Is There a New Supply-Side Economics?

Austan Goolsbee, who is advising the campaign of Senator Barack Obama, talks about supply-side economics:

Is the New Supply Side Better Than the Old?, by Austan Goolsbee, Commentary, NY Times: The presidential campaign has brought back to the fore the vexing question of how much to tax high-income Americans. For the most part, the arguments have run strictly along party lines.

The leading Democratic contenders would allow President Bush’s tax cuts to expire for the very well-off... All the major Republican candidates have called for extending the Bush tax cuts indefinitely,... on the grounds that this would help the economy grow.

The Republicans have not been shy about claiming the old mantle of supply-side economics, proclaiming that tax cuts will pay for themselves by getting people to work harder or to start their own companies.

In some circles, supply-side economics fell into disrepute because it didn’t seem to work. ... But many critics have missed important research by some very prominent economists that has revived some supply-side ideas, giving them an aura of academic respectability. ...

The work of the new supply-siders shies away from the old claims that low taxes will generate an explosion of entrepreneurship or extra hours on the job. Instead, it just looks at the data. When top marginal rates fell, as they did under President Ronald Reagan in 1981 and 1986 or under President Bush in 2001 and 2003, taxpayers whose rates declined the most reported the biggest increases in income in the following years. The supply-side advocates attribute those gains to tax cuts and argue that the Laffer curve — which suggests that some tax cuts can pay for themselves — may live yet.

Some of the most important research was done by Lawrence B. Lindsey, former head of the National Economic Council under President Bush and now the senior economic adviser to ... Fred D. Thompson. But the origins of the current debate ... largely center on the work of the Harvard economist Martin Feldstein.

Professor Feldstein ... has always been known for his conservative views. He has brought more comprehensive data to bear and has made the most influential case; if you accept the evidence he offers, progressivity in the tax code appears very damaging. Raising taxes on high-income people seems to make the economy much less efficient and raises little revenue.

As he put it in a 2006 interview..., when you raise top marginal rates, “it shows up as lower taxable income.” He added: “A reduction in taxable income, whether it occurs because I work less or because I take my compensation in this other form, creates the same kind of inefficiency.”

But for all the renewed interest in supply-side ideas, the politicians espousing these views have missed three important points that have come out of the continuing academic debate.

First, the impact of high-income tax cuts depends on how much additional income a person can keep. When President John F. Kennedy cut top marginal rates to 70 percent from 91 percent, take-home pay more than tripled for these taxpayers, to 30 percent from 9 percent. That is a big difference. By contrast, letting the Bush tax cuts expire so top rates rise to 39.6 percent in 2011 from 35 percent, cutting the take-home share to 60.4 percent from 65 percent, hardly seems the stuff of tax revolution. [I think this part mixes up marginal and average tax rates, but the point that the change was much larger under Kennedy holds]

Second, other research has shown that the new supply-side movement missed a fundamental shift over the last 30 years — the dramatic, disproportionate rise in the compensation of high-income people. The new supply-siders have confused this shift with the impact of tax cuts. ...

[M]y calculations show that in the four years after top marginal rates were cut in 1981 and 1986, and in the three years after the rate cut of 2003, average real salaries (subtracting inflation) for the top 1 percent of earners grew 18.8 percent, 22.5 percent and 17.4 percent. But for the bottom 90 percent of earners over those periods, the average salary changes were 2.6 percent, minus 0.3 percent and minus 0.1 percent. A supply-sider might see this as evidence of the growth power of cutting top rates.

But the data also show that incomes at the top have been growing rapidly regardless of what happened to tax rates. In the four years after the increase in top marginal rates in 1993, average salaries grew 18.7 percent among the top 1 percent of earners and less than 0.1 percent for the bottom 90 percent.

Seeing the same pattern when taxes rose as when they fell indicates that tax cuts weren’t responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces.

Third, recent research has documented that much of what the new supply-side economics attributed to tax cuts was really just the relabeling of income. Sometimes the increase in personal income was matched by an equal and opposite decrease in corporate income. At other times, increases in personal income turned out to be a result of corporate executives shifting the timing of their year-end compensation from a high-tax year to a low-tax year.

Shifts like these have nothing to do with supply-side economics. The academic debate continues, but thus far, the new Laffer curve has looked more like a fleeting figment of economic imagination.

That is sad, because it would be great if we could cut taxes and raise revenue at one stroke. Alas, the research suggests that we will have to pay for high-income tax cuts the old-fashioned way — by actually cutting spending or just busting the budget.

One argument I've never liked is that we can't raise taxes on high income people because they will just find a way to slither out of paying them, even if it means hiring legions of people to figure out how to do it, or even if it means taking their ball and going home and refusing to play the game at all.

So do we just give up? Or do we close the loopholes? To the extent it is true that the rich avoid taxes when they are raised - see here for an argument that raising taxes on the richest 1% raises tax revenue, i.e. that the new taxes aren't entirely avoided - but to the extent that taxes are avoided I say close the loopholes - we can do it if we put our minds to it. And, though I doubt that many of them would be able to suppress their competitive instincts enough to quit playing the game, if they want to go sit on the couch (or maybe their golf cart) and pout because taxes are higher, that's their problem and their choice - it will enhance upward mobility as people with lower tax rates takes up the opportunities they are letting go. [And in many cases, aging sports stars and over-the-hill rock stars come to mind, superstars could do us all a big favor by retiring sooner, but I doubt a change in taxes would overcome the large ego that seems to come with the territory, be it in sports, music, or the corporate world where similar hangers-on fill the upper echelons of management and boardrooms while perfectly capable underlings wait in the wings. Let them take their ball and go home if they want - nobody's that important and we can get along just fine without them.]

Comments

[skeptonomist]

Supply-siders just scrounge around looking for something, anything, which looks like it might support their ideas. Actually, this is not rare in economics in general.

