Macro Roundup

Editorial Board, "The Middle Class Always Pays," Wall Street Journal, November 28, 2019, https://www.wsj.com/articles/the-middle-class-always-pays-11574967052

“…Calculating how all this affects different income groups combines analysis of tax rates with consumption patterns and the like. Where economists have crunched the numbers, the result is grim for the middle class. Researchers at the DIW think tank in Berlin looked at Germany’s tax system in 2017 and found that median earners pay roughly the same proportion of income in taxes as the highest earners do—43%. Germans in the 60th and 70th percentiles of income pay a higher proportion of earnings in taxes than anyone else, approaching 52%.The wealthiest paid more tax on income and investment, but consumption and payroll taxes walloped the middle class. This is how Berlin balances its budget. American voters, beware. Politicians promising that Medicare for All and a Green New Deal can be financed by the rich are lying to you. The middle class will pay because that’s where the real money is….”

Europe shows how the Warren-Sanders agenda really works.

Most European nations have larger welfare and entitlement states than the U.S., though they spend less on defense. According to the Organization for Economic Cooperation and Development, government spending as a share of GDP ranges from about 56% in France to 44% in Germany and 41% in Britain.

The U.S. share of about 40% is financed largely by income taxes on the affluent and the payroll tax that funds Social Security and Medicare, plus state and local taxes and borrowing. Europe has learned the hard way that the rich aren’t rich enough to pay for their entitlements, so the Continent duns the middle class.

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Start with the income tax. Most European governments tax most household income more heavily than Washington does because they impose their highest marginal rates on lower levels of income. Germany’s second-highest marginal income-tax rate of 42% kicks in for married households earning around €112,000 ($124,000). An American couple with that income pays a marginal rate of only 22% and would need to earn $612,350 before paying the top marginal rate of 37%.

Sweden’s top marginal income-tax rate of about 55% applies to earnings as low as $47,000, and in the U.K. the second-highest rate of 40% hits taxpayers earning £50,000 ($64,000). By this standard America’s income tax is highly progressive. The U.S. top marginal rate applies only to taxpayers whose wages are 9.3 times the average wage. In Belgium the top marginal rate ensnares workers earning 1.1 times the average, and in the Netherlands 1.4 times.

The income tax isn’t enough to finance Europe’s vast welfare states, so governments also impose payroll taxes they describe as “social insurance contributions.” For a single American earning the average wage, the employer and employee payroll taxes for Social Security and Medicare average 16% of gross labor costs, according to the OECD.

In Britain the share for similar social-benefit payroll taxes is a little over 20%, and in Sweden and Germany about 40%. Such middle-class payroll taxes account for 35% of government revenue in Spain, 30% in Italy, and 37% in France and Germany, and without them Europe’s welfare systems would be bankrupt.

Elizabeth Warren has figured this out. Her Medicare for All plan includes an expanded payroll tax for employers that she says isn’t a tax on the middle class, but Europeans know better. Employer payroll taxes for social insurance account for as much as 25% of revenue in France or 20% in Belgium. This is a hidden tax on the middle class because it reduces the cash employers can offer in salaries.

Europe also imposes a value-added tax (VAT) with a flat rate averaging 21% on almost all consumption. These taxes account for up to a quarter of total government revenue in many countries. They’re regressive since lower-income households devote a larger share of income to consumption taxed by a VAT.

There are other middle-class revenue grabs. Excise taxation, including on fuel, accounts for 3% of total revenue in the U.S., but above 7% in Britain and 6.4% in Italy. As last year’s yellow-vest protests showed in France (where fuel and other excise taxes account for nearly 6% of annual revenue), this burden is more onerous for middle-class suburbanites and tradesmen than on the Ferrari-driving 0.1%.

Britain also soaks its middle class with a stamp tax on property purchases, amounting to about 1% of the price for the median home nationwide, and up to 3% for the median home in London. This discourages property transactions, making it harder for older middle-class households to cash out of their home equity while raising a barrier for the younger middle class to climb onto the property ladder.

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Calculating how all this affects different income groups combines analysis of tax rates with consumption patterns and the like. Where economists have crunched the numbers, the result is grim for the middle class.

Researchers at the DIW think tank in Berlin looked at Germany’s tax system in 2017 and found that median earners pay roughly the same proportion of income in taxes as the highest earners do—43%. Germans in the 60th and 70th percentiles of income pay a higher proportion of earnings in taxes than anyone else, approaching 52%. The wealthiest paid more tax on income and investment, but consumption and payroll taxes walloped the middle class. This is how Berlin balances its budget.

