Noah Smith on taxes and labor supply

Here’s Noah Smith on the disincentive effects of taxes:

There are reasons to think that taxes, unless they reach very high levels, don’t have a big effect on how much people work.

First, most jobs, even part-time jobs, require a minimum number of hours per week. Few people are likely to quit working entirely because of taxes.

The required number of hours worked is itself endogenous.  In Europe, required yearly hours are less than in the US, due to higher taxes.  Some claim the differences are cultural, but back in the 1960s when French tax rates were comparable to US tax rates, the French worked just as long hours as Americans.  Culture is endogenous.  In contrast, many of the so-called “tiger economies” in East Asia have lower tax rates than the US, and their citizens work longer hours.

Second, when you tax people, they are poorer, and they need to work more to maintain their standard of living.

This is a common misconception that I see all the time.  There is no first order effect of taxes on national income, as the tax money gets recycled into the economy.  Now it’s true that the government might waste the tax money, leaving a country poorer, but in that case it would be more accurate to say that government waste causes people to work harder.  In modern economies most extra spending at the margin goes back in transfer programs.  Since national income doesn’t fall from the direct impact of taxes, there is only a substitution effect on labor supply, not an income effect.  Of course income falls as people work less, but that is a second order effect.  All tax and transfer studies should use income-compensated labor supply curves.

When you look out at the world, you see lots of circumstantial evidence that taxes don’t have a crushing effect on the labor supply. For example, in a recent blog post at the NYT’s Upshot, Neil Irwin reports that countries with higher taxes and more generous welfare systems also tend to have a higher share of the population in the labor force:

Of course taxes are not the only factor that impacts labor supply, programs like free child care matter as well.  (And here I’ll diverge from Smith’s post, and get some things off my chest.) But it’s interesting to note that when progressives like Paul Krugman are confronted with the fact that the per capita GDPs of countries like France are only 70% of US levels, they insist that productivity is just as high, it’s just that the French work far fewer hours.  Indeed that’s generally true of Western Europe; the biggest reason they have lower incomes is that they work fewer hours.  Then they insist that this extra leisure should be counted in utility calculations, proving the European model actually does pretty well.  But when the topic switches to taxes and labor supply, progressives tend to make exactly the opposite argument; they claim the Europeans work just as long hours as we do.

A similar bait and switch occurs with the term ‘leisure.’  When criticizing the US model they focus on how unemployment is not just “leisure,” as those awful RBC models might imply.  It causes people to become depressed, as unemployed breadwinners lose self-esteem.  Fair enough.  But when the discussion turns to Europe the low labor supply is suddenly seen as evidence that the less materialistic Europeans wisely avoid the American rat race, even though a substantial part of the difference is due to much higher structural rates of unemployment in Europe.

Back to Noah Smith:

Also, if you look at the U. S.’s past, you see that although taxes have come down over time, people are not working more than they used to.

You don’t want to use time series data, as there is a long-term downward trend in hours worked due to increasing affluence.  If you look cross sectionally, hours worked in America relative to Europe have risen since the 1960s.  And it’s not clear that taxes have actually come down. Compared to the 1950s and 1960s the rich face a lower MTR, but very few rich people ever faced those 90% brackets. Lower income people face a much higher implicit MTR than in the 1950s and 1960s.

So why do economists such as Mankiw spend so much time warning about the dangers of moderate tax increases on the well-off? It might be because they are morally opposed.

I have no moral objection to very high tax rates, unless they reduce aggregate utility.

PS.  Of course there is one European country that has per capita GDP levels (PPP) that are comparable to the US, despite lacking oil—Switzerland.  Oh wait, that’s the European country with low taxes.

HT:  Saturos


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137 Responses to “Noah Smith on taxes and labor supply”

  1. Gravatar of Daniel Daniel
    28. December 2014 at 13:08

    I’m gonna play the devil’s advocate here and ask what happened to Keynes’ prediction of a 3-hour workday ?

    Surely Westerners have their material needs more than covered for, so why exactly is everybody in a hurry ?

    Yes, low taxes make people work more. But since when is work and end unto itself ?

    Economics may not be a zero-sum game, but social status (which is what people really care about, anyway) definitely is.

  2. Gravatar of Otto Maddox Otto Maddox
    28. December 2014 at 13:42

    “I have no moral objection to very high tax rates, unless they reduce aggregate utility.”

    Isn’t “aggregate utility” the whole argument behind socialism?

  3. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    28. December 2014 at 14:00

    “PS. Of course there is one European country that has per capita GDP levels (PPP) that are comparable to the US, despite lacking oil””Switzerland. Oh wait, that’s the European country with low taxes.”

    There is another one with even higher GDPpc (PPP): Luxembourg. By an amazing coincidence, it’s the other European country with low taxes.

  4. Gravatar of Negation of Ideology Negation of Ideology
    28. December 2014 at 14:32

    Daniel –

    “But since when is work and end unto itself ?”

    Great point. I’d like to see less work done by people as well. I think the only way to get there is to do two things:

    1. Get more people to be capital owners, deriving a significant percentage of their income from dividends.

    2. Eliminate the double tax on corporate income.

    Then automation and replacing humans with machines would be a net benefit for most people. Unfortunately, many people have an irrational bias against corporations, especially on the left, so we’ll likely have to waste countless hours in make work jobs for another generation or two.

  5. Gravatar of Daniel Daniel
    28. December 2014 at 14:43

    Negation of Ideology,

    I don’t think it’s that simple

    http://slatestarcodex.com/2014/07/30/meditations-on-moloch/

    Yes, it’s a long read, but it’s worth it.

  6. Gravatar of Major.Freedom Major.Freedom
    28. December 2014 at 15:22

    Daniel:

    “I’m gonna play the devil’s advocate here and ask what happened to Keynes’ prediction of a 3-hour workday?”

    “Surely Westerners have their material needs more than covered for, so why exactly is everybody in a hurry?”

    Because their material needs are NOT “more than covered for.” Your philosophical view of man is warped by irrationalism that discounts the nature of Reason and what that entails for human needs and desires. Rational animals like us are constantly thinking about “the better mouse trap” because we are capable of doing so. Art, literature, entertainment, “gadgets”, all these are made available to experience when what you call “material needs” are able to be met.

    Humans are not like snails and cows and insects. We are not content to just biologically survive. We have thoughts of traveling to the stars, and no matter how wealthy we get, there is always that burning desire to do more, to experience more, to consume more. This is a supremely benevolent “gift” that we have. It is what drives us to become incredibly advanced, both technologically and philosophically.

    Imagine if there really was a cessation of desire to experience more once certain basic needs are met like food, shelter, vehicles, clothing, and medicine. It would be hell on Earth, because for trillions of years, indeed infinite years going forward, hardly anything would change. Humanity would be stuck in material stagnation. They would be essentially trapped to Earth. Forever and ever.

    Deep down whether you are aware of this or not, you are calling for an end to industrialization. You are calling for a stasis in human life. You are calling for an end to human development.

    And why? It is because you feel exhausted and tired and the thought of infinite development. You feel exhausted because your mind is not exercised to be able to handle a constantly innovating world. It is people like you who are humanity’s biggest threats, because if people like you get into power, you will find it irresistable to refrain from using guns and coercion to make the world look like what you have in your warped mind.

    If you instead educated yourself in active epistemology as opposed to the passive epistemology you have been brainwashed into believing is your proper place in life, then you would not feel tired like you are feeling now. You would have a never ending surge of enthusiasm, empowerment, and curiosity, rather than what you have, which is cynicism, hatred, fear, and self-loathing.

    “But since when is work and end unto itself?”

    Keynesian theory presumes work is an end unto itself. That is why it calls on government to tax, borrow, spend and (inadvertantly) reduce the rate at which real wealth increases, when there is a reduction in labor hours performed. All those people who want full time jobs but aren’t able to find any at the wage rate they desire, but who could work part time and live your ideal life for us all of just surviving with some additional joys in life beyond biological survival, is treated in Keynesian theory as something for government to “fix”. The theory is crude and calls for government action when crude aggregates change.

  7. Gravatar of Nick Rowe Nick Rowe
    28. December 2014 at 15:26

    It’s not how many hours per year you work, it’s how many hours as a percentage of your whole life. The most important margin for the labour/leisure trade-off is what age you retire.

    Or maybe that’s just me!

  8. Gravatar of Biased Statistics Biased Statistics
    28. December 2014 at 15:28

    it’s all very interesting but don’t you think that some public spending can actually increase labour supply? For instance day-care, education, public transportation… It’s too easy to look only at taxes.

    There’s a paper on it on voxeu.org about Scandinavia but I can’t seem to find it…

  9. Gravatar of Rajat Rajat
    28. December 2014 at 15:34

    “This is a common misconception that I see all the time.”

