Soak the rich schemes tend to fail. In this WSJ op-ed Alan Reynolds explains why (ungated version here).
In short, the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that “the elasticity of taxable income” (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS.
The evidence is surveyed in a May 2009 paper for the National Bureau of Economic Research by Emmanuel Saez of the University of California at Berkeley, Joel Slemrod of the University of Michigan, and Seth Giertz of the University of Nebraska. They review a number of studies and find that “for an elasticity estimate of 0.5 . . . the fraction of tax revenue lost from behavioral responses would be 43.1%.”
But wait, there’s more.
For incomes above $100,000, a 2008 study by MIT economist Jon Gruber and Mr. Saez found an ETI of 0.57. But for incomes above $350,000 (the top 1%), they estimated the ETI at 0.62. And for incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2 — which means higher tax rates on the super-rich yield less revenue than lower tax rates.
If an accurate ETI estimate for the highest incomes is closer to 1.0 than 0.5, as such studies suggest, the administration’s intended tax hikes on high-income families will raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.
The ETI studies exclude capital gains, but other research shows that when the capital gains tax goes up investors avoid that tax by selling assets less frequently, and therefore not realizing as many gains in taxable accounts. In these studies elasticity of about 1.0 suggests the higher tax is unlikely to raise revenue and elasticity above 1.0 means higher tax rates will lose revenue.
Read the whole thing – he reckons ObamaCare is based on revenue that will never materialise.
Sinclair, you might like this:
http://www.themoneyillusion.com/?p=4626
I haven’t read the Mankiew post yet.
Have a good easter break
Pedro
1 Apr 10 at 6:03 pm
Yes – that is good.
Thank you – you too.
Sinclair Davidson
1 Apr 10 at 6:06 pm
I’ve long believed that the real worl Laffer curve looks mostly like the profile of Uluru (revenue on the verticle axis, tax rate on the horizontal). Steep on the sides but pretty flat across most of it’s breadth. If true this suggests that tax increases typically do little harm to tax revenues. What gets missed in these tax optimisation games, or rather gets under emphasised, is that the welfare created by governments is less than half the story. A flat laffer curve implies that higher tax rates are very destructive to the welfare created by the private sector.
TerjeP (say Tay-a)
1 Apr 10 at 8:06 pm
Pedro – yes good article. Thanks for sharing.
TerjeP (say Tay-a)
1 Apr 10 at 8:17 pm
Alan Reynolds spent time working for Jude Wanniski of supply side fame.
TerjeP (say Tay-a)
1 Apr 10 at 8:18 pm
“he reckons ObamaCare is based on revenue that will never materialise”
Why blame ObamaCare when it’s just one piece (the most recent) part of the pie. Of course you are going to go broke if you spend 50% of your money on the military (including essentially subsidizing other nations that could pay for their own, like most of Europe).
conrad
2 Apr 10 at 7:41 am
Speaking of which, why doesn’t everyone consider the Free Lunch Project:
http://www.freelunchproject.com/
What the Free Lunch Project is… The Free Lunch Project is an effort to recruit 20,000 dependence-loving people to move to Massachussetts or perhaps California, Venezuela, Illinois or Wisconsin. We are looking for progressive reformers, communitarian activists, and folks from all walks of life, of all ages, creeds, and colors who agree to the political philosophy expressed in our Statement of Intent, that government exists to provide jobs, and should punish those who interfere with the redistribution of wealth.
There’s no better place for dependence-loving Americans than Massachussetts or California … Massachussetts and California are leading the polls in votes that took place recently. They seem to be winning based on having some of the highest state and local tax burden in the continental U.S., highest levels of dependence on federal spending in the U.S., incumbent legislatures where state house representatives have raised their salary consistently since 1889, some of the highest crime levels in the U.S., a decent economy with plenty of guaranteed jobs soon to be paying guaranteed living-wages, and a culture of complete dependence on government programs indicated by an inordinate amount of laws protecting you from yourself.
Michael Sutcliffe
2 Apr 10 at 12:34 pm
It’s funny that people are so willing to attack California and the like. Maybe they got stuck with some problems like shitty tax laws, but the people and their political system did bring the world some of the most amazing advances in both science and technology and culture ever (both things that made the US as a whole rich). There’s no Republican state that’s been anywhere near as successful.
conrad
2 Apr 10 at 12:58 pm
I guess that’s kind of the point. Once the fifth largest economy in the world is now a basket case due to the what, ‘extreme social democracy’? It’s socialism by any other name. Have a look at this:
http://www.city-journal.org/2010/eon0331sg.html
What I also like about that article is that the state can give generously, but it also takes away. All those people who worked till 55 thinking they were retiring on a generous pension – welcome to the world of pittance welfare. Of course, in the social democratic model, if the state needs to do that in the ‘common good’………
California always had a bit of labour movement and a majority of Democratic governors over the years (I don’t know but I feel pretty confident it would be a majority). But it was also a magnet for entrepreneurs and creative people They created the wealth from the Gold Rushes onwards (with a bit of help from government spending through things like naval shipyards, military bases and Defence research funding), but then the socialists wanted more, and the rot set in. Why wouldn’t you poke fun at that (same with New York)? The socialists cannot manage the wealth generated by the entrepreneurs and, through mob rule, ran the place into the ground. Now those entrepreneurs and creative people are moving to other places (such as Texas!).
Same as we should poke fun at the US for letting the government borrow more debt than it can service. The American model is the best model yet implemented on this planet, but if you let big government behave borrow like that from future generations (’cause they can’t vote against you, of course) then it’ll run the place into the ground and the rot will set in. And despite it being such an amazing place, it deserves to be laughed at for that factor.
Michael Sutcliffe
2 Apr 10 at 3:28 pm