My intention in this post is to illustrate the frustratingly low level of discourse in blogs these days. Over at OTB James Joyner has a post on the Obama Administration’s pursuit of fairness in the tax code in its advocacy of the “Buffett Rule”, i.e. that the very rich should pay roughly the same rate of their incomes in taxes as those in lower brackets. I made the following comment:
I guess it depends on whether you want to equalize marginal tax rates or extract the greatest amount of revenue on a continuing basis. The problem is that you can’t do both.
Any number of studies have found that the tax on capital gains that maximizes continuing revenue is actually quite low. Here’s one of the recent studies which finds that a rate below 10% actually increases revenues.
As long as capital gains are taxed at a lower rate than earned income the very rich will pay a significantly smaller proportion of their total income in taxes than those who depend primarily on earned income. One of the advantages that the very rich have is the ability to manage their incomes to minimize their tax burden. You pays your money and you takes your choice.
If you decide that greater equality is more important than revenue, you’re presented with two alternatives. Either you can trim your spending commensurate with the lower revenue or you can borrow (or just spend into existence) the difference between what tax revenues and expenditures. Those choices have consequences, too.
Reducing spending requires tough political choices and, well, spending less on stuff you probably actually want to spend on. Borrowing more (or spending into existence) runs the risk of increasing inflation or a loss of faith in the currency.
The reaction to this comment was several different varieties of out-of-hand dismissal. No attempts at refutation. Several claims of bad faith. Lots of challenges of the study cited on grounds of bias, in the absence of any substantive criticism an extremely weak response. That’s it.
Here’s a Google search of the literature on optimal capital gains tax policy. The results include studies from the Minneapolis and Cleveland Federal Reserve, the NBER, some scholarly studies, and a number of studies from think tanks advocating lower taxes or neoclassical economics. My quick check of the studies in the first three or four pages of results found no studies advocating a higher capital gains tax. I would appreciate it if somebody located a study finding that a higher capital gains tax rate would maximize revenue. I haven’t found any.
Here’s the thing: as long as you tax capital gains at a lower rate than earned income, the very rich will have lower effective tax rates than people in lower earnings brackets. That’s just mathematics. And optimal tax policy suggests that, if you’re taxing income, you should tax capital gains at a lower rate than earned income.
So you pays your money and you takes your choice. You can have fairness, defined as the “Buffett Rule”, or you can maximize revenues. You can’t do both.