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.