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  • Of Course Higher Taxes Slow Growth

    In The Wall Street Journal on Tuesday, Peter Diamond and Emmanuel Saez present a rambling defense of higher taxes on the rich to fund an engorged federal government. That they needed to throw out so many tired and errant arguments shows their entire argument is so much hot air.

    Of course higher taxes would slow economic growth. There are no ifs, ands, or buts about it.

    Diamond and Saez start out by arguing that, because the share of income earned by the top 1 percent of earners has doubled since the 1970s, and since they pay a lower tax rate today than they did then, we should tax them more heavily. Notice the disconnect at the outset: higher income vs. lower tax rates.

    Now let’s reconnect these two data points with a third: During that same time frame, the share of income tax paid by the top 1 percent also skyrocketed. For example, in 1986, the top 1 percent paid more than 25 percent of federal income taxes. In 2009, they paid nearly 37 percent. Oops. (Article continued below chart.)

    This data point alone is enough to debunk their whole premise. As tax rates fell during the 1980s and stayed relatively low, high earners earned more income, paid more taxes, and paid a higher share of the tax burden.

    There’s an old lawyer’s saw that goes: When the facts are against you, argue the law. And when the law’s against you, argue the facts. And when they’re both against you, just argue.

    Well, the facts are against Diamond and Saez, so how about the theory? They are arguing that if the top tax rates go up, then the number of hours worked won’t go down, the amount of saving won’t go down, and the amount of investment in the economy won’t go down.

    Funny thing about liberals—they only believe in incentives when it fits their ideology. They’re perfectly happy to argue for carbon taxes to save the environment, because higher taxes on carbon output will most certainly drive the economy away from activities that produce more carbon.

    Likewise, higher tax rates cause productive high earners to cut back, because prices matter. Would Diamond and Saez argue that raising the price of cars wouldn’t cause consumers to cut back on the number of cars they buy? Of course not. When fundamental theory runs afoul of redistributionist ideology, it’s like Bambi meets Godzilla. You know who would win that one.

    It is true that someone in his peak earning years who needs to provide for a family might not cut back much, just as someone who desperately needs a car would still buy one even if the price rose. But that doesn’t mean that higher taxes won’t slow growth.

    Taxes matter at the margin, and higher rates will shrink the labor force, because they will cause that prime-of-life worker bee nearing retirement to head to the links sooner than if tax rates are lower. Or consider a second-income spouse. This worker is facing the highest tax rate. Raise the rate, and fewer of them will work. Losing these producers from the labor force will slow economic growth.

    A similar phenomenon happens with saving. Raise the tax on the returns for saving, and people will save less. We can argue the magnitude, but to argue that saving does not respond at all is simply to argue that incentives and disincentives are irrelevant to behavior.

    What about investment? Is investment sensitive to tax rates? Diamond and Saez say “nay,” but then why the growing consensus to reduce America’s highest-in-the-world corporate income tax rate? Has America suddenly gotten a soft spot in its collective heart for these poor, downtrodden multinational corporations, or has America finally gotten wise to the fact that high corporate tax rates are just shooting us in the collective foot?

    The facts are against them. The theory is against them. So what does the left do next? They go back to their comfortable, familiar grounds—they just argue for “fairness.” No real reason. Just argue.

    Posted in Featured [slideshow_deploy]

    17 Responses to Of Course Higher Taxes Slow Growth

    1. Chris Kennedy says:

      Did you read Diamond and Saez's JEP paper from 2011? The arguments for higher tax rates not stifling growth are rather convincing, and based on data. Also, you do realize that Saez has a Clark Medal and Diamond a Nobel… both for work in public finance

    2. Pragmatic says:

      Here's the difference between J.D. Foster, Ph.D.'s opinion and that of Diamond and Saez.

      From this piece:
      "Of course higher taxes would slow economic growth. There are no ifs, ands, or buts about it."

      From Saez and Diamond:
      "There is no clear correlation between economic growth since the 1970s and top tax-rate cuts across Organization for Economic Cooperation and Development countries."

