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December 21, 2005

Dan Gross Is Unhappy with Ed Prescott

Dan Gross is offended by Edward Prescott on the op-ed page of the Wall Street Journal. So am I. Prescott is capable of much better work than this regurgitation of misleading Bushie talking points.

Dan Gross writes:

Daniel Gross: December 18, 2005 - December 24, 2005 Archives: [There's good stuff but] there's also a fair amount of junk in there.... [I]n the last couple of years, a huge differential has opened in the taxation between short-term gains and long-term capital gains. If investors were wealth-seeking machines that were highly influenced by differential taxation rates -- as Prescott argues -- then you would think that the opening of this differential would have a huge impact on investing and trading behavior. People would avoid taking short-term capital gains at all costs, and seek only to take long-term capital gains. Of course, precisely the opposite has happened in the two years since the tax regime on capital gains changed.... Prescott also slips into the intellectual dishonesty so common to this page, writing:

And this isn't about giving tax breaks to the rich. The Wall Street Journal recently published a piece by former Secretary of Commerce Don Evans, who noted that "nearly 60% of those paying capital gains taxes earn less than $50,000 a year, and 85% of capital gains taxpayers earn less than $100,000." In addition, he wrote that lower tax rates on savings and investment benefited 24 million families to the tune of about $950 on their 2004 taxes."

That's a nice way of playing with numbers. It may well be that 85 percent of the households that pay a capital gains tax of some sort earn less than $100,000. But that doesn't mean the benefits of capital gains tax cuts don't flow disproportionately to the ultra-rich. The real question to ask is: what percentage of capital gains taxes paid are paid by those earning less than $100,000. The answer: a heck of a lot less than 85 percent.... [P]eople making more than $100,000 probably pay 90 percent or more of the capital gains taxes.... Next, he's on to the deficits.

But shouldn't we worry about federal deficits? Isn't it true that we need to raise the capital gains and dividends rate to capture more revenue and thus help close the widening deficit maw? The plain fact is that last fiscal year the debt-to-GDP ratio (broadly defined) went up only 0.2%. If the forecasted deficits over the next five years are correct, it will begin declining. Tax revenues will rise as economic activity continues to grow -- indeed, this has been the case in 2005. Besides, to raise tax rates and thereby dampen economic activity seems a perverse way to improve our economic situation, including our level of tax receipts -- 15% of something is better than 20% of nothing.

Now we're into serious doublespeak. We don't have to worry about extending tax cuts due to expire, Prescott argues, because if the current forecasts on deficits for the next five years are correct, the deficits will begin declining. Of course, the reason the current forecasts call for deficits to start declining in the out years is precisely because they presume the temporary tax cuts will disappear....

Sigh.

Not good. Not good at all. An economist's job is to teach people what is going on--not to make misleading assertions about the incidence of tax law changes by regurgitating Don Evans's talking points. Don Evans can speak his own talking points perfectly well.

Posted by DeLong at December 21, 2005 05:17 PM