tag:blogger.com,1999:blog-582368152716771238.post542833325761341835..comments2024-03-29T04:41:56.077-05:00Comments on The Grumpy Economist: Dynamic Tax ScoringJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger68125tag:blogger.com,1999:blog-582368152716771238.post-54443169090262941972012-10-16T19:29:57.639-05:002012-10-16T19:29:57.639-05:00Gary, I am a tax lawyer and studies are nonsense. ...Gary, I am a tax lawyer and studies are nonsense. Think about the base, not the rate. It is not a question of being purely money driven, just acting in ones self interest. When I was a child, my father was a lawyer. WHen I went to doctor, dentist, ect., we never paid, it was professional courtesy. But I am sure my dad got a call and gave a bit of free legal advice. But with 70% rates, it made sense for both parties. As a young tax lawyer, near the end of year got calls to look at tax shelters so for a fee anyone with income could avoid income tax. With high tax rates the rich use corporations to hold assets (which they do in Europe and Canada) which generally have lower tax rates, so income is shifted. Do studies take these type of things into account? In tax policy, a page of logic is worth a volume of studies. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-47179863345015843882012-10-16T17:22:26.086-05:002012-10-16T17:22:26.086-05:00Dear Mr. Cochrane,
Your statement:
"Unlike ...Dear Mr. Cochrane,<br /><br />Your statement:<br /><br />"Unlike a Keynesian plan, whose purpose is to transfer wealth to the hands of people (voters) likely to consume it, or a redistributionist plan, whose purpose is to transfer wealth from one category to another of people, the point of a revenue-neutral, income-neutral tax reform is to permanently and predictably lower marginal rates, giving rise to incentives to work, save, invest, and increase economic growth over the long run."<br /><br />First, there is no such thing as permanent and lower marginal tax rates. They didn't stay low after Reagan left office, and it would be highly unlikely that they would stay low when and if Mr. Romney were elected and then left office.<br /><br />The only thing even close to permanent that you get from a political organization like the federal government are the long term contracts that it sells (currently bonds). Milton Friedman (a one time Keynesian) realized this and derived his permanent income hypothesis.<br /><br />A federal government bond is a contract sold by the Federal Government that makes regular interest payments. Those interest payments are funded by tax revenue and are guaranteed by the 14th Amendment to the Constitution. It would seem to me that the federal government could at its choosing sell non-guaranteed equity like claims against the same future tax revenue. In essence, the federal government would be selling tax breaks.<br /><br />The primary reason to do this is as follows:<br /><br />Because the federal government does not exist to compete with the private sector in the production of price sensitive goods and because the buyer of a U. S. Treasury bond is guaranteed to receive his / her money back plus interest, neither the federal government nor the bond buyer has an economic incentive to produce anything.<br /><br />When the federal government sells a tax break with a rate of return and a duration, the owner of that tax break must have a taxable revenue stream to realize the gains against. Meaning, that person must be out working a job and producing something to sell to realize the return on investment.<br /><br />In this way you get a lower tax burden AND a reduction in the federal debt.<br />FRestlyhttps://www.blogger.com/profile/09440916887619001941noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-75903716863621278562012-10-15T00:21:47.170-05:002012-10-15T00:21:47.170-05:00I know no one who gives that as an excuse and it i...I know no one who gives that as an excuse and it is actually a counter argument. So even with a tax rate of 33% someone with a high income will not put in more hours if they already have a high income. Under this theory those people who pay no income taxes because should be putting in the most hours and as your income goes up and your tax rate you work less and less.<br /><br />Garyhttps://www.blogger.com/profile/17414725749450659875noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67803162607345419782012-10-15T00:05:26.729-05:002012-10-15T00:05:26.729-05:00Conservatives say that the rich are purely money d...Conservatives say that the rich are purely money driven and if they get to keep 85% of their pay they will work more hours than if they get to keep 60% of their pay. Studies show only a very marginal effect of this. (Similarly they also say that the poor will work longer if they are paid less and don't notice the contradiction but that may be a separate issue.) <br />The Tax Foundation is not an unbiased source - their raison d'être is to reduce taxes and I don't trust their models. Their model says a lower marginal tax increases work effort even if the total tax is the same and they have similar unproven assumptions in other parts of their models - garbage in - garbage out.Garyhttps://www.blogger.com/profile/17414725749450659875noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-33437592905439135992012-10-13T12:23:17.548-05:002012-10-13T12:23:17.548-05:00Sorry, I should have included this in my last post...Sorry, I should have included this in my last post. Here is a letter from the