How much do taxes matter?

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Once again, empirical data proving conservative thinkers wrong...

How Much Do Taxes Matter?, by James Kwak: Christina and David Romer’s new paper, “The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era,” is available as an NBER working paper(if you are so lucky). Given the current debates about taxes, the paper is likely to garner some attention. ...

Their headline finding is that “The estimated impact of a rise in the after-tax share is consistently positive, small, and precisely estimated” pp. 15–16). They find an elasticity of taxable income with respect to changes in the after-tax income share of 0.19.

Advocates of lower tax rates are sure to seize on this as evidence that higher tax rates depress incentives to work. But that’s hardly what the paper says. First of all, the Romers’ elasticity estimate is lower than earlier empirical estimates that are largely based on the postwar period. To put this in perspective, an elasticity of 0.19 implies that tax revenues would be maximized with a tax rate of 84 percent; that is, you could raise taxes up to 84 percent before people’s reduced incentives to make money would compensate for the higher tax rates.

Second, remember that this is a study of the super-rich: not the top 1%, but the top 0.05%. These are the people whom one would expect to have the highest income elasticity, precisely because they don’t need the marginal dollar. Elasticities tend to be lower for ordinary people because they need to cover their expenses.

Finally,... taxable income ... can change both because people are earning less income and because they are engaging in tax strategies to reduce their taxable income. ...[R]ecent U.S. history shows that when you raise taxes on the rich, they don’t stop trying to make money: they just pay their lawyers and accountants more to avoid paying taxes. The solution to that is a simpler tax code with fewer exclusions and deductions.

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So, to maximize tax collections on the top 0.05% a rate of 84% and the elasticity is lower for lower incomes, and calls for fewer exclusions and deductions...

Phaedrus76's picture
Phaedrus76
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Sep. 14, 2010 8:21 pm

Comments

Any tax rate over 50% is inherently immoral.

When the State confiscate over half of a workers income, that worker has every right to ask "WHO" does he in fact get up everyday TO work for?

Is it himself? Or for someone else?

In essence it is nothing short of slavery !

Calperson's picture
Calperson
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Dec. 11, 2010 10:21 am

Fewer exclusions and deductions...

If we're talking about the top one-half of one percent, their exclusions and deductions really amount to a rounding error. How much can Mitt Romney spend on mortgage interest and property taxes on two homes, car registration, medical expenses, etc? The really big ones, state taxes and charitable contributions, are items I'm not sure I support eliminating deductions for.

The big problem is the income, particularly investment income like interest, dividends, and capital gains, and income from trusts. A lot of these people inherited private corporate business interests, and that income shows up as "earned income" on their tax return, even though it is really "unearned" dividend income. I'm referring to something in the Internal Revenue Code called the "Subchapter S Corporation."

I don't know if all the studies that talk about interest and dividends count income from s-corporations as "investment income" or "unearned income." I'm guessing that the overwhelming majority of taxpayers with s-corporation income did in fact "earn" that income. I am not aware of an accurate way to quantify who's actually working the business and who's just sitting by the pool waiting for the checks. There are various tests to assess things like "passive," "nonpassive," "active and material participation" but these are not difficult with a little bit of planning to manipulate to get the desired results.

When you dip into the pool of 84% marginal income tax rates, I get a little cautious. I favor taxing wealth, net worth, before behaviors, but as we have no history of this approach, and as there are far fewer various and sundry ways to tax property at a moment in time, than there are types of behavior which you can lobby your representative to favor, I don't see this happening any time soon.

To me there is a difference between someone who takes a business from $200k in profits to $300k and then to $900k, and the guy who just collects the $200k every year that his dad built. I want the first guy to be successful, and really high marginal tax rates might stunt that.

chilidog
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Jul. 31, 2007 4:01 pm
Quote Calperson:

Any tax rate over 50% is inherently immoral.

When the State confiscate over half of a workers income, that worker has every right to ask "WHO" does he in fact get up everyday TO work for?

Is it himself? Or for someone else?

In essence it is nothing short of slavery !

If it is "earned" income then you are correct. However if it is "unearned" income such as dividends then you are dead wrong. Unearned income is free money. Somebody else is actually earning that income for someone who sits on their ass and does nothing. Isn't that your beef about welfare recipients? Instead, that unearned income is the lowest tax because the rich leeches have made it so. It should be a minimum of 50% taxes on unearned income for anyone making over 100K a year. It should be a progressive tax so that the hard working person trying to get ahead through the use of unearned income isn't over taxed.

Bush_Wacker's picture
Bush_Wacker
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Jun. 25, 2011 7:53 am

Once again Calperson gets it as wrong as possible. When we invest our earned income together and get a great return, it is just democracy at work. When we "keep our money" and have to buy what we want from hucksters and pirates, it is the 'free market' at work. It is true that when the rich avoid their taxes and make us pay for their profiteering empire, we are getting screwed. But it ain't because of 'high taxes' or 'socialism.' It is because of plutocracy and people who love to use "other people's money" for their own profit.

