Friday, February 22, 2013

We don't have a spending problem!

Contrary to what you will hear from the Villagers in D.C., we don't have a spending problem:  we have a revenue problem - one that began with the Reagan tax cuts.  Those tax cuts, along with foolish spending on  boondoggles like "Star Wars", began the large annual deficits and increase in debt that we've seen since the beginning of Reagan's term, and which were exacerbated by the Bush tax cuts and needless wars he began.

You may think that the slight increase in tax rates in the Clinton years was adequate because we began running surpluses at the end of his term, but the growth of the economy in the late 1990s and concomitant government revenue was a result of the tech bubble, and not an indicator of what tax rates would be appropriate in a healthy economy.

The argument is made that higher tax rates choke off enterprise, and drag the economy down.  I call BS on that claim.  If someone has an idea for a business and thinks s/he can make a bundle on it, the tax rate may be an irritation, but not a deal-breaker.  For instance, in 1957 the top marginal tax rate of 91% did not dissuade Ken Olson and Harlan Anderson from starting the very successful Digital Equipment Company (DEC).  And a top marginal rate of 70% did not dissuade the young Bill Gates and Paul Allen from founding Microsoft in 1975.  So the claims that raising top marginal rates to a modest 40% will destroy incentives and depress the economy are - well - BS.

Diamond and Saez have shown that a top marginal rate of  50-70% will maximise revenue while not depressing growth.  Indeed, if one looks back to see how growth correlates with tax rates, then period of higher growth came in times when tax rates were higher.  So - do lower tax rates on high incomes stimulate the economy? No!

I've been looking back at growth rates in the sixties:

In 1965 and 1966 the top marginal rate on a couple filing jointly was 70% on income over $1,500,000 in today's dollars, yet growth was a healthy 8%+ in 1966.  Clearly a 70% top marginal rate is not an impediment to growth.

We do have a worryingly large deficit and accumulated debt, but it's not the result of spending:  it's the result of the rash lowering of tax rates in the Reagan and Bush years, along with the foolish wars started by George W. Bush, and the economic crash resulting from poor oversight of the banking industry.

Attacking the deficit by reducing spending is self-defeating:  more people are put out of work, reducing tax revenue and increasing outlays on safety net support, as the British are finding out.  Attacking the deficit by raising taxes on lower income earners who live from pay check to paycheck is similarly self-defeating: these individuals will have to cut spending, so depressing the economy, with jobs lost and the same lost revenue and increased safety net outlays.

But raising rates on those whose income allows them to comfortably meet their material needs and then some would not have the same depressing effect on the economy, as their spending needs are satisfied.  And the present tax increase recently passed of top rate of 39.6% on income over $400,000 is woefully inadequate to meet our revenue needs.  Here are the kind of marginal tax rates I believe we should be working towards, simultaneously lowering rates on lower incomes and raising rates on higher incomes, so we may ultimately meet current revenue needs as well as start paying down our accumulated debt:

(Suggested marginal rates for married filing jointly - halve the income ranges for singles. The top marginal rate - constant dollars - is the same as in 1965-66.)

10%            $0 - 25,000
15%            $25,000 - 75,000
25%            $75,000 - 150,000
35%            $150,000 - 325,000
50%            $325,000 - 650,000
60%            $650,000 - 1,500,000
70%            Over $1,500,000

Compare these rates to our present (2013) tax rates for married filing jointly:

10%             $0 - 17,850
15%             $17,850 - 72,500
25%             $72,500 - 146,400
28%             $146,400 - 223,050
33%             $223,050 - 398,350
35%             $398,350 - 450,000
39.6%          Over $450,000

As you can see, I'm proposing more progressive rates,  with considerably higher revenue producing rates on those most able to afford to support their country, and lower taxes on those making $150,000 or less.

Ah, if only they'd asked me....

Update 5/29/2013:  See this paper on the association between low tax rates and inequality.

Update  3/1/2014   Paul Krugman shows (once again) that we don't have a spending problem

Update 4/22/2014  Andrew Sullivan has a thread supporting high taxes

Update 7/20/2014  David Kay Johnstone tells us California's hiring increased after taxes were raised.
And adds:
The empirical evidence ... shows that the best-paying jobs tend to be clustered in states (and countries) with high taxes. The same tends to be true of wealth creators, including the most money-motivated among scientists, and existing wealth holders not actively engaged in business.
Manhattan, home to the highest taxes in America, is also home to many centimillionaires and billionaires drawn by the proximity of other dealmakers, as well as taxpayer-supported amenities such as museums and performing arts halls.

