Most Economists Know There’s No Free Lunch on High Marginal Tax Rates

When Alexandria Ocasio-Cortez suggested a 60-70 percent federal income tax rate on those earning over $10 million, prominent economists and economic commentators Matt YglesiasPaul Krugman and Noah Smith argued that her policy prescription was simply mainstream economics.

But a new Chicago Booth IGM Survey poll suggests economists are generally much more skeptical of the wisdom of jacking up top federal tax rates than these commentators suggest.

The economists were asked whether a top federal marginal income tax rate of 70 percent within the current code would raise substantially more revenue than today’s 37 percent without lowering economic activity. Just 18 percent of those surveyed agreed, against 49 percent who disagreed (21 percent vs. 63 percent when weighted by confidence.)[i]

Top MTRs

In other words, a clear majority of economists believe there’s no free lunch from higher marginal rates on the top income bracket. Either it will raise revenue but with economic distortions, or it won’t raise revenue, or it will both fail to raise revenue and be detrimental to broader economic health.

It’s worth noting the wording of the question does not leave much room for nuance. Richard Thaler asked why it deviated from Ocasio-Cortez’s actual proposal. Kicking in at a much higher income level, and so on a group likely to be more responsive in terms of tax planning, her policy would certainly raise less revenue than the policy asked about in the question.

Several other economists said they would have changed the way they voted if a word like “substantially” was inserted in front of economic activity too. But overall, a host of the economists commented to the effect that such high marginal rates within the current code would lead to a whole host of new avoidance activity, on the one hand, and reduced labor supply on the other.

Given the particular wording of the question, the most interesting vote cast was that of Emmanuel Saez, who has been responsible for much research in this area. Intriguingly, he was in the minority in voting that he agreed a 70 percent top marginal rate would raise revenue without lowering economic activity.

On one level, that’s not surprising. His work with Peter Diamond concluded that a total combined 73 percent top marginal tax rate would be revenue maximizing and “optimal” if we put zero weight on the welfare of the rich. They believe too that the real economic responses to higher top tax rates would be small. As such, their research is the academic go-to for those arguing for much higher top marginal tax rates.

But when you read the details of how they got to that result, it’s difficult to see how Saez answered this IGM question in the affirmative. The Diamond-Saez paper makes clear their 73 percent result only holds if you presume policymakers could redesign the tax code to eliminate deductions, exemptions and other possibilities for tax planning or avoidance.

If not, then presuming people in the top tax bracket are as responsive today to tax changes as in the 1980s, the revenue maximizing total combined marginal tax rate would be much lower at 54 percent – equating to around a 48 percent marginal federal income tax rate. This, incidentally, is very similar to the revenue-maximizing income tax rate calculated by the UK government.

According to Saez’s own work then, raising the 37 percent top marginal income tax rate to 70 percent within the current code (as the question clearly sets out), would take us far beyond the revenue maximizing top marginal tax rate. It would be self-defeating in terms of revenue raising. We would be far on the wrong side of the Laffer curve.

It seems extraordinarily unlikely, in a world where 48 percent is the revenue maximizing rate, that a 70 percent rate would raise “substantially more revenue” than a 37 percent rate, as Saez’s answer implies.


 


[i]  In 2019, the 37 percent rate will apply to all single filers with more than $510,300 of taxable income.

The FDA Bends Over Backwards To Get Drug Makers To Ask Them To Make Naloxone OTC

Press reports have created the impression that the opioid overdose antidote naloxone is now available over the counter. But in fact, the drug is still classified in the US as prescription only, so states have developed workarounds to make it easier for patients to obtain it without going to a doctor for a prescription. In most states, patients can get naloxone by going up to the counter and asking the pharmacist, who is legally authorized by the state to dispense it. 

But some states prohibit third parties from obtaining a prescription for another person, so people in those states who wish to have the antidote available because they have a friend or relative who uses opioids cannot obtain it. And experience shows that many pharmacists choose to not stock naloxone or participate in any distribution program. Furthermore, the stigma now attached to opioid use has deterred many patients from going up to the pharmacy counter and explaining to a pharmacist why they need naloxone.

To get around such obstacles, Australia and Italy have designated naloxone as a truly over-the-counter drug. People can discreetly buy it off the shelf and check out at the cash register.

The Food and Drug Administration is on record since at least 2016 as believing that it is probably appropriate for naloxone to be rescheduled as OTC and has encouraged manufacturers to petition the FDA to that end. Yesterday  FDA Commissioner Gottlieb announced the FDA has even gone to the trouble of designing Drug Facts Labels (DFL) required of manufactures for their products to be sold over the counter, and has even tested these labels for “consumer comprehension” in front of focus groups. The Commissioner stated in the announcement that this represents an unprecedented effort to facilitate and speed up the reclassification of naloxone from prescription-only to OTC.

