That the rich are taxed enough

JohnMaynardKeynes

Thanks to Stag and to our audience.

Framework

When we consider whether the rich are taxed enough, we must ask: what do we mean by “rich?” Rich means, according to Merriam Webster, “having abundant possessions and especially material wealth” (1). But there is no universal conception of this. A report from UBS showed that 4 out of 10 Americans with assets over $5 million or more do not think of themselves as rich (2).  The report argued that “[t]he idea that you’re rich, then, seems to have a lot to do with what kinds of things you’d like to do, rather than hitting some specific asset or income number" (2).  Another survey by the Spectrem Group also had conflicting results:  "Of the respondents, 45% said $5 million or more, 25% said $25 million or more, and 8% said $100 million” (3). Several studies seem to indicate that people view those with double their level of income to be rich (3), and a study by Skandia International found that these conceptions of what constitutes being “wealthy” also deviate significantly by country (4).

Thus, we should define “rich” with with generalized criteria. We can do this by appealing to the law of diminishing returns, or the notion that marginal returns to some factor will eventually decline (5), defining it as “someone who has reached the point of diminishing returns to income”—or, in other words, the person has reached their peak happiness in terms of income.

Also, you should read this resolution as a normative question—as it only implicitly addresses a policy question. It poses an “is” statement, rather than an “ought,” and the transition is causal at best. Therefore, we have a normative resolution and a dual burden of proof. Second, you should weigh economic arguments higher than moral arguments. Whereas moral arguments cannot be factually or functionally evaluated, empirical economic arguments can be. For instance, you should weigh the argument that “the rich will only be taxed enough when X condition is met because of Y” more heavily than “it would be unjust to tax the rich more because of Y.” 

Finally, our resolution is not country-specific, but it is imperative that both of us provide examples from specific countries in order to frame our arguments to attempt to glean an image of the rich as an aggregate. For instance, there may be counterexamples for both sides because countries are structured differently, but we should look to assess our cases based on a preponderance of evidence.

Arguments

C1:  Secular stagnation persists.

Secular stagnation is the notion that structural shifts have ushered in an era of lower trend real GDP growth as a “new normal” (6)--or, in other words, we'll be stuck with around 2 to 2.5 percent real GDP growth instead of the long-run average of 3 percent. Demographic factors have reduced the natural rate of interest--or the interest rate consistent with equating savings and investment at full employment--and led to an era of a persistent demand shortfall, barring structural reform. The optimal solution to this is not only fiscal stimulus funded by higher taxes on the affluent, but a permanent fiscal expansion. I'll first lay out and prove stagnation, and then explain this proposal.

First, we see a significant slowdown in population growth in G7 countries (6). 

We get a similar story by looking at the change in working-age populations (7). In Japan, not only has its overall population shrunk for the third consecutive year, but its fertility rate is the fourth lowest in the OECD, its birth rate is one of the lowest in the world, and its proportion of people over age 65 has reached a global record (8).

Per World Bank estimates, this trend will likely persist. The Samuelson consumption-loan model tells us why this is important (9). It postulates that the natural rate of interest is equal to population growth--so, a declining population growth means a declining natural rate of interest, and thus more investment needed to reach full employment. We could take a Krugmonian interpretation (10), and argue that a decline in population growth leads to a proportional decline in the natural rate, as Lawrence Summers has postulated that the natural rate is in fact negative. Put simply, less people working means less people consuming and thus less investment by businesses, lest they be left with a glut. Provided that sluggish population growth persists or even magnifies, this will be permanent. 

Next, let's consider the substantial downward revision in potential GDP--or the output economies could generate at benchmark levels of resource utilization deemed sustainable (11). A significant downward trend in long-run GDP growth estimates is discussed by Drechsel et al., 2012, (12). 

We see persistent downward trend from the 1970s on. But there's an interesting case in the US: In February 2014, the Congressional Budget Office revised downward potential GDP for the US by 7.3 percent (13). 

As Lawrence Summers argues, "it must be acknowledged that essentially all of the convergence between the economy’s level of output and its potential has been achieved not through the economy’s growth, but through downward revisions in its potential...the economy is now 10 percent below what in 2007 we thought its potential would be in 2014. Of that 10 percent gap, 5 percent has already been accommodated into a reduction in the estimate of its potential, and 5 percent remains as an estimate of its GDP gap. In other words, through this recovery, we have made no progress in restoring GDP to its potential" (14). 

