Adonis Diaries

Case of a rich guy demanding higher tax rates

I have already posted on that topic a few times, but it is good for a refresher (see link in note).

David Levine, former chief economist for the investment-management firm Sanford C. Bernstein, wrote:

“I was a kid in the 1950s. And the entire time, the top marginal tax rate was 87 percent. Not many people paid that much. Only three baseball players — Ted Williams, Joe DiMaggio and Willie Mays — got there. But it was 87 percent.”

David Levine is a very rich man, and like Warren Buffett, is “begging” the government to raise his taxes.

Levine has been following federal tax policy for most of his adult life. “My main job was to forecast the economy. So taxes are tremendously important to that. And tax policy changes are tremendously important.” And, to him, those changes mostly went the same way: cutting taxes on people, like Levine and his friends, who didn’t need tax cuts, as the working class struggled.

David Levine brandishes a table that tells the whole story:

“John F. Kennedy brought the top tax rate down to 70%. Ronald Reagan brought it to 50%, and then to 28%.  I was making seven figures. They lowered my marginal tax rate to 28 percent. And the median American was paying a 15 percent marginal tax plus his payroll taxes plus the employer’s share of his payroll taxes, which comes out of his income. So the median American was paying, all in all, about 28%. And I was paying 28 percent.”

“Under George H.W Bush and Bill Clinton it gets raised a bit more to about 40% percent. But then George W. Bush comes in and cuts it to 35 percent and lowers the rate on qualified dividends to 15 percent. And by now I’ve retired. I’m living off investments. All my income is coming from qualified dividends. And so I’m sitting there in the 15 percent tax bracket. And I use the maximum charitable deduction every year. So my actual tax rate has been only 7 % every year since 2007!”

“It would be one thing if the economy had performed so much better after taxes on the rich were cut. But it didn’t. Some of the fastest economic growth of the post-war period came in the 1950s, when the top tax rate was above 80 percent. The slowest growth came in the 2000s, when the top tax rate was 35 percent. So the fastest income growth for the top 1 percent has come under the low-tax regimes, while the fastest income growth for the median American came when taxes on the richest Americans rose.

Correlation is not causation. As Doug Holtz-Eakin, a conservative economist who squared off against Levine on a panel at the Tax Policy Center, argues, the post-World War II era was good for the United States. We had a kind of global monopoly that allowed us to live large and share the wealth. But that monopoly is gone, and there’s no tax regime that can bring it back.

But the flip side of that is also true. To hear many Republicans talk, you would think that the slightest tweak to the tax rates of the very richest Americans would grind the economy to a halt. In this telling, the “job creators” would go galt and refuse to make profitable investments because the extra money they would make would be taxed at 40 percent rather than 35 percent. Or they would hide so much of their income that the tax wouldn’t raise any money anyway.

But when economists think about the role taxes play in a person’s decision to work, they think about two things:

1. There’s the “substitution effect,” where higher tax rates make you work less, because you keep less of every extra dollar you earn.

2. There’s the “income effect,” in which higher tax rates make you work more, because you need to earn more to be able to live how you want to live, or retire when you want to retire. The question is, which dominates?

Levine, who retired before he turned 50, is an example of the income effect winning out.  He wrote:

“There’s no question you would have gotten more out of me if you’d taxed me more. Think about it. You’re 40 years old, making a ton of money. But you’ve only been making it for a little while. And you’re looking at a life expectancy of 40 more years. Of course you’re going to work more years if taxes are higher! To make the money you need, you need to keep working.”

In a recent paper, economists Emmanuel Saez, Thomas Piketty and Peter Diamond looked closely at the evidence on high-income taxation.  Diamond, who won the 2011 Nobel prize in economics, says:

“The question we were asking is, where is the point where the Laffer curve — which tries to estimate when higher taxes lead to less revenue, because of either evasion or slower growth — hits the maximum revenue. You don’t want to be beyond that. But we argue you would like to be fairly close to that. Taking revenue from people making $1.2 million is better than taking it from other groups.”

The answer, they find, is somewhere between 50 and 70%. Above that, you begin to lose more revenue than you raise.  Diamond says: “So instead of the current Washington fight between Bush and Clinton tax rates, let’s think of the fight being between the Johnson/Ford/Carter tax rates and the tax rate we had after Reagan’s initial cut.”

Note: You may read my article on this topic: https://adonis49.wordpress.com/2012/02/13/maximum-yearly-wage-limit-protests-a-multiple-of-minimum-wage/