Biblical Support for a Progressive Tax

President Obama said at the National Prayer Breakfast

If I'm willing to give something up as somebody who's been extraordinarily blessed, and give up some of the tax breaks that I enjoy, I actually think that's going to make economic sense," he said. "But for me as a Christian, it also coincides with Jesus's teaching that “for unto whom much is given, much shall be required [Luke 12:48].”

The president misses the mark in his biblical justification of a biblical justification for a more progressive tax structure because the verse is about personal responsibility and not tax structure.  A similar verse about personal responsibility could be used to suggest that Jesus preferred regressive taxes.

For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.
And cast ye the unprofitable servant into outer darkness: there shall be weeping and gnashing of teeth [Matthew 25: 29-30].

Leaving behind the appropriateness of using the National Prayer Breakfast as a forum to defend the administration’s economic initiatives, the New Testament can be combined with economic theory to justify a government that aids the poor through a progressive tax structure.  Jesus taught to feed the hungry, cloth the naked and visit the sick and afflicted (Mark 12 34-40).  The poor, at least to some extent, cannot feed or cloth themselves so it must be done by those who are not poor. 
The primary lesson of the parable of the widow’s mite (Luke 21:1-4) is that the poor widow who gave only a small amount to the treasury gave more than the rich who gave out of their abundance fits well with the economic theory of the declining marginal utility of money.  The more wealth or money a person has the less a new dollar of wealth or income adds to their wellbeing.  By transferring resources from the wealthy to the less wealth the resources are placed with those who value them more.
The parable of the good Samaritan told of two men who knew that they should have helped another who had been robbed and wounded but did not and a third man who did not have an obligation but did (Luke 10: 30-36).  A progressive tax may force wealthy free-riders who believe that aiding the poor is their social responsibility to meet the obligation that they believe they owe but wish to avoid.  Combining the admonition to care for the poor, the declining marginal utility of money and the free-rider problem, a Christian could build the case for policy to help the poor paid for by a progressive tax system. 
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Schwarz on Pay-for-Play

Draft quality NCAA football and basketball athletes are underpaid to the tune of several hundred thousand dollars per year (reference).  I believe that the difference between the competitive wage and the actual wage is sufficiently large to constitute exploitation.  Walter Byers, a former NCAA president (1951-1988) agrees. In his book “Unsportsmanlike Conduct: Exploiting the Student-Athlete” goes further labeling the NCAA scholarship system a “neo-plantation belief that the enormous proceeds from college games belong to the overseers (administrators) and supervisors (coaches). The plantation workers performing in the arena may only receive those benefits authorized by the overseers (reference).” 

From the pages of ESPN, Andy Schwarz cogently argues that the NCAA could step aside and allow top athletes to earn a competitive wage (“Pay-for-play -- the truth behind the myths”).  I quote from his opening statement and then list the myths he busts.  His selection of myths could be taken from my class discussions on the NCAA and labor markets.  To learn his answer to the myths, you must to read the linked article.   

It happens so often that it's barely even scandalous anymore.

Some college or its boosters are caught giving "extra benefits" to college football players. In some case the allegations range into the tens or hundreds of thousands of dollars, as was the case with Auburn quarterback Cam Newton and Ohio State's Terrelle Pryor. Economically, these scandals are clear evidence that the NCAA's level of compensation for athletes is so far below the market rate that cheating is irresistible. Despite this, it seems inevitable that well-intentioned columnists, coaches and sports legends weigh in, saying it would be great to pay players, but a long list of impediments makes impossible anything except the NCAA's scholarship-only system.

Every one of those reasons is wrong. Join me on a tour of the top myths about paying college athletes.

Myth 1: It's too hard to figure out how to pay players fairly.

Myth 2: Title IX outlaws paying players.

Myth 3: Pay will ruin competitive balance.

Myth 4: Paid athletes can't be real students.

Myth 5: Paying athletes means that fans won't watch.

I have two additional points to make, one positive and the other normative.  If the NCAA allowed universities and colleges to determine wages for players, it is likely that athletes playing football and basketball would be paid much more.  Compliance costs should plummet but probably less than wages increase.  Colleges and universities are likely to cut athletic programs that lose money. 

