Tyler Cowen points today to a new paper that investigates whether economists tend to talk their own book. That is, do they generally come to conclusions that fit their political leanings?
The answer, unsurprisingly, is yes, and I doubt that we need to bother with any more research on this subject. Tyler particularly directs our attention to this:
For example, we find that going from the most left-wing authored estimate of the taxable top income elasticity to the most right-wing authored estimate decreases the optimal tax rate from 84% to 58%.
That's a big difference. But it's notable that even the furthest-right economists can't manage to twist the evidence any further than a 58% optimal tax rate. That's a very high top tax rate by their standards.
Now, I assume that "optimal" in this context means "the rate that raises the most money"—not the rate that's fairest or most efficient. Still, this indicates that in terms of revenue raising, top rates should be at least 58% and probably closer to 70%. In other words, about what we had before Ronald Reagan wrecked the public fisc for good.
There are multiple reasons for taxation. Revenue isn't one of them, but public purpose in distribution of wealth and income is. See Beardsley Ruml (Taxation for Revenue Is Obsolete, 1943). Ruml was a former President of the NY Fed.
being president of the NY fed disqualifies his opinions (about everything, not just economics- he was probably visiting the pre-WWII version of Epstein’s island)
"being president of the NY fed disqualifies his opinions"
Then let's disregard Ruml's opinions, and focus instead on answering the question, "If the US government can print all the dollars that they spend, then why do they need to tax?"
Because fiscal mechanisms offer at least the possibility of being more progressive than monetary interventions to attempt to control the rate of inflation.
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Long answered. Short answer: massively inflationary. See, eg, discussions of "monetizing the deficit," a similarly disastrous proposal to balance the budget by just printing money. And if you really want to dig into it, there is a whole literature on the supply of money.
If you try hard enough you run out of things to buy and just end up bidding up the price of existing production. But because the Government creates money at will it still doesn't have to tax before it can spend
California top tax rate is 14.4% and the top Federal rate is 37%. The combined rate is ~ 51%....
The Florida, Texas, New Jersey, etc., top tax rates are 0.0%. The top federal rate is 37% The combined rate is 37%.
Look, I can troll too!
I never made a claim about the tax rate in say Texas. My point, some Americans are subject to rates, similar to the 'optimal.'
Perhaps, because I live in California (similar to about 12% of the US), my state is my frame of reference.
"Optimal" is optimal to maximize tax income in a given year.
It is not optimal to maximize over time since a tax rate that high will severely reduce growth. You obviously cannot invest much if profits / income are mostly going to the government.
There is no evidence of that.
MF don't need no stinkin' evidence, MF is an ignorant troll
There is a vast (and somewhat contentious) body of work on the effects of tax rates and economic growth. From what I have seen, the general answer was that lower taxes lead to more growth than those on the left think and less than those on the right think.
Great example of why basic economics should be required in high school and college.
Displaced Canuck, where do you think money to invest comes from if not from after tax profits and income?
It's irrelevant as the government doesn't tax to save money, they spend it and, in some cases, invest it. As long as tax rates aren't high enough to create a disincentive to earn the next dollar, they just don't have that much effect on growth. That's where those numbers come from. The supposition is that if the tax rates exceed 73%, there is a disincentive to earn thus growth and tax revenue decline. Heck, Laffer said the same thing, he was just wildly off on the optimal rate.
You have not answered my question.
For example, I am an active angel investor. Do you think I invest from pre-tax or post tax money?
If I have less post tax money do you think I invest the same amount or less?
That doesn't "severely reduce growth," which was your original contention. Nor does it violate some dictum of "basic economics," which was your second contention. Actual historical evidence shows that economies can and do prosper with high marginal income tax rates, if other things promote growth, and can and do fail to prosper with low marginal income tax rates, if other things do not promote growth.
And FFS, please don't try to argue that angel investing is a significant source of economic growth.
If the investment is in better public education or in repair of public infrastructure, the money for it comes from tax revenues and government borrowing.
