Deficits, Trickle-down, and Tax Rates

The other day I noticed a peculiar historical coincidence. Three things happened between 1980 and 1982.

1. Trickle-down Economics became the dominant theory in politics.
2. The top income tax bracket dropped below 70%, where it had been for 49 of the 68 years of the history of the US income tax (72%), and never came back up.
3. US Deficit mushroomed from $81 billion to $1.6 trillion

Now, of course, co-occurrence doesn't prove causality. Just because Trickle-down theory and the slashing of top tax brackets happened at the same time as the explosion of the deficit doesn't mean that's what caused the deficit.

I presented these facts to a conservative friend to hear his response, which was, initially, are you crazy?? 70% tax rate! That's economic suicide! Job killing! I repeated the facts, which show that this tax bracket, far from being a ridiculous radical idea, was historical fact, that the tax bracket was this much more often than it wasn't, and, indeed, the economy expanded enormously. Indeed, from 1950 to 1964, when the nation was building the superhighways we now can't afford to repair, the top bracket was 91-94%!!

His response then became multi-pronged.

1. This top bracket applied only to people with very high incomes, and hence generated very little tax.
2. The deficit was caused by "entitlements" created by the Democratic congress.
3. This tax bracket would be murder on small-businessmen, historically the engine of job growth.

The first part of the first one is true. In constant dollars, the 91% tax rate of 1950 applied only to people making $3.6 million a year (about $10,000 a day). That would make the tax returns smaller than applying the rate to today's top bracket of $250k. Fair enough, but according to an article in the Wall Street Journal, which was trying to make the opposite point, a lot of money comes in at the $2+ million level. Roughly $0.6 trillion. Increasing their tax rate from 35 to 70% would double that, so an extra $0.6 trillion, which would single-handedly eliminate a third of the deficit. Good show! Asking a little extra of the $200k to $2mil crowd, (say, a 17% bump, about 52% rate) would add another $350 billion, getting us to halfway. Looks like the money is there, after all.

The second objection is ludicrous. For one, from 1980 to 2010, one of two things has been true: either we've had a Republican president, or we've paid down the deficit. Congress holds the purse strings? True. President has veto power, but let's look at Congress. From 1980-86, with the Republicans controlling at least one house and the presidency, the deficit increased 300%. From 87 to 91, with the Democrats controlling both houses, the deficit increased 12%. Between 2000 and 2006, with Republicans controlling at least one house, mostly both, and the presidency, the deficit increased from $17bil to a staggering half trillion, an increase of 3100%. Now, to be fair, I don't mean to say that its all the Republican's fault. It's not. With the singular exception of the Clinton years, the deficit has gone up regardless of the controlling party.

What about small businessmen? Conservatives are always quick to leap to the defense of small businessmen--except of course when actual small businessmen are in trouble. At any rate, what about them? Tell me, how many small businessmen are taking home $3.6million per year? Keep in mind that business expenses and losses are written off, so we're talking a $3.6million profit. Any small businessman making that kind of money, if he has any sense, is going to incorporate, and he won't be paying this personal income tax rate. He'll be keeping this money in the corporation. If he awards himself a $3.6 million dollar salary, then, yes, he'll pay this tax rate, and well he should. That's money that he could be using in his business to create jobs and expand the economy! The truth of the matter is that the overwhelming number of small businessmen are making very little money. It's one of the things you can do to put yourself at the bottom of the income pile: open your own business.

Which brings me to the final suggestion. There should be an alternative minimum tax on corporate income as well. That way corporations like Exxon that make record-breaking profits year after year don't find ways to pay absolutely nothing in taxes, year after year.

So did Trickle-down theory and tax breaks for the rich cause the deficit? Can't really prove that, but it's clear that eliminating them would mostly eliminate the problem.

Nuff said.