Read Michael Boskin’s lips

Writing in today’s Wall Street Journal, Stanford economist Michael Boskin warns that the specter of “growth-destroying confiscatory” tax rates looms if the Obama Administration has its way.

Be afraid.  Be very afraid.

Or maybe not.

The Administration’s proposed changes to the tax code are neither as dramatic not as alarming as Boskin presents.

During the Clinton Administration, federal (marginal) tax rates for those with the highest incomes were 39.6% and 36%.  Under George W. Bush–whose stated goal was to eliminate the budget surplus–these rates were lowered–in theory, temporarily–to 33% and 35%.  Under the Obama Administration’s proposal, these rates would revert to their Clinton-era rates.  This is not a huge change.

Boskin then adds up all the other taxes that Americans pay, including state income taxes (beyond the scope of the Administration) and payroll taxes (which the Administration has not proposed raising), inflates all rates by 31.7% to cover the cost of the projected 2016 deficit (a highly speculative and unrealistic calculation), and comes up with a scary number: a 70% marginal tax rate.

Economic growth has certainly been lackluster, providing excellent arguments against both raising taxes and cutting spending (Boskin does not seem to recognize the macroeconomic costs of cutting government spending–only those of raising taxes).  Despite cogent arguments against doing so, there is broad political consensus that the US should move toward fiscal balance, which means that some combination of spending cuts and tax increases will be necessary.

Writing last month in the Journal, Boskin, citing a study by Alberto Alesina and Silvia Ardagna, argued that successful deficit reduction policies should have a 5:1 spending cut to tax increase ratio.  More than 80% of the deficit reduction in the most recent White House proposal comes from spending cuts–one would think that Prof. Boskin would congratulate the Administration for following his advice.

The ideological opposition to any tax increase exhibited by Prof. Boskin–and held with an almost religious fervor by the Republicans in Congress–is dangerous.  Eventually, ideological purity must give way to cold, hard reality.

Prof. Boskin should have learned this during his own time in government service, when his boss (President George H.W. Bush) famously (and rashly) promised “read my lips: no new taxes”… and was forced to renege less than two years later.

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One Response to Read Michael Boskin’s lips

  1. Procopius says:

    I sometimes wonder why I don’t see more discussion of the remarkable correlation between higher marginal tax rates and higher economic growth. To me it’s perfectly intuitive — as people get a lower return at the high end, they are motivated to work even harder to increase their incomes. We aren’t talking about 100% taxation of additional income, we’re talking about people having to gross $100 to net $10, and history has shown that at least some of the most ambitious will do that — gladly or not. I wish I had a link to the chart I’ve seen several times over the last decade or so showing the level of highest marginal tax rate and GDP growth. It’s an amazing correlation. I know correlation doesn ‘t prove causation, but…

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