Pleasing the Proletariat
Obama’s call for increasing taxes on the wealthy is playing well with the ever-expanding ranks of the proletariat. According to a September 15-18th Gallup poll, 66% of respondents favored increasing income taxes on individuals earning at least $200,000 and families earning at least $250,000.
The results of this poll make a lot of sense as one would expect resentment from an ever-growing underclass. According to the U.S. Census Bureau, the nation’s poverty rate rose to its highest level last year at 15.1%. 46 million people- roughly the combined populations of California and Virginia – were officially poor, and the median income dropped by more than two percent to $49,445. The poverty rate among African-Americans and Hispanics is even worse at about 27% for each group.
Of course, President Obama’s response comes straight out of the Democratic playbook – attempting to raise those at the bottom up by dragging down those at the top. The Soviets tried this radical approach before, and the Russian people are still recovering from the ensuing wreckage.
Few become wealthy through being excessively frugal. Most do so because they find ways to increase their incomes by providing a valuable product or service to free markets. Similarly, the only sure-fire way to get the country out of the current economic morass is through tried-and-true economic growth.
Sadly, empirical evidence suggests that taxing the rich actually reduces GDP growth.
Before I address this provocative conclusion, I would first like to lay to rest the ridiculous notion that the wealthy do not pay their “fair share.” According to The Economist:
“The rich pay a substantial share of taxes across the developed world, and this share has risen in recent decades. According to the OECD, a think-tank, the top 10% of earners contribute about a third of total tax revenues—28% in France, 31% in Germany and 42% in Italy. Rich Britons pay about 39% of total taxes while America’s wealthiest households contribute a larger share to government than in any other OECD country, at 45%. Looking just at income tax, the share paid by the top 1% of earners in America rose from 28% in 1988 to 40% in 2006, in Britain it rose from 21% in 1999 to 28% this year. America’s greater dependence on its rich is due in part to their good fortune. As of 2007, the total earnings of the top 1% equalled 74% of all taxes paid, up from 24% in 1976. The rich are a juicy target because their taxes could conceivably cover far more of the budget than before.”
In other words, the wealthy are paying more of their “fair share” than ever. However, when a state’s policies are failing, scapegoating is a useful technique for distracting the masses, and President Obama is a maestro in wielding weapons of mass distraction.
Unintended Consequences
Martin Feldstein, a Harvard economist, found that “taxable income among high earners adjusted, dollar-for-dollar, with tax rates” when he studied the 1986 Tax Reform Act, which lowered the top American marginal tax rate from 50% to 28%. Economists found similar results when they analyzed Margaret Thatcher’s British tax cuts in the 1970s.
When economists performed similar studies across a number of countries and time periods, the effect was not as dramatic, but present nonetheless. Under these conditions, a 1% increase in the marginal tax rate reduced taxable income by 0.1-0.4%.
More important is the question about how tax increases affect GDP growth. Again, The Economist provides some shockingly high figures:
“In the short to medium term, tax changes have large effects. An isolated tax increase of 1% reduces real GDP by almost 3%, mostly because tax rises have a significant effect on investment…The impact on growth is relatively persistent; the greatest effect is felt more than two years after the change.”
While Mr. Obama’s politics may be playing well in Peoria, they reflect a serious misunderstanding of empirical economics.
This is all about political scapegoating, because I doubt Mr. Obama is that stupid. If I’m wrong, God help us.
It turns out Obama’s policy is not math after all. It’s class warfare.
Reflections of a Rational Republican 
Empirical evidence suggests that higher tax rates, to a point, doesn’t harm GDP. Wouldn’t the Clinton era provide proof? Take the 50s. The 60s. The tax rates on top earners were much higher during the 50s and 60s. During the Clinton era taxes on top earners were about 5% higher and it didn’t seem to hurt eanything. In fact, we are currently taxed at historical lows. Following this logic we should be awash in job.
http://www.econdataus.com/taxcuts.html
Perhaps the message should be that starting wars while cutting taxes is a stupid move.
