Taxes on the Rich should be Increased

There is no evidence that tax cuts create jobs. There is an extensive academic literature on this subject, and it all lends itself to the same conclusion: tax cuts are not conducive to growth, but is to income inequality and middle class stagnation. First, let’s discuss the reality of the current state of taxation in the United States. Andrew Fieldhouse of the Economy Policy Institute, in examining post WWII tax rates, noted this observation (1): Since the end of World War II, U.S. top individual income tax rates have declined markedly, as have effective tax rates on corporate income, capital income, and inheritances. Consequently, the federal tax code has become much less progressive (Piketty and Saez 2007). The top statutory marginal tax rate has fallen from just over 90 percent in the 1950s, to 70 percent in the 1970s, to 50 percent in the mid-1980s, to 35 percent for most of the past decade (TPC 2013a). The taxable income cutoff above which the top rate is applied for married joint filers has also fallen precipitously, from roughly $3 million in the early 1950s (adjusted to 2012 dollars), to roughly $1 million in the early 1970s, to just $388,350 for 2012 (TPC 2013b). The overall decline in progressivity is most striking within the top income percentile: The effective tax rate for the top hundredth of a percentile (i.e., 99.99–100 percent of filers by income) has fallen by more than half, from 71.4 percent in 1960 to 34.7 percent in 2004, versus a decline for the 99.5–99.9 percentiles from 41.4 percent in 1960 to 33.0 percent in 2004 (Piketty and Saez 2007). To elucidate this piece, here are his conclusions: 1. Tax rates, which ranged from 70 to 91% in the first three decades of the post-WWII era, have fallen substantially. 2. Effective rates on corporate income, capital gains, and estate taxes have fallen as well. 3. The tax code, with time, has become increasingly less progressive. We also have data telling us that the tax systems in most states are regressive – that is, a disproportionate portion of the burden is falling on lower-income people – as many states move away from progressive income taxes in favor of sales taxes (2). At the same time, corporations are getting giant breaks. Not only are they low by historic standards, as Thomas Hungerford points out (3); the nonpartisan Citizens for Tax Justice conduced an extensive study (4) of 288 Fortune 500 companies over a 5 year period, and came to the following conclusions: 1. 111 companies, including GE, Exxon, and Boeing paid negative tax rates. 2. One third paid no federal income tax less than 10 percent over the period. 3. The average tax rate was only 19.4%. 4. 55 of the 288 companies enjoyed several years of new taxes, with a total of 203 years of no taxes. So, now we have examined the evidence as to the current state of taxation. Let’s review: 1. Many states have regressive tax burdens. 2. The very affluent have seen their tax rates at near historic lows – in spite of significant growth in the post-WWII era with significantly higher tax rates – and are enjoying significant breaks on the backs of the U.S. taxpayer, who have been forced to shoulder the burden. 3. Corporations are receiving unheard of breaks. So, we know that the essence of trickle-down economics is already in play: taxes are already low. What are the results, however, of these breaks? Let’s go back to Andrew Fieldhouse, whose study concluded this: Analyses of top tax rate changes since World War II show that higher rates have no statistically significant impact on factors driving economic growth—private saving, investment levels, labor participation rates, and labor productivity—nor on overall economic growth rates. Interesting. But what about the Laffer Curve, conservatives may ask? Is there not a point beyond which the government simply cannot raise taxes lest it loses revenue? Of course there is. But what is that rate, and are we anywhere near it? Fieldhouse addresses this, as well: Recent research implies a revenue-maximizing top effective federal income tax rate of roughly 68.7 percent. This is nearly twice the top 35 percent effective marginal ordinary income tax rate that prevailed at the end of 2012, and 27.5 percentage points higher than the 41.2 percent rate in 2013.This would mean a top statutory income tax rate of 66.1 percent, 26.5 percentage points above the prevailing 39.6 percent top statutory rate…. Historically, decreases in top marginal tax rates have widened inequality of both pre- and post-tax income. Emmanuel Saez and Nobel Laureate Peter Diamond also weighed in as to what the effective tax rate ought to be, and concluded that the optimal tax rate on high-income Americans would be 70% (5). We also have data from a 65-year study from the Congressional Research Service (6). Here is their conclusion: Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. For more on income inequality, let’s go to Robert Reich (6): During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns. And, for a bit more, let’s go to Nobel Laureate Joe Stiglitz, who cites World Bank economist Branko Milanovic (7): From 1988 to 2008, Mr. Milanovic found, people in the world’s top 1 percent saw their incomes increase by 60 percent, while those in the bottom 5 percent had no change in their income. And while median incomes have greatly improved in recent decades, there are still enormous imbalances: 8 percent of humanity takes home 50 percent of global income; the top 1 percent alone takes home 15 percent. Income gains have been greatest among the global elite — financial and corporate executives in rich countries — and the great “emerging middle classes” of China, India, Indonesia and Brazil. But how bad is income inequality? Let’s ask Stiglitz: Last year [2012] the top 1 percent of Americans took home 22 percent of the nation’s income; the top 0.1 percent, 11 percent. Ninety-five percent of all income gains since 2009 have gone to the top 1 percent. Recently released census figures show that median income in America hasn’t budged in almost a quarter-century. The typical American man makes less than he did 45 years ago (after adjusting for inflation); men who graduated from high school but don’t have four-year college degrees make almost 40 percent less than they did four decades ago. So, there is certainly a moral argument at play: the middle-class has stagnated since the 1980s – the rise of Ronald Reagan, and the inception of the supply-side economics experiment we’ve been experiencing for about 34 years now. But what are the economic effects of income inequality? Should we be worried that income inequality is constraining the economy? Yes, says Stiglitz again. He makes the following four arguments: 1. Income inequality will lead to underconsumption, as the rich spend relatively smaller portions of their income than poor people due to the diminishing marginal returns of income. 2. Income inequality leads to a waste of human talent, as the non-affluent cannot access high-quality education as readily as rich people. 3. Income inequality gives way to financial crises. 4. Income inequality lowers tax receipts. And we also know that income inequality in the United States, coupled with social mobility, is significantly lower than it is in Europe. We know that countries in Europe – Finland, Germany, Norway, et al. – and even the U.S. in the three decades post-WWII had higher tax rates, more government investment, less income inequality, and more growth as a result. European countries also beat the U.S. on health, life expectancy, happiness, economic mobility, etc. Conclusion: The evidence is overwhelming, and there isn’t much time to waste. Supply-side economics is a fantasy. Sources: 1. http://www.epi.org... 2. http://www.itep.org... 3. http://www.epi.org... 4. http://www.ctj.org... 5. http://pubs.aeaweb.org... 6. http://robertreich.org... 7. http://opinionator.blogs.nytimes.com...