Sunday, August 15, 2010

Bruce Bartlett exploits the Libertarian brand for marketing purposes

Bruce Bartlett responds to me; allow me to give a pretty long answer.

• What I wrote was: “Bruce Bartlett thinks the revenue maximizing tax rate may be 83%, higher than any of the leftist economists”

To this Bartlett replies: “the 83 percent figure is not mine, but that of economist Anthony Atkinson” And that “made it quite clear that I would not favor raising the top rate to the revenue-maximizing rate; I stated that the top rate should not go above 50 percent under any circumstances.”, concluding that “this fellow Tino got just about everything wrong”

I know perfectly well that the 83% figure Bartlett provided as the revenue maximizing figure was not calculated by him, nor did I ever claim so. Of the close to 20 people included in the Laffer-curve survey, only 3-4 have actually done research on measuring the responsiveness of income to taxes. The rest referred to external research, giving us their best estimate, as a sign of how they stand ideologically.

Second, my post was not about how high people personally wanted taxes, but how high they could become before revenue declined, something I again made very clear to the readers.

So what exactly did I get “wrong” Bruce, if we go by what I actually wrote, instead of your representation of what I wrote?

• The Laffer-curve question tests your judgment. As it happens, there are hundreds of articles that attempt to measure the effect of taxes on the economy, with lots of different methods, and producing lots of different results.

Do we trust cross-country comparisons?

Do you regress or calibrate?

Do you treat tax cuts the same way as tax increases (because of mean reversion of income, there is reason to believe that studies based on tax cuts underestimate the responsiveness of earnings to taxes, while studies focused on tax increases overestimate responsiveness)?

Do you think that the current micro-estimates underestimate the responsiveness of taxes because of short time horizons combined with adjustment costs and because of attenuation bias?

The disagreement about the evidence is what makes the replies to Dylan Matthew’s question interesting. It goes to the core of the policy debate about taxation. As anyone can see, there is a strong correlation between ideological position and what figure the different people offered. Those on the right gave low estimates, those on the left (and, it should be acknowledged, the two tax non-political tax experts) high figures.

Bruce Bartlett, who likes to present himself as someone on the right, offered the highest figure, 83%, of all people asked. Higher than the estimate of for example hardcore liberal Brad DeLong.

What the debate reveals is that Bruce Bartlett believes the 83% figure is worth presenting to the public. Of course I know he did not calculate this himself. But what you cite as credible tells us a lot about your world view.

Few economists believe that the range of revenue maximizing tax rate includes 83%. If you believe that, you think that people’s behavioral response to taxes is extremely small, so raising taxes does not harm the economy. Presenting this figure as a credible estimate tells us Bartlett is on the far edge of the continuum when it comes to assessing the effect of taxes.

Bartlett incidentally seems to think we should give him the presidential Medal of Freedom or something for writing that he personally believes that the individual income tax should not go above 50%. Keep in mind that he wants to add state and local taxes and a big fat VAT on top of this. He has also suggested the option of lifting the cap for social security taxes, although I am not sure he has said something definite on the issue.

50% individual tax + local + consumption taxes + perhaps payroll taxes is very high. We are talking Swedish levels here (with the difference that Swedish economists, including leading Social Democratic public finance researchers, believe we should lower our marginal tax rates).

• In his latest article, instead of just defending his ideology, he is cowardly backtracking from the 83% figure. Bartlett writes: “I did not endorse it”

Yes what he wrote exactly was:

“Anthony Atkinson, probably the leading public finance economist in England, estimates that the top rate could go as high as 63% to 83% before it became counterproductive in terms of revenue”

If someone asks you a question about an issue, and you cite an article, making sure to point out the author is a “leading public finance economist”, that should not be seen as an endorsement that you later stick by?

What standard for public debate is that, you favorably cite something, but refuse to stand by it when questioned? Did Bartlett not understand the readers consider papers cited favorably as evidence as arguments in the debate?

Bartlett also writes that he referred to this paper because that was the last one he read, not because he necessarily agreed with it. What kind of bizarre intellectual criterion is that? There are literary hundreds of papers written about taxation every year, or varying quality. Do public intellectuals who want to be taken seriously cite the evidence in the last two they have happened to have read, regardless if they believe in it?

Shouldn’t you cite the papers you think are credible?

• Bartlett also misrepresents the research. He for example wrote about the Trabandt and Uhlig paper that:

"It finds that only two European countries are on the wrong side of the Laffer Curve. All other countries could raise substantial additional revenue by raising tax rates."

In fact Trabandt and Uhlig argue that Europe can raise only very little revenue by raising taxes:

“while the US can increase tax revenues by 30% by raising labor taxes, the EU-14 can raise only an additional 8%.”

