Wednesday, November 12, 2008

Will Obama's soak the rich economic plan work?

With Obama's plan to effectively raise marginal tax rates from roughly 38 percent to around 50, it is instructive to note the relationship between marginal tax rates and economic productivity, which can be seen in the graph to the left.

"Hauser's Law" is the observation by economist Kurt Hauser that revenue as a percentage of GDP remains at about 19.5% of GDP no matter what the marginal tax rate is. It is apparently the result of the fact that increases in marginal rates, which characterize soak the rich schemes like Barack Obama's, simply cause people to shift or hide their income to avoid higher taxes:

As David Ransom put it in an article written earlier this year for the Wall Street Journal:
What makes Hauser's Law work? For supply-siders there is no mystery. As Mr. Hauser said: "Raising taxes encourages taxpayers to shift, hide and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation."

Putting it a different way, capital migrates away from regimes in which it is treated harshly, and toward regimes in which it is free to be invested profitably and safely. In this regard, the capital controlled by our richest citizens is especially tax-intolerant.
In other words, if the farmer takes more of the golden eggs produced by the goose who lays them, then it will simply lay less of them--or find ways to hide them from the farmer.

Hat tip to Sophistpundit on the graph.

10 comments:

Lee said...

I've said it before, and I'll say it again: for rich folks, generating a taxable income is an option, not a necessity. Investing in anything (stocks, bonds, real estate, commodities, you name it) always entails certain costs (which includes risk and overhead, such as taxes). If you want less investment, just penalize it. Raising tax rates is the easiest way to do that.

But when asked by Charles Gibson, Obama indicated he would raise taxes on the rich even if doing so proved counter-productive of tax revenue, "because it's the fair thing to do."

But of course, it's not the rich who will suffer; it's those of us who still need to generate an income. We're the ones who will be hurting when investment dollars dry up.

Anonymous said...

lee, you do know that you are a racist for catching Obama at his economic redistribution leanings, right? Just want you to get ready for how this here game's going to be played :-)

Lee said...

I will simply say I quoted Thomas Sowell. ;-)

Socialism is a bad idea even when white folks advocate it.

Anonymous said...

How is a fair tax rate determined? Why not a truly flat tax - $10,000 per citizen?

What is wrong with having the rich pay something for the stability which allows them to live as they do?

How is taxing the rich more worse than the present situation in which the rich have been getting much richer relative to the rest of us and the deficits which our children have to pay for are getting larger and larger? Can taxes make the economy worse than it is?

Does anyone have figures for the deficits under Clinton and Bush?


In the old days it was the young man who had everything. Now he ain't got nothing at all. Why is lee so sycophantic about supporting a system which allows a few people to enrich themselves at the expense of the rest of us? How have all these derivatives etc benefited the bulk of us (and I am excluding Prof Mankiw who would only save extra dollars 35 years for his grandkids' college education - I don't think he has much in common with most Americans)?

Why shouldn't rich people pay to provide a societal and physical infrastructure which enables them to be wealthy? They couldn't act as they do in unregulated countries such as China where every product might contain melamine or the Fu Dao Xiaong chemical company might dump benzene in their local lake. So what is wrong with having the rich pay something for the stability which allows them to live as they do?

jah

Lee said...

> How is a fair tax rate determined?

Thats's always a "fair" question, isn't it? Mostly, asked by liberals, whose goal in life is to attain cosmic justice without allowing the Creator of the Cosmos to instruct us on it. Where is what is "fair" written down? The Bible? Scratch that, then. Anywhere else? There are certainly many, many takes on it. But the Bible had a comment on that, too: "They did what was right in their own hearts," referring to the state of Israel at the end of the Book of Judges. It was not intended as a compliment.

Because there are so many takes on the word concept of fairness, there is no definitive answer. I don't think it's fair, for example, that the income tax requires intimate government knowledge of people's financial arrangements. That stuff is none of Uncle Sam's business, if you ask me. I don't think liberals would tolerate that sort of intrusion if they didn't see it as productive of the revenue they require for their ambitious social engineering agenda items.

So let's set aside "fair", for just a moment, and judge taxation in terms of freedom (my own ideal) and productivity of revenue (the liberals' ideal) and look for the level of taxation which does the best job of balancing the two. Frankly, I believe high tax rates are injurious of freedom. It's a simple continuum: If government gets to take 100% of what you make, you are a slave. But some percentage is necessary, so we each give up some of our freedom, and it is up to government's stewards to get the job of governing done without turning us into serfs. Naturally, liberals don't care if I feel like a serf, so we have to judge their ideal tax by their own terms. But what liberal will admit to wanting America to become poorer? Face it, they will need wealth to enact their agenda, so creation of wealth is important to them, too. So, if a tax or tax rate contributes to a bad economy, the perceptive liberal will understand that a healthy goose lays more gold eggs, and will back off. The problem, then, becomes finding a perceptive liberal, though liberals we have in great abundance.

