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TMFHousel (95.07)

Marginal Tax Rates and History Deniers

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June 07, 2010 – Comments (10)

Arthur Laffer in the Wall Street Journal has a pretty nasty forecast: Basically, we're all going to die a bloody death in 2011 as the Bush tax cuts expire, meaning, as Laffer notes, "the highest federal personal income tax rate will go 39.6% from 35%."  

Laffer's historical perspective:

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn't take effect until Jan. 1, 1983. Reagan's delayed tax cuts were the mirror image of President Barack Obama's delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don't work until they take effect. Mr. Obama's experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011. 

It's worth noting that the 1983 cuts he's talking about lowered top rates from 69.13% to 50%. (You can see it all here). Top marginal tax rates under all but one year of Ronald Regan's presidency were over 50%. He's remembered as the high priest of low taxes. Obama wants to revert taxes to 39.6%, where they were in the '90s. He's frequently referred to as a socialist. 

Those who don't remember this are bound to suffer from thinking that when something goes up, it's high, and when something goes down, it's low. That's crazy. It's the absolute value of taxation that matters, and today's top marginal tax rates are extremely low on a historical basis. 

 

 

 

10 Comments – Post Your Own

#1) On June 07, 2010 at 4:41 AM, TMFAleph1 (95.68) wrote:

Morgan,

I agree with the overall thrust of your comment, but I take issue with your characterization of Ronald Reagan as the "high priest of low taxes".

While that may be accurate with regard to Reagan's economic philosophy, most of his supporters agree that lowering taxes was the area in which Reagan fell short of his original goals by the widest margin (and I think Reagan himself might agree, also).

In that respect, readers must be careful not to conclude from the association between the notion of "high priest of low taxes" and the tax rates in effect under Reagan's presidency that libertarian politicians find such rates equitable or conducive to economic prosperity.

AD

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#2) On June 07, 2010 at 8:54 AM, russiangambit (29.89) wrote:

At the time of Reagn and before, what were the state, property taxes, registration fees , utility costs though? It feels like these grow exponentially.

So, when you add them , Midcare and SSN on top of these 40%, you easily get to 60% taxation. But you don't get the same bang for your taxes as in Europe.

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#3) On June 07, 2010 at 9:21 AM, cthomas1017 (35.93) wrote:

AD,

The greatest "short fall" for Reagan's presidency was his failure to rein in spending, particularly as it related to structural changes in social "security", where significant increases in benefits were added.  Reagan made great strides given that his entire presidency was during a period when the opposition party controlled both houses of congress.  (What's the opposite of progress?)

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#4) On June 07, 2010 at 9:29 AM, TMFHousel (95.07) wrote:

Alex,

I completely agree that the characterization is bogus. But he's credited with it over and over and over and over again by people like Laffer. That's what I wanted to point out in this post. 

 

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#5) On June 07, 2010 at 11:32 AM, GrHollingsworth (< 20) wrote:

What no one ever talks about is scary correlation between the cuts in the income tax rates and the rise of the national debt.

 http://greghollingsworth.org/blog/2009/8/10/the-high-cost-of-low-taxes.html

 

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#6) On June 09, 2010 at 1:50 PM, SkepticalOx (99.44) wrote:

The problem is with spending no? It's all fine and dandy to cut taxes, but you also have to cut spending for it to make sense. The problem with Republicans of recent years is that they have no issues cutting taxes, but they always end up spending more (you know, to make their constituents happy). 

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#7) On June 09, 2010 at 3:20 PM, MyAIC (< 20) wrote:

The Effect of a Dividend Tax Hike

The tax rate on dividends will likely rise from 15% to 39.6% next year (a 164% increase).  That hike will affect average Americans of all stripes - in 2007, 65% of taxpayers reporting dividends had incomes less than $100,000, and dividend-paying stocks have long been considered "safe enough for widows and orphans."

The hike could also affect the ability of utilities to attract the investors they need to finance important infrastructure projects - new power plants and transmission lines, renewable energy projects, upgrades to water and wastewater facilities.

http://www.arizonaic.org/blog/250-dividend-tax-hike-effect

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#8) On June 09, 2010 at 3:26 PM, TMFHousel (95.07) wrote:

MyAIC,

What were dividend taxes back in the day? During most of Reagan's years, they were taxed at normal income rates (50%-70% for top earners). 

http://static.seekingalpha.com/uploads/2010/2/18/saupload_divtax.jpg 

Why is it that a 70% tax on dividends during Reagan's years promoted growth, yet a 39% dividend tax during Obama's years will wreck the economy? I wonder, too. 

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#9) On June 10, 2010 at 6:07 PM, JakilaTheHun (99.93) wrote:

It's worth noting that the 1983 cuts he's talking about lowered top rates from 69.13% to 50% ... Top marginal tax rates under all but one year of Ronald Regan's presidency were over 50%. He's remembered as the high priest of low taxes. Obama wants to revert taxes to 39.6%, where they were in the '90s. He's frequently referred to as a socialist.

I disagree with a lot of the knee-jerk anti-tax crowd on a lot of tax issues, but there is a lot of truth to the idea that lower taxes create higher GDP growth - and - that it might be more economically efficient to distribute more societal wealth to private individuals, who are more likely to create innovative companies.  Our entire economy is structured around innovation, so this is not an issue of minor importance. 

My biggest problem with the Obama tax increases is that they will raise taxes at a time where credit contraction is already very severe.   If the US economy is on life support now, I'm not sure how it makes sense to raise taxes and potentially exacerbate the situation.  While there is also knee-jerk anti-Keynesian tendencies amongst the knee-jerk anti-tax crowd, I think Keynes would actually have argued against tax increases at a time like right now because it would reduce aggregate demand.  

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#10) On June 10, 2010 at 6:10 PM, JakilaTheHun (99.93) wrote:

Why is it that a 70% tax on dividends during Reagan's years promoted growth, yet a 39% dividend tax during Obama's years will wreck the economy? I wonder, too.

Because it's a change from the status quo.  Specifically, it's a change that could create more credit contraction and lower GDP; which would have the effect of increasing our debtload relative to GDP rather than lowering it.  

Is the credt contraction likely to be severe?  No; but it probably won't help things either.  

I don't pretend to know the hypothetical 'perfect tax rate', but I think the policies we are pursuing are wrong-headed and ignore macroeconomic affects that result from them.   I also believe that, generally speaking, much of our economic growth over the past few decades has come from innovative pursuits that might not have succeeded if there had been less private capital in the system. 

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