One of Margaret Thatcher’s first acts upon taking office as U.K. prime minister in 1979 was to cut their top personal income tax rate from 83 percent to 60 percent. Over the next decade, the top rate delined to 40 percent—less than half the rate at the beginning of her term.
On our side of the Atlantic, conservatives eagerly adopted Thatcher’s tax-cutting mania, a policy that contines more than three decades later. Like their British counterparts, American conservatives argued that lower tax rates for the wealthiest will lead to greater prosperity for all.
That just isn’t true.
Enterpreneur Nick Hanauer, a venture capitalist who has founded several successful companies, said as much in a recent TED talk.
Hanauer claims that calling enterpreneurs “‘job creators’ isn’t just inaccurate; it’s disingenuous.” His bottom line: cutting taxes for the rich doesn’t create a boom in jobs, it creates a boom in wealth for the rich.
The data pretty much back up this claim. As these charts from the Congressional Budget Office show, after tax income for the wealthiest 1 percent of Americans has nearly quadrupled since 1979 (slide 5), even as average tax rates for the group have declined (slide 6).
That this tax cut mania has become such an entrenched part of conservative orthodoxy can at least partially be laid at the feet of economist Arthur Laffer.
In the 1970s, Laffer began arguing that it is possible to raise more revenue by lowering tax rates.
This counterintuitive claim grows out of an observation the government will collect no revenue of the tax rate is at either zero or 100 percent. That observation implies that government revenue can be graphed as a curve, with the revenue-maximizing rate lying somewhere upon that curve.
Conservatives have long assumed that current U.S. tax rates are somewhere on the right side of the curve, meaning that cuts in rates would pay for themselves in increased revenues.
But as my colleage Andrew Fieldhouse pointed out recently, modern economic research doesn’t back up that claim. Indeed, Fieldhouse argues in a new paper, the actual revenue-maximing top income rate is roughly 73 percent (including federal, state, and local taxes).
Interestingly, that number isn’t too far below the figure that Thatcher inherited in 1979.