Taxes and Growth via Yglesias

This entire piece is worth reading. In particular:

The other mechanism that seems to be on offer is labor supply. This makes a lot of sense to me as applied to low-income people. If you work at McDonald’s or drive a taxi then you face a real choice about whether or not to increase your hours worked at the margin in exchange for more money. Driving a cab at 2AM is obviously a huge pain in the ass and not especially lucrative. To the extent that cab drivers face higher income taxes, they have even more reason not to work so late since it becomes even less lucrative. And the availability or non-availability of late night cabs has a variety of downstream impacts on bars & restaurants, drunk driving, etc.

But it’s a lot harder to see this at the high end. A very large share of high-income professionals basically have a marginal wage of $0. The CEO of WalMart can’t cut back his hours by 5 percent in exchange for a 5 percent pay cut. What’s more, a lot of high-end work is characterized by zero-sum competition. It’s plausible to imagine higher income tax rates making veteran NBA players more likely at the margin to retire rather than play one more season at the minimum. But what are the downstream economic implications of Mike Bibby retiring? There overall quantity of NBA players is fixed and there are plenty of other people willing to step up and do that job. The average quality of NBA talent might decline, but so what? The players just play against each other. And it’s not just athletes. Fancy lawyers and high-frequency traders are playing against each other. Marginal changes in average quality don’t matter. If anything, reducing the average quality of America’s lawyers and finance guys would be beneficial if it inspired more people to do something else with their time.

Last, of course, one of the main reasons for taxing the rich is precisely that the utility of a rich person’s marginal dollar is so low. Giving the dollar to someone else will increase overall well-being.

I think that this is a very strong argument and one that we really need to give more thought to. The empirical data for the effects on growth for taxing high incomes is mixed (at best) and the consequences for accelerating our current recession are non-trivial. After all, we are firing people from government jobs at the same time as there is tepid growth in private sector employment. The stated reason is to try and prevent our budget deficit from growing out of control.

However, if restoring the Clinton-era tax rates did not have a direct mechanism to retard economic growth then perhaps we could fire fewer public sector workers? That would help with the large unemployment rate that we have in the United States and the culture focus of self-worth via paid employment.

I think that the question of higher marginal tax rates on very high income earners does bear some thought.

Noahpinion on Public Goods

One explanation of why the narrative on taxation has become toxic in the United States:

Well, I think conservatives (and not a few liberals!) have really fallen into the rut of thinking that all government spending = redistribution. Part of this may be a simple failure to recognize that America's gravy days are over, and that arresting the rapid shrinkage of our national pie is more important than squabbling over who gets which slice.

I think that this insight is entirely correct. Without public goods, a country inherently weakens (imagine no roads, rule of law or sewage). That being said, I do think that redistribution is also an important function of taxation. High income individuals gain a lot from a fully functional society and it is not unreasonable to share the benefits with other members of the society.

Taxes and Growth

I think that this is the most insightful post I have read in ages:

Think about it this way: Grant to the tax skeptic all he wants about the idea that high taxes reduce the level of economic output. There’s an easy story to tell here. The quantity of economic output is, in part, a function of how much time and effort people want to put into doing market production. And the amount of time and effort any given person wants to put into market production is in part a feature of how much purchasing power extra time and effort put into market production will get him. Higher taxes—either on his labor or on his consumption of goods and services—reduces the purchasing power of extra time and effort on market production, and thus tend to reduce the amount of time and effort people put into it. You can tell a different, more leftwing story about this, but the point I want to make here is simply that this rightwing story about taxes and output is a story about levels not growth rates. If Americans started working the number of hours per year that South Koreans work, our per capita GDP would go way up.

But that’d be a onetime adjustment. Countries don’t grow over time by steadily increasing their number of hours worked. They grow, roughly speaking, because people think up better ways to do things and then businessmen either adopt those new better methods or else they get put out of business by those who did.

Taxes suppressing growth was a vicious argument because it suggested that it could (via compounding effects) lead to relative impoverishment over time. While it is true that less work could suppress some innovation at the margins, the story of changing absolute wealth actually seems more credible to me.

It focus the argument on what trade-offs are we willing to make between things like personal security and affluence. It also removes the idea that low taxes might spur growth levels and allow us to grow faster than thus reduce debt (as a proportion of GDP) via economic growth. But it is notable that more socialist and high tax countries (Sweden, Canada, The Netherlands) have not have a fall into relative poverty compared with the lower tax United States.

That is worth considering in these discussions.

A brief history of beast-starving by Bruce Bartlett

Via Thoma, Bruce Bartlett traces the rise and consequences of an economic theory. The whole thing is worth a read but these paragraphs in particular caught my eye:

Once upon a time Republicans thought that budget deficits were bad, that it was immoral to live for the present and pass the debt onto our children. Until the 1970s they were consistent in opposing both expansions of spending and tax cuts that were not financed with tax increases or spending cuts. Republicans also thought that deficits had a cost over and above the spending that they financed and that it was possible for this cost to be so high that tax increases were justified if spending could not be cut.

Dwight Eisenhower kept in place the high Korean War tax rates throughout his presidency, which is partly why the national debt fell from 74.3% of gross domestic product to 56% on his watch. Most Republicans in the House of Representatives voted against the Kennedy tax cut in 1963. Richard Nixon supported extension of the Vietnam War surtax instituted by Lyndon Johnson, even though he campaigned against it. And Gerald Ford opposed a permanent tax cut in 1974 because he feared its long-term impact on the deficit.