Debunking the claim that higher income-tax rates reduce GDP | Hacker News Reader

Debunking the claim that higher income-tax rates reduce GDP

slate.com

17 pointsdarshan30 comments

I hate how they equate progressive taxation with justice. It only works if you think justice is when people get equal outcomes regardless of if they deserve it or not. It would be unjust to penalize Warren Buffet and the other titans that drive our economy with 91% marginal tax rates. They don't deserve that kind of treatment, and frankly, I trust them to do much better good with their excess cash than the government ever would.

Shouldn't he at least pay as much as average joe? He himself conceded that his secretary pays a higher percentage of her income in taxes than he does.

I strongly suspect Warren Buffet pays orders of magnitude more tax than his secretary.

If you're arguing that he should pay the same percentage of his overall income in tax as his secretary, fine, but that's a different argument.

> He himself conceded that his secretary pays a higher percentage of her income in taxes than he does

Buffet is himself a redistributionist, and was comparing his capital gains tax rate (where essentially all his "income" comes from) with the earned-income tax rate his secretary pays. In other words, Buffet was indulging in a bit of FUD, to be blunt.

Many economists believe that taxing capital gains lower than income is a Good Thing to encourage investment and savings, even if it results in strange outcomes like Buffet's in edge cases.

Further, capital gains is only part of the tax he pays. The businesses he owns also pay taxes, so the tax on his income is actually the combined tax on the business and the tax on his capital gains.

in the case of dividends, you are correct, you have to pay corp tax on your cash before you can hand it out as dividends (then the shareholders have to pay capital gains tax on it.) however, if the company immediately re-invests its cash, they don't have to pay corp. taxes on it. In theory, you could build a service-based business (where I am, that means no sales tax) that say, grew for a year on it's own revenue but paid no corp tax (in California and many other places there is a minimum tax, but that's small enough to ignore for this) then, at the end of the year, you could flip the company to some investors, and all your profits would be taxed only once, and at the lower capital gains rate.

Remember when dealing with capital gains you are risking money whereas with normal income you are not. So any taxes on capital gains need to factor in that when you lose, you loose 100% and when you when you only get the return - taxes. If the taxes are too high then the amount of risk/reward becomes lower.

Capital gains isn't there to compensate for risk, nor should it. Let the borrower compensate the investor for their risk.

I think capital gains primarily serves as a crude mechanism to compensate for inflation.

Consider a hypothetical case:

  Year
  2050    $100 would but a 10 day supply of air
          I invest $100 in a jovian mining operation
  2060    $100 would buy a 5 day supply of air
          I sell my interest in the jovian mining operation
             for $300 making a handy $200!
          If taxed as income (33%) I would owe $66 in taxes
          But think about air, I had the equivalent of 10 days
             of air, now I can buy 15 days of air, so I really
             only earned 5 days of air worth $100 which if taxed 
             as income would cost me $33.
          So we invent a 2nd tax scheme for capital gains and
             set the rate at 15%, my $200 profit gets taxed $30
             and we are pretty close to "fair"

Except that only works for certain time periods over which inflation is about 100%. For shorter periods the investor wins. For longer ones the investor loses. And when I say "investor wins" I mean everyone else pays more to cover the government tax bill and vice versa for losing. There is no free lunch.

If only we had invented some sort of "thinking machine" that could perform basic arithmetic operations, and if only investors kept track of when they purchased their investment, and if only we had, say an office that tracked inflation… we could dispense with the crude estimator and just tax people on their profit above inflation.

This is untrue. If you are a small business owner, your earnings are taxed as salary, even though you take as much risk as any venture capitalist.

This is true until you sell your company; at that point the proceeds of the sale are taxed as capital gains. Personally, I think this rewards short-term planning over long-term planning. It's also essentially a subsidy on publicly traded companies that us little guys don't get.

It depends on the type of small business -- how it is incorporated. And yes I agree small businesses have it hard because of regulations and taxation, but I'm in favor of lowering all taxes.

But to claim that capital gains are the same as income is incredibly misleading. In the special case where you are a small business owner that works at the business then yes you are taxed as an employee. The money you invested will be recouped just as venture capital would -- when the company is sold or by paying dividends.

dividends don't help us, as to pay out dividends, I first have to pay corporate tax, which is usually lower than personal tax, but in California, I think, not lower than personal tax plus capital gains which I would have to pay on the dividends.

Sure, I recoup all the money I put in as well as my 'sweat equity' when I sell, and I pay the low capital gains tax rate on that, but like I said, this encourages short-term thinking. Hell, I could happily run my company for another 10 or 20 years. But the capital gains taxes being so much lower than the income tax I pay on money I take out without selling that it might make sense for me to sell out once I'm not doubling twice a year. It's sad, I think, as I think I'd be happier running the company, and the company would probably be better off with someone with a long-term view running it.

He is promoting progressive taxation as an enabler of social justice, not individual justice. There's a difference.

He acknowledges your point that the debate on flat vs progressive tax rates is a virtue vs social justice debate.

