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Tax cuts: Good and Bad arguments
Posted by: Jon Henke on Sunday, July 15, 2007

There's been a great deal of discussion about taxation lately, so it's time for a reminder for those who support tax cuts: don't make stupid arguments.

This would seem to be an obvious point, but some people's fervor for tax cuts - any tax cut, any time — seems to make them willing to peddle very, very stupid arguments. Case in point, this almost criminally-ignorant graphic from the Wall Street Journal. (more criticism at the Free Exchange blog of The Economist)



On the other hand, Gregory Mankiw's New York Times commentary, in response to the recent, disingenuous Warren Buffett tax discussion, makes exactly the kind of argument I would make.
The C.B.O.’s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government.
Indeed, it is exactly the argument I made. Barring some anecdotal outliers, the total federal tax system is effectively progressive.

You may make the purely subjective argument that we ought to soak "the rich" for more, but one cannot argue that the federal tax system is not progressive. It is. So two questions remain...

  1. How "high above a third" of a person's income do you want to go? (Mankiw's question) And...

  2. How far down will we end up defining "the rich"? (my own)

 
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Obviously, "rich" is defined as "anyone who makes more than I do", where "I" is the one doing the arguing.
 
Written By: Kevin R
URL: http://
(Yes, Warren Buffett excepted, I suppose...)
 
Written By: Kevin R
URL: http://
If you count Social Security and Medicare — both employer-paid and employee-paid — 40% of the next dollar I earn goes to the federal government. That’s 40 cents of every dollar that I can’t use to pay my bills, donate to charity, purchase what I want, or invest for my son’s college education. That’s too much.
 
Written By: Diffus
URL: http://
Yeah, somehow I don’t believe the Laffer Curve was meant to ignore Social Security, Medicare, State Taxes, Local/Property Taxes, and Sales/Service Taxes.

I guess you might rebate some of the social security payment since some of us get that back, but at a value below what we would make if we invested it ourselves.
 
Written By: jpm100
URL: http://
The whole debate is wrong, I think. I’d rather look at ways to promote philanthropy and a sense of community. A lot of wealthy people seem totally unconcerned with poverty, and unwilling to do anything really substantive to make a difference (substantive in terms of actually requiring some kind of real sacrifice, not just a little off the top). Forcing them to do that via taxation is inefficient; not only will programs be ineffective most of the time, but it will go to bureaucracies, consultants, and other such groups more than those who need it.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
Forcing them to do that via taxation is inefficient...
Are you suggesting that force would be OK if it were efficient?
 
Written By: tom scott
URL: http://
"A lot of wealthy people seem totally unconcerned with poverty, and unwilling to do anything really substantive to make a difference (substantive in terms of actually requiring some kind of real sacrifice, not just a little off the top)."

Maybe they’re too busy working. Personally, the people I find most maddening are those with cushy jobs pulling in large salaries with no threat of ever being fired or downsized. We shouldn’t let anyone suckling on the gubmint teat get a vote if you ask me. It isn’t fair.
 
Written By: Harun
URL: http://
A lot of wealthy people seem totally unconcerned with poverty
Are you suggesting they SHOULD be concerned? Maybe their focus is on their own productivity and that of their families.
 
Written By: meagain
URL: http://
Well, when you too busy trying to find loopholes to keep your own money you tend to not have enough time to spend caring for others.

But, caring for others is a touchy-feely lie. I don’t "care" any more about McQ than I do Scott Erb. Why? Both lives are beyond my control. Sure, I empathize with events that might affect you, but otherwise, I’m busy enough trying to feed my family and keep the homestead in good enough shape to keep the rain of our heads.

Of course, you’re more than welcome to blog for a sawbuck if times are lean, and I do tend to hit tip jars here and there because, well, I’m human and my empathy and religious beliefs compel me to help. No need for Uncle Sam to put a gun behind my head.

I give to charity when I can, but honestly I pay close to 30% in taxes so there’s not always that much left over.

I agree with Scott that taxation is a lousy way to get money to the needy, but I doubt him and I are under the same impression of what to do about it.
 
Written By: Robb Allen
URL: http://blog.robballen.com
A lot of wealthy people seem totally unconcerned with poverty, and unwilling to do anything really substantive to make a difference
A lot of people from every economic stratus don’t care about their fellow man. So what? By the way, the rich as a group give dispropotionately to charity. 67% of charitable donations come from the top quintile, even though they earn less than half the income.

When people have more money, they give more to charity.
 
Written By: Steverino
URL: http://steverino.journalspace.com/
Robb: I tend to look at it as a situation where all human life has inherent value, and it is both short sighted, unethical and irrational to separate the self from the other in the sense that "I’ll just take care of myself and do best for me and mine and not care about the others." That means I oppose exploitation but also see giving handouts as patronizing, the real key is to give people opportunity to create for themselves and achieve their potential. To the extent they do not have an avenue to do that, they are not free. Constraints on this may be sociological, traditional, and deal with the structure of society, as well as brute physical force and laws. I do think people should be concerned; if not out of a sense of ethics, then self-interest. If people have no hope and believe they are mistreated they will rise up — I can well imagine a third world terrorist movement with WMD that finds a way to bring down the western economic system. It’s in our interest to care. Each of us are here for a short time, our lives will be forgotten. Those who want to just pile up the most toys and lose themselves in trivial materialist concerns aren’t really living, they’re just existing.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
We seem to have dodged the question, so let’s try again. I think there is probably consensus that 100% is too much, since we did free the slaves.

How much is enough? I’d say 25%
 
Written By: MarkD
URL: http://
MarkD, I’d say 25% is too high as some people can’t afford that. Then you’d have to cut them breaks, then to offset those breaks you’d have to raise taxes on richer people, and we’d be back to where we started.

