Environmental Economics

A Winter Solstice miracle

From the inbox:

21-Dec-2017

Dear John,

Thank you for submitting your revised manuscript to the Journal of Benefit-Cost Analysis. It is a pleasure to accept your manuscript BCA-2015-0053.R2 "A benefit-cost analysis of a red drum stock enhancement program in South Carolina" in its current form for publication in JBCA. ...

I first presented this at the 2006 Southern Economic Association Meetings in Charleston, SC.

Will this be the biggest year for the stock market EVER? (Alt Title: Percentages matter)

I seem to be on an explaining basic principles kick the last few days.

I saw this story on CNBC this morning:

The Dow Jones industrial average just did something it has never done in its 121-year history.

The 30-stock average is now up more than 5,000 points in a year, marking its biggest annual-points gain ever. This following a 140-point rally Monday which sent it to an all-time high.

Sounds impressive.  And it is.  But let's take a look at two time periods:

According to MacroTrends.net, from January 2017-November 2017, the DJIA (that's the acronym for the Dow Jones Industrial Average for those of us in the know...), rose from 20,181.82 to 24,272.35.  That's an increase of 4,090.43 points. 

Cool.  But what does 4,090.43 points really mean?  I have no idea.  It's some sort of an index based on the value of 30 stocks, defined by some group who like to do those sorts of things. 

But is 4,090.43 a big increase?

Take another randomly chosen time period, say, January 2009-November 2009.  In that randomly chosen period, the DJIA increased from 9,345.00 to 11,793.12.  That's an increase of 2,448.12 arbitrary points.  

It looks like 2017 beats 2009, right?  

Not quite. 

Because the starting point in January, 2009 was much smaller than the starting point in January 2017, if we convert the changes to percentage terms, in the first 11 months of 2009, the DJIA increased by 26.2%.  In 2017, the comparable percentage was 20.3%.

Given the choice would you rather earn 26% on your investments or 20%?  

Both are good.

But you would draw the wrong conclusion if you just looked at the absolute point change, rather than percentages.

 

   

 

EnvEcon 101: Understanding Marginal Tax Rates (and other unnecessarily complicated stuff)

If you haven't heard, the U.S. Congress is likely to pass a new income tax bill this week.  CNN.com has a graphic with the existing and new income brackets and associated tax rates.  This seems like a good time to talk a little about the difference between the marginal tax rates, total tax bills, and the average tax rate paid, as I have found that principles students (and other adults) often find this confusing.     

First a few definitions:

The marginal tax rate is the tax rate that you pay on the last dollar you earn.  For example, if your taxable income is such that you fall into the 33% tax bracket, that means you will pay 33% of the last dollar you earn to the federal government.  An important note is that this does NOT mean that you pay 33% of all of your income to the federal government.  Just 33% of the last dollar you earn.

Your total tax bill is calculated by adding up the marginal tax you pay on each dollar of taxable income you earn, up to the last dollar you earn.

Your average tax rate is found by dividing your total tax bill by your taxable income.

I know I just made things more confusing.  So let's look at a simple example, and then we will look at the actual tax rates that exist currently and the proposed new tax rates to illustrate the concepts.

A simple example:  Let's suppose there are only two defined income brackets.  The lowest income bracket goes from $0 to $50,000 of taxable income.  This income bracket is taxed at a marginal rate of 10%.  The second income bracket is anything greater than $50,001 of taxable income.  This income bracket is taxed at marginal rate of 25%. 

The correct way to to interpret these brackets is as follows:  No matter how much taxable income you earn, each dollar of taxable income you make, up to $50,000, is taxed at a rate of 10%.  So if you make $25,000 a year in taxable income, each of your dollars is taxed at a marginal tax rate of 10%, meaning your total tax bill will be $25,000 * 0.10 = $2,500. 

If you earn $35,000 of taxable income, then you still fall in the 10% marginal tax bracket, and your total tax bill will $35,000 * 0.10 = $3,500.

