The "Trickle-Down" Zombie

The New York Times's Paul Krugman routinely decries what he calls “zombie ideas”—those that survive despite overwhelming contrary evidence. Senator Elizabeth Warren (D – Ma.) should take note. Her recent attack on conservative tax policy is one that has long lost its battle against facts.

On Wednesday, the senator averred:

The Republicans have a pretty simple philosophy: they say if those at the top have more — more power for Wall Street players to do whatever they want and more money for tax cuts than somehow they can be counted on to build the economy for everyone else. Well, we tried it for 30 years and it didn’t work. In fact the consequences were nearly catastrophic.

This is a deliberate distortion of conservative tax policy, and one that refuses to die despite its repeated refutation. Nowhere have conservatives called for empowering, or cutting taxes for, the rich; and nowhere has such plutocratic favoritism been carried out in practice. Rather than benefit the wealthy, the point for the right is to reduce disincentives for everyone who wants to become rich. So let’s try something old-fashioned in today’s feelings-driven age and look at the hard facts.

Taxes were cut in the 1920s, 1960s, 1980s and in the early 2000s under President Bush. In every case rates were slashed for all income groups. In fact, in addition to universal rate reductions, President Bush removed 10 million low-income taxpayers from the tax rolls entirely.

Those interested in scoring political points rather than having serious discussions of the evidence misrepresent these policies as “tax cuts for the rich” because the wealthy receive more back in dollar terms. True, but meaningless. High earners have higher incomes and tax burdens to begin with, so naturally rate reductions translate to more raw dollars than they would for lower earners. But top earners do not receive larger cuts. As I’ve noted elsewhere:

A 10 percent tax cut to someone earning $1 million per year is a lot more in dollars than a 20 percent tax cut for someone who’s earning $100,000 per year, when in fact the person earning the lesser amount is actually receiving a steeper percentage cut.

Thus, by focusing on dollar amounts rather than percentage reductions or the distribution of the aggregate tax burden, the left misses the forest for the trees. For example, the marginal tax rate for individual income on top earners was 39.6 percent before the Bush tax cuts. Afterward, the rate was 35 percent—a 13 percent reduction. Meanwhile, the marginal rate for individual income on the lowest earners who qualified to pay income taxes was 15 percent. After the Bush tax cuts, that rate became 10 percent—a 33 percent reduction. And that’s in addition to the fact that Bush removed 10 million low-income earners from the income tax rolls entirely. As a percentage of income level, then, the lowest income groups received the largest benefit.

Tax reductions have also pushed more of the total tax burden onto upper earners. According to economist Brian Riedl:

The share paid by the top quintile edged up from 66.6 percent in 2000 to 67.1 percent in 2004, while the bottom 40 percent’s share dipped from 5.9 percent to 5.4 percent. Clearly, the tax cuts have led to the rich shouldering more of the income tax burden and the poor shouldering less.

Furthermore, the past 30 years may have been a “catastrophe” by the standards of some fanciful Utopian vision, but reality indicates otherwise.

During the previous three decades marginal income tax rates were cut to virtually half their pre-80’s levels. What followed were a couple of the longest periods of economic growth in U.S. history, and the creation of almost 40 million net jobs by the year 2000. The trend continued following further rate reductions in the early 2000s. In the six quarters following the 2003 tax cuts, GDP growth shot up to 4.1 percent, from 1.7 percent before. From 2003 to 2007, the economy added more than 8 million jobs.

It is problematic that people believe in zombie ideas without knowing the facts. It is far more problematic to know the facts and perpetrate such ideas anyway.

Cross-posted at Liberty Unyielding.