The great tax debate – the world is turning – Atanas Pekanov and Miriam Rehm
When intellectual and moral arguments align, the global climate can change rapidly. This is what is happening with the American tax debate.
The policy proposals of US lawmakers have sparked a very controversial tax debate among economists in recent weeks. Democratic Congresswoman Alexandria Ocasio-Cortez argued that the United States needs to generate additional income by reverting top-income marginal tax rates of up to 70% to fund social programs and a Green New Deal, while that Massachusetts Senator Elizabeth Warren proposed a wealth tax of up to 3 percent on the richest. While opponents and some commentators have found these proposals radical or ideological, both are supported by economic research. Economists seem to broadly agree on some basic facts: Inequality in the United States has increased and the benefits of growth have largely gone to the richest 1%, while real incomes in so-called America the middle class have stagnated in the past. three decades. There is also a consensus that the progressivity of the income tax system has eroded in many countries since 1980 and that wealth is currently much more unevenly distributed than income.
The recent economic debate has therefore revolved around the question of whether higher taxes on the highest incomes or on the very wealthy should be deployed to counter these trends. American progressives argue that higher incomes are needed if the United States aspires to be more like the model European welfare state, with more inclusive social systems and better public services, funded by marginal income tax rates. income above 40% (in most EU countries) and / or some form of wealth tax. Although some have distorted these ideas, they are said to weigh only on very wealthy people. For example, very high marginal income taxes would only be levied on the portion of income above a certain threshold – in the case of the Ocasio-Cortez proposal, $ 10 million per year.
Economic theory of taxation
Besides sharing the tax burden, a progressive tax system is based on the concept of diminishing marginal utility of income, one of the cornerstones of classical economic thought: an extra dollar is worth more for a person with a salary. $ 500 monthly than for someone with an income of, say, $ 500,000 a month. Furthermore, Haavelmo’s theorem suggests that a revenue neutral tax reform, combining a tax increase at the top and a tax reduction for low-income groups – who have a high marginal propensity to consume and therefore to stimulate demand – can benefit growth.
Of course, there is a long tradition of economic thought warning against excessively raising income tax rates, primarily based on the idea that higher taxes negatively affect work and productivity by discouraging income. work effort. Optimal Tax Theory, drawing heavily on the work of Nobel Laureate James Mirrlees, attempted to operationalize these disincentives and calculate an optimal tax rate, given the estimated tax rate impacts. higher on after-tax income. Emmanuel Saez (Berkeley) and fellow Nobel Laureate Peter Diamond (MIT) find that for the United States such an optimal tax rate would be around 70 percent, while Berkeley professors Christina Romer and David Romer suggest 80 percent. But there are also criticisms: Greg Mankiw of Harvard and his co-authors come to the opposite conclusion in their review of the literature.
There is also some theoretical pessimism around this approach, as the estimates force authors to make choices about so-called social welfare functions – the degree of inequality or equality that a society prefers. Other arguments include the effects of high taxes on innovation, although it is difficult to separate monetary rewards from other influences on the motivation of inventors. While two recent studies have argued that indeed innovation will be lower due to high taxation, a new article by Raj Chetty and his co-authors disagrees with this result.
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What then do economists think of the question of whether taxation should be redistributive? In a recent much-discussed editorial, Gabriel Zucman and Saez argue that the goal of high income taxes is not only to maximize income but also to reduce inequalities to prevent a market economy from turning into a plutocracy. Mankiw called it more of a political argument, not an economic one, revolving around the idea that the ultra-rich are a problem for society. And indeed, the question of whether exorbitant wealth is a political and democratic problem may be up to the voters to decide.
But there are good reasons to believe that excessive inequality can have direct and negative economic effects. Some recent research indicates that it can act as a brake on aggregate demand and therefore growth. Studies by the International Monetary Fund have suggested that too high inequality can pose a threat to the sustainability of growth. And Raghuram Rajan argued that inequality threatens financial stability, causing low-income households to take on excessive credit. In addition, political economy research has attempted to determine, albeit imperfectly, whether rising inequalities have had an impact on democratic processes.
Today, wealth is even more concentrated than income. Warren therefore suggests an annual tax of 2% on people with assets over $ 50 million and an additional 1% on wealth over $ 1 billion. This is reminiscent of wealth taxes in countries like Norway and France, even if this tax has been reduced in France, what Thomas Piketty called “a serious moral, economic and historical error”. There are good theoretical reasons for a wealth tax to dampen the concentration of wealth at the top, especially if it is due to increased monopoly power or rent-seeking. The main disagreements in the wealth tax debate among economists appear to be administrative.
Saez and Zucman backed Warren’s proposal, estimating that it would only apply to 75,000 households but generate an estimated income of $ 2.75. trillion over the next decade. This reduces a breakout by 15 percent. Based on evidence from countries with wealth tax, such as Denmark and Sweden, they argue that evasion would not be as high (or deterrent effects) if the tax was properly designed. In particular, it should include all possible assets without exemptions.
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Others are less optimistic about the escape. Wojciech Kopzcuk (Columbia University) points out that with this type of tax, ultra-rich families can simply distribute their wealth among themselves to fall below the individual threshold or transfer their wealth to assets apparently more difficult to value. There is no doubt that tax evasion by high net worth individuals is a global problem, but economists seem to differ in their assessment of the capacities of governments to limit it. While a study by Jonathan Gruber (MIT) and his co-authors found significant reactions in Switzerland when a differentiated wealth tax was introduced, Saez and Zucman argue that the methodology of this survey overestimated these responses. .
The Warren proposal, in fact, is making unusual efforts to prevent circumvention by suggesting a 40 percent exit tax on wealthy individuals who renounce US citizenship. Here again, the main question seems to be that of public perception. The more Americans are aware and concerned that the wealth share of the top 0.1% has risen from 7% to 20% of total wealth over the past few decades, the more willing they will be to invest in solving the problems. technical applicability problems.
To propel the discussion
The debate on taxation in the 21st century has progressed considerably. The key ideas are that there can be complementarities between efficiency and equity, and that a well-functioning economy not only rewards efforts rightly, but also ensures appropriate contributions to the commons. There is less consensus on other aspects, such as the right size of the welfare state, whether taxes should be redistributed, and the administrative issues surrounding wealth taxes. But there’s no doubt that Ocasio-Cortez and Warren’s proposals propelled the discussion.
Democracy benefits from debate – this is where the current discussion in the United States has wider relevance. Remarkably, a recent poll mainly reveals that most Americans indeed support higher taxes for the rich, on income and wealth, with even nearly half of Republican supporters supporting the Ocasio-Cortez project. If implemented and designed correctly, such progressive tax proposals, which take income inequality and over-accumulation of wealth seriously, can initiate an important debate based on economic logic rather than purely political divisions. .