I'm diving into Jonathan Chait's piece in The New Republic on how a whole huge conspiracy of crazy supply-siders has taken over the Republican party. This is, to put it kindly, wildly overblown. I mean, I'm all for someone taking on the sillier kind of supply siders who fanny about claiming that tax cuts increase tax revenue, but they've been rather thin on the ground lately. Most tax cutters today want tax cuts because they think they are good for the economy, not because they think that it will increase tax revenue. And contrary to Chait's assertions, these are not wild, insane things to think.
Chait tars all tax-cutters with the ideas of the looniest supply siders. One can believe that tax cuts, by reducing deadweight loss and/or providing fiscal stimulus, will be good for the economy, without necessarily believing that the economy will be crippled by a 5% rate increase.
His primary exhibits for the nefarious influence of supply-side policy are: Larry Lindsay, Dick Cheney, Jack Kemp, Jude Wanniski, and George Gilder. Cheney I give you, but Larry Lindsay was drummed out of the administration in disgrace (for unrelated reasons) even before Bush's major tax cut, and Chait somehow neglects to mention the more conventional economists who have occupied the job since. Jack Kemp hasn't had access to serious power since I was snoring my way through Algebra I, and what power he did have was over HUD. Moreover, though I agree that Jude Wanniski and George Gilder are barking moonbats, they have, to put it kindly, limited influence on today's Republican party; which is hardly surprising given that Wanniski was kicked out of the party in disgrace before he died in 2005, and George Gilder has turned his attentions to that hugely influention Republican mouthpiece, the Gilder Technology report. This motley collection of names is hardly proof that the Supply Siders Have Taken Over the Building.
Chait also elides the difference between statutory and effective marginal rates in "proving" that the latter group is wrong: after all, if high marginal rates are so bad for the economy, how come we grew so fast in the fifties, when the top marginal rate was 91%? The answer is that there was a pretty big difference between effective and actual tax rates, thanks to various generous deductions that were largely done away with by the middle of the Reagan administration.
Chait then claims this as evidence for the notion that "whatever negative effect such high tax rates have, it's relatively minor. Which necessarily means that whatever effects today's tax rates have, they're even more minor." For the record, I don't think that increasing the marginal tax rate on the rich (or almost anyone else) will have much effect on the economy. But Chait's breezy assertions are not good evidence for my belief. Perhaps growth in the 1950's could have been even more fabulous absent the high tax rates. Also, our tax code, and our economy, is substantially different in structure from the tax code of the 1950's, so extrapolating from then to now is very, very silly. Again, it might be that the changes would make the effects of rate cuts even more minor--but in fact I doubt it; the tax base is much broader now, and labor and capital mobility much higher, which should greatly magnify the effects of a change in rates.
The article features this kind of simplistic, off-the-cuff journalistic reasoning over and over. And it's often flat wrong, as in its discussion of the Laffer Curve:
That fateful night, Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And, if the government sets a tax rate of 100 percent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two points--zero taxes and zero revenue, 100 percent taxes and zero revenue--Laffer's curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government.At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100-percent tax rate would also produce zero revenue was, just as obviously, false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that, even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve--that is, that rates were then high enough that tax cuts would produce higher revenue.
Ownership of the means of production doesn't really model the same way as an income tax, and at any rate the Soviet government did not take 100% of any worker's output. And no economist that I have ever met doubts that the Laffer Curve holds true, to the extent that there is a revenue-maximizing tax rate which is well to the left of 100%. The Laffer Curve isn't wrong, as Chait wrongly implies; it's just that we're not anywhere near its maxima in the US, this being what responsible tax-cutters like Greg Mankiw have been saying all along.
Chait finishes up with another, really inexcusable bit of journalistic sloppiness: he complains about the share of national income going to the very richest, without informing the reader that these figures are calculated pre-tax. The implication is that the tax cuts have somehow altered the income composition of America at the behest of corporations and mean rich people, when at the most they have acted as a somewhat smaller check on inequality that is growing for reasons unconnected to the tax code.
It is not that I do not support Chait's project: refuting the sillier supply-side notions about tax revenues and growth is God's work. Except . . . this isn't the way to do it. This article isn't going to convince the people at the places Chait excoriates like the Club for Growth or the Weekly Standard--or indeed any of their supporters--that they should jettison their more extreme claims. It's too easy, reading this article, to claim bad faith.
