Lately there has been some discussion about tax policy, in particular the optimum tax rate for the top marginal rate. While I agree with Dean Baker that we liberals need to recognize the importance of Fed policy as well as the working of the Treasury in economic outcomes-we need the opposite of Hank Paulson's "strong dollar policy" what we need is a "weak dollar policy"-I am always in the mood for a good tax policy discussion.
What kicked off the latest discussion was a paper by the economists Emmanuel Saez, Thomas Piketty, and some other colleagues about the optimal tax rate.
http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165
Interestingly it has been a project of Mike Kimel over at The Angry Bear for awhile to calculate the optimum rate. He therefore got a kick out of it when these two major economists picked up his thread.
http://www.angrybearblog.com/
What Kimel and Saez-Piketty conclude is that this rate would be in the 60s or 70s. Krugman liked the paper then wrote a column "Things to Tax." He argues that, "The supercommittee was a superdud — and we should be glad. Nonetheless, at some point we’ll have to rein in budget deficits. And when we do, here’s a thought: How about making increased revenue an important part of the deal?"
"And I don’t just mean a return to Clinton-era tax rates. Why should 1990s taxes be considered the outer limit of revenue collection? Think about it: The long-run budget outlook has darkened, which means that some hard choices must be made. Why should those choices only involve spending cuts? Why not also push some taxes above their levels in the 1990s?"
In principle I agree with this though it seems to me the old adage, 'You gotta walk before you can run' is relevant here. I mean we live in an environment when simply returning to the Clinton rates seems out of reach politically. Indeed all the tax reform proposals we hear about go in the opposite(wrong) direction. Everyone who actually is in a policymaking position seems to focus on the idea that what we need is a "broader tax base" that lowers corporate taxes and on the wealthy and somehow-at least Democrats claim-will raise revenue by closing "loopholes" many of these loopholes benefit the middle class-mortgage interest deduction-and the earned income tax credit-the working poor. Tax broadness means lower the taxes on the rich, raise them for everyone else. While I agree with Krugman that we could profitably see rates about 39.6% for the rich, let's get them there first before discussing whether to raise them further.
The other thing all the proposals we hear about have in common is this desire to see the tax burden more redistributed to consumption so as "not to punish savers." Of course most savers are rich. Herman Cain's 9-9-9 plan is only the most extreme version of this. However as we have seen what today maybe on the outer limits of respectability in future years may come to be the new "Center" which is what the fabulous centrists like David Brooks never consider. To chase the Center is wholly reactive as the Center is not a cause but an effect of policy. In 1994 Newt Gingrich's individual mandate-everyone forgets it was his originally-was too far out on the radical Right. However it is today's position of the Left. See how that changes, today Gingrich of 2011 is running against the Gingrich of 1994-that is to say Romney-Obama.
For my part let me jump in and give you my tax wish list. If I were President-or as this is actually impossible as I was born in England-say mayor of New York City or governor of New York-or in any position to actually implement what I think would be the optimum tax policies would be to policy in the opposite direction.
Take the state of New York-or any state. What I would be is the anti-Herman Cain. Far be it from raising consumption taxes what we should do is cut them. Why? Two reasons: the principle of tax progressivity and it would also be highly stimulative in a time when we need demand. Now of course this would represent a drop in NY state revenue. How do we make it up? Well one thing is that if this significant cut in the NY sales tax greatly increased consumption then there would be an increase in tax revenues to-in other words they would at least to some extent "pay for themselves."
Still how much I don't know of the top of my head-when will Mike Kimel or a Saez-Piketty look at this?-and there will be some level of short fall you would guess. Plus anyway, my goal is to increase total tax revenue not decrease it or simply even have it be neutral. So what we could do is get rid of Andrew Cuomo's mistaken property tax cap. There are other wasy to raise revenue, some sort of NY finance tax perhaps-as most financial transactions happen here it would work particularly well here.
Again the goal is progressivity but also to raise revenue at the same time. So we don't want levies like more tolls or traffic fees. Indeed perhaps if I were NY governor I would take the very aggressive step of looking to lower traffic fees and tickets across all levels-state, city, county. This would be quite a holy war to be sure. And giving up all this revenue would require new ways to raise it. Another controversial idea I might suggest-if this all weren't enough-would be to issue NY Bonds. Would the public snatch them up? Yes, if we marketed them as the way to bring down all traffic fees and tickets. Oh, I should also mention that I might declare something like, "We now repudiate any commitment to a balanced budget amendment" ie, NY would be one of the few states in the nation to actually publicly advocating deficit financing. This too would be new ground-it is hard enough to convince people the the Federal government can run deficits as it can print money. A state has no capacity to do this yet it seems to me, that deficit financing is an idea that should be tried.
Those who say that you can't spend money that you don't have need to explain why if this is such an elementary law of physics why most states have mandates that demand they balance their budget? Nobody has to pass a constitutional amendment that when you jump off a building you fall. The idea of deficit financing has been tried in isolated counties and towns, normally someone ends up resigning in disapproving horror.
For more on the very important question of debt fiancing at the state and city level see
http://diaryofarepublicanhater.blogspot.com/2011/09/state-and-city-balanced-budget.html
While I know that if the governor of NY were tomorrow to declare say that there will be amnesty for all tickets issued prior to 2010 this would imply a huge loss in revenue what about the stimulative effects of all this extra money available for consumption? Notice that I am using what is usually the conservative argument for tax cuts-that "they pay for themselves" but am applying it to cutting taxes on the nonrich. The reason for this is that the propensity to consume is much higher among the nonrich, While the investment boom that cutting taxes for the rich never materialized-not for nothing did George Herbert Walker Bush once call this "voodoo economics"-it would if you cut the taxes of the nonrich-in this context parking and traffic tickets and fees are the same thing as taxes. So what I'm thinking is this: If tomorrow all the meters in NYC were gone what would be the actual loss in revenue? But while we assume it would be considerable wouldn't this at least be partly made up as it put money in consumers' pockets they can now put to better use than stuffing it in a meter?
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