This is commendable. But as I have written herehere, and here, the Commissioner does not have to wait for manufacturers, who may lack the incentive, to request the move to OTC. Under FDA regulations, the FDA can undertake reclassification review at the request of “any interested person,” or the Commissioner himself. States may petition the FDA for reclassification. Finally, if all else fails, Congress can order the reclassification.

The FDA should no longer wait for manufacturers to ask them to make this lifesaving drug more accessible to those in need.

The Impact of The New German Minimum Wage

Germany introduced a new economy-wide minimum wage for the first time in 2015, at a relatively high rate of €8.50 ($9.67 today). This rose to €8.84 in 2017. For reference: between 10 and 14 percent of eligible workers were thought to earn less than €8.50 before the policy was introduced.

This is interesting from a research perspective. Most minimum wage studies examine the impact of minimum wages at low levels or assess small changes to their rate. But here we have a case study of a whole regime change with a high rate introduced for the first time.

A new paper by IZA Institute of Labor Economics provides a clear literature review on the effects so far. Studies have exploited three different strategies to assess the impact: utilizing regional variation of the “bite” of the minimum wage, using treatment and control groups, and assessing the impact on firms. As the table below shows, a broad consensus is emerging, which sits well within the existing minimum wage literature:

  • Unsurprisingly, hourly wages have increased at the bottom of the income distribution, though there is little evidence of a ripple effect further up.
  • Most studies find a small but negative effect on overall employment (up to 260,000 fewer jobs), driven by reduced hiring (not layoffs) and a reduction of casual and atypical employment.
  • All studies that assessed it find a negative effect on contractual hours.
  • As a result, although hourly wages increased, the reduction in hours meant gross monthly earnings does not appear to have increased much for low-paid employees.
  • Since gross monthly earnings have not substantially increased, and those earning minimum wage are often not from the poorest households, the policy hasn’t seemingly reduced the risk of being in poverty.

German minimum wage studies

For more on the state of the academic debate on minimum wages, read my Regulation article.

All Your Money Are Belong to Us

In his State of the City Address, New York mayor Bill de Blasio laid out his governing philosophy succinctly:

Here’s the truth, brothers and sisters, there’s plenty of money in the world. Plenty of money in this city. It’s just in the wrong hands!

The money, of course, is in the hands of those who earned it. In de Blasio’s view, people who earn too much are “the wrong hands.”

In the speech itself and in an interview with Jake Tapper on CNN’s “State of the Union,” he elaborated: the wealthy have too much money because they aren’t taxed enough.

There are whole books on the correct theory of taxation. De Blasio, like many politicians, seems operate on the theory most clearly enunciated in 1990 by Sen. Barbara Mikulski (D, Md.):

Let’s go and get it from those who’ve got it.

There are many theories of taxation, such as Haig-Simons, the Tiebout model, and the Ramsay Principle. But I’d bet that the Mikulski Principle explains actual taxation best. And as “progressives” are feeling their oats, we can expect more politicians and pundits to be asking, “Who’s got the money? Let’s go get it.”

What the Government Is Doing to “Solve” Its “Humanitarian Crisis” at the Border

In his oval office speech, President Trump had this to say about immigrants:

This is a humanitarian crisis — a crisis of the heart and a crisis of the soul. Last month, 20,000 migrant children were illegally brought into the United States — a dramatic increase. These children are used as human pawns by vicious coyotes and ruthless gangs. One in three women are sexually assaulted on the dangerous trek up through Mexico. Women and children are the biggest victims, by far, of our broken system. This is the tragic reality of illegal immigration on our southern border. This is the cycle of human suffering that I am determined to end.

Here’s what his administration is doing to protect these women and children:

Previously, the administration had separated women from their children in order to criminally prosecute them for entering the country illegally.

New Immigrants Are More Culturally Different than They Used to Be

Native-born American concerns about immigration are primarily about how immigration will affect the culture of the country as a whole and, to a lesser extent, how the newcomers will affect the economy.  One’s personal economic situation is not a major factor.  It’s reasonable to assume that the degree of cultural difference between native-born Americans and new immigrants affects the degree of cultural concern.  Thus, Americans would likely be less concerned over immigrants from Canada or Singapore than they would be over immigrants from Egypt or Azerbaijan. 

