Tag: Laffer curve

At Least He’s Honest About It

Building on Alex’s post on income inequality, I note that Mathew Yglesias published this over at Vox. Yglesis advocates for raising the top marginal rate on salaries above $10 million to 90% and the inheritance tax of estates over $10 million to 90%. His argument is that the Laffer Curve is largely bunk and there is no evidence that raising incomes that high would seriously hurt the economy, at least if it were confined to the upper strata of income.

Let’s put aside a few things. Let’s put aside that France tried to raise the top tax rate to 75% and it was a disaster. Let’s ignore that even when that marginal tax rate was 97%, it didn’t stop rich people from being rich*. Let’s ignore that while many economists dispute where the peak of the Laffer Curve is, no one thinks its near 90% or doesn’t exist. Let’s ignore that when you add in state, local and Medicare taxes, this would mean a marginal rate of over 100%. Let’s ignore that previous efforts to tax the evil stinking rich have often resulted in a game of rich person whack-a-mole where they just get income from different sources. In the 90’s, the Democrats put a cap on the amount of CEO pay that could be categorized as a business expense. The result was that CEO’s started getting paid in stock options, which contributed directly to the tech bubble.

No, we’ll put Yglesias’ economic illiteracy aside. Instead I want to applaud him. Because he admits that a 90% marginal rate will bring in little if any revenue. What he argues is that this would stop corporations from paying such huge salaries and therefore pay more to lower level employees. Or something. And high taxes on estates would stop people from inheriting massive wealth. Or something. His argument is that this would address growing income inequality. No word on whether he also thinks cutting the legs off of tall people would help short people dunk basketballs.

I’ve said before that raising taxes on the wealthy isn’t really about revenue. Increases in the marginal rate would increase revenues, although not as much as tax reform would. But that’s a side effect. A huge amount of the motivation for raising taxes on the rich is redistribution. As Barack Obama himself said, it’s about spreading the wealth around. So at least Yglesias is admitting what we all know.

Of course, this won’t go anywhere. Despite the best efforts of the wealth redistributors, the American people don’t want a 90% marginal rate. There is broad support for the rich to pay more, but not at this level. So, in the end, Vox is running an article that is just about as grounded in reality as the most fantastic libertarian fantasy.

(*It’s a funny thing. Jjust as wealth and income inequality are coming back into vogue thanks to Picketty’s new book, I am growing more and more suspicious of it. I am beginning to suspect that the “equality” of the mid-20th-century was a product of how we measure it, not a real phenomenon. Rich people don’t get rich by letting the government take their money; they find ways to shelter it. The 97% marginal tax rate we enjoyed until the 1960’s came with a lot of shelters so that very few people actually paid it — and often it was someone who’d made a new fortune and was trying to raise themselves up into the ranks of the rich. The 97% rate was mainly a way of beating down rising stars so that the rich would remain pure and blue-blooded.

Liberals understand this to some extent. When conservatives point out that capital gains revenue boomed after the tax rate cut, they correctly reply that the taxes reaped from ordinary income fell by a greater amount. The rich just changed how they were getting paid. I suspect the supposed happy valley of income equality was similar but don’t have the resources to do the research.

I am also growing dubious of using income and wealth as pure measures of inequality. It makes things convenient for economists, but doesn’t necessarily tie to reality. Housing and food, relative to income, are much cheaper now for poor and middle class people than they used to be. Most of the working class can now afford homes; they used to almost all rent. Measures of leisure time show that the poor and middle class have more of it than they used to. Just to take examples from my own family: one set of grandparents were middle class. They had a maid, as almost everyone in their social stratum did. No one has maids anymore because they are paid too much (and, it should be noted, other opportunities have opened up to the working class). On the flip side, my other grandfather worked two jobs and had a working farm just to stay functionally poor.

I suspect we are focusing too much on money measures and not enough one thing in life that really matters: time. This is one of the big reasons that I suspect Picketty’s trendy book — like Das Kapital before it — will eventually be unravelled by better minds.)

The Big Graph

The NYT ran this graph yesterday, showing the cause of the debt we have and our piling up this century.

A number of thoughts:

First, several policies are placed entirely in the Bush column that should really be shared. Barack Obama owns the wars and the tax cuts now, having continued both. Obama supported TARP and has only expanded Medicare D.

I do think it’s a good illustration of which policies are driving the debt. I’ve been encountering way too many people who think the debt is being driven by stimulus spending or Obamacare. But these are dwarfed by the war and the tax cuts (so far). Still … it’s been 2.5 years. Obama has not stopped any of the policies driving the debt. Blaming Bush can only go so far.

I would also point out that the graph represent eight years of actual spending from Bush against eight years of assumed spending from Obama. But even now, there is huge resistance to cutting spending down to pre-stimulus levels, as all the budget projections assume will happen. Obamacare is supposed to cut spending; but most people are extremely skeptical. And there is no accounting in that tally for unexpected spending, such as from a major natural disaster.

We’ll see how it works out in reality. Bu remember — almost all projected budgets are optimistic.

Second, the biggest contributor to the debt they list is the Bush tax cuts, which currently have the fed a 15% of GDP, eight points below its spending and three points below Cut, Cap and Balance. Ed Morrissey tries very hard to argue that the tax cuts have actually increased revenues. To my mind, it doesn’t work. The tax cuts corresponded to the biggest drop in revenue since the end of World War II. After a brief “recovery”, driven mostly by the housing bubble, we fell back down to revenue levels close to what we were getting 15 years ago. I’m all in favor of keeping taxes low, but the Laffer Curve is not a line. And “starve the beast” never works. On the contrary, it makes the public more receptive to new spending because they are getting it at a discount.

Third, the NYT leaves off the biggest contributor to the debt, which is the economy. I’ll let you argue amongst yourselves who is to blame for that. I think there may be about two people in Washington who bear no responsibility.

Finally, I’m not sure what the point of this is. As I said on Twitter:

Once again, it’s not all Obama’s fault. And once again, the problem is the problem, however we got there.

What matters now is how we move forward. If we need higher taxes to pay for our commitments, we need higher taxes. We do not need higher taxes just because Bush cut them. If we need to cut spending, defense and entitlements are the place to start immaterial of who spent what on whom and why.

Democrats and Republicans don’t get their own separate economies. We’re all in his foxhole together. If Bush fucked things up beyond all recognition, Obama chose to become Presidet under those circumstances and has chosen to do nothing to right the ship so far. He hasn’t knocked as many holes in the hull, yes. But then again, he hasn’t had as much time to. If the Democrats had won in 2010, we might — God help us — be talking about Stimulus IV: the Search for More Debt. And that graph would be even more irrelevant.

How we got here is interesting in an academic and political sense. But right now, I’m interested in how we get out.