The incentive effects of marginal tax rates

by on February 22, 2012 at 5:40 pm in Economics, History | Permalink

Christina and David Romer have a new paper (pdf), focusing on the interwar era:

This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these changes on taxable income using time-series/cross-section analysis of data on income and taxes by small slices of the income distribution. We find that the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated (a t-statistic over 6). The estimate is highly robust. We also examine the time-series response of available indicators of investment and entrepreneurial activity to changes in marginal rates. We find suggestive evidence of an impact on business formation, but no evidence of an important impact on other indicators.

For the pointer I thank Ilya Novak.  I have not yet read the paper.

ad*m February 22, 2012 at 6:41 pm

Well, I immigrated to the US in part because of the marginal tax rate.

I would counter that when there is a lot of variance in the marginal rate, as in the 1920s and 1930s, – because of the ongoing debate on whether the US economy should be more socialist and more free market, and the tug and pull of these different models on the voters – and now possibly similar, there is hope and most will wait and see.

I predict that in a long period with low variance, the elasticity would rise tremendouslly. As in Europe, where I came from, there was no hope of the marginal ever going down in the lifetime of my children.

So no, the impact can be hugely important, dependent on the variance in the period examined.

Doc Merlin February 22, 2012 at 7:34 pm

+1

Bill February 22, 2012 at 10:12 pm

ad*m, If I remember correctly, you were a person trained as a doctor in Germany, receiving a subsidy in your education, and moved to the US for a higher income.

If you live in the US, you don’t have those choices, and so your circumstances are not replicable for US citizens.

But, if you read Rommer’s study, what it concludes is that higher tax rates had little effect on taxable income, that is, there was no negative incentive effect from higher rates.

So, which do you believe has more weight: your experience from moving to Germany, or Rommers’ study?

Cliff February 22, 2012 at 10:53 pm

“But, if you read Rommer’s study, what it concludes is that higher tax rates had little effect on taxable income, that is, there was no negative incentive effect from higher rates.”

Did you read the same quote I did?

“the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated”

That is, there is a negative incentive effect from higher rates.

Not to mention this is a measure of elasticity in the 1920′s and 1930′s. You don’t think anything has changed since the 1920′s?

Bill February 23, 2012 at 8:58 am

You chose to ignore the word “marginal” and do not understand elasticity measurements. Marginal means small, which is a .2 as a measure. Do you ever use elasticity measures?

While we’re on the subject of elasticity, what do you think the effect of rasing taxes, instead, on the middle class will be on the MPC?

Bill February 23, 2012 at 11:44 am

So the readers understand, a .2 elasticity with respect to income means that if a millionaire were to earn another million, and had a 10% tax increase, the income effect on his desire to earn another $1 million would be reduced to earn only $800,000 instead.

Bill February 23, 2012 at 11:52 am

I might also add that this is not the true marginal rate of a millionaire, assuming the millionaire has investment dividend income, or capital gains, both at a 15% rate, which is lower than the bracket rate.

Finally, elasticity moves in both directions:

So, can you answer this question:

How many millionaires worked HARDER and by how much given a change in marginal rates in 2001.

Did you see millionaires and corporate executives working longer hours at the office following that tax cut.?

Bernard Guerrero February 23, 2012 at 1:08 pm

Bill, “marginal” in this contect doesn’t mean “small”.

Bernard Guerrero February 23, 2012 at 1:08 pm

*context*

Bill February 23, 2012 at 2:30 pm

Bernard, marginal means small in the context of the paper in terms of what the size of the elasticity measure was. Just because they use the term marginal rates, that does not mean they didn’t say the effect of a .2 elasticity measure was not marginal.

Just read the paper.

My only other comment on the paper is that the magnitude of an effect could be higher if the high earner pursued deductable expenses, so as to reduce taxable income, that would not have been pursued but for the rates. On the other hand, probably charitable deductions for donated artwork increased.

trav February 23, 2012 at 7:26 pm

Bill (and Tyler),

This study is hardly state of the art. The results in their baseline specification are likely biased due to endogeneity with the net of tax rate. The instrument they use also cannot be exogenous under most assumptions and likely understates the elasticity.