    Why is someone like Noah Smith, whom you regard as being really smart, making this sort of mistake? Maybe he conflating the first- and second-round effects, maybe he has forgotten the difference or maybe he is just poorly-trained (or maybe he just isn’t that smart). I don’t think it’s bad faith in this case. It seems to me that you, Scott, recall a lot of fundamental things from your undergraduate or graduate training that other people either were never taught or have forgotten. The double taxing of saving through a capital gains tax is another example that seems alien to many other economists. Do you credit your recall, Scott, or your Chicago PhD or your undergraduate education?

  10. Gravatar of Old Whig Old Whig
    28. December 2014 at 15:56

    In Sweden my mother worked as a professor of dentistry. She was also the trade union boss for govt dentists.

    She paid a marginal tax rate of 85%. (Small biz paid 95%).

    She only worked 7 months per year. The reason bring that when she asked here colleagues what they wanted they said. “No pay raise. We want more vacation, higher overtone and earlier retirement.”

    So my mother worked only 7 months per year. 12 weeks mandatory vacation and for every overtime hour got 3x free. Mandatory retirement at 60, rest of of Swedes 65.

    So yes Noah Smith is really barking up the wrong tree.

    In Sweden my mother worked as a professor of dentistry. She was also the trade union boss for govt dentists.

    She paid a marginal tax rate of 85%. (Small biz paid 95%).

    She only worked 7 months per year. The reason bring that when she asked here colleagues what they wanted they said. “No pay raise. We want more vacation, higher overtone and earlier retirement.”

    So my mother worked only 7 months per year. 12 weeks mandatory vacation and for every overtime hour got 3x free. Mandatory retirement at 60, rest of of Swedes 65.

    So yes Noah Smith is really barking up the wrong tree.

  11. Gravatar of Major.Freedom Major.Freedom
    28. December 2014 at 16:00

    Sumner:

    “There is no first order effect of taxes on national income, as the tax money gets recycled into the economy. Now it’s true that the government might waste the tax money, leaving a country poorer, but in that case it would be more accurate to say that government waste causes people to work harder.”

    This is also true in central banking economies. Governments printing money directs resources away from net wealth generating activities towards net wealth consuming activities. So instead of seeing a 5% or 10% annual growth in real wealth, we might see only 2%, or 1%, or even negative growth if the prior inflation was significant enough.

    That makes people work harder, but monetary socialists don’t want to accept this lest they be lumped in with the “raise taxes” progressive camp in this respect.

    When the context is monetary policy, MMs view reduced labor hours as an evil, and use it as an ideological weapon against the inflation hawks. But when the context is “improved” fiscal policy, MMs view reduced labor hours as a good thing, and use it as an ideological weapon against the tax and regulate progressives.

    When the context is government planning of public works, market monetarists view “waste” caused by government printing and spending as an evil, and use it as an ideological weapon against the tax and regulate progressives. But when the context is government planning of money, market monetarists view “waste” caused by government printing and spending of money as a good thing, and use it as an ideological weapon against the “we’re at the zero bound” Keynesians.

    It is impossible, literally impossible, for Monetarist socialists to quibble and disagree with Keynesian socialists without there being rank hypocrisy somewhere in their lines of reasoning.

    This provides those of us who know that improving our knowledge requires reducing inconsistency, with an endless tragi-comedy theatric performance.

    You might as well call the play “Government is evil, except when it aggresses against people to bring about my socialist vision for everyone, or, how I learned to stop worrying and value contradictions.”

    Also, there is no such bloody thing as “aggregate utility”. It is a figment of your imagination. There is only individual utility. The only purpose of “aggregate utility” is to serve as an ideological cover for your desire to harm innocent individuals and reduce their utility, all for the sake of bringing about your utopian vision for society that is believed by you to be more important than anyone’s vision for themselves.

  12. Gravatar of W. Peden W. Peden
    28. December 2014 at 16:03

    Rajat,

    If I may say so, I think that a lot of Scott Sumner’s analytical ability can be summed up in three points: (1) a solid Chicago education, (2) remembering that education, and (3) thinking rigorously through the implications of consensus ideas about ratex, money illusion, tax incidence etc., rather than floating about from fashionable hypothesis to fashionable hypothesis to win some ephemeral policy debate.

    Anyway, a 3 hour workday is one thing- if it’s chosen. One can imagine highly capital-intensive societies where most people would choose leisure, perhaps of a nonmonetarily productive kind. I think that these choices are best made by individuals rather than politicians, economists, internet commenters, or (good grief!) epistemologists.

  13. Gravatar of benjamin cole benjamin cole
    28. December 2014 at 16:13

    Excellent blogging…but as Scott Sumner knows, this whole debate is based on a faulty premise that labor or productive behavior should ever be taxed.
    Please, tax pollution, tax vice, tax luxury goods, tax gasoline, tax consumption.
    But do not tax employers and employees.

    I do think ordinary employees should get four weeks vacation for every 2000 hours of work….

  14. Gravatar of Chuck Chuck
    28. December 2014 at 17:20

    Noah Smith is a smart guy who likes to argue. The position doesn’t really matter.

  15. Gravatar of Brett Brett
    28. December 2014 at 17:24

    The “lower taxes and equal hours worked” argument doesn’t really fly. The French actually had higher average hours worked annually back in the 1960s. Both the US and France had the start of major declines in hours worked in the late 1960s, converging on the same number of hours worked in 1982 – after which France’s work hours kept declining while the US more or less stabilized or declined more slowly.

    You could make an argument that after 1982, lower income tax rates kept the US hours worked from declining faster, but that doesn’t explain why both of them tanked in terms of hours worked in the 1970s despite reduced rates from the 1960s and stable rates over the course of the 1970s.

    I do agree that the lower hours worked and lower labor force participation rate are the source of lower GDP per capita, although I’d also add that they have a higher percentage of the population in significantly less productive rural areas versus the US in the case of France.

  16. Gravatar of Edward Edward
    28. December 2014 at 17:26

    Scott,
    Noah already has a response to your response:
    http://noahpinionblog.blogspot.com/2014/12/scott-sumner-on-taxes.html

  17. Gravatar of Brett Brett
    28. December 2014 at 17:27

    Also-

    I’m aware that affluence and demographic changes are the main reason why, broadly, there have been absolute declines in the number of hours. It’s just that you’d need to explain why tax rates matter much more now in slowing that down versus back in the 1970s.

    The demographic factor could be a big element of it, too – if the US had far higher immigration as a percentage of its population, that would skew its population younger than that of France, leading to higher hours worked.

  18. Gravatar of Edward Edward
    28. December 2014 at 17:29

    Guys, work is a an instrumental virtue, not an absolute one.
    But its still bad to reduce hours worked because real wealth and output is also reduced

  19. Gravatar of Negation of Ideology Negation of Ideology
    28. December 2014 at 18:01

    Daniel –

    I agree I oversimplified. Good link – the author discusses this near the end.

    “They have no value to contribute as workers – and since in the absence of a spectacular social safety net it’s unclear how they would have much money – they have no value as customers either. ”

    It seems to me that if that scenario played out, then the either the rich would earn spectacular profits, meaning the government would collect huge revenues to fund redistribution programs, or the middle class would become larger capital owners and voluntarily retire younger.

    Remember, the voters have the final say.

    Or am I missing a third scenario?

  20. Gravatar of ssumner ssumner
    28. December 2014 at 18:12

    Daniel, I wonder about that too. Why do people want to work so hard? My guess is that people don’t enjoy leisure all that much.

    And the Moloch post might be the best single post I’ve ever read. I’ve been meaning to comment on it, but haven’t gotten around to it.

    Otto, Yes, That’s what the socialists think. But they are wrong.

    Luis, Good point.

    Nick Rowe, You persuaded me, I think I’ll retire right now.

    Biased stat, Maybe, but then why is per capita GDP in Sweden and Denmark well below US levels?

    Rajat, First of all, there are lots of concepts Noah Smith knows that I don’t. My weakness is the technical side of economics and my strength is the intuition behind certain concepts. I probably look smarter than I am because I focus on topics where I have a comparative advantage. There are big areas like risk where I am weak.

    And yes, the 1970s Chicago was great education.

    Old Whig, Great story.

    I am traveling and will respond to other comments later.

  21. Gravatar of Saturos Saturos
    28. December 2014 at 18:55

    To summarize Noah’s response to this post, he points out that since the US does a relatively high amount of redistribution you do need to look at first order income effects on rich people. And then he posts these slides from Emmanuel Saez: http://eml.berkeley.edu/~saez/course/Labortaxes/laborsupply/laborsupply_slides.pdf

  22. Gravatar of Major.Freedom Major.Freedom
    28. December 2014 at 18:59

    Otto said:

    “Isn’t “aggregate utility” the whole argument behind socialism?”

    Sumner replied:

    “Yes, That’s what the socialists think. But they are wrong.”

    They?

    At any rate, how are “they” wrong? Since aggregate utility does not exist, one person’s claim of an action that brings about higher aggregate utility, is just as equally valid (or invalid) as anyone else’s claim of a different action that brings about higher aggregate utility.

