(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.
