I have only one quibble, and that’s that Greg is very sure we should eliminate the mortgage interest deduction in accordance with his first principle: “Broaden the Base and Lower Rates”. I think we should maybe keep it in accordance with his second principle: “Tax Consumption Rather than Income”. (Though I certainly agree that after the second principle has been implemented, it will be time for the mortgage interest deduction to go.)

How sad that so much wisdom is sure to go unheeded.

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1) The tax rate on wages and/or consumption. A wage tax and a consumption tax are pretty much interchangeable; you can tax the money as it comes in or you can tax it as it goes out. So I’m treating this as one category. The “right” level for this tax depends on your forecasts for future government spending.

2,3,4,5 and 6) The tax rates on dividends, interest, capital gains, corporate incomes and estates. I believe these tax rates should all be zero. That is not a statement about how progressive the tax system should be. A wage tax and/or a consumption tax can be as progressive (or regressive) as you like. It is instead a statement that while all taxes discourage both work and risk-taking, capital taxes have the added disadvantage that the discourage saving. This simple intuition is confirmed by much of the public finance literature of the past 25 years. (Here is a good example.)

My personal preference is for a system substantially less progressive than the one we’ve got, but for purposes of this exercise I won’t penalize candidates whose preferences differ from mine. For the record, Romney, Huntsman and Santorum are the three who (as far as I can tell) want to maintain substantial progressivity, with Romney, uniquely among the candidates, preferring even more progressivity than we currently have.

Here, then, is a chart, with candidates ranked roughly in order of their willingness to exempt capital income from taxation. I prepared this chart with a few quick Google searches (this is a blog post, not a journal article) and it probably contains errors. I’ll be glad for (documentable) corrections and will update the chart as they come in. Asterisks refer to further explanations, which you’ll find below the fold.

If we care about efficiency, we’re looking for zeroes in the last five columns. On the face of it, Johnson is the clear winner. But Cain’s 9/9/9 plan has two arguments in its favor that don’t appear on this chart. First of all, people are a lot less likely to bother evading one of three 9% taxes than a single 23% tax; therefore we’d have a lot fewer evasion problems under Cain than under Johnson. Second, it’s pretty easy to imagine Congress raising a 23% tax to 24% or 25% or 26%, but it’s a little harder to break the psychological barrier of single-digit tax rates, so Cain’s 9/9/9 might be more politically stable than Johnson’s 23. Therefore I’m calling this a tie between Johnson and Cain.

But the top six are all pretty good, except maybe for Paul, who hasn’t revealed his key number. Santorum is bad, Romney is atrocious, and Bachmann (who, as far as I can tell, has not bothered to release a tax plan) is an enigma.

Some explanations:

1) Cain stresses that this is a transitional plan, ultimately to be replaced by an even better one.

2) Cain’s plan consists of a 9% VAT, a 9% sales tax, and a 9% income tax. A VAT and a sales tax are not exactly the same thing (they end up getting levied on slightly different goods) but they’re close enough for this rough exercise; therefore we can lump together the VAT, the sales tax and the part of the income tax that taxes wages. That adds up to 27%, but a slightly more careful calculation tells you that Cain will allow you to keep 91% of 91% of 91% of your spending power, which is to say about 75%. Thus this counts as a 25% tax, not 27%.

3) Gingrich wants a 12.5% corporate tax with 100% expensing. This is equivalent to a 0% corporate tax together with a one-time transfer of assets to the government, so as far as its effects on efficiency, I’m calling it the equivalent of a 0% tax. For several reasons, I’d prefer a corporate tax that really *is* 0%, but I’m trying not to impose my personal preferences on these rankings (beyond a preference for efficiency), so I am giving Gingrich credit for the equivalent of a 0% corporate tax.

4) Huntsman, Santorum and Romney all endorse multiple tax brackets; I’ve put only the top brackets in this chart. Huntsman’s 23 should really be three brackets: 8/14/23. Santorum’s should be 10/20/30. And Romney holds the remarkable view that our flawed political system has somehow settled on exactly the optimal system of six brackets, which he would preserve in its entirety.

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Note that all of my remarks apply equally well to all forms of capital taxation. Entin did a better job of focusing on the particular shortcomings of the estate tax.

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So Mitt Romney wants to exempt capital gains from taxation — but only for taxpayers who earn less than $200,000 a year. In Tuesday night’s debate, Newt Gingrich asked him (I’m paraphrasing) “Why the cap?”. Romney’s answer — that he’s looking out for the middle class because “the rich can take care of themselves” — was as incoherent as anything I’ve heard this election year.

