James Joyner already collected posts on this, but we’ll do it here, anyway. The chart comes from Conor Clarke:
When I read propaganda about how Obama will bring us tax rates of 60% during a recession I try to remember that: (1) There is a difference between marginal and effective tax rates; and (2) None of these proposals takes effect for the next couple of years (so it is not “a scary prospect in the midst of a recession”). And let me say it again: The effective federal rate for top earners — the rate we should care about — will still, with this surtax, be lower than it was in the mid-90s.
The basic story is simple: As their incomes have gotten ever higher, their tax rates have gotten ever lower. So if tax rates on the rich are raised to help pay for healthcare reform, as some Democrats are proposing, it would just return us to the rates of the early 90s, not some hellish confiscatory dystopia.
Drum quotes and links to Bruce Bartlett:
In the end, higher tax rates on the rich are inevitable if only because of expiration of the Bush tax cuts next year. Since that would just return rates to where they were in the 1990s when growth was robust, any claim that this will destroy the economy should be taken with many grains of salt.
Still, it would be better to pay for health reform some other way. But if Republicans refuse to propose any alternative, insisting instead that taxes should never be raised for any reason, they pretty much guarantee that Democrats will raise the top rate. If that happens, Republicans will bear some responsibility as well.
Ezra Klein interviews Bruce Bartlett:
One reason is I am disturbed that we have a large percentage of the population that pay no income taxes. And I know many of those people pay payroll taxes. But income taxes fund the general government. According to a study by the Tax Policy Center, 47 percent pay no income tax, or have negative liability. And I think it’s bad for democracy when people get into the position when a majority can vote benefits for themselves but not pay for it. And that should disturb liberals as much as conservatives.
The VAT would necessarily be a broad-based tax. It would be a way of getting people to pay for the benefits they themselves receive. People like Len Burman and Rahm Emmanuel’s brother [Ezekiel Emmanuel, a health care adviser to Peter Orszag] have supported this for some time. Len argues that if people knew the VAT was dedicated to health-care reform, and the rate rose and fell automatically with the spending of the system, they would have an incentive to hold down taxes. They would have some positive reinforcement we do not now have with Medicare. I hope that’s right. You know, every other major developed country has a VAT: The parties of the left in Europe made a deal a long time ago: If conservatives will let us have a welfare state, we’ll fund it conservatively. And I think that’s still a good deal.
Back to the Conor Clarke chart, E.D. Kain comes up with a new chart:
Going back to Clinton level tax-rates is not the doomsday scenario so many tax-hawks claim it is. Then again, it’s also important to remember that the rich already pay a great deal more than any other demographic, and there’s only so much revenue that can be raised by taxing them while doling out services to the rest of the population. At some point, taxes will simply have to go up across the board.
That’s the sad fact about free lunches. They are never, ever actually free.
Joyner also points us to Catherine Rampbell in NYT, who has this chart:
And Joyner, on Clarke’s graph:
I’d note that the curve is wildly exaggerated because the Y axis starts at 28 percent. All the variation is between 31.5 percent and 36.1 percent or so; the drop has hardly been precipitous. In addition to the Bush tax cuts, most of the difference is lowered capital gains taxes.
More on taxes. Bryan Caplan:
The Krugman we’ve got is sold on the House health bill. But the Krugman we had, the thoughtful economist who wrote The Accidental Theorist, would have responded differently. Krugman Past, unlike Krugman Present, would have pointed out that when the unemployment rate is 9.7%, it’s a bad idea to legislate an 8% payroll increase on businesses that fail to offer health insurance. Employers are reluctant to hire workers at today’s wages; how are they going to feel once the marginal worker gets 8% pricier?
I think I’ve read critiques similar to this about a thousand times now. I guess it sounds mighty clever, hoisting Keynesians by their own petard or something. But it’s nonsense. The “pay-or-play” payroll tax increase doesn’t go into effect until 2013 — and if the recession isn’t over by then we’ve got way bigger things to worry about than a minor increase in payroll tax receipts.
Something they taught me back at Emerson Hall was that before you jump on a major philosopher for having committed an elementary mistake, you ought to consider the possibility that you are the one making the mistake. It seems to me that the same principle applies here. Caplan knows Paul Krugman is a good economist. And he knows that it would be odd for a Keynesian like Krugman to advocate for a tax increase amidst a recession. But instead of considering the possibility that it was he, Caplan, who’s not understanding the situation he assumes that Krugman is blundering.
And Paul Krugman:
As Kevin points out, the provisions wouldn’t take effect for several years; it takes real chutzpah, given that obvious point, for Caplan to accuse me of being disingenuous.Actually, it’s even worse: Caplan frames the argument in terms of the nasty effects of raising labor costs. Um, we have a problem with demand, not supply; time to reread Keynes on wages.
