Let's Talk More About Taxes

    About a week and a half ago there was quite a lot of talk about tax rates and the optimum level for marginal rates particularly for the top 1% of income earners-one thing that's important is to not lose sight of the fact that there's a big difference between "income earners" and "wage earners"; if we say "top wage earners" we are already on the wrong track.

   The cause of the conversation at the time was some research by the economists Piketty and Saez about what the top marginal rate should be. Their answer-in the 60s-70s caused a great deal of pushback of course by supply siders, Scott Sumner checked in with a snarky post. On the other hand Mike Kimel at Angry Bear was tickled as he has done his own research on optimum rates based on his own spreadsheet data that had placed it about the same level as Piketty-Saez. Krugman wrote about this too in general agreement.

  I threw my hat in the ring as this is one of the most important fiscal issues we face.

  http://diaryofarepublicanhater.blogspot.com/2011/11/ok-lets-talk-taxes.html

   I imagined a perfect world or at least a much better one where I was Governor of my home state of New York. The reason I settled for Governor is as I was born in England there is no chance of me been President-call it the Alexander Hamilton Prohibition .

   The question of the optimum rate begs the question of objectives. What do we hope to achieve with tax policy? As a liberal I believe we should strive for one which is as progressive as possible while raising as much revenue as possible in a way that will not hurt growth and if anything facilitate and increase growth.

  This triple mandate may well seem daunting. Any one of the three may conflict with the others. In my vision as Governor I focused on ending the general sales tax and issuing a state wide moratorium on all parking and traffic tickets and fees prior to say 2009 and also maybe having a 50% cut in all fees at the state, city and local level. If any Governor tried such a policy it would certainly be bold-there would be an awful lot of quibbling that he should not try to put his hand on the policies of cities much less localities. Still I don't see why in principle the state can't do something that would enforce compliance on the city and local level.

  The idea is that this would be good just for the relief of the burden that is on the backs of the non-rich. But I also think-without seeing a study-that this would be a real boon to economic activity as should lead to an explosion of effective demand. Think about all that wasted money on the endless byzantine parking violations in New York City alone. If people stopped wasting it on traffic fees or even sales tax wouldn't this lead to a boon in economic activity? See I do think it's possible for tax cuts to "pay for themselves" the difference is unlike the Right it should be applied at the demand side level. The virtue of progressive taxation is that it leaves more money in the pockets of the nonrich for whom most money goes to consumption-remember that 70% of economic activity is generated by consumer demand.

  Remember that the goal here is to be as progressive as possible-certainly these tax and fee cuts would be progressive-but also to raise revenue-at this point in time we suffer from cash-strapped governments at all levels. What I think you'd see is that with the boom in consumption there would be a great deal of new tax revenue from this. Clearly this would be a growth story.

 Any way that was my vision. Today I see that over at Naked Capitalism Yves Smith has posted the latest from Piketty and Saez who are arguing that if the top marginal rate should rise to Eisenhower levels-as high as 91%-this would not damage growth.

 http://www.nakedcapitalism.com/2011/12/piketty-saez-and-stantcheva-taxing-the-1-%e2%80%93-why-the-top-tax-rate-could-be-over-80.html

 To believe this one can't believe in supply side economics it is that simple. Empirically it would seem they are right-we had very high growth in the 50s and 60s with these high marginal rates.

   I was just reading Warren Mosler's The Seven Deadly Innocent Frauds of Economic Policy. An idea he suggests that really got my notice is his proposal to cut the payroll tax to zero for the nonwealthy, an idea that like my idea of cutting the state and city sales taxes is a very exciting idea. In a better world we should have both.

  In the real world the debate is even going in the opposite direction. What we hear all the time now-not just from Republicans though they are the ones driving the bus-is that we need a tax code that is "simpler and fairer." The two are far from wholly mutually inclusive. Herman Cain's 9-9-9 plan was very simple but very unfair-in fact when you got into the details it was much less simple than it sounded too. It actually would have raised taxes on most Americans so further dousing effective demand.

  While these discussions are good one wonders when our policy makers will catch up. A start would be to let the Bush tax cuts expire. The case could even be made that we would have been better off if we had let all of them expire if the Republicans refused to let just those for the wealthy do so. If they all expired the deficit would be gone.