See this working paper (University of Michigan Job Market Candidate) for the argument: http://www-personal.umich.edu/~ceweber/ETI_Consistency.pdf

Bill February 23, 2012 at 10:38 pm

trav, The question I have, from personal empirical observations watching well paid CEOs and CFOs, is that they do not work any harder, or any less, regardless of the rate they are taxed. Same for lawyers and docs, I might add. As a lawyer what determined my comp were such things as what stupid thing a client would do, and not necessarily my effort.

On the other hand, I see many lower middle class folks working extra jobs, or not retiring when others can, simply because they do not earn much. The answer seems to be to tax THEM more, or cut their SS benefits or raise their retirement age, just to retain some foolish tax cuts.

Cliff February 22, 2012 at 10:54 pm

What about the choice of a U.S. citizen to move to another country with a lower tax rate?

Ricardo February 23, 2012 at 3:46 am

What about it? U.S. citizens are taxed on their worldwide income minus the first $91,400 (plus other deductions and credits) in wage income. There are some Americans who moved abroad and renounced citizenship — the IRS then tries to freeze that person’s U.S.-based assets and a legal fight ensues. But these are few in number.

Second, at current tax rates, it is pretty clear there are far more people willing to move to the U.S. and work at professional-level jobs than there are U.S. professionals seeking to leave the country. There isn’t any benefit to the extremely wealthy leaving the U.S. in terms of taxes unless they are willing to become full-blown tax protesters and wage legal warfare with the IRS (see above) while the few upper-middle-class professionals who leave the U.S. probably do so for reasons having little to do with taxes.

Bender Bending Rodriguez February 23, 2012 at 11:59 pm

As I understand it, you’re taxed on your worldwide income with no subtraction _unless_ you’ve also managed to work overseas for 330 days out of the year (plus a lot of other conditions).

alexh February 22, 2012 at 10:56 pm

I live and work in the US and my actual, paid, tax rate (1.0 – dollars-I-get/dollars-employer-spends-on-me-after-benefits-but-before-government) is fairly close to 50%,
and my marginal rate (what I actually will pay, no tricks) is a tad over 45%. (To be clear, that is not counting the roughly 9% sales tax if I buy something, I am simply talking
about the amounts actually taken out of my paycheck.)

I could live in a crap-load of wealthy western countries and pay the same or less marginal rates, and I’d probably get health care
into the bargain as well. And I _could_ live in many of these, since I have citizenship or other perks that make it near-automatic entry. Yet I’m here.
Why? Hint, it’s not the tax rate!

I don’t disagree that _some_ people may move to the US because of tax rates, but I really doubt it’s common: if you are low paid the difference
isn’t so great (and you may not have the freedom to move so easily), and if you are well paid the U.S. doesn’t look so good at all. No doubt
there’s a happy middle ground where U.S. taxes look good. Just keep health care and retirement options open in your home country though, or the
equation changes even more unfavorably.

Michael February 23, 2012 at 4:56 pm

Do you wonder why there is a net migration out of New England and California?

Dave Hansen February 23, 2012 at 12:33 pm

Hi Bill,

1) What about ad*m’s statement that “most will wait and see” given the volatility in tax policy over the period studied?
2) What do you mean by “If you live in the US, you don’t have those choices”? Are you referring to the choice to move to another country with lower marginal tax rates? Or receiving a subsidy in your education? If the latter, I’m not sure why receiving a subsidy for job training is unique to Germany. Most students, even those in medical school, receive government support while in school.

ad*m February 23, 2012 at 1:30 pm

Bill, I am sorry but not one of your assumptions is correct. I did not train in Germany, I did not receive a net subsidy, I did not move to the US for a higher income – my gross income here is lower, but my quality of life is higher.

“If you live in the US, you don’t have those choices, and so your circumstances are not replicable for US citizens.” -> That is not the point of my comment, as you ofcourse know. My point was that marginal rates affect behavior to a substantial degree if they DO NOT CHANGE ALL THE TIME.

