As I wrote over the weekend, I've been reading Wanniski's The Way the World Works-which was basically his magnum opus on Supply Side economics.
http://diaryofarepublicanhater.blogspot.com/2013/07/jude-wanniski-way-world-works-and.html
http://diaryofarepublicanhater.blogspot.com/2013/07/jude-wanniski-laffer-curve-and-battle.html
http://diaryofarepublicanhater.blogspot.com/2013/07/wanniski-on-democratic-partys-chances.html
Regarding fiscal policy, it's often struck me that there seems to be some overlap at least between Keynesian and Supply Side fiscal policy at least regarding how to stimulate the economy. After all, when Reagan and Jack Kemp ran on their plans for deep tax cuts in the late 70s and early 80s they would invoke Kennedy's tax cuts in the early 60s.
Even when George W. Bush passed his tax cuts of 2001 and 2003, many argued he was using Keynesian logic-and of course his Chairman of his Council of Economic Advisers was the 'New Keynesian' Greg Mankiw. It occurred to me that Keynesian and Supply Side arguments for a tax cut can often run into each other.
Indeed, Wanniski gives Keynesianism a kind of backhanded compliment in claiming that it works-but not for the reasons it thinks it does. He claims that Keynesians think that it works thanks to bond illusion-that the electorate and the market can be deceived into not knowing that taxes will have to be raised in the future to pay a tax cut today.
What matters for Supply-Siders is not just reducing taxes but reducing rates. So when taxes were cut in the Kennedy cut-along with a drop in tarrifs- this removed barriers to commerce-dropping the rates beneath the prohibitive rate on the Laffer Curve.
I'm also in the middle of reading Bruce Bartlett's The Benefit and the Burden about tax reform. I've been skeptical about tax reform for awhile. and tend to agree with Jared Bernstein that liberals shouldn't bother with it unless we can get more progressive rates-of course this is the last thing conservatives want.
http://diaryofarepublicanhater.blogspot.com/2013/07/does-anyone-really-want-tax-reform.html
http://diaryofarepublicanhater.blogspot.com/2013/07/tax-reform-1986-and-better-mousetrap.html
Still, while I'm skeptical, Barltett at least makes about as good a case for it as you're going to get.
http://diaryofarepublicanhater.blogspot.com/2013/07/bruce-bartlett-on-tax-reform_12.html
One thing that tax reform advocates believe-many economists do as I understand it-is that tax rates are different than tax revenues. The point is that there is supposed to be a major difference not just what the revenue level is raised by the government but how it's raised. There are two concepts that if you believe them argue for tax reform. The income effect and the substitution effect.
The idea is that if average tax rate goes up this likely will have the effect of increasing work effort to achieve the ideal amount of money the worker wants to earn. However, the impact is the opposite with an increase in one's marginal tax rate. If a rise in the marginal rate reduces the after tax income too much workers are more likely to increase leisure.
So this is what the premise of it is. I would note that while it's perhaps imaginable that someone would cut back on work if their after-tax income decreases too much, this suggests someone who nevertheless is at least comfortable financially.
What does come through in reading Bartlett-again, a very good book where you learn a lot about the tax system-is that to really assess a particular aspect of the tax code you have to consider the whole-it's very easy to lose sight of the forest for the trees. For example compare the U.S. tax code with the code in most European countries.
We actually have a comparably more progressive tax code. Most European countries have much higher consumption or value-added taxes. The average tax rate in the U.S. is considerably lower-about 26%; this factors in not just the federal income tax but also the payroll tax, and state income, property, and sales taxes.-then Sweden who's ATR is about 20% higher. However, if you factor in the much more generous welfare state in Sweden and these other countries-where many things that we pay out of pocket, the government provides-the picture is less stark.
On the other hand, our welfare state is more generous than it seems when you consider entitlements like the Earned Income Tax Credit (EITC).
Still, even factoring this, I'd say their safety net is more generous. Bartlett suggests that the EITC significantly distorts the tax code-of course, Milton Friedman deliberately suggested it to cut back on the safety net and he hoped the minimum wage.
Bartlett seems to think the suggestion that the capital gains tax should be zero. Actually, interestingly, it's not just conservatives who think this idea has merit-Hyman Minsky himself wanted it eliminated. If you look at the history of the capital gains tax it's been partly contingent on what the individual rate. For example. liberals often point to the 91% top rate in the 50s to show that it wasn't so bad-I've made this argument myself. Yet, at the same time, the cap gains rate was only 25% then.
