Wednesday, February 17, 2016

Piketty on how American policy has changed

The Guardian is running another fascinating piece by Thomas Piketty, putting historical perspective on American tax rates.   Read it all:  like Krugman, he really knows how to make a very plausible argument:
Let’s glance back for an instant. From the 1930s until the 1970s, the US were at the forefront of an ambitious set of policies aiming to reduce social inequalities. Partly to avoid any resemblance with Old Europe, seen then as extremely unequal and contrary to the American democratic spirit, in the inter-war years the country invented a highly progressive income and estate tax and set up levels of fiscal progressiveness never used on our side of the Atlantic. From 1930 to 1980 – for half a century – the rate for the highest US income (over $1m per year) was on average 82%, with peaks of 91% from the 1940s to 1960s (from Roosevelt to Kennedy), and still as high as 70% during Reagan’s election in 1980.

This policy in no way affected the strong growth of the post-war American economy, doubtless because there is not much point in paying super-managers $10m when $1m will do. The estate tax, which was equally progressive with rates applicable to the largest fortunes in the range of 70% to 80% for decades (the rate has almost never exceeded 30% to 40% in Germany or France), greatly reduced the concentration of American capital, without the destruction and wars which Europe had to face.

A mythical capitalism

In the 1930s, long before European countries followed through, the US also set up a federal minimum wage. In the late 1960s it was worth $10 an hour (in 2016 dollars), by far the highest of its time.
All this was carried through almost without unemployment, since both the level of productivity and the education system allowed it. This is also the time when the US finally put an end to the undemocratic legal racial discrimination still in place in the south, and launched new social policies.

All this change sparked a muscular opposition, particularly among the financial elites and the reactionary fringe of the white electorate. Humiliated in Vietnam, 1970s America was further concerned that the losers of the second world war (Germany and Japan in the lead) were catching up at top speed. The US also suffered from the oil crisis, inflation and under-indexation of tax schedules. Surfing the waves of all these frustrations, Reagan was elected in 1980 on a program aiming to restore a mythical capitalism said to have existed in the past.
The culmination of this new program was the tax reform of 1986, which ended half a century of a progressive tax system and lowered the rate applicable to the highest incomes to 28%.
The bold is mine, because it reminded me of Trump (and Cruz), the two appalling lead contenders for the Republican presidential candidacy.

Meanwhile, I wonder what Australian right wing, small government economists are talking about?

Oh, they're blaming Obama for Muslim inspired instability throughout the world, and still fretting obsessively about numbers on a government website to do with plain packaging of tobacco.  (To be fair to poor old Sinclair, I think he has given up on Kates as having any political sense whatsoever.)

Update:  look at the appalling tax plans of the Republican candidates.  As the article notes about Cruz in particular:
...the plan would cost more than Bush or Rubio's proposals but somewhat less than Trump's. Including both lost revenue and interest, Cruz's plan would cost $10.2 trillion over 10 years. Bush's costs $8.1 trillion, Rubio's $8.2 trillion, and Trump's $11.2 trillion. In its first decade, Cruz's plan would increase the debt by 35.7 percent of GDP; over two decades, that figure rises to 68.7. The current level is about 100 percent of GDP, so Cruz would spike it dramatically. And even more than his rival's plans, Cruz's concentrates its benefits heavily among the richest Americans....

The sheer cost of Cruz's plan is also worth dwelling on. If unpaid for, it increases the deficit by more than $1 trillion a year, and would require about $860 billion a year in spending cuts to avoid that. And Cruz has said he wants to balance the budget, so spending cuts are how the plan would have to be paid for if he keeps that promise.
Those are truly epic spending cuts. Again, Cruz needs $860 billion less spending every year. By comparison, eliminating Medicaid entirely would only save about $500 billion a year. Eliminating Obama's subsidies would only save $92.5 billion.
The biggest economic menace to America is Republican economic ideology.

When will they come back to some common sense?

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