Tuesday, January 22, 2019

Quote Of The Day: High Tax Rates And Growth Unique Only To The Post-War US?

Continuing on from my recent QOTD post from economist Paul Krugman on high marginal tax rates for the rich, another New York Times OpEd by Emmanuel Saez and Gabriel Zucman provides a counter argument to a popular critique proponents of higher tax rates often receive.

When one argues that higher marginal tax rates do not hinder growth and point to post-war United States as an example of that, a common rebuttal is that the US was in a unique circumstance at the time: it could afford higher tax rates because the rest of the world was effectively destroyed. Saez and Zucman use post-war Japan as a counter example of that. Post-war Japan was destroyed and poor by modern standards. It had the US and Europe as competition, and yet it grew rapidly from 1946 to the 1960s and 70s, while it had a top marginal tax rate as high as 85% during those years:

A common objection to elevated top marginal income tax rates is that they hurt economic growth. But let’s look at the empirical evidence. The United States grew more strongly — and much more equitably — from 1946 to 1980 than it has ever since. But maybe in those years the United States, as the hegemon of the post-World War II decades, could afford “bad” tax policy? Let’s look then at Japan in 1945, a poor and war-devastated country. The United States, which occupied Japan after the war, imposed democracy and a top marginal tax rate of 85 percent on it (almost the same rate as at home — 86 percent in 1947). The goal was obviously not to generate much revenue. It was to prevent, from that tabula rasa, the formation of a new oligarchy. This policy was applied for decades: In 1982, the top rate was still 75 percent. Yet between 1950 and 1982, Japan grew at one of the fastest rates ever recorded (5.1 percent a year per adult on average), one of the most striking economic success stories of all time.

Their source comes from a paper by Chiaki Moriguchi and Emmanuel Saez (same author as the OpEd), on the evolution of income concentration in Japan from 1886 to 2005. A graph from that paper shows Japan's marginal tax rate during those years. This provides an interesting counter argument to the popular rebuttal that only the US could afford higher marginal tax rates due to its unique circumstance as the only unscathed country after World War II, and I'd love to hear a rebuttal to Saez and Zucman's argument in the comments if anyone wishes.

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