On the Recumbant Recta among Us II

[Fred the Red Shirt]

Quoting from the online edition of the Wall Street Journal for May
26, 2011,

http://online.wsj.com/article/SB10001424052702304066504576343611464445594.html?mod=googlenews_wsj

[Begin Quoted Material]

A 62% Top Tax Rate?
Democrats have said they only intend to restore the tax rates that
existed during the Clinton years. In reality they're proposing rates
like those under President Carter.

By STEPHEN MOORE

Media reports in recent weeks say that Senate Democrats are
considering a 3% surtax on income over $1 million to raise federal
revenues. This would come on top of the higher income tax rates that
President Obama has already proposed through the cancellation of the
Bush era tax-rate reductions.

If the Democrats' millionaire surtax were to happen—and were added to
other tax increases already enacted last year and other leading tax
hike ideas on the table this year—this could leave the U.S. with a
combined federal and state top tax rate on earnings of 62%. That's
more than double the highest federal marginal rate of 28% when
President Reagan left office in 1989. Welcome back to the 1970s. "

[End Quoted Material]


First of all, Obama has not proposed cancelling the Bush era tax
cuts. The truth is that the Bush era tax cuts were passed with an
expiration date that has since been extended. So even if Obama
opposes another extension, any rollback would be a direct consequence
of the decision to make those cuts temporary in the first place. That
decision was made during the Bush years.

Even if we accept the arithmetic that says adding the highest state
income tax rate to the highest proposed federal tax rate will produce
a sum that is twice the highest federal income tax rate in 1989, is
that not rather like saying if I add my height today to height of my
brother that will be more than twice my height in 1989? A statement
that is accurate as it is meaningless.

And while Federal payroll taxes are higher now than they were in the
1970s, it is plainly deceptive to add them to the putative proposed
rate, while omitting them from the 1970s rate.

Putting aside the absurdity of the calculation, and assuming the
answer 62% is correct (I confess that I did not bother checking state
income tax marginal rates) this would still be less than the top
marginal rate alone for federal income tax since 1981, when Reagan was
President, though it would be more than twice that of the last year of
the Reagan administration due to the disastrous Reagan era tax cuts
that exploded the deficit.

That would still not be as high as the federal 70% top marginal income
tax rate during the Nixon, Ford, and Carter Administrations. So even
if the comparison were valid, it still would not be comparable to the
1970s -- more like 1981. The reasons for not mentioning the
Republican Presidents Nixon and Ford, are left as an exercise for the
reader as are the author's reasons for not adding the top marginal
rate for state income tax to that number to produce an honest
comparison.

Well, that is just the first two paragraphs. Let's' quickly skip
through the rest of the article. While at the top of the article the
author makes it clear that he is addressing the top marginal rate,
this changes to "average rate" as the article progresses, even though
it is still the top marginal rate that is being calculated. Later the
claim is made that the rate being calculated will be applied to "each
additional dollar earned in America", even though it is still the tax
on the highest income bracket that is being calculated. Then nearer
the end of the article this highest marginal rate is compared to the
average income tax rate in foreign countries, yet another dishonest
comparison.

Then there is this:

" in 2009 the U.S. collected a higher share of income and payroll
taxes (45%) from the richest 10% of tax filers than any other nation,
including such socialist welfare states as Sweden (27%), France (28%)
and Germany (31%)"

while neglecting to point out that here in the US the richest 10% of
tax filers receive a much much larger percentage of the nations total
income than do the richest 10% of tax filers in Sweden, France, and
Germany.

It would appear that the author, like many others. would have us
believe that changes to the top marginal rate of the federal income
tax have a profound effect on the economy. Take a look at the
history of that top marginal rate here:
http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213

The top marginal rate was 73% in 1921 and dropped to 25% by 1925 where
it remained until 1932. During that time we had both the roaring
twenties and the start of the great depression.

We see that the top marginal rate was a whopping 80% or higher from
1940 to 1964. Over that 24-year period there were busts and booms,
periods of economic expansion and recessions, periods of high and low
inflation, periods of high and low unemployment. And that top
marginal rate was still 70% or higher during the growth years of the
1960s and the bad times of the 1970s. The obvious conclusion is that
all of these things, good and bad, happened without any significant
change in the top marginal rate.

So even if the top marginal rate can have a significant effect on the
economy, it is clear that there must be other factors that have a much
larger effect.

We have no reason to fear that the proposed modest increase in the top
marginal rate that is needed to halt the growth of the national debt
will do jack shit to the economy.