Yet another mindless canard re ‘Denmark’, this one offered by MIT economist Daron Acemoglu: That the U.S. was less innovative during the postwar decades, because of, y’know, those high tax rates on high incomes.
The sophisticated safety net that ensures few Danes ever experience poverty, fear hunger or lack in health care does not come cheap. The Danish economy may be the most heavily taxed in the world, with rich Danes paying over 55 percent of their total income in taxes to support generous social services.
Even if high taxes, redistribution and low inequality is appealing to some, there are reasons to be skeptical that the U.S. could ever be like Scandinavia. Beyond the fact that Denmark is small and homogeneous — so it eludes many of the social, educational and economic challenges that the vast, multiethnic and deeply diverse U.S. must contend with — Denmark is technologically behind the U.S. If the U.S. increased taxation to Denmark levels, it would reduce rewards for entrepreneurship, with negative consequences for growth and prosperity.
As a result, the country significantly benefits from, and in some cases relies on, the technologies American entrepreneurs create. American technologies are used by Danish consumers and built upon by Danish companies, but in Denmark, the existence of the social welfare state means far fewer rewards for similar entrepreneurship.
The situation would be very different in a world where the Danes did not have access to the inventions of Silicon Valley or the new drugs and medical technologies created by U.S. companies. Imagine if the U.S. increased taxation, reduced rewards for entrepreneurship and discouraged risktaking: It is reasonable to expect that its entrepreneurs — in Silicon Valley, medicine, robotics and aerospace, to name a few — would become less daring and innovative. This could have negative consequences for growth and prosperity not only in the United States, but throughout the world. There is no other country that could step in as the innovation engine of the world economy.
All of this is not to say that there isn’t much the U.S. can learn from Scandinavia, especially in alleviating and preventing poverty, in creating a level playing field for its citizens, and in achieving higher rates of social mobility. Some of the lessons the U.S. could learn might make innovation more inclusive, and consequently, even further propel the American economy. But when it comes to emulating Denmark or Scandinavia wholesale, Hillary Clinton put it best: “We are not Denmark…. We are the United States of America.”
— A Scandinavian U.S. Would Be a Problem for the Global Economy, MIT economist Daron Acemoglu participating in a New York Times Room for Debate exchange titled “The United States of Denmark,” today
Okay, as you can see, Professor Acemoglu did not actually say outright that the U.S. was less innovative during the postwar decades, because of, y’know, those high tax rates on high incomes. Or for any other reason. He doesn’t mention the three decades following WWII at all, in fact.
But someone should, so I will. It was a period of very progressive taxation, with very high marginal rates on very high (for that era) incomes and pretty high rates for just sort-of -high incomes (for that era). It also was an era of huge innovation here in this country, in a broad spectrum of areas of engineering, medicine, and other sciences.
And it was the era in which the Internet was invented. By the federal government. Y’know, that invention that Professor Acemoglu says the Danish economy depends on and that allows Denmark to succeed as it has. They’re piggybacking on U.S. innovation!
There are excellent refutations of this canard by two or three participants in that discussion. Such things as that there have been key medical inventions in European countries that are mainstays of U.S. medicine. And that Denmark in fact has a higher rate of research and innovation than the U.S. does.
But disappointingly, no one mentions the trajectories of U.S. innovation and progressive tax rates. When was it that the first modern computers were invented? And that Microsoft and Apple were founded? And that the Salk and Sabin polio vaccines were invented? What were the marginal tax rates then?
What bothers me most about this particular canard–the canards on this are endless, apparently–is that it invokes American innovation during a lengthy period of high, progressive taxation as support for a false claim that the United States owes its high level of innovation to low tax rates. These inventions came about in the USA, see. Therefore, …. what, exactly?
Then there is the question of how Acemoglu became a chaired professor of economics at M.I.T. Does M.I.T. get a tax break from this, or something?
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UPDATE: This post was linked to on an aggregator called Nuzzel, and tweeted by “@guan”, who added “This was also the era of Bell Labs and Xerox PARC. The US was innovative *because* of high tax rates.”
Added 10/21 at 2015. Also, I’ve corrected the typos in the post!
Well, the Prof may be right that it would reduce risk taking. I mean if Bill Gates knew that 90% of his wealth would have been taken away by taxes he would probably taken a safe out at Dairy Queen as opposed to settling for $8 billion.
Who wouldn’t, considering it comes with all the artificial, nutrient free high caloric crap you can eat for free?
EMichael, explain how come there was lots of risk taking and innovation in those high taxation periods? Or how come the Nordic countries seem to teem with risk taking and innovation? That the current Bill Gates in the current environment would cry and pick up all his toys isn’t really an argument against highly progressive taxation, it is an argument for more sane rich folks.
Carol,
🙂
Hopefully that means sarcasm as I did the smiley face thing without the emoticon.
Which until now I have never used and that fact was a source of pride.
Bill Gates always said he was going to give away 95% of it in the end. He (and Warren Buffet) say their kids are not going to be inherited billionaires. Bill Gates: “It’s a game and the score is kept with money.”
What else would Bill do with his life? Ross Perot said that when you have a couple of billion dollars, all you can do with it is give it away.
The “A” players are always going to be “A” players because that’s what God made them to be. Just like sports there’s always all the “B” players you can use — who also want to get the top just for its own sake.