    It doesn’t matter how many individuals are worse off, because any gain to the rest can always be given a higher weighting such that “aggregate” utility rises. For that is the very principle behind all such claims of “The state should do X to increase aggregate utility”. Individuals who are worse off are always given a smaller weighting that those who gain (in the short run) from mommy and daddy government “help”, in the imaginary concept of aggregate utility.

    I have never met a socialist who advocates for abolishing “state capitalist” central banks. Coincidence?

  23. Gravatar of Nick Rowe Nick Rowe
    28. December 2014 at 19:25

    Saturos: I think Noah is wrong on the redistribution point. If you put lump sum taxes on group A, and use the funds to give lump sum transfers on group B, then group A will be poorer and work more, and group B will be richer and work less. Unless you have different income elasticities for the two groups, the net effect from income effects is a wash. It’s the substitution effect from positive marginal tax rates that remains.

    I think this is standard optimal tax theory, where positive marginal tax rates are used to redistribute income from rich to poor. If the net effect on labour supply was zero, the optimal marginal tax rate to maximise a utilitarian SWF would be 100%. But it isn’t.

  24. Gravatar of Ray Lopez Ray Lopez
    28. December 2014 at 19:56

    I’ve read this thread to now. Here is my scorekeeping: Noah Smith wins, as per http://noahpinionblog.blogspot.com/2014/12/scott-sumner-on-taxes.html

    Sumner, again, uses unsourced ideas to back his claims (analogous to his untested theory of targeting NGDP, which could be disastrous to the economy).

    Major Freedom is correct in everything he says (no surprise there)

    My two cents: study after study has shown that the rich are indifferent to taxes: they will work just as hard with or without higher taxes (within reason). So that’s another reason to tax them–it won’t hurt their output.

  25. Gravatar of ssumner ssumner
    28. December 2014 at 21:49

    Brett, Tax rates rose in the US during the late 1960s and the 1970s.

    Saturos, I’ll have to look at this later, but if he’s saying the income effects may differ for rich and poor then of course I would agree. But that is not what I am criticizing him for in this post.

    Nick, That’s right.

    Ray, I assume educated readers already know this stuff, that’s why I don’t provide sources. This blog isn’t aimed at people like you.

    But thanks for keeping score, I find that really helpful. If you say I’m losing then naturally that gives me more confidence that I am on the right track.

  26. Gravatar of ChrisA ChrisA
    28. December 2014 at 23:54

    I think Noah is not thinking about the marginal analysis, he is looking at average tax rates. To me this should be done by looking at the margin tax rates; everyone (well just about everyone) accepts that the marginal dollar has less utility than the first one. And we can surely agree that people in general stop working when the marginal utility that they get from their compensation is less than the marginal utility they lose from working. So if you tax their marginal compensation at a higher rate it must mean that they will hit this marginal equivalence point earlier (marginal cost exceeding marginal benefit). Which explains why people work less when faced by higher marginal tax rates.

    One possible objection; some people never reach this point because their employment opportunities are limited or because of minimum wage restrictions, but generally speaking there are always jobs out there, just maybe not at wages that are sufficiently high enough to outweigh the loss of utility of that work.

  27. Gravatar of Biased Statistics Biased Statistics
    29. December 2014 at 00:41

    Dear Scott,

    The 70% figure is accurate but a bit misleading, because France is well below other European countries. According to the World Bank, in PPP, here are some GDP per capita figures :
    France : 37 872
    Germany : 44 469
    Sweden : 45 148
    Norway : 65 462
    Denmark : 43 445
    US : 53 042.

    So GDP per capita in the biggest ranges from 70 to 90% (with the exception of Norway at 120%) of US-level in the biggest social-democracies of Europe, with France the lowest and France is not even the one with the highest MTR on labor income (some might argue that low retirement age, free universities and labour market regulations are what keep french labour supply at low level amongst the young and the old). The real distinction is indeed the fact that US workers word longer hours. To argue that this is only because of MTR would be exaggerated, but I agree they’re part of the explication, especially at low incomes. But it’s possible to get to 90% of US GDP per capita with significantly higher MTRs, and that changes a bit the point you trying to make.

    In the end, it could well be an exogenous social choice, and nobody’s able to decide which choice is best for welfare.

  28. Gravatar of Daniel Daniel
    29. December 2014 at 01:29

    Scott,

    My guess is that people don’t enjoy leisure all that much.

    My guess is that people desire status more than leisure (I know I do). This being the “multi-polar trap” Scott Alexander goes on about.

  29. Gravatar of Ben J Ben J
    29. December 2014 at 03:10

    Ray must be really, *really* confused if he thinks both Noah Smith *and* Major Freedom are right about taxes!

  30. Gravatar of Ray Lopez Ray Lopez
    29. December 2014 at 05:08

    @everybody:

    I promised not to mention gold but I could not resist. A trip down memory lane, see http://www.themoneyillusion.com/?p=308#more-308 (February 2009 Sumner Post, entitled: “My Role Model, George Warren”)

    1) Read carefully this early blog post and note how Sumner appears to want to educate “noneconomists” (mentioned twice). Compare to today, when fame has gotten to his head and he states this blog is not for education (read this thread)

    2) Notice back then how much emphasis Sumner places on the stability of gold–he correctly recognizes back then that gold is stable, notwithstanding the production flucuations (this is because as economic activity increases, naturally people want more money due to price inflation, and hence dig more gold out of the ground). Compare to Sumner’s dismissing gold today.

    3) “Warren advocated a much more radical policy of devaluing the dollar until the commodity price indices regained their 1926 level.” George Warren, an obscure economist who suggested devaluing the dollar by targeting commodity prices (against Keynes advice) is Sumner’s hero. Note back then how Sumner correctly conflates two ideas: targeting NGDP and targeting commodity prices. Compare to today’s Sumner who dismisses that these two ideas are even related (see my earlier post on this, ‘cotton DNA’ is the keyword).

    In short, I like the old Sumner better, before he became too big for his britches and started thinking he is some sort of giant in the field. I know I have been guilty of contributing to this by praising Sumner in other forums, but primarily I think it was Tyler Cowen’s singling out of Sumner for recognition. While praise is good, sadly, the man has become a monster due to his enormous and unsatiated ego. Bring back the old Sumner!

  31. Gravatar of Benny Lava Benny Lava
    29. December 2014 at 05:57

    Also this talk about working but what about retirees?

  32. Gravatar of ThomasH ThomasH
    29. December 2014 at 07:57

    All pretty irrelevant at the tiny changes in marginal rates that have been on the table in the US recently.

    I would like to see the discussion done in terms of progressive consumption and Pigou taxes.

  33. Gravatar of Jim S Jim S
    29. December 2014 at 08:14

    A couple of comments have referred to “double tax on corporate income”. That phrase has always appeared to me to be a silly slogan, not a valid argument. Wage income is taxed for general income tax, Medicare tax, Social Security tax, and then again when spent as sales tax. There is at least quadruple tax on income. But no one seems to be saying we must end the “quadruple tax on income”. I think of corporate taxes as being paid by customers in higher prices and by owners in reduced profits. Taxes on dividends are also paid by owners, but as a separate tax on the share of their income coming from capital. It is the nature of taxation to come in bits and pieces. What counts is who pays, how much is paid, and what is being discouraged or encouraged. Tax arguments should focus on those topics, as your debate with Noah Smith on how much taxes discourage labor.

    BTW, if I were designing a tax code from scratch I would only have businesses taxed for Pigovian purposes and I would generate the bulk of the government funds from a very highly progressive income tax. That suits my value system. Other readers no doubt have different values.

  34. Gravatar of Saturos Saturos
    29. December 2014 at 08:38

    An interesting post about markets and discrimination, which seems like the sort of thing Scott might want to weigh in on: http://danluu.com/tech-discrimination/

  35. Gravatar of Jim Glass Jim Glass
    29. December 2014 at 08:47

    I’m gonna play the devil’s advocate here and ask what happened to Keynes’ prediction of a 3-hour workday ?

    He was correct. The needs of the upper middle class good life by the standards of 1930 are paid for by about a 3-hour workday today.

    BEA tells us that real per capita personal income today is 4.6 times that of 1930. Three hours is 37.5% of an 8-hour workday. Arithmetic tells us that 37.5% of 4.6 provides 1.725 of the average per capita personal income of 1930.

    So, to a first-order approximation, a three-hour workday now provides 70% more personal income than the average when JMK was writing in 1930.

    Surely Westerners have their material needs more than covered for, so why exactly is everybody in a hurry ?

    “Material needs”? If one means 1930s level food, housing, and clothing, sure.

    But a lot of people also seem to enjoy commenting on blogs, which requires an internet, computers, grids, technology of all sorts. And if some want to consume these things, others will have to provide them, and want to gain by doing so, and since consumers want these kind of things as soon as possible with as high quality as possible, some hurry enters into the process.