A student of economics need not believe that universities and colleges should increase wages of athletes.  They are not free to deny empirical evidence that college and university athletes playing football and basketball are paid significantly less than the competitive wage. 
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Boehner at the Catholic University of America

President Obama is not the only politician to land in an awkward political position (See “Obama on Government Jobs”). As House Speaker John Boehner prepared to deliver a commencement speech at the Catholic University of America he was greeted with a letter signed by 70 signatories including faculty, priests and nuns that chided him for cuts in the social safety net contained in the budget that he guided through the House.  In part, the letter read (transcript),

Mr. Speaker, your voting record is at variance from one of the Church’s most ancient moral teachings. From the apostles to the present, the Magisterium of the Church has insisted that those in power are morally obliged to preference the needs of the poor. Your record in support of legislation to address the desperate needs of the poor is among the worst in Congress. This fundamental concern should have great urgency for Catholic policy makers. Yet, even now, you work in opposition to it.

The 2012 budget you shepherded to passage in the House of Representatives guts long-established protections for the most vulnerable members of society. It is particularly cruel to pregnant women and children, gutting Maternal and Child Health grants and slashing $500 million from the highly successful Women Infants and Children nutrition program. When they graduate from WIC at age 5, these children will face a 20% cut in food stamps. The House budget radically cuts Medicaid and effectively ends Medicare. It invokes the deficit to justify visiting such hardship upon the vulnerable, while it carves out $3 trillion in new tax cuts for corporations and the wealthy.

I once read the majority of a book used in a Catholic high school that suggested social policies that Catholics in a market oriented society should support.  That ideas the book were consistent with the values expressed in the letter.  Both suggest that Catholics should support a government that actively helps the poor.  Normative values are visions of what ought to be and as such are close to impossible to argue against and a vision of government rendering assistance to the poor is probably held by most Americans.  I hold similar normative beliefs but different positive interpretation about how markets work and the impact of many social policies on the poor and the economy as a whole.  I would not use the same policies the signatories to achieve their objectives.  More often than not, policies that support competitive markets are best at aiding the poor.

In a similar vain, Speaker Boehner’s budget is defendable as aiding the poor.  The budget cuts he supported are significant but less significant than the cuts that will be forced on the government should the national debt continue to grow unabated.  A sovereign crisis could be more severe than the market crash of 2008.  
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Obama on Government Jobs

Last week, President Obama was the guest at a Town Hall meeting hosted by CBS News.  As I watched the interchange between Karin Gallo and President Obama I shook my head and wondered why any president would expose them self to this sort of event (transcript)(video).

KARIN GALLO: About three years ago, just under three years ago, I took a job with the federal government, thinking it was a secure job. Recently I've been told I'm being laid off as of June 4th. And it is not an opportune time for me, I am seven months pregnant in a high-risk pregnancy, my first pregnancy. My husband and I are in the middle of building a house. We're not sure if we're gonna be completely approved. I'm not exactly in a position to waltz right in and -- and do great on interviews, based on my timing with the birth. And -- so, I'm stressed, I'm worried. I'm scared about what I -- what my future holds. I definitely need a job. And -- I just wonder what would you do, if you were me? (LAUGH)

Where did CBS News find this woman?  She is at the end of a high risk pregnancy, and was fired from a job after her husband and she began to build a new home.  She is articulate and has a good sense of humor with a great sense of comedic timing.  What are the odds that another person would have her skill set and experience this series of unfortunate events?  She is certainly not a representative American.  President Obama starts well suggesting that she should get a job but then gives a normative opinion that does not have positive support.

…let me just first of all say that -- workers like you for the federal, state, and local governments are so important for our vital services. And in -- and it frustrates me sometimes when people talk about "government jobs" as if somehow those are worth less than private sector jobs. I -- I think there's nothin' more important than -- workin' on behalf of the American people.

Is someone collecting trash for the government really “working more on the behalf of the American people” than someone who collects trash for a private firm?  Is a government doctor or professor really more valuable to society than a private doctor or professor?  Taking his statement to its logical conclusion, should we all work for the government to maximize our benefit to the American people?

Economists agree that government can provide valuable jobs within an economy.  Milton Friedman, an economist famed for supporting a minimalist government, wrote in “Capitalism and Freedom”

A government which maintained law and order, defined property rights, served as a means whereby we could modify property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and to overcome neighborhood effects widely regarded as sufficiently important to justify government intervention, and which supplemented private charity and the private family in protecting the irresponsible, whether madman or child—such a government would clearly have important functions to perform.

The correct question to ask is, given the current allocation of private and government jobs, should the next job added be private or government.
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Hassett and Viard on Extension of the Bush Tax Cuts

After the November elections, Congress will consider the extension of the 2003 Bush tax cuts.  A growing number of Congressmen support some sort of extension.  The Obama administration favors permanent extension for single taxpayers earning less than $200,000 and married couples with incomes below $250,000.  

