A Couple Of Interesting Thoughts

Here are a couple of the more interesting ideas I’ve run across in the past couple of days.

Though you are probably like me, bored to death with blog posts on income inequality, Scott Winship has come up with an interesting theory. He postulates that the much lamented increase in inequality in the US might very well be due at least in part to changes in the tax code in 1986. Take a look at this chart:

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Notice the big blip up in 1986. Winship points out that the major Reagan revisions had the effect of inducing taxpayers to report income on a pass-through basis to individual returns as opposed to corporate tax returns. The datasets used to measure income inequality did not capture the income hidden inside corporate tax returns.

Winship’s post contains a number of other graphs which further explain his thesis as well as a discussion of the implications. It’s worth your time as it does cast a different light on the debate.

On a completely different subject, Walter Russell Mead has writes about the hypocrisy of the EU bailout efforts:

It is this new addition to Ireland’s debt that has forced the Irish government to rely on bailouts from the IMF and the European Union — and here the Irish have run into Teutonic self righteousness and rigidity.  The normally sensible and balanced German chancellor Angela Merkel faces a firestorm of domestic criticism every time it looks as if she is going to put German taxpayers on the hook to bail out what angry German taxpayers increasingly regard as lying Greeks, lazy Spaniards and other worthless Eurotrash.  As a result, countries like Ireland that are borrowing money from EU institutions are expected to pay punitively high rates of interest.

To German taxpayers this makes a lot of sense, but it looks a little different in Dublin.  There, people are increasingly aware that the chief beneficiaries of the bailout are European banks — mainly German ones who at the moment have about $60 billion in exposure to Irish banks.  The German government — in a country whose badly managed banks have gotten themselves in deep trouble in Greece, Spain, Portugal and Italy in addition to their imprudent Irish ventures — does not want to face the real state of its banking system and pay the high costs of restructuring.

Germany in other words is living in denial — and sending Ireland (and the other peripheral euro economies) the bill.

Mead is particularly incensed about the insistence that Ireland revamp its corporate tax code in exchange for a less punitive interest rate on the bailout funds the country has been advanced. He correctly notes that changing their tax regime would wreak havoc on the Irish economy that would persist long after the current crisis has passed.

As this bank bailout house of cards the French and Germans have tried to erect becomes apparent to those asked to ultimately pay for it, the probability of its success becomes progressively smaller. Some sort of default, either unilateral or managed among the interested parties, would appear to be the likely outcome. Germany and France then would have to deal directly with the insolvency of their banking systems.

It seems that such an outcome would offer a better chance of saving the Euro than the elaborate subterfuge currently taking place affords.

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