David R. Henderson  

Atkinson and Krugman on Tax Rates

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On May 20, British economist Anthony Atkinson and Paul Krugman had a long discussion about inequality and income tax rates. Atkinson thought the top income tax rate should be 60% and Krugman thought it should be 73%. Apparently, the City University of New York wanted a wide range of views.

Here are some highlights I found interesting:

23:02: Krugman says the Koch brothers are evil. In an 86-minute discussion, guess how much evidence he presents for that claim.
24:14: The moderator, Chrystia Freeland, asks a good question, first of Tony Atkinson and then of Paul Krugman: Do the wealthy deserve their wealth. What's interesting is how uncomfortable Atkinson (notice his literal hand-wringing) was with that question and that he didn't give a direct "No." Krugman also talked around the question: he did it, admittedly, in a nuanced way, but it was striking that he was not willing to say "no" either.
26:30: Krugman says name me a financial innovation that has been unambiguously beneficial, and you're not allowed to count the ATM.
DRH (me): I've got one. The court decision in the 1970s that effectively wiped out usury laws on credit cards. From then on, a bank based in a state with no usury laws or very high usury ceilings could issue a credit card to someone in a state with very low usury ceilings, e.g., Arkansas. At the time, that liberated young people like me who had been unable to get a credit card, even with a credit limit of $250, before then. Of course, you might argue that the gain was not unambiguous because a lot of people had trouble controlling their debt. But a similar charge could be leveled against ATMs.
27:30: Krugman says the top marginal tax rate on income should be 73% because we shouldn't care about the well-being of high-income people, whom, as he virtually always does, Krugman mislabels as "the wealthy." I found his callousness towards high-income people breathtaking, even for him.
32:20: Krugman advocates an international tax cartel (of course, he doesn't use that term) of governments to coordinate their attempts to raise marginal tax rates so that high-income people have few ways out. I wrote about that in 2009 here.
34:18: Atkinson says that the top tax rate should be 60%.
35:20: Krugman jokes that we could get Congress to go along with higher tax rates if we got the Cincinnati office of the IRS involved. Interestingly, when he gets little audience reaction, he says, "Sorry. That's a little bit too topical." My guess is that the audience felt uncomfortable admitting what the IRS did. This is actually one of the few things about Krugman that I like: he will sometimes "go off the reservation" and admit certain things that "his side" doesn't like to admit. Of course, in this case--and here's what I don't like--Krugman seemed to approve of what the IRS did.


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CATEGORIES: Taxation



COMMENTS (27 to date)
Eric Falkenstein writes:

As a good modeler, Krugman must realize the strong incentive for a country to cheat from the tax cartel, bringing in more capital. How would he prevent this equilibrium from breaking down his 75% tax?

I guess models are only helpful for getting Nobel prizes, not actually applying their rigor to real-world beliefs.

Julien Couvreur writes:
name me a financial innovation that has been unambiguously beneficial

Doesn't this question apply to all innovation?

Even the beloved iphone has problems, people get hooked, can't disconnect and engage in-person, "waste" time on games, get in car accidents, ...
So I don't know what "unambiguously beneficial" means.

MG writes:

As Julien suggests "name me a financial innovation that has been unambiguously beneficial" is a bogus question because of the "unambiguous" claim. The worst thing is that it allows even those who have never even thought of what a financial innovation is -- let alone conceive and implement one -- to be able to say "ATM" and sound clever or even thoughtful.

I think no one should be allowed the "last word" on this question unless they can list at least ten financial innovations, their main benefit to society, and whether the innovator(s) was afforded any monopoly rights for his/her insights (the last one is for the benefits of the populists in the room).

Tom West writes:

Doesn't this question apply to all innovation?

Wheel - no
Fire - no
Speech - no

Hm... Maybe unambiguous is a pretty high bar.

The one thing that *has* changed is the the rate of adoption. It used to be that an innovation that turned out to be fatal after 10 years or so only took out a small percentage of the industry.

Nowadays, in 10 years we can see whole scale adoption along with elimination of any company that hasn't embraced the innovation.

And that can make it rather uncomfortable when it turns out (as it occasionally will) that an innovation has a serious flaw that wasn't obvious for 10 years.

Nicholas Weininger writes:

Here we have the 21st C equivalent of a couple of plantation owners arguing over how happy and well-fed one needs to keep one's slaves to maximize their productivity, and how to get international enforcement of fugitive slave laws.

Jeff writes:

LOL@Nicholas Weininger. Excellent!

While nothing is unambiguously good (or bad), the rise of the index fund is one pretty hard to argue against. And govt. regulation hindered Wells Fargo in its initial attempts to bring its benefits to its customers; it was claimed that it violated the Glass-Steagall prohibition about mixing commercial and investment banking.

