38 thoughts on “The Tax-Rate Debate

  1. ken anthony

    Obama along with the media lapdogs should be mercilessly ridiculed for not knowing it is calculus. But we have so few on the right that know how to ridicule that way because you have to be johnny on the spot. It doesn’t work as well if you leave these stupid statement to stand for days.

  2. Chris Gerrib

    There are (broadly) three large problems with your article, namely:

    1) Most people have little control over their income. They get a wage or hourly rate for an agreed-on number of hours.
    2) Taxes are only one of a number of factors in determining desired income. The need to pay fixed bills and the desire to maintain a certain standard of living drive desired income as much or more than tax liabilities.
    3) You’ve created a strawman of your opponents. I don’t think Krugman particularly wants a big state (and I know *I* don’t) – what he wants is a set of problems solved. One of those problems is a deficit, caused at least in part by funding two wars on credit.

    As a result, revenue from taxes is much more like arithmetic than calculus. We saw, after all, exactly what happened when Bush cut taxes – revenues fell in a very nearly linear manner, offset by the (rather anemic) growth rate of the economy.

    1. ken anthony

      Most people have little control over their income.

      Spoken like a true victim. In those rare cases where this is actually true they still have a lot of control of their expenses. Even at the very low income levels.

      Taxes are only one of a number of factors…

      Right and for those that don’t pay taxes…

      Strawman…

      Why should only the left have all the fun?

      revenue from taxes is much more like arithmetic than calculus

      Not the red herring above or your assertion here provides any evidence. Rand provided evidence.

      That you and the president would assert it’s just static math rather than a very dynamic calculus publicly demonstrates your cluelessness to any that aren’t. Hint: Explain the Laffer curve.

      Instead of explain how people that pay no taxes are linear math; explain how changing rates doesn’t change behavior for larger income people?

  3. George Turner

    Chris, 1) if working people don’t have any control over their income, why do they even bother going to work? Why not just sit at home since it won’t make much difference in how much they make? Why do some people work two and three jobs? Why do many people take on side projects?

    2) By keeping energy prices as high as he can, Obama is in effect taxing the snot out of the people. By upping health care costs, he’s taxing them again. By upping food costs, another big hit. And then he’s trying to bill them for the extra costs. Of course poor and minorities are the hardest hit, with the net worth gap between whites and blacks doubling under his tenure. The Democrat’s survial strategy depends on black anger and white guilt, and they’ve found a great way to increase both, casting people into poverty and blaming the rich for it.

    3) The only way the deficit can be caused by funding two wars on credit is if we’re struggling to make the interest payments on the debt those wars had cost, so why not blame Obama’s current deficits on the Korean War while you’re at it? If that really is the reason for the current deficit, how on Earth is going far, far deeper into debt a sane way to solve it?

    1. Leland

      I wish Gerrib had the capability to answer your first question. I simply don’t understand his assertion beyond him just wanting to be disagreeable. Seriously, people don’t have control over income? Is this how people live in Illinois? I know his statement isn’t true for me, and I’m nothing special.

      On another note, if people don’t have control over their income, and our government is made up of “We the People”; why not take that approach to the federal level? Let’s understand that tax rate change will have a minor marginal affect on federal revenue, so if you want to fix the deficit, you need to look at the spending (as suggested by Ken in his response to Gerrib).

    2. Chris Gerrib

      The majority of my income comes from a salary, which I get regardless of hours worked. Four of my five direct reports are also salaried, and the one full-time hourly person works 40 hours, because that’s the amount of hours available.

      All of these people make several times what they would if they were on unemployment. None of them can easily vary their income significantly without quitting their jobs. Since they have families and mortgages, that’s not an option. Also because of that, they have a certain minimum level of acceptable income.

      In short, my income and theirs is fairly fixed.

      1. Leland

        It still makes no sense. I get a salary means fixed income, but that’s for one job. It doesn’t consider a long list of other factors. For example, some people are paid hourly. And they often work well over 40 hours if they choose. That’s just one example. There’s also finding another job that pays better. I’ve done the latter several times, but then I live in a right to work state. Maybe it’s different in other states. I don’t know, and based on your comment, I don’t want to find out.

        Other factors:
        2nd or 3rd job
        Investment options
        Shared income (marriage/familiy) and expenses

  4. DaveP.

    The Dems would have a lot more credibility om this issue if they hadn’t spent tehir tiem from 1990 to the present day using “Raise Taxes!” as their knee-jerk response to every single political crisis that came along- but not even for a second discussing the idea of reducing spending as anything to take seriously.