I’d still prefer to see taxes based on consumption and not income.
 
Written By: Robb Allen
URL: http://blog.robballen.com
I’d rather look at ways to promote philanthropy and a sense of community.
The obvious answer, is tax cuts. Along with, of course, government doing less of the charity thing . First of all, confiscated money is not charity.

When government takes responsibility for things that charities would normally do, there is less charity. Why bother giving to charity? That’s now the government’s responsibility. That kind of thinking results in less community.

A look at philanthropy, to the last 50 years or so, is worthwhile. On every occasion where there was a substantial tax cut, particularly at the Federal level, charity giving rose by a similar amount.

There is a very direct and traceable cause and effect relationship between these two.


You keep telling us about how you like less government, you keep claiming your libertarian, and yet when given practical chances to apply those high sounding words that you’re trying to attribute to yourself, you fail miserably every time. And so we have this case before us...

Are we to take it that because it involves less government, it’s a path you hadn’t seriously considered?


 
Written By: Bithead
URL: http://bitsblog.florack.us
unethical and irrational to separate the self from the other in the sense that "I’ll just take care of myself and do best for me and mine and not care about the others." That means I oppose exploitation but also see giving handouts as patronizing, the real key is to give people opportunity to create for themselves and achieve their potential. To the extent they do not have an avenue to do that, they are not free
We provide an essentially free education system to the poor so that they can educate themselves and achieve their potential. Assuming an educational system that can actually deliver a valuable education and that the poor have access to it (these are obvious problems with our government schools), what more should we expect of ourselves?

Furthermore, when people start a business - in their self-interest - they are creating opportunity for others who are willing to prepare themselves for that opportunity.

I don’t see much else that should be done.

"Those who want to just pile up the most toys and lose themselves in trivial materialist concerns aren’t really living, they’re just existing."
I’ll assume this is not a blanket statement about anyone who’s accumulated wealth. But even more importantly, who are you, or anyone, to judge what constitutes ’living?’ One of the beauties of freedom is not having to live under someone else’s definition of "the pursuit of happiness."

As for tax rates, ideally we should articulate only those essential functions that the federal government should provide, determine the cost and split it evenly after excluding some bottom percentage of the poorest people.
 
Written By: Grimshaw
URL: http://
Grimshaw, in America just about everyone has opportunity and is responsible for the life they lead. We have a culture where too many people consider themselves victims and don’t accept their responsibility for their choices. In the third world, and many American inner cities and parts of the rural poor there are problems where people really are structurally limited. But welfare as handouts doesn’t help those, they need to be given better access to opportunities (quality education, security, etc.)

You are of course right that I should not judge the happiness of others. My statement is an opinion based on my own personal/spiritual beliefs, and those beliefs may well be wrong. You are also right that we are free to define what happiness means for each of us. But my experience shows me that a sense of community (real, not forced) and friendship are far more important to real happiness than having more stuff. I suspect wealthy people who have strong family ties and lots of friends are more happy than wealthy people who do not, and I would even bet that a lot of third world people living in real poverty but having strong kinship ties and deep friendships are happier than many wealthy people who have great houses and conveniences. But that’s speculation.

Bithead, tax cuts are good, but we have to have spending cuts as well.
 
Written By: Scott Erb
URL: http://faculty.umf.maine.edu/~erb/blog.htm
It is possible for a system to be too progressive. Once 50% plus one voters are paying no tax, then they are free to vote for politicians who will raise taxes on "the rest of us."

Our current income tax system is nearly there. The "bottom" 50% currently pay 5%.

At some point, we are going to have to tie voting rights to the payment of taxes, or paying $1 more in taxes than received in direct government transfer payments.
 
Written By: SDN
URL: http://
Norway is funny. My friend wrote me an e-mail saying that if Norway could be socialist and so rich, why shouldn’t we try their system. (Actually, I am not sure how socialist they are, but you get the idea.)

He didn’t know about the offshore oil in the North Sea.
 
Written By: Harun
URL: http://
"I suspect wealthy people who have strong family ties and lots of friends are more happy than wealthy people who do not, and I would even bet that a lot of third world people living in real poverty but having strong kinship ties and deep friendships are happier than many wealthy people who have great houses and conveniences."

Teenage happiness polls in Asia consistently rank Southeast Asians as 80% happy versus Taiwan/Korea/Japan teenagers are much less happier (sp?)

A good education that involves 12-15 hours of schooling a day doesn’t make someone happy apparently. But they won’t be poor either.

Hmmm, maybe the stoner who didn’t learn in High School and now works at 7-11 is happy and doesn’t need government assistance? Choices...choices...
 
Written By: Harun
URL: http://
"In the third world, and many American inner cities and parts of the rural poor there are problems where people really are structurally limited."



Having worked with some of the rural poor firsthand, I’m skeptical that their problems are more structural than cultural. I don’t know enough about inner cities and the 3rd world to comment there.

I agree that strong ties to family and friends are more important to happiness for most people than anything else. But I’m not going to suggest any laws designed to steer people in this direction.

 
Written By: Grimshaw
URL: http://
The worst part about the graph is the utter meaninglessness of the axis. If you want to look at a potential laffer curve, then examine overall tax rates versus overall government taxes, possibly per capita. You can’t use taxes as percent of GDP either to support or disprove the laffer curve. The entire idea is that reducing tax rates to get a smaller portion of a larger pie.

At most, each point on the graph tells us what portion of each country’s tax rate consists of corporate taxes. But it doesn’t even tell us that much since we don’t know what portion of the GDP is corporate income.
 
Written By: Phlinn
URL: http://

 
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