POWIP Piece of Work In Progress – Former Abode of Dan Collins

Are 70% tax rates on the way back in?

We're Broke!

Like in the bad old days before Ronnie Reagan reformed the tax code? Writing at WSJ, Michael Boskin seems to think it a matter or "when" and not "if":

Many Democrats demand no changes to Social Security and Medicare spending. But these programs are projected to run ever-growing deficits totaling tens of trillions of dollars in coming decades, primarily from rising real benefits per beneficiary. To cover these projected deficits would require continually higher income and payroll taxes for Social Security and Medicare on all taxpayers that would drive the combined marginal tax rate on labor income to more than 70% by 2035 and 80% by 2050. And that's before accounting for the Laffer effect, likely future interest costs, state deficits and the rising ratio of voters receiving government payments to those paying income taxes.

It would be a huge mistake to imagine that the cumulative, cascading burden of many tax rates on the same income will leave the middle class untouched. Take a teacher in California earning $60,000. A current federal rate of 25%, a 9.5% California rate, and 15.3% payroll tax yield a combined income tax rate of 45%. The income tax increases to cover the CBO's projected federal deficit in 2016 raises that to 52%. Covering future Social Security and Medicare deficits brings the combined marginal tax rate on that middle-income taxpayer to an astounding 71%. That teacher working a summer job would keep just 29% of her wages. At the margin, virtually everyone would be working primarily for the government, reduced to a minority partner in their own labor.

Nobody—rich, middle-income or poor—can afford to have the economy so burdened. Higher tax rates are the major reason why European per-capita income, according to the Organization for Economic Cooperation and Development, is about 30% lower than in the United States—a permanent difference many times the temporary decline in the recent recession and anemic recovery.

Some argue the U.S. economy can easily bear higher pre-Reagan tax rates. They point to the 1930s-1950s, when top marginal rates were between 79% and 94%, or the Carter-era 1970s, when the top rate was about 70%. But those rates applied to a much smaller fraction of taxpayers and kicked in at much higher income levels relative to today.

There were also greater opportunities for sheltering income from the income tax. The lower marginal tax rates in the 1980s led to the best quarter-century of economic performance in American history. Large increases in tax rates are a recipe for economic stagnation, socioeconomic ossification, and the loss of American global competitiveness and leadership.

Amen to that last line. As perhaps one of the elders here, I can vividly recall what our economy was like before and after the tax code revisions in 1981.  Prior to that, wealthy Americans were less inclined to invest in businesses, whether their own or as a venture capitalists, than to make sure that a percentage of their wealth equal to the amount their accountants specified they needed to keep their net income below the rapacious higher bracket levels was invested in instruments known as "tax-shelters"; typically revenue neutral or money losing propositions, such as dilapidated real-estate or other run-down or underwater assets, instead of dynamic, growing concerns.  Which is at the heart of why the tax code changes really resulted in the ensuing economic boom.

As a nation, we can't afford to go back to the tax rates and the concomitant paradigm that existed before 1981. Indeed, the only reason we had been able to stand it, as a nation, between the rise of the welfare state under FDR until Reagan was because of the pre-eminent role that America enjoyed in the global economy; dominating all facets of global industry-smokestack, creative, and financial.

Due to many factors, such as globalization and the aggressive mercantilistic economic posture of China, in particular, not only can't we afford to placate big labor's extortionist-like hold on the public and private sector, but neither can we sustain our welfare state in it's current form or the tax burden to support it.  It's a luxury we can no longer afford...

I've long thought that Mr. Obama's plan was to run up budgets and deficits so high that pragmatism and responsibility would force us to enact large tax increases.  He's made great strides in his first two-and-one-half years in office, and believes himself to be nearing the goal of his threat today to veto any bill containing balanced budget amendment language in it is any indication.  He's determined to drag us to a Euro-style welfare state model by hook or by crook; and lately it looks more like the latter...

So I'd urge all to call or write their Representatives and Senators, the telephone numbers and e-mail contact info can be found at the House's and Senate's websites, and let them know where you stand on the matter; it's especially important to do so if you live in a deep-blue state like I do, just so they get the message.

[Cross posted at The Conservatory]

Rocketman

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