  5. Alan K. Henderson

    For those pining for the fjords 1950s tax rates , note that per-capita GDP growth was anemic during that decade, the slope changing abruptly early in Kennedy’s presidency.

    Why was the economy so sluggish? The reasons are several, but here’s one contribution that a lot of folks will miss. There are two ways to achieve an effective 45% marginal tax rate for top earners: to simply set the rate at 45% outright, or (what Ike’s contemporary Dem legislators did) set the rate at 92% and institute a raft of loopholes. Both plans technically leave earners the same amount of after-tax income, but Plan B forces earners to divert funds away from productive ventures and toward unproductive tax-sheltering instruments.

    1. Edward M. Grant

      45% marginal tax rates are high? Before I left the UK, I was on a 50-85% marginal rate depending on whether I put the money in the bank (where the government would take 42% of any interest, which was already less than real price inflation) or filled my car’s gas tank.

      Want to bet on whether I was queuing up to do extra work to make more money, or queuing up to leave on time at the end of the day?

      BTW, wasn’t government spending in the US a much lower percentage of GDP in the 50s than it is today?

  6. Fletcher Christian

    Tax rates are currently a blunt and ineffective instrument, precisely because they are not discriminatory enough – in terms of the source of the income. Which means that activities with little or no risk will be preferred to those with possibly more potential profit but some risk of loss.

    Specifically, just about any job in the financial “industry” is completely free of risk for the people actually doing the “work”; bond traders and the like. If they screw up, the shareholders or the general public pay; if they score big they get gigantic bonuses. In a situation like that, it makes perfect sense (if you are a sociopath, just about required for bankers and their ilk) to take huge risks with other people’s money.

    How to solve this? Well, one way is to use the tax system. Financial industry bonuses taxed at 100%. Corporate tax rate on such completely unproductive “endeavours” as high frequency trading taxed at 100%. There are probably other candidates for this treatment; arguably, corporate law and tax accounting are examples.

    Keep this up for long enough and maybe, just maybe, people leaving the educational system would decide to go into productive industry rather than becoming parasites.

  7. Jim

    It’s only “charlatans and cranks”, as GOP economist Greg Mankiw put it, who would argue that “broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue”. Unfortunately for the country, one of its political parties is in thrall to charlatans and cranks.

    Back in the real world, it is as simple as arithmetic: lowering the top marginal income tax rate will forego revenue, and raising it will increase revenue.

    That’s a problem for the GOP, which has as its top policy agenda item the lowering of marginal tax rates for the rich, and its top political argument the insistence that we need to reduce the deficit. The two things are in direct contradiction.

    On top of which, the policy agenda — lower tax rates for the rich — is dramatically unpopular. The public isn’t going to insist that Obama go along with extending tax breaks for the wealthy. That puts the Democrats in a formidable bargaining position; there’s no telling what the GOP will be willing to sacrifice to keep the top rates low, and there’s a chance the House GOP caucus will fracture under the pressure.

    1. Curt Thomson

      That’s a problem for the GOP, which has as its top policy agenda item the lowering of marginal tax rates for the rich, and its top political argument the insistence that we need to reduce the deficit. The two things are in direct contradiction.

      Leaving aside the idiocy of “top policy agenda item the lowering of marginal tax rates for the rich”, the distinction between the GOP and DEM is fairly straightforward. One side thinks tax policy should be driven by considerations of economic growth. The other side thinks it’s all about “fairness”. That side freely admits that higher rates resulting in lower government revenue is completely acceptable. Even desirable. Your standard-bearer has actually stated it on record.

      One side considers a tripling of food-stamp expenditures to be problematic. Your side thinks it’s a good start.

      One side thinks that having half of the population paying nothing is troubling. Your side thinks the trend is a good one.

      One side is aware of history. The other is not only ignorant of it, but actively works to ensure our children are as well.

      1. Jim

        One side thinks tax policy should be driven by considerations of economic growth

        And it’s just a lucky coincidence that “considerations of economic growth” dictate lower tax rates for the very people who fund and run that side? Funny how that works.

        1. Curt Thomson

          Are you serious? “My argument is stronger because, as someone who funds my side, I’ll end up paying more.”??