“So, which do you believe has more weight: your experience from moving to Germany, or Rommers’ study?” -> I did not move to Germany, my point was that the period the Romers chose, biased as they are, is a period where the rates were CHANGING A LOT. If marginal rates are high for a long period, they affect behavior, including in my case and that of my brother and many others, as argued here by others and by me on MR in 2010 for example

http://marginalrevolution.com/marginalrevolution/2010/10/economic-misconceptions.html (commenter adam, before someone else took over “adam” here as my pseudonym)

Bill February 23, 2012 at 2:32 pm

My memory was that you were a doctor from Germany who moved to the US for a higher income. At least that is what I remember from a prior post. Did you come from Germany? Were you trained elsewhere? Was there a subsidy? And, what do you mean by net subsidy.

DW February 22, 2012 at 7:43 pm

[double-take]

Partially conducted in a liquidity trap?!

Steve Sailer February 22, 2012 at 9:03 pm

One source of data on the impact of marginal tax rates on behavior is autobiographies of Golden Age Hollywood figures. For example, Frank Capra’s “The Name Above the Title” recounts the role that high taxes played in causing him to pull the plug on several entrepreneurial ventures of his. (Capra is usually assumed to be an FDR Democrat, but he was a Republican, likely due to taxes.) The role of high income taxes in moving Ronald Reagan from Democrat to Republican is famous, of course.

Ricardo February 23, 2012 at 3:58 am

Change this to, “One source of anecdotal evidence on the impact of marginal tax rates on behavior is autobiographies of famous people who self-identify as Republicans.”

Somehow, I think very carefully looking for natural experiments in the history of taxation policy, collecting quantitative data and measure impact based on that data is a more promising avenue.

Steve Sailer February 23, 2012 at 4:15 am

Economists frequently misread reality because they don’t like wasting their time finding out what noneconomists know when they can just theorize about it (e.g., Steven Levitt’s abortion-cut-crime theory, which only made sense if, like Levitt and so many of his fellow economists, he hadn’t noticed the Crack Year while they were happening or whenever Tyler quotes Robin Hanson’s latest breakthrough insight about why corporations hire consultants or other phenomenon that people who have actually worked in corporations figured out decades ago).

Eccdogg February 23, 2012 at 9:09 am

Absolutely agree.

When I have read results from economist that conflicted with my experience and the anecdotal evidence I have accumulated the economist are more often than not proven wrong later.

I think statistics and empirics are important, but often the test set up to measure certain phenomenon are very limited. And in my opinion economist spend too little time simply observing people making decisions and asking asking them why they made the decision they did.

Ricardo February 23, 2012 at 9:32 am

Steve, in my experience, the Romers do a pretty reliable job of going through the narrative historical record. For instance, Section II goes into detail on how the tax code was structured (it was very simple), the types of arguments advanced for tax changes, and explains where the data come from. Their prior work has also involved fairly extensive reading on the primary sources to understand tax changes during this period. If you think they are missing some objective data source or narrative historical source — not a one-man anecdote or potentially ideological ex post facto rationalization — from the period 1919-1941, why not provide it?

Attorney at Flaw February 22, 2012 at 9:58 pm

I know that fear of moving into a higher tax bracket makes me less likely to work hard. Also making me less likely to work hard is not liking legal work.

msgkings February 23, 2012 at 3:36 pm

This is a foolish emotion. Tax brackets are marginal, ‘moving into’ a higher one causes no reduction in after tax earnings. You may cross some thresholds and lose some deductions or investment options however.

Attorney at Flaw February 23, 2012 at 4:17 pm

I know. Also, having worked in a state that has an income tax and a state that does not, I can say that I never once thought about tax rates in the context of whether I should bill more hours. I suppose some people might, but I never have. What makes me work (or not work) extra hours has much more to do with things like my feelings toward my firm, being a lawyer, my home/social life.

Mr. Econotarian February 24, 2012 at 2:11 am

I can tell you my wife did the math of whether after taxes she would come ahead working with child care rather than staying at home with the kids. It was a close call, a few percent more in tax and she’d be out of the workforce!

msgkings February 24, 2012 at 1:31 pm

The child care is the factor here not the tax. If she made more money and was in a higher bracket she wouldn’t be disincented to work.

Doc Merlin February 23, 2012 at 7:14 pm

No, its not. People make decisions based on marginal effects, not based on mean effects.

msgkings February 24, 2012 at 12:04 am

The people that do that in this case are being foolish.

I earn and work with folks who earn pretty large salaries and I have never once seen or heard of anyone working less due to marginal tax rates rising or falling. And many of these folks are as conservative as they come.

