Paul L. Caron
Dean




Tuesday, August 13, 2013

Buchanan: What Legal Scholars Need to Know About Economic Research on Taxation

JotwellNeil H. Buchanan (George Washington), What Legal Scholars Need to Know About Economic Research on Taxation: The Evidence Thoroughly Debunks the Conventional Wisdom (Jotwell), reviewing Peter Diamond (MIT, Department of Economics) & Emmanuel Saez (UC-Berkeley, Department of Economics), The Case for a Progressive Tax: From Basic Research to Policy Recommendations (workshop here), 25 J. Econ. Perspectives 165 (Fall 2011):

Too often, policy research relies more on the misleadingly elegant results of economic theory than on actual evidence. Tax policy discussions, as I will describe below, are especially prone to being infected by this evidence-free approach to analysis. Fortunately, two of the best public finance economists in the world, Peter Diamond and Emmanuel Saez, have recently provided a much-needed antidote. ... [T]hey summarized the best available research and, based on that evidence, made three specific recommendations:

  1. “Very high earnings should be subject to rising marginal rates and higher rates than current U.S. policy for top earners,"
  2. “Tax (and transfer) policy toward low earners should include subsidization of earnings and should phase out the subsidization at a relatively high rate,” and
  3. “Capital income should be taxed.” ...

Diamond and Saez do not merely say that the evidence is lacking to support the conventional superstitions about taxes, but that the evidence supports the opposite conclusions: that marginal tax rates on high incomes should be increased, that lower incomes should be subsidized, and that capital income should be taxed.

Diamond and Saez are not writing on a blank slate. They are debunking received wisdom, exposing shibboleths that legal scholars need to un-learn if scholarship in taxation is to move forward, fulfilling its promise to guide policymakers toward wise decisions. For legal scholars with interests in tax policy, this is the essential article to read.

https://taxprof.typepad.com/taxprof_blog/2013/08/buchanan.html

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Comments

> By help of ingenuity I happened to be born in the wealthiest place of the world, and after hard work I succeeded in getting an IQ that secured me a place at a good university and landed me a job that pays so well that I do not need to spend it all ... and now they are penalizing me!

Things don't work that way. There are lots of Americans with high IQs and low income. And, there are lots of high income folks lacking one or both of those attributes.

Posted by: Andy Freeman | Aug 15, 2013 12:50:13 PM

An uncharitable reading of Buchanan's post seems to be: (1) I have economics training, (2) my economics training suggests you legal types shouldn't give inordinate deference to economists that I disagree with; (3) you legal types should defer to economists that I (did I mention my economics training?) agree with.

That brings to mind what the psychologist Daniel Kahneman (also winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) once said:

You need to have studied economics for many years before you’d be surprised by my research; it didn’t shock my mother at all.

Posted by: Yo Gabba Gabba | Aug 14, 2013 1:37:23 PM

@GSo - If you were dozing off at your current work, I doubt you would be making quite that much. If you think of the skills necessary to hold the job that you currently hold, then it is likely that only a small fraction of the labor force would have that. And therefore, complying with the even more fundamental reality of demand and supply - your employer has to pay you a certain amount.

Posted by: sbagchi | Aug 14, 2013 11:08:09 AM

"penalizing ingenuity, hard work and thrift"
In the absence of research on whether there is causation between wealth and these traits, I have to rely on anecdotal evidence. By help of ingenuity I happened to be born in the wealthiest place of the world, and after hard work I succeeded in getting an IQ that secured me a place at a good university and landed me a job that pays so well that I do not need to spend it all ... and now they are penalizing me!

Posted by: GSo | Aug 14, 2013 6:44:20 AM

OMG people doing real research and not complaining about law school!

Posted by: michael livingston | Aug 14, 2013 2:06:57 AM

Hey Paul - good job on growing the blog. I've been following for many years.

Okay - one thing your posting is overlooking is the moral implications of tax policy. Its one thing to argue that a tax policy is efficient or that a particular economic finding is supported by the evidence.

Whats also important is the moral dimension to the policy. For example why are you penalizing ingenuity, hard work and thrift? If you look at tax information its very clear that most high net worth individuals are small business owners - many of whom have worked hard for decades to get the level of income they've achieved. By arguing for higher marginal tax rates, you're essentially telling these people "sorry, your labor and efforts aren't important...what is important is the public good". So, what I'm trying to say its that its not a shibboleth at all - its important moral and ethical question especially for the people who've worked to get where they are.

Posted by: James | Aug 13, 2013 6:51:19 PM