Kemp Roth Reagan Miller
Matt Miller has an excellent column in The Washington Post in which he coins the phrase “Drawbridge Republicans.” Basically he accuses Romney and Ryan of being pro-rich class warriors who aim to eliminate equality of outcome and of opportunity. A very standard Rhetorical gesture is to concede in the second or third paragraph of an essay that there are shades of grey and fault on both sides each of which has a point. I think that for Miller that this is a reflex(also for others including say the President — I call the trope an “obamanation”). I also think that a part of this phase of writing a well made essay all critical facilities are turned off. Such an aside must be part of a good essay and no data are relevant. The alleged obamanation follows
(In case you were wondering, Ronald Reagan wasn’t a Drawbridge because he entered office when marginal rates, at 70 percent , were truly damaging to the economy. But as GOP business leaders now tell me privately, the Clinton-era top rate of 39.6 percent, let alone today’s 35 percent, are hardly a barrier to work or investment).
(parentheses his). Disclaimer: This post will include exactly 1 link. All claims of fact will be based on my memory. Note the complete lack of any data supporting the flat claim that 70 percent marginal rates were truly damaging. The only hint of an explanation of the alleged damage is in the following paragraph “a barrier to work or investment.”
I don’t have to remind readers of this blog that 70% marginal rates sure don’t seem to have been a barrier to work and investment in the 60s nor were 90% marginal rates obviously a barrier to work and investment in the 40s and 50s. First there is very little evidence for an effect of taxes (or wages or interest rates) on male labor supply. This was well known in 1981. The elastic labor supply is married women’s labor force participation. This increased enormously during the period of 70% marginal tax rates. Notably, the labor supply choice doesn’t depend only on marginal rates (it isn’t a small change). There is no evidence that the elimination of 70% rates removed a significant barrier to work.
The idea that the Kemp-Roth-Reagan tax cuts removed a barrier to investment just can’t be reconciled with the data.
In fact they were followed by a period of extremely low fixed capital investment. This is unsurprising given the extremely high real interest rates which, in turn, are unsurprising given the high budget deficits caused by the Kemp-Roth-Reagan tax cuts. One mildly odd thing in the Miller parenthetical aside is the equation of saving and investment. I will accept the equation which makes sense in the long term although our current problem is high planned saving and low planned investment. But the Kemp-Roth-Reagan tax cuts did not have the effect on private savings which proponents predicted. Instead there was anomalously high private consumption. This is in addition to the massive resulting public dis-saving (deficits). There is vastly vastly vastly less than no evidence that the end of 70% marginal tax rates contributed to capital formation. The more nearly rational advocates of low marginal rates (by which I mean the more nearly rational critics of 70% marginal rates) argue that the important issue is tax avoidance not labor supply or consumption savings decisions.
The argument is that there are efficiency losses due to tax avoidance strategies such as investing in tax shelters (to obtain income losses and capital gains). So a semi-rational defender of Kemp-Roth-Reagan could ask if there was a marked reduction in the vigor of tax sheltering etc. That’s a good question, but the answer is that there was a huge gigantic massive increase in the vigor of tax sheltering. This was widely noted at the time. But surely there must be something good that can be said about the Kemp-Roth tax cuts which isn’t based on ignoring all available data ? I suppose there probably is, but for the life of me, I can’t think of it.
What is good about the tax cuts is that we kept our own money we worked for. Keeping our own money empowers us and we do not give to government which empowers them.
“… extremely high real interest rates which, in turn, are unsurprising given the high budget deficits caused by the Kemp-Roth-Reagan tax cuts.”
Hmmm. The high interest rates had a lot more to do with the Volcker-era Fed and their double-digit Fed-funds rate than with fiscal policy, however dumb it was.
Anon: “Keeping our own money empowers us and we do not give to government which empowers them.”
The word “our” does a lot of work here. Like the lopsided distribution of income itself, keeping “our” money empowers the wealthy *dramatically* more than it empowers people with low incomes and low taxes.
What you’re really saying is that government shouldn’t interfere with Big Business and their efforts to run our country *for* us: government of the poor people BY the rich people, FOR the rich people.
You pose a challenge–I can think of only one positive benefit from the Kemp-Roth/Reagan tax cuts. The legislation rolled-back 1970s bracket creep (high inflation with non-indexed tax brackets) for middle-class taxpayers. For example, when I compare the 50% bracket start-points in 1965, 1980, and 1985 (when Reagan income tax cuts were fully phased-in), and adjust for inflation, I see the bracket dip down to much lower income levels and then rise back up roughly to where LBJ set them. Kemp-Roth/Reagan in a way raised the 50% bracket up to where it was supposed to be. (Which is roughly where the top 35% bracket begins today.) The price of this roll-back for the middle-class: eliminating the higher brackets on the top earners.
I don’t know the economic value of the roll-back of bracket creep for middle-class taxpayers. I grasp that also eliminating the higher brackets had zero or more likely negative impact.
Tax cuts do not enable us to keep our money government spending cuts do that. As Milton Friedman pointed out to spend is to tax. If government spending isn’t cut (and the rate of growth of Federal Government Spendng wasn’t cut under Reagan) then taxes are really just shifted forward and not cut in present value.
Anonymous’s argument is based on the assumption that the Federal Government couldn’t possible have run a deficit under Reagan.
I’d say ending bracket creep was bad too — like the other tax cuts it creates the illusion of wealth as people ignore their share of the national debt when making personal financial decisions.
I’d guess that extremely high medium and long term real interest rates had a lot to do with the deficit and not much to do with monetary policy. The conventional view is that the Fed can control the short term end of the yield curve. The extremely high *real* interest rates lasted long after Volker relented (having crushed inflation and practically crushed the USA).
I come down with Miller. Some type of mean reversion on rates would be great after the economy improves.
I would not carp at miller for a move in the right directions..1/3 prob of cap gains going to 0% in the next for years. 1/3 being the prob. of repub sweep!
“Drawbridge Republican” probably isn’t a Miller coinage. Jennifer Rubin used a similar expression over a year ago:
“…he made clear he’s not a pull-up-the-drawbridge Republican.”
Washington Post, February 11, 2011
I’m pretty sure the notion of pulling up the drawbridge behind you is widely enough employed that somebody before Rubin would have used it with reference to Republicans, though I ain’t gonna bother trying to prove that. Job, you know.
“Making a living the old hard way…”