Published On: Sat, Jan 28th, 2012

Higher taxes on investment income = more investment, Krugman claims

In reading Paul Krugman for more than a decade, I have come to the following conclusions about his economic beliefs:

  • State-sponsored investment is both morally and economically preferable to private investment;
  • Higher tax rates on investment return will result in more private investment;
  • These are mutually-exclusive beliefs, but nonetheless he expresses them both, but if there is to be a choice, it always is in favor of more state power.

Of course, Krugman also seems to believe that the greater the scope and scale of government police power, the freer people will be, at least if the Democratic Party controls the apparatus of government. In other words, the Police State in which government tells us what we can eat, what we should think, where we should live, what income we are permitted to keep, the form of transportation we should have, and so on, is a State of Freedom. (And if any dissenters can point out where Krugman publicly has stated otherwise, please let me know, but for now, I cannot say honestly that I ever have seen Krugman complain about the expansion of the Police Powers of the State.)

Krugman’s recent blog post which I want to examine is the one on taxes on investment income, where he writes:

As Ezra Klein says, the real issue raised by Romney’s maybe-revelation — are we sure that his tax rate is even as high as 15 percent? How much is shielded in tax havens? We need the returns — is the way our system allows those with very high income to pay substantially lower taxes than the upper middle class. If capital gains and other investment income didn’t receive special treatment, we’d be getting substantially more revenue. Why does our political elite talk only about cuts to social insurance, and not at all about raising more revenue from the upper tail of the income distribution? (Emphasis mine)

Given that Krugman and President Obama have called for a return to the 39.6 percent upper-income tax brackets (and Krugman on many occasions has intimated that it should be even higher), one can assume that Krugman also wants a near-40 percent levy on investment income. Now, given that his Keynesian beliefs permit him to assume that the Law of Opportunity Cost does not exist when government is involved, we safely can assume that Krugman believes that if investment income were taxed at about 40 percent, then there would be exactly the same amount of overall investment income that would be taxed.

In other words, a 40-percent tax rate would not discourage investors from putting even a penny less of investment, and that investment returns would not change. My sense is that Krugman believes that even if private investment were to fall, government could make up the difference with investing. Of course, everyone knows that government investments are made in “wise” things like “high-speed rail” in California (a true boondoggle if ever there was one), Solyndra, corn-based ethanol, electric windmills, auto industry bailouts in order to prop up the United Auto Workers, and so on. By moving resources from higher-valued uses to lower-valued uses, government works is “magic,” making us poorer, but apparently that is what Krugman believes is morally and economically preferable to anything that might advance private investment.

Furthermore, Krugman deftly changes “tax rates” to “taxes” themselves, which is what Obama also has been doing. No, Warren Buffet does not pay less in taxes than his secretary, and Mitt Romney does not pay less in taxes than do I. For that matter, I am sure that Krugman himself pays more taxes than do most of us. But there is a difference in tax rates and taxes, even if Krugman wants to confuse us on that subject.

The more I read of Krugman, the more I realize that he is just a pure statist. The corporatism that he espouses (government funnels money to politically-connected firms, with the financial markets essentially carrying out state-sponsored directives) has been seen before, whether in Mussolini’s Italy, Hitler’s Germany, and Peron’s Argentina. We know how those regimes went down, and ours will fare no better, and in the end, Krugman will blame private enterprise and call for even more statism.

Check out the “Krugman in Wonderland” posts here the Dispatch – click here

William L. Anderson is an author and an associate professor of economics at Frostburg State University in Maryland. He is also an adjunct scholar with the Mackinac Center for Public Policy as well as for the Ludwig von Mises Institute in Alabama.

Read more at “Krugman-in-Wonderland”


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About the Author

- William L. Anderson is an author and an associate professor of economics at Frostburg State University in Maryland. He is also an adjunct scholar with the Mackinac Center for Public Policy as well as for the Ludwig von Mises Institute in Alabama.

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