Some elected officials who support phasing out tax cuts on the wealthiest Americans assert that only 98% of American families and 97% of small businesses would pay more taxes.  The implication is that the percentage of small businesses that would face the tax is so low, that the negative impact on future growth would be small as well.  Kevin Hassett and Alan Viard of the American Enterprise Institute take issue with the statistic and its implication in “The Small Business Tax Hike and the 97% Fallacy.” 

The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

It appears that 3% of households earn 48% of net income of small businesses.  They also cite economic literature that finds that increasing taxes on small businesses would reduce gross receipts of small businesses subject to the tax by 7%, impede long-run economic growth, and discourage entrepreneurs for starting new businesses. 

Which statistic is appropriate?  Normatively speaking, is the increased equality of after tax income worth the decreased economic activity?
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Barro on Obama’s Policy Objectives

Robert Barro, a creative and influential Harvard economist, published an opinion article, “The Folly of Subsidizing Unemployment,” that makes several interesting points besides the point made in the title.  Barro faults the Obama administration with being more concerned with transforming the American economy than ending the Great Recession.  He writes

In general, the current administration has been too focused on expanding government, redistributing more from rich to poor, and stimulating aggregate demand. I have previously criticized the stimulus package as cost-ineffective. In particular, whatever tax reductions were in the package did not involve the cuts in marginal income tax rates that encourage investment, work effort and productivity growth.



Now the administration wants to kill the 2003 income-tax cuts, at least the parts that reduced marginal income tax rates for high-income earners and for all recipients of dividend income. This proposal is particularly disturbing because the 2003 law was George W. Bush's main economic achievement; unlike most of Mr. Bush's policies, this one was well-conceived and effective.

I agree with Barro’s criticism.  To the extent that a president can influence economic activities, I believe that influence should be directed toward ending the recession without compromising long-run growth, not changing America.  I also believe that economic evidence suggests that the presidency has limited means to combat recessions and that President Obama’s main objective may not be to end the recession but to change American. David Kennedy, a Stanford historian and author of Freedom from Fear, a book about the Roosevelt administration, and a guest on EconTalk, offers the opinion that Roosevelt’s main objective was not to end the Great Depression but to fundamentally alter the American economy to improve the welfare of the poor and reduce economic risk.  Kennedy said,

There’s a deeper story; I’m going to try to develop a little thesis. I think I can make a case that Roosevelt's top priority was not ending the Depression as soon as possible. His top priority was to use this moment of political, sociological, ideological disruption, malleability, to accomplish reforms that he had thought well before the Great Depression came along that were necessary to make modern American life viable.


A single word that sums up that objective that is in the title of the single most famous piece of legislation that comes down to us from that era, the Social Security Act.  Security is unmistakably the touchstone and core of everything he wanted to accomplish: take the risk out of old age, mortgage lending, securities trading--or at least reduce the risk in all these sectors; and to make American life across the board for individuals and institutions more predictable and less susceptible to these wild ups and downs that had been characteristic of the American economy since the early 19th century, since the United States had entered the early industrial revolution era.


He got a lot of that accomplished. He established the Securities and Exchange Commission, passed Unemployment Insurance, created Fannie Mae, and created the Federal Housing Authority.  Those things worked well for half a century.

Perhaps future historians will not judge the Obama presidency on the effectiveness of the programs he instituted on ending the Great Recession but on how he transformed American by extending health coverage to the poor, improving diets, expanding “green” energy while simultaneously limiting the use of fossil fuels. 
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Positive and Normative Differences

(HT Drudge Report) Using funds from the American Recovery and Reinvestment Act, the Obama administration is increasing spending on paths for cyclists and walkers by $600.  I believe that the projects will be viewed very differently based on people's normative and positive positions (Telegraph, "Obama administration spends $1.2 billion on cycling and walking initiatives").

If you find positive evidence supporting fiscal stimulus through expanded deficits convincing, the cycling and walking projects seem a good fit.  They will be less costly in terms of spending and time than roads for automobiles so many projects can be funded and completed in a timely fashion, and their funding can be cut dramatically once the economic recovery is better established.  If you normatively believe in a paternalistic government, the project has advantages as well.  The government should wean Americans from the gas guzzling automobile and the exercise will be great for our expanding waistlines.   

If you find the positive evidence supporting fiscal stimulus weak due to expanding national debt or small multipliers, the project is like pouring gasoline on a fire.  Funding for projects, even those with set termination dates, seems to roll on forever.  If you are normatively concerned about the paternalistic influence of government, then you believe federal government has no interest in the driving habits or weight of Americans and their efforts are meddling. Permanent Link
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Clinton on The Rich's Fair Share

(HT Drudge Report) At a Brookings Institute forum discussing the administration's national security strategy, Ben Smith of Politico ("Clinton: 'The rich are not paying their fair share'") reported that Hillary Clinton said.

