This week on The Learning Curve, guest co-hosts University of Arkansas Prof. Albert Cheng and Mariam Memarsadeghi interview Stanford University senior fellow and biographer of Joseph Stalin, Dr. Stephen Kotkin. He explores Stalin’s origins, consolidation of power, and his Communist despotism. Kotkin delves into Stalin’s cunning political maneuvers, his complex relationships with other Soviet leaders like Lenin and Trotsky, and the devastating consequences of his regime, including the forced collectivization and mass starvation of millions. Additionally, Dr. Kotkin examines Stalin’s role as a wartime leader, his alliances with Western powers, and the far-reaching implications of the Nazi-Soviet pact. He shares a preview of the forthcoming third volume of his Stalin biography, offering insights into Stalin’s Soviet Union during the post-WWII era and the early years of the Cold War. In closing Dr. Kotkin reads a passage from his first volume, Stalin: Paradoxes of Power, 1878-1928.
Stories of the Week: Albert addressed an article from The Wall Street Journal discussing troubles with India’s education system; Mariam shared an article from Real Clear Education on Columbia University’s Rabbi’s message to Jewish students.
Guest:
Stephen Kotkin is a senior fellow at Stanford’s Freeman Spogli Institute for International Studies, and the Kleinheinz Senior Fellow at the Hoover Institution. He is also the Birkelund Professor in History and International Affairs emeritus at the Princeton School of Public and International Affairs, where he taught for 33 years. Dr. Kotkin’s books include Stalin: Waiting for Hitler, 1929–1941 (2017) and Stalin: Paradoxes of Power, 1878–1928 (2014), part of a planned three-volume history of Stalin’s power in Russia and the world. He has also authored Magnetic Mountain: Stalinism as a Civilization (1995); and a trilogy analyzing Communism’s demise, of which two volumes have appeared thus far: Armageddon Averted: The Soviet Collapse 1970–2000 (2001; rev. ed. 2008) and Uncivil Society: 1989 and the Implosion of the Communist Establishment (2009). Dr. Kotkin’s writing appears in Foreign Affairs, The Times Literary Supplement, and The Wall Street Journal, among other venues. He earned his B.A. in English from the University of Rochester and his M.A. and Ph.D. in History at the University of California-Berkeley.
Tweet of the Week:
https://x.com/educationnext/status/1782371326360985673?s=46&t=ABfrvSJ97fqBLKfOnxBuPw
Decision brings Massachusetts into compliance with 2023 U.S. Supreme Court ruling
SPRINGFIELD, MA –A Massachusetts Superior Court has ruled that a state law allowing municipalities (or private actors to whom municipalities sell the right to foreclose) to foreclose on homes due to property tax debt without having to pay the homeowner the difference between the taxes owed and the value of the home is unconstitutional as applied to the facts of the case at hand.
Ashley Mills was on the verge of losing her fully paid for Springfield home worth around $230,000 due to a $22,000 property tax debt. On Mills behalf, the Pioneer Public Interest Law Center, Greater Boston Legal Services, and the law firms of Morgan Lewis and Greenberg Traurig successfully challenged the law, known as Chapter 60, that would have allowed Springfield to keep the more than $200,000 difference between the home’s fair market value and the taxes owed.
The ruling by Springfield Superior Court Judge Michael Callan comes after the U.S. Supreme Court unanimously ruled last year in Tyler v. Hennepin County that a Minnesota statute substantially similar to the Commonwealth’s “equity theft” law was unconstitutional because it denied reasonable compensation to a homeowner for the taking of her property.
“We see many low-income or elderly homeowners who, having long ago paid off their mortgages, fall behind in their taxes,” said Catherine Kay of Community Legal Aid, who represents Ashley Mills in the Land Court tax lien foreclosure that led to this action. “Suddenly they face losing their homes and all the equity they built over the years. “Not only does the statute deprive these homeowners of their hard-earned equity, but it does so without adequate notice and hearing rights.”
“This is primarily a legislative issue,” said Attorney Todd Kaplan of Greater Boston Legal Services. “Judge Callan properly called upon the Legislature to take action to correct the injustice of Chapter 60.”
Mills, 26, lives with her two-year-old son and disabled mother in the home she inherited from her grandmother that is her only financial asset. If it is foreclosed on and she doesn’t receive the more than $200,000 of remaining equity after the tax debt is satisfied, Ashley, her toddler, and her disabled mother are at risk of becoming homeless even though they have an asset worth hundreds of thousands of dollars.
In 2016, Mills was unable to pay $1,636.70 in property taxes she owed. Over the next three years, she entered into payment agreements with the city, but was unable to catch up, largely due to a punitive 16 percent interest rate and other charges imposed by Springfield under Chapter 60. The City of Springfield filed a motion for judgment of foreclosure in May 2023.
“In Tyler, the Supreme Court sent a clear message that any surplus beyond the tax debt should be returned to the homeowner,” said Pioneer Public Interest Law Center President Frank Bailey. “Massachusetts is one of a minority of states that has a law like Minnesota’s, and the Supreme Court’s ruling makes it clear that such laws are unconstitutional and therefore unenforceable. Cities and towns are on notice that using Chapter 60 in this predatory manner violates fundamental rights under the federal and state constitutions.”
In a timely and well-reasoned opinion, the Hampden Superior Court found Chapter 60 unconstitutional. Both owners of real estate and municipalities were in need of such a definitive ruling by a Massachusetts court. Now the state Legislature must act to address the constitutional infirmities in Chapter 60.
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Community Legal Aid (CLA) provides free civil services to the low-income and elderly residents of the counties of Western and Central Massachusetts (Berkshire, Franklin, Hampden, Hampshire, and Worcester, and maintains offices in Worcester, Fitchburg, Springfield, Northampton and Pittsfield. CLA works to assure fairness for all in the justice system, protecting homes, livelihoods, heal and families. For more information, please visit www.communitylegal.org.
Greater Boston Legal Services (GBLS): GBLS assists survivors of domestic violence, homeless families, elders, people with disabilities, homeowners facing foreclosure, tenants facing eviction, low-wage workers, families with no source of income, and immigrants facing persecution. Annually, GBLS provides legal assistance to more than 10,000 families and individuals who live at or below 125% of the federal poverty standard. GBLS also provides legal counsel to dozens of community-based groups and organizations and conducts strategic impact advocacy to bring about positive systematic change throughout the region and state. For more information, please visit www.gbls.org.
Pioneer Public Interest Law Center (PPILC) is a nonprofit, nonpartisan legal research and litigation entity, organized under Section 501(c)(3) of the Internal Revenue Code. PPILC is a public-interest law firm that defends and promotes educational options, accountable government and economic opportunity across the Northeast and around the country. Through legal action and public education, PPILC works to preserve and enhance liberties grounded in the constitutions and civil rights laws of the United States and the individual New England states.
Click here to read a transcript
[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. On April 15th, we commemorated the 111th anniversary of our federal income tax, which the 16th Amendment instantiated into the U. S. Constitution in 1913. Since then, the top marginal rate has swung dramatically from a modest 7 percent at its inception to a staggering 94 percent post World War II, eventually settling at 37 percent today.
[00:00:33] What’s intriguing isn’t just this wide range of rates, but the rather consistent 16 19 percent range of total GDP revenue collected by the government throughout. What’s even more perplexing is that periods of robust GDP growth, notably in the 1950s and 60s, coincided with sky-high top marginal rates.
[00:00:54] Providing fodder for contemporary proponents of higher taxes to argue that high rates don’t impede growth. However, delving into history reveals that as tax rates climbed, so did efforts to legally evade them through tax-avoiding compensation strategies. These incentives led to an era of corporate indulgence, marked by lavish non-income perks like luxurious office spaces, company-funded vacations, and leisurely three-martini lunches.
[00:01:22] All untaxed incentives. Fostering a thriving economy. How should policymakers interpret this historical puzzle where tax rates seemingly bear little correlation to revenue collected? What dynamics undermine the taxman’s pursuit of higher yields, often resulting in diminished returns? My guest today is Dr. Brian Domitrovic, the Richard S. Strong Scholar at the Laffer Center, and co-author of Taxes Have Consequences, An Income Tax History of the United States. Dr. Dimitrovic’s expertise lies in dissecting how U. S. tax policies intersect with business responses, uncovering why lofty marginal rates fail to boost revenue, and how tax avoidance endeavors ultimately impoverish all economic players.
[00:02:10] Our conversation will delve into past attempts to enhance tax revenue and their implications for contemporary policymakers contemplating rate hikes. When I return, I’ll be joined by economic historian and scholar, Dr. Brian Dimitrovic. Okay, we’re back. This is Hubwonk. I’m Joe Selvaggi, and I’m now pleased to be joined by Dr. Brian Dimitrovic, the Richard S. Strong Scholar at the Laffer Center and co-author of Taxes Have Consequences, An Income Tax History of the United States. Welcome to Hubwonk, Brian.
[00:02:42] Brian Domitrovic: Joe, it’s really great to be here.
[00:02:44] Joe Selvaggi: Well, I’d love to have you here. it was interesting. your Taxes Have Consequences book was recommended to me, and I started reading it, maybe because it was, we were approaching tax day, and on that same exact tax day, I saw your article in Law and Liberty, talking about, historical, tax rates.
[00:02:59] So I thought this was the universe’s way of telling me, you have to be on the podcast. So welcome. Before we get started in our conversation about Taxes Have Consequences, I want our listeners to learn a little bit about your background. You have both your undergrad and your Ph.D from Harvard, and you are a historian.
[00:03:17] What is your expertise in history? What’s your focus?
[00:03:20] Brian Domitrovic: Sure, yeah, my undergrad degree is from Columbia. I was a history major. Oh, I’m sorry. Yeah, and I got my Ph. D. in history, at Harvard, where I also did work in the economics department, so I’ve studied my whole career. Since the 2000s and 90s, has been setting the supply-side tradition in economic, intellectual history, and in policy history.
[00:03:38] Joe Selvaggi: Okay, wonderful. I want to unpack some of the themes in your book, your recent article, and talk at a very high level, about the history of the U. S. income tax. I think we’re just a little bit beyond or about 110 years ago, the 16th Amendment. It was something that was intended, for the highest earners, but now, as your article suggests, doing our taxes on April 15th.
[00:03:59] It’s something all of us as Americans get to do and dread. How do we get from, it being unconstitutional to now where everybody has to wrestle with the same problem every April 15th?
[00:04:09] Brian Domitrovic: For the first 125 years of American history, constitutional history, there was no income tax to speak of. There was a provision for an income tax in the original constitution of 1789, but it had to be collected so that each state yielded as much revenue as they had population in the country.
[00:04:25] So it was proportional to a state’s population. They only imposed it a couple of times. so it was the 16th Amendment that passed in March 1913 that gave Congress, the power to establish income tax, which it did the following October in 1913. So, yeah, we’ve only had an income tax for 100, 111 years now the top rate initially was 7%. The exemption is equivalent today of about 100, 000, so you had to make 100,000 even to pay 1 percent income tax at the margin, and the rates went up after that, but the first income tax had a top rate of 7%.
[00:05:05] Joe Selvaggi: Okay, so in the beginning, tax rates were relatively low and imposed only on the wealthiest, but we’ve had in the interim 111 years, a couple of, world wars, we’ve had a depression, we’ve looking back, now, you said it went from seven percent to much, much higher.
[00:05:20] Seems like, from your book, tax rates have fluctuated wildly. has the money that the government has collected in those taxes, again, they’ve gone over, all over the place, fluctuated as wildly as tax rates themselves?
[00:05:33] Brian Domitrovic: Yeah, Jim, not at all. the total tax take, say, as a percent of GDP has been remarkably stable at about 15, 17 percent ever since income taxes essentially became mandatory for everybody in the 1940s during World War II, so it doesn’t matter what the marginal tax structure is the federal tax take will 16 to 20 percent of GDP. That’s known as Hauser’s Law. In economics, and Alan Reynolds is a great supply center from the 70s and 80s. he has Reynolds law, which is no matter what the income tax rates are, income tax revenues will always be the same, about eight or nine percent of GDP.
[00:06:08] So both of those theories suggest strongly, well, why not just have low rates? If you’re going to get the same amount of money, no matter what.
[00:06:16] Joe Selvaggi: Good. This concept, I want to spend our conversation drilling down on why it seems that regardless of rates, the government receives the same amount of money.
[00:06:24] It seems counterintuitive. I want to point then to your most recent work. I think it came out in Law and Liberty on April 15th. your article, addresses directly this idea, this nostalgia we have for the past, particularly amongst progressives, that we used to have a remarkably high tax rate.
[00:06:39] I think specifically it got as high as 94 percent. That meant the government only gave you six cents out of every dollar you earned. this is in the post-war period. And the same people who point to that say, at that time, the economy was booming. Ergo, it seems there’s no relationship between high tax rates and a healthy economy.
[00:06:59] What’s wrong with this interpretation of high tax rates and a booming economy? What do those historians get wrong?
[00:07:07] Brian Domitrovic: Yeah, I’ll accept the basic correlation. So, let’s say, that from 1954 to 1963, the top marginal tax rate was 91%, the lowest. The tax rate in the income tax structure was 20%. The corporate tax rate virtually for all companies was 52%.
[00:07:24] So, yeah, you have a, 91 percent marginal income tax. You have a 52 percent corporate tax. And the economy is booming, right? It’s post-war prosperity in the 50s and 60s. I’ll accept that correlation. You can quibble. You can say, well, there were three recessions during the Eisenhower presidency. it was impossible for additional family members to enter the workforce if they were filing on the same tax return, hence the collapse in women’s employment.
[00:07:50] you can make all those kinds of arguments, but I’ll just concede it. There’s post-war prosperity. Okay, fine. The problem with the published rates, and this was discussed ad nauseum in the 50s, is that the published rates were inapplicable. So, there has to be some kind of minimum willingness on the part of the government, if it has high tax rates, to collect at high tax rates if we say there were high tax rates and we had prosperity.
[00:08:15] Did the government collect at those high tax rates? Not in the least. So, it’s not functionally correct to say that we had high tax rates, because we didn’t, in that they were not applicable. The federal tax take was 16 percent even though income tax rates began at 20 percent and were only higher after that even though the corporate rate effectively for everybody was 52%.
[00:08:34] So there has to be a minimum willingness of the federal government to enforce those rates to say we actually had them.
[00:08:41] Joe Selvaggi: So I want to drill down a little bit further then. So again, we’re going back to our original idea that even at 91%, you said, was the top rate, the government was taking in just about the same amount of money.
[00:08:51] So how do you reconcile, let’s say a revenue collection remaining constant despite an enormously high, on-the-books tax rate? You say the unwillingness to collect is, how is that manifest? Is it in deductions or how is it that they could ask for 91 and only get what they got?
[00:09:08] Brian Domitrovic: Yeah, this was a paradox everybody had a lot of fun with. the law professor, Stanley Suri, at Harvard Law School had a lot of fun with it. They called it paper rates, and another WAG noted in congressional testimony, that we have to stop this, dipping into high incomes with a sieve.
[00:09:24] yeah, it’s just, everyone, well known. So they had these high published rates, and it became apparent as soon as World War II was over, basically, a couple of days before V Day, even, Congress understood that in peacetime, the jack rates way up in the Depression and certainly in World War II, and as soon as September 1945, Congress is well aware, the American public is not going to tolerate These rates anymore.
[00:09:50] It did for patriotic reasons during World War II. The moment the war is over, the public will not tolerate it. So they’re just immediately developed all sorts of expedience not to pay at those rates. Now, Congress could have just cut the tax rates. It did do that. Revenue Acts of 1945 and 1948 were very substantial cuts in tax rates but the main mechanism that Congress provided was they kept the rate structure and then introduced an absolute slew of legal tax avoidance opportunities. They took one of two general forms, either explicit deductions from income that you reported to the IRS or large categories of income that didn’t even have to be reported to the IRS.
[00:10:30] Joe Selvaggi: So, all right, and adjacent to this article or this, relationship between rates or lack of relationship between rates and revenue collected was also the assertion, again, those people who are nostalgic for higher rates, They assert that the income inequality, which seems to be the buzzword of policymakers these days, that income inequality is bad, and that high tax rates are effectively brought tax, the highest earners and the lowest earners closer together.
[00:10:59] Is it the fact that they were actually, the revenue was, their income was going to taxes or was it going somewhere else? In other words, was it that their income was being taken away or rather their income was being less likely to be reported?
[00:11:12] Brian Domitrovic: Yeah, I don’t think the income inequality literature from the left tells us that at all, anything about the question you just posed, because the income inequality literature, Piketty, Zuckman, Saez, Sancheva, all those people, they, they all talk about pre-tax income.
[00:11:27] that’s their bread and butter. That’s their main measure, pre-tax income. So that tells us nothing about what taxes are paid. So we adopt all of their data with some of the adjustments from Phil Magnus and everyone else. But what we say is, well, if you look at pre-tax income, when tax rates are high, of course, it’s going to plummet.
[00:11:46] I mean, if the, if you have a progressive tax system and tax rates are, go from 7 to 91%, the rich are going to report way less income under a high tax regime. As the cost of reporting income goes up, You produce less of it. As the costs of reporting income go down, you produce more of it. What does that tell us about real income?
[00:12:05] Nothing. But it does tell us about reported income. So pre-tax reported income in high tax eras, as all economic relationships would indicate, goes way down. But that leaves open the question of what real income is. And the deduction culture of the 1950s and 60s indicates that real income was still quite gigantic.
[00:12:24] Joe Selvaggi: So, again, I want to drill down a little bit more on this, so we say, okay, if income gets taxed and therefore we want to have less income, executives, and professionals want to get compensated, so, we, we’ve got a culture where if you report as income, the government takes it away, if you give it in some other form, it doesn’t take it away, you, you compared it essentially to like, in your article or in your piece, recent piece, that we had a culture that evolved around this sort of tax avoidance, almost like the iconic, Madman, culture, or the three-martini lunch at the Fabulous Club, all as a sort of response to taxing income.
[00:12:59] This was a way to circumvent that income tax by compensating people in different ways. Say more about that.
[00:13:05] Brian Domitrovic: Sure. Yeah, Joe, you know from my article, you are, running a risk here and having me sing to you because I was quoting songs. We talk about this golden era of income inequality. Well, one of the pop hits of that time, Steve Allen, Steve Lawrence, and Edie Gourmet’s song, This Could Be the Start of Something, written by Steve Allen of Tonight Show fame. It’s good pop music. You rarely see a song so extolling of the elites and not the little guy. The song, This Could Be the Start of Something Big, talks about how you’re dining at Sardi’s, and you’re lunching at 21, you’re up in an airplane, or lying in Malibu. These are all rich people’s endeavors.
