How to Soak the Rich Without Making them buy Bigger Houses
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.
Robert I agree that Ygelsias is wrong on this issue but as for your solution, wouldn’t it be easier to put a cap on deductions? I’m not sure what the number should be but, for example, total deductions above $100K might be disallowed. (That would be 40 percent of a $250K income.)
This actually applied to me back in 1978. Back then I bought a house at a slight strectch financially, because back then the marginal rate was 36% on my income at the time. (Which is higher than todays top rate) Within a year or two if the rates had not altered I saw the top marginal tax rate going to 40%. That did make the mortgage interest deduction valuable to me, as 40% of the 9.5% interest was paid by uncle. As rates came down in the 1980s it became less clear that buying a house was as much of an advantage as it looked like in 1978. (Just proves the point made)
Matt is becomning addicted to arguing against straw men: nobody is proposing that only the rich be responsible for all taxes. He is perhaps too young to remember that we had a more progressive rate for most of a century until Bush’s tax reductions in 2001 and 2003 gave disproportionate benefits to the rich — and somehow the economy grew faster, at least, with few exceptions, as long as Democrats were in office. Most of us would be happy to go back to that, perhaps with a few other sweeteners — e.g., on corporate tax evasion and progressive estate taxes — but not with eliminating middle class responsibilty for their fair share.
He also doesn’t seem to realize there are ceilings on home mortgage deductions allowed, which prevent exactly what he frets about. The AMT has a similar purpose, too.
“What makes Hauser’s law work? For supply-siders, there is no mystery. As Hauser said: “Raising taxes encourages taxpayers to shift, hide, and underreport income. . . . Higher taxes reduce the incentives to work, produce, invest and save, thereby dampening overall economic activity and job creation.”
“Shift, hide and under report” vs “reduced incentives to work, produce, invest and save”? Well which is it? Tax cheat or avoidance strategy. Herein is another example of the distance between economics and science. Data is collected, summarized and analyzed. The conclusion is a guess that best suits the ideologist. But I’m amused to see that Hauser recognized the inclination for the rich to cheat on their taxes.
“dampening overall economic activity and job creation.” Which chart is it that supports this part of Hauser’s suppositions. it is not a law of economic theory so much as it is a peon to the lawlessness of the wealthy and the abetting of such activities by their trusted vassals in some sectors of the economic community. “W. Kurt Hauser is a San Francisco investment economist….”
Jack’s Corollary: If one’s personal income is generated by a particular class one is likely to promulgate all manner of “laws” and ideologies, from the most limited data sets, that support that class and thereby that income.
Pointing to Hauser on an economics blog is silly. Political, yes.
Dan, why is it silly? We have a budget proposal based, somewhat, on it. Which I must point out, we have had a failure to discuss in any detail amongst the left leaning AB commentariat.
Hows and whys and yeah but.. ? We can argue that stuff to infinity.
This thread, and that article are both “soak the rich” based. That’s why I posted it.
The law is simple, mathematical fact… dating back over 1/2 a century. Discredit it (or call it silly) all you like.. aint fooling anyone.
I for one wouldn’t avoid taxation illegally.. but when my income reaches the point where taxes eat enough of it to make it not worth the effort/risk … I direct my capital and ernergy elswhere. There are plenty of legal ways channel and park wealth.. and then move it in less taxing ways.
Sure PJR. The pointless math problem which I was trying to solve was to change nothing but the marginal tax rate paid by the rich. So my Rube Goldberg (but no probs for turbotaxRW) scheme was designed to neither increase nor decrease incentives to buy McMansions.
I think you are all missing the point. Mortgage interest is deductible within specified limits. This makes the purchase of housing more affordable for ordinary people, but has no effect on the housing choices of the truly wealthy because they do not borrow money to buy houses. Would eliminating the mortgage deduction cause some people to buy less house? Sure, particularly among the near rich, but not the truly wealthy.
Hauser’s law is like the flat earth hypothesis. It fit the data when proposed but has since been proven to be absolutely totally utterly false. In this case, I don’t believe that both sides have a point. I think Houser is more than 100% wrong. He claimed that something, which the CBO doesn’t take into consideration, forces tax receipts to about 19%. If he is at least 1% right, then something, which the CBO doesn’t take into consideration, forces tax receipts towards 19% of GDP. So if he is 0% right, then the coefficient of (actual receipts – CBO forecast) on (CBO forecast – 19%) should be zero and if he is more than 0% right it should be negative. I haven’t run te regression but I am quite sure that the coefficient is positive — when the Clinton tax increase was enacted, the CBO predicted revenues over 19% but actual revenues were even higher. When the Bush tax cuts passed, the CBO predicted revenues under 19%, but actaul revenues were lower.
