Friday, March 28, 2014

Greg Mankiw Argues That The Bush Tax Cuts On Capital Were Motivated By Economic Theory

Paul Krugman has picked up on Thomas Piketty's argument that a progressive tax on capital is needed to reduce the growth in income inequality.  Krugman argued that George Bush's tax cuts on capital gains and dividends were designed to benefit the oligarchy which owns the bulk of corporate stock.  Mankiw, who was a member of Bush's economic team, makes a different argument.  He claims that the Bush tax cuts were motivated by economic theory.  According to Mankiw,  the theory of optimum tax policy suggests that taxes on income and/or consumption are better than taxes on capital.  Certainly, Mankiw is correct in one sense.  The owners of capital believe that its a bad idea to tax capital.  Bush was sitting next to the founder of one our largest brokerages who suggested that a cut on dividends was a splendid idea.  I guess we have to decide whether Bush was more motivated by optimum tax theory or by Charles Schwab's suggestion.  Mankiw and Glen Hubbard, who was also an economic adviser to Bush, are prominent economists who are adept at finding ways to adapt economic theory to the interests of the super-rich.  Unfortunately, it is possible to find economic theories or research which can make the case for whatever policy one wants.

Mankiw supports his claim, that class interest had nothing to do with Bush's tax cuts, by pointing out the President Obama made only minor changes to Bush's tax policies when he took office.  It never occurred to him that the president had to deal with Republicans in Congress to make any changes in tax policy.  This is the political party of both Mankiw and Hubbard which is motivated more by optimum tax policy than it is by class interest.

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