Friday, November 16, 2012

Suzy Khimm interviews Kent "Chainsaw"* Conrad

The key part in which Conrad totally dodges Khimm's question is

So do you think there are actually good policy arguments for raising tax rates on capital gains and dividends to raise revenue, as opposed to raising the individual marginal tax rate?
Sure there are. The argument against raising marginal rates is that has a very different economic impact than it does to raise capital gains taxes, or to raise capital gains and broaden the base. Broadening the base is seen by most economists as more efficient, with better incentives. And when you’re having [taxes on] capital gains and dividends at 15 percent, when everybody else is at 35 percent, it creates these incredible distortions in which very wealthy individuals are paying a fraction of the rate of those with far more modest incomes. You can see a rationale for doing it that way.  

I comment noting that Conrad is making up the views of economists.

I am very pleased that Conrad supports stimulus spending. Of course it isn't going to happen.

On the other hand, he dodged your question on the economic effects of raising income tax rates vs raising rates on capital gains and dividends.    He switched to discuss loophole closing, but even if you insist that the capital gains and dividend rates are loopholes, economists have very different views on them compared to say the mortgage interest deduction.

There is a very widespread view among economists (supported by formal models) that the optimal tax on capital income should be zero.  I am not one of those economists, but this is not a fringe view at all.  In contrast I've never met an economist who supports the mortgage interest deduction (I do occasionally see one in the mirror who says end the mortgage interest deduction but not now wait till the housing industry has recovered).

It is just not true that economists generally think that Clinton era income tax rates are too high to be efficient.  In fact, there are many top economists who advocate a 70% top income tax rate (Nobel memorial prize winner Diamond and Clark medalists Saez for two examples).  I'm not a top economist, but I am an economist and I agree.

As you implicitly argue (without pushing the claim in a follow up question) the Washington consensus that base broadening is more efficient than rate increases does not correspond to the academic public finance literature.  I think it has a lot to do with Republican ideology as they are especially obsessed with the top income tax rate.  He sure knows more than I do about this, but I am irrationally confident that Conrad doesn't understand the politics either and that Republicans will never accept an increase in the capital gains tax or the tax on dividends.  In any case his proposal is not based on the views of academic economists.

*when first elected he said he planned to take a chainsaw to the defense budget.  He also said he wouldn't run for re-election if they didn't eliminate the budget deficit during his first term. Of course they didn't and he didn't run for re-election (he left the Senate and returned when appointed to complete the term of the late Quentin Burdick).  He is the single solitary deficit scold who has walked the walk.  If even he understands the logic of stimulus now and austerity later -- well it's still hopeless.

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