tax

Marginal tax rates

Standard

There has been lots of talk about marginal tax rates recently, thanks to Alexandria Ocasio-Cortez’s proposal for 70% marginal tax rates. The essential argument that Ocasio-Cortez proposes is that because these are extremely marginal–for the ultrawealthy–there should be minimal negative impacts from an incidence perspective.

Not so fast, writes Stanford GSB’s Charles I. Jones:

This paper considers the taxation of top incomes when the following conditions apply: (i) new ideas drive economic growth, (ii) the reward for creating a successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a separate research subsidy — think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon.com. These conditions lead to a new term in the Saez (2001) formula for the optimal top tax rate: by slowing the creation of the new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just the income at the top. When the creation of ideas is the ultimate source of economic growth, this force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates. For example, for extreme parameter values, maximizing the welfare of the middle class requires a negative top tax rate: the higher income that results from the subsidy to innovation more than makes up for the lost redistribution. More generally, the calibrated model suggests that incorporating ideas and economic growth cuts the optimal top marginal tax rate substantially relative to the basic Saez calculation.

(Slides are also available.)

This is a super interesting paper. We generally think of the “mega-rich” in an abstract sense as multi-generational heirs and heiresses who did not do much to earn their wealth, or of CEOs who get paid a lot of money for being at the top but would probably not stop being CEO if they were paid less. The first category is actually not particularly true–68% of the ultra-high net worth population is self-made (probably because 70% of wealthy families lose their inheritance by their second generation)–but the second one… may be?

But the really important question is what kind of CEOs these UHNW people are. Do they just hold pencils and push paper and generally keep the trains running on time? Or, to be less extreme, do they spend their time doing procurement and hiring effective salespeople and otherwise doing things that are generally zero-sum and do not broadly add to GDP or social welfare?

But what if they are formerly aspiring CEOs? What if they are the innovators and the scrappers and the upward-mobility-creators of the world? Of course, innovators are, to some extent, doing it for the love of the game–because they see a problem, they think they can fix it, and, sometimes, because of social good (or at least because they can convince themselves they are creating social good). But, one presumes, at least some of this is driven by a desire for super-high payoffs. 90% of startups fail. On a risk-adjusted basis, the only way to compensate for the blood, sweat, tears, and high likelihood of failure, a startup founder may justifiably demand a particularly high amount in order to be willing to do the job. And if this is the case, reducing rewards that a future CEO might expect–for example, through a higher marginal tax rate–might reduce the optimal top tax rate.

That is the exact model that Jones presents and I have to admit that I find it somewhat interesting. It is not obvious that it is true, of course. For one, it is theoretical, not empirical, and it starts by assuming that the previous paragraph is true. For another, it is insanely hard to figure out the social benefit of economic innovation, especially once you start separating by industry (14% of the UNHW population made their money in finance), and it is therefore very hard to price what the top tax rate ought to be. But the intuitive argument of “taxing the top shouldn’t matter because it’s all marginal and on the ultra-rich” is a bit like saying “pharmaceutical drugs are cheap to manufacture so their prices should be low”–it only looks at operating expenses, not capital (and intangible) upfront costs.

Matthew Yglesias defends Romney’s tax rate

Link

Matthew Yglesias defends Romney’s tax rate

The main reason Romney’s effective rate is so low is that the American tax code contains a lot of preferences for investment income over labor income. That’s something that strikes many people as unfair on its face, and particularly unfair since it often means very low rates for extremely rich people like Rommey. And Rommey himself as a rich guy who’s also a member of the political party seen as favoring the rich, and who’s been recorded as whining that the working poor are undertaxed is perhaps not an ideal messenger for a defense of this policy. 

But this is definitely an issue where the conservative position is in line with what most experts think is the right course, and Democrats are outside the mainstream.

Debt to society and “you didn’t build that”

Link

Debt to society and “you didn’t build that”

Kyle Baxter with a great piece on the wealthy’s debt to society:

If we grant this argument—that we pay taxes because our success means we have a moral duty to pay taxes, whatever the rate may be—we are all dependent on the government’s services, and thus all our income is rightly the government’s. It is only through the government’s benevolent, altruistic nature we are allowed to keep what portion we do, so be happy with it—because you only earned some unnamed portion of it anyway. We—and by we, I mean we—object to that because intuitively we know that isn’t the case. Whether someone’s success is built on other people’s work or not, they deserve their success. No one else can arbitrarily claim moral right to it.

The fairness of a simpler tax code

Link

The fairness of a simpler tax code

Harvey Golub makes an argument for a simplified tax code that goes beyond “it’s long so let’s scrap it”:

What should be done to improve our arcane, complicated and unfair tax system? First, eliminate all preferences in the tax code and, if we still want to subsidize certain behaviors, pay for them through a legislative appropriations process, making them transparent to the public.

In other words, everyone earning the same amount of money should pay the same in federal taxes, regardless of how they earned their money and regardless of how they choose to spend it. What would be fair is all Americans paying federal taxes on all their income, whether it is earned in the form of cash or benefits, and paying taxes on earnings only once.

Your fair share of taxes

Link

Your fair share of taxes

The Economist pens an interesting article on the idea of “your fair share”.

This raises an interesting question: what is your “fair share"? Politicians seem to say if you’re part of my base your fair share is zero. But let’s first acknowledge that probably everyone will have to pay something and then indulge the normative question: who should pay what if the goal is fairness? To me, fairness would suggest taxing behaviour that poses a negative externality to everyone else. Pollution is the obvious example. Fairness can also mean not taxing things you want to encourage, like working and saving, which bolster long-term growth. Instead you’d tax consumption.

American corporations have the highest tax rates, but pay less

Link

American corporations have the highest tax rates, but pay less

David Kockieniewski reports that the highest corporate tax rate in the world is misleading. Thanks to special tax breaks and loopholes, American businesses pay much less than competitors.

But by taking advantage of myriad breaks and loopholes that other countries generally do not offer, United States corporations pay only slightly more on average than their counterparts in other industrial countries. And some American corporations use aggressive strategies to pay less — often far less — than their competitors abroad and at home. A Government Accountability Office study released in 2008 found that 55 percent of United States companies paid no federal income taxes during at least one year in a seven-year period it studied.

(via The Freeman)