Economists need to decide what they want to maximize or optimize, how hypotheses will be tested, and what they would accept as refutation of the hypotheses, before they start to argue about what little pieces of data "support" their ideas.

If the objectives are to increase GDP growth or to increase government revenue, then permanent tax-cutting on the upper brackets is on the evidence a complete flop - see my earlier comment on "It's an Insult to Keynes".

[Mark]

I think a better argument against a highly progressive tax system is a moral one. At the heart of all arguments in favour of a highly progressive tax system is the belief that the rich are undeserving of their incomes. Do the income levels of the rich accurately reflect the value of their talents/product? Do the rich "earn" what they get? If not, why? If so, how do you justify forcibly taking away a much higher proportion of their property than other members of society?
I personally think that the majority of the rich get where they are because of a combination of hard work, talent and luck, not because they steal from anyone or cut corners. Even inherited wealth is still wealth that was earned by someone, and was given to the beneficiary because the benefactor (who earned the money) felt it was the best way they could spend it. I don't see taxing this kind of a gift as being "just" or "fair".
I don't believe that lowering taxes on the rich will increase revenue. I have not heard any economist, left or right, make that statement. However, I do think that taxing the rich will have perverse effects on behaviour and result in some amount of deadweight loss. Most importantly, I think that such progressivity is immoral and unjust.

[James Killus]

“A reduction in taxable income, whether it occurs because I work less or because I take my compensation in this other form, creates the same kind of inefficiency.”

Notice how he leaves out the possibility that, confronted with the fact that huge payouts to a few players would be heavily taxed, firms instead opt for lesser payouts to a larger number of players.

The "inefficiency" described here is the inefficient creation of mega-wealthy individuals by siphoning off large amounts of corporate wealth. But at least he has the courage to tell the rich and powerful that they deserve their wealth. That should count for something in some sort of afterlife.

[gc]

If the tax rate is 0%, then the revenue will be low, no matter how much income. If the tax rate is 100%, then entrepreneurial spirit will be suppressed, no matter how vigorous the individual. So there must be some curve between the two endpoints relating the amount of income that a tax rate will produce; it also seems that there would be lots of different curves depending upon other assumptions made for each one. For example, a generalized commitment to the war effort in WWII would seem to support a sense of work effort in spite of very high marginal tax rates. By contrast, George Bush waging a war that he charges to future generations while asking no sacrifice of his supporters. George Bush is thus neither able to inspire a societal sense of commitment nor a commitment from his core group of supporters; so, he has never asked for a high marginal tax rate. The point that I think that I am heading toward is that in the above statement from Goulsbee, nothing he expressed as his view or as the mainstream supplyside theory looks anything like usable model for how to predict tax rates in order to maximize future revenue. The supply siders assume their conclusion: whatever they do to lower rates results in the greatest tax production whatever it is. This seems entirely consistent with the Bush Administration SOP that refuses to tell you of any goal, but just does something and then tells you that it is best of possible outcomes. (e.g. you're doing a heck of a job, Brownie.)

And all of this seems only vaguely related to executive compensation. CEO pay has so many other problems in how it appears unfair, the relation to marginal tax rates is a minor distraction. I wonder if someone doesn't have a table of the CEO compensation over that last 20 or even 40 years putting Ford, GM, Honda and Toyota side by side, just to ask: are the American companies getting what they are paying for? And with all that, a recent Bloomberg article praising the new GM product from Chevrolet lauded it and the current GM CEO because he was such a good executive to have said to his engineers: "make it as good as a Camry." So that is what it takes to be worth the big bucks. Anyway, it seems that these are two big subjects, that don't do each other any favors by being mixed together.

[Bill Jefferys]

Mark commented:

I personally think that the majority of the rich get where they are because of a combination of hard work, talent and luck, not because they steal from anyone or cut corners. Even inherited wealth is still wealth that was earned by someone, and was given to the beneficiary because the benefactor (who earned the money) felt it was the best way they could spend it. I don't see taxing this kind of a gift as being "just" or "fair"

Mark ignored the most important important part of the equation. That is the environment that makes hard work, talent and luck succeed. That environment is provided by the system that government provides, and to think that these lucky, talented and hard-working people don't owe something extra to the system that allowed them to get ahead is perverse.

I'd go on to discuss [as documented by David Cay Johnston in his book "Free Lunch," and discussed this week on Bill Moyers' Journal] how George W. Bush, after several failed business enterprises, from which disasters he was bailed out by his family and other connections, finally made his fortune by getting government to raise taxes on the hard-working lower-class people of Arlington, Texas; getting government to use eminent domain to expropriate their land to build a stadium for his own personal profit; and funneling those taxes into his own pocket, in an industry (baseball) that is highly regulated and without economic competition, and which would never make a profit without this government intervention, in direct contradiction to his own claimed support for less government and more free enterprise, but I'll refrain. :-)

[Fred]

>At the heart of all arguments in favour of a highly progressive tax system is the belief that the rich are undeserving of their incomes.

Not all arguments. For example, a society split between a small minority of plutocrats and a large majority of poor workers is a society ripe for overthrow by outsiders. This is the real explanation for why Alexander the Great and the Muslim conquerers were so successful. The masses had no reason to bother defending a system which oppressed them. And who was the big loser when the plutocracies were overthrown? If you guessed the plutocrats, you guessed right. So there is nothing paradoxical about someone well off being in favor of a more equal income distribution. (Wealth distribution is a trickier matter, since many or perhaps a majority people are simply incapable of holding onto financial wealth.)

Another argument is that grossly inequal distributions of both income and wealth give the wealthy grossly dispropriate political power, which they then use to change laws so as to benefit themselves at the expense of society as a whole--rent-seeking. When income and wealth are more equally distributed, it becomes more difficult for a small minority to out-bribe the majority, and thus there is less of a tendency towards rent-enabling legislation, and this ultimately improves economic growth for the society. This assumes that the goal is to improving economic growth for the society is the goal. Of course, you may assume another goal. If so, what?

