A Plot of Effective Marginal Tax Rates and Per Capita GDP by State

State Taxes and GDP 2

Jared Bernstein recently posted a scatter plot of Federal Marginal Tax Rates and GDP growth, and found no correlation between the two. The graph above depicts the top potential marginal effective tax rate by state as calculated by the Tax Foundation (I will explain their calculation below) against GDP per capita by state. The correlation is actually positive, at about .2. If one removes the "DC effect," the correlation drops to about .19.

The top rate number I use from the calculation is the number produced under the GOP tax plan from late 2010, since they essentially got everything they wanted from the president in their tax deal. State taxes also move fairly slowly, so there is some persistence in the data across time.

I would not use this plot to argue that taxes on the richest cause higher living standards; but it sure is hard to argue that they cause living standards to fall.

A testimonial to homeownership.

I am reading Howard Bryan's The Last Hero: A Life of Henry Aaron.  The first few chapters are especially interesting, as they are about life in Mobile, Alabama in the early 20th century.   

Henry's father, Herbert, did something that few African-Americans did in the American South after Reconstruction: he owned his own home:

For Herbert, ownership meant protecting his family from outside forces that could, at any time, take away what he had... 

Herbert purchased two adjascent lots for fifty-three dollars apiece on Edwards Street and began culling wood.  Herbert collected ship timber from Pinto Island.  Young Henry, all of six years old, collected wood from abandoned buildings.  Some of the wood came from houses that had partially burned down, and some of the original walls of the house still contained deeply discolored streaks, charred from fire.  Herbert construction a six-to-twelve-foot triangular gabled roof above the front door.  He used the smaller, miscellaneous pieces of wood for the inside walls.  The floor was made of yellow pine.  Like most of the houses of the South, the structure itself stood on concrete blocks...

"The only people who owned their houses," Henry would often day, "were rich people, and the Aarons...."

...Herbert fought for his space, but he used non-traditional weapons..."

Walkability

The word is ugly (can't we come up with something better?), but intriguing.  One can go to a web site, and get a "walk score" for any address in the country.  Stephanie Yates Rauterkus and Norm Miller have a paper that shows that in Birmingham, Alabama, walk scores in the center of town have a mild impact on property values. 

The concept of a "walk score," a metric for how easy it is to not use a car to do things, is fun.  But so far as I can tell, the walk score presented on the web site is somewhat arbitrary; I have no idea how it was calibrated (although they do say "Street Smart Walk Score gives more weight to amenities that are highly correlated with walking. In addition, multiple amenities in each category count towards your score—for example, we count 10 restaurants to reflect the depth of choice that walkable neighborhoods offer.")


What I can say is this: my house in Bethesda received a much lower walk score than my house in Pasadena, and yet I almost never used my car during the week in Bethesda, because I could walk the .85 miles to the Red Line metro stop to get to work, and because for me driving in Washington was a much worse option than driving in LA (believe it or not!).  Both places are comparable in terms to walking to amenities in the evening.

So if we are going to do walk scores, we need to look at how often people in different neighborhoods, well, walk.  I am guessing my USC colleagues Gen Giuliano, Lisa Schweitzer and Peter Gordon, have done some work along these lines, and there seems to be a trove of data at Minnesota.

Some stuff from Weimer School meetings worth thinking about.

1) Albert Saiz showed how rent is endogenous with respect to interest rates.  At the urban fringe, where land has no value, rent is equal to construction cost multiplied by the interest rate.  This pins down urban rents.  When interest rates fall, so do rents at the fringe.  Nevertheless, land values rise, because people want larger structures (because of falling rent), and so they demand more land.  Consequently, rent-to-value ratios fall as interest rates fall.

2) Ingrid Ellen showed that REO properties produce crime.  The interesting part--they induce violent crime, rather than property crime.  The data set she put together, which used block faces, instead of census blocks, was awesome.

3) Len Lin may have solved why real estate appears to have better Sharpe Ratios than stocks.  If they were really better, one could arbitrage between real estate and stocks.  But because real estate is illiquid--it takes a long time to sell it--one cannot arbitrage it.  When one adjusts formally for illiquidity, the Sharpe Ratio of real estate is the same as stocks.

4) Stephanie Yates Rauterkus presented some promising work that suggested that "walkability" near CBDs enhances value, but elsewhere might not.

It was a really good few days.  I learned a lot of other stuff too.

Chutzpah

I was talking to a reporter the other day about policies to write down principal for some home buyers.  He told me that banks objected, saying that it would create moral hazard.  Which is sort of like Newt Gingrich defending the sanctity of marriage.

Martin Feldstein says raise taxes, but not rates

While figuring out tax incidence-who actually bears the burden of the tax--is difficult, my guess is that his proposal, which would limit all deductions to two percent of adjusted gross income, would raise revenue, simplify the code, reduce deadweight losses (i.e., economic inefficiency), and produce a more progressive tax code.  It is the last of these that I am not sure about, but if we also raised the top rates to their Clinton-era levels, then one gets a more progressive code too.  I have seen no evidence that raising the top marginal rate from 35 to 39 percent would produce substantial deadweight loss.

I think such a proposal would need to be phased in--it would be a shock to lots of different markets, but I like the thinking behind it.  

My own beef with Trump

The Donald gives people the worst possible impression about the real estate business--the business that I study for a living. It is not principally about slapping your name on a gaudy building. It is about building 3 bedroom houses and apartment buildings; it is about building Targets and, yes, Walmarts; it is about managing class-B office buildings in suburbs; it is about distribution centers in Oconomowoc.  It is about providing environments where the bulk of people live, work, shop and build.