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  • March 30, 2009 04:20 PM EDT by Brian Sullivan

    Not To "Tax" The Issue (Or Comments To My Blog Comments

    225px-john_f_kennedy_white_house_color_photo_portrait

    I appreciate all the thoughtful comments on my column on higher taxes and the economy.  There seems to be some misunderstanding of my primary point, however.

    My point was not to suggest that higher taxes equate to higher unemployment (though they may in specific consumer discretionary related segments of the economy such as boats and RVs that require much free cash flow to purchase), but rather to suggest that higher taxes will not necessary mean lower unemployment.

    The primary criticisms of my posting seem to revolve around the idea that I am suggesting unemployment will rise if taxes do, and to question my use of data points.   Rather, I was trying to use data to suggest that history, both in the U.S. and Europe, suggest that higher taxes may not solve the jobs crisis many in our nation now face.  I chose the data points (1970 - 1983) because it was one of the rare eras without major buildup (U.S. involvement peaked in 1968 though the war continued), which tends to skew data points.

    As our sharp readers have pointed out, tax rates have been coming down at the top end since the end of World War II.    And while it may not be completely analogous to today's discussion because the top end was still very high by today's standards, I think this clip of JFK's press conference announcing a sweeping tax reduction is a good indication of at least a general belief that lower corporate and personal income taxes can help stimulate growth in times of an economic slowdown.

    Yes, Kennedy only cut the upper end from a staggering 91% to a still-high 77%, nearly double the high end today.   But he clearly felt that even cutting taxes on a small number of people at the very top would make a difference in the economy.   Those at the very top tax rate of 1963 had to make $400,000 per year in 1963 dollars, which equates to a GDP-adjusted income of $2,700,000 in 2007.   Sadly, Kennedy never got to see the benefits of his bold move.

    Still, Ish's (real name?) point about wasting resources on attempts to skirt higher taxes is well taken.    I was reading this paper from a Yale law review member yesterday and part of his conclusion is:

    The reduction of marginal tax rates in the Reagan years was driven by a new policy consensus that still persists today. That consensus is that high marginal tax rates on the rich come with an unaffordably high price for the U.S. economy in the form of reduced incentives for the rich to work and to save, and increased incentives to engage in socially wasteful tax planning. And yet 1957, when Rand wrote Atlas Shrugged and the top income tax rate was 91%, falls in the middle of the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost.

    (The full document can be found here and the conclusion begins on page 23 of the PDF file)

    So while I am still not convinced higher taxes will reduce unemployment (which was my point, not the inverse) as Yale's Reuven S. Avi-Yonah says:

    Thus, the question of whether high marginal tax rates come with an unaffordably high cost to the U.S. economy remains unsettled.  Does Atlas Shrug?, a recent collection of papers written mostly by public finance economists and superbly edited by Joel Slemrod, represents the most recent attempt to answer this question. Unfortunately, no clear-cut answer is forthcoming in the book, and the debate is sure to rage on.

    Tomorrow on the program we will compare historical employment rates with marginal tax levels and debate it with our Senior Economist Mark Lieberman.   No doubt the debate will continue long after that as well.

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Pamela

What about all the infamous tax shelters of the time? Those stated marginal tax rates were not the effective real marginal tax rates because money was diverted into shelters after a certain point. Also, does anyone really believe that Obama's budget will work with the ONLY tax increase staying under 40% for over $250,000???

March 31, 2009 at 6:14 am

Corey in GA

The resources used in avoiding taxation are less a result of taxation levels than they are a result of needlessly complex tax laws. Taxation should not be used for behavior modification (targeted deductions and credits such as the mortgage interest deduction), but only to provide government with necessary funds. I think the other important point is the difference between heavy taxation of those with extraordinarily high income versus taxation of those who make on the order of 6 times the national average. If a person feels that 60% taxation on the amount of income above 25 times the national median income (50% of people earn more than this amount, 50% earn less) would require him to retire, then we can certainly use those funds to provide jobs for several people who would otherwise be unemployed because the company wouldn't have the money after paying one person the wage of 25 average people. If one uses the median income ($32,140 for persons over 25 with earnings in 2005) and applies a heavy tax to the amount more than 25 times that, the tax is unchanged on those making less than $800,000 per year, and this would be increased in the event that there was a family to support. Understand that a person making $1 million would only pay the heavy tax on $200,000, leaving the income up to that point unaffected. Thus the only people who would feel a significant effect would be those making far more than $800,000 per year.

March 31, 2009 at 9:59 am
(1 Reply)

bw55

Pamela's point is exactly right. It doesn't matter what the marginal rate is when tax shelters allow reducing taxable income to 0. I had extensive experience working with income taxes in the late 70's and 80's. I saw the effect of those tax shelters Pamela is referring to. I also saw what happened when rates were lowered and most of the tax shelters eliminated. Many high income people who never paid tax began to get substantial tax bills. I also agree with Corey's point that the tax law should not be used for behavior modification. It seems to me that we are heading back in the old direction of higher rates with many new deductions and credits. Those so called targeted tax incentives are really just more loopholes. I believe that reducing tax rates would stimulate the economy and lower unemployment. Another factor that is increasing unemployment is the increased unemployment benefits we have right now. Yesterday I overheard someone saying that she was making more on unemployment than she was working. She has no incentive to find a job.

March 31, 2009 at 12:31 pm

Ross Kessler

Nancy Pelosi is right! I cannot believe that I finally agree with her!! I do not agree with the laws that she helped to put in place, and i intend to abide only in laws I agree with. I have been a citizen my whole life, as if that means a damn thing!! IT is TEA PARTY TIME, AND THE STATE OF CALIFORNEAH IS FIRST ON MY LIST!!! WE have a duty to make this right!! If that means kick them out of office then its time to start! I have followed the law of the land my whole life, just to get kicked in the teeth by illegal workers. Nancy told us not to obey the law! Now that I have her permission, I am going to join the illegals, and make some real money any way I can, WITHOUT PAYING TAXES TO A SICK GOVERNMENT!!!

March 31, 2009 at 12:33 pm

JimK

Brian, how come you did not use the data point of 1992-2000? During that period of time marginal rate was increased from 31% to 39.6% and if you will recall we added about 2.9 million jobs per year (about 25,000,000 total jobs) and had the longest period of post war expansion. Why is it that high marginal tax rates create jobs? Well the government is going to spend the same no matter what revenues are, so it will need to borrow cash if revenues are not high. When marginal tax rates on high earners are high the government takes in a lot of $$ and doesn't need to run deficits, in fact as Clinton showed the government can even run surpluses and pay down debt. The public debt is well known to crowd out private debt and raise interest rates for individuals and business who seek capital. So when you have higher marginal rates you have greater private access to capital with lower interest rates. The results? Job growth.

April 3, 2009 at 7:22 am

about this blog

  • Brian Sullivan joined FOX Business Network (FBN) in April 2008 as an anchor. He co-anchors the 10am-12pm ET hours of the FOX Business block. Prior to joining FBN, Sullivan served as an anchor for Bloomberg Television where he hosted the programs Morning Call and In Focus.

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