Matt Miller has an excellent column in The Washington Post in which he coins the phrase “Drawbridge Republicans.” Basically he accuses Romney and Ryan of being pro-rich class warriors who aim to eliminate equality of outcome and of opportunity. A very standard Rhetorical gesture is to concede in the second or third paragraph of an essay that there are shades of grey and fault on both sides each of which has a point. I think that for Miller that this is a reflex(also for others including say the President — I call the trope an “obamanation”). I also think that a part of this phase of writing a well made essay all critical facilities are turned off. Such an aside must be part of a good essay and no data are relevant. The alleged obamanation follows
(In case you were wondering, Ronald Reagan wasn’t a Drawbridge because he entered office when marginal rates, at 70 percent , were truly damaging to the economy. But as GOP business leaders now tell me privately, the Clinton-era top rate of 39.6 percent, let alone today’s 35 percent, are hardly a barrier to work or investment).
(parentheses his). Disclaimer: This post will include exactly 1 link. All claims of fact will be based on my memory. Note the complete lack of any data supporting the flat claim that 70 percent marginal rates were truly damaging. The only hint of an explanation of the alleged damage is in the following paragraph “a barrier to work or investment.”
I don’t have to remind readers of this blog that 70% marginal rates sure don’t seem to have been a barrier to work and investment in the 60s nor were 90% marginal rates obviously a barrier to work and investment in the 40s and 50s. First there is very little evidence for an effect of taxes (or wages or interest rates) on male labor supply. This was well known in 1981. The elastic labor supply is married women’s labor force participation. This increased enormously during the period of 70% marginal tax rates. Notably, the labor supply choice doesn’t depend only on marginal rates (it isn’t a small change). There is no evidence that the elimination of 70% rates removed a significant barrier to work.
The idea that the Kemp-Roth-Reagan tax cuts removed a barrier to investment just can’t be reconciled with the data.
In fact they were followed by a period of extremely low fixed capital investment. This is unsurprising given the extremely high real interest rates which, in turn, are unsurprising given the high budget deficits caused by the Kemp-Roth-Reagan tax cuts. One mildly odd thing in the Miller parenthetical aside is the equation of saving and investment. I will accept the equation which makes sense in the long term although our current problem is high planned saving and low planned investment. But the Kemp-Roth-Reagan tax cuts did not have the effect on private savings which proponents predicted. Instead there was anomalously high private consumption. This is in addition to the massive resulting public dis-saving (deficits). There is vastly vastly vastly less than no evidence that the end of 70% marginal tax rates contributed to capital formation. The more nearly rational advocates of low marginal rates (by which I mean the more nearly rational critics of 70% marginal rates) argue that the important issue is tax avoidance not labor supply or consumption savings decisions.
The argument is that there are efficiency losses due to tax avoidance strategies such as investing in tax shelters (to obtain income losses and capital gains). So a semi-rational defender of Kemp-Roth-Reagan could ask if there was a marked reduction in the vigor of tax sheltering etc. That’s a good question, but the answer is that there was a huge gigantic massive increase in the vigor of tax sheltering. This was widely noted at the time. But surely there must be something good that can be said about the Kemp-Roth tax cuts which isn’t based on ignoring all available data ? I suppose there probably is, but for the life of me, I can’t think of it.