"Most tax cutters today want tax cuts because they think they are good for the economy, not because they think that it will increase tax revenue."
Agreed. Republicans and conservatives would do themselves some good by distancing themselves from the fanciful notion that cutting taxes always (or even usually) increases revenue. They would be better off arguing, as Mankiw does, that cutting the taxes that cause the greatest distortions--like the capital gains tax--is worth it even though it will likely cost the government some revenue.
After all, the purpose of government is not to maximize revenue but rather to maximize the welfare and liberty of the people. Lower marginal tax rates on work, saving and investment will result in higher growth--especially if combined with some spending restraint.
I myself would welcome the final scuttling of the Laffer curve arguments for tax cuts. One should not argue for tax cuts on the basis of increasing government revenue and thus power, but rather, on the basis of reducing government revenue and power.
It is always a wonder when ostensibly smart people think that the most effective way to refute ideas they differ with is to make their own easily refutable claims.
Anyone who examines the economy of the U.S. in the fifteen years following WWII, as means of determining the optimal tax code for the U.S. in 2007, is easily as crazy as the most slavishly devoted supply-siders, if not more so.
Megan, you wrote:
The Laffer Curve isn't wrong, as Chait wrongly implies; it's just that we're not anywhere near its maxima in the US, this being what responsible tax-cutters like Greg Mankiw have been saying all along.
...
so, if you know that we're not anywhere near the maxima could you please tell us how much we need to cut taxes to achieve the maxima? And, could you cite some sort of credible study to back this up? I may be a crazy lefty but I just don't see how you can be certain you know where the Laffer peak is (or that Mankiw is certain it's to the left of where we are now).
Citizen (World),
I think you misunderstood what side McArdle and Mankiw think we are on with regards to the revenue maxima.
However, wanting to know how they know where the US is on this curve is a valid question.
In addition, I have always been a bit puzzled as to what the graph is: Is it revenue as a percent of GDP vs total government tax rate on income, or is it revenue in nominal dollars vs tax rate. I see advocates for and against tax cuts argue using both types of graphs, seemingly oblivious to how different the two really are.
Yancey,
OK, how much do we have to increase taxes to get to the Maxima? If the Maxima is not the goal what, exactly, is the goal (if the Maxima is not the goal then why is the Laffer Curve useful at all)?
I'm not an economist and don't pretend to be one. I accept, at a high level, that the Laffer Curve is likely true. I just don't think we have an accurate picture of where we are on the curve. And, I don't think everyone agrees where we SHOULD be on the curve. So, I don't really see the point of these kinds of discusssions.
Citizen (World) - I think you do get the point. Discussions about the Laffer curve with regards to tax policy are moot. We don't know where wer are and we don't know where we should be.
Taxes should not be set to maximize government revenue but to minimize economic distortion while funding necessary government.
There is enough to argue about what minimizes economic distortion (or even if that's a worthy goal) and what necessary government is without worrying about the Laffer curve.
EI
Why don't you include people like Rush Limbaugh and Larry Kudlow in your analysis, because they do have influence over millions of republicans and presumably some of the course of modern republican political thought. Hmm...
Plus, the laffer curve has no empirical evidence backing it up. Take a look at the wikipedia entry. The best study out there says the laffer curve must shift in response to tax rates - in plain english, the Laffer curve is a horrible model that does not fit the real world data. So please stop referencing it like it is some widely accepted economic curve supported by thousands of real world observations, like supply/demand curves are, and begin thinking of it like what it actually is, a clever propaganda tool created by crazy supply siders.
Wikipedia quote:
"However the Laffer curve should not be taken as a literal model for a tax revenue curve, especially in debates between relatively moderate amounts of taxation"
Here is you:
"It is not that I do not support Chait's project: refuting the sillier supply-side notions about tax revenues and growth is God's work. Except . . . this isn't the way to do it. This article isn't going to convince the people at the places Chait excoriates like the Club for Growth or the Weekly Standard--or indeed any of their supporters--that they should jettison their more extreme claims. It's too easy, reading this article, to claim bad faith."
