Bernie Sanders: Taxation as vengeance

Bernie Sanders, in Congress, with a 90 percent tax rate. The victim? The American economy. The motive? Revenge.

Bernie Sanders and the 90% Tax
Bernie Sanders and the 90% Tax

WASHINGTON, May 31, 2015 — Democratic presidential candidate Bernie Sanders wants to raise the tax rate on America’s most successful entrepreneurs and managers to 90 percent. He claims the additional tax revenue would fund many social programs and infrastructure investments. He says it’s for the good of America.

He lies. He’s a killer, gunning for American business, and if he kills the U.S. economy in the process, too bad. His motive is revenge.

His tax would be a disaster for the economy and would lead to prolonged stagnation. It would raise less revenue, not more.

A 90 percent marginal tax rate would allow the wealthiest investors to keep only 10 cents of every dollar they earned on those marginal investments. After taking into account additional income taxes from states like New Jersey, where the highest marginal rate is about 9 percent, investors could pay up to 99 cents in taxes on every dollar they earned, depending on how federal taxes are deducted from state tax calculations.

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New Jersey wants to raise its highest marginal rate to about 11 percent; in theory, a New Jersey investor could owe $1.01 in taxes for every dollar earned.

The Sanders tax would bring in less tax revenue, not more. Suppose high income investors earned an additional $1,000. If the tax rate were 40 percent, they would pay $400 in taxes and have $600 to re-invest back into the economy. This new $600 investment would have a multiplying effect on total income earned in the economy because workers would be hired and equipment would be purchased. Assume a multiplier of 4; the total new income generated would be $2,400.

Additional tax revenue would be 40 percent of the $2,400, or $960. With the initial $400 tax, government’s total revenue would be $1,360.

If the marginal tax rate were 90 percent, the investor who earned an additional $1,000 would pay $900 in taxes and have only $100 to invest back into the economy. With a multiplier of 4, this would generate $400 in new income. Taxing this at 90 percent raises $360 in tax revenue, for a total of $1,260, less than the $1,360 in revenue generated by the lower tax rate.

Worse is the reduction in economic growth. Under the 40 percent tax rate, there would be total economic activity of $3,400; under the 90 percent rate, that falls to $1,400. Under the 90 percent rate, government revenues fall because the pie they come from is so much smaller. This means fewer jobs, lower personal income tax collections, more spending on social welfare programs for the unemployed, reductions in corporate profits that pay into retirement funds, and so on.

Sanders argues that the maximum tax rate in the 1950s was 90 percent and the economy grew faster than when tax rates were lower.

Yes, but …

In the 1930s, the economy imploded in the Great Depression. In the 40s, the economy boomed with the production of tanks, ships, planes and bombs—but not houses, cars, refrigerators and shoes. Consumer goods like tires, sugar and chocolate were in short supply.

By the 50s, a larger population flush with cash that it earned building war goods and that it couldn’t spend on consumer goods was ready to forget its privations of the last 15 years and buy. Houses, cars, refrigerators and clothes—it bought. It went on a consumption binge that lasted a generation.

There are two broad ways to produce goods: labor intensively, which means many workers are hired with little investment in capital goods, like machinery; and capital intensively, which means few workers hired and large investments in capital goods.

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In the 1950s, there were no robots and no computers. Most production was labor intensive. Automobiles, for instance, were built on assembly lines with workers putting the cars together. A capital shortage would have little impact on growth. Today, things are different.

The technology revolution means that most production, except in countries where labor is cheap, is done with large investments in capital goods. A modern automobile manufacturing plant is itself an enormously complex machine; it has few workers and an assembly line of robots. The result is better cars free from human production errors. The cars are produced at much lower cost than a labor intensive car plant could achieve.

Capital is more valuable now and more important than in the 1950s. Growth in the 1950s was fueled by huge pent-up demand, and it was satisfied by a huge pool of labor, not capital.

Everyone, even economists and politicians, knows that economic growth should be America’s top priority. Income re-distribution and attacks on “greedy” (economists would call them “rationally selfish”), successful business people who are the backbone of the American economy should not be a priority.

The anger in Sanders’ voice is almost scary. He wants to “get back” at those who have earned the most, simply because they have earned the most and others haven’t. For him, this isn’t about making life better and America stronger, but about revenge. He’d cut off his nose to spite his face.

A 90 percent tax rate at a time when the economy is trying to grow its way out of the Obama stagnation won’t “grow” the economy; it will kill it. If your goal is to get back at the successful for their success, that might be just the ticket. But it might be better just to hand Sanders a candlestick and let him run amok in the billiard room.

