Stopped Clocks

Paul Krugman gets this one exactly right; among the 47% of Americans who pay no federal income tax in a given year, most do pay federal income tax at some point in their lives — and thus have at least some stake in the tax system.

But even putting that aside, what’s particularly distressing about Mitt Romney’s “47%” speech is the failure to recognize at least one of the following two propositions:

a) Even people who never pay federal income tax have a substantial personal stake in a healthy, thriving economy, and therefore have a stake in federal tax policy. In particular, wages are determined by productivity, and productivity depends to a substantial extent on the accumulation of capital, which can be directly influenced by tax policy.

b) It is possible for a skilled candidate to explain the above, and to sell pro-growth tax policies as pro-wage-earner tax policies.

Yes, the candidate who tries to make such a reasoned case will be the victim of a certain amount of demagoguery about “trickle-down economics”, but the candidate who allows himself to be paralyzed by such threats should not be running for president.

Click here to comment or read others’ comments.

Print Friendly, PDF & Email
Share

56 Responses to “Stopped Clocks”


  1. 1 1 Brandon Berg

    It is possible for a skilled candidate to explain the above, and to sell pro-growth tax policies as pro-wage-earner tax policies.

    To some people, sure. But do you really think it’s possible to explain the Solow growth model to someone who’s reached middle age without ever having earned enough to pay income taxes?

  2. 2 2 Harold

    It seems as though he has noticed that there are about 47% not paying taxes any year, and about 47% hardcore Democrat voters, and just assumed they are the same people.

  3. 3 3 Brandon Berg

    It’s interesting to note that Romney’s conceptual error–looking at a single-year snapshot and extrapolating from that to an entire lifetime–is the very same mistake people make when they claim that consumption taxes are regressive with respect to income. They appear to be in single-year snapshots because income is more volatile than consumption, but in the long run, a consumption tax hits all income net of charitable donations at exactly the same rate.

  4. 4 4 John B. Chilton

    He also ignores the fact that some of the 47% in any given year are there due to the negative income tax which is a Republican idea to address the work incentive problem. And that the income tax cuts that have occurred due to Republican efforts to downsize government also created a zero income tax bracket.

    I’m drawn to the conclusion he’s simply not a conservative, that he has no core values so he can not articulate them.

  5. 5 5 Matthew Lesich

    Given that Krugman believes that incomes over the life cycle are relevant when discussing tax policy, does this mean he should apply the same principle when discussing income inequality?

  6. 6 6 Dave

    Harold (#2) and Matthew Lesich (#5) – bingo!

  7. 7 7 Steve Landsburg

    Matthew Lesich: Fabulous comment.

  8. 8 8 Steve Landsburg

    Brandon Berg: Yes, excellent point, and as Matthew Lesich observes, Krugman is one of the very people who have made that mistake.

  9. 9 9 Rob

    “Even people who never pay federal income tax have a substantial personal stake in a healthy, thriving economy, and therefore have a stake in federal tax policy”

    Is it not also likely to be the case that the 47% will also tend to have high time preference compared ? If so , some of them will be perfectly logically (in terms of their own utility) to prefer wealth transfers to themselves now over future higher income they might get through supporting policies that generate higher productivity in the future.

  10. 10 10 Andrew

    Love the title!!

  11. 11 11 Andy B

    Branden Berg: “in the long run, a consumption tax hits all income net of charitable donations at exactly the same rate”.

    Isn’t that only the case if one consumes exactly all of one’s income over a lifetime? For those who consume less of their lifetime income, the rate would be less.

  12. 12 12 Harold

    Whatever the regressive nature of a consumption tax, it will surely be more regressive than an income tax with variable rates and allowances if taken over a lifetime, unless there is perfect social mobility.

