre for Social and Economic Modelling, cited research released last year estimating that 910,000, or 7.1%, of working-age Australians faced an effective marginal tax rate of more than 50%. She said it was difficult to eliminate the problem, where people who earned more money faced the loss of government assistance.

How does the Iraq War bill add up

The Iraq war caused the global credit crisis?

Leave Us Alone

Leave Us Alone: Getting the Government's Hands Off Our Money, Our Guns, Our Lives

Grover Norquist

How's Canada's Economy doing

Video Summary of Canada Article IV Consultation

The Laffer Curve- Part 2

Terminator's Drastic Cuts

Governor Arnold Schwarzenegger and California's Budget

Related;
The Red Ink State

Let's start with the culture of overspending in Sacramento. State outlays have nearly tripled to $142 billion this year from $51 billion in the early 1990s. After the technology bubble burst in 2001, the state's deficit swelled to $20 billion. Voters recalled Gray Davis from the Governor's mansion in favor of Mr. Schwarzenegger, who promised to "cut up the state's credit card." In Arnold's first year, the budget was held in check, but the state still issued $9 billion in "revenue bonds" rather than shrink the size of government....

Even with the new deficit estimates, the Governor and legislature are promoting a new government health-care plan at a cost, coincidentally, of $14 billion. The state Assembly recently passed the plan. State Senate President Don Perata, a Democrat, advises that to launch this new health-care entitlement now would be both "impractical and impolitic." He's right, but the politicians are floating a $2 a pack increase in the state's cigarette tax to pay for it. So a shrinking number of smokers would be tapped to finance a growing number of citizens dependent on the state for health insurance.

One reason for the budget deterioration is falling home prices. The housing bubble sent the median home price to $500,000 last year in California. At the height of this real-estate euphoria, fewer than one in 20 residents could afford to buy the average home in San Diego and Los Angeles Counties. Now the state is enduring the inevitable correction, with prices tumbling by double digits in some markets. Homeowners are demanding a revision of their property tax assessments, which is only adding to the revenue drought.

California is also losing many of its most productive workers. Over the past decade nearly 1.5 million more Americans fled California than arrived; 275,000 left last year alone, according to Census Bureau data. An influx of foreign immigrants has maintained the state's overall population, but those departing include upwardly mobile middle-class families moving to lower-tax states with more affordable housing.

Assorted on Economic Report of the President

International Economics in the 2008 Economic Report of the President

Tax Policy Chapter of Economic Report of the President

White House Optimism on Business Investment: A Reality Check

White House Does Not See a Recession

Debt and the Real Threat

A Premier on the Alternative Minimum Tax

James Poterba talks about AMT

New Econ blog

Jeff Frankels Weblog