Given that there are still 329 shopping days to go, it might be a little early to be mailing Santa, but what I’d like for Christmas is people only making confident pronouncements on matters they have some clue about. Obviously, this is not likely to be a successful wish in politics, but hope springs eternal. The latest event leading to this heartfelt plea is historian Rutger Bregman sounding off at Davos on high tax rates. Maybe I’m being picky or something, but shouldn’t a historian know something about history?
What Bregman tells us all is that of course high marginal tax rates, those 70 percent and higher, work. They even worked in the United States in the 1950s, he says. They ensured that the rich paid their fair share, and that’s the definition of working that he’s telling us should be used.
The thing is, they didn’t actually achieve that. I could go off into reams of theory about Art Laffer and his curve and all that, but there’s a rather simpler method available to us. When we had those higher tax rates, did we get more tax revenue? No, we didn’t — therefore the higher tax rates didn’t work in that they didn’t produce higher revenue. Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sens. Bernie Sanders, I-Vt., and Elizabeth Warren, D-Mass., want to spend all that higher revenue that we won’t get from higher tax rates, which is a bit of a problem, isn’t it?
Hauser’s Law isn’t a law; it’s an observation, but it is still actually true. The federal government has raised roughly the same amount of gross domestic product in tax revenue whatever the rates in the tax system. In fact, we can get a nice little chart that shows this:
The early 1950s was the war economy concerning Korea; after that those high tax rates actually raised less GDP for Uncle Sam than today’s lower rates do. This isn’t indicating success for a policy of raising marginal rates to give the feds more money to spend.
We can also look at the percentage of GDP raised by the income tax. Those high personal income tax rates topped out at raising 7.8 percent of GDP. We get 8.4 percent, perhaps 8.3 percent, of GDP from today’s lower marginal rates. This isn’t telling us that higher rates give the politicians more money to play with.
Myself, and this really is me just being pedantic, even picky about being so, I expect a historian to know these things before they confidently pronounce upon them. But then what do I know, my training was in economics, not history.
As to why this was and is so, this is moving off into the realms of speculation, not hard fact. Informed speculation, you understand, is useful in understanding the world, but I’d not want to have to prove it directly all on my lonesome. The thing being that you can only raise a certain amount of GDP from any one form of taxation. If you look at the U.S. tax system piece by piece, it doesn’t differ all that much from those of other places. Each strand raises about the same revenue it does in other places — that is, at least within the range of variation. Oddly, the federal part of the system is more progressive than the total tax systems of nearly all other nations.
Yet the U.S. gets somewhere between 26 percent and 29 percent of GDP in tax revenue, while other places collect 34 percent (my native Britain) or up to 40 percent and more in some places. How can this be? The U.S. is missing a big revenue earner as a part of its system — a value-added tax. You can indeed get that 10 percent of everything by taxing consumption.
Sure, a VAT is regressive; it hits the poor harder than the rich. But if you really insist on having more money to pay for all the lovely things government can do for us all, then that’s where you’re going to have to go for the money. Because that’s the only place you can go and get that sort of amount of money, by taxing everyone and their purchases.
No one finances a social democracy (what the hip and woke call democratic socialism these days) through taxation of the rich, on the useful grounds that it doesn’t work. The only way to get that flood of money required is to tax everyone through a VAT.
It might be possible to squeeze a bit more out of the rich in the U.S. than is currently done. But it’s that very example of the 1950s that shows very high marginal tax rates aren’t going to achieve much, if anything. For we did have those rates then, and they didn’t raise more cash to spend on what we do together — fractionally less, in fact.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