A large team of psychologists recently created an index of the cultural distance of people from numerous countries around the world relative to the United States.  The index is constructed from responses to the World Values Survey as well as linguistic and geographical distances.  Their index includes numerous different psychological facts such as individualism, power distance, masculinity, uncertainty avoidance, long term orientation, indulgence, harmony, mastery, embeddedness, hierarchy, egalitarian, autonomy, tolerance for deviant behavior, norm enforcement, openness, conscientiousness, extraversion, agreeableness, neuroticism, creativity, altruism, and obedience.  These are all explained in more detail in the paper.

Their paper has an index where lower numbers indicate a culture more similar to that of the United States while a higher number indicates a culture more distant from that of the United States.  As some extreme examples, Canada’s cultural distance score is 0.025 and Egypt’s is 0.24. 

Using the cultural distance index, I calculated the cultural distance of the stock of immigrants in the United States in 2015 from native-born Americans.  I then compared the cultural distance of the stock to the cultural distance of the flow of immigrants who arrived in 2012-2015.  The immigration figures come from the Annual Social and Economic Supplement of the U.S. Census Bureau.  If the stock of immigrants in 2015 was more culturally similar to native-born Americans than the flow, then the recent flow is more culturally distinct.  If the stock of immigrants in 2015 was more culturally different from native-born Americans than the flow, then the recent flow is less culturally distinct. 

Table 1 shows the results.  The immigrant flow in 2012-2015 is more culturally different from native-born Americans than the stock of immigrants was in 2015.  In other words, today’s newest immigrants are more different than those from the relatively recent past.  Relative to the stock, the cultural distinctiveness of the flow in 2012-2015 was greater by about one-fourth of a standard deviation.  In other words, the stock of American immigrants in 2015 was very culturally similar to people from Trinidad and Tobago (0.099) while the flow of new immigrants who arrived from 2012-2015 more similar to Romanians (0.11).

Table 1

Cultural Distance of Immigrants Relative to Native-Born Americans

  Cultural Distance
Immigrant Stock 0.10
Immigrant Flow 0.11

Sources: WEIRD Index, ASEC, and author’s calculations.

There are a few problems with my above calculations.  First, those who choose to move here are likely more similar to Americans than those who do not.  There is obviously some difference in cultural values inside of a country as the average person does not choose to emigrate to the United States.  Second, American immigration laws likely select immigrants with similar cultural values through various means such as favoring the family members of Americans and those hired by American firms.  It’s reasonable to assume that foreigners who marry Americans and who are hired by American firms are more culturally similar than the average person from those countries.  Third, the cultural distance index only covers about two-thirds of the immigrant population in the United States.  It is possible that countries not on the list could shift the score significantly in either direction.

New immigrants to the United States are more culturally different than those of the past, but not by much.  This increase in the cultural difference of new immigrants could have had an outsized impact on Trump voters in 2016, but immigration overall is more popular with Americans than it used to be.

DEFENSE DOWNLOAD: Week of 1/17/19

Welcome to the Defense Download! This new round-up is intended to highlight what we at the Cato Institute are keeping tabs on in the world of defense politics every week. The three-to-five trending stories will vary depending on the news cycle, what policymakers are talking about, and will pull from all sides of the political spectrum. If you would like to recieve more frequent updates on what I’m reading, writing, and listening to—you can follow me on Twitter via @CDDorminey.  

  1. The Missile Defense Review dropped this morning. For those that have been patiently waiting to see this document for months, your time has finally arrived. Since this was just released hours ago, articles breaking down the details have yet to be posted. So stay tuned and check Twitter for commentary. 
  2. Pentagon preps for budget delay as historic shutdown drags on,” Tony Bertuca. The President’s FY2020 budget request was supposed to be publically available and kick off the budget-making process on February 4th, 2019. With the government shutdown, and various topline numbers coming out of the White House, it looks like the budget request will be delayed. 
  3. Reform panel warns Congress to overhaul Pentagon acquisitions, or lose technological edge,” Joe Gould. The Section 809 Panel was gifted the herculean task of reforming how the Pentagon buys products—everything from cybersecurity software to major weapons system hardware. The report itself is mammoth (500+ pages), but includes recommendations aimed at streamlining the acquisition process and leveraging commercial advances. 
  4. The Myth of Cyber Offense: The Case For Restraint,” Brandon Valeriano and Benjamin Jensen. What does a new era of Great Power Politics mean for American cyber policy? Mostly that it’s still being defined and actively shaped by the changing balance of power—and that the choices America makes now could have either stabilizing or destabilizing effects on the evolution of this domain. 

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