New Paper Suggests Optimal Tax Revenue would be raised as at rates as high as 76%

• BoatShoes

  Peter Diamond and Emmanuel Saez: "The Case for a Progressive Tax"
  
  http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165
  
  It is a difficult read but it makes a point that has been glossed over in the current deficit debate; We're way below the apex on the laffer curve. In fact they estimate that we would not reach the apex until rates as high as 76%
  
  It has been suggested that we need to raise additional revenue (in conjunction with spending cuts) if we're to solve our long term and medium term fiscal problems. In response to the calls for increased Revenue, people like Gut point out that there elasticity problems and behavioral modification that comes with increasing tax rates. The idea is that if you raise rates from 35% to 39.6%, productivity will decline and more revenue won't be raised etc. I respect Gut's opinion quite a lot but Diamond and Saez suggest that his concerns about elasticity in response to rate raises are overblown.
  
  In that paper on page 172, the authors take on that concern noting that the current top tax rate we currently have is only appropriate if we believe the elasticity of top income earners at the top tax rate is as high as 0.9, which is significantly higher than their estimate of the elasticity, which is only 0.25.
  
  Our current political debate is whether or not we should raise the top marginal federal rate by 4.6 percentage points, which would result in the top combined tax rate going from 42.5% to 46.8% (state and local included).
  
  Using the formula in their paper, we find this is only the optimal tax rate if we believe elasticity is as high as 0.76 - still three times higher than the estimate used in the paper.
  
  So, the idea that elasticity will prevent revenue from being increased is very likely incorrect.
  
  Even if you suppose that 0.25 is not exactly the correct estimate of elasticity it is unlikely that two seasoned experts like Diamond and Saez are so far off that we would actually be doing any damage whatsoever by raising the federal tax rate back to 39.6%.
  
  We should not raise taxes on high income earners in the near term unless we use the revenue to finance more stimulative measures like tax cuts for middle income earners but it seems evident to anyone who cares about reducing the deficit (and not just erasing government) that one of the most efficient ways to do so is to raise income taxes on high income earners as part of an overall package that includes spending reductions in the safety net programs.
  
  Nobody has suggested 76% rates but rates that high were ok for Eisenhower and Nixon. Surely we can handle 39.6%. Agreeing to 39.6% to help tame our deficit problems does not mean you're not "conservative" in my opinion. In fact, I believe agreeing to do so bolsters one's claim of being a conservative.
• believer

  

  Although you acknowledge the need for spending cuts, we DO NOT have a revenue (tax increase) issue. We have a massive, insatiable spending issue.
  
  First, guarantee me that real spending cuts will occur. After that happens and no further spending INCREASES are on the political table, then come to me and tell me that we have a need for tax increases.
  
  The problem with Big Government is that when "additional revenues" are generated that newly acquired "wealth" is never applied to balancing the budget. It's simply more dollars for Congressmen and Senators to spend in their home districts.
  
  It's insane to keep feeding the DC Spending Pig, but it's the height of idiocy to ask us to feed it even more.
  
  STOP THE SPENDING FIRST. Then we'll talk tax increases.
• HitsRus

  

  ^^^^that is it in a nutshell. Reps. It doesn't even matter whether what Diamond and Saez propose will work or not. It is about taxes being used to fund a political socialist agenda. Take Obamacare off the table. Get rid of the constant push for more entitlements....and if taxes are to be raised, it should be across the board so that even the lowest wage earner has some financial stake in how the government spends our money. The solution almost has to be political first. People have to realize that you have to stop rewarding sloth....that the chronically non-productive do not deserve a steady stream of entitlements. More over, the purchase of votes for pork needs to stop.
  

  STOP THE SPENDING FIRST. Then we'll talk tax increases.

  Preach it brother.
• jmog

  I have said the same thing over and over again.
  
  Give me real spending cuts NOW first, get the budget in balance. THEN come asking for tax increases and GUARANTEE that they are going to actual pay on the principle of our debt.
• gut

  76% is a little tough to believe...I'm not sure where optimal is, we might be above or below it, but my suspicion is it's well below 76%. I already see successful people who quit working in November and December to lock-in their bonuses and also because they've worked hard all year - the idea that raising those people's rates to 75% won't have them quitting in July/Aug ignores reality IMO.
  
  Let's say I work 70-80 hours a week and make $20k a week ($13k after taxes)....Later in the year do you really think I will continue working that to make $5k a week?
  