Health insurance was also a private sector financial innovation from Blue Cross and Blue Shield, as was life insurance. Have Medicare and Medicaid been 'unambiguously' good, with their trillions in unfunded liabilities?

It's also very hard not use the word 'liar' in describing Krugman's claim that Raghu Rajan is wrong about the CRA contributing to the housing bubble. There is all kinds of evidence it did.

Using exogenous variation in bank incentives to conform to CRA standards around exams, we find that the CRA [Community Reinvestment Act] did indeed induce riskier lending by banks. First, we find that in the six quarters surrounding a CRA exam, lending by treatment group banks (i.e., those undergoing the CRA exam) is elevated on average by 5 percent as compared to lending by control group banks.
Second, using data that track loan performance, we show that loans originated by treatment group banks around CRA exams are 15 percent more likely to be delinquent one year after origination as compared to those originated by control group banks. The evidence therefore shows that around CRA examinations, when incentives to conform to CRA standards are particularly high, banks not only increase lending rates but appear to originate loans that are markedly riskier.

It's hard to see how Krugman could be ignorant of this, but then again, as late as 2008 he was denying that it was even legal for Fannie and Freddie to deal in subprime lending.

Andrew writes:

David,

How does Krugman get his 73% figure, or Atkinson his 60% figure for that matter? They can't possibly be trying to maximize revenue, no way does the Laffer Curve peak at those values. Are there social utility models that would call for such high levels of taxation? It's hard to imagine those values maximizing GDP growth either.

I don't want to ascribe his views to malice, but it sure seems that minimizing high income people's utility maximizes his.

Tom West writes:

no way does the Laffer Curve peak at those values.

That's rather ambiguous. Do you assume that it peaks before or after those values?

(I suspect the peak is > 73%, but what I am certain about is that "what is the peak level" is an open question answered only with certainty by those with an ideological stake in the game...)

john hare writes:

The problem with extreme tax rates is not so much the effect on the wealthy, as the effect on those that are thinking of doing things to make them wealthy. Halving projected ROI would seem to be a major problem when raising financing or assessing risk on a venture.

Bostnian writes:

Even people who wonder if finance is excessively compensated should concede that low-fee index mutual funds have been a beneficial innovation.

Andrew writes:

Tom West,

You phrased it much better than I did. I meant that an exact number seems odd, no that I have an idea what that number is.

noiselull writes:

Why no response from Daniel Kuehn?

Silas Barta writes:

@David_Henderson: I agree with your general points of course, but I'm not sure about comparing ATMs with credit cards -- I doubt anyone hurt themselves with ATMs (presumably by fees?) anywhere near as much as they hurt themselves with credit cards.

Jay writes:

[Comment removed pending confirmation of email address and for rudeness. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Ken P writes:
...we shouldn't care about the well-being of high-income people, whom, as he virtually always does, Krugman mislabels as "the wealthy."

Conflating wealthy with high earners is a pet peeve of mine. It's especially disturbing to see someone with Krugman's following do that.

Don Sillers writes:

The 73% estimate for the revenue-maximizing rate on top incomes comes a piece in the Fall 2011 issue of the Journal of Economic Perspectives by Peter Diamond and Emmanuel Saez: "The Case for a Progressive Tax: From Basic Research to Policy Recommendations." (Krugman mentions Diamond in his remarks (27:15), though it's not all that clear in the audio.)

Thomas writes:

The 73% comes from the revenue maximizing rate, and from Krugman's odd view that we have a moral obligation to harm the rich to raise the maximum revenue. It's very odd, because he doesn't bother to consider whether there are any effects at all to raising the rate, other than the revenue and the harm to those paying it. Bizarre.

Jim Rose writes:

Peter diamond recently wrote a paper and WSJ Op-ed saying that taking the tax code as given, the top marginal income tax rate should be 48%; but it could be as high as 76% if the tax code was shorn of deductions without lowering growth rates.

I like people who use elasticities to choose optimal tax rates. It leaves an audit trail.

If the elasticity of taxable income reaches 0.92, the current US top rate is optimal under the diamond and Saez regime. If the elasticity numbers move, the Left may have to advocate lower taxes for the super-rich.

Diamond and Saez pass over the issue of optimal taxation of capital income being perhaps zero, or at least low, by referring to administrative issues at the capital-income boundary.

Tracy W writes:

Tom West:
It used to be that an innovation that turned out to be fatal after 10 years or so only took out a small percentage of the industry.

South Sea bubble? The Darien Scheme in Scotland? John Laws notoriously only took 5 years to destroy France's economy in the 18th century, though he had the government's support.

