Economics, Pethokoukis, Taxes and Spending

Do liberals really think an 80% top tax rate wouldn’t hurt the US economy?

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Federal income taxes went up last year, a financial reality becoming ever clearer to many higher-earning Americans as tax day looms. But how much higher can Washington clip wealthier Americans before rising tax rates really weigh on US economic growth?

Quite a bit, some would argue. Despite those tax hikes, the American economy actually grew faster in 2013 than in 2012. Real GDP — measured fourth quarter over fourth quarter — accelerated to 2.6% from 2.0%. Another point: while the current top tax rate of 39.6% is the highest since the 1990s, the economy has done just fine with top rates double that level. Real GDP grew by 3.6% annually in the 1950s even with a 91% top rate. Going forward, progressive economist and inequality researcher Thomas Piketty recommends a top rate of 80% in his new book “Capital in the Twenty-First Century,” a work much praised on the left. Clearly, then, tax rates could go a lot higher both to reduce income inequality and raise more dough for government spending programs, right?

Actually, it’s far from clear that we’re not already at Peak Tax, or at least near the summit. First, fiscal austerity last year was offset by monetary stimulus as the Federal Reserve embarked upon its bond-buying program.

Second, the top effective tax rate in the 1950s was closer to 50% because of tax loopholes in an economy experiencing some amazing one-off, postwar tailwinds. High-tax advocates like Piketty want to raise rates and get rid of loopholes, creating sky-high effective rates never before experienced in an advanced economy.

Third, high rates in states like California and New York mean “we might be pretty close to the revenue-maximizing tax rate,” Alan Auerbach, a center-left tax economist at the University of California, Berkeley, told the Wall Street Journal.

Fourth, estimates that sharply raising tax rates has little to no impact on taxpayer behavior completely ignore possible longer-term effects. What about all those folks who take risks and make career choices in hopes of striking it rich? “Significantly reducing that possibility by hitting those individuals with extremely high income taxes is of first-order importance in determining the optimal top tax rate,” AEI’s  Aparna Mathur, Sita Slavov, and Michael Strain argued in a paper last year.

Fifth, it’s not the just the 1% bearing a large share of the income tax burden. Citing the CBO, the WSJ notes that “the increase in the individual income tax burden borne by the top 20%—such as couples with two children making more than $150,000—has gone from 65% in 1980 to more than 90% as of 2010.”

Given an aging society, the US in the future will need to collect more revenue than the postwar average of 17.4% of GDP. How much? Maybe at least a quarter more, and even that’s assuming smart entitlement reform. To do that without crippling growth, the US will need to shift from a progressive income tax to a progressive consumption tax. The US tax burden may be headed higher, but top income tax rates shouldn’t be.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

12 thoughts on “Do liberals really think an 80% top tax rate wouldn’t hurt the US economy?

  1. Do liberals really think an 80% top tax rate wouldn’t hurt the US economy? No, but bashing The Rich seems to bring them so much political satisfaction that they’re quite willing to make that trade-off.

    The simple truth is that when you involuntarily transfer resources from one set of uses to another, the only way that you CANNOT hurt the economy is if the new uses are more economically productive than what people would otherwise voluntarily do with them. You have to be willfully ignorant to believe that government can do that. At the very least, collecting income taxes imposes a large compliance cost that means the government’s uses would have to be A LOT more productive.

  2. We have a demonstration of high tax rates – it is called Europe. Unfortunately the high tax rates also correspond to low economic growth, a lack of job creation and a rise in the underground economy.

  3. Trim entitkements, cut deep in USDA, DoD, DHS, VA and especially intelligence agencies. Consider eliminating HUD and Labor.

    • Reynold’s analysis doesn’t cut muster without adjustment due to the rise of the S-Corp and other pass through entities wherein firm profits are passed through to shareholders and taxed at individual rates and not taxed at corporate rates.

      In 1980 combined individual and corporate taxes were 11% of GDP falling to 9.6% in 1988.

      Reagan was effective at raising payroll taxes though, from 5.6% of GDP in 1980 to 6.5% in 1988.

      • S Corporations became legal in 1958. Why did it suddenly have an impact after the Reagan tax cuts?

        How many S corporations converted from partnerships or sole proprietorships rather than C corporations?

        Granting the possibility that this could still somehow explain the increase after the Reagan tax cuts, how much of an impact did this have? Any idea?

  4. First, the percent of income taxes paid be some group is irrelevant to the question of whether a particular tax rate will significantly effect growth in the economy. So the author’s graphic and related accompanying statistics are irrelevant.

    Second, while there are some liberals who think that a 80 or even 91% top marginal tax rate won’t negatively effect growth, they are in the minority. They are also wrong.

    Third, I have not seen any evidence that a 39.6% top marginal tax rate is anywhere near the “revenue-maximizing tax rate.” Most of what i have seen says that rate is somewhere in the 60-70% range, so even with a 10% state rate the top federal rate is still at least 10% below the revenue-maximizing tax rate. I’m not arguing that it should be increased, just pointing out that if we did we would increase revenue. I agree that eliminating deductions and loopholes like carried interest is probably a more efficient way to raise revenue than increasing rates.

    Finally, as the CBO pointed out in late 2012, when you include loss of benefits we already have effective marginal tax rates over 80%. These aren’t for the rich but instead for the working poor. Reducing these effective tax rates for the working poor is a policy area worth pursuing.

    • If you don’t know the difference between effect and affect, don’t try to convince me of your argument.

      You really think I’ll work harder for 30% of my pay. I already had my wife stop working because 50% of her’s didn’t make sense.

  5. Liberals have a religion, and it requires human sacrifices.

    Taxation rates that aren’t equal are in violation of the 13th Amendment. Its time to start saying it again and again….

    GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, “I certainly would not go above what existed under Bill Clinton,” which was 28 percent. It’s now 15 percent. That’s almost a doubling, if you went to 28 percent. But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.

    OBAMA: Right.

    GIBSON: And George Bush has taken it down to 15 percent.

    OBAMA: Right.

    GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.

    So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

    OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.

  6. A more efficient framework for funding the government would be for all taxpayers to incur the same proportionate tax burden as their share of income. If the top 10% earns half of the income in the population, they should pay half the taxes. Simple as that. Some version of either the flat tax or the ‘fair’ tax would get us closer to this outcome.

  7. Old Economy Steven thinks things were better before socialists ruined this country…back when we had strong unions, financial regulations, and a top income tax rate of 80%.

    Oh, whoops, can’t have it both ways.

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