Moreover, even the FOMC in their recent Summary of Economic Projections predicts that real GDP will grow only 2 to 2.3 percent over the "long run" relative to the 3 percent long-run average (15). We can even see that markets are forecasting sluggish growth moving forward, bidding down the 30 TIPS yield--or the (real) rate at which participants will lend to the government over a 30-year period (16)--to only 91 basis points.

A similar story can be seen by looking at market-based measures of inflation expectations, such as the 10-year TIPS spread, which has been falling dramatically and is now at 1.65 percent (17). 

The takeaway from this is that even market participants are expecting, over the long run, slow growth and low inflation--and these expectations are obviously self-reinforcing. Obviously if you expect low inflation, you save more, which applies downward pressure on Treasury yields.

And, though the labor force participation rate in the US has declined substantially, from 66 percent pre-recession to 62.8 percent now (21), much of this is structural in nature. Goldman Sachs conducted a review of the relevant literature--14 studies--and found that the median median suggests that 1.6 percentage points of the decline was structural (22). For instance, a recent paper from the Board of Governors from Aaronson et al., 2014, found that as much as three fourths of this decline is structural(23). The takeaway is that failure to act aggressively--such as, for instance, public investment in job training programs--will exacerbate this problem. 

Finally, let's discuss income inequality with a focus on the US, where income inequality is worse now than it's been since 1928 (24) (14).

This is compounded by a falling cost of capital equipment--reducing required investment and increasing corporate retained earnings--and by the significant rise in corporate profits to all-time highs (14)(25), as the following graphs show (14).

For a gauge of inequality, let's look at the Gini Coefficient, which has increased since the recession--note that a 0 is "perfect inequality" and a 1 is perfect inequality. The U.S. currently is at .476. (26).

Now, why should we care? Because, per Christopher Caroll, the marginal propensity to consume for lower-income households is far greater than for higher-income households (27). So, as the income distribution is skewed in the favor of higher-income individuals who are more likely to save than to spend, the result is a persistent shortfall in demand. 

Because these factors are going to persist, and will persist largely due to the the continued malaise resulting from the Great Recession, it is urgent that we address this with a permanent solution rather than a band-aid. Monetary expansion cannot last forever; not only is current monetary policy insufficient to achieve full employment, meaning that it would need to be even more expansionary--costing central-bank credibility and anchored expectations, and leading to market volatility--but it has the potential to spur financial imbalances, as underpriced risk leads investors to "reach for yield," which could effectively bring on yet another Great Recession. Moreover, even a doubling of the monetary base in Japan and nearly tripling it in the US hasn't done much to raise inflation and return employment to desirable levels (28). The solution is for the federal government to raise taxes on the truly affluent and fund job training programs to ameliorate hysteresis amongst the long-term unemployed; single-payer to account for the persistently rising costs of healthcare, which would in fact save money over the longer run because Medicare has significantly lower operating costs than private insurance (29); education and research to ameliorate sluggish productivity growth and the high cost of college, as well as the possibility of a skills mismatch shown by a persistent shift the Beveridge Curve which has yet to fully revert back to pre-recession levels, as shown by Hobijn and Sahin, 2012 (30); infrastructure, which is crumbling (31); and more. Only then can we generate the necessary demand at a relatively higher natural rate of interest consistent with financial stability. 

With the remaining space I have, I'll offer a few more contentions. 

C2: Ameliorates income inequality

Stiglitz makes a comeplling case against income inequality which extends far beyond the MPC argument raised earlier. He argues that it hinders tax revenue, preempts middle-class consumption consistent with a self-sustaining recovery, stifles innovation by promoting asymmetries of educational attainment, and spurring speculative activity which leads to boom-and-bust cycles (32).

C3: Would NOT be harmful, on net, to the US economy 

A myriad of work suggests that tax hikes of the kind I propose would not hinder economic growth. 

Hungerford, 2012: "The results of the analysis in this report suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top statutory tax rates appears to be uncorrelated with saving, investment, and productivity growth...However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution" (33).

Krueger and Kindermann, 2014: "[W]e have numerically characterized the optimal marginal earnings tax rate (τh) faced by the top 1% of the cross-sectional earnings distribution. We found it to be very high, in the order of 90%, fairly independently of whether the top 1% is included or excluded in the social welfare function, and independently of whether transitional or long run welfare is considered (34).

