Posted Wednesday, Nov. 21, 2012, at 9:20 AM
The case against returning to the kind of 90 percent marginal income tax rates that we had in the 1950s seems pretty ironclad to me—the 1950s tax code raised way less money than the 1990s tax code (90 percent tax rates are a great stimulus to tax avoidance strategies) so what would the point be? But there's no doubt that tax rates that high were compatible with robust economic growth. This is a somewhat embarassing fact for people who put a lot of emphasis on low marginal tax rates as a key to growth. But in the course of explaining it away, some low-tax advocates tend to tie themselves into an even worse conceptual knot.
Here's Brink Lindsey on the Cato blog:
But several factors were especially conducive to strong performance at that time. There was a pent-up demand for goods and services after the privations of the Great Depression and the mobilization of World War II. There was also a pent-up supply of new products that couldn’t be brought to market during the depression and war years. That pent-up supply was augmented by technological and organizational breakthroughs accelerated by the imperatives of total war. Big advances in transportation, communications, and air conditioning stimulated catch-up growth in the underdeveloped South and underpopulated West. And rapid upgrades in human capital (first explosive growth in high school graduates, then explosive growth in college graduates) doubtless helped to spur productivity gains.
The argument here, which certainly makes sense, is that the postwar US economy grew fast not because of high tax rates but despite them. But Lindsey locates the true cause of the rapid growth in wartime economic planning which led to "technological and organizational breaktrhoughs." I don't think we can attribute air conditioning to the war, but certainly the "big advances" in transportation and communication were a direct result of World War II and then the Cold War. Similarly, the "rapid upgrades in human capital" he lauds were a matter of state-led investment, not bottom-up economic competition.
Lindsey then pivots to the stagflation of the 1970s and lauds policy reforms of the 1980s and 1990s such as "dismantling of price and entry controls in the transportation, energy, financial, and communications sectors and a steep drop in marginal tax rates."
I don't have a big problem with those policies (though certainly it's hard to be so blasé about financial deregulation writ large) but note that none of them relate to aspects of postwar state capitalism that Lindsey attributed the growth miracle to. Brining price competition to the passenger aviation and interstate trucking industries didn't require us to start scaling back investments in infrastructure and human capital. Indeed, the thrust of Lindsey's initial analysis is that massive government-directed investments in education, transportation, and communications infrastructure are so amazingly beneficial that they swamp the negative impact of other bad aspects of our 1950s and 1960s policy paradigm.
Which makes sense to me. But I think we'll be waiting a long time for the followup post on the Cato blog about the need to spend lots of money on upgrading our air traffic control system, building a smart grids, building fiber-to-the-premises broadband networks, establishing a universal preschool program, upgrading Northeast Corridor passenger rail, and so forth. And yet that seems to be precisely the point. The politicial system is highly predisposed to spend tons of time arguing about tax rates. But even a really silly tax code—90 percent rates that don't raise any revenue!—was compatible with ultra-fast growth as long as other aspects of the policy mix were constantly pushing rapid improvements in education and rapid deployment of state-of-the-art technology in key sectors.