In response to John Arensmeyer’s piece from Nov. 23, it is important to provide economic and mathematical context to the suggestion that tax rate increases for high earners, as endorsed by the small business owners in his polling, would solve the national debt.
The argument has been erroneously distilled to something like this: Millionaires aren’t paying their fair share and the deficit is spiraling as a result. The answer: Increase the rates or simply take them back to pre-Reagan levels and the problem solves itself and revenues will stream in. In addition, we stick it to the oligarchy and we get a strong middle class in return.
However, and here is where statistics are indeed vital, despite economic cycles, individual income tax has consistently raised roughly 8 percent of GDP, regardless of 91 percent or 28 percent tax rates. As Alan Reynolds points outs, “Revenues from the individual income tax averaged only 7.7 percent of GDP from 1951 to 1963 with tax rates of 20 percent to 91 percent, but rose t o 8.1 percent from 1988 to 1990 with tax rates of 15 percent to 28 percent.”
Why? Because when individual tax rates drop, high earners earn and report more income when marginal tax rates come down. When Kennedy slashed rates by 22 percent in 1964, the economy grew 6 percent per year through 1964. The same phenomena took place in the early 1980s, when Reagan slashed rates.
Moreover, increasing rates on high-income earners does not put more money in the hands of the middle class, as Arensmeyer’s respondents suggest. It simply centralizes this capital at the federal level.
With respect to job creation, I would suggest that Arensmeyer review William M. Gentry and R. Glenn Hubbard’s 2004 piece on the effects of tax rates on entrepreneurial entry. Contrary to Arensmeyer’s survey, Gentry and Glenn found that the 1993 increase in the top tax rate to 39.6 percent reduced the probability of entry into self-employment for upper middle income households by as much as 20 percent. Donald Bruce and Tami Gurley reached simila r conclusions in their 2005 study.
Thus, two conclusions are clear: Soaking the “rich” does not reduced the deficit, and tax rates do influence entrepreneurial decisions.
I realize that in difficult times storming the Bastille seems an appropriate course of action, but the only thing that gets a country going again is real growth in GDP, not taxation.
Brian D. Reed, PhD
(Originally from Hippo)