Friday, December 9, 2011

More true facts - the empirical evidence suggests that cutting top marginal tax rates on the rich increases non-productive income inequality rather than economic growth

 Dan Buecke at Bloomberg:
This should get Grover Norquist up off the couch: a paper by a prominent team of economists says the tax rate for top U.S. earners could be hiked to 83 percent without hurting anyone but the “mega rich.” And in what’s sure to add gasoline to the income-inequality debate, they suggest pay increases for the wealthiest few reflect mostly “rent seeking” — econo-speak for unshackled greed — rather than executive-suite productivity improvements.

Thomas Piketty of the Paris School of Economics, Emmanuel Saez of Berkeley and Stefanie Stantcheva of MIT reach those conclusions after disputing that tax cuts in several countries since the 1970s had any real impact on per-capita GDP growth. As they say in their less wonky summary (hat tip to 3 Quarks Daily)... “countries that made large cuts in top tax rates such as the United Kingdom or the United States have not grown significantly faster than countries that did not, such as Germany or Denmark.”
What does show a strong correlation is falling tax rates and the share of pre-tax income held by the top 1 percent — doubled in the U.S., to more than 20 percent, over the past 40 years.  (emphasis added)
Piketty, Saez and Stantcheva offer three possible explanations for what happens after a tax cut: 1) the wealthy work harder; 2) they hide less of their income from the government; 3) they bargain harder for higher pay. Long story short, the authors endorse No.3. As they say, “executives can be overpaid if they are entrenched and can use their power to influence compensation committees.”
They’re suggesting politicians should feel emboldened to tackle income inequality and federal deficits by rolling back 30 years of Republican efforts to flatten and depress income taxes. The current 35 percent top marginal income-tax rate is the lowest it’s been since 1992. Before Ronald Reagan’s first term, the rate had not dipped below 70 percent since 1935. As the authors put it:
Up until the 1970s, policymakers and public opinion probably considered - rightly or wrongly - that at the very top of the income ladder, pay increases reflected mostly greed or other socially wasteful activities rather than productive work effort. This is why they were able to set marginal tax rates as high as 80% in the US and the UK. The Reagan/Thatcher revolution has succeeded in making such top tax rate levels unthinkable since then. But after decades of increasing income concentration that has brought about mediocre growth since the 1970s and a Great Recession triggered by financial sector excesses, a rethinking of the Reagan and Thatcher revolutions is perhaps underway. … With higher income concentration, top earners have more economic resources to influence social beliefs (through think tanks and media) and policies (through lobbying), thereby creating some reverse causality between income inequality, perceptions, and policies. We hope economists can shed light on these beliefs with compelling theoretical and empirical analysis.
That’s a dry way of saying the rich make a lot more than they deserve and they’ve used that wealth to persuade the rest of us that they deserve it.

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