Here’s why:

I interpret Romney’s answer to mean that he wants to cut capital gains rates not on efficiency grounds, not on supply side grounds, and not on philosophical grounds, but on redistributionist grounds. Well, okay, I myself don’t think very much of redistribution as a primary driver of tax policy, but Romney and I can disagree on that one. But where the incoherence comes in is this: If your goal is to redistribute from the rich to the middle class, why on earth would you do it by cutting the capital gains tax, as opposed to lowering income tax rates in the middle and raising them at the top?

To put this another way: If you care about efficiency, you’ll want to cut the capital gains rate to zero for everyone. If you care about fairness, and if you believe fairness mitigates against double/triple/quadruple taxation, you’ll still want to cut the capital gains rate to zero for everyone. If you care about redistribution, you’ll want to juggle the tax brackets. But I can’t think of a single thing you could care about that would lead you to laser in on cutting capital gains rates for middle income taxpayers only.

Now it might be that somewhere in Romney’s 59 point economic plan there’s an answer to this. If so, Herman Cain was surely right when he intimated that Romney himself can’t be terribly familiar with the contents of that plan. Because, when asked a simple question about the justification, Romney wasn’t able to come anywhere close to making sense.

I’m guessing that an honest answer would have been something along the lines of “I wanted something that would sound good to Republican primary voters who aren’t paying too much attention to the details, and I knew that the phrase `capital gains cut` was like red meat to a lot of those guys, so I threw it in”.

If the Republicans want a nominee who will pander to the left, right and middle with no coherent philosophy and no coherent policy proposals, why not just drag out Bob Dole? At this rare historical moment when the country just might be willing to take a flyer on some truly radical changes, it saddens me deeply that warmed-over Dole might be the best the Republicans can manage to dish up.

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Here’s a question I haven’t seen asked: If fear of future regulations and taxes is holding business back, as everyone on the right asserts, why didn’t the Republican victory in the midterms set off a surge in employment?

After all, if you really believed that fears of Obamanite socialism were the key factor depressing employment, the GOP victory — with the clear possibility that the party will take the Senate and maybe the White House next year — should greatly reduce those fears. So, where’s the hiring surge?

I even set out to write a blogpost citing this argument with approval — but around the time I was composing it, Krugman followed up with this bit of idiocy, to which a response seemed more urgent.

Now that that’s out of the way, I can come back to the bit about the missing Boehner Boom. It’s a more-than-fair question. How would you respond to it?

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Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.

Where to begin?

First: Krugman tells us that

Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right.

Yes, that oversimplification is indeed sometimes taught in Econ 101. What Krugman doesn’t tell you is that it gets corrected in Econ 102, where students learn that taxing the source of an externality might or might not be efficient policy, depending on the available alternative remedies. It would, for example, be tragic to tax coal plants out of existence if it proved substantially cheaper to clean up their emissions after the fact, or to relocate the victims of those emissions.

I’m tempted to say that this is just Krugman being true to his principle that economics stopped advancing somewhere around the middle of the 20th century (something I certainly believe about music), so that just as Keynes had the last word on macroeconomics, Pigou had the last word on externalities. (Pigou, writing in 1920, is the source of the Econ 101 analysis; Ronald Coase, writing forty years later, advanced us to the level of Econ 102.) Except I know that Krugman knows better, because he once wrote a pretty good piece on green economics for the New York Times, where he made the Coasian argument tolerably well.

Second: the Times article is about Rick Perry’s past criticisms of the EPA, whereas Krugman is citing a brand new paper from the current issue of the American Economic Review. Apparently, his complaint is that Perry failed to account for this research before it existed. Perhaps he’s overestimated the import of fast neutrinos.

Third: I do not think it is beyond Krugman’s analytical powers to recognize that there is no inconsistency between the positions that a) some industries should be more heavily taxed and b) the EPA is often wrong.

Fourth: it is rarely the case that a single journal article is sufficiently definitive that it ought to dictate policy to the point that any dissension would be laughable. (Krugman’s comment on the whole affair is “Hahahahahahaha”.) One possible exception to that rule is Coase’s paper on social cost, which was quite definitive indeed in its refutation of Krugman’s argument from “Econ 101″.

Fifth: Even if we all agreed that the EPA is a paragon of economic efficiency, some of its policies might still be objectionable on some other grounds. Or does Krugman now want to retract every column and every blogpost in which he has appealed to compassion, equity, justice, fairness, etc., etc.?

Sixth: Krugman concludes that

What this tells us is that we are not actually having a debate about economics. Our free-market advocates aren’t actually operating from a model of how the economy works; they’re operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good.

