Tuesday, February 23, 2016

Leftist Tax Policy: Shoot at the Rich, Wound the Poor

February 22, 2016 by Dan Mitchell @ International Liberty

Folks on the left tell us that they want to help the less fortunate.

I sometimes wonder if their real motive is to penalize success and punish the “rich,” but let’s be charitable and assume that many of them truly wish to help the poor.

Leftist FairnessThat’s a noble sentiment, to be sure, but this is why it’s also important to look at the consequences of policy, not just the intentions.

I explained last year that certain left-wing fiscal, regulatory, and monetary policies actually harm the poor and help the rich, and I augmented that analysis earlier this year by showing how farm policies line the pockets of upper-income people.

Let’s now add to this research by looking at a new study (h/t: Tyler Cowen) from Mario Alloza of University College London. Here are some of the key findings from the study’s abstract.
Household panel…between 1967 and 1996 is employed to analyse the relationship between marginal tax rates and the probability of staying in the same income decile. …higher marginal tax rates reduce income mobility. An increase in one percentage point in marginal tax rates causes a decline of around 0.8% in the probability of changing to a different income decile. …the effect of taxes on income mobility…is particularly significant when considering mobility at the bottom of the distribution.
And here are some of the findings from the study.
…to the extent that income mobility is a desirable feature of an economy, it is then relevant to consider how fiscal policy may affect it. …The results obtained suggest that higher marginal tax rates reduce income mobility. Particularly, I find that an increase of one percentage point in the marginal rate is associated with declines of about 0.5-1.3% in the probability of changing deciles of income. …The economic mechanism that induces this impact seems to be related to the labour market incentives created by changes in the tax schedule. …While some studies have pointed out to the importance of progressive taxation in addressing inequality, the results from this paper suggest that such changes may have a detrimental impact on income mobility.
Not surprisingly, it turns out that marginal tax rates are the most important variable, as we learned in our discussion of Cam Newton’s (fiscally) disastrous Super Bowl.
The effect of a percentage point reduction in marginal tax rates fosters relative income mobility across deciles…by about 1%. Similarly, households are about 6% more likely to stay in the same quintile of income when the marginal tax rates goes up by one percentage point… This evidence suggests that the economic mechanism that determines the effect of taxes on income mobility is based on incentives.
And here are more details on how higher tax rates appear to disproportionately harm the less skilled, while lower tax rates are more likely to help.
…non-college are, on average, more likely to move down in the income distribution, while college households are likely to move up (or, at least, less likely to move down) as a result of an increase in the marginal tax rates. …Fiscal reforms that homogeneously reduce marginal tax rates seem to contribute to income mobility by making households with non-college education more likely to occupy relatively higher positions within the income distribution (and vice versa for college-graduated households).
The bottom line is that some of our friends on the left want to shoot at the rich, but they wind up wounding the poor instead by greasing the rungs on the ladder of economic opportunity.

Which is why, for the umpteenth time, I’ll emphasize that market-driven growth is the moral and practical way to help the less fortunate.

P.S. Here’s an update on my travels. I’m in Beijing for a couple of speeches and I probably should say something substantive about how genuine federalism is an ideal long-run outcome for China, Hong Kong, Macau, and Taiwan. They can all be one country, if that’s what everyone wants (and that’s already the case for China, Hong Kong, and Macau), but that doesn’t mean there’s a need for a one-size–fits-all approach to domestic policy. In other words, a version of the advice I offered on Ukraine,Scotland, and Belgium basically applies in this part of the world as well. Call it one nation with three or four systems.

But the most memorable part of the trip (in a bad way) is that my communication lines with the world have been severed. The problem started when I left my phone in an airport security scanner on my way from Cambodia to Hong Kong.

Then I get to China and I learn that my laptop can’t access either the Cato remote desktop or my Gmail account. Or Twitter. Or Facebook.

This is a not a trivial problem since I got to Beijing in the evening, had a speech in the morning, but couldn’t access any of the information (and I’m not organized enough to print things out ahead of time). I eventually figure out a solution for my morning event by asking the front desk to connect me with the person who made the room reservation, which eventually leads to me getting in contact with someone else in the hotel who is there for the same event.

But that’s only part of the story. I still haven’t had email for several days. And I obviously don’t have a phone, either. So while I’m able to access a lot of stuff on the Internet using my laptop, I’m in the dark about what’s happening at Cato or what’s happening in the rest of my life. By the way, if you’re asking why I don’t create a new email address, that’s not as easy as it sounds since the widely-used email sites have security features such as asking to send you a text to confirm your new account, something that obviously wouldn’t work for me.

obama-economy-jobs-debt-deficit-political-cartoon-class-warfare-mathOh, and I’m not able to access my blog while in China. So to maintain my pattern of producing a column every single day for however many years, I had to create a word document and then randomly approach someone in the hotel restaurant to ask if he could upload my column from a thumb drive and email it to friends back in Washington.

Oh well, nobody said the fight for liberty was easy.

P.P.S. Now that I’m done whining, let’s return to our original topic and look at a cartoon showing what Obama wants.

But then let’s look at what Obama has actually delivered, which sort of confirms the research discussed above.

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