Capital Gains Taxes, Paul Krugman, and the Lies of Scott Sumner

    If you think this is unfair to call him a liar, keep in mind that in his recent post has called Krugman either a liar or ignoramus. I know, Tom Brown will say it was nice of him to give us a choice LOL. You know I love you Tom. Here is Sumner:

    "this comment by Greg Mankiw intrigued me:

In this case, the issue is the reduction in capital taxes during the George W. Bush administration.  Paul [Krugman] says that the goal here was “defending the oligarchy’s interests.”
Really? As Paul well knows, there is a large literature in economics suggesting that an optimal tax system imposes much lower taxes on capital income than on wage income (or consumption).

     "Why should we assume that Paul Krugman is aware of that literature?  You would think he would be aware of the literature—other progressive bloggers like Matt Yglesias and Brad DeLong obviously are.  But I don’t recall reading a single Krugman column that showed any awareness of the need for replacing our current tax system with a progressive consumption tax.  I don’t recall a single post pointing out that taxes on capital should be much lower than taxes on labor income, if not zero."

     "I don’t recall a single post pointing out that nominal tax rates on capital income are meaningless, and that real tax rates on (for instance) Treasury bonds are now well over 100%.  Or that corporate income is triple taxed, making nominal corporate tax rates utterly meaningless as indicators of progressivity.  Or that Warren Buffet was spouting utter nonsense when he claimed his tax rate was lower than that of his secretary.  If such Krugman posts exist then please show them to me, I’d love to read them."

     "Either he is unaware of the literature, or he is aware of it and is knowingly spouting misinformation. I’d prefer to be charitable and assume that he’s not aware of the literature."

     http://www.themoneyillusion.com/?p=26468#comments

     This is a very strong statement by Sumner-way too strong. You're either have no idea what you're talking about or you're saying something you know is false. I came back at Sumner:
   
     "On Krugman are you suggesting that the idea that we should tax capital much lower than wage income is universally accepted among professional economists?"

      "There may be a literature with this argument but there is also a large literature arguing the opposite like Joseph Pechman for instance. He also argues against the consumption tax."

      http://college.holycross.edu/eej/Volume16/V16N1P1_5.pdf

     "So there may be a large literature but its far from unanimous. My guess is Krugman is aware of this large literature but disagrees with it."

       It turns out my guess was right. I'm just waiting for Sumner to give me a snarky reply because I'm ready. Here is what Krugman wrote

     "Greg Mankiw is upset at my suggestion that the Bush administration was motivated by class interests in its determination to slash taxes on capital income and eliminate estate taxes. He wants us to know that it was all about optimal taxation, as dictated by economic theory."

     "Well, we could have a political discussion: How many people really, truly believe that George W. Bush chose to slash taxes on dividends and phase out the inheritance tax because Greg Mankiw and Glenn Hubbard told him that this was the conclusion from economic theory? Can we have a show of hands?"

     "But let me instead point out that the case for zero or low taxation of capital income rests on very strong, very unrealistic assumptions — basically perfectly rational intertemporally optimizing agents, with dynasties behaving as if they were infinitely lived individuals. Question those assumptions, and the whole case falls apart. Don’t take my word for it — read Peter Diamond and Emmanuel Saez (pdf), who also point out that the intertemporal optimizing model of saving is in fact rejected by lots of evidence."

    "And when it comes to bequests, read Irving Fisher (pdf):

The ordinary millionaire capitalist about to leave this world forever cares less about what becomes of the fortune he leaves behind than we have been accustomed to assume. Contrary to a common opinion, he did not lay it up, at least not beyond a certain point, because of any wish to leave it to others. His accumulating motives were rather those of power, of self-expression, of hunting big game.

     "The point here is that the economic case for not taxing capital rests on a stylized model that we know does a bad job of capturing real behavior; the case for taxing capital rests on considerations of equity and concerns about excessive concentration of wealth that are very much grounded in real-world observation. You don’t have to be a know-nothing to argue that the second case trumps the first."

 

     http://krugman.blogs.nytimes.com/2014/03/27/too-much-faith-in-models-capital-taxation-edition/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body&_r=0

 

    Ooooh! A few things become clear reading this. For one thing I was right-Krugman obviously is very well acquainted with this literature-he just doesn't buy it. This is a big distinction. It's also clear that someone is knowingly spouting misinformation and that person is, of course, Scott Sumner. He chose to pretend Krugman's reply to Mankiw here doesn't exist. So he's being dishonest-unless he published this on March 28 without having read Krugman's reply on March 27 so maybe he's ignorant.

 

    It's clear what bee was up Sumner's bonnet here. Krugman has really been kicking his hornet's nest the week or so. Listen to Krugman here:

 

    "Consider first one of the classic models in international macro, Dornbusch’s overshooting model (pdf) of the exchange rate, which is used to show how exchange rates can be as volatile as they are — basically it’s the combination of fast-moving asset markets where prices react quickly to news and slow-moving goods markets where prices can take years to adjust. To make his model as clean as possible (which is to say, very clean — Rudi was my role model), Dornbusch assumed rational expectations in asset markets, so that the exchange rate immediately reflects news about the money supply and other things. Was this assumption realistic? No — there is in fact a lot of evidence that the specific result that interest differentials are equal to expected future exchange rate changes isn’t right. But that really wasn’t crucial to Dornbusch’s point; he was using rational expectations as a simple way to get fast-moving asset prices, and his story wasn’t too sensitive to the precise correctness of the assumption."

    "Now compare this to people who say that because asset markets are efficient, there can’t be bubbles. They’re making the same assumption — but they’re putting much more weight on it, weight that it can’t actually bear."

 

     http://krugman.blogs.nytimes.com/2014/03/28/economic-realism-wonkish/?module=BlogPost-Title&version=Blog Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

 

     That no doubt also tweaked Sumner-among other Righties-as this is exactly how he tries to claim there can't be bubbles-after all the market is efficient so how could there be a bubble?

 

      Anyway, good job Dr. Krugman. You have done God's Work here.