    This intra-generational mobility is quite difficult to measure, and not the same as the usual measures of inter-generational mobility. Whilst some statistics appear to show a very high level of mobility, others show the opposite. What is the right comparison? I suggest it is your income relative to others the same age. Most peoples’ trajectory will start low, build to a maximum and then drop off in old age. If we just compare one persons income to the whole population, then we would expect them to cross from low to high and back again, even with zero social mobility compared to their peers. Thus statistics such as “a majority of those in the bottom 20% in 1975 point were in the top 20% at some point since then” are fairly meaningless. This excludes those who have died since then for one thing. On this measure, I do not think social mobility, or lifetime calculations reduce the regressive nature all that much, but it is difficult to be certain without the data.

  13. 13 13 nobody.really

    [T]he very same mistake people make when they claim that consumption taxes are regressive with respect to income [is that a] consumption tax hits all income net of charitable donations at exactly the same rate.

    1. Harold @12 beat me to it: Consumption tax may well be less progressive than the (putatively progressive) income tax. So if people have concerns about progressivity, they might still have concerns about a consumption tax.

    2. This statement applies only to taxable consumption. Which forms of consumption are taxable, and the manner in which they are taxed, varies by tax structure.

    If I rent a home/car/what have you, I may pay a consumption tax on that rental. If I own a home/car/what have you, I pay no incremental consumption tax for period over which I consume the flow of benefits. Of course, DIFFERENT taxes may apply. The devil’s in the details.

    Also, leisure is generally not taxable. Today, affluent people tend to consume fewer hours of leisure than others — so this aspect of a consumption tax would tend to be progressive!

    It seems as though he has noticed that there are about 47% not paying taxes any year, and about 47% hardcore Democrat voters, and just assumed they are the same people.

    I’ve read various analyses about who these people are in the 47% who pay no federal income taxes – poor people, old people, some military people, students, etc. But I have yet to hear any mention of CORPORATIONS. Last I heard, roughly half of them paid no federal income taxes. And, as Romney reminds us, corporations are people, too.

    (Lousy moochers….)

  14. 14 14 Steve Landsburg

    Harold:

    Whatever the regressive nature of a consumption tax, it will surely be more regressive than an income tax with variable rates and allowances if taken over a lifetime, unless there is perfect social mobility.

    I truly have no idea why you’d say this. You can make a consumption tax as progressive or regressive as you like, and you can make an income tax as progressive or regressive as you’d like.

  15. 15 15 Patrick R. Sullivan

    The tax code used to recognize this phenomenon, it was called ‘income averaging’. Repealed, iirc, in the Tax Reform Act of 1986.

  16. 16 16 neil wilson

    Amazing that Reagan and Bush were both proud of the fact that their tax policies helped poor people by reducing their tax rates to 0%.

    Now, allowing people to pay 0% has become a bad thing.

    Frankly, I was in a lot better shape when I paid six figures in income taxes than I am now when I pay in the mid five figures.

    I don’t care how much I pay in taxes. I care how much I have left over AFTER paying my taxes.

  17. 17 17 Kartik Athreya

    Here’s a simple example from two economists at the Richmond Fed that evaluates the “progressivity” or “regressivity” of a consumption tax in a life-cycle setting. Readers may find it useful; It owes much to the nice example of Metcalf (1997) cited within:

    http://ideas.repec.org/a/fip/fedreq/y2009iwinp75-100nv.95no.1.html

  18. 18 18 Floccina

    I wonder if he includes government employees in his 47%? I wonder if Government employees on average have more favorable attitude toward increases in Government spending that people who earn money in the private sector. I would say that SS and medicare recipients fight SS and medicare decreases but support most other spending decreases.

  19. 19 19 Manyburgers

    Krugman does not get it right. How does a person who has paid tax in the past affect their future interest in not paying taxes? This should not be an investment analysis since we do not “invest” in the USA through a compulsory taxation system, but rather the impact is as to people’s motivations for the future.

    The response would be, why would anyone not want to earn more and become subject to taxes? Good question. Why don’t more people see that?

  20. 20 20 Floccina

    @Harold and nobody.really
    If you allow people to put as much income as they want into and IRA and allow them to take money out at any time but tax the withdrawals and any income not put in the IRA, you have a consumption that can be as progressive as an income tax.

