WSJ's Wessel on Taxes

http://www.futureofcapitalism.com/2009/09/wsjs-wessel-on-taxes

The economics editor of the Wall Street Journal, David Wessel, has an article in today's Journal claiming as a "fact" that "'the rich' do have a lot of money, even after the bust, and raising their taxes would raise significant sums without hampering the economy."

His evidence seems to be as follows:

"The 1990s suggests we could raise more money from high-income people...and still have a strong economy," says Joel Slemrod, a University of Michigan tax economist. But the first half of the 2000s suggested the economy also can grow when their taxes are cut. And the latest recession, unlike some others, didn't coincide with any change in tax rates.

There's a counterargument that Mr. Wessel doesn't even deal with. It holds that that economic growth of the 1990s was driven not by the 1993 tax increase, but by the 1997 cut in capital gains tax to 20% from 28% passed after the Republicans took over Congress. For an example of this argument, see this Heritage Foundation paper: "Economic growth was solid but hardly spectacular in the years immediately following the 1993 tax increase. The real economic boom occurred in the latter half of the decade, after the 1997 tax cut. Low taxes are still a key to a strong economy."

As for the claim that the latest recession "didn't coincide with any change in tax rates," the counterargument is that when it comes to taxes, expected rates matter almost as much as actual rates. Once the Democratic candidate, Barack Obama, who was running with a promise to raise taxes on the "rich," including capital gains taxes, took a lead in the polls, it became pretty clear that taxes were going to go up. So taxpayers took steps, such as realizing gains and harvesting losses, so that they could pay taxes before they increased. While that may not have been the sole cause of the recession, it may well have contributed.

If Mr. Wessel is going to make a really convincing case that taxes on the rich can be raised without hampering the economy, he is going to need to do better than this. But it's indicative of the broader state of the battle of ideas. Remember, this isn't a New York Times editorial or some Democratic politician's policy speech here. This is the economics editor of Rupert Murdoch's Wall Street Journal. If he thinks taxes on the rich can be raised without hampering the economy, the free-market forces have a lot of convincing to do, too.

Sep 3, 2009 at 8:40 am Related Topics:  Definition of 'Rich', Press, Taxes receive the latest by email: subscribe to the free futureofcapitalism.com mailing list