The question you didn't ask is, "What are the most profitable -- in terms of creating economic growth -- investments that can be made right now?"
And probably a lot of public investments -- better public education, maintenance of infrastructure, a more rational healthcare system -- would be high in that reckoning in any reasonable answer to that question.
Here we go again; Misfire is now claiming the government never makes investments. It's also obvious -- has been for a long time -- that Misfire doesn't know beans about basic economics, having never taken any of those classes he's so eager to prescribe for other people.
Money invested in something productive is generally tax deductible, either in the year of the investment or, by way of depreciation deductions, over a period of years. In other words, money to invest effectively comes from before tax income. One effect of this is that higher tax rates make tax deductible investments cheaper for the investor because the IRS is bearing a bigger portion of the cost.
If he had evidence, he's be citing it. Not saying there's no evidence (not saying there is either), just that MIsfire isn't informed on much of anything, and has no interest in becoming so.
"Optimal" is optimal to maximize tax income in a given year.
It is not optimal to maximize over time since a tax rate that low is too low to curb the outsized political power of the investor class, whose interests are inimical to our own by intent. Obviously, and with supporting evidence you literally can't escape the consequeces of the outsized politcal power and influence of donor class.
Why aren't you part of the investor class?
I made my first 401k contribution the day I got my first pay check. I opened a brokerage account the following month. I spent the next 35 years saving 10% in retirement accounts and 10% in a taxable account. I am now solidly in the investor class - my investments return more on average than I earn in salary.
Anyone can do this except the poor, and few people reading this blog will be poor.
And the working poor are taxed around 15% (employer and employee portions of FICA tax) by the federal government from the first dollar they earn.
Meanwhile, you can get over $35,000 a year free of federal taxes from investment income (dividend and capital gains exclusions) if you're moderately tax-savvy in your investments, and an unlimited amount (unrecognized capital gains) if you're particularly tax-savvy in your investments. And after the $35,000 tax free, over $400,000 taxed at 10%.
Does that seem fair?
What a silly thing to say. Yes, I receive income from investments; now tell me how that makes me part of the investor (donor) class? We both know you're playing silly buggers (most everyone here thinks that's all you ever do) ... but I want you to say it out loud on accounta the fact we enjoy watching you swing.
And California's a pretty nice place that pretty much everyone in the world wants to move to.
Yes, CA is a nice place, and I like to go there sometimes. But regarding everyone wanting to move there, Google's AI just told me this:
"According to the U.S. Census Bureau, 818,000 California residents moved out of state between 2021 and 2022, resulting in a net loss of roughly 342,000 people. This is a major contributor to the state's declining population. The primary cause of the exodus is the high cost of living, especially housing. Other issues include crime, politics, pollution, and traffic. The rise of remote work also made it easier for people to leave California. According to RubyHome, Californians are most interested in moving to Texas (15%), Florida (7.8%), and Washington (7.25%)."
"California’s population grew in 2023, halting 3 years of decline, state estimates"
https://apnews.com/article/california-population-growth-pandemic-decline-0d2bfc2c0a4ced0c3c2ad934207818bc
It is almost entirely the cost of housing. If 100,000 townhouses suddenly became available in SF or LA for $500,000, you would would find out how little crime and politics matter, but they don't exist.
No one goes to that restaurant these days; it's too crowded.
Though it will not remain so should even a small fraction of the “pretty much everyone in the world” were to move here.
58% if include payroll taxes.
A top tax rate of 58% would be nothing short of a miracle. I'd be gobsmacked. Flabbergasted.
Needless to say, it'll never happen in my lifetime. I'll be exceedingly pleased if by the time I die the number starts with a 4. And is two digits.
58% is CA's top rate when including federal income taxes and payroll taxes. So you have your miracle!
Nope.
