Tuesday, July 09, 2013

Fact-checking Reich

Robert Reich, former Secretary of Labor in the Clinton administration, provides the voiceover in a new video from the left-wing Economic Policy Institute about the evils of inequality which makes the following claims:
Since the 1960s, tax rates on very high incomes have been slashed dramatically, starving public investments in schools and roads and everything else needed to build our economy, and providing ever-greater incentives to rig the economy’s rules to send more money to the top.
Since these are about the only items presented in the video which can be objectively fact-checked, let's see how these comport with reality. The first claim is that tax rates on very high incomes have been slashed dramatically. As can be seen in this chart from the Tax Foundation, this is true:

The top tax rate in 1965 was 70 percent, which hit those making over $100,000 (about $720,000 in 2012 dollars) while today it is 39.6 percent. But the story is a bit more complicated than what Reich and the EPI let on. First off, recall that such rates only apply to taxable income, and that people in the 1960s were very good at avoiding taxes. As wikipedia notes, in the late 1960s legislation was passed by Congress implementing a minimum tax because so many high-income households had avoided paying any federal income tax whatsoever:
A predecessor Minimum Tax was enacted by the Tax Reform Act of 1969 and went into effect in 1970. Treasury Secretary Joseph Barr prompted the enactment action with an announcement that 155 high-income households had not paid a dime of federal income taxes. The households had taken advantage of so many tax benefits and deductions that reduced their tax liabilities to zero. Congress responded by creating an add-on tax on high-income households, equal to 10% of the sum of tax preferences in excess of $30,000 plus the taxpayer's regular tax liability.
While this chart only goes back to 1980, it also helps shed some light on the subject:

In 1980, before President Reagan took office and with top tax rates still at 70 percent, the top 1 percent -- the fattest of the fat cats -- earned something like 9 percent of all income while paying around 19 percent of total income taxes for a spread of 10 percentage points. Thirty years later the top 1 percent were earning 17 percent of total income while paying 37 percent of total income taxes for a spread of 20 percentage points. This may be many things, but an example of getting away with tax murder it is not. 

No matter. The heart of the Reich/EPI claim is that this lowering of taxes led to a "starving" of public spending investments on schools and roads. Is this true? Let's first look at revenue. According to USGovernmentRevenue.com, total government revenue in 1965 was $193.6 billion, or $1.39 trillion in 2012 dollars. Given a population in 1965 of 194,302,963, that works out to revenue of about $7,150 per person. In 2012, meanwhile, the relevant numbers are $5.114 trillion and a population of 314 million, which works out to $16,300 per person. 

In other words, this alleged starvation of revenue in reality has seen the amount of money collected per person more than double. While this does not exclude the possibility that money was taken away from education and spending and spent elsewhere -- hard to believe on the education spending side given that the Department of Education didn't even exist in the 1960s and spends over $68 billion today -- it does mean that any lack of spending was not due to a decline in revenue from tax cuts. 

If the income inequality argument is so compelling, why can't those who scream the loudest about it do so without engaging in such sleights of hand, distortions and outright lies?

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