‘The Things I Remember Were Roads, Tall Buildings, Universities, and Research’

Congressional resolution proposing what became the 16th Amendment to the Constitution, authorizing a federal income tax. Library of Congress

Two previous posts—“When the Top U.S. Tax Rate was 70 Percent—or Higher” and “Who Is Paying Their ‘Fair Share’?”—went into the endlessly complex and newly politically relevant question of the “fairness” of the American tax system.

The question is complex for obvious reasons. It’s politically relevant as evidence comes in about the effects of the Trump-Republican tax cut of 2017, and as Democratic proposals come forth to raise top-bracket tax rates again—for instance, as high as 70 percent (which was their minimum level between 1932 and 1982).

A huge torrent of mail has arrived, of which I expect this will be the next-to-last sampling. Not the very last, because there’s a technical issue I want to understand better before posting information about it. But next-to-last, because there’s a limit on fresh perspectives.

Here we go, with numbered entries and a brief blurb on the perspective each one represents.

1) “Stop saying that high marginal tax rates ‘Made America Great’ in the first place.” Several previous reader-messages have stressed the high tax rates during America’s post-World War II growth decades, as a sign that higher top-bracket rates could be valuable once again. Here is a long, detailed response to that argument, from a reader on the West Coast:

The argument, if you can call it that, over the top marginal tax rate vs national economic well-being is—in my opinion—a correlation vs causation pissing match that takes as its subject an issue of secondary or tertiary importance at best.

It’s fun to bash the tennis ball back and forth across our contemporary social and political divides about the rich and rates, but the absolute, fundamental fact about the United States after the Second World War (which seems to be the consensus Lost Golden Age) was that it had been dealt not only all the aces in the global economic poker hand, but most of the face cards as well. To recap:

  • The physical industrial capacity of the most advanced industrial economies of Europe and Asia ranged between meaningfully damaged and nearly destroyed. The United States by contrast had just invested tremendous amounts of human energy in the construction of productive infrastructure that no one ever attacked.
  • The United States suffered less than 3 percent of the war’s combatant deaths and less than 1 percent of the total global death toll. Considering combatant deaths only, the US suffered in absolute terms about one fifth of the deaths of Japanese soldiers, less than one tenth the deaths of German soldiers, and less than one twentieth the deaths of Soviet soldiers. US military deaths were fewer than those of Yugoslavia. These numbers of course skew even further in the U.S.’s favor when considering total deaths including civilians, and then again when considering total deaths as a percentage of prewar populations.
  • The United States was the refuge of choice for scientists and other intellectuals who fled Europe, i.e. there was a tremendous brain drain in the U.S.’s favor
  • The U.S. had the advantage of significant natural resources in energy and materials (oil, coal, metals).
  • Ethnic tensions were controlled e.g. via the violent subjugation of black Americans, to take only the most obvious and terrible example.
  • The U.S. had as ready markets all the degraded and destroyed industrial economies of the world to export its goods to, with unprecedented demand for capital goods to rebuild those economies.

In sum, for a good twenty and arguably thirty to forty years after the war, the U.S. had by far the largest and most advanced industrial infrastructure in the world, the least damaged and probably best-educated workforce, social cohesion built not incidentally on the repression of ethnic minorities, nearly free energy from oil & coal, and buyers around the world in urgent need of America’s manufactures.

That is the primary set of facts about America the Great that we should keep always front of mind. It seems of little relevance, in light of that combination of facts, whether the top marginal rate in 1955 was 50 percent or 70 percent or 90 percent. The U.S. would have had to shoot its golden goose in the head at point blank range, possibly more than once, in order to kill it.

I am not far-seeing enough to predict all the consequences, intended and otherwise, of changes made now to the tax code or even of changes to the distribution of the tax burden. What I know is that the global competitive landscape has changed permanently, and bears little resemblance to that of 1955.

I would submit that asking “what is the relationship between top tax rates and economic growth in the U.S.” ignores more or less every factor of primary economic importance. A better place to start might be by asking “are there periods in economic history, in the last twenty years or prior to WWI (say), in which we can cleanly (?) observe the impact of dramatic changes to the tax burden paid by the capital-holding and capital-allocating class upon the economic performance of one or more industrial economies participating in high-level import-export competition with other like economies."

