Increase the IRS’s Funding

July 9, 2013Danny Vinik Leave a comment

The recent IRS scandal is not a reason to cut the agency's funding.

The IRS scandal is not a reason to cut the agency’s funding.

After the IRS scandal broke in early May, there was no doubt that Republicans would use it as a reason to drastically reduce the agency’s budget. As expected, House Republicans are doing just that. A new bill looks to cut the department’s funding from $12 billion to $9 billion a year – a 25% reduction. This is in contrast to the $1 billion raise that the President outlined in his budget.

There is no doubt the IRS screwed up. It targeted both Tea Party and progressive groups for more intense scrutiny in the approval process for (c)(4) status than it should have. Even worse, the agency singled out Tea Party groups more than progressive groups, making it harder for those organizations to gain 501(c)(4) status. None of that is okay and we need to correct it.

But that has nothing to do with the IRS’s budget. Subtracting money from the agency does nothing to correct the approval process. It just strains the department’s resources and creates the potential for more mistakes. What makes the House Republican’s bill most foolish though is that we should be increasing the IRS’s budget as the President has called for. In fact, increasing its funding saves the country money. The Treasury estimated in May (PDF) that its proposed budget increase would bring in six times that amount in additional revenue!

Certainly the IRS needs to combat waste within the agency – such as the $49 million it spent on conferences from 2010-2012. But squeezing the budget does nothing to directly combat this waste. The department can still fund those lavish conferences and just relax its enforcement. In the end, taxpayers lose (and those who skip out on their taxes win). If House Republicans really want to make the IRS more efficient, it needs to increase its oversight – as should be done anyways given the recent scandal. But don’t slash the budget simply because people hate the agency. After all, these are the same people who’ve been screaming about our budget deficit the last five years. Even though the IRS’s budget proposal reduces the deficit, I don’t hear them clamoring about it anymore.

Cell Phone Unlocking Doesn’t Stifle Innovation

June 21, 2013Danny Vinik Leave a comment

Michael Moroney is out with a confusing piece in Roll Call today arguing against allowing consumers to unlock their cell phones and use them on other plans. Earlier this year, the White House sided with a grassroots petition that received more than 114,000 signatures to allow cell phone unlocking. A current bill in Congress proposes to do just that but for the moment, it is still illegal. In his column today, Moroney argues that such regulation allows tech companies to recoup the huge amounts of money they spend towards R&D to create such products:

The DMCA is supposed to prevent digital piracy by making it illegal to disable digital rights management software, and it applies to the device locks that carriers put on cellphones — primarily to prevent phones they sell from being used on other carrier networks. When tech companies spend billions of dollars on research and development, they have to recoup those costs and make a profit to stay on the cutting edge of innovation.

Moroney continues on to note that the exclusivity agreement Apple had with AT&T allowed Steve Jobs’s firm to recoup their investment while AT&T had the ability to sell its customers high-cost data plans. Did Apple really need the exclusivity deal with AT&T to profit off the iPhone? Of course not! It makes a huge profit margin on the product alone. Moroney’s basic argument is that without the ability to agree to such deals, Apple would have had no incentive to invent the iPhone and consumers would be worse off today.

Does anyone actually believe that?

All that exclusivity deal did was force consumers to pay higher data fees, part of which AT&T paid to Apple in the form of subsidies as part of the agreement. Consumers are the main losers. In a world where cell phone unlocking is legal, consumers can shop around for the best data plan and carriers must compete on price. Apple earns less without the exclusivity deal, but it still makes a tidy profit that encourages them to continue investing in new products. Consumers save a bit of money overall and no innovation is lost. This is how intellectual property laws are supposed to function.

Instead, our copyright laws protect the profits of Apple and AT&T at the expense of consumers. The companies’ desire to keep cell phone unlocking illegal is pure rent-seeking. Moroney’s article only helps them get away with it.

Is Economic Inequality A Problem? Yes, But It’s Not So Simple

June 17, 2013September 16, 2013Danny Vinik Leave a comment

Former economic adviser to Mitt Romney, Greg Mankiw published an essay (PDF) recently titled “Defending the One Percent.” In it, he argues that growing economic inequality in and of itself is not a bad thing. He writes that the Left has three main arguments in favor of higher taxation for the rich and attempts to refute each one.

First, he argues that liberals believe the current tax system is regressive. Um, not sure where Mankiw got this one: I don’t know of any liberals who believe this. As he points out, the top 20% of homeowners paid significantly more in taxes than the middle fifth and massively more than the bottom quintile. Those are facts – our current tax system is progressive. But that doesn’t mean it’s progressive enough. As for why liberals don’t believe it’s progressive enough, let’s move to his second and third arguments.