Remember, this is 8%, not 8 percentage points. From the paper you can read that Europe, where many countries are collecting 40% of GDP or more from taxes, can only raise an additional 3% of GDP in labor taxes.

For Capital taxes Trabandt and Uhlig write

“the scope for raising tax revenues by raising capital income taxes are small: they are bound by 6% in the US and by 1% in the EU-14.”

Far from finding that “All other countries could raise substantial additional revenue by raising tax rates” as Bartlett claimed, the paper finds that half the other European countries examined could only raise labor taxes by less than 3% of GDP or less, and capital taxes with 0.4% of GDP or less.

Unless we define a 3 points of GDP for countries with two fifths or more of national income already taxed to be “substantial additional revenue” Bartlett is either misinterpreting or misrepresenting the results of the paper (alternatively, he is using a very curious definition of “substantial”).

I have included the two tables from the paper here so you don’t have to rely on my reading (I added the line on the 3% of GDP level):

For Capital (I added the line for the 0.4% of GDP level):

• Bartlett is not straightforward when presenting where he is coming from politically.

He is upset that I complained that Ezra Klein’s site include him as part of the “right”.

He is also (sort of) upset that I called him a European style Social Democrat.

Why is this?

Bartlett is a person who wrote an article about economic policy called

“The Europeanization Of America,
Would it really be so bad?”

Defending the Social Democratic European system throughout the article, he ends the article by writing

Nor does it appear that the welfare state necessarily erodes freedom or places a crippling burden on the economy. As Columbia University economist Jeffrey Sachs recently wrote, "In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness."”

There is a policy debate in the United States between the right and the left, about whether or not the U.S should follow European economic policies. This is the context in which Bartlett’s article is written. Can this be interpreted as anything other than an endorsement of the leftist European economic policy?

This is an important, serious debate. If you participate, you better be honest and open about your views. So why is Bartlett not simply admitting his ideology?

We can guess the answer. Bartlett was once on the right, so he wants to raise his own market value and credibility by emphasizing his past credentials. “you see, if *even* a Reagan adviser agrees with President Obama that higher taxes are good for society, it must be true”

But if someone who considers the French economic system a role-model for the U.S agrees with tax increases, that goes into the “dog bites man” bin.

Bartlett also knows that “Social Democracy” and “Welfare State”, the economic system he promotes, are unpopular words in the American debate. So he is being strategically disingenuous in order to be a more effective left-wing ideologue.

Bartlett wrote:

“Based on what evidence, I don't know, Tino seems to think that I am best categorized as a European-style Social Democrat. I believe he means this as an insult.”

No Bruce, I don’t mean that as an insult. This may shock you, but many people who defend Social Democratic policies are honest enough to openly label themselves thus. I mean it as important information that your readers need to have in order to judge your credibility. That tells them more about where you are coming from when analyzing taxes than “former adviser to Reagan and Bush I”, which the Washington Post presented you as.

• Bartlett, who now objects to being called a European style Social Democrat, is the same guy who wrote:

One way we can learn from them [Social Democratic European countries] is how to have a tax system that raises considerably more revenue as a share of the economy than ours does without killing the goose that lays the golden eggs.

But revenue as a share of GDP is not something to be impressed by, if the collection of revenue Substantially lowers your GDP. As my graph showed, actual revenue is not higher in Europe than it is in the U.S, because their GDP is lower.

Someone could argue that this is a coincidence. Europe is poorer than the U.S for historical or cultural reasons, unrelated to policy. If the U.S implemented high-tax Social Democratic countries, we would continue to be richer, work more hours, have fewer people dependent on welfare, have a smaller shadow economy etc.

But this is not the consensus view in economics. There is evidence that taxes do depress economic activity (but no consensus on how much), that generous social programs lead to more people in social programs, that the size of the shadow economy depends on the tax rate, that hours worked are related to the cost of leisure.

An even if all of this is false, at the very least we should be impressed by American accomplishments, even if you attribute them to sheer luck. The U.S has far lower tax rates, yet collects as much as Europe in taxes. Americans have the best of both worlds. Why than would you be envious of Western Europe?

• Bruce Bartlett want us to believe that he is a “basically libertarian but tempered by Burkean small-C conservatism.”

In this interview by the Economist, which I encourage people to read, they ask him a bunch of questions. Every single policy position Bartlett takes is unmistakably on the left.

He for example writes:

"I would add that I do disagree with the Republican fixation on taxation. Federal taxes as a share of GDP are at their lowest level in two or more generations—14.9% versus a postwar average of 18.2%.”

