Okay, Stan, defender of media, explain to me how the Wall Street Journal can aspire to be a source of news if it permits this op-ed by David Ranson to appear in its pages. It says:
Will increasing tax rates on the rich increase revenues, as Barack Obama hopes, or hold back the economy, as John McCain fears? Or both?
Mr. Hauser uncovered the means to answer these questions definitively. On this page in 1993, he stated that "No matter what the tax rates have been, in postwar America tax revenues have remained at about 19.5% of GDP." What a pity that his discovery has not been more widely disseminated.
The chart nearby, updating the evidence to 2007, confirms Hauser's Law. The federal tax "yield" (revenues divided by GDP) has remained close to 19.5%, even as the top tax bracket was brought down from 91% to the present 35%. This is what scientists call an "independence theorem," and it cuts the Gordian Knot of tax policy debate.
![[You Can't Soak the Rich]](http://s.wsj.net/public/resources/images/ED-AH556B_ranso_20080519194014.gif)
As the title notes, this is beyond awful. It confuses what may be a desire of the American people not to be taxed beyond 19.5% of GDP, under a variety of tax systems, with an unfounded claim that the American people could not be taxed at a higher rate (on GDP) than 19.5%.
Specifically, it ignores the base-broadening that has accompanied much of the reduction in the top marginal tax rate. It ignores the increasing contribution to revenues played by the payroll tax, which has nothing to do with the top marginal tax rate. It is not robust against the standard Laffer curve critique--it will eventually not hold up for a sufficiently low top marginal tax rate. And the list could be extended. These shortcomings are obvious to anyone who takes just a moment to consider the claim, and yet the Wall Street Journal publishes it. They have no one to blame but themselves for the low regard in which they are being held.
I have not been a subscriber to the Wall Street Journal for some time now. If you want to read a serious WSJ, go here.
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The opinion pages are crap, yes:
But the news pages are still gold. A while ago there was a flap because one of the editorialists (Holman Jenkins?) wrote a piece criticizing the news page work on backdating -- the same work that later won the paper two Pulitzers. Some of the reporters were pissed at being second-guessed by the halfwits in their backfield. I can't find a link to descriptions of the events at the moment.
The news pages have also run a variety of deep and probing articles on things like prescription drug practices, how medicine is allocated, and how people react to the changing economy. These stories were pre-Murdoch, but I wouldn't be surprised if they keep running.
Anyway, the point is that you shouldn't judge the rest of the WSJ based on its idiotic and pandering editorial page, which makes even the real journalists at the paper ashamed. The New York Times has its equivalent in the Sunday Styles section or the "Style" magazines, where pouffy stories blur whatever remaining line exists between ads and content.
taxes - my perspective
i don't think there is a need to be alarmist. a return to the fibonacci sequence in income tax may work - 60% you keep and 40% goes to govt (for highest income people). the fed budget was okay at end of 90s without returning to the 1970-style of taxation.
it seems to me that keeping more than half of what you make, in return for living in a country that is one of teh most prosperous and well-defended in civilization, is a decent trade-off.
one more
if the govt wants to raise more money, they should consider more taxes on intangible property - MDs, JDs, CPAs, etc - as opposed to consumption taxes, income taxes or other taxes
No, because then all the
No, because then all the smart people would finish most of their schooling, and go without formal degrees to avoid the taxes. Wouldn't you?
Why is it. . .
I'm too lazy to do the math, but I've always wondered why we have sales tax on bread, milk and cars, but I can trade $15K of stocks and get nicked only a quarter or two by the SEC.
A sales tax on stock and bond trades is pretty low hanging fruit and it seems the budget could be balanced in no time with that in place. . .
As for the WSJ editorial page, I've been ignoring it for years.
"why ... can I trade $15K of
"why ... can I trade $15K of stocks and get nicked only a quarter or two by the SEC. A sales tax on stock and bond trades is pretty low hanging fruit..."
Financial markets are very portable. Drop a small tax on US traders of foreign securities in 1963 and poof you've created the Eurobond market, all those traders are trading somewhere else.
Where do you live that you
Where do you live that you have a sales tax on bread and milk? States where I have lived would never propose such.
I don't see what was wrong with the basic premise of the article. The point is that taxation affects the growth of the economy thus influencing revenues to the government. If you try to soak the rich you may reduce the size of the economy and so the total percentage of revenues as a percentage of the economy remains constant. If you can refute it please do.
Andrew, thanks for posting
Andrew, thanks for posting on this. It's important that those to whom that op-ed is red meat to be wolfed down and regurgitated as talking points hear from a well-credentialed fellow Republican that it is baloney (not that baloney has never been regurgitated, figuratively and literally).
