Archive for December 16th, 2010

The Tax Debate

Right now Republicans and Democrats are both trying to claim their view represents the “common sense” on taxes.  Meanwhile, President Obama and the GOP leadership have hammered out a compromise neither side’s base likes — but that’s always the case for compromises.   But as Renaissance Guy asks over at his blog, what is the right tax rate?

For context, consider this graph:

Tax rates historical

The lighter multicolored lines represent different rates at which Americans were taxed.  Between the 40s and 1980 the highest marginal rate was 90%.   It was a very progressive tax, and most economists agreed the marginal rates were too high.   In 1982 the Reagan reform dropped the highest rates to levels that hadn’t been seen for the wealthy since the 1930s (and they were even lower the the 1920s).    In 2001 the Bush tax reform dropped them even more.   Clearly, in terms of taxes we do not have a very progressive tax structure, and tax rates are historically very low for the wealthiest tax payers.

For one result of this, look at the red line – debt as a percentage of GDP.   Right when tax rates dropped, debt levels started rising.  After dropping a bit just before 2000, they rose again after 2001.  The idea that increased revenues come from tax cuts and thus they pay for themselves is clearly misguided.

For another result, look at this graph:

As our taxes got more progressive in the 40s, the wealthiest 10% went from controlling nearly half the wealth to less than 35%.   The gap between the rich and poor narrowed.   This was also a period of massive economic growth.   As soon as the Reagan cuts were put into effect the gap started to grow again, and by 2007 the wealthiest 10% controlled half the country’s wealth, the most ever.   Clearly the tax cuts were bad for the debt, but good for the very wealthy.

This graph breaks it down:

Arguably, the wealthier you were, the more you benefited from the tax cuts.   As a social scientist I know I’m showing only correlation here, causality would require something far more sophisticated.   But the correlation is strong, especially the timing.   By the way, both of these graphs are from:

And while the richest in the US earn far above the richest in other states, the poorest don’t fare so well:

Our poorest 10% are behind Greece, but ahead of the Czech Republic and Italy!  (This image was from:  And yes, they also show where our top 10% are:

Our wealthy are doing superb!   Now, this doesn’t settle the debate about tax rates.  It does prove, though, that those who claim the wealthy are hurt in the US, and that somehow they are victimized while the poor get all the breaks is pure nonsense.  Our wealthy are the wealthiest in the world!

Last bit of evidence: the growth in some incomes since the tax cuts of 1982:

While it is true that income rose for everyone, how much it rose depends on your wealth.   The wealthier you were to start with, the wealthier you got.   And, since 16% of 20,000 is a lot less than 281% of $200,000, it’s clear the balk of the money went to the wealthiest.

Lower marginal rates help the wealthy.  However, it’s not clear they help the economy.   Overall a lot of that wealth went into consumption of foreign produced goods, or financed bubbles as our manufacturing sector declined.   It does not seem to have produced a lot of investment in anything that increased production.   Instead, we had speculative bubbles.

All that said, politically the Obama-GOP compromise was wise, even necessary.  Still, we have to look at the data and ask some hard questions — does this gap between the rich and the poor make the country stronger or weaker?   It’s the largest gap in the world, and our poor don’t have things like guaranteed health care and other protections that other industrialized states provide.   Perhaps that’s a good thing — keep the government small — but as long as taxes are being collected, it does seem to me that in a time of high federal debt, it would not hurt the rich to pay a more progressive tax.