Restoring the 91 percent tax rate wouldn't solve our budget problems
The Kansas City Star
President Obama says ending the Bush tax cuts would put the top marginal rate back at 39.6 percent, where it was in the booming years of the late ‘90s — so what’s the big deal?
Well, the top rate will actually be higher than that after a raft of Obamacare taxes go into effect next month, including a 3.8 percent levy on investment income for affluent taxpayers.
But the larger point is that you can’t raise the income tax rates high enough to finance the ever-widening hole created by entitlements.
Michael Barone shows why. He looked at a table in the Economic Report of the President listing federal revenues going back from 2011 to 1939. Guess what? Revenues have never gone above 20.9 percent of GDP — even though the top tax rate has jumped all over the place. Even when the top rate was 91 percent in the 1950s, revenues didn’t crack that 20.9 percent ceiling.
The problem is that as the top rate rises, loopholes proliferate and people have a greater incentive to hide income, move it into different periods or seek tax shelters.
The policy goal is what it’s always been: Make the economy grow faster. I’m not saying the world would end if the top rate went up a few points, but there’s a real risk it would make a weak economy even weaker — taking us farther from the goal of fiscal stability.
For those inclined to scream “trickle down,” if there are severe consquences from a tax increase, they won’t be felt by the rich. They’ll hit average people, especially those already on the margin.
If your goal is alleviating our fiscal problems, the two imperatives are: faster growth and entitlement reform.
As Daniel Thornton of the St. Louis Fed wrote in a recent paper, the era of chronic budget deficits goes back 40 years and the main reason isn’t tax rates. It’s spending.
Thornton finds that spending for Social Security, Medicare and Medicaid — along with “other payments to individuals” (i.e., check writing by government) — accounts “for essentially all of the increase in government spending that has given rise to the deficit/debt problem.”
Further: “…most of the increase in spending that generated the persistent deficit over the 38 years before the financial crisis was spending for Medicare and Medicaid, particularly Medicare.”
So naturally, Washington has tied into a knot over tax rates for the rich, something that almost seems beside the point.