Reply to Miles Kimball on Taxes

       Recently I responded to Mile Kimball's generously posting my review of his blog with a heartfelt thanks and-a question. My question no doubt goes to the core of his beliefs as he calls himself a "supply side liberal."

       This self description is very thought provoking as it seems to marry two positions that at least in American ideology tends to be seem as antinomies-liberalism and supply side economics. I for one am a liberal but I would say that I am a "demand sider" though no one every uses this term.

        In my question to Miles I wonder why Supply Siders seem to never concern themselves with demand side issues in fiscal policy.

        http://diaryofarepublicanhater.blogspot.com/2012/07/thanks-and-open-letter-to-miles-kimball.html

        It seems that he has written what can be taken as a response to my question. He has said if I need further clarification he will write a response. I have read both his latest post on taxes, and his previous post which garnered a response from Karl Smith.

        http://blog.supplysideliberal.com/post/24470482950/why-taxes-are-bad

         http://www.forbes.com/sites/modeledbehavior/2012/07/08/miles-kimball-on-taxing-the-rich/

        http://blog.supplysideliberal.com/post/26828687393/rich-poor-and-middle-class     

        In part Miles says he will develop his views on taxes-his Supply Side philosophy-over time, which is fair enough:

         "Two last points: First, it will take me at least a hundred posts to develop, clarify and defend my views about taxation and related aspects of public policy. Second, many readers will be surprised that I think Romney might care about the poor (though not so much about the middle class) in his heart of hearts. This is probably mostly my familial bias talking (which I hope my loyal readers will forgive), but I will try to back up this view in my planned future post “Will Mitt’s Mormonism Make Him a Supply-Side Liberal?”

         Actually what surprises me is that Miles reveals that Mitt is his cousin. This makes me-almost-feel bad about the rough things I've said about Mitt and will continue to say. Almost because despite Ann Romney's complaint that Obama wants to "destroy" her husband, that's just politics, Madam. Your husband and his party certainly want to do the same thing to the President.

        Miles' basic attitude is suggested in his repeated phrase-'taxes bad, redistribution good.' In acknowledging this though there's admission that taxes are not a zero sum game-in raising taxes on some others benefit, and arguably on a Macro level there are net welfare benefits.

         He says of Mitt:

         "Today I want to react to my friend Karl Smith, to my cousin Mitt Romney, and to the part of the American electorate Mitt was trying to pander to when he said:

I’m not concerned about the very poor — we have a safety net there,” he said. “If it needs repair, I’ll fix it. I’m not concerned about the very rich — they’re doing just fine. I’m concerned about the very heart of America, the 90-95 percent of Americans who right now are struggling.

        "I think Mitt has things exactly backward here. Fortunately, I have high hopes that he said it precisely because it isn’t true: that he is concerned about the very poor and the very rich, but has a lot of trouble connecting emotionally with the middle-class. So, since he might be our next president, oh may it be true that Mitt, in his heart of hearts, agrees with me when I say this:

I am deeply concerned about the poor, because they are truly suffering, even with what safety net exists. Helping them is one of our highest ethical obligations. I am deeply concerned about the honest rich—not so much for themselves, though their welfare counts too—but because they provide goods and services that make our lives better, because they provide jobs, because they help ensure that we can get good returns for our retirement saving, and because we already depend on them so much for tax revenue. But for the middle-class, who count heavily because they make up the bulk of our society, I have a stern message. We are paying too high a price when we tax the middle class in order to give benefits to the middle-class—and taxing the rich to give benefits to the middle-class would only make things worse. The primary job of the government in relation to the middle-class has to be to help them help themselves, through education, through loans, through libertarian paternalism, and by stopping the dishonest rich from preying on the middle-class through deceit and chicanery.

           See, this talk about paying too high a price for middle class benefits makes me somewhat wary. What exactly does Miles have in mind-does he mean we should cut Social Security and Medicare? I'm not aware of what other middle class benefits he might have in mind. I think it's easy these days to imagine that the middle class don't need these but the best way to see the error of this is to recall the state of the middle class in the age prior to SS and Medicare-the middle class as we understand it was much smaller and most elderly Americans were confined to either the poor house or stuck living with their kids-that latter was the best case scenario. For those who either had no kids or maybe their kids hated them there was the poor house.

           You could argue that SS and Medicare should be more directed to the low and middle  income rather than the upper middle class but no doubt that'd lead to a major political backlash which is why FDR structured it as he did. To be sure the most unpalatable part of this New Deal legacy is the absurdly low payroll cap which makes it such an aggressively regressive tax. If we only want to tax $105,000 of income for it, why not the second or third $105,000 rather than the first? This is all part of a thorny political debate no doubt.

            Miles gets to the heart of why 'taxes are bad' here:

             "what about the side effects of taking the money from the rich to give to the poor? The “Occupy Wall Street” movement and its spinoffs paint a picture of rich people who got rich by some kind of chicanery or evil—a picture embedded in the negative connotation now carried by the phrase “the 1%.” But the typical case is someone who got rich—or whose parents got rich—by providing a useful service. And I am not just talking about the wonderful services provided by someone like Steve Jobs or Oprah Winfrey. For vividness I need to use famous people as examples, but before their current fame, in the relative anonymity that most rich people live in, Duchess Kate’s parents rose to become part of the “the 1%” in England by providing people with party supplies and decorations. There were many parties that were better because Carole and Michael Middleton provided these supplies and decorations. Aside from the rare cases (think Bernie Madoff) in which someone gets rich by pretending to provide a service they are not really providing, or by means of some other evil—we all benefit from having the rich work hard to provide us with those services. Also, many of the rich provide jobs to employees."

