Let me preface what I am about to write with an admission of some thoughts that have nagged me lately. Those thoughts include that I am increasingly sympathetic with leftist concerns about super-wealthy people and their outsized influence on the world (won’t go into the reasons why at the moment). Let me also recognize that the entire Wall Street apparatus to me is a mess of cronyism and, at current margins, destructive of economic value, if only because so many smart and dedicated people end up going there simply because that is where the money is. Let me also remind everyone, including the folks at Chicken Vox, whom I am about to write about, that the U.S. being a democracy is not because we are here to “give everyone a voice” as a way to get what it is that they want. As much as it is hard to believe, the point is that this was a political system envisioned to be the best protector of our liberty – and this is an idea that is supposed to cut across party lines. I fear that we’ve morphed far from recognizing that, and that irrespective of politics there are simply people out there who think that this is important and others who do not.
The point is that in our forthcoming discussion of taxes and inequality, “not liking it” is not a reason to do anything about inequality, and in fact the political system is supposed to prevent this sort of thing from winning the day. What IS required is that if (the emergent phenomenon of) income inequality imposes legitimate restrictions on the real liberty of others, then perhaps there is a political role.. But that’s not even so clear to me. If some outcome is the result of complex and varied processes which we can not much understand, then it’s not clear we even know how to do anything about it. This is not to say that emerged orders are “good” in any objective sense, not at all. This is to say that emerged orders are hard to understand and certainly harder to change in ways that are predictable. There’s more to say on this, but I wanted to get to today’s Vox. It’s a piece by Matt Yglesias on the case for confiscatory taxation.
I don’t want to spend too much time on the premise – because that just becomes an ideological pissing match and despite the title (the case for confiscatory taxation) it would be nice to try to read the piece charitably. But it becomes tough to do. Here are few illustrations:
The Laffer Curve — the idea that tax cuts can sometimes increase tax revenue
That’s the first sentence, and it’s not really right. To see why, let me come up with an analogy: “the demand curve – the idea that price increases can sometimes decrease quantities purchased” … that’s not even right. The Laffer Curve describes the relationship between the tax rate levied and the gross revenues raised from those taxes. That is what the curve is, so I find it misleading to talk about one of the implications of this relationship as the very first sentence in a big ideas piece. But maybe I am just really sensitive tonight.
Beloved by the right and despised by the left, one thing that both sides have tended to agree on is that knowing what side of the curve we’re on should be a key driver of tax policy.
How can a factual relationship be beloved by the right and despised by the left. If in fact this is true, this is a pretty shocking declaration of what the left is all about. But of course, I know this is not what the author means, he means that this particular IMPLICATION is beloved by the right and despised by the left. But of course, I don’t think that gets you too much further along the spectrum of reasonableness. Why? Because it is sneaking in, quite disingenuously it seems to me, a huge assumption about the goal of tax policy and motivations of “the left” and “the right.” The “point” of tax policy is not to maximize revenue or to even be located at a point on the Laffer curve where there is no gradient. Why is the implication loved or despised anyway? So, the fact that lowering taxes CAN raise tax revenues is HATED by the left? I don’t quite understand why. To see why, would “the left” actually object to a world where, at ANY given level of tax collections, citizens voluntarily contributed more to the government than they were being required to do? The implication of HATING that implication above would seem to be to be the case. And what makes anyone believe that left and right believe that what side we are on should be a key driver of tax policy? If I were a member of the right, which I am not, I would want simply a smaller government. So, I’d want to be on the far left side of the Laffer curve, not because lowering tax rates would raise revenues if we happened to be on the other side, or because further increases in tax rates would enable us to raise revenues should we need it, but because I’d not want very much revenues collected . And for “the left” why do “they” think the Laffer curve should be a key driver of policy?
We already accept this principle for tobacco taxes. If all we wanted to do was raise revenue, we might want to slightly cut cigarette taxes. And since cigarettes are about the most-taxed thing in America, we certainly would want to cut out all our other anti-smoking initiatives. But we don’t do that because we care about public health. We tax tobacco not to make money but to discourage smoking.
Poppycock. I’d believe this if cigarette tax revenues weren’t relied upon not just for smoking cessation programs but rather absorbed into general budgets. Talk about setting people up for a bait and switch (as I am sure has been done already). Take the tobacco settlement funds that the states expected to get. Those revenues were supposed to support public health measures, Instead states actually issued derivative securities based on expected future revenues from the payout, and used those funds for all kinds of things (public goods of course, right?). And then when it turns out that the settlement revenues are lower than anticipated, what do you think happens? OUTRAGE that state budgets are being cruelly curtailed. Austerity! The same damn thing is sure to happen when we get the carbon tax, but I’ll say more on that below. So the point is, “We” DON’T accept this principle for tobacco taxes. It is SAID that it’s not about raising revenues, but that’s just a convenient short term cover for getting access to a new source of funds, so that new spending programs are “neutral” in terms of budget deficits. And should I have learned to be a better researcher or even a googler, I’d love to count the number of articles written by folks in favor of things like taxes on cigarettes, on doobies, on alcohol, and so on because in fact they are great places to raise revenues from – as if revenues in the form of taxes are “good” things and not mere transfers.