  You've got to take state and local taxes into account, as well. People aren't motivated just by their federal tax burden. Also, years past had marginal rates as high as 90%, and revenues as a % of GDP were among the lowest ever. If not, my suspicion is these guys would have had a number closer to 90% as "optimal".
  
  The whole idea of "optimal" taxes is kind of oxymoronic to begin with.
• fish82

  

  It's always amusing to watch you people twist yourselves into little pretzels desperately trying to find a way to "justify" higher tax rates. Keep up the good fight.
• sleeper

  

  Does this paper assume that the rich would stay in this country with a tax rate of 76%? I sure as hell wouldn't.
• queencitybuckeye

  believer;985826 wrote:Although you acknowledge the need for spending cuts, we DO NOT have a revenue (tax increase) issue. We have a massive, insatiable spending issue.
  

  This * 76
  
  As there's no logical reason to believe that additional revenue wouldn't be spent in the same proportion as the status quo (i.e. over 100%), not only would incremental government revenue not be helpful, it would be a disaster.
• BoatShoes

  gut;985937 wrote:76% is a little tough to believe...I'm not sure where optimal is, we might be above or below it, but my suspicion is it's well below 76%. I already see successful people who quit working in November and December to lock-in their bonuses and also because they've worked hard all year - the idea that raising those people's rates to 75% won't have them quitting in July/Aug ignores reality IMO.
  
  Let's say I work 70-80 hours a week and make $20k a week ($13k after taxes)....Later in the year do you really think I will continue working that to make $5k a week?

  Are you saying your "gut" feeling about elasticity is better than their econometrics? haha I kid, I kid.
• BoatShoes

  HitsRus;985848 wrote:The solution almost has to be political first. People have to realize that you have to stop rewarding sloth....that the chronically non-productive do not deserve a steady stream of entitlements.

  Explain to me how you think our country richly rewards sloth. Welfare has been essentially non-existent since 1996 and the EITC encourages work. SNAP? nevermind that many people who work 40 hours a week use the program as well?
  
  In times of persistent high unemployment like this when there is not sufficient demand for the supply of labor the market will not employ everyone no matter how determined and hardworking they are. Surely you don't propose a cooperative State-Federal Job Guarantee program like liberals desire. Now that would make sure no citizen beyond retirees would be getting transfer payments without contributing to economic growth in any type of economy adjusted to the business cycle.
  
  Either way this idea that getting rid of "sloth subsidizing" as a way to solve our long term budget problems is nonsense. We have to cut Social Security, Medicare and Defense Spending and nobody considers the people on Medicare and Social Security sloth.
• BoatShoes

  jmog;985936 wrote:I have said the same thing over and over again.
  
  Give me real spending cuts NOW first, get the budget in balance. THEN come asking for tax increases and GUARANTEE that they are going to actual pay on the principle of our debt.

  You of course realize that "spending cuts NOW" just like "Tax Raises NOW" would decrease economic growth, raise unemployment and therefore make our medium and long term debt problems worse as is happening in Europe right now before our very eyes. Your solution is being tried in the real actual world across the pond and making things worse.
  
  If you're really interested in reading a great summary on this issue you should check out this paper by Christy Romer that she presented on Nov. 7.
  
  "What do we know about the Effects of Fiscal Policy: Separating Evidence from Ideology"
  
  
  It's only about 25 pages. Some Highlights:
  
  http://www.econ.berkeley.edu/~cromer/Written Version of Effects of Fiscal Policy.pdf
  
  "The bottom line is that, as much as policymakers and even many economists want to believe that doing what seems like a noble thing—lowering the budget deficit—is good for growth in the near term, the evidence is firmly against this proposition. Fiscal austerity may be desirable for the long-run solvency and health of the economy. But it lowers growth and raises unemployment in the near term. That is an essential fact that needs to inform policy decisions."
  
  "...Indeed, we know more now than we have ever known before. There is a large and growing literature that shows that fiscal expansion helps an economy grow in the near term; that certain types of fiscal stimulus are particularly effective; and that fiscal contractions will tend to lower output and employment in the short run."
• BoatShoes

  believer;985826 wrote:Although you acknowledge the need for spending cuts, we DO NOT have a revenue (tax increase) issue. We have a massive, insatiable spending issue.
  
  First, guarantee me that real spending cuts will occur. After that happens and no further spending INCREASES are on the political table, then come to me and tell me that we have a need for tax increases.
  
  The problem with Big Government is that when "additional revenues" are generated that newly acquired "wealth" is never applied to balancing the budget. It's simply more dollars for Congressmen and Senators to spend in their home districts.

