I realize that economics is about as interesting as watching my weimeraner drool, but I feel the urge to de-bunk has become a recurring theme among conservatives. That being, that the solution to America’s problems is always smaller government and lower tax rates. The typical conservative mantra on taxes goes something like this: ‘We need to free the wealth creators, who, when stimulated by the prospect of more income (due to lower tax rates), will create wealth for all of us.’ And, that any tax increase — for even the wealthiest taxpayers — would have catastrophic consequences.
As it happens, the post World War II American economy provides a nice empirical test of this hypothesis — the maximum marginal income tax rate has gradually declined from about 90% to about 35%. Shouldn’t this decline have lead to an explosion of economic growth as our “wealth creators” were freed from their long and tortuous imprisonment that is the U.S. income tax system? Ummmm, well, it didn’t.
During the ultra-high-tax 1950s (top marginal income tax rate of 90%), the United States had some of its best real economic growth (over 4% per year). And, for the decade when we had our lowest marginal income tax rates — we had our worst real economic growth (about 1.5% per year).
So what is the deal? Surely this can’t be right.
Well, first of all, don’t call me Shirley (sorry, I couldn’t resist a reference to the classic movie, “Airplane”). And the following will upset ideologues, but the real world is complicated. Taxes are admittedly one part of the American economy, but by no means the only driver of our economic failure or success. People are motivated by many things — not just money!
In all the recent accolades and profundity about Steve Jobs, I can’t recall a single quote, anecdote or story that suggested income tax rates had any influence on Steve Jobs’ behavior. I wonder if anyone honestly believes that if US income tax rates had been slightly higher, Bill Gates would have founded Microsoft in Dublin, or Beijing, or Geneva, rather than the U.S.? As another example — Warren Buffet, who has been an active investor from the 1950s to today, certainly could have moved offshore since tax rates were higher, am I right? Well, he didn’t.
Also, keep in mind that economic growth is not driven solely by entrepreneurs and their hard work (okay, it’s entirely possible that I’ve now pissed off both the left and the right in one blog posting). In the 1950s, the global economy was emerging from World War II and the United States was the only industrial economy relatively unscathed. With better policies, (the then current 90% tax rate was too high in my humble opinion), we might have had even higher economic growth rates in the 1950s. But, our strong economic growth throughout the 1950s was helped by a strong tail wind from other countries as well…that we were intimately involved in supplying materials used to rebuild war-torn Europe comes to mind.
In the early 21st century, we suffered relatively weak economic growth (despite much lower tax rates), but we also faced a far more competitive world and a cataclysmic real estate bubble. It is not clear that lower income tax rates would have had any impact whatsoever. However, higher income tax rates and other policy adjustments certainly might have avoided the real estate bubble from which we are now recovering.
Most importantly, it is not just how the money is raised, but how it is spent during economic downturns. Tax revenues that improve infrastructure, and fund basic research, and improve education, are investments in our future, and will undoubtedly foster economic growth. Tax cuts that primarily favor high-end consumers might stimulate the purchase of luxury goods, but what it will decidedly NOT do is contribute significantly to overall economic growth.
Demand, created by a middle class that feels reasonably certain that a sheriff won’t come knocking on their doors at 6:00 am, to evict them from their home, is now, and always has been, the primary driver of meaningful and steady economic growth.
Political ideology is a poor substitute for pragmatic approaches to complicated problems. This is NOT rocket surgery (sorry “W”, you probably didn’t actually say that, but very well could have). Myriad other factors are involved. Simply reducing tax rates, and primarily for the wealthy, may actually hinder — rather than enhance our economic recovery. For gosh sakes, you Republicans in Congress, sitting on your hands may help you stay popular with your lunch buddies, but it’s killing a large portion of the country that pays you, pays for your lifetime pensions, pays for your lifetime healthcare, and your ever-increasing staffs to do what’s right.
Here’s an idea: How about taking your pledge to the people of this country as your daily motivational impetus instead of your pledge to Grover Norquist?