In 1986, Reagan and friends were willing to raise the capital gains rate to the same level of the-lowered-top marginal income rate.
I'm still pretty far from buying into this idea of eliminating the capital gains rate-I'd have preferred it to be back at 39.6% with the dividends and top income rate after the fiscal cliff deal, rather than just 20%. If you really wanted to lower it, I'd think you have to first narrow what counts as capital gains. It can't just mean what Wall Street players do all day. I think you;d have to be very clear what counts and doesn't count as capital gains.
http://diaryofarepublicanhater.blogspot.com/2013/07/jude-wanniski-way-world-works-and.html
http://diaryofarepublicanhater.blogspot.com/2013/07/jude-wanniski-laffer-curve-and-battle.html
http://diaryofarepublicanhater.blogspot.com/2013/07/wanniski-on-democratic-partys-chances.html
Regarding fiscal policy, it's often struck me that there seems to be some overlap at least between Keynesian and Supply Side fiscal policy at least regarding how to stimulate the economy. After all, when Reagan and Jack Kemp ran on their plans for deep tax cuts in the late 70s and early 80s they would invoke Kennedy's tax cuts in the early 60s.
Even when George W. Bush passed his tax cuts of 2001 and 2003, many argued he was using Keynesian logic-and of course his Chairman of his Council of Economic Advisers was the 'New Keynesian' Greg Mankiw. It occurred to me that Keynesian and Supply Side arguments for a tax cut can often run into each other.
Indeed, Wanniski gives Keynesianism a kind of backhanded compliment in claiming that it works-but not for the reasons it thinks it does. He claims that Keynesians think that it works thanks to bond illusion-that the electorate and the market can be deceived into not knowing that taxes will have to be raised in the future to pay a tax cut today.
What matters for Supply-Siders is not just reducing taxes but reducing rates. So when taxes were cut in the Kennedy cut-along with a drop in tarrifs- this removed barriers to commerce-dropping the rates beneath the prohibitive rate on the Laffer Curve.
I'm also in the middle of reading Bruce Bartlett's The Benefit and the Burden about tax reform. I've been skeptical about tax reform for awhile. and tend to agree with Jared Bernstein that liberals shouldn't bother with it unless we can get more progressive rates-of course this is the last thing conservatives want.
http://diaryofarepublicanhater.blogspot.com/2013/07/does-anyone-really-want-tax-reform.html
http://diaryofarepublicanhater.blogspot.com/2013/07/tax-reform-1986-and-better-mousetrap.html
Still, while I'm skeptical, Barltett at least makes about as good a case for it as you're going to get.
http://diaryofarepublicanhater.blogspot.com/2013/07/bruce-bartlett-on-tax-reform_12.html
One thing that tax reform advocates believe-many economists do as I understand it-is that tax rates are different than tax revenues. The point is that there is supposed to be a major difference not just what the revenue level is raised by the government but how it's raised. There are two concepts that if you believe them argue for tax reform. The income effect and the substitution effect.
The idea is that if average tax rate goes up this likely will have the effect of increasing work effort to achieve the ideal amount of money the worker wants to earn. However, the impact is the opposite with an increase in one's marginal tax rate. If a rise in the marginal rate reduces the after tax income too much workers are more likely to increase leisure.
So this is what the premise of it is. I would note that while it's perhaps imaginable that someone would cut back on work if their after-tax income decreases too much, this suggests someone who nevertheless is at least comfortable financially.
What does come through in reading Bartlett-again, a very good book where you learn a lot about the tax system-is that to really assess a particular aspect of the tax code you have to consider the whole-it's very easy to lose sight of the forest for the trees. For example compare the U.S. tax code with the code in most European countries.
We actually have a comparably more progressive tax code. Most European countries have much higher consumption or value-added taxes. The average tax rate in the U.S. is considerably lower-about 26%; this factors in not just the federal income tax but also the payroll tax, and state income, property, and sales taxes.-then Sweden who's ATR is about 20% higher. However, if you factor in the much more generous welfare state in Sweden and these other countries-where many things that we pay out of pocket, the government provides-the picture is less stark.
On the other hand, our welfare state is more generous than it seems when you consider entitlements like the Earned Income Tax Credit (EITC).
Still, even factoring this, I'd say their safety net is more generous. Bartlett suggests that the EITC significantly distorts the tax code-of course, Milton Friedman deliberately suggested it to cut back on the safety net and he hoped the minimum wage.
