Dutch Historian Rutger Bregman says public opinion about taxes isn't rocket science. Even if it isn’t, he still doesn’t understand it. Bregman made a few claims I wish to address. Among them are two major stated claims and an implied third:
- The public wants higher taxes;
- The Golden Age of Capitalism had a higher top marginal tax rate (91%) when inequality was lower, and so America should (re-)adopt a high marginal tax rate to reduce inequality, and;
- The high growth in the Golden Age of Capitalism was due to equality, something he tacitly chalks up to high taxes.
Each of these claims is misleading, wrong, or both. My arguments are summarized at the end of the post.
Does the Public Want Higher Taxes?
There are two ways to understand this. The first is how Bregman understands it: through polls. When asked if they want higher taxes, Americans generally say ‘yes.’ Others, like Ezra Klein, have made this same remark and used it to argue that American public policy hasn’t tracked public opinion. This populist argument is meretricious.
This is a problematic understanding of the term “public opinion.” If Americans say they want higher taxes, that does not mean they want higher taxes. It may just as well mean they’re misinformed when it comes to current top marginal tax rates, and that they feel as if they want higher taxes, when in fact, they do not.
When the question is asked in a different way — “What do you consider to be the appropriate top income tax rate?” — the answer also changes. That’s the result of this Hill poll. To quote:
Three-quarters of likely voters believe the nation’s top earners should pay lower, not higher, tax rates, according to a new poll for The Hill.
The big majority opted for a lower tax bill when asked to choose specific rates; precisely 75 percent said the right level for top earners was 30 percent or below.
The current rate for top earners is 35 percent. Only 4 percent thought it was appropriate to take 40 percent, which is approximately the level that President Obama is seeking from January 2013 onward.
And here are the numbers:
— 21 percent of respondents recommend a rate below 20 percent;
— 17 percent recommend a rate of 20 percent;
— 23 percent recommend a 25 percent rate;
— 14 percent recommend a 30 percent rate;
— 13 percent recommend a 35 percent rate;
— 4 percent recommend a 40 percent rate;
— no one recommends a 45 percent rate.
I do not claim that these results mean anything, but pundits certainly do when they claim that Americans want higher taxes. The term “higher” means a different thing to academics and laymen. When an academic like Bregman says they want higher taxes, they seem to mean that they want higher taxes than the existing rates. When a member of the lay public says they want higher taxes, they seem to mean that they want taxes to be what they currently are. Presumably, they don’t actually know the top tax rates, but they feel that top-earners aren’t paying enough. Their definition of “enough” appears to be the same as the current top tax rates.
It is disingenuous to appeal to public opinion in support of higher taxes as an academic whose knowledge of taxes isn’t just a feeling like it is for laymen. When people like Bregman and Klein say that public opinion supports higher taxes, they’re projecting their own beliefs unto the public. Public opinion is often the product of how a question is asked; it does not really exist.
Scott Sumner made this point years ago, but I cannot find the post.
Did America Really Have a High Top Tax Rate?
Yes. America had a very high top tax rate of 91% at its peak. However, it effectively did not. The reason for this is simple: no one paid it. Well, practically no one. To quote Lawrence Lindsey:
[I]f you go back and look at the income tax data from 1960, as a place to start, the top rate was 91 percent. There were eight — eight Americans who paid the 91 percent tax rate. [emphasis mine]
Kasprak (2011) writes similarly that approximately 0.00235% of households had income taxed at the 91% top rate. Additionally, he remarks that the top 1% pay a greater proportion of the taxes now than then. These observations concord with Hauser’s Law, the observation that federal tax revenues after WWII have approximated 19.5% despite large fluctuations in marginal tax rates.
The likelihood that the top tax rates at the time explain the relatively low inequality is extremely slim. A more likely explanation for today’s increasing inequality is demographic change. This is what I write about in the following section.
Equality and Growth?
I just said that a “more likely explanation for the increase in inequality is demographic change.” While race is what people tend to think of when they think demographics and race certainly plays a role here, it is not the most outsized demographic influence. The largest appears to be related to education. For example, in 2006 Thomas Lemieux wrote this:
For men, changes in the prices of unobserved skills account for no more than a quarter of the growth in overall inequality. For women, changes in the price of unobserved skills account for between 5 and 31 percent of the overall growth in inequality….
[A]ll of the growth in the price of unobserved skills is concentrated in the 1980s. This finding is difficult to reconcile with the SBTC hypothesis which typically states that the relative demand for skills also increased during the 1970s and the 1990s….
[M]ost of the growth in the 90–10 residual gap appears to be a spurious consequence of composition effects. When the distribution of experience and education is held at its 1973 level, the 90–10 residual gap in the early 2000s is barely higher than in 1973…. [emphasis mine]
Interestingly, all of the remaining growth in the 90–10 gap is driven by inequality growth in the upper end (90–50) of the distribution. In fact… for both men and women, the 50–10 gap declined while the 90–50 gap increased over time once composition effects are controlled for. This mirrors the earlier finding that residual inequality increased in the upper part of the wage distribution (college-educated workers) but decreased or remained stable in the lower part of the distribution (high school graduates and dropouts).
