The other day I quoted from Michael Hiltzik's article on Elizabeth Warren and inequality:
Brynjolfsson schooled Dell by informing him that from the 1940s through the 1960s the top rate on income ran as high as 94%. “Those were actually pretty good years for growth,” he said.I've seen this particular sleight of hand too many times: A tax-rate fact and a growth fact, one after the other, along with the implied conclusion that HIGH TAX RATES ARE GOOD FOR GROWTH.
That conclusion is bullshit.
I complained that Hiltzik seemed pleased with the argument, and I wrote:
The years from the late 1940s through the 1960s were better than "pretty good" years for growth. And income tax rates were definitely high. But there is no reason to assume that high tax rates on income were the cause of the good growth; that is fantasy.But it does need to be said.
What one can say with confidence is that high tax rates did not make good growth unattainable. And really, this is all one needs to say about tax rates and growth.
My morning workout today brought me to Economist's View, where Thoma links to
I jumped on it, because Bernstein and I agree that it needs to be said.
His article is very good, Bernstein's. He says:
... there’s no persistent correlation between top tax rates and growth rates across the US time series, nor in oft-cited international data from Saez et al. This is widely understood among empirical public finance folks ...He says there is no persistent correlation suggesting high tax rates are good for growth, and there is no persistent correlation suggesting high tax rates are harmful to growth.
Interesting stuff, with a far better quality of argument than the one in the Hiltzik article, an argument so bad that they dare not do more than imply the conclusion.
At one point Bernstein says
To be clear, I neither think nor claim that higher top rates lead to faster growth (though such a case is sometimes made).Well you know I had to check out the link. And that gets us to Matthew Yglesias.
In Study: tax hikes could grow the economy at VOX, Yglesias writes:
At the core of Washington's economic-policy debate is a premise shared by both Democrats and Republicans: raising taxes on the rich will hurt the economy by discouraging super-talented, super-productive rich people from working as hard."... as hard" as what? How about "...so hard" instead? Or finish the thought: "... as hard as they do." Somethin.
But in a recent paper "Taxation and the Allocation of Talent," Benjamin Lockwood, Charles Nathanson, and Glen Weyl challenge that assumption. Higher tax rates, they argue, could push talented individuals to eschew lucrative-but-socially-useless jobs in favor of more broadly beneficial careers in teaching and research.Let me skip over all the parts where Yglesias tries to make this sound like a good idea, and get right to the problem:
The authors show that under a variety of plausible assumptions the socially optimal top marginal income tax rate is very high — in the 70 to 90 percent range — largely because high tax rates would deter talent entry into finance and encourage talent entry into research/academia and teaching...So really what they're saying is finance is the problem.
... talent entry into research/academia and teaching. The authors also find that this sort of high tax regime is a distinctly second-best policy alternative and that the vast majority of the benefits could be captured with fewer unintended consequences through hypothetical more targeted policy measures aimed at specific occupations.In order to make the high-tax idea really work, you'd have to decide which jobs are beneficial to society and which are harmful, arrange tax rates to favor the one and discourage the other, and tax the different jobs at different rates. That's a graphic picture of early-stage dystopia. Decline of civilization stuff.
Who gets to decide what's beneficial and what's not? What if they're wrong? And, as always: Who keeps an eye on the decision-makers, making sure decisions are made to benefit society as a whole? Who assures us that the actual decisions (and not only the assurances they give us) are for our benefit? And who watches the watchers?
Then too, the decisions are subjective, even if they are made with integrity. For example:
To the extent that one believes "starving artists" are making contributions to society not captured by their monetary incomes, the true optimal tax rates will be even higher.Yglesias, however, seems to like the idea:
Ultimately the paper is an extremely provocative theoretical contribution that suggests a potentially fruitful line of empirical inquiry. Given that the case for higher taxes tends to rest on equality, this research offers an interesting additional consideration.It seems Yglesias likes the idea because it adds something to the argument for equality. But at this point, I HAVE TO SAY "NO!"
