“To be sure, there are a bunch of unhappy folk about this paper, but S-D are no slouches, and they have support in their corner, too. Krugman is an example, as is DeLong”

Their posts supported the idea that we should have higher MTR in the US – this is due to their subjective belief about the equity-efficiency trade-off.  This is fair enough, but I doubt they would support the inference of the S-D paper regarding what the equity-efficiency trade-off was in fact.

Posts by both of them on these sorts of issues are with regards to politics not economics – they would not want 74% MTR’s at the top, they just want to push the idea that MTR’s should be higher.

“And some of the criticism looks, at first blush, a bit shallow to me”

The money illusion goes into a whole bunch of issues he believes in – which is nice, and I do not agree with many of them.

However, the S-D assumption of little impact on human capital accumulation is indeed a poor one – in reality this is an empirical question.  This is a huge criticism of their figures.

This discussion of S-D is all much of a muchness as you say, you are interested in discussing the optimal equity-efficiency trade-off that is accepted in New Zealand.  Comparing us to other countries appears to assume that, on average, countries meet this – which in itself isn’t a fair assumption. 

The key way to figure out what we should do is to ask “what is the trade-off” and then “what trade-off does our optimal social contract entail” – this requires a direct tackling of optimal tax theory, and then a movement into defining a subjective “social welfare function or profile” for the country.  That is just the way we’d peak at things.

Still, I look forward to reading your book – I haven’t read the Big Kahuna yet either, so I’ll give both a go and then pop up my thoughts.  I can imagine jamesz may do similar.

That’s right – and now I remember that this is the paper that dismissed the impact of higher EMTR’s on human capital accumulation … a point that was so ridiculous and at odds with empirical evidence that I was going to post.  But then I noticed that almost everyone on the internet had already made good posts discussing that very point, so I went to sleep.

You might be referring to, for instance,

http://www.themoneyillusion.com/?p=12054

and

http://modeledbehavior.com/2011/12/09/stephen-williamson-on-marginal-taxation/

A wide range of authors were very unhappy with the Diamond and Saez paper – as it used a very static version of “optimal tax” theory, rather than the more widely accepted idea of using a dynamic framework.  This is one of the primary reasons why they suggested such a significant tax on capital (both in terms of a capital income tax AND in terms of high MTR’s on high income earners).

When I’m not as heavily pinned down by deadlines I’ll have a hunt around for the critical work I saw on these papers and pop up a link 😉

This paper presents the case for tax progressivity based on recent results in optimal tax theory. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. We critically discuss the academic research on these topics and when and how the results can be used for policy recommendations. We argue that a result from basic research is relevant for policy only if 1) it is based on economic mechanisms that are empirically relevant and first order to the problem, 2) it is reasonably robust to changes in the modeling assumptions, and 3) the policy prescription is implementable (i.e, is socially acceptable and not too complex). We obtain three policy recommendations from basic research that satisfy these criteria reasonably well. First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low-income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates. Third, capital income should be taxed. We explain why the famous zero marginal tax rate result for the top earner in the Mirrlees model and the zero capital income tax rate results of Chamley and Judd, and Atkinson and Stiglitz are not policy relevant in our view.

And a link to the paper: http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165
 
 
 
 

I guess I would rather look under the spotlight than shut my eyes.

I’m sure we would all agree with you there, Rob, although the strength of one’s conclusions obviously depend upon how much of the solution you think the spotlight illuminates. On that question, I think we may reasonably differ.

Some [tax regimes] are more efficient, in welfare terms, than others. Flatter tax regimes tend to be less efficient on this dimension.

That is a very striking conclusion you have reached, and certainly at odds with some conventional wisdom among policy-maker; not that that’s a bad thing. If we might tax your patience just a little further, would you be able to comment on how consistent your conclusion is with the optimal tax theory of economists such as Mirrlees, Diamond, and Saez? I don’t know the theory well but I’m aware that a lot of the arguments about the optimality of rising marginal tax rates revolve around the assumed distribution of ability. Does your book deal with their approach?