You’d have to go back to the era of bell bottom jeans and disco music to find the last time any semisane person endorsed 80 percent tax rates, but, suddenly, the idea is making a comeback. The hot new book that has captured the imagination and attention of the Left endorses Robin Hood economics: lift incomes by taking from the rich and giving to the poor. President Obama is one of the biggest fans of this economic strategy.
In his new book, “Capitalism in the 21st Century,” French economist Thomas Piketty endorses the 80 percent income tax “to lower income inequality,” as well as more money for social welfare programs, and a wealth tax as high as 30 percent. He’s being treated by the media like the modern-day Adam Smith.
The obsession here is to spread the wealth and produce a more equal distribution of income. It may well do that – but by making everyone much poorer.
Mr. Piketty assures readers that even confiscatory tax rates don’t hurt the economy. He warns that “meritocratic extremism” – which is another way of saying you get to keep the fruits of your labor – is ruining our nation, and if we don’t divide the pie more equally the result could be “truly frightening.” He says that his goal is to “save capitalism” – which sounds much like the logic George W. Bush used in 2008 during the height of the financial crisis: We need to suspend the free enterprise system in order to save it.
It’s hard to know which is more depressing: that an academic would actually write such drivel or that the media mavens at places like the New York Times would give it worshipful treatment. It is as though the Left’s intellectuals have been sleep walking through the past 50 years, so that none of the economic lessons learned have taken root.
It’s a good bet that this extreme Robin Hood strategy is gaining intellectual traction now precisely because President Obama’s economic strategy of redistribution – more welfare spending, more debt, more bailouts, a socialized health care system and higher tax rates – has crash-landed the U.S. economy. The middle class is fighting over a smaller share of a smaller pie, and the ranks of those in poverty keep rising.
By the way, all the obsession in this White House the past five years has managed only to make income disparities wider. The latest IRS data, through 2012, show that the richest 3 percent have made income gains, and nearly everyone else is losing ground.
Mr. Piketty’s book advises Democrats not to move in a wiser direction, but to double down on class warfare. It’s not enough to raise the capital-gains and dividend tax by almost 60 percent, or to raise tax rates to their highest rates since Jimmy Carter, or to put 47 million people on food stamps and put millions more Americans on Medicaid, unemployment insurance and disability, or to borrow $6 trillion in five years. Mr. Obama has done all these things but all he has to show for it is the weakest economic recovery since the Great Depression and a middle class that is still almost $3,000 a year poorer today than in 2007.
The next step on the road to economic ruin is to raise tax rates in America to the highest in the world.
Mr. Piketty insists he has 200 years of evidence to show that tax rates on the rich can, and should, go much higher, but he must not be counting the most recent 50 years because this has been an era that has proven time and again that high tax rates can destroy an economy. If tax rates didn’t matter, as Mr. Piketty conjectures, then it would be hard to explain why no-income-tax Florida and Texas have gained four times the number of jobs the past 20 years as the two states with the highest rates: California and New York, with rates close 13 percent. And, if overspending and high tax rates create a workers’ paradise, why in the past five years have American workers left these two states at such a steady stream?
The national story is even more compelling. In the 1960s, John F. Kennedy cut tax rates and this was followed by a similar round of rate reductions by Ronald Reagan in the 1980s. Under Reagan, the highest tax rate fell to 28 percent from 70 percent in 1980. Three things happened in the 1960s and ’80s: 1. The economy exploded (44 million jobs and an economy that grew the equivalent size of adding two New Californias from 1982-2000); 2. The share of income taxes paid by the rich increased, and, 3) total tax receipts doubled as the economy roared back to life.
Mr. Piketty argues that, even with an 80 percent tax rate, the rich will invest as much as when rates are only half as high. By this logic, an investor will put his money down whether the government takes 80 cents of every dollar earned or 40 cents of every dollar. But, in the real world, the amount of investment and where the money is invested is highly sensitive to the after-tax return.
Business owners will move or they will move their investment capital to other places to escape the high taxes. This is why nearly 100 nations have ratcheted down tax rates the past 30 years. If the U.S. were to raise taxes to 80 percent, the rest of the world – from the Chinese to the Indians to the Germans – would hold a jubilee.
It is worth noting that IRS data shows that about two-thirds of those in the top 1 percent of income are small-business owners, operators or investors. These rich are the key employers in the country. They aren’t people leading a life of ease off daddy’s inheritance.
If you tax work, and investment, and achievement, at a higher rate, you are going to get less of it. And if you redistribute the money to people who don’t work, you’re not going to get them to work more.
That the Left has come full circle to celebrating the anti-growth tax rates of the 1970s is a depressing reminder that liberals really haven’t learned much of anything over the past 30 years. In the 1970s, the combination of high tax rates and high inflation pushed Americans into an ever-higher tax bracket, which contributed to the worst losses in middle-class incomes since the Great Depression. If America is foolish enough to follow Mr. Piketty’s advice, which is based purely on greed and envy, we may very well have a second Great Depression.
By contrast, a flat tax of, say, 18 percent to 20 percent would likely supercharge the economy. Bring capital and jobs back to the United States. Raise taxes paid by the rich. And increase middle-class incomes by making the economy more productive.
- Stephen Moore is chief economist at the Heritage Foundation.
Originally appeared in the Orange County Register