Stephen Moore’s 62% Tax Rate – How to Compromise The Argument
Stephen Moore is an anti-tax guy from way back, working for Heritage, Cato, and Dick Armey. He and Art Laffer are interchangeable on CNBC whenever a supply-sider is in the discussion. Frequently appearing in print as a member of the Wall Street Journal’s editorial board, Moore’s never one to let facts get in the way of good argument.
Today he writes that Democrats are proposing tax increases that would result in a top marginal tax rate of 62% on some taxpayers, when all federal, state, and local taxes are considered. True?
The Hill reports that Senator Kent Conrad (D-ND) has a draft budget that includes a 3% surcharge on incomes in excess of $1M. When added to the top Clinton-era rate and the 0.9% Medicare tax included in the Affordable Care Act, the new top income tax bracket would be 43.5%.
Democrats also want to re-eliminate certain deductions that were re-allowed as part of the Bush tax cuts, to which Moore assigns an impact of 1.9%. While I don’t think that this should be included in a discussion of marginal rates, since most deductions are not driven by marginal income, I need to look into this further. So for now I’ll let him have his claimed new top marginal rate of 45.4%.
Moore then adds in 2.5% for the Medicare payroll tax, correctly arguing that part of the 1.45% tax paid by employers would otherwise go to the employee; interestingly, this is a higher figure than Congressman Paul Ryan used recently. This brings the total marginal federal tax on earned incomes in excess of $1M to 47.9%. Moore then adds the impact of eliminating the $106,000 cap on the Social Security payroll tax, which he says Obama recently mentioned. Moore says this would add mean about 10.1% of additional tax on the top wage earners (again, Moore’s math on this is solid).
This brings us to a potential top federal marginal tax rate of 58%. Add to this an average state income tax rate of 4% (which is a little low), and we get 62%. So far so good. But then Moore goes and adds misleading context, omits relevant context, and adds utter falsehoods, which compromises his position.
Moore starts by claiming that this 62% figure is “more than double the highest federal marginal rate of 28% when President Reagan left office in 1989.” There are three problems with this statement.
First is that the 28% number is wrong. The highest federal income tax rate in 1989 was 33%, for joint incomes between $78,401 and $185,730 (income above this was taxed at 28%).
Second, Moore’s comparing apples to mangoes. I’m sure he’s aware that the 28% figure excludes the sources from which he derived more than one-third of the 62% rate. When the value of deductions born since 1989 (worth at least as much as the 1.9% the Democrats would reverse today), and Medicare and state taxes (the same today as in 1989) are added in, the equivalent 1989 figure is at least 36.5% (and may be more depending on the value of deductions added since). With this number, Moore’s argument would be powerful. But instead he chose to fudge the numbers to make the argument appear better.
The third problem is the assumption that there was something correct about the 1989 tax rates. In 1989, we were seven years into a vast economic expansion. Real GDP had grown by more than 3% each of those years, for a total of 34%. Government spending as a percent of GDP had dropped by nearly 9% from the recession peak. And still we ran a budget deficit of 2.8% of GDP. Any rational analysis would say that tax rates and revenues were too low to be sustainable.
It would be more appropriate to compare the current rate with the potential 62% rate, since what we’re talking about is a change in current incentives (or disincentives, which is what taxes cause). Using Moore’s math, the current total marginal tax rate on top earners is 41.5%, which will rise t0 42.4% with the Affordable Care Act increase. This is higher than the 1989 equivalent of 36.4% (when we had high growth and weren’t trying to balance the budget) and lower than the Clinton-era equivalent of 48.9% (when we had high growth and were reducing the deficit).
Moore then discusses capital gains taxes, which would rise if every tax increase mentioned by every Democrat were enacted to a maximum of 23.8%. But Moore doesn’t compare this with 1989. Perhaps that’s because capital gains were taxed at significantly higher rates in 1989 than today.
Then Moore states: “After the landmark Tax Reform Act of 1986… the highest combined federal-state marginal tax rate was about 33%.” Not true at all. Starting with the top marginal rate of 33% described above, adding in the payroll taxes Moore includes in his 62% number, the deductions that didn’t exist in 1989, and the same average state income tax rate, and the 1989 number is at least 41.4%. Again, still a good argument for Moore. But apparently not good enough.
Moore then spews out some misleading statistics about tax rates around the world. He compares a top marginal tax rate in the U.S. to a worldwide average rate. It all leads to this blockbuster of mendacity:
“What all this means is that in the late 1980s, the U.S. was nearly the lowest taxed nation in the world, and a quarter century later we’re nearly the highest.”
Two problems here. First, as I described above, in the late 1980s we had an economy on fire and still ran annual deficits on the order of 3% of GDP. Tax rates and revenues were too low.
But more importantly, this statement is patently untrue. The Heritage Foundation’s Index of Economic Freedom indicates the U.S. tax burden as a percentage of GDP is 26.9%. Among the world’s 30 largest economies, 12 are also in the top 30 in terms of per capita GDP. Of the world’s largest economies with the highest incomes, only Taiwan has a lower tax burden than the U.S., and only Japan, Australia, and Canada have tax burdens that are less than 25% higher than ours. Spain, the UK, the Netherlands, Germany, Italy, France, and Belgium all have much higher taxes than us; the burden in the last four is more than 50% higher than ours.
Not satisfied with this whopper, Moore then drops another context-free nugget:
“The Tax Foundation recently noted that in 2009 the U.S. collected a higher share of income and payroll taxes (45%) from the richest 10% of tax filers than any other nation, including such socialist welfare states as Sweden (27%), France (28%) and Germany (31%).”
The obvious missing context here is income share. The OECD study cited by the Tax Foundation for this data is riddled with data showing that the income distribution in the U.S. is much more unequal than in any of these other countries. For example, this chart from the same paper shows that the U.S. median income is 4th highest, 37% above the 30-country average. But the income level of the bottom 10% of Americans ranks 20th, 18% below the 30-country average, while the top 10% in America rank first, making 74% more than the 30-country average. Income disparity helps to explain the tax disparity Moore trumpets.
This is a subject for another day, however.
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