So, by both of our values systems, there is a tax rate X which is injurious to freedom as well as counter-productive towards attaining The Greater Day.

Sorry to labor the point. I just wanted to show that "fair" is not a simple concept, so be careful when throwing it around as if it answers more questions than it raises.

> Why not a truly flat tax - $10,000 per citizen?

Sure, if "fair" means outlawing being poor. The beatings will continue until morale improves.

> What is wrong with having the rich pay something for the stability which allows them to live as they do?

Absolutely nothing. On the other hand, what's wrong with equal treatment under the law? If you take 15% of my pay and 55% of Warren Buffett's pay, aren't you treating us differently?

> How is taxing the rich more worse than the present situation in which the rich have been getting much richer relative to the rest of us and the deficits which our children have to pay for are getting larger and larger?

You're conflating two diffent things: social justice as seen from the perspective of an economic egalitarian, and anger at excess debt. Yet I have asked you several times, is the problem too much debt, or too much spending? Don't recall I've gotten an answer. By focusing on the deficit, you simply glide past any suggestion that overspending can happen even if we were to pay it all as we go. I don't know you well enough to speculate, but many liberals would simply be reluctant to admit that, yes, they would rather the government take our entire paycheck and spend it all on our behalf. I would call that overspending, and worse; they would call it social justice.

Regarding the egalitarian impulse, a simple question: Would you rather that we all be equal under slavery, or unequal under freedom? And a follow-up: if everyone is getting better off, but the rich are getting better off at a faster rate, is that good? Or would you prefer that everyone get worse off, but the rich get worse off at a faster rate? I'm not proposing a false dilemma, but just asking if these were the two choices, which would you prefer?

> Does anyone have figures for the deficits under Clinton and Bush?

Is debt the problem, or is spending the problem?

> In the old days it was the young man who had everything.

That's a myth.

> Why is lee so sycophantic about supporting a system which allows a few people to enrich themselves at the expense of the rest of us?

Because lee rejects the way you have framed the issue. Bill Gates enriched himself, not at my expense, but by contributing to millions of lives and livelihoods. Economics is not a zero-sum game.

> How have all these derivatives etc benefited the bulk of us...

But that was all based on liberal do-goodie-good impulses: loan money so people who can't afford to buy houses can buy houses. Very socially prim, proper, and just. I mean, isn't it all worth it if just one poor person was helped? So what that a bunch of rich folks lost money? Right?

> (and I am excluding Prof Mankiw who would only save extra dollars 35 years for his grandkids' college education - I don't think he has much in common with most Americans)?

So Professor Mankiw is just supposed to keep his nose to the grindstone even though he gets to take home smaller and smaller proportions of what he earns? Apply the same principle to your own life: your employer asks you to work Saturday and Sunday, but after taxes, you take home only $25 -- are you going to want to do that? How about zero? How about a negative return, which can happen depending on where your income places you on the tax chart. Is there some point where you decide it isn't worth it to continue working overtime? Or does your dedication impel you to keep working even though you're getting nothing for it?

> Why shouldn't rich people pay to provide a societal and physical infrastructure which enables them to be wealthy?

15% of 10 million is more than 15% of $50,000. They're already paying more with a flat tax rate.

> They couldn't act as they do in unregulated countries such as China where every product might contain melamine or the Fu Dao Xiaong chemical company might dump benzene in their local lake.

I'm not sure what that has to do with tax rates.

Anonymous said...

One percent of American families possess 35% of America's net worth. Ten percent of American families possess 71% of America's net worth. Forty percent of American families scrabble over 1 % of America's net worth. That means the so called 'middle class'- the remaining fifty percent - scrabbles over about 28% of America's net worth. And they're the ones who'll pay the lion's share of that flat tax because those individuals, proportionately, will feel the burden of that unfair flat tax.

Lee said...

> One percent of American families possess 35% of America's net worth.

So? The top 1% in income also pay 40% of the taxes. I would call that their "fair" share, but then again, there's that word again.

I keep asking these questions and getting no answers. Let's try again:

Would you rather be equal under slavery, or unequal under freedom?

If most are getting better off, but some are getting better off at a much higher rates, is that better, or worse, than enforcing equality even if by doing so most people become worse off?

> Ten percent of American families possess 71% of America's net worth. Forty percent of American families scrabble over 1 % of America's net worth.

