The New York Times account of President Trump’s tax returns reveal far more than his personal ability to avoid taxes. They show how the tax law can make it easy for the very wealthy to avoid taxation. And they reveal more than deficiencies in the tax law. Bankruptcy laws allow wealthy investors to shift losses to others even while they retain gains elsewhere, bank lending practices favor the rich, and for the last three decades monetary has subsidized highly-leveraged wealthy investors by driving borrowing costs ever lower and creating a huge wealth bubble that has saved even the most inefficient of investors.
Whether the president engaged in questionable or even illegal tax practices is only a small part of this story. But by focusing on his personal behavior, Congress may miss an opportunity to address the broader issues of fairness and equity and economic growth. Poor tax and economic policy can spur inefficient investment and concentrate opportunity on too few people.
One way the very rich avoid tax is through the discretionary nature of the individual income tax for investors. That is, the income from appreciated property (capital gains income) is not included in taxable income until the underlying asset is sold, a discretionary step taken by the investor. In the early 1980s I calculated that less than one-third of the net income from capital showed up on tax returns. Studies comparing income declared on individual income tax returns with wealth reported in estate tax returns implied that taxpayers reported a rate of return often hovering around 2 percent, when the value of stocks and other assets rose by an average of around 10 percent per year. Close to one-third of wealthy people in each of the years examined declared a return on their income tax returns of less than 1 percent on their wealth.
While owners of corporations often do indirectly pay corporate income tax, large real estate investors typically use pass-through business and have long been close to exempt from both corporate and individual taxation. In the heyday of the tax shelter era of the 1980s, when real estate investors were making money while shielding other income with huge losses, members of the Senate Finance Committee wondered aloud whether Treasury would collect more revenue if the tax law simply exempted the investments from tax.
Further, if property is held until death, no income tax ever is owed on any accrued but unrealized gains.
Meanwhile, while gains can be deferred or excluded from tax at death, property owners can immediately deduct almost all expenses on their tax returns.
Interest costs are among the most important of those deductible costs, and the nominal interest costs written off are often a multiple of the real costs of borrowing. For example, if annual inflation is 2 percent and annual borrowing costs are 4 percent, the taxpayer deducts twice the real expense of the borrowing. The most highly leveraged investors receive the most benefits.
Investors in real estate can also take advantage of “like-kind” exchanges that allow them to swap real estate properties with another owner and defer the recognition of any capital gains income from the investment.
In this “Heads-I-Win, Tails-You-Lose” world, owners can declare bankruptcy of one company that is performing poorly while maintaining ownership of others that may be thriving. Earn $5 million on an investment in one company, lose $6 million in another; declare company bankruptcy in the second case, and the owner can come out ahead, while others bear the cost.
Bank lending practices, such as the Deutsch Bank loans to Trump, provide a third source of protection. Employees and officers of large financial institutions can make big money even for bad investments. They can earn promotions and bonuses by boosting the institution’s cash flow, at least until everything blows up. And, of course, those bonuses and promotions usually can’t be recaptured.
Finally, by creating real interest rates on short term debt that are close to zero, monetary policy can make the real cost of borrowing also close to zero or even negative after the taxpayer deducts nominal interest costs in excess or real interest payments. As one result, the ratio of household wealth to income rose remarkably from the early 1990s to today, generating at least an additional $25 trillion of nominal wealth over and above a normal growth rate. Recent efforts by the Federal Reserve to buy up all sorts of debt to keep the financial system functioning has further protected wealthholders even in the midst of the current COVID-19 crisis.
Taken together, all these policies have contributed significantly to increases in wealth inequality while they protected even the most inefficient investors. Trump’s tax returns may be just the tip of the iceberg, only one piece of visible evidence on a set of economic policies that may continue to lead to years of sluggish growth.
This column originally appeared on TaxVox on October 19, 2020.
Congress has responded to the COVID-19 pandemic-induced economic slowdown by putting hundreds of billions of dollars directly into people’s pockets. Much of this came from the Economic Stimulus Payments ($1,200 per adult/$500 per child) administered by the IRS and expanded unemployment benefits. The evidence so far suggests that many households are saving much of that money, along with higher shares of their private income. And that suggests those payments are having weaker economic benefits than they otherwise could.
