Wednesday, February 6, 2019

How To Go After The US Wealthy Reagan Style

Ah yes, this is going to be another one of those ironic posts about what a big leftist liberal Ronald Reagan was compared to the current GOP gang in charge of so many of our policies, especially our tax policies.  Certainlly the image of Reagan is one who cut taxes for the high income wealthy, and in general that is the case.  But there were a few items going the other way, and again, compared to current policies some combination of what came out of the two major Reagan tax cuts looks downright progressive by comparison.

Let us start with taxing wealth, with the Elizabeth Warren proposal to put a 2 to 3% annual wealth tax on those holding over $50 million.  I am not opposed to this in principle, but worry that it faces very serious practicsl problems of implementation due to the high costs involved in simply determining the wealth of these large and complicated portfolios, especially given the hollowing out and reductions at the IRS, which would have to do all of it.  As it is, whereas not too long ago 20 nations taxes wealth, that is now down to three: Norway, Spain, and Switzerland, with the latter lacking either a property tax or a capital gains tax. What have those other 17 nations done?  Well, going in the opposite direction from where the US has gone under Trump with his tax "reform."  Indeed, a moddel might well be what we saw in the Reagan tax laws.  So, one of the most important both as a redistribution mechanism taxing wealth while also raising revenue would be to return to the Reagan 1986 tax law's taxing capital gains at the same rates as income is.  The other one is also to undo the cuts in estate taxes Trump has put it and move back to what Reagan had in place after his 1981 tax law, a much more redistributive system than we see now.  Both of these, especiallly the capital gains tax change, would be easily to implement and enforce.

On income taxes, the proposal byu AOC for a top marginal income tax rate of 70% does not face the implementation problems the straiight wealth tax faces.  As noted putting this only on those earning over $10 million per year should not be too damaging on various fronts, although it would probably not raise all that much revenue.  It might be better to go with what ccame in with the 1981 Reagan tax law of a top marginal rate of 50%, but having it on a broader set of upper income people.  This would arguably both raise more money than the AOC proposal while also arguably having fewer disincentiv effects.  So, rerturning to a combination of the Reagan 1981 and 1986 tax laws might be something that can be adopted, implemented, and enforced, which would both raise more revenues, and engage in wealth and income redistribution.

Barkley Rosser

7 comments:

Anonymous said...

Going back to Reagan might be interesting politically--you'd put the GOP in a little bit of a bind. How could they dismiss St. Ronnie so easily? (Although they do de facto often enough anyway.)

Noah Way said...

Taxes do not "raise revenue" to fund government. Government funds its own functions and all of society by creating fiat, not collecting tax revenue. The $22 trillion National 'debt' is blatant proof of the simple fact that government can never run out of money.

Barkley Rosser said...

Noah,

A little too overdone MMT. You have left out crucial detail that US debt is in dollars. If not, then it could "run out of money." Lots of countries have, including the Confederate States of America on their way to ceasing being a country.

Also, it does matter how the government is funded, and it must be funded one way or another. So, going to the extreme, if there are zero taxes, and it is all borrowed, then we shall see a rapidly rising percent of GDP going to interest payments on the rapidly rising national debt. To the extent those borrowings come from abroad, those interest payments are net flows out of the country. For that matter, even if all the lenders are domestic, they are likely to be high income, so this rising portion of national income going to interest payments on the debt will redistribute incme to the wealthy. None of this may be the end of the world, but it may well be (and has been throughout our history) that we prefer to maintain a more stable and balnced fiscal system in which a substantial portion of government spending is in fact paid for by tax revenues.

Daniel said...

It seems like you are distorting what really happened under Reagan with respect to taxes to make a political point that the modern day GOP is too far from the mainstream.

Reagan's tax cuts were far larger than Trump's, measured as a percentage of GDP, in fact, I believe the largest in history.
The 1981 tax law, taking the top rate from 70% to 50% was a large decrease and was really the largest they could get away with politically. They would've dropped it down much lower if they thought they could have.

At this point you're now looking at a top income tax rate of 50% coupled with a top-rate of 20% for capital gains.

Then comes 1986 with tax reform and the top tax rate is dropped all the way down to 28%, but since economically it can make sense to tax all forms of income at the same rate, it's now feasible to do so and hike the capital gains tax rate up to match the 28% rate.
(BTW the capital gains hike actually lowered revenues)

Fast-forward to today, and you have a top tax rate that trump lowered by a tiny 2.6 percentage points, sitting at 37%. And then a capital gains rate of 23.8%.

I would also be fine with going back to the code Reagan implemented and tax both activities at 28%. And I would also be fine with reversing trumps massive expansion of the child tax credit as part of his law.

-JMU Econ alumni here

rosserjb@jmu.edu said...

Daniel,

You are correct that the 1981 Reagan tax cut was larger than Trump's. It was about 2.5% of GDP whereas Trump's is about 0.5% of gDP. However, the 1986 one was revenue neutral, with the cut in tax rates offset by the elimination of many deductions and loopholes. It needs to be kept in mind that these tax laws involve more than just income and capital gains tax rate changes.

As it is, I pulled elemments the 1981 tax cut together with ones from the 1986 tax law change, making it clear that I was doing so. Yes, this is indeed scoring political points. I plead guilty as charged, JMU econ alum.

Anonymous said...

The major point being missed by AOC, Pelosi and the author is that "the rich" have options. If the tax is too high, they can move to a friendly tax location, shut a business down, etc. Look at New York. The Democrat Governor admitted that the tax receipts are falling (in a booming economy) because the rich are leaving the state. The same thing happened in Maryland and France when they decided to "tax the rich".
Most of the truly wealthy do not have to earn another dollar for the rest of their lives. They can sell everything at a small loss and move to Florida or Grand Cayman and never pay significant taxes again.
How much will the rich pay in taxes? As much as they want.

Anonymous said...

"Most of the truly wealthy do not have to earn another dollar for the rest of their lives. They can sell everything at a small loss and move to Florida or Grand Cayman and never pay significant taxes again."

You say that like it would be something bad. I think exactly that would be a good thing - they would at least stop interfering in domestic policy. The government can almost print money (the money can be replaced). Good riddance I say.

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