Apr 17, 2012 2:44 PM GMT
This is a great article featuring the former Chief Economist from Sanford Bernstein dispelling the myths that raising taxes will hurt the economy, and instead demonstrating the correlation between higher tax rates and strong economic growth. Excerpts and charts below, but the whole article is worth reading:
Ezra KleinDavid Levine isn’t most people. Levine is the former chief economist for the investment-management firm Sanford C. Bernstein. He is, as you might expect, a very rich man. But he’s one of those rich guys who, like Warren Buffett, is begging the government to raise his taxes.
Levine has been following federal tax policy for most of his adult life. “My main job was to forecast the economy,” he shrugs. “So taxes are tremendously important to that. And tax policy changes are tremendously important.” And, to him, those changes mostly went the same way: cutting taxes on people, like Levine and his friends, who didn’t need tax cuts, as the working class struggled.
He brandishes a table that tells the whole story: John F. Kennedy brought the top tax rate down to 70 percent. Ronald Reagan brought it to 50 percent, and then to 28 percent. Levine still sounds offended. “I was making seven figures,” he says. “They lowered my marginal tax rate to 28 percent. And the median American, he was paying a 15 percent marginal tax plus his payroll taxes plus the employer’s share of his payroll taxes, which comes out of his income. So he was paying, all in all, about 27.9 percent. And I was paying 28 percent.”
“Under George H.W Bush and Bill Clinton it gets raised a bit more to 39.6 percent,” Levine continues. “But then George W. Bush comes in and cuts it to 35 percent and lowers the rate on qualified dividends to 15 percent. And by now I’ve retired. I’m living off investments. All my income is coming from qualified dividends. And so I’m sitting there in the 15 percent tax bracket. And I use the maximum charitable deduction every year. So my actual tax rate has been 7 percent every year since 2007!”
It would be one thing, Levine says, if the economy had performed so much better after taxes on the rich were cut. But it didn’t. Some of the fastest economic growth of the post-war period came in the 1950s, when the top tax rate was above 80 percent. The slowest growth came in the 2000s, when the top tax rate was 35 percent. So the fastest income growth for the top 1 percent has come under the low-tax regimes, while the fastest income growth for the median American came when taxes on the richest Americans rose.
In a recent paper, economists Emmanuel Saez, Thomas Piketty and Peter Diamond looked closely at the evidence on high-income taxation. “The question we were asking is, where is the point where the Laffer curve” — which tries to estimate when higher taxes lead to less revenue, because of either evasion or slower growth — “hits the maximum revenue,” says Diamond, who won the 2011 Nobel prize in economics. “You don’t want to be beyond that. But we argue you would like to be fairly close to that. Taking revenue from people making $1.2 million is better than taking it from other groups.”
The answer, they find, is somewhere between 50 and 70 percent. Above that, you begin to lose more revenue than you raise. “So instead of the current Washington fight between Bush and Clinton tax rates, let’s think of the fight being between the Johnson/Ford/Carter tax rates and the tax rate we had after Reagan’s initial cut,” Diamond says, with a laugh.