So the basic argument i’m hearing a lot recently is that it is emprically proven that when the top marginal income tax rate is higher the economy grows faster. They cite articles like this: http://www.presimetrics.com/blog/?p=301
I was wondering if the argument has a name? I have tried googling it and searching for it on Mises but I can’t quite figure the keywords out. If anyone can link me to an article.video/mp3 by one of the Austrian scholars talking about this I would be incredibly greatfull.
Also, how would you as an Austrian respond to this argument?
I will post my response to this article as a reply to this post just in case anyone is interested. I would love if someone could tell me where I went wrong/right etc.
My interpretation of the data follows. Keep in mind I was arguing on Facebook so I apologize for poor grammar, sentence structure, etc.
"You should know that measuring a single tax rate change versus the entire GDP of an economy leaves about a million variables in the cabinet. In the 1970’s we saw inflation which of course made the gdp larger. The bust cycles probably very well coincide with cut’s in the tax rate. Then when the economy pics up they raised taxes to increase revenue. You can push this data both ways. I don’t really like either of those arguments however. I simply think that saying that changing the top tax bracket to a higher level somehow proves empirically that the economy is better off is wrong. In fact most of those increases in GDP on that chart are due to military spending increases because of Vietnam and the cold war buildup. Military spending counts towards the GDP.
Furthermore. That article assumes that if Ford payed all it’s executives $1 that Ford would be better off because it would have to hire more people. But this just is not true. Ford would hire more people if it was profitable. The reason they aren’t hiring more people is because it would be wasteful. That labor would be unproductive.
Furthermore, that money that would go into the CEO’s pockets would be put in a bank. Providing money for new businesses who hire new workers, they are hiring workers because of actual demand. Therefore, this is a better investment of money. The free market always directs capital where it needs to go. When you intervene you create mal-investment. When you create mal-investment you create an artifical boom. When the boom turn’s to bust everyone is worse off. Not only should more people have been mechanics and not real estate agents, more bulldozers should have been washing machines. But that capital is wasted".
The way that article looks at investment to consumption ration is weird as well. It doesn’t prove anything. It simply shows a fact that means nothing. It does nothing logically against the Libertarians argument. And the fact that this “scientist” has nothing but ad-hominem attacks towards Libertarians really proves he is worth his weight in fiat currency. What about all the investment that leaves the country because it’s more productive in China? That is still a productive investment that is clearly beneficial for US consumers because of the lower price of goods. So measuring US investment only is a devious thing to do.
This guy was clearly not using a good research design. He obviously did research to confirm his own bias.
I did that. Here is his response because it’s worth a giggle.
If he wrote his statistical findings on a piece of toilet paper would that make them any less valid? It’s funny that a kid with a bachelors in Poli Sci from Colorado State University thinks he knows more about economics and tax policy than the guy with a PhD in economics from MIT. - A Statist
"Answer me one question. How is it in any way logical or based on objective reality to oppose, simply on impulse and ideology, ANY form of taxation? To me that is the epitome of irrational and illogical. I can understand discussions about appropriate levels of taxation, but to unequivocally oppose taxation as a matter of principle is a completely ludacris notion."
Having a degree on a subject does not mean anything, it simply results in a logical fallacy, on his part. Keynes did not have an economics degree, yet he is responsible for the mainstream economic theory that countries use.
Henry Hazlitt did not have a degree at all, yet, he killed people in debate when talking about Economics. And he has to be one of the best writers of all time in my opinion.
I wish there was an easy way to identify it as well, but I’ve never seen any sort of name. It’s sounds very similar to this idea that tax cuts caused the Great Depression. That’s one I’ve heard, well, basically nowhere except for that guy from the Young Turks who basically has every feature necessary to have his picture next to the word “douchebag” in the dictionary.
That makes more sense. I thought it odd that you couldn’t identify a really common fallacy.
The theory behind it is usually “Demand Side Economics”. Specifically the demand effects of progressive taxation. The idea being that you lower taxes on poor people, who have a higher propensity to consume, but you tax rich people, who have a lower propensity to consume. Then you spend the taxed money (or give it to poorer people to spend) to increase aggregate demand. Typical Keynesian stuff.
Of course, this works to an extent. If you take money not factored into a metric and spend it in a way that is, you appear to generate growth. The questions of whether the growth is illusory, sustainable, or even if it equates with an improvement in the satisfaction of people’s wants is not normally considered.
The article linked in the OP takes a different route, that really doesn’t argue for more taxes at all, but less. His theory is that if you raise taxes on rich people, they will reinvest it to avoid the taxes. The investment then fuels growth. So “higher taxes” are only “good” if there is a mechanism to escape the taxes in the first place. A point that is probably lost on most of his readers.
The article linked in the OP takes a different route, that really doesn’t argue for more taxes at all, but less. His theory is that if you raise taxes on rich people, they will reinvest it to avoid the taxes. The investment then fuels growth. So “higher taxes” are only “good” if there is a mechanism to escape the taxes in the first place. A point that is probably lost on most of his readers.
If this is the case, then the op should ask whether or not the wealthy will actually invest it or if there is even a way to know. I mean in May of 2011, people dont really have many options for decent return. Therefore, the idea that raising raising taxes will end up in more investment doesnt reallt make sense. Not to mention we are talking about this while the FED has been doing all of the “investing” because no one else will.
Right. In the OP article case, the post hoc fallacy is committed when he assumes a causation between correlated investment/consumption ratios and tax rates. There are a lot of factors not included in his analysis.
Thanks for pointing that argument out. I did get that when I read through it, but didn’t convey very well here on Mises.
I figured that this sort of data, comparing two charts, really leaves about a million variables. Including investment going overseas and the general flow of the economy.
I’ll accept the label cporter gave as the “logical fallacy” behind it all, although I really have no idea if that’s correct. To me it smacks of common Keynesianism, and therefore suffers from several incorrect assumptions:
The people with the money (aka “the rich”) either aren’t using it for any kind of benefit, or…
The government knows better how to spend the money than the people who earned and own it.
The people who the government gives the money to will be productive with it, thus contributing to the GDP.
The cost of the government handling the money as they redistribute it from the “haves” to the “have-nots” is negligible.
I wish I could find the cite, but I once read an analysis of the equilibrium between size of government and economic growth. The thrust of the argument was familiar, basically that government workers, in an economic sense, aren’t productive because every dollar spent on government must first be taken from someone else who produced it. Therefore, government workers would have to be something like twice as productive as their private counterparts just to break even on economic growth, since they not only have to produce enough to pay for their own costs (salaries, benefits, infrastructure, etc), but enough to replace the growth was lost when the money was taxed from the people who earned it in the first place. A government “breaking even” in the sense of growth would be the best of all possible realities, since in reality it’s probably the opposite - government is counter-productive, spends less efficiently, and government employees are less productive than their private counterparts.
Government workers are taxed also, but the money taken from them has already been removed from the “productive” economy, so it is “inert” in an economic sense - taxed from someone who is not productive, and given back to someone who is not productive. Marginally-speaking, every additional person employed by the government is one less who contributes to economic growth, and an inflection point occurs where growth is not possible once a government grows larger than a certain size. So, economically-speaking, government is a necessary evil that is most efficient when it is as small as possible.