    @nobody.really
    When Corporations pay less taxes somebody gets more and they are taxed more so why should corporations be taxed?

  21. 21 21 Bearce

    Yes, the candidate who tries to make such a reasoned case will be the victim of a certain amount of demagoguery about “trickle-down economics”, but the candidate who allows himself to be paralyzed by such threats should not be running for president.

    Trickle down economics involves tax transfers to the rich though, not the gist of the 47% (elderly, poor, students, and veterans). Allowing people to not pay federal income tax amongst the 47% Romney was speaking of is redistribution of wealth amongst the poor, or proletariat.

    Your statement should read…

    Yes, the candidate who tries to make such a reasoned case will be the victim of a certain amount of demagoguery about “Marxist-Leninist Socialism”, but the candidate who allows himself to be paralyzed by such threats should not be running for president.

  22. 22 22 Bearce

    I’m a bit baffled by those who are saying Krugman should apply these principles to income inequality over a lifetime and/or consumption taxes not being regressive in the long-run. My confusion being…

    1. Given the fact that the US has the social mobility of a third world country and a huge disproportion in the distribution of wealth, this critique isn’t fair.

    2. ^Given this, it seems rather difficult to defend the fact that consumption taxes even out over a lifetime. It also seems to ignore the obvious fact that some people just don’t consume as much as others.

  23. 23 23 nobody.really

    When Corporations pay less taxes somebody gets more and they are taxed more so why should corporations be taxed?

    When I pay less taxes I have more money to spend; the people who receive that spending are taxed more, so why should I be taxed?

  24. 24 24 Scott H.

    Adding irony to bitter irony (as one who would like to see Obama defeated)… Romney himself pays no federal income tax.

  25. 25 25 wintercow20

    Speaking of Trickle-Down Theory … Sowell’s latest piece for Hoover (pdf) http://media.hoover.org/sites/default/files/documents/Sowell_TrickleDown_FINAL.pdf

    there is an interesting challenge he lays out in it: “Some years ago, in my syndicated column, I challenged anyone to name any economist, of any school of thought, who had actually advocated a “trickle down” theory. No one quoted any economist, politician or person in any other walk of life who had ever advocated such a theory, even though many readers named someone who claimed that someone else had
    advocated it, without being able to quote anything actually said by that someone else.”

  26. 26 26 djd

    Leaving aside the numbers, isn’t Romney simply making the Tocquevillean point that a democratic government is the only one in which those who vote for a tax can escape the obligation to pay it? Or perhaps it’s the Madisonian point that tax policy is fertile ground for abuse because “every shilling with which they [a democratic majority] overburden the inferior number, is a shilling saved to their own pockets.”? Do you agree with Tocqueville and Madison?

  27. 27 27 Jack

    I think the consumption tax could be easily made progressive in a “fair” (hate to use that word) way using simple rules. The tax doesn’t apply to unprepared food, housing below a limit, clothing items under some limit, say $100, and medical expenses. More work needed to precisely define the terms, but it’s pretty straightforward.

    If you are a low wage earner trying to take care of your family, it would be possible to completely avoid the consumption tax. If you want to move beyond the basic necessities, like restaurant meals or Air Jordans, you can pay the tax. And boy would you pay when you buy your yacht or Gulfstream.

    The collection of the tax would be very efficient, allowing a significant reduction in IRS employees and accountants. Another benefit is that any attempt by the political class to tamper with the rates is immediately obvious.

  28. 28 28 Brandon Berg

    Andy B:
    Isn’t that only the case if one consumes exactly all of one’s income over a lifetime? For those who consume less of their lifetime income, the rate would be less.

    So what happens to the surplus when you die? Either you leave it to charity, in which case it’s not income net of charitable donations, or your heirs consume it, in which case it eventually gets hit with the consumption tax. The income cannot be consumed without incurring the tax bite.

    nobody:
    Consumption tax may well be less progressive than the (putatively progressive) income tax. So if people have concerns about progressivity, they might still have concerns about a consumption tax.