      Foster asserts a fact based on nothing and Diamond and Saez make a statement based on empirical evidence. Who has the more convincing argument here?

      Notice that Heritage states a fact based on nothing and that Saez and Diamond cite empirical evidence.

      • Craig says:

        Yes the argument for this article is not as clear as other Heritage articles. However, the proof is found in history that when Harding, Coolidge, Kennedy and Reagan all cut taxes, economic growth followed and revenues for the IRS actually went up. Cold, hard facts that Diamond & Saez ignore and Foster is taking as a given.

        The converse is true and is the whole point to the article in that when taxes are raised, the entrepreneurs and the wealthy will plan accordingly for the new rules in the free market and invest less in job creation since the reward is less and fewer jobs will be created and revenues to the IRA will decrease along with economic growth!

        • Pragmatic says:

          They don't ingore "cold hard facts". They take a broader sample set to show that there is no correlation between tax cuts and economic growth. Also, when making these analyses, we need to be careful not to confuse correlation with causation, which I'm afraid you're guilty of in the above post (I make this mistake constantly, but it is something everyone needs to work on. Three sample points hardly suggests that this is true. So, once again, Diamond and Saez still have the best argument on this page. I'm sure there are better, but they aren't being presented here.

          To your second point, I'm not sure if this is true either. It makes sense intuitively, but I'm not sure it will have that much impact (depending on the tax burden of course, a percentage point or two most likely won't hurt). A lot of this will depend on if there is sufficient demand, not supply (I know this could open a whole other argument).

    3. Pragmatic says:

      "Funny thing about liberals—they only believe in incentives when it fits their ideology. They’re perfectly happy to argue for carbon taxes to save the environment, because higher taxes on carbon output will most certainly drive the economy away from activities that produce more carbon."

      Funny thing about Heritage – it only believes in economics when it fits their ideology. The carbon tax ( and cap-and-trade for that matters) is a way to make carbon producers internalize the cost of the externalities they are producing. This is the market correction that would lead to a more optimal equilibrium.

      Here's a discussion of environmental externalities from the famously libertarian George Mason Univ.:


    4. Chris Kennedy says:

      Did you read Diamond and Saez's JEP paper from 2011? The arguments for higher tax rates not stifling growth are rather convincing, and based on data. Also, you do realize that Saez has a Clark Medal and Diamond a Nobel… both for work in public finance

    5. JMS says:

      Ideologically I'm inclined to agree with you and disagree with Diamond and Saez. However, I don't feel you've made much of an argument other than to state general platitudes about incentives. Diamond and Saez took those same platitudes and tested them mathematically. They calculated the tax elasticity of highest income earners based on decades of tax return data. Unless you show some way that their methodology was flawed, then you are actually the one who is "just arguing."

    6. Bobbie says:

      I hope diamond and Saez aren't paid by tax dollars. total conflicts of interest! The increased population of American citizens is an increased population of tax payers so why are taxes ever increased? Someone's getting away without paying their share and it isn't the rich!!!

      • Kat says:

        Agree, Bobbie.
        The imbalance here impacts the ambitious Middle Class and stifles the young, college grads, and uneducated to climb to Middle Class. Why should they give up public support to only pay a huge disproportionate amount in taxes. I don't have a problem withe the current tax rate for the upper income folks, however I would like to see them have incentives to encourage entrepenureships of those in lower incomes. But, it must be to worthwhile investments. Reduce tax rates to the middle income earners will give incentive to rise from the gimmie state of mind. Reduce the middle class will also open the door for expansion and create more wealthy people to raise more revenue.
        I think there is reason to have a higher tax for the top earners; I would be happy to ay more in the 250 millon bracket. Seriously, one cannot live long enough to enjoy that much.
        It would be my privledge and joy to invest in small business entrepenures if were so blessed.
        Have we not learned our lesson in the WV coal mines, company store, company doctor, etc….?

