Casey Mulligan hammers a point I think is important
What is striking about the data is how little they changed over the years. Capital income rates were almost always between 4.5 and 6.0 percent. Although the population more than doubled, our economy grew by a factor of five or six, and tax laws changed many times, the owners of capital at the end of the 20th century were earning at rates much like the owners 50 years earlier.
Being in favor of a Rawlsian-esque redistribution scheme and wanting to tax capital are not equivalent positions.
It is true that many rich people are heavily invested in capital. However, it does not follow that the burden of capital taxation falls on the rich. Two powerful striking features of the past 60 years or so for which we have good data, is that the after-tax return to capital is relatively constant and the after-tax supply of labor is relatively constant (as a percentage of all labor in the country.)
This implies that taxes on capital reduce its supply so as to hold its after tax return constant where taxes on labor reduce its after tax return so as to hold its supply constant.
The result is that taxes on capital may be highly destructive while, within the range we’ve experienced over the last 60 years, taxes on labor have virtually no economic effect at all.
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Saturday ~ November 20th, 2010 at 7:55 pm
teageegeepea
“This implies that taxes on labor reduce its supply so as to hold its after tax return constant where taxes on labor reduce its after tax return so as to hold its supply constant.”
You’ve forgotten to write “capital” in there.
Scott Sumner argues that the estimates of low elasticity of labor in response to taxation are the result of too much short-run micro thinking. Scott Scheule presents Duncan Kennedy’s income-effect argument against taxation reducing labor supply here.
Sunday ~ November 21st, 2010 at 8:26 am
James
Did you mean to say, “This implies that taxes on CAPITAL reduce its supply so as to hold its after tax return constant where taxes on labor reduce its after tax return so as to hold its supply constant.”?