Robert Reich in the NYT has a really good graphical summary of the historical trends in the U.S. economy. If there's any doubt in your mind that the U.S. is a stronger country when top marginal tax rates are higher, this should dispel it. This is about as close to a controlled experiment as you can get in macroeconomics.
Be sure to scroll all the way down, and pay particular attention to the middle of the chart, where the results are neatly summed up in one sentence:
"Great wealth for the top 1% was reversed by policy but then rose again." (Emphasis added.)
What Reich doesn't say, but I will, is that it rose again because of government policy. The chart makes an unfortunate concession to physical layout by putting the white line that separates the "great prosperity" from the "great regression" around 1978. But in fact if you look at the income disparity chart, the real divergence between the top 1% and the rest of the population didn't begin until about 1982, shortly after the Reagan tax cuts. That's either an extraordinary coincidence (one of these day's I'll do the math and figure out the actual odds), or there's a causal relationship.
The evidence could hardly be clearer: low marginal tax rates on top earners leads to massive income inequality, which leads to a collapse in demand, which leads to economic depression. At root the problem is, as I have been saying for a long time now, a fundamental failure at all levels of society to understand the difference between money and wealth, and in particular, a widespread belief that having more money is the same as having more wealth. It isn't. The end-game of our current trajectory is the devolution of the United States of America into a third-world country, complete with crumbling infrastructure, inflated currency, and ubiquitous poverty except inside the gated enclaves of the rich and powerful. Of course, these things take time -- decades -- to play out. But unless We (or perhaps I should say You) the People take steps to reel in the emerging American oligarchy, there is no reason to believe that it won't play out the same way it did the last time we did this experiment.
To paraphrase Yogi Berra, it's 1932 all over again.
> low marginal tax rates on top earners leads to massive income inequality,
ReplyDeleteCorrect.
> which leads to a collapse in demand,
I don't see any proof to that.
> which leads to economic depression.
I don't see any proof to that.
I see from that graph that when top 1% makes less than 10% of national income - it coincides with poor economy (in 70-s).
I get the marginal tax rate thing, and the performance of the economy. I get your concern about a future 3rd-world US.
ReplyDeleteYour proposed connection between the two, is "the difference between money and wealth". I don't understand how that relates to top marginal tax rates.
If anything, it would seem that the graphic (which is great, by the way -- thanks for the reference) suffers from your very concern. It focuses on nominal income, which as you've just explained to us, is not at all the same thing as wealth. It doesn't mention, for example, net worth (since the US doesn't have a net worth tax, aside perhaps from property taxes and inheritance taxes).
For someone (like Scott Sumner) who agrees with you on the vast difference between money and wealth, it would seem that would lead you to throw out "income" taxes altogether (the rates should be zero!), and instead have consumption taxes, which gets more directly at the measure of the actual use of real wealth.
(You also may observe that consumption, unlike most of human history until the last century or two, is far, far less unequal in modern society than other measures like income or net worth. Most rich people don't spend very much, relative to their wealth, any more, like they used to.)
I guess I'm confused. I can see the argument for marginal tax rates. And I can see the argument that money is not the same as wealth. But you assert a connection between the two that I don't understand at all. Can you expand on how exactly this "root problem" relates to the other economic concerns that you have?
> I don't see any proof to that.
ReplyDeleteYou must be living in a cave. Have you not heard of the Great Recession?
> consumption taxes, which gets more directly at the measure of the actual use of real wealth
You have this exactly backwards. I don't want to tax rich people to make them poorer. I want to tax rich people because that leaves everyone, rich and poor, better off in the long run. It's counterintuitive, but the empirical evidence for it turns out to be quite overwhelming.
> Can you expand on how exactly this "root problem" relates to the other economic concerns that you have?
http://rondam.blogspot.com/2011/07/youre-all-wrong.html
I'll add a link.