  There is little evidence of this occuring in the last two decades. In fact Conservatives used our budget surpluses in the early 2000's to justify the Bush Era Tax Cuts because they were concerned that we would "pay off our debt too fast" and as we've seen Republicans will risk defaulting on that very debt in order to preserve them.
  
  Nevermind that they will not fight for the extension of the payroll tax cut when failing to do so would immediately harm our economy in the short term much more than allowing the cut for high income earners to expire would. Not coincidentally I'm sure the very rich do not benefit nearly as much from a payroll tax cut.
  
  And also, the only spending cuts that to be done NOW that would matter are Defense, SS and Medicare...all of which you've said are off the table.
• BoatShoes

  I should repeat that this idea of "massive spending cuts NOW first, before I agree to tax raises" is not a good idea. Massive spending cuts NOW just like Massive tax increases NOW, would raise unemployment, lower GDP and increase our national debt in the short term...making our long run problems worse.
  
  We have to agree to phase in things like, a raise in the retirement age, higher marginal rates, lower SS benefits, fewer defense expenditures, fewer deductions over time. Thus you can't agree to cut a ton of spending today because it won't eliminate the near term deficit because more people will be unemployed and growth will slow...creating a downward spiral of deficits. You have to agree to spending cuts and tax raises at the same time.
• queencitybuckeye

  BoatShoes;986737 wrote:I should repeat that this idea of "massive spending cuts NOW first, before I agree to tax raises" is not a good idea. Massive spending cuts NOW just like Massive tax increases NOW, would raise unemployment, lower GDP and increase our national debt in the short term...making our long run problems worse.
  
  We have to agree to phase in things like, a raise in the retirement age, higher marginal rates, lower SS benefits, fewer defense expenditures, fewer deductions over time. Thus you can't agree to cut a ton of spending today because it won't eliminate the near term deficit because more people will be unemployed and growth will slow...creating a downward spiral of deficits. You have to agree to spending cuts and tax raises at the same time.

  Actually, making things worse in the short term can and probably would make things better in the long term. Of course, idiots who believed the various stimuli actually prevented an economic meltdown wouldn't have the intellectual capacity to get this concept.
• 2kool4skool

  

  From 1950 to 1980 the tax rate for the top bracket varied between 70 and 91%
• BGFalcons82

  

  2kool4skool;986910 wrote:From 1950 to 1980 the tax rate for the top bracket varied between 70 and 91%

  Nobody has suggested 76% rates but rates that high were ok for Eisenhower and Nixon. Surely we can handle 39.6%. Agreeing to 39.6% to help tame our deficit problems does not mean you're not "conservative" in my opinion. In fact, I believe agreeing to do so bolsters one's claim of being a conservative.

  I know the statists get an erection talking about how the tax rates in the Eisenhower era created an economy non-pareleil. If anyone thinks someone earning $1,000,000 blindly gave $910,000 to Uncle Sam and an additional $25,000 to the states and locals is clearly still suffering from Dr. Leary's favorite invention.
  
  If you really want to go back to these rates, then we also need to
  
  1. Dramatically reduce capital gains tax rates/credits back to Eisenhower levels.
  2. Reduce the gas tax to 3 cents per gallon.
  3. Re-institute the deductions for real estate gains that Reagan eliminated in 1986.
  4. Say adios to the Alternative Minimum Tax.
  
  There are literally hundreds of thousands of other tax policy changes since Ike strode the West Wing. But that apparently doesn't matter when confiscatory rates of 91% are involved. To compare tax rates from different eras is to compare apples to pears to bananas to grapes to cumquats. Screw it...the Soviets had nearly a 100% tax rate policy and they are the economic model for all eternity....right???
• Manhattan Buckeye

  2kool4skool;986910 wrote:From 1950 to 1980 the tax rate for the top bracket varied between 70 and 91%

  No one with an IQ above 50 paid nearly that much. This was before the AMT and tax shelters were routine. If I make $1,100,000/year, and I have the option on paying $91,000 of the last $100,000 in taxes or paying a good tax attorney/accountant $35,000 to shelter/defer the balance that I'm left with a $10,000/bill, I choose the latter every time.
  
  The high tax rates were nothing more than a facade. No one paid them. Who the hell takes an income where you pay 91% of if away? No one. That's why people took comp in other forms.
  
  I can't believe this is still an issue. We have a lot of problems, revenue is part of it, the exponential growth in government is the main elephant in the room.
• believer

  

  Manhattan Buckeye;987383 wrote:I can't believe this is still an issue. We have a lot of problems, revenue is part of it, the exponential growth in government is the main elephant in the room.

