What Gets Counted When Measuring US Tax Progressivity

The \”progressivity\”  of a tax refers to whether those with higher incomes pay a higher share of income in taxes than those with lower incomes. The federal income tax is progressive in this sense. 

However, other federal taxes like the payroll taxes that support Social Security are regressive, rather than progressive, because it applies only to income up to a limit (set at $142,800 in 2021). The justification is that Social Security taxes combine both a degree of redistribution but also a sense of contributing to one\’s own future Social Security benefits. But to take it one step further, one justification for the Earned Income Tax Credit for lower-earning families and individuals serves in part to offset the Social Security payroll taxes paid by this group. 

So with all this taken into account, how progressive is the federal income tax and how has the degree of progressivity shifted in recent decades. David Splinter tackles these questions in \”U.S. Tax Progressivity and Redistribution\” (National Tax Journal, December 2020, 73:4, 1005–1024).

It\’s worth emphasizing that any measure of tax progressivity is based on an underlying set of assumptions about what is counted as \”income\” or as \”taxes.\” Let me give some examples: 

The Earned Income Tax Credit is \”refundable.\” Traditional tax credits can reduce the taxes you owe down to zero, but a \”refundable\” credit means that you can qualify for a payment from the government above and beyond any taxes you owe: indeed, the purposes of this tax credit is to provide additional income and an additional incentive to work for low-income workers. This tax credit cost about $70 billion in 2019.   But for purposes of categorization, here\’s a question: Should these payments from the federal government to low-income individuals be treated as part of the progressivity of the tax code? Or should they be treated as a federal spending program? Of course, treating them as part of the tax code tends to make the tax code look more progressive. 

Here\’s another example: When workers pay taxes for Social Security and Medicare, employers also pay a matching amount. However, a body of research strongly suggests that the amount paid by employers leads to lower wages for workers; in effect, workers \”pay\” the employer share of the payroll tax in the form of lower take-home pay, even if employers sign the check. (After all, employers care about the total cost of hiring a worker. They don\’t care whether that money is paid directly to the worker or whether some of it must be paid to the government.) So when looking at the taxes workers pay, should the employer share of the payroll tax be included? 

Here\’s another example: Many of us have retirement accounts, where our employer signs the checks for the contributions to those accounts and the total in the account in invested in a way that provides a return over time. Do the employer contributions to retirement get counted as part of annual income? What about any returns earned over time? 

Or here\’s another return: Say that I own a successful business. There are a variety of ways I can benefit from owning the business other than the salary I receive: for example, the business might buy me a life insurance policy, or pay for a car or other travel expenses, or make donations to charities on my behalf. Are these counted into income? 

There are many questions like these, and as a result, measurements of average taxes paid for each income group will vary. Here\’s a selection of six recent estimates, as collected by Splinter: 

Again, these are just federal tax rates, not including state and local taxes. Notice both that the estimates vary, but also that they are broadly similar. 

One way to boil down the progressivity of the federal tax code into a single number is to use the Kakwani index. The diagram illustrates how it works. The horizontal axis is a cumulative measure of all individuals; the vertical axis is a cumulative measure of either income received or taxes paid by society as a whole. The dashed 45-degree line shows what complete equality would look like: that is, along that line, the bottom 20 percent of individuals get 20 percent of income and pay 20 percent of taxes, the bottom 40 percent get 40 percent of income and pay 40% of taxes, and so on. 

The idea is to compare the real-world distribution of income and taxes to this hypothetical line of perfect equality. The lighter solid line shows the distribution of income. Roughly speaking, the bottom 50% of individuals received about 20% of total income in 2016 The area from the lighter gray line to the 45-degree perfect equality line measures what is called the \”Gini index\”–a standard measure of the inequality of the income distribution. 

The dark line carries out a similar calculation for share of taxes paid. For example, the figure shows that the bottom 50% of the income distribution paid roughly 10% of total federal taxes in 2016. If the distribution of taxes paid exactly matched the distribution of income, the tax code would be proportional to income. Because the tax line falls below this income line, this shows that overall, federal taxes are progressive. The area between the income line and the tax line is the Kakwani index for measuring the amount of progressivity. 

How has the Kawkani index shifted over recent decades?  Splinter writes:

Between 1979 and 1986, the Kakwani index decreased 34 percent (from 0.14 to 0.10) … Between 1986 and 2016, the Kakwani index increased 120 percent (from 0.10 to 0.21) … For the entire period between 1979 and 2016, the Kakwani index increased 46 percent (from 0.14 to 0.21) …

In short, progressivity of federal taxes fell early in the Reagan administration, rose fairly steadily up to about 2009, and then was more-or-less flat through 2016. 

Splinter is using the Congressional Budget Office estimates of income and taxes in making these calculations. CBO estimates are mainstream, but of course that doesn\’t make them beyond question. In particular, a key assumption here is that payments made by the Earned Income Tax Credit are treated as part of tax system, rather than as a spending program, and that explains a lot of why the progressivity of the tax code increased by this measure. As Splinter writes: 

U.S. federal taxes have become more progressive since 1979, largely due to more generous tax credits for lower income individuals. Though top statutory rates fell substantially, this affected few taxpayers and was offset by decreased use of tax shelters, such that high-income average tax rates have been relatively stable. … Over the longer run, earlier decreases suggest a U-shaped tax progressivity curve since WWII, with the minimum occurring in 1986.

For more arguments and details about how to measure income and wealth, a useful starting point is a post from a couple of months ago on \”What Should be Included in Income Inequality?\” (December 23, 2020). 

