Allison's Ode to the Second Moment


Welcome to the 40th issue of Allison’s Ode to The Second Moment a newsletter which is hopelessly uncool for its love of voodoo economics and its skepticism of crypto-currencies.

Some unpopular thoughts about tax reform

The House passed a tax bill, and I’ve heard rumors something will probably become law by year-end. While the new plan has some good parts and plenty of bad parts, I find this process distressing as I am now certain good tax reform is impossible because we just can’t face some hard truths:

  1. I believe in the Laffer Curve. No, I really do. In many intellectual circles, admitting this is worse than believing in zombies. But think about it: If the government taxed an extra dollar of income 200%, the odds are that you would work less or not at all. There exists a tax rate that discourages working, and therefore by lowering taxes more people will work and generate enough revenue to pay for itself. Are we at that point with current tax rates? No, not even close.

But that doesn’t mean the Laffer curve is stupid or wrong; instead, it means we aren’t at the point where the curve peaks. It is also true that lowering taxes (even at current rates) can increase growth in certain circumstances. It is just hard to argue that, given where taxes are right now, cutting them will generate enough growth to pay for themselves.

  1. A good tax regime raises enough revenue to cover spending (at least over the long term) and creates as few distortions as possible. At least that’s what I learned in graduate school. From recent commentaries, you’d think the purpose of taxation is just redistribution.

To be clear, I am all for progressive taxation. The U.S. already has a progressive tax system, so should it be more progressive? Maybe. But first, I’d like it to be simpler and less distortionary, which means lowering marginal rates and widening the base. Doing the latter means getting rid of lots of deductions, which will mostly increase taxes on higher earners. But because some middle-class people take advantage of deductions, you can’t eliminate lots of bad deductions without some middle-class people paying more taxes.

The latest plan gets rid of a few, albeit not enough deductions. That means many of high earners pay more and a few middle-class people pay more. Lots of people think it is unacceptable if a single high earner pays lower taxes while a single middle-class person pays more.

Here's the ugly truth. If we want more revenue and can only tax high earners, then we need even more distortions and higher marginal tax rates. Besides, the fact is that eventually everyone needs to pay more—not just high earners. If we take the view that no one who earns less than $75,000 should ever pay more taxes, we’ll continue with this mess of a tax system and not be able to pay all our liabilities.

Again, I am not defending the current plan, but let’s critique it for the right reasons like the new distortions it creates or that it will add to the debt.

After all, higher earners deserve their money

Well, maybe, as that’s a debate for another day. But there is a link between pay and productivity after all. It has become popular to believe pay is all random or unfair. But Larry Summers and Anna Stansbury’s new paper found that people are rewarded for their productivity. Summers argues technology and globalization have muted wage growth but, on balance, the fruits of productivity still go to the workers. This suggests the singular goal of redistribution over growth may not be such a great idea. Maybe we do want a tax regime that is efficient and not just redistributive.

Though some gained more from productivity than others, a new research paper estimates, consistent most of the earlier literature (with a few notable exceptions I won’t mention here), that high earners, and not people with lots of wealth who don’t work, are responsible for increased inequality.

Bitcoin reaches adolescence

I am a bitcoin skeptic, may be because I just don’t understand it. Lots of people have explained it to me, but about 15 minutes in I get bored and give up. At that point, I shrug and say something like, “I doubt its viability as a currency, but I do think the blockchain technology can be a game changer.”

I think this is what everyone, who doesn’t understand Bitcoin and feels they should, says. Maybe we were too skeptical that an asset with no intrinsic value, other than scarcity, would ever take off. It seems that Bitcoin is becoming more mainstream, more people than ever own some, even in their retirement accounts, and there’s a burgeoning futures market. The Chicago Mercantile Exchange will start selling Bitcoin futures. The problem is we still don’t have exchanges that can handle bitcoins as a mature asset class.

Bitcoin enthusiasts argue that going mainstream will further boost its prices. But maybe trading crypto-derivatives will mean more sensible prices because the risks will be priced, bought, and sold. If Bitcoin is really just a bubble, the derivatives market could bring transparency and its prices down to earth.

Future of work

Here’s a radical thought: maybe gig workers will accept lower wages, not because they are desperate, but because they value flexibility. Jobs that let you work when you want often pay less, gig or not. That doesn’t mean working for Uber is so great that we don’t have to regulate gig work. But as any Uber driver will tell you, there are costs and benefits to this kind of work, and we have a regulatory structure that is ill-equipped to provide the protections workers need while still offering the flexibility they crave.

Soon, we may all be gig workers, and the next person who flies your plane might be one. The best thing you can do in this environment is keep your skills fresh. It turns out that coding is over-rated, as machines can do it anyhow. If you want job security, you better master spreadsheets.

Speaking of machines doing our jobs

Here is an interesting review of automated investment advice platforms that help retirees spend their savings. This is the hardest, and most neglected, part of the retirement finance problem. I am glad more people are trying to solve it. Though I am concerned, the only metric used to judge these strategies is the odds people have money in their 90s. Achieving that goal is not hard. Just juice up market risk (and therefore expected return), and any 30-year projection will look rosy. Retirement income needs to be predictable year to year, no matter what happens to markets. Old age is not the ideal time for extreme income risk—that’s just my opinion.

Until next time, Pension Geeks!