[algernon]

Mark makes an excellent case, though Bill Jeffreys & Fred offer worthy counters.

However, I think our host is a bit churlish in his attitude toward the behavior of those whom he wants to relieve of something on the order of half their marginal income. Further, economists who concentrate so much of their mental effort on redistributing money from those who earn it to those who didn't (typically, the politically well-connected), could do better. After all, secure property rights are the sine qua non of prosperity.

[johnchx]

[Commenter] Mark wrote:

At the heart of all arguments in favour of a highly progressive tax system is the belief that the rich are undeserving of their incomes.

Wrong. The principle of equal sacrifice, i.e. the argument that the burden of taxes should inflict more-or-less equal "pain" on each taxpayer, supports a highly progressive income tax while taking no position whatsoever on who "deserves" their income and who doesn't.

There are also efficiency arguments based on the observation that high income households spend more of their incomes on positional goods, which implies unusually low welfare impact of taxes which are "order preserving" -- i.e. as long as the pre-tax richest guy remains the richest guy post-tax, the "harm" inflicted by the tax is less than it would be if applied at lower income levels (where "absolute value" goods predominate).

The notion that all arguments for progressive taxation involve a claim that high incomes are, ipso facto illegitimate, is simply ill-informed. Not that there aren't a lot of such arguments floating around. But they aren't the only ones.

[Cosi]

Re:"the impact of high-income tax cuts depends on how much additional income a person can keep. When President John F. Kennedy cut top marginal rates to 70 percent from 91 percent, take-home pay more than tripled for these taxpayers, to 30 percent from 9 percent. That is a big difference. By contrast, letting the Bush tax cuts expire so top rates rise to 39.6 percent in 2011 from 35 percent, cutting the take-home share to 60.4 percent from 65 percent, hardly seems the stuff of tax revolution. [I think this part mixes up marginal and average tax rates, but the point that the change was much larger under Kennedy holds]"

Actually, much more relevant than SIZE of the cut (which, if larger, would be larger in terms of impact on both factors of revenue -- a larger negative impact on the rate, a larger positive impact on incentives and, in turn, taxable income) is simply where rates are prior to the cut -- in other words, Laffer Curve. See illustration here:
http://logicizer.townhall.com/g/c5ecb3cf-2712-4f5a-ad89-7ae03da99280

[calmo]

Good to hear from Obama's economic adviser [I take it the italicized remark about midship ("[I think this part mixes up marginal and average tax rates, but the point that the change was much larger under Kennedy holds]"was Mark's irresistible tutoring] and confirm some suggestions that Obama is indeed to the right of all the other Dems.
Can't unify much if you don't drift slink right, izatit?
I'm afraid I don't waste my time on learned economists no matter how influential, no matter how many professorships, no matter how many Nobels, who nod along to unrevivable supply side economics [I can't tell you how I struggle with "the aura of academic respectability"...]
I suppose this

That is sad, because it would be great if we could cut taxes (because we don't need roads...walking is good for you!) and raise revenue at one stroke.

counts as the embracing opinion uniting the supply siders idiots and the doubters...thoughtful curious people with no academic insecurities, you know?
But this is way sadder:

But the data also show that incomes at the top have been growing rapidly regardless of what happened to tax rates. In the four years after the increase in top marginal rates in 1993, average salaries grew 18.7 percent among the top 1 percent of earners and less than 0.1 percent for the bottom 90 percent.

that this learned man (with the somewhat dated info...but he means well) can identify incomes (he says "salaries" but he means total income) in that upper echelon that have only escalated since that period along with the importation of 12M "illegal aliens" ...and not take that obvious step to conclude that those marginal tax rate increases were no problem to circumvent.
But that is not part of his stinky little agenda: capture as many pea-brained Repugs and Independents as possible with whatever crud carefully crafted for the NYT audience of well-to-do disenchanted Frankfurtifiable poverty stricken, gutless, tripe as he can muster.

[gc]

Algernon's comment is a verbal equivalent of an Escher print. Perhaps it is intended to criticize highly compensated and individuals of great inherited wealth who do not earn what they receive. The effect is to deprive industrious, but modestly paid, individuals of their property interests in home equity or rainy day savings so that they must always act from necessity or fear. This is what was intended, or not?

[Movie Guy]

Mark Thoma: "One argument I've never liked is that we can't raise taxes on high income people because they will just find a way to slither out of paying them, even if it means hiring legions of people to figure out how to do it, or even if it means taking their ball and going home and refusing to play the game at all.

So do we just give up? Or do we close the loopholes?"

Well, the very wealthy can afford quality professional help to avoid other than minimal taxation. We should always anticipate that.

I recommend an entirely different taxation system based on consumption with one baseline exception rule. If a single individual (or one married) can not in writing, complete with appropriate seals and endorsement concurrences, prove that her/his or joint married income is below a given threshold for tax exemption, then the individual pays the consumption tax (set at whatever agreed upon legislative level). Period.

Game over.

[napablogger]

I find myself wondering who are the people in the top 1% and why is their income going up so rapidly recently? It can't be that many people that they couldn't be studied almost individually, to some extent. I saw Paul Krugman had an article on it but it was speculation on his part. It can't be CEO's that everyone mentions except in small part, there just aren't enough of them.

The only comment I really disagree with is Fred's, people don't owe society for them making money. That is an authoritarian thing that will never work in human relationships, making people owe you for something they don't really owe you for. They made the money on their own, and if they made it illegally or unethically they should be attacked for that, not told they owe. If we are not allowed to keep our success, if it is stolen when it happens, then people will stop succeeding. Hating the rich will mean less rich, and the problem is we need more rich, not less rich.

