Sunday, October 5, 2014

Horse nearly beaten to death

So you say you want to tax the rich? Sorry, Charlie, say Nezih Guner, Martin Lopez-Daneri and Gustavo Ventura;
In our baseline exercise we keep the ‘level’ parameter of the tax function at its benchmark value, and vary the parameter governing its curvature or progressivity, τ. For each τ, we compute a steady state in our economy and report on a host of variables. Figure 1 illustrates the effects on government revenues – federal and total – in relation to the benchmark economy. The figure clearly depicts a Laffer-like curve associated to changes in progressivity. Revenue from federal taxes is maximised when τ increases from its benchmark value (0.053) to 0.13. The associated increase in federal taxes is only about 8.4%, or about 0.9% of output in the initial steady state. At τ = 0.13, the increase in overall tax collections – including tax collections at the local and state level and from corporate income taxes – is much smaller: 1.6%.
Bold by HSIB above. And blame the usual suspect;
As τ increases there is a substantial decline in labour supply, the capital stock, and aggregate output across steady states. Aggregate output, for example, declines by almost 12% when τ = 0.13. Hence, the government collects taxes from a smaller economy and while revenue from federal taxes increases by more than 8%, the increase in total tax revenue is substantially lower. 
He who Laffers last....

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