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Greg Mankiw ponders: Is the U.S. undertaxed?
Friday, April 2, 2010, 2:08 PM ET
Greg Mankiw ponders:
Is the U.S. undertaxed?
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Funny that Mankiw gives thanks for the defense (referenced above), but doesn't point out that his own work has shown that the central tenet of the defense (that in our economy higher tax rates don't bring in much more revenue) is incorrect.
Bottom line, Mankiw threw this one out there without seriousness. Of course incomes (personal or national) must be considered when comparing taxes collected.
2 Apr 2010, 02:55 PM
Considering the large body of work showing that lowering tax rates raises federal revenues this shouldn't be a surprise. Lowering per capita taxes is going to increase incentives and thus GDP. This will feed back into falling tax revenues as a percentage of GDP, even as tax revenues increase. The goal ought to always be to raise GDP to raise total tax revenues. Attempting to raise tax revenues as a percentage of GDP (or per capita) is a perverse incentive that only serves to drive down GDP.
2 Apr 2010, 04:07 PM
"Considering the large body of work showing that lowering tax rates raises federal revenues this shouldn't be a surprise."
I defy you to demonstrate that there's a SMALL body of work showing this. It's just not true in our economy - our rates are far to the left of Laffer's peak.
Please see Mankiw, Lazear, or the Bush Treasury department:
2 Apr 2010, 04:20 PM
The Laffer concept is clearly correct, that is above a certain ruinous rate of taxation you will reduce revenues when you increase the rate of taxation. This was discovered by many emperors including Genghis Kahn when his advisors pointed out that pillaging and burning out (i.e. 100% taxation) conquered opponents wasn't as productive as leaving their means of production intact and imposing yearly taxes.
The problem with Laffer's conjecture is that there is no evidence that US tax rates are currently high enough to be over the inflection point where reducing rates results in more revenues. In fact the contrary has occurred during both the GW Bush and Reagan tax cuts. With both of these revenues decreased and the country accumulated large amounts of debt during these administrations.
2 Apr 2010, 05:43 PM
Vox, tax rates dropped with Reagan and - again - with Bush II and you saw growth in aggregate tax revenue over the course of both presidencies RISE. The more money you can capture, the more efficiently it gets spent and the better off we all are.
Mayor Bloomberg has offered some insightful advice:
"One percent of the households that file in this city pay something like 50% of the taxes. ...that's something like 40,000 people. If a handful left, any raise would make it revenue neutral. The question is what's fair. If 1% are paying 50% of the taxes, you want to make it even more?".
2 Apr 2010, 06:02 PM
There's more than adequate evidence, including the Bush Treasury that you claim otherwise. The fact is Vox, that whether it's the USPS, AmTrak or any other idiotic government policy, you can be expected to show up to defend it.
2 Apr 2010, 06:52 PM
laxmaan wrote: "Vox, tax rates dropped with Reagan and - again - with Bush II and you saw growth in aggregate tax revenue over the course of both presidencies RISE."
And tax rates were increased substantially under Clinton and tax revenues rose. So where's the cause and effect?
"'The question is what's fair. If 1% are paying 50% of the taxes, you want to make it even more?'"
The problem with these kinds of discussions is that it leaves out income - if that top 1% makes 50% of the income, there's no problem at all with them paying 50% of the taxes. Of course, since we have a progressive tax system, they don't make 50% of the income. but it's closer to that than them making 1% of the income.
2 Apr 2010, 09:41 PM
Bricki wrote: "the contrary has occurred during both the GW Bush and Reagan tax cuts. With both of these revenues decreased."
Not true. Following Reagan's tax cut, revenue rose. Following Clinton's tax hike, revenue rose. Following Bush's tax cut, revenue rose. The most obvious potential correlation doesn't work.
2 Apr 2010, 09:51 PM
Cinci wrote: "There's more than adequate evidence, including the Bush Treasury that you claim otherwise."
The "analysis" you cite isn't a Treasury conclusion, is it? It's also really quite simple to explain: policy arbitrage. People were more willing to take gains when rates dipped and less willing to take them when they rose, because they expected another reversal to come. The reason why people don't take capital gains isn't because the rates are "too high," but because of the huge differential between treatment of capital gain income and capital gains that pass through an estate (basis reset and NO tax under a certain amount). Once again, a common sense approach to incentives is likely to lead to the correct answer.
