The Perils of Straw Man Economics

Stockholm, world capital of low taxes

Photo by Sven Nackstrand/AFP/Getty Images

Last night I watched the Munk Debate between Paul Krugman and George Papandreou on the one hand and Newt Gingrich and Arthur Laffer on the other. The subject was whether we should tax the rich more. It was mostly predictable, but with one surprise. Laffer’s big examples of the virtues of tax cutting all involved … much higher taxes than we have in the United States.

He specifically cited JFK’s work in getting the top marginal income tax rate down to 70 percent and the center-right government of Sweden’s successful efforts to get overall government spending down below 50 percent of GDP as examples of economic policy done right. Now I can’t read Krugman’s mind, but I get the sense that he doesn’t disagree with either of these things. He thinks the pre-Kennedy 90 percent tax rate really was counterproductively high, and the big fiscal debate in the U.S. is whether the federal share of GDP should grow 3 or 4 percent or shrink 1 or 2 percent. The experience of Sweden and Denmark in exploring the outer frontiers of the welfare state is interesting but not in any way relevant to the issue of whether the much smaller U.S. welfare state could or should grow somewhat larger than it currently is. The fact that these were Laffer’s big examples—we shouldn’t put marginal rates above 70 percent and shouldn’t have the government spend more than 50 percent of GDP—only seemed to me to underscore how strong the case for taxing the rich is in the contemporary United States.

So why would Laffer commit such a tactical debating blunder? As best I can tell, neither he nor Gingrich was deliberately engaging in straw man rhetorical tactics.

Instead, they both seemed to genuinely believe that the case against tax hikes is identical to the case against communism. Both men spent considerable time on the correct observation that China’s shift from Maoist economic policies to something more like Lenin’s “commanding heights” strategy has successfully turned a once-poor country into a middle-income one. That’s great news. And more broadly, the outcome of the Cold War was a strong confirmation that the welfare state democracies of Western Europe were much more pleasant places to live than the command dictatorships of Eastern and Central Europe. But why the success of welfare state capitalism should be taken as evidence against the welfare state is not obvious to me. It must make sense, though, if you believe that having the government mail checks to retired people is really just a stalking horse for the Gulag. But sometimes taxation and transfer payments are just taxation and transfer payments!

The essential case for taxing the rich is that this is a way to keep inequality in check that doesn’t require the kind of central planning that leads to massive allocative inefficiency or the kind of draconian protectionist regulation that stifles the development and use of state-of-the-art technologies.