Brad DeLong writes:
I don’t understand how any professional economist can disagree with the fact that more technology-driven inequality should call forth more social insurance in response.
I do think taxation should be progressive, but the comparative statics are tricky. If absolute standards of living are rising, and credit constraints are being relaxed, economic failure often means no cable TV rather than starvation. That militates in favor of less social insurance, noting on the other hand that we can afford it more as well.
Furthermore greater productivity for the high earners can mean greater deadweight loss from the taxes and in the longer run less innovation and lower living standards (a prize to the first person who in the comments shouts "trickle down!" and accuses me of believing in discredited supply side notions; I’ll also recognize that well-spent government revenue can raise rather than lower the living standard).
Whether "the rich would have worked virtually as hard for less" will depend on social norms. I personally think that "shop at Barney’s slurp my sushi run a hedge fund psycho norms" — at least concentrated in a few percent of the human race — may be better for humanity than the sanity promoted by Bob Frank and Montaigne. The thing is, part of the craziness of these people might include them not wanting to give away half or more of what they earn.
Of course we could calm these people down altogether (or maybe not, or maybe letting them run a hedge fun is calming them down), but I’m not sure we want to.
What about me? I could read Epictetus all day long for free, listening to my already-purchased Indian classical music CDs and blogging for you all. But at fifty percent marginal rates of taxation or higher, I would work considerably less at the margin. I don’t look at a budget, to me the extra work "just don’t seem right." Maybe it’s because I don’t play the ultimatum game like a chimpanzee. But in any case for many people I think there is a significant notch effect at about 45-50 percent and up for the tax rate.
I might add that serious egalitarian-oriented health care reform — if indeed it succeeded — would significantly lower the case for greater progressivity of taxation.
What are you, some kind of trickle down supply sider!
Now onto the serious comment.
“I don’t understand how any professional economist…”
That’s because DeLong doesn’t buy into the distinction between an economist and a moralist. I believe an economist should be a model-builder–someone with a good theory that if you do more of X you get more of Y, etc. No moralizing necessary, but we all get a clearer view of how the world works. A moralist provides statements with the word “should.” As in, people should do this, or the government should do that. There is a well-grounded philosophical discipline around which to discuss “should” statements, and most people who call themselves economists (Tyler excluded) are ill-equipped to deal with it.
As for the economics, sure government spending could, in economic theory, raise social welfare. But unlike economists like Dani Rodrik who are quick to provide all the theoretical constraints under which markets must work to be efficient, I think public choice theory provides far more convincing constraints under which government action is likely to actually produce an efficient outcome.
But most of the people arguing for government action are not doing so as economists, but as moralists willing to sacrifice economy. I don’t mind that, as long as the distinction is honestly proffered.
i agree with what Mr. Hodak. Economists should stop preaching morality, but present clear pictures, both sides of a situation. Moralities change as gains of a certain situation change when parameters change, so its best left to the government to decide whats best for its people. We should do what we do best, that is analyse a situation from all sides, no matter how much we are ridiculed for saying “on the other hand”.
“Maybe it’s because I don’t play the ultimatum game like a chimpanzee.”
Taxes aren’t the ultimatum game. In the ultimatum game it is cost-less to accept the offer. With respect to taxes, you have to do the work to collect the money.
I don’t understand how any professional economist can disagree with the fact that more technology-driven inequality should call forth more social insurance in response.
Hmmm. Technology-driven inequalities are sharpest between residents of Western countries and those who live in the third world. DeLong is a professional economist, so let’s take him at his word. Clearly, we need a globalized social insurance plan, perhaps run by the United Nations. Who could possibly disagree? Not Brad DeLong, that’s for sure. I eagerly await his concrete proposals.
What is the equilibrium solution? The models I’ve seen produce a power law or similar curve of income with an increasing concentration at the top. Basically, money makes money. The rest is in the details.
