Hilzoy is tired of hearing about “socialism” and “class warfare” just because Barack Obama is raising the top marginal tax rate from 35 percent to 39.6 percent. After all, we had much higher rates under John Kennedy and even Ronald Reagan, two legendary tax cutters. And rates are higher in most of the developed world, too!
There’s much truth in that. To many Republicans, tax cutting has become something of a fetish. But there’s a right way and a wrong way to frame the debate.
I came of political age in 1979-80 and Reagan was my first political hero. I’m a firm believer in lower and flatter taxes but, at the same time, I recognize that:
Some progressivity is fiscally necessary and morally justified
– Government would need a lot of money even if it were only to do the things that everyone agrees it must do
– People at the bottom of the wealth scale don’t have any money, so the rich will by definition have to pay more
– Money needed to meet basic human needs is more valuable to the individual than incremental money after that point
Cutting taxes generates more revenue . . . but only up to a point
– The greater percentage of an earned dollar taken by the government, the less incentive there is to earn said dollar
– The lower percentage of all money collected as revenue, the lower the revenue collected
Once those points are conceded, as the old joke goes, we’re just haggling over price.
The top tax rate [PDF] has fluctuated wildly since the passage of the 16th amendment in 1913. It began at 7 percent (no, that’s not a typo) on those earning $500,000 — a massive sum in those days. It rose to 15 percent in 1916, 67 percent in 1917, 77 percent in 1918, went down numerous times before settling at 25 percent in 1925, jumped back to 63 percent in 1933, 79 percent in 1936, 81 percent in 1941, 88 percent in 1942, 94 percent in 1944.
It went down to 91 percent after the war and stayed there for years. That’s where it was when John Kennedy took office and where it was when he was murdered. Despite being constantly cited as a tax cutter, he left the top marginal rate alone.
Lyndon Johnson cut it to 77 percent in 1964 and 70 percent in 1965. That’s where it stayed until Reagan cut it to 50 (1982) to 38.5 (1987) to 28 (1988).
It has gone up and down considerably over the two decades since but never back to that low after it went up to 31 percent under George H.W. Bush (1991). Nor has it gone up above the 39.6 percent we reached under Bill Clinton (1993 to 2001).* John Cole has created a graph with this data:
So, no, 39.6 isn’t some magical threshhold that catapults the nation into socialism (indeed, tax rates really have little to do with socialism). Nor is it necessarily a road to financial ruin via the demoralization of the productive class; we’ve had boom and bust times with considerably higher and considerably lower rates.
But here’s the thing: There are different ways of talking about tax rates and some are more useful than others. In addition to the list above, I’d like to add in another thing the debate should recognize:
It’s our money, not the government’s
People earn money by trading in their time, labor, energy, present enjoyment, and so forth. While it’s not universally true, those earning more money tend to work more and have made better choices than those who earn less. One generally doesn’t get rich without getting an education and putting in much more than 40 hours a week. Indeed, few get rich working for someone else; most have taken the enormous risk of going out on their own and starting their own companies.
Recognizing that “the rich” have both earned their money and that they have more ability to pay, let’s debate where the tax rates should be on the needs of society and the logic of the market. This will be an ongoing debate, as there’s no “right” answer that applies regardless of circumstance.
One thing that’s obvious from a glance at the history of the top marginal rate is that it has typically gone up — sometimes skyrocketed — during crises. Especially wars. We went in the opposite direction during the Bush administration (partly out of ideology, partly because we went on a wartime footing during a recession and didn’t want to raise taxes and put a further strain on the economy). So, I’m persuadable that going up to 39.6 percent is necessary.
Here’s how not to persuade me: Using soak the rich rhetoric. The constant, “hey, only the top five percent are having to pay for any of this, so it’s cool” talk. That’s class warfare.
Via Jim Henley, I see that IOZ snarks,
In general I think it safe to say that people who display no outward indications of appreciating the distinction between business income, profit, salary, and taxable income are not, whatever their claims to the contrary, occupying the lofty brackets that Obama proposes we liquidate or nationalize or blast into space or whatever as we make the final transformation into the People’s Republic.
In addition to being untrue (lots of high earners have little knowledge of economics or tax policy) this is entirely beside the point. Whether you’ll personally have to pay more taxes shouldn’t be a major consideration at all.
It’s dangerous for a republic to operate on the basis of the lower classes voting themselves a larger share of the earnings of the upper classes. It’s one thing to appeal to a sense of noblesse oblige and quite another to treat others’ wealth as a piggy bank to be raided at will.
Image: Retirement Council of America
_________
*Yes, I know presidents don’t set tax policy on their own and need Congress to cooperate.
