Do the Rich Pay their Fair Share of Income Taxes?

WSJ :

•  The top 1% of earners in 2021 provided 45.8% of tax revenue;  
•  the top 10% provided 75.8%; 
•  the bottom 50% provided 2.3%. 

 The obvious justification for this kind of inequality is incentives.  If we pay people who create more wealth more, we get more wealth. 

  Claude.ai: 

•  Denmark: The top 10% of income earners in Denmark pay around 28% of all Danish income tax revenue collected. However, Denmark has very high income tax rates across the board compared to the US, with even average earners paying around 36-37% in income taxes. 
•  China: vIncome inequality is high in China, with the top 10% earning around 41% of total national income as of 2015. However, taxes on high incomes in China are relatively low compared to Western nations. The top marginal income tax rate is only 45%. 
• France: the top 10% of income earners pay around 70% of all income tax revenue. 
• Germany: the top 10% pay about 55% of all income tax. 
• UK: the top 10% contribute around 60% of income tax revenue. 
• Sweden, despite high taxes overall, only around 27% of income taxes come from the top 10% of earners due to a more even income distribution. 

So while the exact percentages vary, it is common across developed nations for a relatively small percentage of top earners to contribute a disproportionately large share of total income tax revenues due to progressive tax rate structures. Denmark's flatter overall tax system leads to more evenly distributed tax contributions across incomes.

Music Backed Securities

 

Due to music streaming, many musicians can expect steady royalty streaming. The WSJ has a video that explains how this future income is increasingly being capitalized and securitized. This way, the artist has access to the cash now instead of waiting for the streams to materialize.

FTC vs. Amazon: If there is no solution (remedy), there is no problem (liability)

The FTC asked a Washington court to split its monopolization case against Amazon (earlier blog post) in two: 1. to determine whether Amazon has a monopoly (liability), and then 2. what to do about it (remedy). 

Their argument (not yet posted) likely would be that bifurcation is more efficient because if FTC loses on liability, there would be no need for a remedy trial.  But if the FTC has to litigate both at once, it would change the trial.  The FTC would have to answer the questions "what should they have done differently?"  and "why is the choice they made bad for competition?"  The burden of answering it would fall on the FTC, and its economic expert. 

For example, suppose that the FTC thinks that the source of Amazon's market power is the integration of its fulfillment network with its electronic marketplace, and proposes a remedy to force divestiture of the two.  An economic witness would be forced to admit that divested companies may not perform as well as the integrated one (See Chapters 22, 23), e.g., by creating a double markup problem, or by foregoing some other economy of integration. 

The Dept of Justice brought (I was Chief Economist then), and then lost, the ATT/TimeWarner vertical merger challenge, in part because it could not overcome this burden of proof.

SOME RELATED ACADEMIC WORK:

• Willem H. Boshoff, Luke M. Froeb, Wihan Marais, Roan J. Minnie, Steven Tschantz. Bargaining Competition and Vertical Mergers: The Problem of Model Selection, Review of Industrial Organization (SSRN). 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as a Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. (SSRN)
• Comment by Frederick Scherer (2005) 
• Comment by Ralph Winter (2005) 
• Reply by authors (2006) 
• Rejoinder by Ralph Winter (2006)

TRUTH IN BLOGGING: I have done consulting work for Amazon.

Post will be updated as information becomes available.  

Would that the EU were as fast at innovating as they are at regulating

 Link:  The European Parliament approved the AI Act, which raises the cost of European innovation.

➵ High-risk AI systems will be assessed before being put on the market and also throughout their lifecycle. People will have the right to file complaints about AI systems to designated national authorities. ➵ Generative AI, like ChatGPT, will not be classified as high-risk but will have to comply with transparency requirements and EU copyright law.

➵ Fines for non-compliance can be up to 35 million Euros or 7% of worldwide annual turnover.

Americans favor SUV's over the environment, ...

...because they are exempt from fuel economy standards:

Because making light trucks held to lower environmental standards was more profitable than building small clean cars, automakers marketed big models, including suvs, enthusiastically. They portrayed them as quintessentially American, embodying freedom, strength and adventurousness. By 2002 light trucks made up a bigger share of light-duty vehicle sales than cars. After the price shock of the 1970s, by the 1990s petrol had become cheaper in America than in other rich countries—so the cost of running a big car did not deter buyers. Such models are convenient for suburban living, and consumers see them as safe. (The Economist)

This is an example of what economists call "revealed preference."  You don't have to ask people whether they care about the environment; instead you infer their preferences from how they behave.   

It is also an example of "incentive misalignment" from Chapter 1.  If we want people to drive more fuel efficient cars, we have to stop penalizing them for doing so.  

Why did Chocolate become so expensive?

 

From The Economist:

Carla Subirana Artus explains that severe drought and diseases, driven by extreme weather, together with regulatory pressures have created the perfect storm for the cocoa industry.

In other words, supply declined.

Like Snapshot for Your Home

Progressive Insurance pioneered telematic monitoring devices to offer Pay-How-You-Drive (PHYD) insurance policies over a decade ago. Now State Farm, along with other insurance companies, is partnering with Whisker Labs to offer the Ting home monitoring system. These are WiFi-enabled sensors that plug into an outlet to detect potential electrical fires. Whisker Labs monitors these sensors in what they claim is the largest Internet of Things (IoT) network to monitor the grid. State Farm is offering these for free to its customers presumably because, once insured, customers provide too little of their own monitoring.