A recent report by the Bureau of Economic Analysis (BEA), found that the saving rate of US households rose from about 8 percent in pre-pandemic February to 13 percent in March to 33 percent in April. Annualized, that would be equal to $4.7 trillion in increased savings, far more than the increase in net transfers made so far by government through the various COVID-19 relief bills.
Before taking into account changes in government transfers, disposable personal income (net of taxes and related social insurance contributions) fell across March and April by about $1.6 trillion (all numbers here are at a seasonally adjusted annual rate, so that, roughly speaking, a $100 billion decline in one month, if permanent over the year, would add up to an annual decline of $1.2 trillion). Thanks largely to delaying the income tax filing deadline from April 15 and those COVID-19 relief bills, government transfers less taxes rose by about $3.4 trillion over those two months. Despite the devastating losses in wage and other income suffered by millions, disposable personal income overall rose by about 13 percent or about $1.8 trillion (on an annual basis). Still, outlays (basically all forms of personal spending) fell at an annual rate of about $3 trillion, or nearly double the $1.6 trillion decline in disposable personal income before those net transfers.
There are many reasons why people were not spending in the pandemic months of March and April. At first, in March, people were afraid to travel, shop, or eat out. Then governments closed many businesses and imposed stay-at-home orders, leaving people without places to spend, and often without jobs. Those abnormal pressures weakened the normal recession-fighting ability of fiscal and monetary policy to boost consumer demand.
Even in a classical economic downturn, recovery often takes time simply because people become extra cautious with whatever money they have. Yale economist and Nobel laureate Robert Shiller recently noted how the tendency of some people to embrace austerity may have extended the length of the Great Depression. When people spend less, they save more, and with less spending on goods and services, the demand for workers to produce those goods and services falls as well.
Admittedly, the BEA numbers, which only cover income and items such as checks or refunds paid by the end of April, tell a very incomplete story. The stimulus funds delivered by rebate payments or unemployment benefits no doubt lessened the severity of the downturn. Many households did or eventually will spend their rebate payments and increased unemployment and other benefits, though for some it may take a while. Without a continuation of these transfers, the declines in personal income will soon exceed the net increase in transfers provided by government. The jury, therefore, is still out on just how well these recent congressional actions will stabilize the economy in the short term and stimulate demand over the medium term.
Still, the data raise important policy questions. My colleague Howard Gleckman has questioned the value of government distributing payments to almost everyone, not just those who are most in need. As he notes, many types of consumer spending (e.g., travel, entertainment) are just not available at the current time.
Low-income households and the unemployed probably will spend funds quickly, if for no other reason than to pay for rent, food, and utility bills. Many people, however, suffered little or no decrease in income and have reduced their consumption for reasons other than immediate financial shortfalls. Even after months pass, they are unlikely to take two cruises at the end of the year to make up for the one they gave up this spring. These households may simply deposit those government payments and save them for the longer-term.
Congress should study both the successes and failures of the early government payments to boost demand as it considers the next round. It needs to carefully consider how well each dollar of spending or tax reduction meets the two primary objectives of the day: caring for those who are hurting and stimulating the economy.
Here are four rules that should guide these deliberations:
- Government purchases likely stimulate the economy more than many forms of transfers and tax reductions;
- Almost any speed-up of test and vaccine production and delivery leads to faster economic recovery;
- Reinforcing a normal tendency for consumption rates to rise as income and wealth falls, government spending on households whose incomes have declined and whose bills are due will be more effective than providing windfalls for those who have not lost income and already are saving more than usual; and
- Not every cause, no matter how worthy for other purposes, deserves equal attention as a response to our current health and economic crises.
Using these four guideposts can ensure the effectiveness, efficiency, and equity of future federal responses to the current health and economic crisis.
This column originally appeared on TaxVox on June 8, 2020.
The COVID-19 Crisis Reveals the Need to Let Eligible Workers and Retirees Take Partial Social Security BenefitsPosted: June 11, 2020
Workers often face uncertainty about their jobs, but not since the Great Depression have so many been unemployed or worried about becoming unemployed.
Some have been laid off temporarily but don’t know if their job will come back. Others find themselves without a job and searching in a labor market with few openings. These problems hit older workers especially hard, as research shows they have the toughest time getting a new job and, once reemployed, have great difficulty restoring their former pay level. Their problems will be with us for some time as we recover from the COVID-19 pandemic and recession.
