see also this
On May 26 of this year we talked about the Laffer Curve which is a, if not the foundation stone, of the Republican theory that cutting taxes is a panacea. If you have too much revenue - cut taxes. If you have not enough revenue - cut taxes. If we are spending too much - cut taxes.
He pointed out that during his life, capital gains taxes had been at 39.6% and taxes on earned income (highest marginal rate)had stood at 70%. (These are rates that are much higher than now and rates that the Republican true believers think would devastate the economy.)
Warren Buffett's recollection of those days is that:
“our economy did just fine.”
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(As noted before it may not be possible in the middle of a recession.)
Thursday, December 2, 2010
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I was just a kid, but I distinctly remember out of control inflation, gasoline lines, my father being laid-off and his company heading elsewhere, interest rates in the double digits, and then some man named Ronald was elected and it all got better.
ReplyDeleteOkay, so my comment was anecdotal and was during a time when Ronald reduced the rates from 77% to 50% and now the rate is around 35%.
ReplyDeleteHere is question concerning your May Laffer post comment #4:
Is maximizing government revenue really a Republican goal?
The principle of reducing government to an efficient machine that does the essential duties that private companies can not faithfully accomplish is more imporatant to me than maximizing the revenue stream. So, reducing taxes is always a good idea when the money is being wasted to the degree that we see today.
point 4 was: (the media should ask those who argue that a tax rate cut will increase revenue: If (as the argument claims) a reduction in the tax rate would increase revenue, then isn't what they are calling a TAX CUT actually a TAX (amount) INCREASE?
ReplyDeleteYour answer is?
David
ReplyDeleteI think you are right:HM = highest marginal
Reagan - HM tax rate 50% - economy good
Clinton - HM tax rate 39.6% - economy good
Bush-Obama- HM tax rate 35% - economy bad
Let's see what conclusion should we draw?
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For an American I would think the touchstone for determining the abstract purpose of government is the Preamble:
ReplyDeleteWe the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
I believe that it is fair reasoning to think that the phrase "We the People" refers to actual people and not the apparent current judicial notion that a corporation is numbered among the intended beneficiaries of these words " ... to ourselves and our Posterity ..."
If that is the case then any conveyance of privilege to a legal structure such as a corporation by our government is acceptable only insofar as it benefits "the People," actual people, of this nation. And, if this is correct, then the degree of taxation and the encouragement or discouragement of privatization of services for the government must first and last meet the criteria defined in the Preamble.
"The People," fickle, wise or foolish, are the masters of our fate it would seem. Any economic theory would have validity only in that it demonstrably serves their purpose.
Reagan was reputed to have been angered in the forties by the high tax rate that successful entertainers such as himself had to pay. Supposedly that memory energized his battle against taxes. The thinking toward the end of the war had been that high taxes were necessary to reduce the national debt that had soared during the Depression and war (tax and spend Democrats were in power). They remained high until Reagan (and Laffer) had his chance,... then we all lived happily ever after.
Of course our times are different now aren't they?
What's the best highest marginal tax rate does seem like an optimization problem whose inputs are devilishly hard to objectively quantify. Wayne and David's back and forth seems to suggest maybe the right number is somewhere between 35% and 50%? I dunno...
ReplyDeleteA liberal friend of mine is very unabashed about having a class warfare view of the whole debate: He wants to "soak the rich." This view doesn't resonate with me at all. But I strongly agree with his view that government provides something much more than essential duties, that government isn't "the problem": NASA, publicly-funded higher education, the interstate road system come to mind. Fareed Zakaria makes the point that one of the lessons of the great World Wars of the 20th century is that a strong state is necessary in order to marshall the resources of the country in order to assert itself in such global conflicts and to secure the peace. I think he's onto something there.
On a related note: How do we feel about the Deficit Commission's final report?
The devil is always in the details. Our country, like our world, is a living system always changing the organism and the ecosystem. There can never be a final resolution to any of its problems (except through cataclysm) since every change engenders an overall adaptation with a new set of hopefully lesser problems. No analysis arriving at an optimal percentage for taxes can possibly address all of the unpredictable changes in the system. This is one reason "permanent change" (in the rate) is such a ridiculous phrase.
