Monday, March 9, 2009

Paul Krugman award for Intellectual Dishonesty

Paul Krugman is a smart guy, and presumably he understands economics, having been a John Bates Clark Medal winner and a Nobel Prize winner. But he clearly lets his leftish political views shape his economic commentary.

The Economist has written the following: "... his past columns reveal[s] a growing tendency to attribute all the world's ills to George Bush ... Overall, the effect is to give lay readers the illusion that Mr. Krugman's ... personal political beliefs can somehow be derived empirically from economic theory."

If anything, this understates Krugman's bias. For shamelessly and dishonestly using his stature as a world-class economist to justify and promote his personal political beliefs, Krugman is, in my opinion, the most intellectually dishonest economic commentator alive today.

I have decided to shine some light on intellectually dishonest commentary from time to time by copying an idea that other bloggers have used, which is to offer an award dedicated to the most well-known offender.

The inaugural winner is Dorothy Brown, a professor of tax law at Emory University, for her op-ed in the NY Times today about the unfairness of the preferential tax rate on stock dividends and capital gains (p. A23 of Mar 9, 2009 print edition).

Dorothy writes nine paragraphs explaining that the tax rate on dividends and capital gains is only 15%, -- in contrast to the maximum rate of 35% on ordinary income -- and that this is some crazy aberration which benefits rich people and penalizes poor people. The reader is led to believe that there is simply no rational basis for a preferential capital gains tax rate and furthermore that there would be no negative consequences to equalizing the rate at the ordinary income tax rate.

Given that Dorothy is a professor of tax law, we can assume that she knows the real reason behind the preferential capital gains rate. To wit, the earnings on C corporations are already taxed at the corporate level (35% rate) before they are distributed. Until either the corporate level tax is repealed, a corporate tax deduction is allowed for dividends, or a tax credit (a.k.a franking credit) is passed along to stockholders, the United States will remain virtually the only country in the developed world that taxes stock investors twice. I figure the least our friendly, neighborhood tax collector can do is give a small discount when he comes around for the second time.

Ironically, the real aberration in our tax code was that stock dividends were taxed at a higher rate than capital gains, which fortunately the Bush administration remedied in 2003. The aberration was causing corporations to hoard excess cash, or at best use it for stock buybacks (which strikes me as rather inefficient and less than transparent) instead of paying it out to shareholders.

I am looking forward to Dorothy's next op-ed in which I expect she will decry the unfairness of municipal bonds. After all, the rich are paying zero tax on the interest! I'm sure that she can come up with a good solution, something along the lines of having an alternative minimum tax framework for people who have too much municipal bond interest income. Yeah, that's the ticket...


dj1234 said...

Good post. You wrote: "I am looking forward to Dorothy's next op-ed in which I expect she will decry the unfairness of municipal bonds."

People already do try to make this point, albeit in a disguised way. They complain that certain rich people are only paying 15% or 20% of their income in taxes, when (I suspect) that most of their income comes from munis. I've seen this complaint made in several newspaper articles over the years.

d nova said...

1st, no reason political views cn't get informed n even shaped by knowledge o economics, so i don't c krugman as hypocritical at all.

2nd, income, unless reinvested, is not capital. reduced capital gains tax rate is meant 2 encourage long-term investing rather than speculation. u cd eliminate double taxation (n motive 2 hoard cash) by corporate income tax only on undistributed net profit. shareholders shd pay full rate on dividends they don't reinvest: it's income! lower rate shd apply only 2 profit fro sale o asset after long-term holding.

not going 2 get in2 muni issue except 2 say there're good reasons they're tax-free.

ESM said...

To d nova:

1) Krugman is intellectually dishonest (not just hypocritical) because he makes economic arguments which he knows either to be false or misleading in order to advance his political agenda. As just one example, he used to rail against the budget deficits during the Bush years, but only because they were (in part) brought on by tax cuts for the "wealthy." I believe he knows that budget deficits are not inherently bad (in fact, I think he agrees with me that they are in fact necessary). He only used the "budget deficits are bad" argument to fight lower taxes on the wealthy because he believes in using government to level out income inequality.

2) I don't understand the distinction you're making between uninvested income and capital. I would like to address what I believe is a common misconception about the long-term capital gains tax rate:

I think most economists would agree with me that it is actually harmful rather than beneficial to encourage investors to hold stocks for a long time. Why distort the market? If investors come to believe that a company's stock is overvalued, then it is efficient for them to sell it and invest their money in a better prospect. Why should investors be incentivized to hold a position when they think they have better use for the capital? The incentive to hold stocks for at least one year is clearly an inefficiency.

Now, you might ask, why does the government encourage a one year holding period by creating a preferential long-term capital gains tax rate? The answer is that it was to prevent securities dealers, brokers, and traders from benefiting from a lower capital gains tax rate when their income from trading securities is properly considered business income.

Somehow this pragmatic distinction has morphed into a belief that the tax system is designed to encourage long-term investing. It simply isn't true.