“New study shows why heavily taxing the rich won’t work”
And that’s in addition to the more common sense explanation, which recognizes that you could confiscate all the income of all the “millionaires and billionaires” and that income would fund the federal government for about 4 months. Once.
Because after that, there are no more rich (aside from government servants) and nothing left to tax.
— Which I suppose is why Geithner is making the case that the US not arbitrarily stop itself from borrowing and lift the debt limit to infinity — a rather telling assertion that what we’re dealing with is all make-believe, anyway.
At any rate, here’s Jim Pethokoukis on the new AEI study:
[…] a new American Enterprise Institute analysis, published in Tax Notes, of the Diamond and Saez research suggests Obama might want to rethink his tax-hike strategy — or at least his cavalier attitude toward the potential risks it poses to US economic growth and job creation. In their paper “Should the Top Marginal Income Tax Rate Be 73 Percent?,” Aparna Mathur, Sita Slavov, and Michael Strain say they “do not believe that the [Diamond-Saez] model can be used prudently as the basis for the real-world public policy problem of determining the socially optimal top marginal income tax rate.”
Conducting the sort of deep dive that economic policymakers and pundits rarely make, Mathur, Slavov, and Strain highlight a number of questionable assumptions and choices made by Diamond and Saez:
1. Diamond and Saez assume that high-income taxpayers react to tax hikes more or less like lower-income taxpayers, meaning not so much. While there is no consensus here, studies focusing on high-income individuals tend to find much higher estimates of short-term responsiveness than studies of lower-income households. It makes intuitive sense: Wealthier taxpayers have a greater ability to alter how much they work, in what form they get their income, and fashion tax- avoidance strategies. “We do not believe that in the real world the top tax rate should be set under the assumption that tax avoidance and evasion behavior can be dramatically changed,” Mathur, Slavov, and Strain write.
2. Diamond and Saez assume sharply raising tax rates has zero, zilch, zippo long-term impact on taxpayer behavior and the economy since, well, those effects are hard to measure. But economists agree those long-term effects are important. America benefits greatly from people who take risks and make career choices in hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” Mathur, Slavov, and Strain argue.
3. Diamond and Saez have created a model — admittedly a lovely and elegant one — with a built-in bias that says more equality is better than less equality. Or, in other words, government should maximize the revenue it collects from high earners since they value each additional dollar of income less than lower-income earners. “Because the social loss from taking money from the rich is assumed to be zero and the social gain from giving money to the non-rich is greater than zero, society’s goal is clear: The government should take as much money as possible from the rich and redistribute it to the non-rich,” Mathur, Slavov, and Strain write. But is this really the role Americans want their tax code to play? The AEI economists:
Gregory Mankiw, a Harvard economist and former senior economic adviser to President George W. Bush, has said: “My sense is that people are rarely outraged when high incomes go to those who obviously earned them. When we see Steven Spielberg make blockbuster movies, Steve Jobs introduce the iPod, David Letterman crack funny jokes, and J.K. Rowling excite countless young readers with her Harry Potter books, we don’t object to the many millions of dollars they earn in the process. The high incomes that generate anger are those that come from manipulating the system. The CEO who pads the corporate board with his cronies and the banker whose firm survives only by virtue of a government bailout do not seem to deserve their multimillion dollar bonuses. The public perceives them (correctly or incorrectly) as getting more than they contributed to society.
A better criterion, according to Mankiw, would be: ‘‘People should get what they deserve.’’
Diamond and Saez’s academic work is filed with caveats and explanations not found in their work for public consumption, which is far more black and white. And to some degree that’s understandable. But a deeper reading leads Mathur, Slavov, and Strain to this conclusion:
Diamond and Saez ignore long-term behavioral responses, assume more equality is a better social welfare function, assign no social value to the marginal dollar of consumption for the rich, and use a short-run behavioral response predicated in part on less evasion and more enforcement to compute an answer of 73 percent. Consequently, we can be pretty sure that the answer is significantly less than that. Further, we find the suggestion that the government should take more than half of a citizen’s income in taxes to be unpalatable.
Cranking up taxes on the rich isn’t the free lunch or cure-all that liberals so desperately desire it to be. And anyway, the revenue-maximizing tax rate isn’t the same as the growth-maximizing tax rate. America needs a tax code that pays for the amount of government it wants in a way that is as efficient and least harmful to economic growth as possible while also broadly reflecting society’s sense of equity. Using a $15 trillion economy to run a precarious, ideologically-driven experiment to find the exact tax-rate tipping on the Laffer Curve of the current tax code — and thus temporarily avoiding politically risky entitlement and tax reform — is a terrible way to pursue public policy.
But it’s more than just “a terrible way to pursue public policy” — and this is the point that constitutional conservatives, libertarians, and classical liberals all need to be making: the progressive income tax when it comes to rates is, in fact, immoral. Or, that kind of value-charged word puts you in fear of godbothering Christers out to police your uteri, then let me put it this way: the progressive income tax, in addition to being a Marxist idea, is in fact “unfair”; and as we’re a country now operating in a rhetorical milieu that runs on the tropes of “fairness” and “social justice,” the response from those who wish to protect liberty and not get lost in the weeds of the data is to show that “the rich,” by simple mathematics, have to pay more on income, because when you take 30% of $5 million dollars, you’re bringing in much more than when you take 30% of $50 thousand dollars — while at the same time taxing Americans equitably and fairly.
— Which is why the case to be made for a flat tax or a fair tax is a case that needs to be made on the basis of morality, or ethics, or simple equal justice claims.
I don’t know how many times I suggested, during Obama’s introduction of the class warfare campaign that would eventually help him win re-election, that the GOP could completely counter the Obama strategy by asking him to support a flat or fair tax — the very essence of “fairness” and “paying your fair share.” This could have been coupled with the question of whether or not Obama is in favor of expanding the tax base — to make sure “everybody had skin in the game.”
Naturally, Obama would have responded to such calls with the Marxist line of progressive taxation — but it would have been obvious as that point that what he believes in isn’t fairness, but rather the systemic punishment of a productive class to support those who are struggling. Which, while that may garner empathy at first, loses its power when it is tethered to policies that are allowing for more and more illegals to flood the already overburdened welfare system, creating even more of a strain on those being asked to subsidize Americans who pay no federal income tax whatsoever and subsist entirely on government benefits paid for by those who provide the revenue.
This would have been a clarifying moment — a stark delineation of the economic beliefs of the left and “right,” one that didn’t just address debt and numbers, but one that on an intuitive level exposed the unsustainability of Democrat policies, while simultaneously exposing the cynical attempts of the left to add to an already unsustainable burden by allowing for an influx of welfare cases (who trade their subsistence for Democrat votes).
And as such, it could set up the conservative/classical liberal/libertarian argument as a kind of civil rights issue, where the work and labor of some Americans is being unfairly plundered to subsidize those who in many cases aren’t even citizens.
If you want to beat the left, you need to learn to beat them by refusing to play their game. We have a perfect opportunity to take back “fairness” and “equality” from the political ideology that has so bastardized those terms that they now mean precisely their opposites.
Sadly, the GOP policy makers profit just as much from controlling the byzantine tax code as do the Dems, trading favors for favors, be they in the form of campaign contributions or lucrative lobbying jobs once they leave office.
So they have no real desire to see the tax code simplified to the point where it can serve to expose the plunder and crony favoritism DC thrives upon, and speak to issues of equality, economic liberty, and the rights of the individual to pursue happiness.
Which is why the suck ass and should be abandoned, pointedly and with aplomb.