Thursday, March 1, 2012

Another Economist Off the Rails

Maybe he is being misquoted! In today's NY Times Professor Ronald Kurtz of MIT's Sloan School of Management is described as believing, in his new book, that tax policy is the reason we have an out of control debt situation. If Kurtz believes this, he must have some serious trouble with arithmetic. Taxes are really irrelevant to our long run debt situation -- whether high or low. The entitlements cannot be afforded if we were able to grab 100 percent of everyone's income -- rich and poor.

So what difference does the tax rate make? There are, of course, two debates going on. One is the "fairness" debate which is a bit misleading, since those who advocate "higher taxes on the rich" are well aware that higher tax rates may end up reducing what rich people will show as taxable income and reduce revenues, potentially dramatically reduce revenues. So "fairness" may come at the price of lowered federal revenues. Is that fair?

The other part of the debate is that higher marginal tax rates reduce incentives for business expansion and employment. Those who deny this point to earlier periods when marginal rates were higher. But, no one paid those higher rates of yesteryear. There were far too many loopholes.

When John Kennedy was first sworn in, he asked for a report on all the taxpayers paying the 91 percent rate, which was the highest rate at the time. Guess what? There were a whopping total of seven taxpayers paying that rate. No one willingly pays rates like that. You wouldn't either (neither would Warren Buffett). The rich simply shift assets around so that no income shows up. One of the wealthy taxpayers in 1961, Mrs. Dodge, a General Motors heiress from Grosse Point, didn't even file a tax return. Her assets were all in tax free municipal bonds. So, do you think Mrs. Dodge cared a whit whether rates were 30 %, 70 %, 91 %, or 100 %.

So, what did John Kennedy do? He sent a bill over to Congress to lower the highest marginal tax rate from 91 % to 70%. His purpose? To increase tax revenues. President Kennedy got the point, that seems lost on Professor Kurtz.

Anyway, here we go again. Another economist who thinks that a $ 66 trillion unfunded liability can be dealt with by taxing a hand full of wealthy Americans.

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