If you earn $50,000 of taxable income, then you still fall in the 10% marginal tax bracket, and your total tax bill will $50,000 * 0.10 = $5,000.

But hear's where things get interesting (and probably more confusing).  Suppose you earn $50,001 of taxable income.  You now fall in the 25% marginal tax bracket.  Many people interpret this to mean that your tax bill will now be $50,001 * 0.25 = $12,500.25.  But this would be WRONG.

The correct way to calculate your new tax bill is to recognize that you pay a rate of 10% for each dollar you earn up to $50,000 of taxable income, and then you pay 25% for each dollar you earn above $50,000 of taxable income.  So if your income is $50,001 of taxable income, then you will pay 10% in taxes for each dollar up to $50,000 ($50,000 * 0.10 = $5,000) plus 25% for the $1 you earned over $50,000 ($1 * 0.25 = $0.25).  So your total tax bill is now $5,000 + $0.25 = $5,000.25.  

To calculate your average tax rate, you now divide your total tax bill ($5,000.25) by your taxable income ($50,001) and convert to a percentage (100 * $5,000.25/$50,001) to get an average tax rate of 10.0003%.  Notice that the average tax rate is below the marginal tax rate (25%).  This will always be the case.

Let's extend the example.  Suppose your salary is $125,000 of taxable income per year.  Everyone pays 10% on the first $50,000 of taxable income earned, so you pay $5,000 on the first 50,000 of taxable income. On the remaining $75,000 of taxable income (the $75,000 above $50,000), you will pay a marginal tax rate of 25% ($75,000 * 0.25 = $18,750), so your total tax bill is $5,000 + $18,750 = $23,750, and your average tax rate is 100 * $23,750/$125,000 = 19% (notice it is still below the marginal rate of 25%.

So that's the end of the simple example (SIMPLE?!, IKR).  So what does the new tax bill do to income brackets and marginal tax rates?

Here are the current and new income bracket and marginal tax rates under the proposed bill for unmarried individual filers (that's right, to make things even more complicated, tax rates change depending on your filing status--individual, married, or married filing individually, but that's for a later post): 

Let's take a look at someone making $50,000 of taxable income per year.  Under the current tax plan, this person will pay:

• 10% of the first $9,525 of taxable income earned: $952.50
• 15% of each $1 earned between $9,525 and $38,700 of taxable income (($38,700-$9,525)*0.15) = $4,376.25
• 25% of each $1 earned between $38,700 and $50,000 of taxable income (($50,000-$38,700)*0.25) = $2,825

Adding these together, the current total tax bill for someone making $50,000 of taxable income per year is $8,153.75, and the average tax rate is (100 * $8,153.75/$50,000) = 16.31%

The new tax bill drops the marginal tax rates in the second and third income brackets to 12% and 22% respectively, so the total tax bill for someone making $50,000 of taxable income per year falls to $6,939.50 and the average tax rate falls to 13.88%.

It looks like the new tax plan offers a tax cut to someone making $50,000 of taxable income per year.

And that's true...IF WE ONLY BASED TAXES ON INCOME AND DIDN'T FILL THE REST OF THE TAX BILL WITH DEDUCTIONS, LOOPHOLES, GIFTS, POLITICAL PAYOFFS AND RIDICULOUS CRAP THAT KEEPS ACCOUNTANTS EMPLOYED* AND POLITICIANS HAPPY. 

I'VE BEEN CAREFUL THROUGHOUT THIS POST TO MAKE SURE I QUALIFY INCOME AS TAXABLE INCOME.  WHAT THIS POST FAILS TO EXPLAIN, BECAUSE NO ONE CAN REALLY EXPLAIN IT BECAUSE NO ONE HAS ACTUALLY READ THE TAX BILL, IS THAT TAXABLE INCOME WILL CHANGE DUE TO CHANGES IN DEDUCTIONS, LOOPHOLES, GIFTS, POLITICAL PAYOFFS AND RIDICULOUS CRAP THAT KEEPS ACCOUNTANTS EMPLOYED* AND POLITICIANS HAPPY. 