The same is true of widely discussed proposals to tax carbon dioxide and other greenhouse gas emissions. The goal here wouldn’t be to maximize tax revenue, it would be to reduce pollution. The revenue would be a pleasant side effect.
I do in fact find this disingenuous, condescending, and quite wrong – and again I am really surprised to read this from this particular author, whom I generally really like reading. The GOAL of Carbon Taxes is NOT to reduce CO2 emissions. If that is the case, then surely I won’t find other articles by this author, or anyone dressing themselves up as “economic” anythings claiming that Carbon taxes are Pigouvian taxes. What the heck do I mean? The point of taxing “externalities” is NOT to reduce them, sorry folks. It is to make sure that we get an efficient amount of the “stuff” produced. The point, to make it clearer, is that we want to make sure we get more value from the activities which generate Carbon than the damage that Carbon is thought to do. It does NOT follow at all that this means reducing Carbon much if at all. It just means that we want to make sure that when individuals are deciding whether they want to do something, that the costs imposed by the carbon emissions are going to be part of their decision. It may very well be the case that an “efficient global carbon tax” would not result in very much Carbon reduction at all. By the way, how many “serious policy wonks” are ready to make the argument that, “I truly am being unbiased and scientific here, and I understand that it might be efficient to have a lot of global warming?” Call me stupid, but I don’t think there are many. And once again, the revenue is NOT a pleasant side effect. It’s not a side effect. It’s just a transfer. And presumably, if we were being all scientific and socially-justic-y about it, then those “pleasant” side effects would be required to be paid to those who nonetheless are damaged from my actions and who have no agency in doing so (i.e. if I hire a worker to do something, like build a car she gets paid, but if I “hire” you to help build my car by accepting higher sea levels, you don’t automatically get paid because that cost is not internal to the firm making my car, but it is no less a production cost). It’s not just “pleasant” … it’s required.
Rather than pay $90 to Uncle Sam for the chance to send $10 more to their kids, rich people would give the money to a tax-exempt charitable institution instead. That wouldn’t help balance the budget — in fact, it would hurt those efforts — but it would help break the doom loop of oligarachy whereby concentrated wealth breeds political power breeds greater concentration of wealth.
Goodness. First of all, click through the link on the “doom loop” which among other things doesn’t actually demonstrate that it says it demonstrates, and includes such sterling economic insights that “one percent of the country owns over 40% of the wealth” –> which of course says nothing, and especially says nothing about how much of that wealth they produced first, or how “real” any of it is, or why that should have anything to do with political power. Read the rest for a treat. My other favorite implication is to ask how the “rich’s share of wealth” changed prior to 1913? Did they own 100% of the wealth until then? How did it evolve between 1789 and 1913? But to go back to the Yglesias quote, on what grounds is that claim made? How do we know they’d give money to some charity? At least we could have seen the expression, “for example” as a prelude to such a statement.
And to roll out another tired “statistic”:
About twenty years ago, Congress and the Clinton administration took a step that they thought would curb what they thought was excessive CEO pay. They said that salaries of over $1 million wouldn’t be deductible from the employer’s corporate taxes. Since that time, CEO pay has gone further up. Now the typical S&P 500 CEO earns 311 times more than his median employee.
The associated chart, by the way, shows data for the top 350 firms, NOT the top 500. But once again, does anyone see the problem here? And no it’s not a “defense” either. It’s that he’s picking the CEOs from the largest most successful firms in the US and using their pay to compare to a “typical” worker. I’d LOVE to see what the real data looks like for “all CEOs.” One of my former students is the CEO of his own company, and I can assure you he does not pay himself 300 times more than his median employee. But why does THAT particular comparison matter? What about the top 50 movie stars’ pay as compared to a key grip over the past 50 years?
Imagine a world in which we not only closed that loophole, but imposed a 90 percent marginal tax rate on salaries above $10 million. This seems unlikely to raise substantial amounts of revenue. If you really really really really desperately wanted to give your CEO a raise, you would have that option. But for every extra $1 you give him, you’d have turn over $9 to the government. Why not use that same $10 to give raises to three or four people lower down the food chain who pay lower taxes?
Do firms just wake up and DECIDE to pay the rich dudes some more for the sake of it?
I’m losing energy … skipping to the end:
If you believe systematically lower CEO compensation packages would mean a mass withdrawal of talent from the business world and a collapse of American industry, then those smaller pay packages could be an economic disaster. But the more plausible theory is that systematically lower CEO compensation packages would mean systematically higher compensation spending elsewhere in the corporate structure. Either more frontline workers or better-paid ones. The new tax code would redistribute value inside the corporate structure without anyone actually paying the new sky-high taxes.
I’m pretty sure, ironically given the title of his last section, that this is a false dichotomy.
Great insights. And thanks for illuminating the more subtle parts.