I have a simple suggestion to help older workers that would cost the government little money because it mainly changes how and when older workers receive their Social Security payments, with adjustments that keep their value actuarially fair. The goal is to give people much more flexibility to adapt to changing financial needs and employment prospects.
Social Security could make it easier for those eligible for old age benefits after age 62 to opt in and out of benefit receipt and collect partial benefits, with each delay in benefit receipt boosting future annuity payments through delayed retirement credits and related adjustments, similar to what is already sometimes allowed.
Older workers hoping to get back in the labor market can then adjust as their opportunities and needs change. This approach would grant older workers, whether retired or not, flexibility to use some of their Social Security benefits to buy a very good annuity at variable levels over time.
The ability for some eligible beneficiaries to opt in and out of the system and a mandated system of partial benefits for others already exists, though the process is confusing.
Consider those older than the full retirement age (or FRA, age 66 and 2 months for those born in 1955). Technically, they can receive benefits, suspend them, and resume collecting. But Social Security doesn’t broadcast this ability, so few know it exists.
For every year these workers delay collecting benefits until age 70, they receive an 8 percent increase in their annuity, plus inflation adjustments. Thus, if I were born in 1955 and delay benefit receipt 46 months after the full retirement age, from 66 and 2 months to age 70, I can get about a 31 percent higher annual benefit every year after age 70. But I could also take benefits at age 66 and 2 months, stop receiving them completely for two full years at ages 67 and 68, then start receiving them again at age 69, thereby increasing my future annual annuity by 16 percent.
Why not make this system simple and transparent? Why not allow workers simply to take a partial benefit that works the same way? And why not give them the option not just to opt in and out of the system periodically, but also to cut back on some benefits in exchange for later actuarial adjustments?
For instance, we could allow people to take half their benefit in a given year and receive half the delayed retirement credit, then receive no benefit the next year in exchange for a full delayed retirement credit, and switch again to a full benefit in a third year. This would allow people to adjust over time according to their needs and work prospects—a particularly valuable option during the ups and downs of recession and recovery.
The language surrounding credits and adjustments for delayed benefit receipt confuses even financial advisers. It derives from a long history in which delayed benefit receipt was defined by an earnings test that took back Social Security benefits as beneficiaries earned more. Congress removed the earnings test for those past the FRA, but as the FRA increases toward age 67 for those born in 1960 and later, more older workers are quickly becoming subject to it and fewer for the delayed retirement credit.
A variation on a historically much stricter earnings test remains for those retiring between age 62 and the FRA. In essence, in 2020, Social Security is reducing benefits by one-half of earnings above $18,240 for beneficiaries between age 62 and the FRA, although a different formula applies to the year when the FRA is reached. But benefits lost in those early years are offset by a little more than 7 percent per year increase in later payments.
The point to remember is that those between age 62 and the FRA essentially are often forced to take something similar to a delayed retirement credit. The amounts involved are fixed by an earnings-related formula, not their financial needs. One survey found three out of five respondents incorrectly viewed the earnings test as a permanent tax on work, so it also deters work, especially for those in their early 60s.
Getting $.07 or $.08 every year of remaining life on every $1.00 deposited, plus an inflation adjustment, is a great annuity rate for those with average or better life expectancies, better than anything available in the private market, especially now that the Federal Reserve has cut interest rates to nearly zero. The main losers in the mandated system are those younger than the FRA with chronic health problems that would lead to an early death; they would be better off not purchasing an annuity.
This simple reform would enable people to make adjustments according to their own financial needs in times of reduced income or unemployment and to buy the decent annuities the system offers over time and in variable amounts.
Although congressional action would be necessary to allow beneficiaries to take partial benefits before the FRA, the Social Security Administration needs no authority to clarify the existing opportunity to opt in and out for those older than the FRA. The sooner it can adapt, the sooner workers—including those forced to retire earlier than planned during economic downturns—can adapt according to their own needs and future opportunities.
As our population gets older, we are moving into a world where the worker-to-beneficiary ratio in Social Security falls from 4:1 in 1965 to 3:1 in 2010 to close to 2:1 in 2040. At the same time, older people recently have increased their rate of participation in the labor market, and their employment rate actually increased during the last recession (PDF).
Even if the COVID-19 crisis had not swelled the number of older workers and retirees in need of greater flexibility, Congress could make this convoluted system of actuarial adjustments salient and transparent for millions of current and future Social Security beneficiaries.
