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Thursday, April 21, 2011

These Can't Both Be True, Correct?

Steve Landsburg notes that the economic incidence of a tax is separate from its legal incidence. So, if you try to tax, say, savings accounts of the rich, you can't really say upon whom the real burden of the tax will fall. I think that's right.

But then it can't also be right to complain that high marginal rates discourage productivity, because that argument assumes the tax burden stays right where one puts it, doesn't it? Or have I missed something?

14 comments:

  1. I just receivd this from Steven Landsburg:

    "I tried commenting on your blog post today but found you'd set up more hurdles to commenting than I could easily jump.

    "Here's what my comment would have said: High marginal taxes discourage productivity. It's not always easy to tell who bears the cost of that lost productivity.

    "We can ask two separate questions: 1) How much is lost? and 2) Who
    loses it? Sometimes it's easy to answer the first and harder to answer the second."

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  2. But, I respond to me who is really Prof. Landsburg above, if we don't know upon whom the tax burden really falls, then how do we know we really have a high marginal rate? In other words, saying "Gene's marginal tax rate is 50%" assumes the tax burden is really falling on me; if, instead, it happens to fall upon the horde of household sevants I am employing who were paying almost no taxes, then we have a tax that legally (nominally) imposes a high marginal rate but economically actually represents a very low marginal rate.

    The usual story I see about the productivity discouraging effects of high marginal rates is that, faced with this 50% tax on additional money earned, I won't bother, and I relax by my olympic-sized pool instead. But since in my example I'm not actually facing such a rate, why would it discourage me from working?

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  3. But Gene, you don't have a swimming pool.

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  4. I would if not for those high marginal tax rates!

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  5. They are both true. High marginal tax rates discourage activity that generates (taxable) income because of the diminishing marginal returns. But income is not consumption. Landsburg's example was deliberately extreme. Almost everyone is far more sensitive (i.e. burdened) by marginal rate changes.

    You asked "But, I respond to me who is really Prof. Landsburg above, if we don't know upon whom the tax burden really falls, then how do we know we really have a high marginal rate?"

    We have a 'high' rate whenever we don't have 'enough' productivity. There's a political measurement problem for 'high' and 'enough' (obviously).

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  6. "High marginal tax rates discourage activity that generates (taxable) income because of the diminishing marginal returns."

    High tax rates only produce a (significant) diminishing marginal return for me if the tax incidence actually falls on me. Depending on the slopes of my suppliers supply curve and my supply curve and my demanders demand curves I may simply be able to pass the high tax rate on -- in which case, there is not a high marginal tax rate on me!

    These things can both be true, to some extent... but to the extent one is true, the other is false.

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  7. Oh, and K, the distinction between income and consumption is a red herring here -- as Landsburg says, follow the goods, not the money.

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  8. Very interesting argument. However, just because the legal incidence and economic incidence of taxation are distinct doesn't mean they can't be the same in a particular case. For example, I believe the general view among economists is that the employer's share of payroll taxes are actually paid by employees in the form of lower wages. Yet I've never heard anyone argue that the employee's share of payroll taxes aren't paid by employees (in fact it would be strange if employees were able to pass on the tax nominally paid by themselves but not the same tax nominally paid for by others).

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  9. Yes, Edward, they certainly can be. To the extent they are, however, the importance of Landsburg's recent argument diminishes.

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  10. And by the way, Edward, the incidence need not fall on the employer OR employee: it might fall on their customers... or the customers customers...

    This is Mises point: the market places the impact of a tax, not the legal tax code.

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  11. Gene,

    The key assumption in Landsburg's argument is that Kendrick's is really doing nothing with his money, that it really is idle. I don't think Landsburg really believes this, he's just pointing out an implication of what would be true if Kendrick's money really were idle.

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  12. Elasticity speaks to both questions.

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