Pethokoukis, Economics, Taxes and Spending

New study shows why heavily taxing the rich won’t work

Image Credit: White House Flickr Stream

Image Credit: White House Flickr Stream

It’s strange when you think about it. Not only is President Obama pushing the largest round of tax hikes in almost a generation, but those increases would come during the most anemic economic expansion since World War Two — or maybe ever in American history. Still, the White House appears not at all concerned that raising the tax burden and hiking marginal tax rates would make a sickly economy even weaker. Nor is Team Obama concerned, apparently, about the risk of raising the long-term tax burden at a time when demographic changes will begin making it harder for the US economy to grow as fast in the future as it has in the past.

How can Team Obama be so preternaturally carefree and nonchalant about its taxapalooza? (Not to mention Paul Krugman who would like to return to ultrahigh, 1950s tax rates.)

One big reason is research from two highly respected — and left-of-center — economists, Peter Diamond and Emmanuel Saez. (Diamond is a failed Obama nominee to the Federal Reserve Board in addition to being a Nobel Laureate, while Saez is perhaps best known for his work on income inequality with Thomas Piketty.) In their paper, “The Case for a Progressive Tax,” they contend that the top federal income-tax rate in the US could more than double to 73% from 35% today without hurting economic growth. To put it another way, the US is nowhere close to the top of the Laffer Curve, where higher tax rates start lowering tax revenues. If Diamond and Saez are correct, raising the top marginal rate to roughly 40% (actually closer to 43% when you account for other tax code changes), as Obama wants to, is no problemo.

Diamond and Saez summarize their findings in an April op-ed for The Wall Street Journal:

Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.

Diamond and Saez, shorter: Let’s use an “all of the above” tax hike strategy to create a tax-hike “straitjacket” of higher rates and fewer tax breaks for wealthier Americans (and small business). The approach is the clear model for Obama-style tax reform.

But a new American Enterprise Institute analysis, published in Tax Notes, of the Diamond and Saez research suggests Obama might want to rethink his tax-hike strategy — or at least his cavalier attitude toward the potential risks it poses to US economic growth and job creation. In their paper “Should the Top Marginal Income Tax Rate Be 73 Percent?,” Aparna Mathur, Sita Slavov, and Michael Strain say they “do not believe that the [Diamond-Saez] model can be used prudently as the basis for the real-world public policy problem of determining the socially optimal top marginal income tax rate.”

Conducting the sort of deep dive that economic policymakers and pundits rarely make, Mathur, Slavov, and Strain highlight a number of questionable assumptions and choices made by Diamond and Saez:

1. Diamond and Saez assume that high-income taxpayers react to tax hikes more or less like lower-income taxpayers, meaning not so much. While there is no consensus here, studies focusing on high-income individuals tend to find much higher estimates of short-term responsiveness than studies of lower-income households. It makes intuitive sense: Wealthier taxpayers have a greater ability to alter how much they work, in what form they get their income, and fashion tax- avoidance strategies. “We do not believe that in the real world the top tax rate should be set under the assumption that tax avoidance and evasion behavior can be dramatically changed,” Mathur, Slavov, and Strain write.

2. Diamond and Saez assume sharply raising tax rates has zero, zilch, zippo long-term impact on taxpayer behavior and the economy since, well, those effects are hard to measure. But economists agree those long-term effects are important. America benefits greatly from people who take risks and make career choices in hopes of striking it rich. “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” Mathur, Slavov, and Strain argue.

3.  Diamond and Saez have created a model — admittedly a lovely and elegant one — with a built-in bias that says more equality is better than less equality. Or, in other words, government should maximize the revenue it collects from high earners since they value each additional dollar of income less than lower-income earners. “Because the social loss from taking money from the rich is assumed to be zero and the social gain from giving money to the non-rich is greater than zero, society’s goal is clear: The government should take as much money as possible from the rich and redistribute it to the non-rich,” Mathur, Slavov, and Strain write. But is this really the role Americans want their tax code to play? The AEI economists:

Gregory Mankiw, a Harvard economist and former senior economic adviser to President George W. Bush, has said: “My sense is that people are rarely outraged when high incomes go to those who obviously earned them. When we see Steven Spielberg make blockbuster movies, Steve Jobs introduce the iPod, David Letterman crack funny jokes, and J.K. Rowling excite countless young readers with her Harry Potter books, we don’t object to the many millions of dollars they earn in the process. The high incomes that generate anger are those that come from manipulating the system. The CEO who pads the corporate board with his cronies and the banker whose firm survives only by virtue of a government bailout do not seem to deserve their multimillion dollar bonuses. The public perceives them (correctly or incorrectly) as getting more than they contributed to society.

A better criterion, according to Mankiw, would be: ‘‘People should get what they deserve.’’

