The share of income going to the rich has an effect on the amount of revenue which can be raised by taxing the rich.

TO BE NOTED: From Robert's Stochastic thoughts:

"Soak the Rich. Non lessons from Europe.

Lane Kenworthy too. Vance Maverick in comments told me about his post.

The claims, always based on the same few data points are
1) Differences across a few rich countries in the effect of policy on inequality have a lot to do with transfers, nothing to do with the progressivity of the tax system and a lot to do with total tax take.
2) The options open to the USA are described by outcomes in these countries.
3) therefore egalitarians should support increased taxes on the non rich.

I totally disagree with this analysis in, for example, Lane Kenworthy's post. The important issues are first what is optimal policy and second what are political limits on policy. I think on both issues Obama is right and Lane is wrong.

First, the argument against Obama is that tax progressivity does not determine the effect of the fiscal system on inequality. It is not that, other things equal, a more progressive tax system is worse. Some have made that argument, basing their claim on the incentive effects of high marginal tax rates. However, the post does not make the argument (I'd say the evidence shows that distortionary effects of high taxes on the working poor are socially costly and not much on the sign of the effect on social welfare of high taxes on the rich). Rather from the claim that something is not "the key" follows the claim that it should not be an aim. This is the oldest rhetorical trick in the book.

Second, and more importantly, raising taxes on the rich is much easier politically than raising the taxes on the non rich. This isn't just electoral politics. Discussing optimal policy is a parlor game unless one asks how it will be enacted. There is no evidence at all to support the claim that the incorrect beleif among progressives that progressivity is "the key" to reducing inequality will cause reduced total tax revenues. There isn't even an argument.

The evidence presented is, I think, based on the assumption that Europe is perfect. If European taxes aren't very progressive, then taxes shouldn't be very progressive. Otherwise what is the point of noting that European taxes aren't very progressive. It sure doesn't show that taxes can't be progressive.

Importantly, different countries are, uhm different. The USA has an extremely unequal distribution of pre-tax income. Other things equal, that would mean that the US can raise an extremely high share of GNP as taxes by taxing the rich. In the USA a small fraction of workers are self employed. This makes it easier to collect income taxes. Many people receive huge compensation from large firms which keep track of everything. They can be taxed. The USA isn't Europe. Even if it were true that European policy is optimal for Europe, it would not necessarily be optimal for the USA.

The key policy relevant assertion in the post is "Moderate or high levels of tax revenue can’t come solely from higher rates or new taxes on the rich; the math simply doesn’t work." What math ? Where is that math ? It certainly isn't in the post.

There is now a fairly large blogoliterature all making the same argument based on the same few data points. If someone has addressed the question of what the math says about whether moderal or high levels of tax revenue can come solely from higher rates or new taxes on the rich in the USA, I would like a citation.

Evidence from Europe or the USA during the period of a much more equal income distribution does not count. The share of income going to the rich has an effect on the amount of revenue which can be raised by taxing the rich.
posted by Robert permalink and comments11:48 AM"