Yesterday’s Wall Street Journal op-ed by Peter Diamond and Emmanuel Saez received quite a reaction Buy eflora cream without prescription, . Diamond and Saez advocate raising the top marginal tax rates on the rich to between 50-70%. Eflora cream medication, Their recommendation is based on a 2011 paper they published in the Journal of Economic Perspectives (PDF) where they advocated 1) Raising marginal tax rates on the very rich, 2) Subsidizing earnings (phasing out at a high rate) for low earners, and 3) Taxing capital, buy eflora cream on internet. Their paper was widely discussed when it was published, Find cheap eflora cream, and it is serving as a justification for many on the left to raise taxes on high-income earners. It’s their first recommendation that I would like to address.
There are several key limitations with the authors’ methodology used to conclude that raising marginal tax rates is optimal social policy, buy eflora cream without prescription. Two I'll mention here are the dynamic effects of raising marginal tax rates in the medium and long term, eflora cream generic, and the volatility that comes with higher rates on a small portion of the population. Purchase eflora cream overnight delivery, First, and this is the most important issue with the paper, Profs, discount eflora cream overnight delivery. Diamond and Saez are unable to produce estimates of the effect higher marginal tax rates have on economic growth or tax revenues in the medium or long term. Generic eflora cream online, (I’d note that Scott Sumner highlighted the following excerpt months ago. Buy eflora cream without prescription, Still, it should be front and center of the criticism of their recommendation.) From their paper:
It is conceivable that a more progressive tax system could reduce incentives to accumulate human capital in the first place. The logic of the equity-efficiency trade-off would still carry through, but the elasticity e should reflect not only short-run labor supply responses but also long-run responses through education and career choices, order eflora cream. While there is a sizable multiperiod optimal tax literature using life-cycle models and generating insights, Cheap eflora cream no prescription, we unfortunately have little compelling empirical evidence to assess whether taxes affect earnings through those long-run channels.
Translated: We don’t know what will happen in a few years as a result of this change.
The effects of their optimal tax recommendation after more than a few time periods cannot be predicted with any accuracy. It seems unreasonable to have confidence in such a recommendation, eflora cream online pharmacy. Their suggestion isn’t a small change either; it would completely alter the tax code, buy eflora cream without prescription. When playing with hundreds of billions - or even trillions - of dollars, No rx eflora cream, we should be confident about what the results will be.
Yet the justification the authors cite in the WSJ for ignoring the effects higher rates have on economic growth is historical adjusted US growth in the past half-century, first from 1950-1980 and then from 1980-2010, eflora cream online without prescription. They note that the top marginal tax rates were 70% in the earlier period, Buy eflora cream cheap, and much lower in the recent period. First one thing to make clear is the enormous difference between marginal tax rate and effective tax rate (a point John Cochrane brilliantly made a few days ago). Buy eflora cream without prescription, Second, correlation isn’t causation. I think if I had used their example as justification for such a policy in an introductory econometrics class, eflora cream in malaysia, I would be given a failing grade. Eflora cream uk, To be fair, some of the reaction to the authors’ recommendation is that raising marginal tax rates would lower economic revenue in the long-run, since we’d see lower growth, eflora cream overnight delivery. But Diamond and Saez aren’t saying that – what they’re saying is that in the short-run, Eflora cream cost, we could haul in a sizable chunk of tax revenue from the rich before they have a chance to respond. Pity we aren’t playing a single-period game.
The solution is instead to shift focus from identifying the revenue-maximizing tax system to the growth-maximizing tax system, while still raising enough revenue to operate the necessary functions of the federal government, buy eflora cream without prescription.
The second critical flaw in the authors’ optimal tax policy is that it completely ignores the volatility in tax revenues such a system would induce, discount eflora cream online. (This, Where to order eflora cream, of course, stems from failing to predict behavior a few time periods out.) Assuming tax avoidance wouldn’t run rampant (ever wonder why we created the AMT?), tax revenues would vary widely from peak to trough, purchase eflora cream no rx. Has anyone ever sought to create a tax system that’s volatile. I’d be willing to wager that a majority of economists prefer a stable system of tax collection through a broader base and lower rates is preferable to a volatile tax system with a narrow base and high rates, even if the stable system collected slightly less revenue.
Meanwhile, I’ll wait for an “optimal tax policy” that includes predictions of its effects on both economic growth and tax revenue.
Tom Church is a research fellow at the Hoover Institution. Click here to subscribe to his RSS feed..
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