Business, Community & Government

Understanding Taxes

Paul Krugman

Lesson time 13:35 min

Paul explores the data behind “supply side” taxation, the potential impact of the 2017 tax cuts, and how the American tax plan affects each of us.

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Topics include: Rethinking the American Tax Plan • The Data Behind “Supply Side” Taxation • The 2017 Tax Cuts Weren’t About Taxes • Don’t Overthink Taxes


People often trash talk the US tax system as it is and talk about it's hopelessly complex, and it's full of disincentives. And there's some truth to that. But it's not really that terrible. If you actually ask us, is tax reform making the existing tax system cleaner, getting it so you can file your taxes on a postcard, those are not actually important. Those are not central issues. The main thing is that we need some more money. People who think that taxes are a tremendous disincentive to economic activity, I would invite those people to walk around to Copenhagen or Stockholm. Ask, does this look to you like a wrecked economy, a failing society? You know, they look pretty good. So we could do this, and it's not actually a very hard issue, except that nobody wants to hear it. [MUSIC PLAYING] When you're trying to be doing tax policy, the first thing you want to ask is, how much money do we need? How big a government do we want? And that's, of course, that's going to be a value judgment, although I think if we ask what most Americans want, they want to maintain our basic social safety net. People want to maintain Medicare, Medicaid, social security. Interesting, actually, that Medicaid, which is to some extent the poverty program, turns out to have very, very high approval ratings. People don't want to see it cut. They care enough about their fellow citizens. They want to maintain that. That's already telling you that you need quite a lot of money. In fact, you need, if anything, somewhat more money than we're now collecting in taxes because all of these programs spend disproportionately on the elderly, and my generation is steadily moving into it's sunset years. And that's a burden. So you need a tax system that collects a lot of money and, in fact, collects at least a few percent more of GDP than it does now. So we need a lot of revenue. Then you want to say, OK, how do we do that without creating really big disincentives because even liberals do say, taxes are some disincentive? So you want a tax system that is-- that doesn't take away the incentive to work, to innovate, which means that you want to try and keep marginal rates, the rate-- the fraction of the last dollar that you pay in taxes from getting too high. That means that you can only get-- even if you're a big liberal, you can only get so much money out of soaking the rich. Now, there are reasonable estimates of what makes sense as a top tax rate. And they often actually suggest that we'd be OK with the highest tax rate being between 70% and 80%, which sounds really high, except that, in fact, that's all taxes. That's state and local. That's sales taxes plus income tax. In fact, it's probably something like 55 as it stands. So we could go a bit higher, and we can raise some more money by taxing high incomes. But then if you want to go beyond that, if you want to have something that is going to pay for the government services that everybody wants--...

About the Instructor

For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.

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Paul Krugman

Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive history, policy, and help explain the world around you.

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