The Least, First

Monte Asbury's blog

Do lower taxes on top 1% boost the economy?

with 8 comments

Since the days of Reagan, many have held that the economy can be stimulated by cutting taxes on the incomes of people who have the most money to invest. An insightful analysis at LaneKenworthy.net offers evidence questioning that assumption. Consider some intriguing observations on the data graphed below.

Chart 1: Note that at the close of World War II, Americans in the top 1% of income paid a marginal tax rate of 90%. Now, it’s about 35%. I’m sure most Americans don’t realize how profoundly this rate has fallen.

Chart 2: As the rate dropped, government revenue from this group (as a proportion of GDP) plummeted. Find ‘the late ’90s through 2001; compare them with ’02-’05.

Chart 3: Finally, note the comparison of the top 1%’s marginal tax rate with the growth rate of the national GDP. Note that it’s pretty tough to find a link between the two.

clipped from lanekenworthy.net
The following chart shows the top marginal rate and the average effective rate on the top 1% of taxpayers since World War II

The following chart shows federal government tax revenues as a share of GDP by the effective tax rate on the top 1%.

tax rates on the richest are positively associated with the portion of GDP collected in taxes.
The next chart shows the growth rate of per capita GDP by the effective tax rate on the top 1%. The effective tax rate on the richest appears to have had no impact on economic growth.

a somewhat higher rate of taxation on the richest Americans would not only be fairer but also enhance the government’s ability to provide valuable services and benefits.
  blog it

Theoretically, if the rich get a break, they invest the extra, and we all gain from the stimulation of the economy. While it’s true that financial data can be read a number of ways, cutting taxes to the richest can’t be shown to boost economic growth.

And what happened to the USA in those years when revenue from the top 1% dropped so dramatically? The US government replaced the tax revenue with the sale of bonds. And as long as the highest 1%’s tax rate stays low, I wonder what income brackets will provide the revenue that pays off those bonds? Doesn’t it simply seem like a shift of the tax burden away from the richest onto those who earn less?

Read the whole narrative at LaneKenworthy.net. And please, let’s ask ourselves whether economic conservatism— however revered it may be— is really good for most Americans.


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Written by Monte

January 16, 2008 at 7:50 pm

Posted in Politics

8 Responses

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  1. Paris Hilton…you love her or you hate her. I still have to make my final judgement…lol. Although I’m keen on her doggy :-)

    Kraig Clickner

    April 14, 2010 at 4:29 am

  2. OK, I’ll drop Paris Hilton; the Fortune 400 still mostly began with inherited wealth. I hope that point survives.

    Who cares if wealthy people win? We all should. For I think your admittedly attractive argument overlooks an important factor: wealth is not created from thin air – it is transferred from one person to another. When any quintile increases its wealth faster than the others, that quintile has obtained wealth from the other quintiles. In our case, since the wealth of the richest Americans is increasing much more rapidly than any other group, the wealthiest have successfully harvested wealth from those poorer than themselves.

    Much of the time, this extraction is partly by use of corporate welfare, price subsidies, trade agreements and labor practices that limit the rights of individuals and increase the rights of the corporations they buy from and work for. Those pro-corporate regulations were put in place because the few were more politically powerful than the many; with each such law, power shifts further from individual rights in favor of those of the corporation and its executives.

    Our republican democracy is gradually loses its ability to protect rights of individuals; it becomes a corporatocracy: undue power by a small number of very wealthy barons. Like pure democracy, it easily becomes tyranny.

    Thanks for thinking with me, Will!
    Monte

    Monte

    January 18, 2008 at 4:08 pm

  3. Well, in response to your comments regarding Paris Hilton and does it change the argument, my point is to say that exemplifying those who don’t work fails to account for those who do. I think it does change the argument. You establish a justification based on only part of the population.

    I think we should all be a bit more upbeat :) Who cares if wealthy people win. We all win in America with our long tradition of personal liberties. We shouldn’t ask has someone suffered enough or had enough pain, but how can we help each other.

    But, again that’s just me.

    Will

    January 17, 2008 at 11:10 pm

  4. Of course not. But why is it fair for people who have everything to suffer less for their government than others?

    Actually, Paris Hilton is, in some ways, typical. According to “Born on Third Base,” a study by the Boston-based United for a Fair Economy, a majority of the Forbes 400 inherited their way onto the list, inherited already substantial and profitable companies, or received key start-up capital from a family member. It’s discussed here.

    Let’s not nit-pick the details (“simplicity is attractive”- sure, but a graduated scale can be simple, too; or “it is easy to pick on Paris Hilton” – yes, it is, does that change the argument?).

    We live in a culture where hundreds of millions run the 10k; a few hundred start at the 9000 meter-mark. Whether they run hard or not, they win. They have better health and longer lives, see fewer of their babies die, receive the world’s best education, and have much more authority over government than their peers.

    That’s hardly a society of equal rights.

    Monte

    January 17, 2008 at 10:13 pm

  5. I must disagree, but to each his own.

    Simplicity is attractive. Simple systems perform better and are easier to maintain. The more complex the system the more unpredictable and likely to break down.

    Well, I guess it is easy to pick on Paris Hilton. However, there are plenty of high income people who work very hard for their money. The term ‘sacrifice’ seems a bit subjective. Should high income earners (the million dollar example) be taxed down to say $50,000?

    But that is just my thought.

    Will

    January 17, 2008 at 8:37 pm

  6. To answer the question posed by this post’s title, take a look at OECD countries over thirty years of taxation and twenty years of growth:

    http://trueconservative.typepad.com/trueconservative/2007/12/government-ba-2.html

    and

    http://trueconservative.typepad.com/trueconservative/2008/01/government-bad.html

    Draw your own conclusions.

    Steve Roth

    January 17, 2008 at 1:22 pm

  7. I don’t think it so – though the simplicity of it certainly is attractive!
    Here are the main problems I see:
    1) A flat tax effectively moves the tax burden away from the wealthiest and onto the middle class. I would think this would result in a shrinkage of the middle class – and a large middle class is essential to survival of democracy.
    2) Fair is equal sacrifice, not an equal percent. Asking $10,000 from a family making $50,000 means asking them to surrender money they use for their family’s food, shelter, and education. Yet asking $200,000 from someone making a million a year (the same percentage) has no necessarily negative impact on his survival whatsoever. It isn’t fair for us to demand that government be paid for in a way that limits some families’ ability to buy homes and send their kids to college, while others scarcely notice the loss. Fair is equal sacrifice, not an equal %.
    3) Fair is taxing wealth at a higher rate than work. It is tempting to think the rich are rich because of their own spectacular achievements; so, it seems unfair to take away their reward. But the super-rich include the Paris Hiltons of the world: people who work no harder than anyone else, who live extravagantly, and make a great deal of money off the millions they were born with that someone else invests for them. They were born with an advantage, their achievements are not noteworthy, and they do far less work than the average welfare mom.
    Asking greater sacrifice from people who work hard for their income than from those who coast through life on other people’s money – that’s not fair.
    Good question, and an important issue. Thanks, Will!

    Monte

    January 17, 2008 at 1:00 pm

  8. Wouldn’t it be more fair if the government just taxed everyone at a flat tax rate (perhaps only kicking in after a certain level of income)?

    Will

    January 16, 2008 at 9:36 pm


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