The empirical evidence shows the change in tax rates impacts GDP, not the absolute level. Apparently, the Clinton period was included in the study as were the 1950s and 1960s. I am actually shocked that the effect of a 1% increase in the marginal tax rate resulted in a 3% decline in real GDP, and half expect The Economist to issue a retraction.
“President Obama’s response comes straight out of the Democratic playbook – attempting to raise those at the bottom up by dragging down those at the top. The Soviets tried this radical approach before, and the Russian people are still recovering from the ensuing wreckage.”
As you know, Dwight Eisenhower presided over rates that reached 90 percent, and was outraged at Democrats for talking about cutting taxes in a time of deficits.
By your logic, Eisenhower was just like the Soviets.
Why do you think that was the case? Was it his engagement in collectivist organizations and activities like the US Army and his familiarity with farms from his time growing up in Kansas? Was it all the time he spent in Europe? What was it, in your judgment, that made Dwight Eisenhower into a communist?
You are making a false comparison. When Eisenhower was president, the US had >80% market share in most markets and there was little if any global competition. Rates were that high because the country had just finished fighting a world war and had amassed massive debt. He was simply doing what Republicans always do – defending the status quo. The world has changed markedly since then.
To compare now to the 1950s is absurd.
So your argument appears to be that it’s OK that Eisenhower was a communist, because the country was stronger then– that communism works, but only when we face diminished competition. What was it, do you think, that drew Eisenhower toward communism– was it his admiration of Josef Stalin left over from our alliance during WWII?
How about Nixon, who presided over income tax rates at 70 percent in the 1970s. What turned him into a communist, in your opinion? Was it his time spent staring into the abyss on HUAC?
Again both President’s maintained the status quo. They did not seek to increase rates. The comparisons are crude and do not take into account that the world was dramatically different then than it is now. Furthermore, a larger percentage of the budget was consumed by defense expenditures than it is today, as both presidents were operating in the midst of the Cold War. As such, the percentage of the budget that made up entitlement programs was much smaller than it is today. Both presidents’ budgets were therefore geared far less toward socialist-like income redistribution policies (at least 40% of the budget under Obama) and more toward national defense.
Historical context makes all the difference in the world, as does the actual use of government dollars.
OK. So Eisenhower and Nixon made their peace with communism, deciding not to fight it because it would have been too hard, and plus they had to fight the Cold War.
What about LBJ? He presided over Nixonesque tax rates of 70 percent, and pushed for the creation of Medicare. Did he fight the Vietnam War to pretend to be opposed to communism, so that no one would notice that he was actually an even bigger commie than Eisenhower?
How come the Bush Jr. era GOP, with control of all three branches of government after the Cold War, failed to eliminate the communism from America? Why does the GOP have avowed communists like John Boehner and Paul Ryan– who voted to create an unpaid-for prescription drug benefit program to increase the communism of Medicare– in positions of power today?
I’m also curious– which countries do you admire, today and in the past 50 or so years, that aren’t communist? Are there any states in NATO that you consider to be non-communist?
I completely agree with you on Medicare and expansion of Medicare under Bush. Both policies are socialist. The Prescription Drug Benefits Program was clearly not Bush’s finest hour.
Are there any successful countries in the world that aren’t communist? I’d think, but I could be mistaken, that all other wealthy countries are even more communist than the US. Has communism already gripped the world? Did the Soviets win the Cold War after all?
China. Then again, that country has more of a totalitarian government with a capitalist economy. It turns out that a command economy was not working for them. North Korea is probably the only country left with a communist government. Europe has mostly socialist governments, which, of course need to be paid out because their social welfare programs are too generous. Sounds familiar doesn’t it?
So, there are no countries on earth that are successful and non-communist, in your view. If you believe all the world must undergo a transformation of all its polities, do you view yourself as a “conservative,” or as a “radical”?
Europe has mostly socialist governments, which, of course need to be paid out because their social welfare programs are too generous.
That’s not actually true. It’s close to true in Greece, but nowhere else. See: http://graphics8.nytimes.com/images/2011/09/23/opinion/092311krugman2/092311krugman2-blog480.jpg
Also, it’s not true that the US is broke. We can balance our budget simply enough, if we choose to, in a number of ways.
