Why the 90% Top Marginal Tax Rate isn't Feasible
If you browse Facebook, or /r/politics, or any number of sites or boards where leftists congregate, you're sure encounter someone complaining about how shitty the U.S. economy has gotten since the Baby Boomer generation. Eventually you'll see someone comment that, from the end of World War II until the 80's, the U.S. had a top marginal tax rate of around 90% and the standard of living for the middle class was awesome. The commenter will then call for the government to simply tax the rich more. Bonus points if someone mentions how trickle-down economics, job outsourcing, and Ronald Reagan/Art Laffer ruined everything.
Even though the effective tax rate was never near 90%, here's 4 reasons why the 90% top marginal tax rate thing will not happen in the U.S.
1. Capital Flight
World War II destroyed much of the industrial capacity of Europe. China wasn't an industrialized option. That pretty much left The United States as a capitalist manufacturing powerhouse. Because capital couldn't flee AND be productive elsewhere, tax rates could be high. The world has changed since then. The bulk of many industries has all but moved to China. Increasing tax rates just makes that happen faster as it makes other countries more attractive.
Not all taxes are created equally and The Laffer Curve is different for different taxes. When taxes are more costly to avoid, the inflection point on the curve will be aligned with a higher tax rate. Capital, unlike labor, has no loyalties to countries or culture and has no immigration process - it can flee easily.
2. The Age of Individualism
The last war that had a clear goal and metric for success was World War II. It fit the narrative of good versus evil much better than any war the U.S. military has been engaged with since. It's much easier to push things through in wartime that wouldn't be accepted in times of peace: rationing, victory gardens, a military draft, etc. People were willing to accept lower standards of living to be patriotic. Companies, being run by people and having to sell products and services to people, would adjust their practices to at least appear patriotic.
Contrast this to George Bush telling the public to "keep shopping." People buy products from China through Wal-Mart to dump in U.S. landfills even though there are products which last longer but cost more and, ostensibly, have a lower total cost of ownership. But price is king. Convenience is king. Getting out of Saudi Arabia to avoid another 9/11 is too much of a pain in the ass if it'll raise the price of gasoline by a few dollars a gallon.
A high capital tax rate will raise consumer prices. There's only one tax I know of which can't be passed on. All others are ultimately paid by the consumer.
3. Regulatory Capture Happened
People have this dumb idea that money won't chase power if power is restricted by ... someone with power. There's no getting money out of politics - so long as it's worth it for people to get favorable legislation and for politicians to seek favors such a system will persist. Firms and politicians which don't play the game are selected against. There are a hundred ways to work around any anti-corruption law. The more byzantine the system and specialized the government agents and institutions are, the harder it is to stop corruption.
Business owners aren't dumb. And they're not all evil schemers either - they're doing what they need to survive. If that's corrupting a weak system built on bad ideas, so be it. Why did the tax code change? Even if none of the previous items I've outlined were factors, it was less expensive for companies to get the code changed or to convince the public to push for that than it was to pay the tax. Creating laws onerous for business will increase attempts at regulatory capture.
4. Bitcoin Exists
Calls for high tax rates on moveables, attempts at negative interest rates, and legislation such as FACTA are predicated on the assumption that people are trapped in the banking system, transactions are transparent, and that other countries will kowtow to the demands of U.S. law. Bitcoin and other decentralized cryptocurrencies are undermining those assumptions. In theory precious metals could've done this, but they're too inconvenient to use for trade and are subject to capture when crossing borders; there's a reason why no one's attempted to make a Silk Road website which directly takes precious metals.
When people can get out of the banking system and avoid negative interest rates or take their purchasing power abroad, laws punish late adopters and make cryptocurrencies even more attractive.
The U.S. won't be the sole top dog on the world stage for the remainder of this century barring some catastrophe occurring in other countries. Countries obey the U.S. in part because of the direct military might of the U.S., and the economic power of the U.S. propped up by the military via petro-dollars. If oil and other concentrated resources become less necessary for a functioning economy or if the nature of warfare changes such that non-state or small-state actors can foil the aspirations of expensive militaries, expect the value of the both U.S. dollars and U.S. laws to fall - curtailing laws like FACTA which attempt to keep the proverbial tax cows on the farm.
