Telling the truth to mislead

When someone tells us he\’s going to give us the real skinny always worth looking to see what he\’s leaving out so as to mislead.

The point is this: we will always have big deficits as long as tax policy is radically different from the post-second world war average until about 1981. And Republicans now want to cut taxes, mainly on the wealthy, even further. So the GOP\’s moaning about the deficit has no credibility whatever to anyone who knows budgets. But most people, and most reporters, don\’t know that during the Eisenhower administration, the top marginal rate was 91%, and that it was 70% for the following two decades or so, and that capital gains (which accrue overwhelmingly to the rich) were usually taxed as ordinary income. That lack of perspective distorts a whole range of popular assumptions about social equity now versus, say, the 1950s.

Spot what he left out?

Yup, the brackets. That 91% kicked in at about $1.9 million in current dollars. Not the over $250k which is said to be \”rich\” now.

Oh, and, of course, it was that well known rightist Republican JFK who pointed out that such rates were counterproductive, lowered them and saw an increase in revenue collected (well, he didn\’t actually see it as a grassy knoll shot him but his successor did).

Plus, of course, he\’s making the usual Anglo-Lefty mistake of thinking that you can pay for big government by taxing the rich. You can\’t, to pay for big government you need to have a broad based consumption tax. Otherwise you\’ll kill economic growth.

Interesting point of the day. The US tax system is more progressive than that of most other OECD countries.

6 comments on “Telling the truth to mislead

  1. US tax revenues went up and stayed up after Clinton increased the top rate to 39.6% in 1993. And they went down and stayed down after Bush cut it to 35%. So it’s reasonable to think that the current top rate is too low, even if you think the pre-Reagan 70% rate was too high.

  2. Why does taxing the rich kill economic growth more than broad-based taxes?

    Beyond some point, you can’t actually use your surplus income to consume. I also think it’s fair to say (at least a widely-held belief) that the mega-rich (or overpaid investment bankers) aren’t actually directly producing their millions in annual income – rather they are skimming a proportion of lots of other peoples’ productivity and stopping them doing that wouldn’t necessarily kill the economy stone dead. That also supports the argument that progressive taxation is the way to have broad-based taxation, because in general the greater your income the more of it is from skimming rather than the sweat of your own brow, progressive taxation thus indirectly collects more or less evenly from everyone.

    Instead, that surplus money is invested. A lot of that takes the form of simply bidding up the value of already-existing businesses. Even of that consumed, much takes the form of bidding up the value of paintings, yachts, country mansions and so on. No extra real value created, just increasing the measurable dollar supposed-value of real world stuff.

    OK, I am partly playing devil’s advocate here, I haven’t become a socialist overnight, but I also don’t know any good arguments against these positions. So please tear them to shreds.

    Tim adds: “Beyond some point, you can’t actually use your surplus income to consume”

    Quite, thus you save and other people use the savings to invest. And it really is investment which drives long term growth. Thus taxes on investment, taxes on corporations, taxes on capital, decrease the future growth rate more than taxes on consumption. Remember that the Keynes stuff about aggregate demand is a specific exemption in the short run to these general rules.

  3. @PaulB, the US tax take is going to be always closely linked to rates because US citizens cannot escape paying US taxes, anywhere in the world.

    So with the emigration route to escape high taxes blocked, revenues would only fall to the extent that rates were so high it was worth peoples’ while to evade taxes and risk criminal penalties.

  4. There were also far more loopholes and exemptions built into the US tax system back in the 1950s than exist now.

  5. @PaulB: “So it’s reasonable to think that the current top rate is too low, even if you think the pre-Reagan 70% rate was too high.” Not quite. It is not reasonable to *assume* this but is reasonable to investigate the hypothesis.

    Mr. Frost

  6. Kyle – “There were also far more loopholes and exemptions built into the US tax system back in the 1950s than exist now.”

    I would be utterly astonished if this was the case. I mean, seriously astonished. Shaking the very foundations of my world view astonished. After all, the system is run by tax lawyers and they have had 50 years to make the system more complicated so that only a tax lawyer can understand it and thus create massive amounts of work for themselves and their friends (see the legal system).

    And so it would be astounding if they did not in fact create more work for themselves and their friends.

    Not to mention politicians who use the tax system to buy off special interests.

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