Tuesday, November 13, 2012

An Old School Keynesian on Marginal Tax Rates

"Our present system of welfare payments does just that [with 100 percent taxes], causing needless waste and demoralization. This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate."
Tobin, James. “On Improving the Economic Status of the Negro,” Daedalus (Fall 1965), 94(4).

Another interesting quote on the marriage tax implicit in welfare programs:

All too often it is necessary for the father to leave his children so they can eat. It is bad enough to provide incentives for idleness but even worse to legislate incentives for desertion.

2 comments:

László Sándor said...

I think (hope) many progressives understand MTRs. Many would give it to you that it's better to have them smooth and low or even negative. What I don't see you discuss much that this is very costly if you still want to give anything meaningful to those without income, because this way you'd need to give even more (or just as much) to higher and higher earners too.

As basically the low-MTR story would imply a low demogrant to those without earnings with the current tax levels, it is valid to compare the high marginal utility of consumption of these people under the low-MTR-scenario with the marginal cost of public funds. Are you implicitly also saying that the MCPF is very high, so it's OK to leave the unfortunate with little consumption? Or are you OK with somebody subscribing to the low-MTR program but raising redistribution (in levels) and probably (average) tax rates for most of the schedule?

László Sándor said...

I wonder what you think about Republican proposal of a notch (perhaps smoothed a bit, still with super-high MTRs): http://www.nytimes.com/2012/11/23/us/politics/congress-looks-at-ways-to-leave-top-tax-rate-as-is.html?pagewanted=1&_r=2&hp&pagewanted=all&

Btw, you might enjoy if Henrik Kleven followed up on their QJE-paper with using some of the notches collected in your book.
http://personal.lse.ac.uk/kleven/Downloads/MyPapers/WorkingPapers/kleven-waseem_sep2012.pdf

Finally, you might get a kick out of smart entrepreneurs, that backbone of America, wealth creators, dreaming up notches and high MTRs even when they are none: http://blog.supplysideliberal.com/post/36350211978/how-marginal-tax-rates-work