Some folks are actually suggesting that this op-ed "ends the tax cut debate". Check out this lunacy on RedState.com http://www.redstate.com/blogs/matthew_g/2008/may/20/did_the_tax_debate_j... . The money quote: "There have been a precious few times in history when a piece of evidence so incredibly important and indisputably true has been discovered, that rational minds cease to debate the issue. The world is round(ish). Porcupines do not throw their quills at dogs. And raising the tax rate does not raise tax revenues as a percentage of GDP. Kurt Hauser has ended the tax debate in the U.S. Or at least he should have, IMVHAPUO, fifteen years ago."
Yeeeeeesh!
Andrew, when you refer to the "base-broadening that has accompanied much of the reduction in the top marginal tax rate", are you referring mainly to elimination of deductions (as accompanied the Kennedy tax cuts), to bracket creep, and to other forms of taxation?
Yes, truly beyond awful
Yes, beware of anyone who seem to be in a hurry to "end the debate". In fact, there are a number of serious problems with David Ranson’s op-ed. The chart compares the top marginal income tax rate with the revenue from all federal taxes. These numbers are simply not comparable. One must either compare the top marginal income tax rate with the revenue that come from that rate or compare the effective tax rate of all taxes with the revenue from those taxes. As the revenue figures for the former are not available to my knowledge, I've done the latter. Comparing the effective tax rate of all taxes with the revenue from those taxes reveals a very close positive correlation. That is, the effective tax rate and the corresponding revenue tend to go up and down together by similar amounts. This correlation likewise holds if one looks at individual income taxes. I have posted a graph of these numbers and a discussion of the op-ed at http://usbudget.blogspot.com/.
B Davis, I'll check out that
B Davis,
I'll check out that analysis over at your site.
I do disagree, though, with one of your assertions above. You write "The chart compares the top marginal income tax rate with the revenue from all federal taxes. These numbers are simply not comparable. One must either compare the top marginal income tax rate with the revenue that come from that rate or compare the effective tax rate of all taxes with the revenue from those taxes."
I disagree. From the perspective of choosing top marginal income tax rate, the question here is: If we lower top marginal income tax rate, what is the net impact on TOTAL revenues (and in turn, on deficits), ceteris paribus. And the impact on total revenues is not confined to the impact on revenues from the top tax rate, because the impact on economic behavior will presumably have some ripple effect throughout the economy and thus the broader tax base, and in turn, revenues from taxes at the other individual (labor) income tax rates, as well as tax revenues from capital gains, dividends, corporate income tax, etc.
Put differently, the independent variable here is the top marginal income tax rate, and the dependent variable we are concerned with (from a policy perspective) is TOTAL revenues, not revenues just from taxes paid at that top rate. (I'm not saying that revenue-maximization is or should be the goal of tax policy, just discussing this one factor).
Ranson's problem is not that he focuses on total revenues, but that he just ASSUMES that ceteris paribus is indeed the reality. That is, his obviously oversimplified "analysis" (for lack of a better word) observes a correlation (or lack thereof, as he claims) and simply ignores all other variables whose impact could be masking the impact of his independent variable.
Hauser
If growing federal revenue is a good idea (a big if), perhaps growing GDP is the best policy choice. That's what the column suggested to me.
Pulitzers aren't much of an argument against the musing of Holman Jenkins. Remember "The Good Earth"? Agree with him or not, he often has an original take on things, including backdated options. His take this week on climate change politics seemed on the nose to me----adaption is the primary coping strategy to follow.
The more likely cause of stable revenue
I disagree. From the perspective of choosing top marginal income tax rate, the question here is: If we lower top marginal income tax rate, what is the net impact on TOTAL revenues (and in turn, on deficits), ceteris paribus.
Thanks for the comments as this forced me to think about this more carefully. What we need are more thoughtful critiques and discussions and fewer declarations that the "debate being over" (like the redstate.com article that you pointed out). What I meant by saying that the variables were not comparable is that the top marginal rate is not the sole determinant, even in a strict static sense, of total tax revenues. It only determines the tax revenue from the top tax bracket. Now I would agree that one could argue that a cut in the top marginal rate might lead to faster growth in taxable household income which could offset the cut in the rate. However, the apparent correlation between the total effective tax rate and total revenues would seem to exclude this. Suppose that the apparent correlation can be represented by the following formula:
effective_rate = k * (taxes_paid / GDP), where k is a constant
Putting in the CBO's definition of effective rate, this becomes
(taxes_paid / household_income ) = k * (taxes_paid / GDP)
which becomes
(household_income / GDP) = (1/k), where (1/k) is a constant
Hence, it would appear that household income as a percentage of GDP is remaining relatively constant. If you lower the rates on one part of that income, it would seem that you would have to raise rates on another part of the income or change the amount of household income that is taxable in order to keep the same amount of revenue.
