Paul Krugman: Newt Economic Thinking


 

OK, we had our Munk debate, and I have a few minutes to blog here at Pearson airport; for what it’s worth, my side “won” the audience vote.

The notes I used for my opening 6 minutes (I didn’t read them exactly) are after the jump:

Good evening. I’m delighted to be here, in this lovely city, which among other things appears to have a much more interesting mayor than any city I’ve ever lived in. But that’s not what we’re here to talk about; we’re here to talk about taxing the rich.

Now, there are big philosophical and social issues involved here, and I believe that my colleague George Papandreou will be taking on some of those issues. What I want to do in these opening remarks is focus on several fairly mundane questions. First, why should we be thinking about increasing anyone’s taxes? Second, can we actually raise significant sums of money from higher top rates? Third, should we fear disastrous economic consequences if raise top rates?

So, on the first question: right now the United States is operating in a political regime in which we are constantly being told that we can’t afford to do good things because the money just isn’t there. Here’s an example I’ve been looking at: food stamps, which have been an utterly vital lifeline for millions of Americans in recent years. Never mind, say some politicians – we can’t just keep spending money we don’t have. And so Republicans in Congress have voted to kick 2 million people off the rolls, for a saving of about $2 billion a year.

So how do sums like these compare with the amount of taxable income at the top? Well, in 2011 the top 1 percent of Americans had a combined income of about $1.4 trillion, not counting capital gains. So if we could raise the average tax rate this elite pays by just 1/7th of one percent, we could obviate the supposed need for those food stamp cuts. Obviously I’d like to raise a lot more revenue than that, and reinforce a lot of other programs, but I hope this gives you some sense of the reality that there’s a lot of money at the top, and taxing it a bit more could make a big difference to our lives.

But can you collect more taxes from the rich? Won’t the money just go underground? No. Yes, raising rates will lead to more tax avoidance and evasion – but bear in mind that the United States has moved top tax rates around a lot over the years, giving us very good evidence on how taxable income actually responds to rate hikes and cuts; and what that evidence tells us is that rates would have to be a lot higher than they are now, at least 70 percent and probably above 80, before you’d need to worry that we might be on the wrong side of the Laffer curve.

Finally, should we worry that raising tax rates on the rich will deeply damage the economy? Well, that’s always what they say. Back when Bill Clinton raised rates in 1993, one prominent politician said this:

“The tax increase will kill jobs and lead to a recession, and the recession will force people out of work and onto unemployment, and actually increase the deficit.”

Now, I know what you’re going to say, Newt, because of what you did when Lawrence O’Donnell tried to hold you accountable here – you’re going to say that it was all because of Republican tax cuts. But it won’t wash. The US economy added 6.7 million jobs during Bill Clinton’s first two years in office, that is, before your guys came in. That’s 278,000 jobs a month. And while there were some tax cuts further down the line, it’s still true that the average tax rate on the top 1 percent was higher in every year of the Clinton administration than in any year of either the Bush I or the Bush II administrations. That didn’t stop us from having an economic boom. Sorry, Newt, but you were wrong pure and simple, and you really should man up and admit it.

Oh, and the high top tax rates of the generation that followed World War II didn’t stop that from being the greatest generation of economic growth, and in particular of rising middle-class living standards, in U.S. history.

So, should we raise taxes on the rich? Yes, for various reasons, but first of all because we could use the money. Can we actually raise more money that way. Yes. Will it hurt the economy? No. Let’s do it.

Newt Economic Thinking – NYTimes.com

This entry was posted in HomeWork, Macroeconomics, Paul Krugman, Public Finance. Bookmark the permalink.

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