What this tells me is that we are not actually having any sort of debate about policy. Krugman isn’t actually operating from a model of how government works; he’s operating from some combination of knee-jerk defense of redistribution and mystical faith that government always serves the common good.

After all, even if we all agreed that stricter environmental policies are desirable in principle, it would not follow that stricter environmental policies are desirable in a world where those policies will be formulated and enforced by politicians and bureaucrats with decidedly parochial agendas.

Krugman says:

Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right.

It would indeed be naive to believe that there are no market failures. It would be equally naive to believe that there are no government failures, which is what Krugman seems to be assuming.

The choice, all too often, is not between market failure on the one hand and government success on the other; instead it’s between market failure on the one hand and government failure on the other. That calls for some hard thinking about the costs and benefits of the various policy options, thinking that is not advanced by pointing one’s finger and saying “Hahahahaha.” Economists can contribute to this discussion with an honest attempt to illuminate the tradeoff. Tradeoff! Now there’s a concept Krugman ought to recognize. It is, after all, at the core of Econ 101.

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Meanwhile, here, courtesy of our frequent and invariably interesting commenter Mike H, is a puzzle to keep you busy while I’m gone:

Your enemy places, say, 8 red points and 8 blue points in the plane. Your job is to connect each red point to some blue point with a straight line segment, so that none of the line segments cross.

1) Can your enemy place the points in such a way that you are guaranteed to fail?

2) What if we make your job harder by requiring each blue point to be used exactly once?

3) What if we change 8 to 17 or 26 or 43 or …. ?

Edited to add: Question 2) is the interesting one. Also, to keep it interesting, your enemy is not allowed to put any three points on the same line.

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1) I gather that he’s proposing to shift a greater percentage of the tax burden onto upper-income taxpayers — that is, to make the tax system more progressive — via a steeply graduated tax on capital income (with the zero bracket extending up to the $200,000 income range). Reasonable people can disagree about how progressive the tax system ought to be, and I disagree with Mr. Romney; I’d like to see it made less progressive, not more.

2) Be that as it may, we might at least agree that for a given degree of progressivity, efficient taxes are better than inefficient taxes. Continuing to tax capital income violates that principle. If you want to make the rich pay more, the most straightforward and efficient way to do it is with a steeply graduated tax on labor earnings, not by taxing capital. A tax on labor earnings distorts the incentive to work, but a tax on capital distorts both the incentive to work and the incentive to save.

3) In other words, there are two separate issues here: Should the rich pay more, and if so, how should we make them pay it? I think Romney is wrong on the first, and I’m virtually sure he’s wrong on the second. You don’t have to tax capital to tax the rich.

4) There are a number of popular misconceptions that I expect to arise in comments, for the sad reason that not everybody has read or digested all of my previous blog posts on this subject (try typing the word “capital” into the search box on this page). Let me try to pre-empt one of them: There are a lot of retired rich guys whose income consists entirely of dividends and capital gains; a tax on labor income, you might think, would not touch them at all. The reason that’s wrong is that dividends flow from savings; if you raise the tax on labor income, these guys will have save less and earn smaller dividend streams. (That doesn’t apply to the ones who have already retired today, but it does apply to all future generations, the effects on which collectively dwarf whatever happens today.) So a steeply graduated tax on labor earnings does hit more or less the same population as a tax on capital, but it does it without nearly as many destructive side effects.

Edited to add: And if it’s really really important to you to sock it to the currently retired rich, you can do it with a steeply graduated consumption tax. You still don’t need to tax capital income.

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Anybody who blogs often enough (very much not excluding yours truly) is occasionally going to post something that, at least as written if not as intended, is objectively plain flat out wrong. Paul Krugman did that a couple of days ago, I responded, he’s responded to my response, and at least 4/5 of our disagreement is now resolved. That’s exactly as it should be.

To review the bidding:

1) Eric Cantor demands that any spending on disaster relief should be paid for through cuts in current spending.

2) Krugman makes a blog post arguing that as a matter of theory, the cost of any new spending at all should be spread over as many categories of taxes and cuts as possible. He makes a correct argument, but it’s based on the premise that the current structure of spending and taxes is optimal.

3) I respond with a major point and a minor point. The major point is that it’s nuts to assume that the current structure of spending and taxes is optimal; therefore Krugman’s argument proves nothing. The minor point is that in the nature of politics, sometimes it’s wise to hold even a good policy as a hostage while negotiating for other policies that you also think are good.

