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Friday, May 04, 2007

Picking up 12 year old intellectual garbage

See below an argument that the effects of the 1986 tax reform on reported income should be balanced by the effects of the reform on reported capital gains so the income plus capital gains going to the top 1% series is (roughly) un-distorted. This point has been obvious to me since I read a working paper by Martin Feldstein in which he exclued capital gains from consideration and reported that the effect of the 1986 cut in income tax rates on reported income meant that the Clinton tax increase would lead to roughly no increase in revenues. Looking for the cite, I see that it was obvious to Feldstein too. He simultaneously discovered that the 1986 increase in the capital gains tax caused a huge decline in reported capital gains. He interprets both results as implying taxes should be cut.

The thing that really appalls me is that he published part one in the JPE

Feldstein, Martin (1995) "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act" Journal of Political Economy, June 1995, v. 103, iss. 3, pp. 551-72

and part two in the AER (which has never published anything I wrote).

Feldstein, Martin (1995) "Behavioral Responses to Tax Rates: Evidence from the Tax Reform Act of 1986" American Economic Review, May 1995, v. 85, iss. 2, pp. 170-74

If he had reported all of his analysis in one place, it would have been impossible for referees and the editor to refrain from demanding that he show that the two changes were not a case for making tax rates on different flows similar and not an argument for low tax rates. As it is, I don't see how they managed to censor themselves. As to their motives, I have absolutely no idea.

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