In reality, anyone approaching the top federal and state income tax brackets is going to pay a smaller percentage of his/her income in payroll taxes, since those are capped. For 2024, the upper maximum is $168,600, at which point you're paying $10,453.20 -- 6.2%. If your income doubles to $337,200, you're still below the top federal income tax bracket, but your payroll tax rate has dropped to 3.1%. California's top tax rate kicks in at $1,000,000 per year, at which point the combined rate for federal plus state plus payroll is 37% + 14.4% + 1%. That's 52%, not 58%. Your poor, hypothetical taxpayer is left with only $480,000 after-tax dollars, what a disincentive!
TL;DR you got your basic arithmetic wrong.
Good luck with that. The rich have long ago figured out that it’s much cheaper to pay K St than the IRS
Best congress money can buy
"it’s much cheaper to pay K St than the IRS"
Up to now, yes, but the protection-racket model of trumpist autocratic grift (that so many of them seem to be fine with) is that grift will grow to the point where it eventually channels all their profit and gain beyond a nominal one from themselves over to the trump family and approved insiders. And it will be much more comprehensively administered than the Putinist model, with much less left to the current recipients.
Yet so many of our mega-rich don't have the wit to see it. They all think they'll remain privileged insiders as far as the eye can see and can't believe their current ability to amass cash will make them particularly vulnerable in an arbitrary kleptocracy. Democratic governance is their safest system, if only they could accept it.
I read a comment not long ago: 'all of them think that after the chaos, they'll be the one sitting on the throne made of human skulls, when actually they'll be one of the skulls'. Exactly.
Buying the federal government is by far the best investment anyone can make, if they are in a situation where they can make that investment.
Pretty easily tenfold annual return on investment, I'd say.
"they generally come to conclusions that fit their political leanings"
I suppose it's out of the question for a right-winger like Cowen to consider that the causality might go the other way; some economists might actually let their research results drive their political leanings to some degree. It's all cynicism all the way down for these people. If their own conclusions are driven by their preconceived notions that must be true for everyone.
I say, they [those at the top] don't have to conspire, because they all think alike. The president of General Motors and the president of Chase Manhattan Bank really are not going to disagree much on anything, nor would the editor of the New York Times disagree with them. They all tend to think quite alike, otherwise they would not be in those jobs.
- Gore Vidal
I don't have access to that article on accounta I'm not signed up on accounta I haven't given them any of my hard-earned dollars they demand before being registered (talk about talking your own book), so I can't be anything but skeptical of their results until I go over their methodology. Given the players involved however, I suspect your are correct. I would also suggest that in addition to being right-wingers, they also tend to be both authoritarian and hierarchical; they toe their institutional party line and got no problems with that. To quote Noam Chosmky:
Did they control for that, that is, did they look the total pool of applicants for a particular departmental position at a particular school, or did they just look at who was employed where when they wrote those oh-so-partisan articles? One guess as to what I think ????
What? The "players involved" are Jelveh, Kogut, and Naidu. Their academic biographies don't indicate that they are authoritarian, right wing, or even hierarchical.
The total pool of applicants would be utterly irrelevant to the question being asked.
The "involved players" I was referring to was that dim-witted Cowan. Do you think he would have called attention to any study that did not affirm his Ideological bias. And your last sentence is so wrong it's not even wrong. I'll leave it as an exercise for you to parse out why.
Cowan isn't the author of the study; he's just reporting on it.
And OF COURSE political leanings (left or right) affect how economists approach problems and interpret data. The same is true for Supreme Court justices, journalists, Joe Schmoe at the truck stop, and pretty much anyone else who has political opinions. That isn't "cynicism all the way down," it's reality. Pretending otherwise is somewhere between naive and willfully obtuse.
Surely they mean the Laffer Curve.
Laffer didn't invent the idea that there's an optimal rate of taxation, just the idea that the optimal rate is probably fairly low. Adam Smith wrote about this in The Wealth of Nations, Frank Ramsey did academic work on this a century ago.
This book'll get your blood boiling
https://www.amazon.com/Tax-Rich-Loopholes-Lobbyists-Richer/dp/1620976269
(unless you're in line for a $100M inheritance or are a beneficiary of the reset basis loophole or the carried interest loophole or any of a number of other loopholes written specifically to further enrich the already rich).
