A GOP Economic Myth Bites the Dust

It's one of the most enduring myths in American politics; that if you increase taxes for the wealthy (or, in the right's favorite BS term, "job creators"), the rate of employment will take a nosedive. Nothing about this makes any sense at all, but with a media environment that values a false "balance" above truthtelling, it's much easier to gloss over that fact. What the right is saying when they make this argument is that it would be too expensive to make profit -- a ridiculous claim that ignores simple math, not to mention logic.

So, in our current political and media environment, even obviously bogus claims need to be debunked. And two top economists -- Nobel Prize winner Peter Diamond and John Bates Clark award winner Emmanuel Saez -- probably felt more than up to the task when they took it upon themselves to bust this rightwing myth. In a Wall Street Journal op-ed, Diamond and Saez set the record straight.

The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s. At the same time, the average federal income tax rate on top earners has declined significantly. Given the large current and projected deficits, should the top 1% be taxed more? Because U.S. income concentration is now so high, the potential tax revenue at stake is large.

[...]

According to our analysis of current tax rates and their elasticity, the revenue-maximizing top federal marginal income tax rate would be in or near the range of 50%-70% (taking into account that individuals face additional taxes from Medicare and state and local taxes). Thus we conclude that raising the top tax rate is very likely to result in revenue increases at least until we reach the 50% rate that held during the first Reagan administration, and possibly until the 70% rate of the 1970s. To reduce tax avoidance opportunities, tax rates on capital gains and dividends should increase along with the basic rate. Closing loopholes and stepping up enforcement would further limit tax avoidance and evasion.

But will raising top tax rates significantly lower economic growth? But will raising top tax rates significantly lower economic growth? In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. Indeed, according to the U.S. Department of Commerce's Bureau of Economic Analysis, GDP annual growth per capita (to adjust for population growth) averaged 1.68% between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23% between 1950 and 1980 when top tax rates were at or above 70%.

So no, raising taxes on the wealthy won't harm job creation -- mostly because the "job creators" aren't the wealthy, they're consumers as a whole.

"With the 'taxes harm growth' and Laffer curve arguments undercut by research such as this, Republicans have fallen back on the argument that it's unfair to take income away from those who earn it," comments economist Mark Thoma (link mine). "But that presumes that the system allocates income fairly, a claim that is hard to swallow given how much financial executives are paid relative to their contribution to the productive process (to name just one example). There's nothing unfair about using taxes to 'clawback' misdirected income, and it won't harm growth to send income where it should have gone in the first place."

In other words, the dreaded "redistribution of wealth" -- although it would be more accurately described as the "re-redistribution of wealth." Insanely low tax rates and a corporate culture that rewards even failure with tremendous bonuses represent "Robin Hood in reverse" economics, where those least able to afford it take the hit, in order to take the burden off the wealthy.

Does this create jobs? We've already established that the answer is no. And the reason is simple -- producers will only offer the goods and service that people will pay for. The less money consumers have to spend, the fewer employees will be needed at any given workplace. By taking money from consumers to cover tax breaks for the wealthy, you do the opposite of creating jobs. Take a look at that chart at the top of the page -- tax rates for the top earners are the lowest since 1950 and jobs follow that downward arc. Money in the hands of consumers, not employers, creates jobs. This is not a hypothesis, this is as solid a fact as gravity.

It's really very easy to explain all of this: employers don't hire people any time they can afford to -- they only hire people when they can't afford not to. Anyone who argues otherwise is either a liar or someone who doesn't understand economics, business, or math at all.

-Wisco

(chart courtesy of the Center for American Progress)