Every country in the EU is tied to a common monetary system. A Greek default would ripple through the system and devalue the Euro. By definition, Greece’s massive social welfare programs required a bailout. Portugal and Italy came close. Additionally, 8 of 12 countries in Krugman’s chart have been running fiscal deficits for at least seven years – and those were the good years (2000 – 2007). I fail to see how those figures help advance your point.
In regard to your successful and non-communist thread, your argument seems to be coming out of left field (literally and figuratively). It also seems a bit hyperbolic.
I think our debt levels are reaching those of the Eisenhower years — in fact I think we’re there already. Moreover, we had little foreign debt then. Eisenhower actively fought against Democratic efforts to cut taxes (Kennedy would ultimately get the cuts), saying cutting taxes in times of high debt was irrational. I don’t think the comparison is absurd; it only shows that it’s absurd to label calls for tax increases from the historic low levels we have now “class warfare.” If there is any time we need to ask for the wealthiest to pay a bit more, it’s when we’re in deep debt and the poor and middle class are being squeezed by recession.
But Scott, Government was only spending 18% of GDP during Eisenhower’s day. Now government spends nearly 25% of GDP. We have a spending problem, not a revenue problem. I would be willing to pay more if I knew my money wouldn’t be wasted, and if I knew that it wasn’t being transferred to someone who never contributed to the system. There is too much dead weight, and at some point, enough is enough. If we increase taxes, fine. Spread the pain and share the sacrifice. This rob Peter to pay Paul nonsense is simply unacceptable.
It would be interesting to list the exemptions of those 90% rates. It seems to me that we collected nearly the same tax revenue as it relates to GDP then as we do now?
* By then I mean any period after the “war years”.
Good point. I just looked it up. Government spending was 18.1% of GDP, on average, during the Eisenhower years. During the Obama years, it has been an average of 24.7% per year.
And tax receipts:
53: 18.7
54: 18.5
55: 16.5
56: 17.5
57: 17.7
58: 17.3
59: 16.2
60: 17.8
61: 17.8
An average of 17.5
Bush?
01: 19.5
02: 17.6
03: 16.2
04: 16.1
05: 17.3
06: 18.2
07: 18.5
08: 17.5
Average: 17.6
The same.
Fascinating.
Obama and Buffett aren’t waging class warfare. Class has nothing to do with it. Obama’s sentiment is best summed up by the economist — Americans are all in the same boat but the rich can row a bit harder. http://www.economist.com/node/21530100
The problem is that the rich have already been paying most of the country’s taxes. More worrisome is that half the country pays no federal income taxes at all. I have no problems with an overall tax increase on all Americans to help balance the budget two years from now. However, increasing taxes on one group of Americans to provide more handouts to another group of Americans (who conveniently happen to be Obama’s political base) is nothing other than base politics and class warfare.
Remember the Biblical story about the widow giving a tiny amount, but it was more impressive than the wealthy man giving a lot. The reason? The wealthy man was not sacrificing. The same applies here. The wealthy have a huge chunk of the countries’ wealth and are paying a very small proportion of that wealth to help solve our problems. Meanwhile middle class and working poor are quite often suffering, going without health care, and barely scrapping by. The wealthy have benefited from the stability of our system and its protections much more than the poor and middle class — they can thus pay more. Remember, Obama isn’t even asking for rates to go as high as Reagan’s rates, so the wealthy will still be the best off in the world (can’t say that for our middle class or poor) and still be paying historically low levels of taxes, and lower than the wealthy in other industrialized states.
Yet they are paying most of the taxes, while 50% of the population is nothing but deadweight. Furthermore, the rich make huge sacrifices to get where they are (except for those who inherit wealth, in which case I break with my party in terms of my supporting death taxes). Again, I have no problem with tax increases, just with targeting a select group of people to “punish.”