The Effect of M&A on Workers

New research by Arnold, Milligan, Moon and Tavakoli investigates worker outcomes from mergers in Canada. They identify three possible mechanisms: 1) workers may gain bargaining power if the firm's products have increased market power, 2) workers may lose bargaining power if the reduced number of firms confer onto them monopsony power, 3) workers who are not retained after the merger may face worse job prospects. The first two do not seem to be important.

First, we don’t find that increasing corporate competition driven by M&A is important for workers either through concentrating the market for the products the workers produce, which would in theory increase worker wages, or through concentrating the labor market, which would in theory decrease their wages. 

However, job displacements usually lead to worse worker outcomes. Which begs the question as to why they were displaced. Earnings fall most for workers with more time at the old firm and workers with higher pay. Their firm-specific human capital may not carry over. Or these are entrenched, overpaid workers that represent the inefficiency the merger was meant to eliminate.

But the efficiency impact of these M&A-driven job transitions depends on whether the higher pay at the old firm reflected higher productivity or was itself a source of inefficiency that the M&A was able to eliminate.

Hat tip: Marginal Revolution

Should restaurants let menu prices "surge?"

 When demand increases, shouldn't price be allowed to rise? (WSJ)

Dynamic pricing—charging higher rates at peak times and dropping them at slower ones—has become commonplace in industries such as e-commerce, and mobile apps have made it easier for companies to study consumers’ buying and browsing and quickly adapt. Rising costs in recent years have led more retailers to implement it.

Restaurants are experimenting with the technology as the industry looks for ways to boost sales and increase profits. Many restaurants increased menu prices as labor, food and other costs have soared since 2021. Prices for food eaten away from home in January were 30% higher than in the same month in 2019, according to Labor Department data.

If prices cannot rise shortages will develop, and profits will fall, which will reduce the number of sellers (supply), further exacerbating the shortage. 

Using procurement for political ends gives you worse prices.

Over 20 years ago, some middling economists (cite) estimated that the Small Business Set-Aside program reduced Forest Service Timber prices by 15%.  By limiting the potential pool of available bidders to only smaller lumber mills, you get less competition and worse prices.

Now San Francisco is re-learning that lesson.  In 2016, it refused to do business with companies headquartered in states that don't share San Francisco's values. As a result, project costs increased 20 percent. 

Two forces are at work:  

• Short-run reduction in competition:  just as mergers which eliminate competition raise price, so too does limiting the number of bidders.  

NOTE:  a reduction in competition in a selling auction (high bid wins, e.g., timber), price goes down; in a procurement auction (low bid wins, e.g., city services) price goes up.  

• Long-run decline in bidder quality:  winning bidders must outbid the losers, so if losing bidders from states that share San Francisco's values--like unionization--have higher costs, they are easier to outbid, so price goes up.

REASON, "Great Moments in Unintended Consequences"

The Economics of Skiing

Vail's two-part pricing (Fixed Fee + Low Daily Price) from The Economist:  

With the Epic Pass, Vail has changed the offer. Skiers can now get unlimited skiing at a whole pack of resorts cheaply, but only by committing before the season starts. The result, says Stuart Winchester, who runs the Storm Skiing Journal, an industry blog and podcast, is that for the first time in decades skiing in America is reliably profitable. But it has come at a cost to competition. “Everyone else is swimming around. Vail is buying everything,” he says.

Vail now owns 41 resorts, including more than two dozen tiny hills on the East Coast and in the Midwest, which they consider “feeder” resorts that nurture new skiers who eventually may come west. In 2018 a competing pass, the Ikon, was launched by the Alterra Mountain Company, owned by the billionaire Crown family of Chicago, which shares revenue with independent resorts. Nowadays, most of America’s biggest ski areas are on one or the other pass.

Guide to Online Econ Videos

From Marginal Revolution 

• On day one, I show video on how secure Property Rights lead to growth.  The basic idea is simple, if you give owners secure title to their property, they have an incentive to take care of it, invest in it, and move it to its highest-valued use. 
• Others I like but do not assign.  
• Data Analysis Video , note that what he calls omitted variable bias is what I term "correlation vs. causation."
• Mastering Econometrics Video.  

Gaelic Price Control

 Here is a nice video on the experience with price control in Ireland and Scotland.

 

 

Hat tip: Marginal Revolution

Compensating Differentials in the Marriage Market

Potential mates differ in what they bring to the relationship. In online dating, youth, especially for women, appears to be sought after. In a forthcoming Journal of Labor Economics article, Corine Low applies the Indifference Principle to estimate how much more income a woman must earn each year she ages to remain equally attractive. Here is the abstract.

This paper quantifies the causal negative impact of age on women’s marriage market appeal using an experiment where real online daters rate hypothetical profiles with randomly assigned ages. Truthfulness is incentivized through the experiment’s compensation: participants receive professional dating advice customized according to their ratings. The experiment shows that for every year a woman ages, she must earn $7,000 more annually to remain equally attractive to potential partners. This preference appears driven by women’s asymmetric fertility decline with age, as it is present only for men without children and who have accurate knowledge of the age-fertility trade-off.