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August 11, 2010

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Sorry for the lack of posts

You are forgiven.

"o the way I see it, even quite high marginal tax rates on high earners — even rates in, say, the 70 percent range that prevailed pre-Reagan — are unlikely to put us on the wrong side of the Laffer curve by discouraging effort."

I would note that, on the not unreasonable assumption that a curve goes flat before it reverses course, (Might even be a mathematical rule to that effect...) one can predict that, even below the inflection point of the Laffer curve, tax increases will produce substantially less revenue than any linear projection would anticipate.

Depending on the actual shape of the curve, there might even be a substantial region where raising taxes, though it won't reduce revenue, is essentially pointless.

I'd add that the very fact that people aren't interchangeable implies that the peak of the Laffer curve probably IS a fairly wide plateau.

Morally, no one should make more than X times a full time minimum wage worker. We can all debate what X should be, but it shouldn't be infinity. How much incentive is needed to get me to do my best? 20 times as much as the other worker? Seven times as much? We should agree that, above some multiple, the marginal tax rate should be 100%. On moral grounds,alone. Admit that we are all connected at some level.

Put in all the economic arguments you want, but start with the idea that there is some connection between the lowest paid worker and the highest paid.

Somewhere toward the end of Algebra II, when seemingly out of nowhere, my teacher came up with the notion that numbers had signs, cosigns and tangents for reasons that today still seem a worthless mystery, I gave up on what still today seems like higher mathematics. Arithmetic is fine for me.

Here is some arithmetic: X number of hours in a day times Y dollars an hour minus 70% = diminishing returns in much shorter order.

Krugman has no evidence for his proposition. It runs counter to logic. There is only so much work a person can do and most of us are at maximum capacity as it is anyway.

More to the point, progressives, when it comes to tax increases, won't leave the goalposts in one place. Are we talking about 39.6% or 70%? At which levels? A tax on incomes over a million at an additional 3-5 marginal points or an additional 35 marginal points for a dandy 100% increase in the marginal rate?

Does Krugman say anything about risk? Of course not. Who will put their net worth at risk on a new venture if 70% of the money goes to the gov't? Further, the private sector needs money. Pulling money out at that rate doesn't spur growth, it retards it.

could someone show me the equation which generates the Laffer Curve?

kthx

There is only so much work a person can do and most of us are at maximum capacity as it is anyway.

10% unemployment is "most of us are at maximum capacity already"?

But of course, those 11,000 households averaging $24,000,000 a year after-tax income (not even mentioning wealth) -- they would really be hurting if we raised their taxes.

But since we're all connected, maybe a few of the 24,000,000 who are making do with $15,000 a year after taxes can give them some tips on economizing.

Are we talking about 39.6% or 70%?

39.6%.

At which levels?

If I understand it correctly, the 33% bracket reverts to 36% beginning at about $250K, and the 35% bracket (which starts at $379,650) reverts to 39.6%.

A tax on incomes over a million at an additional 3-5 marginal points or an additional 35 marginal points for a dandy 100% increase in the marginal rate?

Personally I'd like to see an additional bracket created for very high earners, where "high earners" would be folks with earned income somewhere in the low millions, and with a rate of maybe 45%. Income tax currently stops being progressive at $379K, there are folks who literally make a thousand times that much.

But nothing like that is actually proposed.

could someone show me the equation which generates the Laffer Curve?

In order to understand the Laffer Curve, you first have to imbibe a couple of lovely cocktails, expensed to the Free Enterprise Foundation.

There is only so much work a person can do and most of us are at maximum capacity as it is anyway.

10% unemployment is "most of us are at maximum capacity already"?

What JanieM said.

Seriously McKinney, and I say this with complete respect, if an increase in the top marginal rate would make you pack it in, somebody else would pick up the slack.

It's not like folks would simply stop needing the services you supply, and there will always be another guy hungry enough to make a feast out of your crumbs.

I don't know what the "revenue-optimal" number is in the Laffer analysis. Nobody does, and as soon as anyone figured it out it would probably change anyway.

The one thing I think we can all agree on is that we could really use the revenue.

Not to expand the federal government into a soul-sucking nanny-state octopus.

To keep the freaking lights on. Literally.

Here is some arithmetic: X number of hours in a day times Y dollars an hour minus 70% = diminishing returns in much shorter order.

wait, who proposed a 70% flat rate ?

(and if you find him, could you ask him to return the goalposts, too?)

Speaking of the Laffer Curve, if you haven't read Ezra Klein's recent columns asking several notables where it bends, you need to. Especially the right-wing pundits' and Republicans' answers:

The Right

Larry Kudlow, host, CNBC's The Kudlow Report:

"Personal income tax of 15-20%, business, sales tax rate of 8-10%. I can make some generalizations which would suggest, in terms of just the personal income tax rate, 91% was too high, Reagan cut it to 28.... We've done pretty well in the economy these last three decades, apart from this Great Recession, which is more financial related. Maybe it's a range of 35-40%, it seems like that worked pretty well. If you started encroaching on 50, that would cause trouble.... Once you get into the 40 or 45% range, in my view, you're risking a long-term revenue slowdown and a long-term growth slowdown."

Pat Buchanan, syndicated columnist, former presidential candidate:

Would prefer not to be quoted exactly, but says the revenue-maximizing combined state and federal rate is about 33 percent.

Donald Luskin, columnist, SmartMoney.com, National Review:

"19%... I am saying that the way to maximize the take from personal wage income tax is with a 19% rate on that tax."

Stephen Moore, senior economic writer and editorial board member, Wall Street Journal:

"The revenue maximizing rate is probably around 40 or 50 percent. But the growth maximizing rate, even given the current deficits, is probaby about 20 percent. So the goal is to get the rate down to 20 to 25 percent. For cap gains the revenue maximizing rate is between 15 and 20 percent."

Amity Shlaes, senior fellow, Council on Foreign Relations; author, The Forgotten Man:

Declined to answer.

Republican Politicians

Senate Minority Leader Mitch McConnell (R-KY):

His office declined to answer.

Sen. Jim DeMint (R-SC):

His office declined to answer.

Rep. Mike Pence (R-IN):

His office declined to answer.

Rep. Thaddeus McCotter (R-MI):

His office declined to answer.

Seriously McKinney, and I say this with complete respect, if an increase in the top marginal rate would make you pack it in, somebody else would pick up the slack.

Russell, it depends on the increase. I'd vote for 39.6% if it went for debt reduction. I'd go to 45% of net income over 1mm, with the same stipulation. Krugman is talking about 70%.

JanieM--no matter how thin Krugman slices the baloney, it still has two sides. His premise is that people would work just as hard at a 70% marginal rate as they do at 35%. That is what I am arguing with.

Russell was kind enough to draw the line on where rates should stop. Eric, IIRC, is in line with this. What about everyone else?

McKinney,

First, it's "sine" and "cosine". Numbers do have "signs", but definitely not "cosigns".

Second, X hours times $Y/hr minus 70% is indeed arithmetic. But it's about as sophisticated as: "Ronnie has 5 ideas. He gives Maggie 3 of his ideas. Ronnie has 2 ideas left." Arithmetic can be "true" and still be silly.

You cannot fool us, McKinney: we KNOW you're not ignorant. We know you know the meaning of "marginal".

To be fair, I do acknowledge that a small, put-upon minority of Americans live entirely on the margin. People who get paid tens of millions of dollars a year, for example, pay the top marginal rate on practically ALL their money. Poor dears.

--TP

Who will put their net worth at risk on a new venture if 70% of the money goes to the gov't?

Some of the same people and the descendants of the others who did it when that was the rate. We're not talking about an experiment here. We're talking about something that was in place for years not all that long ago.

Further, the private sector needs money. Pulling money out at that rate doesn't spur growth, it retards it.

That makes no sense. The government is part of the same economy that the private sector is. Money goes from one side to the other, back and forth in different places. If you think the government should be doing something and if you think it needs to pay for what it does through taxation (not exactly my view) it has to collect taxes. But those taxes return to the private economy when schools and roads are built, when railroads are built, when the FBI protects private assets and its employees spend their paychecks, when strapped states get federal funds so they can hire the teachers they had to lay off, when the teachers teach our kids the stuff they'll need to know to be productive members of society, when the teachers spend their paychecks.

Government spending puts money into the private sector. If you think taxes are the source of that money, don't complain about taxes in general. Quibbling over rates and complaining that taxes suck money out of the private sector are two very different arguments. We're talking about one specific aspect (the highest marginal rate) of one specific tax (the income tax), not the government taking 70% of all private wealth.

It seems like we should have evidence from the past, or don't you think people did work as hard then the marginal rates were at 70% or higher?

I'm not going to draw a line because

1) I would want to educate myself a lot more before pretending I knew enough to be that specific (alternatively I could just say "What Russell said" -- that usually works well ;)

2) if I were going to try to get that specific it would only be in the context of a discussion about the system as a whole, i.e. asking/saying what other parameters I would want to see adjusted besides tax rates -- e.g. the minimum wage, the estate tax, and who knows what else.

A system where those that have can grab everything they can (like water flowing downhill to where there's already lots of water) (to the tune of 1587 times what the least of us have), and those that haven't can make do no nothing, is not a system I'm happy with.

