Wall Street Journal Column Pushes Myth That Tax Cuts Pay For Themselves To Attack Bernie Sanders

The Journal's Jason Riley Mocks "Confiscatory" Tax Rates For The 1 Percent That Some Economists Argue Are "Optimal"

››› ››› ALEX MORASH

Wall Street Journal editorial board member Jason Riley attacked Democratic presidential candidate Bernie Sanders for supporting progressive income tax rates to fund government investments, falsely claiming that additional tax cuts for the wealthy are a better method of increasing tax revenue.

WSJ Columnist Attacks Bernie Sanders' Progressive Tax Plans

WSJ's Riley: "The Rich Pay More When The Top Marginal Rate Is Reduced." On October 20, a Wall Street Journal opinion piece by Journal columnist Jason Riley falsely claimed that high-income Americans actually generate more tax revenue when they are taxed at lower rates and slammed the so-called "confiscatory" tax rates that prevailed before the 1960s. The column attacked Democratic presidential candidate Sen. Bernie Sanders' (I-VT) plan to raise income tax rates on the top 1 percent of earners, claiming his proposal would not be enough to pay for promised infrastructure investment and college tuition assistance, and misleadingly credited tax cuts during the Bush and Reagan administrations for increasing tax revenue in following years:

Bernie Sanders has been asserting more forthrightly than any of his Democratic rivals that pretty much every domestic problem--from aging infrastructure to student debt to teenage acne--could be solved by raising taxes high enough on the super rich. Rarely do interviewers perform the public service of challenging his math, which is why the Vermont senator's exchange Sunday with George Stephanopoulos of ABC News is noteworthy.

Mr. Sanders said that he is open to raising the current 39.6% top marginal income-tax rate to as high as 90%. The self-proclaimed "democratic socialist" also explained how he would increase the death tax "so that [Donald] Trump and his billionaire friends and their families will end up paying more."

[...]

The irony is that liberals who want the federal government to secure more revenue for redistribution ought to favor a tax code that's less progressive. Time and again, history has shown that the rich pay more when the top marginal rate is reduced. The income-tax rate on high earners fell to 24% in 1929 from 73% in 1921. Over that same period both the amount and fraction of taxes paid by the rich increased, while the amount and proportion of taxes paid by low earners went down.

[...]

The Reagan and Bush tax cuts of the 1980s and 2000s continued this pattern. In both decades, the rich reported much more taxable income after the top rate was reduced. By contrast, an increase in the top marginal rate in 1990 under George H.W. Bush was followed by a reduction in the fraction of taxes paid by higher earners. The reason liberals find this history unpersuasive is because their soak-the-rich rhetoric is more about politics than about economics. Class warfare gets Democratic voters to the polls, which takes priority. [The Wall Street Journal, 10/20/15]

Raising Taxes On Top 1% Of Earners Would Generate Hundreds Of Billions In Revenue Without Harming Economy

NYT: Raising Rates On Top 0.1 Percent Would Pay For College Tuition, Prekindergarten. According to an October 16 article by The New York Times, raising taxes on the top 1 percent would generate as much as $276 billion a year in additional revenue, enough to fund Democratic priorities for college tuition assistance and universal prekindergarten:

All the Republican tax proposals, in fact, cut taxes for the wealthiest Americans. Democrats, on the other hand, are prepared to raise taxes at the top, though they have not been very specific about how they would do so.

[...]

Raising their total tax burden to, say, 40 percent would generate about $157 billion in revenue the first year. Increasing it to 45 percent brings in a whopping $276 billion. Even taking account of state and local taxes, the average household in this group would still take home at least $1 million a year.

If the tax increase were limited to just the 115,000 households in the top 0.1 percent, with an average income of $9.4 million, a 40 percent tax rate would produce $55 billion in extra revenue in its first year.