The rich are not paying their fair share in any nation that is facing the kind of employment issues [America currently does] — whether it's individual, corporate or whatever [form of] taxation forms,

I have many problems with such a short statement.  Rather than ask the rich to support their policies aimed at aiding the unemployed, her implication that the rich are shirking social duties engenders a sense of entitlement, and that entitlement, a sense of ingratitude owed taxpayers who fund these programs.  The unemployed are owed nothing that they don't earn.

Clinton's statement also implies that the government is a better economic steward or the rich's money in a social sense than the rich are themselves.  What would the rich do with the money if it is not taxed?  They have three options: consume, invest, or save.  If they consume, they are directly employing people who produce goods and services.  From a social sense, this may be superior to providing incentives for workers to remain unemployed by expanding unemployment benefits or other welfare programs.  If the rich invest, they are directly expanding the base of goods and services that our country can produce, making our country wealthier and providing employment opportunities.  If they save, they are funding the investments of others who would expand our production possibilities.  Even if we are in a liquidity trap caused by financial institutions deleveraging, free and voluntary savings is superior to government bailouts because it cuts out the middleman, the taxpayer. 

What would the government do with the tax revenues?  They would expand a bureaucracy that takes from one set of citizens and gives to another.  That bureaucracy will probably not shrink when the market economy resumes growth.  Worse still are the perverse incentives that entitlement programs create.  Both the poor and the rich have less incentive to work to produce goods and services.  The economic literature is clear that societies with high levels of transfers grow more slowly than those without.  
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End of Life Health Care

One issue in the health care debate has focused on end of life expenditures.  Some argue that too much money is spent to extend lives short periods of time.  Philip Moeller of U.S. News and World Report describes research that gives a counter argument in "End-of-Life Medical Spending Not So Wasteful." 

However, new research from four economists challenges conventional thinking. I don't pretend to be able to follow the math in their arguments but if it supports their logic, then perhaps we ought to re-evaluate the way we look at end-of-life healthcare spending. The economists are Tomas J. Philipson, Gary S, Becker, Dana Goldman, and Kevin M. Murphy. Goldman teaches at the University of Southern California and is a senior economist at the RAND Corp. The other three are at the University of Chicago. All of them have impressive backgrounds, including a Nobel Prize won by Becker, and a John Bates Clark Medal, awarded to Murphy in 1997 as the nation's most outstanding young economist. Their paper was published by the National Bureau of Economic Research.

Up to a quarter of all healthcare spending occurs at the end of life, they note by way of introducing the topic. "However, though many observers have claimed that such spending is often irrational and wasteful," their paper says, "little explicit analysis exists on the incentives that determine end of life healthcare spending."

In providing such analysis, they conclude, among other things, that each year of life is not worth the same. Later years are actually more valuable. "A substantial amount of spending on futile care is rational when there is little-to-no value of leaving wealth behind," they say, and this is in fact how people behave near the ends of their lives. Thus, the value of an additional year of life rises substantially as people get older. People's perception that wealth has no use to them after they die makes them willing to spend much if not all of their wealth to extend their lives. "The value of a life year equals total wealth when the alternative is death and decreases as you get further from there," the economists write. "By contrast, traditional valuations typically assume that the value of a life-year is constant."

I don't have a problem with people sending their money on themselves.  I doubt anybody does.  Should we care if people near death spend taxpayer money to extend their lives?
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Experts Vs Partisans

I love college football; my favorite team is Southern Cal and it has been since I was ten. I love tailgating before the game, and walking into the stadium in a wave of cardinal. Then the game starts. USC defers to the second half. Ray Maualuga smacks a back for a five yard loss and the band plays Conquest. Mark Sanchez hits Patrick Turner on a slant up the middle for a thirty yard gain and the band plays Conquest. The band plays Conquest a lot. After the game, the players, the band, and the fans gather at one end of the stadium to chant traditional cheers, often led by players. I love being a fan and surrounded by other fans.

If I had money on the game, I would not listen to my fellow fans; I wouldn’t even trust my own opinion. As a fan, I have too much skin in the game. With money on the line, I would look at a computer model, or read what an expert or experts say. I would also try to get a consensus opinion of experts by looking at the Las Vegas betting line, or prediction markets. Experts and aggregations of experts somehow stay above the fray and remain objective.