Judges and Ideology

When judges are going through confirmation hearings, they tend make comments about how they will act as a neutral umpire, not taking sides and following the law. As one representative example, here\’s a comment from the statement of current US Supreme Court Chief Justice John Roberts when he was nominated back in 2005:

I have no agenda, but I do have a commitment. If I am confirmed, I will confront every case with an open mind. I will fully and fairly analyze the legal arguments that are presented. I will be open to the considered views of my colleagues on the bench, and I will decide every case based on the record, according to the rule of law, without fear or favor, to the best of my ability, and I will remember that it’s my job to call balls and strikes, and not to pitch or bat.

I will not here try to peer inside the minds of judges and determine the extent to which such statements are honest or cynical. But I will point out that there is strong evidence that many judicial decisions have a real ideological component, in the sense that it\’s easy to find judges who reach systematically different conclusions, even when they have both promised to follow the rule of law without fear or favor. The Winter 2021 issue of the Journal of Economic Perspectives includes two papers on this topic: 

Bonica and Sen lay out the many ways that social scientists have used to measure judicial ideology. I\’ll mention some of the approaches here. It will be immediately obviously that none of the approaches is bulletproof. But the key point to remember is that when one compares these rather different ways measuring judicial ideology, you get reasonably similar answers about which judges fall into which categories. 
 For example, the Supreme Court Database at Washington University in St. Louis classifies all Supreme Court decisions back to 1946 using various rules: 

As an example, the liberal position on criminal cases would be the one generally favoring the criminal defendant; in civil rights cases, the liberal position would be the one favoring the rights of minorities or women, while in due process cases, it would be the anti-government side. For economic activity cases—which make up a perhaps surprisingly large share of the Supreme Court’s docket—the liberal position will be the pro-union, anti-business, or pro-consumer stance. For cases involving the exercise of judicial power or issues of federalism, the liberal position would be the one aligned with the exercise of federal power, although this may depend on the specific issues involved. Finally, some decisions are categorized as “indeterminate,” such as a boundary dispute between states.

Another approach looks at the process by which a judge is appointed, which can include both the part of the president doing the appointing, while for federal judges appointed to district or appeals courts, one might also take into account the party of the US senators from that area. A more sophisticated version of this approach seeks to estimate the ideology of the president or the senators involved, thus recognizing that not all Republicans and Democrats are identical. Yet another approach categorized judges according to their political campaign contributions that they made before being appointed, or according to the contributions made by those that the judges choose to be law clerks. Another line of research looks at newspaper editorials about Supreme Court judges during their confirmation hearings, and how they match with other measures like the categories above. There is some recent work using text-based analysis to categorize the ideology of judges according to their use of certain terms. 

Yet another approach ignores the content of judicial decisions, and instead just looks at voting patterns. An approach called Martin-Quinn scores is based on the idea that the ideology of judges can be positioned along a line. As one extreme, if there were two groups of judges that always agreed with each other but always disagreed with the other group, they would be at extreme opposite ends of the line. If there were some other judges who voted 50:50 with one extreme group or the other, they would be in the middle of the line. Using these kinds of calculations and the voting records for each term, one can even see how a judge may evolve over time away from the extreme and toward the middle, or vice versa. 
Here\’s what the Martin-Quinn for Supreme Court judges look like going back to 1946. Blue lines are judges appointed by Democrats; red lines by Republicans. There is a different score for each judicial term, and the scores can thus evolve over time. The members of the Supreme Court as is stood before the appointment of Amy Coney Barrett last fall are labelled by name. Again, remember that these scores are not based on anyone making decisions about what is \”conservative\” or \”liberal,\” but only on similarities in actual voting patterns. 

It\’s perhaps not a surprise that the red and blue lines tend to be separated. But looking back a few decades, you can also see some overlap in the red and blue lines. That overlap has now gone away. 

While research on the Supreme Court gets the most attention, there is also ongoing work looking at lower-level federal courts as well as state and local court systems. For example, a body of academic research points out that some judges are known to be less likely to grant bail or more likely to imposed more severe sentences. Given that judges are often assigned to cases at random, when the judge is available, this means that there are cases where very similar defendants are treated quite differently by the courts–just based on which judge they randomly got. For justice, this is a bad outcome. For researchers, it can be a useful tool to figuring out whether those who randomly got bail, or got a shorter sentence, have different long-term outcomes in terms of recidivism or other life outcomes than those who randomly did not get bail or ended up with a longer sentence. 
At some basic level, it isn\’t shocking that judges are human and have ideological differences. Indeed, sports fans will know that even when talking about referees, there are some who are more likely to call penalties, or among baseball umpires, some who are more likely to call strikes.  Indeed, the reason we need judges is because laws and their application are not fixed and indisputable. One might even argue that it\’s good to have a distribution of judges with at least somewhat different views, because that\’s how the justice system evolves. 
That said, is there some kind of judicial reform that might reduce the role of judicial  ideology and/or turn down the temperature of judicial confirmation hearings? Hemel talk about a range of proposals, including ideas like a mandatory retirement age or fixed 18-year terms for Supreme Court judges. For various reasons, he\’s skeptical that the situation is as historically unique as is sometimes suggested, or that most of the proposals will make much difference. 
One of the interesting facts that Hemel points out along the way is that the US Supreme Court has experienced \”the fall of the short-term justice.\” He writes: \”Over the court’s history, 40 justices have served for ten years or less. None of these quick departures occurred in the last half-century. Several factors have contributed to the fall of the short-term justice. Fewer are dying young, and no justice since Fortas in 1969 has been forced to depart in disgrace. The justices also are now less likely to leave the court to pursue political careers in other branches. Contrast this with Charles Evans Hughes, who left the court in 1916 to accept the Republican nomination for president, and James Byrnes, who would serve as US Secretary of State and Governor of South Carolina in his post-judicial life.\” We have instead evolved to a situation where justices leave the court only because of infirmity or death. 