50% of the population are dead weight? You seem to think they’re that way by choice. The system is structured in a way that limits opportunity. The goal of government spending and social welfare should be to help them help themselves and become productive — they need opportunities. I think your core premise is flawed — you seem to think the poor are lazy and want to life off the rich, while most are struggling to get by, need help to pay high bills, and often are working two low paying jobs even with assistance. I mean seriously — what’s the language of class warfare — calling half the population ‘dead weight’ and saying hard working poor who don’t make enough to pay taxes shouldn’t vote. At least think about this for a second, show some empathy for those who are struggling, it’s not like they’re mostly lazy and sitting at home watching TV!
“50% of the population are dead weight?”
I did not intend to make a value judgment. Either one contributes to the tax system or one doesn’t. Those who don’t are deadweight, by definition. That doesn’t mean they are lazy or aren’t trying to get jobs. It simply means that they either don’t help the system or consume more from it than they contribute.
The other piece of this is that some of these folks have come to hard times by no fault of their own, while others are lazy. Rather than provide two years of unemployment insurance, the government should incent employers to create jobs by doing things like granting a 10-year tax holiday on all goods manufactured in new factories built in the United States. I completely agree with helping people help themselves. Unfortunately, our President believes that it is better to provide handouts to one group of people by taking from another group. This is simply against everything I was raised to believe.
Obama and Buffett aren’t waging class warfare. Class has nothing to do with it.
Two groups of people. Membership in one or the other group is dependent upon your class. The only thing that determines if you pay tax money or if you receive tax money is which group you are in.
Rich = pay.
Poor = take.
THAT, like it or not, is class warfare. You may like that arrangement. You may feel that the rich SHOULD pay and the poor take, those are valid fiscal theories. But you can’t just deny that what you propose is something it’s not.
But one could argue that the wealthy have been taking. They’ve raked in huge profits while hard working middle class and poor are squeezed. They claim they’ve earned it — just because the market gives a CDO manager at Goldman’s a $25 million bonus and a hard working construction worker a cut in pay and unemployment because of the housing downturn, does that mean each earned what they got? When someone works long days and can’t keep up with the bills, while the owner of his company is wealthy because of the cheap labor, has he really earned more? Marx had a labor theory of value — that’s BS. Class warfare is when the elite can structure the game to benefit themselves at the expense of others. To squeeze the poor and middle class more while not having the winners pay their fair share would be class warfare.
This is where we fundamentally disagree. I think the wealthy have been paying more than their “fair share” for quite some time.
What is the basis for that belief? I really don’t get it, looking at US history and the experience of all other wealthy nations.
It’s simple. I’m sure your familiar will Aesop’s fables – the tale of the ant and the grasshopper. Look there, and you need look no further. Our argument is as old as civilization. 😉
What is the basis for that belief? I really don’t get it, looking at US history and the experience of all other wealthy nations.
Let’s test this.
What exactly, what number – any number describing ratios or hard values – is the rich’s fair share. At what point would you consider the rich to be paying more than their fair share?
I suspect that you can’t answer this. And my reason for that is because the whole narrative is to win elections and gather power.
If you’ve seen the most recent incarnation of the movie Wall Street, I think the liberal’s answer is: “More.”
They claim they’ve earned it — just because the market gives a CDO manager at Goldman’s a $25 million bonus and a hard working construction worker a cut in pay and unemployment because of the housing downturn, does that mean each earned what they got? When someone works long days and can’t keep up with the bills, while the owner of his company is wealthy because of the cheap labor, has he really earned more?
It sounds like what you REALLY want is to use the tax code to redistribute wealth more equitably. Is that closer to the truth?
“Fair share” is a matter of opinion. Comparatively, our wealthy pay very little and get the most. Given our debt, and how they’ve benefited from the deficit years, I think it’s right to have them pay more (the bottom 60% haven’t benefited from the debt economy). Pino, the goal isn’t equal outcomes but real opportunity. To get equal opportunity you have to intervene and assure things like access to education, health care, and the basics. If someone doesn’t work, they deserve to fail. All I’m looking for is real opportunity for all — and I’m convinced that will benefit everyone, and stop our current period of decline.
But that 10% pays 45% of taxes. They pay far beyond their fair share. They almost singlehandedly fund the government.
“I think it’s right to have them pay more (the bottom 60% haven’t benefited from the debt economy).”