Diamond and Saez’s academic work is filed with caveats and explanations not found in their work for public consumption, which is far more black and white. And to some degree that’s understandable. But a deeper reading leads Mathur, Slavov, and Strain to this conclusion:

Diamond and Saez ignore long-term behavioral responses, assume more equality is a better social welfare function, assign no social value to the marginal dollar of consumption for the rich, and use a short-run behavioral response predicated in part on less evasion and more enforcement to compute an answer of 73 percent. Consequently, we can be pretty sure that the answer is significantly less than that. Further, we find the suggestion that the government should take more than half of a citizen’s income in taxes to be unpalatable.

Cranking up taxes on the rich isn’t the free lunch or cure-all that liberals so desperately desire it to be. And anyway, the revenue-maximizing tax rate isn’t the same as the growth-maximizing tax rate. America needs a tax code that pays for the amount of government it wants in a way that is as efficient and least harmful to economic growth as possible while also broadly reflecting society’s sense of equity. Using a $15 trillion economy to run a precarious, ideologically-driven experiment to find the exact tax-rate tipping on the Laffer Curve of the current tax code — and thus temporarily avoiding politically risky entitlement and tax reform — is a terrible way to pursue public policy.

79 thoughts on “New study shows why heavily taxing the rich won’t work

  1. “Using a $15 trillion economy to run a precarious, ideologically-driven experiment to find the exact tax-rate tipping on the Laffer Curve of the current tax code — and thus temporarily avoiding politically risky entitlement and tax reform — is a terrible way to pursue public policy.”

    Cue the laugh track.

  2. Taxes under Clinton and Reagan were higher and we had good economic growth. cannot balance the budget on higher taxes on the rich – ALONE – but they’re not calling for that either.

    The most telling part of this is what Romney did not offer – a real plan which is what the GOP has not offered – a real alternative to what the President if proposing – that effectively balances the budget without relying on voodoo economics that they refuse to have scored.

    these guys have run their mouth for 4 years yaking that we have a “spending” problem when what we have in the way of actual revenues is about 1.5T – less than at any time in the prior 50 years and at the same time – they refused to provide any credible cuts-only plan.

    What Romney offered was a joke,., How can a “revenue-neutral” tax “reform” reduce the deficit?

    his whole plan was warmed-over supply-side – cut taxes more and growth will occur – idiocy.

    • “Taxes under Clinton and Reagan were higher and we had good economic growth”

      * * * * * * * * *

      There were other factors at work in both cases. In both cases we did have good economic growth in spite of the tax burden. And I would say that, if we had 4-5% GDP growth right now, we could tolerate a higher tax burden (at least for as long as the 4+% growth continued). But we do not have 4% growth at all. We are in the 1-2% range, and a small shock could send us back into recession

      As far as what Romney promised, the fact is that 100% of all presidential candidates promise more than they can deliver. It’s impossible to get elected POTUS by being entirely honest.

    • The top rate at the end of the Reagan administration was 28%.

      People who site the Clinton top rate conveniently ignore that Clinton lowered the capital gains rate, thus offsetting, if not more than offsetting (remember, “the rich” get most of their income from capital gains) his earlier income tax increase, leading to stronger economic growth and a balanced budget.

      Income tax receipts, notwithstanding a recession and 9/11, were higher in the last year of the George W. Bush administration than in the beginning, so there was no loss from the “Bush tax cuts.”

      In 1954 and 1955, income tax receipts were lower than the preceding year under the 90%-plus rate that Paul Krugman proposes to reinstate.

      In every one of the three years 2005, 2006 and 2007, despite the Iraq War (and before the banking crisis), the deficit went down – yes, three straight years of deficit reduction, to a mere $160 billion – essentially, a balanced budget. (

        • Larry, you’re forgetting TEFRA 1986- the top tax rate was dropped from 70% to 50% under TEFRA 1982 in Reagan’s first term.

          Don’t forget these marginal rates aren’t as meaningful as they sound- you still have a bracketed system where tax thresholds are jerked around for effect, and without capping deductions, some people’s taxes can either change very little, or maybe even go UP.

          Its those little details Jimmy P. forgets abouut. Here’s a dumb couple for you:

          • re: the rich who don’t know how taxes work?


            are you serious?

            there might be one or two dim bulbs guy but the vast majority of them are very active politically these days.

            but the point is that Reagan went too far – and when he did – he had the good sense to back up and not let the country go into a structural deficit.

            That’s the way fiscal conservatism “used” to work.

            Nowdays.. it’s all about “starving the beast” no matter whether the budget goes to hell in a handbasket or not.

            that’s irresponsible in my book.

          • You have no idea how many self styled “conservatives” are out there who think raising the top rate to 39.6% means a tax hike from the first dollar earned.

            People are really that stupid, which is how this site survives. You have to be a flaming moron to think that raising taxes by $38 per week on a couple earning $300,000 a year will have ANY effect on the economy at large. In fact, someone calculated that with average deductions, a couple would have to earn north of $350,000 before they saw any tax increase.

      • The 28% tax rate at the end of the Reagan term was 28%, dropped from 50%, which gave the nation huge deficits and helped crater real estate.