          That is so intellectually bankrupt it’s past parody. I guess it might be effective for the guy who sees more of his property taken from him, but is happy because the other guy over there is getting even more taken from him. And granted that is probably a good representation of a majority of your fellow travelers. But I can’t imagine you’re stupid enough to think it’s a good long-term strategy.

    2. George Turner

      Back in the real world, it is as simple as arithmetic: lowering the top marginal income tax rate will forego revenue, and raising it will increase revenue.

      And simple arithmetic says that the more you charge for a beer, the more revenue you make, which is why we don’t use simple arithmetic for real-world cause and effect relationships.

      I could cite the Laffer Curve and Hauser’s Law but that would be like trying to explain differential equations to a third grader, so instead I’ll ask if raising tax rates doesn’t change behavior, how come the Democrats are so devoted to taxing habits they want to eliminate, like smoking? How come they government debates whether certain taxes should be called a fine or pentalty if their purpose isn’t to make people avoid their invocation?

      1. Jim

        if raising tax rates doesn’t change behavior

        Changing tax rates does change behavior. But it doesn’t change behavior enough to cause a 35% top tax rate to collect more revenue than a 39.6% rate. Only charlatans and cranks believe otherwise: just ask Greg Mankiw.

  8. Bilwick

    Amazing that Chris Gerrib says he doesn’t want a big state, yet in any discussion about which policy to take–one that increases the power of the State, and one that will diminish it–he’s invariably comes down in favor of the former and not the latter. In fact whehn I once put him to what one might call “Sobran’s Question” (wherein you ask a “liberal”, “Is there any point at which you would stop taking people’s money or stop expanding the power of the State?”) he could only give me some weasel answer. advocating a bigger one.

    Krugman reminds me of Ludwig Von Mises (I think it was von Mises; maybe Rothbard) talking about pseudo-economists: people who might give their profession as “economist,” and might be accepted as such, but who avoid the work of a true economist–i.e., ascertaining or defining the laws of economics and applying those laws to an economy–and instead are simply shills for statism. They’re analogous to “court historians,” who write history to please their masters; and are to economics what court historians are to history. Sounds like an occupation Jim might want to look into.

    1. Chris Gerrib

      Bilwick – I don’t think the state should violate Constitutional rights. I think in some instances (the “war on drugs” especially as applied to pot) the state is already too big and should contract. I think the 91% top tax rate of the 1940s was justified only as an absolute wartime emergency. So, yes, there are limits to what the state should do.

  9. ken anthony

    it is as simple as arithmetic: lowering the top marginal income tax rate will forego revenue, and raising it will increase revenue.

    This is how you lose credibility Jim. By saying something you know not to be true in the hope of winning an argument.

    Suppose the tax rate is 50%. You are stating that raising it to 100% will increase revenue. Only someone as stupid as Obama’s father or Karl Marx would believe that. You don’t believe that (because we can credit you with not being that stupid.) For you to state something you know not to be true to us is insulting (because now you’d be stating that we the reader are stupid.)

    1. George Turner

      Why stop at 100%? Wouldn’t it make more sense to have people take out loans to pay more than they even earn? If you want to make a rocket go faster, just use a bigger engine. It’s simple arithmetic.

      1. ken anthony

        That is a good point. Didn’t Pelosi tell us how good it is for the economy for people to be collecting unemployment insurance? Think about how this would stimulate the lending industry and then you could add the multiplier effect. Why this could be the engine of stimulus we’ve all been waiting for. It is simple math!

    2. Jim

      Suppose the tax rate is 50%. You are stating that raising it to 100% will increase revenue.

      You seem to have skipped over the first part of my sentence: “Back in the real world”.

      Back in the real world we aren’t talking about raising the top rate from 50% to 100%, we’re talking about letting it return to 39.6% from 35%. Doing so will raise revenue; not doing so will forego revenue. Only charlatans and cranks would dispute that.

      1. ken anthony

        That’s raciss charlatans and cranks to you Jim.

        Ok. 39.6% from 35% is a change of rate. You have no evidence this is the same as raising revenue. To assert “Doing so will raise revenue” constitutes fraud.

        YOU LIE.

        1. Jim

          To assert “Doing so will raise revenue” constitutes fraud.

          In that case Greg Mankiw is guilty of fraud (along with the CBO, and every non-crazy economist working today).

          1. George Turner

            As we’ve said, the CBO does NOT adjust their numbers for any change of behaviors. They assume the Laffer Curve is a straight line directly from 0,0 to 100%,100%.

