Economics

5 reasons why Obama wants to double U.S. tax rates

I almost missed this. At the end of today’s New York Times story on declining income inequality is a quote from economist Emmanel Saez, co-author of much-cited research on the topic (bold for emphasis):

The income shares of the top 1 percent became a common metric of inequality after a 2003 study by the economists Thomas Piketty and Emmanel Saez, which traced trends back to 1913. It peaked at 24 percent in 1928, just above its 2007 level. Mr. Saez, of the University of California, Berkeley, sides with those who think the rich will soon get richer.

“Barring an economic cataclysm ahead, top earners will be recovering faster than the other 99 percent,” he wrote in an e-mail. “The inequality problem is not going away and won’t until drastic policy changes are made (as happened during the New Deal).”

“Drastic policy changes” like those “during the New Deal.” Wow, whatever could Saez mean? Strange that the reporter didn’t ask or if he did, chose not to include the answer.

But I think I have a pretty good idea of what Saez meant, especially given the New Deal reference. According to his research, Saez thinks the top U.S. income tax rate should more than double to 80 percent, putting it back at levels seen during the 1930s and 1940s. Indeed, Saez and Piketty are playing a key role in reinvigorating the old liberal consensus that taxes need to return to pre-Reagan era levels. Back to the 1970s!

Saez has also done research with Peter Diamond, whose nomination by President Obama to the Federal Reserve sunk in the Senate, that suggests the top income tax rate should go back to 70 percent, right where it was when President Reagan took office. Hey, 70 percent, 80 percent, who cares, really. Just start cranking that baby up! Naturally, liberal economists such as Paul Krugman and Brad DeLong are very excited by all of this.

But does this mean President Obama also thinks the top marginal tax rate should return to at least 70 percent from 35 percent today, if not higher? I think there is strong evidence, though not conclusive, that he does:

1. As it is, Obama’s policies, if fully enacted, would push the highest marginal tax rate up to 44.8 percent.

2. In his Osawatomie speech, Obama repeatedly said how the U.S. had gone off track the “last few decades,” which is exactly when tax rates started falling dramatically.

3. In his book “The Audacity of Hope,” Obama suggested he didn’t buy the theory that the high marginal tax rates that existed when Reagan took office hurt incentives to save and invest.

4. The foundational economic theory of Obamanomics is that even though the economy expanded during the “last few decades,” the middle class stagnated. In short, the rich took all the money. And now it’s time they give it back. As he told “60 Minutes” last weekend:

But you can’t get away from the basic concept that either we have a system in which the people who have benefited the most from this new economy — by a magnitude of 200%-300% increases in their income. And the middle class in America has really taken it on the chin, during this period. They haven’t seen their wages go up, they haven’t seen their incomes go up.

5. Obama rejected the recommendations of his own debt panel. This is key. Recall that the Bowles-Simpson Commission would have reduced or eliminated tax breaks while lowering the top tax rate to no higher than 29 percent. But even though all those changes would still have resulted in a huge net tax increase, the amount of new revenue would not be enough to balance the budget without an equally huge restructuring of entitlements. By 2035, both spending and revenue would be 21 percent of GDP under Bowles-Simpson. And liberals know there is no way to keep government spending that low without a Paul Ryan-style, market-based approach to Medicare reform.

To fund a federal government where Obamacare is fully operation, Social Security is fully solvent and domestic “investments” are fully financed, the Obamacrats need dramatically higher tax revenue. And they think sharply higher income tax rates on the “rich” — and eventually hitting everybody else through a value-added tax — is how to get their hands on the dough. So there’s no way Obama could have supported the Bowles Simpson plan and the lower tax rates it recommended.

Think this high-tax scenario could never happen? Liberals sure believe this is America’s fiscal endgame and time is on their side. If the U.S. should face its own sovereign debt crisis, you’ll surely hear Democrats say “all options should be on the table.” And you’ll know exactly what they mean.

 

 

9 thoughts on “5 reasons why Obama wants to double U.S. tax rates

  1. Hey lets just raise the income tax to 100% and i am sure it all will work out just fine. What a bunch of left wing morons. Just someway got to figure out how to leave the USA and say ” I,m outa here”.

  2. The study cited conveniently ended at 2007 when the top 1% earned 17% of total income and paid 25% of total taxes. Why 2007 ? Perhaps because in 2008/2009 the share of income earned by the top 1% shrank to 11%. It seems that the income of the top 1% is highly volatile which perhaps explains why Obama always talks about millionaires and billionaires but really wants to punish those rich rascals earning $250k.

  3. I love the logic here: The #1 piece of evidence that Obama wants 80% marginal rates is that his actual policy proposals are for 45% rates. (It’s actually 39%, but we may as well round up to the nearest thing Paul Ryan says. I wonder how many will notice the trick that payroll taxes are added in to describe Obama’s proposals, but not to describe current rates.) The plain fact is that all Obama has proposed is to return to the same tax rates for the wealthy that we had under Clinton, when the economy was booming at a better clip than under any Republican president.

  4. The economy didn’t boom under Clinton because he raised taxes- and how many on the left have talked of returning to the tax rates of the 1970s? Or even the 1950s? Hiking tax rates to 45% on the wealthier earners isn’t the end. It’s more of a down payment on even higher rates. The left’s answer to every fiscal issue is a tax raise on the rich. There is only so much money there, and only a matter of time before they creep down into other brackets (the AMT is a great example). As for payroll taxes- many of the top filers are small businesses, so they pay both sides of the FICA tax. It should be included- they pay double.

    • Rick, no one said the economy boomed under Clinton solely because he raised taxes — it’s simply an antidote to the naive thinking that higher tax rates than we have now will automatically lead to economic decline. You ask how many liberals have proposed returning to the tax rates of the 1970s or 1950s. I can’t think of a single one, certainly no Democrats. I challenge you to correct me. You misunderstand the point about payroll taxes — it’s not whether they should be included, it’s that Pethokoukis deceptively includes them in one formulation and not in another to make Obama’s proposals look more radical.

      Finally, both you and Pethokoukis commit the same fallacy — without a serious argument against returning to Clinton-era tax rates, you’re forced to invent the threat that taxes will just keep going up, as if taxes increase by some magic force of momentum rather than by requiring laws to be passed. Pethokoukis is even forced to invent new scary revenue sources (like a VAT!) that Obama has never proposed or lent support to. The central problem, of course, is that Obama’s actual policies are extremely moderate. But one certainly can’t admit that at AEI.

      • Thank god someone here does not subscribe to absolutism. Why can’t methodology/philosophy of science be more widely taught?

        The fallacy in more general form: noting that A is not a primary causal factor for phenomenon B (said differently, B must follow from A = FALSE << note that this does not mean that A and B are unrelated, only that the occurrence of A is an *insufficient* premise for B) does not imply that one is saying that A must result in "not B" (not B must follow from A = TRUE).

        I mean seriously people, come on.

  5. If you are old enough to remember the 70% tax rates, you should be experiencing an involuntary shutter. Bring back the tax schemes, the deferrals, the municipal bonds, the real estate schemes, and the accountants who manage them all.

  6. Considering every place that isn’t a third world shit hole is to the left of the US that says something about right wing politics. Want to go to a conservative place, enjoy Saudi or Somalia.

  7. There are statistics claiming that the top 1% of earners in New York City pay over 40% of the federal tax collected there.
    The top 10% pay over 70%. If these figures are true, why don’t Republicans repeat them at every opportunity? This would serve to dampen the constant leftist refrain about “making the rich pay”. In addition to creating employment, the rich certainly pay more than their fair share.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>