Morally, nobody "deserves" or "earns" $24,000,000 a year.

We're talking about one specific aspect (the highest marginal rate) of one specific tax (the income tax), not the government taking 70% of all private wealth.

hairshirt, thanks for the reminder. I'll try to get with the program.

Also, just from the excerpted passage above, it sure doesn't read to me as if Krugman is proposing a 70% marginal rate, he's just citing past experience as evidence that even a 70% marginal rate doesn't significantly dampen enterprise.

Russell, it depends on the increase. I'd vote for 39.6% if it went for debt reduction. I'd go to 45% of net income over 1mm, with the same stipulation. Krugman is talking about 70%.

McKinney, I have to point out here that you are severely mis-characterizing Krugman. Nowhere in this piece does he propose raising the top marginal rate to 70% -- he merely says that he doesn't believe that the pre-Reagan rates would put us on the "decreasing revenue" side of the Laffer curve.

In fact, in the VERY NEXT PARAGRAPH of the piece -- which you quite evidently did not click through to -- he states: That doesn’t mean, however, that it’s OK to go back to Eisenhower-era 91 percent top marginal rates. The problem with super-high rates isn’t so much that they reduce incentives to work; it’s that they create huge incentives to avoid or evade.

But we’re nowhere near Laffer country now. In terms of taxes and revenue, up is up, down is down.

If you're going to argue, argue as honestly as possible. Krugman is not saying, "70% top rate for great justice!!!!1!" He's saying, "We're nowhere near the bend in the Laffer Curve, and I don't believe that even a top rate of 70% would get us there."

Krugman has no evidence for his proposition.

Actually, he does, as do lots of other professional working economists. If you click through to that Ezra Klein piece I linked to, you'll find some. E.g.,

Emmanuel Saez, E. Morris Cox professor of economics, University of California at Berkeley:

"The tax rate t maximizing revenue is: t=1/(1+a*e) where a is the Pareto parameter of the income distribution (= 1.5 in the U.S. and easy to measure), and e the elasticity of reported income with respect to 1-t which captures supply side effects. The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. Then t=1/(1+1.5*0.25)=73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed."

McK,

Krugman was not advocating 70% marginal rates. He was addressing the question of where the curve bends.

Brett,

one can predict that, even below the inflection point of the Laffer curve, tax increases will produce substantially less revenue than any linear projection would anticipate.

If we leave the word "substantially" out, for vagueness if nothing else, then you won't find many people who deny that. Those who are in the business of projecting revenues do in fact consider the effect on output. See, for example, Krugman's discussion of the elasticity of effort wrt the marginal rate.

The trouble is that there are those who simply want to use that idea as a club against taxes at all levels, without evidence or consistency.

His premise is that people would work just as hard at a 70% marginal rate as they do at 35%.

Actually, no, that is not his premise. His premise is that the reduction in work that would result from taxation at that level would not offset the higher tax rate such that there would be no revenue gained. His premise is that people wouldn't work much less. Phil's comment gets at this. Note the use of the word "elasticity."

"The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. "

As long as we assume .25 not .4 or .12 or any other number. This isn't evidence it is theory.

Another point about the Laffer curve: no one has any idea what shape it is. All we know about it is that it is zero at each end. There's an assumption that it only has one peak, but there's no actual reason to believe that. There's an assumption that it's a simple curve - that the peak's in the same place regardless of which direction you approach from - and there's no reason to believe that either.

As long as we assume .25 not .4 or .12 or any other number. This isn't evidence it is theory.

Okay, Marty, you want a range, covering all the reasonable estimates? Do the math: t ranges from about .94 (if e=.12) to .625 (if e=.40). So, even on the most generous reasonable assumption, the revenue-maximizing rate is in the high 50s.

Marty,

As long as we assume .25 not .4 or .12 or any other number. This isn't evidence it is theory.

I haven't tracked back to find the source of this, so can't be sure, but I'd bet that these numbers are based on empirical work.

This may surprise some people, but an awful lot of the research conducted by serious economists, as opposed to clowns like Luskin and Moore, involves testing models and estimating these sorts of parameters using very careful techniques on actual data. It's not just "pull it out of your a**" theorizing.

ajay: Martin Gardner wrote an essay on a more-realistic treatment of the Laffer curve in 1981. It remains relevant.

Safe trip home, Jacob.

Evidence in its broadest sense includes everything that is used to determine or demonstrate the truth of an assertion.

I think a theory that is backed up with reason can constitute evidence. Maybe it's not absolute proof, but there's no such thing in a discussion like the one we're having. It's a matter of who has the best theory. So, what theory would you like to present, Marty? Or what specific problems do you see with the one Phil presented?

(This comment may be redundant. I started typing it and was interrupted.)

that the peak's in the same place regardless of which direction you approach from - and there's no reason to believe that either

That's hysterical.

As long as we assume .25 not .4 or .12 or any other number. This isn't evidence it is theory.

What Jim Parish said. Feel free to solve for the entire range of proposed values for e and let me know what results you get. And if you'd like to read Saez's paper, and tell us why those estimates for e are probably not correct, feel free to do that, too. Also.

Perhaps nothing so sets progressives apart as the belief that higher taxes do not impact the private sector negatively. No country has ever taxed itself into prosperity. No sane person will risk his/her money on a new venture if success beyond X point produces confiscatory tax rates of 70%. In point of fact, tax rates on earned income pre-Reagan were 50%. The 70% rate only applied to unearned income. So, one thing we need to do is compare apples to apples. Krugman is misleading, to say the least, when he implies that the earned income rate was 70%.

TP

Second, X hours times $Y/hr minus 70% is indeed arithmetic. But it's about as sophisticated as: "Ronnie has 5 ideas. He gives Maggie 3 of his ideas. Ronnie has 2 ideas left." Arithmetic can be "true" and still be silly.

Actually, it is real arithmetic. If the last two or three hours I work in a day are taxed so high as to make it more worthwhile for me, or anyone else, to do something else, then something else is what gets done. TP, as a means of further explication, the day example translates into the tax year: at a certain point, the benefits of going to work are outweighed by the benefits of doing something else. Your friend Ronnie didn't work all day to come up with those ideas before giving away 3/5's of his work to someone else. Ronnie has other things he can do with his time. And why isn't Maggie coming up with her own ideas?

Further, the private sector needs money. Pulling money out at that rate doesn't spur growth, it retards it.

That makes no sense. The government is part of the same economy that the private sector is. Money goes from one side to the other, back and forth in different places.

Actually, it makes perfect sense. I don't borrow money from the gov't to keep things going when collections are slow (as they happen to be at the moment FWIW). I go to my bank. Now, my bank can only lend a certain amount of money against my net worth and against my account receivable (we should do a thread on current banking regs--they are really, really smart. Not.) so if I need more money to cover a shortfall, or if I want to expand or put money into a case that doesn't pay off until it is resolved in a year or two, I have to go to private lenders. Not the gov't. Dollars taken out of the economy by gov't aren't available for private borrowers, which drives up the cost of borrowing because of the competition for the scarcer dollars.

Morally, nobody "deserves" or "earns" $24,000,000 a year.

Not a problem. Someone like Steve Jobs builds a better mousetrap, or computer, but since his income is capped, he only sells enough better mousetraps to max out his moral limit on earnings, limiting supply, driving up cost if the demand is there and, not incidentally, because his income is capped, so too is the income on which he pays taxes, so everyone wins. Or not.

Who is the moral arbiter for how much money another can earn?

I'm fascinated by Buchanan's belief that "the revenue-maximizing combined state and federal rate is about 33 percent." I'm trying to figure out where he might have gotten that.

For most of my career, I figured that my marginal combined rate was 50%. (IT pays well, even for techies. And California taxes are high.) Did that mean I stopped working hard? Not even slightly, even when my salary increased to double where that rate took effect. Nor did any of my co-workers, that I could see.

Sure, I wouldn't mind having more of my salary in my own pocket. But running up the government's deficit to the point that the economy totally tanks and things fall apart is hardly in my long-term interest, no matter how much more I got to keep personally. And, absent a lot more revenue (or spending cuts far above what looks politically viable) that looks to be where we are headed.

Besdies, at incomes above $500K per year (to pull a number out of the air; maybe it's 50% different one way or the other) people aren't working for money per se. A few years of that, and they have more than they can spend without working at spending full time. No, what they are working for is status -- being able to say to their peers: I make xx dollars, so I rate higher than you. Which means that the tax rate is largely irrelevant to them, except philosophically. They won't like a higher rate, but it won't have a major impact on their behavior.

Perhaps nothing so sets progressives apart as the belief that higher taxes do not impact the private sector negatively.

Well, lower rates sure don't seem to be doing the trick, do they?

91% was too high, Reagan cut it to 28

I want to go back and dig into some of the links and other information provided in this thread, thanks to all for this stuff.

But mostly I just wanted to expand on Kudlow's, shall we say, telegraphic snapshot of the history of income tax marginal rates in the post-war period.

Top rate was 91% under Eisenhower. Kennedy, not Reagan, dropped the top rate to 70%. Nixon dropped the top rate on *earned* income to 50%.