        And as you well know, Mr. Schwimmer, Clinton had the Internet to credit for all of his economic success.

        Isn’t that right?

        BTW, the cap gains rate under Clinton was dropped from 28% to 20%- but that was signed in 1997.

    • How Can “revenue-neutral” tax “reform” reduce the deficit?

      You CUT the out of control spending that increases year after year!

      The tiny amount of revenue generated with tax hikes on the rich do nothing to the deficit check the numbers.

      These politicians play class warfare to get votes from the ignorant..

      • re: ” You CUT the out of control spending that increases year after year!”

        so what does that have to do with the revenue neutral tax reform?

        and why didn’t Romney make his plan what you say instead of his “revenue neutral” plan?

    • Really?/ 1.5T? Hmmm, O-Care will cost much again??? Hmmm, Those wars he stopped that Bush started that were unfunded should’ve brought us back in line. I wonder why that isn’t happening??? SPENDING SPENDING SPENDING, not revenue. When you can say we were at 8T 6 yrs ago and now we’re at 15T, where does it not compute that we’re spending too much? Is everyone so befuddled by this guy that we’re willing to make up numbers to alloy his Keynesian guided policies to continue? Reagan worked with Tip O’neill, Clinton worked well with Newt Gingrich, Obama MUST work with John Boehner! 51% to 48% is no landslide and it was probably closer than that. He’s OUR President, not dictator…

      • “51% to 48% is no landslide and it was probably closer than that. He’s OUR President, not dictator…”

        Oh, that WAS a landslide. You see, when all of the remaining votes are counted and finalized from New York and California, the popular vote will prove that. Romney, ironically, only got the “47%” of the vote.

        With 330 electoral votes, that is, by any measure, a landslide.

        And by the way- the President was TOO accomodative with the GOP House, and they shafter him anyway.

        Let us go over the cliff. If the one percenters are so stupid to watch the stock market crater over a 4.9% tax hike, maybe they’re not so smart after all.

      • re: the stopped wars should bring us back in line –

        they will – when we finally get out. Do you think we are not still spending money there?

        re: “O-care” – how much will it add per year? got credible numbers?

        re: spending, spending, spending

        ok – let’s identify the increased spending since Bush took office.

        entitlements – how much more?
        DOD/National Defense – how much more

        Medicare – increase premiums, co-pays – problem solved

        how do you fix DOD spending?

        when you are done cutting and there is still a deficit then what?

        re: working with the GOP.

        The GOP under Reagan and Clinton did not have a Grover Norquist pledge and in both cases taxes did increase once it was clear that cuts alone would not balance.

        that’s what has changed. Tax increases to pay for what you won’t cut – have been ruled out when under Reagan and Clinton they were not. That’s how the GOP “worked” to solve the deficit under both Reagan and Clinton.

          • Medicare is a fixable problem – as opposed to trying to slim down DOD.

            Medicare was originally created with a 20% co-pay so the consumer would have some skin in the game.

            When Part C was brought into the mix – it effectively did away with the 20% co-pay and it did it with govt subsidies.

            this is what Obama wanted to cut in Medicare that got demagogued – the govt subsidy for Part C – known as GAP and supplemental coverage.

            this allowed people who have significant assets, two homes, etc.. to buy health care for about $100 a month because even though it’s means tested – it’s primarily on income, not assets and even income is generous …income up to about 100K a month single and double that for a couple.

            That’s way, way too cheap and it has to change.

            but even if we fixed it right now so that it was self-supporting – you’d still have a significant deficit.

            We did not dramatically increase spending for Medicare from 2000 – 2008 – the boomer demographics pushed up costs.

            But DOD – it DID double in spending from 300 billion to dang near 900 billion now and that does not included the rest of National Defense like Homeland Security.

            The people who are truly serious about balancing the budget do not believe we can do it with only cuts to entitlements. The ones that do believe this simply do not care if we balance the budget or not – because that’s not the game they’re playing.

          • re: ” Considering that medicare is at best constitutionally questionable what does it matter its still more expensive than defense?”

            how do we know when Juandos is lying?

            he speaks!

            I challenge you Juandos to list the total outlays for Medicare and DOD – not from your whacko sources but from credible sources.

            do it.

            Hint: Medicare is about 500 billion
            DOD is over way more than that.

            re: disability – is NOT Medicare.

          • liberal larry who is incapable of looking in embedded links claims without credible attribution the following: “Hint: Medicare is about 500 billion
            DOD is over way more than that

            So you say, then again you say a lot of silly stuff…

            liberal larry you know I’m going to immediately disregard any libtard site where Keynesian thought processes as bankrupt as they are still considered somehow useful…

            Do some real homework liberal larry:

            lesson one pandering to parasites

            lesson two pandering to parasites

            re: disability – is NOT Medicare“…

            Disability is entitlement spending…

          • exactly what I thought… bogus propaganda links to AEI and company.

            disability is entitlement spending.

            yes.. and I asked you to list the major entitlements and their costs and what you did was sling more AEI hash.

            show me the top number on entitlements and show the major components – and do not count FICA/SS which are pre-paid entitlements that do not get funded from the budget.

            then show me the DOD and National Defense numbers.

            and no more AEI propaganda… use credible links.

            or just fly back to LA LA LAnd.