    Sure. But the claim is that a flat consumption tax would be regressive in an absolute sense, not that it would be less progressive. And you can always add deductions to a consumption tax, if continuing to give the lower classes a free ride is an explicit goal. The point is that a consumption tax is not, in the long run, inherently more “regressive” than an income tax; the claim that it is depends on an untenable extrapolation.

  29. 29 29 Patrick R. Sullivan

    ‘…Romney himself pays no federal income tax.’

    Because Harry Reid claimed that? Romney has paid millions of dollars in income taxes, both as the owner of corporations that pay corporate income taxes and when he got his personal distribution of dividends and capital gains.

    Theoretically, he could be paying almost 50% of his income in federal income taxes.

  30. 30 30 Paul T

    SL: “Paul Krugman gets this one exactly right”

    TOTAL UNIVERSAL IMPLOSION.
    DARKNESS.
    SILENCE.

  31. 31 31 iceman

    To be fair Krugman has addressed the income mobility argument (e.g. in Peddling Prosperity), he just believes it’s fairly small.

    I have yet to find, and so would sincerely like to hear, the economic case for the corporate income tax, other than an opaque way to alter people’s true tax incidence (possibly in regressive ways?)

  32. 32 32 Bearce

    @ iceman:

    I have yet to find, and so would sincerely like to hear, the economic case for the corporate income tax, other than an opaque way to alter people’s true tax incidence (possibly in regressive ways?)

    Corporations are people. If they don’t pay it, that’s tax evasion!

  33. 33 33 Neil

    So, you are saying Paul K is right twice a day?

  34. 34 34 Scott H.

    @ Patrick Sullivan…

    Yeah, I was thinking the capital gains tax was separate from the standard federal income tax much like the fica tax is separate (they have different tax tables). Both taxes are considered part of federal income tax so I was wrong.

  35. 35 35 Mike H

    Mitt Romney is who he is, but I doubt we know who he is. I doubt we can assume anything he says is actually his policy.

    A candidate who economic policy sounded consistently sound would not have won the Republican nomination. A candidate whose economic policy sounded consistently radical would not win the presidency. So, the only candidate with any chance is a Romneyesque figure, who says different things to different audiences, and tries to keep the focus off his policies as much as possible.

    I suspect his “47% = 47%” remark was playing to the audience. Can he really be so confused as to think they are the same?

    http://www.theonion.com/articles/best-they-could-get-accepts-republican-nomination,29383/

  36. 36 36 Frozen

    @Manyburgers 19

    “The response would be, why would anyone not want to earn more and become subject to taxes? Good question.”

    Maybe I’m just not following what you wrote, but wouldn’t a simple answer to your question be that their increased earnings were more than offset by a reduction in government transfer payments? Isn’t that the whole point of the EIC and gradual phaseouts?

  37. 37 37 Seth

    Paul Krugman gets his red herring exactly right?

    “…and thus have at least some stake in the tax system.”

    Some stake? How much? Not a lot. Probably not enough to sway their vote.

    Most folks don’t know with much certainty what they will be earning at various points in the future. They also don’t know their current tax situation very well, let alone what it might be sometime else.

    And, as other have pointed out, for many those tax paying days may already be in the past.

    I’m guessing these two uncertainty factors brings for those with their taxpaying days ahead of them brings their present value perspective ‘stake in the tax system’ down mighty low.

    I know too many folks who scratch their head when they pay their first big tax bill.

  38. 38 38 Harold

    Regarding regressive consumption tax, I was erroneously not thinking of consumption tax, but actually a purchase tax or VAT with a flat rate on purchases. Floccina has suggested a progressive consumption tax – thanks.
    Are progressive consumption taxes actually used to significant extent? In real terms, I can see purchase taxes being implemented, but it seems unlikely that wholesale revision of the tax system is on the cards, no matter how much sense it might make. Effectively, if an economist talks of a consumption tax, then they are probably thinking of a system as progressive as you want. If a politician talks of a consumption tax, they are probably talking of a system less progressive than the current one.