American voters, beware. Politicians promising that Medicare for All and a Green New Deal can be financed by the rich are lying to you. The middle class will pay because that’s where the real money is.

new Moretti/Van Reenen finds that government funded R&D results in “crowding in” a 10% increase in government-financed R&D generates 4.3% additional privately funded R&D and that this spending does result in “significant” but not “overwhelming” productivity gains. They estimate an increase in the defense R&D to value added ratio of one percentage point is estimated to cause a 5% increase in the yearly growth rate of TFP (e.g., from 2 percent per annum to 2.1 percent).

“…In the US and many other OECD countries, expenditures for defense-related R&D represent a key policy channel through which governments shape innovation, and dwarf all other public subsidies for innovation. We examine the impact of government funding for R&D – and defense-related R&D in particular – on privately conducted R&D, and its ultimate effect on productivity growth. We estimate models that relate privately funded R&D to lagged government-funded R&D using industry-country level data from OECD countries and firm level data from France. To deal with the potentially endogenous allocation of government R&D funds we use changes in predicted defense R&D as an instrumental variable. In both datasets, we uncover evidence of “crowding in” rather than “crowding out,” as increases in government-funded R&D for an industry or a firm result in significant increases in private sector R&D in that industry or firm. A 10% increase in government-financed R&D generates 4.3% additional privately funded R&D. An analysis of wages and employment suggests that the increase in private R&D expenditure reflects actual increases in R&D employment, not just higher labor costs….Increases in government-funded R&D generated by variation in predicted defense R&D translate into significant increases in privately-funded R&D expenditures, with our preferred estimates of the elasticity equal to 0.43. Our estimate implies that defense-related R&D is responsible for an important part of private R&D investment in some industries. For example, in the US “aerospace products and parts” industry, defense-related R&D amounted to $3,026 million in 2002 (nominal). Our estimates suggest that this public investment results in $1,632 million of additional private investment in R&D. Our estimates also indicate that cross-country differences in defense R&D might play an important role in determining cross-country differences in overall private sector R&D investment. For example, we estimate that if France increased its defense R&D to the level of the US as a fraction of its GDP (admittedly a large increase) private R&D in France would increase by 8.7%. The increases in private R&D expenditures appear to reflect actual increases in R&D activity, not just higher wages and input prices caused by increased demand. We uncover significant positive effects on employment of R&D personnel in both datasets, with limited wage increases. This is consistent with a fairly elastic local supply of specialized R&D workers within an industry across countries, or across industries…..Our estimates imply that some of the existing cross-country differences in private R&D investment are due to cross-country differences in defense R&D expenditures. We also find evidence of international spillovers, as increases in government-funded R&D in a particular industry and country raise private R&D in the same industry in other countries. Finally, we find that increases in private R&D induced by increases in defense R&D result in significant productivity gains….We estimate models where measures of productivity growth – growth in TFP or output per worker – are regressed on lagged private R&D intensity, using predicted defense R&D as a share of value added or sales as an instrumental variable. Industry-level models based on OECD data indicate a positive effect of private R&D on TFP….An increase in the defense R&D to value added ratio of one percentage point is estimated to cause a 5% increase in the yearly growth rate of TFP (e.g., from 2 percent per annum to 2.1 percent). We view this as an important, but not overwhelming effect.It suggests that a fraction, although certainly not all, of US economic growth is accounted for by investment in defense R&D. For example, defense R&D in the US increased by 52% between 2001 and 2004 following the 9/11 attack. Compared to historical standard, this was a very large increase. We estimate that, holding taxes constant, this translated into a 0.006 percentage point increase of the annual TFP growth rate in the US in the affected years—about a 1.8% increase. Since in reality, this defense R&D spending had to be financed by increased taxes or cuts in other government expenditures, the ultimate impact is almost certainly smaller.…”

Enrico Moretti, Claudia Steinwender, John Van Reenen, “The Intellectual Spoils of War? Defense R&D, Productivity and International Spillovers,” National Bureau of Economic Research, November 2019, https://www.nber.org/papers/w26483

Orszag argues against Philippon that the evidence uncovered by Autor inFall of Labor Sharebuttresses the view that superstar firms are thriving because they are simply more productive than other firms