Reagan then brought top marginal rates on all income to 50%, and it was 50% through the first six years of his Presidency.

In 1987, it went to 38.5%, then to 28% in 1988, the last year of Reagan's Presidency.

And it's worth noting that the decreases under Reagan were not really across the board, as much as they were simply a matter of eliminating the upper rates, making the overall income tax regime significantly less progressive.

I'm sure Kudlow is aware of all of this, and merely offered his quite brief precis of the history in the interest of saving time.

If the last two or three hours I work in a day are taxed so high as to make it more worthwhile for me, or anyone else, to do something else, then something else is what gets done.

and then you get fired for not doing your job. QED.

if you don't want the pay, quit. get on your F'ing boat and sail away into the sunset. nobody will care. there are plenty of people who would be thrilled to make the money you just walked away from.

Also, just to clarify:

35% on income above $250K and 39.6% on income above $380K is not my personal take on where the Laffer curve bends.

I have no idea where the Laffer curve bends.

I just wanted to focus the discussion on the proposals that were actually on the table, rather than on Krugman's notional 70%, which I believe he offered as a historical example rather than a recommendation.

I'm sorry but this stuff about how the pitiful hardworking rich will go sulk and pout and stop producing if they have to pay more taxes is nonsense. Let them go sulk and pout if that's what floats their boat.

It's the lower icome people who work hardest and have the least to show for it.

I know people who work full time while on chemotherapy, people who are working into their seventies and people who work fifty or sixty hours a week to support their families. I know families where the kids do all the housework and never seee their parents because the parents have to put in two shifts a day to meet the basic bills. All of these folks live on extremely tight budgets, use the food bank and the clothes bank, and could benefit from a tax break.

The Laffer curve is a religious doctrine. People who see themselves as benefitting from it take it on faith and use it to justify attitudes and values they had before they encountered it.

Maybe we need a new curve,one that tracks increases in disposible income and diagrams the point where a person's real need to keep their income to themsleves changes into pathological selfishness.

Dollars taken out of the economy by gov't aren't available for private borrowers, which drives up the cost of borrowing because of the competition for the scarcer dollars.

You're only looking at one side of what the government does. Dollars are taken out in one place and put back in in another. If the government taxed us all at high rates and spent money on gum and candy, that would be pretty bad. The point being that it's not just a matter of how much is collected in taxes, it's also a matter of how much is spent and on what.

Maybe you don't realize it, but what you're really arguing for is deficits.

As far a crowding out goes, I think it's baloney, at least right now, since the banks have lots of money to lend. They just don't want to lend it and few qualified borrowers want to borrow it. And you're mixing things up when you discuss crowding out in a discussion on tax rates. If you're afraid of crowding out, you should be against government borrowing, which means you should be in favor of taxation or against spending.

Demand sucks because too many people and entities are trying to save at the same time. Another thing you don't seem to take into account is that there is no such thing as money without the government, the only source of money in the first place. (Why the hell do they have to borrow the money they created in first place? Riddle me that.) You want the economy to grow and you want more business? Then you need demand, and the private sector isn't providing enough of it, and we have a trade deficit.

There's only one sector left, my man. And if you don't want it to squash private demand even further, what money it takes in better come off the top, where it will be least missed.

Dollars taken out of the economy by gov't

hairshirt (I think it was) has pointed out at length that the money is not "out of the economy." It gets spent, of all places, in the economy. Russell has pointed out repeatedly for all the years you and I have been here that you're not the Long Ranger, you're part of a system, and if you don't work those last few hours, someone else will take up the slack. (Speaking systemically.)

The Steve Jobs example is "even more so." Steve Jobs doesn't make either mousetraps or widgets, Steve Jobs doesn't make anything. http://en.wikipedia.org/wiki/Apple_Inc.>As of September 26, 2009, Apple had 34,300 full time employees and 2,500 temporary full time employees worldwide". A few of those people make computers (and iPhones and iPads and so on, though probably not mousetraps). So I suspect that Steve Jobs's personal income tax rate plays at this point a vanishingly small role in determining how many widgets get made and sold, how much tax goes to the government (and back into the economy), how much money flows through the economy in general because of the existence of Apple Computer.

*****

I shouldn't have mentioned the word "morally." I was responding (too vaguely for the context) to repeated assertions and suggestions (some of them by you yourself, McK) that people with more money have it because they are somehow worthier, smarter, harder-working, more indispensable to the rest of us, etc., than people who have less. No one I have ever seen works harder than the guy who mows and plows the property where I live. I am absolutely sure he is in that bottom quintile of income in the US. I suspect he isn't as "smart" as you are, though he can keep one tractor going from the parts of give others. But "smart" isn't something we earn either, it's something we're given, whether by god or by luck or whatever. It isn't something we earned.

What I am really getting at -- which is too vague for this context, but here I go off the wagon already -- is that every time this subject comes up, it seems to me that you (McK and others) are saying that it's perfectly okay for some individuals to take as much as they can out of the system, out of the whole store of common resources, but if other people try -- via a higher minimum wage, higher marginal tax rates, union activity, or whatever -- to take some of it "back" or ensure that it is distributed differently for the common good in the first place, or even, heaven forbid, for the greater good of households trying to live on $15,000 a year, then that is some kind of outrage in response to which you're going to take your ball and go home, and the rest of us will suffer as a result. I'm skeptical about that, for reasons hairshirt and Russell and others have mentioned already.

I'm sorry but this stuff about how the pitiful hardworking rich will go sulk and pout and stop producing if they have to pay more taxes is nonsense. Let them go sulk and pout if that's what floats their boat.

It's the lower icome people who work hardest and have the least to show for it.

It's a fact that the more successful a business is, the more money the owner(s) make. It also means the more people the business hires. Taxing owners doesn't put people to work. It limits the business' ability to grow. No growth, no added employment, people remain out of work. It's not that complicated.

since the banks have lots of money to lend. They just don't want to lend it and few qualified borrowers want to borrow it.

And why is that? Why are those rich bastards not wanting to expand their operations?

There's only one sector left, my man. And if you don't want it to squash private demand even further, what money it takes in better come off the top, where it will be least missed.

Or reduce spending. Cap it. You want to juice demand--we've been over this--give the people who most need and are most likely to spend money a two year FICA holiday.

We are beating the same dead horse. The Repubs say cut taxes, the Dems say raise them and let us stimulate the economy. They are both wrong. Let the consumers stimulate the economy by letting them keep more of their own money for a couple years. The same old crap from both sides is getting tiresome.

Never mind where the Laffer curve bends. What precisely are the variables it purports to relate?

I'm sure I could look it up, but it hardly matters what the "formal" definition is. People who cite "the Laffer curve" seem always to focus on the top marginal income tax rate -- as if that could POSSIBLY BE the independent variable.

Here's a question for Laffer: set the "top marginal rate" to 95%, kicking in at $1B a year. Show me where you plot that on your curve.

--TP

The Repubs say cut taxes, the Dems say raise them and let us stimulate the economy. They are both wrong. Let the consumers stimulate the economy by letting them keep more of their own money for a couple years

so, your solution is "cutting taxes", which you just said was wrong ?

I think I'll join in the others trying to shift the boundaries of acceptable debate a little and say this: If increased marginal tax rates and the return of higher tax brackets meant the uber-wealthy didn't concentrate on raking in as much cash as possible, that'd probably be a good thing. One of the major causes of the economic crash/Great Recession/whatever you want to call it was the continued growth of the financial sector, which created huge payoffs for people who did very little actual productive work. And created huge bonuses for people who "innovated" ways to divide up crap and pretend it wasn't crap. Maybe if instead of making enough in bonuses and stock options to retire in five years, they actually had to expect to work at a company long term, the executives and brokers and managers and other "Masters of the Universe" wouldn't be so quick to chop up companies and sell the economy's future for a bucket of gold now.

So yes, I'm saying the idea that we may deliberately want to create punitive rates on extreme income at the margins may be a GOOD idea.

Nate gets my vote.

The Laffer curve is a religious doctrine. People who see themselves as benefitting from it take it on faith and use it to justify attitudes and values they had before they encountered it.

That, IMO, is the unvarnished truth of the matter.

The "Laffer Curve" says one very simple and obvious thing:

1. There is a continuum of possible tax rates
2. When taxes are 0%, no revenue
3. When taxes are 100%, no revenue, because noone will work
4. Somewhere between 0% and 100% is a sweet spot
5. If you're to the right of that sweet spot, lowering the top marginal rate can actually result in higher revenue

That's all it says. And nobody really disputes it, because that would be like disputing gravity.

The relevant questions are:

Where is the sweet spot?
Are there reasons other than maximizing revenue that we might want to have a rate other than at the top of the Laffer curve?

Nobody really knows where the sweet spot is, although Saez' work and Jim Parish's follow-up seem to indicate it's to the right of where we are right now.

And, wherever it is, there may be reasons to have the actual marginal rate somewhere else. As Moore points out, the revenue-generating maximum might not be the growth-generating maximum, and we might simply prefer to encourage growth rather than revenue. If the top of the curve has the top marginal rate at 80%, it might simply not be politically acceptable to crank the rate that high.