    By the same token, consumers today want to consume much more in the way of years of education, better health care and longer life expectancies, bigger houses with climate control year round (instead of just coal scuttles in winter, as per 1930), smartphones, autos per family, family trips by jetliner to Disneyworld, flatscreen TVs with hundreds of channels, and countless other entertainment options unimaginable even by the richest 1930ers like JMK himself.

    And for all that is consumed, of course there are matching incentives to work to provide.

    But, hey, anyone who feels all his material needs would be happily met by 1930-level life expectancy and living standards can certainly cut back his work hours enough to get by on say one-third of the average personal income of today, and enjoy all the increase in leisure that results.

  36. Gravatar of Daniel Daniel
    29. December 2014 at 08:48

    ^ Well, I guess it was bound to happen – the feminists are going after the nerds in IT.

  37. Gravatar of Daniel Daniel
    29. December 2014 at 08:49

    Jim Glass,

    Way to miss the point, bro.

  38. Gravatar of Jim Glass Jim Glass
    29. December 2014 at 08:55

    Ah, the fact that you don’t like my answer doesn’t mean I missed your point.

  39. Gravatar of Daniel Daniel
    29. December 2014 at 09:10

    I’m talking about human happiness/status-seeking/coordination problems, not how much crap you can stuff in your closet.

    So yeah, you managed to miss the point entirely.

  40. Gravatar of Matt McOsker Matt McOsker
    29. December 2014 at 09:17

    Under federal deficit spending scenarios raising taxes on the rich (or anyone for that matter) does not necessarily redistribute anything, unless you also increase the budget by the same amount. Otherwise, you just simply reduce bond issuance.

    If the federal government is running a surplus, that money definitely does not redistribute, it just retires debt.

    I am just speaking at the federal budget level.

  41. Gravatar of TallDave TallDave
    29. December 2014 at 09:31

    Second, when you tax people, they are poorer, and they need to work more to maintain their standard of living.

    Another problem with this logic is that it totally ignores where the money goes. When those taxes support a consumption floor, Noah’s assumption is false — in fact I have personally met quite a few people for which the opposite was true! Means-based assistance can actually lower the marginal dollar of value of additional work income below zero in some cases.

    I’m surprised Noah doesn’t seem to realize the poor face huge MTRs (easily the largest of any income group), it’s a well-known problem.

  42. Gravatar of TallDave TallDave
    29. December 2014 at 09:34

    sorry. sb “Means-based assistance can actually lower the marginal value of additional work income below zero in some cases.”

  43. Gravatar of TallDave TallDave
    29. December 2014 at 09:40

    Jim Glass — But, hey, anyone who feels all his material needs would be happily met by 1930-level life expectancy and living standards can certainly cut back his work hours enough to get by on say one-third of the average personal income of today, and enjoy all the increase in leisure that results.

    Good points. FWIW, BLS found households in the lowest income quintile spent about half the median HHI.

    http://www.bls.gov/opub/btn/volume-2/spending-patterns-of-families-receiving-means-tested-government-assistance.htm

  44. Gravatar of Daniel Daniel
    29. December 2014 at 09:49

    Why am I not surprised Tall-“USA-commited crimes don’t count cuz God is on our side”-Dave is too stupid to understand the question ?

  45. Gravatar of Becky Hargrove Becky Hargrove
    29. December 2014 at 10:46

    Oh my! From Tyler Cowen:
    “Nick’s post brings out my inner Arnold Kling, as I think these models are on the wrong track altogether.”
    http://marginalrevolution.com/marginalrevolution/2014/12/sentences-to-ponder-84.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+marginalrevolution%2Ffeed+%28Marginal+Revolution%29

  46. Gravatar of Floccina Floccina
    29. December 2014 at 11:11

    First, most jobs, even part-time jobs, require a minimum number of hours per week. Few people are likely to quit working entirely because of taxes.

    Think wives Noah, think wives. Men will work at very high tax rates it is demanded of then socially.

  47. Gravatar of Floccina Floccina
    29. December 2014 at 11:18

    Oh and BTW it is not so much a choice between work and leisure but between work in the taxed economy and work for in home consumption (or under the table work). Many people seem to like to work.

  48. Gravatar of Doug M Doug M
    29. December 2014 at 13:52

    I think you are looking at the wrong side of the equation.

    How do employment costs influence job creation. A job will be created when an employer can make sufficient marginal revenue from that labor to cover the cost of employment + training + risk premium.

    The level of taxation is part of the all in employment cost regardless of the whether it is the employer or the employee who pays those taxes.

  49. Gravatar of Jim Glass Jim Glass
    29. December 2014 at 19:49

    I’m talking about human happiness/status-seeking/coordination problems, not how much crap you can stuff in your closet.

    So yeah, you managed to miss the point entirely.

    So you consider all the added years of life expectancy, better health care for better quality of life, years more education for the average person, raising kids in homes that have heating and cooling by thermostat instead of just incidental heat by coal scuttle … to be “crap stuffed in the closet” since 1930?

    Yes, I did get that. No, I didn’t miss that point you were making. :-)

    However, it is possible to disagree with it and think that “status seeking” actually has not been the primary driver behind all the work hours that have gone into consuming (and supplying) longer life expectancy, better health, better education, better living conditions, and even much more diverse and better-quality entertainment (what were the masses working only three hours a day supposed to do with all their freed-up time?) attained post-1930.

    Your life expectancy is about 20 years longer today than it would have been in 1930. Is the primary reward you get from this the kick of a feeling of “higher status”? If you suddenly get the bad news that you have 20 years less of this than you expected stuffed in your personal closet, will you be just as happy? If you are upset by the news, will it be because of a blow to your pride and status?

    Of course some people do labor merely to achieve status, without adding much substance to the world. This has always been true, it certainly was in 1930, and no doubt all the technological advances since then have created more ways than ever to act thusly today. For instance, by spending hours of one’s life arguing in blog comments, attacking others and trying to come off as some sort of intellectual alpha dog.

    But even so, that just doesn’t seem to be the basic driver of economic growth, and the quadrupling of personal income, since 1930.

  50. Gravatar of ssumner ssumner
    29. December 2014 at 20:56

    ChrisA, Good point.

    Biased, Actually France is very typical of western Europe, it is the other countries you included that are very atypical. It makes no sense at all to compare a huge multi-ethnic country like the US with 300 million people of all different races to Denmark. Compare the US to Europe, if you insist on doing that sort of comparison. Europe has much higher taxes and an average GDP per capita at French levels, if not lower. I could cherry pick parts of the US that are much richer than average.

    Daniel, I think you are right about most people (although I actually prefer leisure to status.)

    Ray, Yes, I have become a monster with an enormous and unsatiated ego, but I haven’t changed my views on gold one iota.

    Jim S. A progressive consumption tax is much fairer, the income tax should be abolished.

    Floccina, Very good point.

  51. Gravatar of Jim Morales Jim Morales
    29. December 2014 at 21:02

    I expect my government to provide services such as snow plowing, Fire and Police Depts., K-12 education…the list goes on. I also expect to pay taxes for these services. Are you arguing that all taxes are “Bad”? If so, I do not agree.

    I feel we spend too much on weapons and not enough on bridges, but isn’t that a political debate? Taxation does have economic consequences,but to me,arguments about taxes are fundamentally political in nature, not economic.

  52. Gravatar of Daniel Daniel
    29. December 2014 at 21:31

    Jim Glass,

    that just doesn’t seem to be the basic driver of economic growth, and the quadrupling of personal income, since 1930.

    Your naivete is adorable.

  53. Gravatar of Major.Freedom Major.Freedom
    29. December 2014 at 22:42

    A useful “insider” harbinger:

    http://m.imgur.com/78BEVOm

  54. Gravatar of Major.Freedom Major.Freedom
    29. December 2014 at 22:46

    “But thanks for keeping score, I find that really helpful. If you say I’m losing then naturally that gives me more confidence that I am on the right track.”

    You spelled “wrong” incorrectly.

  55. Gravatar of Major.Freedom Major.Freedom
    29. December 2014 at 22:54

    Ben J:

    “Ray must be really, *really* confused if he thinks both Noah Smith *and* Major Freedom are right about taxes!”

    Speaking of confused, I think you’re mixing up ad hominem with a substantive argument. For I did not even mention taxes I this thread, and yet you assert I am wrong about it anyway.

    Just more evidence of the intellectual laziness and tribalist mentality masquerading as reasonable discourse coming from the MF haters, lol.

    PS, if you disagree with me on taxes, then you are infinitely confused, so, uh, there.

  56. Gravatar of dtoh dtoh
    29. December 2014 at 23:02

    Scott,

    “the income tax should be abolished.”

    You’re coming around. Before you said consumption tax only without some form of income (wage) tax would not work. Now I see that you’ve accepted the fact that we should eliminate all tax on income.

