Tuesday, May 20, 2008

Ceteris paribus, taxes edition 

Janet wrote me asking if I would post on this article by David Ranson in today's WSJ. It's long been a theme of the Journal's editorial board that no matter what the top individual income tax rate is, you get the same level of tax revenue. Now I find that interesting, given that we are told the Laffer curve works by the very same people, and the Laffer curve clearly says that variations in tax rates will yield variations in tax revenue (just sometimes in the opposite direction.)

Any time I think about these marginal tax rate changes that Ranson draws on, however, I am pretty sure I can find changes in the base on which the tax is collected. When we drop the marginal tax rate, there's worry that "the government is losing money", so we need to make that tax change "revenue neutral". As the Tax Foundation points out, that is in essence giving one group a tax cut while shifting the cost of that cut onto someone else, so that Uncle Sugar stays in sweetness.

It would be great to find natural experiments where the marginal tax rate is cut and the legal definition of the tax base is unchanged. But darned if I can think of one.

UPDATE (5/21): There's a lot of criticism of Ranson from more liberal bloggers. Take for example Justin Fox's graphic. One of the problems of using the finer gradation of his graph versus Ranson's is that it makes relatively small fluctuations look like peaks and valleys. Almost certainly some of those are due to fluctuations in the tax collections through a business cycle (the progressive income tax is supposed to be an automatic stabilizer.) If you're going to draw that graph as Fox does, you would want to measure individual income tax collections at full employment, which is a highly speculative activity. CBO provides the data you could use.

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