Selected in the top 100 Economics Sites

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Wednesday, November 14, 2012

I'm IN!

http://gregmankiw.blogspot.com/2012/11/how-to-raise-tax-revenue-from-rich.html
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6 comments:

SkepticalStatistician said...

Big picture, I think capping deductions is a good idea.

However, I'm always interested in the thinking among conservative economists that this option is much different than an increase in top marginal rates. Some theoretical model might say there's a difference, but households are going to look at the change in their taxes paid, and not necessarily the rate(s) by themselves when considering consumption & incentives to work.

I've always wondered if upon graduation, economists have a sworn oath to defend certain buzzwords - scarcity, opportunity, incentives, marginal, etc... regardless of reality. Theoretical models are a big problem with economics - they might get a paper published but they have extremely limited use in reality. But I digress.

So, maybe I'm missing something. Considering that consumption is a function of disposable income, and both capping deductions and changing marginal rates impact Yd, how are these two options (in the real world) much different?

November 14, 2012 at 8:36 AM
Randall Parker said...

Dear SS: Thanks for the question. Tax deductions cause economic distortions that convolute the market price of resources and give preferential tax treatment to this particular resource or that particular political interest group. These distortions reduce economic efficiency and slow economic growth. Our tax code currently is a political document and not an economic one. Moving away from that and having the people especially at the higher end of the income distribution (which I think is what the left wants)pay more would be a good thing.

Resources are allocated at the margin. In deciding whether to hire another worker or add another piece of capital or work more overtime, the firm or the household
looks at their return on the last or "marginal" dollar earned or expended. The primary determinants of that return are the productivity of the inputs and the marginal tax rate that is paid on the last dollar. And that is why marginal tax rates and not the total tax bill are so utterly crucial.

I confess to being guilty as charged to the oath. Scarcity, marginal, opportunity cost...all are economic verities and scientific truths that I will defend.

Thanks for your visit. Perhaps we should end with a quote from Robert Solow:

"Maybe the main function of economics in general is not, as we usually think, the systematic building of theories and models, or their empirical estimation. Maybe we are intellectual sanitation workers. The world is full of nonsense, full of things people and institutions know that "ain't so." Maybe the higher function of economics is to hold out against nonsense..."

November 14, 2012 at 11:10 AM
Randall Parker said...

Eliminating the preferential tax treatment of health insurance premiums is low hanging fruit to the tune of $250 billion dollars of higher revenue per year in perpetuity. It would cost me close to $2000 if this were taken away...but I am for it because it is the economic right thing to do and eliminates the distortions in the price of health care. Plus, my brother has to pay income taxes before he pays his premiums and what is fair about that? Nothing. Are you listening...$250 billion in perpetuity.

November 14, 2012 at 11:20 AM
SkepticalStatistician said...

Again, I do agree with getting rid of these deductions.

"The primary determinants of that return are the productivity of the inputs and the marginal tax rate that is paid on the last dollar. And that is why marginal tax rates and not the total tax bill are so utterly crucial." - I agree, however, you have to see it isn't the marginal tax rate so much as the total marginal impact. IE: increasing the marginal rate can have the same results on marginal decisions as capping deductions for earners of certain income levels.

"250 billion in perpetuity" - statements such as these don't help your profession.

"my brother has to pay income taxes before he pays his premiums and what is fair about that" - didn't I read on this very blog where you said "whenever you hear the word "fairness" hold on to your wallet because someone is coming after it"?

Also, the oath is okay except for the scarcity thing - everything is scarce if you get down to it. Or maybe I just never had a econ professor explain the concept well.

Thanks for the dialog..........

November 14, 2012 at 11:58 AM
Randall Parker said...

Well, the $250 billion figure comes from Martin Feldstein. If that hurts the profession then I guess we have to take the hit.

The fairness comment comes after MY wallet so these words should have some credibility. Asymmetric tax treatment because I am a public employee and my brother is not should be corrected.

The impacts of the cap and the marginal rate are not the same.

And when you say everything is scarce...now you are catching on because that's exactly right.

Have a very nice day and thanks fo rhe visit.

November 14, 2012 at 12:07 PM
SkepitcalStatistician said...

this article hits at my thinking:
http://www.washingtonpost.com/blogs/wonkblog/wp/2012/11/14/let-them-eat-nonrefundable-credits/

November 16, 2012 at 1:45 PM

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