Wednesday, April 20, 2011

In which I am pessimistic

Steven Landsburg:
“Taxing the rich” cannot work unless you do it in a way that induces the rich to consume less.
In more detail, Landsburg correctly says that if a rich person responds to a tax by cuts in his investments and lending but no cuts in his consumption, then all his tax burden falls on the investees and lendees, which are generally not rich.

My take-away is that to the extent rich Americans invest in and/or lend to non-rich Americans, taxing rich American's income and/or wealth is a probably politically expedient, economically inefficient way to indirectly tax the middle class, while raising the same amount of revenue through, say, higher gasoline taxes would probably be much more direct, politically inexpedient, and much less economically inefficient. (Depending on what you expect the externalities of global warming to be, higher gas taxes might be more efficient than lower gas taxes. My personal guestimate is that higher US gasoline taxes might have a net expected benefit for the world, but probably not for the US.)

To the extent that rich Americans invest in foreigners, taxing the rich is even more politically expedient. Karl Smith:

The US government borrows cheaply from abroad. It uses that money to finance tax cuts for wealthy Americans. Those wealthy Americans use some of that extra income to invest in multinational companies, which then return huge profits to the United States.

On net the United States is richer for having done this. Though, I suspect that its has suppressed the wages for working class Americans.

The Feds will eventually raise much more revenue, in roughly the most inefficient ways possible, either before or (more likely) after a fiscal crisis strikes. Forget about a VAT. We'd be very lucky to get rid of either of the following income tax deductions: home mortgage interest and employer-provided health-insurance. Doing so would raise tons of revenue and actually reduce government distortion of incentives, but it would be a transparent tax increase falling most heavily on the upper middle class. Good luck with that.

To get to a VAT, first things have to get so bad that all other means of increasing federal revenue are even more unpopular, yet more revenue is still needed. Insert Churchill quote here.

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