[FoRK] Tax math

J. Andrew Rogers andrew at ceruleansystems.com
Mon Oct 11 13:50:10 PDT 2010

On Oct 11, 2010, at 1:20 PM, laurent oget wrote:
> The fact that income tax rates on the high income were more than twice
> higher than they are now, and yet economic activity did not grind to a halt
> in the 50s and 60s is a hard counter-example to miss.I guess they do not
> call economics the dismal science for nothing, as it appears being in
> agreement with his political delusions is more important for Mankiw than any
> relationship with reality.

Income taxes per se do not matter that much in terms of economic activity. Higher income taxes bias businesses toward non-income compensation; the incentive structure is still there but accounted for differently. See, for example, the comparatively lavish non-income compensation of European employees versus their American counterparts.  The "higher income taxes" is an illusion that keeps the populists happy.

Even beyond that, in terms of economic loss, capital gains taxes are far more damaging than income taxes.  All things being equal, it is usually *much* better to raise a given amount of tax revenue via income taxes than capital gains taxes.  Of course, blowhards in favor of either higher or lower taxes routinely conflate the two when convenient for their arguments. 

The strong economic growth in the US closely tracks low effective capital gains rates, with changes in policy having a 1-2 year lag to fully produce their effects.  Higher tax proponents pretend you can treat capital gains like income.  Lower tax proponents pretend you can treat income like capital gains.  Both of these positions sound reasonable to the ignorant.

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