The World That Mitt Romney Wants to Build…for the One Percent

“A gaffe is when a politician tells the truth — some obvious truth he isn’t supposed to say.” — Michael Kinsley

Mitt Romney really stepped in it this time. His only saving grace is that no one noticed…yet.

In a recent interview with Fortune magazine, Romney indicated that, under his tax plan, “high-income people would continue to pay the same share of the tax burden that they do today.”

This quote doesn’t sound like a gaffe until you put it together with the rest of Romney’s promises. Under his tax plan, those “high-income people” would face much lower tax rates.

This seemed odd to me. The same tax burden with lower rates? Wouldn’t that mean they’d have to earn a heck of a lot more money before taxes?

As it turns out, yes. Yes, they would.

If Romney gets his way, the top 1 percent will pay an average federal tax rate of 22.5 percent, down from the 28.3 percent rate they paid in 2007. The average federal tax rate for the nation as a whole will fall from 19.9 percent to 17.4 percent. (This is assuming Romney doesn’t eliminate a bunch of deductions and credits, in which case most people’s tax rate would actually go up and the number I’m about to report would be worse. I’m giving Romney the benefit of the doubt here.)

In 2007, the top 1 percent paid 26.2 percent of the nation’s taxes. In order to maintain that share of the tax burden, as Romney suggested in his interview, the top 1 percent would have to earn 33.9 percent of the nation’s pretax income.

33.9 percent. One in three dollars of our nation’s output will go into the pockets of the richest 1 percent. To put that into context, in 2007, the top 1 percent pocketed 18.7 percent of pretax income. In 1979, they earned 8.9 percent.

Let’s take Romney at his word. Let’s try to imagine what the world will look like if the top 1 percent earns 33.9 percent of pretax income.

In order to earn that much income, CEO compensation will soar. The financial sector will probably double its share of corporate profits. Leveraged buyouts and other short-term gimmicks will become more prevalent, and many more manufacturing jobs will disappear, replaced by low-wage, no-benefit service jobsif they’re replaced at all. Wages for the average worker will decline relative to inflation. Most households will have to work more hours just to maintain their standard of living, but even that won’t be enough. Households will sink deeper in debt just to stay afloat. As a result, financial crises will become more frequent and more prolonged. Wall Street will thrive, creating ever more complex financial securities that prey on ever more naïve borrowers.

That’s another thing: Lack of education. Well, you can expect poverty to go up, and therefore students’ test scores will go down. But don’t expect the government to pick up the slack with more funding because the top 1 percent is no friend to high public education spendingor food stamps or Medicaid or pretty much anything that would help poor kids.

And in a world where they’re earning one-third of the nation’s income, the top 1 percent is going to have twice the influence they currently have in Congress. So you can expect plenty of corporate subsidies, especially for Big Oil. Forget about clean energy. We’ll import all that stuff from China. You see, the 1 percent doesn’t like to nurture new industries when they threaten the old monopolies.

Of course, not everyone in the 1 percent thinks or acts the same. They’re a diverse and brilliant and, in many ways, admirable bunch. But 1 percent of the population should not control one-third of the economy, no matter how impressive they may be.

You may think I’m an alarmist. Surely the future won’t be that bad.

Well, guess what: Everything I just described has been happening for the past three decades. And it all happened while the 1 percent doubled its share of pretax income.

Welcome to the future. How do you like it so far?

==========

This op-ed was published in today’s South Florida Sun-Sentinel.

Reader Request: Do Lower Tax Rates Lead to Higher Tax Revenue?

A reader asks: If low tax rates lower income to the Treasury and cause deficits and lower economic growth, how do you explain how we ran deficits with a 70 percent top marginal tax rate in the 1970s and we ran surpluses for 1998-2001 with a 39 percent top marginal tax rate with almost identical average GDP growth for the periods? Doesn’t this fact give significant credence to the supply-side argument that lower tax rates increase tax revenue and cause surpluses?

Professor Chandra Mishra made roughly the same argument in our debate over the Bush tax cuts. I didn’t address it in my op-ed because I didn’t expect a tenured professor to advocate such a widely discredited position.

First, a clarification: I never said that “low tax rates…cause…lower economic growth.” On the contrary, the economic evidence indicates that tax cuts have a slightly positive effect in the short run.

In order for tax cuts to increase tax revenue, however, they would have to have such a large effect on economic growth that it outweighs the effect of the lower rates. Taking a smaller percent of a bigger number can yield more than taking a bigger percent of a smaller number, given the right numbers. At a certain point, if you keep raising taxes, people will stop working because it isn’t worth the effort. If enough people stop working, economic output decreases, and tax revenue shrinks despite higher rates. If you like graphs, you can visualize that “tipping point” as the top of the “Laffer curve,” named after economist Arthur Laffer who helped popularize the concept in the 1970s:   Continue reading “Reader Request: Do Lower Tax Rates Lead to Higher Tax Revenue?”

How to Discover the Truth with Statistics

Regular readers may remember my post, “How to Lie with Statistics,” where I criticized ASU economist Richard Rogerson for misleading the public with bad math. I showed the nonsense in his claim “that raising taxes will turn us into a bunch of lazy old Europeans.”

Since I’m going to be writing about taxes a lot this week, now is a good time to show how a responsible statistician approaches this issue. The following is a summary of two excellent posts by University of Arizona political scientist Lane Kenworthy.   Continue reading “How to Discover the Truth with Statistics”

5 Ways to Sound Stupid When Discussing the Debt Ceiling

In the past week, I’ve had conversations with people who voiced the following myths. Read and learn, lest you embarrass yourself in the same way.

Myth #1: Federal debt has been increasing under all presidents since World War II.

Reality: Federal debt steadily declined from the mid-1940s to the early 1980s, then it increased dramatically (with a brief hiatus in the mid-to-late 1990s). Ronald Reagan reversed four and a half decades of safe, responsible fiscal policy, and every successor except Bill Clinton followed his lead. See for yourself:   Continue reading “5 Ways to Sound Stupid When Discussing the Debt Ceiling”