The problem is that when the average keeps rising, but the median stays put or falls. Fewer and fewer people are benefiting from the system. The usual way around this, dating from pre-biblical times, is to provide some way for money to flow from the top to the bottom. If you don’t do this, eventually growth stops and the average starts to fall to no one’s benefit.
In our society, we call the top to bottom flow social insurance.
Furthermore greater productivity for the high earners can mean greater deadweight loss from the taxes and in the longer run less innovation and lower living standards (a prize to the first person who in the comments shouts “trickle down!” and accuses me of believing in discredited supply side notions; I’ll also recognize that well-spent government revenue can raise rather than lower the living standard).
Personally I think that one can make a huge case that for the top 0.1% of wage earners, the decline from 90+% of wages being taxed to 28% being taxed (and partially back up again) is the single biggest cause of their exploding incomes and that this is exactly as TC outlined in his post, namely “insane” people who continue working long past the point where a seemingly sane person would have retired, and that they wouldn’t do this if the government got the bulk of their spoils.
I’ve read that in Sweden that there isn’t a company in the top ___ of companies that has been started in the past 30 years. You can’t say that about the US, and Americans in general (and others) are better off because of the latter.
When one considers that a huge amount, perhaps the vast bulk, of the wealth of these “insane” superrich is going to be donated to charity eventually, and combine that with the above reasoning, it seems quite foolhardy for society to try to bring the rich down a peg or two via punitive taxation in the name of “fairness”.
All of us are probably guilty of that conflation.
No doubt. Me too. But then why pick on DeLong? Why claim that you are virtuous about the distinction and he is not? Isn’t it really that you just disagree with his views?
Tyler -
What are the Indian classical music CD’s?
Social Insurance: As originated by Bismark, it was indeed “insurance” in that it was a transfer of risk (that’s what insurance is). It was indeed “Social” (pace Hayek)because there was a transfer to the society (general German public) as a charge on government revenues. It was a transfer of part of the risk of costs of living beyond the then life expectancy. On the then statistics it was a fairly cheap bet.
The term as used today is quite something else, not “insurance” at all, just transfers, without choice.
To “favor Progressive Taxation,” (whether of revenues or of anything else – like size or value of landholdings or cattle) implies a selection of the reason WHY the tax should be “progressive.” And that selection most often takes us to a determination of what are the functions to be assigned to the mechanisms of governments (that’s all governments are- mechanisms), because the sole justification for taxation is to provide revenue for the functions of governments: Adorn the King; pave the roads; arm the defense; bread and circuses; Museums of Rock and Roll; and other important functions.
Now, to “promote domestic tranquility,” by taking from some and giving to others (basic socialism) through political selections, so the “others” do not rise up and take for themselves, or squabble amongst themselves over the table scraps, is likely the cited function; whether empirically justified or not.
Shall the “Economics of taxation” determine the functions of governments; or shall the politically selected functions of governments determine the “Economics of taxation?” We can only make that water flow uphill that has come down from a higher hill – that’s “progressive.”
R. Richard Schweitzer
s24rrs@aol.com
On further reflection, Tyler’s views seem to meet Brad’s criterion objective, Tyler simply takes a different route to get there.
As to “trickle down,” some consideration should be given to the trickle down of the impact of taxation.
Simple case: Both Joe SixPack and Prof. Noel Sundregen, Ph.D. price their services on take home pay, “Wadda I get net?” “Wadda I have to have net?”
Raise the lawyer’s taxes and his fees rise (to the extent of available elasticity) because he needs a net amount with two in college. Legal costs rise at his client corp., and pass through as costs of goods. It’s probably a good guess that very, very few bear the total and final impact of the taxation that falls on them, and there are those better placed than others to trickle on down some of what gets laid on them, and they may not even be conscious of doing so; they only focus on how much they “need” for how they can, or want to, live, and try to price that into their work.
R. Richard Schweitzer
s24rrs@aol.com
I do think taxation should be progressive, but the comparative statics are tricky.
Dr. Cowen, progressive taxation would be nice. However many forms of taxation, particularly Ad Valorem taxes, are regressive in nature.
