Discussion: (17 comments)
Comments are closed.
The public policy blog of the American Enterprise Institute
View related content: Public Economics
It seems so simple. The 1950s was a decade of high economic growth and high tax rates. So why not go back to those tax rates and also return to an economic Golden Age? Higher taxes would, theoretically, generate more tax revenue to reduce budget deficits or finance new social programs to reduce income inequality. And as the 1950s example shows, the economy can do just fine if rich folks pay a lot more to Uncle Sam—even a whole lot more.
Sounds good to David Levine, former chief economist at Sanford C. Bernstein and a fellow, according to The Washington Post, who wants to put tax policy in a souped-up DeLorean and go back to the future! “I was a kid in the 1950s,” says Levine, “and the whole time, the top marginal tax rate was 87 percent.” Levine is a supporter of Responsible Wealth, which is, according to the group’s web site, “a network of over 700 business leaders and wealthy individuals in the top five percent of income and/or wealth in the U.S. … Their message is simple, and surprising to some: we can afford to pay more; we don’t need any more tax breaks.”
The top marginal tax rate was 91% during the 1950s. Here’s why we can’t go back:
1. The 1950s was no Golden Age. The U.S. economy grew by an average of 3.4% a year between 1948 and 2007. How did the 1950s do in comparison? If you measure the 1950s from 1950 to 1959, it did a bit better than average, growing at an annual rate of 3.6%. If you measure the decade from 1951 to 1960, it grew at a below average 3.0% rate. The period also saw three recessions, July 1953-May 1954, August 1957-April 1958, and April 1960-February 1961. Now, overall, it was a strong period for the economy, especially for folks with still-fresh memories of the Great Depression. But recall that John F. Kennedy’s 1960 presidential campaign said he would “get this country moving again.” That’s a slogan a politician uses after a decade of stagnation, not hypergrowth. (Of course, JFK sharply cut taxes and the economy boomed.)
2. Real tax rates were a lot lower. Even Levine concedes that “not many people paid that much. Only three baseball players — Ted Williams, Joe DiMaggio and Willie Mays — got there.” Indeed, the top effective tax rate was probably somewhere between 50-60% because of a tax code full of loopholes. Now, that’s still higher than today’s top effective tax rate of around 30%. But those 1950s tax rates actually generated less tax revenue than subsequent periods of lower rates. From 1950 to 1963, income tax revenue averaged 7.5 percent of GDP; that’s less than in the Reagan years when rates were being slashed. This could suggest that rates are right around the Laffer Curve equilibrium point in the current economy. Indeed, the following chart from the WSJ makes this calculation over a variety of time periods:
3. The post-war U.S. economy was in an incredibly strong international position. Did the the “91% or Bust” crowd forget about World War Two? 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. With industrial capacity destroyed in Europe—except for Scandinavia—and in Japan and crippled in the United Kingdom, the United States produced approximately 60 percent of the world output of manufactures in 1950, and its GNP was 61 percent of the total of the present (1979) OECD countries. This was obviously a transitory situation.”
When you’re as dominant as the U.S. was, it papers over a lot of bad economic policy coming from Washington. Today, of course, America competes with a slew of strong, technologically advanced economies including the EU, China, and Japan.
4. Even economists who argue for higher tax rates don’t want to go back to the 1950s. The New York Times just ran a profile of economists Thomas Piketty and Emmanuel Saez, who are very influential on the left and with the Obama White House. The piece summed up their views: “As much as Mr. Piketty’s and Mr. Saez’s work has informed the national debate over earnings and fairness, their proposed corrective remains far outside the bounds of polite political conversation: much, much higher top marginal tax rates on the rich, up to 50 percent, or 70 percent or even 90 percent, from the current top rate of 35 percent.”
So 91% or bust? Not so fast. Here is Piketty in another interview:
Does the fact that the United States did it in the past necessarily imply that we should immediately return to 80-90 percent top marginal rates? Of course not. … It could be that the right level is 70 or 60 percent. … Most importantly, I said very explicitly that I was talking about very, very high incomes, and that at least 99.5 percent of the population would be unaffected by this new top rate. … I firmly believe that imposing a 70 or 80 percent marginal rate on large segments of the population (say, 25 percent of the population, or even 10 percent, or even a few percentage points) would lead to an economic disaster. And I made very clear that the reason I propose to focus on the very top end because this is where the labour market and the pay determination process are not working properly—or, more accurately, have completely gotten out of hand.
And, of course, an ultrahigh tax rate on an initially small slice of the population, like Obama’s Buffett rule imposes, would neither raise very much revenue nor do anything to create jobs. And look at what just happened in Great Britain. Their 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. The Brits don’t have state income taxes, which implies by extension that our revenue maximizing federal rate is lower than theirs—a whole lot lower than 70, 80, or 90%.
Back to the 1950s? Forget it. We need pro-growth tax reform that will get this country moving again.
Comments are closed.
1150 17th Street, N.W. Washington, D.C. 20036
© 2015 American Enterprise Institute for Public Policy Research