Ask, how much? Part 2

In the same EconTalk podcast with Morris Fiorina that I wrote about in this post, Fiorini describes another ‘how much’ scenario:

…I saw a paper presented yesterday on taxes. And it was very interesting that the population according to these surveys does think we should have more taxes on the rich. But then when you ask them, what are the rich actually paying, they underestimate, of course, what the rich are currently paying. And, what’s interesting is they think the rich should be paying less than they actually are. But you ask them, what is the fair tax to pay for various income brackets? They come in at figures that are actually below what the rich, what people in those brackets are actually paying. So here’s a case of people being uninformed and mal-informed at the same time.

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Good points for Buffett to consider

Thanks to W.E. Heasley of The Last Embassy for providing a link to this article from the American Enterprise Institute’s magazine, The American.  The article is titled, Obama’s Folly: Why Taxing the Rich is No Solution.

I enjoyed this article because it’s a good example of a well-argued position.  The authors do a fine job of properly characterizing their opponents’ argument that the wealthy should pay more taxes. They don’t resort to inaccurate straw men.  We could make much progress with debate in this country if more people could do this. That would be a great course to add to our public education curriculum–how to accurately characterize your opponent’s position.

The authors also provide many valid points for their opposition to consider and none of it is about coddling the rich.

Their examination of the numbers should be sobering to the tax the rich folks:

According to the New York Times, the president’s plan to abolish the Bush tax cuts for those making more than $250,000 is expected to bring in merely $0.7 trillion over the next decade, or about 0.4 percent of Gross Domestic Product per year. As a comparison, the Congressional Budget Office estimates that the deficit over the same period is going to be $13 trillion, more than 6 percent of GDP per year.

If this is accurate, then it alone should end the debate.  Focusing so much attention on taxing the rich brings to mind the old saying to be penny wise but pound foolish.

Next, the authors address what has become a popular argument put forth by a member of President Obama’s advisory board, Laura Tyson, and published in The New York Times:

The most common fallacy repeated by Tyson is that taxes do not matter because the economy was booming during the Clinton years even though taxes went up.

They go on to point out that the 90s had other economic events as well — NAFTA, welfare reform and the Internet boom — to name a few.

I’ll add that in 1997 significant reductions were made in the capital gains tax rates for assets held more than one year (source), so not all tax rates for the wealthy increased.  I’ll also add that much of the increase in tax revenue in the last part of the 90s came from capital gains taxes.

The authors correctly point out:

Instead of picking one historic event that happens to fit your preferred theory, a more reasonable approach is to investigate all historical periods where taxes increased or decreased.

This has been done by former Obama advisor Christina Romer and her husband David Romer. They also take into account the causes of tax increases.1 They find that tax increases tend to reduce economic growth, stating that “tax increases appear to have a very large, sustained, and highly significant negative impact on output,” as “an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.” Similar results have been obtained by Harvard economist Alberto Alesina using a different methodology.2

I don’t trust studies like that of the Romers.  However, their finding is not surprising.  It’s called incentive effects and believe it or not, they exist.  Believe it or not, you respond to them everyday of your life, whether you realize it or not.

But other people put more stock into statistical studies.  Many of those people also think we should raise taxes on the rich.  So, the Romers’ studies and the other economic events of the 90s should at least give those people something to consider.

I also appreciate the authors’ encouragement to look at more than one data point on which to draw our conclusions. That’s great advice.  When someone does that, or when you do it yourself, your skepticism should rise.

Here’s why.  Do you think it would be tough to find one data that says the opposite?  I doubt it.

I appreciate actual experience over conjecture.  But to focus on a single time period and neglect other important factors (like the reduction in capital gains tax rates) is not good practice.