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Monday, March 21, 2016

Paul Krugman, "On Invincible Ignorance": Is Increasing Taxes on the Wealthiest One Percent the Answer?



Worried by a "looming Trumpocalypse" (I am, too) and railing against Paul Ryan's feeble understanding of economics (too harsh), Paul Krugman writes in a New York Times op-ed entitled "On Invincible Ignorance":

"You might think that Republican thought leaders would be engaged in some soul-searching about their party’s obsession with cutting taxes on the wealthy. Why do candidates who inveigh against the evils of budget deficits and federal debt feel obliged to propose huge high-end tax cuts — much bigger than those of George W. Bush — that would eliminate trillions in revenue?."

Now don't misunderstand me. America's national debt of more than $19 trillion has reached unsustainable proportions under the Obama administration and indeed must be addressed. Moreover, this is hardly the time for high-end tax cuts, but would raising taxes on the wealthiest Americans go a long way toward reducing this debt and promoting income equality?

We learn from the Executive Summary of a September 2015 Brookings Institution article entitled "Would a significant increase in the top income tax rate substantially alter income inequality?" by William G. Gale, Melissa S. Kearney, and Peter R. Orszag (my emphasis in red):

"The high level of income inequality in the United States is at the forefront of policy attention. This paper focuses on one potential policy response: an increase in the top personal income tax rate. We conduct a simulation analysis using the Tax Policy Center (TPC) microsimulation model to determine how much of a reduction in income inequality would be achieved from increasing the top individual tax rate to as much as 50 percent. We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest."

The article goes on to explain (my emphasis in red):

"Increasing the top [income tax] rate to 45 percent would bring in an additional $49.4 billion in revenue. Dividing that evenly among the 36.1 million households in the bottom income quintile (defined over households) would give each of those households an additional $1,370 in post-tax income.

Increasing the top rate to 50 percent with the same redistribution scheme would bring in an additional $95.6 billion in revenue, leading to an additional $2,650 in post-tax income for the bottom fifth of households. Applying a new top rate of 50 percent to income above $1 million for married filers and above $750,000 for single filers would bring in an additional $63.5 billion in revenue, which would result in $1,760 in additional post-tax income for households in the lowest quintile."

In short, an increase of taxes on the wealthiest one percent of Americans is not without any benefit whatsoever. However, it is also far from a panacea and comes with the possibility that some affluent Americans will leave for greener pastures

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