      • ” perspective/101712-629790-data-debunk-deficit-exploding-tax-cuts-myth.htm?p=full”

        there is no dispute over tax cuts generating more revenue, the dispute is what happens if you cut taxes, generate more revenue but the same people who approved the tax cuts ALSO approved spending that ended up exceeding what the tax cuts generated?

        and what do you do when that happens?

        do you back up and increase taxes to correct the shortfalls (like Reagan did) or do you say “deficits don’t matter” like Bush/Cheney did?

        • You probably don’t realize that what you just posted confirms that spending is the prime driver of the deficit and debt, IRREGARDLESS of tax rates……….

  3. According to Ben Franklin the worst thing we can do for the poor is to make their poverty comfortable.

    Liberals can never accept that the risk takers of society who drive employment WILL.change their behavior if overtaxed. Their idea that one can overcome this through mere enforcement reminds me of Soviet Russia. People do not innovate with a gun pointed at their heads.

    This all goes back to the entire premise of liberalism – that the people are children who must be controlled by the parents (liberal ruling class) for their own.good. We have seen throughout history that this brings only suffering. They don’t build walls around Communist countries to keep people out.

    • if you have kids in public school – you are likely by far – the biggest “taker” in the “taker” group bar none.

      Kids cost about 10K per year to educate.

      If you are not paying 10K MORE than others without kids are paying then you are a “taker”.

      • Actually, it costs *nothing* to teach a child.

        It costs $10k per child to support the education industry that has been put in place to do the educating.

        How much does it cost to educate a child in how to talk? How to walk? Dress themselves? Nothing but time.

        Considering that children are graduation high school unable to spell, write coherent sentences, or do basic math without a calculator (and sometimes unable to *with* a calculator), despite education spending having increased exponentially over the years, the obvious conclusion is that more funding does not equal better educational outcomes.

        Therefore, having a child in public school (mandatory, BTW), does not mean someone is a “taker”, since they are paying taxes on multiple levels to effectively support teachers’ unions, and receiving an inferior education for their children in the process.
        In simpler terms, parents are not getting what they’re paying for in public education. Far from making them “takers”, they are being *taken*.

        • how about in Europe and japan where public schools and taxes produce kids far better educated than ours?

          what’s the difference?

          More than 1/2 of the US States do NOT have teachers unions and their test scores are the same and states with unions – so what’s the difference?

  4. Liberals simply cannot conceive on increasing tax revenues through growth. If the economy moves you get to tax the same dollar over and over again at lower rates therefore resulting in higher revenues. Every time tax rares have been cut revenues to the Treasury have increased. EVERY SINGLE TIME from Kennedy to Reagan to Bush. Clinton was able to raise taxes because he did so in the middle of the boom. Do not forget that the economy collapsed during Clinton’s final year with the NASDAQ losing half its value.

    • ” Liberals simply cannot conceive on increasing tax revenues through growth”

      sure they can but they can also see when you are 16 trillion in debt with a trillion dollar deficit that you cannot fix that by cutting taxes further.

      at some point – and we’ve already reached that point – your revenues fall so low that you cannot pay for what you’ve already spent.

      we take in about 1.5 Trillion in revenues. It’s the lowest in 50 years. we are ALREADY spending more than a trillion more than we take in.

      Even Ronald Reagan would not abide by a deficit if his “growth” policies did not work. He raised taxes once he saw the tax-cuts would not generate enough growth to keep from going into deficit.

      that’s common sense. something that self-proclaimed fiscal conservatives today don’t seem to have.

      when you are 16trillion in debt and your response is ideological not practical and pragmatic, you’re no longer truly interested in solutions.

      • Reagan was blamed for raising taxes because the Dems in Congress pulled a fast one on him. they promised spending cuts if he would go along with raising taxes. the taxes were raised but the spending cuts NEVER happened.

        • Nonsense. Reagan sponsored and got the most massive build up in defense expenditures ever seen. His ruse was that he would “spend the Soviet Union” into oblivion knowing they couldn’t keep up. He was never apologetic about it. That’s what got you those deficits, which of course, served to make his successor a one termer.

    • Here’s the party line folks:

      “Every time tax rares have been cut revenues to the Treasury have increased. EVERY SINGLE TIME from Kennedy to Reagan to Bush. Clinton was able to raise taxes because he did so in the middle of the boom. Do not forget that the economy collapsed during Clinton’s final year with the NASDAQ losing half its value.”

      This meme is repeated often, and has taken on the status of a religious talisman.

