by Dan Mitchell
I’ve pulled evidence from IRS publications to show that rich people paid a lot more to Uncle Sam after Reagan reduced the top tax rate from 70 percent to 28 percent…….. The United Kingdom saw similar dramatic results when Margaret Thatcher lowered the top tax rate from 83 percent to 40 percent. Allister Heath explains.
During the 1970s, when the tax system specialised in inflicting pain, the top one per cent of earners contributed 11pc of income tax. By 1986-87, with the top rate down to 60pc, that had increased to 14pc. After the top rate fell to 40pc in 1988, the top 1pc’s share jumped, reaching 21.3pc by 1999-2000, 24.4pc in 2007-08 and 26.5pc in 2009-10. Lower taxes fuelled a hard-work culture and an entrepreneurial revolution. Combined with globalisation and the much greater rewards available for skilled workers, Britain’s most successful individuals earned a lot and paid a lot in tax.
Interesting comment from RC:
So how does one explain the last 5 years where the worlds top wealthy individuals have seen their amassed wealth increase from no less than 20% to a staggering 100%+ in some cases? If your theory were true, we wouldn’t have half the problems we currently have.
My response: RC, You seem to be missing the point: it is not about how much wealth they amassed but how much tax they contributed to government coffers. These are not mutually exclusive.
This article is comparing apples to oranges. The total percentage of taxes paid by upper income individuals seems to be a distraction in order to avoid looking at the other side of that equation, which would indicate how the percentage of taxes paid by middle and lower income workers has fallen. The real question is why? A simple chart of incomes adjusted for inflation shows a reduction in incomes for lower and middle income workers which easily explains the growing percentages paid by the upper income folks who saw healthy growth in incomes and wealth. I have to laugh at the Laffer curve. It only works if incomes rise across the board. I was working as a tool and die maker in the 70’s and the 80’s when Reagan was elected. The town I live in had five Boeing sub-contractors with the one I worked at also doing NRC/Dept of Defense work including the MX missile system and submarine work. There were thousands of engineers, machinists, T&D makers, welders, platers and painters, inspectors, maintenance, drivers, accountants….on and on it filtered down with a huge portion of the populace employed at good wages. Those businesses are now all gone. We don’t have a single shop doing that work anymore, we have very few actual manufacturing jobs and Boeing has contracted all around the world. Millions of jobs have been exported and those who drove that export process showed the increase in income that generated the rise in the total percentage of taxes they pay. If the wealthy want to lower the total percentage of taxes they pay, they need to look at what they can do to resolve the problem they created. It was their greed that got us here. I guarantee, American workers would jump at the chance to make more and pay a higher percentage of taxes again. You can’t have it both ways.
Thank you for the Boeing example. We need to remind politicians and economists of the unintended consequences their decisions can have.
Your post seems to suggest that the wealthy are collectively responsible for exporting millions of jobs to other countries. They are a convenient target. Similar to blaming greedy bankers for the housing bubble. In both cases we should look at the people doing the blaming: politicians and their economic henchmen. They are the ones who add alcohol to the punch bowl and then blame others for getting drunk. In the first case they allowed more than $2 trillion of capital inflows from China and Japan, invested in Treasuries, without reacting. The effect was to suppress the yen and the yuan, giving them a trade advantage over the US, resulting in the outflow of manufacturing jobs. In the second case, the Fed suppressed interest rates to artificially low levels. Combined with the capital inflows they fueled a rapid expansion of credit, resulting in the housing bubble. In both cases, there was serious dereliction of duty from people trusted to run the country.
Thank you for pointing out the culpability of the politicians. They set-up the situation favoring the wealthy. Reagan had a union busting agenda and appointed Greenspan who ran an activist Fed. The Greenspan Fed started this bubble fest, each in it’s turn inflating to the bursting point, then requiring ever more liquidity to ‘resolve’ the bursting of each in turn. The politicians seemed to think that exporting skilled jobs (in order to reduce the union political power and advances and in the name of lowering costs, which really meant working wages) wouldn’t have a negative effect on the country, but it has spiraled out of control in conjunction with the printing and devaluation of the currency by the Fed. As usual we look at the effects rather than the causes. The wealthy take advantage of the opportunities to invest overseas in markets with low wages and rising currencies while labor struggles to hold on to their living standards and jobs while their savings lose value and inflation reduces their earnings further. Labor looks at the wealthy and says ‘hey, what gives’ and the wealthy look at labor and says, ‘hey, we’re paying more taxes and we want a reduction’. To add insult to injury, the wealthy lobby the Congress with their new added wealth and secure tax cuts for their capital gains and dividends while labor loses wealth on a daily basis to inflation and falling wages. Falling wages and inflation take enough of a toll that former middle class working people need public assistance to make ends meet or to keep a roof over their heads and feed a family. Maybe the wealthy aren’t directly to blame, but it’s hard to dismiss the obvious lobbying and public relations campaigns and no one likes a whining winner.
The strategy of the politicos is “divide and rule.” Set labor and the wealthy/middle class against each other and they will be distracted from the poor performance of government. So far they are succeeding. Nothing should distract us from holding them to account for their actions/inaction. If you want to fix Wall St, start by fixing Washington.