Out of sample, Houser’s law receives less than zero support from the data. It is a useful example to explain the Lucas critique and just how bad empirical research can be. However, except as an example of what not to do, Hauser’s research has no useful role.
I mean really look at the data. If you can look at them and not see that Houser’s law is the very model of everything that one can get wrong when analysing data without thinking, then I can only conclude that you are hallucinating.
AKA straw man. I propose that only taxes on the rich be increased. Yglesias is arguing with me. I am arguing back. I am eccentric and extremist but not, last I checked, made of straw. Nor as far as I know, is Obama who proposes increasing taxes only for families with incomes over $250,000 (or with cadillac health insurance).
I am more extreme. I want 60% of voters to pay 0 or less income plus payroll taxes. One might think that this would lead to tyranny of the majority. I certainly hope so.
You and Ygleasious (my favorite illiterate blogger) both have plans that once again do NOT soak the rich. They soak people who want to become rich. If you want to soak the rich, you need a wealth tax, otherwise your not going to touch them. No one is going to soak Gates or Soros, or the Koch brothers or Senator Kerry. Gates could never take another dime in income and not have his quality of life effected in the least.
The only two taxes currently on the books that actually soak the wealthy are property taxes and estate taxes. Both can be avoided or minimized (I’ve seen it done very easily). All these plans seem to accomplish is cutting the upwards mobility between the upper middle class and the lower upper classes.
So you really don’t have a plan to soak the rich, what you do is limit mobility into the upper crust and thus freeze in an oligarchy. Which I fear we are already well down the path too.
Islam will change
60% to have no skin in the game??? Wow, should we just through in free bread and circuses also?
Or are you just advocating communism or extreame socialism – too failed economic systems?
Islam will change
Verifiable numbers plotted on a straight-forward graph..over a LONG period of time.
Nope, it’s not imagery…
What it DOES point out, is that by definition, the upper 2%, are just that.. TWO percent. And the percentage of them earning significantly above where a marginal rate kicks in, is so small, that whatever you get from manipulating that rate, above and beyond what they’re already paying, doesn’t amount to much difference in total tax reciepts. Never has, never will.
Let’s just suppose a number.. say that for every household above $250,00- we could extract an additional $50,000 in income tax. Of course, at 250K + 1 we’re talking about a few pennies.. and then as you get into the upper, tiny fraction of one percent it get’s larger .. to the statistical top of the scale, where even the household earning $10M ( a literal handful of houses), will only net you ~$2M (assuming a dramtic 20% increase in marginal rates)…
… what you end up with, is (2M households X 50K), is $100B (near meaningless 1/16 of JUST the deficit).
THAT is the Hauser Curve message.. not liking that message doesn not negate it.
Buff, If I remember correctly Robert has admitted communism. Dunno, Robert?
No, if it is used as a policy measure a blunt instrument. Red herring guys…period. It is almost on par with ‘tax cuts increase revenue’…as Tim Worstall would say ‘Some tax cuts raise some kinds of revenue’. Huge difference.
Well it is not a ‘fact’ that has any policy or economic significance. Lots has been written already.
I see your point, but I think you’re missing mine… that there simply aren’t enough “rich” people to tax.
Even if you could extract an insane, ADDITIONAL $1,000,000 from the top 1% (aprox 1,000,000 households) .. that’s only $1T … not enough to balance the budget, let alone pay-down debt.
Even if you counter that a $1.6T deficit is a short-term, crisis-based anomaly (which would be an odd thing to say, considering that a 2011 base-line is nearly a trillion dollars larger than just two years ago (one-time stimulus ? lol)) .. you could only try that ridiculous taxation ONCE… it won’t work , long-term.. Forget about the damage done to the economy; extracting a trillion dollars from the private-sector.. that money simply won’t be there to take, the next year.
I think that’s noteworthy in these “soak the rich” conversations..
Obviously the Hauser Chart would be well recieved on a conservative, economic blog.. It’s not a policy reference/tool, it’s more a historical observation.. so I suggest that discrediting it, is ideological.
Sorry.. I should have closed saying:
“discrediting it is as ideological as referencing it”
“Notice my proposal is complicated because I aim to raise taxes on zero non rich people. “
Robert, I’d be interested to hear your thoughts on this, at least as a concept: