The Truth about Taxes and Growth
Hugerford provided some data that I had never seen. As I have mentioned many times, the top marginal tax rate on incomes fell from 95% at the end of the Second World War to 91% shortly thereafter, where it remained until 1964. The Kennedy-Johnson tax cut, timed to favor the GI generation as it entered its peak earning years, cut it to 65%, where it remained until Ronald Reagan, who cut it to the mid-40s in 1981 and below 30% in 1986. It rose again under Bush I and Clinton, to 40%, and then fell to 35%. Capital gains taxes have fallen a similar downward path, except in the 1970s, when they reached historic highs. They held steady at 25% all through the High (1945-65), went up apparently to about 35% in the 1970s, and have fallen in stages ever since until now they are at about 18%. But Hungerford went beyond the simple top marginal rate and provided data on the effective rate paid respectively by the top .1 % (one tenth of one percent) and the top .01% of households. These figures are equally striking. The top .1%'s effective federal income taxes fell steadily from about 55% to 35% between 1945 and 1965, while the top .01% fell from 60% to 40%. Both then rose during the 1970s, to 45% for the top .01% and about 41% fort he top .1%. Then came a pretty steady fall to 25% in 1990,a figure which applied to both groups, followed by a rise under Bush II and Clinton to 31% in 1995. Then, however, two things began to happen. Even under Clinton, the effective rate paid by both groups began to fall sharply. I don't know why this was--perhaps it was at that time that investment bankers developed the "carried interest" dodge that effectively exempts them from federal income tax rates. The second thing that happened was that the top .01% began paying an even lower percentage of effective income taxes than the top .1%. For reasons which, once again, I cannot explain, their effective taxes bottomed out in 2005 and have risen slightly since. The top 1% now pay an effective rate of 26% and the top .01% pay 24%.
It's unfortunate that Hungerford did not expand his tables to include the rest of the population, and that he did not provide additional tables that would have shown the impact of payroll taxes as well. We all know thanks to Mitt Romney that 47% of households pay no federal income taxes (although they do pay payroll taxes.) We don't know what the total tax burden is, both of those 47%, and of the additional 42% who comprise most of the upper half of our society. They may have the most reason to be angry of anyone.
Hugerford then presents tables correlating the change in top rate tax brackets with changes in private savings, private investments, productivity growth, and real per capita GDP growth. I shall begin by saying that Hungerford's regression analyses--the equations that determine correlations between factors--did not find his results to be statistically significant. However, the insignificant correlations that emerged from his data were, almost without exception, opposite to what Republican ideology holds to be true. Savings and investment tend to be higher when top marginal income tax rates and capital gains rates are higher, and vice versa. Productivity growth is also positively correlated (albeit insignificantly) with higher marginal income tax rates, although negatively correlated with higher capital gains rates. Increases in real per capita income are almost totally uncorrelated with changes in tax rates.
It's hard to know exactly what to make of these figures, because I'm not sure they represent the true picture. What is indisputable, as Hungerford acknowledges, is that economic growth, productivity growth, and per capita income rose much more quickly during the High (again, 1945-65), the era of the highest effective income tax rates on the very rich, than they have since, as the Silent and Boom generations took over the world. But since 1964 top tax rates and capital gains taxes have bounced up and down a good deal, while maintaining a secular downward trend. It is those frequent changes, I suspect, that resulted in such weak correlations.
Hungerford concludes with tables correlating income inequality with changes in top tax rates and capital gains rates, and those results, of course, are striking. The top .1% (again, the top one in a thousand) of households earned about 4% of national income in 1945 and that figure dropped to about 3% in the 1970s. Then their share began to rise, reaching 12% in 2006, falling to about 8% at the depths of the recession, but now on the way back up at 9%. The question we now face in connection with the expiration of the Bush tax cuts is whether we will allow the resumption of that trend to continue. (Incidentally, for the whole of the period under consideration, the top .01% has earned about half the total income of the top .1%.)
This is good a time as any to mention a very recent story in the New York Times floating a possible "compromise" that would allow Republicans to vote for higher taxes on the wealthy without offending their enforcer, Grover Norquist. This compromise would keep the top rate where it is, at 35%, but would apply that rate to the total income of households making approximately $300,000 or more. To some one making $300,000, that would mean a substantial tax increase. To some one making $3 million, $30 million, or $300 million, it would be completely trivial, even if they were counting most of their income as wages and salary instead of carried interest. The only way we will get a genuine increase in taxes on higher brackets will be to let the Bush tax cuts expire in toto and force the Republicans to accept a compromise involving higher rates for the wealthy.
John Kenneth Galbraith frequently remarked that the world became much easier to understand if one simply kept in mind that rich people believe they should be even richer. The story of our politics over the last 30 years is terrifyingly simple. Lower taxes on the wealthy have created gigantic and growing fortunes, which enable the wealthiest to buy more and more political power, which they use to make their fortunes even larger. The is the process that the entire Republican party is now dedicated to promote. It's sad but true to note that the last time that the nation had to confront this problem, in the Progressive era, both parties included office-holders who wanted to do something about it. The situation today is very different. Hugerford's report, which received surprisingly little media attention, genuinely threatened Mitt Romney's campaign. Congressional Republicans therefore somehow forced the Congressional Research Service to withdraw it. They didn't save Romney, but we still don't know whether they will save most of the tax policy of the last thirty years and its consequences.