      First off, this “revenue boosting by tax cuts” is a bit of joke. For one, it takes two metrics, isolates them from every other economic dynamic, and then from this, we derive a “truth.”

      Want another truth? There’s no emprical evidence for it. Not only that, you have the effect of cutting by one dollar, and getting a 75 cent increase. So the only result from this policy is what you constantly decry: deficits. BIG deficits, which you THEN pivot on blaming spending, not tax cuts.

      The argument is intellectually and historically empty.

      Lastly the “tech boom” that is used to remove any credit from Bill Clinton for his sparkling economic performance is also bogus.

      Unfortunately for those who push this meme, it is devoid of reality. According to BLS, tech only accounted for 8% of total job growth during this period, and could not have possibly caused the job and income growth we experienced by itself. In fact, ultimately, technology COSTS jobs.

      But the Holy Grail of cuts continues. If only we didn’t fund Big Bird.

      • Lower rates do increase revenues, and you can put the 1920′s Harding-Coolidge tax cuts in the example list. The result was the Roaring Twenties. But it should also be stated that the federal government must be limited to 18-20% of GDP. Regulations must be put on a tight “budget” too.

        A normal economic growth rate of 3-4% would grow investments at 8-10% annually, double the economy (and federal revenues) in about 20 years, and make virtually all young workers who invested 15% of their income into multimillionaires by retirement.

        Or we can stick to the current European path of slow growth, high unemployment, massive borrowing, and economic doom. Let’s see…

        • “Lower rates do increase revenues, and you can put the 1920′s Harding-Coolidge tax cuts in the example list. The result was the Roaring Twenties.”

          Really? See a pattern here?

          Coolidge cuts rates, deregulates, causes real estate boom, followed by massive depression. Tax rates go up anyway.

          Reagan cuts rates, deregulates, real estate boom, followed by recession. Tax rates go up anyway

          Bush II cuts rates, deregulates, real estate boom, followed by another depression. Tax rates (will) go up anyway.

          YOU CAN’T LEGISLATE THE BUSINESS CYCLE. And you can’t juice the economy or bankrupt the government every time there’s a slowdown. The deal we make as capitalists is that we dont have static economies- they boom and they bust, they speed up and slow down.

          If history has taught us ANYTHING, its trying to circumvent the inevitable order of economic events through tax policy that leads us to ruin. ALL YOU’RE DOING IS AMPLIFYING THE BOOMS AND THE BUSTS.

    • And just how the f is the economy gonna grow when the wealthy and big corps are taking their investments dollars overseas? NOT because our f’en taxes are too high but because they can pay wages of a few dollars per day and no benefits. When that practice started becoming prevalent in the 80s (thank you Reagan) TRICKLE DOWN, SUPPLY SIDE, REAGONOMICS ceased to have any value to the average American. Most of us aren’t entrepreneurs, job creators and don’t want to be risk takers. We just want to work in a job that provides a decent standard of living for our family. We don’t want to be rich, we count our riches in our family and personal relationships. So tell me – how is there EVER gonna be jobs for average Americans? When the “risk takers” in our country feel no allegiance to their country whatsoever and don’t realize how unpatriotic they are when they deposit every single dollar made off jobs they took away from fellow Americans? How will we ever grow when the “job creators” throw Americans who need jobs under the bus?

  5. Have we reached the point where the underlying assumption of economic policy is that the only reason to allow individuals to keep more of what they earn is that in some circumstances doing so might actually increase revenue for the government?

  6. Saying that you could increase taxes to 73% on the top producers of society and not expect them to change their behavior is simply the stupidest thing I have ever heard. Britain increased taxes on.millionaires to 50% and tax revenues were halved.

    Liberals need to stop looking at theory and start looking at history.

    • ” Saying that you could increase taxes to 73% on the top producers of society and not expect them to change their behavior is simply the stupidest thing ”

      saying that tax rates under Clinton and Reagan changed behaviors and plummeted tax revenues is also stupid – because it’s not what happened.

      there is some middle ground – Reagan and Clinton occupied that middle ground.

    • You can’t compare British and American tax systems. Remember when an American has his Federal rate raised, his LOCAL tax burden is essentially cut, because he is allowed to deduct them at a higher percentage.

      That’s why I am against capping deductions. Its a dishonest method, and it being pushed for the flimsiest of reasons.

      • the “cut taxes to spur growth” folks seem to have no answer for what happens when you go into deficit.

        We did that under Bush and now we are told the “solution” is to cut taxes even more? WTF?

      • “Remember when an American has his Federal rate raised, his LOCAL tax burden is essentially cut, because he is allowed to deduct them at a higher percentage.”

        —NOT NECESSARILY. Our beloved deep-blue state of New Jersey bases its income tax on the gross rate reported to the IRS. THEN THERE IS ACT. Because most of us are “rich” by the unchanged, never-deflated standards of 1967, we lose most of our deductions as we move up the economic ladder. (Since the problem it was supposed to fix, that some wealthy Americans were able to exploit so many of the hundreds of loopholes that a few actually managed to owe nothing, because the tax code was so artificial back then, when the tax code was simplified and marginal rates lowered, it should have been abolished, anyway.)

