How to Soak the Rich Without Making them buy Bigger Houses

Robert Waldmann | April 7, 2011 7:07 pm

This is new. This post by Matthew Ygelsias isn’t about monetary policy, and I don’t find it convincing at all. He wrote

if you raise high-end marginal rates while leaving deductions alone, what you do is massively increase the value of the deductions. The home mortgage interest tax deduction, for example, is both distributively regressive and also economically damaging by shunting too much money into the housing sector. If wealthy people start paying a marginal income tax rate of 47 percent, then the incentive to overconsume housing becomes much more intense. A economically sound approach to the tax code needs to go after some of these deductions, and that means some middle class families will have to pay somewhat more.

Yglesias almost contradicts himself when he notes that increased marginal tax rates on the rich increase the value of deductions *and* argues that to avoid that problem we must raise taxes on middle class people. This isn’t true unless one assumes that the options open to legislators are limited (in particular that they don’t include something which might be called an “alternative minimum tax” like, say, the alternative minimum tax).

One could replace the deductions by an AMT like provision that taxes are the greater of taxes calculated with the deductions and taxes calcuated without the deductions minus a credit equal to the reduction in taxes which would be caused by the deductions if family income were $250,000 (or individual income were 200,000 for individuall taxpayers). I wouldn’t expect people to figure taxes owed under this code without turbotax, and couldn’t reprogram turbotax myself, but it would be no problem for someone more computer literate than I am.

Notice my proposal is complicated because I aim to raise taxes on zero non rich people. I would prefer a reform which replaced deductions with tax credits. This would increase tax liabilities of the upper middle class and reduce tax liabilities of the lower middle class and the poor.

But it should be obvious that one doesn’t have to increase the benefits rich people get from deductions if one increases the marginal tax rates they pay. He is assuming that deductions can’t be replaced with a formula which is the same as the current formula (subtract deduction then go to the tax table) for income under 250,000 and quite different for higher incomes (go to new tax table with adjusted gross income then subtract the integral of old marginal tax rates from adjusted gross income minus deductions to adjusted gross income) .

Update: A friend explains to Matthew Yglesias that he was wrong. It is possible to reduce the value of deductions at will (as proposed by Obama from time to time by the way). Therefore it is possible to soak the rich without increasing the incentives due to deductions.

Also, while on the topic of Yglesias and taxes, I agree with him that the right way to tax is a progressive consumption tax (I add that brackets have to depend on consumption per equivalent adult not on total family consumption). So basically we agree about taxes (except I think I want them more progressive for tyranny of the majority class war reasons).

I do note that the graph he posted shows that the New Deal could be financed even though only about 20% of families filed income tax returns. Notoriously, FDR didn’t like deficit spending (hence the 1937 recession). The payroll tax was introduced.

Comments (21) | |