I do agree with Fred about gaining power and rent seeking by the rich via regulations. That is what lawyers have done with so many laws and court process rules, for one example. That is where the unethical aspect comes in.

I think the Republicans just cut taxes as an article of faith at this point. I don't even think most people who make in the top 1% care that much if their top marginal rate is a couple percent higher. Made $3 million, paid 1.05mm in taxes, or paid 1.175 mm in taxes. It sure isnt going to make anyone vote differently.

[Lafayette]

Justifying the unjustifiable

We can go around on this discussion till the cows come home; it's equivalent to "how many angels can dance on the head of pin".

I maintain that we are using the wrong metric, a purely economic one that may show (or not) that tax rate hikes are better for American millionaires in particular and the world in general.

No one is proposing the moral argument against "Gratuitous Greed" (because it is untaxed).

I think that economists who do Death Defying Mathematical Somersaults to defend an morally indefensible POV need a healthy dose of social empathy. It's probably due to a birth deficiency, that a couple of away from academia and living in the slums could quickly cure.

The devil is in the numbers, where it can be seen justifying the unjustifiable.

PS: Ask most Americans if they feel better off since Reagan lowered marginal tax rates. That's the only arithmetic metric that counts.

[anne]

"The academic debate continues, but thus far, the new Laffer curve has looked more like a fleeting figment of economic imagination."

The academic debate continues only among academics who are determined that we should continue insanely bombing and wrecking Iraq at the involuntary expense of America's increasingly relatively beset middle class. While the mysteriously debate prone academics continually assure us that the one charactistic that truly characterizes the wealthiest is that they are too smart to fairly be taxed for such as the cursed war and occupation.

Remind me, debate speaking, since we are in the presence of a political academic adviser, will be paying for the 100,000 additional soldiers Barack Obama has been calling for?

Speaking academically, there is absolutely no reason in a twinkling not to have financial managers earning million and ten and hundreds of million and billion of dollars pay more than 15% on income. Hedge funding will surely continue.

What inane political academic advising rubbish.

[anne]

Let Laffering financial fund managers and acolytes surge us to hell in Iraq, I am not willing to play or accept inane immoral supposed academic excuses for a fair tax system. I am not willing to accept more supposed academic reasons for flag-drapped financial fund managers avoiding billions in fair and reasonable taxes at the expense of the health of children.

[hari]

Mark is finally off his rocker!

Morality DOES make sense in politics. Immorality does not. Look at rest of OECD-rich countries and their domestic trends in social/economic fundamentals.

What do you find is happening? Lafayettee is outraged - morally and intellectually also - to dispose this argument.

The path forward you find in all rich OECD countries is more or less one form or another of social democracy - as part and parcel of "acquis european" - namely, the will to power will not last longer than capacity to reign in the levels of inequality in society.

US - among OECD bloc - is the most unequal economic system!
Either you're for supply-side economics with its inherent contradictions and social dialectics or you're prepared to distinguish American dream for ALL its citizens!

The choice, it seems from far off, is very simple, Mark!
It's not because I've adopted Sweden as my country. It's because in a post-industrial society you've some fundamental (moral) choices to make about the type of society you want to be part of (Lafayette's scream!), and the better off in Sweden have decided for a more equitable social system. That's it!

[hari]

Altruism was the sina-quo-non of the Founding Fathers of America!

Has academia succeeded in finding ways and means of redistribution in favour of the 1% at the top?

Or - have they lost their intellect and moral conscience to question the audacity of the state to empower ONLY the rich and tax the poor at source?

The next American revolution, I suggest, will not be far off if you continue on this path of immorality, as academics.

[hari]

Altruism was the sina-quo-non of the Founding Fathers of America!

Has academia succeeded in finding ways and means of redistribution in favour of the 1% at the top?

Or - have they lost their intellect and moral conscience to question the audacity of the state to empower ONLY the rich and tax the poor at source?

The next American revolution, I suggest, will not be far off if you continue on this path of immorality, as academics.

says...

"At the heart of all arguments in favour of a highly progressive tax system is the belief that the rich are undeserving of their incomes." - What a dipshit.

We want to keep the marginal rate as high as possible to reduce wealth and power concentration in our society. George Bush isn't qualified to lead a little league team but their he is thanks to the concentration of wealth and power in his family. Same with the unearned income tax.

The other side is to raise "all" income levels above the poverty line and maintain a bulge in the number of Americans families who earn a family level, middle class, after-tax income. The most abused marginal rate in the modern times is the marginal benefit to our society of low poverty, a strong, educated and healthy middle class, and pension security. IMO, the rest is gravy.

As usual, the academic economists (all republicans in this case) build sophisticated models and arguments that corrupt the discussion with drivel while ignoring the obvious. The budget deficit soared following tax cuts for the rich under both Reagan and Bush. Both administrations found it necessary, under the same Fed chairman, to create debt bubbles to stimulate the economy. The uber regressive social security tax was doubled under Reagan to offset the collapse in tax revenue.

Where are the benefits to our society that have accrued from the current round of personal wealth and income and industrial concentrations ? Tax policy is about what is best for the country. The selfish rich think it's all about them, of course. Too bad. Anyone with a wealthy relative is likely to understand how true that is.

[zinc]

above posted by zinc

[ken melvin]

Galvanizing zinc.

Entrepreneur, my my how we do throw around the term. Now we have it on authority that the skimmers on Wall Street are entrepreneurs. If 'twould somehow suddenly be that the road to riches was paved by dint of hard work, the world be turned would be turned upside down in an instant with the poor working class suddenly having all the wealth. Save us inhaling the smoke, greedy grubby economics is for the third world. These you champion are but street hustlers on steroids.

[Bob]

>> personally think that the majority of the rich get where they are because of a combination of hard work, talent and luck, not because they steal from anyone or cut corners.

Personally i believe in the Easter bunny but i do find it amusing that people have made it to adulthood maintaining their belief in such fairytales.