        The problem is most acute in the blue states where seemingly high incomes only exist because of the much higher cost of living. Since, under ACT, you lose most of those deductions, you pay a double penalty—higher taxes and the loss of deductions against federal taxes. This is virtually the only tax which has never been indexed for inflation, and neither the Republicans nor the Democrats have ever done anything to change it.

        BTW, almost all UK taxes are national. “Rates,” which are what they call local taxes, are minimal because everything is so centralized there. Their total effective rates were, until recently, comparable to ours, because we pay so much in state and local taxes.

        • “—NOT NECESSARILY. Our beloved deep-blue state of New Jersey bases its income tax on the gross rate reported to the IRS. THEN THERE IS ACT. Because most of us are “rich” by the unchanged, never-deflated standards of 1967, we lose most of our deductions as we move up the economic ladder. (Since the problem it was supposed to fix, that some wealthy Americans were able to exploit so many of the hundreds of loopholes that a few actually managed to owe nothing, because the tax code was so artificial back then, when the tax code was simplified and marginal rates lowered, it should have been abolished, anyway.)”

          I’m not sure I understand what you’re saying. I think you’re referring to the Alternative Minimum Tax, (AMT) which was started in 1970.

          Secondly, you state ” Our beloved deep-blue state of New Jersey bases its income tax on the gross rate reported to the IRS”
          There is no such thing as a “gross rate.” Are you referring to “gross income?” In any case Federal tax code allows you to deduct this number from your gross income on your 1040.

          While I am favor of fixing the AMT, which might even be dumped in the near future, remember you just had a millionaire candidate for President who paid an effective 9% rate. And those idiots in the Red States applauded him for it.

          • Of course, I meant AMT. (My daughter is in the midst of applying to college and just took her ACTs, which probably explains the slip!)

            For its own income tax, New Jersey uses the mostly unadjusted rate which you insert on the 1040 before taking federally-allowed deductions, including the sky-high Jersey property taxes. There is no correction on the New Jersey form for having been hit by the AMT, nor for property taxes. It’s a double-whammy.

          • My point was whatever you give to the State, you take that off to reduce the amount listed on Line 1 of your 1040. I live on Long Island- believe me, I pay property taxes (mostly school costs) and that is one reason I thought Romney’s plan to limit deductions was a deal killer.

          • AMT takes it all away after you’ve entered your deductions, anyhow. It’s a special tax on high-cost-of-living parts of the country, and also on those with unusual expenses, such as extraordinary medical bills. Congress won’t get rid of it, because it brings in a lot of revenue especially now that it reaches down well into the middle class: probably an omen of things to come . . .

          • I know what the AMT is, but since I’m not subject to it, I’m not familiar with the mechanics. If its any comfort, the deal Boehner welched on would have scrapped AMT, and I’m sure you won’t have to live with it much longer under any new deal

  7. There is one possible silver lining. If Obama hikes the tax rates, and if, despite that, we end up with anemic growth during his entire second term, and another $4 trillion in debt, love for Obama and his ideology will diminish.

    By the time 2016 rolls around, it’ll begin to dawn on people that not everything that goes wrong is Bush’s fault.

    • Y’all can quit pulling for and working toward out country failing because your #1 priority is making sure Pres Obama is one-term President. You’ve been there, done that AND FAILED. So is securing the White House for the GOP more important than America meeting our economic challenges?

  8. One would assume the Laffer curve moves, it may be shallow in a poor economy and steep in a good economy. My point, progressives have no idea where the sweet spot is, and the two economist who did this study ought to bone up on their Hayek.

  9. Apparently, the two economists upon whom Obama is basing his thinking are unreformed, nineteenth-century socialists, who have learned NOTHING from the experience of the intervening 141 years since the Paris Commune. If their theories are the basis of the administration’s plans for the next four years, the situation is even more dire than I had thought.

  10. This is what it is really about:

    we take in about 1.5 trillion in income taxes.

    We spend about twice that much.

    Obama is not talking about ONLY taxing the rich

    but if you do not accept Obama’s plan – then put yours on the table.

    For 4 years, we’ve heard that we have a spending problem not a revenue problem yet our revenues are the lowest in 50 years.

    so don’t like Obama’s Plan? how about a competitive alternative?

    Wanna make Obama really look bad?

    propose a balanced budget plan that does not increase taxes.

    The GOP lived in an imaginary world during the election but I think they have lived in an imaginary world since 2008 when we had a budget that was in deficit when just a decade earlier under Clinton it was not.

    so let’s see some real alternative plans.

    • Obama won. Twice. He’s the leader. So, lead.

      Stop demanding the people who lost lead. You wanted to be in power, now act like it.

      Last 3 Obama budgets lost 98-0 in the Senate, which is not GOP run.

