This op-ed was published by Barron’s on March 8, 2023
The finance budget the White House will propose this week may not stand a chance of passing a divided Congress, but it raises a question that’s worth considering. Is raising taxes on the richest among us a good idea?
The analysis is rather simple, and powerful. Throughout history, the rate of taxation of top tier earners has swung between comically high to arguably low. All the while, U.S. gross domestic product has risen inexorably upward to produce an economy that is the envy of the world. In fact, there are many periods when GDP grew faster under higher rates of taxation than the current top rate of 37%.
- As the U.S. was coming out of the Depression, the top tax rate was 79%, and in 1938 GDP grew 8%. The following year, at the same top tax rate, it grew 8.8%.
- In 1941, the top rate was increased to 81% and the economy grew an eye popping 18.9%. Tax rates during the war reached as high as 94%.
- Throughout the entire decade of the 1950s, the top tax rate was at 91%. During this time, the economy grew an average of 3.6% a year.
- In the 1960s the top tax rate declined, from a high of 94% to a more “reasonable” 77%. Growth accelerated to an average annual rate of 4.2%.
- In the 1980s, when the top rate declined from 70% to 28%, GDP growth was 3.3% annually, lower than when the top rate was 91%.
- The 80’s ultra low tax rates occurred near the end of the decade, perhaps skewing a decade-long average. But these lower rates persisted during the 90s. The average annual rate of growth during this period was 3.5%, less than the 50s and 60s, when top rates of taxation were much higher.
- During the 2010s, the top rate started at 35%, ran up to 39.6% for most of the decade before settling back to today’s 37%. Though rates for the 2010s were among the lowest in our history dating back to 1929, GDP growth was anemic, averaging 1.7% annually during the period.
The strength of this argument is its simplicity: The U.S. economy continues to grow regardless of its highest tax rate, and there are many periods where the economy grows faster at higher rates of taxation.
The weakness of this argument is that the top tax rate is less relevant to the people it is applied to than everyone else further down the food chain. If a billionaire is making real income of $100 million annually, it’s not like he or she is taking a $1.9 million paycheck to the bank each week, and paying a tax of 37% on everything past the first $628,000.
For these taxpayers, rates on dividends and capital gains almost certainly matter most.
In a paradoxical and often conveniently forgotten fact, conservative standard bearer Ronald Reagan signed legislation subjecting all of a taxpayer’s dividend income to ordinary income tax rates. These rates were applied in 1985 and lasted until 2003, when the tax cuts under President George W. Bush offered some relief. From 1985 to 2003 the economy grew at 3.5% on average each year.
And what’s happened since the Bush tax cut that left dividends taxed at more favorable long-term capital gains rates? Between 2003 and 2022, the economy grew more slowly at just 1.8%.
As for the capital gains tax rate, it was lowered in 2003 from 20% to 15%, and stayed that way until 2012. During this time the economy grew at an average annual rate of 1.8%.
Critics of this analysis will likely accuse me of cherry picking, to which I say, go pick your own. When looking at a wider canvas the central fact is unavoidable: The U.S. economy grows regardless of how its wealthiest citizens are taxed.
As an emerging class, billionaires and their lesser brethren—literally—the centimillionaires are resistant to paying more taxes. This is unsurprising, but the billionaire might be more resistant than others to tax increases, even if more taxes will not affect their standard of living. The magical drive that enables them to create a vast fortune is deployed with equal vigor against any forces that might drain it.
In short, it’s not about the money. It’s about the principle. And principle among such an ardent cohort of earners is hard to dislodge. Still, the nation needs the money. Fiscal austerity is well and good and noble, but unburdening future generations from our debt can’t be achieved by spending cuts alone. No way, no how. There’s a revenue component.
And there’s a policy mandate too. The maximum employment, stable prices, and moderate long-term interest rates that Congress has instructed the U.S. Federal Reserve to pursue are designed to promote an expanding economy. There is little evidence that taxing the wealthiest, which admittedly has an unfriendly ring to it, undermines this policy.
Were it that the dictates of policy to expand the economy and lift all boats was the tonic politicians needed to raise revenue by taxing our most successful. Or perhaps they could follow the logic of Billy the Kid and simply tax our wealthiest more vigorously because that’s where the money is. We’ll see. But when the economy is producing billionaires at a rate that is more than twice the overall growth in the economy—nearly 8% annually since 1990—a lightbulb should go on. Hopefully soon.