Yes, High Tax Rates Don’t Mean High Tax Revenue

To some on the left, the golden age of America was the 1950s.  The post war boom era saw high tax rates as well as higher rates of unionization.  Some have taken this historic evidence to assert that higher tax brackets must result in a more robust economy.  Former Labor Secretary Robert Reich and collective bargaining sympathizer frequently opines for a return to the time of housewives and Leave It To Beaver:

Higher taxes on the rich would hurt the economy and slow job growth. False. From the end of World War II until 1981, the richest Americans faced a top marginal tax rate of 70 percent or above. Under Dwight Eisenhower it was 91 percent. Even after all deductions and credits, the top taxes on the very rich were far higher than they’ve been since. Yet the economy grew faster during those years than it has since.

Surely this writer isn’t the only one confused over a self identified progressive pleading for a return to the policies of half a century ago.

Invoking Bastiat’s classic case of the “unseen,” any economic observer, when encountering historical instances such as this, must always attempt to deduce if correlation does in fact equal causation.  In a recent blog post from Timothy Taylor highlighting a report from the Tax Policy Center, the true effect of high tax brackets is uncovered.

For starters, take a look at the statutory tax brackets for 1958 and 2009. The The tax brackets are adjusted for inflation, so the horizontal axis is constant 2009 dollars. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%.  Marginal income tax rates are lower across the income distribution in 2009. In addition, the top marginal tax rate occurs much lower in the income distribution in 2009 than it did in 1958.

How many households actually paid these rates? Here’s a figure showing the share of taxpayers facing different marginal tax rates. At the bottom, across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates back 1958.

How much revenue was raised by these high marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It’s interesting to note that the share of income tax revenue collected by those in the top brackets for 2009–that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.

If the goal is to raise more tax revenue from those with high incomes, higher tax rates are not the only method of doing so.

Curiously, many economists who claim to admire the “free market” are always devising ways for governments to obtain more tax revenue.  Their interest may lie in keeping tax rates low but for some reason these confused defenders of capitalism wish politicians had more money to throw at favored interests.  The reality is that governments don’t invest income, they merely consume wealth and resources in order to maintain dominance.  They are violence masquerading as creatures of social good.  For those who see scarcity as an undeniable truth and necessitating the effective use of resources to ensure a better standard of living, limiting the amount of income in Leviathan’s clutches is a must.  Therefore, championing tax cuts as a means to boost tax revenues (the so-called Laffer Curve) is not a policiy any serious market-focused commentator should endorse.

Yet many do as highlighted by James Pethokoukis, a supply side economics advocate and blogger for the American Enterprise Institute:

In 1980, the top U.S. marginal income tax rate was 70 percent; today it is 35 percent. Yet the share of total income taxes paid by wealthier taxpayers has risen sharply.  That is powerful evidence that the United States was on the wrong side of the Laffer Curve back in 1980.

If higher taxes mean less money going to the state, then perhaps the U.S. was on the right side of the Laffer Curve.  As Taylor’s blog post shows, those glorious tax rates of the 1950s failed to bring in the type of revenue captured by Washington today as many savvy businessmen avoided the IRS highway men.  The left seems to conveniently forget the fact that people don’t work, invest, and allocate their labor and capital in an uncertain world for the sake of giving the political class more funds to play with.  If that were the case, then they would be voluntarily writing checks to the U.S. Treasury.  Production is done for the sake of consuming.  Plain and simple.  If governments were efficient at production, then they need not tax as the services they provide would be paid for willingly.  Instead, services offered by the state almost always resemble the needlessly long and aggravating trip to the Department of Motor Vehicles.

The goal of lowering taxes should be to decrease the amount of tax revenue collected; not increase it. Since economics is never a science capable of replicating isolated case studies and market economies are enormously complex, one may conclude that the robust amount of growth experienced in the 1950s was in reaction to high tax rates not being paid and hence leaving more money in the hands of the private sector.  Those who assume higher tax rates will bring in more income take production for granted and view it solely as wealth to be pilfered.  These so-called forward thinkers still infatuated with the 1950s have bastardized the word “progressive” for their preferred policies, taken to their full extent, would take man back to the days of serfdom.

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