A commenter to my previous post writes: “Tax increases on the wealthiest would keep rates below Reagan era rates, and add some revenue.”
No, they won’t. Not even close. Here’s why:
Now, this chart counts all tax revenues. Income taxes, corporate taxes, excises, tariffs, etc. All of them. It includes the low income taxes of the 1930s, the 90% top tax brackets of the 40s and 50s, the Kennedy and Reagan rate cuts of the 60s and 80s…it’s all there.
And what do we notice about this model? Well, a couple of things. First, the highest tax receipts as a percentage of GDP was 20.9%. That was in 1944. In 1945, the percentage was just north of 20%. I think I have a pretty solid–and obvious–explanation of why tax receipts jumped so high in those two years. Sadly, the Nazis are gone and the Japanese seem rather less interested in the Greater Southeast Asia Co-Prosperity Sphere project than they did back then, so a global conventional war seems out of the picture at the moment. Darn our luck!
But the other thing we notice when we look at this chart is that despite top marginal tax rates varying between 28% and 90% since 1945, tax revenues as a percentage of GDP seem to be locked in at about 18%. There is, in fact, only one explanation for the variations–minor as they are–in the revenue percentage since 1945, and that is economic expansion. Irrespective of the statutory tax rates, the single, overriding factor in increases or decreases in the revenue percentage has been economic growth. The percentage rises when the economy expands, and dips when it contracts.
As a practical matter, this chart shows us a very obvious, but little-understood phenomenon, namely, that 18% or thereabouts is the rate at which the electorate consents to be taxed. Think about that for a minute. Dwight D. Eisenhower presided over a system of steeply graduated tax rates with a top marginal tax rate of 90%. He got 18% of GDP in revenue. Ronald Reagan slashed tax rates, simplified the structure into three brackets, indexed for inflation, with a top marginal tax rate of 28%…and got 18% of GDP in revenue.
In the past couple of weeks, three different progrssive policy think tanks have released deficit reduction plans, all of which contained substantial tax increases, and which projected revenues as a percentage of GDP rising to over 23%.
Not. Gonna. Happen.
We know it won’t happen, because the American people have told us repeatedly, over the past 60 years, exactly how much revenue they’re willing to pay in taxes. You can jack around with tax rates all you want and you’ll get 18%. Unless you grow the economy. When the jobs are plentiful and the money is rolling in, the American people get a bit more generous. They’ll give you 19%. Maybe, if things are really going swell, 20%. But if the economy isn’t rolling hard, you’re gonna get your 18%–or less. Assuming you can lift 23% of GDP in tax revenues is just a fantasy.
Because here’s the thing: You can’t force people to make money. If they can make the same take-home pay working 35 hours per week under the new tax regime as they made in 40 hours per week under the old one, they’ll just work 35 hours per week. The more you penalize income, the less desirable additional income becomes. It’s almost as if people respond to incentives!
Bonus question 1: If the government collects about 18% in GDP irrespective of the statutory tax rates, what is the electorate telling you the desired statutory tax rate is?
Bonus question 2: If the main factor in increasing tax revenues is economic growth, would economic growth likely be greater or smaller under a regime of lower taxes?
Discuss among yourselves.
Dear media, the House vote last night – which sends the bill to President Obama for his signature – wasn’t an $801 billion tax cut bill, as the NYT headline blares. Certainly there are tax cuts in it, but not to the tune of $801 billion. Nor did "millionaires" get a “tax cut. “
All that happened is the House voted to maintain the current income tax rate for everyone. Nothing changes. No one gets "more" in terms of tax savings than they do right now and have gotten for most of a decade. Well, except, perhaps, those who don’t pay any taxes into the system. They may get more in the way of a “refundable credit”.
So quit spinning this as something it isn’t. There is no permanent tax rate. They aren’t “Bush era tax cuts”. They’re the current tax rate. Period.
Keeping that rate doesn’t "cost" the government one red cent, because they never had the money to begin with. Pretending that somehow anticipated revenue from an increase in taxes is somehow a "cost" is a perversion of the English language as well as a misuse of an economic term.
In this podcast, Bruce, Michael, and Dale discuss the Obama Tax Compromise, and its repercussions this week.
The direct link to the podcast can be found here.
As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2009, they can be accessed through the RSS Archive Feed.
Let’s get a few things straight, shall we? For the most part, this deal between Obama and the GOP on the Bush era tax rates isn’t a “tax cut”. It is a maintenance or extension of the current tax rates. There is nothing – absolutely nothing – permanent about any tax rate. They’ve ranged all over the place in the history of the income tax and are, in fact, subject to the whims of Congress. Within this package there are some tax cuts (payroll taxes for a year) and tax giveaways (EIC, etc). Other than that, it’s about keeping the current tax rates for everyone in a time of economic hardship.
Consequently it isn’t costing the government anything except a few rosy revenue projections if it had been able to increase taxes on the wealthy. And consequently, at least that part, adds nothing to the deficit. Got that? Nothing. What adds to the deficit is spending based in borrowed money.
And that problem is found in the extension, again, of unemployment benefits. So if there’s a spending negative, that’s it. Some may argue that it’s necessary. I personally wonder about that.
Anyway, it is important, as the spin begins to come out on both sides about this deal that the basics be understood.
Yesterday a petulant president tried to defend the deal at a hastily called news conference. Once into questioning, a bit of bitterness began to show through. This particular quote struck me:
And I will be happy to see the Republicans test whether or not I’m itching for a fight on a whole range of issues. I suspect they will find I am. And I think the American people will be on my side on a whole bunch of these fights. But right now I want to make sure that the American people aren’t hurt because we’re having a political fight, and I think that this agreement accomplishes that.
It reminded me of the kid picking himself up off the dirt of the playground after getting his rear end kicked and yelling “next time your butt belongs to me” at his antagonist. Obama then goes on to call John Boehner a “bomb thrower” and compare the Republicans to hostage takers (to be fair, he was none to kind to the “professional left” and even took a shot at the New York Times).
But the bottom line remains, the GOP succeeded in getting the tax rates extended for all to include thousands of small businesses who would have otherwise been hit with higher taxes. And what Obama is left saying is, “you know that line in the sand about doing away with tax cuts for millionaires, the one I drew 3 years ago and have promised to do away with ever since? Yeah, well, wait till 2012, by gosh”.
Another interesting quote from the newser was this:
So the issue — here’s the choice. It’s very stark. We can’t get my preferred option through the Senate right now. As a consequence, if we don’t get my option through the Senate right now, and we do nothing, then on January 1st of this — of 2011, the average family is going to see their taxes go up about $3,000.
Is that a fact? What have we heard for years concerning what the left continues to call the “Bush tax cuts”? That they were primarily “tax cuts for the rich”. Of course, they were much more than than and as is obvious, Democrats can’t allow them to expire or that nasty little truth would suddenly become widely known.
Finally, this struck me the wrong way:
This country was founded on compromise.
No. It wasn’t. It was a nation founded in a principle – that which said people have the right to be free from oppressive government and have the right to do what is necessary to accomplish that. Any compromise had to do with the particulars of accomplishing the principle, not in the principle itself. Obviously politics is the art of compromise. What isn’t to be compromised is that founding principle and it is the ongoing compromise of it – or at least an attempt to do so – that has people figuratively up in arms. Those Gadsden flags are waiving for a reason.
Anyway, each side is busily spinning a “win” for themselves on this particular deal. All the while, political resistance is forming on both sides of the aisle in Congress. Pelosi and Reid both seem less than enthusiastic about it and have signaled by their language that they may not have the votes to pass it.
Politically, the next few days should be interesting.