        • Bobbie says:

          hi Kat!
          I agree with most your points but not the higher tax on the multimillionaires when there's so much cronyisms with billionaires and tremendous conflicts of interest effecting innocent citizens. I don't agree with government involvement when it comes to the market place. I'm 100% against the public/private partnership. Once you take government money, it's no longer private and if one can't stand on one's own one wouldn't force others to hold them up without consent. And where government is in control the potential to corrupt is there. Today the government conducts more corruption than not, under government control.

          I'm not sure what's considered middle class it seems to vary at convenience.

          I do agree with less taxes to everyone and keeping it the same to the wealthy. Reasonable tax impositions with a constitutional government creates incentive for people to build their skills to become wealthy and the desire to do so freely and independently. All within their control. Integrity and accountability often leads to success without, always leads to failure. I don't like punishment because the government sees the opportunity when nothing is done wrong and the only reason for more money is more government control. but anyway …

    7. Data says:

      I see you artfully forget to mention that the 1%'s share of income in 1986 was only 9.13%, as they were making on average $386K. Now that their share of income is 17.42% and they are on average making 857K, of course the amount of total taxes they pay is going to rise. However, it only rose from 25% to 37%. Not exactly proportional. This is simple math. You should try it sometime.

      • Bobbie says:

        For what business is it of yours? If the government has to spend peoples time and money earned, pinning American against American shows non productivity and down right ignorant, impractical and highly unconstitutional. Peoples' livelihoods is none of the government's business. Building resentment through government controls is not a government that can be trusted who's deviance along with suspicious and questionable contents of characters running it continue to show more danger and corruption unworthy of the amount government abuse of unconstitutional authority is happy to cheat America to pay themselves.

    8. Pete Houston says:

      I still don't agree with the thought that you work hard, sacrifice, and make a company happen, that you are then expected to pay more in taxes for working harder or smarter than the next guy. This does nothing more than take away the incentive to achieve or grow. The government does not need to be a charitable organization for this country or the world.

    9. Therealpoint says:

      Most arguments above and the Diamond and Saez article miss the crucial point. It does not matter whether increase taxes affect economic growth or not if demand for taxes increases at a higher rate than our combined ability to create income. We don't need more taxes, we need to curb the politicians appetite for more spending that leads to greater dependency on the government. There is little tangible results to show for the trillions of dollars (regardless of where it comes) spent on fighting poverty and improving education. But there is now a massive dependency on the government that will eventually be unable to deliver. At that point the 99% will become the 100% and no one will have the resources to fund the ever-growing government (federal, state and local). Just return to us our freedom!!!

    10. Danny says:

      My issue with the tax argument is the fact that most people miss one very important part of taxation. At what level does it become morally wrong to take from someone that which they have productively earned?

    11. Sharmarke says:

      Of course, this post is pernicious and pathetic.
      We know that the thirty years after WWII were an economic boom in America unrivaled in it own history, and back then, marginal tax rates were never below 70% for top earners.
      What's more, median wages have risen 70%, and incomes doubled over this period. By comparison, median household incomes haven't even grown 20% since 1980, and the median wage has gone up only about 10%.
      Your graph is misleading. It doesn't take into account payroll taxes for Medicare/Social Security, state and local sales taxes, excise taxes, and others. Lower-income families pay a far greater share of their incomes in these taxes than anyone else in America.

    12. Sharmarke says:

      Of course, this post is pernicious and pathetic.
      In the thirty years after WWII, the United States experienced an economic boom unmatched in its own history. Top tax rates then, marginally, were 70% or above. The high tax rates were clearly associates with faster economic growth, more market stability, and faster median wage and median household income growth.
      The average hourly wage has shot up over 70% between 1947-79. Since 1980, that figure has only gone up 10%. Median household incomes doubled between 47-79 but only went up 20% since 1980.
      Finally, your graph is misleading. Income taxes are a part of the equation, but so are payroll taxes, state and local taxes (like sales taxes), and excise taxes. Lower-income families chuck out a greater share of income towards these than anyone else in America.

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