This column originally appeared on Urban Wire on May 29, 2020.
The CARES Act Charitable Deduction For Non-Itemizers Was A Lost Opportunity To Help Beneficiaries Of Non-ProfitsPosted: May 29, 2020
According to the Joint Committee on Taxation, Congress spent about $1.5 billion in the Coronavirus Aid, Relief, and Economic Security (CARES) Act to create a one-year charitable deduction of $300 for the 90 percent of taxpayers who claim the standard deduction.
Unfortunately, little of this $1.5 billion will benefit the recipients of charitable services. At best, they may get $100 million or so in extra services. The rest of the money simply reduced taxes for those non-itemizers who will claim the deduction without significantly changing their overall amount of giving.
This was a missed opportunity. With a better designed tax subsidy, Congress could have increased the incentive to give to charity. Or, it could simply have given $1.5 billion directly to charities, with a requirement that they spend it on beneficiaries.
Don’t get me wrong. In the grand scheme of things, this is small potatoes in a $2 trillion package. My colleague, Howard Gleckman, has outlined the failures and successes of this and other charitable provisions of the CARES Act.
Still, the $300 deduction sets a poor precedent, especially for the more universal deduction at a much higher foregone revenue cost that many charities have been pursuing. This type of proposal very likely will be a topic of Congressional attention in the near future, at least when Congress addresses the post-2025 expiration of the 2017 individual reforms that led to a significant cut back in the value of the charitable deduction.
The CARES Act version has several flaws: First, it provides deductions for what people do anyway. Second, the law creates no way for the IRS to track newly deductible gifts, and cheaters will be among the biggest winners. Finally, it caps at a very low level the amount of giving eligible for the new subsidy. The Tax Policy Center estimates indicate that over 90 percent of both itemizing and nonitemizing donors make annual contributions in excess of $300. Thus, most donors get no extra incentive for any extra gifts because their deduction is limited to less than their normal annual giving without a tax deduction.
By extension, those who benefit from the work of non-profits could lose out of tens of billions of dollars of services annually, and hundreds of billions over a decade, if Congress builds on the CARES Act in creating a more universal deduction. This is because reduced federal revenues will likely mean less federal spending directed through non-profits.
There are better designs.
Instead of subsidizing the first dollars of giving, Congress could concentrate its rewards on the last dollars contributed. It could set a contribution floor at, say, 1 percent or 2 percent of AGI, below which donors would get no subsidy. Excluding those who do not give, the average level of giving for donors is about 3 percent. So this approach concentrates the tax incentive on taxpayers who give an average or greater share of their income to charity. At the same time, Congress could cap deductions for donations at a high level, such as the 50 percent of adjusted gross income (AGI), the long-time limit that was applied to itemizers (the CARES Act raised the cap to 100 percent of AGI for 2020).
The signals Congress sends are very important. When it comes to charitable giving, the most effective message is: You should donate more than you traditionally have been giving—whether or not you itemize. The symbolism of a subsidy made universally available to all taxpayers giving away more than a small amount may increase charitable giving even more than implied by the financial reward provided by the tax incentive.
My simple suggestion is to put the beneficiaries of non-profits first. Members of Congress should ask the Joint Committee on Taxation to estimate the amount of giving that various options could generate at each of several alternative revenue costs. This additional analysis would allow Congress to focus on the efficiency of the tax incentives under consideration. Beyond examining alternative floors and caps, as noted above, Congress should include other options, such as instituting a better information reporting system that, by reducing revenue losses to those who cheat on their tax forms, would add to the revenues that could be devoted to an enhanced charitable incentive. Allowing deductions for the previous tax year up to the time of filing, a provision that once passed the House of Representatives, would also increase giving substantially relative to any revenue cost.
Once Congress decides how much it wants to spend in terms of foregone revenue, it should then choose the option that maximizes the benefits for those whom charities aim to help, rather than an option that promotes the self-interest of either taxpayers or the non-profits themselves.
This column originally appeared on TaxVox on May 19, 2020.
Did the Treasury Department’s decision to put President Trump’s name on the coronavirus stimulus checks slow the mailing of those checks? Of course it did, despite Administration claims to the contrary.