He also is debunking the idea that higher taxes hurt the economy, which is the OMG BE SCARED argument that the right uses to try to lower taxes (without a commensurate reduction in spending) in order to grow the economy and (eventually) increase the tax base. I recently wrote a similar article about this particular point (http://www.reasonablyopinionated.com/2010/02/tax-revenues-ta...) because the only thing that ever happens in modern history when taxes are lowered is horrible deficits. As the Slate article points out, there isn't a strong correlation between tax rates and GDP growth.

Personally I am on the side of Buffet and Spitzer on this issue and do support progressive taxation, precisely because of the social justice argument. I believe in equal opportunity, but abhor the idea of forcing equal outcomes.

What really irks me about the anti-progressive-tax crowd is how they don't even acknowledge the benefits the rich get from such a system: efficient and reliable infrastructure, political stability, and a large middle class (ie customer base). If the government did not make those investments, the overall pie would likely be smaller.

Could you explain what you mean by "social justice"?

Oh sorry I meant to...

"Social justice is the application of the concept of justice on a social scale."

from http://en.wikipedia.org/wiki/Social_justice

That article doesn't really explain what social justice is, nor does your quoted sentence. What does "justice on a social scale" mean?

Does it mean that groups (on the "social scale") are granted the same rights as individuals? I.e., make corporate [1] personhood a fundamental concept rather than a convenient interface?

The only really concrete idea I get from the wikipedia article is that an unjust government is illegitimate (without explaining what "unjust" means), and that somehow equality of outcome is desirable.

[1] By corporate, I mean any large explicitly defined group of people, not strictly limited liability corporations.

To me it means ensuring equal opportunity for all citizens. Historically that's included women's suffrage, ending slavery, civil rights legislation, public education, OSHA-type worker protections, fiscal policies that allow for upward mobility via opportunity and hard work, etc.

I am sure others would include additional programs in the definition, but I think that anything crossing the line from providing equal opportunity to equal outcomes (ie quota programs) crosses the line of equitable treatment in the other direction.

How is that any different from regular justice? Women's suffrage, ending slavery and civil rights all seem like nothing more than individual justice.

Also, I'm not sure how OSHA-type protections support equality of opportunity. How does removing the ability to negotiate workplace safety with one's employer create equality of opportunity? And also (more to the point), how does progressive taxation create equality of opportunity?

Hmm good point. I was very busy today and didn't think too hard about my answers....

I think social justice is more about equality of individual justice as applied to people in different classes. I guess that's how I'd answer that.

So OSHA requires protections for low-"class" workers that rich people would do if they were doing the work... something along those lines.

I would agree with you (more than I do anyway) if everyone started out from the same base. But isn't it also unfair that true entrepreneurs who take a lot of risk are taxed equally to people who have inherited wealth or just went from one elite school to the next ending up at a consulting firm talking hot air for the rest of their lives?

I do think that there is a causal relationship between effort and wealth, but that relationship is very patchy.

One obvious issue with this argument: The claim that higher tax rates can reduce GDP is from Arthur Laffer and his Laffer curve -- and relates to the total tax burden, and not the marginal rate.

Also there's a complete lack of a baseline, the GDP growth in 2000 vs 2008 is much more down to global economic conditions than US tax rates.

What would make a more reasonable comparison is if you compared similar US States with different tax burdens in over the same time period.

One obvious issue with the Laffer curve: Nobody actually knows where the peak is.

No, but that doesn't mean it isn't there.

Most social sciences (including economics) can't very well be exact for the lack of experiments, much less controlled experiments.

If you don't know where the peak is, you can't argue that raising taxes will reduce GDP because you don't know if you're going up the hill or down it.

And that's fine, because that's not the purpose. The purpose is to argue that the relationship isn't linear (as might be intuitively expected), but curved (I don't know what the shape is called).

It's impossible to accurately model the economy of a society, but theories like this can help politicians better judge the impact of their policies.

...which, to me, would suggest that we need more progressive taxation (income, capital gains, etc.) and much less regressive taxation (sales, use fees, etc.). Of course, one can look at the GDP growth rate for the U.S., Canada, and Norway and see interesting results:

http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mk...

It'd be nice to figure out what datasets are available in the Public Data. That's really useful.

Nothing like debunking a political debate by writing an op-ed favoring your side of the argument.

GDP growth in the US in particular can be misleading, owing to population growth. Growth in GDP per capita may be better.

Considering the pace of chance in the last forty years, comparing the 1960s and 1970s to today doesn't seem like sound methodology. I suspect, for example, that it's now considerably easier to vote with your feet.

I read somewhere [citation needed] that the reason that you don't see a real correlation is that the rich effectively tend to pay somewhere around a 40% tax rate. As tax rates go up, it starts to pay to look for tax shelters, and get non-taxable benefits from their company, and so on, and by the time all is said and done, they won't pay more with the higher rate.

If true, raising the tax rate won't get any more money for the government, although it might be good PR for the rich and good income for their accountants.

Reply on news.ycombinator.com