John Cochrane Worries the Rich are Being Taxed Too Much

     So he proposes that we have an Alternative Maximum Tax to go with the Alternative Minimum Tax. Ok, ,he doesn't use the word "rich" anywhere in the post. However, that's the obvious beneficiary of any alternative max tax. He asks rhetorically how high taxes have to get before it starts to harm the economy:

    "With Monday's deadline for filing tax returns looming, let's start a national conversation: How much is the most anyone should have to pay? When do taxes indisputably start to harm the economy and produce less revenue—when government takes 50% of people's income? 60%? 70%?"

     http://online.wsj.com/article/SB10001424127887323741004578414402175056688.html

     As most discussions about the harm that taxes on the rich posies, the conversation is rhetorical. He asks how much is too much however, the claim that taxes at some level indisputably hurt the economy is, well, very much up for dispute.

    We could look at history-in his entire piece Cochrane doesn't look at a single piece of empirical evidence. In the 60s we had a 70% top marginal rate. We had a very strong economic boom. In 1942, the top marginal rate was pushed up to 91% to pay for the war. This didn't stop the economy from coming back thanks to all that stimulus war spending. We saw a very strong economy at the  start of the postwar era despite a 91% top marginal rate.

    Based on history, neither a 70% or even a 90% reach that point where the economy is indisputably hurt. To be sure, here, we're only discussing the top marginal rate. He points out that there are more taxes than the federal tax rate:

     "The zombies howl that the top federal tax bracket is still "only" 40%. Surely "the rich" can contribute a bit more? They forget that the economic damage of taxes comes from the total tax bite, not just the federal income tax."

     He's calling liberals who call for higher taxes on the rich "zombies." I guess Krugman should be flattered. I notice that Sumner too the other day was using Krugman's "zombies."

     It's true that there are many taxes other than federal income taxes. However, you can't figure out what top income earners pay in taxes by taking 40% and adding state, property, consumption, etc. What Cochrane doesn't acknowledge is the difference between the nominal tax rate and the effective tax rate. In recent years-before the recent expiration of the top Bush rates-we'd see that while the nominal top rate was 35%, many were paying less than half that in reality. 

    What we seem to see is that the effective rates that the 1% pay is about half of the states top marginal rate. Of course, it's only a marginal rate so that any income they make beneath that number is taxed at lower rates. 

     So if you were going to figure out what the true tax rate is for those in the top brackets, it's not simply 40% + other taxes as Sumner sometimes makes it sound. 

     I would say that in general I think that nonrich Americans are overtaxed-based on what services we get. I don't make much money in my telemarketing job but when you factor in all the different taxes-Fica, state, local, etc.-it's about 20%-this ignores the point that workers are held to pay the employer side of payroll taxes as well. 

      Cochrane takes pains to argue that what matters is economic efficiency not fairness, when discussing public services:

      "Liberals might object to a maximum tax, since it leaves out all the benefits that we get from government. In setting the maximum level of taxation, shouldn't we consider the nice roads, free schooling, police, national defense, thoughtful regulation, and other benefits and services?"

     "This is a valid consideration if one argues about what's "fair." But I propose the AMaxT entirely to limit the economic damage of taxation, a goal you must consider even if you think it's "fair" to take every cent of a rich person's income."

     "To limit economic damage, benefits are irrelevant. Suppose that the government levies a 100% income tax, but it is so good at providing services that each of us gets back twice the value of what we put in. Good deal? Yes. Functioning economy? No. Each person gets services whether they do or don't pay taxes. But with a 100% income tax, nobody works, nobody pays any taxes, and nobody actually gets any services."

      Ok. Forget fairness and just limit the economic damage of higher taxes. A few troubles with this:

       1. The claim that a certain level of taxation hurts the economy is claimed by many like Cochrane. However there is very little rigorous proof or evidence of this claim. It's basically felt that it must do, however there hasn't been any successful attempts to actually prove this. Is it any more than an article of faith?

     2. He seems to think we can seamlessly partition off what is fair from what is efficient. Let's just forget fairness. This assumes that what is fair and what is efficient are two things that have no mutual inclusivity at all. If you believe there is any then you can't simply ignore fairness. To believe they are is to believe that fairness and efficiency are either mutually exclusive or at least wholly unrelated. Neither of these premises seem plausible. 

     Even if we granted it however that fairness and efficiency have nothing whatsoever to do with each other, how far could we take it? If we figured out a very efficient tax plan that most people considered unfair, would most policymakers promote that plan? Of course not. They don't want protests, riots, and social disorder. How would those things effect economic efficiency. 

   3. He says that cuts in social services shouldn't be factored in. This is a fallacy as the sequester is now demonstrating. He seems to be assuming that government spending has no positive effect on the economy-in reality spending is spending. 

   If the government taxed all your money and then sent you a check for double the amount it would be a great deal. Based on what Lucas assumes about incetivizes people would work harder. He's saying that government would take the $30.000 you make in total but send you back $60,000. That's a great deal. Of course, you wouldn't need all of this in government services but hut the example is a reductio absurdem anyway. 

   The fallacy is the assumption that there is no growth via government spending-which the sequester is disproving. 

   Cochrane's question of how high taxes have to get to harm economic growth is rhetorical as there really is no definitive answer. He then admits that this problem he complains of may not even be a problem:

   "How many people are really being taxed at outrageous rates? I don't know. The U.S. tax system is so complex, with so many layers of taxing authority, that nobody really knows. Still, an alternative maximum tax is a win-win bet.

If there really are few people who pay an extraordinarily high percentage of their income, then liberals shouldn't object. They won't lose any revenue and will enjoy snickering "I told you so." If it turns out that there are lots of people being so taxed, then we will sharply reduce the unintended, multiplicative effect of taxation, and we will measure that fact. A canary in the coal mine is as valuable chirping as choking."

    If a small number are effected by this it will likely be only rich people and liberals won't enjoy snickering while the rich get a new major tax cut. If it's a larger number he seems to be suggesting the AMaxT may not be revenue neutral, in which case it's not a win-win either. 

    Cochrane's AMaxT then seems to be a solution in search of a problem. We don't know though those like Cochrane feel that higher taxes on the rich are a problem regardless of how much of that revenue is spent by the government. We don't know that many are effected by it but since we feel taht higher taxes are a problem we will assume that many are effected by it.