Like the supply siders have acted for a moment in good faith. Listen to Larry Kudlow for a few weeks to get a sense of what bad faith is please, and Jon C falls far short of what larry spews out daily. And like Chaits audience is the people you mentioned. Like those people at the WS would ever consider changing their minds whatever the evidence. If they haven't done it yet, you can be sure they are either stupid or happy being propagandists. I am sure that Larry K. knows his rap is primarily bullshit, but it happy to do it as he considers his job to be to support pure capitalism at all costs, and damn the exceptions.
Citizen,
The argument is used primarily by tax cut advocates to advance their agenda by claiming, rightly or wrongly, that the cuts will pay for themselves, thus obviating the necessity of cutting spending to keep the deficit from rising. I personally consider a cheap rhetorical trick, and likely to be wrong if applied any time in the last 24 years. As I wrote in my first comment, I think the goal should not be to increase government revenue in any case. In other words, I think we should be off the maxima and as far to the left of it as politically feasible.
The thing I wonder is why lowering the tax rate on high incomes is so much better than cutting taxes on the middle class. Can anybody explain this?
at any rate the Soviet government did not take 100% of any worker's output.
Stalin managed approximately this in the Ukraine - to which the workers duly responded by dying.
First of all... everyone thinks they are in the middle class. Before you lower tax rates for the middle class, you have to define it. Second, the rich pay most of the taxes, so there isn't as much to cut for lower income groups than there is for higher income groups.
The IRS publishes some very interesting tables showing who is paying how much taxes.
EI
how come we grew so fast in the fifties, when the top marginal rate was 91%? The answer is that there was a pretty big difference between effective and actual tax rates, thanks to various generous deductions
Also, that top rate (91%) didn't kick in until $400k of taxable income, which is something like $3-$4 mil in 2007 dollars.
mickslam: Plus, the laffer curve has no empirical evidence backing it up. Take a look at the wikipedia entry. The best study out there says the laffer curve must shift in response to tax rates - in plain english, the Laffer curve is a horrible model that does not fit the real world data.
That would be a neat trick, since the existence of a Laffer curve is trivially true.
I love watching liberals respond to the Laffer argument, and how they can't figure out if they're disputing its existence, or where we are relative to the maximum.
I mean, I'm all for someone taking on the sillier kind of supply siders who fanny about claiming that tax cuts increase tax revenue, but they've been rather thin on the ground lately.
Rudy Giuliani: "I regard myself as a supply-sider for sure. I mean, watched Ronald Reagan do it and learned it, saw it work. Taxes get reduced, more revenue come in." (Kudlow & Co., 3/26/07)
John McCain: "Tax cuts, starting with Kennedy, as we all know, increase revenues." (NRO, 3/5/07)
Mitt Romney: "If you lower taxes enough, you create more growth ... And if you create growth, you get more jobs. You get more jobs, more people are paying taxes. You get more taxes paid, the government has more money by charging lower tax rates." (remarks to Club for Growth, 3/07)
Fred Thompson: "Are you really interested in tax rates that benefit the economy and raise revenue--or are you interested in redistributing income for political reasons?" (WSJ, 4/14/07)
Doesn't look so thin on the ground to me.
In fairness, I think it's probably true that most or all of these men know that cutting tax rates generally does not increase tax revenue. (In particular, Romney took a bit of heat from the right for his initial failure to mouth the words of that nutjob credo, although he eventually caved.) But I'm not sure why simply pretending to be a silly supply-sider is better than being one.
alkali, there is no consensus whatsoever, that cutting taxes does NOT increase tax revenues. What is fairly certain, however, is that increasing taxes makes itmore likely people will tend to want to evade them, the incentive to work harder to make more money is diminished, and a NutJob idea like raising taxes to increase tax revenue is a shur thing short term gainer (for about six months), then it's less tax receipts...etc.
Person:
Show me the study/white pater where the laffer curve is well defined with actual data, that doesn't rely on shifting it around as the tax rates change.
There isn't any. Does it exist if we can't measure it? I say for that if it is shifting and it is something called a curve, it doesn't exist. However, I have something called a backup argument. My worst case argument is that we are far, far below the inflection point where decreasing taxes causes the taxes collected to raise.
