From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: ==> Rhetoric Vs. Reality--The First Debate
Date: Fri, 16 Oct 92 10:36:37 EDT
Organization: IFS Project, University of Michigan
Reply-To: jwh@citi.umich.edu

In article <lds0vaINNo3i@spim.mti.sgi.com>, mpolen@suntory.mti.sgi.com (Mike Polen) writes:
|> Jim Howe) writes:
|> |> 
|> |> I don't have a study that I can refer to but I would like to make two
|> |> points.  First, it does not seem at all unreasonable to me that when
|> |> the marginal tax rate hits 70% that someone may decide to spend time
|> |> doing other things than economic activity.  In addition, the higher
|> |> tax rates are, the more people can afford to spend finding tax shelters
|> |> to shelter the income they do have.  Reducing the rate increases
|> |> the costs of finding and maintaining a shelter relative to the benefits
|> |> received.  Second, I believe the results of the 80's give a reasonable
|> |> empirical basis for Bruce's claim.  Marginal tax rates were cut
|> |> significantly and the income earned by those effected by those cuts
|> |> rose.  We're talking pre-tax earnings.  When rates were cut pretax
|> |> earnings rose substantially.  I believe this represents the increased
|> |> economic activity and reduced sheltering of income done by those in
|> |> higher brackets.
|> |> 
|> 2. The second only may say that by cutting their taxes, they had more to
|>    invest and therefor invested more and earned more.  But if you believe
|>    that, they why not cut everyones tax.  What is the magic of giving
|>    the extra to the already rich?
|> 

The effects of the Laffer curver are only going to be felt by those
facing high marginal rates.  It's the marginal rate that matters.
This is one reason why it is so hard to work your way off welfare.
The marginal rates can be greater than 100%.  You also have to 
remember that the Reagan tax plan raised the zero bracket, thereby
eliminating many people from pay taxes at all.  In addition, brackets
were adjusted for inflation, preventing bracket creep.  These were
all things which benefited low and middle income tax payers.  Also
your comment about giving extra to the rich isn't correct IMHO.  To
believe that someones actions aren't affected by incentives and 
disincentives is foolish.  When Britain had confiscatory taxes, many
of its wealth simply left the country.  You can't tell me that high
marginal rates wont have an effect on a persons behavior.  I
fully believe that the lowering of rates encouraged productive behavior
which would not have happened had the rates remained the same.  As
such, I don't see cutting rates as giving 'extra' to the already
rich.  If anything, I see it as making the system more 'fair'.

|>    We seem to be talking about priveledge, or special treatment.  Of
|>    course the argument could be made that the wealthy were the best
|>    people to give it to because they had already proved they knew
|>    how to invest it properly.  But that would fly in the face of
|>    the initial premise that the rich were sitting idly about doing
|>    nothing because they got such a small piece of incremental income.

I don't know, using cost/benefit analysis seems like a perfectly
rational thing for a person to do.  The rich were sitting 'idly'
because they had better things to do than work extra for very
little gain.  Ignoring all the supply side arguments, however, I
feel that Reagan's tax cuts helped make the system fairer.  It
still isn't 'fair' in my book.  A fair income tax would have a
high zero-bracket amount and a flat rate applied to any income
beyond that amount.  So, ignoring any economic benefits from
the tax cuts (of which I believe there were many), the cuts helped
move from a very unfair system to one which is closer to being fair.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         

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