Greg Mankiw (former head of CEA under Bush II) and Weinzierl: "Dynamic Scoring: A Back-of-the-Envelope Guide" - Tax cuts on labor recoup about 17% of their lost revenue through economic growth, which rises to about 50% of cuts in capital taxes.
Mankiw, in his textbook Principles of Economics: "Subsequent history failed to confirm Laffer’s conjecture that lower tax rates would raise tax revenue. When Reagan cut taxes after he was elected, the result was less tax revenue, not more.”
Martin Feldstein, Reagan's Chairman of the CEA: "I objected therefore to those supply-siders like Arthur Laffer who argued that a 30 percent across-the-board tax cut would also be self-financing because of the resulting increase in incentives to work."
2003 Economic Report of the President (under Glenn Hubbard, CEA Chair before Mankiw), pp.57-8: "Although the economy grows in response to tax reductions (because of higher consumption in the short run and improved incentives in the long run), it is unlikely to grow so much that lost tax revenue is completely recovered by the higher level of economic activity."
Jeff Frankel, James W. Harpel Professor of Capital Formation and Growth, Harvard Kennedy School, "Snake-Oil Tax Cuts" (
): "The Laffer Proposition, while theoretically possible under certain conditions, does not apply to US income tax rates: a cut in those rates reduces revenue, precisely as common sense would indicate. As detailed in the paper, this was the outcome of the two big experiments of recent decades: the Reagan tax cuts of 1981-83 and the Bush tax cuts of 2001-03, both of which contributed to record US budget deficits. It is also the conclusion of more systematic scholarly studies based on more extensive data. Finally, it is the view of almost all professional economists, including the illustrious economic advisers to Presidents Reagan and Bush. So thorough is the discrediting of the Laffer Hypothesis, that many deny that these two presidents or their top officials could have ever believed such a thing. But abundant quotes suggest that they did."
But hey, why worry your little head about the publications and testimony of respected economists - including those who were part of Republican administrations - when you can quote partisan rags and a think tank that never saw a tax it thought should survive?
"The fact is Vox, that whether it's the USPS, AmTrak or any other idiotic government policy, you can be expected to show up to defend it."
I don't recall ever defending Amtrak. As for the rest, I tend to show up when people make incorrect assertions while displaying astonishing ignorance. Like you do. All the time.
By the way, you might enjoy my latest SA article on CAFE standards:
. So much for me being a cheerleader.
2 Apr 2010, 10:37 PM
Vox - the dates in the quote above are interesting when the author states the Reagan and Bush II cuts failed as revenue didn't increase in 1981-1982 and again 2001 - 2003 - duh! Cutting taxes is not going to expand the economy instantly out of a recession, they will however help an economy expand and over the ensuing years (1983-1989 + 2003 - 2007) higher tax revenues for the Treasury will result. You are right, Clinton raised taxes when he started in office and - as you remember - our economy wasn't exactly knocking the cover off the ball during those years; 1990 - 1994 consisted of a recession followed by a slow recovery. Clinton did however do some very significant tax cutting in the form of form of the North American Free Trade Agreement which passed into law in 1994, and let's not forget the Taxpayer Relief Act of 1997 where Clinton signed off on lowering our capital gains tax, rose the estate tax exemptions, and the exemption of home sales from capital gains taxation. The robust economy of the 1990's was really the second half of the decade, not the first. The US Treasury's revenue from capital gains taxation was far higher after passage of the law than prior to (even with a lower tax rate). Taxes *are not* everything - of course, however if you tax people too heavily you remove their incentive to risk their capital, bust their bums, etc. But don't take my word for it, here is a quote from Fred Smith the founder and CEO of FEDEX - he has to pay these taxes:
"We've got to reduce the taxes on equity. Let companies expense their capital purchases.
Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We'd buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate."
We want Fred to buy that additional 777, slim taxation and parts of our obese government and you will unleash the productive power of the world's most dynamic economy. If you have any experience with unions or governments you know - first hand - the amount of waste involved. If you're a professor with tenure who has never run a business than I suggest you defer to our good man Fred Smith's advice.
