Peter Diamond (MIT) and Emmanuel Saez (Berkeley) recently published an article in The Journal of Economic Perspectives (Fall 2011 issue) entitled: "The Case for a Progressive Tax: From Basic Research to Public Policy." This article exhibits the total absurdity of modern academic economic research.
The point of the article is to show the "scientific" case for progressive taxes. Their conclusion: the highest marginal income tax rates should approach 80 percent! That is the conclusion of Diamond-Saez so-called science.
Here are a few of the assumptions in this "science:"
1. "Because the government values redistribution, the social marginal value of consumption to top bracket taxpayers ...can be ignored..."
Transalation: rich people don't value income at all so they won't miss it if it is taxed away. (Note this is an assumption!) You might wonder how Diamond and Saez know what "the government values" (or what that expression even means). They don't elaborate. They just make the statement "...the government values..." and then they fill in the blanks. Must be nice.
Here's another "scientific" assumption:
2. "Since the goal of the marginal rates on very high income incomes is to get revenue in order to hold down taxes on lower earners, this equation does not depend on the total revenue needs of the government."
Translation: regardless of whether government spends anything we should tax rich people at the highest possible marginal rate so that we can redistribute income.
3. "..the tax avoidance or evasion component of the elasticity e is not an immutable parameter and can be reduced through base broadening and tax enforcement."
Translation: By eliminating all deductions and exemptions and taxing capital gains and all other forms of revenue to high income tax payers as ordinary income, we can eliminate any tendency to avoid taxes.
Turns out this is utter nonsense. All the wealthy have to do is borrow the necessary money to live their lifestyle and not show any income at all -- ordinary or capital income. Consider Warren Buffet. He could just borrow $ 100 million per year and live on that without showing any income for tax purposes at all. Diamond and Saez are probably unaware that high income folks borrow, so they have ignored this among the myriad other things this "scientific" study has ignored.
Or, alternatively, high income folks could move to a country with more rational policies regarding income taxes. Diamond and Saez did not consider that possibility. Perhaps, they should talk to the states of California and New York to discover whether high marginal rates drive people away.
Here's the ridiculous conclusion of this "scientific" paper: "Thus we have identified basic research findings that we find relevant in thinking about practical tax setting......the case for higher rates at the top appears robust in the context of this model."
The above is what passes for economic research in modern academia, along with the argument that increasing minimum wages increase employment. Next, I guess we will be reading about how enacting maximum home price laws will revive the housing market. You can't make this stuff up. This is why tuition levels are going through the roof...to support this nonsense.