          2. Jim

            In 2003 the CBO experimented with using dynamic scoring for the second round of Bush tax cuts. It didn’t make much difference: the cuts still didn’t come close to paying for themselves. The dynamic effects just aren’t very strong between 35% and 39.6%.

            If tax rate cuts could boost revenue, no one would oppose them.

          3. Curt Thomson

            If tax rate cuts could boost revenue, no one would oppose them.

            Obama would. He’s said so on record.

          4. ken anthony

            What’s with you Jim, you usually make a stronger argument?

            If tax rate cuts could boost revenue, no one would oppose them.

            Now you’re asserting they NEVER increase revenue?

            Normally Jim, you make assertions that are at least arguable. This is not one of them.

          5. someguy

            How about going back to starting assumptions?

            How about starting from the place where the government’s only real job is to protect my life, liberty, property and pursuit of happiness from being taken by others?

            Therefore the only taxes that are rightly taken are the little taken for those goals and those goals alone.

            This means it is wrong to have programs like Social Security, Medicare and the rest because those programs are not about protecting me from others trying to take my stuff. It is about others taking my stuff at the point of a gun to fund their entitlements.

            So it doesn’t really matter what the rate is per se. And it doesn’t matter what rate does or doesn’t bring more government revenue. The overall point is that the government wants to take more and more of my stuff to do things that are not within its rightful place to do.

  10. rednecktech

    And this argument will go on until some realistic method is found to explain all the particulars to all concerned. Employees wanting more money is a given. Some percentage of them will realize that there is a limit to how much a company can pay, but not all in any company of larger size. The problem is exponential in a nation.

    The need is to develop arguments that accurately get the point across to as many as possible. Insults and yelling Liberal/Leftist/Marxist/etc just muddy the waters of rational discourse. By the same token, it must be understood that much of the voting population is and will remain mathematically illiterate at the level required here.

    The danger of excessive tax rates is less to the established wealthy than to the ambitious that wish to become wealthy. The established wealthy will use lawyers and accountants to protect assets in a way that the merely ambitious mostly do not have available. The ambitious are the wellspring of prosperity for a society as they are the innovators and workaholics that produce the future wealth. If these people perceive, rightly or wrongly, that the effort and innovation is futile, they will stop. When they stop, the countries’ future will run down like clockwork, though it will take decades or even centuries to reach true banana republic status.

    1. ken anthony

      this argument will go on until some realistic method is found to explain all the particulars to all concerned.

      Which is exactly why liars want to keep it complicated. Remove everything from the tax code eliminating most of the power of congress to defraud the people. Reduce it to just two values, a single rate and a single monthly check with only a 1% annual adjustment allowed.

      Demagogues would never allow this, so…

      Vote out everyone that votes against this. Try again every two years.

      As Forbes might have said, “this law would fit on a post card.”

      1. Peterh

        I believe Forbes had a line about the tax return fitting on a post card. But the point is clear, a tax code simple enough for anyone of clear mind to understand, with no room for demagoguery or evasion of paying a “fair share”.

      1. Karl Hallowell

        So making bank robbery illegal makes honest people into bank robbers?

        You need a little practice with making analogies. Raising tax rates is fundamentally making it more expensive to observe the law. If in analogous fashion, we made it much more expensive to interact lawfully with a bank and get the sort of services that a bank provides, then we might well make more formerly honest people into bank robbers.

  11. Fletcher Christian

    Karl – The banks have done the “make it more expensive to interact lawfully with a bank” routine. I have personal experience of several instances where my natural (or perhaps trained-in) instincts to deal honestly with my bank led to significant personal loss – ultimately leading to extremely significant loss in the form of the complete collapse of a business which had been running for well over twenty years.

    As far as banks are concerned, my attitude has completely changed. Tell any bank nothing unless directly asked. If you have knowledge of actual or planned dishonesty towards a bank, keep your mouth firmly shut. If you see a person known by you to be a banker in distress and needing help, walk on by. To use a well-worn phrase, somewhat cleaned up, I wouldn’t urinate on a banker if he was on fire.

    If enough people did that, people in general who actually work for a living might get back some of the untold billions stolen by the biggest gang of crooks in history – the banks. They make the Mafia look like small-timers. Also, some people leaving education might go into productive occupations instead of the institutionalised thievery known as banking.

    (In the word “banks” I include many other financial institutions such as hedge fund trading groups and the like.)

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