  57. Gravatar of Vivian Darkbloom Vivian Darkbloom
    29. December 2014 at 23:55

    http://eh.net/encyclopedia/hours-of-work-in-u-s-history/

    Per the above, estimated hours worked from 1930 in the Us have declined since 1930 (likely between 10 and 25 percent). Surely, something else is behind our improved standards of living than just the willingness to.work harder than previously. On the other hand, the fact that we are hierarchical and competitive creatures somewhat explains why we work more than we have to. This also explains why free (labor) market societies economically outperform controlled markets. Lebronprobably increases the level of play of many others in the NBA. Putting ankle weights on him would have the opposite effect.

    Happy New Year.

  58. Gravatar of Ray Lopez Ray Lopez
    30. December 2014 at 01:55

    @ MF – right on brother! As I saw on a T-shirt, ‘wrong is the new right’. And indeed your graphic is good: central banks claim that gold is a barbarous relic, but they keep hoarding it anyway. “Do as I say, not as I do” says the teacher, hypocritically.

    @ Sumner–I give you credit for answering each and every one of your critics with a one-liner, which all good comedians are adept at, but you have flaws like everybody else. Examples: why have you given up on answering Major Freedom? Nobody is always right, not even you. If leading economists say the multiplier is less than one (at times, sometimes it is close to one or even exceeding one, but not all the time as the Keynesians claims), and if Keynesian economics always assumes the public loses wealth (savings) short term, even though perhaps long term they may gain it back (akin to ‘selling at a loss to gain market share’), and if sticky wages were hard to discern in the Great Depression, says Ben Bernanke, do you disagree? Why? Instead of one-liners, some up with a substantive one page response. Nobody is infallible; your “target NGDP” thesis is not written on stone from God. As Krugman said, if targeting NGDP was so good it would have been done by now ($20 bill on sidewalk).

  59. Gravatar of Ben J Ben J
    30. December 2014 at 03:15

    Will pay money for a chrome extensions that turns Major Freedom’s comments into a smiling portrait of Bob Murphy and Ray Lopez’s comments into a child’s crayon scribblings

  60. Gravatar of Jeff Jeff
    30. December 2014 at 04:30

    After Daniel mentioned it and Scott gave a favorable opinion of it, I went and read the Moloch piece. Where do I apply to get back the hour and half I devoted to it?

    The author is an MD who likes writing extremely wordy posts and does not understand economics or economic history. Here is a short list of economics lessons he seems to have missed.

    1. Pay and working conditions for unskilled labor improve over time not because employers are nice, but because labor itself is a scarce resource, one that potential employers have to compete for. Marx got this wrong as well.

    2. We will not all be put out of work by smart robots. Comparative advantage teaches us that in a two-country, two-good case free trade benefits both countries even if country A is absolutely more productive than country B for both goods. Call the robots A and humans B and the argument still holds. If the robots really are smarter than us, they will know this.

    3. Malthus was wrong when he was alive and is still wrong today. Malthus assumed that population grew exponentially but agricultural production growth was only linear. From those two assumptions disaster follows trivially. But it makes much better sense, even theoretically, to assume that both grow exponentially. Then the question becomes which growth rate is higher, and it was clear even in Malthus time that agricultural productivity growth was faster than population growth, and it had been for centuries.

    I would not presume to tell Scott Alexander (not his real name, he says) how to practice medicine because I know he is an intelligent man who has devoted years to studying it and I have not. Why does he think he understands economics better than economists do?

  61. Gravatar of Jim Glass Jim Glass
    30. December 2014 at 06:14

    Daniel, don’t be such a pouty-face. Go admire the stuff in your closet, it’ll cheer you up!

  62. Gravatar of Scott Sumner Scott Sumner
    30. December 2014 at 08:36

    Jim, Where did I say all taxes are bad?

    dtoh, I’m afraid that what’s changed is your perception of my beliefs, not the beliefs themselves. I still favor a wage tax. Indeed a progressive wage tax. A wage tax is a consumption tax, it is not an income tax.

    Ray, Your $20 bill on the sidewalk analogy for public policies is beyond absurd. Consider the first time any public policy is adopted. One could always argue that it can’t be optimal because it would have already been done. Even worse, when the Fed was created in 1913 then ANY Fed policy would have been suboptimal (in your view) because if it was optimal than it would have already been done. When the Fed adopted 2% inflation targeting, you would have arged it was suboptimal, because they had been allowing double digit inflation, ergo double digit inflation must be optimal.

    Do you even think before you write?

    Jeff, I focused on other aspects of that post (which you are right, was very long.)

  63. Gravatar of Majromax Majromax
    30. December 2014 at 10:17

    @ssumner:

    Indeed a progressive wage tax. A wage tax is a consumption tax, it is not an income tax.

    I’m not entirely sure what a progressive consumption tax would look like, in practice. Most implementations of such taxes appear to be as a flat tax.

    Additionally, implementation may run into difficulty because owners/operators of firms have considerable flexibility in how they take compensation.

    When the Fed adopted 2% inflation targeting, you would have arged it was suboptimal, because they had been allowing double digit inflation, ergo double digit inflation must be optimal.

    Why am I reminded here of Candide?

  64. Gravatar of TravisV TravisV
    30. December 2014 at 11:01

    Interesting graphs…..

    http://www.zerohedge.com/news/2014-12-30/spot-difference

    Bloomberg’s Commodity Index dropped below those financial crisis lows for the first time

  65. Gravatar of TallDave TallDave
    30. December 2014 at 11:40

    Jeff — Great points. It reminds me of the other day when Tyler pointed out the gains to Cuban liberalization won’t go to labor — but Cuba doesn’t have a labor shortage, it has a devastating capital shortage. The effects of productive capital benefit consumers. The misconception that the living standards of laborers must be at odds with capital goes back to the beginning of the Industrial Revolution, when, for instance, patents for power looms were disallowed on the basis they would put too many weavers out of work.

    Apparently some people still think we need more weavers.

    Imagine a capitalist in a cutthroat industry. He employs workers in a sweatshop to sew garments, which he sells at minimal profit. Maybe he would like to pay his workers more, or give them nicer working conditions. But he can’t, because that would raise the price of his products and he would be outcompeted by his cheaper rivals and go bankrupt.

    That’s sort of the classic example of economic illiteracy, just another version of the broken windows fallacy or Bastiat’s “that which is not seen.” OK, suppose they all agree to raise prices and wages. That helps the workers in he industry, but it hurts all the consumers. There’s just something else they then can’t afford to buy. An economy is a system for allocating scarce resources, and prices are the means by which an economy transmits information about relative scarcity.

    My favorite laugh line was “Or suppose someone invents a robot that can pick coffee better and cheaper than a human. The company fires all its laborers and throws them onto the street to die.” Except that if robotic labor is better and cheaper, that means food will also be better and cheaper, possibly so much so that even people who do nothing productive will be easily fed. Which is exactly why starvation rates have been falling so dramatically since the start of industrialization — in fact Rudy Rummel has shown that nearly every instance of mass famine in modern times has been caused by government abuse, often deliberately.

    Fortunately, some people want more robots.

  66. Gravatar of TravisV TravisV
    30. December 2014 at 13:35

    Video: Mervyn King and former chairman of Federal Reserve Ben Bernanke reflect on world financial crisis http://www.bbc.co.uk/programmes/p02g1zmb

  67. Gravatar of TravisV TravisV
    30. December 2014 at 17:45

    Krugman had a long interview with Ezra Klein: http://www.vox.com/2014/12/29/7458807/paul-krugman-economist

  68. Gravatar of Philippe Philippe
    30. December 2014 at 18:27

    Scott,

    “…a progressive wage tax. A wage tax is a consumption tax, it is not an income tax”

    Do you have a link to more information on this?

  69. Gravatar of ChrisA ChrisA
    30. December 2014 at 18:45

    @TallDave and Jeff – not to pile on, but I had the same reaction to the Moloch piece. The author (Scott Alexander) is getting a lot of respect recently from people I generally respect (like Scott S and Bryan Caplan) even if I don’t agree with them. But although he can certainly produce some striking images its hard to work out any point or conclusion anywhere except some trivial ones that are already pretty well analysed already. For instance he discusses an example of a fish pond with many users, and the need to regulate pollution issues in that fish pond. Which is a nice illustration of the tragedy of the commons problem. He concludes from this example that we need regulators to avoid this “race to the bottom”. He ignores all the debate and history of how this issue has been dealt with in the past, including the solution that is most effective, which is assigning ownership rights to the pond, as was discovered oh 300 years ago in the UK in the enclosures acts. This is a detail though there are many more (really, productivity improvements are bad because they put people out work??). The main issue I have with his writing is his whiny premise that we are in a crappy world and everyone is really horrible to each other. This world is pretty much a paradise compared to the rest of human history.

  70. Gravatar of Philippe Philippe
    30. December 2014 at 19:01

    Chris A, if you can’t assign clear ‘ownership rights’ to everything then you might have a problem with your theory.

  71. Gravatar of Mike Sax Mike Sax
    30. December 2014 at 19:06

    “And it’s not clear that taxes have actually come down. Compared to the 1950s and 1960s the rich face a lower MTR, but very few rich people ever faced those 90% brackets. Lower income people face a much higher implicit MTR than in the 1950s and 1960s.”