Bartlett does not realize that the distortion from taxes comes from *rates*, not revenue collected. Revenue is lower now than 2007 mainly because of the recession, not because tax rates are lower.

“There is not one iota of evidence that the economy is suffering from excessive taxation”

According to the Trabandt and Uhlig paper Bartlett himself cited, taxes in the United States are associated with large distortion to the economy.

Now, someone could make the claim that the benefit produced by the government is worth having top marginal rates of 40-45% (including state taxes), and a 35% corporate tax rate. But it is a quite extreme leftist position to claim that the economy does not suffer at all from taxes.

Bruce Bartlett talks about the “know-nothing” Tea Party movement, but tells the Economist that there is “not one iota of evidence” that taxes hurt the economy? What about all the papers in top journals that find empirical evidence of distortions due to taxes?

I guess all the economists that teach about excess burdens in schools are ignorant, and those who study the various distortions of taxation are to be categorized as ‘know-nothing’; because the “libertarian” Bruce Bartlett has declared there is not “one iota” of evidence that taxes hurt the economy.

He continues:

Tax cuts don’t help those with no incomes because they are unemployed, businesses running at a loss, or investors with a large stock of capital losses. In my view, the Republican obsession with taxes is based on pure dogma, not analysis."

Bartlett would do better with some economic analysis instead of his own dogma:

The currently unemployed may have a better chance of finding a job if taxes are cut and lead to higher growth:

Business decisions are partially based on expected future taxes. Bartlett may not be forward-looking enough in his analysis to look further than the front of his nose, but many businesses are.

Another libertarian gem:

American conservatives—unlike those in Europe—still don’t accept the legitimacy of the welfare state or its fundamentally conservative underpinnings in a Bismarckian sense. (The welfare state provides stability, prevents revolution and accepts a certain diminution of freedom and rule by technocrats as a trade-off.)

So when Bartlett presents himself as a small c “conservative”, he is partially referring to Bismarckian conservatism, under which definition a large welfare state is a conservative project. It suffices to say that this is not what the term conservatism means in the United States.

Bartlet is again engaging in false marketing. American conservatism is about conserving American institutions based around the values of individual liberty. Not conserving aristocratic 19th century Prussian institutions through buying off the working class (nor should libertarians want to conserve that kind of system). It is also silly to argue for creating a welfare state in the United States to ‘prevent revolution’.

Of course someone who wants a large-scale social experiment, creating a European size welfare state in the middle of an economic crisis, is cringe-inducingly dishonest (either to himself or to the public) when describing himself as a libertarian and Burkean. Those terms have meaning; it is simply not up to Bartlett to exploit the brand name of libertarianism and Burkean conservatism to further an agenda far removed from those concepts.

Bartlett concludes:

Eventually, American conservatives need to make the deal that European conservatives made after the war: liberals basically spend the money—subject, roughly, to a balanced-budget constraint—and conservatives raise the money in ways that don’t overly burden capital. This means that conservatives have to accept the welfare state and liberals have to give up redistribution on the tax side.

Remember, a minute ago Bartlett was perplexed why I would consider him a “European-style Social Democrat”. Here is a hint: When you advocate the introduction of European-style Social Democracy in the US, people might come to believe that you are a European-style Social Democrat, rather than a libertarian Burkean.

Moving on to the substance of the issue, capital taxes are only marginally lower in Europe than in the U.S (33% in the European average vs. 36% in the U.S over the last decade). Half of the European countries have higher capital taxes than the US. Europe has high taxes on labor income as well as higher taxes on capital. It is also quite logical for the U.S to all else being equal have higher capital taxes than small European nations, because of the size of the U.S economy.

As the CBO explains and illustrates:

“In general, OECD countries that account for smaller amounts of investment have lower statutory corporate tax rates (see Figure 2-3 on page 24). In those countries, the supply of capital and the size of the corporate tax base are probably more sensitive to corporate tax rates than they are in the larger countries.”

Second, it is a misunderstanding that a VAT means liberals “give up redistribution on the tax side”. A flat tax redistributed income because the rich have more money (duh). Bo Rothstein explains this through numerical examples in his article “The Welfare State as a Social Dilemma”. Contrary to what Bartlett claims, a larger welfare state financed by a VAT is sure to increase income redistribution in the U.S.

• A “libertarian” certainly does not have to like the GOP (most don't), be part of the conservative movement, or respect the tone of the Tea Parties.

However, someone who is using the libertarian brand to market themselves does need to actually believe in libertarian ideas. Belief in economic liberty is the central tenant of economic libertarianism.