Update 10/19/2014.  It's clear that the claim that raising taxes will strangle the economy is a prime example of derp.

Update 12/21/2015

My attention has just been brought to this paper by two "resident scholars" and a "research fellow" at the AEI propaganda mill, in which they argue against the proposed top marginal tax rates proposed by Diamond and Saez.

Hers's the meat of their argument:

"Imagine a high school student who graduates in a world where the top marginal income tax rate is more than 70 percent. He may decide not to pursue his dream of becoming a college-educated engineer because the government will take a large share of the returns to his college investment — that is, much of the extra money he will earn because he is a college-educated engineer will be seized by the government, so he may conclude that going to college isn’t worth it. He is worse off because of the high top income tax rate. And so is society, because we now have one less engineer. Or imagine a medical school student. She may decide to become a pediatrician instead of a heart surgeon because a large share of the extra money she would earn being a surgeon would be taken by the government. There is nothing wrong with pediatricians, but the problem is that the government is distorting this medical student’s decision — that is, she isn’t making the choice based on her preferences and market prices alone. If enough people made that choice, there wouldn’t be enough surgeons (an economist would say there is an inefficient allocation of human resources). Or imagine a small business owner. His business is growing and he has the opportunity to expand it over the next decade. But because expanding it will require a lot of work — not to mention that the payoff is risky — he chooses not to. He decides that it’s just not worth it given that the potential rewards from his hard work will largely go to the government."

Let's take a realistic look at their argument here.
" (A high school student) may decide not to pursue his dream of becoming a college-educated engineer because the government will take a large share ....of the extra money he will earn because he is a college-educated engineer.."
What would be his income tax rate as a high school graduate?  The NCES data show high school graduates earning a median annual income of $30,000, and if the tax rates I propose were in place, his income tax (single person) would be $3,875, leaving an after tax income of $26,125
If he were to be an engineer, he could expect to be making $62.950 a year (taking the average of median entry level incomes for different engineering fields). My proposed tax rates (single person) would mean an annual income tax bill of $11,273, leaving an after tax income of $51,677 (i.e. more than the pretax income of a high school only graduate).
The difference in income after taxes: $25,552.
This difference in income would pay off a college debt of $100,000 in four years, leaving the engineer in a far better financial position than the high school graduate for the rest of their careers.
Similar calculations could be made for the other examples suggested by the AEI, but consider: these are financial calculations only.  They do not take into account the satisfaction coming from the realizations of dreams, which I suggest would outweigh the mundane financial considerations that the AEI "scholars" seem to think are so important.

Read more here:


  1. I think it would be helpful if you did some number-crunching and calculated how much additional revenue this would bring in. I will wager it's less than you think. Much less. And that's assuming that you think income levels will stay the same with these higher rates, which I don't think they would. But just for fun, please go ahead and do the math. I think you will see that this will not do all that much to close the deficit. But, I could be wrong.

    1. Three points:

      1. I'm not saying these rates would eliminate today's deficit right now, though they would reduce it some.

      2. I said these are the kind of rates we should be working towards - not instituting today, and not necessarily those exact brackets and rates. For now, a cut to those making less than $150,000 a year could be stimulative. In the long run, rates on those lower incomes will probably have to rise.

      3. Significant reduction of the deficit will only come when we are back to something like full employment, with millions more people working and paying taxes, and when today's large safety net costs like unemployment benefits and food stamps have dropped.

      You may be right that lowering taxes on those making less than $150,000 would mean not enough revenue would be generated, even in a full employment economy. (See point 2 above.) In the short run, lower rates on this income group will help a recovering economy, but may not be a good idea in the long run. My own view is that it was a huge mistake on the administration's part to make most of the the Bush tax cuts permanent (see the dark orange portion of the deficit in the graph above): a better compromise would have been to pass legislation extending the cuts until unemployment dropped to an acceptable level (say 5.6%), so that then the cuts would automatically expire, and then consider revising rates on lower incomes. I do think that the rates, whatever they ultimately turn out to be to adequately fund our government, should be way more progressive, and that we could be making a start now towards establishing the higher income tax brackets and rates.

  2. Hmmmmm. . . .let's see if I understand the Keynesian theory: Massive public sector spending generates a robust economy, and the spending needs to be subsidized through the imposition of exorbitant taxes without an adverse economic impact. I know I've heard that theory somewhere before. Oh I know, it's called the "California Plan", and there's the proof positive that it actually works in the real world. LMAO at the idiocy.

    1. Oh, sure, set up a straw man to knock it down. Well known tactic.

    2. Oh, you mean this California plan?