Tax Realism

The numbers shown in this graph (from [1]) are appealing to my skeptical mind. While democrats believe that taxes (particularly on the rich) can always be increased to get more revenue and republicans try to argue that increasing taxes (particularly on the rich) actually reduces revenue, the reality is that... tax rates don't have much effect at all:



Over the 60 years shown in the graph, tax rates fluctuated enormously (between ~90% and ~25%). Yet tax revenue to the government as a percentage of GDP stayed almost always at 15-20%.

One idea I like, at least to focus the debate properly, would be to mandate that tax revenues are to be fixed at, say, 18% of GDP. Some advantages of doing so would be the following.

1. It reminds everyone that we don't have a limitless supply of money. There is a fixed percentage of GDP that can be spent on services, and so the only question is how we will divvy that up.

2. On the other hand, we can increase the amount of tax revenue in absolute terms by increasing GDP. Hence, this gives even big-government types an incentive to be pro-growth.

3. One other approach to increasing tax revenue is to switch to more efficient taxes. Hence, this gives big-government types a reason to like some of the tax proposals typically supported by pro-growth types. It's worth pointing out that European countries tend to have more efficient tax schemes than the US already, while they also tend to have more government services, so this scenario is not as outlandish as it may sound.

[1] http://www.deptofnumbers.com/blog/2010/08/tax-revenue-as-a-fraction-of-gdp/

Skepticism on Ds vs. Rs

This post by Brian Caplan makes some great points about the lack of any substantive differences between the two parties. This certainly matches my experience.

For example, if you ask republicans why they supported McCain over Obama, they often cite differences that are not even real. Both support middle class tax cuts, both want to stop global warming, both are in favor of missile defense, both want to increase the size of the Army and Marine Corps, both favor restrictions on late term abortions, etc.

Similary, differences between Bush and Kerry were often more in emphasis than substance. In particular, thinking back to the start of the Iraq war, Kerry argued that it is critical to gain the support of allies (multi-lateralism), but admitted that the president must ultimately do what is in the interests of the American people. Bush argued that it was most important to do what is in the interests of the American people, but admitted that it is better to have as much support from allies as possible. What's the difference between those positions? Emphasis.

Of course, it is well known that candidates "run to the center" during an election. This is predicted by the median voter theorem as well as common sense. However, to win, the candidate must also get his base to turn out, and that usually requires convincing those voters of important substantive differences between themselves and their opponent.

How can a candidate do this while actually taking extremely similar positions? Rhetoric. The easiest rhetorical tactic is for him to ascribe to his opponent views that he does not actually hold, and then argue against those (which really are different) instead. This is called the "strawman" argument. And this is leads to Rs and Ds often having substantial misconceptions about the views of their candidate's opponent, like the ones mentioned above held by republicans about Obama.

Sowell Talks Past Moderates

In his brilliant book, A Conflict of Visions, Thomas Sowell explains how liberals and conservatives (or as he more accurately calls them, believers in the "unconstrained" and "constrained" visions, respectively) often mean different things when they speak the same words. For example, "equality" means equal outcomes to a liberal and equal rules/laws to a conservative. As a result, when liberals and conservatives argue about equality, they talk past each other: neither side's arguments make sense to the other since they take the same words to mean different things.

In Sowell's recent columns (for example, this one on negative advertising), he falls victim to the same phenomemon. His points about Obama's track record on various issues are only compelling under the assumption (not stated until the very end) that his record is a better predictor of his future actions than his currently stated beliefs.

When Sowell does get around to mentioning this assumption, he quickly dismisses any contrary opinion:

Does anyone in real life put more faith in what people say than in what they do? A few gullible people do -- and they often get deceived and defrauded big time.

But this assumption is the basis of his entire argument. If you instead believe Obama's recent statements are better predictors of his future behavior, then nothing Sowell says in the article will be compelling. So perhaps it would be better to focus the article on addressing the evidence for this assumption rather than simply dismissing anyone who would disagree as "gullible".

