Rutger Bregman’s Mistake – Higher Tax Rates Don’t Mean Higher Taxes

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Rutger Bregman has become famous for shouting that the rich should be paying more tax at Davos – for insisting that the high post-war tax rates show that high tax rates work. The pity is that he’s an historian and therefore should know something about this. Sadly, on all the evidence we’re being given he doesn’t. For he’s not actually grasped the basic fact at issue here. Those high post-war tax rates didn’t in fact raise extra revenue. And if they didn’t do so then there’s not that much point in having them.

Here he is again:

As a historian, Bregman noted the most successful period for capitalism occurred in the years after the second world war, when the top rate of tax in the US was above 90%. “This is about saving capitalism,” he said. “Most innovation has come about through government spending. During the golden age period [after the second world war], there were way higher taxes on wealth, property, inheritance and top incomes. That’s what we need today if we are going to tame this beast called capitalism.”

As to the success of that post-war economy, as Marginal Revolution points out, I do in fact get it:

For it’s is saying that the great Post WWII economic expansion was nothing to do with high unionisation rates, Bretton Woods, restrictions upon capital movements, high marginal tax rates, fixed exchange rates or any other of the ”liberal” or ”social democratic” (use one for the US, the second for Europe) theories that are so often advanced. It was driven by the lack of economic growth in 1929-1945, a lack of economic growth which was accompanied by technological and productivity advances. That is, Post WWII growth happened not because of the policies enacted but despite them.

Another way of looking at this: we all know that growth when you’re well behind the possible technological production frontier is easier than growth when you’re at it. This is why a poor place like China or India can grow at 8-10%, year after year, for decades even, while mature economies struggle to manage a consistent 2.5-3%. There was somewhere between none and f**k all economic growth in the US (and many other economies) in the 1929-1945 period. But the production frontier continued to move outwards, indeed, the 30s are one of the all time great decades for both technology and productivity improvements. The 50s to the 80s were simply playing catch up, in the same way that China and India are now.

Having explained the growth, what about those high tax rates?

Hauser’s Law isn’t a law; it’s an observation, but it is still actually true. The federal government has raised roughly the same amount of gross domestic product in tax revenue whatever the rates in the tax system. In fact, we can get a nice little chart that shows this:

High rates don’t seem to have collected any more money

The early 1950s was the war economy concerning Korea; after that those high tax rates actually raised less GDP for Uncle Sam than today’s lower rates do. This isn’t indicating success for a policy of raising marginal rates to give the feds more money to spend. We can also look at the percentage of GDP raised by the income tax. Those high personal income tax rates topped out at raising 7.8 percent of GDP. We get 8.4 percent, perhaps 8.3 percent, of GDP from today’s lower marginal rates. This isn’t telling us that higher rates give the politicians more money to play with.

Yes, there’s a point to this:

“I didn’t want to waste four years on an insignificant subject nobody cares about,” he said. Instead, the global financial crisis pushed him in a different direction. “I thought that we needed historians to take the stage and explain what’s going on. When I watched the crisis on TV, the only people being interviewed were economists, and these were the guys that didn’t see it coming. I thought that we needed some historians there, so I left academia,” Bregman said.

An historian is, supposedly at least, an expert in what actually happened. Would be useful if there was any demonstrated knowledge of what did happen, wouldn’t it? Before we go off designing systems about what should happen?