The Tax Cuts Deal

Atlantic Economist and my long-time blog crush Megan McArdle gives some light to the tax cut deal just struck in Washington and has a thought I wish I’d had before:

Let me get the personal stuff out of the way: I think this is a terrible deal.  I was rooting for gridlock to cause the tax cuts to expire entirely, which would probably have a moderately negative impact on the economy, but would at least somewhat forestall a devastating fiscal crisis down the road.  If it was politically necessary to do tax cuts, I wanted them to be as small as possible, not $900 billion over two years.

Oh yeah, basically things don’t get done in Washington and the world gets better. I for one, even in my family’s tight budget, am willing to chip in a bit more to keep roads and schools open as long as everyone else is too.

Still, the deal wasn’t as horrible as it sounds to left-wing ears. The narrative has surrounded the idea of keeping the wealthy taxed at a lower rate during a recession, though I still think they’ve done nearly nothing but get wealthier while the rest of the people have stagnated. Still, the deal is also getting coverage for a lot of people who need it in the unemployed area.

Back to Ms McArdle, she does a better job at explaining economics than most and goes into her take on an interesting graph that’s been going around the past couple of days too:

My interpretation is rather different. We have an awkward tax structure, to be sure–if you were designing a code from scratch, you probably wouldn’t set it up this way.  However, the payroll tax isn’t particularly different from what the tax code looks like in many places in Europe–most people pay a broad, low rate, and then the carriage trade pays something more progressive. And it has grown over time largely in support of two social programs much beloved of progressives.  If those programs were smaller, the employment taxes would be, too.

To me, this chart shows how dependent the US federal tax take is on income taxes on higher earners, which tend to plummet precipitously in recessions, and are at historical lows simply because we’re in an exceptionally bad recession.  Even the things that presumably worry progressives, like the lower revenues from corporate income taxes, are to some extent simply showing up elsewhere, as taxes on capital gains income.  But you can’t complain about this, and also complain that tax revenues are so low right now; broadly, the most stable taxes are also the most regressive–they’re the taxes on necessities.  In bad times, non-luxuries tend to get cut back and then so does your tax revenue.

I love the thought experiment of eliminating any and all taxes and starting from scratch (and all subsidies as well). All I ever seem to come up with, other than some really basic silliness:

Ken: have you solved the US economy yet?

Fry: I’m trying. Oh how I’m trying.

Fry: I can’t think of what to tax, really. Income based not in brackets but an algebraic formula seems the most reasonable.

Fry: And a law stating that the highest paid worker in a company cannot earn more than 100 times that of the lowest…

Ken: No that’s novel

Ken: and make sure to include perks and bonuses

Fry: And just tax vices instead of criminalizing them.

Ken: also novel

I would also eliminate farming subsidies and increase taxes on junk food and vices. If there are negative consequences (health, waste, excess carbon, etc) then those get taxed. I do believe that it is irrational for a government to affect human nature and behavior, so it might as well make a profit off of it. That said, vice shouldn’t be a baseline for income, it should probably be set off a relatively even rate for the employed.

Alas, I have no concrete ways of better explaining matters of specie and notes. Such topics make me grow weary and I believe I shall now retire. Good morrow to you all!