      GOP House passed budgets, but Harry Reid wouldn’t countenance even voting on them.

      So please spare us your game of how the burden is on the GOP now.

      Your guy won. Again. Now lead. Show us your proposal.

      No one here is stopping that, we are just saying that you will be in for a surprise.

      Many countries have run into these sorts of problems, and then tried taxes. In the end they do reform and shrink the state.

      • re: ” Stop demanding the people who lost lead. You wanted to be in power, now act like it”

        what I am saying is that looking at spending or taxing as a percent of GDP is not particularly useful for a number of reasons but the most important of is – that how much in tax revenue that you take in – is the real bottom line.

        this is what the sequester was all about -making across the board cuts – a “cuts only” budget over 10 years and not assuming any increased revenues.

        Obama supports that. The very people that have said we have a “spending” problem – the GOP – OPPOSED cuts to DOD.

        What they want is cuts ONLY to entitlements instead, no cuts to DOD/National Defense and no increased revenues.

        this is what has gone on for four years in the House.

        This is essentially Paul Ryans budget – which does NOT “balance” until 2030 and the way that revenues will “increase” is through some very ambitious and very questionable supply-side economics.

        by 2030 – our debt will be 16 trillion plus the deficits accumulated between 2012 and 2030 – likely another 16 trillion.

        that’s not “leadership” especially when there is no chance what-so-ever that such a bill would pass in the Senate or get signed by POTUS.

        The sequester achieves “balance” after 10 years and applies cuts to entitlements, DOD/national defense and the rest of govt and will add another 6 trillion to the 16 trillion..
        right now – interest on the debt is 227 billion or 6% of the budget. If the debt doubles, the interest will likely double to over 500 billion and 12% of the budget.

        Now when and where did the structural deficit spending happen?

        Obama did add a trillion in debt with the stimulus – but it’s not year, after year structural deficit -it’s one shot over two years.

        where did the rest of the spending – twice as much as we take in -in taxes come from?

        well for starters, the DOD budget in 2000 was 300 billion and now it’s around 900 billion and this does not count non-DOD defense spending like Homeland Security, NASA military satellites, etc.

        Nor does it address the fact that the military now has almost twice as many retired who receive entitlements – as they do active duty – and this number is growing.

        Finally, folks my not realize it but the military pays into social security and will receive benefits like everyone else AND the military forces those over 65 to buy Medicare and make the military health care secondary to Medicare being primary. So the military is ALSO ADDING to the demands on Medicare – which is 75% subsidized right now.

        so… we are in a hell of a deep budget hole that no one has wanted to deal with – in part – because dealing with it at the bottom or recovering part of a recession will likely drive us back into recession.

        Everyone knows that but what has the GOP done over the past 4 years? They’ve hammered the current POTUS for spending too much money and getting us in 16 trillion in debt when he did not get us into debt to start with and what got us into debt was voted in favor of in 2000-2008 by the very same folks who say we have a “spending” problem not a “revenue” problem.

        this is not only not leadership – this is feckless pandering and obfuscation.

  11. Nobody in a position to influence the coming “deals” on taxes or long-term tax reform has come close to suggesting a top tax rate of 70% or even 50%, so all this talk is irrelevant. What is being discussed, AS IT SHOULD BE, is how can the lowest tax rate America has had on upper income in recent history be justified when our federal government is running huge deficits AND the economy is only growing at a sluggish rate?

    Reagan had good economic growth while top rates were 50%. He then lowered rates, but that began to drive huge deficits. Bill Clinton raised rates to 40% in order to get a handle on deficits and America STILL enjoyed a booming economy. George W Bush came in, lowered those top tax rates and ended his terms with TRILLION $ deficits which we can’t seem to get out of AND the economy crashed. THERE IS NO JUSTIFICATION TO KEEP TOP RATES AS LOW AS THEY ARE. All evidence points to higher rates helping tame the deficit without harming GDP growth AT ALL. Dare I say, evidence even points to higher rates going hand-in-hand with increased economic growth?

    The answer to the tussle over taxes is laid out there for America to see IN OUR HISTORY!

  12. re: ” New study shows why heavily taxing the rich won’t work”

    this is not the real issue. The real issue is how do we balance the budget.

    If you do not like the idea of taxing only the rich to do it (and I would AGREE that – just that one idea will not work), then you need to make a proposal that WILL balance the budget, buy down the debt.

    We’ve had a four year conversation about what we don’t want to do – to balance the budget.

    when do we start talking about how we should?

    I think right now the President has a plan – that INCLUDES among other things, SOME increases on taxes for the rich – that track what Clinton/Reagan did – and it’s up to the folks who are opposed to his plan to put forth a competitive alternative plan that ALSO balances the budget – and no – voodoo supply-side economics that cannot be scored is not acceptable.

    You simply cannot get there without serious cuts to BOTH entitlements AND DOD AND increases in revenues.

    it’s time to stop saying “no no no” and deal with the realities which is EXACTLY what Ronald Reagan did by the way,.