Hemel offers a different kind of reform that he characterizes as a \”thought experiment,\” which is at least useful for expanding the set of policy options. The idea is to break the rule that a judge can only be added to the court when another judge leaves. Hemel writes:

Decoupling could be implemented as follows. Each president would have the opportunity to appoint two justices at the beginning of each term, regardless of how many vacancies have occurred or will occur. Those justices would join the bench at the beginning of the next presidential term. For example, President Trump, upon taking office in January 2017, would have had the opportunity to make two appointments. Those appointees—if confirmed—would receive their commissions in January 2021. The retirement or death of a justice would have no effect on the number of appointments the sitting president could make. Justices would continue to serve for life. Decoupling thus shares some similarities with the norm among university faculties, where senior members enjoy life tenure but the departure of one does not automatically and immediately trigger the addition of a new member.

The decoupling proposal would result in an equal allocation of appointments across presidential terms, though that is not its principal advantage. It would create new opportunities for compromise when the White House and Senate are at daggers drawn: Because appointments would come in pairs, a Democratic president could resolve an impasse with a Republican Senate (or vice versa) by appointing one liberal and one conservative. It would significantly reduce the risk that a substantial number of justices would be subject to the loyalty effect, since no more than two justices would ever be appointees of the sitting president (and only in that president’s second term). The loyalty effect could be eliminated entirely by modifying the plan so that justices receive their commission only after the president who appointed them leaves office (that is, if Trump had been reelected in 2020, none of his appointees would join the court until January 2025).

The plan would likely have a modest effect on the size of the court. The mean tenure of justices who have left the court in the last half-century (since 1970) is 26.4 years, though one might expect tenure to be shorter if appointees had to wait four (or eight) years between confirmation and commission. If justices join the court at a slightly faster rate than they depart, the gradual growth in the court’s size would be tolerable. … A larger court would serve the objective sometimes cited by term-limit proponents of reducing the influence of any individual jurist’s idiosyncrasies over the shape of American law. It would also likely lessen the macabre obsession with the health of individual older justices.

Hemel also argues that these changes could be implemented via ordinary legislation. I don\’t have a well-developed opinion on this kind of proposal, but I had not heard the proposal before, and it seemed as worthy of consideration as some of the better-known ideas.

How to Regulate a Railroad

The economics of railroads poses some problems for economists. What combination of competition and regulation will keep prices low but also encourage ongoing investment in track and rolling stock? Russell Pittman provides an overview of these issues and the various regulatory responses that have been tried to address the dangers of monopolistic pricing on one side and of competition leading to repeated bankruptcies on the other side in \”On the Economics of Restructuring World Railways, with a Focus on Russia\” (January 2021, US Department of Justice, Economic Analysis Group Working Paper 21-1). A version of this paper is also published in Man and the Economy (December 2020, 7:2, subscription required). The paper was originally delivered as a lecture at the Higher School of Economics in Moscow, which is the reason for some emphasis on Russia\’s experience, but the discussion ranges broadly across the topic and international experience. 

Pittman\’s quick overview of the problems of competition in railroads–which are in a broad sense similar to the problems of competition in other network industries including electricity, phone service, and airlines–may be useful in setting the stage. The standard views of economists and policy-makers have shifted over time. 

Back in the 1970s, a standard view was that competition didn\’t work in network industries, and so there needed to be government regulation of prices. Pittman writes:  

I learned this in the 70s, in my graduate course on industrial economics, and it was very clear. The infrastructure sectors – electricity, natural  gas, telecoms, railways – were “natural monopolies”. That is, it would be economically inefficient to have competition. For that reason, in order to protect the public from monopoly abuses, they were in most countries owned and operated by the government, or they were privately owned and regulated by state, local, or national government. The latter was certainly the regime in the U.S. and the UK.

They were regulated in a particular way. It was called rate of return regulation or cost of service regulation. They were regulated in the way that every year or every rating period they would total their costs, their labor costs, their material costs, plus the return on capital, provide those to the regulator and the regulator would say, “Okay, you’re allowed a rate of return on this capital stock and you’re allowed to pay your expenses. So here are the prices you can charge.” Everybody knew that that was not an ideal solution. Economists were very fond of saying that the “first best” solution – and that’s redundant, I admit – the first best solution was marginal cost pricing. But if you have marginal cost pricing in a network industry, you would have to have government subsidies for the network. And that was considered to be politically infeasible or not likely to happen.

The big difficulty with rate-of-return regulation or cost-of-service regulation is that it lacked any incentive for efficiency or innovation. After all, the regulated industry got its prespecified rate of return no matter what it did. Even worse, the rate of return was calculated based on the firm\’s spending–so if a firm spent more, its profits (in absolute levels) went up. So in the 1980s, there was a shift to what was called \”price cap\” or \”incentive\” regulation. Pittman again (citations omitted): 

[T]he new tools were called price caps. They came basically from some smart economists in the UK, led by Stephen Littlechild, among others, in many cases economists who were working as regulators. They understood as we all did that rate of return regulation provided poor incentives for efficient operation of the monopolist, but they said, “We can do better.” Littlechild and others came up with an idea called incentive regulation, or what became called “RPI minus X” regulation, and what also became called price caps. And the idea was that the prices of services from the natural monopolies would be allowed to increase every year by the overall rate of inflation RPI (for “Retail Prices Index”), minus a productivity adjustment. And this is something the regulator would impose and say, “Okay, telecom company, you’re allowed to raise rates every year by last year’s rate of inflation minus, say 2%, 3%.” Whatever we think should be the rate of increase in productivity in telecoms.