    To which Krugman might say ‘Fine, let’s go back to the 1950s tax rates then.’

  72. Gravatar of Mike Sax Mike Sax
    30. December 2014 at 19:08

    “Of course there is one European country that has per capita GDP levels (PPP) that are comparable to the US, despite lacking oil””Switzerland. Oh wait, that’s the European country with low taxes.”

    And a considerably more generous welfare state.

  73. Gravatar of Ray Lopez Ray Lopez
    30. December 2014 at 22:12

    @Sumner – Sorry, but I was reporting what I thought Krugman said about targeting NGDP, and apparnetly I was wrong, since Googling this I see Krugman favors NGDP not because he thinks it will work, but it is a dishonest way of loosening money supply more. My mistake, apologies.

    But read this for a more substantive critique of your proposal. Why do you think your ‘intuition’ on NGDP is better than Larry Ball’s 1996 (before you even thought about targeting NGDP I bet) model? Keyword below: “DISASTEROUS”. I see your blog cites L. Ball four times, but always for his paper on Bernanke and not for his 1996 model. Have you even read his paper? Bet not.

    http://www.economist.com/blogs/freeexchange/2011/11/case-against-case-nominal-gdp-target (“History is littered with busted frameworks” “In a model developed by Larry Ball in 1996, NGDP targeting produces systematic over- and under-shooting of both inflation and output. It is “not just inefficient, but disastrous. It causes both output and inflation to wander arbitrarily far from their long-run levels.”)

    @ChrisA – your ‘ownership’ solution to Tragedy of the Commons is incomplete. Another solution is pointed out by Nobelist Elinor “Lin” Ostrom. Read her book (as I have) and you will see she shows that the “tragedy” only occurs if the actors are ignorant of each others decisions (classic Prisoner’s Dilemma model). If there is feedback between and amongst the players, no ‘race to the bottom’ and no tragedy. Analogy: suppose there is a jerk in the Comments section of this blog that refuses to play by the rules, constantly spams on irrelevant topics, posts ad hominem, and generally makes life unpleasant. Solution: either ban that person, akin to a “top-down” regulation approach, or, give each person ownership of what they read (such as, in some Usenet blog software, you can killfile another poster so their comments don’t even show up), or, Ostrom’s approach, get fellow commentators to point out to the obnoxious poster that they are being a jerk, and hence ‘shame’ them into compliance. It does work, notwithstanding what you may think. If you use me as the example, I have voluntarily agreed to tone down my gold bug posts a bit since I see it’s a sensitive topic with some of you easy-money freaks….

  74. Gravatar of dtoh dtoh
    31. December 2014 at 03:49

    Scott,
    A progressive wage tax has two problems. 1) It’s easy to get around (pay yourself a dividend instead of a wage). 2) It taxes capital (human capital). What’s the difference between someone who invests in machine and someone who invests in a degree in economics? Why should they be taxed differently?

  75. Gravatar of RA RA
    31. December 2014 at 05:35

    @Major.Freetard

    If you are going to nit pick about spelling mistakes, you ought to spell a word like “in” correctly.

    “For I did not even mention taxes I this thread, and yet you assert I am wrong about it anyway.”

  76. Gravatar of TallDave TallDave
    31. December 2014 at 06:16

    Mike — I don’t think Krugman would like that idea. The tax distribution in the U.S. was much less progressive in the 1950s and 1960s. The main reason MTRs are higher for the poor today is that we take a lot more money from very rich people and give it to the bottom quintiles, which now pay virtually no income taxes.

    Also, the U.S. has the most generous social welfare system in the world.

    http://www.edwardconard.com/america-spends-25-percent-more-per-capita-on-social-welfare-than-any-other-county/

  77. Gravatar of TallDave TallDave
    31. December 2014 at 06:24

    Vivian — thanks, great link. But I always wonder about farmers and householders, are cooking and cleaning “leisure” activities?

  78. Gravatar of Major.Freedom Major.Freedom
    31. December 2014 at 09:24

    RA:

    I wasn’t complaining about anyone’s spelling mistakes. I spelled “in” incorrectly as “I” because I am typing on a tablet and it sometimes auto-“corrects” and I miss it.

    And what is with the name calling? Maybe your new year’s resolution can be “I will try to acquire better reading comprehension. And maybe class as well.”

  79. Gravatar of Major.Freedom Major.Freedom
    31. December 2014 at 09:26

    The stuff about Sumner spelling “wrong” incorrectly was a joke.

  80. Gravatar of RA RA
    31. December 2014 at 10:38

    Perhaps your resolution should be to learn to write coherent sentences.

    Can anyone identify how many grammatical mistakes there are in this sentence fragment? Was that autocorrect as well?

    “And maybe class as well.”

  81. Gravatar of Major.Freedom Major.Freedom
    31. December 2014 at 11:19

    RA:

    You’re right, my grammar should improve, but that sentence you quoted from me is not incoherent. It is coherent, in that the meaning is clear, but it has grammatical errors, such as beginning with an “And”.

    So yes, I will try to improve my grammar as a new year’s resolution, thanks.

    Could you do me a favor? Could you always correct my grammar whenever your see a mistake? It would be most welcome and not in any way annoying.

  82. Gravatar of Student Student
    31. December 2014 at 11:53

    Starting a sentence with a conjunction isn’t gramatically incorrect. However, a sentence without a subject or a verb is. The problem with MF is he says incoherent things using way way to many words that are littered with grammatical mistakes. It makes him look even more idiotic than even his ramblings do. I think RA was right. MF is a freetard.

  83. Gravatar of Major.Freedom Major.Freedom
    31. December 2014 at 12:40

    Student:

    Thank you Student for the grammatical recommendation to include a noun or verb in every sentence. It helps when it is accompanied by name calling.

    After all, it is a really smooth move to strip a sentence, e.g. “And maybe some class as well”, out of its context, see there is no noun or verb (doesn’t “some class” constitute a noun? Enlighten me please), and then assert it is not clear I meant it as a suggestion to RA to make getting it a new year’s resolution.

    So happy I am being called retarded for making grammatical mistakes! It means I don’t have to read your thoughts on economics.

    Where else have I written a sentence without a verb or noun? I need to know this because it is seriously keeping me awake at night.

    Whatever you two do, do not under any circumstance avoid dismissing my arguments by pretending sentences stripped away from their context are incoherent because of a lack of verb or noun. How entertaining! Woops, that sentence right there was without a verb or noun! Incoherent again! That sentence is as unclear as a random string of words! I should have said “I would find it enjoyable for you to you dismiss my arguments based on the lack of verbs and nouns in certain sentences and starting sentences with a conjunction.”

    You and RA are much needed grammar police.

  84. Gravatar of Mike Sax Mike Sax
    31. December 2014 at 18:05

    Talldave Ill check the link but that claim that weve got generous welfare is patently false. First of all you have to explain ur definition of welfare here. Only food stamps and Tamf qualify as welfare. Tanf has been gutted since Welfare Reform and food stps were never generous and the Gip has gutted them the last 6 years

  85. Gravatar of Mike Sax Mike Sax
    31. December 2014 at 18:13

    As to taxes most liberals actually say they prefer the pre Reagan tax rates. The always point out that median income has been stagnant for 30 years. So here I believe you are mistaken as well

  86. Gravatar of Mike Sax Mike Sax
    31. December 2014 at 18:20

    What I notice as well at ur link is they claim ‘social welfare’spending is higher here which is broad concept with a lot of latitude in gow you define this

  87. Gravatar of Benjamin Cole Benjamin Cole
    31. December 2014 at 20:24

    Waaayyyy OT, but, I know Sumner is a bit of China follower—

    http://chinadailymail.com/2014/08/17/the-great-chinese-exodus-64-of-chinas-rich-plan-to-leave/

    When two-thirds of a nation’s wealthy (read educated, managerial class, Mandarins, managers, investors etc) want to leave…what will happen?

  88. Gravatar of Edward Edward
    31. December 2014 at 22:06

    So mike sax, I guess you wouldn’t mind all those weird pre Reagan deductions for rich people then…

  89. Gravatar of Scott Sumner Scott Sumner
    31. December 2014 at 22:19

    Philippe, No, I don’t have a cite, but any decent public finance textbook should explain that point.

  90. Gravatar of Scott Sumner Scott Sumner
    31. December 2014 at 22:21

    Dtoh, The same problem occurs with a consumption tax. How to differentiate between consumption and investment?

  91. Gravatar of Scott Sumner Scott Sumner
    31. December 2014 at 22:23

    Ray, Yes, by all means let’s do the bet you propose. I will bet you that I was already thinking about NGDP targeting before 1996. Shall we make the bet for $1000?

  92. Gravatar of TallDave TallDave
    31. December 2014 at 23:05

    Mike — The U.S. has the highest per capita government spending in the world, and the highest per capita private charity spending to boot.

