Paul Krugman’s Tax Confusion

In Sunday’s paper, New York Times writer and Nobel Prize winning economist Paul Krugman wrote a controversial post on taxes. Krugman essentially suggested that the rich currently do not pay their fair share, unlike the 1950’s, and we should strive to reclaim that era of high tax rates and “economic justice”.  Krugman’s only actually cited numerical evidence for this theory is that the 1950’s had a marginal tax rate of 91% and the top .01% paid an effective income tax rate of over 70% in 1960.

There are so many things wrong with this analysis that it is hard to know where to begin. First, part of the reason that America was so prosperous in the 1950’s was that most of the rest of the civilized world was recovering from World War II. Second, these statistics are so deceptive that they almost do not warrant serious debate. The large number of loopholes and deductions made the marginal tax rate almost irrelevant in the 1950’s, so the only statistic that matters is effective tax rate. Krugman’s estimate of over 70% deceptively includes the estate tax. Furthermore, even with the acceptance of using the estate tax, it is still misleading number.

Why does Krugman use .01% as his example? Because no other percentage would really serve his point. If we instead use the metric of top 1%, which has been the percentage that most describe as the very rich, their effective tax rate was 34% in 1960 and a very similar 31.3% in 2004. Not much change there, despite a significantly lower marginal tax rate.

Also, Krugman uses this percentage to discuss fair share, even though the rate that individuals pay is not really indicative of the share of the tax burden that they take on.  Krugman assumes that the current share that the rich pay is not fair, without actually providing any numbers to back that up.  In 2009, the top 1% paid 38.7% of the federal income taxes, while only bringing in 13.4% of the income. There are obviously some issues with using these numbers as well, but there is no evidence that the rich are paying less of a share than what they make.

Edward C. Prescott, another Nobel Prize winning economist, once remarked that Krugman “doesn’t command respect in the profession,” and this kind of one-sided political propagandizing is a prime example of why that is the case. No serious person would suggest going back to the tax rates of the 1950’s, which says a lot about what kind of person Paul Krugman has become.