That would more than cover, for example, the estimated $47 billion cost of eliminating undergraduate tuition at all the country's four-year public colleges and universities, as Senator Bernie Sanders has proposed, or Mrs. Clinton's cheaper plan for a debt-free college degree, with money left over to help fund universal prekindergarten. [The New York Times, 10/16/15]

CRS: Lowering Top Tax Rates Does Not Affect Growth, Leads To Concentration Of Wealth. According to a September 14, 2012 report by the Congressional Research Service (CRS), reducing top income tax rates does not correlate to increased economic growth, but lowering top rates does "appear to be associated with the increasing concentration of income at the top of the income distribution." On November 1, 2012, The New York Times reported that Senate Republicans suppressed the CRS findings, which debunked "a central tenet of conservative economic theory":

The results of the analysis suggest that changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth. The reduction in the top tax rates appears to be uncorrelated with saving, investment, and productivity growth. The top tax rates appear to have little or no relation to the size of the economic pie.

However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. As measured by IRS data, the share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. At the same time, the average tax rate paid by the top 0.1% fell from over 50% in 1945 to about 25% in 2009. Tax policy could have a relation to how the economic pie is sliced--lower top tax rates may be associated with greater income disparities. [Congressional Research Service, 9/14/12The New York Times, 11/1/12]

Economists Find "Optimal" Top Tax Rate Is 90%. According to a report by economists Dirk Krueger and Fabian Kindermann, the "optimal" marginal tax rate for the top 1 percent "is indeed very high, in excess of 90%." The authors found that this rate correlated to maximum social welfare, and reflected rates last seen in the United States "after World War II":

We find that the optimal marginal tax rates on the top 1% of earners is indeed very high, in excess of 90%, and thus consistent with the empirically observed levels after World War II. Note that since we explicitly consider the transition periods in our policy analysis, our results capture both short- and long-run consequences of the policy reforms we consider. Interestingly, even when including welfare of current and future top 1% earners in the social welfare function, and even when restricting attention only to the long-run consequences of the policy reform (by adopting a steady state welfare measure) we find very high optimal marginal tax rates, in the order of about 90%. [University of Pennsylvania, 1/23/15]

Tax Cuts Do Not Pay For Themselves

CBO Director: "Tax Cuts Do Not Pay For Themselves." According to an August 25 article in The Hill, the Republican-appointed director of the Congressional Budget Office (CBO), Keith Hall, stated during a press briefing that tax cuts are not revenue neutral and "do not pay for themselves":

"No, the evidence is that tax cuts do not pay for themselves," Hall said. "And our models that we're doing, our macroeconomic effects, show that."

[...]

Some conservatives argue that cutting taxes leads to more economic growth, and thus higher tax revenue from job and wage growth.

The majority-GOP Congress is requiring the CBO to use "dynamic scoring," which considers how a bill will affect the broader economy and how that might affect the federal budget. The CBO also uses the more traditional static scoring approach.

GOP lawmakers have argued that "dynamic scoring" would provide more accurate estimates. Hall said it does improve the quality of CBO's scores, but he also warned that there is a lot of uncertainty involved. [The Hill, 8/25/15]

Brookings: Tax Cuts Can Reduce Economic Activity, "Will Typically Raise The Federal Budget Deficit." According to a September 2014 Brookings Institution report by economists William G. Gale and Andrew A. Samwick, tax cuts do not always create economic growth, and can even discourage growth by undermining economic incentives to invest. The report concluded that tax cuts alone, "as a stand-alone policy... will typically raise the federal budget deficit":

The argument that income tax cuts raise growth is repeated so often that it is sometimes taken as gospel. However, theory, evidence, and simulation studies tell a different and more complicated story. Tax cuts offer the potential to raise economic growth by improving incentives to work, save, and invest. But they also create income effects that reduce the need to engage in productive economic activity, and they may subsidize old capital, which provides windfall gains to asset holders that undermine incentives for new activity. In addition, tax cuts as a stand-alone policy (that is, not accompanied by spending cuts) will typically raise the federal budget deficit. The increase in the deficit will reduce national saving--and with it, the capital stock owned by Americans and future national income--and raise interest rates, which will negatively affect investment. The net effect of the tax cuts on growth is thus theoretically uncertain and depends on both the structure of the tax cut itself and the timing and structure of its financing. [Brookings Institution, September 2014]

Posted In
Economy, Budget, Taxes, Elections
Network/Outlet
Wall Street Journal
Person
Jason Riley
Stories/Interests
2016 Elections
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