    I don’t know where you got the idea food stamps or any other welfare programs have been gutted. All welfare reform did was create some minimal work requirements that Obama has been unwinding.

    http://www.realclearmarkets.com/articles/2014/10/16/the_us_economic_recovery_is_still_on_food_stamps_101334.html

    http://www.bls.gov/opub/btn/volume-2/spending-patterns-of-families-receiving-means-tested-government-assistance.htm

    The only way anyone can claim the US system isn’t “generous” is to ignore private contributions and measure proportion of GDP rather than the actual per capita spending (which is obviously misleading, e.g. Lebron James’ food budget is obviously relatively tiny compared to his income but he’s clearly not underfed).

  93. Gravatar of Ray Lopez Ray Lopez
    1. January 2015 at 01:26

    Hey, if I am the first person in 2015 to post here, it means according to tradition that the rest of the year will be dominated by me and my posts! It’s gonna be a good year folks!

    @Sumner – I will not take you up on your bet, but I am happy to hear that you have thought about NGDP targeting before 1996, and I hope to hear your objections to the L. Ball paper at some point (I’ll be lurking). Happy New Year to you sir. My resolution on this blog is that I hope the economy falls apart enough so the Fed adopts your Target NGDP framework, so we can see how badly it works!

  94. Gravatar of mikef mikef
    1. January 2015 at 05:36

    I think that birth rates and marriage rates also have a big impact on hours worked and workforce participation for average people. If I am 50 and get laid off and I am single without a family or married to another breadwinner…I can probably coast until retirement with a combination of savings and part-time work if I need to…I am not about to take any job. If I have 4 dependence..I am in a hurry to get back into the workforce and will do whatever it takes….

    It is not all about taxes..but when people have a choice whether to work or not marginal taxes are very important. Take my brother-in-law…his wife is the primary wage earner…such that his wages are taxed at a very high rate…because of that he is not working and not looking for work…he is doing some work off the books. I suspect that happens a lot in Europe…high MTRs lead to a large informal economy and at some point lead to less government revenue.

  95. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 07:26

    My idea food stamps has been gutted comes from a few sources. One is I know some people on food stamps here in NY and that’s what they tell me. One friend of mine-who for the record is mentally ill-got $182 a month in food stamps 4 years ago. Now he gets $139.

    I think a 30% drop in food stamps can qualify as ”gutted.’

    Also the GOP keeps cutting food stamps, in fact have ‘deeply cut’ it.

    http://www.nytimes.com/2013/09/20/us/politics/house-passes-bill-cutting-40-billion-from-food-stamps.html?_r=0

  96. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 07:28

    As long as the GOP has a decent amount of power at all levels in this country conservative anxieties about people getting treated too generously from the government are unfounded.

  97. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 07:30

    Now Dave I understand why you want to believe we’re so generous: then you can demand even more cuts. That’s 101 in the GOP playbook as well.

  98. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 07:33

    ON TANF welfare reform gutted it as well. You can now only be on it for a few years and then you’re banned for life.

  99. Gravatar of TallDave TallDave
    1. January 2015 at 10:43

    Five years of TANF isn’t enough? There’s a reason it isn’t called “PANF.” Anyways, some states still give it to kids even after the limits.

    http://en.wikipedia.org/wiki/Temporary_Assistance_for_Needy_Families

    Poverty traps are real.

    http://www.cato.org/blog/new-study-finds-more-evidence-poverty-traps-welfare-system?utm_content=buffera8ec5&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer

  100. Gravatar of TallDave TallDave
    1. January 2015 at 10:45

    Maybe anecdotes from the mentally ill aren’t a great data source, Mike. Food stamp spending is still near record highs. In fact, it’s doubled just since 2008.

    http://dailycaller.com/2012/06/07/sessions-food-stamp-spending-up-100-percent-since-obama-took-office/

  101. Gravatar of TallDave TallDave
    1. January 2015 at 10:50

    Mike, you’ve found a perfect example of NYT/Democrat doublespeak.

    When they say they’re “cutting” $40B, they’re talking about reducing future spending increases by $40B over ten years. This is a program whose spending has increased by $40B per year just since 2008!

    Now Dave I understand why you want to believe we’re so generous: then you can demand even more cuts. That’s 101 in the GOP playbook as well.

    Oh, the irony.

  102. Gravatar of TallDave TallDave
    1. January 2015 at 11:03

    Also, note the bill you referred to was never implemented (it died in the Senate). So those cuts never happened.

  103. Gravatar of dtoh dtoh
    1. January 2015 at 14:01

    Scott,
    You said, “The same problem occurs with a consumption tax. How to differentiate between consumption and investment?”

    I think it’s simple. You do a national progressive sales tax rather than a consumption tax. Businesses are exempted from the tax. (Seller has to record the business’s EIN tax ID for a tax exempt sale.) Houses, cars, boats, planes, or other fixed assets whose purchase price exceeds $50k are also exempted from the sales tax but are subject to an annual fixed assets tax if they are used for any personal (non-business) use.

    The sales tax would be the source of funding for the national government. State and local would fund themselves through the fixed assets tax.

  104. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:38

    Look Dave you want to have a debate fine. You have no business attacking a friend of mine. To say ‘mentally ill’ doesn’t mean he’s drooling in his porridge all day you pompous twit.

    I know he’s an intelligent and worthwhile person-otherwise he wouldn’t be my friend- and you got no business snickering at him. If anyone who has mental health issues is somehow not worthy to speak about what they receive in food stamps why don’t we just take away their votes as well? I know the GOP is working on it in their states.

    You crossed a line there and I do not take kindly to it. The irony is you call yourself ‘Tall Dave’ when you are pretty small even for a GOPer.

  105. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:39

    “Now Dave I understand why you want to believe we’re so generous: then you can demand even more cuts. That’s 101 in the GOP playbook as well.”

    Where’s the irony, you don’t want even more cuts?

  106. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:43

    I guess I sure was wrong that all conservatives are small minded bigots.

  107. Gravatar of TravisV TravisV
    1. January 2015 at 17:47

    Dear Commenters,

    What are the most important issues Prof. Sumner disagrees with the WSJ editorial about?

    Off the top of my head, I can only think of monetary policy, financial regulation and (maybe) pollution, defense policy, police, prisons and surveillance……

  108. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:49

    “Five years of TANF isn’t enough?” It may not be in every case. To categorically assume it always will be is wrongheaded. I’m sure the ‘poverty trap’ you conservatives pretend to care about is caused by $139 dollars a month in food stamps

  109. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:50

    And yes there have been many food stamp cuts over the last 5 years Short Dave.

    http://www.usatoday.com/story/news/nation/2014/03/26/stateline-food-stamps-benefits/6906913/

  110. Gravatar of TravisV TravisV
    1. January 2015 at 17:51

    Dear Commenters,

    Please see this post on the “economistic worldview.” http://www.themoneyillusion.com/?p=640

    Does Paul Krugman disagree with economists about any of points #1 – #7 listed by Sumner?

    If not, maybe Krugman isn’t truly that much of a leftist…..

  111. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:52

    These cuts have been at both at the national and state level. We don’t have a generous welfare state. Pointing this out enrages you so that you do what all conservatives do when confronted with the facts-you take cheap shots that are besides the point.

  112. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:55

    You claim that the bill died in the Senate but there were food stamp cuts attached to the Farm Bill Obama signed in Feb this year.

    It was the only way to get the GOPers to even pass a farm bill

    http://www.msnbc.com/msnbc/obama-signs-food-stamp-cut

  113. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:56

    Even though the initial bill might have not passed the final bill had food stamp cuts.

  114. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 17:57

    “On Friday, President Obama added his signature to legislation that will cut $8.7 billion in food stamp benefits over the next 10 years, causing 850,000 households to lose an average of $90 per month. The signing of the legislation known as the 2014 Farm Bill occurred at a public event in East Lansing, Mich.”

  115. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 18:15

    So Edward I guess you wouldn’t mind eliminating the Reagan tax cuts then?

  116. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 18:29

    Now among those things called ‘the poverty trap’ I might agree that disincentives exist.

    Like for instance people on SSDI-I know Dave doesn’t think we can believe anything they say though we can believe his buddies at Cato or Jeff Sessions-are forced out of working more in that if they start to make more than like $400 a month they’re SSDI starts to get cut and once they hit $850 in income they lose SSDI altogether.

    However this doesn’t mean that we should do away with SSDI or cut it-though I know that’s going to disappoint Dave-we could simply increase the amount you can earn until your benefits begin to phase out.

    Even on UI one way that some have suggested in the past to make up for disincentives-as someone who has been on UI in the past I can speak to that even if it’s another ‘anecdote’-would be to allow people to continue to collect UI while working a new job for about 8 weeks. Actually some GOpers have even suggested something like this in the past. Predictably, though when Obama suggested this as part of his Jobs bill in 2012 they suddenly were not interested.

  117. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 19:48

    In that Cato piece it would really help if they showed their work. I mean they make a pretty crazy claim here.