Fieldhouse, 2013: "Analysis of top tax rate changes since World War II show that higher rates have no statistically significant impact on factors driving economic growth"private saving, investment levels, labor participation rates, and labor productivity"nor on overall economic growth rates...Recent research implies a revenue-maximizing top effective federal income tax rate of roughly 68.7 percent...This would mean a top statutory income tax rate of 66.1 percent, 26.5 percentage points above the prevailing 39.6 percent top statutory rate" (35).

Diamond and Saez, 2011: "[T]he optimal top tax rate using the current taxable income base..would be `4;* = 1/(1 1.5. " 0.57). = 54 percent, while the optimal tax rate using a broader income base with no deductions would be `4; * = 1/(1 1.5. " 0.17). = 80 percent. Taking as fixed state and payroll tax rates, such rates correspond to top federal income tax rates equal to 48 percent and 76 percent, respectively" (36).

Finally, as Yellen (37) and Bernstein (38) argue, globalization has eased supply constraints to a great deal, shifting the aggregate supply curve out. Ultimately, this means firms are more capable to bear the costs of a tax hike.

References

(1) http://tinyurl.com/2c7vdkd

(2) http://tinyurl.com/mu8bg87

(3) http://tinyurl.com/l6oxjyv

(4) http://tinyurl.com/mdeqecy

(5) http://tinyurl.com/ydcw25r

(6) http://tinyurl.com/qjx4a92

(7) http://tinyurl.com/pnelkjw

(8) http://tinyurl.com/knl2ycn 

(9) http://tinyurl.com/qycx2uv

(10) http://tinyurl.com/kcf44kp

(11) http://tinyurl.com/klb4c2w

(12) http://tinyurl.com/kc2exe8

(13) http://tinyurl.com/p4v3kro

(14) http://tinyurl.com/pyzw9e3 

(15) http://tinyurl.com/njm7fuz

(16) http://tinyurl.com/npx7a4y 

(17) http://tinyurl.com/kulurv7

(18) http://tinyurl.com/p68y4l5

(19) http://tinyurl.com/otsme3e

(20) http://tinyurl.com/qbrqv76

(21) http://tinyurl.com/m4ua3v2

(22) http://tinyurl.com/lsawknw

(23) http://tinyurl.com/ldgacux 

(24) http://tinyurl.com/kb7ly4k 

(25) http://tinyurl.com/p9ay993

...

JohnMaynardKeynes

Thanks, Stag.

HOUSEKEEPING

Some of my sources from last round cut out. They can be found here and in cross-ex.

FRAMEWORK

Here, PRO only challenges that we should weigh economic arguments higher than moral arguments. Here's why you should prefer my framework. First, he fails to show how morality has more of an impact on humanity. Economic impacts are clearer, and can be functionally and factually evaluated, whereas moral impacts cannot. We can clearly see the impediments to liberty if economic growth stagnates--e.g., flat real wages result in fewer choices and less innovation, and reduce welfare--whereas PRO can only provide vague platitudes as to how my plan would be deleterious. Second, he fails to establish an optimal moral framework, or to account for objective morality, at least insofar as we can evaluate it. Third, he claims that morality defines humanity, but disregards that there is no way more fundamental by which morality manifests itself than in the economic system we devise. In reality, humans define morality insofar as we can conceive of it. My system controls for morality and more.

REBUTTALS

First, citing historical figures via appeals to authority will not a convincing argument make. We should consider not that X person said Y, but rather evaluate Y. I am going to address the lines rendered by PRO as though he himself were making these arguments—either by addressing the argument itself, or by balancing it with further context.

PRO renders a line from Hamilton, conceding to the necessity of government—that people cannot be expected to act perfectly rationally without constraint, thus forming not only a rationale for government, but a framework by which the government can enforce laws. Much of Hamilton’s paper addresses the insufficiency of the government established by the Articles of Confederation (39). He wrote: “It is essential to the idea of a law, that it be attended with a sanction; or, in other words, a penalty or punishment for disobedience. If there be no penalty annexed to disobedience, the resolutions or commands which pretend to be laws will, in fact, amount to nothing more than advice or recommendation” (39).

