Business, Politics & Society

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.

Paul Krugman
Teaches Economics and Society
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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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--...

Think like an economist

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.


Students give MasterClass an average rating of 4.7 out of 5 stars.

He is a great teacher, a Nobel Laureate and NYTimes columnist.

Great class to learn some economics. Would have liked if classes can be more audience targeted i.e For Beginners, Intermediate, Advanced

Great lesson in thinking and in humility (Did I really write that? Yes), with a serious point : great ideas won't work unless you share them. In Paul's words : 'keep plugging on' and 'don't let the crazies grind you down'. Illegitimi non carborundum.

I have always found econ to be fun. To get Mr. Krugman's insight and perspective is quote great. I found his course enlightening.



Keep in mind that MAYBE the top 1% was at 91%, most 'wealthy households' were still down in the 40% area. Additionally, during that time, actual revenue collections were not higher, indicating tax avoidance was aggressively sought, people showing less income than they really had, etc.

Tapan P.

The basis of his argument here is confusing- though what he said at the end is spot on. If he is comparing Reagan's rise, and Clintons, etc- he doesn't provide the counters for that. Especially in the Obama years, we had a tech boom- outside of taxes. I think it has to do more with maintaining the businesses cycle then pointing fingers.

Johnny C.

Taxes are "paid," pursuant to GAAP (Generally Accepted Accounting Principles). In the world of accounting, there are two kinds of individuals: 1) Creditors and 2) Debtors. Debtors pay taxes which are returned to the Creditors (in the form of a 'tax return'), which is why the rich don't pay taxes. And THAT is the shocking truth about Understanding Taxes!


It's not the matter of tax break or high tax, it's what the government need and how much the government needs.

RJane @.

The corporations have connections in the U.S.government. Some pay the politicians, who can help them to lower their taxes even more and to make more profit. Some politicians are against politician service purchase . Politician service purchase is subtle and behind doors, and it also exists in other countries.


the tax issue is that they r controlled by the corporations/campaign donnors/lobbys, taxes don't need 2 b complicated when the govenment prioritices public wellbeing, but when interest conflicts arise they end up favoring the corporations that own the puppets in Congress. Lobbying and campaign donations must b regulated, those r the cause of tax beign an issue

Pureum K.

There are several issues with Krugman's argument. First, he assumes that government will use the tax money well. I always pray for an efficient government and it has not happened yet. He should go to the DMV. Second, Denmark is a bit different from the US. A lot of government services are outsourced and are arguably more efficient so Danish people will likely tolerate higher taxes. Third, nobody really pays the high tax rates. Research shows nobody paid the 70% income tax and also firms manage taxes very effectively- So if nobody pays the high tax rate, why do we need it? I agree that taxes are needed to run and defend the country but too high taxes cause more harm than good-

A fellow student

I have been to Denmark and the only thing that is unique is the people and the multicolored houses. I like both.

A fellow student

Guess what? I don't want to give my hard earned money to the government in taxes. Higher wages and more jobs are important to the average citizen. The things he considers insignificant are the things that citizens consider extremely important. (His politics are once again getting in the way of personal economics.)

Stan B.

Economists (as do many sociologists) chose to simplify and generalize to explain or illustrate their theories. For the folks here with an ability and appreciation for the messy reality of life, accepting Mr. Krugman's broad prescriptions at face value is difficult. And knowing the generalizations gloss over vast (and likely significant) complexities erodes the credibility of the course.