Ever wonder where the Occupy Wall Street crowd got their slogan, “We are the 99 percent”? They got it from a shoddy piece of academic research published nine years ago.
Back in 2003, Berkeley economist Emmanuel Saez and his collaborator Thomas Piketty produced a graph showing that for the last 30 years, inequality in this country has returned to the extreme levels of the 1920s. But from the 1930s to the 1970s, the gap was considerably narrower.
Now, you might ask yourself, what exactly is inequality? To be sure, that tough question has bested top economists. Piketty and Saez took a pretty easy route in their definition. They looked at tax returns. They grazed a century’s worth to see how much money the “top 1 percent” has reported in comparison to the “bottom 99 percent” over time. Their basic finding was that in eras of high tax rates on the rich (the 1930s through the 1970s), that ratio was small. But when taxes were low (the 1920s, and again from the 1980s till now), that ratio was big.
An objection leaps right out. You mean to say that rich people, in eras of high taxes, don’t make special moves to hide their income from the IRS? Because if they do, tax returns are going to give you a very distorted picture of things. Back in the 1970s, for example, when the top rate of the income tax faced by the highest earners was 70 percent, those earners availed themselves of all sorts of devices to reduce the amount of income they reported to the IRS.
One nice trick was to buy a commodity that kept going up in price — gold made a great play here — and then stake the thing as collateral when taking out a big loan. Come tax time, the increase in the commodity’s value, which could have been huge, did not have to be reported because no sale was ever made, and the loan interest could be taken as a deduction. Quite a good deal, when the alternative is to be hit by 70 percent rates.
So here were the rich making a killing — via gold, oil, art, land, all those inert assets that went up stratospherically in the 1970s — while reporting small incomes to the government. This changed in the 1980s, when the top rate of the income was cut to 28 percent. The rich made a stampede away from the old tactics and became comfortable again with earning money that could be taxable every year. If taxes are going to leave you with 72 percent of your profit as opposed to 30 percent, you’ll be ready to show that profit to the government.
Economically, this change in the rich’s behavior manifested itself in the burst of entrepreneurialism and corporate restructuring that was responsible for the incredible boom of 30 million new jobs in the years after the tax cuts started to take effect in the early 1980s.
In the 1970s, high taxes made the wealth of the rich unproductive, and the economy stagnated. In the 1980s and beyond, low taxes activated their wealth and income for broad purposes, and society prospered as a result.
The Occupy Wall Street movement has been duped by “inequality” statistics which really prove the opposite of their worldview — that high tax rates cause the rich to hoard and shield their resources. Those numbers and that world view should be scrapped.
Brian Domitrovic, Ph.D., is a senior fellow of the Laffer Center for Supply-Side Economics and an associate professor and chairman of the history department at Sam Houston State University.
