Pethokoukis, Economics, Taxes and Spending

4 reasons why we can’t bring back the 91% tax rate

Paul Krugman's Strange Ireland Prediction

Photo Credit: Prolineserver (CC BY 2.0)

Paul Krugman wants to go back to the future:

America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.

Krugman is too smart a guy to really believe this. Perhaps by making the case for a 91% top tax rate, President Obama’s tax hikes won’t look so extreme. But whatever the politics, the economics of Kurgman’s plan are terrible

1. The 1950s and 1960s were affected by a host of unique factors, not the least of which was that they came right after a devastating global war that left America’s competitors in ruins. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world. … This was obviously a transitory situation.”

2. As former Bain Capital executive Edward Conard notes in his new book, Unintended Consequences, the size of the U.S. labor force was constrained during those decades by both the 1930s baby bust and casualties from the war. So a surge in jobs and a restricted supply of labor produced fat wage growth. Hoping for a return to that era is futile, Conard concludes:

The United States was prosperous for a unique set of reasons that are impossible to duplicate today, including a decade-long depression, the destruction of the rest of the world’s infrastructure, a failure of potential foreign competitors to educate their people, and a highly restricted supply of labor. For the sake of mankind, let’s hope those conditions aren’t repeated. It seems to me anyone who makes comparisons between today’s economy and that of the 1950s and 1960s without fully disclosing their differences is deceiving their readers.

3. Even most liberal economists think the high-end for US marginal tax rates is 70% or so. And a new study from AEI shows even that estimate is almost certainly too high since it a) assumes the rich won’t respond to higher rates by changing work habits or engaging in tax avoidance, b) it assumes zero long-term impact on behavior by sharply higher rates, c) it assumes Americans prefer want government to take as much income as possibly from the rich and redistribute it to the non-rich.

4.Look at the natural experiment that just happened in Great Britain. Its Independent Fiscal Oversight Commission—which reviews all of the budgetary assumptions—just ruled that cutting the top rate of tax from 50% to 45% was revenue neutral, implying the revenue maximizing rate is in that range.

Sorry, Mr. Krugman, your dream of confiscatory tax rates will have to remain just that, a left-of-center fantasy.

16 thoughts on “4 reasons why we can’t bring back the 91% tax rate

  1. I think Krugman just wants the fiscal stimulus that tax rates at 91% will give. Like back in the 1950′s, at such rates, the private sector will assuredly PAY less in taxes.

  2. Oh lordy, can we PLEASE stop pretending that Krugman is still a serious economist and just call him what he is? A lickspittle for the modern Left who prostitutes who his dust-gathering credentials for credibility?

  3. Krugman is such a clown, I can’t believe he gets space in the NYT to pontificate on things he obviously knows nothing about. Please don’t pay any attention to him, he’s like the drunk uncle at your daughter’s wedding….

  4. There are only two possible explanations for Paul Krugman’s pronouncements on economic policy over the past fifteen years or so:
    (1) He suffers from senile dementia.
    (2) The Nobel-Prize winning economist of the 1970s and early 80s has been kidnapped by hostile space aliens and replaced by a simulacrum pre-programmed to make statements calculated to destroy the Earth’s economy and make it easier to be conquered.

    • Actually. . . I remember Krugman once penning a ‘serious’ article about how we needed an ‘alien invasion’ to ‘stimulate the economy’.

      I am not lying. He seriously did. Paul Krugman actually made the case in the NY Times for space aliens invading earth as an economic argument.

  5. Even when he attempts to smile in the above picture, this fraud portrays the EVIL that occupies the little space behind his evil eyes.
    It is a human puzzle how these folks control America…

  6. Cue commenter Max Planck…”the usual drivel from plutocrat wannabe Pethokoukis, whining again about taxing the actual rent seeking witling plutocracy as if that would crash the economy. Idiot.”

  7. Krugman conveniently forgets that rates in the 1950′s (and 1990′s) were much higher for everyone. The marginal rates for the middle class were about 50% in the 1950′s. I can’t imagine even Krugman is crazy enough to advocate for that?

  8. You missed one other big reason why the 91% top rate didn’t devastate the economy. Contrary to Krugman’s laughably ignorant claims about how well executives lived in the 1950s, they lived quite well because of non-salary benefits and expense account abuse.

    I’m guessing Krugman has forgotten all about things like the Three-Martini Lunch because such once-common extravagances are no longer extensible thanks to the closing of expense loopholes in the 1960s and 1970s. It wasn’t just lunches. Executives were compensated with company-owned cars, mansions, yachts, and vacation homes, given servants, and had deferred compensation deals, all to avoid that high marginal tax rate. The higher the tax rate, the more beneficial it is to evade taxes, which is why most of Europe has a much higher tax evasion rate than the US.

    If you want some evidence of how bad the expense account abuse problem was during what Krugman thinks was a golden age of egalitarianism, see the beginning of this Yale Law Journal article from 1958:

    http://www.jstor.org/discover/10.2307/794007

    I also note that, somehow despite that 91% top marginal rate, the Kennedys managed to remain quite wealthy, as did plenty of others.

  9. I always wonder why NOBODY’S solution is sound currency and no taxes? Why hasn’t it worked yet? They literally take a shot at everyone who tries to implement it. Notably, two wars against Britain we ‘won’ after we signed a bank charter with the Crown, and they got on their boats, with guns, and sailed away… Enjoy your debate, folks…

  10. Sorry, Jeff Owens, OLY and others, these arguments against the person are not economic arguments. They do nothing to further knowledge.

    • Allen,
      For what’s worth:
      It is simpler than you think; start from the word economy. It was created by the ancient Hellenes and simply means financial “order” in one’s house. Superimpose that into the State’s financial order and you should have your answer.
      NOTHING IS FREE IN LIFE, and if we elect profligate politicians that believe that our children should PAY for our bad decisions then there will NEVER be financial order in our country.
      Now, CUTTING EVERYTHING DOWN TO THE BONE is the only financial solution; or, we are all looking at what used to be the former United States of America.
      “Crookman” is a true “One World Order” FRAUD.

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