Old Debates Are Old (Peak Income Tax)
Yesterday, most of us heard the Munk Debate between Paul Krugman and George Papandreou arguing for “higher taxes on the rich” with Newt Gingrich and Art Laffer arguing against. I was up between 4:30 and 6:00 AM (India time) excited to watch it, and did learn a thing or two. But it was ultimately hackneyed and political. Little in the debate transcended above what we might expect in a conversation between Bill Clinton and Ronald Reagan. This isn’t to say it was bad, but it tells us something about one of America’s most interesting questions.
The debate over income taxation is over. It’s boring, saturated, and predictable. And that’s because we’ve been hearing the same arguments since JFK. A lot of the big debate in economics is rich and novel today. Liquidity traps in the West, exotic monetary policies, and capital liberalization offers room to test theory unlike ever before.
The Munk Debate yesterday is not. And this isn’t just because I’ve kept my ear to the debate: this is stuff Americans hear on Fox or MSNBC every day. I don’t want to comment on points within the debate at all but on the question itself:
- What exactly does it mean to “tax the rich” ? It’s the kind of question we expect on primetime news, but between four statesman and scholars, the lack of specification fails to create valuable discussion. We’re talking within a bad paradigm of income, corporate, and capital taxes. No room for fresh discussion.
- In my head, I define taxing the rich as the percentage of revenues derived from some top n%. But this is also a fail definition, without more moderator guidance, because we expect the percentage of pretax income going to said n% to be increasing.
- I know Matt Yglesias, myself, and a few other proponents of a land value tax are sick of hearing whether people earning more than whatever the top bracket is (400k-ish?) should be taxed at 35% or 39%. Or whether revenue is maximized at 50% or 70% It’s stale.
- There was barely an ounce of discussion about getting rid of the corporate tax.
So this is the curse of four smart people discussing “taxing the rich” without a more engaged moderator. We revert to discussing within the paradigm of an income-dominated tax code, which regresses to the “Democrat vs. Republican” debate. Not because the debaters aren’t creative, but because this conversation is so molded into our sociopolitical memory.
I also think the academic debate on the subject of income taxes is nearing its peak. On the left we know that revenue-maximizing tax rates hover around 80%. On the right we know that taxes always cost jobs, and that every dollar raised in revenue is one step closer to communism.
Some debates are fantastic to hear on screen. Others are better over the blogosphere and other more careful media, wherein authors can carefully deliberate caveats and creative exceptions. Income tax is one such debate.
This is Ashok. 
I agree, it’s hard to even know how to react to such debates that have already been heard too many times. I prefer to think of services potential as coordinated reciprocity – some of which could eventually replace government taxation for a lot of services that only get captured by special interests.
Well the biggest “service” to special interest are the many exemptions and loopholes carved into the tax code itself.
It would be interesting to incentivefy people to gain tax reduction based on their contribution for society. This sort of non traditional method may create overall value that increases the wealth or betterment of the local community and returns more than an income tax would. Example An earner that makes say $1,000,000+ and resides in the United States is taxed at 50% or $500,000. If they employee however 5 people at $40,000 in the state the live in then they have a reduction in their taxes of the salaries plus 5%. So instead of only maintain $500,000 thousand, they are able to maintain $550,000 plus have the service of 5 people who have incomes that would be taxed and they have revenue to spend increasing the areas wealth as consumers. The idea of flat tax based solely on income will not help as much as one that is valued on contribution to society.
This seems like it would be a very complex system, at first approximation. Also, the theory behind this is similar to the argument for lower top tax rates which incentivize job creation and investment (arguably). I think what you miss is that your income *is* – more or less – your contribution to society. There are many rents (especially at the top) and externalities, but in general I don’t think it’s a bad estimate.