All reasonable and legitimate points.

But whenever the Laffer Curve gets trotted out, it is used like some magic totemistic talisman.

Taxes are bad.
Lowering taxes will increase revenue sure as night follows day, because taxes are a disincentive to production, and production will magically create its own demand and spur growth.

It is a religion. It's not based in any kind of empirical evidence, or at least none is ever offered, and it's always accompanied by the claim that government is bad and inefficient, the private sector is unfailingly good, wholesome, and productive.

It's an article of faith, asserted to provide a political justification for wealthy people to hold on to as much of their wealth as they possibly can, regardless of the impact on every other person who lives in the entire god-damned world.

Nobody wants to discourage people from doing useful, productive work. And we are so far from that at this point that even worrying about it is some kind of background noise.

What is discouraging people from doing useful, productive work is the fact that they can't find any to do. Because we are living with nearly 10% unemployment, in an economy and society that doesn't have anything like the institutions to address that. People are losing their jobs, their life savings, their homes, their access to health care.

I know of people who have, literally, killed themselves because of how the financial disaster we're in has affected them.

So you will forgive me if *I don't care* if some very wealthy people decide to not go to the office if we raise the top marginal rate.

It will just leave some headroom for somebody else to jump in.

The country is in seriously bad shape. If folks can't see that, and can't abide the idea that they should be asked to pay *the same tax rate they paid all of ten years ago*, which was already historically quite low, then I have no use for them.

And to be clear, this is not specifically aimed at McKinney, who IMO is a good guy.

I'm more concerned about greedy f***s like hedge managers who insist on having their earned income counted as capital gain. Or people making not a quarter million or half million, or even a million bucks a year, but tens or hundreds of millions of dollars a year.

Mazel tov, as they say, but there is no reason on earth, either moral or practical, why public policy should be crafted to keep their income tax rates as low as they are now.

None.

McKinney, businesses don't hire more people because a tax cut increases the owner's income. Businesses hire more people because the market is good and the market improves if other people, the ones not connected to the business, have more money in their pockets which they can spend buying whatever the business makes. A tax cut for the a whole lot of lower income people will be spent supporting local businesses which increases the profits which allows the local businesses to grow and hire people. An increase in the income of the very large porportion of people in this country who currently have no little or no disposible income would support more businesses than an increase in the income of a few who already have plenty.Money flows up, not down. This is why the GAO said that the unemployemnt extention would be good for the economy.

Nate gets my vote.

mine also

You want to juice demand--we've been over this--give the people who most need and are most likely to spend money a two year FICA holiday.

I'm not necessarily against that idea. It could be one ingredient in the demand juice, but I really don't think it will be enough all by itself. A lot of that money would go into reducing private debt, which artificially kept the economy going for a while, but unsustainably. Reducing private debt is a good thing in the long run, but it won't do much for demand, and given how much money the banks have in reserves already, it won't do much to increase lending either.

Reducing government spending right now would be ruinous. What we need is more spending on the right stuff, which is staring us all in the face, and it ain't missiles or tanks or agri-business subsidies or oil subsidies.

And why is that? Why are those rich bastards not wanting to expand their operations?

Bastards? Anyway, because there's not enough effing demand. Cap government spending and watch it get worse. Watch everyone try to save at the same time, meaning more job losses, meaning more attepts to save, meaning more job losses, rinse and repeat.

Tony,

Never mind where the Laffer curve bends. What precisely are the variables it purports to relate?

I'm sure I could look it up, but it hardly matters what the "formal" definition is. People who cite "the Laffer curve" seem always to focus on the top marginal income tax rate -- as if that could POSSIBLY BE the independent variable.

Or even the only important one.

The country is in seriously bad shape. If folks can't see that, and can't abide the idea that they should be asked to pay *the same tax rate they paid all of ten years ago*, which was already historically quite low, then I have no use for them.

Russell, the idea is to put people back to work. We all agree on that. Raising the marginal rate to 39.6% isn't going to juice employment. I have no idea if it will negatively impact employment at the margins. Rather, the rate increase is a budgetary device to address federal deficits.

Consumer demand is the issue, the only issue, that matters for a short term stimulus that benefits the private sector.

McKinney, businesses don't hire more people because a tax cut increases the owner's income. Businesses hire more people because the market is good and the market improves if other people, the ones not connected to the business, have more money in their pockets which they can spend buying whatever the business makes. A tax cut for the a whole lot of lower income people will be spent supporting local businesses which increases the profits which allows the local businesses to grow and hire people.

Wonkie, on the business owner side, depending on the size of the increase/decrease, you will get a degree of payroll increase/decrease. But, for stimulative purposes, I agree fully--give people making less than 150K a year a FICA holiday. Put 8% of that aggregate payroll tax in the economy every month. Do that for two years. As between the well off and the struggling, give the break to the struggling.

Just don't jack the marginal rate so high that you produce unintended and adverse results and don't think that higher rates, beyond point X, won't have those results.

Further on this: Dollars taken out of the economy by gov't

This makes it sound like the government is amassing stacks of dollar bills in a cave somewhere, or burning them in bonfires.

IANAE(conomist), but people have pointed out repeatedly in this thread that money the government takes, it then turns around and spends -- in the economy. On roads and schools and law enforcement and what have you. The money isn't in a cave and it doesn't just go up in smoke and disappear.

Part of what we're talking about here without quite talking about it is that decisions about what to buy with the money get made by a different mix of people, to the benefit of a different mix of people and causes, depending on whether the uber-rich get to hang onto more or less of what they rake in.

It's great that Bill Gates and Warren Buffett and Doris Buffett are giving away so much money to worthy causes, but why should three individuals have such an unimaginably outsized voice in decision-making about what's a worthy cause? If they are free to decide to give money to worthy causes, they are equally free to spend it on champagne and caviar.

That money too would go "back" into the economy, just the way tax money does, but the (or an) underlying issue is the power to decide what gets funded. Roads for everyone or yachts for a few? Etc.

In a word, power is a great deal of what's at stake here.

Taxing owners doesn't put people to work.

No, it just pays for the education of the workforce so that they can do higher-level jobs, builds roads and bridges that enable them to get to their jobs, enforces some minimum standards of health and safety, provides remedies for violations of contracts, and prints the money that allows the owners to buy and sell what they buy and sell more expeditiously. Does that provide no benefit to owners and workers?

As I suspected,

From the abstract to Saez, Slemrod, and Giertz

This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates (ETI) using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research.

The bolding is mine.

I had a post about possible estimated numbers for new high income marginal tax brackets, but I'm really not sure if the numbers actually matter as much as putting the idea out there.

Here's some of the context numbers, though, from Wikipedia and the Census. Now, I don't have a specific tax plan, and haven't done any calculations, but here's some numbers to toss out there.

The current plan is for taxes on incomes over $250K to go up to 39.6%. That would affect ~3000 households (from Wikipedia).
According to the census data (here) the top 5% income group starts at around $177K, and that top 5% captures just over 21% of all the income in the country. The top 20%, as a whole, captures just over 50% of all the income in the country.

Hogan's mention of education reminds me of my handful of visits to my niece's schools as she was growing up. My then-brother-in-law had plenty of money, and she went to the best schools money could buy from the time she entered kindergarten.

This is going to sound doofy, but I could not visit her elementary school without fighting back tears the whole time I was there. It was a stunningly wonderful place -- endless resources, caring teachers, engaged and cheerful kids. What made me feel like crying was that only a tiny fraction of kids get to go to a school like that.

And there's no real "reason" for that, other than that fact of human nature and life on earth otherwise known as "the poor you will always have with you."

Naming a tangent while trying not to go down it, and speaking as a parent whose kids were mostly homeschooled: we have a system in which schools don't have to meet any standards, reallly, even of safety in some neighborhoods, and yet kids must attend....

but people have pointed out repeatedly in this thread that money the government takes, it then turns around and spends -- in the economy. On roads and schools and law enforcement and what have you. The money isn't in a cave and it doesn't just go up in smoke and disappear.

Sure, the money isn't burned or thrown away, yet with record high deficits, if gov't taxing and spending was stimulative, why isn't our economy booming?

The reason is that gov't spending isn't all that stimulative. Only X number of people know how to build bridges or schools and once they are all built, what next? What is the unemployment number in the highway/school construction cohort anyway? How many 40 and 50 somethings are ready to shovel dirt and finish cement, drive a nail or dig a ditch? That's what construction work is. Not indoor work and not so easy on the untrained sedentary among us. Entry level construction work is brutal.

it just pays for the education of the workforce so that they can do higher-level jobs, builds roads and bridges that enable them to get to their jobs, enforces some minimum standards of health and safety, provides remedies for violations of contracts, and prints the money that allows the owners to buy and sell what they buy and sell more expeditiously. Does that provide no benefit to owners and workers?

Federal income tax dollars play some but not huge roles in education and in highway construction. Most of that money is state money. The court system operates on peanuts relative to the federal budget and most lawsuits are brought in state court anyway and paid for by state dollars. Besides, it isn't lack of education or pot holes that is the problem right now. It's the lack of a growing private sector.