In my world, that is the real world we live in today in the U.S., the laffer curve either doesn't exist or irrelevant, and I can't figure out why I have to talk about this stupid curve over and over. It's like talking to someone who knows only a little about physics and they keep saying, "yeah, but E=mc2 over and over for no reason. In your world, I don't know what you are thinking. You don't provide a real argument, only snark. I guess there are magical ponies throwing money from the sky, shouting "This is for cutting taxes! No, thank you - you cut taxes!"
You know, for someone with such a crappy, unproved curve named after him, I somehow saw ol' Art Laffer on CNBC TODAY!!! How did he get on TV, with such an irrelevant innovation. You know what was below his name? "Regan administration Economic Advisor" I guess the republican party doens't think supply siders are so bad after all. And he was talking about some crappy lowering taxes = much, much higher growth and higher tax revenue claptrap, if you can believe it. I think, after hearing this for about the 10,000 time, I believe it!
Show me the study/white pater where the laffer curve is well defined with actual data, that doesn't rely on shifting it around as the tax rates change.There isn't any. Does it exist if we can't measure it? I say for that if it is shifting and it is something called a curve, it doesn't exist.
So, demand curves don't exist either? You reject all supply and demand analysis?
Okay, express the curve as tax revenues over the next period, compared to tax rate over that period. Then, there is necessarily a curve: for each tax rate you set for that period, there will be a corresponding tax revenue.
Do you agree that making the tax rate 0% over that time will yield no revenue? That making 100% will yield nothing? That making it in between will yield something?
Then you have conceded everything Megan and most economists have advanced.
What I love about this topic is how it seriously makes liberals go insane, as they're forced to confront the idea that taxes might hurt productivity so bad that they cause tax revenues to fall.
I mean, look how loopy you get:
However, I have something called a backup argument. My worst case argument is that we are far, far below the inflection point where decreasing taxes causes the taxes collected to raise.
It's like you have to set up this advanced "something called a backup argument" so you can "beat" the argument instead of ... er, pondering its merits and expressing where you disagree with it. No, instead it's become this big war where you've gotta *beat that durn idea no matter what it really means!*
Btw, I don't think anyone claims that the idea is that "innovative" anyway. As I'm sure the Wikipedia article explains, it goes back at least to a medieval islamic scholar. Moreover, it's just a trivial case of diminishing marginal returns: you can't arbitrarily increase tax revenues by increasing taxes, or else most third world countries would have paid off their debts by now ;-)
It should be noted that referres to Jude Wanniski should be in the past tense since he has been dead for a few years.
Person,
There is no reason to believe that a 100% tax rate will yield nothing. That's based on an analysis that only considers government revenues but ignores government spending. Much of the money the government collects is redistributed. In the 100% tax scenario the taxpayer will get some money back from the government. Depending on how much he gets back he may be OK paying the 100% tax. For example, if he got back 70 cents on the dollar that would be the same as having his income taxed at 30%.
Of course this would be a pretty inefficient system and I am not advocating it. I'm simply pointing out that the whole Laffer curve analysis is based on very simplistic assumptions that don't even look at what government does with the money.
While my example is a bit silly it points to one of the reasons that hardcore tax cutters tend to overestimate the public's desire for tax cuts. And that's because they underestimate the public's desire for government spending. Notice how making public who got what earmarks passed in Congress, which was supposed to 'shame' politicians in the eyes of the voters, has only made earmarks more popular. This makes perfect sense since voters love government spending in their backyard (they only hate spending when others get it) and the politicians that bring home the bacon get reelected.
The best reason I can find for this is that the benefits of spending are dispersed while the costs of taxes are concentrated. The bottom half of households filing returns pays 2.8% of income taxes, with the rate topping out at 6.6% of AGI for the $25,000-$30,000 group. The bottom 90% (under $100,000) pays 28% of income taxes at rates under 10% of AGI. I make no moral judgments, but I do suggest that public choice theory predicts that there is little to restrain growth of either taxing or spending under our current regime. I'm not sure why it hasn't already run away, but part of it may be that Americans tend to overestimate their relative wealth. I remember reading about a survey where 20% of the respondents believed they were in the top 1% and another 20% hoped to get there.
A correctly-plotted Laffer Curve resembles the gently sloping top surface of an airplane wing. The Wall Street Journal drew a line through the obvious outlier Norway, to make its "Laffer Curve: Editorial Page Edition" resemble an Olympic ski jump.
It is not Jon Chait's fault that dishonesty of this magnitude casts a taint over every other argument in favor of cutting the rich's taxes.