Believing that high taxes don't distort the economy much (or not at all), that deficit funded spending must increase even further, and that the U.S should learn from Europe and expand the welfare state to French dimensions are respectable views. But they are not economic libertarian views, by any stretch of the imagination.

On issue after issue, Bartlet agrees with the leftist economist position and attacks and ridicules the libertarian position. The attacks might be taken more seriously if he used original or thoughtful arguments, but he is just repeating liberal talking points (taxes don’t matter, the welfare state does not harm economic activity, America should learn from Europe etc etc)

His main selling point for his unimaginative rehash of the standard progressive opinion is that Bruce Bartlett, unlike the other run-of-the-mill liberals, was once an advisor to Ronald Reagan.

Why would we grant him the credibility of being part of the libertarian movement if he clearly no longer believes in those ideas, and instead want to implement the opposite policies to libertarianism?

You cannot honestly market yourself to the Economist or to Forbes as a part of the right criticizing the right’s policies, if every single opinion you have is identical to liberals.

Bartlett is to the left in virtually every issue that he advocates for, but still wants to market himself as a “libertarian”?

On what ground?

Bruce, you are not fooling anyone, or at least not me. What you are doing is a deceitful exploitation of the libertarian brand, built by people much better than you, for your own personal gain.

Wednesday, August 11, 2010

U.S and European tax policy, and misunderstanding the Laffer curve

Dylan Matthews on Ezra Klein's site writes an interesting article asking some economists what the revenue maximizing tax rate is.

The answer from the conventional wisdom of public-finance economics is about 60-70%. This is based on relying on current estimates of the short term estimates elasticity of taxable income, measured in micro-studies where different people get different tax changes. This is also what I have been taught. However as the work of Raj Chetty has shown, due to costs of adjusting to tax rate these comparisons probably underestimate the responsiveness to taxes. I think if Dylan Matthews asks the same question 10 years from now the answer will have changed somewhat.

What strikes me most however is the answer by Bruce Bartlett. At one point, Bartlett was on the right. But people occasionally change ideology. Currently Bartlett is best described as a European style Social Democrat. Most of what he writes are attacks on the American right, demands that taxes be raised, defense of President Obama, meanwhile pretending he is on the right in order to get more media attention (a Social Democratic attacking free market policies is not news, someone pretending to be a “right-winger” doing so is).

Dylan Matthews knows this perfectly well, and is therefore quite dishonest in classifying Bartlett as on the “right”.

Bruce Bartlett thinks the revenue maximizing tax rate may be 83%, higher than any of the leftist economists Klein interviewed.

The important paper from Uhlig that Bartless cites is interpreted by most economists as a strong case in favor of lower taxes, not higher taxes. Harald Uhlig is a brilliant U-Chicago macro-economists. As a rule of thumb macro-economist conventional wisdom believes in higher responsiveness of economic activities to taxes than micro-economists and therefore that taxes are more distortive than micro-economist think.

Uhlig believes that Europe on a whole is quite close to the top of the Laffer curve, especially on capital taxes.

He also thinks that taxes in the United States can only go up by less than one third before the U.S. hits the revenue maximizing rate. This is not enough to fund the massive new welfare state that the left is trying to build.

Now, remember always that the criteria for an optimal tax rate is not to maximize revenue. Long before the revenue maximizing rate is reached, the government is destroying 2 dollars or more from the private sector just to collect 1 dollar for the public sector.

The marginal government expenditure it is quite unlikely to produce twice or several times as much social good than what is spent.

Uhlig thus concludes that “In the EU-14 economy 54% of a labor tax cut and 79% of a capital tax cut are self-financing.”

A 54% self-financing tax cut means that if the state puts more than 2$ in the pockets of the tax-payers, government spending only has to go down with less than 1$. Sounds like to pretty sweet deal to me.

A 79% self-financing tax cut means that the state can give 5$ to the private sector with only a loss of 1$ for the public sector. Only fools or committed socialists would defend this rate of taxation.

This is evidence of a deeply dysfunctional system, not something the United States should emulate, as Bartlett wants to do.

We can rank the social value of everything the state spends on from best to least necessary. Sure, there are some public expenditure items that may be worth 5 times what they cost, such as (say) police and cancer research. But in countries where 40-50% of national income is public (the United States is getting close to this as well), there are lots and lots of marginal forms of public expenditure, such as subsidies to leisure activity, subsidies to weak sectors and agriculture, various forms of unemployment and sick leave expenditure.

The social benefit of these activities are hardly worth 2-5 times what they cost.

Many people do not not really understand the Laffer curve. They think as long as we are to the left of the revenue maximizing point, everything is fine. The left seems to think that preferably we should be exactly on top, maximizing revenue as a share of GDP.

