New York Times economist Paul Krugman called for a 91% tax on Americans in his opinion piece yesterday. Americans have largely forgotten that income tax rates were once nearly 100% in their own country. Just like most politicians, Krugman's ideal tax rate is 100%; he can think of no reason why people should actually get to spend the money they earn. For Krugman the problem with the economy is that Americans are not taxed enough and the government doesn't spend enough.
Krugman made fun of the devastating economic news that Hostess is laying off 18,000 employees and discontinuing some of its most popular products, like the Twinkie. "The demise of Hostess has unleashed a wave of baby boomer nostalgia for a seemingly more innocent time," he said. The massive layoffs at Hostess represent something far more important than nostalgia for childhood memories; it represents serious economic trouble in the country and a fearful business climate due to President Obama's re-election.
Calling the 1950s the "Twinkie Era," Krugman attributed that decade's economic success to embarrassingly high taxation. "In the 1950s incomes in the top bracket faced a marginal tax rate of 91, that's right, 91 percent." He is pleased that the wealthy paid their "fair share" of taxes in the 1950s. For Krugman, keeping less than 10% of their earnings is their fair share. This is false. Their fair share is everything they earn. The government does not actually have a right to any amount of an individual's earnings. The income tax was not even around for most of Ameircan history. People earned money and they spent it, without worrying whether or not the government was forcing them to pay their fair share.
The income tax was originally sold as a very small tax paid by only a small amount of Americans. Then Wilson entered World War I in 1917 to substantially increase the tax and the number of taxpayers: the excuse was that the government had to pay off war debts to the tune of over $20 billion. That was the plan for the income tax all along and the rate actually rose to over 90% in the 1950s as Paul Krugman correctly pointed out. The reason for the postwar economic boom was the end of the warÂ—no longer wasting money on big and unprofitable projects to support the war effort. And this postwar boom did not last into the 1950s, when economic growth averaged a modest 2.4% per year.
Krugman's whole argument is based on a false history of the postwar era. The idea that increasing income tax rates will lead to prosperity is not even close to the truth. What actually happens is people find ways not to pay the tax because they cannot possibly afford to do so. This does not promote economic progress or even fund the government. A lot of the money never circulates into the American economy at all when income taxes are too high.
Paul Krugman's claim about the prosperous 1950s is a myth and the last thing America needs right now is to double income tax rates. Obama may raise income tax rates as high as he wants, but still he will not bring in enough money to pay for his reckless budgets. Struggling Americans need a lower income tax rate or, better yet, elimination of the income tax.