At that now much-examined fundraiser in Florida last spring, Mitt Romney shared how “someone calculated” that if the country doesn’t alter Social Security and Medicare, the payroll tax will climb from its current 15.3 percent to 44 percent.
The Republican presidential candidate added: “Then, there’s the income tax on top, which President Obama wants to take to 40 percent. Then, there’s state taxes, most states, and sales taxes. And so you end up having to take 100 percent of people’s income.”
Every penny!?
Something tells me that isn’t going to happen. We will all be tea partyers then.
For Romney, this is the case for reducing spending, for reshaping entitlement programs. Actually, almost everyone agrees, the arc of Medicare, in particular, impossible to sustain in any practical way, the program reflecting an aging population and ever-increasing health-care costs. A large part of the Affordable Care Act involves seeking avenues to curb health spending.
Yet in framing his argument so dramatically, Romney also makes the case for a balanced approach to budget discipline that includes tax increases. Are we really going to cut our way out of a problem so large?
As it is, that 40 percent tax rate the president proposes (39.6 percent, to be exact) would apply to annual income above $250,000 or so. It would mean paying an additional 4.6 cents on every dollar, the current top rate at 35 percent. That’s hardly a rapid escalator to seizing all you earn.
There was a time when the top income tax rate was 91 percent. The Congressional Research Service provided the reminder in a recent analysis, “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945.” It was the 1950s, an era of impressive economic performance. The study presents the numbers, the real growth rate for the decade averaging 4.2 percent.
The analysis shows how the top rate has declined, dropping to 70 percent in the 1960s and ’70s, reaching a low of 28 percent in the 1986 Tax Reform Act. It jumped to 39.6 percent in the 1990s under Bill Clinton, and then fell to 35 percent in 2001.
The study makes the comparison, the 2000s proving a slacker compared to the ’50s, the average real growth rate at 1.7 percent. A similar point has been made about the ’90s, higher top rate, better economic growth, not to mention job creation.
What is the lesson?
The analysis cautions against drawing easy connections, that somehow a higher top rate is the engine of improved economic performance. If anything, top tax rates have a statistically insignificant role. Thus, the report concludes: “It would be reasonable to assume that a tax rate change limited to a small group of taxpayers at the top of the income distribution would have a negligible effect on economic growth.”
In other words, if you want to narrow the budget deficit, go ahead, raise the top income tax rate as part of your approach.
The report looked at the impact of top rates on savings, investment and productivity, finding, again, no correlation with economic growth. It arrived at the same conclusion concerning the tax rate on capital gains, which has bounced from 25 percent in the ’50s and ’60s to 35 percent in the ’70s and now 15 percent.
Where the analysis did make a connection involves reduced top rates and income inequality, or the increasing concentration of income at the highest rungs.
Average inflation-adjusted income has increased 116 percent since 1945. And for the top 0.1 percent? An average 395 percent increase. The top 0.01 percent? Try 692 percent.
All this, the study shows, as the average effective tax rate for those with the highest incomes has dropped from 50 percent to 25 percent. It notes that tax rates at the top “are currently at their lowest levels since the end of the second World War.”
Andrea Louise Campbell, a professor of political science at MIT, makes a similar point in the current issue of Foreign Affairs. She also raises a study by economists Thomas Piketty and Emmanuel Saez that tracks the share of total income going to the top 1 percent — from 9 percent in 1970 to 23.5 percent in 2007. Then, she cites the share held today by the 1 percent in Germany, 11 percent; in Japan, 9 percent; in France, 8.7 percent; in the Netherlands, 5 percent.
This is the specter Romney raises on the campaign trail, and even at that fundraiser. He argues the Obama White House wants to create nothing less than a European-centered, entitlement society. He warns darkly about “redistribution.”
And just how much does this country redistribute? Campbell shares an analysis by the Institute on Taxation and Economic Policy that in 2011, the lowest one-fifth of earners received 3.4 percent of total income and paid 2.1 percent of total taxes. The middle fifth? Received 11.4 percent, paid 10.3 percent. The top 1 percent? Received 21 percent, paid 21.6 percent.
That’s not much redistribution. Again, the numbers reinforce the thinking that there’s ample room for a tax increase in any package to put the budget in better order.
Douglas is the Beacon Journal editorial page editor. He can be reached at 330-996-3514, or emailed at mdouglas@thebeaconjournal.com.
