Skip to comments.Debunking Paul Krugman's Beloved 91 Percent Tax Myth
Posted on 11/20/2012 4:38:46 PM PST by Kaslin
In his column yesterday, New York Times columnist Paul Krugman made the case for how the pro-union and high-tax policies of the 1950s led to America’s unparalleled economic success from the end of World War II until the mid-1970s. The essay is a classic example of how to use a few correct facts to make a completely illogical argument.
First Krugman says “Above all, the success of the postwar American economy demonstrates that, contrary to today’s conservative orthodoxy, you can have prosperity without demeaning workers and coddling the rich.” The only evidence of “coddling” he cites is lower tax rates on the wealthy in today’s America as compared to higher rates in the 1950s.
Krugmans basic assumption here is that a law-abiding American does not own his or her legally-earned money. Instead, the money belongs to the government, at the generosity of the government.
Krugmans next point looks at this alleged coddling in some detail:
Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. Remember that Erskine Bowles and Alan Simpson, charged with producing a plan to curb deficits, nonetheless somehow ended up listing lower tax rates as a guiding principle.
Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, thats right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.
Unfortunately, his argument holds no water when one considers a couple of major factors holding back the American economy today – the world economy and America’s entitlements, especially as compared to the 1950s. From Reason Foundation on Jan. 25, in disputing Krugman’s declaration that America’s debt level post-World War II is comparable to today’s challenges:
First, we didn’t have a growing entitlements crisis in 1945. As aptly pointed out here, federal spending as a percent of Gross Domestic Product (GDP) dropped significantly after World War II, as did the level of debt as a percent of GDP. Looking forward 40 years, on our current path, we will have very opposite numbers as debt and spending continue to rise precipitously. Back in 1945, for example, Social Security was paid for by 42 times as many workers as retirees who utilized it. Today? That ratio is about 2.9 to 1, and getting worse. Meanwhile Medicare, which did not exist in 1945, is expected to grow from 3.6% of GDP to 5.5% of GDP between 2011 and 2035.
Second, the economic state of nations such as Germany, Britain, France, Japan, China and others are very different today than they were 66 years ago. After World War II, these nations had little infrastructure or economy left. Additionally, many of their young people had died in the war. Meanwhile, America was left with infrastructure, a stable monetary system, a first-class educational system and an economy that exported to the vast majority of the nations of the world. Unfortunately, America no longer has those advantages. In fact, we are in the middle of the pack educationally, according to a December 2010 Program for International Student Assessment report, and our infrastructure is aging rapidly while our imports increase and our exports decrease.
In short, Krugman’s argument ignores how America’s unparalleled economic dominance across the world more than made up for absurdly high tax rates. He also ignores how massive government debt holds back economic growth.
Two final points to finish putting Krugman’s column in a coffin: first, Krugman says “economic justice and economic growth aren’t incompatible.” He’s right. He’s just wrong on the solutions. On the tax side, the best way to match economic justice with economic growth is to eliminate all federal tax loopholes, broadening the tax base as a result, and subsequently instituting a Flat Tax. Just as we should not have taxation without represenation, is it fair to have representation without taxation? All these things are supported by many conservatives. These changes provide the potential for massive economic growth across all income levels – more than overcoming the higher tax rate on the bottom 20% of earners, who currently pay 1% of their income to taxes(the top 1% pays nearly 29%, as seen at the link). It also eliminates the many immoral and economically inefficient tax loopholes that make the tax code horribly complex.
Related, economic justice would include elimination of federal subsidies for the wealthy, including bailouts and farm and energy subsidies. It also would include prevention of tax increases on the middle class, something that regularly happens when taxes go up on the wealthy as seen with the Alternative Minimum Tax and individual income tax.
At the end of the day, America is indeed in great need of policies that make opportunity more equal. This is best done by bringing the federal government back within the Constitution on spending, and instituting either a national sales tax (along with elimination of the income tax) or a flat income tax.
