Monday, July 27, 2009

What's the Big Deal About Taxes?

So, many of us are asking, what's the big deal about increasing the top tax rate from 36% to 39.5%? (Or even a little higher). Why this carrying on as if it were some kind of catastrophy, or the first step on the Road to Serfdom?
A top marginal rate of 39.5% is no higher than in the notably prosperous '90's, and lower than the rate most of the time since 1920? Granted, there was some grumbling when Bill Clinton raised the top marginal rate, some warnings of economic catastrophy, some attempts by Republicans to demagogue the issue, but nothing like the hysteria we are experiencing now, the references to a modest tax increase as "demonization," the threats to "Go Galt," the hysterical comparisons to Hitler. What's going on here?

Serious hysteria whipped up
Several things, I suspect. For one thing, the right-wing media was by no means as advanced in 1993 as today. Talk radio was in its infancy. Rush Limbaugh was considered a lunatic. Fox News did not exist yet. The blogosphere was not even a twinkle and anybody's eye. In short, it was not as easy to whip up hysteria in 1993 as it is today. (The hysteria-whipping-up establishment grew rapidly as the '90's progressed).

For another thing, the Clinton tax increases were honest. They were a straightforward attempt to balance the budget, not accompanied by large spending increases. The current proposed increases have to look suspicious. They will almost certainly not be enough to erase the current deficits, so many people justifiably suspect that taxes will end up going up a lot more.

But I think something else is at work as well. The Clinton Administration discovered something that seems obvious in retrospect, but did not receive much attention at the time. When economic growth is concentrated heavily at the top, as it has been since the mid 1970's, even a modest tax increase at the top can greatly increase revenue, by tapping into that growth. (Likewise, the Bush Administration demonstrated the opposite -- when growth is heavily concentrated at the top, a modest tax decrease at the top can cost a lot of revenue). Furthermore, displeasure of Republican ideologues not withstanding, when there is rapid growth at the top, there is not, after all, that much resistence to an increase in the top marginal rate. After all, when your income is rising rapidly, a modest tax increase simply means it is rising a little less rapidly. Ideological dogma aside, who really cares?

But the situation is very different today. Today, incomes and wealth are falling, with losses heavily concentrated at the top. When your wealth and income are rapidly falling, even though they remain well above the national average, even a modest increase in tax rates can feel like adding insult to injury. Also significant, of course, is that with incomes at the top rapidly falling, raising taxes on them will be a much less effective revenue generator than it was in the 1990's.*
_______________________________
*Of course, we do not know what growth patterns will be when the economy starts to improve.

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