If they are free to decide to give money to worthy causes, they are equally free to spend it on champagne and caviar.

Yes, it is their money. Janie, would you make more money if Bill Gates made less? Is there some redistributive formula that demonstrates that capping income at the top produces higher levels of wealth at the lower end? Is there a country somewhere remotely comparable to the US that proves this formula? Capping human earning potential would be a disaster. Appointing moral custodians to regulate how others spend their money is completely antithetical to the notion of personal liberty.

The current plan is for taxes on incomes over $250K to go up to 39.6%. That would affect ~3000 households (from Wikipedia).

Nate...I'm cooking a meal right now, but I believe that number should be 3,000,000. The households column is "thousands."

In the CBO charts, the top 1% of 1% includes 11,000 households, so 3,000 households over 250K can't be right.

Sure, the money isn't burned or thrown away, yet with record high deficits, if gov't taxing and spending was stimulative, why isn't our economy booming?

Well, if tax cuts were stimulative, and Bush ushered in the largest tax cuts in history, more than once, why wasn't our economy booming during the Bush years? And why not now since those cuts are still in effect?

Regardless, the "record high deficits" are due in large part to those same tax cuts, as well as funding two wars which is not really stimulative in any effective sense.

Regardless, McTex, are you saying that Keynes was 100% wrong? That govt spending isn't stimulative in a depression/recession? That the Great Depression was climbed out of because...tax cuts that weren't made?

Yes, it is their money.

It's that statement that I'm, yes, attacking.

That it's "their" money is completely contingent on all kinds of details of the particular political and economic system we live in. In an earlier era, "their" money would have been earned in part from factories in which children were worked to death. That was put a stop to -- not by factory owners, to be sure, but by government, by people acting collectively one way or another.

Also, you want to focus on the last couple of years in relation to stimulus and employment, but I want to say hey, we've had these precious low tax rates for ten years and look where it got us. If these low tax rates are so damned good for the economy, how did we get where we are? We've had a lot more time to see them work than we have to see the recent stimuli work.

Some points, not so much to be argumentative, but to help clarify the conversation:

Inflation adjusted incomes where the highest tax rate kicked in (which was $400,000 at the time) are at about $3 million in 2009 dollars. (I unscientifically chose the calculate inflation from 1957 which is the middle of the 91% years. If you choose the first year you get $3.5 million. If you choose the last year you get $2.7 million).

So if we are using this as evidence, it can't be used for evidence at the location of our current top tax rate, which is at around $380,000.

Also in the 1950s state and local taxes were much lower than they are now. The higher tax states are at or near 10%, with states like New York having an additional 4% sales tax and more local communities having and additional 3%. In California you can have combined state-local tax rates approaching 10%. (The rate in Los Angeles County last I checked was 9.75%). I don't remember where I read it, but at the time I found a convincing thumb nail that suggested you could estimate the incidence of income tax at about half the rate of a sales tax. (I.e. a 10% sales tax ends up being paid for as a 5% increase in income tax). So for medium level discussions like this, we can probably count state/local sales taxes as counting at around 4% additional income taxes.

So since the average of the large states is about 8% income tax, it is fair to impute about 11% in state and local taxes.

Also we shouldn't be quoting Saez selectively. The same paper includes some things that aren't as helpful for the progressive side of the argument and which contradict some of the assertions above about how high earners react.

"As we discuss later, a number of empirical studies have found that the behavioral response
to changes in marginal tax rates is concentrated in the top of the income distribution, with
less evidence of any response for the middle and upper-middle income class"

Also, Saez reminds us that you can have overall losses before the revenue maximizing rate due to the dead weight loss of taxation (which he puts at 38% over small increases above the current rate and increasing as you go above that).

In recent years,
for the top 1 percent income cut-o (corresponding approximately to the top 35 percent federal
income tax bracket in that year), Piketty and Saez (2003) estimate that a = 1:5. When
combining the maximum federal and average state income, Medicare, and typical sales tax rates in the United States, the top marginal tax rate for ordinary income is 42.5 percent as of 2009.12
For an elasticity estimate of e = 0:25 (corresponding, as we discuss later, to the mid range of the estimates from the literature), the fraction of tax revenue lost through behavioral responses
(􀀀dB=dM), should the top tax rate be slightly increased, would be 27.7 percent, slightly above a
quarter of the mechanical (i.e., ignoring behavioral responses) projected increase in tax revenue. In terms of marginal excess burden, increasing tax revenue by dR = $1 causes a utility loss (equal to the MECF) of 1=(1 􀀀 0:277) = $1.38 for taxpayers, and hence a marginal excess burden of 􀀀dB=dR = $1.38, or 38 percent of the extra $1 tax collected.

Anyway, while writing this I had a minor revelation about economic stimulus which I will put in a post.

The reason is that gov't spending isn't all that stimulative.

Some government spending isn't all that stimulative. Other government spending is. Pointless legacy wars in the Middle East? Not stimulative. Infrastructure construction and maintenance? Stimulative. It puts money in the pockets of people who will spend it, and helps produce a qualitatively better environment for the spending. More demand, more supply.

JamieM: So it is, you're right. It probably doesn't get down to actual thousands until you start getting into the multiple millions. I don't think it changes the thrust of my point, since 3 million people is 1% of the population of the country.

McTx: "Sure, the money isn't burned or thrown away, yet with record high deficits, if gov't taxing and spending was stimulative, why isn't our economy booming?"

See others about "if low taxes are so great, why does the economy suck" above, but also I would point out that you, yourself said that consumer demand is the main driver of the economy, and consumer demand is low because the money has been concentrated upwards for years, so average people don't have the money to create demand, and the debt wheel people used to make up for that lack of income is broken.

And NONE of that will be fixed by keeping tax rates low on the people who have been benefiting from the massive concentrations of wealth over the past many years. The private sector can't grow when the only people able to afford things are only in the market for yachts, solid gold toilets, and investments with 8-10% annual ROI.

Dollars taken out of the economy by gov't aren't available for private borrowers, which drives up the cost of borrowing because of the competition for the scarcer dollars.

Under full employment of resources. See here.

But that's not what we have.

What it amounts to is that private borrowers aren't competing with the government because they don't have enough attractive ways to invest the money, even at very low interest rates. When the government borrows and spends it creates demand, which makes investment more attractive, and starts to move us out of the trap. (By "invest" here I mean invest physically - buy equipment, hire workers, etc., not buy a security.)

Think about it in terms of workers. If the government goes out and hires a bunch of people does that drive wages up and make it more expensive for private firms to hire? Under full employment it does, but with 10% unemployment it doesn't, because there is an excess supply of labor. If there are ten day laborers lined up at Home Depot looking for work, and you hire one to come help you landscape your yard, the other nine don't suddenly demand higher wages from the next guy.

Capping human earning potential would be a disaster. Appointing moral custodians to regulate how others spend their money is completely antithetical to the notion of personal liberty.

Could you point to where I proposed either of these things? I mentioned minimum wage laws, income tax rates, and unions, if I'm not mistaken.

And I wasn't remotely meaning to suggest that we should tell other people how to spend their money. As I said in my previous comment, I was suggesting something even more radical, and even deeper underlying our everyday notions about these issues: that the idea that it's "theirs" is totally contingent rather than being some kind of law of the universe.

Honestly to my way of thinking, if you think of the world as a collection of wonderful resources, then I think of it as first and foremost "ours" -- everyone's. And I think of people with a hundred billion dollars under their control as having -- with the help of the particular economic and political system we live in -- grabbed so much more than their share as to be...well, I'm not going to bother to say it.

But I am not proposing what you suggest I'm proposing to remedy the situation. I'm proposing things that are well within our reach because we have had them before: higher marginal tax rates, a higher minimum wage (I have a spreadsheet somewhere comparing the minimum wage over my lifetime to the price of a loaf of bread, but it's not polished enough for public consumption yet), and a readjusgment of the balance of power between workers and employers.

Regardless, the "record high deficits" are due in large part to those same tax cuts

indeed.

and it rarely hurts to point out that the reason those tax cuts were not made permanent when enacted is because, by Senate rules which forbid bills passed under reconciliation from increasing the deficit, they could not be made permanent.

in other words: the GOP knew precisely what kind of effect the cuts would have. they did it anyway. because they are fiscally conservative.

Not for the sake of argument, just FTR:

From here:

Percentiles 99.5-99.9:

-- 451,000 households
-- $830,100 average after-tax income

Percentiles 99.9-99.99:

-- 99,000 households
-- $3,191,600 average after-tax income

Top 0.01 Percentile:

-- 11,000 households
-- $24,286,300 average after-tax income

The nice thing about a FICA holiday is that it would be difficult to end.

That gets 2 Republican wish-list items solved at once -- an extra $500 billion in deficit and an excuse to kill Medicare and Social Security.

McK: Appointing moral custodians to regulate how others spend their money is completely antithetical to the notion of personal liberty.<.I>

Me: I wasn't remotely meaning to suggest that we should tell other people how to spend their money.

But I would note in passing that allowing tax deductions for charitable contributions is certainly nudging people in the direction of spending their money one way rather than another.

Or is that also antithetical to the notion of personal liberty?