    Author Erik Randolph finds that a single mother with two children who increases her hourly earnings from the Illinois minimum wage of $8.25 to $12 only sees her net income increase by less than $400. For many low-income workers striving to climb the ladder of prosperity, our welfare system takes away almost all of their incentive to move up from an entry-level job as they do not get to realize almost any of these gains. Even worse, someone in this scenario who works hard and increases her earnings all the way to $18 an hour, a wage level which would place her in the middle class, would actually see her net income decrease by more than $24,800 due to benefit reductions and tax increases. Instead of making it easier for beneficiaries to become independent and achieve a level of prosperity, the welfare system traps them into low levels of earnings. This parent would have to increase her earnings all the way to $38 an hour in order to replace the lost benefits and achieve the same standard of living.

    If anyone can actually show the work behind these figures I’d be impressed. I mean how much income are they assuming a single mother of two who makes $8.25 an hour with Tanf is receiving per year? It sounds like Cato thinks it’s about $50,000. If that were true how could you even talk of a ‘poverty trap?’

  118. Gravatar of Mike Sax Mike Sax
    1. January 2015 at 20:03

    Another thing that’s I find irritating. Why can’t conservatives just be honest about what they want? Like that Cato paper says ‘welfare needs to be reformed.’

    Why not just say what they mean? They want it to be cut, but they can’t even bring themselves to say it-they have to pretend to want ‘reform’ rather than what they want: a meat cleaver.

  119. Gravatar of Saturos Saturos
    1. January 2015 at 20:23

    Looking forward to Scott’s review of this book!
    http://www.hallofmirrorsbook.com/description-contents.html

    (as well as, you know, Scott’s own book.)

  120. Gravatar of Ray Lopez Ray Lopez
    1. January 2015 at 22:16

    Looking forward to Scott’s review of this book!
    http://www.hallofmirrorsbook.com/description-contents.html
    (as well as, you know, Scott’s own book.)

    Though I’ve preordered this book by Eichengreen, I don’t expect anything more than warmed over “Golden Fetters” nonsense, that ignores that the gold standard largely worked fine except for the UK, US and only because of high WWI debts (when both countries suspended gold shipments). Nuff said. As for Scott’s book, I’m very sure it will be objective, fair and balanced…

  121. Gravatar of Mike Sax Mike Sax
    2. January 2015 at 08:19

    I know you guys just wish ole Mike Sax wouldn’t come here with his liberal talk and rain on your parade. My mistake is wanting an intellectual discussion rather than signing in a choir. I’m sure you folks hate me as much as you hate the President. That’s life though. You can’t like everyone.

    Dave one more thing. The use of ‘per capita’ might make sense in talking about Lebron’s diet but not in comparing welfare spending between countries.

    To compare the absolute amount of welfare spent in each country is badly misleading indeed-a good example of Krugman’s point about ‘lies, damn lies, and statistics.’ I mean I mean In a country of $1 million GDP $300,000 goes much further than one of $1 billion of GDP that spends $750,000.

    Talk about the misuse of statistics.

  122. Gravatar of Scott Sumner Scott Sumner
    2. January 2015 at 10:00

    Dtoh, That’s fine, but you can address human capital by exempting education and training from tax.

  123. Gravatar of mpowell mpowell
    2. January 2015 at 10:07

    I appreciated this post Scott. I’d also add that when you look at European household’s, they engage in more household labor. They don’t necessarily have more leisure time. So you can spend time at the office or cleaning, mowing the lawn, doing your own plumbing, etc. I know what I’m better at. I’m just glad the govt hasn’t raised my MTR to the point where it doesn’t make economic sense to outsource some of these tasks the way they seem to have in Europe.

  124. Gravatar of TravisV TravisV
    2. January 2015 at 10:16

    Noah Smith’s reply to this blog post: “Scott Sumner on taxes”

    http://noahpinionblog.blogspot.com/2014/12/scott-sumner-on-taxes.html

  125. Gravatar of dtoh dtoh
    2. January 2015 at 13:40

    Scott,
    How do you calculate the income derived from education and training? Everything above the minimum wage?

  126. Gravatar of Edward Edward
    2. January 2015 at 17:05

    Mike,
    The pre -Reagan tax rates had so many loopholes for the rich it was a complete joke. If you think NOW the rich don’t pay enough tax…

    Personal anecdote:
    My dad’s third cousin once or twice removed was a mid level corporate executive for Gilette in brazil. He came to the states in the 1970s. He was already a millionaire back then, (now he’s retired) he told me that he was the landlord of several apartments he used for their depreciation, for tax purposes. (When he immigrated to the States) The irs audited him, and after a couple of months muttered to him that everything was in order and LEFT HIM with a ZERO % income tax liability!
    Ever since Reagan rich people can’t use that particular loophole anymore. Why do you think Democrats voted for the Reagan tax cuts?
    70% paper tax rates, much much less in reality.
    I’m sure if you wanted to go back, rich people would say “fine give me those loopholes again!” Don’t say we can eliminate those loopholes and still have the rich pay 70-90% of their income in taxes, because we can’t. One, the rich will have the money to alaws buy exemptions. Two, morally, it’s ridiculous to ask the rich to fork over 70-90% of their income in taxes in REALITY, as opposed to paper rates.
    All things considered, it’s better to have the rich pay 40% with less loopholes than to have a 70% system where the rich end up paying nothing

  127. Gravatar of ssumner ssumner
    2. January 2015 at 22:31

    dtoh, No need to do so, just allow education and training costs to be treated as investment, not consumption.

  128. Gravatar of dtoh dtoh
    3. January 2015 at 06:51

    Scott,
    That’s not the problem. If you have a wage tax, then the return on education gets taxed. The return on buying a machine does not. What sense does that make?

  129. Gravatar of Andy Harless Andy Harless
    3. January 2015 at 07:33

    What matters for the income effect is not whether the government wastes (or even redistributes, I add, having now read Noah’s response) the money but the degree of substitutability/complementarity between government spending and private consumption. It’s far from obvious that even very valuable government spending is a close substitute for private consumption. It’s even arguable that it’s complementary: government spending, e.g. on public safety, is meant to provide an environment in which it’s possible to enjoy private consumption. I don’t think we can make a baseline presumption that worthwhile uses of tax money would tend to offset (let alone fully offset) the income effect of taxation.

  130. Gravatar of ssumner ssumner
    3. January 2015 at 08:19

    Dtoh, Consider an income tax combined with a 401k. That’s a pure consumption tax, and is identical to what I proposed for education.

    Andy, If you compare high tax places like Europe with lower tax places like the U.S. with still lower tax places like East Asia, the differences are in transfer payments. So no income effect seems like the most reasonable assumption. Although as always in Econ many assumptions are possible.

  131. Gravatar of dtoh dtoh
    3. January 2015 at 12:07

    Scott,
    Yes, but why make it complicated. A national sales would be so easy to implement (it could just be outsourced to Visa or Paypal). With an income less saving plan, a) everyone still has to fill out an income tax form, b) everyone now would have to keep records of and record their savings, c) you would have to require everyone to report on their wealth at the start of the program, d) you would have to track and report everyone’s debt. And then obviously you still have the lobbyists pushing for this and that deduction and exemption. Why not just throw the whole thing out and use a simple system that gets you the same thing.

  132. Gravatar of TallDave TallDave
    3. January 2015 at 14:54

    Mike, it’s just flatly ridiculous to claim there are draconian cuts in a program whose spending has doubled since 2008. That’s beyond the bounds of any rational debate. All the flowery prose about “cleavers” and “deep cuts” masks rank innumeracy.

  133. Gravatar of TallDave TallDave
    3. January 2015 at 14:56

    “To compare the absolute amount of welfare spent in each country is badly misleading indeed”

    Look up the definition of purchasing power party, Mike.

  134. Gravatar of TallDave TallDave
    3. January 2015 at 15:05

    “If anyone can actually show the work behind these figures I’d be impressed.”

    Apparently you didn’t read the study they linked. It’s about 65 pages of numbers and calculations, all citing their official government sources.

    http://www.illinoispolicy.org/reports/modeling-potential-income-and-welfare-assistance-benefits-in-illinois/

    Anyways I’m not going to read further, but I hope this was informative for you.

  135. Gravatar of TallDave TallDave
    3. January 2015 at 15:08

    Edward,

    The great thing about the Reagan tax reform was it eliminated so much of that kind of tax-driven behavior, which imposes a huge deadweight loss on society. It might be comparable to ending rail and airline price controls in its magnitude.

    As a certain someone once said, there’s a lot of a ruin in a country.

  136. Gravatar of ssumner ssumner
    5. January 2015 at 11:43

    dtoh, I would vote for your plan, I just think you need to add a progressive wage tax to make it politically feasible.

  137. Gravatar of dtoh dtoh
    6. January 2015 at 02:58

    Scott,
    You’re probably right but I’m not sure. A progressive consumption tax should enjoy broad support, but I suspect there would be a lot of pushback from the “progressive” trustafarian wing of the democratic party.

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