Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, September 12, 2014

AI Summary. The Congressional Budget Office estimates the effective tax rate on capital income averages 13.8%, but varies widely: -6.4% for debt-financed corporate investment versus 36.1% for equity-financed, and tenant-occupied housing is taxed 23.3 percentage points more than owner-occupied. Eliminating individual-level capital income taxes with full expensing would yield a -15.1% rate, subsidizing capital returns.

Paul Burnham and Larry Ozanne Congressional Budget Office
Date Posted:
Is Database:
Database

CBO analysis reveals significant disparities in effective tax rates on capital income, with a base case rate of 13.8%.

How much do effective tax rates on capital income vary?

Core argument: CBO estimates the base-case effective tax rate on capital income at 13.8%, with debt-financed corporate investment taxed at -6.4% and equity-financed corporate investment at 36.1%.

The Congressional Budget Office (CBO) analysis reveals significant disparities in effective tax rates on capital income, with a base case rate of 13.8%. Debt-financed corporate investments face a -6.4% rate, while equity-financed investments are taxed at 36.1%. Corporate investment rates are 5.7 percentage points higher than noncorporate, and tenant-occupied housing is taxed 23.3 percentage points more than owner-occupied. Eliminating individual-level capital income taxes and allowing full expensing of new investments could result in a -15.1% effective rate, subsidizing rather than taxing capital returns. This approach would reduce disparities between corporate and noncorporate investments but increase differences between equity and debt financing. Removing interest expense deductions could standardize rates at zero, achieving uniformity across capital income types.

Takeaways by Macro Roundup® AI

  1. CBO estimates the base-case effective tax rate on capital income at 13.8%, with debt-financed corporate investment taxed at -6.4% and equity-financed corporate investment at 36.1%.
  2. CBO finds corporate investment faces effective tax rates 5.7 percentage points higher than noncorporate investment, and tenant-occupied housing is taxed 23.3 percentage points more than owner-occupied housing.
  3. CBO estimates that eliminating individual-level capital income taxes and allowing full expensing of new investment would yield a -15.1% effective rate, subsidizing capital returns, while also removing interest expense deductions could standardize rates at zero.

note the report doesn't cover the second order effects on the real economy beyond directional moves (comparative advantage of say debt versus equity financing)
please tag under marco/other.“…In addition to analyzing the level of taxation currently applied to capital income, the Congressional Budget Office (CBO) considered the composition of capital income taxes: how uniformly capital is taxed under the present system and how potential steps toward eliminating the tax on capital income would affect that uniformity. A lack of uniformity can signal the potential for distortion in economic decisions….CBO’s find…Under a tax regime that assumes the indefinite extension of provisions in place in 2008 (the base case), the overall effective tax rate on income from capital is 13.8 percent, about midway between the zero percent tax rate under a consumption tax or a wage tax and the average statutory marginal rate in the current income tax (approximately 27 percent for noncorporate business income)… Effective tax rates on capital income under the base case are highly uneven.For instance, whereas the effective tax rate on debt-financed corporate investment is -6.4 percent, it is 36.1 percent on equity financed corporate investment. Using typical mixes of debt and equity financing, the effective tax rate on corporate investment is 5.7 percentage points higher than that on noncorporate investment, and the rate on tenant-occupied housing is 23.3 percentage points higher than that on owner-occupied housing. Effective tax rates also differ significantly across different asset types…. Eliminating individual-level taxes on capital income and allowing businesses to expense new investments would produce an effective tax rate of -15.1 percent because of the continued deductibility of interest by businesses and homeowners. Thus, instead of taxing the return on capital investment, the tax systemwould, on balance, subsidize it. The above combination would also alter the unevenness of capital taxation.Not taxing capital income at the individual level would reduce the difference in tax rates that exists between corporate and noncorporate investment but would increase the difference between equity-financed and debt-financed corporate investment and between tenant-occupied and owner-occupied housing.Furthermore, adding the full expensing of the acquisition cost of capital assets would significantly increase the difference in rates between equity financed and debt-financed corporate investments, although it would eliminate the variance across asset types. Eliminating the deduction for interest expenses in tandem with the above combination would set effective tax rates on all capital income to zero and achieve complete uniformity…” Burnham, Paul and Larry Ozanne. “Taxing Capital Income: Effective Rates and Approaches to Reform,” Congressional Budget Office, October 2005. Available at:http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/67xx/doc6792/10-18-tax.pdf