But getting close to the top of the Laffer curve means that we are exponentionally getting closer to an infinite marginal cost of government activity. At the top, that is the cost of government activity. After the top we are in negative region, every tax dollar destroys lots of private activity as well as lowering public sector activity.

Let me also give you a simple graphic illustration of tax rate and tax revenue in the U.S and western Europe (defined as the EU-15 minus Luxembourg that Trabandt and Uhlig provide data for, and assuming that workers on average spend all what they earn).

We all know that tax rates are higher in Europe than in the United States. But we also know, or should know, that the U.S is far richer than Europe. Tax revenue is a function of tax rates and of per capita income.

The OECD provides data on taxes as a share of GDP, and on per capita GDP. This gives us the relevant variable for determining public expenditure, which is tax revenue per capita.

In the latest available year, 2007, per capita tax revenue for Western Europe was 13.440$ .

For the United States, it was 13.140$, or only about 2% less. You can see this in the figure below.

However according to Uhlig the average of labor and consumption taxes are 51% in Europe and only 31% in the U.S, as seen in the second figure.

American tax revenue per capita is thus only 9% lower than for example France, even though the average French worker pays 50% of their income in combined labor and consumption taxes compare to 31% for the average American worker.

Which society do you think should want to emulate the other one? Or are we supposed to think high tax rates have intrinsic value, even if they only give rise to mediocre tax revenue?

Friday, August 6, 2010

Wilkinson and Picket in Full Retreat

Having suffered a number of devastating blows in their public debate with us, Wilkinson and Pickett now appear to be in full panic mode. They have made a bizarre declaration on their homepage demanding that "all future debate should take place in peer-reviewed publications"!

This is yet another abuse of the trust that the general public places in

* The very book we are debating, “The Spirit Level”, was not peer-reviewed.

* The principal conclusion of the book, namely that weak correlations between health and inequality constitute “evidence” of a causal link, was never peer reviewed.

* When Wilkinson and Picket lied about the work of Nobel prize winner James Heckman, that was not peer-reviewed. Recall that Heckman, upon learning how Wilkinson and Picket cited his article, called it a "misrepresentation of my work". Lies like that would not make it through peer review in serious journals.

* When I pointed out that there was no statistically significant relationship between life expectancy and inequality, in any sample of countries, with any measure of inequality, from either the U.N or the OECD, and forced Wilkinson and Picket to admit in the Wall street Journal that the strongest claim in their tour was simply wrong, there was no need for peer review.

*It is simply not an appropriate or standard code of conduct in academia to demand that a policy debate be peer-reviewed. Arguments should be evaluated on their own merits. Someone purporting to be a scientist ought to understand this.

When Nobel prize winning scientists in serious fields, such as (say) Milton Friedman or Paul Krugman engaged in a policy debate on issues of relevance to the broader public, they never claimed that the debate should only be peer-reviewed. Have you ever previously encountered such a claim? I certainly haven't.

But these two Nottingham and York professors, from the soft field of social medicine, have the audacity to attempt to try to silence the critics of their shoddy work by demanding peer-review in a public debate?

Why would I need peer-review to point out - for example - that more serious work by more senior scholars in far more prestigious journals comes to the opposite conclusion of Wilkinson and Picket? Economists already know this. They can read the original work themselves. Economists and anyone with elementary statistical training knows also that "association" (the criteria used by W&P in their survey article work) is not the same as proving causation (the claim W&P make in their book).

Of course everyone knows why they are making this comical demand. It takes time and effort to publish peer-reviewed articles and few serious social scientists have any incentive to point out the obvious flaws in Wilkinson and Picket's book. It is simply a lot of extra work which yields few rewards.

People who are winning debates rarely try to end them.

Wilkinson and Picket are hoping that we will give up debating their lies, stop pointing to their cherry picking of data and misrepresentations of the state of science. However, unsophisticated non-scientists such as Swedish Social Democratic party leader Mona Sahlin can perhaps be fooled about what is the norm in science and believe that our critique should be discounted because Wilkinson and Picket say so. After all, they are professors.

My response to Wilkinson and Picket demand that "all future debate should take place in peer-reviewed publications" is simply this: It is not for you to decide how I choose to point out the distortions in your book. But if you promise to limit your self-promoting book-sale tour aimed towards the general public to "peer-review", I will limit my critique of your campaign to academic journals. If you continue to make false claims in public, I will continue to expose your false claims in public.

Sounds fair, right?

Also, here is a challenge. Manage to publish in any serious (say, top 50) economics journal your claim that inequality causes mortality. If you can do that we will attemp to respond in a peer-reviewed publication.
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