2) “Yes, the economy has changed since the 1950s. It’s changed by becoming more unfair.” A reader makes a contrary argument, about the shifts in the economic landscape since the post-war growth decades:

I think one of the main reasons for having a 70-90 percent tax on the highest income people is to reinstate a feeling of fair play in this country. This has been lacking in the last 40 years ever since wages have stagnated for most of us, taxes on the wealthy have gone down, and the wealthy have taken control of the government via lobbying, Citizens United, etc.

Every game needs equal opportunities and fair rules equally applied to everyone. If it doesn't people get tired of playing and tip over the board.  That's what's happening to this country and around the world.

The rich people's claim that "upskilling" (a Davos term) workers will reduce the wealth gap and income inequality is a fallacy.

I'm an M.S. level biochemist with an MBA and some okay computer skills working as a knowledge worker, and making a solid middle class income, and my fellow employees and I are lucky to get a 2.5 percent yearly raise, while we see the top managers make hundreds of thousands a year and up to over a million/year and get big bonuses.

You can't get too much more upskilled than me or my colleagues, and we're still falling further and further behind the wealthy.      

3) Yes, it really is more unfair. Continuing the argument in #2, from another reader:

In discussing the changes in average tax rates for the (as reference
points) the bottom 50 percent and the top 1 percent of incomes, it is also useful to keep in mind the changes in incomes for those groups. Since 1980, median household income (half make more, half make less) has been essentially flat. Labor productivity (and resulting GDP growth) has continued at near the historic (since 1800) rate, but virtually all the additional income has gone to the top 10 percent, and most of that to the top 1 percent.

The share of all income going to each of the four lower quintiles (the bottom 20 percent of households, the next 20 percent, etc.) has decreased since 1980. The portion going to the top 20 percent has, of course, increased (and, to repeat, most of that has gone to the top 1 percent).

The point of all this is that the situation is even more serious than
would be suggested by the data sent by other readers. The bottom 50 percent are paying a higher percentage of an essentially unchanged income, while the top 1 percent are paying a lower percentage of vastly higher incomes.

Higher (marginal) tax rates for the very well off would be part of a program to address income inequality, but only part. The discussion,
though, should also explicitly include the dramatic (and apparently growing) increase in income inequality since 1980.

4) Rebuild America, through more public spending. An extension of arguments #2 and #3, from another reader:

If I were a Democratic strategist, I would point to our nation's once great and groundbreaking infrastructure, started / built / rebuilt largely under FDR and in the few decades immediately post-WWII and which is so desperately in need of upgrades or even basic maintenance these days and I'd brand today's conservatives as freeloaders sponging off the hard work of Americans from the past—including conservatives from Eisenhower's time, who realized patriotism meant a certain level of sacrifice by all for the good and safety of all.

5) The things I remember were roads, tall buildings, universities and research.” Finally for today, from a reader who is a small-business owner in North Carolina.

In the 1950s the marginal income tax rate was high. But we were in the height of the cold war. So, in those days was the money taken in taxes turned back into our “military/industrial” economy in  a way that grew the overall economy?

[JF note: through some of the early Cold War years, military spending neared 10 percent of the GDP. In recent decades, it’s been closer to 5 percent—of a much larger GDP. But whether those big defense budgets helped the long-term U.S. economy, rather than distorting it, has been a long-term source of serious contention. In the mid-1970s, Seymour Melman, of Columbia, wrote his influential book The Permanent War Economy, arguing that large military budgets would be a significant long-term drag on American economy. I see that I wrote a review of this book for the New York Times, when it first came out nearly 45 years ago.]

And is the difference that today that a high percentage of taxes are used for income transfer between rich and poor and younger and older? And therefore with much less GDP impact?…

And what about local property taxes? In the postwar as the South industrialized what was the contribution of industrial property to the tax base vs. the individual property tax on a home? As far as I know companies weren’t bribing, and whining for all sorts of tax concessions because they were so special. Could it be that when corporate ownership was still local they may have even had a bit pride in paying the taxes and seeing the civic improvements they paid for?

I was born in North Carolina in 1959. But as I started work in the early 1980s I got the impression people in other parts of the country were surprised that I had shoes. The things I remember were roads, tall buildings, universities and research. A state proud to show progress from subsistence to the modern age. Today there seem to be people that want to take us back to 1950, or maybe more realistically, 1850.

How did we get to where we can’t even maintain what our ancestors built, much less build for our own time?