Thought du Jour

US journalist Christopher Caldwell looks at President Barack Obama’s call for a minimum 30% tax on those earning more than $1m a year.

Mitt Romney, a Republican candidate for US president, released his tax returns this week. They showed that he had paid just $3m on his 2010 income of $21.6m, which is just the tip of his quarter-billion-dollar iceberg of wealth. Mr Romney, in other words, is paying taxes at a lower rate than most of the middle-class Americans he seeks to rule. And this inequity is made possible in part by a special rule on “carried interest” that taxes the earnings of managers of private equity, such as Mr Romney, at the super-low capital gains rate of 15 per cent. ….

When Mr Obama and his fellow Democrats held the presidency, the House and a filibuster-proof majority in the Senate, they could have eliminated the carried interest accounting rule in a single afternoon. It remains in the tax code because Mr Obama’s party – which, let us not forget, holds the allegiance of 19 of the richest 20 postcodes in the US – wanted it there.

Christopher Caldwell “Class warfare need not be taxing“, Financial Times, 28 January 2012.

Mr Caldwell (born 1962) is a senior editor at The Weekly Standard, a neoconservative opinion magazine.

Alan Greenspan’s contribution to the FT series “Capitalism in Crisis” is a spirited defence of free-market capitalism. This comes as no surprise, since he is a follower of Russian-American novelist and philosopher Ayn Rand (1905–1982). Ms Rand was a fervent advocate of laissez-faire capitalism.

Greenspan, correctly in my opinion, attributes the economic success of countries in the past century to competitive markets. He fails, however, to defend capitalism from the charge that, unfettered, it produces a very unequal distribution of income. He touches on inequality only briefly, in two paragraphs:

During the past century …, competitive-market-driven economic growth created resources far in excess of those required to maintain subsistence. That surplus, even in the most aggressively competitive economies such as America’s, has been mainly employed to improve the quality of life: advances in health, greater longevity and pension systems that go with it, a universal system of education and vastly improved conditions of work. We have used much of the substantial increases in wealth generated by our market-driven economies to purchase what most would view as greater civility. ….

The often-assailed greed and avarice associated with capitalism are in fact characteristics of human nature, not of market capitalism, and affect all economic regimes. The legitimate concern of increasing inequality of incomes reflects globalisation and innovation, not capitalism. But an additional contributor to inequality in America is our immigration law, which “protects” many high earners from skilled migrant competitors. The American H1B programme is in effect a subsidy for the wealthy, a policy that is anathema to the supporters of capitalism.

Alan Greenspan, “Meddle with the market at your peril“, Financial Times, 26 January 2012.

I will restrict myself to just a few comments. Economic growth improves quality of life for those with rising incomes, but government action is necessary if everyone is to enjoy the gains. Markets alone do not ensure universal access to health care, old age pensions or education. Greenspan must know this. He should write it, instead of describing free markets/central planning in black and white terms. Real economies – including the US economy – are mixtures of markets and government planning (interference).

Greenspan writes that income inequality reflects globalisation and innovation. There is some truth to this. But wouldn’t incomes be almost as unequal in a closed, free-market system without international trade, capital flows or innovation? Wouldn’t there still be greed, crony capitalism and abuse of wealth? I think so, unless the initial endowment of wealth was very equal, but economists (fortunately) cannot run an experiment to test my hypothesis.

In any event, it is clear that capitalism’s ‘creative destruction’ produces winners and losers. Government can distribute some of the increased income from winners, so that everyone gains at least something from economic growth. Greenspan does not mention this. He advocates market solutions, for example allowing skilled migrants to compete with high earners. Competition from immigrants would not, I suspect, have any effect on bonuses of fund managers, or on incomes of the super-rich in general. Nor would it improve earnings of those in the bottom half of the income distribution.

Photos: Ayn Rand, Alan Greenspan

President Ronald Reagan in 1987 appointed Alan Greenspan (born 1926) to succeed Paul Volcker as chairman of the US Federal Reserve. Greenspan served in this position until January 2006, when President G.W. Bush replaced him with Ben Bernanke.

Bruce Bartlett, an historian who became a senior economist at the White House, US Congress and Treasury, writes that Barack Obama missed an opportunity to call for reform of a tax code that “has become cluttered with far too many special tax breaks that cost a great deal of revenue and show little proof of effectiveness”.

Barack Obama effectively threw cold water on any tax reform effort in his State of the Union Address on Tuesday. ….

The president proposes a variety of … special tax breaks for activities in current political favour and penalties for individuals and businesses in disfavor. This is exactly the sort of thing that created America’s current tax mess. ….

Mr Obama’s decision to move away from reforming the tax code this year is both a substantive and political error that I believe he will come to regret.

Bruce Bartlett, “Obama is tinkering with a tax system that needs fundamental reform“, The A-List, Financial Times, 25 January 2012.

Bruce Bartlett (born 1951) was domestic policy adviser to President Ronald Reagan, a Treasury official under President George H.W. Bush, and worked also for Congressmen Ron Paul and Jack Kemp. He is author of numerous books, including Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006) and The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take (Simon & Schuster, 2012).

Bartlett left the Republican Party and now considers himself to be an independent:

I think the party got seriously on the wrong track during the George W. Bush years, as I explained in my “Impostor” book. In my opinion, it no longer bears any resemblance to the party of Ronald Reagan. I still consider myself to be a Reaganite. But I don’t see any others anywhere in the GOP these days, which is why I consider myself to be an independent. Mindless partisanship has replaced principled conservatism.

“Where is the GOP of yesteryear?“, Democracy in America, The Economist, 2 September 2009.