Chait finishes up with another, really inexcusable bit of journalistic sloppiness: he complains about the share of national income going to the very richest, without informing the reader that these figures are calculated pre-tax.
If you looked at the change in the distribution of post-tax income from 1970 to 2005, it would be even starker than that simple pre-tax income distribution.
The question of whether pre-tax income inequality is changing for reasons that are unrelated to tax policy is not so simple. The fact that income inequality has ballooned far more rapidly in the US than in countries with a more progressive tax structure suggests that the two are not unrelated. And, on McArdle's own reasoning, the two should not be unrelated: the fact that taxes on the US rich are low (compared to history or to other countries) should mean they have more of an incentive to go out and make more money, which should drive up pre-tax income inequality as well as post-tax income inequality.
Incidentally, John McCain just used the "tax cuts increase revenue" line in the debate tonight.
It seems as if the "loonies" that are "thin on the ground" are running the GOP. I can understand the misperception - it's not like Megatron hangs out with Ken Mehlman all day (that we know of) - but shouldn't the dismissal of a core tenet of Republican philosophy be more carefully considered in light of GOP candidates being unelectable without adhering to it?
Of course, the most interesting big lie in GOP tax policy is the Fair Tax, an effective tax hike on most Americans riddled with half-truths, pitfalls and a far heftier price tag than its supporters are willing to admit. Much like supply-sidism, it's heavily in vogue among the GOP glitterati.
Starscream -- it's really amazing just how much GOP rhetoric consists of up-is-downism. Tax cuts increase government revenue. Minimum wages hurt the poor. To defend ourselves, we must attack other countries. Freedom means obeying authority (thank you, Rudy). Foreign aid...hurts the poor. Guaranteed health care makes people sick. And so on, and so on.
The "Fair Tax" is one of the new high points. You see this tack in the right-wing press constantly: "Rich's Tax Burden Rises Again", meaning that, since the wealth of the top 0.1% has just risen stratospherically, they are, predictably, paying a larger share of the country's total tax revenue. The idea of the "Fair Tax" is that a billionaire should pay the same $100 tax on the $1000 dollars he earns in a nanosecond as a working stiff pays on the $1000 he earns in 40 hours. Because the billionaire needs that $1000 just as much to pay for a few minutes of jet fuel for his Gulfstream as the working stiff needs it to buy food for his family. Fair's fair!
Why is income equality per se important? Isn't it more important that the poor be less poor? I don't think tax policy should be trying to make the rich less rich. Making the poor less poor would be good, even if it makes the rich still richer, IMHO.
EI
Megan trots this "no serious Republican ever says this" post out every so often. She is always easily refuted, as alkali does above, and Mark Thoma does here.
Even she grudgingly concedes that Cheney is a "crazy supply-sider," but seems to imagine that he has little influence in the Republican party.
Why is income equality per se important? Isn't it more important that the poor be less poor?
This meme is extraordinarily familiar. There are many ways to answer it. One is that as a factual observation, the world's richest societies are all quite egalitarian: there is much less inequality between Americans (let alone Norwegians or French) than between Indians, Russians or Chinese. However, Americans are less equal now than they were in 1973, and the poor in America have not gotten less poor while inequality in America increased: median household income is actually lower today than it was in 1973 - that is, most people are worse off. So while it may be theoretically possible on Planet Z that the poor would be better off in a more inegalitarian society than in a more egalitarian one, in fact on Planet Earth this is not the way things work.
(There are two counterexamples. The first would be the former communist economies, which were egalitarian and poor. But such economies generally had vast hidden inequalities that didn't show up as wealth: Party members had access to goods which others didn't. The second would be countries like China where inequality has increased as the country becomes more prosperous. But the situations in wealthy developed economies like the US and Europe are not comparable to those in least-developed countries. In LDCs, there will inevitably be a period of rising inequality as the economy takes off. But at some point such inequality actually becomes a drag on growth; China can't keep notching up fast growth indefinitely unless it integrates its 500 million destitute farmers into the new economy, with roads, decent education, etc.)