I agree that workers ought to ask who they are working for, but when the evidence is in, working for "the Man" is the corporate model of wage slavery. What matters is what we get back for the money we spend in taxes or in private sector charges. If the "private sector" can compete and do a better job for the worker, it ought to be clear in the bottom line. Where does it do the better job for the worker? Rhetoric is not proof. Rants about government control are deflection. Show us the money!

DRC's picture
DRC
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Jul. 31, 2007 4:01 pm

Those higher tax rates like 91% when I was a kid is that those rates weren't meant to get more money for the government but to discourage the accumulation of wealth. We're seeing right now how hideous it is to let individuals become multibillionaires and what horrendous power they wield doing so. It makes me a socialist coupe would occur and arrest these people and seize their wealth. I think they actually deserve it! I'd love to see the Koch brothers spend the rest of their lives in prison.

When I was a kid there were hardly any billionaires in the US. I think H L Hunt was the only one. The Rockefellers weren't even billionaires.

captbebops's picture
captbebops
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Jul. 31, 2007 4:01 pm

Daddy Warbucks and Scrooge McDuck were not heroes.

DRC's picture
DRC
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Jul. 31, 2007 4:01 pm
Quote Calperson:

Any tax rate over 50% is inherently immoral.

When the State confiscate over half of a workers income, that worker has every right to ask "WHO" does he in fact get up everyday TO work for?

Is it himself? Or for someone else?

In essence it is nothing short of slavery !

I think I might agree, but that is not the point. The point is that ALL THE REPUBLICANS since Reagan are DEAD WRONG that lowering taxes changes work effort. And, of course, economists have known this since the 80's.

Dr. Econ's picture
Dr. Econ
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Jul. 31, 2007 4:01 pm
Quote Calperson:

Any tax rate over 50% is inherently immoral.

I don't disagree.

That's why I favor a flat tax of 3% of net worth.

chilidog
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Jul. 31, 2007 4:01 pm

Exlpain how a tax rate is either moral or immoral? A tax rate by its very nature can be neither. Whether the rate is 35 or 37 % it is has no morality. When businessmen like Mittens Rmoney borrow money for a leveraged buyout, then take the resulting stock, borrow against that, claim tax incentitives for the business activity, fire all the workers and not pay back the loans, where is the free market outrage for the lack of morals?

Any of the 3 times Trump's business has filed bankruptcy where was the moral outrage?

Phaedrus76's picture
Phaedrus76
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Sep. 14, 2010 8:21 pm

Social neglect is immoral. Refusing to fund democracy so the rich can keep their money is at least uncivil. The pronoun needs to be parsed. What makes it "theirs?" Why not "use it or lose it?" The whole justification for Reaganomics and Supply Side tax reductions was that it would "lift all boats." The Right still talks about "job creators" without showing us any jobs. "Making money" is equated with "earning" it. It flies in the face of our moral and cultural heritage, but they call themselves conservatives while they do obvious damage to society and others.

We are talking marginal tax rates, not flat taxes. "Flat tax" proposals would have to exclude the personal cost of living and apply only to wealth above that. Otherwise you ask those with less than enough to live to give up more than they can afford. How is it moral for the hungry to give up any of their food while the rich only have to give up dessert?

In Poly's Econ 101 continuing class, Say's Law has been clearly stated as inherent and necessary in an economy. The only moral judgment made by that economic reality is that failing to obey it brings down the economy. The consequences of causing an economic collapse are hugely moral, so those who protest against economic reality and "the Law" are neither realistic nor moral in what they argue for. The essential point of Say's Law is that "unproductive capital" needs to be returned to productivity. The only people who have unproductive capital are those with too much money stashed away or "invested" in unproductive economic activities. Merely making money does not measure productivity. That makes money making money immoral and unrealistic.

DRC's picture
DRC
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Jul. 31, 2007 4:01 pm

Half of American households have a negative net worth, so they won't have to worry about anyone snatching bread from their babies' mouths.

I would argue that they would pay less in sales taxes and payroll taxes but the economic reality is that at the end of the day they would still work the same amount and consume the same amount and still have nothing in the bank.

chilidog
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Jul. 31, 2007 4:01 pm

That is immoral.

DRC's picture
DRC
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Jul. 31, 2007 4:01 pm

Currently Chatting

Should public radio program in the public interest?

NPR is supposed to be our national public radio, but they're barely covering climate issues that are in the public's interest.

Only one month ago, a national New York Times/CBS News poll found that half of all Americans think that global warming is already having a serious impact. Sixty percent of those surveyed even said that protecting our environment should be a priority “even at the risk of curbing economic growth.”

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