How Higher Taxes on the Rich Can Raise Revenue
A response to Amity Shlaes
When Amity Shlaes surveys the current political environment, she can only see the “creepy” prospect of new tax increases. “The main reason for this is said to be democracy itself,” she writes. The horror.
Yet, Shlaes views the political process almost single-mindedly through the prism of tax policy, where the answer to every question is lower taxes! This anti-tax fundamentalism is the only way to account for her latest offering over at Bloomberg View.
Shlaes’ thesis is that we have reached a tipping point where tax increases are perceived as imminent. Throughout American history great leaders have been able to untip this “tipped” nation and resist the urge to raise taxes. This is based on two major points that are deeply misleading.
First, Shlaes perpetuates the myth that half of Americans pay no taxes. This is critical because she argues “an untaxed majority is unlikely to reduce taxes on the taxed minority.” Without broadly shared taxation, the reasoning goes, the average voter has no incentive to lower overall tax rates. Instead, as Catherine Rampell of The New York Times has noted, all income groups contribute to the federal tax burden with the lower 60 percent of Americans contributing from 3 to 10 percent of their income (which broadly tracks their share of the nation’s total income).
Second, Shlaes promotes the misleading conservative line that lower taxes in the current environment will increase total revenue. For those who are unfamiliar with the famous Laffer curve, the economist makes the claim that lower tax rates can increase total government revenue if prohibitively high taxes are disincentivizing work and productive output.
Arthur Laffer’s insight is roughly true, but we’re not situated in a historical moment where it’s relevant. Shlaes cites the “chutzpah” of Andrew Mellon who was able to reduce top marginal tax rates from 73 percent down to 25 percent. She conveniently fails to mention that under his tenure top rates rose back up to 63 percent, and that he presided over the Treasury Department in the ten years leading up to the Great Depression. His famous advice to President Hoover in 1932 to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate” was not only awful, but looks exceedingly cruel in light of the economic experience of most Americans over the following ten years.
A closer look at tax policy over the past three decades shows that we’re past the tipping point where the Laffer curve is relevant. Conservatives often forget the curve has a downward slope where revenue decreases as taxes are falling. During first three years of the Clinton administration top marginal rates increased from 31 to 39.6 percent (and corporate and capital gains taxes held steady), and federal tax receipts leaped from about 17 percent of GDP to 21 percent.
Shlaes is deeply out of touch with our present historical moment. Americans are suffering from high unemployment, and nearly all the gains in household income are captured by the top one percent of income earners. It’s amusing the watch the supposedly vilified super rich, like Mitt Romney, argue they’re being punished for their success. Since these very high-income earners are capturing nearly all the fruits of America’s economic growth, they should be paying taxes consistent with those gains.
Justice Oliver Wendell Holmes famously said, “I like paying taxes. With them I buy civilization.” This attitude of civic mindedness seems so antiquated in the current political environment dominated by the likes of Amity Shlaes. It’s past time for conservatives to remember the Laffer curve they love slopes both ways.