Wednesday, April 25, 2012

Do High Taxes Slow Growth?

(This is my response to a piece which appeared in the Wall Street Journal April, 24th on the Opinion page.  The original can be found here.)       

Peter Diamond and Emmanuel Saez make a weak case in “High Tax Rates Won’t Slow Growth” (April 24).  Unfortunately, economic statistics are not like baseball statistics; they cannot be compared over long periods of time without significant adjustment.  In baseball, statistics are easily compared going back decades since the variables have mostly remained constant.  Not so with pre-tax income, overall growth rates, or any other economic statistics which have undergone infinite variable changes and need to be put in the proper historical context.  

For example, the authors begin by saying; “The share of pre-tax income accruing to the top 1% of earners in the U.S. has more than doubled to about 20% in 2010 from less than 10% in the 1970s.”  What the authors omit is that back in 1970 there were very few S Corporations and today there are about 5 million.  S Corp. income is reported on individual tax returns thus inflating the reported incomes of S Corp. shareholders.  Diamond and Saez do not indicate that they have corrected for this, and if not, their opening premise is flawed.
A similar flaw taints their main point, which is that; “…growth…averaged 1.68% between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23% between 1950 and 1980 when top tax rates were at or above 70%.”  As I recently heard Charles Krauthammer point out, Europe and Japan were still smoldering ruins in 1950!  Also, India and China were not playing on the world stage, the U.S. had modest regulations, and Americans were known for their work ethic.   

I would prefer economists find a more unified measurement which would encompass all taxes, regulations, laws, and trade issues affecting economic activity.  Hard as that might be to do, we could then compare 1950 with 2012 just as we do in baseball.