Tuesday, August 22, 2006

Yglesias gets it wrong

Matt Yglesias has a sort of insane post on marginal tax rates and revenues.

If you look at, say, this chart you'll see that overall federal tax revenue hasn't changed all that much since 1962 -- bouncing up and down between about 16 percent of GDP and about 20 percent of GDP. The top marginal income tax rate, by contrast, has changed a great deal, veering from 91 percent to all the way down to 28 percent. In particular, there was a large structural shift during the Reagan years when the top rate started at 70 percent and has never since gone above 39.6 percent.

The implication being that one can infer a supply-side effect from the combination of a) revenues constant as a share of GDP and b) declining top marginal income tax rate. While this is a tempting idea, it is also rather wrong on two levels.

First, on logical grounds. If supply-siders are correct, then a declining top rate would keep tax revenues constant (or increasing) in dollar terms, but they would be decreasing as a share of GDP. The point of supply-siders is that you cut taxes, the economy grows, and so you can collect the same amount of revenue but from a larger economy. This would in most cases imply that revenue falls as a share of GDP (though, admittedly, this is not a necessity).

Second, on factual grounds. Revenue has stayed constant as a share of GDP not because of a supply-side effect but because the base has broadened: that is, more kinds of income are now taxable and not because of increases in income. In particular, the 1986 tax reform (for the right-wing take on it, see here).


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