This is where I think you are most wrong. The poor very much benefited from the debt economy. Many of them foolishly purchased homes they could not afford and then walked away when valuations collapsed. They exhibited just as much greed as the wealthy banker who packaged the CDO that made these suprime loans possible. Not everyone who is poor is a victim.
Tax rates dropped dramatically over the last 30 years. The top 1% of the country increased income by 291%. The top 20% by 95%. The bottom 60% haven’t kept up with inflation. The distribution of income in the US is more unequal than anytime since the 19th Century. Our wealthiest 10% are the wealthiest in the world — but our middle class and workers have been losing ground. Meanwhile the debt bubble that allowed this accumulation of wealth has put our country in crisis. No, I think to get out of this those who have benefited most from all this debt should pay more to get us out of it. I don’t think they can claim they really earned all that — they found a way to take it.
Tax rates may have dropped, but so have the number of deductions (at least after Reagan’s Tax Reform Act of 1986). So comparing tax rates under Eisenhower, for instance, is not an appropriate apples to apples comparison. Furthermore, the top 10% pay over 50% of taxes. The bottom 50% pay nothing. Addtionally, spending is near World War II levels, yet we aren’t fighting a world war. Instead, we are propping up an ever-growing underclass that is increasingly depending on government largesse to sustain itself. In nearly every democracy in recorded history, this is how the end begins. The population discovers that it can vote itself funds from the public treasury. And in every case, that civilization ultimately fails.
My question to you is this: How much would the left be satisfied with? 70%? 80%? What is the wealthy’s fair share? It seems, according to The Economist, that this “fair share” always increases.
My question to you is this: How much would the left be satisfied with? 70%? 80%? What is the wealthy’s fair share? It seems, according to The Economist, that this “fair share” always increases.
I suspect that you will never get an answer to this. Until the poorest among us earn the same as the richest, there will be a “cause” that needs a champion.
Sounds like the ending of Atlas Shrugged.
Edmund Burke:
Shorter Edmund Burke: “It depends.” That is conservatism.
Unfortunately, the real world, the actual policy question, have nothing at all to do with today’s conservatism in the US. Allegiance to the Republican Party has no policy content; it is instead the product of a series of resentments.
The question before us is, “does our current economic context warrant returning marginal taxes on income earned about $250,000 to surplus-era levels?” We can’t expect anything from Republicans but wailing about “communism” and a retreat to Randian fantasies. (Unsurprisingly, her philosophy led her to personal ruin in real life).
Interesting quote.
The question before us is, “does our current economic context warrant returning marginal taxes on income earned about $250,000 to surplus-era levels?”
I agree. My response would be that the current economic context warrants an increase in taxes at ALL levels. Drawing an arbitrary line between one group of Americans and another makes little sense since that group will not be able to pay enough in taxes to solve the deficit problem. It only makes sense in the context of trying to win a future election by scapegoating 10% of the population.
Drawing an arbitrary line between one group of Americans and another makes little sense since that group will not be able to pay enough in taxes to solve the deficit problem. It only makes sense in the context of trying to win a future election by scapegoating 10% of the population.
This is not true.
When we look at what to do going forward, we don’t have to revert to where rates were in 2000 and revert to them just because we just have to; nor do some Democrats in Congress want to raises taxes on people such as themselves who have benefited the most because they want people to hate the rich.
Remember, context matters. In the last 30 years, the income of the top quintile has gone up a great deal. Which is good news! But the income of the bottom 80% of Americans has stagnated. See: http://jaredbernsteinblog.com/the-policy-backdrop-of-inequality-and-its-implications-for-class-warfare/
The idea that the bottom 80% (or whatever) could do bad unfair things to victimize the top 20% is, of course, valid in principle. Happily, it’s not happening in the United States today. Rejoice!
“Remember, context matters. In the last 30 years, the income of the top quintile has gone up a great deal. Which is good news! But the income of the bottom 80% of Americans has stagnated. See: http://jaredbernsteinblog.com/the-policy-backdrop-of-inequality-and-its-implications-for-class-warfare/”
Notice, that everyone always says over the last 30 years. This figure is, of course, true. That said, the income of the top 5% as a share of US income has actually declined slightly in the past 10 years. So under Bush, the rich actually got slightly poorer. But, your point is a fair one.