“…if Bill Gates knew that 90%…”
I really doubt that anyone paid anything close to 90% of their GROSS income in federal income tax during the time that the top marginal tax rate was around 90%…let alone 90% of his wealth!
I call “pants on fire”.
If I am wrong, show me the facts!
Jerry is quite right. 90% top marginal rates bore on income and REALIZED gains. And were designed and IMHO functioned rather well to incentivize reinvestment while penalizing consumption.
Neo-libs are not entirely wrong is their assertions that taxing something mroe causes people to do it less. But by casting top progressive rates as a tax on investment (and so causing less of it) but rather as a foregone tax on reinvestment (and so causing more of investment) they managed to turn the actual history on its head.
We have seen this so clearly in the last three and a half decades. Reagan inspired cuts in top rates simply incentivized the gross (in both senses) excess in consumption we have seen and continue to see. As opposed to Gate’s expressed view that it is all a matter of keeping score rather than consumption for its own sake.
Hence Warren Buffet. What is amazing to me is that a simple verbal misunderstanding of WHAT is being taxed by high top rates can lead to so much societal dystopia. High marginal rates don’t tax accumulation as such, they instead tax liquidation of accumulations. In the 50s we taxed more and industries invested more. This wasn’t an bug it was a feature. And would be again.
In the fifties taking the gains necessary to buy a million dollar ANYTHING meant liquidating 10 million dollars and sending 9 to Uncle Sam. So maybe you didn’t really need that yacht. Today we have billionaires enyoing a 23.7% rate on carried interest and (actual) long term gains. Which is why Larry Ellison was able to purchase the America’s Cup, one of the largest yachts in the world and a whole fucking Hawaiian major island. If he was paying a 90% effective penalty on every large purchase he might be doing more investing and less consuming.
BTW one of the main points my post on Homo Oeconomicus was pointing towards. Homo Socialis tends to consume and so dissipate assets whre Homo Oeco tends to invest and accumulate. Flipping large parts of the superstructure of modern capitalist thought on its head. Want investment? Tax consumption by the rich.
(And oddly a lot of conservatives actually adopt this approach when looking to tax the working class – THEN they love them some consumption tax. They just never extend the logic to the gains of the 1%)
Bruce is really quite right. The top marginal tax rate, if placed high enough (both rate and income) is a consumption tax rather than income tax, and spurs investment. Let’s not forget, consumption tax is a favorite of conservatives.
geez
It was a play on the subject and Gates net worth of $80 billion.
Meanwhile, I find it interesting that no one commented on Dairy Queen.
damn
Want a comment on Dairy Queen?
Most fast food places don’t actually provide free shift meals. It would literally eat away at the profits. Because most of their employees are either hungry teens (because teens) or hungry single parents and these days senior citizens who would gladly make that their one big meal of the day (and sneak some food home in their purses for their kids and spouses).
The fundamental cruelty of most low wage employers can’t be over-estimated. Workers would be extremely lucky if they were allowed to eat the mistakes. (Because owners don’t want to incentivize sloppiness).
To follow up on Bruce’s point, there have been complaints that corporate tax rates are too high and dividends have come in for special treatment because of alleged double taxation, but the truth is corporations benefit greatly from government spending whether on courts and the legal system, infrastructure which allows the delivery of goods and services, basic science research (which Big Pharma and others depend on to produce anything), and of course the defense contractors. Corporations, as entities should pay their fair share for all these goodies and there is no “double tax” when after tax profits are provided to shareholders. The proliferation of the LLC and Subchapter S model of organization means that no small business (many of which are quite big to the average person) has to pay corporate taxes as the quid pro quo for limited liability. That being said, the real reason for the corporate form is to shield income from high individual tax rates and allow for the accumulation (through reinvestment) of great wealth and power. When the individual rates got reduced beginning with JFK the motivation to reinvest was reduced and hence the slowing of innovation and productivity gains. It is not that corporate rates are too high it is that individual rates are too low. The same phenomena is the reason why the government’s efforts to encourage individual retirement savings have not been a huge success. To the extent that the government matches or better your 401K contributions you have an incentive to sock away as much as possible. If the government is only contributing 15 or 25% of your contributions, not so much. Finally, we see examples of corporate misbehavior on a regular basis. The banks almost brought down the world economy, VW tricked the emissions standards etc. I have longed believe that the people who run corporations would be less likely to run the risks they do if the benefits of being successful were taxed at 90% rather than 43% or less if they can get capital gains or dividend treatment.
There is simply no good reason for corporate income taxes. Corporations are nothing but groups of people — owners (stockholders) and employees.
Tax the individuals when they get the money — dividends and capital gains for owners, and wages for employees.
Warren, I thought I pointed out some very good reasons why corporations–as entities–consume huge amounts of government supplied resources. You do not think they should pay for them?
They would, Terry, as the individuals which constitute that corporation — as owners and employees — through their personal income taxes.
ALL income, whether from wages, capital gains, dividends, or interest, would be subject to the same tax treatment on each individuals taxes.
Um, Warren?
You understand that your thoughts give the owners of that corporation all the benefits from the corporation while shielding them from all blame for the conduct of that corporation?
Um. To him it’s Feature, not Bug.
Not at all. The owners are already so shielded. That’s what a corporation does. Changing the tax treatment of corporate income does nothing to change that.