Joint Committee on Taxation, talking about how hard base broadening is in practice:<br /><br />http://www.washingtonpost.com/blogs/ezra-klein/files/2012/10/BN_101212_192832.pdf<br /><br />Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5910687145420198442012-10-13T11:38:56.096-05:002012-10-13T11:38:56.096-05:00Here is a recent post from one of the authors of t...Here is a recent post from one of the authors of the original TPC study:<br /><br />http://www.brookings.edu/research/opinions/2012/10/08-romney-tax-debate-gale<br /><br />and an article on Bloomberg reviewing the studies Romney is relying on (the Romney campaign gave him the list so we know this is what the Romney campaign is referring to):<br /><br />http://www.bloomberg.com/news/2012-10-12/the-final-word-on-mitt-romney-s-tax-plan.htmlAbsalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39986749189632006682012-10-13T00:10:32.243-05:002012-10-13T00:10:32.243-05:00Different anonymous here (I posted the question at...Different anonymous here (I posted the question at top of this thread).<br />OK, I see how a lower marginal rate makes additional work pay off more that with higher rates. But is there any empirical evidence that people actually do work more hours? Did people work more hours when Reagan or Bush II cut rates? Did people work less hours when Clinton raised rates?<br /><br />Plus, given that unemployment and under employment are so high right now, the question remains: can people actually work more, even if they want to? I build furniture for a living, I could work more hours to make more tables, but if I don't sell the additional ones the extra work is worth $0 to me. I can see that in an economy with higher consumer demand this would not be true & the extra work would pay off with more sales.<br /><br />And a greater point- even if lower rates encourage more hours worked, is that how we want to grow our economy? I understand your job is to predict what will maximize GDP or tax revenues, but maybe there are long term, negative implications to this we are not taking into consideration. What about laborers wearing out their bodies earlier (higher health care costs later)? Or parents able to spend less time with their kids? <br /><br />fyi I have no formal economics training past Econ 101 but find it fascinating and have been reading as much as I can the past few years. I appreciate you taking the time to read & respond.<br /><br />JonAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34195370616204166032012-10-12T20:41:18.772-05:002012-10-12T20:41:18.772-05:00Professor Cochrane,
You said, "Thanks for as...Professor Cochrane,<br /><br />You said, "Thanks for asking! This is the most important point. In economics "how much money you have in your pocket" is really a secondary question to the overall economy (I know it matters to you!)<br />What matters is, if you (say) work an extra day, how much more money do you get to keep? If you get paid $100 per day, but the government takes half, then you keep $50. If it takes a third, then you keep $66, and are more likely to work that extra day rather than go home and watch the ball game. A revenue-neutral tax reform lowers this marginal rate, but eliminates deductions so you end up paying the same amount overall."<br /><br />I'm a different poster than the original Anonymous. Here's what I don't understand -- are we assuming the Romney plan is revenue neutral because A) eliminating deductions will completely make up for the revenue loss from lower marginal rates; or B) eliminating deductions will partly make up for the revenue loss AND the increased growth from the lower rates will make up the rest? If it is the former, which is what I interpreted the original question to be referring to, I don't see how a business or person has more incentive to work, save, or invest when their after-tax income will be the same. If I have $100 to invest, why am I more likely to invest with a marginal tax rate of 28% and no deductions than a marginal tax rate of 35% and current deductions, if my after-tax income will be the same in both situations?<br /><br />Thanks for taking time to answer these (simple) questions.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60469192590078045362012-10-12T12:46:16.191-05:002012-10-12T12:46:16.191-05:00I would hardly use such a small sample size (2 pre...I would hardly use such a small sample size (2 presidencies decide the habits of all Republicans and Democrats?), but let's follow with what John said. If we'll still be underemployed, and Romney takes office and uses his plan, then, according to your logic, that would be "stimulating". I would argue that it's complete nonsense, but using YOUR logic and the circumstances that's the conclusion. Taking your logic to a further extreme, it's a matter of which candidate is claiming to add the largest amount to the debt that will be the most "stimulating". Hmmm.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87289241872496572812012-10-12T09:31:18.907-05:002012-10-12T09:31:18.907-05:00If Gates and Jobs would not have worked harder or ...If Gates and Jobs would not have worked harder or smarter, their financiers, investors, and employees most likely would have financed less and at higher costs and worked less or elsewhere (where the pressures would have been less).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-812473561035542982012-10-12T08:53:45.221-05:002012-10-12T08:53:45.221-05:00Absolutely on mothers responding to wages.