[00:13:45] And this is a popular song that was on the Billboard charts. So what’s this about, this is a golden era of income inequality. These are young, affluent people celebrating being just that, and there’s a line in that song that says while doing your income tax or buying a toothbrush, just indicating that the kind of up and coming, rising people, number one, were celebrating how high on the hog they were living, and when they were dining at Sardi’s or lunching at 21, declining a Charlotte Russe dessert, they were all totting that up on the deduction tableau. Virtually all business consumption, including lunch, three martinis, lunch, everything. We put it in the book, Tom Wolfe’s descriptions of the Midtown Manhattan lunches in the 50s and early 60s from 12:30 to 3pm, right? As he says, they were like something out of a dream. You really need to know French in order to pronounce everything they were ordering.
[00:14:40] It’s not just that these things were all deductible as intermediate expenses because they’re business expenses. They’re deductible against a 91 percent tax rate. Okay, that’s very valuable. You’d have to pay them with your four, with your nine bucks if it weren’t deductible. No, it’s deductible.
[00:14:56] You don’t have to pay taxes on that expenditure. It’s more than that. It’s that those expenses were also, furthermore, deductible from the corporate tax return, which meant that the government was picking up half the bill, because the corporate rate was 52%. So there was a double deduction. And I think income inequality misses this stuff, literature misses this stuff completely.
[00:15:17] We have the quotation in the piece that I wrote from Piketty, Saez, and Stancheva saying that all this stuff is anecdotal. We have anecdotal evidence of deductions in 1960, and the anecdotal evidence says they were small. Well, what I argue is that statement on the part of Stancheva is itself sufficient to show that those economists have not studied this era.
[00:15:39] If you look at circa 1960 tax culture and say, all we have is anecdotal evidence, you haven’t even begun to look at that period. Because the evidence is essentially Mount Everest of how much the tax deduction culture was in 1960. You can’t look at that period without getting overwhelmed, white out overwhelmed, with tax deductions.
[00:15:59] So if they just say, hey, we haven’t really picked up any evidence of tax deduction of the periods, it’s tantamount to saying they haven’t even studied the period. So I just throw out all of their literature. They just haven’t studied it.
[00:16:09] Joe Selvaggi: Indeed. So again, we could talk about the lavish lunches, but also I think a legacy of high tax rates, or you, actually, I guess it was, income control, we, employers compensated, employees with health insurance, being tied to, their wage, meaning they could give them lavish health plans rather than taxed income.
[00:16:28] I think we still live without the distortions of employee-based income control. Health insurance to this day, would you characterize that as a sort of a legacy of a high tax regime?
[00:16:38] Brian Domitrovic: Yeah, the health insurance came about specifically in World War II when wages were under control, so unions, workers weren’t allowed to ask for, weren’t allowed to get higher wages in World War II because of wage-price controls.
[00:16:49] And so unions came up with the idea of income benefits that were not technically wages. And so workers during World War II took their raises in the form of health insurance benefits at that time, as opposed to increases in wages. And then this became because they were so valuable against the tax code, they were deductible against health insurance benefits are deductible.
[00:17:09] Employee compensation is deductible to the corporation. So that means deductible against a 52 percent corporate rate. The government pays half the bill. And they’re untaxable to the recipient. So in other words, there’s the double tax deduction again. So you see this proliferation, and that’s just one. pensions were actually, an even greater example in that both the contributions and the lump sum distributions were We’re tax free.
[00:17:33] So that was gigantic. We have a similar to today in the 401k world. It’s funny how retirement savings can’t get out of the deduction trap. When you have high tax rates, you always have these kind of retirement plans. Cash value life insurance was the same thing in the 50s. It was the equivalent of a 401k.
[00:17:51] So we don’t have cash value life insurance anymore because we have 401k, but your contributions were all taxable. tax deductible, your appreciation was not taxed, and then when you received the lump sum, it was not taxed. So, this ends up amounting to, 20 percent of GDP in total. And so the idea that we look at pre-tax income and come up with income inequality charges is just a losing enterprise.
[00:18:13] Joe Selvaggi: Right. And then, of course, what it does is generate this sort of spy versus spy where the government tries to tax and business tries to frustrate that attempt and comes up with creative alternatives, probably hand in glove with the cooperation of legislators who they may have influence over.
[00:18:27] Brian Domitrovic: So, that point. Since I conceded post-war prosperity, I’m not even going to concede the government tried to tax it. There has to be a certain minimum of effort that proves that you’re trying. And, if the tax rates are 20 to 91 percent and 52 percent and you’re collecting 16, you’re not trying.
[00:18:45] So, and that’s consistent with post-war prosperity. If the government tried at all to collect on those tax rates, there would not have been post-war prosperity.
[00:18:53] Joe Selvaggi: Let’s shift our argument from, let’s say, a historical perspective to just a common, understanding of taxes. Again, you as an expert in taxation and the history of taxation, the spirit of taxation, I think, for many of our listeners would be, at the end of the day, we have prosperous, high-earning, Americans and, let’s say, less fortunate Americans.
[00:19:11] The idea that taxation might also serve the purpose of not just paying for wars, but Redistributive, right? We want to, in a sense, like Robin Hood, take from the rich and give to the poor in some fair, agreeable way. You, particularly in the book you wrote with Dr. Art Laffer, suggest that when we try to redistribute wealth, that is take money from the wealthy and give it to the needy, we have a double effect of, in a sense, discouraging production.
[00:19:40] On those we tax and discourage production on those we give benefits to. Elaborate a little bit on how this, noble effort to redistribute wealth might get frustrated by reality.
[00:19:52] Brian Domitrovic: Yeah, Arthur Laffer talks about this, the so-called transfer problem, which he learned at the feet of Robert 60s.
[00:19:58] And it comes from the Slutsky equation. I will add just preliminarily, I don’t consider it a noble effort whatsoever. I consider it nefarious. it’s, very clear that rich people in American history, 19th century, whatever industrial revolution, when they’re not taxed, they do things like create millions of jobs.
[00:20:16] So that’s like an immense benefit to the lower classes. so if you throw sand in those gears, you’re not doing, you’re not doing any kind of noble work, but, by raising taxes on the rich, you’re just going to diminish job creation and opportunity and production. So yeah, Arthur Labrador’s argument is, well, if you impose a tax to distribute, in welfare, well, the tax on the producers leads them to produce less.
[00:20:40] And then when you give stuff, Give resources away in welfare. Those, recipients don’t want to work because they just receive money. Robert Mundell outlined this argument very famously in the 1960s. One of the reasons he won the Nobel Prize. So, in technical economics jargon, the substitution effects accumulate.
[00:21:01] These are not counteracting forces. They’re both bad. It’s a double negative. If you tax the rich and give to the poor, the rich produce less, the poor produce less. There’s less overall output. The economy gets worse.
[00:21:13] Joe Selvaggi: Yeah, it seems counterintuitive to think that progressive tax rates, again, I just share with my friends, just over a beer one time, you think, okay, we have wage rules that require you to pay time and a half overtime, which is to say, if you’re asked to work more than your 40 hours, you better compensate me a lot.
[00:21:34] 150% of my wage for that 41st hour, I need to be paid more to work more. Progressive tax logic seems to work in the opposite, that the more you work, the more money you earn, the less you keep. It does seem to be, if not explicitly, it will have the effect of discouraging the next marginal, propensity to produce.
[00:21:54] Is it that simple?
[00:21:55] Brian Domitrovic: It is that simple. Now, what we know now from the high tax rate era, however, is what the subject of our talk today, or our podcast, is. Is that, yes, high tax rates will be very discouraging of production from the most productive people. That’s the interesting thing. Like, the top 1 percent is by definition the most productive because every time they do something, they make a ton of money.
[00:22:15] So if we did have high tax rates in the 50s and 60s or whenever. we wouldn’t have had post-war prosperity because there must have been some secret. You can’t have a 91 percent tax rate and the economy actually being productive. So, therefore, we didn’t have a 91 percent tax rate. And sure enough, we did not, because you look at the federal tax rate at 16%.
[00:22:33] So everything about our history, including the high tax era, shows resoundingly that high tax rates that are de facto correct, real, will kill the economy.
[00:22:46] Joe Selvaggi: Well, this is a great segue for me to just introduce an idea that we could spend, again, a whole separate podcast about is, the infamous, and I hope for our listeners they’re familiar with the idea of the Laffer Curve, and we’re talking around this idea, which is to say, the government needs money and wants to impose some, a level of tax.
[00:23:02] As it raises taxes, it gets more money from a tax base, but at some point, The tax is large enough that it changes the behavior of the tax base. In other words, you and I are talking about the high tax rates, in the 50s and 60s that cause people to compensate their employees differently, and not in the form of income, in the form of something else.
[00:23:22] So, there’s always a reaction, perhaps an unintended reaction, as tax rates increase. The total revenue coming to the government seems to decrease gradually and then ultimately reverse. Share with our listeners from a historical economist perspective, why does the Laffer Curve obtain, let’s say, in the 50s, 60s, and perhaps even today?
[00:23:43] Brian Domitrovic: Sure, yeah, Laffer Curve, Arthur Laffer probably first drew it on a napkin, famously, on, updated as December 6th, 1974, the long-term, bottom of the Dow Transdestrial Average, as it turns out, to the second. and yeah, he says that it’s a simple relationship, says, when you increase tax rates, revenue increases to a certain point, and then as you increase tax rates, revenue goes down.
[00:24:06] Same thing with tax cuts. You can cut taxes and increase revenues, and then cut taxes and lower revenues. And there’s a normal relationship when things respond as you would expect. Thank you. Raise taxes, increase revenue, lower taxes, less revenue. That’s the normal section of the curve. And the prohibitive range is when you get the opposite effects.
[00:24:25] Yeah, we knew this in the 50s and 60s. when you had tax rates lowered from 91 to 70 percent as John F. Kennedy took care of in 1964. the rates that are Revenue from the top earners, from those earning over 100,000, say a million dollars today, in today’s terms, the revenues from that cohort just soared.
[00:24:46] So, yeah, whenever you made the, whenever you lowered the statutory tax rates when they were very high, you found out immediately that we had been in the prohibitive range. Same thing with Ronald Reagan. Ronald Reagan walked into the office and cut the marginal tax rate from 70 to 50 percent and all of a sudden revenue from the top, that’s a tippy top cohort, just goes way up.
[00:25:06] So yeah, that’s the Laffer curve and it’s, it’s been proven time and again.
[00:25:09] Joe Selvaggi: Would this, logic,pertain to even, let’s say, state, income tax? I’m here in Massachusetts. we have, a flat 5%, until very recently we imposed a, what they call a millionaire’s tax, a, surcharge on income over a million dollars of 4%.
[00:25:21] Yeah. I can see, and we made the argument on this podcast that such, tax rates would encourage high earners to leave or change their behavior such that they don’t pay that tax. How is it that would even apply in the U. S.? if we could take a serious effort to reduce all these creative ways of avoiding income tax, that is, get rid of all these deductions, and actually impose a higher tax, what choice would Americans have other than to pay it?
[00:25:45] What are they going to do about it?
[00:25:48] Brian Domitrovic: Yeah, if you don’t mind, I’m going to take the opportunity to talk about what’s going on in Massachusetts. I think Massachusetts is over. I think that the income tax surcharge will kill it. I noticed that I never travel to Massachusetts anymore. I’m always invited.
[00:26:04] I always travel to Texas, to Florida. Places with no income tax. That’s just, a kind of natural movement of capital. I think Massachusetts has completely misunderstood what has been responsible for its prosperity for the last 50 years. It is almost exclusively due to Proposition 2.5, which limited property tax growth to 2.5 percent as of 1980. So, property owned in Massachusetts has just been a wonderful investment. It enabled the state to cut its income tax rates in the 80s and 90s. And that’s why we had a Massachusetts miracle. It’s why we had a Dukakis candidacy, all that stuff. If Massachusetts doesn’t understand that and raises its, or doubles its marginal income tax, there is no chance it will ever attract capital again.
[00:26:47] I don’t care about Harvard, I don’t care about the Athens of America, I don’t care about its high-tech tradition, I don’t care about Yankee ingenuity. There will be a complete capital departure from Massachusetts, and I think it’s starting right now. Why can’t the government just impose tax rates?
[00:27:01] Well, there’s no record that it can’t. So, when it imposed 20 91 percent tax rates, what happened? Nobody paid them. when it imposed a 52 percent corporate tax rate, what happened? Nobody paid for it. So, there’s no evidence that high tax rates ever collected, ever are effective. So, I don’t have any problem saying that there’s no reason to explain it.
[00:27:20] It just never works.
[00:27:22] Joe Selvaggi: Yes, indeed. Again, like, I think we somehow intuitively understand that. But, of course, there are those who would say our progressive, intuition here in Massachusetts is because we’re wealthy and educated. I think that gets the causation backward, where you’re
[00:27:37] Brian Domitrovic: Yes.
[00:27:38] Wealthy and educated, with Proposition 2. 5. Without Proposition 2. 5, wealthy and educated, would have resulted in zero in negative economic growth since 1980.
[00:27:46] Joe Selvaggi: All right, let’s let me get back to this idea that tax rates equals tax revenue. It seems that, at least, as you mentioned, people, our progressive friends say, the way to raise revenue is to increase taxes.
[00:27:59] From a historical perspective, what you’re saying is Higher tax rates rarely, if ever, lead to more revenue and in fact, over time, particularly with the right to vote with their feet, someplace like Massachusetts, ultimately, as more and more people leave, or as you suggest, fewer and fewer people come with their dollars and investment dollars, ultimately, higher taxes may result, or inevitably will result, in lower net revenue. Is that what I’m saying?
[00:28:27] Brian Domitrovic: We don’t have to look, just look at anywhere where there’s tax increases, permanent tax rate increases, and they immediately become long-term bust areas. I’m going to list the following states that started from scratch in income tax between 1960 and 1990.
[00:28:45] New Jersey, Pennsylvania, Michigan, West Virginia, Ohio, Indiana, Illinois. yeah, you just said, right, you just named the Rust Belt. Yeah, I did. Those are the states that started an income tax in the 60s and 70s. Right, so investments, investors just said goodbye. And because investors say goodbye, there are no more jobs, and that’s the Rust Belt.
[00:29:04] Since then, all those states have increased their property taxes big time because their income tax not only failed to produce revenue, it also drove away all the business. So, yeah, just, that’s just the story of, taxation. If you want to have high taxes, people won’t live there. And the idea that the government can outsmart people on taxes is ludicrous.
[00:29:21] People deal with their own personal circumstances as a natural matter of course. They’re the master of that domain. You impose a tax on it, they’ll just master it because they’re in charge of their own affairs. Yeah, there are no examples of successful tax increases.
[00:29:38] Joe Selvaggi: And I think something that, I’ll call it reading between the lines.
[00:29:41] In the process of avoiding taxes, which is natural, I think all of our listeners try to minimize their taxes. I don’t say they would try to cheat on their taxes, but rather tax minimization is a normal thing we all, I hope, consider. all these schemes, whether it’s at a firm level or an individual level, if I choose to pick up, pull up stakes, and move to Florida, that’s very, cumbersome and disruptive to my life, but I might do it if I’m earning enough.
[00:30:07] But doesn’t that also, reading between the lines, Doesn’t that also have a negative effect? If I’m spending my life, because taxes are so high, trying to avoid taxes, I’m making choices that are not good for me to maximize revenue, or good for my business to maximize, productivity, but rather, minimizing taxes is fundamentally, or the attempt to minimize taxes is fundamentally counterproductive.
[00:30:27] You’re minimizing tax payment. You’re not minimizing, you’re not optimizing production
[00:30:33] Brian Domitrovic: output, right? Absolutely. Just the ascertainable costs of income tax compliance are at least half a trillion dollars a year. And those are the actual ascertainable costs, like how much you have to pay accountants and all that stuff.
[00:30:48] But in terms of substituted behavior and deadweight losses in terms of wasting time doing this stuff, it’s incalculable. So, yeah, if you have an aggressive tax administration. You couple that with native human ingenuity to pursue legal tax avoidance and even illegal tax evasion, you’re just going to have deadweight losses galore.
[00:31:10] So, that’s why I say when I look at the 50s And I see, post-war prosperity. I know the federal government has no vigor in enforcing those tax rates because if it did try to match those tax rates with vigorous collection, the economy would have collapsed.
[00:31:25] Joe Selvaggi: Indeed, and of course, it would have collapsed, but instead it incentivizes some, I would say not necessarily productive activities.
[00:31:32] In other words, yes, uh, the economy thrived because there wasn’t really a high effective tax rate, but so did lunch clubs and martini makers. they thrived, but that’s not, that didn’t contribute to efficiency. Once those, the tax rates came down, I think that I don’t know if it was in your book or in something else I read by you that said, once we took tax rates down to, let’s say, normal levels or reasonable levels, people stopped getting expense accounts, and the madman three martini lunch went away, and everybody got a ham sandwich and a Sprite for lunch.
[00:32:02] So all the, let’s say, negative, or counterproductive activities, like three martini’s lunch, went away, and effectively, lower tax rates generated more efficient business behavior. Is that a
[00:32:13] Brian Domitrovic: question? Yeah, you got that from us. We were quoting Tom Wolfe’s famous piece in Esquire about the founding of Intel for that.
[00:32:19] The lunch sandwiches and Sprite on a sawhorse in Silicon Valley instead of, yeah, that’s Tom Wolfe again. So, yeah, no, there’s a deadweight loss. There’s no question about it. But when there really is no enforcement of the paper rates, the amount of the deadweight loss is small.
[00:32:34] but I do think this point is absolutely essential for understanding the dynamics of modern American economic history. This whole thing about a corporate job and a job for life were all in-kind forms of compensation because the tax rates taxed cash compensation. So when you worked in a fancy lab or a corporate park or had art on the wall in your office, All those things of the mid-century, those were forms of compensation that were not taxed to the recipient and were tax deductible against a 52 percent rate to the employer.
[00:33:06] When tax rates went down in the 1980s, you had those massive corporate layoffs. you’re talking, things like Motorola was laying off 10,000 people a year in the early 1980s, in the 1980s, Goodyear, all these companies. you just have incredible corporate layoffs. And yet there’s 18 million job growth in the 1980s.
[00:33:23] 40 million from 1980 to 1990, even as the Fortune 500 just sheds employees like crazy. Yeah, because when you lower the corporate rate from 52 to 34, and you lower the marginal rate from 91 to 28, You just completely change the fundamental structure of how business is organized towards entrepreneurialism and, non-write-offs.