TallDave February 22, 2012 at 10:13 pm
TallDave February 22, 2012 at 10:52 pm

(btw TNR has criticized the table, justly on some grounds (e.g. the taxes are too high all the way across) and questionably on others (they use averages in places where they don’t seem appropriate) but it’s pretty clear that at the very least the marginal incentives to earn more within that range are a lot smaller than one would think, even assuming (as the author notes) the recipients aren’t cheating)

JWatts February 23, 2012 at 9:59 am

If you assume that you are working minimum wage at some business that has tipping (say pizza delivery) you can do very well. You can probably average an extra $4-7 per hour in tips and report that as an average of $1 and have a huge increase in nominal wages.

I paid my way through school delivering pizza’s in the early 90′s and I routinely recorded my tips at 25% of actual and always had the highest recorded amount of tip income.

TallDave February 24, 2012 at 9:00 pm

Yep, no one reports their tips, which means jobs that don’t have them are at an even larger disadvantge, given the high marginal rates within that range created by welfare programs. Reminds me of the Steve Buscemi rant from Resvervoir Dogs.

You know, I’m honestly not opposed to a society in which 50%+ of humans do little to no work, but we aren’t there yet and to get there we need to drive more innovation. Like Communism, these incentives are ironically making it harder on the poor in the long run.

Barkley Rosser February 23, 2012 at 12:06 am

The sign that the study is probably about right is the largely small effect the more than 90% marginal income tax rate the US had from 1940 to 1964 had on the economy, despite the scattered high profile cases, such as Reagan’s testimony about not wanting to make an extra movie due to his tax bracket, along with his political party change. The US economy grew more rapidly then than it has since the rate went below 50% in 1986 (where it has remained since).

In general, there has been way too much focus and hysteria about this issue. All kinds of people run around declaring it is the most important thing since sunshine first appeared, but in fact the study is probably right: some impact on enterprise formation, but otherwise not much except for really way out cases such as the tax code in Russia prior to 2001, where there were parts of the country where the rate exceeded 100%.

Willitts February 23, 2012 at 1:04 am

Too much hysteria with your cum hoc ergo propter hoc fallacy.

Our economy did well in the 40s, 50s, and 60s because our international competitors were engaged in or destroyed by a World War. After the war, millions of blacks and women entered the labor force, expanding production possibilities. Our new worldwide hegemony opened up markets for natural resources. The war provided us with a boost from talented refugees and spinoff technology.

I’m tired of hearing this mountain of crap that 90% marginal tax rates aren’t harmful, ALL ELSE HELD EQUAL. If you studied economics, you learned that on Day 1.

The methodology of the study seems sound. It’s very sophisticated. But I have a problem with using 70-90 year old data collected by government bureacrats who didn’t have computers. When marginal rates are that high and variable, the incentives to falsely report income are huge. If your reported income from one year to the next plunged after a tax hike, it might invite an audit. A low variation in reported income is meaningless when income is always under-reported. How much wealth and income was sequestered in offshore and illegal operations? The wealthy also invested heavily in tax exempt bonds as they still do today.

I’m a wealth advisor, and tax avoidance and deferral comprises most of the value I add. I wish I had a 1920 Bureau of Internal Revenue to deal with. They were processing tax returns from two years earlier. Remember that the income tax was relatively new in the 1920s, and the sopistication of record keeping at the BIR was poor. The spoils system of government service was slowly being phased out.

Rahul February 23, 2012 at 1:52 am

Do you have any formal studies showing the contrary i.e. high elasticity of income in response to high marginal rates? I agree it is a study based on dated and possibly unreliable data but I don’t see any concrete numerical evidence offered as refutation in the comments so far.

andy February 23, 2012 at 6:45 am

I have heard that pre-tax inequality rose just after the very high marginal rates were lowered under Regan. Wouldn’t that hint at something?
Now I’d guess a 90% marginal tax rate would have some effect?