Even though the effective tax rate was never near 90%, here's 4 reasons why the 90% top marginal tax rate thing will not happen in the U.S.
1. Capital Flight
World War II destroyed much of the industrial capacity of Europe. China wasn't an industrialized option. That pretty much left The United States as a capitalist manufacturing powerhouse. Because capital couldn't flee AND be productive elsewhere, tax rates could be high. The world has changed since then. The bulk of many industries has all but moved to China. Increasing tax rates just makes that happen faster as it makes other countries more attractive.
Not all taxes are created equally and The Laffer Curve is different for different taxes. When taxes are more costly to avoid, the inflection point on the curve will be aligned with a higher tax rate. Capital, unlike labor, has no loyalties to countries or culture and has no immigration process - it can flee easily.
2. The Age of Individualism
The last war that had a clear goal and metric for success was World War II. It fit the narrative of good versus evil much better than any war the U.S. military has been engaged with since. It's much easier to push things through in wartime that wouldn't be accepted in times of peace: rationing, victory gardens, a military draft, etc. People were willing to accept lower standards of living to be patriotic. Companies, being run by people and having to sell products and services to people, would adjust their practices to at least appear patriotic.
Contrast this to George Bush telling the public to "keep shopping." People buy products from China through Wal-Mart to dump in U.S. landfills even though there are products which last longer but cost more and, ostensibly, have a lower total cost of ownership. But price is king. Convenience is king. Getting out of Saudi Arabia to avoid another 9/11 is too much of a pain in the ass if it'll raise the price of gasoline by a few dollars a gallon.
A high capital tax rate will raise consumer prices. There's only one tax I know of which can't be passed on. All others are ultimately paid by the consumer.
3. Regulatory Capture Happened
People have this dumb idea that money won't chase power if power is restricted by ... someone with power. There's no getting money out of politics - so long as it's worth it for people to get favorable legislation and for politicians to seek favors such a system will persist. Firms and politicians which don't play the game are selected against. There are a hundred ways to work around any anti-corruption law. The more byzantine the system and specialized the government agents and institutions are, the harder it is to stop corruption.
Business owners aren't dumb. And they're not all evil schemers either - they're doing what they need to survive. If that's corrupting a weak system built on bad ideas, so be it. Why did the tax code change? Even if none of the previous items I've outlined were factors, it was less expensive for companies to get the code changed or to convince the public to push for that than it was to pay the tax. Creating laws onerous for business will increase attempts at regulatory capture.
4. Bitcoin Exists
Calls for high tax rates on moveables, attempts at negative interest rates, and legislation such as FACTA are predicated on the assumption that people are trapped in the banking system, transactions are transparent, and that other countries will kowtow to the demands of U.S. law. Bitcoin and other decentralized cryptocurrencies are undermining those assumptions. In theory precious metals could've done this, but they're too inconvenient to use for trade and are subject to capture when crossing borders; there's a reason why no one's attempted to make a Silk Road website which directly takes precious metals.
When people can get out of the banking system and avoid negative interest rates or take their purchasing power abroad, laws punish late adopters and make cryptocurrencies even more attractive.
The U.S. won't be the sole top dog on the world stage for the remainder of this century barring some catastrophe occurring in other countries. Countries obey the U.S. in part because of the direct military might of the U.S., and the economic power of the U.S. propped up by the military via petro-dollars. If oil and other concentrated resources become less necessary for a functioning economy or if the nature of warfare changes such that non-state or small-state actors can foil the aspirations of expensive militaries, expect the value of the both U.S. dollars and U.S. laws to fall - curtailing laws like FACTA which attempt to keep the proverbial tax cows on the farm.
Conclusion
Regardless of how you feel about the effects of a 90% top marginal tax rate or, worse, a 90% effective tax rate, it's not going to happen in the U.S. barring a Venezuela-style command economy... and such an economy would kill the standard of living far more than corporate inversion, offshoring, or people "not paying their fair share" will.