3 Apr 2010, 12:15 AM
Surely you understand we don't have a progressive tax system, see the fact that Warren Buffet's average tax rate is less than his secretary's. America has a facially progressive tax with deductions, capital gains, etc., that lead to regressive tax results. Therefore, effectively - it's regressive.
3 Apr 2010, 12:48 AM
Not exactly. Broad consumption-based taxes are regressive, but we have very little of this at the federal level. The Social Security tax is regressive because it applies only to earned income and only the first $100K or so. Until it applies to investment income in 2013 (I think), the Medicare tax will be regressive because the poor have no investment income. The income taxes are progressive, and the estate tax only hits the wealthy. Buffett's example is true because so much of his income is capital gains, taxed at 15% - and because he hasn't died. His earned income is only $100K.
But overall the system is mostly progressive: the 4th quintile (61-80th percentile) makes 20.3% of all income, and pays 19.2% of tax (5% less than under a revenue-neutral completely flat tax), lower quintiles pay a lower percentage, and the top quintile pays 67.2% while making 53.4% (26% more than a flat tax). Within the top quintile, the progressivity continues, with the Top 0.1% paying 52% more than under a flat tax.
3 Apr 2010, 10:12 AM
The federal income tax has two major components: one is regressive - long term capital gains and dividends, and the other
one is progressive - wages. They are still both components of the federal income tax.
So it's progressive to a point and then becomes regressive for the benefit of the ultra-wealthy or those who live off old wealth. How many of the ultra-wealthy make most of their money off of wage income? I thought I saw a study by the IRS showing the top quintile's effective tax rate at 22%.
I agree on the payroll taxes and consumption taxes.
3 Apr 2010, 12:36 PM
You did see 22% for the top 1%, regularly up to 2007 (later IRS data not available until this July...your government at "work"). This happens because the top 1% was making ~60% of its income as capital gains (60%*15% cap-gains+ 40%* 35% ord-income ~ 23%, close enough for government work). However, for 2008 and out-years the cap-gains take may be zero, or even lots of carry-forward-losses from the meltdown, so that the effective rate will go up to 39% or whatever Obama jams through, but the total amount so taxed will be <=40% of the boom-year numbers. Depending on how the top-10% (mostly businesspeople, not finance-industry change-handlers) respond to the attacks on their incentives. It doesn't matter much what public opinion holds, when most of said opinion is the hope that someone else will create a job for them.
Reflexivity, George Soros calls it, [
] the problem that sentient actors don't always follow statistical expectations; while Soros talks about markets, the economic disincentives of changed tax burdens, crap-and-trade, compulsory health care and a host of other items both lower the expected net return and increase its variance, which sounds good in sound bites for the populace but undermines the vitality of an economy. I recently visited Europe, nice place to visit but a poor venue for investment, IMO. American exceptionalism IS entrepreneurialism; it may soon evaporate, and the country will remain, like Europe, a nice place to visit.
Prognosis - deficits to the horizon and beyond. Blustery politics, rhetoric gusty at times. Volatile trading environment.
5 Apr 2010, 04:07 AM
"So it's progressive to a point and then becomes regressive for the benefit of the ultra-wealthy...I thought I saw a study by the IRS showing the top quintile's effective tax rate at 22%."
My data includes corporate taxation. Since corporations are just organizations representing the wealth of people, the owners effectively pay the corporate tax.
7 Apr 2010, 12:17 PM
You mention the corporate tax but that only applies to dividends - not to debt payments, which are written off, and the corporate tax doesn't apply to capital gains.
Is that data hypothetical or publicly available? Your logic is interesting and I'd like to take a look at the data behind it.
8 Apr 2010, 12:55 AM
Truck wrote: "You mention the corporate tax but that only applies to dividends - not to debt payments, which are written off, and the corporate tax doesn't apply to capital gains."
You are correct about business interest payments. But the corporate tax applies to all profits, including both those profits that are paid out in dividends and also those that are retained, increasing the value of the business and eventually the capital gains captured when the stock is sold.
"Is that data hypothetical or publicly available?"
I'm sure there's more data available, the link I provided from the tax policy center is just a roll-up of corporate tax incidence across income quintiles.
