In 2004, Paul Krugman, New York Times columnist and Nobel Laureate, was asked at an economics conference if he believed that a return to the 1980 top income tax rate of 70 percent was a good idea. “Oh, no!,” he replied, “Those rates are insane!”
In yesterday’s column, however, after the new Democratic superstar, Rep. Alexandria Ocasio-Cortez, called for a top rate of 70 or even 80 percent, he’s all for it. He quotes such people as Peter Diamond, another Nobel laureate, who thinks the optimal rate should be 73 percent, and Christina Romer, head of President Obama’s Council of Economic Advisors, who sets the sweet spot at 83 percent.
These numbers, one infers from Krugman although it’s unclear, are the point on the Laffer Curve where revenues would begin to decline because of the tax disincentive to earn the money in the first place. At least he admits that, at a 100 percent tax rate, people would just stay in bed.
Krugman claims that while Republicans tout tax cuts as a stimulus to economic growth, he notes that over the last 60 years, while the top tax rate has declined from 91 percent to 37 percent, the economic growth rate has fallen from over 2 percent to under 1 percent (his chart ends, most conveniently, if dishonestly, at 2017). But Krugman doesn’t give any evidence that this is causation, not pure coincidence. Could not the high growth rate in the 1950s and ’60s have been due to the great increase in human capital in this country as the GI Bill sent millions to college for the first time? Or perhaps the huge pent-up demand for capital goods once the demands of World War II ended fueled it? Or perhaps it was the great post-war building boom as the suburbs exploded in size? Or maybe all three.
He also ignores, as does Ocasio-Cortez, the difference between the marginal rate (the rate at which the last dollar earned is taxed) and the effective rate (the percentage of total income that is taxed away.) In eras of high marginal rates, there have always been lots and lots of deductibles, which greatly lower the effective rate—the rate taxpayers actually care about.
In the 1950s, for instance, all interest paid was deductible. And these deductions ineluctably favor those with the highest marginal rates. An interest rate of 5 percent, for instance, would cost a man in the 25 percent bracket 3.75 percent a year after the tax deduction. The man in the 91 percent bracket, however, would pay an interest rate of only .45 percent. Thanks to the tax deduction in the 1950s, Mr. Bigbucks could drive a Ferrari at nearly no capital cost, paid for by Uncle Sam.
Congress has always written these silent tax fiddles into law for the benefit of the rich when marginal rates are high, and there’s no reason to think they would stop now. After all, who do you think writes six- and seven-figure checks to super PACS? If Congress actually socked it to the rich, the rich would sock right back with firmly closed checkbooks.
Finally, Krugman writes, “Why do Republicans adhere to a tax theory that has no support from nonpartisan economists [Krugman-speak for liberal economists] and is refuted by all available data [which is nonsense]? Well, ask who benefits from low taxes on the rich, and it’s obvious.” I can only assume he thinks that the rich vote Republican, as they did in the 1950’s when the Republicans were still the country club party and the Democrats the party of the working stiffs. Today, Republicans are the party of the upwardly mobile middle-class, and the Democrats are the party of the elite and the government-dependent. Both Barack Obama and Hillary Clinton easily carried a majority of voters earning over $250,000 a year. And for every Koch Brother and Sheldon Adelson today, there are a dozen virtue-signaling digital, Hollywood, and hedge-fund billionaires underwriting liberals.
Paul Krugman, like his party, is stuck in a political Groundhog Day. For them, it’s always 1955.