OK, that's out of my system.  As you can see from the tax table above, comparisons between current and new tax bills get more complicated as incomes increase, because not only do marginal tax rates change, but the income brackets change too.  For example, someone who makes $175,000 per year currently falls in the fourth income bracket, but under the new bill falls in the fifth bracket.  I won't bore you with all of the calculations, but,

• Under the current system, someone making $175,000 in taxable income pays a marginal tax rate of 28%, has a tax bill of $41,842.75 and an average tax rate of $23.91%
• Under the new system, someone making $175,000 in taxable income pays a marginal tax rate of 32%, has a tax bill of $37,689.50 and an average tax rate of $21.54%

*In full disclosure, my spouse is gainfully employed by a tax accountant and makes her living by helping people take advantage of DEDUCTIONS, LOOPHOLES, GIFTS, POLITICAL PAYOFFS AND RIDICULOUS CRAP THAT KEEPS ACCOUNTANTS EMPLOYED AND POLITICIANS HAPPY.

 

 

 

 

 

When you're dealing with the current EPA administration, the humor writes itself

Really, could you have made this up?

Hat Tip: Paul Jakus

 

NCEE is hiring

NCEE is hiring (yes, again, but we should be clear of the hiring freeze).

We have permanent positions for research economists focusing on CGE modeling, electricity or energy market modeling, and applied microeconomic analysis and a position for a visiting scholar or postdoc on CGE modeling.

NCEE is a pretty great place to work and I encourage people to apply.

 

Will

This work is not a product of the United States Government or the United States Environmental Protection Agency, and the author is not doing this work in any governmental capacity.  The views expressed are those of the author only and do not necessarily represent those of the United States or the US EPA.

 

 

 

Who knew? Revenue-neutral corporate tax cuts!

With a carbon tax or cap-and-trade:

In 2015, the U.S. Environmental Protection Agency issued the Clean Power Plan under which each state can set a mass-based target to meet its assigned electric power sector carbon dioxide emission reductions. If it proceeds, states can design policies to meet those requirements and also raise revenue via a carbon tax or cap-and-trade program with auctioned permits. We calculate each state's potential revenue and demonstrate its significance. In 13 states, carbon revenue could replace all of corporate tax revenue. In addition, we collect budget projections from six key states to determine if and how carbon revenue can substantially reduce deficits. While such revenue is not free money, we discuss its advantages over use of distortionary taxation. Finally, we consider distributional aspects and potential external fiscal effects on federal revenue.

via onlinelibrary.wiley.com

That's the abstract from: Don Fullerton and Daniel H. Karney. "Potential State Level Revenue under the Clean Power Plan," Contemporary Economic Policy Volume 36, Issue 1, 149–166.

What sort of idiot would ignore this? Hmm ...

Daily demand and supply: gas prices

If you throw away your pennies think about this:

According to the Energy Information Administration’s (EIA) latest Weekly Petroleum Status Report, nationwide gasoline stocks have grown in each of the past five weeks – a new trend for 2017. Over this time period, gasoline stocks increased by roughly 17 million bbl in total. For the latest reporting period, stocks across the country grew by an eye-popping 5.7 million bbl, which ranks as one of the highest one-week stock builds of the year. Stock growth has been fueled by increased gasoline production, which averaged 10.1 million b/d last week, while refineries have been operating above 90% capacity for the fifth consecutive week. Low demand and steady stock growth have helped to push the national average for regular unleaded gasoline down to today’s price of $2.45, dropping a penny so far this week and 11 cents over the past month.

via gasprices.aaa.com

Continuing the penny per week trend for a whole year adds up to $0.50/per gallon (let's give the savings a couple of vacation weeks to make my math simpler). Assuming 15,000 miles driven per year and 20 miles per gallon leads to savings of $375 per year.