    The paper linked by Kartik Athreya is interesting. One particular passage that relates to a common theme here at TBQ is comparison of a world where households work and save for a period, then live off the savings during retirement. They point out that a consumption tax can be made equivalent to an income tax where both capital and labor income is taxed. A capital tax is equivalent to a consumption tax that rises with age- effectively future consumption is more expensive than current consumption.

    Their conclusion is that a consumption tax of a flat rate on all purchases appears regressive an annual income, but is proportional (neither progressive nor regressive) on a lifetime basis. I am not sure how real-world effects would alter this. For instance, people dying before retirement.

    They point out that the lack of an age-related consumption tax element makes it impossible to have an equivalent to the current system where capital income is taxed.

    The consumption tax does get round some of the issues of disguising labor income as capital income. It probably creates others of deciding when a thing has been consumed or purchased.

  39. 39 39 Al V.

    It would be interesting to look at the coorelation between people’s voting preferences and income. One might assume that higher income people are more likely to vote for Romney, and lower income people to vote for Obama, but I see many exceptions. I have a higher income (say, top 10%), and I will vote for Obama. My sister has a lower income (bottom 25%) but will vote for Romney.

    My sister’s and my voting preferences are not driven by economic rationale, but by social. I support gay marriage and abortion rights, and that drives my vote more than anything else. My sister supports coal power and gun rights (she lives in West Virginia), and that drives her preferences.

  40. 40 40 Manyburgers

    @ Frozen 36

    I was inarticulate. Krugman’s article is a misdirection and therefore incorrect. The 47% issue is not an issue about whether people have ever paid taxes over their lifetime or the equity of taxing structures due to deductions and exemptions. The issue is whether people who are currently paying no tazes have an incentive to continue under the tax scheme in which they pay nothing, or push for more income and/or taxes.

    The comment about investment was that past taxpayers are not investors because their “investment” was through a compulsory system of taxation. To overstate it, a victim does not invest in the criminal who holds him up at gunpoint. It was not an entry into the argument about the financial wisdom of tax vs distribution.

    What a fun comment section! Sometimes better than the blog itself!

  41. 41 41 Martin-2

    Mike H (#35) – “I suspect his “47% = 47%” remark was playing to the audience. Can he really be so confused as to think they are the same?”

    If I’m thinking of the right thing, this remark was actually caught on tape in private and not part of any speech.

  42. 42 42 Andy B

    Branden Berg: “The income cannot be consumed without incurring the tax bite.”

    If everything we spent money on was subject to a consumption (i.e. sales) tax that would be true. There are components of one’s total expenditures that never get consumed, at least in the manner which makes them subject to a consumption tax. Investments don’t get assessed a consumption tax.

  43. 43 43 Manyburgers

    @ Scott H 24

    Taxes paid per Romnery’s returns. Cannot tell how much is state and how much is fed. Total dollars are a lot.

    http://www.weeklystandard.com/blogs/romneys-release-taxes_652850.html

  44. 44 44 David Wallin

    @Andy B r 42
    “There are components of one’s total expenditures that never get consumed, at least in the manner which makes them subject to a consumption tax. Investments don’t get assessed a consumption tax.”

    Investments aren’t consumption. At some point the return on the investment would be consumed.

  45. 45 45 Al V.

    Investments are consumption, at some level. If I buy 100 shares of IBM, I own something – a small percent of IBM. That’s no different from my wife buying a painting for above the couch, except hopefully I get a better return from IBM than from the painting.

  46. 46 46 Bearce

    Investments are consumption, at some level. If I buy 100 shares of IBM, I own something – a small percent of IBM. That’s no different from my wife buying a painting for above the couch, except hopefully I get a better return from IBM than from the painting.

    Whoa, neat analogy.

  47. 47 47 Bearce

    ^Actually, a better example of artwork would be comic books. You buy the things to read, but if you then place it in a plastic covering and let it sit, it might accrue value (depending on the growing popularity of the superhero.)

