Alexander Ocasio-Cortez, the 29-year old democratic socialist from New York, recently took office in Congress. She has gained national fame and is trying to be the young female version of Bernie Sanders.
Ocasio-Cortez is a proponent of a “Green New Deal”. In other words, she favors a massive expansion of government. A “Green New Deal” is just a sales pitch for higher taxes and massive subsidies to certain favored industries.
Ocasio-Cortez has suggested that the U.S. adopt a 70% marginal tax rate for the highest income bracket. Some of the left may be cringing at this suggestion (partially for political reasons), while some other parts of the left are cheering it on. One of the common themes of those defending such high tax rates is that the U.S. once had even higher tax rates and did just fine.
My first question to the left is: Why do you want the government to collect more money? I fully realize that the government probably won’t collect more money, but I doubt that most leftists spouting a 70% marginal tax rate are thinking about the Laffer Curve.
Do they want more money to pay down the debt? Do they want more money to ramp up the federal war on drugs? Do they want more money in order to fight more wars overseas?
Of course, most leftists will say that they want greater welfare at home. They will use terms such as “greater social benefits”, “free healthcare and education”, and “taking care of those in need”. Some might also say that we can spend more on building infrastructure to create more jobs.
This is mostly nonsense. Even if the government did collect more money, we know that most of it would be wasted (at least from our perspective). It wouldn’t be wasteful to the bureaucrats, lobbyists, and cronyists who live at our expense.
People have this syndrome of playing king. They naively say that if only the government would implement their plan, then it would make things better. But Congress never implements their plan, and the plans laid out never work as stated.
Does anyone honestly think that the government would run more efficiently or could significantly help more people (aside from those connected inside the beltway) if it could just have a few hundred billion dollars more to spend each year?
Central Banking and Income Taxation
With all of that said, the premise of having a 70% tax rate and being just fine is wrong. Ocasio-Cortez, Paul Krugman, and the other leftists defending this kind of idea are getting it wrong (whether intentional or not). They are not comparing apples and oranges.
After World War 2, the highest tax rate was over 90%. It came down to 70% in the 1960s. After Reagan took office in 1981, the highest rate went down to 50%. It ended up at 28% at the end of Reagan’s presidency.
The 1950s was a time of decent prosperity, and the highest marginal tax rate was over 90%. It was also a time when the federal government was barely involved in medical care and insurance as compared to now. That was the time that a doctor would make house visits, and a stay in the hospital was rather affordable. Medicare and Medicaid did not exist at this time.
After World War 2, federal government spending went way down. Overall, government was far smaller than what we have today. There was less spending and less regulation.
In the 1950s, the U.S. was still on an international gold standard. The U.S. was off the gold standard domestically, but the possibility of foreign governments redeeming gold for dollars kept something of a check on the Federal Reserve. Therefore, it was a time of relatively low inflation as compared to what was seen after the abandonment of the international gold standard in 1971.
So many people, including economists, focus on tax rates and other factors. But central banking is huge. Virtually every transaction includes money on at least one half of the transaction. When a central bank is tampering with interest rates and the money supply, it is tampering with the entire economy. When you have a relatively stable money – as was the case in the 1950s – you will tend to get a good economy, in spite of higher tax rates.
As for the tax rates themselves, consider that the highest marginal rate of 90% or more was rarely actually paid. It was only for incredibly high-income earners, and even then there were many deductions and other ways to shelter income. You can call them loopholes or whatever you want, but the effective tax rate for most people was nowhere near the 90% rate that is frequently quoted.
The 1950s vs. The 1880s
There is one last important point to make in all of this. Those calling for a high marginal tax rate, such as 70%, like to reflect on the 1950s. But why not go back to the 1880s?
The 1950s is seen as a decent time for middle class American, and certainly it did introduce something of a new era of relative prosperity after the horrors of the Great Depression and World War 2. But the time period after the Civil (so-called) War and before 1913 (the introduction of central banking and the 16thAmendment) was perhaps the greatest period of prosperity in the history of the world.
It is that period where we saw the introduction of cars, airplanes, electricity, modern-day refrigerators, and so much more. It was a time of good deflation, where real wages went up. Due to massive increases in innovation and productivity, prices dropped and new products came to the market at an astounding pace. Living standards vastly improved from each generation to the next.
Why doesn’t the left talk about an earlier decade, such as the 1880s? It is because they don’t want to talk about tax rates at that time.
What was the highest marginal tax rate in the 1880s? It was zero percent. There was no federal income tax. It was after the 16thAmendment passed in 1913 (the same year as the forming of the Federal Reserve) that the income tax began (with a couple of brief unconstitutional exceptions).
For me, pointing to the late 1800s just destroys the whole argument coming from the left that higher tax rates are fine because they were high in the 1950s. If we are going by the standard of what times were most prosperous (according to the logic of the left), then we should just return to a zero percent income tax.