Let’s Not Kid Ourselves About 70% Tax Rates
Their only justification is to confiscate others’ money.
My op-ed in Tuesday’s Wall Street Journal argued that academic justifications for 70 percent marginal tax rates, such as Peter Diamond and Emmanuel Saez’s, are nothing more than a veneer intended to deceive a wider audience that doesn’t know better. Saez’s expansion of his justification for confiscatory taxes in the New York Times does little to prove otherwise.
Diamond and Saez’s original argument for a 70 percent tax rate – that it would enhance both tax revenue and social welfare – ignores the long-term consequences of high tax rates on growth. They assume that taxing, redistributing, and consuming income that taxpayers would otherwise invest doesn’t reduce investment. While admitting that taxes discourage work, they similarly assume that a reduced supply of properly trained talent has no effect on the willingness of investors and entrepreneurs to take risks that grow the economy. Nor, in their model, does lower pay reduce the number of students willing to pursue tedious and arduous fields of endeavor that grow the economy — e.g., accounting, engineering, and computer programing — or the willingness of talented workers to immigrate to America. Nor do reduced amounts of investment, talent, and risk-taking slow the rate at which the economy builds growth-magnifying institutions such as Google, which exposes workers to cutting-edge knowledge that spawns innovation, and Silicon Valley in general, which facilitates the commercialization of new ideas. They also ignore the effect of slower growth on tax revenues more broadly. Honest analysis that endeavors to estimate these effects finds welfare-maximizing tax rates of 30 percent or less.
Saez’s op-ed in the New York Times avoids all his far-fetched economic assumptions, abandons his prior economic justifications for higher taxes and now claims America needs higher taxes to prevent “oligarchical” control of the government, a topic on which he has no expertise. Like his sometimes partner Thomas Piketty, Saez implies that success is largely ill-gotten and so policymakers can tax it without slowing growth. And he uses disingenuous historical examples, such as high tax rates in post-WWII Japan – a nation of savers who merely needed to copy the hard-earned success of the U.S. to catch up rapidly, circumstances that have little, if any, application to America today — to provide evidence that tax rates don’t slow growth. Read more