Yglesias is willing to use a very bad idea because he thinks it contributes to a good idea. Do you see how scummy that is? How wrong it is? Do you see how it tends to "dirty" the good idea?
Do you think those people, who at present do not see reducing inequality as a good idea, will be more willing to change their minds because of this study Yglesias is hawking?
I doubt it.
Hayek:
Most planners who have seriously considered the practical aspects of their task have little doubt that a directed economy must be run on more or less dictatorial lines... The consolation our planners offer us is that this authoritarian direction will apply "only" to economic matters...Excerpts from The Road to Serfdom by F.A. Hayek, Chapter 7.
Economic planning would not affect merely those of our marginal needs that we have in mind when we speak contemptuously about the merely economic. It would, in effect, mean that we as individuals should no longer be allowed to decide what we regard as marginal.
5 comments:
Its a shame that the discussion of progressive income tax has devolved into a discussion of fairness and income inequality and nobody says a word about the original intended purpose.
The theory behind taxing income at a progressively higher rate is that it is an automatic stabilizer to the economy.
users.nber.org\~jroth\w7662.auto.pdf
Automatic stabilizer? Now, that's a name I've not
heard in a long time.
Jim, I think the perceived usefulness of automatic stabilizers disappeared after Keynes was reduced to "applause for deficits" and deficits were reduced to "always bad".
What is said to be true or perceived to be true is not always what is.
The analysis in the paper I linked to goes only to 2000. The automatic stabilizer has been in the process of being dismantled since the early 1980's but its effect is still enormous but not what it could be.
If you just look at the fiscal response to the 2008 collapse. It looks to me that about 85% was the automatic stabilizer of reduced taxes and increased unemployment and welfare payments that happened automatically and quickly and 10% was the brief payroll tax cut and maybe 5% was direct stimulus spending. The latter 2 took a while to implement and thus were of the too-little-too late type.
Jim, I often find myself looking at new graphs, and at old graphs in new ways, because of things you say. Thanks!
The graph of NBER based Recession Indicators changes after the Great Depression, from mostly gray to mostly white. It never occurred to me that automatic stabilizers may have had a big hand in this.
The difference between "Federal Government Current" Expenditures and Receipts, as a percent of GDP runs at a low number (averaging maybe 1%) in the 1950s and '60s. The average jumps up to maybe 3% in the 1970s and '80s.
During the Great Recession, the value goes temporarily high. But it looks like Obama was trying to bring the average back down to 3%. And there is the hint of a possibility that Trump wants to push the average up to around 5%.
These average values represent long-period targets for the Federal deficit. A long-term increase in these long-period targets, from 1% to 3% to 5% -- that would be interesting.
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I can't imagine how to calculate your 85%, 10%, and 5% numbers. Do you just compare the change in deficits to the size of the payroll tax cut and the size of the stimulus?
I'm looking at the deficit over 4-5 years following the crash (a counter-cyclical response to the crash) and breaking it down to see what generated the deficit. The deficit is the amount of money the govt adds to the economy
Starting with 5% number. That may be generous. It is true that in the first year programs like TARP and the bailout of Freddie and Fannie and AIG took money from the Treasury and put it into the economy, but in subsequent years that flow reversed and when you add up all the principal, interest, dividends, capital gains,fees and penalties that took money out of the economy and put it into the Treasury the total stimulus may well be less than zero. QE for example has generated more than 100 billion in interest payments to the Treasury. Freddie and Fannie and AIG have been even more profitable for the Treasury all of which didn't add to the deficit but instead reduced the deficit and reduced the money put into the economy .
The Payroll tax cut in the 2 years it was in force was about 20% of the deficit, so on average it was maybe 10% per year.
After that what is left is the reduced taxes and increased spending that happens automatically without any changes in the law when there is a downturn.
The effect of the progressive income tax is that when the economy is growing taxes grow at a faster rate and conversely if the economy shrinks tax revenues shrink at a much faster rate.
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