ReplyDeleteAs for the Fred Zakaria's history lesson, I believe Germany gave us a very dramatic demonstration of how a strong state can marshal resources to secure "peace." I repeat, the devil is always in the details.
About the deficit commission. Is it not interesting that the goal of the deficit commission almost exactly matches what would happen deficit wise if the Bush Taxes were all allowed to lapse?
Of course that would not address unemployment or health care, but I don't believe the Deficit Commission is addressing those problems either if some reports are correct.
I would agree with David that we shouldn't increase the role of government just to use up the maximized revenue. However it is pertinent which side of the Laffer curve you are on.
ReplyDeleteAnd the "tax cut panacea" is just getting so tiresome. Particularly now that it has morphed from being the solution to the budget problem to being the solution to the jobs problem. That was the point of the Buffett reference: a little higher tax rate is not inherently a "job killer".
Well enough of this. I am going to the other Buffett's world down at Los Portales.
Ahh, that frozen concoction that helps us hang on. Margaritas for everyone... now there's a panacea I can believe in. As Homer Simpson says, "Here's to alcohol: the cause of, and solution to, all the world's problems." :-)
ReplyDeleteI believe Michael and I agree that given the complexity of the economic system, it's not reasonable to search for or claim you can find an optimal tax rate. Still, most of us will agree that a reasonable ("right") percentage is strictly between 0% and 100%. I only meant to suggest that perhaps we can agree to narrow those bounds a bit more using recent history as a guide, so maybe somewhere between 35% and 50% (or so)? From there, what should we do to settle on a number? Our legislators seem content to use the highest marginal tax rate mainly as a vehicle for touting their party line. I have no reason to expect the issue will be decided by anything other than party politics.
ReplyDeleteMichael makes a nice point about the silliness of the phrase "permanent change" in the whole discussion.
Also, I certainly agree with Michael that Germany (and I suppose the Soviet Union as well) are great 20th century demonstrations of the havoc strong states can wreak. Not to speak for Zakaria here, but I think his point was that it also took strong states to defeat them and secure, well, a kind of peace better than a German or Soviet hegemon would have provided.
While I generally like the Deficit Commission's proposals, I actually hadn't thought about the interesting connection Michael made between the Commission's work (which I think of as long-term) and the short-term politics of extending (or not) the Bush tax cuts.
"[The Deficit] Commission was a fraud from the get-go. Any commission that has as its objective a plan to reduce the deficit and does not even include Obamacare in the discussion cannot be taken seriously."
ReplyDeleteMaha Rushy
Besides the absurdity of permanent change, I also believe in the absurdity of pegging a "marginal" rate since the real demon here is the irritation of brackets in the first place. People get angry that they somehow become culpable when they edge across an arbitrary "income"line. Mathematically speaking, the debatable principle is "progressive" taxes or no progressivity.
ReplyDeleteOnce you sign on to progressivity, then bracket creep becomes an issue, but we are really talking about some form of exponential growth in "tax rates." So the least onerous system might be one in which the rates increase with income in a continuous manner, and even that could be indexed to inflation. So if my salary does not increase in a given year but inflation does, my tax rate will decrease. Politicians could not use inflation to hit the little man with hidden tax increases.
Rough idea this, but our current system does not to have many fans so in a time when "everything is on the table" why not such as this?
Michael and Rob
ReplyDeleteI thought when they talked about making the "tax cuts permanent" they meant that that would be the rates until they were changed.
As opposed to the Bush tax cuts which are were all along scheduled to end at the end of this year.
Michael
ReplyDeleteI agree with progressivity and there are a lot of things that should have been indexed. The SS retirement age should have been attached to life expectancy for one thing.
But I also like simplicity. If you make a flat rate with very large deductibles (15K,15K, and 10K for each child)you can get progressivity that way too. (The deductibles could be adjusted for inflation.)
But I think the main question right now is are we willing to tax enough to pay for what the government is spending. For thirty years now the answer has been no and now here we are.
Michael
ReplyDeleteI agree with progressivity and there are a lot of things that should have been indexed. The SS retirement age should have been attached to life expectancy for one thing.
