The Agenda

Austan Goolsbee on High-Income Rate Reductions

Austan Goolsbee, by all accounts a terrific economist and good dude, talk to Ezra Klein about the Obama administration’s economic plans and priorities. On the high-income rate reductions, he writes:

EK: The CBO also said that extending all of the tax cuts, including those for income over $250,000, would do less damage to the economy than just extending the middle-class tax cuts. Obviously you disagree, but why?

AG: Having been a major player in, and studied the academic evidence on, how people respond to changes in tax rates, I don’t think the old-style argument that high-income people have big responses to small changes in tax rates is warranted by the evidence. Even a casual look at our experience in the ’90s and the 2000s suggests that high-income marginal tax rates aren’t the primary drivers of growth. Bill Clinton raised rates on exactly this group that we’re talking about, and it did not have a significant negative impact on the growth of the country. Then, in the 2000s, we cut high-income tax rates by as much as they’ve ever been cut, and we certainly did not experience a massive renaissance in economic growth. There should be a higher burden of proof on people saying that rates going up by four points on income above $250,000 will have a huge negative effect.

I’m happy to concede that the top marginal tax rate isn’t a primary driver of growth — population is one primary driver I can think of — but the claim that keeping marginal tax rates relatively low will encourage work effort is a different and far more modest claim. Given the headwinds facing the economy, I’d oppose high-income rate increases even if they only had a modestly negative effect. And though Goolsbee refers to an old-style argument, I’d suggest that there are new-style arguments about the long-run impact of increasing marginal tax rates that resonate with more with the old-style arguments than Goolsbee’s own slightly-less-old-style arguments. The discipline marches on! 

It’s also worth remembering that effective marginal tax rates will exceed Clinton-era levels due to tax changes enacted in the new health law and at the state and local level, and that the international economic environment has changed over the last twenty years. 

Overall, though, I was pleased with Goolsbee’s intellectual honesty. I don’t think he said anything he’ll later come to regret, and that is to his credit.

P.S. One thing that stuck in my craw: despite the staggering cost of the non-high-income tax cuts:

 

Ezra Klein: You guys attack the Republicans for pushing unaffordable tax cuts, but even your plan would add $3 trillion to the deficit over the next 10 years. How can we afford that?

Austan Goolsbee: Look at the decade the middle class has had, where middle-class incomes fell by $2,000 during an economic boom — a first in our history. That was followed by the worst recession since 1929. I don’t think, in that environment, you can afford to balance the budget on the back of the middle class. You have to address the long-term fiscal challenges facing the country through the bipartisan commission in some bipartisan way.

This actually does seem needlessly polemical and misleading to me. Later in the interview, Goolsbee rightly raises the bang-for-the-buck question. That is, if we want to enhance growth, should we spent $700 billion on the high-income rate reductions? That’s a legitimate debate. 

In a similar vein, however, it’s not clear that the $3.1 trillion in tax cuts that Goolsbee evidently supports represents the best approach to alleviating the burdens facing middle-income households. My own view is that preserving or indeed expanding the child tax credit makes sense, but that we should roll back all of the other 2001 and 2003 tax cuts to pave the way for comprehensive tax reform. Over the long run, this would do much more to enhance growth and improve the standard of living of middle-class families.  

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