More on taxes

I promised I would come back to why progressive taxation is good. Specifically, I claimed in my last post that progressive taxes probably do not, in practice, reduce the incentive to work. Those who belive that they do say that as taxes increase the relative value of leisure also increases, and thus individuals will increasingly choose leisure over work. This is called the subsitution effect. Against this, there is also an income effect that says that as individuals face an increasing tax burden, they will work harder to maintain the same wage (or even to attain a higher one). No one is really sure which of these two predominates, many imagine that they come close to cancelling one another. If we imagine a theorectical extreme of 100% taxation, it is (mostly) clear that rational individuals would choose leisure instead of work. (Keep in mind that this is not 100% taxation of all income earned, but only of income earned above a certain amount, say 1 million dollars). Opponents of progressive taxation also claim that if marginal tax rates are set too high, then total tax revenues will actually fall. If we return to the example of a 100% tax, and assume that it produces no tax revenue because individuals choose not to work, and then add another point of zero tax revenue at 0% taxation, and then imagine (concoct) a line between the two, we have what is called the Laffer curve. Laffer argued that somewhere on this line there is a point, call it t*, at which tax revenues are maximised. However, it is difficult to discern where this point is, and so rather impossible to say what effect increasing taxes will have. The central difficulty is in determining the elasticity of work with respect to taxation.

This sort of economics has been variously referred to as supply-side economics, Reaganomics, Chicago-school economics, voodoo economics, and "that trickle-down bullshit." It was tried by Reagan, but without the fiscal discipline that would have been the true test of supply-side theories. During Reagan's years, the US deficit reached strastospheric levels, thanks both to Reagan's fear of communism and penchant for science fiction, and also his inability to cut spending on social programs (the Dems controlled the House) as he would have liked. It's thus difficult to say whether the economic expansion that occured during the latter part of his presidency was created by the tax cuts. Since Keynes, many economists have argued that governments should spend their way out of recessions (Keynes called this 'priming the pump'). Supply-siders have also gotten themselves elected in our own home of British Columbia. Again, though BC has enjoyed outlandishly good growth the past few years, there are a host of contributing factors, many of which are more important than Gordo's tax cuts. (I must admit that my knowledge of BC's economy has waned significantly since I moved away. All of my pronouncements on it, though I believe them to be correct, should be checked in available literature before being taken as fact.)

But back to Federal taxes in Canada. Reaching back into my memory from when I took a Public Economics course, I believe that some respectable studies have pegged the peak of the Laffer curve at somewhere betwen sixty and seventy percent. So how about this for a mostly unresearched suggestion: add another marginal tax bracket of 65% for income above $500,000. The income threshold could be raised, or lowered, and it might be desireable to split the jump from 46.5% to 65% into two jumps.

One last thing: because few things are more corrosive to democratic society than dynastic succession, we should bring back the inheritance tax. Inheritance over a million should be heavily taxed. I'm inclined to assess taxes on the inheritor in the case of immediate children (the inheritance received by a child above 1 million is heavily taxed, say 50% or more), and on the estate in other cases. The threshold for taxation, like tax bracket cut-offs, should either be linked to inflation, or re-assessed every few years.

"The man who dies rich thus dies disgraced." – Andrew Carnegie