Saturday, September 20, 2014

AI Summary. Research indicates that much of the reduction in household debt came from lenders charging off and writing down loans rather than from households actively repaying, with one estimate attributing two-thirds of the decline to write-offs. High-leverage homeowners did not significantly increase repayment of non-housing debt.

Karen Dydan FCIC
Date Posted:
Is Database:
Database

Analysis shows 2/3 of household debt reduction is due to write-offs, not active repayment. Banks’ actions drove debt reduction, not consumer behavior. @KarenDynan @NYFed

Did household debt fall because of loan write-offs rather than repayment?

Core argument: Karen Dynan estimates two-thirds of household debt reduction came from write-offs rather than active repayment, with the New York Fed paper putting gross charge-offs on foreclosed homes at $1.3tn and net write-downs likely smaller.

The analysis of mortgage pay down versus charge off reveals that a significant portion of household debt reduction stems from charge-offs rather than active repayment. Daniel Cooper's study indicates that high-leverage homeowners did not significantly increase non-housing debt repayment, contradicting claims that such repayments contributed to the sluggish economic recovery. Karen Dynan estimates that two-thirds of household debt reduction is due to write-offs. The NY Fed paper highlights the complexity of measuring mortgage debt pay down, noting that gross charge-offs for foreclosed homes reached $1.3tn, with net write-downs likely smaller. This suggests that banks' contributions to debt reduction through foreclosures and write-offs were substantial, aligning with the Financial Crisis Inquiry Commission's $350bn estimate of expected mortgage losses. Overall, the data indicates that the reduction in household debt was largely driven by financial institutions' actions rather than consumer behavior.

Takeaways by Macro Roundup® AI

  1. Karen Dynan estimates two-thirds of household debt reduction came from write-offs rather than active repayment, with the New York Fed paper putting gross charge-offs on foreclosed homes at $1.3tn and net write-downs likely smaller.
  2. Daniel Cooper's study finds high-leverage homeowners did not significantly increase non-housing debt repayment, contradicting claims that such repayments contributed to the sluggish economic recovery.
  3. The New York Fed analysis suggests household debt reduction was largely driven by financial institutions' foreclosures and write-offs, aligning with the Financial Crisis Inquiry Commission's $350bn estimate of expected mortgage losses.

Here are my notes on the analysis whether increased household savings or lender financing and write offs account for the pay down of household debt. I’m surprised there hasn’t been much more analysis of this, since the extent to which households dialed back consumption is central to the Keynesian view of the recession. If someone there has a more thoughtful prospective, I’d love to learn from them.

In my review/criticism of Mian & Sufi’s book, I argued: “Even if Mian and Sufi are right, they never convincingly show that highly levered homeowners saved sharply more when home prices fell. The authors present evidence that low-income households borrowed against the rising value of their homes and spent the proceeds. They assume these same homeowners saved at a similar rate when home prices declined. This assumption need not be true, nor does it seem likely. Low-income households tend to consume all of their income and save little for retirement. When home prices rose prior to the recession, low-income homeowners borrowed against their unrealized real estate gains and consumed much of that additional wealth. When home prices fell, these homeowners had no need to lower their consumption beyond the level required to pay back the loan.”