  The problem is the Keynesianists and statists think the elephant needs to get bigger.
• isadore

  BGFalcons82;987043 wrote:I know the statists get an erection talking about how the tax rates in the Eisenhower era created an economy non-pareleil. If anyone thinks someone earning $1,000,000 blindly gave $910,000 to Uncle Sam and an additional $25,000 to the states and locals is clearly still suffering from Dr. Leary's favorite invention.
  
  If you really want to go back to these rates, then we also need to
  
  1. Dramatically reduce capital gains tax rates/credits back to Eisenhower levels.
  2. Reduce the gas tax to 3 cents per gallon.
  3. Re-institute the deductions for real estate gains that Reagan eliminated in 1986.
  4. Say adios to the Alternative Minimum Tax.
  
  There are literally hundreds of thousands of other tax policy changes since Ike strode the West Wing. But that apparently doesn't matter when confiscatory rates of 91% are involved. To compare tax rates from different eras is to compare apples to pears to bananas to grapes to cumquats. Screw it...the Soviets had nearly a 100% tax rate policy and they are the economic model for all eternity....right???

  We should make that deal. Eisenhower rates sound good.
  During the Eisenhower Presidency federal gasoline tax went from 2 to 4 cents a gallon. Of course during that time the price of a gallon was between 28 to 31 cents a gallon. So as a percentage of price it was between 7 to 13%.
  http://www.taxfoundation.org/taxdata/show/1067.html
  http://www1.eere.energy.gov/vehiclesandfuels/facts/2005/fcvt_fotw364.html
  Not such big changes in capital gain
  http://www.taxpolicycenter.org/index.cfm
  http://www.backtaxeshelp.com/tax-blog/filing-taxes/capital-gains-rates.html
  And raising the tax rate on millionaires would make so many people happy.
  What do people want
  http://www.washingtonpost.com/blogs/plum-line/post/yup-moderates-and-independents-support-taxing-the-rich/2011/03/03/gIQAB9gMiK_blog.html
  They want taxes raised on the rich.
  Even the well to do favor taxing the rich.
  http://blogs.wsj.com/wealth/2011/10/05/the-affluent-support-higher-taxes-on-the-rich/
  I know it abhorrent to the Paulians and Cainites who want 9-9-9 or better yet repeal of the 16[SUP]th[/SUP] amendment,
  The top quintile offensive in class warfare began with the Reagan tax cuts and has been going largely unabated for 30 years. It has given us an 15 trillion dollar debt, a society with an increasingly skewed income distribution, a disappearing middle class and the worse social mobility among the industrialized nations of the world.
  
• I Wear Pants

  believer;987390 wrote:The problem is the Keynesianists and statists think the elephant needs to get bigger.

  Not really. Or at least anyone who has a brain.
  
  But lowering taxes as the de facto answer is equally as stupid as thinking we somehow need more spending.
  
  We need much, much less spending from everywhere (everywhere includes military) and certain new taxes could also be beneficial. Though I agree that they would be silly if it wasn't also done with spending cuts. No reason to raise taxes to pay for more programs that in all probability don't help in the aggregate.
• gut

  BoatShoes;986647 wrote:Are you saying your "gut" feeling about elasticity is better than their econometrics? haha I kid, I kid.

  Sounds like an interesting read that I will get around to at some point. I assume their research will withstand scrutiny of peer review (although often such papers are NOT submitted for peer review, but "published" as a political commentary as much as anything else). I do know that sound research often fails in the real world because you just can't model everything all that well, and because people do not behave rationally and there are other frictions. I'd also question if they've taken subsititutes into account - namely that ability to move or shelter income or also to "consume" more leisure time. Just because income is relatively inelastic doesn't mean the effort required is.
  
  In fact, the conclusion is completely counter-intuitive because we know as wage rates drop (which a tax increase is the same, effectively) the incentive to work/produce drops. And you're not talking a few points, you're talking DOUBLING that rate.
• gut

  I Wear Pants;988816 wrote: But lowering taxes as the de facto answer is equally as stupid as thinking we somehow need more spending.

  I think there is probably merit to lowering taxes and eliminating loopholes. There has to be a reason why when marginal rates were as high as 90% that revenues were among the lowest ever.
  
