Wednesday 4 April 2012

A reason to increase taxes on the rich

Paul Krugman in The Simple Analytics of Soaking the Rich (Wonkish) argues that the rich should be taxed more:
The optimal thing, from the point of view of the non-rich, is to set a tax that makes the cost of hiring rich people to produce J equal to the true marginal cost of that J, a cost that includes the fact that buying more drives up the price of inframarginal purchases. And if you grind through, you find that the optimal tax is … 1/(1+ε). Even if the rich are uniquely able to supply the magic of jobcreation, they should face much higher taxes than they do.

And this is all perfectly standard economics — indeed, Econ 101.

So what’s the basis for claims that we must tax the rich lightly? Often, it seems as if conservatives believe that there are somehow big positive externalities to what the rich do; it’s as if they believe that industrial policy is nonsense, unless the industry in question is jobcreation by the rich, in which case loose arguments about huge spillovers are just fine.

But the simple analytics say that we should soak the rich, hard.

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