Jim Timmy February 23, 2012 at 8:55 am

In fact, there have been many studies on this topic. Arpit Gupta has summarized here a number of studies finding strong behavioral responses from higher marginal tax rates on the wealthy:

http://economics21.org/commentary/tax-increases-and-behavioral-responses

Likewise, there are a large number of studies finding that long term aggregate labor supply is highly influenced by taxation:

http://www.nationalreview.com/agenda/286812/guest-post-arpit-gupta-labor-supply-and-taxes-arpit-gupta

Education choices are also shown to be responsive to taxation and other redistributive policies:

http://www.stanford.edu/~ranabr/Abramitzky_Lavy.pdf

The Romer study finds some negative incentives from marginal tax rates. That is lowering taxable income (by a somewhat low amount) and decreasing new business formation. Granted, this study does not find huge negative effects from high marginal tax rates, but it certainly does find some negative effects.

The real question here is about tradeoffs. High MTRs certainly reduce output to a degree. The question is the extent of this effect. It is important that we get a better idea of how large this effect is when making policy choices.

For the time being, however, it is certainly much better to increase revenue by decreasing deductions and credits in the tax code than by raising MTRs. Of course, this is much harder to do in practice than the rhetoric would suggest.

swickster February 23, 2012 at 11:19 am

“The real question here is about tradeoffs. High MTRs certainly reduce output to a degree. The question is the extent of this effect. It is important that we get a better idea of how large this effect is when making policy choices.”

Couldn’t agree more. I am not a PHD economist but have practiced dilettant economics for years in the public sector. Actual deadweight losses from a tariff in the an economy the size of the United States’ are often de minimus and are hardly worth the debate. I argue that this is true across the economy, where the losses in many cases cancel out in unpredictable ways so there is no overall loss in utility to the economy as a whole. Sure, some folks get rents that are higher than others, but a lot comes out in the wash. And in the lack of transparance, which allows for folks to bellyache on both sides of the polical spectrum, or for what passes for one in this country. The truly egregious cases are few. Economists should call them out, though, and its alwas good “fun” to read about an experiment like this.

Barkley Rosser February 23, 2012 at 1:20 pm

Willitts,

Sorry, but all the hysteria is on your side, with your need to capitalize certain obvious words. Of course I was not arguing that the higher marginal income tax rates were responsible for the better GDP performance in the earlier period. What on earth made you think such a stupid thing?

What I noted, and what is completely true, is that whatever those negative effects were (and I grant they were there and am not at all advocating a return to such rates) is that they did not overcome the other things that were going on that led to the superior economic performance. I would note that if you listen to an incredibly wide array of commentators and politicians, with Grover Norquist dictating to an entire political party on this matter, you would believe that there could be nothing worse for an economy than high marginal tax rates. After all, remember how loudly Newt Gringich forecast an unavoidable recession after the Clinton tax increase, not supported by a single member of Gingrich’s party in Congress? I am sure you remember well how correct he was with that terrible recession we had in the mid-to-late 90s, just awful it was!

Jim Timmy February 23, 2012 at 2:50 pm

Barkley,

I think you are largely right. Conservatives and libertarians tend to vastly overestimate the negative effects of increases in marginal tax rates, especially the short term impact. However, in the same vain, I think liberals and progressives are guilty of underestimating the negative effects.

As you’ll see in my above comment, there is a growing consensus that there are some negative long term effects from high marginal tax rates. These effects become more evident when looking at natural experiments and cross country comparisons. The short term effects are negligible on growth, but there is a short term effect on taxable income.

No serious person can argue that slightly higher marginal tax rates would impoverish the United States. However, I think it is also clear that significantly higher marginal tax rates would have significantly negative effects in the long term.

Bender Bending Rodriguez February 24, 2012 at 12:03 am

Don’t forget the new Interstate Highway system, affordable air conditioning (which made places like Phoenix livable year round), and air travel.

Jason Braswell February 23, 2012 at 12:38 am

When people discuss this issue, they almost always come into the discussion with a ridiculous hidden premise: if the government can have more money, then it should. Just because the government *may* be able to extract more money from people without causing *too* much harm, doesn’t mean it should.

It’s a silly mindset with which to approach resource allocation. When a person is deciding how much he should exercise, does he say to himself “What is the absolute maximum amount of exercise I can do without interfering too much with the rest of my life?”. Of course not. He first estimates what the optimal amount of exercise is, and then he tries to get as close to that as he can without giving up too much else. Similarly, I would think the natural way to think about optimal tax rates is to first ask what kind of things the government *should* be doing. Once you’ve decided on that, then you can ask how you can collect that amount in the least harmful way.

I’d much rather Kanye buy platinum toothbrushes than have the government use that money to militarize the Mexican border.

Rahul February 23, 2012 at 1:56 am

A debtor doesn’t have much real choice. If he can earn, he probably should.

TallDave February 24, 2012 at 1:19 pm

If only they earned, instead of seizing.

GiT February 23, 2012 at 2:11 am

Quite the strawman you’ve got there.

When people discuss this issue, they discuss it because someone has told them not to increase taxes because it will drive away the rich.

Those who want to increase taxes have perfectly explicit, non-trivial reasons for wanting to increase taxes – tied to concerns about income redistribution or spending on public services.

The only ‘hidden’ (and it’s not really hidden) premise is that taken by those who protest tax increases. While saying, ‘Oh, but don’t you see, that will in fact defease your goal of raising revenues by scaring off the delicate high earners,’ they actually mean, ‘any increase of taxes is wrong, regardless of its effect on revenues, because the government really shouldn’t be spending a dime on public works and income redistribution, and didn’t you know taxes are morally wrong.”

Tom February 23, 2012 at 10:03 pm

re: “‘any increase of taxes is wrong, regardless of its effect on revenues, because the government really shouldn’t be spending a dime on public works and income redistribution, and didn’t you know taxes are morally wrong.”

Or you get Obama’s ‘it’s OK to raise taxes even though it won’t raise revenues because it fair’ arguement.

Neither your strawman nor Obama’s actually made arguement should be relevent. Your working from the false premis that just because gov’t can take more that it should. People believe gov’t should have a very limited role. You would seem to believe in an expanded role, which is your right. It is not your right to do it on my dime, though.

TallDave February 24, 2012 at 9:21 pm

Amusingly, Worstall makes the same point in the next post up.

:For we mustn’t underestimate the ability of the British left to think up any number of reasons why the rich should pay more taxes even if it doesn’t lead to greater revenues.

GiT February 23, 2012 at 10:50 pm

How dim of you.

“Should be” relevant.

Many people think your opinion about the proper scope of government should not be relevant either.

But we’re not talking about what should or shouldn’t be, but what is instrumentally useful, given the policy positions people have – not what policy positions they “should” have.

Ricardo February 23, 2012 at 9:39 am

No. The question here is simply an empirical one: what is the partial elasticity of income with respect to after-tax income share? You can be an anarchist and think marginal rates should be 0% or you can be a social democrat and think 95% is the right rate for incomes over $200,000. It doesn’t matter. The elasticity question is an empirical question that can be answered with data. What policy conclusions you choose to draw from that are up to you and someone could conceivably be opposed to a tax increase even if the measured elasticity is 0 just like someone else could support a tax increase if the measured elasticity was infinite.

TallDave February 23, 2012 at 11:35 am

Good points, we encounter this pretty often in re the Laffer curve, as though the whole point of an economy was to provide gov’t the maximum possible level of tax revenue, which too many commentators seem to just take as a given.

GiT February 23, 2012 at 4:39 pm

To hear you and Braswell tell it, the Laffer Curve was invented to figure out how to maximize revenue, not to offer a pragmatic justification for lowering tax rates by arguing that decreased tax rates could be revenue neutral or revenue positive, thus offering the argument that even on their own terms (which is to say, given one wants to increase revenue), increased taxes are a bad idea for the left.

Barring figments of your imagination, no one goes around saying that we need to set tax rates to the point which maximizes government revenue on the Laffer curve. Rather they say, we want more government revenue, and we have not reached the maximum on the Laffer curve, therefore, we can get it by increasing taxes.

But really, what can one expect from someone who can’t distinguish democracy from the unrestricted use of money.

Doc Merlin February 23, 2012 at 7:16 pm

“the Laffer Curve was invented to figure out how to maximize revenue”

If by revenue you mean government tax revenue, then yes, it was. David Hume and Adam Smith both pointed it out.

GiT February 23, 2012 at 10:47 pm

Yes, I mean government tax revenue, as is obvious. And no, Smith and Hume, though they may have pointed out the phenomena (I don’t doubt they did), did not make it a topic of popular policy debate during the past few decades.

