Tax cheat Tim Geithner, the only member of the Obama economic brain trust who has not yet been fired, testified to the Senate Finance Committee today in favor of the president's proposed trillion-dollar-deficit budget.
Geithner, a Dartmouth man esteemed more for his tennis skills than for his understanding of markets or business, peddled much Keynesian voodoo before a nation whose economy he helped destroy while employed by the Federal Reserve Bank and then the Department of the Treasury. To get a sense of the mixed metaphors and confused logic that characterized the treasury secretary's testimony, ponder the Reuters headline "Geithner: Year-end fiscal cliff to hit U.S. growth," and tremble to reflect that this word salad accurately describes Geithner's comments.
Mostly, Geithner pressed the need to lay heavier tax burdens on the "top 2 percent" of Americans. In proof that the second version of history is farce, the same rhetoric that characterized the birth of the modern central banking system – that the income tax would be levied only on the rich – is being used again at its death. But the Tax Foundation, citing data from Geithner's Internal Revenue Service, suggests why the political goal of raising taxes on people who earn more than $340,000 in a year will not achieve the fiscal goal of raising more revenue:
Earners in the top 1 percent pay 37 percent of the income tax. Earners in the top 5 percent pay 59 percent. Raising tax rates for these people may feel good, but the iron judgment of history is that it will not increase the total tax haul. As you can see from the chart here, top marginal rates have varied from above 90 percent to below 30 percent over the past 70 years, but federal revenue as a percentage of GDP has remained steadily in the 19-percent neighborhood.
The chart also gives strong evidence of what brought Uncle Sam's cut of GDP from the single-digit range to the 19-percent range. That happened in the mid-1940s, when the government and the Federal Reserve broke their original promise to soak the rich and broadened taxable income to include every penny earned by every American.
While the Geithner plan will not succeed in raising revenue, it does have the capacity to raise the volatility of revenue collections. High earners experience more severe ups and downs in their income than the rest of us. This is the particular danger in California's own effort to service its spending addiction through higher top rates, as I explained a few weeks ago:
Geithner's top-2-percent strategy risks putting federal revenues on the same roller coaster. Here is a look at just how contingent and temporary millionaire status is in the United States. As Geithner knows from his own experience using TurboTax to conceal income from Washington, high earners also have more opportunities to earn in ways that will not be captured by the IRS – even though in the final stages of its decadence the U.S. government is becoming far more punitive on overseas earnings, charitable donations, expatriation of wealth and people, and other hallmarks of personal freedom.
This is not novel stuff. Even First Baron Keynes understood that the relationship between tax rates and revenue raised is not one-to-one. In fact, if Keynesians were truly attentive to their master, they would have a better understanding of the importance of depressive taxation in centrally planning an economy. What's truly worrying is that Geithner doesn't seem to grasp the concepts he's trying to put into practice. Plenty of people want to soak the rich:
But if Warren Buffett or Hillary Clinton or even Stephen King believes in garbage, that has at most a tangential effect on me. Geithner, on the other hand: He's the guy who takes money directly out of my pocket.