Monday, March 24, 2014

Not Class Warfare, Optimal Taxation

Today's column by Paul Krugman is classic Paul: It takes a policy favored by the right, attributes the most vile motives to those who advance the policy, and ignores all the reasonable arguments in favor of it.

In this case, the issue is the reduction in capital taxes during the George W. Bush administration.  Paul says that the goal here was "defending the oligarchy's interests."

Really? As Paul well knows, there is a large literature in economics suggesting that an optimal tax system imposes much lower taxes on capital income than on wage income (or consumption).  I can personally attest that President Bush's economic advisers were well aware of this literature.

Note that when Barack Obama ran for President in 2008, he campaigned on only a small increase in the tax rate on dividends and capital gains.  He did not suggest raising the rate on this income to the rate on ordinary income.  Is this because Barack Obama also favors the oligarchy, or is it because his advisers also understood the case against high capital taxation?