My wif...Absolutely on mothers responding to wages.<br /><br />My wife is a well paid consultant 100k+, but after taxes, in home child care, eating out, guilt at not being there, outsourcing of most houshold work she is really close to the margin on wether to work or not.<br /><br />The wives of most of my peers and neighbors do not work. Most of these women are college graduates in desirable fields (nursing, engineering, etc) but given that their husbands also do quite well it is not worth the effort to work given that 1/3 of the extra income will go to the fed/state govt.eccdoggnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-36951852336133882812012-10-11T17:52:19.593-05:002012-10-11T17:52:19.593-05:00I think the theoretical framework is a nice way to...I think the theoretical framework is a nice way to organize our thoughts. (Very much in vein of the Chicago price theory tradition.)<br /><br />I checked the JEL piece, but I do not find corporate taxes lumped on the rich. I must be searching the wrong way. If you care, would you mind pointing me to it?<br />http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdfAnonymoushttps://www.blogger.com/profile/12979135259213557607noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7055551879515313412012-10-11T10:08:16.207-05:002012-10-11T10:08:16.207-05:00Thanks for the pointers. I'll add to the readi...Thanks for the pointers. I'll add to the reading pile. I grew a bit disenchanted with Piketty-Saez the last time I read one of their pieces (JEL) carefully. The fact is, in the 1960s rich people didn't pay much taxes despite high statutory rates. PS goosed up the tax rate for rich people in the 1960s by adding the burden of corporate taxation entirely to rich people. This violates the conclusion practically everywhere else that the rate of return to capital is basically fixed, so taxes are passed on through prices and wages not lower rates of return. And, while "burden" of taxation is the right economic concept, to use it just once to goose up taxes paid by rich people and nowhere else seemed borderline dishonest. I guess this experience should make me anxious to dive in to dig up more dirt in other papers, but it has the opposite effect. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41521778286556263982012-10-11T09:00:28.610-05:002012-10-11T09:00:28.610-05:00On the consensus (?) labor supply elasticities, fo...On the consensus (?) labor supply elasticities, for both intensive and extensive margins, see these papers:<br />http://obs.rc.fas.harvard.edu/chetty/bounds_opt.pdf<br />http://obs.rc.fas.harvard.edu/chetty/ext_margin.pdf<br /><br />Also note that we like to talk about earnings elasticities as they are a composite of many important margins (second job, effort, promotion, human capital investment, bonus). These papers take that into account. That said, there are many rigidities in real life, which do matter at least in the short run (organization of the workplace, salience, switching costs). These estimates go a long way to be robust to that and still end up with 0.3.<br /><br />But everyone would admit that truly long-run responses like investing in your kids and career choices and what not are very hard to estimate, so are missing from the 0.3 number. That said, clinging to a hope of large responses contrary to all our best though imperfect evidence does not sound like a good Bayesian thing, unless one has unscientifically strong priors or in his heart lets anecdotal evidence outweigh economists best efforts at scientific estimates.Anonymoushttps://www.blogger.com/profile/12979135259213557607noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-41922005441300142142012-10-11T08:49:25.675-05:002012-10-11T08:49:25.675-05:00On these points, you might be interested in (and g...On these points, you might be interested in (and give a fair if conservative reading of) the new revision of the optimal income tax paper that does (try to) look at long-run growth, tax-base issues (lower effective marginal rates, avoidance) and unproductive bargaining.<br /><br />With empirical results too, however imperfect.<br /><br />http://elsa.berkeley.edu/~saez/piketty-saez-stantcheva12thirdelasticity_nber_v2.pdfAnonymoushttps://www.blogger.com/profile/12979135259213557607noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-13968860441184156542012-10-10T16:28:17.807-05:002012-10-10T16:28:17.807-05:00I know that my wife, a working mother, WOULD work ...I know that my wife, a working mother, WOULD work substantially fewer hours or retire if her marginal income tax rate rose from 35% to 75%. Economists have found that the marginal rate cuts of Reagan did encourage married women to work.