Next, Mankiw suggests that liberals do not believe that compensation for the rich accurately represents “their contributions to society.” He also notes that the rich earning their income through rent-seeking behavior is inequitable and inefficient:

The key issue is the extent to which the high incomes of the top 1 percent reflect high productivity rather than some market imperfection. This question is one of positive economics, but unfortunately not one that is easily answered. My own reading of the evidence is that most of the very wealthy get that way by making substantial economic contributions, not by gaming the system or taking advantage of some market failure or the political process.

Finally, he argues that liberals believe the rich should pay a greater share in taxes, because they benefit from the social, legal, and physical infrastructure more than others. Mankiw does not refute that belief, but argues that the rich already pay enough. His main reasoning is that government expenditures have gone more and more towards transfer payments than towards infrastructure over the past few decades. Given all that, the rich have to be paying more than their fair share:

As I pointed out earlier, the average person in the top 1 percent pays more than a quarter of income in federal taxes, and about a third if state and local taxes are included. Why isn’t that enough to compensate for the value of government infrastructure?

How much value the rich receive from government infrastructure is not an easy question and I don’t have a simple answer. But Mankiw completely dismisses it, assuming instead that the rich must be paying too much. Maybe they are. Maybe they aren’t. But he offers zero evidence here to backup his complaint.

However, I want to return to the second argument as Mankiw ends his essay by offering his “just desserts” philosophy of income distribution:

According to this view, people should receive compensation congruent with their contributions. If the economy were described by a classical competitive equilibrium without any externalities or public goods, then every individual would learn the value of his or her own marginal product, and there would be no need for government to alter the resulting income distribution. The role of government arises as the economy departs from this classical benchmark. Pigovian taxes and subsidies are necessary to correct externalities, and progressive income taxes can be justified to finance public goods based on the benefits principle. Transfer payments to the poor have a role as well, because fighting poverty can be viewed as a public good.

In large part, I agree with this framework (with the glaring exception of us having a moral obligation to provide basic living conditions and equal opportunity for all Americans). People should be paid based on their contributions to society, but those contributions are not always priced into the economy. Are teachers salaries in line with what they add to society? What about stay-at-home moms? Of course not! The free market doesn’t take into account many of the ways that people contribute to society. Thus, I agree that we should aim for perfectly competitive markets with the government correcting externalities and fixing any other market failure. But we also need to take into account non-capitalistic ways people add to society.*

Here’s where Mankiw and I differ: He believes our current system lives up to this philosophy. I don’t.

This disagreement results from the difficulties in ascertaining how much an individual contributes to society. Estimating those numbers is very challenging. In October 2011, the CBO released a report on changes in after-tax household income between 1979 and 2007 (PDF). Here’s the most important finding:

The share of after-tax household income for the 1 percent of the population with the highest income more than doubled, climbing from nearly 8 percent in 1979 to 17 percent in 2007.

That stat also takes into account government transfers. If we assume that Mankiw is correct and our current system accurately represents individual’s contributions to society, that means that during that period, the top one percent became more than twice as valuable to society while the bottom eighty percent all became less valuable. Does that sound like a legitimate depiction of how our society has changed over the past 30 years? The top 1% contribute twice as much as they did in 1979?

However, just because that isn’t true doesn’t mean that the income levels of the top 1% are too high. It’s possible that in 1979, the top 1% were paid only half as much as they contributed to society. Thus, even if their contributions hadn’t changed over those three decades, their growth in after-tax income led to a more accurate representation of each quintile’s value to society. That’s certainly a possibility, though I don’t believe that’s the case either.

On a more fundamental level, do you believe that the top 1% equal 17% of the value of our economy and thus deserve 17% of the after-tax, post-transfer income? Do the top 20% contribute 53% of value to society? I find that extraordinarily hard to believe. Based on his conclusion, Mankiw doesn’t. Unfortunately, deciding who is right is not so simple. There’s no easy way to estimate how much each quintile is worth. That’s a main reason that Mankiw’s essay lacks specific numbers – those numbers are hard to come by. But I have trouble believing that most Americans look at that distribution of after-tax income (to say nothing of wealth) and believe it’s an accurate representation of value-added to society. I certainly don’t.

*I edited this paragraph up to make it more clear that I advocate for people earning what they contribute to society in all forms, not just economic ones.