It’s one thing for Krugman to tell us what the Republicans or people at the Heritage Foundation are “really” after, etc., but it’s quite another when he just makes stuff up about objective economics literature. In a recent post lambasting Greg Mankiw (who won’t just admit he’s a moral monster like a man), Krugman writes:
[T]he case for zero or low taxation of capital income rests on very strong, very unrealistic assumptions — basically perfectly rational intertemporally optimizing agents, with dynasties behaving as if they were infinitely lived individuals. Question those assumptions, and the whole case falls apart.
The thing here is that the standard case for, say, a flat tax on consumption–meaning zero taxes on income, including dividends and capital gains–pops out of a simple two-period model. You don’t need a perfectly rational agent who lives forever, you need an agent who can look ahead one period and who realizes “If the government taxes my interest income, that makes future consumption less attractive on the margin than sheer considerations of time preference would suggest.”
I’m not being coy here. I actually had to alter my discussion in a Flat (Income) Tax report (before it had been released–it was still in the review stage) I did for Pacific Research Institute because I realized I wasn’t handling this issue properly, after I got feedback from a mainstream tax economist. So if consideration of a simple two-period model made me “get” the standard mainstream economist’s case for a flat consumption tax, such that I actually told the graphics people I needed to tweak a few sentences, then you should get a sense of how I feel about Krugman’s claim above.
In a post the next day, Krugman goes on to claim: “[W]e don’t actually know much about how to produce rapid economic growth — conservatives may think they know (low taxes and all that), but there is no evidence to back up their certainty.”
Hmm I guess Krugman missed this empirical paper (in which the authors, to my knowledge, do NOT use a model relying on hyperrational agents with infinite time horizons), which concluded:
Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent. Third, investment falls sharply in response to exogenous tax increases. Indeed, the strong response of investment helps to explain why the output consequences of tax changes are so large. Fourth, the output effects of tax changes are highly persistent.
That paragraph comes from a 2010 publication in the top-ranked journal, the American Economic Review. The authors were David and Christina Romer.
If there’s zero evidence that cutting taxes leads to economic growth, it’s amazing I was able to generate such a long essay at EconLib listing it.
Last thing: I am sure someone will defend Krugman by saying, “He said there’s no evidence to back up their certainty, not that there’s no evidence for their conclusion.” But again, if that’s the route you wish to take, then please give Krugman yet another award for breaking his own record of Most Misleading Blog Post of All Time. Krugman certainly didn’t produce quotations from conservatives saying, “I would bet my firstborn son that cutting tax rates produces faster real GDP growth,” rather he just invented a generic position and then said there is “no evidence” to back up what conservatives think they know.
UPDATE: Ken B. in the comments was pushing back on my claim that Krugman just “makes stuff up” about the optimal tax literature. It may interest some of you to see what I wrote in reply:
Ken B. I am not going to get into a discussion with you about this. If you follow Krugman’s link you will see where he is coming from, but I think those authors are being obtuse. Look, I am perfectly confident in saying, “The optimal tax literature says it would be insane to levy a sales tax on bananas at 90% but on apples of 2%.” Yet, every single model in the literature would rely on unrealistic assumptions that were violated empirically as documented by the behavioral econ guys. And I could come up with another model in which aliens said, “We will blow up Earth unless you all tax bananas at 90% but apples at 2%.” Then lo and behold, I would have completely blown apart the result, since in my new model–which doesn’t stick to all of the rigid and unrealistic assumptions in the conventional literature–the social planner does indeed set optimal tax rates that way.
If you think I’m suffering from Krugman derangement syndrome, look at the PPS in Sumner’s blog post. He goes nuts on Krugman too. So if you want to argue with somebody and defend Krugman, see if Sumner has the stamina.