Next, Hamilton supported an expansive view of the "general welfare" clause in the US Constitution (40) where the power for the government to raise money was "plenary and indefinite; and the objects to which it may be appropriated are no less comprehensive, than the payment of the public debts and the providing for the common defence and ‘general welfare’” (41). George Washington supported this interpretation, signing legislation that provided housing, food, healthcare, and education to the poorest citizens that was continued by Adams and Jefferson (42). They realized that the government has the responsibility to aid people in need, and that positive freedom--"the capacity of a person to determine the best course of action and the existence of opportunities for them to realize their full potential" (43)--matters. If, for instance, you haven't the capacity for survival because you lack adequate nourishment, freedom from constraint matters not to you. PRO, during cross-ex, defined liberty as "the allowance to make a choice." However, if you cannot afford healthcare, you don't have the ability to make said choice--if the government pays for it, you have the right to refuse it or to die, but without government intervention, the option was never available to you. If you're hungry, and someone offers you a sandwich, you have the option to deny it, but that in no way deprive you of your "right to be hungry."

PRO next emphasizes the principle of government "by the people." But this supports my case. During cross-ex, Pro remarked that my proposal would impact "popular liberties that the majority of people want to have,” endorsing democracy and majority rule as the basis not only for doling out certain liberties, but deciding which people ought to have. This leaves room for the government to establish and enforce positive liberties, such as the kind I'm advocating for--education, medical care, etc. Polling the American public, we find that these liberties are widely supported: 71% support investment in disease prevention (44); about 66% of Americans support single-payer healthcare (45); the vast majority of Americans oppose cuts to SS and Medicare (46); and about 60% support raising taxes on the rich (47).

Further, a study by Gilens and Benjamin, 2014, concluded the following: "In the United States, our findings indicate, the majority does not rule—at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites or with organized interests, they generally lose..even when fairly large majorities of Americans favor policy change, they generally do not get it" (48). Note that their data set is from 1981 to 2002, in the wake of a massive reduction in top tax rates, a massive rise in income inequality, and stagnating wages in spite of productivity doubling. It is clear that we are far from what the founders sought, but not from PRO’s reasons.

Moreover, he argued in cross-ex that, if the government were to deviate from his three (or four, if you look at his rounds) things, it would be too large and thus dangerous. But he hasn’t explained this when, as I've noted earlier, this actually increases freedom by giving people choices they would not have had otherwise. He conceded on the existence of government, and thus on the social contract, whereby we sacrifice some freedom for the sake of a greater end. The question is not whether people have absolute freedom to retain the entirety of their earnings or to live without constraint, as some constraint is necessary. The question is of degree--and it remains true that people are significantly less free without the capacity to make these choices. When people die from lack of health insurance or lack of nourishment or when poorer children are unable to attend college to contribute to society, we are all worse off. Not to mention, PRO fails to show that the elements of government I wish to fund would not qualify even under his system of government under public-sector alleviation.

Further, it is morally imperative--and the utilitarian solution--that government act to ameliorate suffering and maximize utility when it can, especially when, as I've demonstrated in the last round, there would be little if any negative ramifications on the economy. Moreover, in the example I gave during cross-ex, PRO concedes that both freedom and liberty are unaffected by the government funding healthcare for a poor man with a family to feed. In fact, his freedom and liberty are enhanced, and his moral responsibility to care for his family fulfilled, both of which are impossible under PRO's oligarchical system. His quote from Gerald R. Ford does not in any way support his case because it's nothing more than a reducto ad absurdum: I have never argued for a government that will give us "everything." Almost the entirety of PRO's case is predicated on this fallacy, and he fails to make a case for how my proposal would in any way be deleterious to freedom. He cites Reagan and Eisenhower, but fails to acknowledge that their presidencies featured government acting far beyond the scope he would desire, be it 91% top tax rates under Eisenhower and public investments in education and infrastructure, or Ronald Reagan's eleven tax hikes, 18 debt limit increases, or massive increase in the amount of federal workers (49), so his reference so these figures fall flat.

PRO claims that governments don't create laws to protect us from others but from ourselves. He fails to provide any evidence. Moreover, he fails to explain how a law protecting us from ourselves is necessarily undesirable. For instance, the Glass-Steagall Act, enacted in the 1930s, prevented banks from becoming so large that they took on too much leverage and crashed the economy for about 50 years (50). When we lifted those regulations under Clinton, the economy crashed, significantly reducing societal welfare and, thus, liberty. We could even consider that companies which operate legally, in their own self interest, trick consumers with complex financial instruments and fine print. The CFPB, established under the Dodd-Frank Act, has saved consumers about $4.6 billion (51). Again, this enhances freedom.