[00:33:43] Yeah, that’s a more efficient way, but you had this wrenching 20 years in which you had to make the transition. And the shame of the 2000s is that we never then just glided into smooth growth. We had nonmarginal tax cuts under George W. Bush, which were bad. And then, Obama just consolidated the George W. Bush tax structure. So, we should have had a 21st century of just extraordinary economic growth.
[00:34:07] Joe Selvaggi: So, we’re getting close to the end of our time together, so I don’t like to have a show all about criticism, you’re a historian, but I suspect you, you do have an inclination towards looking to the future, I don’t think that’s a betrayal of your expertise.
[00:34:19] Given what you know about the future and the relationship between, say, tax rates and productivity and the well-being of everyone, rich and poor, what would you imagine as, let’s say, an optimal, tax structure whereby we encourage Rich and poor to go to work and be productive. we want to have, an efficient, productive, prosperous economy.
[00:34:40] What kind of a tax structure, based on your view of history, cultivates the optimal level of prosperity?
[00:34:46] Brian Domitrovic: yeah, if the tax take is 17%, when it’s 17 percent or 13 percent as Arthur Laffer says, flat tax rate, and then you would have no deductions and you just have the most efficient system.
[00:34:57] So, practically, that’s probably what I’d say. But ultimately, I’d say this. If the American economy and currency are leading the world, the United States has no grounds for having a tax system whatsoever.
[00:35:08] Joe Selvaggi: Interesting. That’s quite a bold assertion at the end of a show. That would be a different podcast and maybe I’ll circle back with you.
[00:35:16] Thank you very much for joining today. Where can our, you sent me along, your website, which is a collection of your essays, and a link to your book. Where can our listeners learn more about your work? The work of the Laffer Institute, is it? Laffer Center. The Laffer Center. Where can, if we’ve, piqued their interest, whet their appetite for supply-side economics, where can our listeners, read more about it?
[00:35:38] Brian Domitrovic: Yeah, so the Laffer Center. org is our website here at the Laffer Center, and I have my own personal website called globalmonetarism.com, and supply-side economics was first called global monetarism back in the 70s, so that’s why I use that term.
[00:35:51] Joe Selvaggi: Well, good. I’m good. I’ve learned a lot today, and I’m going to continue to dig into Your work, past and present, I’m fascinated by all of it.
[00:35:58] I really appreciate your time joining me today on the podcast, in this week of taxes, where it’s top of mind for everyone. I appreciate you joining me today. Thanks, Joe. It was great. This has been another episode of Hubwonk. If you enjoyed today’s show, there are several ways to support Hubwonk and Pioneer Institute.
[00:36:16] It would be easier for you and better for us if you subscribed to Hubwonk on your iTunes Podcatcher. It would make it easier for others to find Hubwonk if you offer a five star rating or a favorable review. We’d be grateful if you share Hubwonk with friends. If you have ideas or comments or suggestions for me about future episode topics, you’re welcome to email me at Hubwonk at pioneerinstitute.org. Please join me next week for a new episode of Hubwonk.
Joe Selvaggi talks with economic scholar Dr. Brian Domitrovic about the history of federal tax policy and the reasons for why varied marginal rates fail to correlate with either tax revenue or GDP growth.
Guest:
Brian Domitrovic is the Richard S. Strong Scholar at the Laffer Center in Nashville. He is the author or editor of six books, including “Taxes Have Consequences” (with Arthur Laffer and Jeanne Sinquefield), “The Emergence of Arthur Laffer” (2021), “JFK and the Reagan Revolution” (with Lawrence Kudlow, 2016), and “Econoclasts” (2009). He has been professor of history at Sam Houston State University in Texas and the Visiting Scholar in Conservative Thought at the University of Colorado Boulder. He holds a PhD in history from Harvard.
“She’s a good girl. She helps me a lot. She has big, big dreams. I don’t have the money, but she has big dreams. I hope she’s going to get everything, but she works so hard. She works so hard in school.”
“Our family is needing to make some really big sacrifices because we believe this is important, and so, we’re basically going to do whatever it takes… Sometimes we look at each other and go ‘I don’t know if I can do it again another month…’”
“A lot of the families have to sacrifice and work multiple jobs… And just scraping together enough money to just make tuition, just the basics.”
“It is discriminatory, that parents who want to choose an alternative to public school for their children, would not in any way receive any compensation for that, whether it be tax credit, whether it be a voucher…”
In the 1840s, nativist movement leaders formed official political parties and local chapters of the national Native American Party (later the American Party), although they continued to be commonly known as the Know-Nothing Party. Politicians sought to insert provisions into state constitutions against Catholics who refused to renounce the pope. The Know-Nothing movement brought bigotry and hatred to a new level of violence and organization.
The party’s legacy endured in the post-Civil War era, with laws and constitutional amendments it supported, still today severely limiting parents’ educational choices. A federal constitutional amendment was proposed by Speaker of the House James Blaine prohibiting money raised by taxation in any State to be under the control of any religious sect; nor shall any money so raised or lands so devoted be divided between religious sects or denominations. These were then named the Blaine Amendments of 1875.
in recent decades, often in response to challenges to school choice programs, the U.S. Supreme Court has demonstrated great interest in examining the issues of educational alternatives and attempts limit parental options. Massachusetts plays a key role in this debate. The Bay State was a key center of the Know-Nothing movement and has the oldest version of Anti-Aid Amendments in the nation, as well as a second such amendment approved in 1917. Two-fifths of Massachusetts residents are Catholic, and its Catholic schools outperform the state’s public schools, which are the best in the nation.
This week on The Learning Curve, guest co-hosts University of Arkansas Prof. Albert Cheng and Mariam Memarsadeghi interview Stanford University senior fellow and biographer of Joseph Stalin, Dr. Stephen Kotkin. He explores Stalin’s origins, consolidation of power, and his Communist despotism. Kotkin delves into Stalin’s cunning political maneuvers, his complex relationships with other Soviet leaders like Lenin and Trotsky, and the devastating consequences of his regime, including the forced collectivization and mass starvation of millions. Additionally, Dr. Kotkin examines Stalin’s role as a wartime leader, his alliances with Western powers, and the far-reaching implications of the Nazi-Soviet pact. He shares a preview of the forthcoming third volume of his Stalin biography, offering insights into Stalin’s Soviet Union during the post-WWII era and the early years of the Cold War. In closing Dr. Kotkin reads a passage from his first volume, Stalin: Paradoxes of Power, 1878-1928.
Stories of the Week: Albert addressed an article from The Wall Street Journal discussing troubles with India’s education system; Mariam shared an article from Real Clear Education on Columbia University’s Rabbi’s message to Jewish students.
Guest:
Stephen Kotkin is a senior fellow at Stanford’s Freeman Spogli Institute for International Studies, and the Kleinheinz Senior Fellow at the Hoover Institution. He is also the Birkelund Professor in History and International Affairs emeritus at the Princeton School of Public and International Affairs, where he taught for 33 years. Dr. Kotkin’s books include Stalin: Waiting for Hitler, 1929–1941 (2017) and Stalin: Paradoxes of Power, 1878–1928 (2014), part of a planned three-volume history of Stalin’s power in Russia and the world. He has also authored Magnetic Mountain: Stalinism as a Civilization (1995); and a trilogy analyzing Communism’s demise, of which two volumes have appeared thus far: Armageddon Averted: The Soviet Collapse 1970–2000 (2001; rev. ed. 2008) and Uncivil Society: 1989 and the Implosion of the Communist Establishment (2009). Dr. Kotkin’s writing appears in Foreign Affairs, The Times Literary Supplement, and The Wall Street Journal, among other venues. He earned his B.A. in English from the University of Rochester and his M.A. and Ph.D. in History at the University of California-Berkeley.
Tweet of the Week:
https://x.com/educationnext/status/1782371326360985673?s=46&t=ABfrvSJ97fqBLKfOnxBuPw
Decision brings Massachusetts into compliance with 2023 U.S. Supreme Court ruling
SPRINGFIELD, MA –A Massachusetts Superior Court has ruled that a state law allowing municipalities (or private actors to whom municipalities sell the right to foreclose) to foreclose on homes due to property tax debt without having to pay the homeowner the difference between the taxes owed and the value of the home is unconstitutional as applied to the facts of the case at hand.
Ashley Mills was on the verge of losing her fully paid for Springfield home worth around $230,000 due to a $22,000 property tax debt. On Mills behalf, the Pioneer Public Interest Law Center, Greater Boston Legal Services, and the law firms of Morgan Lewis and Greenberg Traurig successfully challenged the law, known as Chapter 60, that would have allowed Springfield to keep the more than $200,000 difference between the home’s fair market value and the taxes owed.
The ruling by Springfield Superior Court Judge Michael Callan comes after the U.S. Supreme Court unanimously ruled last year in Tyler v. Hennepin County that a Minnesota statute substantially similar to the Commonwealth’s “equity theft” law was unconstitutional because it denied reasonable compensation to a homeowner for the taking of her property.
“We see many low-income or elderly homeowners who, having long ago paid off their mortgages, fall behind in their taxes,” said Catherine Kay of Community Legal Aid, who represents Ashley Mills in the Land Court tax lien foreclosure that led to this action. “Suddenly they face losing their homes and all the equity they built over the years. “Not only does the statute deprive these homeowners of their hard-earned equity, but it does so without adequate notice and hearing rights.”
“This is primarily a legislative issue,” said Attorney Todd Kaplan of Greater Boston Legal Services. “Judge Callan properly called upon the Legislature to take action to correct the injustice of Chapter 60.”
Mills, 26, lives with her two-year-old son and disabled mother in the home she inherited from her grandmother that is her only financial asset. If it is foreclosed on and she doesn’t receive the more than $200,000 of remaining equity after the tax debt is satisfied, Ashley, her toddler, and her disabled mother are at risk of becoming homeless even though they have an asset worth hundreds of thousands of dollars.
In 2016, Mills was unable to pay $1,636.70 in property taxes she owed. Over the next three years, she entered into payment agreements with the city, but was unable to catch up, largely due to a punitive 16 percent interest rate and other charges imposed by Springfield under Chapter 60. The City of Springfield filed a motion for judgment of foreclosure in May 2023.
“In Tyler, the Supreme Court sent a clear message that any surplus beyond the tax debt should be returned to the homeowner,” said Pioneer Public Interest Law Center President Frank Bailey. “Massachusetts is one of a minority of states that has a law like Minnesota’s, and the Supreme Court’s ruling makes it clear that such laws are unconstitutional and therefore unenforceable. Cities and towns are on notice that using Chapter 60 in this predatory manner violates fundamental rights under the federal and state constitutions.”
In a timely and well-reasoned opinion, the Hampden Superior Court found Chapter 60 unconstitutional. Both owners of real estate and municipalities were in need of such a definitive ruling by a Massachusetts court. Now the state Legislature must act to address the constitutional infirmities in Chapter 60.
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Community Legal Aid (CLA) provides free civil services to the low-income and elderly residents of the counties of Western and Central Massachusetts (Berkshire, Franklin, Hampden, Hampshire, and Worcester, and maintains offices in Worcester, Fitchburg, Springfield, Northampton and Pittsfield. CLA works to assure fairness for all in the justice system, protecting homes, livelihoods, heal and families. For more information, please visit www.communitylegal.org.
Greater Boston Legal Services (GBLS): GBLS assists survivors of domestic violence, homeless families, elders, people with disabilities, homeowners facing foreclosure, tenants facing eviction, low-wage workers, families with no source of income, and immigrants facing persecution. Annually, GBLS provides legal assistance to more than 10,000 families and individuals who live at or below 125% of the federal poverty standard. GBLS also provides legal counsel to dozens of community-based groups and organizations and conducts strategic impact advocacy to bring about positive systematic change throughout the region and state. For more information, please visit www.gbls.org.
Pioneer Public Interest Law Center (PPILC) is a nonprofit, nonpartisan legal research and litigation entity, organized under Section 501(c)(3) of the Internal Revenue Code. PPILC is a public-interest law firm that defends and promotes educational options, accountable government and economic opportunity across the Northeast and around the country. Through legal action and public education, PPILC works to preserve and enhance liberties grounded in the constitutions and civil rights laws of the United States and the individual New England states.
Click here to read a transcript
[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. On April 15th, we commemorated the 111th anniversary of our federal income tax, which the 16th Amendment instantiated into the U. S. Constitution in 1913. Since then, the top marginal rate has swung dramatically from a modest 7 percent at its inception to a staggering 94 percent post World War II, eventually settling at 37 percent today.
[00:00:33] What’s intriguing isn’t just this wide range of rates, but the rather consistent 16 19 percent range of total GDP revenue collected by the government throughout. What’s even more perplexing is that periods of robust GDP growth, notably in the 1950s and 60s, coincided with sky-high top marginal rates.
[00:00:54] Providing fodder for contemporary proponents of higher taxes to argue that high rates don’t impede growth. However, delving into history reveals that as tax rates climbed, so did efforts to legally evade them through tax-avoiding compensation strategies. These incentives led to an era of corporate indulgence, marked by lavish non-income perks like luxurious office spaces, company-funded vacations, and leisurely three-martini lunches.
[00:01:22] All untaxed incentives. Fostering a thriving economy. How should policymakers interpret this historical puzzle where tax rates seemingly bear little correlation to revenue collected? What dynamics undermine the taxman’s pursuit of higher yields, often resulting in diminished returns? My guest today is Dr. Brian Domitrovic, the Richard S. Strong Scholar at the Laffer Center, and co-author of Taxes Have Consequences, An Income Tax History of the United States. Dr. Dimitrovic’s expertise lies in dissecting how U. S. tax policies intersect with business responses, uncovering why lofty marginal rates fail to boost revenue, and how tax avoidance endeavors ultimately impoverish all economic players.
[00:02:10] Our conversation will delve into past attempts to enhance tax revenue and their implications for contemporary policymakers contemplating rate hikes. When I return, I’ll be joined by economic historian and scholar, Dr. Brian Dimitrovic. Okay, we’re back. This is Hubwonk. I’m Joe Selvaggi, and I’m now pleased to be joined by Dr. Brian Dimitrovic, the Richard S. Strong Scholar at the Laffer Center and co-author of Taxes Have Consequences, An Income Tax History of the United States. Welcome to Hubwonk, Brian.
[00:02:42] Brian Domitrovic: Joe, it’s really great to be here.
[00:02:44] Joe Selvaggi: Well, I’d love to have you here. it was interesting. your Taxes Have Consequences book was recommended to me, and I started reading it, maybe because it was, we were approaching tax day, and on that same exact tax day, I saw your article in Law and Liberty, talking about, historical, tax rates.
[00:02:59] So I thought this was the universe’s way of telling me, you have to be on the podcast. So welcome. Before we get started in our conversation about Taxes Have Consequences, I want our listeners to learn a little bit about your background. You have both your undergrad and your Ph.D from Harvard, and you are a historian.
[00:03:17] What is your expertise in history? What’s your focus?
[00:03:20] Brian Domitrovic: Sure, yeah, my undergrad degree is from Columbia. I was a history major. Oh, I’m sorry. Yeah, and I got my Ph. D. in history, at Harvard, where I also did work in the economics department, so I’ve studied my whole career. Since the 2000s and 90s, has been setting the supply-side tradition in economic, intellectual history, and in policy history.
[00:03:38] Joe Selvaggi: Okay, wonderful. I want to unpack some of the themes in your book, your recent article, and talk at a very high level, about the history of the U. S. income tax. I think we’re just a little bit beyond or about 110 years ago, the 16th Amendment. It was something that was intended, for the highest earners, but now, as your article suggests, doing our taxes on April 15th.
[00:03:59] It’s something all of us as Americans get to do and dread. How do we get from, it being unconstitutional to now where everybody has to wrestle with the same problem every April 15th?
[00:04:09] Brian Domitrovic: For the first 125 years of American history, constitutional history, there was no income tax to speak of. There was a provision for an income tax in the original constitution of 1789, but it had to be collected so that each state yielded as much revenue as they had population in the country.
[00:04:25] So it was proportional to a state’s population. They only imposed it a couple of times. so it was the 16th Amendment that passed in March 1913 that gave Congress, the power to establish income tax, which it did the following October in 1913. So, yeah, we’ve only had an income tax for 100, 111 years now the top rate initially was 7%. The exemption is equivalent today of about 100, 000, so you had to make 100,000 even to pay 1 percent income tax at the margin, and the rates went up after that, but the first income tax had a top rate of 7%.
[00:05:05] Joe Selvaggi: Okay, so in the beginning, tax rates were relatively low and imposed only on the wealthiest, but we’ve had in the interim 111 years, a couple of, world wars, we’ve had a depression, we’ve looking back, now, you said it went from seven percent to much, much higher.
[00:05:20] Seems like, from your book, tax rates have fluctuated wildly. has the money that the government has collected in those taxes, again, they’ve gone over, all over the place, fluctuated as wildly as tax rates themselves?
[00:05:33] Brian Domitrovic: Yeah, Jim, not at all. the total tax take, say, as a percent of GDP has been remarkably stable at about 15, 17 percent ever since income taxes essentially became mandatory for everybody in the 1940s during World War II, so it doesn’t matter what the marginal tax structure is the federal tax take will 16 to 20 percent of GDP. That’s known as Hauser’s Law. In economics, and Alan Reynolds is a great supply center from the 70s and 80s. he has Reynolds law, which is no matter what the income tax rates are, income tax revenues will always be the same, about eight or nine percent of GDP.
[00:06:08] So both of those theories suggest strongly, well, why not just have low rates? If you’re going to get the same amount of money, no matter what.
[00:06:16] Joe Selvaggi: Good. This concept, I want to spend our conversation drilling down on why it seems that regardless of rates, the government receives the same amount of money.
[00:06:24] It seems counterintuitive. I want to point then to your most recent work. I think it came out in Law and Liberty on April 15th. your article, addresses directly this idea, this nostalgia we have for the past, particularly amongst progressives, that we used to have a remarkably high tax rate.
[00:06:39] I think specifically it got as high as 94 percent. That meant the government only gave you six cents out of every dollar you earned. this is in the post-war period. And the same people who point to that say, at that time, the economy was booming. Ergo, it seems there’s no relationship between high tax rates and a healthy economy.
[00:06:59] What’s wrong with this interpretation of high tax rates and a booming economy? What do those historians get wrong?
[00:07:07] Brian Domitrovic: Yeah, I’ll accept the basic correlation. So, let’s say, that from 1954 to 1963, the top marginal tax rate was 91%, the lowest. The tax rate in the income tax structure was 20%. The corporate tax rate virtually for all companies was 52%.