The decision surrounding Trump’s name triggered a series of time-consuming steps. The White House consulted with top Treasury officials who, in turn, talked to top IRS officials, who, after some delay because of the political sensitivity of the matter, communicated with the agency’s staffers who had to carry out the operation. These civil servants had to redesign the basic check, mock up the display of the president’s name, and rejigger computer software needed to produce the checks. Then they had to have the redesign reviewed at the IRS, Treasury, and, likely, the White House to both insure against technical glitches and make sure the president was satisfied.
Did this take time? Of course, it did. Does it matter a lot? Well, that’s a different question.
It certainly took attention from other, more important, matters. Senior Trump Administration officials, including the Treasury Secretary and the Commissioner of the IRS, were spending time on marketing the president rather than on, say, reviving the economy or preventing occurrences of tax fraud likely to accompany any rush to get the payments out.
Did it slow down the payment of checks to people? Here’s how a Treasury spokesperson carefully answered that question:
“Economic Impact Payment checks are scheduled to go out on time and exactly as planned — there is absolutely no delay whatsoever…In fact, we expect the first checks to be in the mail early next week which is well in advance of when the first checks went out in 2008 and well in advance of initial estimates.”
Nothing in that statement says that the additional process did not slow down the mailing of the checks relative to when they could have been mailed out. The comparison with 2008 is irrelevant.
Meanwhile, the IRS released another statement, to wit:
Thanks to hard work and long hours by dedicated IRS employees, these payments are going out on schedule, as planned, without delay, to the nation.”
Well, the same calculations take place in all aspects of life as well.
Consider the brag about checks going “out on time” or “on schedule.” If I tell my wife I will be home by 7 PM and then take an extra walk around town but still get home by 7 PM, did my stroll delay my arrival? Of course, it did. In fact, it is likely that IRS expected to be ahead of the original “schedule” before it had to add the president’s name to those checks.
Think of it this way: Suppose the IRS staff worked all night to add the president’s name to the checks. That all-night session may have avoided delay relative to the prior schedule. But, if the staff didn’t have to add his name, working that extra night could have been devoted to getting the checks out earlier.
Maybe figuring out the extent of any delay isn’t at the heart of the issue. There are more important matters to worry about in these days of COVID-19. Even if somehow all this extra effort caused no delay, it’s demeaning to ask career professionals in places like IRS to devote their time and attention to promoting the president’s reelection. This request has nothing to do with helping the taxpayers they pledge and, as the IRS release indicated, “work hard” to serve. Worse yet, this accommodation of the president’s wishes reinstates a bad precedent for political interference in the operations of the IRS. These actions have real consequences, none of them good.
This column originally appeared on TaxVox on April 30, 2020.
The current recession derives from two sources: demand and supply. On the demand side, consumers are purchasing fewer durable goods (e.g., automobiles) and spending much less on services, such as all forms of transportation. On the supply side, there has been a massive decline in supply of goods and services as workers stay home and supply chains break, leading to a collapse of trade networks, further disrupting firms that can’t get the physical or worker inputs they need to produce their own output. Accordingly, some writers, including my colleague Howard Gleckman, have criticized the extent to which stimulus packages so far have emphasized the demand side of the market, particularly with rebate payments to almost everyone, regardless of need. My purpose here isn’t to measure the extent to which that criticism applies to all the provisions enacted so far, but rather to ask how future legislation can better be oriented toward increasing supply and demand at the same time and, thereby, increasing employment.
The short answer: increase government purchases.
Basic economic theory teaches that under certain conditions government purchases do more than tax cuts or increases in transfers to stimulate the economy. That’s because a dollar of purchases effectively creates a demand for that purchase, leads to an increased supply of labor to fulfill that purchase, and then leaves a dollar of income in the hands of the those who supply the goods and services purchased. This is especially relevant in today’s economic downturn. When government simply puts a dollar of tax cut or transfer increase in our hands, but without purchasing anything, we often simply tuck that dollar under the mattress, so to speak, in which case there is no increase either in demand or supply.
Consistent with health concerns, therefore, Congress should strongly consider which types of stimuli are most likely to help minimize supply disruptions and more immediately increase employment.
You can see such concerns expressed partly in the efforts of Congress to keep people on the payrolls of existing firms. Along the same lines, the President and others have also suggested ramping up spending on infrastructure.
Of course, implementing this type of response requires some thought as to what can or must be produced, consistent with minimizing additional health threats to those involved. Here are a few examples.
We will need many additional healthcare workers who, with minimal training, could perform routine functions, whether testing for the coronavirus in the tens of millions rather than tens of thousands, as now, or giving tens of millions of vaccine shots when they become available. Government should start training more people to perform those functions now. Bill Gates has already suggested that we need to build the facilities now that will be able to generate billions of vaccines worldwide when that opportunity becomes available. Those production efforts and the training of health care workers are complementary actions.
Among the hardest hit of all sectors, restaurants deserve special attention. If we want to keep more of them viable, the government could give people vouchers that can be spent on take-out restaurant meals. Normally this would be quite inefficient, but it’s probably more efficient than simply paying restaurants to hang onto staff who have few functions to perform.
More educators could be hired now to develop better online tools for teaching, not just for the short-term needs arising from social isolation, but for the longer-term opportunities that information technology provides.
State and local governments clearly have rising needs to serve their citizens even as their revenues start to plummet. Congress should ensure, to the extent possible, that much of the federal support given to those governments goes toward currently purchasing additional goods and services, as opposed to being saved to offset the tax increases or transfer cuts these governments may need to impose down the road.
Even independently of federal help, states facing balanced budget constitutional restrictions should realize that additional state and local purchases, even if offset by temporary tax increases or cuts in salaries, still increase output in times of high unemployment.
Charities need resources to deal with increased demands. The recently enacted $300 tax deduction for charitable contributions offered to non-itemizers in the CARES Act probably won’t increase either charitable giving or charitable output by much at all. Government instead could take steps to purchase more services from charities. Every dollar spent that way will increase charitable output by roughly the same amount, a much more efficient result.
Infrastructure may be hard to begin immediately; “shovel-ready” projects were hard to find in the Great Recession. However, the ramp up could start now, particularly if the longer-term financing needed to support these projects was put into place when the projects were authorized.
While none of this is easy and certainly doesn’t address health and other welfare issues, the next tranches of Congressional legislation should increasingly give due consideration to the stimulative impact of additional purchases of goods and services in bringing workers back into the productive economy.
This column originally appeared on TaxVox on April 20, 2020.
For both social and economic reasons, people will soon begin to re-congregate even while awaiting the availability of a vaccine that itself may be less than foolproof. In fact, if estimates of a 15 or 20 percent unemployment rate prove correct, that means that still over 80 percent of workers have remained employed, often in groups and factories that provide the vital goods and services we need. Meanwhile, families increasingly will do what they have to do: gather to solve such problems as child and elderly care, food purchases, and shared rent. These social and economic demands increasingly will force physical contacts to expand.
Clearly, “bending the curve” on the rate of new infections and demands on hospitals only begins to deal with the crisis. Health experts tell us we seem far from a science-based plan for reopening the country. Nonetheless, individual needs and demands for increased production of vital goods and services made scarce by trade disruptions will lead to further opening up social and economic life even in absence of vital information on the risks entailed.
Accordingly, the debate over testing, its funding and expansion, has itself started to ramp up, but it must move way beyond considering what a medical model centered in the doctor’s office or hospital requires, what South Korea or China achieved when, even by late March, they had tested far less than one percent of the population, and even beyond the phase of extensive testing and surveillance, as suggested separately in roadmaps by Ezekiel Emanuel and Mark McClellan and colleagues.
Instead, I’m referring to the need to reinforce a top-down medical model with a bottom-up economic model that informs the billions of associational decisions that are being made daily by households and businesses with whatever information they have on who is infected, recovered, immune, or currently virus-free. Even while awaiting a vaccine, or even after a far-from-foolproof one is developed, very broad expansion of testing can inform almost all of us better on how to limit the extraordinary social and economic costs of isolation.
Policymakers are starting to pay attention to his issue. Recent late-in-the game efforts include Medicare’s recent decision to double to $100 what it pays for a test derived through high throughput technologies and a $30 billion testing subsidy that Congress is only now considering after already passing a $2 trillion plus package. Yet even these only touch on what is required to ramp up production, distribution, information networks, potential patent purchases, and, perhaps, use of wartime production powers.
To see what I mean, suppose ideally that testing was widely and easily available for everyone and on a frequent basis regardless of symptoms. Think of some of the inventive ways that individuals and businesses might make use of knowledge that they, along with family members, coworkers, and other parties, are free from the virus or had developed immunities to it.
An immediate gain, of course, will be the reduced stress and anxiety of hundreds of millions.
At the same time, social isolation can be reduced by making it much easier to move from individual isolation to what I will call “group isolation.” Access to testing with quick results could enable a tested child to take a tested elderly parent out of the nursing home. Extended families could more easily visit among themselves to deal with family needs. Childcare can more safely be employed for millions who have to work. Families could more readily combine to care for children, the impaired, and those most isolated.
Poorer and newly immigrant families for millennia have dealt with their economic needs by clustering together, and, indeed, many do so now—one likely reason, along with the need to work, for their higher death rates. Lack of adequate testing deters these social opportunities and reduces avoidable costs where clustering already occurs.
If serology or other testing gave us a better handle on who had immunity and the extent of that immunity, including many who didn’t even know they had been infected, these individuals could make a better risk assessment of whether to return to work or volunteer to fill in for economic functions increasingly found vital.
On-site work becomes a more extensive and safer opportunity. As already noted, employment rates tell us that most businesses still operate. Workers live together at New York utilities and dorm together in Chinese factories. AngelSoft brags that its factories hum day and night, partly to deal with our fetish on hoarding toilet paper.
Such practices could be made more extensive more quickly, as well as safer. Creative restaurant entrepreneurs might find new ways to keep their staffs safely employed, perhaps rotated in combined work and living arrangements for, say, weeks on and then weeks off. The temporary closing of factories, such as has occurred with meat-processing plants, would more easily be avoided. Protections would expand for truck and bus drivers delivering the goods and transportation that people need, grocery clerks selling needed food, equipment repair experts who keep homes functioning, health scientists working around the clock, and so many others. With safer conditions, these workers might also be less likely to quit or go on strike.
Don’t get me wrong, my focus is long-term. Even with recent improvements in testing, doctors still have to go through bureaucratic hurdles to get tests and, when made, still have to wait for results. While people without major symptoms today should be discouraged from competing for scarce test kits, the opposite should hold as near in the future as possible.
The focus up to now has been on limiting numbers initially affected and flattening the curve so that our hospitals are not overwhelmed. But the threats to both our health and the economy in all likelihood will remain for months or years, depending partly upon when a vaccine is developed, how fast it can be manufactured and deployed, and the continuing power of the virus to spread. Recognizing these extraordinary costs and the possible world-wide need for billions of vaccines, Bill Gates recently suggested that we start now to gear up manufacturing facilities even for promising vaccines that might not prove efficacious.
I’m suggesting similarly that now is the time to ramp very large interventions for testing. Its invention and improvements don’t seem to face the same hurdles as does a vaccine. Abbott Laboratories alone claims that it expects monthly to produce 5 million point-of-care tests that can detect the novel coronavirus in as little as five minutes. Yet, with a U.S. population of about 330 million and a world population of 8 billion, we’re still talking about allocating a very scarce resource. Mologic works on developing a one-dollar, 10-minute home test, primarily for Africa, that would not require labs, electricity or sourcing supplies from global manufacturers.
Invention is only part of the battle. Government must immediately plan for and finance much broader production and distribution systems for whatever might come along. The health system will need to adapt to new, as not-yet-fully-understood, opportunities, while supporting testing and information systems that don’t rely excessively on doctors, nurses or other trained officials. Their numbers simply are too small to provide one-on-one testing, much less advice, to tens or hundreds of millions of people regularly being tested. Lesser developed nations with limited health providers and weak supply systems already are forced to think this way. And the U.S. recovery depends in no small part on recovery abroad, as well.
There is no doubt that richer firms and organizations will not await government actions. What tests Stanford and Apple are now providing for local first responders, you can be sure at some point they will be giving to their own workers and staffs, even if they individually have to expand or create their own laboratory facilities or use less reliable tests when better ones are too scarce. But only the government can achieve the breadth and scale required for millions of households and businesses.
Obviously, the adaptations themselves will depend upon the types, qualities, and levels of testing made possible, especially should at-home or on-site tests be able to provide timely results.
As Bill Gates discussed with vaccines, multiple systems likely will be required, should periodic improvements make obsolete more expensive, less reliable, tests. The imperfection of tests and their processing requires dealing with liability laws that could slow down improvements and recovery itself. Patent law must also be tackled, and government must decide whether, as Burt Weisbrod from Northwestern University suggested long before this outbreak, whether up-front government purchases of patents will be more efficient than depending upon firm decisions over production, distribution, and price. As with ventilators, the Defense Production Act may need to be invoked.
