Taxing the Rich Won’t Raise Revenue – but Will Hurt the Economy

Writing in the Wall Street Journal, my Cato Institute colleague Alan Reynolds offers a simple economics lesson about pitfalls of class-warfare tax policy:

…the evidence is clear that when marginal tax rates go up, the amount of reported incomes goes down. Economists call that “the elasticity of taxable income” (ETI), and measure it by examining income tax returns before and after marginal tax rates claimed a bigger slice of income reported to the IRS. The evidence is surveyed in a May 2009 paper for the National Bureau of Economic Research by Emmanuel Saez of the University of California at Berkeley, Joel Slemrod of the University of Michigan, and Seth Giertz of the University of Nebraska. They review a number of studies and find that “for an elasticity estimate of 0.5 . . . the fraction of tax revenue lost from behavioral responses would be 43.1%.” That elasticity estimate of 0.5 would whittle the Obama team’s hoped-for $1.2 trillion down to $671 billion. As the authors note, however, “there is much evidence to suggest that the ETI is higher for high-income individuals.” The authors’ illustrative use of a 0.5 figure is a perfectly reasonable approximation for most purposes, but not for tax hikes aimed at the very rich. For incomes above $100,000, a 2008 study by MIT economist Jon Gruber and Mr. Saez found an ETI of 0.57. But for incomes above $350,000 (the top 1%), they estimated the ETI at 0.62. And for incomes above $500,000, Treasury Department economist Bradley Heim recently estimated the ETI at 1.2—which means higher tax rates on the super-rich yield less revenue than lower tax rates. If an accurate ETI estimate for the highest incomes is closer to 1.0 than 0.5, as such studies suggest, the administration’s intended tax hikes on high-income families will raise virtually no revenue at all. Yet the higher tax rates will harm economic growth through reduced labor effort, thwarted entrepreneurship, and diminished investments in physical and human capital. And that, in turn, means a smaller tax base and less revenue in the future.

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States with Biggest Debt Burdens – Some Surprising Results

This chart, published in the New York Times and based on work by Andrew Biggs of the American Enterprise Institute, shows the states with the most serious debt problems. Maybe I don’t follow state issues closely enough, but I was surprised to find that Alaska had the most debt and that California was not very high on the list.

State debt is a combination of several factors, of course, including past deficits (I assumed California would be higher just based on their current levels of red ink) and unfunded liabilities for things such as pensions for state bureaucrats.

I may be wrong, but I suspect Alaska is in better shape than these numbers indicate because of the ability to tax oil and other naturual resources. I have no reason for any optimism about places such as Rhode Island and Ohio.

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PG 13 Political Joke (and Two Extras from the Late-Night Comics)

The Last Nickel

A father walks into a restaurant with his young son. He gives the young boy 3 nickels to play with to keep him occupied. Suddenly, the boy starts choking, going blue in the face. The father realizes the boy has swallowed the nickels and starts slapping him on the back. The boy coughs up 2 of the nickels, but keeps choking. Looking at his son, the father is panicking, shouting for help.

A well dressed, attractive and serious looking woman in a blue business suit is sitting at the coffee bar reading a newspaper and sipping a cup of coffee. At the sound of the commotion, she looks up, puts her coffee cup down, neatly folds the newspaper and places it on the counter, gets up from her seat and makes her way, unhurried, across the restaurant.

Reaching the boy, the woman carefully drops his pants, takes hold of the boy’s testicles and starts to squeeze and twist, gently at first and then ever so firmly.  After a few seconds the boy convulses violently and coughs up the last nickel, which the woman deftly catches in her free hand. Releasing the boy’s testicles, the woman hands the nickel to the father and walks back to her seat at the coffee bar without saying a word.

As soon as he is sure that his son has suffered no ill effects, the Father rushes over to the woman and starts thanking her saying, “I’ve never seen anybody do anything like that before, it was fantastic. Are you a doctor?”

“No”, the woman replied. “I’m with the IRS.”

—–

And here are two extra jokes from the late-night comics.

Obama demanded more accountability, a crackdown on corruption, and a better government. And if it works in Afghanistan, he’s going to try it in the United States – Dave Letterman, on Obama’s trip to Afghanistan

It must be very embarrassing for the people involved. I’m sure the strippers didn’t want anyone to know they were hanging out with politicians – Craig Ferguson, commenting on the scandal of the RNC spending donor money at a strip club

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