[00:07:24] So, yeah, you have a, 91 percent marginal income tax. You have a 52 percent corporate tax. And the economy is booming, right? It’s post-war prosperity in the 50s and 60s. I’ll accept that correlation. You can quibble. You can say, well, there were three recessions during the Eisenhower presidency. it was impossible for additional family members to enter the workforce if they were filing on the same tax return, hence the collapse in women’s employment.
[00:07:50] you can make all those kinds of arguments, but I’ll just concede it. There’s post-war prosperity. Okay, fine. The problem with the published rates, and this was discussed ad nauseum in the 50s, is that the published rates were inapplicable. So, there has to be some kind of minimum willingness on the part of the government, if it has high tax rates, to collect at high tax rates if we say there were high tax rates and we had prosperity.
[00:08:15] Did the government collect at those high tax rates? Not in the least. So, it’s not functionally correct to say that we had high tax rates, because we didn’t, in that they were not applicable. The federal tax take was 16 percent even though income tax rates began at 20 percent and were only higher after that even though the corporate rate effectively for everybody was 52%.
[00:08:34] So there has to be a minimum willingness of the federal government to enforce those rates to say we actually had them.
[00:08:41] Joe Selvaggi: So I want to drill down a little bit further then. So again, we’re going back to our original idea that even at 91%, you said, was the top rate, the government was taking in just about the same amount of money.
[00:08:51] So how do you reconcile, let’s say a revenue collection remaining constant despite an enormously high, on-the-books tax rate? You say the unwillingness to collect is, how is that manifest? Is it in deductions or how is it that they could ask for 91 and only get what they got?
[00:09:08] Brian Domitrovic: Yeah, this was a paradox everybody had a lot of fun with. the law professor, Stanley Suri, at Harvard Law School had a lot of fun with it. They called it paper rates, and another WAG noted in congressional testimony, that we have to stop this, dipping into high incomes with a sieve.
[00:09:24] yeah, it’s just, everyone, well known. So they had these high published rates, and it became apparent as soon as World War II was over, basically, a couple of days before V Day, even, Congress understood that in peacetime, the jack rates way up in the Depression and certainly in World War II, and as soon as September 1945, Congress is well aware, the American public is not going to tolerate These rates anymore.
[00:09:50] It did for patriotic reasons during World War II. The moment the war is over, the public will not tolerate it. So they’re just immediately developed all sorts of expedience not to pay at those rates. Now, Congress could have just cut the tax rates. It did do that. Revenue Acts of 1945 and 1948 were very substantial cuts in tax rates but the main mechanism that Congress provided was they kept the rate structure and then introduced an absolute slew of legal tax avoidance opportunities. They took one of two general forms, either explicit deductions from income that you reported to the IRS or large categories of income that didn’t even have to be reported to the IRS.
[00:10:30] Joe Selvaggi: So, all right, and adjacent to this article or this, relationship between rates or lack of relationship between rates and revenue collected was also the assertion, again, those people who are nostalgic for higher rates, They assert that the income inequality, which seems to be the buzzword of policymakers these days, that income inequality is bad, and that high tax rates are effectively brought tax, the highest earners and the lowest earners closer together.
[00:10:59] Is it the fact that they were actually, the revenue was, their income was going to taxes or was it going somewhere else? In other words, was it that their income was being taken away or rather their income was being less likely to be reported?
[00:11:12] Brian Domitrovic: Yeah, I don’t think the income inequality literature from the left tells us that at all, anything about the question you just posed, because the income inequality literature, Piketty, Zuckman, Saez, Sancheva, all those people, they, they all talk about pre-tax income.
[00:11:27] that’s their bread and butter. That’s their main measure, pre-tax income. So that tells us nothing about what taxes are paid. So we adopt all of their data with some of the adjustments from Phil Magnus and everyone else. But what we say is, well, if you look at pre-tax income, when tax rates are high, of course, it’s going to plummet.
[00:11:46] I mean, if the, if you have a progressive tax system and tax rates are, go from 7 to 91%, the rich are going to report way less income under a high tax regime. As the cost of reporting income goes up, You produce less of it. As the costs of reporting income go down, you produce more of it. What does that tell us about real income?
[00:12:05] Nothing. But it does tell us about reported income. So pre-tax reported income in high tax eras, as all economic relationships would indicate, goes way down. But that leaves open the question of what real income is. And the deduction culture of the 1950s and 60s indicates that real income was still quite gigantic.
[00:12:24] Joe Selvaggi: So, again, I want to drill down a little bit more on this, so we say, okay, if income gets taxed and therefore we want to have less income, executives, and professionals want to get compensated, so, we, we’ve got a culture where if you report as income, the government takes it away, if you give it in some other form, it doesn’t take it away, you, you compared it essentially to like, in your article or in your piece, recent piece, that we had a culture that evolved around this sort of tax avoidance, almost like the iconic, Madman, culture, or the three-martini lunch at the Fabulous Club, all as a sort of response to taxing income.
[00:12:59] This was a way to circumvent that income tax by compensating people in different ways. Say more about that.
[00:13:05] Brian Domitrovic: Sure. Yeah, Joe, you know from my article, you are, running a risk here and having me sing to you because I was quoting songs. We talk about this golden era of income inequality. Well, one of the pop hits of that time, Steve Allen, Steve Lawrence, and Edie Gourmet’s song, This Could Be the Start of Something, written by Steve Allen of Tonight Show fame. It’s good pop music. You rarely see a song so extolling of the elites and not the little guy. The song, This Could Be the Start of Something Big, talks about how you’re dining at Sardi’s, and you’re lunching at 21, you’re up in an airplane, or lying in Malibu. These are all rich people’s endeavors.
[00:13:45] And this is a popular song that was on the Billboard charts. So what’s this about, this is a golden era of income inequality. These are young, affluent people celebrating being just that, and there’s a line in that song that says while doing your income tax or buying a toothbrush, just indicating that the kind of up and coming, rising people, number one, were celebrating how high on the hog they were living, and when they were dining at Sardi’s or lunching at 21, declining a Charlotte Russe dessert, they were all totting that up on the deduction tableau. Virtually all business consumption, including lunch, three martinis, lunch, everything. We put it in the book, Tom Wolfe’s descriptions of the Midtown Manhattan lunches in the 50s and early 60s from 12:30 to 3pm, right? As he says, they were like something out of a dream. You really need to know French in order to pronounce everything they were ordering.
[00:14:40] It’s not just that these things were all deductible as intermediate expenses because they’re business expenses. They’re deductible against a 91 percent tax rate. Okay, that’s very valuable. You’d have to pay them with your four, with your nine bucks if it weren’t deductible. No, it’s deductible.
[00:14:56] You don’t have to pay taxes on that expenditure. It’s more than that. It’s that those expenses were also, furthermore, deductible from the corporate tax return, which meant that the government was picking up half the bill, because the corporate rate was 52%. So there was a double deduction. And I think income inequality misses this stuff, literature misses this stuff completely.
[00:15:17] We have the quotation in the piece that I wrote from Piketty, Saez, and Stancheva saying that all this stuff is anecdotal. We have anecdotal evidence of deductions in 1960, and the anecdotal evidence says they were small. Well, what I argue is that statement on the part of Stancheva is itself sufficient to show that those economists have not studied this era.
[00:15:39] If you look at circa 1960 tax culture and say, all we have is anecdotal evidence, you haven’t even begun to look at that period. Because the evidence is essentially Mount Everest of how much the tax deduction culture was in 1960. You can’t look at that period without getting overwhelmed, white out overwhelmed, with tax deductions.
[00:15:59] So if they just say, hey, we haven’t really picked up any evidence of tax deduction of the periods, it’s tantamount to saying they haven’t even studied the period. So I just throw out all of their literature. They just haven’t studied it.
[00:16:09] Joe Selvaggi: Indeed. So again, we could talk about the lavish lunches, but also I think a legacy of high tax rates, or you, actually, I guess it was, income control, we, employers compensated, employees with health insurance, being tied to, their wage, meaning they could give them lavish health plans rather than taxed income.
[00:16:28] I think we still live without the distortions of employee-based income control. Health insurance to this day, would you characterize that as a sort of a legacy of a high tax regime?
[00:16:38] Brian Domitrovic: Yeah, the health insurance came about specifically in World War II when wages were under control, so unions, workers weren’t allowed to ask for, weren’t allowed to get higher wages in World War II because of wage-price controls.
[00:16:49] And so unions came up with the idea of income benefits that were not technically wages. And so workers during World War II took their raises in the form of health insurance benefits at that time, as opposed to increases in wages. And then this became because they were so valuable against the tax code, they were deductible against health insurance benefits are deductible.
[00:17:09] Employee compensation is deductible to the corporation. So that means deductible against a 52 percent corporate rate. The government pays half the bill. And they’re untaxable to the recipient. So in other words, there’s the double tax deduction again. So you see this proliferation, and that’s just one. pensions were actually, an even greater example in that both the contributions and the lump sum distributions were We’re tax free.
[00:17:33] So that was gigantic. We have a similar to today in the 401k world. It’s funny how retirement savings can’t get out of the deduction trap. When you have high tax rates, you always have these kind of retirement plans. Cash value life insurance was the same thing in the 50s. It was the equivalent of a 401k.
[00:17:51] So we don’t have cash value life insurance anymore because we have 401k, but your contributions were all taxable. tax deductible, your appreciation was not taxed, and then when you received the lump sum, it was not taxed. So, this ends up amounting to, 20 percent of GDP in total. And so the idea that we look at pre-tax income and come up with income inequality charges is just a losing enterprise.
[00:18:13] Joe Selvaggi: Right. And then, of course, what it does is generate this sort of spy versus spy where the government tries to tax and business tries to frustrate that attempt and comes up with creative alternatives, probably hand in glove with the cooperation of legislators who they may have influence over.
[00:18:27] Brian Domitrovic: So, that point. Since I conceded post-war prosperity, I’m not even going to concede the government tried to tax it. There has to be a certain minimum of effort that proves that you’re trying. And, if the tax rates are 20 to 91 percent and 52 percent and you’re collecting 16, you’re not trying.
[00:18:45] So, and that’s consistent with post-war prosperity. If the government tried at all to collect on those tax rates, there would not have been post-war prosperity.
[00:18:53] Joe Selvaggi: Let’s shift our argument from, let’s say, a historical perspective to just a common, understanding of taxes. Again, you as an expert in taxation and the history of taxation, the spirit of taxation, I think, for many of our listeners would be, at the end of the day, we have prosperous, high-earning, Americans and, let’s say, less fortunate Americans.
[00:19:11] The idea that taxation might also serve the purpose of not just paying for wars, but Redistributive, right? We want to, in a sense, like Robin Hood, take from the rich and give to the poor in some fair, agreeable way. You, particularly in the book you wrote with Dr. Art Laffer, suggest that when we try to redistribute wealth, that is take money from the wealthy and give it to the needy, we have a double effect of, in a sense, discouraging production.
[00:19:40] On those we tax and discourage production on those we give benefits to. Elaborate a little bit on how this, noble effort to redistribute wealth might get frustrated by reality.
[00:19:52] Brian Domitrovic: Yeah, Arthur Laffer talks about this, the so-called transfer problem, which he learned at the feet of Robert 60s.
[00:19:58] And it comes from the Slutsky equation. I will add just preliminarily, I don’t consider it a noble effort whatsoever. I consider it nefarious. it’s, very clear that rich people in American history, 19th century, whatever industrial revolution, when they’re not taxed, they do things like create millions of jobs.
[00:20:16] So that’s like an immense benefit to the lower classes. so if you throw sand in those gears, you’re not doing, you’re not doing any kind of noble work, but, by raising taxes on the rich, you’re just going to diminish job creation and opportunity and production. So yeah, Arthur Labrador’s argument is, well, if you impose a tax to distribute, in welfare, well, the tax on the producers leads them to produce less.
[00:20:40] And then when you give stuff, Give resources away in welfare. Those, recipients don’t want to work because they just receive money. Robert Mundell outlined this argument very famously in the 1960s. One of the reasons he won the Nobel Prize. So, in technical economics jargon, the substitution effects accumulate.
[00:21:01] These are not counteracting forces. They’re both bad. It’s a double negative. If you tax the rich and give to the poor, the rich produce less, the poor produce less. There’s less overall output. The economy gets worse.
[00:21:13] Joe Selvaggi: Yeah, it seems counterintuitive to think that progressive tax rates, again, I just share with my friends, just over a beer one time, you think, okay, we have wage rules that require you to pay time and a half overtime, which is to say, if you’re asked to work more than your 40 hours, you better compensate me a lot.
[00:21:34] 150% of my wage for that 41st hour, I need to be paid more to work more. Progressive tax logic seems to work in the opposite, that the more you work, the more money you earn, the less you keep. It does seem to be, if not explicitly, it will have the effect of discouraging the next marginal, propensity to produce.
[00:21:54] Is it that simple?
[00:21:55] Brian Domitrovic: It is that simple. Now, what we know now from the high tax rate era, however, is what the subject of our talk today, or our podcast, is. Is that, yes, high tax rates will be very discouraging of production from the most productive people. That’s the interesting thing. Like, the top 1 percent is by definition the most productive because every time they do something, they make a ton of money.
[00:22:15] So if we did have high tax rates in the 50s and 60s or whenever. we wouldn’t have had post-war prosperity because there must have been some secret. You can’t have a 91 percent tax rate and the economy actually being productive. So, therefore, we didn’t have a 91 percent tax rate. And sure enough, we did not, because you look at the federal tax rate at 16%.
[00:22:33] So everything about our history, including the high tax era, shows resoundingly that high tax rates that are de facto correct, real, will kill the economy.
[00:22:46] Joe Selvaggi: Well, this is a great segue for me to just introduce an idea that we could spend, again, a whole separate podcast about is, the infamous, and I hope for our listeners they’re familiar with the idea of the Laffer Curve, and we’re talking around this idea, which is to say, the government needs money and wants to impose some, a level of tax.
[00:23:02] As it raises taxes, it gets more money from a tax base, but at some point, The tax is large enough that it changes the behavior of the tax base. In other words, you and I are talking about the high tax rates, in the 50s and 60s that cause people to compensate their employees differently, and not in the form of income, in the form of something else.
[00:23:22] So, there’s always a reaction, perhaps an unintended reaction, as tax rates increase. The total revenue coming to the government seems to decrease gradually and then ultimately reverse. Share with our listeners from a historical economist perspective, why does the Laffer Curve obtain, let’s say, in the 50s, 60s, and perhaps even today?
[00:23:43] Brian Domitrovic: Sure, yeah, Laffer Curve, Arthur Laffer probably first drew it on a napkin, famously, on, updated as December 6th, 1974, the long-term, bottom of the Dow Transdestrial Average, as it turns out, to the second. and yeah, he says that it’s a simple relationship, says, when you increase tax rates, revenue increases to a certain point, and then as you increase tax rates, revenue goes down.
[00:24:06] Same thing with tax cuts. You can cut taxes and increase revenues, and then cut taxes and lower revenues. And there’s a normal relationship when things respond as you would expect. Thank you. Raise taxes, increase revenue, lower taxes, less revenue. That’s the normal section of the curve. And the prohibitive range is when you get the opposite effects.
[00:24:25] Yeah, we knew this in the 50s and 60s. when you had tax rates lowered from 91 to 70 percent as John F. Kennedy took care of in 1964. the rates that are Revenue from the top earners, from those earning over 100,000, say a million dollars today, in today’s terms, the revenues from that cohort just soared.
[00:24:46] So, yeah, whenever you made the, whenever you lowered the statutory tax rates when they were very high, you found out immediately that we had been in the prohibitive range. Same thing with Ronald Reagan. Ronald Reagan walked into the office and cut the marginal tax rate from 70 to 50 percent and all of a sudden revenue from the top, that’s a tippy top cohort, just goes way up.
[00:25:06] So yeah, that’s the Laffer curve and it’s, it’s been proven time and again.
[00:25:09] Joe Selvaggi: Would this, logic,pertain to even, let’s say, state, income tax? I’m here in Massachusetts. we have, a flat 5%, until very recently we imposed a, what they call a millionaire’s tax, a, surcharge on income over a million dollars of 4%.
[00:25:21] Yeah. I can see, and we made the argument on this podcast that such, tax rates would encourage high earners to leave or change their behavior such that they don’t pay that tax. How is it that would even apply in the U. S.? if we could take a serious effort to reduce all these creative ways of avoiding income tax, that is, get rid of all these deductions, and actually impose a higher tax, what choice would Americans have other than to pay it?
[00:25:45] What are they going to do about it?
[00:25:48] Brian Domitrovic: Yeah, if you don’t mind, I’m going to take the opportunity to talk about what’s going on in Massachusetts. I think Massachusetts is over. I think that the income tax surcharge will kill it. I noticed that I never travel to Massachusetts anymore. I’m always invited.
[00:26:04] I always travel to Texas, to Florida. Places with no income tax. That’s just, a kind of natural movement of capital. I think Massachusetts has completely misunderstood what has been responsible for its prosperity for the last 50 years. It is almost exclusively due to Proposition 2.5, which limited property tax growth to 2.5 percent as of 1980. So, property owned in Massachusetts has just been a wonderful investment. It enabled the state to cut its income tax rates in the 80s and 90s. And that’s why we had a Massachusetts miracle. It’s why we had a Dukakis candidacy, all that stuff. If Massachusetts doesn’t understand that and raises its, or doubles its marginal income tax, there is no chance it will ever attract capital again.
[00:26:47] I don’t care about Harvard, I don’t care about the Athens of America, I don’t care about its high-tech tradition, I don’t care about Yankee ingenuity. There will be a complete capital departure from Massachusetts, and I think it’s starting right now. Why can’t the government just impose tax rates?
[00:27:01] Well, there’s no record that it can’t. So, when it imposed 20 91 percent tax rates, what happened? Nobody paid them. when it imposed a 52 percent corporate tax rate, what happened? Nobody paid for it. So, there’s no evidence that high tax rates ever collected, ever are effective. So, I don’t have any problem saying that there’s no reason to explain it.
[00:27:20] It just never works.
[00:27:22] Joe Selvaggi: Yes, indeed. Again, like, I think we somehow intuitively understand that. But, of course, there are those who would say our progressive, intuition here in Massachusetts is because we’re wealthy and educated. I think that gets the causation backward, where you’re
[00:27:37] Brian Domitrovic: Yes.
[00:27:38] Wealthy and educated, with Proposition 2. 5. Without Proposition 2. 5, wealthy and educated, would have resulted in zero in negative economic growth since 1980.
[00:27:46] Joe Selvaggi: All right, let’s let me get back to this idea that tax rates equals tax revenue. It seems that, at least, as you mentioned, people, our progressive friends say, the way to raise revenue is to increase taxes.
