Low Taxes On The Rich Could Be Hazardous To Your Economy

Isaiah J. Poole

Former Wall Street trader and analyst Henry Blodget asks a prescient question about tax rates in his column at Business Insider: “Do low tax rates on rich people actually ruin the economy?”

He doesn’t answer the question, but he makes an observation that points to a “yes” answer:

“Some of the most prosperous periods in US history (1950s and 1960s) have come during periods of super-high marginal income tax rates. And some of the most disastrous periods in US history (1930s, 2010s) have come after periods of super-low income tax rates. In the good periods, moreover, the middle-class boomed and inequality between the country’s highest earners and everyone else shrank. In the bad periods, meanwhile, inequality soared, and the richest 1% of the population came to earn a staggering amount of the country’s income.”

Blodget notes that during times when top-end tax rates were high—as high as 91 percent in the 1950s—there were exemptions and shelters that lowered the effective tax rate, the actual percentage of income tax wealthy people paid. Then he asks:

Were the tax shelters that high-earners were encouraged to set up to shield themselves from high income tax rates actually better for building a sustainable, prosperous economy than the combination of low tax rates and no shelters?

Was there something about these tax shelters that encouraged high earners to invest more sustainably–in businesses, real-estate, and so forth–than the “free market” of low rates does? And did high income taxes encourage executives to be less piggish and selfish when compensating themselves, thus narrowing the now-spectacular gap in incomes between the average employee at a big company and the most-senior executives?

These issues raised by these questions are why overhauling our Byzantine tax code is so important. The tax code as it has been for at least the past 40 years has been a monster designed to serve the interests of the corporate class, with a good bit of faith-based economic theology thrown in for good measure. The theology has proven to be in the service of a false god, the notion that low top-end tax rates produce jobs. (In fact, the chart below from the Center from American Progress shows the opposite: the country has experienced its best job creation during periods of high tax rates.)

Lower taxes on the rich don't lead to job growth

Robert Borosage, attacking this myth earlier this week, wrote, “Big corporations are reaping record profits, sitting on literally trillions in cash, and shipping jobs abroad. Small businesses are lacking not in confidence but in customers. The rich keep getting richer, without generating jobs. We’d be better off taxing them and spending the money rebuilding the country and putting people to work.”

It should be common sense to realize that a step as modest as going back to the tax rates of the Clinton era on the richest Americans, and devoting the receipts to rebuilding our infrastructure and strengthening our human capital, would get the economy out of its malaise and set the stage for broad prosperity, including for the corporate class.

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