This was believed to provide public utility enterprises with powerful incentives to behave efficiently, because their prices were set independently of their costs, at least until maybe an adjustment every few years. And if those prices were set, then if the company is operated efficiently and could cut its costs, it would make profits, just as we hope all companies do. On the other hand, if the company is operated inefficiently and has high costs, there would be financial losses. Again, a powerful incentive to behave efficiently. This was considered to be a real revolution in regulation.

But price cap regulation turned out to have big problems, too.  One problem was that real-world regulators could not commit to the price cap. For example, say that a regulator agrees that the price of telecom services will fall 3% per year for the next five years. Sounds pretty good! But with this incentive, the regulated firm drives down costs by 6% per year, and after three or four years is making large profits. The regulators then face a lot of public pressure to break their promise of what the decline in prices will look like. On the other side, say that the regulator presets what prices will be in the next few years, and perhaps some exogenous shock causes the costs of the regulated firm to soar above that level. If the regulator doesn\’t allow the firm to charge higher-than-planned prices, the regulated firm may be driven into bankruptcy. Thus, the planned \”price cap\” often turned out to be just a basis for future negotiations–and its incentive properties were much more muted. 

The next stage of regulating industries focused instead on whether an industry like a railroad, phone company, or electricity company could instead be divided up into pieces: say, a baseline part of the industry that would remain regulated, and then another part where firms could compete against each other. One of the first big examples was the break-up of AT&T into a regulated local phone service with competition in the long-distance phone market. In airlines, the airports are run as regulated local monopolies, but the airlines can compete with each other. In electricity markets, for example, the idea was that the government would run the electricity lines as a regulated monopoly, but electricity producers could compete to provide the power. 

This approach has had its successes and failures. Deregulating long-distance US phone service has worked pretty well for consumers, although many of us would like to have more local competition to provide phone and internet service than we currently do. On the other side, some readers will remember when California tried to deregulate electricity along these lines, and big electricity providers figured out ways to game the system and drive up prices. 

In the case of railroads, two main approaches have emerged. With \”vertical separation,\” the government owns the track and the railroad carriers share the track and compete with each other. With \”horizontal separation,\” railroad companies (mostly) own and use their own track. Each approach has strengths and weaknesses, but at least in Pittman\’s telling, the second approach has turned out better. He writes: 

The European Commission has been very strong on pushing complete vertical separation: competition above the rail among independent train operating companies. This originally was urged for both freight and passenger rail. Now it remains an option for passenger rail to some degree, especially internationally, but is more emphasized for freight. ,,, 

On the other hand, in the Americas, North and South America and Central America, we have almost exclusively horizontal separation. Competition among vertically integrated railway companies that own their track in the U.S. and Canada, or have long-term franchise control of their track in Mexico and Brazil, and can for the most part insist that only their trains run on their tracks. For the most part, they have the complete right to deny other trains access. 

The big problem with the European-style approach is that it relies on the government to invest in track, including maintenance, upgrading, and expansion–and most European countries don\’t do nearly enough of it. As Pittman writes: 

And every year when the railway comes to the legislature and says, `We need this money, we’ve got to build some new track, renovate some old track,\’ the legislature says, `Yes, we understand that’s really important, but our pensioners need better medicine, or we need to give a tax break to some importers, or some other crucial need this year for funding. We’re sorry. We know it’s a problem, but the track will last another year.

The result has been bottlenecks, lack of expansion where it’s needed, slow and unreliable service in many countries in the EU. It’s a very big problem. Throughout the EU, I would say, especially in the East and the Central and Eastern European countries, where freight is very dependent on rail and there are a lot of rail bottlenecks and so a lot of the freight moves on the road.

The share of EU freight that travels by railroad has been falling over the decades. 

In the US, on the other hand, the share of freight carried by rail has been expanding. By the 1970s, the US has evolved an especially lousy system of rate-of-return regulation. In theory, the railroads could earn a profit. But in practice, they were required to keep operating lines that were losing money. There was also \”value of service\” pricing, where the railroads were supposed to charge more to carry more expensive goods–which meant those goods get moved to trucks and non-rail transit. The result was that by the late 1970s, the US railroad tracks and rolling stock were in lousy shape, rail’s share of intercity freight-ton miles in the US had crashed from about 70% in 1930 to about 35% by1980. 

In 1980, the US passed the  Staggers Act of 1980, which deregulated most  freight rates. Here\’s the story since then in a figure: rates have fallen, volumes carried have risen, productivity rose for a couple of decades before levelling off. US railroad spend lots of money on their track and rolling stock every year, while EU governments (with a few exceptions) don\’t. 

The big potential downside of the \”horizontal separation\” approach, which is also used in Canada and Mexico, is that it\’s easy to end up with situations where certain customers may be \”captives,\” in the sense that they rely on a single railroad–and thus they can be subject to monopoly pricing. Thus, the US system continues to protect these \”captive\” users with price regulation. 

Notice that if the European system of vertical separation did make big investments in the quality and size of its tracks, then competition would presumably work OK. As Pittman writes: 

So again, just to be fair, protecting captive shippers is the strength of the vertical separation model, because if anybody can run a train on the tracks, then if I’m a coal shipper and I don’t like the rate that Deutsche Bahn offers me, I can buy some locomotives and runmy own trains, or I can try to attract some other company, PKP or maybe RZhD in the future, to run trains on the common track and protect me.