Contrary to the commonly-touted figures from Piketty & Saez (2003), Auten & Splinter (2016) find that when changes in the tax code are properly accounted for, changes in the composition of disposable income have only modestly changed since the 1960s. Part of the problem with inequality calculation is that large and growing proportions of market incomes are excluded or deferred from taxation (Foertsch, 2016). Also not towing the Piketty & Saez’ line, Stephen Rose of the Urban Institute recently evaluated some of the studies regarding modern (post-1979) trends in inequality. What he finds is that:
instead of stagnating, real median incomes grew by just over 40 percent (1 percent a year) from 1979 to 2014;
the top 10 percent of the income ladder captured 45 percent of income growth from 1979 to 2014; and
the share of the top 1 percent grew 3.5 percentage points.
All studies find that income inequality rose after 1979, but common perceptions that all income gain went to the top 10 percent and middle class incomes stagnated (or even declined) are wrong.
Contemporary increases in inequality are mostly demographic in origin and are strongly exaggerated in the popular discourse. The decline in growth is probably demographic as well, while the link between inequality and slower growth is tenuous at best. There is certainly not an economic consensus on the connection between inequality and growth. Neves et al.’s (2016) meta-analysis of the effects of inequality on growth is probably as close as we can get and it concludes:
We found that, although the average impact of inequality on growth is not significant, there is a high degree of heterogeneity in the reported effect sizes. This suggests that there are several “true” effects of inequality on growth, which may occur in opposite directions. We also found the presence of publication bias, as authors and editors are more prone to report and publish statistically significant effects, and the results tend to follow a predictable time pattern over time, according to which negative and positive effects are cyclically reported.
After correcting for these two forms of publication bias, we investigated the sources of heterogeneity by means of a meta-regression. As in Dominicis et al.’s (2008) our results suggest that for a 5% level of significance: the effect of inequality on growth is negative and more pronounced in less developed countries than in rich countries; the inclusion of regional dummies in the growth regression of the primary studies considerably weakens such effect; expenditure and gross income inequality tend to lead to different estimates of the effect size. However, contrary to it Dominicis et al.(2008), we find that: the impact of inequality on growth is not significantly influenced by the quality of the data on income distribution or by the use of different panel estimation techniques; cross-section studies systematically report a stronger negative impact than panel data studies. Furthermore, our results suggest that wealth inequality is more pernicious to subsequent growth than income inequality is. With the exception of the impact of using expenditure versus gross income, all these results are robust.
The effect of inequality on growth in developed countries such as the US is apparently very minor or statistically insignificant, while in less-developed countries it often seems to be larger and significant. This is also what Kolev & Niehues (2016) found. When discussing the effect, nuance is clearly necessary. For example, Bagchi & Svejnar (2015) found that:
Our results suggest that wealth inequality has a negative relationship with economic growth, but when we control for the fact that some billionaires acquired wealth through political connections, the relationship between politically connected wealth inequality and economic growth is negative, while politically unconnected wealth inequality, income inequality, and initial poverty have no significant relationship.
Voitchovsky (2005) brought yet more nuance into the discussion by arguing, similarly to Okun, that inequality brought about by the poor becoming poorer hurts growth, whereas inequality brought about by the rich getting richer increases growth. This is similar to a study by Castells-Quintana & Royuela (2017), who argued that most inequality is bad for growth, but inequality that emerges through market processes is good for growth.
More technical investigations of these topics have been conducted, but I won’t get into those in this post. For those interested, I highly recommend reading Neves & Silva (2013), Klasen et al. (2016), Ferrero, Gross & Neri (2017), Eggertsson, Mehrotra & Robbins (2017), Eggertsson, Robbins & Wold (2018), Eggertsson, Lancastre & Summers (2018), and Lunsford & West (2018). The analyses by Neves & Silva and Klasen et al., in particular, are very interesting for their discussions of the channels for inequality to affect growth. These may explain why the relationship seems to differ in developed and developing countries. Other papers related to these topics, which I recommend reading, include Delis, Hasan & Kazakis (2014), La Cava (2016), and Manish & O’Reilly (2018). Schmidt’s (2017) comments are relevant to some of Bregman’s assertions about poverty.
Misleading the Public
This article highlighted three claims Bregman recently made or implied— though these are certainly not in any way novel arguments on his part— :
- The public wants higher taxes;
- High top tax rates were the reason for low inequality in America in the middle of the 20th century, and;
- High growth in this period was due to low inequality.
I believe I have demonstrated that none of these claims is strongly supported and they are all misleading. I have done this by showing that:
- While Americans may say they want higher taxes, the tax rates they recommend are in fact at or below current rates;
- Practically no one (literally eight people) paid the top tax rate of 91%, making this an implausible explanation for low inequality, and;
- Contemporary increases in inequality have been exaggerated, are predominantly demographic in origin, and the link between inequality and growth is tenuous and most likely insignificant for a developed country like America.
I hope this short essay helps to clarify issues about the existence and meaning of “public opinion,” the recent history of taxation and inequality, and the aetiology of current trends in inequality.
