Friday, May 27, 2011

The WSJ Editorial Page at Work


TJE said...

You will be pleased to know, PBM, that Fox news had Martha Macallum interviewing Moore on the subject. For the lead-in they played the theme song from the old tv show "Welcome Back Kotter" to imply welcome back Carter. The dastardly propaganda machine is once gain subverting democracy by manipulating the masses against the truth. (Sound's like Al Gore's commencement speech!)

Actually, leaving aside the comparison to Reagan and Carter, Moore's description of enacted and proposed increases in top rates is accurate.

TJE said...

Read carefully, PBM, Moore points out that he is comparing two different things:

"If the Democrats' millionaire surtax were to happen—and were added to other tax increases already enacted last year and other leading tax hike ideas on the table this year—this could leave the U.S. with a combined federal and state top tax rate on earnings of 62%. That's more than double the highest federal marginal rate of 28% when President Reagan left office in 1989. Welcome back to the 1970s."

So the relevant question is what was the combined top marginal rate under the Gipper?

PBM said...

I guess what your saying is technically correct, but it still feels like the original editorial and its trumpeting in the right-wing media is at least somewhat deceptive.

Patrick_L said...

The WSJ 62% figure is too high for various methodological and tax policy reasons, but the gist is correct that combined marginal tax rates (not effective tax rates) would reach high levels... if every single mentioned tax increase on the table was all allowed to go into effect. However, the millionaires' surtax is extremely unlikely (since just allowing the Bush tax cuts for the those over $250k is unlikely), and completely eliminating the cap on Social Security is not what Obama was talking about nor is what nearly all on the left would even consider. (You have to get really really far left- Bernie Sanders & Co.- to find anyone seriously proposing eliminating the cap.) Many on the left would probably oppose this reform because it would go too far and weaken the social-insurance model. Most left and centrist experts propose raising the cap to its originally set-level of applying to 90% of all earnings paid in covered employment. Due to inequality in income growth, the level has dropped to the low 80%'s currently.

Anyways, nearly the entire Reagan administration was under even higher combined marginal tax rates than we'd have under Obama if we ended the Bush tax cuts and had the millionaires' surtax as well. Moore's figures would get us to 52% if we ignore the Social Security tax change- which I think is the right thing to do just because I think it’s ridiculous, Obama and his advisers don’t want it, and I know it is never going to happen politically. I haven't seen an equivalently comprehensive measure for those years like Moore compiles, but for simplicity sake remember that the top federal income marginal tax rate from 1982 through 1986-i.e. after the initial traditional supply-side tax cuts- was 50%. Throw in 3 or 4% for state income taxes on average and you’ve already surpassed Obama’s potential 52% rate. Now Moore tries to obscure this by only focusing on rates of the final two Reagan years which were the result of very different tax policy changes than Republicans right now are willing to specifically commit to.

I’d love to see base-broadening reform, but so far no one in power is talking about how specifically they would do this. Obama gets some (very little) credit for his proposals one capping the value of combined tax expenditures for someone’s taxes and has intimated support for base broadening, but hasn’t proposed anything specific yet. Republicans have said they would pay for top rate tax cuts (benefiting the wealthiest taxpayers) with base-broadening (limiting tax expenditures)- which btw would almost certainly be a regressive tax system change, since I haven’t seen anyone come up with a collection of tax expenditure reforms that could raise the nearly $3 trillion in revenues Republicans are likely to need for their additional top rate tax cuts that would maintain the current system’s progressivity. Tax expenditures may benefit high-income tax earners more than those in the middle, but as conservatives are fond of pointing out- there aren’t that many high-income taxpayers which means their isn’t likely to be sufficient tax expenditure savings to be had from them to offset the regressive nature of their specifically proposed and frequently mentioned top rate cuts.

Patrick_L said...