4) Krugman concedes the major point, which of course he must, because he’s objectively flat out wrong. (Again — I’ve been that myself from time to time on other issues.):

Landsburg points out, correctly, that the proposition that a spending increase should be offset with a little bit of pain everywhere and everywhen — that is, with higher current and future taxes and lower current and future spending on many things — follows from assuming that the government starts from a position of doing the right thing. If you think the government’s priorities are all wrong, then theory doesn’t tell you much about what should happen.

5) We now agree that there is no principle requiring new spending to be paid for from a broad base of spending cuts and tax increases.

6) Krugman now goes on to say that Eric Cantor is asserting a principle that all new spending on disaster relief must be offset with current spending cuts. I do not know why Krugman says this; my impression is that Cantor defends this as a policy preference, not as a principle. In any event, when Krugman writes “I should have been clearer about that” (that being the question of what point he was trying to make), I think he’s being a bit disingenuous; his original post was very explicitly not a critique of the take-it-all-from-one-place principle but a detailed careful correct argument (though based on a faulty premise) in favor of the spread-it-out principle. But this is an argument over what is now (in Internet time) ancient history; Krugman and I are in total agreement on substance going forward.

7) Let me stress that: We are in total agreement on substance. Namely: There is no general principle that supports Cantor’s policy preference, and (given reasonable assumptions) there is also no general principle that supports the opposite preference.

8) Krugman then turns to the minor point: Is it ever a good idea to hold good policies hostage in order to get other good policies? I think it sometimes is; he seems to think it’s not. Or he thinks it’s not in this particular instance; I’m having trouble telling how general a statement he’s trying to make here.

9) I’d like to be clear that I never took a stand on whether in this instance it was a good idea to hold one policy hostage to another. I said only that there are surely some such instances and therefore we can’t settle this issue by appeal to general all-encompassing principles.

10) Krugman objects to the analogy in which I compare disaster relief to letting your kid go to the prom. Here he has quite entirely misunderstood the point of the analogy (whether the fault lies more in his reading or in my writing, I’ll let you decide). I was not saying “disaster relief is as frivolous as going to the prom”. I was saying: “Look, there is such a thing as relatively unimportant spending, and therefore if you’re going to argue in favor this particular spending, you’ve got to argue for it on its merits, not on the basis of some general principle that `if it’s good we should do it’ “.

11) Krugman closes by repeating the charge that Cantor has invented a nonsense principle. Here I think Krugman is being mildly libelous, because, as I said above, I’ve seen Cantor claim no such principle; all I’ve seen is a statement of a policy preference. But the language of politicians is sufficiently vague that it’s often hard to be sure what they’ve really meant.

12) The language of academics, by contrast, is refreshingly precise, which is why we’re able to reach something pretty close to consensus even when we start off in opposite corners.

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Kathleen Kennedy Townsend, writing in the Atlantic, has figured out that Jesus Christ wants you to be a Democrat. There are, you see, 2500 passages in the New Testament that call on us to care about other people. Rick Perry (and presumably others of his Republican ilk) ignores those passages, according to Ms. Townsend, when he voices “concerted opposition to government social programs”.

Now, of course Rick Perry is no more concertedly opposed to government social programs than is Kathleen Kennedy Townsend; instead, they disagree about how those programs should be structured and how extensive they should be. Not even Ms. Townsend (unless she is an even greater lunatic than she appears to be) believes that such programs should be unlimited, so her disagreement with Rick Perry is largely over where to draw the lines. Somewhere in those 2500 New Testament passages, she’s managed to discern an endorsement for her own preferred lines over Governor Perry’s. Quite a discerning reader she must be.

But it gets worse: According to Ms. Townsend’s reading of the Bible, we ought to “use all the tools we have at hand to help the poor, the sick and the hungry” — and I’m guessing that’s not someplace Kathleen Kennedy Townsend wants to go. That’s because using all the tools at hand to help the poor, the sick and the hungry means unleashing the power of capitalism. Regarding the poor and hungry, it means eliminating barriers to trade and immigration, reducing or eliminating capital taxation, and eliminating or drastically restructuring most federal regulations. Regarding the sick, it means curbing the power of the FDA, eliminating the tax deduction for employer-provided health insurance, and committing ourselves not to regulate the prices of prescription drugs. As a general rule, it means diminishing the power of the political class that Kathleen Kennedy Townsend has devoted her life to serving.

Ms. Townsend might disagree with me about whether those are really the most effective ways to help the poor, the sick and the hungry. If so, I’m pretty sure she’s wrong. So should I conclude, as she does of her own ideological opponents, that (in defiance of the admonitions of Jesus Christ!) she just doesn’t care? Or would jumping to such a conclusion about one’s political adversaries just violate another set of New Testament precepts — you know, the ones about being charitable?

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