Now long forgotten, in July 2005 the Congressional Budget Office expressed surprise at the extra $100 billion in unexpected tax revenue it received. There it was; it just showed up. Republicans claimed vindication for Bush tax cuts and pushed to make them permanent. Opponents said it was temporary and we'd soon be back to our deficit-racking ways. I'm reminded of this as Tuesday nears and the tax debate reaches a fevered pitch. Art Laffer and other tax-cut free-marketiers are making a plea in the face of panic to hold the line on taxes. We've been down this road many times before, they claim, and knee-jerk increases in the top marginal tax rates is the exact wrong thing to do. Try it, and the only "change" we'll experience is a return to the heady days of 1979.
Before you dismiss Laffer as a nut-bag right-winger (at this point, I don't know how you could, but there are those of you who will try), consider Austan Goolsbee of the University of Chicago, now a top Barack Obama advisor. According to the Wall Street Journal, in a paper entitled "What Happens When You Tax the Rich?" Goolsbee writes "the higher marginal rates of 1993 led to a significant decline in taxable income." Less for Treasury coffers, not more.
Just as Bill Clinton promised a middle-class tax cut in the 1992 presidential campaign funded by "the rich," Barack Obama now promises the same. Clinton immediately back-pedaled between the election and inauguration and by July 1993 we instead had a middle-class tax increase (retroactive to January, so consider it his first official act). But wait; what about the fantastic economy we experienced for much of the Clinton Administration? I have yet to find any causation between Clinton's tax increases in the early 1990s and the boom we subsequently experienced. Quite the contrary, it can be argued that when Ronald Reagan began cutting taxes in 1981 in the top marginal rate from 70 percent to 28 percent, it freed capital that was then invested in tech R&D that came to fruition in the mid-to-late 1990s.
In other words, bad tax policy was mitigated by previous good tax policy. But with baby boomer retirement now in full swing, and the economy in its fragile state, populist appeals to "tax the rich" will do far more damage than anything we've previously seen. Good in theory, horrible in reality. I've made my pitch. See you at the polls.