[00:27:59] From a historical perspective, what you’re saying is Higher tax rates rarely, if ever, lead to more revenue and in fact, over time, particularly with the right to vote with their feet, someplace like Massachusetts, ultimately, as more and more people leave, or as you suggest, fewer and fewer people come with their dollars and investment dollars, ultimately, higher taxes may result, or inevitably will result, in lower net revenue. Is that what I’m saying?
[00:28:27] Brian Domitrovic: We don’t have to look, just look at anywhere where there’s tax increases, permanent tax rate increases, and they immediately become long-term bust areas. I’m going to list the following states that started from scratch in income tax between 1960 and 1990.
[00:28:45] New Jersey, Pennsylvania, Michigan, West Virginia, Ohio, Indiana, Illinois. yeah, you just said, right, you just named the Rust Belt. Yeah, I did. Those are the states that started an income tax in the 60s and 70s. Right, so investments, investors just said goodbye. And because investors say goodbye, there are no more jobs, and that’s the Rust Belt.
[00:29:04] Since then, all those states have increased their property taxes big time because their income tax not only failed to produce revenue, it also drove away all the business. So, yeah, just, that’s just the story of, taxation. If you want to have high taxes, people won’t live there. And the idea that the government can outsmart people on taxes is ludicrous.
[00:29:21] People deal with their own personal circumstances as a natural matter of course. They’re the master of that domain. You impose a tax on it, they’ll just master it because they’re in charge of their own affairs. Yeah, there are no examples of successful tax increases.
[00:29:38] Joe Selvaggi: And I think something that, I’ll call it reading between the lines.
[00:29:41] In the process of avoiding taxes, which is natural, I think all of our listeners try to minimize their taxes. I don’t say they would try to cheat on their taxes, but rather tax minimization is a normal thing we all, I hope, consider. all these schemes, whether it’s at a firm level or an individual level, if I choose to pick up, pull up stakes, and move to Florida, that’s very, cumbersome and disruptive to my life, but I might do it if I’m earning enough.
[00:30:07] But doesn’t that also, reading between the lines, Doesn’t that also have a negative effect? If I’m spending my life, because taxes are so high, trying to avoid taxes, I’m making choices that are not good for me to maximize revenue, or good for my business to maximize, productivity, but rather, minimizing taxes is fundamentally, or the attempt to minimize taxes is fundamentally counterproductive.
[00:30:27] You’re minimizing tax payment. You’re not minimizing, you’re not optimizing production
[00:30:33] Brian Domitrovic: output, right? Absolutely. Just the ascertainable costs of income tax compliance are at least half a trillion dollars a year. And those are the actual ascertainable costs, like how much you have to pay accountants and all that stuff.
[00:30:48] But in terms of substituted behavior and deadweight losses in terms of wasting time doing this stuff, it’s incalculable. So, yeah, if you have an aggressive tax administration. You couple that with native human ingenuity to pursue legal tax avoidance and even illegal tax evasion, you’re just going to have deadweight losses galore.
[00:31:10] So, that’s why I say when I look at the 50s And I see, post-war prosperity. I know the federal government has no vigor in enforcing those tax rates because if it did try to match those tax rates with vigorous collection, the economy would have collapsed.
[00:31:25] Joe Selvaggi: Indeed, and of course, it would have collapsed, but instead it incentivizes some, I would say not necessarily productive activities.
[00:31:32] In other words, yes, uh, the economy thrived because there wasn’t really a high effective tax rate, but so did lunch clubs and martini makers. they thrived, but that’s not, that didn’t contribute to efficiency. Once those, the tax rates came down, I think that I don’t know if it was in your book or in something else I read by you that said, once we took tax rates down to, let’s say, normal levels or reasonable levels, people stopped getting expense accounts, and the madman three martini lunch went away, and everybody got a ham sandwich and a Sprite for lunch.
[00:32:02] So all the, let’s say, negative, or counterproductive activities, like three martini’s lunch, went away, and effectively, lower tax rates generated more efficient business behavior. Is that a
[00:32:13] Brian Domitrovic: question? Yeah, you got that from us. We were quoting Tom Wolfe’s famous piece in Esquire about the founding of Intel for that.
[00:32:19] The lunch sandwiches and Sprite on a sawhorse in Silicon Valley instead of, yeah, that’s Tom Wolfe again. So, yeah, no, there’s a deadweight loss. There’s no question about it. But when there really is no enforcement of the paper rates, the amount of the deadweight loss is small.
[00:32:34] but I do think this point is absolutely essential for understanding the dynamics of modern American economic history. This whole thing about a corporate job and a job for life were all in-kind forms of compensation because the tax rates taxed cash compensation. So when you worked in a fancy lab or a corporate park or had art on the wall in your office, All those things of the mid-century, those were forms of compensation that were not taxed to the recipient and were tax deductible against a 52 percent rate to the employer.
[00:33:06] When tax rates went down in the 1980s, you had those massive corporate layoffs. you’re talking, things like Motorola was laying off 10,000 people a year in the early 1980s, in the 1980s, Goodyear, all these companies. you just have incredible corporate layoffs. And yet there’s 18 million job growth in the 1980s.
[00:33:23] 40 million from 1980 to 1990, even as the Fortune 500 just sheds employees like crazy. Yeah, because when you lower the corporate rate from 52 to 34, and you lower the marginal rate from 91 to 28, You just completely change the fundamental structure of how business is organized towards entrepreneurialism and, non-write-offs.
[00:33:43] Yeah, that’s a more efficient way, but you had this wrenching 20 years in which you had to make the transition. And the shame of the 2000s is that we never then just glided into smooth growth. We had nonmarginal tax cuts under George W. Bush, which were bad. And then, Obama just consolidated the George W. Bush tax structure. So, we should have had a 21st century of just extraordinary economic growth.
[00:34:07] Joe Selvaggi: So, we’re getting close to the end of our time together, so I don’t like to have a show all about criticism, you’re a historian, but I suspect you, you do have an inclination towards looking to the future, I don’t think that’s a betrayal of your expertise.
[00:34:19] Given what you know about the future and the relationship between, say, tax rates and productivity and the well-being of everyone, rich and poor, what would you imagine as, let’s say, an optimal, tax structure whereby we encourage Rich and poor to go to work and be productive. we want to have, an efficient, productive, prosperous economy.
[00:34:40] What kind of a tax structure, based on your view of history, cultivates the optimal level of prosperity?
[00:34:46] Brian Domitrovic: yeah, if the tax take is 17%, when it’s 17 percent or 13 percent as Arthur Laffer says, flat tax rate, and then you would have no deductions and you just have the most efficient system.
[00:34:57] So, practically, that’s probably what I’d say. But ultimately, I’d say this. If the American economy and currency are leading the world, the United States has no grounds for having a tax system whatsoever.
[00:35:08] Joe Selvaggi: Interesting. That’s quite a bold assertion at the end of a show. That would be a different podcast and maybe I’ll circle back with you.
[00:35:16] Thank you very much for joining today. Where can our, you sent me along, your website, which is a collection of your essays, and a link to your book. Where can our listeners learn more about your work? The work of the Laffer Institute, is it? Laffer Center. The Laffer Center. Where can, if we’ve, piqued their interest, whet their appetite for supply-side economics, where can our listeners, read more about it?
[00:35:38] Brian Domitrovic: Yeah, so the Laffer Center. org is our website here at the Laffer Center, and I have my own personal website called globalmonetarism.com, and supply-side economics was first called global monetarism back in the 70s, so that’s why I use that term.
[00:35:51] Joe Selvaggi: Well, good. I’m good. I’ve learned a lot today, and I’m going to continue to dig into Your work, past and present, I’m fascinated by all of it.
[00:35:58] I really appreciate your time joining me today on the podcast, in this week of taxes, where it’s top of mind for everyone. I appreciate you joining me today. Thanks, Joe. It was great. This has been another episode of Hubwonk. If you enjoyed today’s show, there are several ways to support Hubwonk and Pioneer Institute.
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Joe Selvaggi talks with economic scholar Dr. Brian Domitrovic about the history of federal tax policy and the reasons for why varied marginal rates fail to correlate with either tax revenue or GDP growth.
Guest:
Brian Domitrovic is the Richard S. Strong Scholar at the Laffer Center in Nashville. He is the author or editor of six books, including “Taxes Have Consequences” (with Arthur Laffer and Jeanne Sinquefield), “The Emergence of Arthur Laffer” (2021), “JFK and the Reagan Revolution” (with Lawrence Kudlow, 2016), and “Econoclasts” (2009). He has been professor of history at Sam Houston State University in Texas and the Visiting Scholar in Conservative Thought at the University of Colorado Boulder. He holds a PhD in history from Harvard.
Hoover at Stanford’s Stephen Kotkin on Stalin’s Tyranny, WWII, & the Cold War
/in Featured, Learning Curve, News, Podcast /by Editorial StaffRead a transcript
The Learning Curve Hoover at Stanford’s Stephen Kotkin on Stalin’s Tyranny, WWII,
& the Cold War
Albert: [00:00:00] Well, hello, everybody. I hope you’re doing well. I want to wish you a warm welcome to this week’s episode of the Learning Curve podcast. I am one of your co-hosts this week, Albert Chang from the University of Arkansas. And co-hosting with me today is Mariam Memarsadeghi. Hey, Mariam. Good to see you again.
Mariam: Hi, Albert. Great to be with you again.
Albert: Yeah, glad to have you on the show again and I hope you’re doing well. Yes, looking forward to this one, especially. Yeah, that’s right. And so yeah, you’re right. Coming after the break, we’re going to have Stephen Kotkin talk to us about Joseph Stalin. [00:01:00] So I’m looking forward to that.
Before we get to that, though let’s talk some news. I wanted to bring up an article that I saw in the Wall Street Journal recently. The title is kind of provocative. India’s broken education system threatens its superpower dreams. And the sub-headline there is creating a competent manufacturing workforce is the country’s biggest challenge.
And, you know, the article, I’ll point listeners to it. And it’s worth some consideration. So apparently India. Wants to pivot to an economy that emphasizes manufacturing kind of like what China did maybe earlier. And, I think listeners here might know that certainly since the early 2000s, at least according to the article India really pivoted to information technology.
You know, software. I know we, you know, a lot of these tech companies and actually a lot of companies outsource a lot of their labor in India. And so India is really done [00:02:00] well and training students for software engineering of those kinds of fields. And now they want to pivot and this article is actually skeptical that India might be able to pull this off. I think what strikes me about this is I think there’s, there’s a lesson to be learned here, which is the dangers of reducing education to mere career preparation. I get it, you know, we need to make sure students have the proper human capital to contribute to the economy. But that’s not all, you know, education ought to be so much more. And, certainly, I think this is why we do the kinds of things we do on this podcast, right? And instead of doing things that might be temporal or things that might pass in a few years, like the labor market and the kinds of skills we need you know, I think I’d like to see education talk more about the enduring.
The human condition, the enduring questions make us human and have kids ask those kinds of [00:03:00] questions so that they might live good, morally worthy lives. So, think this article is, something to consider you know, lest we go too hard down the vocational track you know, we ought to go down that a little bit, but this is a balance I think that’s necessary.
Mariam: Yes, yes. And you just don’t know who’s going to be what. I mean, part of the, reason education is important is to provide young people with enough opportunities so that, they figure themselves out over time and through the opportunities. And schools don’t always get it right.
Certainly, governments can’t get it right to just say, okay, from age X or Y. we’re going to put these people into this type of work and these people into that type of work. And it’s one of the reasons America is as, empowered and successful as it is. It’s a very open education system, even compared to some other democracies around the world.
Albert: Yeah.
Mariam: Well, I’ve been kind of absorbed with this story, given what, my background is. Just for the audience, [00:04:00] reminder, I was born in Iran and came to the United States during the Cold War. The 79 revolution when I was seven years old and then really devoted my career to civic education for people living inside Iran as well as human rights advocacy and writing about these issues as well.
And so what’s happening at Columbia University? And really other universities in the United States are very upsetting to me because you know, I really see the fingerprints of Iran’s regime in what looks like student protests and they are, but they’re just of a fundamentally different character.
And so let me explain. I think that these kinds of anti-Semitic. Protests that we’re seeing on college campuses are completely different types of phenomenon than the protests on college campuses in the sixties and seventies for women’s [00:05:00] equality, anti-Vietnam war, racial equality, just entirely different.
I mean, these people right now, And maybe they are victims in some ways of bad education, poor education at the universities and their professors, but what they’re protesting is terror. they’re not protesting against war. They are. Not all of them, obviously, but when you are chanting for Hamas, you’re chanting for a terrorist organization.
And Iran’s regime yesterday and today and in its state media. Is celebrating the slogans and the dance circles and things of the protesters at Columbia. I mean, for, clear reasons, almost everything, almost all their slogans are the Iranian regime slogans. And, one article I noticed was put out by CNN and real clear.
Real clear politics, the real clear education section, that [00:06:00] website. And it’s about the rabbi on campus. Who’s, you know, asking students or encouraging them to stay home.
Mariam: Very disconcerting yesterday. I was following tweets by Debbie Die. Professor at Columbia, who has been very outspoken since the October 7th attack and how, you know, he was not permitted in the parts of campus where the protesters are.
And even his, ID was deactivated. And so, he’s been tweeting and one of his tweets yesterday, basically, you know, said this is 1938 what’s happened. So to see this on American college campuses and to see Iran’s regime celebrating it and to, it’s a long time coming because these are the fruits of a lot of investment in soft power by Islamists.
Iran’s regime, let me just really quickly plug that I wrote an article [00:07:00] about at Stanford University’s Hoover Institution about how Iran’s regime has really invested in the American university system. we hear a lot about this from the Chinese communists, but Iran’s regime has been slowly, but surely quietly working at this.
And I think we’re seeing the results now on campus. It’s just, it’s, honestly very infuriating to me.
Albert: Yeah, yeah, it’s a sad thing, sad development and very sobering maybe we’ll throw in a bonus news article. Actually, there’s a nice article at City Journal talking about Boston University’s situation when South African Apartheid was, going on, there were protests there and John Silber, who was president of Boston University in the 1980s, took a totally different response, and stood up to that and really navigated, I think, his, the, the institution well, through that and didn’t tolerate any of this kind of behavior.
So, to be a lot to learn through history and certainly, uh, speaking of [00:08:00] history stick with us after this break because uh, we’re gonna talk to Dr. Stephen Kotkin about Joseph Stalin. So, I’m looking forward to what we might learn from that and how that might cast some light on making sense of today.
So, stick with us after this break.
Albert: Stephen Kotkin is a senior fellow at Stanford’s Freeman Spogli Institute for International Studies, and the Kleinheinz Senior Fellow at the Hoover Institution. He is also the Birkeland Professor in History and International Affairs Emeritus at the Princeton School of Public and International Affairs, where he taught for 33 years.
Dr. Kotkin’s books include Stalin, Waiting for Hitler, [00:09:00] 1929 to 1941, published in 2017, and Stalin. Paradoxes of Power, 1878 to 1928, published in 2014. Part of a planned three-volume history of Stalin’s power in Russia and the world. He has also authored Magnetic Mountain, Stalinism as a Civilization, published in 1995, and a trilogy analyzing Communism’s demise, of which two volumes have appeared thus far.
Armageddon Averted, Soviet collapsed, 1970 to 2000. Published initially in 2001 with a revised edition in 2008 Uncivil Society 1989, and the implosion of the Communist Establishment published in 2009. Dr. Kin’s writing appears in foreign affairs, the Times Literary Supplements, and the Wall Street Journal among other venues.
He earned his B. A. in English from the University of Rochester and his M. A. and Ph. D. in history at the University of California, Berkeley. Dr. Kotkin, welcome to the show. It’s a [00:10:00] pleasure to have you on. Well, thank you for the honor. Let’s start with a term you’ve used to describe Joseph Stalin.
He calls him the Gold standard of dictators. So I’m curious about that. Could you share with our listeners why Stalin is perhaps the most influential figure of both the World War II and Cold War eras as well as some of the other larger themes you think are relevant for our listeners about this person you’ve studied for, quite some time now.
Stephen: Yes, Albert. So why do we study or read biographies? And the answer is, is because we’re looking for exemplary people. We’re looking for lives that can teach us How to live our own lives, people who live according to values that we might uphold or want to introduce into our lives, people who made difficult decisions and how they made them and why they made them and what consequences.
So you could think of the founding fathers, you could think of Harriet Tubman, [00:11:00] you could think of Franklin Roosevelt and Winston Churchill, you could think of a lot of examples. of people you’d want to study. A Stalin is not someone you study for an exemplary positive life, let’s say. You study Stalin as an exemplar.
His biography is an exemplar of something else. evil, and the effects of evil, where it comes from, and what type of consequences it can have on millions and millions of lives. Stalin was in power for more than 30 years. He built a military-industrial complex on a vast scale. He presided over the deaths of probably around 20 million people, not including World War II, which was of course an attack by Nazi Germany on the Soviet Union.
And he built the greatest dictatorship, really despotism of [00:12:00] all time. Hitler is in the same category as Stalin, but he lasted many fewer years. Hitler’s regime was over in 12 years when he committed suicide in the bunker in April 1945. Mao’s life also can be put in the same category as Hitler’s and Stalin’s, but Mao did not have a military-industrial complex.
He did not create a superpower in his lifetime. And so even though Mao ruled for a really long time, like Stalin, nonetheless, Stalin stands out. So if you’re interested in power uh, how to accumulate power, how to exercise power and what happens, what are the consequences when someone exercises power, Stalin is therefore the gold standard.
So an exemplary life. in a cautionary sense and the gold standard when it comes to power, especially authoritarian, dictatorial, despotic power. So it’s an irresistible [00:13:00] subject.
Albert: Yeah. Yeah. Yeah. And certainly this, you know, something we, we emphasize on this podcast the things we can learn from history about the human condition.
So very much appreciate your answer there. let’s get into his life. Let’s start with volume one really of it’s a two-volume series or three two volumes published so far, one volume to come. Ah, great. Well, the first volume, just to remind our listeners, is Stalin, Paradoxes of Power, 1878 to 1928.
So, in that volume, you, describe his background, quote, a poor cobbler’s son, a seminarian from an oppressed outer province of the Russian Empire, a top leader in a band of revolutionary zealots. So, talk about that era the First World War, and how did it create the wider political conditions for Russia’s Bolshevik Revolution set the stage here to help us understand Stalin.
Stephen: So he’s born in December of 1878 on the periphery of the Russian Empire in the [00:14:00] region known as Georgia. A separate language, a separate culture, and also Eastern Orthodox religion, but really not the same as Russia per se, Georgia’s inside the Russian Empire now for a a while when he’s born. He’s a very insignificant figure, and during the time of his birth, you would not have paid any attention to him.