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  • Bill

    What a terribly reasoned article. Not only would no one owe $1.01 on every dollar earned “in theory”, it wouldn’t happen in practice either. Please make an attempt to understand how marginal taxes work before you wax economic theory. Your basic premises is wrong as are your conclusions.

  • AllMightySavior

    Good luck passing that bill through the snake pits of Congress.

    P.s. Sanders never said he would tax at 90%, just bad reporting by CNBC.

  • BernieSandersForPresident

    You have every reason to fear Bernie Sanders. He is the leader the American people have been waiting for to help us take back our country from the banksters and oligarchs. Ridicule him all you want…he will be haunting your dreams by Election Day.

    • tonylocke

      I will happily lay a cold $50 that the only Sanders mentioned the first week of next November is Colonel Sanders. This guy will be lucky to make all the debates. He’s a less serious version of Howard Dean.

  • Sam Osborne

    Independent Sen. Bernie Sanders has had the courage to go where no presidential candidate since the Great Depression has braved to go before—the West Branch, Iowa home town of Republican President Herbert Hoover.

    Sanders came here nine long summer and winter months before we Iowans hold our presidential causes. And though distant in time and with people having many things to think about in wrapping up spring, moving on into a long hot summer and not much caring to think of the cold of winter, they came out of their homes last week to rally with an Independent.

    Beyond it being remarkable that people showed up on a Friday night under rain-threatening skies was the size and makeup of the crowd. It was the largest and most engaged crowd in such a small place as this longtime Democrat political activist has ever seen and of a broad array of political sentiment I have ever rubbed shoulders with.

    In addition to usual Democratic Party suspects and progressive independents were young and old I would have thought might have been more at home in the other party. Given the motley fabric of those assembled it seemed fitting that the man voicing the common concerns and interests of those gathered with him is an Independent from the Yankee Northeast that caucuses with Democrats in Congress but does not toe any party line when it comes to fulfilling his responsibilities to serve what constitutes the interest of government of the people, by the people and for the people.

    This man Sanders is a leader for these times and I dedicate what capabilities as a citizenship that I can muster to join in securing Bernie Sanders the caucus nomination of my Iowa Democratic Party and election as presidential servant of the people of United States of America. In this I will work toward attending the Feb 1, 2016 Iowa caucus with any and all others for a victory by WE THE PEOPLE we can achieve together if we join together.

  • Spark

    And maybe you can write another truthful article on how trickle down economics will save the day! Bernie has my vote!

  • LoriS.

    Is this person serious? He sounds hysterical. Senator Sanders has no reason to get back at anybody for being monetarily successful. He is a successful man with a good living. He is living a full life and has many admirers. He just wants corporations and the wealthy to pay their fair share. If I use the author’s argument, any one that wants to eliminate/privatize social security just wants revenge at people for daring to get old. It is just a strange argument.

  • Toni Grossmann

    Oh my god. You are allowed to teach? When the government taxes peopke this money just disapears but is spent and invested too. So you could multiply it with 4 too. (And it is well known that the multiplier on government spending is acually higher then on private investment in an open economy, where you can invest in china easily, while the government mist sertainly is not going to build roads.) Even your undergrads would understand this.

    • JWPicht

      Whoa. You’re saying that government spending generates more economic activity and higher return than private investment? Where did you learn that? The “bridge to nowhere?” The F35? Corn ethanol? You’re claiming with a straight face that there’s a positive ROI on that stuff, or that it promotes economic growth? Some schools may be teaching magical thinking-hand money to consumers, and because GDP is 70 percent consumption, they’ll spend it and make the economy grow-but that’s a lot like the magical thinking that says, throw a brick through your grocer’s window and he’ll spend thousands on a new window, starting a wonderful cycle of spending and growth.

      If that’s what economists are teaching, they might as well festoon themselves with bones and feathers and scream and throw chicken blood at you.

  • debfa

    Anyone who says “90% tax rate” is a liar, plain and simple. A top marginal tax rate of 90% is not the same thing as taxing all income at 90%. I’m assuming the author knows that and is deliberately lying to mislead their audience, but I suppose they could just be an ignorant fool.

    By the way, guess what the top marginal tax rate was during the late 40’s and 50’s, that period of economic growth the author is celebrating in the article? 90-95%.

    In the field of psychology they’ve begun to study the minds of people who amass great wealth, and the conclusions are that while their happiness stays the same, their critical thinking skills and empathy for others take a nose dive. Meanwhile their brains exhibit all the signs of addiction, but with money as the object of obsession instead of drugs. This idea of a ‘capital shortage’ is the post-hoc rationalization of a junkie – one who already has more money than he can ever spend but has the shakes because he needs more, more, MORE!