Don’t tax me, Don’t tax thee, Tax the fellow behind the tree! Latest obfuscation on taxes by Krugman within

Posted on March 27, 2014 by

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Nobel Laureate Paul Krugman delights in stirring the pot, and he is not only a brilliant economist (legitimately so in the specialized area of international trade), but he is also very clever.  He doesn’t out-and-out lie, but he gives tidbits of truth while deliberately ignoring other facts to lead a reader to his own biased and false conclusion.  So what’s Mr. Krugman up to lately?  He argues that evil Republicans favor the rich–after all, everybody knows this–and they do it through tax policy.

Despite the frantic efforts of some Republicans to pretend otherwise, most people realize that today’s G.O.P. favors the interests of the rich over those of ordinary families. I suspect, however, that fewer people realize the extent to which the party favors returns on wealth over wages and salaries. And the dominance of income from capital, which can be inherited, over wages — the dominance of wealth over work — is what patrimonial capitalism is all about.

Now Mr. Krugman is well aware that so-called “preferential” treatment of capital over wages is not truly preferential, but in fact is a way to equalize the unfair double taxation of earnings from capital.  Economists generally support this, because we understand the importance of capital formation to increased productivity and corresponding wage growth; to have an equal tax rate between dividends and ordinary wage income means that capital is taxed at a much higher rate than income, and would discourage capital formation.  But Mr. Krugman studiously ignores what he very well knows to be true, since he is on the class warfare attack:

Some of these cuts were reversed under President Obama, but the point is that the great tax-cut push of the Bush years was mainly about reducing taxes on unearned income. And when Republicans retook one house of Congress, they promptly came up with a plan — Representative Paul Ryan’s “road map” — calling for the elimination of taxes on interest, dividends, capital gains and estates. Under this plan, someone living solely off inherited wealth would have owed no federal taxes at all.

Of course Mr. Krugman knows that, under the Ryan plan, while the individual would not pay federal taxes, capital would.  How does this work?  Dividend income comes out of the profits of corporations, which are taxed by the government at the highest tax rate in the OECD (do we really want to be #1 in the world in our tax rate?  Not very business friendly here) at an average high of 39.1%.  So every dollar of final profit is down to $.609 that could be distributed to shareholders.  If you are unfortunate resident of NYC, you may get to pay 13.2% (combined state & city) if Mayor DeBlasio has his way, but that is still slightly less than CA.  With the top federal rate at 39.6%, you have combined ~53% tax rate.  So if all the income of the corporation after taxes (60.9 cents) is distributed according Mr. Krugman’s desires (treated the same as wage income), the shareholder will receive 28.6 cents.  Is it right that capital ought to be taxed at over 71%?  When there is no certainty of return on invested capital, high tax rates discourage productive investment in risk capital (in equities) in favor of the very bane of Mr. Krugman’s ire, those nasty “coupon-clippers” who put their interest in relatively safe bonds.  This further favors the existing bias in the tax code of debt over equity. Let’s further not forget that after the original $1 of profit is reduced to less than 29 cents, that when those rich buy something they’ll pay another, say 7-10% in sales taxes in many states, so they’re down to around 27 cents on the dollar of purchased goods or services from a dollar of profit from capital investment.

So Mr. Krugman, why does a private individual take all the risk and receive only 27 cents on every dollar of profit, while the government takes no risk and gets 73 cents of every dollar of profit (if earned by those nasty rich people)?  Well part of Mr. Krugman’s answer is that:

Many conservatives live inside an intellectual bubble of think tanks and captive media that is ultimately financed by a handful of megadonors. Not surprisingly, those inside the bubble tend to assume, instinctively, that what is good for oligarchs is good for America.

Hmmm….”conservatives live in an intellectual bubble of think tanks and captive media.”  No doubt some do.  But is there any reason to doubt that liberals do the same?  So maybe we should just realize that, as Thomas Sowell writes, we have a conflict of visions and just leave it at that?  Why have to ascribe evil motives that Republicans favor wealthy people?  Maybe they are just aware of basic economics, which they might have even learned with your textbook.

Bereans ought to be especially dubious of class-warfare, populist language used in argumentation, considering the Bible’s condemnation of creating strife between people.

HT to Don Boudreaux over at Cafe Hayek.

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