Italics

begone. :(

I wanted to make a concentrate of comments addressing the notion that government spending is necessarily not stimulative, as though all forms of spending are the same. I hate it when people ignore crucial points in the discussion.

If the government taxed us all at high rates and spent money on gum and candy, that would be pretty bad. The point being that it's not just a matter of how much is collected in taxes, it's also a matter of how much is spent and on what.

That money too would go "back" into the economy, just the way tax money does, but the (or an) underlying issue is the power to decide what gets funded. Roads for everyone or yachts for a few? Etc.

Regardless, the "record high deficits" are due in large part to those same tax cuts, as well as funding two wars which is not really stimulative in any effective sense.

Some government spending isn't all that stimulative. Other government spending is. Pointless legacy wars in the Middle East? Not stimulative. Infrastructure construction and maintenance? Stimulative. It puts money in the pockets of people who will spend it, and helps produce a qualitatively better environment for the spending. More demand, more supply.

Sebastian, you wrote:

"So if we are using this as evidence, it can't be used as evidence for our current top tax rate, which is at around $380,000."

Well, as far as your inflation calculation goes, using only the top 91% rate, that is true. But go to: www.taxfoundation.org/publications/show/151.
html

Scroll down to the bottom of the page and click on the pdf for Historical Marginal Tax Rates and scroll down to your sample year 1957.

You will see that marginal rates were steeply progressive with a 38% bracket (slightly more than the current top rate) kicking in at $20,000, which equates to roughly $150,000 using your inflation multiplier.

I'd say this is evidentiary.

McKTexas:

How about this?

We all make $400,000 annually. We reverse the marginal tax rates so that the first $380,000 (7 hours of each day) is taxed at 39.6% and the remaining $20,000 (20 minutes at the end of the day) is tax free.

Janie M and I will work the first seven hours of the day and pay our taxes. You work the final hour (kind of a job-sharing idea to get unemployment down), which you would have skipped, if the Bush tax cuts expire.

I can't speak for Janie, but given behavioral incentives as expressed in myraid equations above divided by the number of grams of 1971 Mouton Rothschild contained in the spit take of wine Jude Wanniski sprayed all over Arthur Laffer at Michael 1's tony Wall Street restaurant when the latter produced the fateful, curvacious napkin, I'll take it.

Janie and I will be at the bar having a drink when your're done working.

Come on by. Janie's buying.

BTW, I'd also like to repeat, just for good measure and in my own words, what others have already more or less said.

We left it to the private sector at the top of the food chain to do what they wanted with most of their money for a long time. What they did was create a bloated, unproductive, cleptocratic FIRE sector that almost ruined the world economy, save for government intervention, however badly crafted. And these financial wizards may yet still ruin the world economy. We won't know for sure until things turn around, which they certainly haven't fully as of yet.

I'd buy McKinney a drink any day. You too, John. Are you coming east any time soon?

What was the unemployment rate in 2005? The deficit? Enter the recession. What caused the recession? Lower taxes? No, inflated real estate values, derivatives, lending to people who couldn't pay the money back and generally, all around bad banking by Goldman Sachs/AIG crowd.

How stimulative is fed gov't spending, civilian vs. military? No clue, really. Someone has to build the planes, tanks, ships, etc. Presumably they are paid for that. Cut that spending and what do they do? Build roads and schools? Mass transit? With what skills and at what relocation costs?

BTW, why does everyone (Eric, hello) think construction is so stimulative? Are our unemployed all out of work cement finishers and rod busters?

Surely I'm not the only one here who worked their way through school doing construction work? You are either a skilled trades person, semi-skilled or labor. It's back breaking work. And, at the labor end, the pay is crappy (and in my neck of the woods, it's mostly done by recent immigrants. Very recent). How will out of work IT/managerial/white collar people, much less men/women who aren't physically up to 8-10 hours in a hot son swinging a hammer or pushing concrete, going to benefit from that?

Seems to me fabricating and assembling a Humvee is better work at better pay. But I'm sure there's some study somewhere that shows that infrastructure repair and replacement produces better jobs than ship building. For my part, I think I'd want to talk to the folks covered in mud first.

Keynes, again. What worked in WWII can't be duplicated. A huge agrarian population got drafted/volunteered for war and women went to work in factories due to a gross labor shortage. It was as close to an existential event as this country has had save the Civil War. Right at 10% of the population was in uniform. We transformed, in 4 years, into the world's only manufacturing power. All of the others had been blown up. That's what kept us going post war. Until WWII, the New Deal staved off starvation, but didn't do diddly to get the economy off of life support.

JT, what is 20K in 1957 adjusted to present value? I'm trying to compare apples to apples.

By the way, my 1:02 numbers were for 2005, the last year in that CBO spreadsheet.

McTex:

Construction is good because it also improves infrastructure which facilitates business beyond the initial spend. For example, a broadband network competitive with other Western Democracies would have many ancillary biz benefits.

On the other hand, military spending results in dead people and holes in the ground, which doesn't really facilitate business beyond the initial spend.

Keynesianism, and stimulative spending, have worked in contexts outside of WWII, so the suis generis theory seems weak.

What was the unemployment rate in 2005? The deficit? Enter the recession. What caused the recession? Lower taxes? No, inflated real estate values, derivatives, lending to people who couldn't pay the money back and generally, all around bad banking by Goldman Sachs/AIG crowd.

The jobs picture throughout the 2000s was dismal. Just dismal. And the tax cuts contributed to the extreme concentrations of wealth which leave demand anemic which is a huge part of the recession, and the overleveraging in the housing market for many Americans as well.

Also, all the money sloshing around at the top fed the speculative securities swapping.

McKinneyTexas: For one thing, construction is important because a lot of our infrastructure is failing. See the American Society of Civil Engineer's estimates here. Cs and Ds, with an estimate of 2.2 trillion dollars in terms of just fixing decaying roads, bridges, drinking water lines, stormwater and sewer lines, 50 year old electrical grids, failing buildings, and on, and on, and on. These are things JUST to keep society running the way it is now.

To invest in infrastructure for the future, there's internet data pipes, SUPERTRAINS, electrical grid, electrical generation, building renovations, and on and on and on as well.

These are things that need to be done ANYWAY, not just for stimulus. See also: Slacktivist on drinking water and storm and sewers.

(Full disclosure, I'm a civil engineer, but I went into this because I saw all the things that needed doing.)

Are our unemployed all out of work cement finishers and rod busters?

No, but they're people who can work on all the deferred maintenance we've been piling up (there's a lot), and when they get paid they buy stuff, and then more people get jobs providing the stuff they buy, and the stuff used to make and transport the stuff they buy. Plus then we have decent roads, which saves on people's car repair bills, and decent water mains that don't break as often, which saves on repair costs.

Seriously, did you really think anyone was proposing that all 17 million unemployed people get jobs fixing roads and replacing corroded water mains? Is that the level you think we're talking at?

McK, $20K in '57 is about $155K today.

I use this, from the BLS.

I don't think anyone argues against the idea that it's better for demand to come from the private sector than to have it artificially pumped up by government.

I don't, anyway.

I also don't think folks dispute the fact that the postwar period was unique, and different enough from today that we can't simply assume that what worked then will work now.

I, personally, also don't doubt that there are people who would find a small-percentage-point increase in their tax burden to be sufficient motivation to call it a day and go fishing.

Nor do I, personally, think there's any particular upper bound on what folks should be allowed to earn. My only gripe are folks who take home much more than is merited by the value that is created by their efforts. IMVHO, that's not "earning", it's "extraction".

I don't even think that government should levy taxes at the revenue-maximizing rate, at all places and times. It should raise the funds it needs to do the things it's been asked to do, and no more. It should do so in the most effective manner that we can figure out, but it shouldn't raise funds just for the sake of raising funds.

All of that said:

*At this particular point in time*, we're in tough shape. A lot of people who really do want to work are out of work and can't find work. Companies are hesitant to hire and invest because they don't know where things are headed, so they're holding their cash. Tax revenues are down, and states can't go do deficits, so lots of public services and public jobs are going away.

We could really use the revenue, for about 1,000 different reasons, and the tax "increases" that have been proposed actually preserve lower rates on lower and middle class tax rates, relative to what they will be if the Bush cuts simply expire as planned.

So, tax rates on lower incomes, where demand creation will be greatest, will actually remain low.

What we are actually talking about is that marginal earned income above $250K will be taxed somewhere between 3 and 5 points more than they are today.

Which will be exactly how it was taxed ten years ago.

That is all.

To me, that seems completely reasonable.

Also: construction is good because the unemployment rate in building trades is at least half again as high as across the economy as a whole.

Yes, I've done construction work, yes, I'm too old to really want to do it anymore, but there are lots of folks who aren't that old and could use the work.

Construction is often used as an example of a place to put people to work, but it's not the only possible place.

Construction is often used as an example of a place to put people to work, but it's not the only possible place.

Right, I mean, we're also laying off a lot of teachers, cops, firefights and health care workers due to shrinking state budgets.

Let alone not hiring enough going forward.

Those are good jobs that provide real value to quality of life for our citizens.

