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View Diary: Killing Sacred Liberal Cows, or What Economists Think About the Economy (105 comments)

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  •  That's ridiculous (0+ / 0-)

    I can't believe someone would even suggest in passing that income has a infinite demand curve, this is demonstratably not true (and there's hordes of empirical evidence) unless the income has no cost of any kind attached to it.

    Furthermore, income at any given time isn't a prerequisite for consumption at all... that would be wealth.  

    Seriously, could you even quote an economist who doesn't feel income taxes are a disenctive to earn income at any rate?   You'd have to completely throw out the idea of a rational actor.

    •  Let's see it (0+ / 0-)
      this is demonstratably not true (and there's hordes of empirical evidence) unless the income has no cost of any kind attached to it.
      Let's see it. You misunderstood what I said. The "cost of income" you refer to comes out of the labor-leisure trade-off that I mentioned, a theory that gets bandied about by the Right and has been taken to an extreme as a means to reduce marginal income tax rates in perpetuity. Unfortunately, the labor-leisure trade-off has only limited applicability to marginal income tax rates. That's why in the 1950's, 1960's and 1970's, under higher marginal rates (yes, yes...loopholes, loopholes), GDP in the U.S. grew at significantly higher rates than preceding and following decades. That's why most international empirical models show a positive correlation between marginal rates and GDP growth (to a certain breaking point where the tax rate is too high). Several economists (Stiglitz, Krugman the most visible of them) have pointed this out.

      Now, most of the research I've seen only makes the point that differentiated tax rates on different kinds of income shifts behavior towards the lower taxed form of income. Not really the same thing as the point I was making, certainly not definitive evidence of disincentives for earning income (indeed, the behavior shifts to a different form of income, not abandoning income receipt all together), and definitely not a wealth of empirical evidence. And it has very little bearing on marginal income tax rates and even less on the relative efficacy of income taxes versus consumption taxes for efficiency considerations.

      Now, to be fair, you are right about the distinction, and I should have been more clear about this, that wealth and income are distinct, wealth more likely has an infinite demand curve, and income only has an infinite demand curve in the presence of certain market conditions (caps on work weeks and work days, income contingent upon full-time employment, etc.). But given that I wasn't intending to give a dissertation on the economic theory behind incentives or wasn't assuming a technical audience, I was okay with not setting up the full series of assumptions in which my statement was true.

      My point was that marginal income taxes are a very progressive and relatively efficient way to go about raising public revenues, and for many reasons grounded in solid economic theory, are superior to using consumptions taxes. Additionally, I made a point that while labor can be analyzed in a supply-demand model (like goods and services), income cannot, as there are different, more complex variables involved, some of which are not easily quantified. Finally, I made the point that consensus among these 5 economists in no way represents the field.

      Now, about that horde of empirical evidence, please share. I'm not familiar with it and would like to read it. But, as I said, there is by no means of consensus on this in the field.

      •  Severence of cause and effect (0+ / 0-)
        Let's see it.
        Well, the easiest example would be the years of decline in revenue after the capital gains tax in the mid-1980s.  Some seem to want to dismiss that as the revenues recovered a decade later, but their rather blithely pretending that there's no outside variables.

        Oil and mineral concession agreements are another excellent example, as they provide a near perfect example of the mechanism in action:  The government is essentially rent-seeking, and is attempting to maximize return through both the agreement and taxation, while still getting the outside company to conduct the economic transaction.

        One of the most famous examples was Ecuador's windfall tax wiping out the market.

        That's why in the 1950's, 1960's and 1970's, under higher marginal rates (yes, yes...loopholes, loopholes), GDP in the U.S. grew at significantly higher rates than preceding and following decades.
        You're attributing to higher marginal rates what was really just lower taxation.  In 1960, you'd have to been in the top 95% of income to pay 20% effective federal tax.  By 2004, you'd have hit 20% federal tax at around P70, or in 2000, just P40.

        See P. 13 (PDF)

        Furthermore, the federal government was taking in several percentage points less of the GDP in taxation. It only declines in 2009-2011 because of the massive deficit.

