In a post yesterday, Krugman took apart the irritating right-wing “job creatorz!” argument against high top marginal tax rates. He begins by describing reality:
The way Diamond and Saez do the analysis is to argue that because the rich are rich, their marginal utility of income is very low, which means that at the margin their income doesn’t matter for social welfare. So they should be taxed at the rate which maximizes revenue, which is 1/(1+ε) — where ε is the elasticity of labor supply from the rich. And since we have a lot of evidence suggesting that ε is quite low, the appropriate tax rate for the rich is quite high — 70 percent or more.
Krugman also has empirical evidence on his side, since a look back at the last half-century of American taxation shows little relationship between the top marginal tax rate and the rate of unemployment:
So the notion that it would be in our – the non-filthy-rich’s – best interests to keep slashing taxes for the filthy rich simply doesn’t comport with what actually happens when we do that.
But just for funsies, Krugman also calculates what the ideal top marginal tax rate would be even if it were true that the 1% are benevolent and wise job creators:
But what if the rich in their Galtian goodness supply something nobody else can? Call it J, for jobcreation. Doesn’t the imperative to encourage J mean that we should keep their taxes low? Actually, no.
The optimal thing, from the point of view of the non-rich, is to set a tax that makes the cost of hiring rich people to produce J equal to the true marginal cost of that J, a cost that includes the fact that buying more drives up the price of inframarginal purchases. And if you grind through, you find that the optimal tax is … 1/(1+ε). Even if the rich are uniquely able to supply the magic of jobcreation, they should face much higher taxes than they do.
And this is all perfectly standard economics — indeed, Econ 101.
Needless to say, the conclusion that we should draw from all this is that Jesus hates Paul Krugman.