And out of curiousity, what examples are you thinking of of companies that have been eliminated by their refusal to embrace a financial innovation? (I presume you have some in mind, I just can't think of any personally and would like to add some examples to my mental collection of interesting anecdotes.)

ConnGator writes:

How about online banking/online bill paying? I have not set foot inside a bank in over five years and I love it.

Too bad Betsey Stevenson and Justin Wolfers weren't invited to the debate. They aren't married, despite having a three year old daughter, because of the taxes they'd have to pay if they were married.

Justin: Because Betsey and I earn similar incomes, we would pay a marriage penalty. The U.S. has a household-based taxation system which subsidizes married families when one person stays home and taxes most people extra if they choose to marry and both work full-time. The average tax cost of marriage for a dual-income couple is $1,500 annually. When our accountant ran the numbers for us a few years back we discovered marriage would cost us substantially more. I love Betsey and all, but is the marriage certificate worth thousands of dollars annually?

Steve J writes:

I see several comments of "where did this 73% number come from?" I find it disturbing that critics of Krugman appear not to read Krugman. Here is his most recent explanation of that number:

http://krugman.blogs.nytimes.com/2013/06/03/ben-bernanke-endorses-a-73-percent-tax-rate/

Jay writes:

The top tax bracket was increased from 25% in 1931 to 63% in 1932, yet the portion of tax revenue paid by those in the top bracket fell from 79% to 63.7%, according to a 1986 paper by Yale Brozen (The Economic Impact of Government Policy).

Is there any reason to think things would be different today? Does anyone have recent data from France?

Mr. Econotarian writes:

I have to agree that we know income tax revenues went up immediately after the JFK tax cut, not down, which suggests that very high income tax rates lead to people figuring out how to hide their income from taxes.

One can argue that in the 1960's, there wasn't enough compute power to track down all the wealthy tax cheats, and possibly no political incentive either. But I still suspect a 73% income tax will have a distortionary effect where people find a way to take "income" without reporting taxable income.

Max writes:

While I am neither a friend of Krugman nor Atkinson and not even halfway aligned with any thought. I think that the number of 60 to 75% is really high in percent of income terms. I also find it baffeling how they arrive at exactly these numbers. Is it guess-work or is this rooted in deeper optimization of tax numbers. Did they do a general partial differential equation that yielded these values? If yes, what where the differences in variables and coefficients?

I am not surprised that Krugman didn't come out against wealthy men not having earned their wealth, because he himself is not a member of the poverty club. Atkinson is even less willing to join this club.

Remarkable however was Krugmans answer to whether there is a financial innovation that was unambigiously good. Well, is there ANY innovation where nobody could find fault and negative consequences. The automobile displaced horse carriages, certainly a drawback for them, and uses up fossil fuels. The train wastes uranium, nature or steel, depending on your views on energy creation.

In my view there no pareto-optimal inventions, neither in the financial sector, nor in any other. There are always some that lose, although it might be better overall for a lot of people by default (because they opt for it!). I still think that commodity options and futures are important financial instruments that have yielded more good than bad (not so much HFT imo, but this is mostly because of people and not much more).

Krugman advocates an international tax cartel (of course, he doesn't use that term) of governments to coordinate their attempts to raise marginal tax rates so that high-income people have few ways out.

Yeah, I think all leftists and even some rightists favor a world-wide tax cartel to punish the evil evaders. I wonder whether they thought that through and based it on more than jealousy. What if the rich would forgoe extra economic activity due to shielded income? What if they would change their mind and stop investing and earning money, because in the end the extra buck is not worth the time-spent?

I believe this is not the world, we would want to live in, especially not in the US or in Europe. It would mean that the rich would stop buy luxury items and those items are the bred and parcel of most of Europe's and US high tech industry. What if Bill & Melinda Gates would stop funding their charities, I doubt that would be a pleasant outcome; especially for the poor.

Krugman jokes that we could get Congress to go along with higher tax rates if we got the Cincinnati office of the IRS involved. Interestingly, when he gets little audience reaction, he says, "Sorry. That's a little bit too topical." My guess is that the audience felt uncomfortable admitting what the IRS did. This is actually one of the few things about Krugman that I like: he will sometimes "go off the reservation" and admit certain things that "his side" doesn't like to admit. Of course, in this case--and here's what I don't like--Krugman seemed to approve of what the IRS did.

I concur and imo, this is frightening. He actually believes that a government body should use ideology to hunt down its enemies. This is an indication that for the "bastardized" US liberalism, he would advocate an autocracy as better than a democracy.

Asif Dowla writes:

David:

Krugman was quoting the work of Saez and Diamond. He said that since marginal utility of $1 is zero for the wealthy, one should only concentrate on maximizing tax revenue and that would imply taxing the super-rich at 73% rate. Your transcription of Krugman's argument missed this elaboration.

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