    • You simply cannot get there without serious cuts to BOTH entitlements AND DOD AND increases in revenues“…


      Good one larry g!

      Repetitive fairy tale syndrome hard at work here…

        • You’d think even a moron like Juandos would understand math, eh?“…

          Well I know the ever moronic larry g can’t do the simple arithmetic then again what good is math for someone who’s grip on reality is at best questionable?

          • 1.5 trillion in revenues and we spend 1.5 trillion on DOD and National Defense.

            in Juandos-world which is very similar to clueless world – we spend every penny on defense and screw the rest.

            lucky for the country – folks like Juandos spend most of their time at keyboards blathering nonsense that even the most obtuse do recognize.

          • lying larry the libtard whines: “in Juandos-world which is very similar to clueless world – we spend every penny on defense and screw the rest“…

            Hmmm, what part of the Constitution says stealing from one group and giving it to larry’s fellow parasites is how it should be done?

            lucky for the country?

            What? That the country mirrors your absymal ignorance of the Constitution?

            Good one!

          • re: ” ignorance of the Constitution?”

            actually the Constitution permits spending, making laws and regulations and people voting to decide what they want and don’t want.

            I love it when you “Constitutional” types trot out the Constitution and cherry-pick the parts you like and ignore the other parts – like elected representation.

            What’s missing from the US Constitution is what is present in many State Constitutions which is the requirement for the budget to balance yearly.

            Juandos wants to double the DOD spending ….to suck up every penny of tax revenues and zero other spending including entitlement spending.

            Lucky for the rest of the country, people like Juandos are irrelevant if noisy.

  13. Mr. Pethokoukis generally spends his days searching for any “research” that validates his prejudices.

    That’s why the AEI is a “think tank.” First they define the narrative, and they “think” of ways to lie about it so it fits.

    • maxie boy whines: “Mr. Pethokoukis generally spends his days searching for any “research” that validates his prejudices“…

      Meanwhile maxie boy ever dependable tenuous grip on reality continues shine on and on…

  14. If you received a $1 tax offset for each $1 you spent or paid to a poor person, you are replacing government food stamps with a job. You can send the same dollar to the government and have nothing to show for it or you can hire a person and get the benefit of the person’s work while they get the benefit of having a job. Workers benefit by being able to earn more than they can receive on welfare and the pride of knowing they earned everything they have received. If everyone is working, then the food stamp program is not needed. The government safety net remains until everyone voluntarily walks away from the safety net. I call the tax offset “cash in the hand” and the web site is It can be the foundation of self government. The same principle applies to saving as well as spending. If I save $1 for my future healthcare or schooling needs, I get a tax offset of $1 for each $1 saved. If tax rates become 100%, I don’t care. Every $1 I earn, I spend or save, so my taxes can go to zero, even as tax rates go to 100%. This is how you can rase taxes and cut government spending at the same time.

    • Your argument has great merit! And logic says applying that reasoning to corporate taxes shows why lowering corporate taxes rates WILL NOT increase employment. Because, RIGHT NOW, any expenditure a business makes by hiring results in $1 to $1 tax deduction. A business only pays taxes on PROFITS. If a business has revenue of $1million, a payroll of $500k, other business expense of $200k, profit of $300k – then taxes are paid on $300k. If the business wants to pay less taxes – hire a couple people, reduce profits by $100k and only pay taxes on $200k. Also, when a business invests in capital improvements that also gives tax breaks; so lowering corporate tax rates has NOTHING to do with creating jobs and EVERYTHING to do with creating profits which ARE NOT TRICKLING DOWN.

      It actually seems to me that RAISING taxes on corporations would ENCOURAGE hiring because those dollars wouldn’t be taxed. But I’m probably missing something there.

      What I do know is this, if US lowers corporate taxes and DOES NOT tie it to a requirement for a company to hire more employees, then we are gonna increase deficit for the sole benefit of putting more $$ in the pockets of the very group who have received all the wealth generated in America over last 14 years and the hit to the deficit will DO NOTHING for unemployment which is the worst part of America’s economic situation as we are wasting our human capital, not to mention demoralizing them.

      • Your key statement was “if US lowers taxes and DOES NOT tie it to a requirement for the company to hire more employees”. The tax deduction “cashinthehand” does tie the taxes directly to employment. The more people you hire or the better you pay them, the lower your taxes.
        The tax deduction/offset is results first, payment second, dollar for dollar. You must hire or pay more first, and then your taxes go down, put down only by the amount you paid the worker.

        • Very interesting! Is this in effect now or is it part of proposed plans? Cause if it is in effect now and corporations are not hiring to take advantage of this, why is anybody proposing lower corporate taxes as way of stimulating growth and creating jobs?

        • ” If you hire an employee your taxes already go down as they are an expense before taxes.”

          you’re getting dangerously close to using logic and facts which is definitely swimming upstream to many of the nincompoop ninnies who nest in AEI!

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