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Monday, June 20, 2011

Why not raise the top marginal tax rate back to 94%?

I have always been befuddled by the burning passion to raise taxes on the "rich" so they can pay their fair share. Whenever you hear the word "fairness" hold on to your wallet because someone is coming after it. Now folks in Washington and Academia (Robert Reich for example) are floating the idea of jacking up the top marginal tax rate back to 1960s levels, in the 70% range or so. Why stop there? Why not put it back to 94% like it was in the Second World War? And make it for all incomes above $250,000. The graph above of Hauser's Law is a historical fact that is perpetually ignored by all the social engineers of the world who want to sock it to the American people to pay for their vision of what America should be (think France here). Revenues to pay for that are not going to come from tinkering with the tax code. If you doubled everyone's income tax bill today, and made everyone who pays income taxes stroke a check for twice what they paid last April, you would collect $1.2T and would not balance the budget for even one year. If you confiscated all incomes over and above the $100,000 threshold, you would collect $1.5T, and obviously you could only do that once. What really matters is what you squeeze out of the economy as a percentage of GDP and it is clear that we have never gone much beyond 20% no matter how you want to re-arrange the furniture, so to speak.

The real cash cow would be to keep the tax code as it is and slap on a Value Added Tax (VAT, think national sales tax), that would certainly be a revenue whopper. But when that money is spent then what do you do? There will always be the call for more taxes even after that. Don't believe me? Look at the UK. They have high income taxes and a VAT, they are broke too and in deficit spending and what were they screaming? You got it, "we need to raise taxes to do something about the deficit"! They raised the VAT from 17.5% to 20% in January of this year. That is a bunch of Bullocks mate! Count me out.

Most if not all of the deficit and debt reform we should be looking at should come from spending reduction and the elimination of so-called tax expenditures. So let's start have a special tax subsidy or deduction because you are some favored political class or bought some special item, say your prayers varmint. Kill it. Then let's talk about entitlements for all you young folks under age 55.

Until we are willing to put government spending at 20% of GDP or choke the living hell out of our economy with a European-style VAT (that will never be enough), we will have the ongoing deficit and debt saga for as long as financial markets will allow it.

For further explanation of such nonsense look here.


Ashton said...

How about a consumption type tax like Fair Tax?

Of course, it would be reassuring if the 16th Amendment were repealed before enacting a consumption tax. Wouldn't like a consumption tax alone at first and then a "value added" tax with my fair tax later.

Randall Parker said...

Very much doubt 16th amendment would ever be repealed. Anything that would make the tax code less of a political entity and more economically efficient would be worth it. And you should not doubt that our tax code is a political and not an economic apparatus.

Anonymous said...

Federal revenue could easily exceed 20% of GDP. Your argument assumes govt was trying to exceed 20% of GDP but failed. The graph also treats the social security surplus as revenue when it's really debt. You calculate revenue by subtracting spending from the on-budget deficit. Since the top rate was cut below 50% (1988), the surplus has been between 1% of GDP and 1.5% of gDP. Under the Bush rates, revenue peaked at 17.2% in 2007 when tax payers were cashing out of a 8 trillion housing bubble. Cap gains that year were 900 billion. Assuming you want a cyclical surplus at the peak of the business cycle, you would need spending cut to about 15.5% of GDP to balance the budget under the Bush rates. Revenue ranged from 13.1% of GDP to 17.2% of GDP since 2001.