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I've been hearing a lot lately these calls for people to tax the rich as a solution to
our economic woes or the government budget problems. After all the rhetoric I've been
inundated with, I think it's time to inject some hard data into the discussion, which
no one else seems to want to do. I'll be dealing with two claims here. One is that the economy
is better when the tax rate on the rich is higher, and it's usually the 1950s that people
point to, a period of prosperity where the rich were taxed 90%, and the other day I heard
someone make the same claim about the '90s. The other claim is that if we tax the rich
we'll get in the revenues to make up for all these budget shortfalls, and of course it
was Bush's tax cuts that got us into this mess--which I've already shown in a previous
video just isn't true. But we'll look at this claim that taxing the rich will give us much
greater revenues.
I've put it all in this graph. The orange parts in the background represent recession
years, starting at 1913 because that's when the Income Tax began and we're looking at
taxes on the rich. So you've got a few recessions after World War I and on through the '20s,
and then you have the Great Depression which is the longest recession (actually it shows
up in the statistics as a bunch of recessions jammed together, I've just made it all one
thing here). Then you have World War II which I separated out here to show you the length
of that, and you can see from the orange area on the end--our current economic downturn,
the one we're in now is the third longest since the Income Tax was levied, rivalled
only by World War II--which we're fast approaching--and the Great Depression. And then you have other
recessions scattered here and there. One thing you'll notice is that during the recessions
where government took a hands-off approach the recession wasn't that bad, it didn't last
that long, although I should probably point out that the way I created this graph, I just
listed recession years--I just got a list of years we were in a recession, so if a recession
lasts one year but it lasts from July of one year to July of the next year it shows up
here as two years; nothing I could do about that, sorry. But you get these nice thin little
lines for those recessions and thicker lines for ones where the government tried to step
in and fix things, which I think is the first important lesson to take from this.
But anyway, on to the data. The blue line, the one higher up, is the tax rate on the
highest income earners--in other words, how much the rich are taxed. You'll notice that
the top tax rate started out very low but it didn't take it very long to jump up to
around 80%--whereupon we promptly had a recession and it went down again. It kept going down
through the '20s, then up during the Great Depression, it stayed up during the prosperity
of the '50s, went down during the prosperity of the '60s, WAY down during the prosperity
of the '80s, and even in the '90s it was just under 40%. We see it go up during recessions,
go down during recessions...there's just no pattern there at all. So this idea of taxing
the rich leading to prosperity isn't even a correlation/causation fallacy, because you
don't even have a correlation there. The only conclusion I think we can draw from these
data is that there's no relationship at all one way or the other between taxes on the
rich and cycles of economic prosperity and recession. The myriad causes of the business
cycle--from interest rates to credit expansion to inflation to government regulations to
monetary policy--all overwhelm whatever effect these taxes may have. And so the bottom line
is you cannot drive in a period of prosperity by taxing the rich more; if you could, we'd
have been out of the Great Depression in 1932.
The green line, the one along the bottom, is Income Tax revenues as a percentage of
GDP. I want to be clear: once again we are ONLY looking at Income Tax since we're studying
the effects of taxing the highest earners; if we had included reveneus from other sources,
the line would be higher up, but it would also be misleading. So the claim is we can
get more revenues in by taxing the rich. Well, to begin with, it looks like this is exactly
what happens: there's a surge in revenues in the late teens/early '20s to match a surge
in the tax rate as our government paid debts incurred during World War I and also helped
bail out the UK. Then it went down again. But notice it DIDN'T go up again during the
Great Depression; that didn't happen until World War II when production for items for
the war effort skyrocketed. After that it seems like revenues have hit something of
a plateau; although we had that initial surge up to 16%, it seems to more or less level
off at around 11-13%. Occasionally you get it rising above or falling below those levels,
but it doesn't last. It seems like no matter what you do you cannot get sustained revenues
beyond about 13%. Once again, we see by the data that taxing the rich just will not help
here. Maybe it would raise revenues if the revenues were less than 1% of GDP, as they
were at the beginning, but according to this graph if it's more than a few percent, there
are diminishing returns and we lose all correlation between the tax levels on the rich and revenues
as a proportion of GDP. Raising taxes on the rich will do NOTHING to improve the budget
situation.
So, how do we fix our problems? Well, it's spending, STUPID. It's time to shake off this
bogus class warfare and focus our energies on doing what really needs to be done to improve
the situation in this country for EVERYBODY, and that's to rein in this greedy, insane,
and out-of-control government.