There is a similar relationship between economists, politicians, and citizens; economists are the experts and politicians are the players, the media, the band, and voters, the fans. Politicians and voters are partisans, allegiance to the team comes before objectivity. Politicians enact policy through law, and economists study the impact of policy and advise politicians. Politicians need good positive economics to achieve their normative goals. But if I were a politician, I would like to know my advisors had my back, and would not hire an advisor unwilling to show allegiance to me.

Economists advising politicians walk a fine line between holding to their science and remaining objective, or becoming partisans. Occasionally, a good advisor might contradict the politicians they advise as did Greg Mankiw when he said,

Romney has had to distance himself from his top economics adviser after Mankiw _ a Princeton-trained economist now teaching at Harvard _ voiced his support for an immigration bill Romney strongly opposes [1].

At some point, an economist must become a partisan, or at least bit his tongue when his team supports policy that contradicts good science as Greg Mankiw did when he supported tax cuts that important Bush administration officials said would raise tax revenues. Mankiw is on the record as stating that tax cuts don’t increase tax revenue. He took incoming fire from fellow economists for his silence, but defended himself by parsing words, noting that, “Being opposed to a tax cut as a policy and being critical of an argument for tax cuts are two different things. [2]” In response to Mankiw’s relative silence and awkward position on the revenue impact of the tax cut, Brad DeLong noted,

Mankiw was indeed correct in thinking that he personally could do more good for the country and the world working inside than if he were to march up to Dick Cheney, tell him "you have to stop saying that tax cuts raise revenues," and so get fired. But the Bush administration did frequently argue that tax cuts raised revenue. And there is the much harder question: is it worth the sacrifice of the economics profession's outside credibility and the further confusion of the public that is entailed when good economists defend bad policies on the outside that they are working to change on the inside? I don't know the answer to that.

The world has need for both experts and partisans, and it is difficult to do both simultaneously. Anyone who reads my blog for any period of time will note that I do not like economists surrendering their science for partisanship. I believe that most economists share my sentiments. I hope that I can be fair. Best wishes to the Obama economics team that now must walk that fine line.

[1] Glen Johnson, “Romney Finds Advisors Both Help And Hurt,” The Washington Post, June 19, 2007.

[2] Nathan Strauss, “Mankiw Defends Tax Cut Stance, Faces Online Flak,” The Harvard Crimson, July 13, 2007.

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Barro, Krugman and Taxes

I recently read the transcript of a discussion between Robert Barro and Paul Krugman moderated by Peter Robinson of the Hoover Institute for the program, Uncommon Knowledge. The episode was titled, Dubyanomics, but was really a critique of the economic policies, particularly tax policies, of several administrations. It was filmed on January 4, 2004 and can be viewed here. Both economists are at the top of the profession. Barro is often considered a conservative and Krugman is a self proclaimed liberal. He wrote a book titled, The Conscience of a Liberal.

I went through the transcript in an attempt to objectively measure their opinions about topics covered in the transcript. My score is shown below.

Action	Barro	Krugman
Credits Markets	2	2
Blames Markets	0	0
Credits Reagan	5	2
Blames Reagan	0	1*
Credits Clinton	2	1
Blames Clinton	0	0
Credits Bush (W)	2	0
Blames Bush (W)	4	4
Credits Fed	2	2
Blames Fed	0	0

Overall, Barro seemed more willing to criticize conservatives and praise liberals than Krugman to criticize liberals and praise conservatives. Barro made seven positive and four negative statements about Republicans, and two positive statements about Democrats. Krugman made two positive and five negative statements Repulicans and one positive statement about Democrats.

In particular, Krugman was generally positive about the Reagan administration, but said that markets were more responsible for the good economic performance during the Reagan years than tax policy. Barro believes that the tax cuts successfully encouraged investment and growth and set the stage for growth into the 90s.

Barro was positive about the Clinton administration, particularly about trade policy, but said that markets were largely responsible for the good economic performance during the Clinton years. Krugman was positive about the Clinton administration.

Both economists were tough on the Bush administration. Barro generally liked Bush tax cuts, but offered some criticism, and was generally critical of trade policy. Krugman did not like the Bush administration's tax cuts, but focused most of his criticism of the honesty of the administration's salesmanship of the cuts.

Krugman made a valuable and humorous description about his differences with Barro and Reagan, and it had less to do with their positive views about economics--how the economy works than their normative views--what goals that society should pursue. He said,

But the question [about tax policy] is...a value judgment. That's not about economic growth. That's about do you think that the things that were under pressure should have been under pressure...We have by far the smallest government, smallest revenue base relative to the size of the economy of any advanced country. I'm a conservative. I want to preserve these programs we have and that unfortunately requires more revenue than we're collecting after the Bush tax cuts.

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