Unfortunately for non-moderates, it is easy to find examples in either direction. In fact, republicans themselves do not always believe this assumption. For example, many seem to accept McCain at his word that he would not offer amnesty to illegal immigrants despite his clear track record of trying to do so.

The fact is that no simple rule -- either Sowell's assumption or the opposite -- is always true. The moderate voter is left to make the best prediction possible taking all the evidence into account on a case-by-case basis. Those who decide Obama means what he now says will ignore contrary evidence in his record, and conservative commentators like Sowell will talk right past them as they write article after article decrying that record.

Income vs. Wealth

While we're on the subject of rich and poor, another issue comes to mind: income versus wealth.

Conservatives often decry the progressive income tax on the grounds that it does not put a higher burden on the wealthy, necessarily, but rather on those that currently have a high income. The latter may be people who are still a long way from being wealthy. For example, it could be a doctor who is paying off hundred thousand dollar loans she took out to pay for medical school. This doctor is clearly not wealthy.

In a world where the tax man had perfect information, would it really make sense, though, to be taxing based on wealth rather than income? I would argue not. Why should someone with a modest income who has managed to save up a significant amount of money over time be taxed at a higher rate than someone who has a higher income but spends it all as fast as it comes in? That would clearly be rewarding the wrong behavior.

The example of a doctor paying off loans seems bad because it is a case of investment: in this case, the doctor is investing her money in educating herself so she can earn a higher income in the future. Typically, we only tax the profits of investment, not the revenues. Perhaps the tax code could be fixed to better handle those cases. However, they are often sorted out already in the form of deductions. Special provisions for paying off school loans are usually popular with politicians. Other investment cases are likely similar.

If we have deductions for investment cases and we don't want to reward people for not saving money, then what's wrong with taxing income instead of wealth?

Capital Gains

The Legitimate Skeptic is an equal opportunity contrarian. Having criticized a left-learner yesterday, it is time to criticize some right-wing views.

Suppose I save up some money, buy a second house, and rent it out to make extra money. That rental income is taxed at up to 35%. If, instead, I lend my money out directly, then the money I make is capital gains and is taxed at 15%. Does this make any sense?

Conservatives will say that capital gains should be taxed differently because the money has been taxed already. However, only the principal has been taxed, and it is not taxed a second time. It is just the interest, which has not been taxed before, that is taxed in scenarios I described.

It seems to me that income is income, no matter from whence it comes. The fact that we tax capital gains at a lower rate than other income enables the rich to get richer more easily than the poor. This is clearly out of line with a principles of a country that prides itself on economic mobility.

See what you will

It always amazes me how easily people can distort their view of reality to match their current convictions. This article on digg is a case in point: AP: Wall Street bankrupt by GOP failure to regulate Freddie.

The title makes clear the poster's view that that republicans failed to regulate Freddie and Fannie, leading to the stock market collapse. Presumably, the part of the linked article they see as evidence is that Freddie and Fannie hired a firm to lobby republicans against a bill that would have increased regulation (and ultimately succeeded in killing it).

As the article explains, though, democrats were uniformly against the bill already. But since republicans were in the majority, they also needed republican votes to stop it; hence, they lobbied republicans. In particular, they got "prominent constituents and financial contributors" to call their republican representatives and express opposition to the bill. They targeted republicans up for reelection, in tight races, who would be most sensitive to the views of their constituents.

In short, the poster places no blame on the large number of democrats who were against the bill, instead places it entirely on the few republicans who were against it, and hence declares the lack of regulation as the failure of the republican party as a whole (ergo the "GOP failure to regulate Freddie").

This kind of thinking reminds me of a scientist I know who looked at a graph with dots scattered randomly all over -- which he was expecting to be in a line -- and said "well, you've got outliers all over the place, but these three right here look right". Sometimes it seems like, the smarter a person is, the easier they can convince themselves of whatever they wish.