8 Apr 2010, 07:19 AM
Last time I checked the goverment controlled post office charged 44 cents to deliver to my house, that same delivery by ups of fedex would be about $10 dollars. Same delivery speed,live over 200 miles from Dallas and get overnite delivery of first class mail.
2 Apr 2010, 04:45 PM
One of the things to realize about the USPS is they are not free to operate as an independent business would. They are still controlled by Congress (I defy anyone in that situation to run a business in an optimal fashion!). This has all sorts of implications. For example it is quite clear the USPS has far too many branch offices - and would like to close many of them. Fat chance though - anytime an office comes up for closure people start writing Congressmen who then do their darnedest to prevent this closure.
Until this insanity stops it is not reasonable to hold the USPS to the same efficiency standards as a private business.
2 Apr 2010, 05:56 PM
Some people might argue that's exactly why private enterprise is more efficient than government-backed companies. With branch closings, that would probably be an effective argument.
However, I do agree with you to a large degree. The USPS is considered a public service and therefore, is expected to generate a small loss in return for that public service. The USPS provides delivery to anywhere in the United States; hence it serves all American citizens; which is not something any private company is willing to do.
When you take that out of the equation, the USPS would probably be significantly more profitable. It's actually run fairly efficiently as is, simply because it is run like a private business for the most part.
IMO, where you get the really grossly inefficient government spending is not in places like the USPS --- but rather, in governmental areas that aren't run like a private business at all. Once the profit/loss motives are completely eliminated, and money is simply thrown around without regard, that's where problems occur. That's not the case at all with the USPS.
2 Apr 2010, 06:17 PM
i am thinking the real problem is not the taxes are to hight but that incomes have been deflating for decades now.
2 Apr 2010, 05:58 PM
This discussion is pointless if you are not going to discuss state income tax, ss and medicare, and property tax. For many people, this increase your tax bill 60%, making the US more taxed than many other places...
2 Apr 2010, 10:34 PM
In my view, Us citizens are undertaxed if we want the European model of society. You gain personal security and lose personal freedom. Government takes care of your needs and takes the taxes to pay for it.
If we want the United States style of existence, or at least the "old time way", we have lower taxes, less given to us by the government
and more personal responsibility and freedom.
Personally, I vote for the latter.
2 Apr 2010, 11:25 PM
It is all well and good discussing the economic impact of tax rates in isolation, but we need to think about where we are. Never mind whether the government drastically reduces spending, which will require moving the costs to the private sector and therefore may be more efficient etc etc. The truth is, the Federal debt stands north of $12 trillion now, with another $333bn added last month alone. The US CANNOT get control of its deficit without either increasing tax rates, or inflating it away (which is another form of taxation anyway.) Inflation seems to be building up and this is going to put serious strain on the bond market.
The government is attempting to divert peoples' attention from this issue by the up, up and away equity markets, but this is the 800lb gorilla sitting in the room.
3 Apr 2010, 06:05 AM
Laxmaan wrote: "Vox - the dates in the quote above are interesting when the author states the Reagan and Bush II cuts failed as revenue didn't increase in 1981-1982 and again 2001 - 2003 - duh!"
Not my quote, I think. Corporate+individual tax revenue by year:
1981 | 347.0
1982 | 346.9
1983 | 325.9
1984 | 355.3
1985 | 395.8
1993 | 627.2
1994 | 683.5
1995 | 747.2
1996 | 828.2
1997 | 919.8
2001 | 1,145.4
2002 | 1,006.3
2003 | 925.5
2004 | 998.4
2005 | 1,205.5
From this, you can see that revenue did in fact decline immediately following the tax cuts, and increase immediately following the tax hike. But neither can be attributed only to the changed tax policy; in both 1982-1983 and 2002 recessions led to lower tax revenue.
But the best of the bad arguments here aren't that revenue IMMEDIATELY increases, but that it increases over time due to faster growth. Elsewhere I've provided a taste of conservative economic thought on the matter, the consensus of which is this: those who argue that Laffer applies don't know what they're talking about.
"You are right, Clinton raised taxes when he started in office and - as you remember - our economy wasn't exactly knocking the cover off the ball during those years; 1990 - 1994 consisted of a recession followed by a slow recovery."
