David R. Henderson  

Great Moments in Economic History

Thaler Rediscovers Hayek?... The (white) kids are alright...

I'm working on a talk on economic inequality that I'm giving in Zurich next week and so I've been paying particular attention to what Thomas Piketty has written since his book came out. In the latest New York Review of Books, which a friend who follows it more closely tells me is also sometimes referred to as the New York Review of Our Friends' Books, Thomas Piketty reviews Anthony B. Atkinson's latest book, Inequality: What Can Be Done? Piketty's article is titled "A Practical Vision of a More Equal Society."

In a discussion of Margaret Thatcher's cut in the marginal tax rate on "earned" income from 83% to 40% and of Reagan's cuts in the top marginal tax rate from 70% when he entered office to 28% by the time he left office, Piketty writes:

This break with a half-century of progressive tax policy in the United Kingdom was Thatcherism's distinctive achievement (just as the Tax Reform Act of 1986, which cut the upper tax rate in the US to 28 percent, was the distinctive achievement of Reaganism). It would never really be called into question by New Labour during the years of Tony Blair (for whom Atkinson has no special fondness), any more than Reagan's tax cuts were by the Democrats during the Clinton or Obama years.

Although he doesn't quite say it, Piketty seems to be getting at the idea that Democrats didn't vociferously question the Reagan tax cuts. Hmmm. I wonder, then, how Clinton got away with raising the top rate to 39.6% after Reagan's read-my-lips successor had raised it to 31%.

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CATEGORIES: Economic History , Taxation

COMMENTS (4 to date)
Scott Sumner writes:

I was puzzled by that too. And of course Obama raised the top rate to 43.4%.

Piketty also fails to mention that virtually every country in the world cut its top income tax rate during the 1980s and 1990s.

ThomasH writes:

I think it is a lot easier to believe a backward-bending tax revenue curve at over the range 95-30 than between 30% and 40%.

Zack writes:

The 1986 tax reform did a lot more than just lower marginal rates. Alan Reynolds from Cato has criticized Piketty several times for ignoring changes in tax reporting rules(allegedly. I can't say I've read all of Piketty's work too closely, so maybe someone else can correct me).

According to the CBO, in 1980 (the year before Reagan took office) the top 1% paid an average federal tax rate of 33.1%, the middle three quintiles paid an average of 19.1%, and the bottom quintile paid an average of 7.4%.

In 2013, the top 1% paid an estimated rate of... 33.3%. The middle three quintiles paid 13.3%, and the bottom quintile paid 2.9%. The CBO stats don't go back to, say, the 1950's, but I really have a hard time believing effective rates were more progressive back then.

Jim Glass writes:

Piketty seems to be getting at the idea that Democrats didn't vociferously question the Reagan tax cuts.

Of course they didn't -- they co-sponsored the TRA '86 that dropped the top tax bracket rate from 50% to 28%. The Act was officially name-sponsored by Gephardt in the House and Bradley in the Senate, and introduced to the House by Rostenkowski.

It was very much their tax act too, overtly. The House was Democratic, you may remember, while the Senate was Republican by only 53-47 (and there were filibuster rules back then too).

It passed the House by voice vote, and by the Senate by 97-3.

It was a classic political deal: the right got the lower tax brackets they always wanted ... the left got the mass slaughter of all kinds of tax preference items (deductions, credits, exclusions, etc) that richest used to reduce their effective tax rates to *lower* than than those paid by the less rich, in several outrageous cases all the way down to 0% ... and both sides were happy to kill off 90% of the massive tax shelter industry that was making mega-bucks by distorting market and tax incentives while aiding the richest in their pursuit. Win-win-win^2.

As a young cub lawyer I had a whole string of very nice lunches bought for me in the Plaza Hotel by shelter promoters trying to buy a favorable opinion from me for their products. They ended promptly with the passing of TRA '86 -- but I consoled myself by telling myself it was for the public good. Drat it all.

I wonder, then, how Clinton got away with raising the top rate to 39.6% after Reagan's read-my-lips successor had raised it to 31%.

What's to wonder? All politics is extremely short-term, of-the-moment. Intellectual consistency with past positions has never been any kind of serious obstacle to the parties when pursuing the marginal voter of the day.

Plus, as public choice analysts well know, voters are dumbas^h^h^h, er, massively ignorant. They don't even know what they used to know.

E.g. the left today has total amnesia about what made the rate reductions of the TRA '86 popular with it back then: how high tax rates via the deadweight cost of taxes drive the mass creation of all kinds of targeted tax preferences for special interests, compounded by an engorging tax shelter industry of clever entrepreneurs who take them far beyond even their bad enough original intent.

*Poof*, what was once well known by them is now all gone from the collective memory, replaced by a fantasy that in the days of the 50+% corporate tax rate compounded by a 70%-90% top personal tax rate, the richest actually paid those rates, and a higher rate than anyone else to boot.

If behavioral economists were really interested in reducing the social cost of group cognitive failures (instead of whipping up justifications for themselves to take on the role of enlightened interventionists, Plato's Guardians Lite) this is the kind of 'madness of crowds' they'd be interested in.

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