Man Without Qualities

Monday, December 30, 2002

UPDATE: The Two Ivory Towers

Jane Galt makes the excellent point that the Paul Krugman column discussed here claims that states are going to have to raise regressive tax rates in order to meet the latest crisis. Jane quite correctly points out that no evidence or argument is provided in the column to support the assertion.

And there is probably a good reason for that lack of support: The assertion probably isn't correct, if the following observations are correct:

Every state maintains a mixture of regressive and progressive taxes. Every interest group (including the wealthy and those of modest means) vie with each other in the legislature to impose costs somewhere other than themselves. An actual tax structure is a kind of topographical map of the relative political power of the various interest groups.

Why does that matter?

Because, as Jane and others point out, the current state deficits mostly come from increased spending - which were based on prior "assumptions" that then momentarily -enlarged capital gains tax streams would continue to flow indefinitely. Capital gains taxes on income from securities sales are paid disproportionately by the relatively wealthy. There is good reason to believe that those (wealthier) people who lost the last round in the legislative taxation game when it came to paying for the last round of state spending hikes will for the most part lose again if the legislature chooses to fund whatever programs are not cut through tax increases.

I cannot guaranty that the above analysis is correct. But I do guaranty that the question addressed is one for that area of economics known as "public choice theory" - a field which is mentioned in Paul Krugman's columns only rarely and normally only to be misused.

In contrast to empty and/or wrong Krugmanian non-predictions, one may find in the works of James M. Buchanan, probably the world's most important economist working in this field, a willingness to apply the principles of public choice theory to specific tax reforms. For example, Professor Buchanan was willing to go on the record to predict how Congress would behave after the 1986 federal income tax overhaul. - and most of what he predicted turned out to be correct.

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