"...Autor and his team find support for a productivity-based explanation of increased market concentration....Second, the productivity-based view, but not the antitrust one, would predict that the industries concentrating fastest would be the ones with the fastest growth in productivity. The economists show that larger firms are more productive than smaller ones, that industries concentrating faster are ones with faster growth in patents, and that industries with bigger gains in labor productivity had larger increases in concentration. How can these observations be reconciled with the overall slowing of aggregate productivity growth? Either the effects aren’t that large, or they have been offset by the growing productivity gap between leading firms and others in each sector.Finally and most crucially, if rising concentration is caused by the benign productivity explanation as opposed to the more troubling lax-antitrust one, the patterns should be similar across the globe despite varying antitrust laws and enforcement. And that’s precisely what the Research shows. As the economists note: “An alternative interpretation of these patterns is … that weakening U.S. antitrust enforcement has led to an erosion of product-market competition. The broad similarity of the trends in concentration, markups and labor shares across many countries that we document below casts some doubt on the centrality of such U.S.-specific institutional explanations. Indeed … antitrust enforcement has, if anything, strengthened in the European Union — and yet … industry concentration appears to have risen in the European Union despite this countervailing force...."
Peter Orszag, "What If Companies Get Big Because They're Better?,"Bloomberg, December 2, 2019, https://www.bloomberg.com/opinion/articles/2019-12-02/antitrust-zealots-beware-big-companies-are-more-productive

Burkhauser finds that market income for the median American/mean value of the middle quintile of American tax units started to decline in 1969 but has been more than off set by tax/transfers (especially in kind)

".... Using either of our most restrictive income definitions—labor earnings or market income—and a tax unit as both our sharing unit and our unit of analysis (choices researchers using tax record-based data are forced to make—e.g. Piketty and Saez 2003) the resources available to the middle class (measured as the median American tax unit or the mean value of the middle quintile of American tax units) peaked in 1969 and trended downward thereafter. While these yearly values fell and rose within all subsequent business cycles, with the exception of the business cycle of 1989-2000 these values were lower at the end than at the beginning of each cycle. In contrast, as we broaden our income definition to the disposable size-adjusted household income (including both cash and some in-kind transfers) of persons—the measure of income most commonly used in the survey data-based literature—middle class Americans have made peak-to-peak gains over all completed business cycles since 1959 including the 2000-2007 business cycle....We find that the dramatic decline in themarket income of the middle class (measured as the median American tax unit or the mean value of the middle quintile of American tax units) began in 1969. However, we find that this decline was more than offset by government tax and transfer programs—especially in-kind transfers.... However, we also show that government tax and transfer policies have transformed a 23.0 percent cumulative increase (0.36 percent annual rate) in the market income of the median tax unit between 1959 and 2016 into a lower bound 130.4 percent or an upper bound 153.7 percent increase (1.47 and 1.65 percent annual rate, respectively) when we more fully account for taxes and transfers, and use the proper sharing unit and unit of analysis. Doing so we show that while over this period the rich got substantially richer, so did poor and middle class Americans....In 2016, this disposable income measure finally returned to its peak year 2007 pre-Great Recession high at the start of the current, on-going business cycle. However, this is a lower bound measure of the importance of government tax and transfer policies for the growth in the median American’s disposable income. When we include the market values of Medicare, Medicaid, and ESI in our upper bound measure of the median American’s disposable income, we find even greater growth....When we adjust for government taxes, include cash and in-kind transfers, but exclude the value of Medicare, Medicaid, and ESI benefits—thus creating a lower bound measure of disposable income—we find that all five quintiles have experienced gains of more than 100 percent since 1959 with the highest gains among the top and bottom quintiles.When we include the market values of Medicare, Medicaid and ESI, the former two of which are programs that only began in 1966, in our upper bound measures of disposable income, the bottom quintile of the income distribution registers the greatest gains since 1959 and there are much smaller differences in gains across the other quintiles....."

Richard V. Burkhauser, James Elwell, Kevin Corinth, "Income growth and its distribution from Eisenhower to Obama: The growing importance of in-kind transfers.," American Enterprise Institute, November 2019, https://www.aei.org/wp-content/uploads/2019/11/Corinth-Burkhauser-Eisenhower-to-Obama-WP-1.pdf

Economistlooks at the state of play of the academic research on inequality including nice chart juxtaposing Saez/Zucman against Smith/Yagan/Zidar/Zwick. Note they also mention Auten/Splinter and Rognlie

Economist Staff, "Economists are rethinking the numbers on inequality,"Economist, November 28, 2019, https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality