Archive for category: Washington Post

As an economist, I am normally enthusiastic when presidents or other political leaders emphasize the economic aspect of public policy issues. I am all for economic growth, cost benefit analyses, trade agreements, more flexible markets and prudent deregulation. Yet I am appalled by President Trump’s invocation of economic arguments as a basis for overriding the judgments of public health experts about battling the coronavirus pandemic.

In fact, as a matter of pure economics — even leaving aside moral considerations that should be taken into account — the president’s arguments are flatly wrong. When Trump tweets and says things like “we cannot let the cure be worse than the problem itself” or “you can destroy a country by closing it down” and raises the prospect of reversing measures taken to promote social distancing, he misunderstands the fundamental economic problem posed by the pandemic, as well as the most rational, economically sensible way to address it. In the end, economic growth and well-being would be harmed, not helped, by the course he is advocating.

It is an elementary confusion to believe that lost growth and lost jobs are primarily a consequence of social-distancing measures rather than the pandemic itself. There are currently more than 50,000 diagnosed cases in the United States; the number is doubling every few days. Perhaps some people would be traveling, shopping and eating out as usual if there were no prohibitions. But does anyone believe that ordinary life will continue if millions of Americans have the virus and our hospitals are overflowing? This is where we surely will be in a few weeks if we abandon social distancing.

I recovered over the past year from ruptured quadriceps tendon. At a certain point, sick of the braces that kept my knees rigid, I pressed my physicians to take them off. They responded by pointing out that taking them off prematurely would put at risk all the progress I had made. If I ruptured the tendons again, they said, I would have to start the whole process over — and from a worse starting point. Fortunately, I saw their point, managed my impatience and am doing well today.

The same logic applies to social-distancing policies. Prematurely abandoning or relaxing social distancing will be disastrous on both economic and health grounds. If restrictions are lifted prematurely, the result will be a follow-on pandemic surge. More people will die. What will the policy choice be then? If it is a return to restriction, starting from a much less favorable point and much more disease spread, then the cumulative economic loss will be greatly magnified. The costs we have already borne will have been totally in vain.

Indeed, as a matter of logic, overly temporary social distancing represents the worst of all policy alternatives. In the view of almost all experts, it would be a grave mistake to accept the full and rapid spread of coronavirus as inevitable. But if this is to be our strategy, there is no reason not to get on with it, rather than suffer the additional burden of temporary distancing.

Ending restrictions too soon and allowing a further disease spike carry a range of collateral risks and costs. When it is safe to take up old habits, will the public trust the advice of authorities who misled them? What extra uncertainty cost will be baked into all financial markets when it becomes clear that the federal government has offered false assurances on safety? Will other countries be willing to buy our goods when the United States has turned itself unnecessarily and against the advice of experts into an exporter of products?

The president has compared the challenge of pandemic to the challenge of war. But Americans do not fight wars for our freedom saying we can only keep going for another few weeks and then we will give up. Elevating temporary economic expedience over the long run health of the citizenry is a dangerous strategy. And we deserve better from our business community than demands to go back to selling when disease counts are still rising.

The president and the business leaders who urge him to abandon a public health orientation to pandemic policy are nonetheless correct to want to move through the current difficult period rapidly as possible. The right focus is not on false hopes. It is on realistic strategies that permit a targeted approach to reducing transmission. That means more testing, more contact tracing, and more and better facilities for those who need to be separated from others or treated.

There will come a time when we can gradually let up on current restrictions and help the economy in the process. It will be the moment when new case counts are no longer accelerating; when we have adequate measures in place to quickly catch and contain new outbreaks; and when we are confident that we are not endangering hard-won progress by impetuous actions.

By Natasha Sarin and Lawrence H. Summers

Over the past year, the concept that corporations owe a responsibility to the broader society beyond their responsibility to their shareholders has flourished. The Business Roundtable renounced its earlier view that companies exist to serve stockholders and endorsed stakeholder capitalism last summer. BlackRock chief executive Larry Fink, whose firm controls $7 trillion in investable funds, expects a “fundamental reshaping of finance” and has vowed to vote against corporate directors insufficiently committed to serving interests beyond those of stockholders.

This year’s Davos meeting was centered on business’s responsibility to protect the environment. And there has been much celebration of recent corporate commitments, such as Microsoft’s promise to invest $1 billion to end or offset all of its greenhouse-gas emissions, present and past.

The most important stakeholder of U.S. corporations is the United States itself. Before any obligation to voluntarily reduce emissions, start charter schools or pay above-market wages should come an obligation to pay a reasonable share of income in taxes. Many of our most successful corporations have used accounting tricks, especially those involving sales of intellectual property to low tax jurisdictions, to avoid paying federal taxes.

A stunning story recently published jointly by Fortune and ProPublica credibly alleges that Microsoft avoided tens of billions in corporate tax liability by locating its profits in Puerto Rico on the advice of KPMG, and then waged all-out war against IRS efforts to hire strong counsel and gather information from key witnesses. (In a comment for the story, Microsoft said that it “follows the law and has always fully paid the taxes it owes”; the IRS’s audit efforts are ongoing.) Facebook is being investigated for its profit-shifting behavior, and in a number of years Amazon has paid no taxes. Companies such as Google, Netflix, Delta and General Motors pay a much lower share of their taxes in profits than the vast majority of successful small businesses.

As is so often the case, there is a major question here of whether the scandal is illegal things companies do, or the things that are legal. No doubt that much of the problem involves badly written tax laws that permit large-scale reduction in taxes below common-sense levels. But this goes only so far as a defense for companies that have lobbied and used campaign contributions to shape tax law. And apart from shaping the law, corporations that wish to be seen as good corporate citizens should refrain from pushing the envelope as they file their returns.

The issue here goes beyond corporate hypocrisy and even the significant revenue that could be collected from better tax laws and enforcement. With confidence in government and big business at a nadir, and global cooperation seen as harming ordinary Americans, a serious effort at restoring taxation would represent a substantial, economically rational response to populist and nationalist pressures. It is a legitimate source of outrage that a former senior Treasury official can assert — without apparent criticism from the corporate, tax bar or accounting communities — that the S in IRS stands for the “service” that the IRS should first and foremost provide to business taxpayers.

What should be done?

First, the tax code needs to be reformed. The United States should enthusiastically join the European-led effort to ensure that digital companies are taxed at reasonable rates, as long as the effort is expanded to cover other sectors where corporations from other countries dominate. And current approaches to the allocation of income across jurisdictions should be reviewed. For instance, ways to support Puerto Rico can be found without tax breaks for multinationals that exacerbate the federal deficit and do more for highly profitable but lightly taxed major corporations than they do for Puerto Rico.

Second, tax enforcement should be beefed up. It is a scandal that the share of large corporations that face corporate audits has fallen by half in the past decade. And the audits that remain are less aggressive, with the IRS almost 90 percent less likely to challenge companies’ tax liabilities than they were a decade ago.

Third, as in antitrust, Congress should make clear that it expects the IRS to hire and fully compensate top-flight legal and financial experts when bringing actions in tax matters. It is indefensible that star private litigators are only rarely used in tax matters and that it appears Microsoft was able to successfully challenge private counsel’s right to question their employees. Similarly, to improve effectiveness in enforcement, statutes of limitation should be extended and disclosure requirements increased.

Fourth, no matter how much enforcement is enhanced and the tax code reformed, there will still be efforts to play the audit lottery and take unreasonable positions. Strong actions including treble damages, removal of privileges for attorneys and accountants to practice before the IRS and direct financial penalties on executives should be considered as means to discourage efforts to push the envelope. The case for taxpayer privacy is far less compelling with respect to public corporations than it is for individuals. Some sunlight on how companies allocate income across jurisdictions could also be an effective disinfectant.

Fifth, anyone who is concerned with business being seen as constructive — such as the Roundtable, large institutional investors or presidents and their treasury secretaries — should work to change the law to eliminate the most egregious shelters and make clear that they are prepared to name and shame companies that don’t meet their obligations.

Justice Oliver Wendell Holmes famously said, “Taxes are what we pay for a civilized society.” Any company that wishes to be thought of as a good citizen needs to join the effort to combat corporate tax avoidance. No issue is more important to restoring the legitimacy of our economic system.

Lawrence H. Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 through 2010.

Natasha Sarin is an assistant professor of law at the University of Pennsylvania Law School and an assistant professor of finance at the Wharton School.

www.larrysummers.com

By Natasha Sarin and Lawrence H. Summers

November 17, 2019

While there’s plenty of disagreement about how the money should be used, almost everyone involved in public-policy debates agrees that it would be good if the federal government could collect more revenue without raising tax rates or reducing tax deductions or credits.

It should be indisputable that investment to make sure all citizens meet their tax obligations is desirable. Such investment would raise substantial revenue, as well as increase economic efficiency and help redress growing inequality: Our rough estimates suggest that at least 70 percent of the “tax gap”— defined as owed but uncollected taxes — comes from underpayment by the top 1 percent. This contributes to legitimate concerns that our tax system unfairly advantages the elite.

Our new analysis suggests that better-focused audits, raising Internal Revenue Service enforcement to previous peak levels, investing in information technology and broadening earnings reporting could raise more than $1 trillion in the next decade, primarily from very high-income taxpayers. This well exceeds the revenue benefit of raising the top individual rate to 70 percent.

Some basic facts about tax compliance and enforcement:

Extrapolating from the most recently available IRS information, the tax gap will be more than $7.5 trillion over a decade. You only need to close 15 percent of this gap to raise $1 trillion.

Enforcement effort — as reflected in the share of gross collections reinvested in the IRS — has declined by approximately 35 percent over the past decade, and the decline has been disproportionate for corporations and millionaires: In 2011, more than 12 percent of individuals making $1 million or more annually were audited; last year, only 3.2 percent were. Audit revenue declines proportionally to the declining audit rates.

At present, recipients of the earned-income tax credit — all of whom have incomes below $50,000 — are about as likely as those making $500,000 or more to be audited.

Only 5 percent of taxpayers earning above $5 million are audited — even though IRS data demonstrates that an extra auditor-hour spent on their returns raises almost $5,000 on average.

Fewer than 1 percent of corporate returns were audited in 2018 — even though corporate audits on average raised nearly $1 million in additional revenue.

The IRS invests less than a quarter as much in information technology as major banks and still relies on systems from the 1960s. Pilot projects suggest payoff rates on strategic IT investments could approach 50:1.

When third-party income reports exist to compare to individual tax returns, income is correctly reported more than 95 percent of the time. Almost all income earned by individuals who make $200,000 or less annually gets reported in this way. But without such substantiation, between 17 percent and 55 percent of income goes unreported (and so untaxed) — and more than two-thirds of the income of those who earn $10 million or more falls into this category.

There are more facts in this vein. But these should be sufficient to demonstrate that there is plenty of low-hanging fruit in the area of tax enforcement.

What is the overall potential? In a study released this weekend, we conservatively priced out a program of increased auditing, IT investment and greater third-party reporting. We estimated that it would be possible to close 15 percent of the tax gap by spending approximately $100 billion on additional enforcement, as would be necessary to return the IRS to its historical scale. Every $1 that is spent would generate more than $11 in greater tax collection.

Congressional scorekeepers have suggested more modest revenue potential from investment in enforcement; however, our study shows these differences can be reconciled. Their approach is based on a program that is more modest in size (only a quarter as large as our proposed restoration of enforcement effort to previous peak levels) and scope (we consider the revenue potential of targeting audit resources on high-income individuals, as well as increasing information reporting). Critically, the Congressional Budget Office does not account for deterrence effects, which Treasury Department reports suggest greatly magnify the revenue gains from increased enforcement.

Why is the federal government leaving so much money on the table? Part of the answer is that there are powerful interests that want to maintain a system that facilitates evasion.

Likely more important, though, are congressional budget procedures. Historically, it was common for congressional leaders faced with last-hour budget gaps to rely on substance-less “tax compliance initiatives” to plug holes. The practice became discredited, and revenue from increased enforcement came to be excluded from budget scoring.

What’s counted counts. When credit is not given for the revenue that will be collected from increased enforcement spending, it can hardly be surprising that tax compliance is neglected.

Restoring the IRS budget would, we believe, pay for itself many times over. It would also create a more progressive tax regime: At a time when working people pay their taxes in full, because of withholding, it would be reassuring for the tax law to be equally well-enforced on high-income earners.

Assuring compliance to the maximum extent feasible is not where tax reform should end, given the many problems with the current system and our need for significantly greater revenue. But it is where it should begin.

Natasha Sarin is an assistant professor of law at the University of Pennsylvania Law School and an assistant professor of finance at the Wharton School.

Governments should borrow more to stave off secular stagnation

October 11, 2019

New IMF managing director Kristalina Georgieva’s first speech makes bracing reading for the global financial community as it gathers this coming week in Washington for the annual IMF and World Bank meetings. Ms Georgieva noted that while two years ago growth was accelerating in 75 per cent of the world, the IMF now expects it to decelerate in nearly 90 per cent of the global economy in 2019 to the lowest level in a decade.

This shift into reverse comes as central banks in Europe and Japan have embraced negative interest rates and investors expect further rate cuts from the US Federal Reserve. Bonds worth more than $15tn are trading with negative yields.
If the primary problem were on the supply side, one would expect to see upward price pressure. Instead, despite loose fiscal and monetary policy, central banks in the industrialised world have as a group fallen well short of their inflation targets for a decade and markets project that this will continue.

Europe and Japan are engaged in black hole monetary policy. Without a major discontinuity, there is no prospect of policy rates returning to positive territory. The US appears to be one recession away from entering the same black hole. If so, the whole industrialised world would be providing at best negligible and often negative returns to risk-free savings and falling short of growth and inflation targets. It would also have to maintain financial stability amid increased incentives for leverage and risk-taking.
All this requires new thinking and new policies, much as the rapid inflation of the 1970s forced a reset back then. Once economies are in the monetary black hole, central banks that focus on inflation targeting will be ineffectual in hitting their immediate goal and unable to stabilise output and employment. The policy action has to shift elsewhere.

Today’s core macroeconomic problem is profoundly different from the problem any living policymaker has seen before. As I have been arguing for some years now, it is a version of the secular stagnation — chronic lack of demand — that terrified Alvin Hansen during the Depression. In today’s global economy, private investment demand is manifestly unable to absorb private savings even with negative real interest rates and limited restraints on financial markets. That is why even with burgeoning government debt and unsustainable lending, growth remains sluggish and below target.

Since 2013, when I first argued that we were seeing more than simple “economic headwinds”, interest rates have been much lower, fiscal deficits have been much larger, and leverage and asset prices have been much higher than expected. Yet growth and inflation have fallen short of forecasts. That is exactly what one would expect from secular stagnation: a chronic shortage of private sector demand.

What is to be done? To start it would be helpful if policymakers acknowledged this week that the policy problem is not smoothing cyclical fluctuations or preventing profligacy. Rather the fundamental issue is assuring that global demand is sufficient and reasonably distributed across countries.

The place to start is by dampening down trade wars — deeds, threats and rhetoric. Trade warriors think they are participating in zero-sum games globally with one country gaining demand at the expense of another by opening markets or imposing protection. In fact trade conflicts are negative-sum games because there is no winner to offset the demand that is lost when uncertainty inhibits and delays spending decisions.

Given the risk of a catastrophic deflationary spiral, central banks are probably right to attempt to ease monetary conditions. But diminishing returns have surely set in with respect to monetary policy and there is risk of doing real damage to the health of the banks and other financial intermediaries.

Most important governments need to rethink fiscal policy. Government debt or government support for private debt is needed to absorb savings flows. With real rates near zero or even negative, the cost of debt service is very low and low rates can be locked in for decades. That means that the debt levels that were prudent when rates were at 5 per cent no longer apply in today’s zero interest rate world. Governments that run chronic surpluses are failing to do their part to support the global economy and should be the object of international scrutiny.

There are other possible interventions. Increasing pay-as-you-go public pensions would reduce private saving without pushing up deficits. Public guarantees could spur private green investments. New regulations that prompt businesses to accelerate their replacement cycles will increase private investment. Measures to create more hospitable environments for investment in developing countries can also promote the absorption of global saving.

Spurring sound spending is the antidote to secular stagnation and monetary black holes. It should be an easier technical problem to solve and much easier to sell politically than the austerity challenges of earlier eras. But problems cannot be solved until they are properly diagnosed and the global financial community is not there yet. Hopefully that will change this week.

The Business Roundtable recently announced a major policy change declaring that the purpose of a corporation is not just to serve shareholders (its official position since 1997) but “to create value for all our stakeholders.” At a time of considerable disillusionment with U.S. capitalism, this is a significant statement that could signal meaningful change in the operation of the American economy. Certainly the recognition by leading chief executives that they need to look beyond the narrow metric of their stock price is to be welcomed.

But there are some questions that Business Roundtable members will need to wrestle with going forward. This is crucial, because initiatives of this kind can be not just ineffective but also counterproductive if they weaken the impulse to address problems through government policy.

First, who will watch CEOs going forward? Under what authority do CEOs have the role of declaring the purposes of the corporations as broader than just shareholders, when they were appointed by boards of directors representing shareholders? It’s legendary that whenever you serve multiple masters, you serve none. With shareholders disempowered and no other form of vigilance empowered, how will the risk that stakeholder capitalism becomes an agenda of CEO empowerment be avoided?

Second, will the roundtable act on its professed principles? For example, I have no idea whether recent grievances against General Electric, Boeing or Johnson & Johnson are warranted, but if they are valid, they represent blatant violations of the roundtable’s principles. Will companies or CEOs ever be forced to leave the Business Roundtable? How will this be adjudicated?

Third, while the statement references communities, consumers and customers, what role does the United States have as a stakeholder for roundtable companies? Are roundtable companies that act according to the group’s principles supposed to be indifferent between locating new plants in the United States and other countries? What obligation are roundtable companies now under not to subvert American democracy with campaign contributions or extensive lobbying operations? What is their obligation to speak out against presidential words or deeds that undermine the United States’ standing in the world or offend core values of their employees or customers?

Fourth, is it as clear as the Business Roundtable seems to assume that standing up for stakeholders is the right thing to do in a dynamic economy? Consider, for example, a firm debating whether to relocate some or all of its operations out of super-prosperous, fully employed Silicon Valley to a disadvantaged area to reduce labor costs. On “shareholder” grounds, this would likely be desirable. Its employee stakeholders would likely object. Yet I would argue that broad American egalitarian values would be well-served by the move. We generally celebrate disruptive innovation such as digital photography, but it often comes at the expense of some employees and customers with traditional skills and tastes. How are stakeholder capitalists supposed to decide about pursuing disruptive innovation?

Fifth, what role does the roundtable imagine for public policy? The idea that companies should be run for the benefit of stakeholders is a powerful one. But for it to work, companies that practice stakeholder capitalism must be protected by law from excessively ruthless competition from companies run only in shareholders’ interests.

If the Business Roundtable is serious about stakeholder capitalism, and if responsible firms are to flourish and spread their benefits, it will not just decree principles according to which its firms will operate but will also push for laws and regulations that support firms’ ability to stand up for their stakeholders. These might include minimum-wage and benefits requirements and broader mandates to protect companies that want to do right by their workers from those competing companies that are ruthlessly pursuing shareholder interests. Or they might include rigorous restrictions on advertising and promotion practices, so firms who are honest and transparent are not placed at a competitive disadvantage. Or universally high capital standards on financial institutions, so that imprudent willingness to take on risk cannot be a competitive advantage.

Most CEOs want to do the right thing by all their stakeholders, and most shareholders want to support them in being responsible. But in a world of fierce competition, good intentions are not enough. All companies do right some of the time. Some companies do right all of the time. But even the Business Roundtable should know that all companies do not do right all of the time. That is why a serious Business Roundtable program in support of stakeholder capitalism will include legislation and regulation.

The Federal Reserve will over the next several months make monetary policy decisions that are as consequential as any it has made since the financial crisis and Great Recession of 2007-2008. The temptation in a highly uncertain and politicized environment will be to move cautiously. Yet this would be a grave error in the current context, where a recession could be catastrophic and the odds of one beginning in the next year, while still less than 50-50, now appear significant and increasing.

While the headline number for first-quarter growth in gross domestic product (GDP) was a robust 3.1 percent, the details of the report suggest much weaker prospective growth. Jason Furman has highlighted that the gap between GDP as reported and the conceptually equivalent GDI, (gross domestic income) measure is now at its highest level since the onset of the Great Recession.

Moreover, the components of GDP that have predictive powerfor future growth are running at less than half the total GDP growth rate. Little wonder that most forecasters’ expectations for second-quarter growth are well below 2 percent. Other grounds for concern include weak reports from business on spending intentions, trade-war uncertainty and yield curve inversions —traditional predictors of recessions.

The best way to take out recession or slowdown insurance would be for the Fed to cut interest rates by 50 basis points over the summer and by more, if necessary, in the fall. A serious recession anytime in the next few years would encourage populism and polarization at home, and reduce American influence and strength in the world as well as damaging the global economy. It is clear in retrospect that the Fed was too slow in responding to gathering storms during 2008 as the Great Recession took hold and in 2000 when the Internet bubble collapsed.

Given that monetary policy operates with substantial lags and that downturns develop momentum once they start, monetary policy delay is always problematic when recession is a risk. For several reasons, slow Fed action would be especially dangerous in the current context.

First, markets currently expect rate cuts, so failure to deliver would be a negative surprise; it would have direct adverse effects and raise questions about whether the Fed is adequately sensitive to economic conditions. After the Fed unnecessarily raised rates last December, market gyrations and economic anxiety were contained when Chairman Jerome Powell signaled a dramatic change in policy, but the agitation illustrated what can happen when the Fed disappoints.

Second, the Fed normally cuts rates by a cumulative 5 percentage points in response to recession, and with rates now below 2.5 percent there is nothing approaching that amount available. Allowing a recession with inadequate firepower to confront it risks “Japanification” — a situation where interest rates are permanently pinned at zero and deflationary pressures take hold. The Fed will be able to do too little in combating the next recession, so it is especially important that it’s not too late.

Third, and perhaps most important, unlike the normal situation where the benefits of supporting the economy need to be weighed against the risks of allowing inflation, we are now in a situation where the Fed needs to accelerate inflation to meet its 2 percent inflation target. Core inflation on the Fed’s preferred indicator has come in at 1.6 percent over the last year and 1 percent over the last quarter. Moreover, market expectations as reflected in Treasury index bonds are for inflation on the Fed’s preferred measure to remain in the 1.5 range even over a 30-year horizon and to be even lower over shorter horizons. There is the further point that with a 2 percent inflation target, inflation during good times should run above 2 percent to compensate for its lower level during recessions.

Sometimes the Fed should worry that overly easy policy will lead to complacency in financial markets. In light of recent volatility in the markets and with the possibility of more adverse surprises on the trade front, this is not such a time.

If rate cuts by the Fed are seen as a capitulation to President Trump, this sort of pressure may be counterproductive, even apart from any long-term consequences. It would be tragic, though, if a lack of institutional self-confidence and a focus on appearances kept the Fed from doing what is best for the economy.

By Natasha Sarin and Lawrence H. Summers

March 29, 2019

Part Two

Over the last several weeks, we have paid careful attention to tax proposals by Representative Alexandria Ocasio-Cortez of New York, for a 70 percent marginal tax rate on top earners, and by Senator Elizabeth Warren of Massachusetts, for a wealth tax on those worth more than $50 million.

We share the lawmakers’ enthusiasm for progressive taxation that ensures that the wealthiest pay their fair share. But we believe that base-broadening, efficiency enhancing reforms are the right way to start raising revenue from the ultrarich. As Part One of this series illustrates, closing tax shelters alone raises more revenue than Ocasio-Cortez’s proposal. And our base-broadening reforms — rolling back President Trump’s tax plan, increasing tax compliance by the rich, closing shelters, eliminating stepped-up basis and deductions for the wealthy, and broadening the estate tax base — together raise more revenue than the wealth tax is estimated to. Most of these measures would be desirable even if they did not raise revenue, because they would improve investment efficiency and correspond to the basic notion of fairness: If two people are similarly situated economically, one of them should not be able to pay substantially less tax because of cheating or taking advantage of quirks in the law. In contrast, rate increases or wealth-tax proposals are unlikely to increase the efficiency of the economy.

Issues with using the wealth tax or rate hikes to curtail political power

Some argue for punitive taxation of the wealthy because the concentration of wealth leads to a concentration of political power. Professors Gabriel Zucman and Emmanuel Saez, who have played a major role in validating the wealth tax, advocate this view. They suggest that “high tax rates for sky-high incomes do not aim at funding Medicare for All” and instead “aim at preventing an oligarchic drift.” But framing tax policies as attacks on the wealthy rather than as ways of raising revenue is problematic on multiple levels.

We have sympathy with complaints that economic policy decision-making gives too much weight to the interests of affluent elites. But we are skeptical that large rate hikes or wealth taxes are the right way to address this problem.

First, these proposals do not get at the main ways in which the wealthy exercise influence. The whole apparatus of think tanks, research institutes, advocacy groups — organizations like the Federalist Society, which has transformed the judiciary — are supported by tax-deductible contributions that tax hikes will not discourage. Indeed, increases in tax rates or broad wealth taxation would make it cheaper in terms of forgone personal spending to support advocacy efforts or to create elite enclaves.

Second, even draconian tax hikes will not have a major impact on the ability of very wealthy Americans to be politically influential. For a few tens of million dollars, an individual or interest group can become a major political player. Even if you took away half the wealth of a billionaire, that person would still be able to invest $50 million a cycle in political activity without dipping into capital. Such an expenditure would make that billionaire the fourth largest donor in the 2018 midterms, right behind Sheldon Adelson, Michael Bloomberg, and Tom Steyer.

Third, many of the areas of special interest concern that seem most serious do not involve players who would be substantially impacted by recent tax proposals because they are not hugely wealthy. Think about the way the NRA distorts gun control debates or how community bankers resist consumer financial reform.

If the concern is with the excessive power wielded by wealthy elites, there are more effective strategies. Consideration should be given to limiting the deductibility of lobbying expenditures; restricting the ability of political organizations to have allied 50(c)(3) organizations that can receive tax-deductible contributions; and tightening the rules on donor-advised funds that enable the wealthy to get essentially all the benefits of foundations without any of the requirements to pay out resources or provide any public transparency.

Issues with respect to raising rates

Even increasing top rates to 70 percent would raise less than one third as much revenue as our base-broadening approach. Moreover, unless a base-broadening approach was adopted first, dramatic rate increasing would be quite inefficient.

An important parameter in tax analysis is the “elasticity of taxable income” — which measures how the tax base changes as tax rates change. The reported income of high-income taxpayers responds to tax changes in part because it changes how much income they generate but more so because it increases sheltering incentives. Economics literature suggests that a 1 percentage point increase in top income rates decreases reported taxable income by perhaps 0.6 percent. So more than half of the potential income from raising rates is dissipated as individuals increase their tax avoidance activities and perhaps also reduce their income earning. As a result, the ratio of economic distortion to revenue raised is likely to be very high for rates pushed up to 70 percent, especially when one recognizes that Ocasio-Cortez’s proposal would mean a top income tax rate of well over 80 percent for residents of New York City.

One benefit of the approaches we advocate is that broadening the income tax base may lead to lower elasticities by making it more difficult for the wealthy to shield income from taxation. Increasing top tax rates will have more potency in a world where the elasticity of the tax base to rate changes is lower.

Issues with respect to wealth taxation

While the idea of wealth taxation has generated popular support in some quarters, we are skeptical as to how deep this support will prove to be.

The idea that taxing only the wealth of a few thousand people can generate significant revenue seems compelling.

However, arguments of this type have long been used to justify punitive estate taxes and estate taxes more generally and tend not to have proven effective. A long time has passed, but when Senator George McGovern proposed taxing estates to limit inheritances in a speech to the United Auto Workers in 1972, he was booed off the stage. During the 1990s, the Clinton administration found it difficult to mobilize enough congressional support to uphold the president’s veto of total estate tax repeal. And progressive countries like Australia, Canada, Norway, and Sweden do not have estate taxes.

The reluctance to embrace estate taxes reflects issues that also arise with respect to wealth taxes. There is the sense, perhaps misguided, that asking people to pay significant taxes at moments when they are not generating significant cash receipts is unjust. For example, imagine if the head of a family-owned auto dealership dies. Many believe that his children should not have to sell the dealership to cover their tax burden.

Wealth taxes are estate taxes on steroids because they are collected annually rather than at the end of life and thus raise almost 10 times as much revenue. Initial polls for are broadly positive; however, the wealth tax has not yet been opposed and attacked in the way that critics have successfully gone after estate taxes. And while there is significant enthusiasm for taxing the rich, there is much less enthusiasm for redistribution. Additionally, the share of Americans who think the wealthy pay too little in taxes has actually declined since the early 1990s.

Wealth taxation also raises practical concerns — for example, issues of valuation: Is a partnership in a law firm wealth? How will illiquid assets — like football teams or newspapers — be valued? And issues of liquidity: If someone owns 1 percent of Uber — still a private company — she will owe roughly $20 million in taxes each year, but it’s unclear where she can get this money. She can’t sell shares and, if involved with the operation of the company, is likely to be barred from borrowing against the value of her stock.

There are also family unit issues: If a couple files separately or gets divorced, do they get two $50 million exemptions? And issues of gaming: There will be incentives to use legal structures to relinquish direct ownership of assets while maintaining control of them. For example, owning assets in a trust or a nonprofit to benefit from wealth while avoiding tax liability. Granting that capital income should be taxed more heavily than it now is, and that unrealized capital gains going untaxed is a serious problem, there is also a question of just how a punitive tax is appropriate.

It is important not to be misled by the 2 percent annual rate: A 50-year old who has accumulated a substantial fortune can expect to pay more than half of it in taxes before she dies.

Imagine that a wealthy person invests in 10-year treasury bonds, with a 2.4 percent return. The wealth tax would extract 2 of the 2.4 percent return. Combined with income taxes levied at a 40 percent rate, the wealth tax could make the effective tax rate on capital income well over 100 percent. And then at the end of life would come the estate tax. While we are not aware of formal estimates of the loss in economic efficiency from wealth taxes, we suspect that if levied without concomitant reductions in income tax rates or estate tax rates, the ratio of burden on the economy to revenue raised would be far higher than with the base-broadening measures we advocate.

Of course, it might be objected that the wealthy invest in assets that are riskier than Treasuries and provide higher returns. Thinking about effective tax rates in the context of risky assets is complex because it needs to be recognized that income taxes, unlike wealth taxes, share risks as the government loses tax revenue when investments yield low returns. For this reason, research by one of us with Jeremy Bulow suggests that in thinking about the burden of wealth taxation it is appropriate to assume that investments earn the safe return. There is the further point that wealth taxes are likely to be burdensome on entrepreneurial businesses in their private phase, when entrepreneurs are liquidity-constrained. Perversely, this could disincentivize transformative innovation.

Any new tax has problems, and no doubt, with further reflection, the wealth tax’s can be addressed. However, we find international experience cautionary. Twelve countries had wealth taxes in 1990, and only three still do today.

The Organization for Economic Cooperation and Development recently assessed wealth taxation and concluded that “from both an efficiency and equity perspective, there are limited arguments for having a net wealth tax.” Of the three countries with a wealth tax, two — Norway and Spain — raise an average of 0.305 percent of GDP. These taxes generate less than one-third of what the wealth tax estimates despite having a much broader base: While precise data are hard to come by, we suspect that less than 10 percent of this revenue — or 0.03 percent of GDP — comes from those in the top 0.1 percent of the wealth distribution.

Only Switzerland raises the 1 percent of GDP that the wealth tax estimates, and the differences between our tax regimes make it unclear if extrapolating from their experience is reasonable. Switzerland has no capital gains tax, very low property taxes, and in many regions no estate tax. And in some regions 30 percent of Swiss taxpayers pay a wealth tax, which is fundamentally different than the wealth tax proposal (wealth tax for 0.06 percent of US taxpayers). Overall, we are skeptical that the wealth tax will raise close to the $2.75 trillion estimated.

To be sure, as Bill Gates has recently noted, wealth taxes do respond to an important lacuna in our current tax system: Those who start businesses or invest wisely earn great wealth that is in the form of stock they do not sell. It seems wrong that such gains escape taxation.

However, the proposals for repealing stepped-up basis and reducing estate tax sheltering likely represent a sounder approach to this problem.

Ultimately, we agree with Warren and Ocasio-Cortez that there is a major need for tax increases that are borne by the most fortunate Americans. But it is important to be clear about the logic. There are essential public investments the United States needs to make and crucial safety nets that need to be preserved, and that this requires more revenue. At a time of increased inequality it seems natural to first look to those with the highest income in collecting this revenue.

Justifications for substantial increases in tax burdens as a tool to address “oligarchic drift” are problematic. First, given that most outlays to promote a political agenda are tax deductible, approaches like wealth taxation may actually increase oligarchic forces. But more broadly: If America had had more figures like Bill Gates, Warren Buffett, and Steve Jobs over the last generation, it would have been a good thing, associated with a stronger economy even if measured inequality increased. Bill Clinton was right when he said that he wanted to see an economy with more millionaires, because that meant an economy with more job-creating successful businesses. Turning the tax code into a vehicle for confronting what some call “oligarchic drift” would undermine business confidence, reduce investment, degrade economic efficiency, and punish success in ways unlikely to be good for the country or even to be appealing to most Americans.

While some may argue that a single broad stroke, like the wealth tax or the 70 percent top rate, has a better chance of political success than our broader agenda, we believe this may be a dangerous gamble. The wealth tax could well be found unconstitutional, and so substantial political effort might have gone to waste. And investing substantial political capital into a tax model that is untried in the United States and has failed internationally strikes us as unwise. We are unaware of any example where a single, clear soak-the-rich tax proposal has been successfully legislated in the United States.

The traditional tax reform approach of using the tax code to raise necessary government revenue as efficiently and progressively as possible, starting with base broadening, is the right first step forward. It may be that wealth taxes or very high-income tax rates are necessary to adequately fund appropriate government activities. But that is a conclusion should be reached carefully only after full exploitation of traditional alternatives, rather than in a spirit of joyous confrontation with the successful.

Excess austerity is a bigger risk than fiscal profligacy

When people are fundamentally healthy, they do not yet know what will cause their death. An economic recovery is healthy if it is not clear what will cause the next recession. By this standard, the recovery from the 2008 financial crisis, although disappointingly slow, has been healthy for most of the last decade.

This is now in serious doubt. Paul Samuelson’s quip that the stock market has predicted nine of the last five recessions cautions against overreacting to recent stock market moves. But credit spreads have widened considerably, commodity prices have softened and investors have started demanding higher yields for short-term US bonds than for those with longer terms. Unlike equity markets, “yield curve inversions” have not historically tended to produce false recession predictions. The overall judgment of financial markets is that recession is significantly more likely than not in the next two years.

Real economic indicators for the world’s largest economies, China and the US, also suggest considerable cause for concern. Almost every Chinese indicator in the last few months has come in below expectations. Beijing authorities now see the need for stimulus measures if they are to credibly report the attainment of growth targets. Revisions of economic forecasts tend to run in the same direction for protracted periods as forecasters adjust to emerging reality. This tendency is especially pronounced in China, given the extreme political sensitivity of economic statistics.

In the US, inflation is again running below the Federal Reserve’s 2 per cent target and comparisons of the yields on ordinary and inflation-adjusted bonds suggest investors expect this to continue for the next decade. While jobs growth remains strong, employment is usually a lagging statistic. Forward-looking indicators of business and consumer sentiment suggest that growth is likely to slow.

Perhaps the US economy will enjoy a soft landing: jobs growth would slow towards long run sustainable levels, and productivity growth would accelerate enough to allow continued gross domestic product growth of 2 per cent and increased wage growth without accelerating inflation. But this would require both policy skill and great luck. Given that we are starting from very high debt levels and low unemployment, a recession is the more likely outcome.

It is almost inconceivable that the global economy will remain healthy in the face of serious economic problems in both China and the US, even leaving aside their conflicts over trade and technology. Europe lacks economic energy and the uncertainties associated with Brexit, French protests, German political transition and Italian populism mean the continent is more likely to be a source of problems than a solution.

Like generals fighting the last war, too many policymakers are focused on yesterday’s problems. The global economy is much more likely to suffer from a downturn than from overheating in the next two years. There is more likely to be too little credit flow than too much, asset price deflation is more probable than a bubble and excess austerity is a bigger risk than profligacy.

The critical challenge for monetary and fiscal policy will be to maintain sufficient demand amid immense geopolitical uncertainty, increasing protectionism, high accumulated debt levels and structural and demographic factors leading to increased private saving and reduced private investment.

The Fed should signal that it is determined to avoid a downturn that would assure another decade of below target inflation. The People’s Bank of China and other central banks should also make clear that they recognise that avoiding another recession is the most important thing they can contribute to financial stability.

Fiscal policymakers should realise the very low real yield on government bonds is a signal that more debt can be absorbed. It is not too soon to begin plans to launch large-scale infrastructure projects if a downturn comes. The largest economies should try to limit trade frictions and signal that they are committed to co-operating to support global growth by assuring adequate capital flows to emerging markets and avoiding a cycle of protectionism.

Even if my recession fears are excessive, a shift towards emphasising growth will contribute to bringing inflation up to target levels and can be reversed. If I am proved right, the costs of delay in the policy response could be catastrophic. It is the irony of our moment that prudence requires the rejection of austerity.

President Trump has publicly and harshly rebuked Federal Reserve Board Chairman Jerome H. Powell for what the president regards as misguided interest-rate increases that threaten continued economic expansion. As with much of what Trump says and does, this way of doing business is counterproductive — irrespective of whatever merit his underlying position may have.

No self-respecting central banker can be seen as yielding to pressure from a politician facing a difficult election. A central bank that appears subservient to political concerns will rapidly lose credibility in the markets, resulting in increases in inflation expectations and rising long-term interest rates. As those of us at the Treasury Department used to remind White House political staff during the Clinton administration: Fed bashing is a fool’s game — the Fed doesn’t cut short rates, and the market raises long-term rates. The sense that policy is being politicized increases uncertainty, which is likely to decrease investment and ultimately slow growth.

So Trump is surely making a serious error in his rhetorical approach to the Fed. Two questions remain. First, how rapidly should the Fed raise interest rates in coming months? Second, recognizing that public Fed-bashing is wrong, what should be the nature of relations between the central bank and the executive branch? On neither question does orthodox thinking seem quite right to me.

On the first question, it seems there is considerably more danger of the Fed raising rates too fast than too slowly over the next year. Inevitably, monetary policy is a judgment about competing risks. If the Fed raises rates too slowly, inflation will increase and remain clearly above the 2 percent target for a significant interval. This does not seem like it should be a dominant worry. Inflation has been below the target level for a decade, so above-target inflation is necessary if inflation over the long term is to average 2 percent.

Even with good luck and good policy, a recession will come along at some point and pull down the inflation rate. Two months ago, it might have been reasonable to worry about complacency in asset markets, but in light of recent volatility this seems a lower order problem.

On the other hand, the risks of excessive tightening seem substantial. Monetary policies affect the real economy with lags of a year or more. It is, therefore, easy for policy to tighten past the point at which the economy is thrown toward recession because of an absence of clear signals of slowing. Indeed, on almost every occasion in the past 50 years when the Fed has tightened in a sustained way, the result has been recession. The risks of a downturn now are greater than at any point in living memory because, given the zero lower bound on interest rates, the Fed would have limited room for easing, and because of the populist and protectionist pressures that would almost certainly accompany a downturn. Caution should be the order of the day.

Second, there is a need for pragmatism regarding the independence of central banks. It is important they resist the kind of pressure for inflationary policy that Trump has recently engaged in. But it is foolish to suppose that a nation’s financial policies should be conducted entirely independently of its elected officials.

Consider some examples: During the period of quantitative easing following the financial crisis, the Treasury was pursuing a strategy of extending the duration of U.S. government debt. At the same time, to pursue stimulus, the Fed was operating in the opposite direction, in effect, issuing short-term debt and buying long-term debt. Surely a coordinated policy would have reduced transactions costs and served the public interest?

Or take exchange rates, which are objects of international diplomacy and are determined, in substantial part, by monetary and reserve management policies. Should elected governments with responsibility for foreign affairs have to be removed from exchange-rate policy in the service of central bank independence?

Occasions when interest rates are constrained by a zero or near-zero floor are likely to recur in the future. In such circumstances, coordination of fiscal and monetary policies may be necessary. This is very difficult if central bank policy is entirely independent of budget policy.

The point is not that central banks should be made more subject to political pressure. That is Trump’s bad idea. It is that, as their activities expand beyond pure monetary policy, there will be a need for coordination between the banks and elected government.