They would be saved with more Stim spending (state aid was a big component, bigger still before the "moderate" Dems and Repubs stepped in to trim something for the sake of it, really)

BTW, why does everyone (Eric, hello) think construction is so stimulative? Are our unemployed all out of work cement finishers and rod busters?

Infrastructure covers a lot of areas. IT people can do infrastructure, too. It's not just rebar and concrete.

And why do you keep ignoring things like this:

What we need is more spending on the right stuff, which is staring us all in the face, and it ain't missiles or tanks or agri-business subsidies or oil subsidies.

There's plenty of desperately needed work to be done, which, if done, would yield great, long-lasting value to this nation's economy. It would spur growth for decades. Aside from infrastructure, there's education, public health, R&D and plenty of other things that don't require back-breaking work out in the sun within that set. (And construction work doesn't have to pay crap, nor would it under government expenditure.)

Further data point from Brad DeLong and Feldstein on the Saez study, supporting what I was saying about deadweight loss:

Martin Feldstein, George F. Baker Professor of Economics, Harvard University, former chairman, Council of Economic Advisors: "Why look for the rate that maximizes revenue? As the tax rate rises, the "deadweight loss" (real loss to the economy rises) so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue.... I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living..."

Marty and Bruce are, of course, correct: you don't want to be at the peak of the curve: you want to be way down on the left side. Note that if you take Emmanuel's high estimate of the elasticity of reported taxable income to the tax rate you get a peak at a tax rate of 62.5%; for Emmanuel's low estimate the peak comes at a tax rate of 85%

Which again is not saying that there can't be some play still in raising tax rates (I sure hope there can be, because the deficit is crazy large). But it doesn't suggest that Krugman's simplification that we have enormous amounts of room is not accurate.

[Again for informational purposes only. I'm specifically not accusing anyone in particular of wanting a 70% rate. Except for those who already stated that they do upthread.]

I'm specifically not accusing anyone in particular of wanting a 70% rate. Except for those who already stated that they do upthread.

Did someone state this? If so, I missed it.

To try to approach from a different angle what I was trying to say earlier.... I am not proposing that we try to cap personal income or tell people how to spend "their" money. I'm not so starry-eyed as to think it could be done, nor do I even want to.

But money is always obtained and wealth is always accumulated within a particular legal, societal, and economic system. Such a system almost always includes indirect ways of curtailing personal income and wealth, if only in the sense that the people with the most wealth are competing with each other for it at the top.

Tinkering with the marginal tax rates is only one of many ways in which collective decisions affect the accumulation of personal wealth. Other ways include employement safety regulations, environmental regulations, and so on.

There was a time, in England, when this was a great victory:

The factory reform movement spurred the passage of laws to limit the hours that could be worked in factories and mills. The first aim of the movement was for a "ten hours bill" to limit to ten hours the working day of children.

We've come a long way since then.

There was a time in the United States when businesses were allowed to dump so much crap into waterways that the http://en.wikipedia.org/wiki/Cuyahoga_River>Cuyahoga River became famous for the number of times it caught fire.

We've come a long way since then, too.

Were the people running the businesses in such a way that a river caught fire, and in such a way that limiting children's working hours to ten a day seemed like a huge improvement, running their businesses for the good of their society?

No. They were running them that way to make a lot of money. Eventually their societies woke up and said: those things can't be part of your money-making operation any more.

We too live inside a system. We have laws that say that while you can accumulate as much wealth as you can get your mitts on, you can't do it by enslaving people, employing children in factories, dumping your factory's wastes into rivers, or not paying some share of your wealth (and our collective resources) in taxes.

We don't cap personal income, but we do say that you can't accumulate personal income by doing this, that, and the other thing that are too damaging to other individuals or to society or to the land, water, and air.

It seems to me that in effect, what "progressives" are saying here on this thread is that they think that some things that are severely damaging to some people in our current collective situation, and moderately damaging to many more, could be remedied if we changed the tax rates so that the people with the most have a little less most. More moderate people than I are making that argument without necessarily saying that the mess we're in is partly attributable to the obscene accumulation of wealth at the top in the last thirty years.

I'm not so moderate; I'm happy to suggest a connection that there's no way I or anyone else can prove. But even in my lack of moderation and first-principles-big-picturism, I'm happy to come down to earth and agree that a mere 3.6% rise in the top marginal rate would be an improvement, regardless of whether you think there's any direct connection between our recent rates of wealth accumulation at the top, and the suffering that's currently going on at the bottom.

This also implies that I agree with the people who think that a slight increase in taxes will help the situation. I fully admit that my gut assumptions about the world lead me in that direction, but so do people I respect immensely, including some writing here.

"Did someone state this? If so, I missed it."

Well some people seemed to suggest a maximum income, which suggests a 100% tax rate at some point. But I figured I didn't really want to engage at that, because I think it is radical enough not to bother with (either because I'm completely misunderstanding it, or otherwise).

Well some people seemed to suggest a maximum income.

As far as I can tell, that was McKinney's misinterpretation of something I wrote. I don't think anyone has suggested that. If it seems like I did, then I wasn't writing clearly.

Nate wrote this -- So yes, I'm saying the idea that we may deliberately want to create punitive rates on extreme income at the margins may be a GOOD idea -- which still, to nitpick perhaps, isn't the same as a maximum income. But Nate can clarify if he wants.

Hey now, I'm not a progressive, I'm a liberal, and will be no matter how often Republicans try to make it a dirty word.

I didn't propose a solid maximum income, but punitive tax rates, the kind McKinneyTexas said would keep him from working that extra hour every day or whatever. What that tax rate would be, I don't know. Somewhere between 70% and 90%, probably, I wouldn't make it crank up to 100% ever, probably (though FDR did limit salaries during WWII with a 100% tax above a certain amount through an Executive order, until Congress overturned it)

This wasn't for purposes of revenue, as I said there, it was to disincentive the whole concept of "@$!# you money" and the kind of "financial innovations" that were created solely to be sold and net the creator a bonus without having to worry if the investments were any good.

I fully realize it's not likely at all to happen, but I threw the idea out there because of the inevitable "but then the rich won't work as hard!" hysterics, to offer the point that people working madly to get themselves that last few percentage points more on top of already stratospheric incomes is not necessarily a desirable thing on its own.

What we need is more spending on the right stuff, which is staring us all in the face, and it ain't missiles or tanks or agri-business subsidies or oil subsidies.

Aside from infrastructure, there's education, public health, R&D and plenty of other things that don't require back-breaking work out in the sun within that set

What are we trying to accomplish and how much are we willing to raise taxes get there?

Deficit reduction or stimulate the economy?

Short term answer: stimulate.

Stimulation Choice A: vote in another stimulus bill, grow the economy, get everyone back to work, and raise taxes to pay off the money borrowed stim money and, fully stimulated, cut spending and live happily ever after.

Potential problems with Choice A: is there any reason to believe the next stimulus bill will be any better crafted than the last one? HSH notes areas where public monies could be wisely spent. But does anyone trust congress to be so wise? Where are the private sector jobs created by the last stimulus? When have the Dems ever cut spending (as noted by Seb) so why should they be trusted this time? And would they give the tax raise back after paying off the money borrowed for the stimulus?

Stimulus Choice B: cut freaking FICA for two years, phase back in over four years, cap federal spending at current rates, get out of Iraq and Afghanistan, raise taxes on the over-250K group to 39.6% but only to pay down the deficit (including the FICA holiday, can't get much more redistributive than that) and keep congress the f out of picking winners and losers.

Problems with Choice B: ?????

When have the Dems ever cut spending (as noted by Seb)

Personal Responsibility and Work Opportunity Act

cap federal spending at current rates

Since there's no such thing as inflation, this is a great idea!

And this just slays me:HSH notes areas where public monies could be wisely spent. But does anyone trust congress to be so wise?

Wisdom's got naught to do wi' it, laddie! Those bridges need to be repaired. Those schools need to be modernized and staffed. Is there some non-public-sector body you're proposing is going to do those things? If so, out with it!

Where are the private sector jobs created by the last stimulus?

With all due respect, who cares? Even if all the job growth has been in the public sector, what, exactly, do you think those employees do with their salaries? Light them on fire?

When have the Dems ever cut spending (as noted by Seb)

Personal Responsibility and Work Opportunity Act

Check how the two parties voted on this and who introduced the legislation. It wasn't the Dems.

cap federal spending at current rates

Since there's no such thing as inflation, this is a great idea!

Yes, inflation will necessarily shrink outlays. People who depend on the gov't will get squeezed to that extent. Letting gov't payroll shrink by attrition will make up some of the shortfall, reallocating among competing programs can further mitigate the impact.

It's not enough to increase revenue. Spending has to be reigned in or we never get this matter under control.

"Stimulus Choice B: cut freaking FICA for two years, phase back in over four years, cap federal spending at current rates, get out of Iraq and Afghanistan, raise taxes on the over-250K group to 39.6% but only to pay down the deficit (including the FICA holiday, can't get much more redistributive than that) and keep congress the f out of picking winners and losers.

Problems with Choice B: ?????"

Besides that it's about as realistic as my suggestion to tax extreme incomes to prevent them?

