22 November 2011

Whose Money is it Anyway

The World's Greatest Thinker writes about a paper published by Peter Diamond of MIT and Emmanuel Saez of Berkeley discussing optimal tax rates on top earners.

The authors tip their hand right form the get-go stating that:

Models in optimal tax theory typically posit that the tax system should maximize a social welfare function subject to a government budget constraint, taking into account that individuals respond to taxes and transfers. Social welfare is larger when resources are more equally distributed"

So the tax system is in place to maximize social welfare. A sentiment, no doubt, that our beloved Super Genius embraces whole-heartedly.

Krugman then goes on and does everyone a favor by constructing three straw men he foresees as objections to the maximum tax rates on "high earners" suggested by the authors. His focus is on his third straw man: "You'll kill job creation!"

But I want to focus on his first, or rather, his response. His first straw man is, "Theft! Tyranny! OK, I hear you. This can’t be argued on rational grounds; I think there are a lot more important moral issues in the world than defending the right of the rich to keep their money, but whatever."

The fact that one can 1) think that taxation is theft, and 2) argue the point rationally is incomprehensible to Krugman. But the point is that, especially considering his readership, anyone who thinks that taxation is theft is irrational, because he says so, QED. And even if it were rational, it doesn't matter because he can conjure up other injustices or immoralities. By this logic, we needn't address any injustice because there will always be other injustices.

But he makes the point himself, "The right of the rich to keep their money." It is their money, legally obtained. I'll grant that a certain amount of taxation is necessary for society to function. But the rate should be kept as low as possible and people should be encouraged to fight to keep every cent they earn, avoiding taxation, legally of course, whenever possible. This is not greedy or irrational, it is perfectly understandable.

Oh, and the rate the authors think will optimize utility and not disincentivize those greedy top-earners? 70%.