Debunking the claim that higher income-tax rates reduce GDP

http://www.slate.com/id/2245781/

by darshan • 16 years ago

17 30 16 years ago

xmstr• 16 years ago

Nothing like debunking a political debate by writing an op-ed favoring your side of the argument.

mseebach3• 16 years ago

One obvious issue with this argument: The claim that higher tax rates can reduce GDP is from Arthur Laffer and his Laffer curve -- and relates to the total tax burden, and not the marginal rate.

ig1• 16 years ago

Also there's a complete lack of a baseline, the GDP growth in 2000 vs 2008 is much more down to global economic conditions than US tax rates.

What would make a more reasonable comparison is if you compared similar US States with different tax burdens in over the same time period.

mattheww2• 16 years ago

One obvious issue with the Laffer curve: Nobody actually knows where the peak is.

mseebach3• 16 years ago

No, but that doesn't mean it isn't there.

Most social sciences (including economics) can't very well be exact for the lack of experiments, much less controlled experiments.

halostatue• 16 years ago

...which, to me, would suggest that we need more progressive taxation (income, capital gains, etc.) and much less regressive taxation (sales, use fees, etc.). Of course, one can look at the GDP growth rate for the U.S., Canada, and Norway and see interesting results:

http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mk...

It'd be nice to figure out what datasets are available in the Public Data. That's really useful.

JeffL• 16 years ago

I hate how they equate progressive taxation with justice. It only works if you think justice is when people get equal outcomes regardless of if they deserve it or not. It would be unjust to penalize Warren Buffet and the other titans that drive our economy with 91% marginal tax rates. They don't deserve that kind of treatment, and frankly, I trust them to do much better good with their excess cash than the government ever would.

forinti• 16 years ago

Shouldn't he at least pay as much as average joe? He himself conceded that his secretary pays a higher percentage of her income in taxes than he does.

gyardley2• 16 years ago

I strongly suspect Warren Buffet pays orders of magnitude more tax than his secretary.

If you're arguing that he should pay the same percentage of his overall income in tax as his secretary, fine, but that's a different argument.

jbellis• 16 years ago

> He himself conceded that his secretary pays a higher percentage of her income in taxes than he does

Buffet is himself a redistributionist, and was comparing his capital gains tax rate (where essentially all his "income" comes from) with the earned-income tax rate his secretary pays. In other words, Buffet was indulging in a bit of FUD, to be blunt.

Many economists believe that taxing capital gains lower than income is a Good Thing to encourage investment and savings, even if it results in strange outcomes like Buffet's in edge cases.

apinstein4• 16 years ago

He is promoting progressive taxation as an enabler of social justice, not individual justice. There's a difference.

He acknowledges your point that the debate on flat vs progressive tax rates is a virtue vs social justice debate.

He also is debunking the idea that higher taxes hurt the economy, which is the OMG BE SCARED argument that the right uses to try to lower taxes (without a commensurate reduction in spending) in order to grow the economy and (eventually) increase the tax base. I recently wrote a similar article about this particular point (http://www.reasonablyopinionated.com/2010/02/tax-revenues-ta...) because the only thing that ever happens in modern history when taxes are lowered is horrible deficits. As the Slate article points out, there isn't a strong correlation between tax rates and GDP growth.

Personally I am on the side of Buffet and Spitzer on this issue and do support progressive taxation, precisely because of the social justice argument. I believe in equal opportunity, but abhor the idea of forcing equal outcomes.

What really irks me about the anti-progressive-tax crowd is how they don't even acknowledge the benefits the rich get from such a system: efficient and reliable infrastructure, political stability, and a large middle class (ie customer base). If the government did not make those investments, the overall pie would likely be smaller.

yummyfajitas4• 16 years ago

Could you explain what you mean by "social justice"?

fauigerzigerk• 16 years ago

I would agree with you (more than I do anyway) if everyone started out from the same base. But isn't it also unfair that true entrepreneurs who take a lot of risk are taxed equally to people who have inherited wealth or just went from one elite school to the next ending up at a consulting firm talking hot air for the rest of their lives?

I do think that there is a causal relationship between effort and wealth, but that relationship is very patchy.

gyardley2• 16 years ago

Considering the pace of chance in the last forty years, comparing the 1960s and 1970s to today doesn't seem like sound methodology. I suspect, for example, that it's now considerably easier to vote with your feet.

barrkel• 16 years ago

GDP growth in the US in particular can be misleading, owing to population growth. Growth in GDP per capita may be better.

three14• 16 years ago

I read somewhere [citation needed] that the reason that you don't see a real correlation is that the rich effectively tend to pay somewhere around a 40% tax rate. As tax rates go up, it starts to pay to look for tax shelters, and get non-taxable benefits from their company, and so on, and by the time all is said and done, they won't pay more with the higher rate.

If true, raising the tax rate won't get any more money for the government, although it might be good PR for the rich and good income for their accountants.

Debunking the claim that higher income-tax rates reduce GDP

Related Stories