“The idea that the bottom 80% (or whatever) could do bad unfair things to victimize the top 20% is, of course, valid in principle. Happily, it’s not happening in the United States today. Rejoice!”
For now…;-)
My goal would be to keep taxes as low as possible while trying to maximize equal opportunity for all to succeed (not equal outcomes). There is no fixed number — I would prefer it relatively low with fewer deductions. At this point we have high debt and a really struggling middle and working class. The wealthy have done extremely well while the others have not. So to have them pay more now to help get through this crisis would help. Back to the Reagan rates, maybe?
Scott,
I agree with simplifying the tax code. I think the government could even do it in such a way that the wealthy pay more. I believe President Obama could have easily done this and gotten something through Congress. But I don’t believe Obama is interested in finding the best solution. He is more interested in winning the next election, which is why he chose to demonize the “rich.”
I believe President Obama could have easily done this and gotten something through Congress.
But that’s not true.
Witness not only the Republicans’ behavior on the deb ceiling (raised it repeatedly under Bush, voted for Ryan’s budget that required raising it again, then held America hostage for the vote, causing great uncertainty in the economy), but their position on the payroll tax. Cutting that tax is generally (not universally, admittedly) regarded as highly stimulative, because the folks who get it are more likely to spend it than those who receive the Bush upper-income tax cuts that the GOP fights to the death to preserve. And in the past, the GOP has always supported cutting it. But once Pres. Obama wanted to extend the tax cut… you know what happened.
http://www.tnr.com/blog/jonathan-chait/94167/why-republicans-turned-against-payroll-tax-cuts
As on issues such as cap and trade and the Heritage/RomneyCare health insurance reform, the GOP opposes, with militant action and rhetoric, policies that it formulated. Pres. Obama offers centrist ideas, like a tax-cut-heavy, modestly sized stimulus, and a GOP idea on health insurance reform, and finds the GOP calling him a socialist waging a class warfare.
This is because Republicans don’t have policy views; they just like being part of a side.
I have actually felt a little uncomfortable when Republicans oppose the payroll tax cuts, as it smacks of hypocrisy. They should actually approve of this part of the President’s plan. That said, what makes me uncomfortable about them is the blatant manner in which the President plans to fund them by taking money from the “evil” rich and redistributing it to a portion of the popupation that pays zero federal income taxes. This is nothing but buying votes by scapegoating 10% of the population, and is the very embodiment of class warfare.
Are there any societies on the planet Earth that you think don’t “scapegoat” the rich with progressive tax policies?
Do you think that Adam Smith had it wrong, when he wrote:
Also, remember, the poor pay just about the same proportion of their income in taxes as the rich do in the US: http://www.poisonyourmind.com/2011/08/deficits-are-a-consequence-of-spending-and-revenue/
(Meanwhile, the bottom 50% controlled 2.5 percent of the country’s wealth, with 2007 data, according to the Institute for Policy Studies).
As we know, there’s no rational way to look at the current and recent history of the United States or the history of the world and conclude that anyone is engaging “class warfare” against the rich, or that 1990s marginal rates on upper incomes is “class warfare”.
Republicans make that claim because they don’t have policy beliefs; they just have a side, and a series of resentments against those they perceive to be on “the other side”.
I still disagree. The President could easily achieve his goals by simplifying the tax code and reducing rates. In that case, the rich would pay more, but it would not seem like they were being singled out. In this case, the President is all but saying that it is right and proper that the country should take more from 10% of the population paying 45% of taxes and transfer their wealh to the bottom 50% who don’t pay a dime in federal taxes.
Seems like a declaration of war to me based on nothing other than class. Hence, class warfare.
The method one pursues in achieving one’s goals matters. The president could achieve the same goals in a less openly hostile manner. Yet he has chosen the path of most resistence, whch indicates that his goals are tied more to his political ends, rather than fixing the US economy.
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