Another way to answer is that no society in which there is gross inequality between rich and poor can possibly be fair to children born into poverty. Claims that poor kids born in the US would somehow be poorer if the US had a more progressive tax structure are speculative (not to mention just plain wrong). What is certain is that they are enormously more likely to die in infancy than rich children are, and will then receive lousy public educations and be segregated into low-status neighborhoods and jobs which make it virtually impossible for them to join the country's upper half. When you see concrete injustice of this kind, it is disingenuous to say, "Well, but they'd be worse off if society were more egalitarian." Nobody knows anything of the sort; the claim is advanced because it serves the interests of those enjoying wealth and privilege.
Okay... I am happy to accept that thesis that an more egalitarian society would be better and I'd love to see everyone be rich. So, shouldn't the focus be on bringing up the poor by figuring out ways to make them less poor? Our income tax system is already pretty progressive and making it more progressive doesn't make the poor richer, all it does is make the rich poorer.
Taking money away from the rich and giving it to the poor doesn't really help the poor. What we need to do is figure out ways to help the poor improve their lot through better jobs, etc... If higher taxes are a necessary part of that, then fine... but making the income tax more progressive just to make things equal is backwards.
EI
That would be a neat trick, since the existence of a Laffer curve is trivially true.
Actually, no. The usual trivial example is a rate of 100% and 0%.
But a tax base of $100 and a rate of 100% produces $100 in tax revenue. The rate of 0% produces $0 in revenue.
"Wait, in subsequent years, you're going to have $0 in revenue." Well, no. That assumes that no savings would be used to generate income. Etc.
There is no trivial proof of the Laffer curve.
Regardless of the position on the Laffer Curve, the tax system should be made massively less progressive. That is the only way that the 50% that do not pay taxes will be made aware of the cost of their "entitlements". A special program could be put in place for those folks, who, after the de-progressivation of tax rates, still pay no taxes -- they can forfeit their right to vote.
In addition, tax cuts should only go to tax-payers. I know it seems axiomatic, but apparently many have difficulty with such a simple concept.
Finally, as it is government spending that is the ultimate problem to be resolved, all spending programs should have a mandatory five-year "sunset" provision, or one year in the case of earmarks. This "sunset" provision is of course in addition to the elimination of baseline budgeting -- let each spending program justify its existence/costs every year, with bonuses calculated as a percent of savings over the prior year.
Kudos to commenters who dug up those quotes from the leading GOP candidates. And for further demonstration that supplys-siders are THICK on the ground in the GOP, watch *any* of them *any* time they open their mouths. You're more likely to see a leading GOP candidate embrace Osama than dispute, in public, the idea that "lower tax/more revenue" isn't correct.
Dear brooksfoe-
Median household income seems like a poor proxy for well-being. It would seem to be easily swayed by such things as divorce.
I am also somewhat bemused by your assertion that the lack of an even *more* progressive tax system "make it virtually impossible for [the poor] to join the country's upper half". I too look forward to the day when we can all reside in Lake Woebegone, but I doubt it will happen in my lifetime.
Finally, all this discussion of tax rates seems predicated on a static analysis -- the base of taxpayers will be the same independent of tax rates. This, I think is fundamentally flawed -- capital is mobile and will seek the greatest returns, here or abroad.
m, don't act stupider than you are. You know perfectly well that the "them" in "make it virtually impossible for them to join the country's upper half" referred to kids born into poverty -- in other words, class mobility. In an efficient and just society, there should always be kids born into the lower half moving into the upper half and kids born into the upper half falling into the lower half. That's how you reward hard work and the development and employment of talent. American society now has less income mobility than wealthy European societies like Germany do, and that is connected to the strategies which America's wealthy class have instituted in the past 30 years to lock in inherited wealth and privilege.
Median household income has fallen since 1973; median wages have been virtually static. Meanwhile, the economy has more than doubled in size.
There is no evidence that reasonable increases in the US tax rate cause significant capital flight. The US raised taxes in the 1990s and capital poured into our economy.
re: "Most tax cutters today want tax cuts because they think they are good for the economy, not because they think that it will increase tax revenue."
True but if they are good for the economy, and they are sustained, then in the very long run they will increase tax revenue.
That's more of an abstract point than something relevant to the real world political situation because taxes won't stay static long enough for one particular tax changes very long run effects not to get lost in the effects of all the other subsequent changes.
Median household income has fallen since 1973; median wages have been virtually static. Meanwhile, the economy has more than doubled in size.