It does explain why used car salesmen, supply siders and other mountebanks are still able to gather a crowd around their wagon while they sell their serpent oil.

[Bob]

Well he did throw in "luck" so i guess he's not a lost cause

[robertdfeinman]

Why are comparisons with other societies never included in the analysis? Firms do quite well in the EU and Japan with CEO's who earn much smaller multiples of the average worker's wage.

Innovation happens frequently. Several of the most important inventions have come from Japan such as the blue laser used in the new high def DVD players. Several of these countries also have much more advanced telecommunications systems. Why doesn't the head of Siemens or Volkswagen pick up his marbles and go home, burdened as he is with a high tax rate in Germany?

Once again the Dems have been suckered into playing the wrong game. All the effort is being expended on whether the top rate should go up a few percent again. The same effort could have been applied to a proposal to raise the rate to, say, 70%. The plutocrats would then have been happy settling for 50%.

What we get is endless arguments about very small changes in tax policy which push all discussions of the fundamental problems aside.

Even if the rate was raised to 50% this would still not compensate for the drain caused by runaway militarism. Every sector of society is being drained to fuel the war machine: health care, education, roads, basic R&D and industrial capacity. Society's which hollow themselves out to keep the army strong collapse from within. I'll skip citing the usual examples.

[calmo]

Dang the man KOs with few words:

Save us inhaling the smoke, greedy grubby economics is for the third world. These you champion are but street hustlers on steroids.

Those registered HF managers "earnings" in 06 hit an individual high of $1.7B and I imagine the top 1000 made more than the rumored $145B tax rebate for the rest of us (the managed)[ok, you are onto me: I can't stand the sleazy Goolsbee managing me...I demand some wit, some sensitivity...ok, well turned ankles phrases in lieu of real talent]

The road block for me with Goolsbee: Can he be serious?

Supply side economics has some credibility...among respected professionals (which needs to be enumerated for me so I can prune my reading lists, you know?) other than his colleagues who need to incubate an incestuous relationship because they get no respect from ordinary Joe and even less from ordinary Jose...who will do any and all those jobs Americans don't like to do...not at those wages.

Hence the measured over-worked tutorial marketing of the possibilities, real bona fide professional (as in "respected" not as in some assessment of the crime: "it was a professional job") support for "supply side economics"...appealing to that NYT audience (slightly above average Joe who works for a living...poor devil) he hopes have not read much economics and will be bowled over by his own research if not by mentioning Feldstein...whose large head can only mean that supply side economics has some possible merit (you pinheads hear this?).

I think his assessments of income and disparity are deliberately thin. [Saez and Pickety ignored.] And supply side, possibly genuine deception.
Honesty is sacrificed for loyalty to a larger political agenda...attracting uncommitted or soft-committed (hell, punkin heads!) clients/voters.
If he read Suskind's Loyalty he treated it as the manifesto --not the condemnation it was and is.
We have enough marketers and better salesmen too. We don't need more like him, we don't.

[2slugbaits]

calmo,

Either you and I are reading different articles or you have completely misunderstood Goolsbee's point. Goolsbee is arguing that the aura of "academic respectabiity" is paper thin and doesn't stand up to closer scrutiny. You might want to reread what he is saying.

[skeptonomist]

Mark, you say "...the majority of the rich get where they are because of a combination of hard work, talent and luck."

Not quite - you forgot inherited wealth and connections. As Fred points out, letting wealth accumulation run wild results in plutocracy or even aristocracy, in which hard work and talent are not important except among the select few.

Maybe we could agree that hard work and talent should result in appropriate rewards, for incentive as well as moral reasons, but not to great political power (which can lead to more wealth accumulation), or to aristocracy. The majority should not use their democratic political power to punish those who are successful economically, but I don't think this has been a big problem in the past in the US (there have been conflicts about this, but the wealthy have usually been successful in protecting themselves).

The main premise of free-market economics is that players have incentives in the form of monetary rewards to take actions such as innovate, fill needs, be efficient, etc., which are in the interests of society as a whole. But this has its limits - few people would agree that robbing a bank is constructive activity, and there is no reason to think that everything speculators and financiers do is acceptable either. Also, things change when prestige and power, rather than basic necessity, become the objectives.

[Cynthia]

Supply siders (SSers) are to economics as intelligent designers (IDers) are to biology...
Instead of accepting the fact that their pet theory is flawed and not based on sound science, SSers -- just like IDers -- keep spinning it in every way imaginable -- with the hope (and the prayer) that it will eventually fly...

But just like intelligent design, supply side won't (and never will) fly!

[mrrunangun]

The American political system has created incentives for its political leaders to to act the detriment of the average citizen. It is in the interest of each individual congressman to maximize earmarks and to neglect spending for the commons. The effect of the sum of this activity is to damage the whole for the benefit of some of the parts. Even if tax rates are raised on the rich, many will receive counterbalancing benefits like the special taxing regulations for hedge fund magnates or the perpetual copyright protections for Hollywood types and Rock stars. Our solons need a lot of money to remain in power and the sources of that cash exact a price. They are not going to legislate a level playing field for elections, as that would confer an advantage on potential challengers that they would not otherwise enjoy. What passes for election reform usually amounts to raising the bar for challengers.

[save_the_rustbelt]

I would point out that when given the chance in 1993, Clinton and his advisors did not try to recreate the Carter years and the 70% top marginal rate.

Given them credit for that much sense.

On another note (sorry Mark T.) I have yet to meet an economist who actually knows many of the details of the income tax system, or who actually knows how a business works.

But then I'm not much at econometrics.

[save_the_rustbelt]

And let's not forget the yacht tax, which had the immediate impact of destroying the jobs of thousands of middle class boat builders, many of them in the home state of Senate Majority Leader George Mitchell.

Very bad idea. Quickly repealed by the Democrats.

