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Tuesday, April 07, 2009

Commenting on Yglesias commenting on Crook

Yglesias writes

Government spending on effective social welfare programs is very progressive. The main thing to do, from an egalitarian point of view, is to have a lot of it and to pay for it through whatever taxes are politically viable. Compared to Europe, the American tax code is toward the high end of progressivity, though not off the charts. The big difference, though, is that our overall tax revenues are lower, and a much larger share of our revenues goes to the military. Whatever you do to shift spending from defense to domestic priorities, and whatever you do to increase revenue, is a step in an egalitarian direction.

It may be that it’s easier to raise revenues through taxes on the rich, because they bite fewer people. Beyond that, there are concerns about growth. Certainly I think it’s clear that restoring Clinton-era taxation won’t kill the economy. But over the long run we’ll need even more revenue than that. So I think some consumption taxation may be necessary.

As Yglesias notes, his argument has not practical relevance whatsoever. We do not have to choose between whether to have a generous social safety net or whether to soak the rich. The only remotely politically feasible way for the US get a generous social safety net is raise taxes on the rich. There is overwhelming support for such tax increases (75% in the latest CBS Washington Post poll).

Significantly increasing taxes paid by most US residents is almost certainly politically impossible. Saying it would be OK even if not as good as a progressive increase in taxes is like saying one would rather be turned into a frog than dead. Maybe it would be better, but VAT in the USA is about as likely as Matthew Yglesias turning into a frog.

The fact that non rich people pay high taxes in Europe does not mean that it is an option open to activists or policy makers in the USA.

Yglesias mentions “growth”. The logic of his argument is that Clinton era taxes were fine, but any increase above Clinton era rates is impossible or would have intollerable effects on growth. That is, he either assumes that there is a huge discontinuity in the effects of marginal income tax rates on growth at exactly the Clinton era tax rates or he is making an argument which makes no sense at all.

A plea to my readers (or reader don't want to make false claims about traffic at this blog).

Do you know of any evidence that high taxes on the rich have any effect on growth ? How about any evidence that raising the same amount of money with VAT is better for growth than raising that amount of money by taxing high incomes ? The argument is made very often, so often, that one might imagine there must be some evidence supporting it.

I don’t know of any.

1 comment:

Bruce Webb said...

Me neither.

We had lots of growth in the 50's with 90% rates. True this resulted in a lot of tax avoidance, but that in turn served to suppress conspicuous consumption. That is you could live quite large behind the gates and doors of your country club or city club but only the New Rich did the same in public. Giant yachts and huge new mansions were something that Greek shipping magnates did, the Old Rich knew to keep their heads down and reinvest.

We also had plenty of growth in the 60's are early seventies with 70% rates, though I think not as sustained as the fifties, on the other hand relatively soon after those rates went into effect we had a downturn in I believe 1968, I know my Dad lost a job around then.

The slowdowns in the late seventies were largely and I think rightly caused by the energy shock and not by an unwillingness to invest based on high marginal rates. We just didn't have that same effect in years past, it would be odd if it just popped up in 1977,

The Reagan years are more problematic. We did have growth but starting from a pretty low basis. And I would impute most of that growth to the huge increases in defense spending which may have boosted GDP but didn't do much for employment, unemployment stayed at 7.0% or higher for 69 out of his first 71 months. (BLS). Carter's last budget had defense spending at 5.2% of GDP up somewhat from 4.7% in 1978. Reagan raised that almost immediately by a point of GDP before peaking at 6.2% accounting. And guess what average GDP under Carter grew 2.1%, under Reagan 2.9% letting defense spending neatly explain the whole change leaving no room (actually negative room) for growth that can be attributed to tax cuts. alone.

In fact an argument can be made that in each case the effect was mostly negative. See Figure 1.1 at the above link.