Thus, the question of how to regulate a railroad seems to turn on this issue of how to get sufficient investment in track and capacity. If, and it\’s a big if, the government invests enough in this way, then above-the-track competition might work pretty well. Otherwise, it may be more useful to think about the geography that will let a model of horizontal separation work, so that there are multiple railroad linkages between city-pairs with a little backup price regulation for captive customers. 

Some Evidence on Those Who Hold Multiple Jobs

There\’s an old grim joke about those who hold multiple jobs

Comment:  \”Hey, did you hear the US economy created 100,000 new jobs last month?\” 

Response: \”Yeah, I\’m doing three of them.\”

Holding multiple jobs isn\’t always a bad thing: for example, a number of doctors technically have have one job at a private practice and another when they work at a hospital. But in the past, it has been hard to find detailed or consistent evidence on multiple job-holders.  For example, household survey data often asks about one\’s main job, not about all jobs. 

Keith A. Bailey and James R. Spletzer of the US Census Bureau Have cracked this problem by finding a way to use data from  the  Longitudinal Employer-Household Dynamics (LEHD). The Census Bureau has published a readable short overview of their work in \”Using Administrative Data, Census Bureau Can Now Track the Rise in Multiple Jobholders\” (February 3, 2021). The full working September 2020 working paper, \”A New Measure of Multiple Jobholding in the U.S. Economy,\” is at the Census Bureau website, too.

The LEHD is based on data that the government was already collecting for other purposes: for example, data on employment that was being collected for the unemployment insurance program, or data from the Quarterly Census of Employment and Wages, and other sources However, this data was often collected for administrative purposes (like running unemployment insurance), and so the task of the LEHD is to pull together data from a variety of sources into an anonymized dataset that can be used by researchers.  

Here are some basic findings from Bailey and Spletzer: About 7-8% of the workforce holds multiple jobs, with the share tending to rise when the economy is going well and fall during recessions.  The share of people holding multiple jobs seems to be edging up over time, but slowly.  

Some other patterns: 

Women hold multiple jobs at a higher rate than men and the rate has increased in the last 20 years. In the first quarter of 2018, 9.1% of women and 6.6% of men were working more than one job. …

[M]ost multiple jobs are clustered in a few industries. Here’s the percentage of second jobs by sector:

  • 16.8% in healthcare and social assistance.
  • 16.7% in accommodation and food services.
  • 14.5% in retail trade. …

Full-quarter jobs are long-lasting, stable jobs that exist in the previous quarter, the current quarter and the following quarter. Multiple jobholders earn less. … Why do persons with multiple jobs earn less, on average, from all jobs compared to persons with only one long-lasting, stable job? Our working paper shows that this earnings differential is due to age, gender and the industries that employ multiple jobholders. …

On average, earnings on all multiple jobs account for 28% of a multiple jobholder’s total earnings ($3,780 divided by $13,550). …

One of the most striking findings is that the share of total earnings that come from multiple jobholding is above 25% for every percentile.

A basic lesson here is that those with multiple jobs depend fairly heavily on those jobs, in the sense that a quarter or more of their income comes from the additional jobs. One suspects that many of these workers are putting in a lot of total hours, but with limited access to many of the common benefits of full-time jobs like paid vacation, employer-provided health insurance, and contributions to a retirement account.  

Winter 2021 Journal of Economic Perspectives Available Online

I am now in my 35th year as Managing Editor of the Journal of Economic Perspectives. The JEP is published by the American Economic Association, which decided about a decade ago–to my delight–that the journal would be freely available on-line, from the current issue all the way back to the first issue. You can download individual articles or the entire issue, and it is available in various e-reader formats, too. Here, I\’ll start with the Table of Contents for the just-released Winter 2021 issue, which in the Taylor household is known as issue #135. Below that are abstracts and direct links for all of the papers. I will probably blog more specifically about some of the papers in the next week or two, as well.

________________
Symposium on the Minimum Wage
\”The Elusive Employment Effect of the Minimum Wage,\” by Alan Manning
It is hard to find a negative effect on the employment effect of rises in the minimum wage: the elusive employment effect. It is much easier to find an impact on wages. This paper argues the elusive employment effect is unlikely to be solved by better data, methodology, or specification. The reasons for the elusive employment effect are the factors contributing to why the link between higher minimum wages and higher labor costs are weaker than one might think and because imperfect competition is pervasive in the labor market.
Full-Text Access | Supplementary Materials

\”City Limits: What Do Local-Area Minimum Wages Do?\” by Arindrajit Dube and Attila Lindner
Cities are increasingly setting their own minimum wages, and this trend has accelerated sharply in recent years. While in 2010 there were only three cities with their own minimum wages exceeding the state or federal standard, by 2020 there were 42. This new phenomenon raises the question: is it desirable to have city-level variation in minimum wage polices? We discuss the main trade-offs emerging from local variation in minimum wage polices and evaluate their empirical relevance. First, we document what type of cities raise minimum wages, and we discuss how these characteristics can potentially impact the effectiveness of city-level minimum wage policies. Second, we summarize the evolving evidence on city-level minimum wage changes and provide some new evidence of our own. Early evidence suggests that the impact of the policy on wages and employment to date has been broadly similar to the evidence on state- and federal-level minimum wage changes. Overall, city-level minimum wages seem to be able to tailor the policy to the local economic environment without imposing substantial distortions in allocation of labor and businesses across locations.
Full-Text Access | Supplementary Materials

