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.

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Paul Krugman
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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.



Reviews

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

Prof Krugman makes economics easy to understand and relates it to our daily lives. As he says - do not use the industry jargon but simple language to get the point across. Better understanding of how economics affects us, how to read it and be a more informed, discerning citizen.

Confirms its a complicated topic, however, much less scary, and manageable to learn/follow.

Extremely interesting and important information that every American should try to understand

honestly i monstly just confirmed all my broad beleifs and biases. i never would have imagened just how in lockstep my overall conceptionsof the economic world already line up with such an expert. honestly my only complaint is that i wish he would do another series after to bet way more wonkish on the concepts shown and go through the math on it.


Comments

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.

Pisko

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.

Sebastien

This goes into political economy big time. For comparison with Denmark, I advise people to check the world value survey.

A fellow student

But tax rates as said are irrelevant. The real tax rate is government expenditure/GDP

Mia S.

"We had a major tax cut passed by Congress. It was a very Republican tax cut. It was, big tax cut for corporations, large tax cuts for people with high incomes, a few sort of loss leaders, for middle class people. It certainly wasn't from popular demand; the public was not clamoring for a tax cut. If you actually look at polling, it really suggests that most people think that the rich should pay higher taxes, not lower taxes; and that corporations should pay higher taxes, not lower taxes, and that if we ask, 'Why do people vote for people who propose big tax cuts for the rich?' the answer is usually, 'For some other reason.' It looks from the available polling as if people voted for Republican candidates for reasons that have to do with whatever social values or race relations, various kinds of perceptions, and just a lot of tribalism and that the reason why politicians push these policies is not because these are what voters want, but it's because they're what donors want. Now, it is true that US corporate taxes - the US had a badly-designed corporate tax, one which has the official rate of corporate taxation is actually a little bit high by international standards. But then there are many, many exemptions and loopholes, so that the average tax rate is a little bit low by international standards. There is a reasonable case for a corporate tax reform that reduce the headline rate and closed some of the loopholes - but what we got was, we reduced the headline rate without closing the loopholes, so it ends up being just a big giveaway. And there's a legitimate question: If you cut taxes on corporations, how much of that tax cut will go to stockholders versus how much will go to workers? And there is a story - a story that is coherent - which says that if you cut taxes on corporations, money will flow in from other countries; that will expand the amount of capital. It'll raise worker productivity, and wages will end up rising. The only question is, first of all even if this is true - how long will it take? And the answer has to be a long time. This is not something that would happen in a year or in a decade. And it's then, 'How much will it really happen?' Then there is legitimate room for some dispute here, but the preponderance of the evidence, both from looking hard at US data and looking at the experiences of other countries that have changed their corporate tax rate is, actually, you know what?If you cut taxes on corporations, most of the benefits flow to people who own stock in those corporations and not to their workers."

Mia S.

"The classic supply-side argument says, 'Cut taxes. That'll make a bigger economy. If you worry who's gonna buy all that stuff, the Fed can always cut interest rates, and the bigger economy itself will bring higher tax revenue and will offset much, if not all, of the effect of lower taxes on deficits.' So it's not getting about people to spend more, it's about getting people to produce more, to be willing to produce more, and that this is going to be a big, favorable thing. And in principle, it's a perfectly coherent story - it makes perfectly good sense. It just happens to be, in practice, pretty much trivial. This argument that says that tax cuts do wonderful stuff really starts in the 70s, and Reagan did a big tax cut and after a recession at the beginning of the Reagan administration, there was a rapid economic recovery, and of people said, 'See? This proves tax cuts do great stuff.' And if we stop the clock in 1988, that would be a hard argument to refute. But then, time went on, Bill Clinton raised taxes significantly in 1993, and that was followed by an economic boom even bigger than the one that was under Reagan. Then George W. Bush cut taxes, and people were talking about a 'Bush Boom,' and what you actually kind was kind of an anemic recovery under Bush followed by catastrophe in 2008, which I don't think had much to do with the tax cuts, but still - not looking good. Then Obama managed to reverse part of the Bush tax cuts in 2013, and got also some additional taxes to help pay for Obamacare, so tax rates on the 1% went up significantly. The US economy kept chugging along. So, where in this history is there any evidence for the idea that tax rates are really crucial, one way or another, for economic growth? Unless you're willing to say that that one story of growth under Reagan - which is itself ambiguous; you can argue that monetary policy had a lot more to do with that than tax policy - where is your evidence for any of this? The best sustained economic growth the United States has had was in the generation after WWII, a period when individual tax rates and corporate tax rates were much higher at the top than they are now - when we had a 15% corporate tax rate and when we had a - for some of that period, we had a top individual rate of 91%. At this point, the conviction that lowering taxes is a magical economic elixir rests on absolutely no - there's just nothing in the history of the past 40 years that would support that orthodoxy - and the fact that it's such a total orthodoxy on one side of the political evidence despite that lack of evidence actually in a way is evidence against you; it's telling you, 'This is not about the facts.' Supply-side economics is your classic zombie idea; no matter how many times you think you've killed it, it just keeps shambling along. And the reason is because anyone who proposes a theory that says you should cut taxes on rich people is going to get a lot of financial support from rich people, so that's why the story just keeps going."