Let's Be Serious, There's No Such Thing As a 70% Top Tax Rate

Let's Be Serious, There's No Such Thing As a 70% Top Tax Rate
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The late Jude Wanniski used to scoff at reports of abnormally high country unemployment, particularly in poor countries. He knew better. Even in the richest ones it’s rare that over 20% of the working capable population can afford to do nothing. In the poorer ones work (often of the backbreaking variety) is generally a necessity for all who are able-bodied. Wanniski knew large swaths of the population weren’t not working as much as high rates of taxation have a tendency to push a lot of work underground.

Which brings us to revived talk of a 70% top tax rate. The latter was the rate in the 1960s, and unserious people who will not be mentioned here are talking legislation meant to bring it back. It’s not just that these attention-seekers aren’t serious, it’s that they deep down know they’re not. This is all about publicity, so they will get none. Only their droolings will be addressed. There’s quite simply no such thing as a 70% top rate.

That’s why all the knowing calculations on the right revealing how little a 70% tax rate on earnings above $10 million would net are similarly obtuse. Talk about missing the point. The right quickly lose tax arguments in which they use revenues and revenue projections as their weapon.

With taxes the talk should always be about liberty. Indeed, for members of the right to say nosebleed rates won’t bring in the expected revenue is for them to implicitly say the goal should be to find a rate that would. No, the goal should be to limit in all ways possible what the political class gets to take from us. End of story.

Back to the 70% rate, there’s again no such thing. There wasn’t even such a thing in the 1960s. As Larry Kudlow and Brian Domitrovic point out in their book JFK and the Reagan Revolution, while top tax rates rose as high as 90% in the 1950s, the average tax rate for earners above $100,000 (a lot of money back then) was closer to 36%.

Hopefully this helps explain why politicians clamor for “high” rates of taxation. It’s not that they don’t understand the revenue-maximizing rates that fascinate economists and pundits, and it’s not that they don’t know that high taxes are a disincentive to production. Rest assured that they know all of this intimately. This includes the Democrats. If readers doubt this, they need only ask themselves why so many movies are made in Georgia. The answer to the previous question is a reminder that Democratic politicians and their Democratic supporters understand as well as Republicans do that tax rates matter when it comes to the where and when of production.

They do simply because politicians exist to spend money. That’s why they’re there. You don’t get into politics because you want to not “do something,” rather you get into the field because you do. This explains why government relentlessly grows no matter the political party in power. Of course it does. They’re there to spend, and to amass power.

So while some will talk of a 70% rate, or of simply raising taxes, they’re not signaling that everyone’s taxes will go up, or even that the taxes of the rich will go up. What they’re saying is that they want to raise the headline rate so that they can quickly lower it through all manner of deductions and loopholes introduced into the tax code. Strange as it sounds, tax hikes are a full-employment act for political types not because they’re raising taxes, but because those hikes will elevate the power and importance of the political class through tax-code adjustments that will bring the effective rate down.

Politicians get what any sapient human being gets about the folly of excessive taxation. Importantly, excessive taxation is not what they're aiming for. Taxes are ultimately a negotiation; one that enriches those setting the headline rates that enable endless tax code tinkering to bring the actual rate down. This hopefully explains to readers why there will never, ever be a flat tax or a simple consumption tax. Not a chance. Would you the reader voluntarily accept a substantial decrease in your individual prestige, and much worse, a catastrophic collapse of your lifetime-earnings potential? You know the answer.

So while pundits, politicians and economists will go back and forth about the economic implications of a 70% tax rate, readers can rest assured that the debates are monument to time and breath wasted. No matter the party in power, we’ll never have a 70% tax rate without numerous ways introduced to avoid it. Politicians are people too, and that’s the problem.  

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is titled They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers. Other books by Tamny include The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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