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A public policy blog from AEI
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.
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