TallDave February 24, 2012 at 1:13 pm

Your responses aren’t worth my time, have a nice day.

GiT February 24, 2012 at 2:00 pm

I’m not surprised you suffer from epistemic closure.

Here’s a quote you should appreciate:

“And for this reason democratic states have instituted ostracism; equality is above all things their aim, and therefore they ostracized and banished from the city for a time those who seemed to predominate too much through their wealth, or the number of their friends, or through any other political influence.”

But please, tell me again how restrictions on free monetary contributions to political groups are against the essential principles of democracy.

GiT February 24, 2012 at 8:06 pm

What do you mean ‘perhaps’? The Laffer curve emerged as an attempt to show that left policies were internally inconsistent. That’s just basic history. In hoping to defease their arguments on their own terms, conservative/libertarian policy activists moved the debate from whether or not to spend more to whether or not it is possible to raise money to spend more.

I agree that the Laffer curve is a largely irrelevant side issue, except at limit cases, and that debate should be about the scope of government action.

If you can show me evidence that the upward sloping portion of the Laffer curve has been used to justify increasing revenues independent of an explicit commitment to increasing the scope of government activity, please do so.

As it stands, it’s pretty obvious to me that the Laffer curve has been used primarily to justify decreasing taxes. That it offers a scenario where decreasing taxes increases revenue is just a (failed) means of trying to hoist those on the left by their own petard.

GiT February 24, 2012 at 8:09 pm

But of course my responses aren’t worth your time. In each case they show you to be completely incorrect, and to attempt to show otherwise would be not only a waste of your time, but of my own and everyone else’s.

Thank you for the courtesy.

Rahul February 23, 2012 at 5:32 am

A Hollywood figure and a politician. We shall take their word to be truthful, free of ideological bias and more representative of the target population than a data-based rigourous study.

Let’s at least hear some solid critiques of said study.

Ryan February 23, 2012 at 6:02 am

Is it just me, or is it somewhat overweening to declare one’s own estimate “highly robust?” Isn’t that what peer review is for? Just sayin’…

celestus February 23, 2012 at 10:10 am

Our political system demands that the elasticity either be negative or greater than 1!

Bill February 23, 2012 at 10:41 pm

+1

mark February 23, 2012 at 11:46 am

I don’t have time to read this all right now but from what I did read, I have to question how relevant it is. They describe the interwar period as one in which 95% of all income tax was paid by the top .002 of the income distribution; then they say (duh) this cohort probably didn’t generate a lot of labor income. Then they acknowledge there wasn’t much enforcement – no withholding until 43, for instance. (I was also thinking of prohibition and how much income was illegal and outside the system to begin with). So it seems that the tax rate was not affecting behavior because the tax wasn’t enforced and the income was not earned by behavior to begin with. Seems of little consequence to our century.

Jason Braswell February 24, 2012 at 1:11 am

“When people discuss this issue, they discuss it because someone has told them not to increase taxes because it will drive away the rich.”

Perhaps. In those cases, those people have it wrong, too. People get so caught up in the argument about whether or not tax increases or decreases will raise or decrease revenues that they really forget that the more important question is whether or not the government should have more revenue.

“Those who want to increase taxes have perfectly explicit, non-trivial reasons for wanting to increase taxes – tied to concerns about income redistribution or spending on public services.”

I’m sure. I’m saying that we should spend 80% of the time arguing about whether those reasons are any damn good. (Of course, mostly they’re not, but that’s a different discussion.)

There was no straw man, as I wasn’t trying to masquerade my question *as* the original question. I’m saying that my question is more important and underappreciated.

TallDave February 24, 2012 at 1:24 pm

+1, that sort of muddled thinking is how we get nonsensical rhetoric like “we can’t afford tax cuts, they’re a giveaway to the rich” as though government seizing less money is exactly the same as gov’t giving money away.

GiT February 24, 2012 at 8:07 pm

Sorry, I accidentally replied to your comment above, in the original thread 2/24/12 at 8:06

Paul February 24, 2012 at 4:55 pm

Is it nonsensical to say “We can’t afford for the governmennt to seize less of our money because the government already doesn’t have enough of our money to spend on the things we’ve asked the government to spend our money on?”

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