        That's why most international empirical models show a positive correlation between marginal rates and GDP growth (to a certain breaking point where the tax rate is too high).
        This is, unfortunately, coincidence rather than causation.  You certainly wouldn't see the same result examining historical data in China or most other countries.
        •  You're shifting goal posts and arguments a lot... (1+ / 0-)
          Recommended by:
          tardis10
          Well, the easiest example would be the years of decline in revenue after the capital gains tax in the mid-1980s.  Some seem to want to dismiss that as the revenues recovered a decade later, but their rather blithely pretending that there's no outside variables.
          Covered that already. Result of differential rates on sources of personal income, relaxed enforcement, etc. Not relevant to my point.
          Oil and mineral concession agreements are another excellent example, as they provide a near perfect example of the mechanism in action:  The government is essentially rent-seeking, and is attempting to maximize return through both the agreement and taxation, while still getting the outside company to conduct the economic transaction.
          Irrelevant to a point about personal income incentives.
          You're attributing to higher marginal rates what was really just lower taxation.  In 1960, you'd have to been in the top 95% of income to pay 20% effective federal tax.  By 2004, you'd have hit 20% federal tax at around P70, or in 2000, just P40.
          There's a lot of hand-waiving and misdirection in here. First, partially due to the progressive marginal rates, income inequality was not anywhere near what it is today. You're using an argument about more horizontal income distribution to make a point about behavior effects and incentives to earn income from marginal tax rates. And by using effective tax rates, you're again distorting the conversation: effective rates will always be lower than nominal marginal rates. That's how a progressive tax system on income using marginal rates works. Back in the 60's, when rate on income over $363,000 (ish, I'm citing this from memory) was 72% (again, ish), the rate only applied to income OVER $363,000. No one expected, argued for, wanted an effective rate of 72% on these people. Yes, there were some loopholes and such that lowered the effective rate slightly from what a pure effective rate would have been under the nominal marginal rates, but that doesn't change the fact there was not a resistance to higher wages or incomes because of the marginal rates attached to them, which was my argument. Sound economic theory will tell you that someone at full employment will take a raise from 361,000 to 363,000 even if the additional $2,000 is taxes at 72% because they are already at full-employment and are not sacrificing leisure. In other words, the additional income is cost-free income.

          Now, going back to my point about income distribution, we have had 4 decades of population and market growth, and the 70's, 80's, and 90's have seen large expansions of income (although much less even distributed growth rates in the 80's, 90's and 00's). Comparing effective rates in a highly unequal society with a vastly different economic scale to effective rates of a society with a more equal income distribution is silly, misleading, and irrelevant to the point I was making. As I pointed out, effective rates are meaningless in discussing the incentives behind income taxation from an economic standpoint because they are an aggregate of many different kinds of taxes on many different kinds of income and behaviors, all with different incentive and behavior effects that should be measured independently and within their own "markets."

          While the paper you cite is interesting, and thank you for sharing it, the paper itself points out that there is disagreement with how to measure, analyze and approach this topic, which only further my point that the field does not have consensus on this issue.

          This is, unfortunately, coincidence rather than causation.  You certainly wouldn't see the same result examining historical data in China or most other countries.
          Finally, I come to this. Now, if you'll be so kind as to re-read the quote you responded to with this, you'll notice I said nothing of causation. Indeed, my entire comment had no mention of causation. I deliberately and intentionally said "correlation," which, as I'm sure you know, is not the same thing. However, while correlation does not alone prove causation, it does say two things: one, it is much more indicative of a relationship than "coincidence" or "random chance" (a fundamental point of econometric modeling), and two, consistent evidence of correlation, while not definitive, goes a long way as evidence. Most theories and relationships and knowledge about economics are built on a evidence of correlations. Given the complexity of the systems, the multitude of variables, and the inability to use laboratory controlled experiments, most empirical evidence in economics is built on arguments about correlations. Hence the disagreement in the field on most issues.

          As for examining China, most models use international comparisons and complex fixed-effects models that take advantage of policy variance to create a natural (though imperfect) comparison group. I'll take the validity of an international model with a larger number of observations and data points from a more diverse pool of economies than a historical analysis of one country for reliable evidence, thank you very much.

          Anyway, you can agree to disagree all you want, but I would prefer to be 1) afforded some measure of respect, since I would assume we are all friends and political allies here, and 2) debated on what I've actually said using evidence on the specific (very specific) sect of micro-economic theory and taxation policy that I have brought up. Don't post three links, only two of which are actual studies, as evidence that there is consensus that what I've said is incorrect (it isn't).

          •  The world's tiniest goalposts, apparently. (0+ / 0-)
            Irrelevant to a point about personal income incentives.
            How is it irrelevant?  Are you implying that corporations are sensitive to income tax, but people aren't?  Why would that be?
            And by using effective tax rates, you're again distorting the conversation: effective rates will always be lower than nominal marginal rates. That's how a progressive tax system on income using marginal rates works...  but that doesn't change the fact there was not a resistance to higher wages or incomes because of the marginal rates attached to them, which was my argument.
            Why wouldn't you discuss effective tax rates?  They're what actually matters.  There wasn't a resistance to high marginal tax rates because people only care about effective tax rates.  

            Is there some lobby that advocates high marginal (but low effective) tax rates for the wealthy?  Who would they be?

