Hillary’s revealing tax gaffe

June 2, 2010

Who really cares what Hillary Clinton thinks about taxes, right? She’s Secretary of State in the Obama administration, not Treasury. It’s not as if Timothy Geithner said the following, as Clinton did last week:

Brazil has the highest tax-to-G.D.P. rate in the Western hemisphere. And guess what? It’s growing like crazy. The rich are getting richer, but they are pulling people out of poverty. There is a certain formula there that used to work for us until we abandoned it — to our regret, in my opinion. My view is that you have to get many countries to increase their public revenues.

The actual cross-country comparison doesn’t interest me much. Brazil has a very different tax structure and an economy that’s one-seventh the size of America’s. And I am not even sure, really, what Clinton is talking about. Brazil’s aggregate tax burden, as Dan Mitchell of Cato notes, of about 24 percent of GDP “is slightly below the aggregate tax burden in the United States.” And its top marginal income tax rate is a third lower than America’s.

But here is what I am interested in: Clinton’s tax analysis is perfectly reflective of the counter-reformation against the global tax revolution launched in the 1980s. According to this economic cosmology, tax burden is really a secondary or tertiary economic factor. Bill Clinton raised income taxes in the early 1990s, after all, and the U.S economy roared. (Here is a different economic narrative of that decade.) Of course, liberal Democrats are talking about increasing taxes far beyond what Clinton did– such as imposing a value-added tax — to deal with the exploding budget deficit. At the very least, as Clinton’s comments indicate, Democrats believe America’s wealthy still aren’t paying their fair share. But that is just wrong-headed for several reasons:

1) Top tax rates are already at dangerous levels where ever-higher rates bring in less money. Take a look at “The Elasticity of Taxable Income with Respect to Marginal Tax Rates” by Emmanuel Saez, Joel Slemrod and Seth Giertz:

Following the supply-side debates of the early 1980s, much attention has been focused on the revenue-maximizing tax rate. A top tax rate above [X] is inefficient because decreasing the tax rate would both increase the utility of the affected taxpayers with income above [Y] and increase government revenue, which can in principle be used to benefit other taxpayers. Using our previous example … the revenue maximizing tax rate would be 55.6%, not much higher than the combined maximum federal, state, Medicare, and typical sales tax rate in the United States of 2008.

2) Taxing the wealthy to solve the budget deficit would require confiscatory rates. As the Tax Policy Center found:

Washington would have to raise taxes by almost 40 percent to reduce — not eliminate, just reduce — the deficit to 3 percent of our GDP, the 2015 goal the Obama administration set in its 2011 budget. That tax boost would mean the lowest income tax rate would jump from 10 to nearly 14 percent, and the top rate from 35 to 48 percent.

What if we raised taxes only on families with couples making more than $250,000 a year and on individuals making more than $200,000? The top two income tax rates would have to more than double, with the top rate hitting almost 77 percent, to get the deficit down to 3 percent of GDP. Such dramatic tax increases are politically untenable and still wouldn’t come close to eliminating the deficit.

3) The rich already have a high tax burden. Here at the latest numbers from the Tax Foundation:

In 2007, the top 1 percent of tax returns paid 40.4 percent of all federal individual income taxes and earned 22.8 percent of adjusted gross income. Both of those figures—share of income and share of taxes paid—are significantly higher than they were in 2004 when the top 1 percent earned 19 percent of adjusted gross income (AGI) and paid 36.9 percent of federal individual income taxes. The 2007 numbers show that the top 1 percent’s income and tax shares reached all-time highs for the third year in a row. That is likely to reverse direction when data from recessionary 2008 is published a year from now.

Dramatic tax increases on the wealthy — much less the broad middle class  — are  neither the ticket to higher economic growth nor a path to fiscal solvency.


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