Wednesday, September 26, 2012

Many Economists Question that Capital Taxes Should be Lower

Since I have belabored this point often in the past, I felt like I should share a link to a rather more prominent blogger on how many economists do not share the idea that capital taxes should be lower than other taxes. The post is framed as a critique of claims regarding Mitt Romney's taxes, which is something I don't really care about.

What interests me is this,

Matthews rests his case on some arguments in the literature concerning scenarios in which we both look to an infinite future horizon and we have identically situated individuals, meaning that we all have the same wealth and the same opportunity to gain income. When these assumptions are relaxed, the case for preferntial treatment of capital income becomes considerably weaker, as argued in a recent Journal of Economic Perspectives article by Peter Diamond and Emmanuel Saez, two of the most prominent public finance economists in the world.

I've mentioned this before, but had to reference fairly specialized economic literature that I couldn't link to. Having something I can share is a great improvement.

This did lead me to ponder something. In the public finance and taxation literature, it seems rather common to question the assumption about the benefits of low capital taxation, or at least to limit claims regarding those benefits. However, it remains common for economists, and even the educated public, to profess the idea that capital taxes should be lower as common knowledge.

My working explanation is based on when I was in grad school, though since I only went to a Masters degree take the following with a grain of salt. Something I heard from some professors was that graduate students were most up to date on some subjects, it just wasn't possible to keep up with everything when someone had a career and specialty to work on. My hypothesis is that many of today's academics were trained in the 80s and 90s when it was widely accepted that low rates of capital taxation were ideal. This particular specialty has moved on from those conclusions, however, those with other specialties are relatively unlikely to have kept up with a specialty not their own. This means the substantial dissent within those focused on tax policy hasn't spread widely, particularly not to economists being contacted by journalists newspaper articles.

Working hypothesis, of course, but it is interesting how an interested amateur like me can easily find references that question the common wisdom in the literature yet this doesn't trickle down to people with an actual platform to spread their views, like journalists. Of course, another explanation would be elite mobilization, those with opinions favored by elites are given a platform to spread their views, those with unfavorable views have to find work that doesn't involve disseminating their point of view.

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