Now, that just sounds resentful. Why would you care if 1% are so much better off, as long as you and most other people have plenty? My wife and I have our comfortable but modest brick ranch house, two cars (well, one and a half), new kitchen, 401K, and an overweight cat. We're typical Americans, but in historic terms, we are richer than all but the very richest people in past history. Why should it bother me that Bill Gates has a $200 million house on a private island?

One of the things that Christianity teaches is to count one's blessings. I try to honor that. I'm not saying I don't ever find myself envying others with more money, better cars, better homes, or whatever. But I do recognize it as a personality flaw, and repent it as a sin when I catch it. You should too, if I may be so bold.

> That means the so called 'middle class'- the remaining fifty percent - scrabbles over about 28% of America's net worth. And they're the ones who'll pay the lion's share of that flat tax because those individuals, proportionately, will feel the burden of that unfair flat tax.

There's that word again. "Fair". When jazz players lack inventiveness, their critics label their performances as "one-note sambas."

I think you're probably wrong on the numbers. For one thing, with a flat *rate* tax (nobody is advocating a regressive tax, except liberals, about which more below), more money would be coaxed out of tax shelters and into more productive investments, and more rich folks would choose to generate more taxable income. 20% of a large income can be more than 50% of a smaller income.

And besides, we have had periods in our history in which we have taxed as much as 90% of the last dollar earned. Those periods didn't last, because such tax rates chase capital into hiding, or overseas. They're counter-productive, in other words.

But some people won't be happy until they've collected every penny every earns and every owns, so they can spend it on behalf of everyone. It's only "fair", after all. Of course, the people doing the collecting and the spending will have an advantage over those who do the earning and the sacrificing, but such talk sort of ruins the feel-good ambience of liberal eschatology, doesn't it?

Lee said...

Now about that regressive tax: the most regressive tax in America is the Social Security tax. My SS tax liability is about the same as Warren Buffett's.

But since that particular tax was a liberal big idea, not many liberals find the time or energy to criticize it.

As usual, liberals have a gift for labeling their preferred policies. The "progressive rate" tax, for example, becomes the "progressive tax", implying that anyone who opposes it simply isn't progressive.

But a flat rate tax is neither progressive nor regressive. It's proportional.

You might as well give up trying to get more money out of rich folks than they feel inclined to pay. For your every move, they have twenty.

But old dreams die hard, don't they?

Anonymous said...

How many cars do 1% of American families own? How many homes? How much of their budgets, in percentage, does it take for them to live like the other families? Same for groceries, how many loaves of bread must they purchase? Get back to me on 'proportionate.'


The CODA REPUBLICANUS

Our policies address the cares
Of heiresses and millionaires.
Our point of view reverberates
With folks who live behind high gates
And folks whose country clubs may lack
A single Jew, a single black.
We're backed by all the CEOs.
We waive the regs that bring them woes.
To comfort them is our intent.
Yes, though we always represent
The folks who sit in corporate boxes,
The gratifying paradox is--
And this we love; it's just the neatest--
The other party's called elitist.

Lee said...

> How many cars do 1% of American families own? How many homes? How much of their budgets, in percentage, does it take for them to live like the other families? Same for groceries, how many loaves of bread must they purchase? Get back to me on 'proportionate.'

I keep asking questions, and never getting any answers.

The Soviet Union tried very hard to abolish profit. They tried to abolish private property. It didn't work out well for them. Instead of working out your resentments against the rich, think of profit as the overhead our economy pays for effectiveness and efficiency. When someone owns property, one tends to take care of it. Nobody takes care of property that does not belong to them, and no one puts it to its economically most efficient use if any profits are forfeited.

This is Human Nature 101. As it happens, there are plenty of socialists who prescribe certain things for "society", and something else for their own personal net worth. Noam Chomsky, for example, knows that inheritance is a bad thing for society, but has trust funds set up for his own kids.

In America, the rich have their many cars and homes, as you suggest. (One such is Al Gore, who goes from gig to gig with jets, Lincoln Town Car limousines and Chevy Suburbans, while lecturing us when we buy gas guzzlers.) But an ordinary guy like me can own a Honda, which mechanically and electrically is about as good a car as you can buy.

You know what they used to drive in the USSR? Ladas, when they could get them. Five-year waiting period. They cost enough to represent several years' ordinary wages. Must be really good cars, though, since they were so expensive, right? Think again. Essentially, they are a 1974 Fiat 124 sedan, built in Russia. As it happens, I married into aa 1974 Fiat 124 sedan. Piece of junk. In East Germany, they drove two-stroke Trabants and Wartburgs. Peddling a tricycle is more dignified.

So I ask, again, if economic freedom leads to wide disparities in wealth, but lifts everyone's standard of living, is that not better than everyone being more equally poor?

If not, why not?