Category: Economics


So truth be told, when I paused my blogging I was not only very busy, but also just really not feeling inspired to write anything. Good thing this blog is just for fun. Apparently the thing to do when you want to seem “professional” about a blog is to write a lot of things in advance and have them sitting around ready to post when you’ve got nothing to say so you can update frequently.

But right now I’m still in the crunch at work, and rather busy personally as well, but I’ve had some thoughts on things I really want to write. Including a somewhat fresh take on a topic that usually becomes just a curmudgeonly rant for me: driving. I don’t have time to write it now, but it all hinges on these two items, so I’m just going to leave them here so I don’t lose them:

http://news.drive.com.au/drive/roads-and-traffic/speed-camera-rewards-drivers-20101129-18d3i.html

http://trafficwaves.org/

 

EDIT: Also, this is interesting and related: http://www.theatlanticcities.com/commute/2012/03/should-we-pay-people-drive-peak/1586/

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Kill the Dollar Bill

I had intended my next blog post to be about bubbles and the Presidential election, but when I learned that Senators McCain and Harkin had recently introduced a bill to switch from using dollar bills to using dollar coins I had to let people know about it. Eliminating dollar bills in favor of dollar coins will result in substantial savings to the Federal budget, and could potentially also have a stimulative effect on the economy. You should all write to your Senators and urge them to cosponsor Senate Bill 2049, the Currency Optimization, Innovation, and National Savings Act.

You can see the argument for killing the dollar bill in this brief and entertaining video, or scroll down to read my version in boring old text.

The Government Accounting Office has analyzed this issue a number of times and always comes to a similar conclusion: the government could save 5.5 billion dollars over the next 30 years by eliminating the dollar bill and replacing it with dollar coins. Admittedly, that’s not actually a lot of money when compared with the total Federal budget and the current size of the deficit. Stopping the minting of pennies and nickels would save more. But we’d be foolish to ignore the fact that there’s money to be saved by a simple technical change that doesn’t involve raising taxes or cutting vital programs. The savings come from the fact that printing dollar bills is relatively expensive, and that dollar bills simply don’t last long. They are handled so much that they wear out quickly and have to be replaced. That is the point at which a coin is preferable to a bill. Coins can be handled much more without wearing out, so we wouldn’t have to mint nearly as many coins as we currently print dollar bills. Not only that, but we currently have a rather large stockpile of dollar coins, so there’s not a lot of start up or switch over cost involved, all we have to do is get those coins into circulation. Most attempts to do that have failed because people are resistant to change, but this bill contains one key provision that will guarantee that coins get used and not bills: it stops the circulation of dollar bills after a certain number of coins are circulated or after four years, whichever comes first.

The other advantage to replacing dollar bills with dollar coins is the potential stimulative effect on the economy. This is due to something called the denomination effect. It basically says that people tend to spend more money in small denominations than large ones. A dollar coin effectively feels like a smaller denomination than a dollar bill and is more likely to be spent. So replacing dollar bills with coins should result in more spending, which will stimulate the economy without the tax cuts or spending increases that either side of the political aisle will oppose. Again, the effect may be relatively small, but it’s something. Right now we’re leaving both these cost savings and economic stimulus sitting on the table because of inertia, emotional attachment to the bill, and probably some lobbying from paper and ink companies (just think how much paper and ink we’re buying to print all those bills).

Resistance to change and emotional attachment will produce arguments that people don’t want to carry around that much change and will therefore empty it from their pockets and take it out of circulation. But the experience of say every other developed economy in the world shows that a coins work.

This is a nonpartisan bill that will save money and stimulate the economy. There’s simply no good reason not to do it. So take the time to go to www.senate.gov and send an email to your senators asking them to support Senate Bill 2049, the Currency Optimization, Innovation, and National Savings Act. Feel free to use anything from this blog post to make your case.

President Obama has proposed reducing corporate income tax rates from 35% to 28% while eliminating some loopholes to make up the lost revenue. I think it would be interesting to consider a more controversial change:

What would happen if we eliminated corporate income taxes?

This kind of suggestion would be greeted with elation from libertarians and some Republicans, and generally derided by liberal Democrats like me, but if done correctly, it might actually turn out to be a pretty good idea.

We have to recognize first that any tax levied will result in some amount of tax avoidance behavior.  Some of this we want, like charitable contributions and reinvesting in the. But the behavior we don’t want, like off-shoring and spending millions on accountants and lobbyists to create and exploit loopholes, can be really costly to economic efficiency. What you get is really huge companies that pay no income taxes, and due to various tax credits, actually get money back from the government after making billions in profits.

Corporate income taxes, in spite of the fact that many large corporations pay little or no income taxes, are also used as an excuse for having a regressive 15% tax rate on capital gains, the notion being that dividends are being taxed twice, once as corporate profit and once again as capital gains to share holders.

I think we would potentially capture more revenue if we eliminate corporate income taxes altogether, but tax all capital gains as ordinary income.  This would eliminate the “double taxation” argument, and eliminate a lot of inefficiency involved in off-shoring.

If we just say that all corporate income is tax free there would be new kinds of tax avoidance behavior. If it is all business profit, then I can just quit my job and work as an independent contractor and suddenly I pay no taxes.  So I think the first rule is that for this to apply you must pay dividends at a certain level relative to profits.  We would also need protections against CEOs simply living off the company bank account. Some other rules would be needed to get back the behavior we do want that corporate taxes drive. For example, for a corporation to be tax free it must also give no money to lobbyists or political campaigns. Violations of regulatory rules, instead of resulting in one time fines that large corporations are more than willing to pay, result in revocation of tax free status until the company passes a review demonstrating that they have cleaned up their act and paid restitution. There would be no tax loopholes for corporations outside of this policy, so if you get caught and are forced to pay taxes, you pay the full amount, no exceptions. There should also be some level of profit as a percentage of revenue above which you go back to paying income tax, to continue to encourage reinvestment and hiring.

I would love to have real economists look at this idea and run the numbers to see how it would affect income tax receipts. Perhaps they have, but I don’t think I’ve ever seen it addressed in quite this way. Part of the reason for that is likely that conservatives would only look at eliminating corporate taxes and not doing any of the other mitigating things I’ve mentioned, while liberals scorn the very notion without considering that it could be a more practical means of attaining very liberal goals. My personal guess is that we would not see much decrease in tax receipts, and maybe even an increase. All dividends would be taxed as normal income, and hedge fund managers who currently pay 15% would suddenly be paying 38% on their millions in annual income. That’s a lot of money.

At the same time, businesses should save money by not having to work as hard at avoiding taxes. Not to mention we would move at least some jobs back to America. We’ll never be able to compete with offshore locations in terms of labor costs, lax environmental regulation, and cheap transportation, but some kinds of businesses are less affected by these costs and would move back. Financial services companies would be delighted to move back to the U.S. so there would be plenty of money and jobs coming back to America. States like Florida and Texas that have no state income tax could become new centers of finance.

Nevertheless, I’m not foolish enough to think that I’ve just solved a huge problem with a simple solution that no one ever thought of before. I expect there are holes in my idea, but I just can’t think of any that would be insurmountable, except for the political ones.