But I also like simplicity. If you make a flat rate with very large deductibles (15K,15K, and 10K for each child) you can get progressivity that way too. (The deductibles could be adjusted for inflation.)
But I think the main question right now is are we willing to tax enough to pay for what the government is spending.
I'm OK with this equivalent version.
But I think the main question right now is are we willing to limit government spending to the amount of taxes that we pay.
Either way for the last thirty years the answer has been no and now here we are.
A flagrant lack of national discipline.
I imagine you are right. Kind of like the (permanent?) debt ceiling. The debt cannot go above this amount until we decide to let it go above the designated amount. The users of the terminology are abusers ... of the permanent meaning of "permanent," to give it a Clintonesque touch.
ReplyDeleteI do agree that the desire for simplicity is appealing with the natural result being 2 brackets and a lot of vague adjustments for the lowest end of the scales. I am just afraid that this marketing ploy creates large numbers of people threatened by their nearness to the upper bracket line who become politically energized ala Reagan. That also has not worked well for us this past 30 years.
ReplyDeleteSo I liked Michael's observation about the silliness of the use of the word "permanent" in the discussion because it seems to me to answer Wayne's question -- are we going to match government revenue (basically, taxes) and government spending? -- with a resounding NO. To me the word suggests that the principle of the tax cut is to be dutifully observed, whatever the circumstances.
ReplyDeleteI think David (or Maha Rushy) has a point about the Deficit Commission's work being flawed in ignoring Obamacare. But, it feels to me like we're at a crucial point where there is possibly some political will (and public interest) for an "adult conversation" about the deficit. So, it seems better to me to come to the table on the Commission's recommendations rather than dismiss them altogether from the start, but I maybe I'm being too Pollyanna on that.
I haven't read the Commission's work, and I've read only a little about it. Some things I "like" in the sense that the proposals seem to me to be reasonable recommendations as part of an effort to match tax revenue and spending: Eliminating the interest rate deduction for homeowners; cutting defense (yes Michael the devil's in the details there for sure); gradually raising the retirement age; and gradually raising the gas tax.
I like Michael's idea of a more continuous function for tax rates that takes into account inflation. I could imagine that idea actually being simpler than the loophole-riddled system we have now. On the other hand, the graduated idea is something we're very used to as consumers, for example in the form of discounts for purchases of a certain volume, etc.
Michael 9:13 AM
ReplyDeleteExactly what marketing ploy?
I remember when I was young that some people thought that when they went over an income tax bracket boundary that the higher rate was going to apply to all of their income. But nobody thinks that these days do they?
I think every legislative attempt to sell a change in the income tax requires a strategy for selling the product to wary "customers" (citizens). A more simple tax (remember that there were times in the past 60 years when there were many brackets) is a selling point.
ReplyDeleteAs to how many people clearly understand the tax code: Are there still accountants?
I expect there are many, many people who don't understand "marginal rates." I may be professionally jaded.
Surely you are not saying that one has to be an accountant to understand marginal tax rates.
ReplyDeleteIn answer to "I remember when I was young that some people thought that when they went over an income tax bracket boundary that the higher rate was going to apply to all of their income. But nobody thinks that these days do they?" (Wayne 12.5.2010 5:56 PM)...
ReplyDeleteSome of my pre-calc students do, at least until we talk about it. Some math-speak here... Wayne you are correct that the current "tax function" is continuous, I took Michael's expression to suggest at least a smooth function and possibly something that is defined simply and explicitly by one expression that is a combination of basic algebraic and transcendental functions. For example, to smooth out the transitions you could always do some sort of polynomial approximation. But I suppose that would make no one happy: the formula would be a good bit less transparent and still basically graduated. Somewhat fun to think about though, and maybe an interesting problem for a class on mathematical modelling? If nothing else it would provide a good occasion to discuss some of the details of the graduated income tax...
Rob you got my meaning exactly.
ReplyDeleteI have survived many seasons in the classroom by use of the mythic "curve" which has little explicit meaning until they get their grade back. Then they say "I don't think much of you, but your computer's a cool dude!" They really don't care about the details as long as it gets the result.
A basic function that says Tax(x), where x is the taxable income, is probably what everyone wants as long as it generates reasonable outcomes. The details might be of interest only to math and accounting classes.