Finally, PRO claims that governments can function without much revenue and thus we should cut taxes across the board. He fails to account for the negative impacts from the spending cuts and this transitional period, the lives that would be destroyed, the loss of political capital, and the hit to positive freedom. He disregards not only the lack of pragmatism, but also that many governments--e.g., US and Japan--are already running large deficits.

DEFENDING MY CASE

PRO essentially drops my case. Moreover, he strawmans it, and falsely insinuates that I didn't address taxes more than once, which is simply wrong. My argument involves fiscal expansion because it's the reason TO raise taxes--in other words, what I would do with the money. My case addresses not only how and why I would fund this expansion--because we face, by virtue of structural shifts, a prolonged period of sluggish growth, which negatively impacts everyone through reduced wages, innovation, opportunity, jobs, as well as the deleterious impacts of income inequality--and why this would not negatively impact the economy. He claims that we're trying to "fix something that isn't broken," but I've explained why it's broken--because the policy response to the recession was far too inadequate, and as a result, we have a substantial amount of people who are long-term unemployed or involuntarily part-time employed, and that harms us all--and will continue unless we act. Further, he insinuates that I can take a stand on raising taxes without focusing on impacts, which is ludicrous. If anything, his insinuation that this is a debate over the "morality of a large government" is off the mark, because his definition of what constitutes "large" and thus "dangerous" is vague and loosely defined, and the programs I want to fund would even fit into PRO's conception of what government ought to do. Note that PRO fails to touch any of these contentions or provide anything at all to balance against them, so I extend my case.

He goes on to address what he deems injustices such as banning drugs or certain magazines, but these are completely non-topical, ironically. These have nothing to do with whether or not we ought to raise taxes, nor must I endorse these in order to win. As I noted during cross-ex, taxes are not the vehicle of corruption, nor do they increase the power of government--rather, the will to do wrong must have already existed, and that would find other funding sources independent of tax rates. In fact, a truly corrupt government would likely be funded by offshore terrorist organizations, rather than through a system of taxation which fund social services and other things people desire and depend on, such as SS and Medicare. I'll also cross-apply my evidence earlier on Glass-Steagall and the CFPR to address his remarks on "protecting us from ourselves," and on the obfuscation of democracy, which I solve for but PRO fails to. The public, as noted, largely supports my proposals--but not PRO's oligarchical regime.

PRO goes on to address government abuses which result from the fact that man is imperfect. But these remarks are non-topical and irrelevant and, again, solved by my contentions on democracy--whereby, if a leader is corrupt, he or she will be removed from office. Again, PRO is attempting to make a categorical argument against government, but himself concedes the necessity of it, whilst blurring the line between his own proposals and mine. If, truly, he believed government were corrupt, why should it fund X, Y, and Z without B? Shouldn't he be able to explain why B, but not the others, are corrupt? He could not do this during cross-ex, nor has he thus far. His argument lends itself to tearing down government in lieu of fixing it, which is not only inconsistent with his opening markets, but completely unrealistic and inducing far more problems than it solves for. The only argument he offers is "pride," and that by raising taxes, in some way we're reducing the government to a mere puppet. He fails to explain how.

PRO claims that taxes increase inequality increases inequality. This is ludicrous and unsubstantiated: raising taxes and funding social services, as my proposal does, is redistributing income from the top to the lower rungs of the economic latter, or the precise opposite. He claims that companies are "reimbursed" by people's dollars. How? Through subsidies and preferences from the government? They're gone under my regime, but exacerbated under PRO's, unless he would like to concede that we ought to lift them, and thus raise taxes.

He contends that raising taxes would not solve for inequality because it would simply circulate back to them via the government--e.g., subsidies. What he fails to realize, again, is that my plan, but not his, controls for this, and ensures that just this cannot happen. His remark is so ludicrous that he's effectively suggesting "the rich will always influence government, so let us concede, and give them what they want anyway." He concedes to the problem of inequality, as he does with slow growth and asymmetric influence of the affluent, but contends that there is effectively no solution--though I have offered one. He insinuates that I want to "throw more debt at the problem" but this simply is not the case. I want to spend the money productively, at a time when the affluent in countries such as the US, Japan, and South Korea on sitting on inordinate amounts of cash that they aren't investing or putting to good use (52), in order to boost growth. More growth means more tax revenue and lower deficits, and thus more leverage to invest wisely in things people need and want.

REFERENCES

26. http://tinyurl.com/mojbjrc

27. http://tinyurl.com/ovvl67c

28. http://tinyurl.com/kkw7nbl

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52. http://tinyurl.com/owfo232