The Daily Caller

The Daily Caller

Krugman’s Twinkie Defense

A few notes about Paul Krugman’s column, “The Twinkie Manifesto,” which discusses the 1950s:

1) That 91% tax rate: Krugman writes:

[I]n the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today. [E.A.]

Hmm.  Something seems off here. Did this super-rich hundredth-of-the-1% in the ’50s really a) pay anything near those super-high 91% marginal rates, or did they b) employ accountants and loopholes to avoid them (as the conventional tax-reformer wisdom would have it)? If you read Krugman’s paragraph you’d probably conclude (a)–high income tax rates really sock it to the rich! But the truth is closer to (b).

According to this CRS study, that 91% marginal rate produced an effective income tax rate on the top o.o1 percent of only about 45%. Krugman himself appears to be relying on Piketty and Saez–but they come in with an even lower figure, 31%. They only get to 70% by including corporate taxes, which Krugman mentions, and estate taxes–which he doesn’t mention at all. **

Why is this semi-deceptive omission significant? Because Krugman’s arguing against the Simpson-Bowles Commission’s pursuit of

“lower [income] tax rates” as a “guiding principle”

If the rich actually paid the high income tax rates of the 1950s–as opposed to wasting a lot of society’s energy finding loopholes and evading them–then the Simpson-Bowles argument for low rates/fewer loopholes would make less sense. It might even seem to be a conspiracy to let the super-rich off the midcentury redistributionist hook. But the super-rich didn’t pay those rates.

Why didn’t they? Here are Picketty and Saez, concluding that the effective income tax rate

in 1960 reached an average rate of 31 percent at the very top, only slightly above the 25 percent average rate at the very top in 2004. Within the 1960 version of the individual income tax, lower rates on realized capital gains, as well as deductions for interest payments and charitable contributions, reduced dramatically what otherwise looked like an extremely progressive tax schedule, with a top marginal tax rate on individual income of 91 percent. [E.A.]

It turns out that reduction in top marginal rates under Reagan and Bush was not so bad, progressivity-wise:

The reduction in top marginal individual income tax rates has contributed only marginally to the decline of progressivity of the federal tax system, because with various deductions and exemptions, along with favored treatment for capital gains, the average tax rate paid by those with very high income levels has changed much less over time than the top marginal rates. [E.A.]

That’s for the super-rich. What about the non-superrich–say the storied 1% (as opposed to the .01%)? Here Krugman hides the ball again. It turns out that those wonderful high marginal income tax rates of the 1950s soaked this cohort not that much more than the one-percent of today get soaked–even if you take into account corporate and estate taxes. For the bottom half of the One Percent–99 to 99.5th percentiles of the income distribution–the effective tax rate was 34 % in the high-marginal-rate 1960s and 31% in the low-marginal-rate 2004. BFD. ***

As a historical progressivity mechanism, high marginal income tax rates (like that 91%) would seem to be way overrated. Mainly they offer a way for inequality-fightin’ economists like Krugman and Robert Reich to pose as great levellers while doing little that threatens to put them out of that job by solving the problem–while simultaneously offering plenty of employment for loophole hunting lawyers.  Win-win!

2) The servant problem: Why do we care about rising income inequality anyway? Do we just hate rich people having nice homes and cars? I’d argue it has more to do with the way having more money can enable rich people to think they’re better than the rest of us–and treat us as social inferiors. Krugman, with his talk of “demeaning workers” seems to agree.

One of the primary ways rich people might accomplish this is by hiring lots of personal servants. Which makes these Krugman grafs significant:

 In 1955 Fortune magazine published an essay, “How top executives live,” which emphasized how modest their lifestyles had become compared with days of yore. The vast mansions, armies of servants, and huge yachts of the 1920s were no more; by 1955 the typical executive, Fortune claimed, lived in a smallish suburban house, relied on part-time help and skippered his own relatively small boat.  …

Today, of course, the mansions, armies of servants and yachts are back, bigger than ever … [E.A.]

Armies of servants? Bigger than ever? That would be deeply troubling, especially … I never got to finish that thought because the loud klaxon of my BS detector made thinking impossible. Does Krugman really believe that if you compared the household of, say, John D. Rockefeller **** and the household of Bill Gates or Warren Buffett that the latter figures would have more servants?

It’s probably true that, compared with the more recent past (i.e., the ’70s or ’80s), rising income inequality has led to a rise in servants–houseboys and butlers and personal chefs–among the richest Americans, though technological progress has also tended to make having lots of servants unnecessary, giving the rich fewer of their fellow citizens to lord it over.  Whatever the recent dueling trends, plutocrats surely had more servants in the 1920s.  (And in the middle class–well,  it was common as late as the ’60s for middle class Americans to have full-time maids. In 1960, 29% of American families reported expenditures for “domestic service.”  By 1989 that number was down to under 7%.)

 3) The big argument: We had powerful unions and more progressive taxes in the 1950s and the country prospered. Therefore we can have powerful unions and more progressive taxes now and prosper again! I can’t be the only one to point out that this does not follow. What if something important about the economy has changed in the meantime? Say, trade has opened up a global market in which American workers must compete with cheaper foreign labor (so any union that extracts above-market wage hikes is quickly undercut). And advances in technology have reduced the value of unskilled work, quite apart from trade-while requiring businesses that can make lots of changes very quickly (without worrying about work rules) and workers who can shift jobs frequently. As someone–an economist named Paul Krugman–recently pointed out:

insecurity is on the rise for everyone, driven by changes in the economy. Our industrial structure is probably less stable than it was — you can’t count on today’s big corporations to survive, let alone retain their dominance, over the course of a working lifetime. And the traditional accoutrements of a good job — a defined-benefit pension plan, a good health-care plan — have been going away across the board. [E.A.]

It’s especially implausible to just assume that traditional Wagner Act unionism will achieve prosperity in this new climate given that unions themselves have changed since the 1950s–e.g. becoming more minutely legalistic as court decisions have imposed on them a duty to defend practically every dismissed or aggrieved worker, on pain of being sued.

Krugman knows all this, of course. He just writes as if we don’t.

__________

**– Each  of these two other taxes–corporate and estate–seem to ding the super-rich for another 20% of income in Piketty and Saez’s calculations, though it is notoriously difficult to figure out who actually pays higher corporate taxes. Pikkety and Saez apparently assume, for example, that none of that corporate tax gets passed on to labor in the form of reduced wages. They also assume, when calculating the effect of the estate tax, that the distribution of estates mirrors the distribution of income.
***–Presumably the effective rates (counting estate and corporate taxes) on the entire one percent were higher than 34% in 1960. Piketty and Saez don’t give that stat in the paper I’ve linked, but just eyeballing their chart it’s hard to believe it isn’t closer to 40% than 70%.
****–The prototypical 1920s rich guy is, unfortunately, a fictional character. But Jay Gatsby had a lot of servants, no?