      "Now let’s look at the bad side-effects of tax distortions. To do this, we need to compare distortionary taxes (such as income taxes, labor earnings taxes or consumption taxes) to taxes on the rich that do not depend on the level of their income, earnings or consumption. If we could tax the rich in a way that did not depend on their income, earnings or consumption, they would fulfill their obligation to contribute toward helping the poor in part by working harder to make more money to pay the taxes. This would benefit all of the people who receive the services they provide. And they might hire additional employees to work with them in the extra time they are devoting to work."

      "By contrast, distortionary taxes such as income, earnings or consumption taxes push the rich toward getting the money to pay their taxes out of their existing income rather than in part by raising their before-tax income to soften some of the hit to their after-tax income. We are all then worse off as a result: the rich because they would rather work harder than take the tax hit entirely as a reduction in after-tax income, and everyone else who would have benefitted as a customer or employee from the extra services and jobs they would have provided."

      "So why don’t we use non-distortionary taxes that don’t depend on income, earnings or consumption to raise the taxes to help the poor? It is because it is not easy to tell the rich and the poor apart without looking at income, earnings or consumption.

       "In principle, if we could look at genes, say, to figure out who is inherently blessed with the talents to be rich, we could avoid distortions. This approach raises a host of troubling philosophical issues. But it is taken seriously in the academic literature. See for example my University of Michigan colleague Joel Slemrod’s paper with Kyle Logue: Genes as Tags: The Tax Implications of Widely Available Genetic Information. At this point, I am not willing to recommend such a gene-based approach. But without some new approach, we are stuck with identifying who is rich by looking at income, earnings or consumption. So we use taxes that depend on income, earnings or consumption, with all their attendant distortions."

        http://blog.supplysideliberal.com/post/24470482950/why-taxes-are-bad

        Yes, I'm fairly nervous about this "genes approach" in terms of where it might take us-like Charles Murray's Bell Curve. It seems that Supply Siders like Scott Sumner seem to think that consumption taxes are less distortionary than income or corporate taxes though I'm not clear why. One of my frustrations with Supply Siders is they never seem to want to explain to the unpersuaded their preferences-certainly Sumner does nothing but offer insults when I ask him about it. That's why I'm eager to here hear Mile's answers as he seems to be cut from different cloth.

      As to this concern on distortions of Miles:

       "If we could tax the rich in a way that did not depend on their income, earnings or consumption, they would fulfill their obligation to contribute toward helping the poor in part by working harder to make more money to pay the taxes. This would benefit all of the people who receive the services they provide. And they might hire additional employees to work with them in the extra time they are devoting to work."

       The answer is likely that distortions of some kind or another are inevitable. Remember taxes are never a zero sum game. One of the many problems I have with the approach of a Grover Norquist is that tax cuts for some usually mean tax hikes for someone else-again, it's inevitable. There are always Pareto Effects.

       There are gains from taxing the rich as well. It does well to remember that we have an empirical record to refer to on the question of taxation. There was a time when we taxed the wealthy at much lower levels-the pre income tax era. I think on balance from an overall macroeconomic and social welfare standpoint we are better off than we were then. Then the rich had less taxes to discourage behaviour we might want to encourage but then we didn't have the level of social spending and benefits we have today.

        I think that these have been considerable. It's easy to ignore that the middle class as we know it today is largely the product of the New Deal-that prior to it far fewer Americans were what we today would consider middle class.


       One more point: Implicit is the idea that rich are the "job creators." It's not wholly true that the Occupy Wall Street presumed that most wealthy people are rich through personal chicanery. Much of their indignation is directed to what they see as systemic injustice-I for one do believe that capitalism is the most efficient and potentially most just allocator of resources, though I'm skeptical of too much laissez-faire.  What I see in Supply Side analysis is no recognition that 70% of GDP is consumer demand. So who is exactly the job creators?

       http://useconomy.about.com/od/grossdomesticproduct/f/GDP_Components.htm

        If there's no money in people's pockets there's no demand and no job creation. Again, my position is a "Demand Sider" I'd like to find ways to reduce the demand side taxes-the taxes that the poor and middle income have to pay, from high payroll taxes, to the litany of state sales taxes, and fees-traffic fees, meters, indeed, insurance. As I suggested in my first reply to Miles nothing gets my goat more than this Cato canard that's repeated ad nauseum that "45% of Americans pay no tax."

        Even the wino on a park bench pays tax every time he gets his hands on demon rum.

       Does Miles recognize the distortions that come from the demand side of income-the taxes that the nonrich pay? Again, I poise these questions to Miles as I appreciate his contributions to the debate. Hopefully he understands the spirit that I poise these questions. I've certainly changed my opinion some on the "progressive consumption tax"-not enough to take the scare quotes away yet, of course!-and am willing to be persuaded on supply side issues.

      I look forward to learning more about his positions.