\”How Do Firms Respond to Minimum Wage Increases? Understanding the Relevance of Non-employment Margins.\” by Jeffrey Clemens
This paper discusses non-employment margins through which firms may respond to minimum wage increases. Margins of interest include evasion, output prices, noncash compensation, job attributes including effort requirements, the firm’s mix of low- and high-skilled labor, and the firm’s mix of labor and capital. I discuss the basic theory behind each margin’s potential importance as well as findings from empirical research on their real-world relevance. Additionally, I present a set of pedagogical diagrams that show how supply and demand analyses of labor markets can be extended to bring additional nuances of real-world markets into the classroom.
Full-Text Access | Supplementary Materials

\”The Rise of American Minimum Wages, 1912–1968.\” by Price V. Fishback and Andrew J. Seltzer
This paper studies the judicial, political, and intellectual battles over minimum wages from the early state laws of the 1910s through the peak in the real federal minimum in 1968. Early laws were limited to women and children and were ruled unconstitutional by the Supreme Court between 1923 and 1937. The first federal law in 1938 initially exempted large portions of the workforce and set rates that became effectively obsolete during World War II. Later amendments raised minimum rates, but coverage did not expand until 1961. The states led the way in rates and coverage in the 1940s and 50s and again since the 1980s. The most contentious questions of today—the impact of minimum wages on earnings and employment—were already being addressed by economists in the 1910s. By about 1960, these discussions had surprisingly modern concerns about causality but did not have modern econometric tools or data.
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Symposium on Polarization in the Courts

\”Estimating Judicial Ideology,\” by Adam Bonica and Maya Sen
We review the substantial literature on estimating judicial ideology, from the US Supreme Court to the lowest state court. As a way to showcase the strengths and drawbacks of various measures, we further analyze trends in judicial polarization within the US federal courts. Our analysis shows substantial gaps in the ideology of judges appointed by Republican Presidents versus those appointed by Democrats. Similar to trends in Congressional polarization, the increasing gap is mostly driven by a rightward movement by judges appointed by Republicans. We conclude by noting important avenues for future research in the study of the ideology of judges.
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\”Can Structural Changes Fix the Supreme Court?\” by Daniel Hemel
Proposals for structural changes to the US Supreme Court have attracted attention in recent years amid a perceived “legitimacy crisis” afflicting the institution. This article first assesses whether the court is in fact facing a legitimacy crisis and then considers whether prominent reform proposals are likely to address the institutional weaknesses that reformers aim to resolve. The article concludes that key trends purportedly contributing to the crisis at the court are more ambiguous in their empirical foundations and normative implications than reformers often suggest. It also argues that prominent reform proposals—including term limits, age limits, lottery selection of justices, and explicit partisan balance requirements for court membership—are unlikely to resolve the institutional flaws that proponents perceive. It ends by suggesting a more modest (though novel) reform, which would allocate two lifetime appointments per presidential term and allow the size of the court to fluctuate within bounds.
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Symposium on Economics of Higher Education

\”Staffing the Higher Education Classroom,\” by David Figlio and Morton Schapiro
We discuss some centrally important decisions faced by colleges and universities regarding how to staff their undergraduate classrooms. We describe the multitasking problem faced by research-intensive institutions and explore the degree to which there may be a trade-off between research and teaching excellence using matched student-faculty-level data from Northwestern University. We present two alternative measures of teaching effectiveness—one capturing “deep learning” and one capturing “inspiration”—and demonstrate that neither is correlated with measures of research success. We discuss the move toward contingent faculty in US universities and show that on average, contingent faculty outperform tenure-line faculty in the introductory classroom, a pattern driven by the lowest-performing instructors according to our measures. We also present some of the ways in which instructor gender, race, and ethnicity might matter. Together, these pieces of evidence show that several institutional objectives associated with staffing undergraduate classrooms may be in tension with one another.
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\”The Globalization of Postsecondary Education: The Role of International Students in the US Higher Education System,\” by John Bound, Breno Braga, Gaurav Khanna and Sarah Turner
In the four decades since 1980, US colleges and universities have seen the number of students from abroad quadruple. This rise in enrollment and degree attainment affects the global supply of highly educated workers, the flow of talent to the US labor market, and the financing of US higher education. Yet, the impacts are far from uniform, with significant differences evident by level of study and type of institution. The determinants of foreign flows to US colleges and universities reflect both changes in student demand from abroad and the variation in market circumstances of colleges and universities, with visa policies serving a mediating role. The consequences of these market mechanisms impact global talent development, the resources of colleges and universities, and labor markets in the United States and countries sending students.
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\”Why Does the United States Have the Best Research Universities? Incentives, Resources, and Virtuous Circles,\” by W. Bentley MacLeod and Miguel Urquiola
Around 1875, the US had none of the world’s leading research universities; today, it accounts for the majority of the top-ranked. Many observers cite events surrounding World War II as the source of this reversal. We present evidence that US research universities had surpassed most countries’ decades before World War II. An explanation of their dominance must therefore begin earlier. The one we offer highlights reforms that began after the Civil War and enhanced the incentives and resources the system directs at research. Our story is not one of success by design, but rather of competition leading American colleges to begin to care about research. We draw on agency theory to argue that this led to increasing academic specialization, and in turn, to more precise measures of professors’ research output. Combined with sorting dynamics that concentrated talent and resources at some schools—and the emergence of tenure—this enhanced research performance.
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Articles

