Brackets Baby, Brackets

I don’t hate Megan McArdle as much as a lot of people do, although I suspect that’s mostly because I don’t read her blog all that often. But it does seem like every time I do, there’s some really, crazily, dumb statement to be found within 5 minutes or so. Here’s her “explaining” optimal tax ideas and how they relate to richer folks:

Take an extreme example.  The top 1% of households, about 1 million in all, have about 20% of national income.  They’ve also experienced most of the income gains in the last twenty years.  So let’s say we want to fund federal operations entirely out of their pockets.  Well, to do so, we’d need an income tax rate of 100%.  Even ardent liberals will surely concede that at these levels, the supply-siders are right, and we’ll soon end up with no tax base.

Even a less extreme example–make them pay half the tax burden–ends up with a 50% effective rate on high earners.  And to get a 50% effective rate, you need an even higher marginal rate.  The problem for people who want to load tax increases on these people while cutting taxes for everyone else is that if you actually succeed in shifting the tax burden this way, you’ll rapidly end up on the wrong side of the Laffer Curve. 

You’d really think that someone who gets paid to blog about economics for a major, elite, magazine would understand how marginal tax brackets work. To put it succinctly, we don’t tax people, we tax income. And the idea is to put the tax burden on income with the least marginal propensity to consume. That’s why a progressive tax system makes sense, economically, because the higher up the income ladder you go the less likely each dollar is to be put towards consumption. It’s also why tax cuts for the rich make little economic sense, because at higher income levels those tax cuts are less likely to find their way into economic stimulus, and are simply more likely to find their way into some mechanism of savings. Now I understand that a lot of people who get their economic lessons from Limbaugh & Hannity aren’t going to know this, but you’d think the The Atlantic’s resident econ-blogger would.

Although I do agree with her subsequent point, that even Obama isn’t paying particularly good attention to budgetary reality.