A simple back-of-the-envelope calculation suggests that if at peak the virus reduces total U.S. economic activity by one quarter, that adds up to about $100 billion less in U.S. output and income per week. Double that amount to account for foregone nonmarket production and the unmeasured cost of social isolation and its attendant health costs. The cost of a vastly expanded system of testing seems minor by comparison to advancing the recovery phase by even one week.
So, yes, first focus on expanding testing so that the healthcare system can readily test those with symptoms and then track down and isolate those with whom they have had contact. That discussion is already underway. But recognize, finance and organize now for how a greatly expanded system can further inform the billions of social and economic associational decisions that households and businesses will and often must make every day.
As Republicans and Democrats joined hands to provide the most recent of what might be several stages of relief from our national pandemic crisis, almost everyone—fiscal hawks and doves alike—agrees that this isn’t the time to think about who should pay for the recovery.
The conclusion may be correct as a political matter but not as an economic one. The payoff from these rescue packages likely will be high, just as might your borrowing to finance additional education or simply to shelter and feed your family. But even worthwhile debt-financed investments eventually must be covered. While this may not be the time to make those judgments about payments, holding off determining who pays has little or nothing to do with the timing of when they pay.
The economic argument against paying some of the cost for the relief package now goes something like this. Enacting immediate tax increases or spending cuts would be counterproductive and dampen or negate the stimulus provided by tax cuts and spending increases. Policymakers say let’s put our attention to the problems at hand.
The politics behind this approach are clear, even if not explicitly stated. Elected officials like to give away money. They particularly like to spend money and call it a tax cut; that makes government, measured by the size of spending and taxes, look smaller. On the flip side, elected officials don’t like to explain who should pay for government. It’s easier to pass that problem onto some future Congress, which, by the way, will be even less inclined to mandate additional payments from future taxpayers for past benefits for which it can’t even claim credit.
Given those incentives and Congress’ modern inability to deal with the cost side of government, worrying now about who pays makes it very hard to garner consensus on actions that must be taken immediately. So, yes, politically, it was probably the right solution to not specify the source of these future payments. But this approach does have negative consequences that shouldn’t be ignored.
Simply as a matter of fairness, delay on specifying the payment mechanisms weakens the message that “we’re all in this together.” Many are already contributing extraordinarily to dealing with the crisis. We ask a lot from those on the front line in hospitals, nursing homes, prisons, and homeless shelters, as well as both those businesses that were asked to close and those deemed essential that must stay open. We also ask many workers to put themselves at risk by selling us groceries and drugs, delivering needed supplies, fixing our broken utilities, policing our streets, even producing toilet paper and otherwise maintaining a base economy on which we can survive and hopefully soon thrive. Some commentators already ask whether the burden of this recession isn’t being borne disproportionately among less advantaged groups.
Can we really say that those of us who end up well protected and lucky enough to have current income from our jobs, Social Security checks, or other sources, have paid a fair share of the total burden to society from this crisis? If my income doesn’t fall, and I get some additional grants or subsidized loans from government, I may even come out ahead by that narrow economic standard.
To be clear, if Congress had required individuals to contribute, say, an average of $100 more in taxes for each of the next ten years, it would have had little or no effect on the stimulative or incentive impact of giving them $1,000 today. Unfortunately, it is not possible to make detailed distinctions among who already contributed or lost the most from the pandemic and the resulting recession. But, future tax contributions, averaged across all taxpayers, would provide greater relief to those with the greatest loss in income in 2020 if assessed through a progressive surtax on existing income and profits. Under this formulation, those whose incomes fell below existing tax-exempt levels of income would pay nothing while those whose incomes rebounded mightily would pay the most.
Without taking a single dime out of the economy today, Congress could act now to strengthen the economic recovery itself by reducing investors’ worry about government’s long-term fiscal trajectory. This may seem less worrisome in the U.S. than countries already facing sovereign debt crises, but we have our own fiscal issues, not the least of which is that the rising ratio of debt to national income weakens our ability to respond to future crises. And these prudent fiscal steps might even give the American people greater faith that the federal government at long last was beginning to act in their long-term, not just short-term, interest.
This column originally appeared on TaxVox on Monday, April 13, 2020.