In fact, I believe that the relative stability of revenues indicates that the politicians who determine tax changes are not complete idiots. The cut in the top marginal rate from 50 to 28 percent represented a proportional cut of 44 percent. If all rates had been cut by this amount with no changes in deductions or other tax measures, revenue would have fallen by about 44 percent in the first year, even if positive effects began to kick in going forward. Hence, our politicians never do that. Likewise, when the 1981 tax cut led to a loss of revenues, it was followed by the Social Security tax hike of 1983 and the Deficit Reduction Act of 1984. So, as you said, there were many other variables impacting revenues.
B Davis,
B Davis,
I must have messed up in my reply a moment ago.
You wrote:
"What I meant by saying that the variables were not comparable is that the top marginal rate is not the sole determinant, even in a strict static sense, of total tax revenues. It only determines the tax revenue from the top tax bracket."
In static scoring, if you cut one tax rate it reduces revenues at that rate AND, in turn, total revenues. No revenue feedback effect is factored in either for the revenues at that rate or for revenues at other rates and from other taxes, but that's a separate point.
My point was just that if we consider dynamic (revenue feedback) effects of a cut in one tax rate (e.g., the top marginal rate) of one type of tax (e.g., individual labor income), we have to consider these effects on the ENTIRE tax base and on ALL revenues, because the economic behavior affected by the tax cut (presumably more work and investment) has effects across the broader tax base (e.g., corporate income; employment of workers in lower brackets; etc.). So if our goal is to measure the net revenue impact of a cut in one tax rate, ceteris paribus, our dependent variable would have to be ALL revenues from ALL taxes at ALL rates.
Let's keep in touch on fiscal policy issues. You can email me anytime at BrooksBud@aol.com to share thoughts.
The cause of stable revenue
My point was just that if we consider dynamic (revenue feedback) effects of a cut in one tax rate (e.g., the top marginal rate) of one type of tax (e.g., individual labor income), we have to consider these effects on the ENTIRE tax base and on ALL revenues, because the economic behavior affected by the tax cut (presumably more work and investment) has effects across the broader tax base (e.g., corporate income; employment of workers in lower brackets; etc.). So if our goal is to measure the net revenue impact of a cut in one tax rate, ceteris paribus, our dependent variable would have to be ALL revenues from ALL taxes at ALL rates.
It's fine to study the dynamic effects of a cut in one tax rate on the entire tax base and on all revenue. However, you have to look at all major factors that are affecting that revenue if you want your study to have any meaning. During the period that the top marginal rate dropped, the Social Security tax rate went UP, major deductions were eliminated, and many other changes were made to the tax laws. In fact, I would contend that the general stability of tax revenues was largely due to a conscious effort of those changing the tax laws to maintain some stability. They doubtlessly used static and dynamic analysis to craft the changes so as to avoid a precipitous drop in revenue. In those cases where they misjudged the effects, additional tax changes were made to try to bring things back into some kind of balance. I've just posted more on this at http://usbudget.blogspot.com/. Anyhow, thanks for the reply.
B Davis, Re: "you have to
B Davis,
Re: "you have to look at all major factors that are affecting that revenue if you want your study to have any meaning."
Yes, of course. I wasn't suggesting otherwise. To the contrary, as I said in my previous comment, "Ranson's problem is not that he focuses on total revenues, but that he just ASSUMES that ceteris paribus is indeed the reality. That is, his obviously oversimplified "analysis" (for lack of a better word) observes a correlation (or lack thereof, as he claims) and simply ignores all other variables whose impact could be masking the impact of his independent variable."
Also, I should point out that it's not just "fine" to study the impact of a cut in one tax on ALL revenues; if the whole argument/question is regarding the budgetary impact of such a tax cut, it is imperative that total revenues be considered, not just revenues from that tax bracket of that type of tax.
We're in agreement
Yes, of course. I wasn't suggesting otherwise. To the contrary, as I said in my previous comment, "Ranson's problem is not that he focuses on total revenues, but that he just ASSUMES that ceteris paribus is indeed the reality. That is, his obviously oversimplified "analysis" (for lack of a better word) observes a correlation (or lack thereof, as he claims) and simply ignores all other variables whose impact could be masking the impact of his independent variable."
Agreed. I missed this in your prior post as my Latin is very poor. I see from an online dictionary that "ceteris paribus" means "with all other factors or things remaining the same". Rereading the Wall Street Journal editorial, I am reminded that the author did not even mention the existence of other factors, much less consider their effect. Hence, we appear to be in complete agreement.
Cool. Although disagreement
Cool. Although disagreement is more fun, ceteris paribus :-)
I posted on
I posted on this:
angrybear.blogspot.com/2008/05/hausers-law-laugher-curves-and-why-one.html
All credit goes to Zubin Jelveh for a nice rebuttal:
www.portfolio.com/views/blogs/odd-numbers/2008/05/20/lying-with-charts-w...
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