Tuesday, May 26, 2009

'6.5% of nothing'

Glenn Reynolds asks, "Who Is John Galt?" in response to this Wall Street Journal editorial about Maryland (where I live):
Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. . . .
One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.
Even if we concede that the recession may account for some or most of this revenue decline, what's fascinating is the reaction of liberals like the Atlantic's Conor Clarke:
Progressive taxes are useful in recessions precisely because of all that vanishing revenue. That's because a progressive income tax is an automatic stabilizer: It helps offset shocks to GDP that come from large declines in income and wealth. . . .
It is also true, as the Journal says, that there will be a decline in revenue. That's the inevitable price of offsetting the shock.
Whiskey Tango Foxtrot? It is at this point that the sane man must ask Conor Clarke, "What is the purpose of taxation?" Excuse me for believing (a belief shared by the Founders) that the entire point of taxation is to collect revenue. The government must have money to fund its operations, therefore it must have tax revenue.

Stabilizing the economy? Offsetting shocks to GDP? I am a primitive caveman blogger. Your Keynesian concepts confuse and frighten me.

What Clarke confesses here is that progressive taxation is not about revenue. It has policy aims beyond merely funding the government, and constitutes an effort toward the planned economy, in which economic activity is not a function of voluntary action by individuals. Rather, the progressive tax is a mechanism for centralized direction of the economy by government.

Ergo, never mind the Laffer Curve. A soak-the-rich rationale means that progressive taxation is preferred even if it results less revenue.

There is a word for this. It begins with "s" and ends with "m." And I don't mean "sarcasm."

UPDATE: Cato's Brink Lindsey dismantles Paul Krugman's economic nostalgia in Reason magazine. I used to work with a guy, a Pat Buchanan-type protectionist, whose basic political impulse was that life should be like it was when he was growing up in the 1950s in Parkersburg, W.Va. Dad worked at the mill, mom stayed home and made cookies, the kids played in the streets without fear, etc.

No doubt it was wonderful, but nearly everyone remembers their childhood fondly. Then you point out that they lived in a 2-bedroom bungalow, all three kids sleeping in the same room, and the whole family sharing one bath. No air-conditioning, no cable TV, no computers, etc.

Even if we could "turn back the clock," even if my friend and I were willing to live so simply, foreswearing every modern convenience, we cannot legislate matters so as to force others to do so, in order to create around us this 1950s Parkersburg society. But the enactment of protectionist legislation is just exactly the kind of legislation by which the nostalgists propose to do that.

Well, it won't work, because it is based on a false understanding of why the '50s were the way they were. Lindsey debunks some of Krugman's revisionism, but he doesn't debunk all of it. Let me finish the job:
  • During World War II, the U.S. came as close as it ever could to "full employment," but wartime rationing limited the ability of workers to spend all their earnings, and much of the excess was invested in war bonds or otherwise saved.
  • World War II devastated the industrial infrastructure of Germany, Japan, Russia and other nations. Until those nations could rebuild, they were effectively off the map as economic competitors to the United States, which had expanded and improved its own infrastructure during the war. Furthermore, U.S.-made equipment -- trucks, cranes, bulldozers, machine tools -- would be needed for the work of rebuilding those war-shattered rivals.
  • Meanwhile, once wartime rationing and other economic controls were lifted, U.S. consumers were flush with cash and eager to buy. I once worked for a man who began a small department store right after the war. He explained to me that the difficulty in the first couple years was getting stuff to sell. There was no shortage of willing customers, but it took a while for manufacturers to switch from making bombs and boots to making skillets and skirts.
  • The great era of general prosperity that followed World War II, then, was not really caused by liberal economic policy so much as it was a consequence of the war.
  • The social stability of the 1950s was, in large measure, a result of the fact that Americans had experienced so much turmoil and woe -- first the Depression, then the war -- in the past two decades, and were intent on enjoying peace and prosperity.
  • However, a recession began in 1957, caused by various factors, including labor union strikes and a tax policy under Eisenhower that imposed high rates on top incomes.
  • In reaction to this sense of economic stagnation, Kennedy in 1960 ran on a promise to "get this country moving again," and subsequently did so by slashing income taxes, particularly in the top brackets.
  • Kennedy's tax cuts sparked one of the greatest economic booms the country had ever seen, creating new affluence and rising hopes of upward mobility that were the real fuel of the social upheavals we think of (in retrospect) as "The Sixties." College kids did dope and protested the war because they could afford to. Jobs were plentiful, wages were high, and many middle-class kids saw no point in working the night jobs, weekend jobs, and summer jobs which previously been necessary to pay tuition, room and board.
This is one of the ironies of modern liberalism, this desire to substitute ideological certainty and revisionist history for the actual reality of what happened. Many Baby Boomers who fondly remember the peace-and-love stuff of the 1960s don't ever think hard enough to understand how JFK's big tax cut (and the hard work of their parents) made it all possible.

You want a revolution? Cut taxes!


  1. "A soak-the-rich rationale means that progressive taxation is preferred even if it results less revenue."

    Precisely what St. Barry O'Guiltwhite wants. Please recall the campaign of last year, wherein MSM tool C. Gibson had the temerity to point out to Mr. Messiah that raising the cap gains tax will likely result in less revenue for Mommy Gubmint. Barry's response was that taxation should be a matter of punishing success. Uh, I mean, "fairness."

    "GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected? OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness."

  2. Hey, thanks for this post. And sure, I believe taxes serve purposes besides raising revenue. I think it's perfectly reasonable to be concerned about fairness and efficiency as well!

  3. Mr. Clarke - Do I correctly interpret your usage of "fairness and efficiency" to mean redistribution of wealth / income from those who have more to those who are less fortunate? Because that sir, is utter rubbish.

    RSM - you think 6.25% is high? Try 10.75% which is the current "millionaires" tax rate in New Jersey. And it kicks in at a mere $400,000. Because according to Conor Clarke that would be "fair and efficient".

  4. Apparently, Mr. Clarke's moral development reached its zenith in the sandbox. That blasted Bobby Smith and his superior sandcastle architecture! I'll show him what happens to wiseguys who sculpt flying buttresses!

  5. I should come here more often! I don't think I've been called "sir" in a comments section before.

    But the debate about the nature of fairness has been around for a few thousand years and I confess I'm skeptical we're going to resolve it here..