Bartlett seems to think the suggestion that the capital gains tax should be zero. Actually, interestingly, it's not just conservatives who think this idea has merit-Hyman Minsky himself wanted it eliminated. If you look at the history of the capital gains tax it's been partly contingent on what the individual rate. For example. liberals often point to the 91% top rate in the 50s to show that it wasn't so bad-I've made this argument myself. Yet, at the same time, the cap gains rate was only 25% then.
In 1986, Reagan and friends were willing to raise the capital gains rate to the same level of the-lowered-top marginal income rate.
I'm still pretty far from buying into this idea of eliminating the capital gains rate-I'd have preferred it to be back at 39.6% with the dividends and top income rate after the fiscal cliff deal, rather than just 20%. If you really wanted to lower it, I'd think you have to first narrow what counts as capital gains. It can't just mean what Wall Street players do all day. I think you;d have to be very clear what counts and doesn't count as capital gains.
Lots of good stuff here Mike
ReplyDeleteI think he makes an error here that he needs to explain better;
"The idea is that if average tax rate goes up this likely will have the effect of increasing work effort to achieve the ideal amount of money the worker wants to earn. However, the impact is the opposite with an increase in one's marginal tax rate. If a rise in the marginal rate reduces the after tax income too much workers are more likely to increase leisure.
So this is what the premise of it is. I would note that while it's perhaps imaginable that someone would cut back on work if their after-tax income decreases too much, this suggests someone who nevertheless is at least comfortable financially."
I know those were your words but I have seen many people make the error of arguing that raising the rate will decrease the income and therefore discourage harder work. Obviously if my income stays at 100k and the tax rate on the 100k bracket goes up 3% I will pay 3000 more in taxes, thats not arguable, but I have heard many claim that the increased rate will disincentivize work because you can actually make more before taxes and take home less than at a lower tax bracket. IOW many people do not understand (and I think the supply siders feed this myth in a way) how you pay your tax bill. I had to explain to a colleague once that just because they went and earned overtime they were not going to take home less than they would without the overtime. They really saw a scenario where they would work more but the increased rate would be applied to every dollar they make, so they would actually take home less over all. She was dumbfounded when I explained her error. They dont understand marginal taxation rates.
In another discussion with another coworker, I had to explain to him that even if HE decided not to work the overtime since he didnt want to pay more taxes that this could not happen on a macro scale. That this would not be a negative and result in less work economy wide (or department wide even) because all work willing to be paid for will be done by someone in all likelihood. Even in our own department if we all said "no more work past five, we all walk out"..... they (the physicians who employ us) will either raise the OT pay or do the work them selves and keep the money they would have paid out (raise their own incomes!!) We are not lowering the production of the economy by refusing to do the OT work.
Work that needs to be done will be done and paid for.
There are a lot of these kind of macro misconceptions out there on the right (probably left too) and the whole supply side wave has really fed these in my view.
I totally agree with your last paragraph. If we can start getting things labeled properly as investments vs simple savings shuffling, then I would be in favor of very low to no tax rate on true new investment. But trading stocks in secondary markets or flipping houses every other year? Nope. Those should not be rewarded with low rates on return. We have gotten to where anything you buy today and sell next year for a return is called "investment".......... and thats wrong. Investment is when you actually put up your capital to new enterprises which are going to raise our productive output in the future potentially. Its this willingness to try "new" opportunities (not just trade some proxy for an old opportunity that now has a price tag on it) that should be encouraged and rewarded. If the new venture pans out all profits you make are tax free for ten years maybe. And if it fails 100% of the principal investemnt can be written off on taxes over the next three years say. Im sure a tax guy could tweak these numbers to get better aligned with our tax code reality but my (not claiming this is a truly original idea btw) basic idea can hold.
Hey Greg. Yes there are all kinds of confusions. The idea that you'll be better off without working overtime-more money-because of a small tax increase makes no sense.
ReplyDeleteAs you know I'm no. exactly in the sweet spot on the tax code for Supply Siders. However, my taxes did go up-as did all wage earners with the end of the payroll tax holiday. Still I work as many hours as I can get. After all, working more hours is stil a lot more money even if they are taking out $6 extra dollars a week or whatever it is.
The substitution and income effects are just ideas that a lot of economists believe. Again, the key is that Bartlett himself in explaining it says that large increases in the marginal rate might lead to opting for more leisure. Certainly the small tax increase in the fiscal cliff deal doesn't qualify for this.
However, the idea of substitution and income effects are actually used more broadly in the consumption market.
http://www2.econ.iastate.edu/classes/econ101/hallam/Income_Substitution.pdf
It could be argued that the labor market is different and is not just another supply and demand market.