That Wishful Thinking About Tax Rates

[MindMover]

At least since Calvin Coolidge, politicians have trumpeted the supply-side benefits of cutting marginal income tax rates. Lower rates will unleash economic growth and the cuts will largely pay for themselves — or so it’s often said. Yet careful studies find little evidence of such effects. Perhaps it’s time to reform tax policy based on facts, not worn-out assumptions.

A family’s marginal tax rate is what its members pay to the government if they earn another dollar. If the government takes a smaller chunk of that dollar, a family has more incentive to earn it. Workers may choose to work additional hours, or a stay-at-home spouse may decide to work outside the home. Likewise, entrepreneurs may invest in a new enterprise or expand an existing one. Lower marginal rates also reduce people’s incentives to shield income from taxes, through legal and illegal means.

http://www.nytimes.com/2012/03/18/business/marginal-tax-rates-and-wishful-thinking-economic-view.html?_r=1

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And if you decide to not read to the end of the article, here it is....

Finally, income inequality has surged in recent decades. Raising marginal rates on the wealthy is a straightforward, effective way to counter this trend, while helping to solve our looming deficit problem. Given the strong evidence that the incentive effects of marginal rates are small, opponents of such a move will need a new argument. Invoking the myth of terrible supply-side consequences just won’t cut it.

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[LuvNewcastle]

1. When politicians propose tax cuts, they should be required to

offset them by proposing cuts to government programs. For the last 30 years, Americans have been told that they can have their tax cuts without reducing access to needed programs. Tax cuts will never be unpopular with voters, but government cuts are hardly ever popular, either. Making cuts without dealing with the consequences is not the mature way to run a government.

[Igel]

3. The flip side of that is to require any tax increase be tied to specific programs.

Some states have tried this. It didn't work. Once funding is tied to a program, it's fiendishly difficult to alter the funding level whatever the more pressing needs, whoever overfunded the program becomes.

It makes things too inflexible.

But having tax cuts tied to programs is also a mistake in another way. In times of rising tax revenues tax cuts aren't necessarily unwarranted. If you have a budget surplus of $100 billion you have four choices: Reduce revenues, reduce debt load, increase spending on programs, start savings. All four options should be on the table; most people would want to eliminate at least one, if not two, of the options.

[Lasher]

2. A compelling argument.

We seldom hear it from anyone in Congress, the White House, or the media.

[Igel]

4. No, not really.

When we hear that Romney pays such-and-such a marginal rate we know to scoff. Instead we ask what his effective tax rate is.

We know that after deductions and loopholes, after having the first few tiers taxed at lower tax rates, what he pays isn't the amount that you get by the simple application of the marginal rate to his gross income.

Heck, one year I was supposed to pay 30% or so on a slice of our income, less amounts on other slices. We paid, in federal income tax, less than 3%. No amount of piddling with what the marginal rates were would point to that number.

We argue that we need to increase taxes based on effective rates of taxation. Then we argue over the effects of increased taxes based on the marginal rates shown on paper.

We use anecdotes as data. We talk about income, earned income, adjusted earned income, and wealth often as though the terms are interchangeable.

This guy looks at marginal rates on paper. He doesn't look at effective rates of taxation. He looks over time when deductions and tax rates were changing. And relies on somebody who says to contact him over the limitations of the "data," i.e., the results of the source's analysis. It's why economics requires a lot of math to be understandable, but the math is always built on a lot of assumptions. Here we have neither math nor assumptions made clear.

[FogerRox]

5. Effective rates are more important

[Lasher]

7. I refer to the more general concept of demand side economics.

Having higher marginal federal income tax rates is one way to promote it. Another way is to treat dividends and capital gains as ordinary unearned income. Inheritance taxes need to be restored.

I agree that we have too many deductions and loopholes. But that does not defeat the argument in favor of higher marginal rates.

[FogerRox]

6. The larger conversation is to look @ corp, cap gains and income taxes

like a ballon, when you push down here, it pops out over there.

70% top income rate, 20 brackets. deductions for emerging tech and markets creating jobs in the US, making effective rate 22% as it was in 1980. 10% bottom rate.

Cap gains 33%


Corp taxes, deductions for emerging tech and markets creating jobs in the US, Current corp effective rate is under 12%, those older deductions need to be removed. Add 3 brackets for small & med business.

This will creat jobs, reduce incentives for the uber rich to speculate and allow the working a middle classes to be engaged in the economy.

[JHB]

8. It is a _market-based_ disincentive to grab every last buck

I've tried to make this point for a while now: the power of high marginal rates is not to "soak the rich" but to change their decision-making on how best to not get soaked.

It creates (or amplifies) a situation of diminishing returns, adding a real cost to maximizing profits: once you're already in the economic stratosphere, how much is it worth to you to get more? Or would it be more valuable to you to reinvest those resources in the business and your people rather than siphoning it off as personal wealth? Maybe even use pay "carrots" with employees to get the best from them?

Innovation and real-wealth creation become more attractive than speculation and liquidation: steady, long-term investment becomes more attractive than "win big" deals that would end up highly taxed.

There would still be loopholes: there were before, and to get it passed there would be some deal-making needed, but it would still be a big improvement over what we have now.