Yet the comeback hasn’t quite materialized, and Pigou is in danger of returning to obscurity. That would be a major loss. Pigou, a key bridge figure in the history of his field, was one of the earliest classical economists to notice that markets do not always produce the best possible social outcomes.
He wasn’t a classical. He was a neo-classical. All right, all right, you think I’m being pendantic. But I’m not at all: that marginalist revolution that marks the divide between the classicals and the neos- is hugely and vastly important.
Ignorance of this sort of thing is why I do so hate lefties on economics.
And then we come to their lies with the statistics:
The minuscule increase in the median household income, about 0.4 percent per year, supports this myth. But the economy has not stagnated. Output per capita has risen more than 90 percent since 1975, or an average of 2.1 percent per year. That’s less than the figure for the Golden Age but not much less. The difference is that since the 1970s, virtually all the gains have gone to those at the top. The average income of the top 1 percent has tripled, while the median household income has increased by less than 20 percent.
Because the size of the median household has changed you ignorant fucking buffoons. Or liars, whichever.
Plus the measurement of income leaves out employer provided health care insurance.
The new incentives affect the behavior of anyone with a decent shot at getting rich. CEOs of large corporations expect astronomical compensation packages. Wall Street executives pursue riskier lines of business in search of higher profits than they could earn through traditional banking or brokerage. Doctors and lawyers have an incentive to train for lucrative subspecialties, leaving a shortage of general practitioners and public defenders. All these brain drains impose costs on everyone else.
You what? That people specialise because we value specialisation is causing a cost to everyone else?
In the 1950s, the top threshold was around $3 million in today’s dollars, or about 130 times the average income of the bottom 90 percent.
Wrong inflation adjustment! Wages do rise with respect to general inflation over time. That’s why real wages rise. $400,000 in 1950 is around $3 million by general inflation now. But it’s more like $6.5 million in relation to production wages.
But we can examine whether higher tax rates raise or lower overall income-tax revenue. The evidence shows a strong positive correlation between the marginal tax rate for the top 1 percent and total tax revenue but not such a strong relationship for the top 0.01 percent (those who may find it easiest to earn in ways that avoid taxes). Economists who specialize in these matters, including Thomas Piketty, Emmanuel Saez, and Peter Diamond, typically argue that a marginal rate around 70 percent maximizes revenue.
No they fucking don’t. They argue that a total (ie, including all social security, medicaid etc, including employer paid taxes on employment) tax rate of that might be the revenue raising optimum. And that is only and purely in the absence of any allowances in the tax system. When there are allowances then the rate (again, that total rate, not just the marginal income tax rate) falls to 54%.
So far, so good. But how might high marginal tax rates affect overall economic growth? The conventional wisdom holds that high rates are a threat to growth. The conventional wisdom is wrong. A plot of growth rates against top tax rates shows little or no correlation between the two.
Sigh. The argument is that high corporate and capital taxation limits economic growth because deadweight costs. Income tax less so. So you need to go look for the correlation between capital taxation and growth: and when you find it, then conclude that you want to have a lower capital return taxation rate then you’ve introduced allowances into your tax system. At which point, as above, the 70% finding collapses down to the 54% one. Capisce?
As a thought experiment, imagine a quilt factory. Everybody is paid according to how much he or she produces—say, $5 per quilt. Produce one quilt an hour, and your hourly pay is $5; produce ten quilts, and it’s $50. Now, imagine that the government raises marginal tax rates. How would you respond? Maybe you’d decide to produce fewer quilts, since the government is going to take more of your money. Or maybe you’d decide to work harder and make more quilts to maintain your take-home pay. The economists who measure such things usually say that for most people, these two effects roughly cancel each other out. People end up producing about the same amount, regardless of whether marginal tax rates go up or down.
What bastard misery is this? The income and substitution effects depend upon what the tax rate is. That’s how we derive the Laffer Curve for God’s sake. No one at all is saying that they roughly balance out for all people over the possible range of tax rates.
One logical explanation is that the rich are not those who can quilt 351 times faster than the average quilter. Instead, there may be among them company owners who convince the government to subsidize quilt production, or lobbyists who persuade Congress to scrap regulations requiring labels showing what’s in the quilts, allowing the companies to lower their costs by substituting poor-quality, flammable stuffing.
These are zero-sum activities, a sort of economic version of airborne carbon emissions, and over time they can compromise the economy’s efficiency. The owners’ gains don’t come without somebody else’s loss.
Err, if you’re worried about rent seeking why not reduce the opportunities for rent seeking? Instead of taxing everyone to reduce the incomes of the rent seekers?
BTW. If you were to propose an increase in the total tax rate on incomes over $6.5 million to 54% then I certainly wouldn’t argue. There’s about 4% or so in Federal employer paid taxes at that number, leaving 50%. California’s state income tax is what, 11, 12%? So the federal rate would be 37, 38% instead of the current what is it, 35%? I really don’t think that anyone would care very much either way on that.
The real issue about the taxation of the rich, the Bush tax cuts etc, is the looming change in dividend taxation. One calculation has it going from the current 40-45% or so (adding corporate tax and the 15% dividend tax) to something over 68% (full corporate income tax plus the 39% top income tax rate). Which brings us back to our consideration of the difference between tax rates on capital income and labour income.