Republicans are quite right calling the Democratic health care plans “socialist,” as they are nothing but egalitarian income redistribution programs. But what the Republicans fail to mention, is that their own so-called “free market” programs are not much better. In fact, Republicans are quite happy to mandate that everyone should carry insurance, even though this does not make sense for certain demographic groups, like university students. Politicians both left and right would just love being able to mandate what will go into these health insurance policies, as it would allow for endless symbolic debate on who is not helping “America’s children” now.
Tyler wrote:
“I might add that serious egalitarian-oriented health care reform — if indeed it succeeded — would significantly lower the case for greater progressivity of taxation.”
Medical care as charity brings to my mind that my $2,000 donation to UF’s medical mission to the Dominican Repulbic probably does more than $1,000,000 spent in the USA. People there often suffer badly from a lack of vitamins and minerals.
Bill,
Theft is theft regardless of whether or not it is illegal. Mugabe was elected, and he is using government to steal from the people and give to his favored recipients. Democracy is not and end, but a means to an end. The end should be individual freedom. If it isn’t, then deomcracy is simply two wolves and a lamb voting on what to have for dinner. You can’t call that justice or something to be proud about.
It is worth pointing out that in this context that I am not complaining about taxation for the common welfare, just taxation that is spent on the few.
As to creating a mechanism of industrialized poverty, give me a break. Poverty was decreasing last time I checked.
Check out this link. It shows that US definition poverty bottomed out in 1973 after falling dramatically in the preceding period. After 1973 you could overlay a chart of US recessions and the unemployment rate and you’d see as clear as day that all rises and falls in the poverty rate since then are cyclical, not secular.
Previous to the “Great Society” taking hold, people knew they had to take care of themselves and their families, and therefore they worked hard to get a job and gain some valuable skills. Government redistribution took away that incentive for anyone not likely to earn more than the government handouts, thus institutionalized poverty. That is most definitely not compassion as defined by output, although you may wrongly feel good about the input.
It is compassionate because a benefit if being created where there was none before
I reject your notion that something free is going on. There was indeed a benefit beforehand, indeed two benefits. First, we had a society of people spending their own money, which is itself a benefit that is most definitely being taken away. Which leads to the second benefit, we had a secular falling poverty rate.
Do you see the differences? The reason is that otherwise productive people aren’t producing anything under government redistribution. Under a more compassionate system where the government takes its foot off their collectinve heads, these people would be making forward progress and adding to our collective wealth, without taking anything away from anyone else against their will.
Under the alleged compassionate system of government redistribution everyone is worse off. Under a more libertarian system everyone has to work to succeed, and the laggards who have a hard time getting going can and do receive a voluntary hand up from charity/philanthropy, helping them to help themselves. That is the true compassionate system because of the better outputs.
Once you define compassion by output instead of by input, you can begin to see that socialism and its cousins are distinctly inferior at helping the poor. The Soviet Union, to take an extreme example, had by your definition the most compassionate economic system because of its treatment of redistrbuting 100% of inputs. On the other hand, by my definition the Soviet Union had the least compassionate system because of its near 0% outputs. Indeed it was negative in output in its latter years and needed massive amounts of unsustainable borrowing from overseas to finance purchases of basics like food.
Happyjuggler0:
“Under a more libertarian system everyone has to work to succeed, and the laggards who have a hard time getting going can and do receive a voluntary hand up from charity/philanthropy, helping them to help themselves.”
Maybe venturing too far into the field of morality but do you think that people with more money would spend accordingly more to the “laggards”? Also, for the libertarian compassionate system to work (I really like the idea and I think I get the output vs. input difference) the system would have to provide equal opportunities to all (otherwise laggards may not be laggards but simply less fortunate).
I feel that it is as much of a utopia as financial equality although a more desirable one I’ll admit.
“Maybe it’s because I don’t play the ultimatum game like a chimpanzee.”
I like this too.
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