And daddy gets 3+ pair of shoes (brown shoes for work, hightops for hoops and some hikers)!

Picture of the Day: "The charitable giving value of people's best friend"

Jacob Hochard (Department of Economics, ICSP), Greg Howard (Department of Economics), Kayla Clark (School of Art and Design), John Whitehead (Visiting Troxler Professor Department of Economics) and Yuanhao Li (Norwegian School of Economics) partnered with the Salvation Army during the holiday season to conduct a local field experiment. The Troxler-funded study, The Charitable Giving Value of People's Best Friend, was conducted from November 27th-29th and tested whether the presence of dogs at bell ringing stations increased donations at a major retail store in Greenville, North Carolina.

via www.jacobhochard.com

Sierra Club quote of the day

From POLITICO's Morning Energy:

Meanwhile, Democrats and liberal groups asked for the tax bill to be put on hold until Alabama Democrat Doug Jones is sworn in. "There should be no votes on the despicable GOP tax scheme or other dangerous efforts to put the profits of corporate polluters and billionaires before the people until the voice of every voter is represented in the Senate," Sierra Club Executive Director Michael Brune said in a statement Wednesday.

Very persuasive Mr. Brune, you make me care to hear whatever hyperbole you might say next!

Natural disasters and net-migration? @mattkahn1966

I feel the earth move under my feet, I feel the sky tumbling, a'tumbling down ... (Quakes and Fires ...):

For the half-century after World War II, California represented the epitome of middle-class America on the move. As people poured into the state in search of good weather and the lure of single-family homes with backyard orange trees, the state embarked on a vast natural engineering project that redirected northern water southward, creating the modern Southern California and making the state the most populous in the nation.

Those days are long gone. For more than three decades, California has seen a net outflow of residents to other states, as less expensive southern cities like Phoenix, Houston and Raleigh supplant those of the Golden State as beacons of opportunity. California still has a hold on the national imagination: It has lots of jobs and great weather, along with the glamour of Hollywood and the inventiveness of Silicon Valley.

Still, for many Californians, the question is always sitting there: Is this worth it? Natural disasters are a moment to take stock and rethink the dream. But in the end, the calculation almost always comes down to cost. ...

California was once a migration magnet, but since 2010 the state has lost more than two million residents 25 and older, including 220,000 who moved to Texas, according to census data. Arizona and Nevada have each welcomed about 180,000 California expatriates since the start of the decade. ...

California has 40 million people and has grown through much worse. ...

Two million divided by 40 million is 5% in out-migration. That seems fairly large to me. But, I don't think the numbers include in-migration so net migration is likely lower. 

The theme of the article is that if it wasn't so dang expensive in California the residents might ride out the disasters. But many are in disequilibrium (i.e., the value of the amenities is lower than the cost of living) and moving out. Here is one of the earlier papers looking at this: Berger and Blomquist, J. Urban Econ. (1992). 

And it might get worse:

Right now it is the Republican tax plan that is causing people to rethink their finances and ultimately where they want to live. The plan, while still a work in progress, is almost certain to land harder on California and other heavily Democratic states if it passes. The state’s median home cost is $500,000, twice the national level, and for decades residents have softened the blow from high home prices and high state and city taxes by using generous federal deductions that lower their taxes.

Curious as to how this might change Californians’ outlook, Redfin, a national real estate brokerage firm based in Seattle, recently asked a sample of 900 homeowners if they would consider moving if they could no longer deduct state and local taxes. Some 37 percent of Californians said they would consider it. Californians looking elsewhere are already among the most popular searches on the Redfin website.

The first paragraph might be misleading, I don't think the mortgage deduction is in the GOP tax bill. It is the deduction for state and local taxes that will hurt Californians. Getting rid of the mortgage deduction (i.e., rich person's housing subsidy) is probably a good idea. My public finance is too rusty for me to figure out if getting rid of the deduction for state and local taxes is a good idea.