  48. 48 48 Brandon Berg

    No, investments aren’t consumption. Investment is spending for the purpose of facilitating future production. Collectables like paintings may be considered investments from a personal financial perspective (they may appreciate in value, making you richer), but not in an economic sense (because they don’t facilitate production). This is why profit on the sale of collectables is taxed as ordinary income.

  49. 49 49 Bob Murphy

    A stopped clock is right twice a day. On a good week, Steve Landsburg blogs a total of 6 posts. I conclude that Krugman’s blog contains more than twice as much knowledge as Steve’s.

  50. 50 50 Bearce

    No, investments aren’t consumption. Investment is spending for the purpose of facilitating future production. Collectables like paintings may be considered investments from a personal financial perspective (they may appreciate in value, making you richer), but not in an economic sense (because they don’t facilitate production). This is why profit on the sale of collectables is taxed as ordinary income.

    That’s true too I guess because by definition investment in capital goods is to produce other goods.

    But if you think about it, let’s say hypothetically you’re not an art lover but buy the painting and store it in a vault for the shear purpose of having it appreciate in value. Perhaps you’re aware that the artist is going to become popular or expect the genre of art the painting represents is going to increase in demand. Once you cash it in, it’s really no different from a stock that hit a lucky streak.

  51. 51 51 Eliezer

    Andy 42,
    In addition, there are capital gains and dividend taxes on investments and don’t forget about the death tax/estate tax.

  52. 52 52 iceman

    Anyone ever hung a stock certificate on your wall for the pure aesthetic beauty of it? Of course one can speculate on the value of anything (e.g. collectibles), but unless you have some specialized expertise, it seems to me all it is at best is speculation. By contrast, investing in equities provides capital to people who in turn use it to grow businesses, and based on no particular expertise we can *expect* this will provide a real return on average over time. In that sense storing a painting somewhere nobody can see it seems as questionable of a proposition as viewing one’s primary residence as an ‘investment’ – you’re not getting paid for the intrinsic services those assets provide.

  53. 53 53 Keshav Srinivasan

    Steve, you may want to respond to this post by Kevin Drum:
    http://www.motherjones.com/kevin-drum/2012/09/my-baroque-argument-higher-capital-gains-taxes

    He argues that higher capital gains taxes can actually be a good thing, in the sense that it could encourage labor income over capital income. I suppose your counterargument would be that labor income comes from capital, so taxes cannot increase labor’s share of national income. Do I have that right?

  54. 54 54 Harry

    I guess I am one who falls in the category of one who has paid taxes that far exceed federal taxes. For fifty years or so my real estate taxes (mostly school taxes) have been as best as I can figure in my head (in constant dollars) well over a million, which far exceeds the Feds, even counting the year when I sold a lot of the farm. Sure, I minimized my tax bill every year we had losses, but I would have preferred a positive number over a negative number.

    However, I forgive Romney his Mother Jones moment, which by the way was released a week ago, timing it so it would be difficult to respond to, five weeks before the election. I understand his broader point, which is that we have too many in the wagon and not enough people pulling the wagon.

    In particular, we will never solve the problems of the people in the wagon, whether they are in there voluntarily or not, without economic growth. I challenge all to defend the prospect of the present clowns in charge doing anything more on that. They are pushing the wagon into the canyon.

  55. 55 55 Scott F

    A bit off topic but, I was wondering your take on another foible of Republican ideology:

    http://www.nationalreview.com/agenda/328673/unintended-consequences-alabamas-immigration-law-reihan-salam

    This, I believe, represents the neoconservative point of view on immigration, and at first glance it appears to just as illogical as ever. Thoughts?

  56. 56 56 Peter

    Branden Berg: “The income cannot be consumed without incurring the tax bite.”

    Might be missing something but what about if you consume things in a different country?

  1. 1 Taking a Ride on a Cycle « The Unbroken Window
  2. 2 Some Links

Leave a Reply