Daniel Cooper at the Boston Fed (see attached paper) uses the PSID survey to conclude: “The percent of high leverage homeowners who were repaying their non-housing debt did not jump relative to other household types—a finding that is inconsistent with the claim that debt repayment by highly levered households has contributed to the sluggish economic recovery. … The vast majority of debt repayment by households was due to foreclosures, but debt charge-offs through foreclosure are not a form of active household debt repayment.

Cooper references a study by Karen Dynan, formerly at Brookings, now at Treasury, who claims 2/3s of the HH debt reduction stems from write offs, but I could only find quotes from her, no study/data.

Apaper by economists at the NY Fedexplains the difficulty of measuring the sources of mortgage debt pay down.

“Mortgages are more complicated because after a charge-off and foreclosure, there is typically a house that can be resold, albeit often at a discounted price. For example, a borrower defaults on her $100,000 mortgage and the lender repossesses her house. The lender then resells the house to a new buyer, who pays $80,000 for the property, making a 20 percent down payment and financing the remaining $64,000 with a thirty-year mortgage. The amount charged off on the original borrower’s credit report in this case is $100,000, but the net change of mortgage indebtedness from this series of events is only -$36,000 (=$64,000 minus $100,000). We do not have property-level data on housing debt, and therefore cannot infer the amount of a charged-off mortgage balance recovered by the bank through resale of the asset or the resulting contribution to aggregate mortgage debt by the new owner. This data shortcoming prevents us from allocating percentages of the mortgage debt decline to: 1) a net charge-off and 2) changes in active borrowing and repayment.”

Nevertheless, the paper concludes: “So did consumers reduce their use of debt? Yes.” Obviously, HHs “reduced their use of debt” since they could no longer borrow, so that’s not very conclusive/insightful and I suppose if HH paid down a dollar of debt they could be said to have paid down debt, but frankly the paper seems to leave a lot unresolved.

Of the $400 billion of non-mortgage/non-student debt the paper examines, it appears only $85B was paid down. (more straightforward than mortgages)

It also says, “While all kinds of borrowing contributed an annual average of about $350 billion to consumers’ cash flows between 2000 and 2007, by 2010 consumers reduced their cash flows by $138 billion to reduce this debt. This represents a nearly $500 billion change in annual cash flow from debt in just three years.” But that seems to indicate that $350B/yr of $500B/yr decline in spending (70%) stems from HHs not borrowing enough to continue spending $350 billion/yr more than they earned and, at most, only $138B per year for three years ($420B) being used to pay down debt.

The paper also says the gross charge offs for foreclosed homes was $1.3 trillion so surely net write downs (after reselling the houses) are substantially smaller (perhaps in the range of the Financial Crisis Inquiry Commission’s $350 Billion estimate of expected mortgage losses) but timing complicates the issue. If the bank forecloses but can't sell the foreclosed house for several years, then the bank may have temporarily contributed to a larger share of the net pay down of household debt at the trough than just write offs.

Looking at the inventory of unsold foreclosed homes shows theinventoryof foreclosed but unsold houses rose from 250,000 units to about 1.5 million units at the peak. (There was an additional 1mm unit increase in “seriously delinquent mortgages,” but I don’t know how the Fed/Equifax (which is used by the NY Fed) accounts for those mortgages on the balance sheet of households). But between an approximate $250 Billion increase in foreclosure inventory (at a guesstimated $150,000 per foreclosed house; less than the average house), $350B mortgage write offs (per the FCIC) and $300B non-mortgage write-off, that’s $900B of the $1.2T of debt pay down contributed by banks at the trough—slightly more than Karen Dydan’s 2/3s write off estimate (since the inventory is not fully written off; just temporarily financed with bank equity).

http://www.newyorkfed.org/householdcredit/2013-Q3/

Would love your perspectives or anyone else’s there.

Total $12.7T $11.5T

Student0.60.8

Other 0.4 0.3

Credit Cards 0.9 0.7

Auto 0.8 0.7

Mortgage $10.0T $9.0T

‘08 Q4 ‘11Q1