Finally, Krugman says the wealthy paid “their fair share” in decades past. Given that the top 1% earn 50 times as much as the bottom 20%, but pay 1,500 times as much in taxes, and provide much of the nation’s charitable donations, private investments, and employment opportunities, what level of taxation would Krugman consider the “fair share” of their income? Is anything less than 91% unfair? As Peter Schiff found in interviewing Occupy Wall Street participants, the answer seems to be more talking point than policy change. I guess this is pretty common on the left, regardless of whether one has a Nobel Prize in Economics or not.
I would also note that:
* The state, local, and sales taxes were much lower. Today, if the Fed Gov took 91%, the top bracket would have an effective tax rate above 100%.
* This maximum bracket, in your article, was applied to the .01%. That’s billionaires, not millionaires and billionaires, or $250,000 in annual income-aires. Krugman would push very high tax rates down to the 1 or 2% level. The .01% is a much rarer bird.
This article provides the historical background for Krugman’s position. i wonder if Krugman would like all the other things that made up the 1950’s? Polo, nuclear bomb drills, and lets not even think about civil rights and feminism.
With the generous deductions available in the 1950’s no one actually paid 91%, in fact the wealthy could often reduce their rates to near zero using some creative accounting measures.
I believe Krugman knows this and is just simply a chronic liar with an agenda.
I’ve had this arguement with Krugman loving liberals. They are ignorant about what grows the private sector. They fully embrace the idiocy of You Didn’t Build That. They’re Marxists who deny the label.
Thus the reason the AMT was invented. I think there were 50 Taxpayers that it was supposed to affect, nowadays it’s 10 Million or so if I recollect.
Krugman is something I scrape off the bottom of my shoe when I step in a pile of Dog crap.
Krugman is a Nobel Prize-winning economist.
All you need to know about the Nobel Prize...
Yeah, the Nobel Prize would be a good tool to scrape the crap off my shoe.
Using Krugman’s logic (oxymoron), the Bush era Tax Rate Cuts would have resulted in Federal Tax Revenues dropping by 35% instead of INCREASING by 35%.
Not to mention there used to be even more tax shelters and deductions. The 86 tax law really pruned those. Everyone played extensive tax games.
Krugman claimed that the rich paid something like 70% after all was said and done, and I really doubt it.
“Using Krugmans logic (oxymoron), the Bush era Tax Rate Cuts would have resulted in Federal Tax Revenues dropping by 35% instead of INCREASING by 35%.”
And he would STILL maintain his position. He is an idealogue who deletes important facts and deliberately misinterprets things.
I read Krugman’s article yesterday. His glaring omission of what happened after the tax rate was lowered down from 91% is either by choice or stupidity.
He’s not an economist. He’s an Econo-propagandist and deserves his noble prize in economics as much as Obama deserved his noble peace prize.
Interesting that you should mention Nobel Prizes—my wife and I had that same discussion today. We noted the unworthies that recently have received Nobel prizes of various sorts: Krugman, Arafat, Zerobama, Al Gore, the IPCC, the EEU, Jimmy Carter, Kofi Annan, the UN. The peace prize in particular has no meaning any more.
Hamas will receive the next peace prize
The prizes have become an exercise in self-congratulation among liberals.
There is seemingly nothing that liberals touch that they cannot trivialize.
Krugman won an Academy Award or something for figuring out that two-bits is the same as a quarter. The man’s a genius.
No wonder they vote for Communism....they've been taught about "Mean White Rich Guys", and "you have Rights to what others earned".....
The following opinion is based on information found in the first chart contained at the following link.
Since 1960, tax revenues collected at a federal level have averaged 15-20% of GDP. This average has held pretty much constant over a 50 year period that has had many changes to tax codes and tax rates. So, what can we get from this? In the same way that 15% of $100 is $15, and 15% of $200 is $30, we see that the real way to increase tax revenues is by expanding GDP. You expand GDP by making is easier for business to prosper, so they can hire more people, who spend money on stuff, which makes other business grow, and so on and so forth.
This is easy, simple, math and economics, but it will never happen with the current anti-business administration.
Krugman is a very angry little man. On top of it I bet he uses every deduction known to the tax codes to keep the government out of his pocket.
Cum Hoc, Ergo Propter Hoc.
Don’t forget JFK’s tax cuts and why he did it.