[Guest post] Policy Effects versus Ideology

In the comments to my missive on tax progressivity, MNRobot is confused:

The confusion here is that I'm discussing the real world "effect" of altering tax policy, not what anybody would "want" in some kind of idealistic social aesthetic sense. Of course nobody wants to pay taxes, that's why they punish you if you don't pay them. The question is, given that the insult of forced taxes are necessary to pay for all the free stuff we demand (see note below), what's the best way to lay on those painful taxes so as to get the necessary revenue while we minimize negative consequences.

Policy makers should think about effects, not idealistic wants. I'm talking about how altering tax policy changes behavior. Policy pundits often confuse these two things. They confuse their simplistic and idealized moral wants and theories with real world consequences. There are many other examples of this same confusion. One is the pointless war on some drugs where the idealized want is to decrease drug use and the real world effect of the policy is gun violence and 7 million people in the criminal justice system (3.1% of the US adult population).

Anyway, I digress, back to the pointless war on some taxes. As taxes go up on people with discretionary funds, behavior changes to favor the best tax dodges. One of the best tax dodges is investing in a business, therefore as taxes go up, entrepreneurs will tend to invest more in their businesses rather than, say, taking money as salary or dividends to spend on mink coats or vacation homes. Spun the other way, as taxes go down people will use their tax holiday to cash in their investments to spend on consumer items.

The conservative talking point is that higher taxes discourage business investment. I disagree. In general, higher taxes make investment in a business more attractive. Furthermore, I think higher taxes on the rich hurt the sale of luxury items, and taxes on the middle class make hiring middle class workers less attractive. In that sense, higher middle class taxes stop the creation of human worker jobs and encourage outsourcing, robotics, etc....

The bottom line of my argument is that the tax rate curve is better more exponential than logarithmic. We need to make the middle class American worker less expensive to hire as we encourage entrepreneurs to invest in their businesses. One way to do that is to tax the rich more, and tax the middle class less.

Posted at 17:17 by Nadz   [/guest/nadz]   Comments | Perm Link |
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