Even if you could come up in theory with the tax expenditure reforms to pay for their level of tax cuts and even come close to the current system’s progressivity, it would never pass politically. So far we have Camp (Chair of W&M so it’s his job to do this) refusing to comment on any ideas, Paul Ryan refusing to say specific tax expenditures he’d change even though he has been repeatedly asked, Senate Republicans voting for oil tax breaks, and Cantor telling realtors in his district that he doesn’t see any movement on the major revenue-loser and regressive home mortgage tax expenditure (just one example of politicians’ buttering up to supporters, which means every tax expenditure is sacrosanct but every politician claims to want to “broaden the base.” But don’t worry- House Republicans are being serious on tax expenditure reform by looking at saving some money by holding hearings on the refundable tax credits (that coincidentally are the ones that provide any benefit for low-income workers) like the EITC. Bastards. Great priorities there. EITC that has been proven to increase work propensities of single-mothers and improve their children’s future life outcomes- evil. Mortgage deduction that inflates home prices, does nothing to increase home ownership, and predominantly benefits households making six figures- a necessary and perfectly defensible tax subsidy.

TJE said...

PL, you're ignoring perhaps the biggest Reagan domestic achievement-- the bipartisan tax reform act of 1986. What was the highest tax rate (federal, state, payroll included) in 1987?

Palanders said...

Well for this discussion to be consistent across time periods we'd exclude payroll taxes because they generally don't apply to the next dollar of income (i.e. marginal rates), but in 1987 if we look at federal and state income marginal tax rates we'd get something in the low 40's, which would be about two or three percentage points below the level that existed from 1993 to 2002. If the Bush tax cuts expired, the level would be 0.9 higher than the Clinton rates due to the PPACA Medicare surtax. Essentially, the variation between the 1987, Clinton, and no-Bush high-income tax cuts rates would be within a tight band of a handful of percentage points (which means minimal differences in behavioral effects, because of the range of the rates). You'd only run into big differences if you also implemented a surtax and eliminated the cap for Social Security taxes.

Several caveats: Reagan achieved his low levels by base-broadening, something nearly everyone would like Congress and President Obama to do (though it will likely take several years to achieve a cleaner code). Due to the growth of tax expenditures, base-broadening on the scale of the 1986 reforms would allow the tax code to get to marginal tax rates equal to and below those Reagan achieved- although I hasten to note that there is weak evidence that the differences in marginal rates on the type of income at these kinds of levels have significant behavioral effects. Base-broadening could simultaneously lower tax rates and raise additional revenues.

In addition, Reagan partially compensated/paid for his individual rate cuts by not only broadening the base but also shifting the burden to the corporate tax sector- something that seems extremely unlikely in the current political situation and economic environment, where even revenue-neutral corporate tax reform seems like it might be a struggle. The corporate tax system incidentally contributes less revenues under the current system than it did before Reagan passed his tax policy changes- let alone afterwards when he increased their tax contributions.

Also, income tax rates are hardly the only major tax that affects the highest-income earners. Many others, like the estate and gift taxes, have been significantly weakened since the 1980's to the great advantage of the wealthiest families. In additional, changes n capital gains and dividend rates have been quite favorable.

Palanders said...

Conclusion: Letting the Bush tax cuts expire for high-income earners would hardly create a historically unprecedented tax system that is likely to inhibit growth due to excessively high marginal tax rates- as supported by the historical record of presidencies like Reagan or Clinton. However, it would be helpful to do base-broadening tax reform in addition to letting all of the Bush tax cuts expire. The American people need to make a choice- a) no revenue increases, in which case Medicare has to be so dramatically reformed that the typical 65-year old beneficiary's contribution to their health care costs would likely be doubled to what they'd be versus the traditional Medicare system then, the expansion of health insurance coverage for millions of Americans in PPACA has to be repealed, Medicaid has to be cut by over $750 billion in addition to repeal of PPACA's expansion of the program, the safety-net needs to be cut by trillions, and the non-defense portion of government (excluding health and Social Security) would need to be cut back to pre-New Deal levels. Or b) revenues be allowed to increase- including taxes on most of the American “middle-class”, the health care system needs to be dramatically reformed and improved using the best of everyone’s ideas on the subject, Social Security's solvency be restored through a mix of benefits/revenue changes, defense spending be reduced (to at least Clinton-year levels), nonsecurity discretionary and the lesser entitlement programs be capped so that they overtime decline in size, and additional costs savings be achieved in the Medicare program- potentially in the end though structural changes that wouldn't need to be on the scale Ryan-proposes but still would likely need to occur.