Tax Policy Revisionism

By James Kwak

In an otherwise unobjectionable article about The Piketty, the generally excellent David Leonhardt wrote this sentence: “In the 1950s, the top rate exceeded 90 percent. Today, it is 39.6 percent, and only because President Obama finally won a yearslong battle with Republicans in early 2013 to increase it from 35 percent.”

Is “yearslong” really a word?

But that’s not what I mean to quibble with. It’s that “yearslong battle with Republicans.”

Let’s review the facts. The 39.6 percent tax rate dates from the first Clinton budget act in 1993. It was lowered to 35 percent by the 2001 Bush tax cut, which had a sunset provision at the end of 2010 because Bush couldn’t get 60 votes to pass it, so he had to use reconciliation, which under the Byrd Rule couldn’t be used to increase the deficit more than 10 years in the future. The 35 percent rate was then extended for two years by the December 2010 tax cut, which was supported by President Obama and passed with overwhelming bipartisan support. It finally expired on January 1, 2013, at which point the 39.6 percent rate reappeared in its original form. A few hours later, Congress passed a new tax cut for just about everyone, except households with income over $450,000, who were left with the 39.6 percent rate.

In other words, President Obama didn’t fight a battle with Republicans. He fought a battle with himself. In 2010 and 2012 he could have restored the top tax rate to 39.6 percent simply by doing nothing and letting the Bush tax cuts expire. The January 2013 tax bill also locked in big tax preferences for capital gains and dividends, though not quite as big as envisioned by President Bush.

President Obama talks a good game when it comes to inequality, but he hasn’t backed it up with actions. There may have been extenuating circumstances, sure. But when it comes to tax policy, his main impact has been to make permanent most of the inequality-increasing tax cuts that his predecessor’s most treasured legacy.

15 thoughts on “Tax Policy Revisionism

  1. All good and bad deeds get recorded in heaven, unbeknownst to the deeders, either rewards or consequences get paid in the end, and it’s usually the opposite of what is typically believed which will occur. Go figure.

  2. Unstated above is if President Obama did nothing, low and middle income taxpayers would have also seen tax increases. Were those tax cuts “inequality-increasing” when passed in 2001?

  3. I don’t know what it’s like filing your taxes in the States but in Canada it is a “bloody nightmare” .

  4. Yes, Thomas, those were inequality increasing because all most of us go was a lousy $300 and the rich got huge cuts. Besides, just as what eventually happened, if he had let all the cuts expire in 2010, he could have restored the cuts for the low and middle income brackets within days.

  5. I agree totally with Mr. Kwak in that Obama and the Democrats have jumped on the taxes are evil bandwagon and could have let them go back up by just letting the Bush tax cuts expire. But, he felt as if the middle class needed a tax break. As a middle class person, I don’t need a tax break. We can’t keep cutting taxes and be able to pay for all this stuff. I don’t mind paying taxes and don’t even mind paying higher taxes than I am now to get better health care, infrastructure, etc. But, what I do want is for the rich to pay a much higher percentage of their income than me. We should make paying our taxes a sign of personal honor and integrity and doing our fair share to pay for this boat we’re all in. The rich seem to be lacking in that.

  6. I’m not sure you can call that article “otherwise unobjectionable.” I feel that Leonhardt completely missed the point of how inequality has increased by focusing on education as the solution.

    There have been two forces increasing inequality over the last 40 years. The first, as argued by Goldin and Katz, is that the demand for educated workers has been increasing faster than the supply, driving up the college wage premium. This has increased what I call the 80-20 level of inequality, the ratio between those at the 80th percentile, mainly college graduates, and those at the 20th percentile, mainly high school graduates. Increased access to education (and higher quality education) should decrease this type of inequality.

    But the bigger increase in inequality, and the focus of Piketty’s book, is not the 80-20 split, but the split between the 1% and everybody else. This is clearly not driven by education. The last time I looked, Jaime Dimon did not have an MD, JD, and two PhDs. If this were the case, James Kwak would be one of the masters of the universe (not that I’m saying he isn’t). This inequality seems to be driven by an increase in the relative bargaining power of executives over workers. This has taken place as trade with low-wage countries has increased and union membership in the private sector has almost disappeared.

    But the fact that it hasn’t happened the same everywhere shows that policies, such as high marginal taxes for the rich, support for unions and labor, etc. can have large effects on this 1% (and really 0.01%) inequality.

  7. ACA had some pretty big equality increasing provisions. The biggest was struck down by the Politburo, but it is still at least as big a deal as a 3% change in the top marginal rate.

  8. If one was trying to prove ALL politicians and both political parties are owned by the CentaMillionaire$ and Billionaire$, you would need to look no further than the TAX CODE! The rich refuse to be taxed like the “little people” and the TAX CODE proves that Maxim of History!

  9. That tax bracket is the least of our problems. Cap gains are not taxed progressively at all and at a mere 20%(how the truly wealthy make there money). The prevalence of off-shore tax havens have exploded. The carried interest loophole still exists to to turn fortunes of earned income from wages taxed at 42%(don’t forget Obama care tax) into cap gains taxed at 22%. Don’t forget wage and payroll taxes which are regressive and state taxes which are flat to barely progressive at all

    Many progressive economist hang up with the ordinary income tax rate at while ignoring the true abuses and regressive areas of the tax codes and sourced of inequality in the tax code always amazes me!~

    Whine about the most progressive part of the tax code?

  10. The truth hard to come by. Obama had the whip hand and got taken to the cleaners. His fecklessness in 2011 led to the 2013 government shutdown when the GOP figured he would cave and he didn’t. If he really did go to law school he never learned how to negotiate.

  11. How about some higher marginal tax rates on higher incomes?
    42% at $2MM, 45% at $5MM, 48% at $8MM and so on.

  12. 480 people worth a collective total of 2.08 TRILLION don’t need to pay any taxes for a LONG time in USA since it was a very rich and productive village that they stole from the DEAD producers….infrastructure, smurfrastructure…we don’t need no stinkin’ government….

    wait for it, 3, 2, 1 – here come the numbers from the Department for the Disembowelment of the Living of how much THEY pay as Trillionaires (boo-hoo) in comparison to how much the kids (50+ without jobs) are coughing up to the IRS that their DEAD “greatest generation” parents supposedly still owe….

  13. Correction to an earlier comment: capital gains are taxed at a maximum of 15%. Law passed by Obama.

    Yes, Obama’s main legacy has been to cement and secure the legacy of George W. Bush — on tax policy, on imprisoning people without trial, on lawless assassinations, on torture, on spying in violation of the 4th amendment, and so on and so on. It really has felt like the 3rd and 4th term of GWB.

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