<br /><br />Bostoniannoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-3914824407383190762012-10-10T13:32:11.224-05:002012-10-10T13:32:11.224-05:00If you look back at the Tax Reform Act of 1986, th...If you look back at the Tax Reform Act of 1986, the top rate was brought down from 51% to 34% and income tax collections never missed a beat. Reduction in rates, reduction in deductions, revenue neutrality.Rich Bhttps://www.blogger.com/profile/00941404638652186901noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-6275089645694941582012-10-10T10:10:01.693-05:002012-10-10T10:10:01.693-05:00"Somewhere there seems to be a theory that Re..."Somewhere there seems to be a theory that Republican deficits lead to hyperinflation and Democratic ones to stimulus, but I haven't figured it out yet."<br /><br />I will help you figure it out: <br /><br />Republican deficits (as in Bush 2) were incurred in a fully employed economy. Democratic deficits (as in Obama) have been incurred in an economy with underemployment and underutilization of other resources.<br /><br />Such Republican deficits tend to be inflationary, whereas the Democratic ones are stimulative.<br /><br /> Ed Rhttps://www.blogger.com/profile/17720176132423294274noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-23378992564930079542012-10-10T08:46:33.225-05:002012-10-10T08:46:33.225-05:00Gio:
That is irrelevant. Temporary fiscal stimulu...Gio: <br />That is irrelevant. Temporary fiscal stimulus in the form of government purchase of goods and services increases output even if RET holds and the world is completely neoclassical instead of Keynesian. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-69886091953353945742012-10-08T22:15:40.405-05:002012-10-08T22:15:40.405-05:00I think the reason the Tax Policy Center is right ...I think the reason the Tax Policy Center is right to hold Romney to the standard of revenue neutrality is because they take his word for it, but Obama's plan is overtly revenue-positive because he's talking about raising marginal rates on high income earners. Saying a tax increase is revenue neutral is nonsense: his is increasing revenue vs. baseline (extend Bush tax cuts ad infinitum) and Romney says he's cutting taxes without increasing revenue. I get your earlier point abt dynamic scoring, but if the TPC doesn't do dynamic scoring, then neutrality would have to come from some revenue enhancements somewhere.Anonymoushttps://www.blogger.com/profile/14235846531323511190noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-977073934199593802012-10-08T14:34:06.223-05:002012-10-08T14:34:06.223-05:00Anonymous, Just trying to follow you: what about t...Anonymous, Just trying to follow you: what about the Ricardian Equivalence Theorem, then?<br />Giohttps://www.blogger.com/profile/11595388892349007664noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-21593750400012395682012-10-08T13:38:06.942-05:002012-10-08T13:38:06.942-05:00You are making exactly my point, Professor. Indeed...You are making exactly my point, Professor. Indeed, the French rate might be the tipping point. Our highest rate of 35% (soon to be 39%) is not that. In fact, a paper by Christina Romer indicates it may be 33%, while others say it could be as high as 70%. I'm not arguing about a particular number. Just pointing out that raising or lower the rate in and of itself does not do what you claim it does. A certain (perhaps unknown) threshold must be met for that to happen.joshhttps://www.blogger.com/profile/14858146314409413869noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4614512948013027832012-10-08T13:31:12.048-05:002012-10-08T13:31:12.048-05:00Could we do a dynamic scoring analysis on this cou...Could we do a dynamic scoring analysis on this country's last round of tax cuts in the prior presidential administration? Don't we have that data?<br /><br />Also, I'm not sure I'm buying the idea that people as a rule will work longer hours/an extra day/ etc. with a lowered tax rate. We've had years of people working longer hours for less money. Aren't there also reams of data that show people really don't "Go Galt" until their tax rates are much, much higher than they are now, or than they are proposed to be under Obama?joshhttps://www.blogger.com/profile/14858146314409413869noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-53672086884108297412012-10-08T00:49:11.159-05:002012-10-08T00:49:11.159-05:00KyleN: I do not need to do research, other people ...KyleN: I do not need to do research, other people smarter than me have done it already. If you bother learning try the review of the literature that recently came out at The Journal of Economic Literature.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-55934409316140392502012-10-08T00:44:53.943-05:002012-10-08T00:44:53.943-05:00To Gio:
In most macroeconomic models, permanent de...To Gio:<br />In most macroeconomic models, permanent deficits cause consumption to fall. That is because those deficits have to be financed by taxes. That is true in Keynesian models but also in neoclassical or monetarist models too. Anonymousnoreply@blogger.com