Inequality 7.

According to the CIA, income inequality in the United States now is more extreme than in Red China.[1] So what? What matters is that a “rising tide lifts all boats,” as JFK said when arguing for a tax cut. However, some economists argue that the evidence for this “true that” statement is sketchy (as young people used to say). President Clinton got Congress to raise the top tax rate from 31 percent to 39.6 percent and the economy boomed (admittedly with the “Tech Bubble” that collapsed after he left office); President George W. Bush got Congress to cut taxes on high earners to 35 percent, but the economy floundered (admittedly with the “Housing Bubble” that collapsed before he left office). In this analysis, what really matters is the amount of demand for goods in the economy. That is an argument for shifting resources to consumers.

The “Great Bull Market” of the Twenties (and other stuff that pundits don’t want to know about) led to the Great Depression. The Great Depression led to the New Deal and 20 years of Democratic dominance in Congress. The Depression discredited businessmen as prophets-of-the-New Era. The New Deal imposed all sorts of restrictions on business and raised taxes on the rich swells (who were in some vague way blamed for the Depression). By the 1950s the top rate on marginal incomes had risen to 91 percent, essentially a confiscatory tax on high incomes. Proponents of relative income equality point to this period as the ideal society because it coincided with the period of American economic ease. Good-paying working-class jobs allowed many people with only a high-school diploma to enter some version of the middle class.

However, the Great Depression ended in 1940. By the 1970s a whole new generation of businessmen had come on the scene. They were unburdened by the sins of their elders. They campaigned for a reduction in the punitive tax rates of the New Deal era. One can see this as Republicans responding to the Democratic strategy of “tax, spend, elect” with their own mantra of “tax-cut, spend, elect.” In theory, savings create investment capital and investment capital creates jobs. Therefore, the tax rate on capital gains fell to 70 percent in the 1970s, then to 50 percent in the first Reagan administration, and then to 28 percent in the second Reagan administration. Bill Clinton pushed for and won a reduction in the tax on capital gains from 28 percent to 20 percent. George W. Bush pushed for and won a reduction in the tax on capital gains from 20 percent to 15 percent. However, President Bush also pushed for massive cuts on taxes paid by lower income groups.

Two things resulted from the Bush tax cuts. First, the US government lost $400 billion a year in revenue. Of this lost revenue, “only” $87 billion came from people earning $250,000 a year or more. The other $313 billion came from people earning less than $250,000 a year.[2]

Second, taxation became much more progressive. While cutting taxes overall, Bush shifted the burden of taxation onto upper income earners. After the Bush tax cuts, the top 1 percent of income-earners now pays 40 percent of the income tax bill (and 21 percent of all taxes), while 47 percent of Americans now pay no income tax at all.[3] Despite his bitter condemnation of the Bush Administration on many scores, President Obama fought hard to confirm 98 percent of the cuts.

There are three observations worth making. One is that there are big long-term trends or swings in tax policy. The huge deficits looming as the “Baby Boom” ages may herald an end to low taxation for everyone.

A second is that President Obama has loudly condemned the plutocrats “who tanked the economy” in the financial crisis. How did Bill Gates or Steve Jobs or Warren Buffett or the idiots who ran American car companies “tank the economy”? They didn’t. In fact, only about 14 percent of the richest Americans work in finance. Yet Gates, Jobs, Buffett and a lot of other ordinary, successful entrepreneurs were hammered by the Obama tax increases.[4] They have also been subject to his frequent dispensation of moral opprobrium.[5]

A third is that the Democrats need to define what they mean by “fair.” As in, “the rich should pay their fair share.” The rich are already carrying a disproportionate share of the fiscal weight while almost half of Americans pay nothing at all for the programs that benefit them. As Woody Guthrie might have said (had he been an entirely different person), “A poor man with a ballot-box can rob you just as easily as can a rich man with a pen.”

[1] “Taxing the rich,” The Week, 4 November 2011, p. 11.

[2] Can you impeach a former President?

[3] If “taxation without representation is tyranny,” then what is representation without taxation?

[4] Perhaps it is worth pointing out that of the “one percent,” about 16 percent are in medicine; about 12 percent are lawyers, and about 50 percent of the members of the House of Representatives and the Senate belong to the “one percent.”

[5] See: “Stuff my president says.”

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2 thoughts on “Inequality 7.

  1. If tax cuts create jobs, then why were the 1981 Reagan “job-creating” tax cuts followed by sixteen straight months of rising unemployment, and why were the 2001 Bush “job-creating” tax cuts followed by two years of steadily rising unemployment? And why, at this exact same point in the Reagan Miracle, was unemployment still over 6%? Over-simplified, I know…

    Another random thought on higher tax rates. Perhaps one (unintended?) side affect of high income tax rates is that those with high incomes will invest the money back into their business rather than pay taxes on it?

  2. I didn’t endorse the notion that tax cuts create jobs. I just noted the theory. Historical evidence isn’t clear. The Mellon Tax Plan in the 1920s and the Kennedy tax cut in the 1960s did create jobs, so far as I can tell. To be fair to Reagan, and none of those posts on FB that compare Reagan with Obama on job-creation are fair, Reagan’s tax cuts coincided with the tight contraction in monetary policy engineered by Paul Volker at the Federal Reserve Bank. The two oils shocks of 1973 and 1979 had set off a severe inflation. Stopping that inflation took priority over job creation. Interest rates were pushed up very high. In contrast, President Obama’s time in office coincided with a period of very low interest rates engineered by Ben Bernanke at the Federal Reserve Bank. Bernanke had little choice but to pursue this policy (JMO) because the dummies in Congress (both parties, but especially the Republicans) had taken flight from Keynesianism.

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