\”Taxing Our Wealth,\” by Florian Scheuer and Joel Slemrod
This paper evaluates proposals for an annual wealth tax. While a dozen OECD countries levied wealth taxes in the recent past, now only three retain them, with only Switzerland raising a comparable fraction of revenue as recent proposals for a US wealth tax. Studies of these taxes sometimes, but not always, find a substantial behavioral response, including of saving, portfolio change, avoidance, and evasion, and the impact depends crucially on design features, especially the broadness of the base and enforcement provisions. Because the US proposals are very different from any previous wealth tax, experience in other countries offers only broad lessons, but we can gain insights from closely related taxes, such as the property and the estate tax, and from optimal tax analysis of the role of wealth taxation.
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\”Melissa Dell: Winner of the 2020 Clark Medal,\” by Daron Acemoglu
The 2020 John Bates Clark Medal of the American Economic Association was awarded to Melissa Dell, Professor of Economics at Harvard University, for her path-breaking contributions in political economy, economic history, and economic development. This article summarizes Melissa Dell\’s work, places it in the context of the broader literature, and emphasizes how, with its data collection, careful empirical implementation, and audacious ambition, it has revolutionized work in political economy and economic history.
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\”Recommendations for Further Reading,\” by Timothy Taylor
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Why High-Income Economies Need to Fight COVID Everywhere

High-income countries are pushing and squabbling as they seek to vaccinate their own populations from COVID-19, while many lower-income countries have been pushed to the sidelines and forced to watch. But it\’s not clear yet clear (because not enough time has passed) to know for how long the vaccine provides protection, or for that matter, how long having had COVID provides protection against getting it again. Moreover, there is clearly some danger that at least some of the new strains of COVID emerging around the world might need different vaccines. 

In short, vaccinating the populations of high-income countries is a useful step. But if COVID remains prevalent and mutating into new strains in the rest of the world, we may be running on a treadmill from a public health point of view. Moreover, because of the interconnectedness of the world economy, there is a basic cost-benefit argument the high-income countries of the world to work together in a way that can make COVID vaccination widespread around the world. 

Cem Çakmaklı, Selva Demiralp, Ṣebnem Kalemli-Özcan, Sevcan Yeşiltaş and Muhammed A. Yıldırım make this case in \”The Economic Case for Global Vaccinations: An Epidemiological Model With International Production Networks\” (January 2021, available with free registration from the International Chamber of Commerce, and also available as NBER Working Paper #28395). 

The authors offer a useful reminder of interconnections in the world economy. Exports of goods and services are about 30% of world GDP.  Of that trade, about 60% is \”intermediate products,\” meaning products that are part of the production process for final goods, rather than being final goods themselves. The pandemic recession makes it harder for low- and middle-income countries either to purchase exports from  high-income countries or to produce intermediate products used by producers in high-income countries. To illustrate the issues here, consider two figures the authors produce to illustrate the interconnectedness of the global economy. 

This figure includes 65 countries, and then a ROW or \”rest of the world\” box to combine the others. The sizes of the boxes are relative to the size of the GDP of each area. The darker the shade of blue, the higher the ratio of export and imports to GDP. The thickness of the lines shows the importance of trade relative to the GDP for the two countries. Small connections between countries are not shown at all. Countries with a black line around their names have access to vaccines right now: of the 65 countries, 41 have access.

   

One can also look at the interconnectedness of global world production by industry. Here, the size of each node shows the size of the industry. The arrows show flows of goods from one industry to another. The darker the color, the more heavily that node depends on imports from other countries. 

The authors write: \”We show that even if AEs [advanced economies] eliminate the domestic costs of the pandemic thanks to the vaccines, the costs they bear due to their international linkages would be in the range of 0.2 trillion USD and 2.6 trillion USD, depending on the strength of trade and production linkages. Overall, AEs can bear up to 49 percent of the global costs in 2021. These numbers are far larger than the 27.2 billion USD cost of manufacturing and distributing vaccines globally.\”

The exact numbers from this study are of course imprecise, representing a range of different assumptions. But the basic lesson, which has applied at many points in the pandemic experience, is clear enough: what might seem like fairly large up-front costs actually are a pretty cheap price to pay for the benefits. It\’s not really a surprise that high-income countries would put a  higher priority on on vaccine supplies for their own citizens first. But if the high-income countries think that protecting their own citizens will insulate them from economic costs, or from future public health risks, they are missing some basic insight about what it means to live in a world where goods and people cross national boundaries all the time. 

Why Have Other High-Income Countries Dropped Wealth Taxes?

Advocates of a wealth tax for the United States need to confront a basic question: Why have  other high-income countries decided to drop their own wealth taxes? Sarah Perret explores this issue in \”Why did other wealth taxes fail and is this time different? (Wealth and Policy Commission, Working Paper #6, 2020). Perret writes;  

In 1990, there were twelve OECD countries, all in Europe, that levied individual net wealth taxes. However, most of them repealed their wealth taxes in the 1990s and 2000s, including Austria (in 1994), Denmark and Germany (in 1997), the Netherlands (in 20012 ), Finland, Iceland, and Luxembourg (in 2006) and Sweden (in 2007). Iceland, which had abolished its wealth tax in 2006, reintroduced it as a temporary ‘emergency’ measure between 2010 and 2014. Spain, which had introduced a 100% wealth tax reduction in 2008, reinstated the wealth tax in 2011. The reinstatement of the wealth tax was initially planned to be temporary but has been maintained since. France was the last country to repeal its wealth tax in 2018, replacing it with a tax on high-value immovable property. In 2020, Norway, Spain and Switzerland were the only OECD countries that still levied individual net wealth taxes.

The basic story, as Perret tells is, is that countries which gave up on the wealth tax tax largely decides that it was possible to tax wealth in other ways; and that defining how to tax \”wealth\” was running into enough problems of exemptions and exceptions that it wasn\’t worth the relatively small amount of revenue being raised. 