US GDP nearly doubled between 1973 and 2006, from about $6.67 trillion (in 2006 dollars) to about $13.13 trillion. On the other hand, the total US labor force also nearly doubled, from about 75.5 million to about 144 million. "Virtually static" median wages sounds about right. Did you think (for example) that the average waitress now serves twice as many customers as in 1973, and therefore should be expected to earn twice as much?
Dear brooksfoe-
I apologize for missing your post where you demonstrated that all those in the upper half in 1973 remain floating effortlessly in their lofty realm, while all those in the bottom-half remain mired in steerage.
I believe that post was right after the one where you had both accounted for the effect on median income of the massive (unsought) immigration of (illegal) poor laborers, and praised the mobility that allowed many legal immigrants to rise to the highest levels of society.
As I said, my browser seems to be acting up (it can't even *find* "class mobility" in either the Declaration or the Constitution), so the fault is surely at my end.
So what if "revenue is zero at both a 0% and 100% tax rate?"
That tells us absolutely nothing about the shape of the curve between those two points. It could have a sharp maximum, or be fairly flat over a wide range. It could have more than one relative maximum. It could change shape because of other economic changes.
It also tells us nothing about where we are on the curve, or how changes in the distribution of the tax burden affect revenues.
In other words, it's a meaningless statement that is seized upon by lots of conservatives to justify their fanatic devotion to tax cuts as the solution for all ills.
Byomtov-
Tax cuts are certainly not a panacea. But they will certainly do until we can get spending cuts. (Tax cutting is a means, not an end: the end is to reduce the role of government to the absolute minimum necessary to fulfill its constitutional obligations, thereby maximizing liberty for all).
m said: Tax cuts are certainly not a panacea. But they will certainly do until we can get spending cuts.
Until we have some sort of impediment to borrowing to cover the difference cutting taxes won't hinder the folks in DC.
So what if "revenue is zero at both a 0% and 100% tax rate?"
That tells us absolutely nothing about the shape of the curve between those two points.
As I've pointed out, those two points are NOT equal. A rate of %0 produces nothing. A rate of 100% produces 100% of its base. Once you start crossing the boundary into multiple years, you've got to include the deficits accrued and the interest on those deficits.
But the good side is that you've only got to do that if you're honest.
Jeffrey Davis,
I don't disagree with you. I was just pointing out that even granting what supply-siders consider a killer point their argument is silly.
brooksfoe,
I stand before you, ready to take the brickbats: Why should society be worried about "decreasing social mobility?" I find it very hard to get worried about that when I see folks that are clearly poorer and browner than me with cellphones and Ipods attached to their earlobes. Those same folks also tend to have better clothes than me, and in some cases have better cars.
Frankly, your worries about "decreasing social mobility" are no different than the conservative "worry" about legal/illegal immigrants supposedly not paying our culture its proper "respect."
Good comment on Marginal Revolution -
--
"How hard is this to understand? The taxpayer doesn't care about maximizing government revenue.
Politician A: Mr. Joe Sixpack, we can maximize government revenue by raising taxes by 10%, because you see, we'll only lose 9% to slower growth, so our revenue actually increases! Then we can spend it in lots of ways to make you happy!
Joe Sixpack: So, you're raising taxes by 10% and you're going to slow the economy?
Poltician A: Don't look so glum! It's for the children!
Politician B: Me cut taxes. You keep money, economy grow fast. Ugh. Me like cookie.
Joe Sixpack: I pick B."
Posted by: 8 at Sep 6, 2007 5:10:39 PM
http://www.marginalrevolution.com/marginalrevolution/2007/09/the-demand-side.html
Byomtov - Your right that the principle that there is a curve connecting the points with 0% taxes giving zero revenue, and 100% taxes giving zero or near zero revenue doesn't tell us the shape of the curve, or where we are along that curve. But generally for any realistic shape of the curve increasing taxes does not generate as much additional revenue as you would get if you just applied an additional percentage to the same baseline. The tax increase does discourage economic activity, and also distort it towards seeking avoidance of taxes, rather than towards seeking the highest real pre-tax ROI. For a small increase and when taxes are starting from a low point those factors might not be that large but they are still real. If you start from a higher tax rate the effects become larger. That is the point behind the Laffer curve, and its a fairly important one.