Mostly irrelevant, since the Clinton tax cut wasn't signed until August 1993. Also, the "slow recovery" you speak of (real GDP growth rates of 3.4% and 2.9% in 92-93) doesn't seem too slow compared to the 1960-2008 average of 3.3%.
"...and let's not forget the Taxpayer Relief Act of 1997 where Clinton signed off on... the exemption of home sales from capital gains taxation."
Funny how this piece of legislation is NEVER mentioned as a potential contributor to the real estate bubble.
"The robust economy of the 1990's was really the second half of the decade, not the first."
Right, when whatever negative impacts of the 1993 tax increase would have been more in force. Real GDP growth by year:
1993 | 2.9
1994 | 4.1
1995 | 2.5%
1996 | 3.7%
1997 | 4.5%
1998 | 4.4%
1999 | 4.8%
2000 | 4.1%
Note, real GDP growth in the 12 months before the 1997 tax cut was signed was 4.7%.
"The US Treasury's revenue from capital gains taxation was far higher after passage of the law than prior to (even with a lower tax rate)."
1. Are you actually giving credit for the dramatic increase in capital gains realizations from 1997-2000 to the tax cut, as opposed to the 75% increase in the stock market during that period?
2. Investors will take gains if they think rates may be higher later. See for example the huge amount of gains taken in 1986 in advance of the capital gains tax rate going from 20% to 28%.
"if you tax people too heavily you remove their incentive to risk their capital, bust their bums, etc. But don't take my word for it, here is a quote from Fred Smith the founder and CEO of FEDEX..."
Your quote doesn't back your assertion. A couple of things about it:
1. I was in favor of simplifying the tax code by allowing accelerated depreciation as part of the stimulus package; it would have acted as a reduction in the cost of current capital investment. This may have merely shifted tax liability to subsequent years, but it may also have provided a bit more growth if companies invested more over time. The revenue effect would have been at worst a shift of tax revenue into the future - basically the same effect as additional government spending, but perhaps in a more efficient and therefore more effective manner.
As for the corporate tax rate argument, it's specious. The EFFECTIVE tax rate is what matters, because different tax codes allow for different ways to protect income from taxation. Check out this article:
, which puts the effective rate at 27%. There's also an interesting chart on page 40 of this treasury report:
comparing "integrated effective marginal tax rates," which includes the effects of personal taxes on investment income. Ours is higher than Japan and France and lower than the UK, Canada, and Germany. Basically, right in the middle of the G7 at about 38%.
"If you have any experience with unions or governments you know - first hand - the amount of waste involved."
In my experience, the larger the bureaucracy - public or private - the more the waste. The amount of waste in large corporations is astonishing, but it's just the nature of the beast. The more levels of management, the more inefficiency creeps in.
3 Apr 2010, 02:49 PM
Everyone here is missing the point.
1. My income is my income not the governments. Any amount of tax imposed involuntarily, is stealing. It's what dictators do. The more we tax the more we become a third world country.
2. Giving people free housing, free food, free healthcare only leads to one thing. More people wanting more free stuff. If the hardware store was giving away free hammers, guess what? Everyone would need/want/get a hammer. Wake up, this is only about buying votes. If you voted for this administration you have been bought and paid for.
3. The result of 1 and 2 is the real truth. Taxes and free benefits are not about helping people, because there are better ways to do that. Its all about making sure that the only successful class of people are the government administrators. The government is running a big con, and because the education system has been teaching a screwed up view of what history, the constitution, freedom, and responsibility mean for 50 years, most people do not have the knowledge or desire to see the truth.
In the end, propaganda with a dumbed down education system always wins.
3 Apr 2010, 05:06 PM
I'd take issue with the libertarian line that ANY form of taxation is stealing.
I expect to pay some tax to fund those things enumerated in the Constitution that the government is supposed to take care of, like national defense.
But I agree wholeheartedly with you on the rest, that funding housing, food, cable TV, health care for everyone is NOT the function of the federal government.
3 Apr 2010, 05:18 PM
He didn't say any form of taxation is stealing. He said:
"Any amount of tax imposed involuntarily, is stealing."
I think it's all about getting a say in how you get taxed. What's our return on our tax money?
3 Apr 2010, 08:12 PM
And getting a say in how the money is spent.
4 Apr 2010, 01:27 PM
4 Apr 2010, 03:05 PM
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