            Sound economic theory will tell you that someone at full employment will take a raise from 361,000 to 363,000 even if the additional $2,000 is taxes at 72% because they are already at full-employment and are not sacrificing leisure. In other words, the additional income is cost-free income.
            Well, yes, but once again you're using a "raise" example because there's no actual additional effort involved.  We both agree that people will accept free money up to virtually a 100% tax rate in return for neither risk nor effort on their part.  That's not really controversial.  It's also not a situation that comes up much.
            Finally, I come to this. Now, if you'll be so kind as to re-read the quote you responded to with this, you'll notice I said nothing of causation. Indeed, my entire comment had no mention of causation. I deliberately and intentionally said "correlation," which, as I'm sure you know, is not the same thing. However, while correlation does not alone prove causation, it does say two things: one, it is much more indicative of a relationship than "coincidence" or "random chance" (a fundamental point of econometric modeling), and two, consistent evidence of correlation, while not definitive, goes a long way as evidence. Most theories and relationships and knowledge about economics are built on a evidence of correlations. Given the complexity of the systems, the multitude of variables, and the inability to use laboratory controlled experiments, most empirical evidence in economics is built on arguments about correlations. Hence the disagreement in the field on most issues.
            If you advocate a policy based on a given trend, you must assume some level of causation, otherwise your suggested political action is nothing more than a random guess, and taking people's money based on a guess is hardly sound government.
            As for examining China, most models use international comparisons and complex fixed-effects models that take advantage of policy variance to create a natural (though imperfect) comparison group. I'll take the validity of an international model with a larger number of observations and data points from a more diverse pool of economies than a historical analysis of one country for reliable evidence, thank you very much.
            You can take as many data points as you wish, the issue is that the high marginal tax rates during GDP growth in the US is a statistical outlier compared to other countries.
            Given the sheer amount of unsupported verbiage you've posted, I think I've been pretty polite.  "Ridiculous" is a rather mild pejorative, and it was directed at your argument, not your person.

             

            and 2) debated on what I've actually said using evidence on the specific (very specific) sect of micro-economic theory and taxation policy that I have brought up. Don't post three links, only two of which are actual studies, as evidence that there is consensus that what I've said is incorrect (it isn't).
            What, precisely, would be the ideal number of links for a forum post in someone's diary about economics?  

            As I stated above, there's no reason to assume that corporations are rational actors and individuals are not, in regard to income tax.

            •  Sorry, didn't see you responded... (0+ / 0-)

              Okay, so this will be my last response on this. It's become clear to me that you're either not terribly knowledgeable of economic theory and economic research or you are a conservative troll (or both, not mutually exclusive). I think I recognize your screenname from a previous trolling encounter. I know, I know...you're going to act all hurt and offended that I would make such a claim, implying that I am only saying it to avoid arguing. But, really, your last post shows that you aren't interested in dialogue. You think you are irrefutably right, and ignore my points, taking snippets out of context in order to continue to fight with me, even if it's over points I've already addressed. That behavior strongly resembles trolls I encounter in other forums, and usually, if it quacks, walks, and looks...

              Okay, so we'll just go in order here.

              Are you implying that corporations are sensitive to income tax, but people aren't?  Why would that be?
              Yes. Because businesses, particularly large businesses like corporations, respond to much different incentive structures and make decisions regarding different variables than people. This is true in both economic theory and research, so unless you believe corporations are people, friend, it should be relatively easy to understand even if you aren't familiar with economic theory. Of course, if you aren't familiar enough with economic theory to understand something from Econ 101, I'm not sure why you decided to pick a fight with me over a very specific and technical assertion about a niche aspect of economic theory...but whatever.
              Why wouldn't you discuss effective tax rates?  They're what actually matters.  There wasn't a resistance to high marginal tax rates because people only care about effective tax rates.  

              Is there some lobby that advocates high marginal (but low effective) tax rates for the wealthy?  Who would they be?

              I explained, pretty comprehensively, why marginal rates will always be higher than effective rates. It's simple math. Let's take a more concrete example to make it clearer to you (and anyone else still reading this) how marginal tax rates work and why this is true. Okay, in our fictional world we have the following tax structure on personal income:

              10k-20k = 10%
              20k-30k = 15%
              30k-40k = 20%
              50k + = 25%

              Okay, so in this world, steveholt makes 100k per year. That means steveholt's total tax burden would be 17K ([.10*10k]+[.15*10k]+[.20*10k]+[.25*50k]). steveholt's effective tax rate (in a pure world, without deductions) would be 17%. Although steveholt have income that reaches the highest marginal bracket of 25%, steveholt's effective tax rate is much lower at 17%. Of course, adding in deductions could lower it further, but, as I said before, deductions are different kinds of taxes with different incentives that require different analytic tools. Deductions are associated with some kind of consumption or investment behavior incentive (either encouraging or discouraging different market behaviors), and thereby are irrelevant to discussions about income tax rates and their effects on incentives to earn income (e.g. one's incentive for additional work is not to take advantage of a deduction on private jet depreciation write-offs. One's decision to consume a private jet with income earned may be influenced by that deduction, however).