There are a number of taxes that work in a way similar to a wealth tax. A property tax (like the French tax on \”high-value immovable property\” mentioned above) is a tax on one kind of wealth. An estate tax or a gift tax is a tax on wealth. A capital gains tax can be, on average, similar to a wealth tax as well. Parret writes:  

In some ways, a wealth tax is similar to a tax on capital income. For instance, if an individual taxpayer has a total net wealth of EUR 10 million that earns a rate of return of 4%, the tax liability will be the same whether the government levies a tax of 30% on the capital income of EUR 400,000 or a wealth tax of 1.2% on the capital stock of EUR 10 million. Both will end up raising EUR 120,000. A capital income tax of 30% is thus equivalent to a wealth tax of 1.2% where the rate of return is 4%.

However, as Parret also notes, the wealth tax applies every year, whether you have a capital gain that year or not, which means that the incentive effects of such taxes may be quite different. 

 One reason why Switzerland has a relatively large wealth tax is that it has no taxes on capital gains, and most cantons of Switzerland have no inheritance or gift taxes, either. Most countries use these other policy tools rather than a wealth tax; the  Swiss are using a wealth tax rather than these other policy tools,

For most of the countries that gave up on their wealth taxes were collecting about 0.2-0,3% of GDP with those taxes–in countries where government tax revenues were often 40% of GDP or more.  Part of the reason for what may seem like a low level of revenue is that wealth taxes are typically built chock-full of exemptions. 

The first and most obvious exemption is that wealth taxes typically only apply to those above a certain threshold level of wealth. Parret explains (citations omitted): .

In some countries, the wealth tax is (or was) levied only on the very wealthy (e.g. France and Spain). Before repealing its wealth tax, France had the highest tax exemption threshold, taxing individuals and households with net wealth equal to or above EUR 1.3 million which meant that only around 360,000 taxpayers were subject to it in 2017. In other countries, wealth taxes have applied to a broader range of taxpayers. In Norway, the tax exemption threshold is approximately EUR 150,000 per person. In Switzerland, despite variations across cantons, tax exemption thresholds are comparatively low: in 2018, they ranged from USD 55,000 in the canton of Jura to USD 250,000 in the canton of Schwyz (for married couples) (Scheuer and Slemrod, 2020). Thus, Swiss wealth taxes affect a large portion of the middle class. 

Then think of all the different ways that one might hold wealth, and how those with a lot of resources might switch between them. For example, most countries exempted from wealth taxation the wealth held in the form of an expected pension or in the form of a retirement a county. Many countries exempt the value of the house you live in.  Many countries exempted the value of a family-run business. They exempted investments in certain collectibles like paintings and jewelry. Some exempted life insurance policies, donations to charitable foundations, and trusts set up for future generations.  There are typically exceptions for the wealth embodied in intellectual property, like ownership of a patent or copyright, although such rights can be bought and sold All of these factors can be further complicated if one takes into account wealth that is built up in other countries. 

There is solid evidence that people with a lot of wealth and a lot of lawyers can be very flexible in shifting their wealth between these and other different forms. Sure, it\’s possible to send government lawyers and accountants off to due battle on these issues, but remember that we\’re talking here about a tax with relatively small total revenues, and if most of the money collected from the tax goes to enforcing the tax, it\’s not worth it.  

The evidence that wealthy people move around their money to different types of ownership is strong, but the evidence on how a wealth tax might affect incentives for savings, investment, and entrepreneurship is not especially strong in either direction. To understand the incentives of a wealth tax return to the point made earlier that a wealth tax applies every year, whether wealth rises or not 

Imagine that an annual wealth tax is 2% of wealth (for those above some threshold amount of wealth). Thus, if the value of your wealth increased by 5% in given year, and the wealth tax takes 2%, then the after-tax gain on your wealth would be 3%. If the value of your wealth fell by 10% in a given year (say, the stock market declines), then the wealth tax tax still takes 2% and your after-tax loss would be 12%. 

In this situation, imagine a person with wealth is invested in a low-risk, low-return activity (like government bonds). Especially in the current setting of low interest rates, that person could end up paying all of the return to the wealth tax. Do we want to give the wealthy a strong disincentive to choose low-risk, low-return investments? 

Conversely, imaging a person investing in a high-risk entrepreneurial activity that might have either high or low returns. Say that the entrepreneurial attempt fails, and the investment loses half its value. The wealth tax still applies! Do we want to tax failed entrepreneurs? Or imagine that the entrepreneurial attempt succeeds, and the entrepreneur wants to use the additional wealth to build and expand a company. Do we want to impose an additional tax, above existing income and capital gains taxes, on successful entrepreneurs? 

Again, the evidence on how real behavior is affected by a wealth tax isn\’t clear. But it was clear that some of the real incentives of a wealth tax could be undesirable. The more a country tried to write up a set of rules to specify exactly what wealth should be taxed, or not, the more opportunities there were to sidestep such a tax with lawyer-driven financial planning. 

Parret\’s paper was written as background reports for a UK Wealth Tax Commission. The final report of the commission, A Wealth Tax for the UK (December 2020, written by Arun Advani, Emma Chamberlain, and Andy Summers) proposes a one-time wealth tax to pay for some of the cost of the pandemic recession. The advantage of a one-time wealth tax is that if it is both unexpected and one-time, it\’s difficult for those with high wealth to rearrange their finances and property-ownership in ways that would limit the bite of the tax. Of course, if the wealth tax is either expected or seems likely to be extended over time, this advantage diminishes. 

The report itself is fairly UK-centric, but those interested in wealth taxes in general will find a treasure trove of working papers at the website, both on specific topics related to the wealth tax and on country-by-country European experiences with such a tax.