Of course people just discuss income taxes and fail to include payroll taxes. It used to be the top tax rate went up the amount that Social Security payroll taxes dropped so the overall rate for high earners was not below people who earned less.
This is why Arthur Laffer is such a POS. It was generally understood in Econ for a long time that there is a rate at which revenue from a tax is maximized and for the federal personal income tax it was generally estimated to be around 70%. Laffer A) pretended he'd invented this longstanding concept, and B) pretended that rate was much lower than it was known to be.
JFK pushed lowering the top marginal rate, not coincidentally to 70%. The last supply side tax cut that actually worked.
I don't think it was Laffer who first pretended that he discovered "his" curve; it was just that the politicians he was explaining it too recognized that it sounded much more impressive to refer to the "Laffer Curve" than to lay out some pretty obvious economic ideas.
I've tried -- unsuccessfully, so far -- to have addition referred to as "the (MY NAME) function," for the same reason: "Let's recall that the (MY NAME) function of 3 and 5 is 8, so therefore ..."
JFK, by the way, extremely wealthy. Surely a coincidence.
Everything conservatives advocate is or has been complete failure, and has been for centuries.
You'd think Democrats could run on that.
Every society needs a responsible conservative party to put the brakes on the excesses of the left-wing party. Otherwise progressives would simply push farther and farther left, and at some point government becomes all powerful and freedom falls away. So in this sense, you can say that conservatives have preserved important things, such as free enterprise (capitalism) and perhaps freedom itself.
For an example of where the left can go when unchecked, see the speech restriction laws spreading in western Europe now. Or if you dislike capitalism, just visit Cuba. The push for ultra-wokeness in all things in the US certainly needs some checks on it. (Unfortunately we don’t have a responsible conservative party to serve this purpose. Trumpists are easily dismissed.)
For the ultimate in the unchecked left, we were given the Soviet Union with Lenin and Stalin, Castro in Cuba, Mao in China, North Korea, Vietnam, and so on.
Nope.
There is one and only one role for a "conservative" party: to be the voice (and votes) of Chesterton's Fence.
There is no reason for conservatism to be particularly concerned with freedom, or a particular economic system, or anything else that vaguely sane conservative parties are traditionally associated with.
Their job is to make sure that progressivism (which is not inherently "left", BTW) does not needlessly or stupidly tear down existing things before understanding why they were that way.
Progress does not require tearing down all that came before, though often it requires tearing down quite a lot of it. Conservatism exists to make it more likely we will get that balance right, not to ensure that "freedom" or "capitalism" persist.
I have no particular fondness for Saint Ronnie. My father was nearly riffed when Reagan wanted to gut the Department of Energy. But under his administration they/Congress simply restarted a process which began in 1963/1964 and continued through 1970.
Since this is the land of charts: https://fred.stlouisfed.org/series/IITTRHB
Can anyone else see the link between Kevin's last post and this one? Even in the home of the Austrian School od Economics they know they have to tax enough to have good infrastructure.
There's a reason Austrian School heavy hitters ended up in the US.
It’s not so much about raising taxes as it is:
1: Eliminating methods to defer taxes
2: Eliminating or limitings preferences on capital gains
3: Capping tax-free accounts such as 401ks at reasonable levels (for example, $1 million combined per person)
4: Eliminating methods to transfer untaxed money to heirs without taxation
5: Eliminating methods to transfer paper income outside the USA.
6: Reducing deductions and untaxed perks
+1
I think everyone knows this already; 'raising tax rates' is shorthand for raising effective tax rates.
Taxes on the rich bring down inflation without a major negative impact on the economy.
I suspect that a lot of the historically high investment valuations that we have recently are in large part a result of the government running deficits -- unsustainable deficits, barring some major rethinking of our fiscal economy, such as adopting "Modern Monetary Theory" wholesale, in my opinion -- in order to give tax cuts to corporations and the wealthy.
I think we have an investment bubble that will in all likelihood burst when the government is paralyzed by debt and the public part of the real economy (tangible things, like bridges and roads) starts falling apart.