A) Republicans will run on the "BIGGEST TAX INCREASES FOR WORKING FAMILIES EVAR!!!!11" when FICA phases back in.
B) Republicans will run on "SOCIAL SECURITY IS BANKRUPT OHNOES!" if FICA is phased out.
C) Republicans will run on "COWARD HIPPIE COMMIE TRAITORS!!!!" for getting out of Iraq and Afghanistan, and most Democrats don't seem to have much inclination to do it either.
D) We will STILL be stuck with the failing infrastructure that's had its maintenance "deferred" to be "fiscally responsible" for years now.
E) Inflation, as mentioned by Phil.
F) Would anyone allow military spending to actually go down even if we were out of Afghanistan and Iraq? (see also C, above)
G) Congress already picks winners and losers, if we can't manage to change things now to pick ones that are better for the country now, why would we expect to six years from now, while the states continue to shed jobs, Palin, Gingrich, and co continue to lie, and the Tea Partiers get madder at imaginary liberals?
H) Is there any reason to believe that the Free Market that got us into this mess, by deciding that financiers twiddling numbers were more valuable than hundreds of people actually growing food, making stuff, selling stuff, or offering services, so why should we trust it this time?
I) The Republicans would filibuster it because it doesn't cut taxes for the rich or get rid of the estate tax.

With all due respect, who cares? Even if all the job growth has been in the public sector, what, exactly, do you think those employees do with their salaries? Light them on fire?

A lot of people outside the left/progressive camp care. Nearly a trillion dollars spent and for damn little except a larger federal gov't and little else. Yet, in the same breath, you're telling me that there are bridges to fix and congress is just the right group of folks to do that. What did they do with the last bag of money they had? Charlie Rangel and Nancy Pelosi have a list of bad bridges and they're burning up with a desire to let those contracts? Jesus. If putting money in people's pockets so they'll spend it is the goal, please address Choice B. Why go through congress when it can be done directly and quickly?

Sorry, douchebag-itis is a bipartisan condition, and the Dems, having had a chance to stimulate, acted like pork besotted d**ks. I am quite confident the repubs will make their own stupid mistakes, but in the meantime there is nothing indicated from the Dems to suggest they've gotten smarter.

cut freaking FICA for two years, phase back in over four years, cap federal spending at current rates, get out of Iraq and Afghanistan, raise taxes on the over-250K group to 39.6% but only to pay down the deficit (including the FICA holiday, can't get much more redistributive than that) and keep congress the f out of picking winners and losers.

McTex, you complained about Stimulus 2.0 on the grounds that the eventual end product that emerged from the legislative process would be bad, but then you propose your own version of a legislative pipe dream.

Now, I'm not saying I hate it all, but there are some particulars I don't like:

1. Cutting FICA will weaken Social Security when it is in need of a little support, not a cut. If I was sure that the hike you mentioned will come about and be apportioned, I could live with this. That's a big "if."

2. Capping federal spending sounds great in vague terms but what does that mean in real terms? Will you let prisoners out of federal prison? Increases are pegged to inflation and to projected cost increases. Without spending increases, federal services will be cut. Some are important.

3. Otherwise, I like it.

Keep it civil folks.

Check how the two parties voted on this and who introduced the legislation. It wasn't the Dems.

But, just so we're clear, the Democratic president, who campaigned partially on "ending welfare as we know it," asked for and supported that bill, and signed it into law, right? He didn't veto it?

Yes, inflation will necessarily shrink outlays. People who depend on the gov't will get squeezed to that extent. Letting gov't payroll shrink by attrition will make up some of the shortfall, reallocating among competing programs can further mitigate the impact.

See, what you're actually talking about is, first of all, putting more people out of work. I know, I know, they're EVIL EVIL GOVERNMENT WORKERS BOO HISS, but they do subsist on food and housing and other things that require a paycheck.

Increasing unemployment in an attempt to revive the economy seems, I don't know, silly, unless you're proposing that recovery will be so explosively fast that they'll all be snapped up in private sector jobs before it matters. But you're going to need to make that case.

Second, government institutions still have to consume things like electricity, and water, and land, and gas, and sewer, and paper, and office supplies, and so forth. And none of those things are going to get cheaper just because you want to cap spending.

If you think attrition and reallocation are sufficient to overcome that, make your case. Show me your numbers. You can't just assert it and assume it to be so.

In the meantime, well, those bridges and railroads and sewers are still falling apart.

Nate, you didn't suggest anything substantively wrong with Choice B other than Republicans wouldn't like it. Ok, same objection--Republican disapproval--to every other idea here, so I guess we're done.

1. Cutting FICA will weaken Social Security when it is in need of a little support, not a cut. If I was sure that the hike you mentioned will come about and be apportioned, I could live with this. That's a big "if."

2. Capping federal spending sounds great in vague terms but what does that mean in real terms? Will you let prisoners out of federal prison? Increases are pegged to inflation and to projected cost increases. Without spending increases, federal services will be cut. Some are important.

Eric, we are all debating how many angels can dance on the head of a pin. That is the main purpose of the blogosphere.

The cap on spending and the tax increase go hand in hand. Pain on the high earner side until the deficit is paid down (that's a long time), pain on the consumer of gov't services side until congress makes the hard calls. Yes, there will be issues. Congress can, if it finds the stones to do it, reallocate among competing programs. Defense cuts and savings from the wars should help too. But, we are talking about a moratorium on new gov't programs. Or, if a new program comes in, an old one goes out.

There will be spending cuts. We can start today when options remain or keep going as most of Europe and Japan did, and cut well past skin and flesh and go into the bone.

Also keep in mind that if Keynes was right, the economy will be stimulated. That means additional revenues from employer FICA matching and income taxes from the newly employed and from additional lucre flowing into the pockets of the undeserving filthy rich scum capitalist banker dirt bags, which produces faster deficit reduction, lower gov't debt service and more money for gov't spending. (Is it Friday yet? Jesus. I note it is the cocktail hour in the East Coast).

McKinney: Seriously, the whole "where's the STIMULUS?!?!" stuff is not the quality I'd expect out of you.

First, the federal stimulus dollars have been more than offset">http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&FirstYear=2009&LastYear=2010&Freq=Qtr">offset by state and local cuts because state and local govts can't run deficits, and the Republican-allied "moderate" Democrats took huge chunks out of the state aid in the original stimulus.

"The government" in the sense of all goverments, federal, state, and local, hasn't been getting bigger. It's been at most the same, with most of the layoffs being Evil State Employees like teachers.

A lot of people in the "left/progressive camp" warned the stimulus was too small. Often simply by noting that the stimulus started out smaller than the output gap it was trying to fill.

Also, more than a third of the stimulus money you're decrying as the result of "pork besotted d*cks" was precisely the kind of targeted tax cuts you're recommending.

Also, when the federal government does infrastructure projects, it generally doesn't actually DO them. For example, a lot of the stimulus infrastructure money went into the various State Revolving Funds, which is then loaned to the localities in the state that hire engineers to design and/or workers to construct the project. The whole point of the parts that wasn't was to try and get the money straight to "shovel ready" projects where the design had been done, rather than having a several months to several years delay for design and permitting and the rest of the stuff that goes into starting a project. Which is, incidentally, why some of the stimulus money still hasn't been spent.

Which is an argument for speed of doing things, rather than going through the normal process, but Obama and the others picked the normal process specifically to avoid the Republican's obvious cries of "Waste, Fraud, and Abuse" that would have followed.

It probably would have been better to start something like the WPA, and just directly hired people to do the projects, which some of us pushed for. But that would have led to cries of "SOCIALISM!!!1!" and "Bigger government", so they didn't go that way. We see how much that helped them.

The problems with the stimulus have come not from it being too "left/progressive", but as a result of being too moderate, too small of vision, and too afraid of what the Republicans would say, which they then said anyway.

I note it is the cocktail hour in the East Coast

That has come to my attention as well.

the Democratic president, who campaigned partially on "ending welfare as we know it," asked for and supported that bill, and signed it into law, right? He didn't veto it?

Actually, Clinton bitched like crazy about the Repub version of welfare reform but his pollster (can't remember the little fat bastard's name, but he's a Fox guy now) told him he had to do it. Not really a high mark for Dem spending responsibility.

See, what you're actually talking about is, first of all, putting more people out of work. I know, I know, they're EVIL EVIL GOVERNMENT WORKERS BOO HISS, but they do subsist on food and housing and other things that require a paycheck.

Probably more like medicare cuts and SS benefit freezes for the most part, but not pain free. And, Phil, you're all fine will cutting our military by how many hundreds of thousands of troops, are you not?

Increasing unemployment in an attempt to revive the economy seems, I don't know, silly, unless you're proposing that recovery will be so explosively fast that they'll all be snapped up in private sector jobs before it matters. But you're going to need to make that case.

Well, the fastest way to get money into the economy is to quit taking it out. Just leave it there. Spending would be capped next year. It's already budgeted for this year. The FICA cuts could go into effect tomorrow if Congress moved its ass. You could, in fact, get major stimulative impact in just a couple of months. I'm not an economist, so I can't chart any of this. But what we've seen not work suggests beating the dead horse harder isn't optimal.

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