Do low taxes explain inequality?
By Scott Sumner
Matt Yglesias suggests that the answer is yes:
Three or four decades later, scholars are able to look at the fruits of those policies and draw some conclusions. The same main technologies that exist in the United States and United Kingdom are also in use in Germany and Sweden. Those countries are also exposed to the forces of global trade and immigration. But inequality has grown much more sharply in the US and UK than it has in Germany and Sweden. And the main reason seems to be taxes.
Looking across the world in a series of papers, a line of academic research originally pioneered by Piketty and Emanuel Saez joined over time by a growing list of other economists finds that falling marginal tax rates on the rich are strongly correlated with higher levels of income concentration but don’t lead to faster overall economic growth.
Yglesias also suggests a possible reason for this correlation:
In the old days of 70 or even 90 percent marginal tax rates, it wouldn’t make much sense for executives to expend enormous amounts of time and energy trying to maximize the amount of money they can personally extract from a company in the form of salary.
There may be some truth to this claim, but we need to be very careful in not overselling this result. Consider the top income tax rates in the US, Germany and the UK:
US: Top federal income tax rate = 43.4%, including state and local income taxes the top rate is probably averages 45% to 50%, even more in states like California and New York, which have many high earners.
Germany: Top rate is 47.5%
Britain: Top rate is 45%
There is very little difference between the top rates of various countries, and hence it seems unlikely that taxes have much to do with the US and UK having more inequality than Germany. I’d add that Germany didn’t even have a capital gains tax until 2009, and Sweden has no inheritance tax.
PS. During his campaign, Trump promised to cut the top income tax rate from 43.4% to 25%. Now he’s hinting that the top rate will remain little changed. Trump seems to be endorsing the Obama “tax the rich” policies that the GOP referred to as “socialist” just a few years ago. Congress will probably go along. And yet the media spin is exactly the opposite; they claim that he ran as a friend of the workingman and is now implementing tax cuts for the rich. Very odd.
Always be skeptical of what you read in the media. And speaking of “fake news”, the press will tell you that the top federal income tax rate is 39.6%, which is false. It’s 43.4%.
PS. It’s also possible that this post is “fake news”. Please let me know if my tax data is incorrect. It’s difficult to find accurate tax data.