  The other problem is you can eliminate loopholes and everything else, but with people with this kind of money taxes truly are "voluntary". I can sit on capital gains for a long time, almost indefinitely if I have the means, before realizing it as income. And there are many other perfectly legal ways to reduce or exclude my tax liability, up to and including moving myself and/or my company to a country with more favorable taxation.
  
  I don't have any illusions about the social/progressive goals of taxation, nor do I think it is inherently bad. But the govt as a middle man in redistribution is clearly ineffective and inefficient, and we need to think about fundamentally changing our policies to better incentivize business to hire more and pay more. That actually can work - i.e. a win for the business and the worker - because there's value in eliminating that govt dead-weight loss. Unfortunately none of the power-hungry leeches in Washington appear to have any interest in a smaller govt.
• gut

  isadore;988581 wrote:It has given us an 15 trillion dollar debt, a society with an increasingly skewed income distribution, a disappearing middle class and the worse social mobility among the industrialized nations of the world.
  

  Spare me. The govt has never propped-up the middle class. The govt does nothing to "expand" the middle class by taking from the rich and giving to the poor - wait, where's the middle class in that equation? Often they end-up unintentionally included in the "tax the rich" proposals.
  
  Revenues have bounced around pretty consistently on 18% of GDP. There are in fact real trade-offs to consider which is why you can't just tax income any amount you want. Economists universally agree that taxing production (i.e. incomes) is a drag on growth. Truthfully the only responsibly and practical way to grow revenues is implementing a consumption tax - this is as high as 19% in Europe and if you want to collect more than 18% of GDP that's your answer. Problem is, consumption taxes are generally flat at best, usually regressive in effect. But it would be good for everyone to have a little more skin in the game of federal govt. I think you could exclude food and energy, and perhaps housing (which means you're taxing probably less than 50% of GDP with a consumption tax) and that would be fair - everyone SHOULD pay the same tax on a smartphone or flat screen tv, luxury non-necessity purchases don't need progressive handouts.
• gut

  BoatShoes;986671 wrote:and as we've seen Republicans will risk defaulting on that very debt in order to preserve them.

  Horribly inaccurate bordering on an absurd lie. There was money to make the payments, ultimately Congress and/or the POTUS would have had to choose between paying the debt or other entitlement/discretionary expenditures. A vote against raising the debt ceiling was most certainly NOT a vote to default.
• isadore

  gut;989484 wrote:Spare me. The govt has never propped-up the middle class. The govt does nothing to "expand" the middle class by taking from the rich and giving to the poor - wait, where's the middle class in that equation? Often they end-up unintentionally included in the "tax the rich" proposals.
  
  Revenues have bounced around pretty consistently on 18% of GDP. There are in fact real trade-offs to consider which is why you can't just tax income any amount you want. Economists universally agree that taxing production (i.e. incomes) is a drag on growth. Truthfully the only responsibly and practical way to grow revenues is implementing a consumption tax - this is as high as 19% in Europe and if you want to collect more than 18% of GDP that's your answer. Problem is, consumption taxes are generally flat at best, usually regressive in effect. But it would be good for everyone to have a little more skin in the game of federal govt. I think you could exclude food and energy, and perhaps housing (which means you're taxing probably less than 50% of GDP with a consumption tax) and that would be fair - everyone SHOULD pay the same tax on a smartphone or flat screen tv, luxury non-necessity purchases don't need progressive handouts.

  “The government has never propped-up the middle class.” Really it seems like many government actions have helped prop up the middle class. A couple off the top of my head, FDIC gave the middle class confidence to put their money back in banks, mortgage payment deductions helped them buy homes, a few small examples. Here is a bigger one, the GI Bill one of the major factors in expanding the middle class in America after unregulated capitalism had done its best to destroy it. GI Bill allowed returning service people to get an education, buy homes and start businesses, it helped make America a middle class nation.
  Then the statement “Economists universally agree” is oxymoronic. But beyond that many of our leading economists favor raising taxes on the rich for example Nobel prize winners, Joseph Stiglitz and Paul Krugman. They and the vast majority of American people see the need to reduce the deficit by increasing taxes on those most able to pay.
  http://www.nytimes.com/2010/09/20/opinion/20krugman.html
  http://abcnews.go.com/Business/nobel-prize-winner-joseph-stiglitz-raising-taxes-class/story?id=14554508
  “But it would be good for everyone to have a little more skin in the game of federal govt.” It is so easy for some of us to dismiss the suffering of those in need. As you admit the consumption tax would be regressive, increasing the tax burden of those least able to pay. They already maybe paying other payroll taxes with state and local taxes. They don’t have a lot of skin to give.