              So, given that marginal rates by definition will always be higher than effective rates, and effective rates also include tax deductions that have no impact on income earning incentives, effective rates are irrelevant when discussing the economic incentive effects of marginal taxation rates on personal income. People do not acquiesce to higher marginal rates because their effective rates are low. That will always be the case, so, by that argument, people would always acquiesce to higher marginal rates (warping effects such as political ideology aside, of course).

              So now you know how marginal income tax systems work.

              Well, yes, but once again you're using a "raise" example because there's no actual additional effort involved.  We both agree that people will accept free money up to virtually a 100% tax rate in return for neither risk nor effort on their part.  That's not really controversial.  It's also not a situation that comes up much.

              I agree that it's not controversial and is founded on economic theory. I'm glad you don't dispute it. Imagine my surprise that stating it elicited such bluster from you....

              Also, it is a situation that comes up more often than anything else, particularly in the higher brackets of income. Marginal tax rates on income only apply to income from wages, tips, and salaries. In other words, the only increase from bracket to bracket will come in the form of a raise (either with the same company or a new one). Unless you think that small business owners submit their income from their business as personal income, in which case, you'd be wrong. So, in all actuality, you don't disagree with what I said, but don't seem to fully understand how our tax system works, and so mistakenly believe that the most common form of income is not common. And that is the reason for these blustering responses full assertions made with an unjustified tone of certitude?

              If you advocate a policy based on a given trend, you must assume some level of causation, otherwise your suggested political action is nothing more than a random guess, and taking people's money based on a guess is hardly sound government.
              I'm not being paid to teach you the finer points of empirical research or academic research on economics, so I'll leave it at this: you might want to look up the difference between "correlation" and "random guess (or chance in most literature)." Aside from that, this statement makes it seem like you don't understand how government makes decisions well enough to understand what "sound government" is.
              You can take as many data points as you wish, the issue is that the high marginal tax rates during GDP growth in the US is a statistical outlier compared to other countries.
              I'm guessing this was intended to not be in block quote; it's not something I said, so you're not quoting me. Anyway, no, that's just flat out false. As I said, several international studies have shown positive correlation between marginal rates on personal income and GDP growth. That is the opposite of making the U.S. an outlier. I am not responsible for doing homework for you. You challenged something I said rather emphatically, and I asked for evidence to the contrary because my statement was based on knowledge of both the field and recent literature on the subject (also, you were the one who claimed to be privy to hordes of empirical evidence). You provided a handful of links that were irrelevant to my statement. I don't care if you disagree with me. But don't pretend empirical research definitively agrees with you when I know for a fact that it doesn't. You can look up the literature on international econometric models on income taxation yourself.
              What, precisely, would be the ideal number of links for a forum post in someone's diary about economics?
              You're the one that brought up "hordes of evidence," not me. If hordes is three, okay. Whatever. My point was not that your number was suboptimal, but that three links, two of which are irrelevant, does not a consensus make.
              As I stated above, there's no reason to assume that corporations are rational actors and individuals are not, in regard to income tax.
              No one is making that case, and it's a distraction to even bring it up. The two are rational actors, but face very different decision incentives and variable inputs when making decisions, so their rational choices are different and should be (and in the academic study of economics, are) analyzed, modeled, and studied differently.

              Anyway, that's it for this thread. Maybe I'll one day make a diary providing information about the economics of income taxes and the structure of marginal tax rates, since the misunderstanding of these things seems endemic (not just with you, but I encounter it a lot...there are a lot of people who seem to equate the marginal rate of the highest bracket with the intended effective rate for someone making that level of income). And then maybe you can troll that diary too, haha.

              Anyway, as I said before, we can agree to disagree. Have a nice life.

    •  Come to think of it... (1+ / 0-)
      Recommended by:
      tardis10

      I'm pretty sure a group of economists recently released an empirical analysis showing that a more efficient tax system in the U.S. would have a highest bracket marginal rate at anywhere between 50-70%. In addition, a study from NBER covering a comparison of OECD countries found that income inequality created significant drags on the economy and inefficiencies. Higher tax rates on income creates positive externalities by eliminating these inefficiencies. While that doesn't say much about income incentive effects, it does get at the larger point that there are many empirical studies showing that income tax revenues are more efficient and economically preferable to consumption taxes.

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