Progressive taxes produce volatile revenue streams. That’s the basic and important point made by former Senate Republican staffer Michael Solon in an opinion article in today’s Wall Street Journal. Solon lays out some of the facts and figures, and they’re pretty alarming. Revenues have averaged only 15.3% of gross domestic product over the last four years, the lowest in the last 60 years. Why is this so? Because wages and sales tend to be much less volatile than profits. It’s as simple as that.
Solon argues that if we want more revenues we need more economic growth. And, he goes on, if we want more economic growth we must reduce tax rates on high earners. You may or may not agree with that second sentence. But you can’t really disagree with the first without forfeiting your status as a member of the reality-based community.
The 1990s are a lesson in point. My recollection is that when Newt Gingrich’s House Republicans called for a balanced budget in seven years, they were ridiculed by spokesmen for the Clinton White House. No way we can achieve that, they said; the models show it can’t work. But Clinton and Gingrich did agree on a balanced budget package in 1997 and the budget was balanced within two years. Why? Robust economic growth and a tech boom that generated big profits for many people.
There’s an inevitable tradeoff between progressive taxes and a reliable revenue stream. The more you have of one, the less you have of the other. If you have steeply progressive rates, like the federal government or states like California, the revenue stream is more volatile. And you come up particularly short as the cost of countercyclical programs like unemployment insurance and food stamps spikes upward. I don’t think most Americans want to abandon progressive tax rates altogether, at least at the federal level. But those who urge more progressive rates should understand that they will have to pay a price if they get their way.