[Bruce Webb]

"They made the money on their own, and if they made it illegally or unethically they should be attacked for that, not told they owe."

Sorry nobody "made the money on their own". Everybody makes money within the existing economic, social, and political structure and each of those are subject to certain degrees of distortion. Distortions that don't automatically get corrected by notions of legality and ethics. One hundred and twenty years ago not only wasn't insider trading a crime, the people engaged in it didn't even consider it wrong. The mantra was 'Business is business'.

Today's business environment is not as separated from Gilded Age capitalism as some would like to believe. The notions that all markets clear right at the point of marginal productivity is in the real world nonsense. If I can manage to bundle together enough political ontributions to be on the short list for a single source contract, I may not have done a single thing that was illegal. But it hardly means that I 'made it on my own'.

At every level of economic activity it matters who you know. I worked for a governmental entity that had strict rules on hiring, everybody had to go through the Civil Service process. Yet an astonishingly high number of relatives ended up joining the staff. Similarly at our largest private employer (Boeing) the same pattern holds. Children of Machinists end up Machinists, children of supervisors end up lower level supervisors in numbers that can't be put down to chance. To bring it home to younger commenters it is a rare internship that is granted purely on merit, the rare summer job at the law office not influenced by who your parent plays golf with.

And hiring bias is only a small part of the actual market failure in distribution of gains from productivity. There is an asymmetry in power between the small number of compensation grantors and the larger number of compensation grantees. History across time and culture shows that people who control compensation will reward themselves and theirs in amounts well out of proportion to their actual labor/capital contributions. The current Queen of England is not the second richest woman in the Kingdom because her great-great-great grandmother Victoria added all that much value to the British Industrial Revolution, and Prince Charles doesn't draw down all that income from the Duchy of Lancaster because he is a hell of an estate manager, or because his ancestors were, the economic strength or weakness of a monarchal house has little to nothing to do with past economic performance, that wealth by and large was accumulated outside the economic system.

Do I begrudge the fact that the Rockefellers and Kennedys are rich through inheritance. Well no, my mom got (and spent) a series of modest inheritances that she didn't in any practical sense earn, there is nothing wrong with handing down wealth. Which doesn't mean looking back and seeing exactly how that wealth was acquired to start with.

Were Rockefeller's tactics in building Standard Oil either illegal or unethical? By legal standards at the time no, by ethical standards maybe, which led to new legal standards. But by the logic expressed by Mark and others the outsized distribution of wealth that accrued to the Windsors, Vanderbilts, Rockefellers and Andrew Carnegie should not have been addressed by legislation or taxation, after all they 'made the money on their own'.

Nope. That is the cartoon version of political economy. Any theory that doesn't take into account pricing power outside the confines of simple supply and demand is going to result in stick figure models in place of the multi-dimensional reality we all see everyday as we interact with the other economic actors. In the words of Animal Farm 'Some animals are more equal than others' and most of us know that full well.

[cm]

Lafayette: "Ask most Americans if they feel better off since Reagan lowered marginal tax rates."

I don't want to quibble about what "most" means in our demographic situation, but I would like to offer the back-of-the-envelope perspective that given that people become economically "exposed" (independent) more or less in their 20's, and Reagans policies were implemented some 25 years ago, nobody under the age of about 45 will be in a position to comment from first-hand experience. Quite likely only the 50+ crowd will know the difference to what was before.

That's the general problem with long-term comparisons and "social memory" to begin with.

[cm]

An additional factor in this is that people's priorities and way of evaluating things (of now and of then) change as they enter different stages of their life.

[cm]

hari: I think commenter "Mark" may not be Mark Thoma.

[Mark Thoma]

I'm behind, but just noticed this - Yes, I always use "Mark Thoma" in comments. There are a couple of other Marks that comment and just use their first name.

[napablogger]

Bruce, I don't entirely disagree with you, the thing of it is some people made money by landing the exclusive contract, some people made it by hard work. I find that most of those I know who made or make a lot of money did it by working hard. Even if they got into school due to family connections, lets say, they had to do the work once they got there, and almost all of them worked very hard in their businesses.

Things are infrequently 100% one thing or the other. I believe that the most consistent thing.

We all live in the same society, so if we are going to take money from some people who did well, wouldn't logic also dictate then that we punish in some way those who don't pull their weight? If we are going to take more from people who work hard and succeed, then we ought to penalize the poor and lazy. By your logic anyway, otherwise we have a society that punishes success and hard work, and that is never going to work. We have to tax for other reasons than that.

I think the problem in your argument is that our country is based on individual freedom, and that according freedom to the individual economically is an intrinsic value. Individual freedom is where we start, and then from there we look at our obligations to society as a whole. I feel that American society, because of our basic values as Americans, need to keep that focus on individual freedom as the primary value.

Other societies do not, they usually value group values over individual and that can work better for them. I mean China and other Asian countries. We can change ourselves over more like that, some want to, but I prefer not. There is value both ways but we are Americans and it works better for us to honor individual freedom, including economic freedom.

[ken melvin]

Damn I hate to see a man so entangled in his own web.

[anne]

"If we are going to take more from people who work hard and succeed, then we ought to penalize the poor and lazy."

I would suggest we begin by roaming the streets looking for poor people to beat down with clubs. Me, I am all up with that having been given a Red Sox "Manny" bat this fall and needing to break it in (how do the Sox break in bats, anyway?)

[billyblog]

No, the "Mark" of

"I personally think that the majority of the rich get where they are because of a combination of hard work, talent and luck, not because they steal from anyone or cut corners."

Is definitely not Mark Thoma. Thanks to the "real Mark for clearing that up. But had he not we could have figured it out from "favour" and "behaviour".

Nothing wrong with spelling the Queen's – and most of her former colonies' -- way, of course.

But it would be interesting to hear into which of his "majority" legal and non-cutting of corners (whatever that phrase was supposed to mean) tripartite determinants of getting rich – hard work, talent, and luck -- Mark would put such things as:

1. Hedge fund managers being "lucky" (?) enough to have friends in high places -- such as Alan Greenspan and Chuck Schumer – to keep them unregulated and have their income taxed at the capital gains rate of 15% -- less than what Warren Buffett's secretary pays.

2. Executives of Big Pharma, through their lobbyists' "hard work" at Washington watering holes, being able to increase the probability of getting their hard earned bonuses by having someone such as Billy Tauzin in Congress (Oops, now the $2 mil per year President and CEO of PhRMA) make sure that the Federal government cannot negotiate prices for drugs under Medicare Part D.

3. Interlocking Boards of Directors whose compensation committees have determined, with the help of "objective" research by "professional" consultants such as Hewitt Associates and Heidrick & Struggles that executive "talent" is so scarce in their industry that they simply have to add another zero or two to the compensation package to even get the guy's attention while he's hard at work on the tee at Pebble Beach – with the ink on his eight figure severance check from the last company he added value to barely dry.

4. Mitt Romney's company, Bain Capital, rewarding Mitt – and other Bain Capital partners – quite handsomely for their "hard work and talent" in adding value by, among other things, acquiescing in Burger King's management trying to scuttle an industry wide proposal, of stupendously eleemosynary proportions, for adding one penny – yes, that's $.01 – to each pound of tomatoes supplied by those overpaid braceros doing the picking.

5. And the list goes on and on and on ….

If these were just occasional distortions, to use Bruce Webb's term (and I am not implying that Bruce thinks they are occasional at all), we might be able to overlook them as containable noise. But they're not. This sort of thing is systemic – and it is systemically on the increase.

And we are talking really big bucks in the aggregate.

All very legal, of course. And again, I don't know about non-corner cutting, as I remain in the dark about what the other Mark had in mind using this notion.

Actually, Bruce Webb nails it nicely when he points out:

"Sorry nobody 'made the money on their own'. Everybody makes money within the existing economic, social, and political structure and each of those are subject to certain degrees of distortion."

But, the other Mark might say: "OK, but you can't parse 'distortion' with moral categories."

Um, I'd be willing to accept such a claim if the other Mark could persuasively square two circles:

1. Develop a coherent theory of political economy which does not rest on some notion of the social contract.

2. And/or provide us with a version of social contract theory which is not, au fond, moral in its formulation.

Non-starter alert: even Hobbesean-style social contracts are thoroughly moral at their core.

BTW, it's just a coincidence that Hobbes failed in his attempt at a proof to square the circle.

[save_the_rustbelt]

Anne:

Red Soxs break in bats by beating Yankee fans. :))

[James Killus]

"Hard work, talent, and luck"

Can one get rich on hard work alone? That's pretty funny, isn't it?

How about just oodles of talent? Oh, the stories I could tell.

But luck works every time, even to the explaining of inherited wealth (the "lucky sperm club" as I've heard it called).

The problem with acknowledging this is that it would seem to discourage hard work and the development of talent. But that is only true if one takes money alone to be the measure of virtue, and I do not.

[reason]

Everybody should read johnchx's comment and address that. He has the important argument. Essentially there is some money illusion at work here. The real cost of higher taxes on the rich is much lower than the nominal cost. People still wanted to be rich when marginal taxes were higher.

There are two side issues as well (not clearly stated elsewhere):
1. Money makes money, so the rewards even when earned are disproportionate
2. The rich benefit from the states support of property rights more (they have more property) and so should pay more for it.

What that means in terms of how the system as a whole is configured is a political issue, and people can and do rightly have different opinions about it. To pretend it is a moral issue (with "taxation is theft" schick) is just intellectually dishonest.

[Cyrille]

Everytime I read about "punishing people for being successful", or for being rich, or for working hard... my blood pressure gets wild.

Or could the authors please put up with an actual example? Anyone sent to prison in USA for being rich, for having worked hard? Anyone got slapped in the face? Made to kneel on a ruler? Only getting bread and water for a week?

Whatever the rate of taxation on the top margin, the rich, the successful, are not punished. The rate is only on the top margin, therefore they still get to keep more than anyone who earned less. They are still vastly more comfortable than those who are not part of their club, and yes, that was true even with the Eisenowher tax rates. Rich people were still rich -only less insanely so. And that sure was a more sensible social contract. No rich person ever chose poverty instead because taxes were too high. They were still top of the pile, there were just lower inequalities.

As Lafayette often says, everybody wants a billion dollars, but NOBODY needs a billion dollars.

[Lafayette]

hari: and the better off in Sweden have decided for a more equitable social system.

A zero-sum game

Yes, the Swedish "Social Model" is one that has been in the making for a great many years - perhaps even a century historically. It certainly did not happen yesterday or the day before.

What it takes is a national mind-set that places collective values (principally, social well-being) above that of crass accumulation of capital for the personal glory of the individual.

And, I maintain, that simple notion is a long, long way away from the common American Dream -- which is one of Personal Achievement. This means, inherently, distinguishing oneself above all the rest. It is the the aggrandizement of the individual. (Of the kind that made Ayn Rand fall into a tizzy. ;^)

I cannot see the moral justification for such personal apotheosis in today's society. What benefit does it accrue society except its lemming-like emulation -- everybody wanting breathlessly to become a Movie Star or a TV Celebrity. ("I've seen myself on TV! So I MUST exist!!)

There are other Social Values that are paramount. Like living decently, the human dignity of natural mutual respect amongst individuals, marketplace competition without the consequence of avarice and governance without exploitation of the many by the few. Are not these important?

Personal greed is an aberration in Human Nature, an abomination.

Mankind can have other, more sane outlets for its ambitions: Sports, politics, even business. But, that they should become the singular most prevalent expression of personal achievement as measured by financial gain seems an intolerable deviance.

One's own such personal gain must come from the loss of others. The economy is a zero-sum game, even when growing -- because growth does not eradicate poverty, it simply lowers it.

Eradication should be our goal, since we have certainly the means to do so but are simply wasting them elsewhere.

[ken melvin]

"Cynthia says...

Supply siders (SSers) are to economics as intelligent designers (IDers) are to biology..."

Priceless.

[cm]

reason: Another aspect of the (ill termed?) "money illusion" is the "grossing up" of incomes and perks, which appears to get more prevalent and more expansive as one moves up the (at least corporate) ladder.

Grossing up means that when a perk/benefit is taxable imputed income, a compensation amount will be added to neutralize the taxes. The same principle can be applied to all taxable transactions including regular income or bonuses, or setting prices "accounting" for taxes and other expenses.

It basically amounts to the business paying those guys' taxes, and in some part personal expenses. Something to take into account when one hears the "we pay most of the taxes" rhetoric.

There is nothing wrong with this at least when it comes to plausibly business-related expenses like relocation which happens to be charged to the employee, but the line is crossed often enough.

And I wouldn't make the case if everybody would get this treatment, but most don't.

[Holly W.]

Mark: At the heart of all arguments in favour of a highly progressive tax system is the belief that the rich are undeserving of their incomes.

Not true at all. Progressive taxes date from the days of the Athenians, when the city leaders decided that a weighted tax system was more just than one in which everyone paid the same monetary amount regardless of total income (poll tax) or a flat tax.

Progressive taxation is based on the idea of equal pain of taxation. Everyone is assumed to need their first dollar of income to live on; thus that, and a certain amount of income above it, is generally tax-free, or at least taxed at a low rate. But, depending on a person's total income, their last dollar is usually alot less important to them, and can therefore be taxed at a higher rate without causing hardship.

Under such a system, a city, state, or nation can generally collect a higher total tax revenue than it could with a flat tax, while more evenly distributing the pain of paying taxes across its citizens.

I'm not saying a "soak-the-rich" mentality has never played into the implementation of a progressive tax, but it's really not part of the basic theory.

[Holly W.]

More to the point of Mark Thoma's original post, why does supply side economics stay so popular, and why do people try so hard to defend it? The time-tested cliche is that "Money flows uphill." Has this every really changed?

[Mark N.]

"That environment is provided by the system that government provides, and to think that these lucky, talented and hard-working people don't owe something extra to the system that allowed them to get ahead is perverse."

I completely disagree with this. The most important job of the government is to stipulate and enforce the "rules of the game". They provide a legal framework that facilitates economic transactions and property rights. My point was that insofar as the rich are acquiring their wealth legally, they deserve what they earn. I don't see why they have an obligation to "give back" anything when all they are doing is following the rules. These individuals did not steal their wealth. They created it. The reason they are rich is because they provide something that other people in society value highly, so in this sense they are in fact "giving back".

"The principle of equal sacrifice, i.e. the argument that the burden of taxes should inflict more-or-less equal "pain" on each taxpayer, supports a highly progressive income tax while taking no position whatsoever on who "deserves" their income and who doesn't."

Your argument implies that the rich have a lower marginal utility per dollar, and thus since they don't value money as highly, higher proportions of their property can be taken away from them. This is basically assuming that the rich are undeserving of these additional dollars. The rich do value these additional dollars highly, or else they would not have put in a proportional effort to attain them.

"grossly inequal distributions of both income and wealth give the wealthy grossly dispropriate political power, which they then use to change laws so as to benefit themselves at the expense of society as a whole--rent-seeking."

A number of counterarguments to my original post follow this line of reasoning. This sounds like more of an argument in favour of small government than progressive taxation. There are many different types of interest groups that lobby the government for special treatment. I am opposed to any particular group receiving disproportionate political power from rent seeking - corporations, unions, etc. This problem can be abated by reducing the size and power of government.

"Maybe we could agree that hard work and talent should result in appropriate rewards, for incentive as well as moral reasons, but not to great political power"

I absolutely agree.

To BillyBlog - Anecdotes #1, 2 and 4 are all instances of failure of government. As I said above in this post, I don't think rent seeking is a good thing.
As far as CEO compensation goes - CEO's are hard workers with lots of responsibilities. They have to have immense amounts of business acumen and talent. It's a difficult job, one that I wouldn't want. Unfortunately for you, adding sarcastic quotation marks to your writing doesn't convince me that they are unworthy of their salaries.

[ken melvin]

Proportionality. As Anne might say, "I must think on proportionality". Whilst there, I shall ponder long on the relationship of effort and wealth and try ever so hard to envision the efforts of an Ellis or Gates afore I even think to tackle that of the hedgefunders and HMOers.

[Lafayette]

MN: My point was that insofar as the rich are acquiring their wealth legally, they deserve what they earn.

Right and wrong.

Gaining wealth legally does not mean one deserves it. Just because you earn money does not necessarily mean it is justified. Merit is not conditioned only by the work employed to obtain money or riches.

There is a larger context. We are all agents in an economic system, and it is certain that a rich man on an island is an impossible circumstance. We all obtain our income from the same economic mechanism.

There comes into play, therefore, a moral notion of fairness. That one percent of the population garners 30 or 40% of the wealth cannot be considered "fair" by any stretch of the imagination.

It is, in fact, grossly unfair -- and explains why the Gini Coefficient of the US is so very much higher than other developed countries. You would do yourself a great service to familiarize yourself with that Coefficient. It will help in understanding Income Inequality that currently besets America.

It is the policy of taxation that decides what is fair and honest in terms of net revenue. And, since the Reagan reductions in the early 1980s, Income Inequality in America has worsened to a worrisome level.

How can we justify the hallucinatory riches in a country where 13% of the population has remained poor for more than three decades.

The rich get richer and the poor stay poor? That is the sort of Liberty that we should be proud of?

[DebtSettlement]

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