And had it not been for World War I destroying the Russian Empire and enabling a ragtag group of far-left violent armed revolutionaries to seize and hold power in the capital Petrograd, formerly St. Petersburg, and again, St. Petersburg today. We wouldn’t know anything about him. So how do you write a biography of a person who’s born on the periphery of an empire and has lived for a really long time?
For the first years of his life. He’s got no job, [00:15:00] no profession, no source of income. He’s in and out of Siberian exile, czarist prisons. He’s persecuted by the secret police. for being a revolutionary, which is to say, having no profession to speak of. And as I said, no source of income. So it’s a story you have to tell not solely or predominantly from the point of view of the person who was born in 1878, but instead from the world in which he’s born.
So the book begins with Bismarck’s unification of Germany in the same decade of Stalin’s birth, the Meiji restoration of Japan. Just a little bit before the decade of Stalin’s birth, the late 1860s, and then these two episodes, the unification of Germany on the continent and Japan’s Meiji restoration, you have the birth of two new great powers on either side of the Russian Empire flanking.
The Russian Empire and [00:16:00] the rise of German power on the continent and the rise of Japanese power in East Asia will be two of the great problems that leaders of the Russian Empire and then of the Soviet Union will have to deal with. Russia loses to Germany in the First World War. It loses to Japan in a war in 1904 05.
And so these are the challenges and this is where the book launches and Stalin has to be placed into that context in order to understand the changes he wrought on the world, you have to understand the world into which he was born.
Albert: Fascinating. I mean, you certainly are whetting my appetite to dig into that era.
So why don’t we press into this era a little bit more? And so I think some of our listeners will be interested. Very familiar with Alexander Solzhenitsyn and so he’s got a multi-volume historical novel entitled The Red Wheel, which on events in Russia between 1914, August 1914 specifically, and April [00:17:00] 1917, and that’s when the demise of Tsarist Russia happened and the Soviet well.
Well, Could you put that work together with, your work? The first volume, Stalin Paradoxes of Power 1870 to 1920. What do these two works teach us about the ideological origins of Soviet totalitarianism and really Stalin’s central role in shaping the fundamental character of the Soviet regime?
Stephen: I hesitate to put myself in the same category conversation with the great writer, Alexander Solzhenitsyn.
Stephen: I apologize if I put you in that tough spot. That was what I understand now, but Solzhenitsyn was the second most important person. of the Soviet epoch. And so he’s a giant and his Gulag archipelago forever stamped that regime as both a metaphor and an analysis of what totalitarianism, just as you called it, was like and where it came [00:18:00] from.
Solzhenitsyn showed that Stalin was not a deviation from Lenin. But a fulfillment of Lenin’s vision and just in general, Solzhenitsyn’s work over decades has had an immortal, eternal impact. His One Day in the Life of Ivan Denisovich is one of the great little novellas, which was published during his lifetime in the Soviet Union, unlike most of the rest of Solzhenitsyn’s work.
So the Red Wheel is an epic about the revolutionary process. You have to understand that it’s really unusual for a bunch of far-left radicals. to hold power, to sustain themselves in power, not to seize power. This happened in the Paris Commune during France’s defeat to Germany in the period 1870 to 71.
A ragtag group of individuals seized power in the capital Paris, not in the rest of the country, and held it for a brief period of time before they [00:19:00] were put down by the forces of order. It happened in a few neighborhoods and towns in northern Italy. In the aftermath of World War One, it was again put down, and this is where fascism comes from, many of the early fascists were the shock troops who destroyed the seizures of power in the northern Italian towns by the leftists.
You had it in Hungary with Bellacombe, you had it in Bavaria, that is to say, in Munich, right after World War I, but every single time, the leftists were thrown out of power, usually by a peasant army, usually by what we would call the forces of order. In this particular case, not only did they seize power in the chaos, the anarchy of World War I, to which they greatly contributed. Not only did they seize power, but they held it and they built the state, they built the regime, which lasted All the way, as you know, through 1991. So that’s a big story and a story is not [00:20:00] limited just to 1917. What happened? The seizure of power in October 1917, amid the anarchy and chaos, it’s about building this state, building a dictatorship, and it’s about Stalin building a personal dictatorship inside the Leninist or Bolshevik dictatorship, and that’s a process that the book examines at great length.
And you have to say again that evil, as Stalin was, and he was very evil, it’s pretty remarkable that he was able to build a state of that scale and power, and then take on German power in World War II, and take on Japanese power in World War II, and effectively defeat them. Of course, in a coalition with the US and the UK.
With Roosevelt and Churchill, but nonetheless, that story was not something foreseeable in the chaos of 1917 and 18 that Solzhenitsyn writes about so eloquently in the [00:21:00] Red Wheel. It’s a really big story, somewhat of a mystery, or at least an enigma. To try to unfold that, and that’s what we try to do in Paradoxes of Power.
Albert: Yeah, well, let’s talk about some of the figures Trotsky in, particular. And so, certainly, we know that one of the founding fathers, you know, Lenin of the Soviet Union died in 1924. And so within a one-party socialist state governed by the Communist Party, you had Trotsky and Stalin vying for control.
Yeah, talk about these two men and what the dynamics between them were like, really, how did Stalin ultimately defeat Trotsky?
Stephen: Trotsky’s the kind of figure you would have seen. in a cafe in Paris or in a cafe in Vienna in the period before the First World War, reading newspapers, arguing amid all the cigarette smoke that fill the cafes.
Trotsky was a very, let’s say vivid person, but he [00:22:00] never was a figure who vied for power with Stalin. This is a mythology that Trotsky and his followers created in the aftermath of Trotsky. losing out to Stalin in a power struggle that was never really a struggle. So think about it this way. The revolution as we call it sometimes, but really the Bolshevik coup of October 1917 installs a Bolshevik monopoly, which changes its name from Bolshevism to Communist Party.
They’re communists because they’re building communism in the Marxist stages of history. It’s feudalism, succeeded by capitalism, succeeded by socialism, and eventually communism. So the Communist Party needed to build socialism first before it could build communism, changed its name as I said in 1918, and Stalin built this dictatorship inside the dictatorship.
So in April 1922, [00:23:00] Lenin created a new position. called the General Secretary of the Communist Party. He’s looking for someone who’s going to be his right hand, who’s going to manage all of the bureaucracy, including personnel appointments, while Lenin is in charge of the state. Lenin’s the equivalent of a prime minister.
He’s the guy running the government, the head of the cabinet-style monopoly Bolshevik regime. But he created this position for Stalin because He thought Stalin could do this. And in fact, next to the position of General Secretary of the Communist Party in Lenin’s own hand, we have Stalin’s name. So this was done in April 1922.
In May 1922, about six weeks later, Lenin had a stroke. It’s the first of several really debilitating strokes. Lenin had a series of illnesses. He would die in January 1924. But already from May 1922, Lenin was [00:24:00] partly incapacitated. So Stalin was appointed to this newly created position of general secretary which controls access to the secret police and access to the army and the party-state and all the party personnel appointments and the ideology and it is the nerve center of the regime and it’s supposed to serve Lenin but Lenin’s incapacitated.
So as of May 1922, Stalin is in power. Trotsky is nominally the Commissar of War. That is to say what we would call the Secretary of Defense today in the U. S. But in fact, Stalin is controlling the Red Army by virtue of being the General Secretary of the Party. So there never was a succession struggle because Stalin was already in power.
For someone else to take power, they would have had to evict Stalin from power, which is where Lenin put him. Now, of course, Stalin could have said, Oh, well, you know, Lenin didn’t create this [00:25:00] position for me to take over. He expected to live. And so it’s not right that I have all this power that I can control the secret police and the military and the party machine and the ideology.
I should share this with other people. Well, as you know, Stalin was not that kind of person. On the contrary, once he saw the position he was in, he began to, as I said, build that dictatorship, that personal dictatorship within and Trotsky was rather easily marginalized. In a situation where Stalin was at the center and Stalin was capable of building and running a dictatorship, which all the other figures in the regime recognized, Stalin resigned six times in the 1920s, three times in writing and three times orally.
Between 1923 and 1927 28 and each time [00:26:00] the other comrades in the hierarchy of the Communist Party ruled alongside Stalin, each time they begged him to stay, and so it was clear to them that Stalin was tremendously capable and carrying this regime on his back. What they didn’t perceive in real time was that Stalin would go on within a decade to murder them all.
And if they had seen that Stalin already in the 1920s, they would have latched on to his requests. To resign, and they would have pushed them out. But instead, they brushed aside those requests and begged him to stay. And so one of the arguments of the book is that Stalin was not born Stalin. He became Stalin, the one we know in the process of building that dictatorship of acquiring power and exercising power.
So it’s a story about Russian power in the world, which has relevance today, [00:27:00] as well as a story about Stalin. The purse.
Albert: Wow. Yeah. Fascinating. I mean, is fascinating to hear and, you know, get to know this, figure. last question before I turn you over Mariam you know, speaking of consolidating power another aspect of this is his force peasant collectivization.
And so this is I mean, you mentioned earlier how he forgot the verb you used, but he kind of oversaw the death of millions of folks. So, yeah, talk about peasant collectivization these kinds of mass murdering events that happened as a consequence of Soviet communism, and his relation to how Stalin used that to consolidate his power.
Stephen: One of the most important things to understand about the far left, the anti-capitalist left, the left that thinks capitalism is evil and must be eradicated. One of the most important things to understand about them is that they have no electoral path to power. Their only path to power is force. People will not give up [00:28:00] voluntarily their private property and their freedom.
If you want to take away their private property, if you want to destroy private property, if you want to eliminate markets, if you want to eliminate the ability of people to build their own businesses, you can only use force to do that. You’re not going to have a voluntary relinquishing of either person’s property.
For their freedoms. And so in 1928, 1 percent of the arable land in the gigantic Soviet Union had been voluntarily collectivized by the farmers. 1%. And that 1 percent reflected largely people who were unable to farm and tried to make up for their incapacities by joining with others who were similarly not very good.
And so what you get, therefore, is a party that’s dedicated to the destruction of capitalism, to the elimination of [00:29:00] markets and private property, as well as what they call bourgeois parliaments. That is to say representative government. They’re dedicated to its destruction because they think it’s evil.
They think it causes alienation as Marx wrote. They think it causes war and so they want to eliminate it and the rest of the ones around Stalin are afraid. They’re afraid to go for broke and eliminate it. You see, because the peasants had their own revolution in 1917 18. They had de facto control over the property.
They didn’t have legal control over the property. In the cities, you had the Communist Party monopoly. And in the countryside, you had the peasants with their de facto, not de jure, but de facto control over the land. So this was the clash. The Marxist regime believed Capitalism was evil, and it also believed that the base, the economic base, determined the politics or the superstructure.
So therefore, a [00:30:00] communist party politics, a communist party monopoly, a communist party superstructure, no matter how many party members, no matter how much force and secret police, could not last if the base The underlying base, the economy, the socioeconomic base was capitalist. And so Stalin decided to destroy capitalism across 11 time zones, a sixth of the Earth.
It was a remarkable decision he took in early 1928. And even more remarkable than the decision, which shocked everybody, was that he did it. He carried it out. He went all the way. And so he destroyed capitalism and produced a despotism. The gulag, that is to say, the labor camps, the ration tickets, that is to say, the shortages in the rationing, the unfreedom, the wasteful state, completely [00:31:00] state-owned and state-run economy.
He produced all of that by eliminating capitalism. And people would say, Oh, you know, this was a perversion. That’s not what Marx wrote. Marx wrote that if you eliminate capitalism, private property markets in bourgeois parliament, and representative government, you’ll get freedom, but you don’t get freedom. You get complete statization.
And so this leftist seizure of power. And then leaving this destruction of capitalism is a lesson because it happened again and again. Mao saw what happened, and how many people died when Stalin did this. Mao had the Soviet example to go on and he just did it again, knowing. the kinds of severe repression necessary and the consequences of millions and millions of people dying.
And so Stalin’s story of [00:32:00] enslavement of the peasantry, collectivization of agriculture, is one that’s emblematic of all those who think That capitalism is evil and must be eliminated.
Mariam: Fascinating. Professor Kotkin. I’m just listening to every word partly because I’m focused on Iran. I’m originally from Iran and Stalin has influenced me. Iranian history in the sense that it was a driving force of some of the revolutionaries and then Khamenei, the supreme leader is a student of that whole history and the NKGB tactics.
And then I personally, right now, I’m really listening to you. thinking about a future government for Iran, how do we avoid, and prevent a new kind of authoritarianism, if not totalitarianism, because I think the lesson from your work is that it can happen. and it can happen even by a [00:33:00] person who is really disempowered from the fringes of society.
Like a kind of a loser, a loser can even make it up there and kill many millions of people. So, in volume two, Stalin waiting for Hitler 1929 to 41 you begin by saying Stalin was a human being. He collected watches. He loved gardening. He wore semi-military tunics. He liked colored pencils. He smoked a pipe. Could you talk about the Man of Steel as a person, his character traits, family, and how his daily schedule and decisions as dictator extended across the Soviet regime, including the tens of millions who perished in his forced labor gulags between the 30s and early 50s?
Stephen: Yeah, Miriam, thank you for that question as well. Evil is more understandable, and more believable when it’s human. There’s no need to caricature, there’s no need to [00:34:00] paint in a way with such a broad brush that everything an evil person did was always evil, that they were evil from the moment they were born, that they never had anything but evil thoughts.
Just as our heroes. Have many warts, many blemishes, and to understand their heroism. It’s necessary to understand all aspects of their character, all their limitations, as well as their greatness. So it is with evil people. It’s necessary to understand them as people. And so Stalin was a person who. Worked hard in school as a young boy.
He got outstanding grades. He sang in the choir. He went to a church school and he sang in the church choir. He entered a seminary to become a priest, a priest, and monk, and was on track given his excellent grades in school to become that. [00:35:00] He wrote poetry, actually pretty good poetry as a teenager. In the Georgian language, which of course was his native language, he would switch to Russian in the seminary because most of the subjects at the seminary in Belize, the capital of the Georgian area, were in Russian.
But nonetheless, he had a life and that’s not a life where you can see the monster. coming later on. Instead, what you see is a guy who’s dedicated to social justice. He begins to read literature that’s banned by the czar’s censors. He begins to see all the injustice of imperial Russia around him, and there is tremendous injustice.
It wasn’t something he made up, and he dedicates his life to overthrowing this regime, and therefore he is sent, as I said, into exile in prison. And has a life without a profession, without an income [00:36:00] until he’s 39 years old. So his entire adult life from 17, to 18 years of age to 39 is spent on the run fighting for social justice against real injustice.
However, Stalin’s regime would produce far greater injustice in the Soviet Union than he had fought against in Imperial Russia. So intentions are not enough. And sometimes you can produce the opposite. You can have what we call perverse and unintended consequences. You can say we’re going to lead a revolution to overthrow injustice.
And you can instead, as happened in Iran, institute a worse form of injustice in the name of justice. And so this is a lesson that we have to relearn again and again and again. The road to hell is paved with the best intentions. Now having said that, this doesn’t [00:37:00] vitiate Stalin’s dedication to social justice.
It was real. That’s the person he was. Now, once he gets into power, any means as a Leninist, as a follower of Lenin, as someone close to Lenin, any means are considered necessary to attain the ends that they’re pursuing. The elimination of markets, and private property, that is capitalism and representative government.
And so you begin to see him using some of the same methods that the czarist regime used against him. But only he uses them even more vigorously and at an even greater scale and there are just infinite geometrically more victims as a result. So he is a real person and he does have an interesting life and we need to understand how he thought and how he could become the person he became.
Mariam: Well, I’m very interested to know this because [00:38:00] I’m always thinking about this when it comes to dictators. How aware do you think he was of his own evil?
Stephen: So for him, it wasn’t evil. Capitalism was evil. Markets and private property were evil. And so what he was doing was bringing about a new world of justice against evil, against the imperialist war, against mass unemployment, against capitalist alienation of the worker.
So his worldview, we don’t share his worldview, but his worldview needs to be taken seriously. The key discovery of going into the formerly secret communist party archives is that they were communists. Same thing we discover when we see the internal Nazi documents. They were Nazis. They had ideas.
The ideas are hateful. The ideas brought about suffering that’s hard to encompass, but [00:39:00] nonetheless, they were sincere. They were not merely cynical. you get to understand him and you get to fathom the way his mind worked. And so he would never admit that he was evil, quite the opposite. He thought that he was doing the communist version of God’s work.
Mariam: Even when it was about executions and starvation, there was no sense in anything you’ve studied that he had misgivings, doubts, worry.
Stephen: We don’t have a single recorded instance of him expressing significant doubts about what he was doing. We have one major apology that was public in World War II.
When he was speaking in May 1945 at a banquet in the Kremlin in a speech that would be published in Pravda the next day, and he admitted that, quote, our government, unquote, made mistakes that were his [00:40:00] one major admission of guilt or of mistakes, and it was referring to the early World War II catastrophes that befell the Red Army and the Soviet people under his leadership.
But otherwise, no. Doubts or guilt or expressions of apology are really unheard of with him.
Mariam: But this is not the case with, leaders of the Soviet Union in the end stage of, that regime, right?
Stephen: No, certainly when you get to the Gorbachev period, which was not intending to bring about the end of the Soviet Union, it was intending to bring about its revitalization.
And part of that was about admitting the mistakes, but the mistakes were attributed to Stalin personally, not to the system. The same thing Khrushchev did. Nikita Khrushchev didn’t say that the system was evil. He said that there was a cult of the [00:41:00] personality, that Stalin had become evil and Stalin had deformed the revolutionary process.
That was Khrushchev’s de Stalinization speech of 1956, which Gorbachev revived, blaming the problems not, as I said, on the system per se, but on mismanagement, on bad people, on bad leaders, rather than on the fact that when you eliminate capitalism, private property, You get poverty. And when you eliminate representative government and constraints on executive power, you get tyranny.
That’s not what they said when they admitted mistakes in either the Khrushchev or the Gorbachev.
Mariam: Okay. Okay, good. So again, the volume two Stalin waiting for Hitler. You focus on Stalin’s shrewd understanding of Soviet politics and culture, as well as his foreign policy. Would you tell us about Stalin’s view of geopolitics, and how it influenced his [00:42:00] relations with Hitler’s Germany, and other powers like Britain, France, and Japan during the years between the two world wars?
Stephen: So Stalin was a Marxist Leninist. He believed that there was something called imperialism and that imperialism caused war. That the capitalist powers in their drive for markets An ever-greater exploitation would inflict war on the world. And so Stalin’s goal was to avoid the capitalists ganging up on him.
It was to divide the capitalist coalition. It was to try to pit the capitalists against each other so that if there was an imperialist war, as he described it, it would be between the capitalists or among the capitalists and the Soviet Union could maybe sit it out. And then take advantage. of the distress self destruction of each other by the capitalists.
And so you see this in [00:43:00] his foreign policy in the 1930s, trying to peel away Nazi Germany from Britain and France. The United States is largely outside European geopolitics in the period after World War I before World War II, as you know. So for Stalin, it divides the potential. what he calls a capitalist anti-Soviet imperialist coalition.
And he was successful for a time because he signed a nonaggression pact in August 1939 with Hitler. in this pact, Hitler and Stalin divided Poland up between themselves. They both attacked Poland and then Hitler turns his attention to France and Britain in the West, so Stalin diverted the Nazi land army, the Wehrmacht, Hitler’s power.
He’s diverted it westward and protected the Soviet Union, and in fact, Stalin is supporting Hitler’s regime [00:44:00] economically. The way the Chinese Communist regime today supports Russia in its aggression against Ukraine, Stalin is sending all manner of critical raw materials, especially grain and oil, to the Nazi war machine as it destroys France.
The problem with this brilliant idea of dividing the capitalists against each other and pushing Hitler westward is Hitler was a lot more successful than anticipated. And so instead of four years and four months or four years and three months, which is what you have in world war I, France falls in six weeks.
And so Nazi Germany is triumphant on the continent and can now turn its attention eastward and take on Hitler can take on Stalin and move all the troops that he needed to conquer France back to the east. Where he now has a common border with Stalin, thanks to the dividing up of [00:45:00] Poland. And so Stalin’s genius begins to look less like genius, now that he has overly supported the Nazis in their quest to destroy France.
Now Britain is defended by Stalin. By the channel, it’s off the continent. As you know, it’s an island country. It’s defended by the channel and also by the Royal Air Force. So Britain doesn’t capitulate under Churchill, but nonetheless, they can’t remove the Nazis from the continent. So Hitler is secure in the West in some ways and decides to turn against Stalin and Stalin doesn’t have an answer.
Now he’s bereft his grand strategy has hit a wall and soon enough Hitler will attack him in June 1941.
Mariam: So going back a couple of years 1939, Nazi Germany and the Soviet Union signed a nonaggression pact, secretly partitioned Central and [00:46:00] Eastern Europe between them. Could you talk to us about the context of that pact, and the wide implications of this agreement on the world’s opinion of Stalin’s USSR?
And the long-term implications the treaty had on the fate of Poland and helping start World War II.
Stephen: Yeah, those are really big and important questions and very complicated.
Mariam: It’s a lot of them.
Stephen: But most people will begin with Neville Chamberlain, the prime minister of Britain, and his so-called appeasement policy.
Appeasement originally was a positive term. It meant doing diplomacy. in order to avoid war. Now, you were supposed to also build up your deterrence, your military capabilities, so that when you went into the diplomacy, you had both deterrence and diplomacy. Both Chamberlain’s predecessor and Chamberlain had not done a sufficient job in building up the military in the [00:47:00] UK.
And it’s unclear whether Hitler could have been deterred in any case, some leaders are just not susceptible to deterrence. We hope that Xi Jinping today would be susceptible to deterrence, but Hitler proved not to be. And so Chamberlain tried to accommodate Hitler and give Hitler things to try to satiate Hitler’s appetite.
And this is the infamous Munich Pact. of the fall of 1938, when Chamberlain, along with the Prime Minister of France, traveled to Munich to negotiate handing over a part of Czechoslovakia, a sovereign state, to Hitler. In other words, without the Czechs agreement, Chamberlain handed over the so-called Sudetenland, an ethnically German region of Czechoslovakia, not Holy, but predominantly ethnic German region of Czechoslovakia [00:48:00] hands it over to Hitler in Munich 1938 in the hope that this appeasement, this deal, this bargain, this accommodation of Hitler will be the end, that Hitler will be satiated and not want more.
But of course, the appetite grows in the eating. Chamberlain misunderstood Hitler. But here’s the big thing that your listeners need to understand about the Munich Pact, which was disgraceful and cannot be defended. Chamberlain’s critics at the time said, well, why are you accommodating Hitler? How come you don’t go into a coalition with Stalin and fight a war against Hitler?
Now, Stalin had murdered. His own elites in the so-called terror. He had destroyed his upper officer core, and his diplomatic officials, calling them home from abroad and executing them in the cellars with a bullet in the back of the neck. It was not a regime you wanted to be in [00:49:00] alliance with. But that wasn’t only what Chamberlain said to his critics, he said to them, well, if I go into an alliance with Stalin and we fight Hitler and we win, how do I get the communists out of Central Europe?
In other words, a victory of the UK and the USSR against Nazi Germany meant that the USSR would likely be in occupation of Nazi Germany and Central Europe. And so Chamberlain, for all his mistakes and foibles and miscalculations understood in 1938 what we would eventually call the Cold War, which was that a coalition, eventually including the US as well as the UK, with the Soviet Union, with Stalin’s Soviet Union, would draw Stalin into the heart of Europe.
And so, as I like to say, in many ways Hitler was the one who started the Cold War that Chamberlain foresaw.
Mariam: [00:50:00] At the 1943 Tehran Conference, Stalin said that World War II would be won with British brains, American steel, and Soviet blood. The Soviets lost around 27 million people during the war, including 8. 7 million military and 19 million civilian deaths. Stalin ultimately secured from FDR and Churchill much of central and eastern Europe.
Would you discuss a few elements of Stalin as a war leader, his dynamics with his generals, and his relationship with the allied leaders?
Stephen: Yeah, another really big one, the Tehran Conference of 43. Stalin flew on an airplane for the first and last time he was afraid to fly leading to the Yalta Conference of February 45, and eventually Potsdam.
It’s a really big story, the Roosevelt Churchill Stalin meetings, negotiations, and the outcome of the war. [00:51:00] The main thing for your listeners to understand is that The United States is an expeditionary force. It’s the greatest military in the history of civilization. It can send significant numbers of troops and equipment at great distances anywhere across the globe, and it’s really quick, in short periods of time.
It’s just a marvel, the U. S. military, this gigantic expeditionary force. Big wars like the war against Nazi Germany or Japan and East Asia, they’re won by land arms, not by expeditionary forces. The casualties in war at sea or war in the air are a mere fraction of the casualties in land war. So you could argue that Roosevelt, the United States, the great expeditionary force, and his partner Churchill rented the Soviet land army to destroy the Nazi [00:52:00] land. And so the United States casualties in the war, about 400, 000 or so deaths don’t compare to the 11 million Red Army deaths in battle. Plus the 27 million overall Soviet deaths. We did something similar in the East Asian theater where we rented the Chinese army and the Chinese suffered at least 13 million casualties, probably more.
That’s the lowest estimate. And the Japanese broke their teeth. Trying to garrison China even before the US entered the picture and began to fight Japan and that island-hopping campaign that we all know, and that the US came out victorious. So if you add up the 27 million Soviet deaths and the 13 million Chinese deaths, the minimum estimate, you get 40 million of the 55 million deaths in World War II.
Soviet and Chinese, 40 million of 55 million. So that’s [00:53:00] where the war was fought. That’s where the people died. That’s where the sacrifices were made. And that’s how the U. S. and the U. K. were able to come out victorious because someone else did the dying for them. This was well understood by Roosevelt. He understood that this would have enormous political implications for the post-war settlement.
Churchill didn’t want to understand this, he wanted to override this, when in fact Churchill was a bit player compared to Roosevelt, just because the U. S. production facilities on the home front and the U. S. fighting force was just so much larger and more decisive in the war, including Len Lee’s. So in the end, We got a settlement that Stalin imposed because there weren’t other choices.
Either the U. S. was going to suffer the 11 million casualties, which we’ve never suffered, [00:54:00] and God forbid we should ever have to suffer in a land war. Or, the U. S. was gonna outsource the land war to Stalin, and therefore, that was partly outsourcing also the post-war settlement. And so there’s a lot of hand-wringing over how Roosevelt bungled.
Tehran and how we bungled Yalta and he let Stalin take over Eastern Europe and impose Soviet clone regimes in Poland and Czechoslovakia and half of Germany and elsewhere. And the answer to that is. What were the actual alternatives? What would you have done differently given the circumstances?
Democracies cannot just throw people in a meat grinder and let them die. Send a million enslaved collective farmers to the front to die. And when they do die, go back to the [00:55:00] collective farms and get another million and send them to their deaths and do that again and again and again. That’s not how democracies work.
We see Ukraine facing some of the same challenges against Russia today, where Putin doesn’t care about casualties, but Zelensky must care about casualties and value life. in the flawed democracy that Ukraine is compared to Putin’s dictatorship. And so in the end, the bungling is, true. Roosevelt did bungle in some ways.
The alternative room for him to maneuver was highly constricted, and it’s not clear whether he could have done what his critics did. Said he should have done it before he himself died in April 1945. Stalin was a shrewd, conning person at the negotiating table, but just as importantly, he had the forces and he was willing for them to die in the millions.
You know, George Shultz, my former colleague, the former [00:56:00] secretary of state, the president Reagan at the Hoover institution who passed away after reaching his centenary, he was one of the great diplomats. In recent modern American history, he used to say, you have to do diplomacy. You have to negotiate.
It’s absolutely critical, but it helps a lot if the shadow of force is cast over the diplomatic table. That’s what Stalin did in World War II. Is
Mariam: it fair to say that Churchill and FDR didn’t really know how awful Stalin was domestically. In other words, do we know a lot more since the end of World War II about Stalin?
Stephen: Of course, we know more. The archives that were formally closed were opened. But you know, it wasn’t like the archives opened up and we discovered, oh, you know, we didn’t realize. This was actually a [00:57:00] parliamentary democracy, not a purity, we knew and they knew, we just didn’t know the details and we didn’t always know the scale precisely, but we knew the scale and orders of magnitude.
Roosevelt was no fool, and Churchill was a lifelong anti-communist for a reason. The question was, what could they do? They needed Stalin in alliance. The thing that Chamberlain wouldn’t do. Right. Form an alliance with Stalin against Hitler and pay the price for that.
That’s what they did. They formed the alliance and Churchill said it himself. He would form an alliance with the devil if it was necessary to save Britain. And that’s what he did. And so the consequences are not that shocking. These were not naive men. Roosevelt was one of the greatest politicians this country has ever seen in terms of pure politician, a real pole, as they say, he was shrewd.
He talked over all sides of his mouth. [00:58:00] He told everybody what they wanted to say. He kept things ambiguous. So they all thought he was supporting them rather than the other guy. But he wasn’t going to hoodwink Stalin. He wasn’t going to substitute the American army for the red army on the battlefield either.
Also he was sick and infirm and in fact, he died only 82 days into his fourth term, not long after the conference in Yalta, where he was very ill and Stalin noticed just how ill he was. And how little time Roosevelt had left. But that wasn’t the problem. The problem wasn’t his sickness. It wasn’t his naivete.
The problem was there was a bargain to defeat Hitler and you had to get in bed with the devil and you then had to pay the consequences, the price for that, the price of the cold war. And that’s a lot better than hot war. And we won the cold war. So in the fullness of time, you could [00:59:00] argue that Roosevelt and especially Truman were right.
And Stalin lost the peace in the fullness of time. Yes, he was on the winning side in the war, but in today’s Russia, the Soviet Union is gone, and Russia is farther from Europe than Stalin. Since Peter the Great, with the small exception of Kaliningrad, that province they took from Germany where Immanuel Kant was born and Russia still controls, they’re very far from Europe.
And so in the fullness of time, without losing millions of people in a hot war against the Soviet Union, we won the Cold War, which Chamberlain foresaw would be a challenge. And George Kennan, my former colleague at Princeton University when I worked there, I have to say, also foresaw how this would work.
And so, deterrence and diplomacy, not necessarily sacrificing millions and millions and millions of young boys and [01:00:00] girls.
Mariam: Mm-hmm. We’ll have a million smaller questions related to that last question, but I will move on to our final question. The third volume of your magisterial biography, Stalin, Totalitarian Superpower, is reportedly due to be in 2024.
Could you give us a preview of your observations about Stalin’s Soviet Union during post-World War II and early years of the Cold War.
Stephen: I wish we were going to be out later this year, Miriam. I’m sorry to disappoint your listeners. I’m still working on it. I was working on it all morning before I got on the call with you.
It’s going to take a couple more years. Wow. The argument there is about how the Soviet Union was a superior totalitarianism to Nazi Germany. That may sound A little bit, I don’t know, paradoxical, but it was a superior [01:01:00] totalitarianism to Nazi Germany, but an inferior superpower to the United States. And so in the fullness of time, it was able, in coalition with the U.
There’s a subplot in there about the Chinese revolution and Mao and how Mao would eclipse Stalin because Stalin was old and infirm and Mao was young and healthy and the future of the global communist movement and over time, China would eclipse Russia [01:02:00] and become the senior rather than the junior partner in Eurasia.
That subplot is inside the story. of the inferior superpower vis a vis the United States.
Mariam: Can’t thank you enough. I haven’t been this absorbed in by anything in, so, so long. Thank you so much, Professor Kotkin.
Stephen: My pleasure.
Mariam: Professor Kotkin, could you please read a passage from your book?
Stephen: Of course. Let’s take volume one, just the single paragraph, pages 387 and 388, setting the scene.
I mean, this is the 10th party Congress. In 1921, the regime’s been in power not quite four years, and they’ve won the Civil War, so there’s this tremendous relief and sense of victory that they have. And they’re putting together something called the Union of Soviet Socialist Republics, a new version of the [01:03:00] state to replace the Tsarist Empire.
For Marxist Leninists, nationalism is like religion. It’s a false god, whereas class is supposedly the predominant way that the world is or should be organized. And so Stalin is speaking. He’s at the podium at the 10th Party Congress. He’s in charge of nationalities and here he is. Stalin got the last word and attacked an array of objections.
Quote, Here I have a written note to the effect that we, communists, supposedly artificially forced a Byelorussian nation. This is false because a Byelorussian nation exists, which has its own language different from Russian. and that the culture of the Belarusian nation can be raised only in its own language.
Such speeches were made five years ago about Ukraine [01:04:00] concerning the Ukrainian nation. Clearly, the Ukrainian nation exists and the development of its culture is a duty of communists. One cannot go against history, end quote. So that’s Joseph Stalin in 1921, telling his fellow communists that nationalism was not ephemeral, but that nationalism had to be taken into account, which was why they formed the Union of Soviet Socialist Republics, like Soviet Ukraine and Soviet Byelorussia, rather than one single unitary imperial Russia.
But for your listeners, think about this. very much. Stalin is acknowledging Ukraine as a separate nation, as a real nation, something which Vladimir Putin today refuses to do. So, your listeners can quote Stalin against Putin in arguing for the existence of a real [01:05:00] Ukrainian nation. Amazing.
Mariam: Can’t thank you enough. I haven’t been this absorbed in by anything in, so, so long. Thank you so much, Professor Kotkin.
Stephen: My pleasure.
Albert: I really enjoyed that interview as well.
Mariam: Yes. It was fascinating.
Albert: Yeah, lots to learn, certainly whet my appetite dig in Stalin a little bit more. that brings us to the conclusion of our show this week, but before we close out I want to give the Tweet of the Week, which comes from Education Next.
It [01:06:00] reads, but fostering high quality learning requires high quality teaching. I can’t just lecture at my students. Rather, teaching complex matter requires a combination of dialogue, authentic engagement, and mentoring. You know, that’s a line from an article over at ednext entitled, There are no shortcuts to thinking.
Where uh, higher ed instructor reflects on the capacity, the potential of AI to offer what he said there in the tweet, dialogue, authentic engagement and mentoring I’ll direct listeners to check out that article. I think this is You know, the question a question on many folks minds.
What’s the role of AI and its capacity in education? Right now, personally, I’m a little bit more bullish. You know, I don’t know whether this is going to deliver. I suppose on the promises, but certainly this article, at least this individual who wrote the article more optimistic. And so I’ll.
Leave it there for listeners to consider and think through and come to their own [01:07:00] decision. Miriam thanks for co hosting with me. This week is always great to have you on. It’s always a pleasure. Thank you very much. And I hope you join us next week for our episode on the learning curve podcast.
We’re going to have. Colonel Peter Hayden, who is general counsel at United States Cyber Command. So that should be a fascinating conversation. I’m looking forward to speaking with him. So I hope you join us and have a good day and good week until then. Goodbye now.
This week on The Learning Curve, guest co-hosts University of Arkansas Prof. Albert Cheng and Mariam Memarsadeghi interview Stanford University senior fellow and biographer of Joseph Stalin, Dr. Stephen Kotkin. He explores Stalin’s origins, consolidation of power, and his Communist despotism. Kotkin delves into Stalin’s cunning political maneuvers, his complex relationships with other Soviet leaders like Lenin and Trotsky, and the devastating consequences of his regime, including the forced collectivization and mass starvation of millions. Additionally, Dr. Kotkin examines Stalin’s role as a wartime leader, his alliances with Western powers, and the far-reaching implications of the Nazi-Soviet pact. He shares a preview of the forthcoming third volume of his Stalin biography, offering insights into Stalin’s Soviet Union during the post-WWII era and the early years of the Cold War. In closing Dr. Kotkin reads a passage from his first volume, Stalin: Paradoxes of Power, 1878-1928.
Stories of the Week: Albert addressed an article from The Wall Street Journal discussing troubles with India’s education system; Mariam shared an article from Real Clear Education on Columbia University’s Rabbi’s message to Jewish students.
Guest:
Tweet of the Week:
https://x.com/educationnext/status/1782371326360985673?s=46&t=ABfrvSJ97fqBLKfOnxBuPw
Superior Court Judge Invalidates “Equity Theft” Law as Unconstitutional
/in Blog, Featured, News /by Editorial StaffDecision brings Massachusetts into compliance with 2023 U.S. Supreme Court ruling
SPRINGFIELD, MA –A Massachusetts Superior Court has ruled that a state law allowing municipalities (or private actors to whom municipalities sell the right to foreclose) to foreclose on homes due to property tax debt without having to pay the homeowner the difference between the taxes owed and the value of the home is unconstitutional as applied to the facts of the case at hand.
Ashley Mills was on the verge of losing her fully paid for Springfield home worth around $230,000 due to a $22,000 property tax debt. On Mills behalf, the Pioneer Public Interest Law Center, Greater Boston Legal Services, and the law firms of Morgan Lewis and Greenberg Traurig successfully challenged the law, known as Chapter 60, that would have allowed Springfield to keep the more than $200,000 difference between the home’s fair market value and the taxes owed.
The ruling by Springfield Superior Court Judge Michael Callan comes after the U.S. Supreme Court unanimously ruled last year in Tyler v. Hennepin County that a Minnesota statute substantially similar to the Commonwealth’s “equity theft” law was unconstitutional because it denied reasonable compensation to a homeowner for the taking of her property.
“We see many low-income or elderly homeowners who, having long ago paid off their mortgages, fall behind in their taxes,” said Catherine Kay of Community Legal Aid, who represents Ashley Mills in the Land Court tax lien foreclosure that led to this action. “Suddenly they face losing their homes and all the equity they built over the years. “Not only does the statute deprive these homeowners of their hard-earned equity, but it does so without adequate notice and hearing rights.”
“This is primarily a legislative issue,” said Attorney Todd Kaplan of Greater Boston Legal Services. “Judge Callan properly called upon the Legislature to take action to correct the injustice of Chapter 60.”
Mills, 26, lives with her two-year-old son and disabled mother in the home she inherited from her grandmother that is her only financial asset. If it is foreclosed on and she doesn’t receive the more than $200,000 of remaining equity after the tax debt is satisfied, Ashley, her toddler, and her disabled mother are at risk of becoming homeless even though they have an asset worth hundreds of thousands of dollars.
In 2016, Mills was unable to pay $1,636.70 in property taxes she owed. Over the next three years, she entered into payment agreements with the city, but was unable to catch up, largely due to a punitive 16 percent interest rate and other charges imposed by Springfield under Chapter 60. The City of Springfield filed a motion for judgment of foreclosure in May 2023.
“In Tyler, the Supreme Court sent a clear message that any surplus beyond the tax debt should be returned to the homeowner,” said Pioneer Public Interest Law Center President Frank Bailey. “Massachusetts is one of a minority of states that has a law like Minnesota’s, and the Supreme Court’s ruling makes it clear that such laws are unconstitutional and therefore unenforceable. Cities and towns are on notice that using Chapter 60 in this predatory manner violates fundamental rights under the federal and state constitutions.”
In a timely and well-reasoned opinion, the Hampden Superior Court found Chapter 60 unconstitutional. Both owners of real estate and municipalities were in need of such a definitive ruling by a Massachusetts court. Now the state Legislature must act to address the constitutional infirmities in Chapter 60.
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Community Legal Aid (CLA) provides free civil services to the low-income and elderly residents of the counties of Western and Central Massachusetts (Berkshire, Franklin, Hampden, Hampshire, and Worcester, and maintains offices in Worcester, Fitchburg, Springfield, Northampton and Pittsfield. CLA works to assure fairness for all in the justice system, protecting homes, livelihoods, heal and families. For more information, please visit www.communitylegal.org.
Greater Boston Legal Services (GBLS): GBLS assists survivors of domestic violence, homeless families, elders, people with disabilities, homeowners facing foreclosure, tenants facing eviction, low-wage workers, families with no source of income, and immigrants facing persecution. Annually, GBLS provides legal assistance to more than 10,000 families and individuals who live at or below 125% of the federal poverty standard. GBLS also provides legal counsel to dozens of community-based groups and organizations and conducts strategic impact advocacy to bring about positive systematic change throughout the region and state. For more information, please visit www.gbls.org.
Pioneer Public Interest Law Center (PPILC) is a nonprofit, nonpartisan legal research and litigation entity, organized under Section 501(c)(3) of the Internal Revenue Code. PPILC is a public-interest law firm that defends and promotes educational options, accountable government and economic opportunity across the Northeast and around the country. Through legal action and public education, PPILC works to preserve and enhance liberties grounded in the constitutions and civil rights laws of the United States and the individual New England states.
Tax Man Confounded: Why High Rates Haven’t Yielded Higher Revenue
/in Featured, News, Podcast Hubwonk /by Editorial StaffClick here to read a transcript
[00:00:00] Joe Selvaggi: This is Hubwonk. I’m Joe Selvaggi. Welcome to Hubwonk, a podcast of Pioneer Institute, a think tank in Boston. On April 15th, we commemorated the 111th anniversary of our federal income tax, which the 16th Amendment instantiated into the U. S. Constitution in 1913. Since then, the top marginal rate has swung dramatically from a modest 7 percent at its inception to a staggering 94 percent post World War II, eventually settling at 37 percent today.
[00:00:33] What’s intriguing isn’t just this wide range of rates, but the rather consistent 16 19 percent range of total GDP revenue collected by the government throughout. What’s even more perplexing is that periods of robust GDP growth, notably in the 1950s and 60s, coincided with sky-high top marginal rates.
[00:00:54] Providing fodder for contemporary proponents of higher taxes to argue that high rates don’t impede growth. However, delving into history reveals that as tax rates climbed, so did efforts to legally evade them through tax-avoiding compensation strategies. These incentives led to an era of corporate indulgence, marked by lavish non-income perks like luxurious office spaces, company-funded vacations, and leisurely three-martini lunches.
[00:01:22] All untaxed incentives. Fostering a thriving economy. How should policymakers interpret this historical puzzle where tax rates seemingly bear little correlation to revenue collected? What dynamics undermine the taxman’s pursuit of higher yields, often resulting in diminished returns? My guest today is Dr. Brian Domitrovic, the Richard S. Strong Scholar at the Laffer Center, and co-author of Taxes Have Consequences, An Income Tax History of the United States. Dr. Dimitrovic’s expertise lies in dissecting how U. S. tax policies intersect with business responses, uncovering why lofty marginal rates fail to boost revenue, and how tax avoidance endeavors ultimately impoverish all economic players.
[00:02:10] Our conversation will delve into past attempts to enhance tax revenue and their implications for contemporary policymakers contemplating rate hikes. When I return, I’ll be joined by economic historian and scholar, Dr. Brian Dimitrovic. Okay, we’re back. This is Hubwonk. I’m Joe Selvaggi, and I’m now pleased to be joined by Dr. Brian Dimitrovic, the Richard S. Strong Scholar at the Laffer Center and co-author of Taxes Have Consequences, An Income Tax History of the United States. Welcome to Hubwonk, Brian.
[00:02:42] Brian Domitrovic: Joe, it’s really great to be here.
[00:02:44] Joe Selvaggi: Well, I’d love to have you here. it was interesting. your Taxes Have Consequences book was recommended to me, and I started reading it, maybe because it was, we were approaching tax day, and on that same exact tax day, I saw your article in Law and Liberty, talking about, historical, tax rates.
[00:02:59] So I thought this was the universe’s way of telling me, you have to be on the podcast. So welcome. Before we get started in our conversation about Taxes Have Consequences, I want our listeners to learn a little bit about your background. You have both your undergrad and your Ph.D from Harvard, and you are a historian.
[00:03:17] What is your expertise in history? What’s your focus?
[00:03:20] Brian Domitrovic: Sure, yeah, my undergrad degree is from Columbia. I was a history major. Oh, I’m sorry. Yeah, and I got my Ph. D. in history, at Harvard, where I also did work in the economics department, so I’ve studied my whole career. Since the 2000s and 90s, has been setting the supply-side tradition in economic, intellectual history, and in policy history.
[00:03:38] Joe Selvaggi: Okay, wonderful. I want to unpack some of the themes in your book, your recent article, and talk at a very high level, about the history of the U. S. income tax. I think we’re just a little bit beyond or about 110 years ago, the 16th Amendment. It was something that was intended, for the highest earners, but now, as your article suggests, doing our taxes on April 15th.
[00:03:59] It’s something all of us as Americans get to do and dread. How do we get from, it being unconstitutional to now where everybody has to wrestle with the same problem every April 15th?
[00:04:09] Brian Domitrovic: For the first 125 years of American history, constitutional history, there was no income tax to speak of. There was a provision for an income tax in the original constitution of 1789, but it had to be collected so that each state yielded as much revenue as they had population in the country.
[00:04:25] So it was proportional to a state’s population. They only imposed it a couple of times. so it was the 16th Amendment that passed in March 1913 that gave Congress, the power to establish income tax, which it did the following October in 1913. So, yeah, we’ve only had an income tax for 100, 111 years now the top rate initially was 7%. The exemption is equivalent today of about 100, 000, so you had to make 100,000 even to pay 1 percent income tax at the margin, and the rates went up after that, but the first income tax had a top rate of 7%.
[00:05:05] Joe Selvaggi: Okay, so in the beginning, tax rates were relatively low and imposed only on the wealthiest, but we’ve had in the interim 111 years, a couple of, world wars, we’ve had a depression, we’ve looking back, now, you said it went from seven percent to much, much higher.
[00:05:20] Seems like, from your book, tax rates have fluctuated wildly. has the money that the government has collected in those taxes, again, they’ve gone over, all over the place, fluctuated as wildly as tax rates themselves?
[00:05:33] Brian Domitrovic: Yeah, Jim, not at all. the total tax take, say, as a percent of GDP has been remarkably stable at about 15, 17 percent ever since income taxes essentially became mandatory for everybody in the 1940s during World War II, so it doesn’t matter what the marginal tax structure is the federal tax take will 16 to 20 percent of GDP. That’s known as Hauser’s Law. In economics, and Alan Reynolds is a great supply center from the 70s and 80s. he has Reynolds law, which is no matter what the income tax rates are, income tax revenues will always be the same, about eight or nine percent of GDP.
[00:06:08] So both of those theories suggest strongly, well, why not just have low rates? If you’re going to get the same amount of money, no matter what.
[00:06:16] Joe Selvaggi: Good. This concept, I want to spend our conversation drilling down on why it seems that regardless of rates, the government receives the same amount of money.
[00:06:24] It seems counterintuitive. I want to point then to your most recent work. I think it came out in Law and Liberty on April 15th. your article, addresses directly this idea, this nostalgia we have for the past, particularly amongst progressives, that we used to have a remarkably high tax rate.
[00:06:39] I think specifically it got as high as 94 percent. That meant the government only gave you six cents out of every dollar you earned. this is in the post-war period. And the same people who point to that say, at that time, the economy was booming. Ergo, it seems there’s no relationship between high tax rates and a healthy economy.
[00:06:59] What’s wrong with this interpretation of high tax rates and a booming economy? What do those historians get wrong?
[00:07:07] Brian Domitrovic: Yeah, I’ll accept the basic correlation. So, let’s say, that from 1954 to 1963, the top marginal tax rate was 91%, the lowest. The tax rate in the income tax structure was 20%. The corporate tax rate virtually for all companies was 52%.
[00:07:24] So, yeah, you have a, 91 percent marginal income tax. You have a 52 percent corporate tax. And the economy is booming, right? It’s post-war prosperity in the 50s and 60s. I’ll accept that correlation. You can quibble. You can say, well, there were three recessions during the Eisenhower presidency. it was impossible for additional family members to enter the workforce if they were filing on the same tax return, hence the collapse in women’s employment.
[00:07:50] you can make all those kinds of arguments, but I’ll just concede it. There’s post-war prosperity. Okay, fine. The problem with the published rates, and this was discussed ad nauseum in the 50s, is that the published rates were inapplicable. So, there has to be some kind of minimum willingness on the part of the government, if it has high tax rates, to collect at high tax rates if we say there were high tax rates and we had prosperity.
[00:08:15] Did the government collect at those high tax rates? Not in the least. So, it’s not functionally correct to say that we had high tax rates, because we didn’t, in that they were not applicable. The federal tax take was 16 percent even though income tax rates began at 20 percent and were only higher after that even though the corporate rate effectively for everybody was 52%.
[00:08:34] So there has to be a minimum willingness of the federal government to enforce those rates to say we actually had them.
[00:08:41] Joe Selvaggi: So I want to drill down a little bit further then. So again, we’re going back to our original idea that even at 91%, you said, was the top rate, the government was taking in just about the same amount of money.
[00:08:51] So how do you reconcile, let’s say a revenue collection remaining constant despite an enormously high, on-the-books tax rate? You say the unwillingness to collect is, how is that manifest? Is it in deductions or how is it that they could ask for 91 and only get what they got?
[00:09:08] Brian Domitrovic: Yeah, this was a paradox everybody had a lot of fun with. the law professor, Stanley Suri, at Harvard Law School had a lot of fun with it. They called it paper rates, and another WAG noted in congressional testimony, that we have to stop this, dipping into high incomes with a sieve.
[00:09:24] yeah, it’s just, everyone, well known. So they had these high published rates, and it became apparent as soon as World War II was over, basically, a couple of days before V Day, even, Congress understood that in peacetime, the jack rates way up in the Depression and certainly in World War II, and as soon as September 1945, Congress is well aware, the American public is not going to tolerate These rates anymore.
[00:09:50] It did for patriotic reasons during World War II. The moment the war is over, the public will not tolerate it. So they’re just immediately developed all sorts of expedience not to pay at those rates. Now, Congress could have just cut the tax rates. It did do that. Revenue Acts of 1945 and 1948 were very substantial cuts in tax rates but the main mechanism that Congress provided was they kept the rate structure and then introduced an absolute slew of legal tax avoidance opportunities. They took one of two general forms, either explicit deductions from income that you reported to the IRS or large categories of income that didn’t even have to be reported to the IRS.
[00:10:30] Joe Selvaggi: So, all right, and adjacent to this article or this, relationship between rates or lack of relationship between rates and revenue collected was also the assertion, again, those people who are nostalgic for higher rates, They assert that the income inequality, which seems to be the buzzword of policymakers these days, that income inequality is bad, and that high tax rates are effectively brought tax, the highest earners and the lowest earners closer together.
[00:10:59] Is it the fact that they were actually, the revenue was, their income was going to taxes or was it going somewhere else? In other words, was it that their income was being taken away or rather their income was being less likely to be reported?
[00:11:12] Brian Domitrovic: Yeah, I don’t think the income inequality literature from the left tells us that at all, anything about the question you just posed, because the income inequality literature, Piketty, Zuckman, Saez, Sancheva, all those people, they, they all talk about pre-tax income.
[00:11:27] that’s their bread and butter. That’s their main measure, pre-tax income. So that tells us nothing about what taxes are paid. So we adopt all of their data with some of the adjustments from Phil Magnus and everyone else. But what we say is, well, if you look at pre-tax income, when tax rates are high, of course, it’s going to plummet.
[00:11:46] I mean, if the, if you have a progressive tax system and tax rates are, go from 7 to 91%, the rich are going to report way less income under a high tax regime. As the cost of reporting income goes up, You produce less of it. As the costs of reporting income go down, you produce more of it. What does that tell us about real income?
[00:12:05] Nothing. But it does tell us about reported income. So pre-tax reported income in high tax eras, as all economic relationships would indicate, goes way down. But that leaves open the question of what real income is. And the deduction culture of the 1950s and 60s indicates that real income was still quite gigantic.
[00:12:24] Joe Selvaggi: So, again, I want to drill down a little bit more on this, so we say, okay, if income gets taxed and therefore we want to have less income, executives, and professionals want to get compensated, so, we, we’ve got a culture where if you report as income, the government takes it away, if you give it in some other form, it doesn’t take it away, you, you compared it essentially to like, in your article or in your piece, recent piece, that we had a culture that evolved around this sort of tax avoidance, almost like the iconic, Madman, culture, or the three-martini lunch at the Fabulous Club, all as a sort of response to taxing income.
[00:12:59] This was a way to circumvent that income tax by compensating people in different ways. Say more about that.
[00:13:05] Brian Domitrovic: Sure. Yeah, Joe, you know from my article, you are, running a risk here and having me sing to you because I was quoting songs. We talk about this golden era of income inequality. Well, one of the pop hits of that time, Steve Allen, Steve Lawrence, and Edie Gourmet’s song, This Could Be the Start of Something, written by Steve Allen of Tonight Show fame. It’s good pop music. You rarely see a song so extolling of the elites and not the little guy. The song, This Could Be the Start of Something Big, talks about how you’re dining at Sardi’s, and you’re lunching at 21, you’re up in an airplane, or lying in Malibu. These are all rich people’s endeavors.
[00:13:45] And this is a popular song that was on the Billboard charts. So what’s this about, this is a golden era of income inequality. These are young, affluent people celebrating being just that, and there’s a line in that song that says while doing your income tax or buying a toothbrush, just indicating that the kind of up and coming, rising people, number one, were celebrating how high on the hog they were living, and when they were dining at Sardi’s or lunching at 21, declining a Charlotte Russe dessert, they were all totting that up on the deduction tableau. Virtually all business consumption, including lunch, three martinis, lunch, everything. We put it in the book, Tom Wolfe’s descriptions of the Midtown Manhattan lunches in the 50s and early 60s from 12:30 to 3pm, right? As he says, they were like something out of a dream. You really need to know French in order to pronounce everything they were ordering.
[00:14:40] It’s not just that these things were all deductible as intermediate expenses because they’re business expenses. They’re deductible against a 91 percent tax rate. Okay, that’s very valuable. You’d have to pay them with your four, with your nine bucks if it weren’t deductible. No, it’s deductible.
[00:14:56] You don’t have to pay taxes on that expenditure. It’s more than that. It’s that those expenses were also, furthermore, deductible from the corporate tax return, which meant that the government was picking up half the bill, because the corporate rate was 52%. So there was a double deduction. And I think income inequality misses this stuff, literature misses this stuff completely.
[00:15:17] We have the quotation in the piece that I wrote from Piketty, Saez, and Stancheva saying that all this stuff is anecdotal. We have anecdotal evidence of deductions in 1960, and the anecdotal evidence says they were small. Well, what I argue is that statement on the part of Stancheva is itself sufficient to show that those economists have not studied this era.
[00:15:39] If you look at circa 1960 tax culture and say, all we have is anecdotal evidence, you haven’t even begun to look at that period. Because the evidence is essentially Mount Everest of how much the tax deduction culture was in 1960. You can’t look at that period without getting overwhelmed, white out overwhelmed, with tax deductions.
[00:15:59] So if they just say, hey, we haven’t really picked up any evidence of tax deduction of the periods, it’s tantamount to saying they haven’t even studied the period. So I just throw out all of their literature. They just haven’t studied it.
[00:16:09] Joe Selvaggi: Indeed. So again, we could talk about the lavish lunches, but also I think a legacy of high tax rates, or you, actually, I guess it was, income control, we, employers compensated, employees with health insurance, being tied to, their wage, meaning they could give them lavish health plans rather than taxed income.
[00:16:28] I think we still live without the distortions of employee-based income control. Health insurance to this day, would you characterize that as a sort of a legacy of a high tax regime?
[00:16:38] Brian Domitrovic: Yeah, the health insurance came about specifically in World War II when wages were under control, so unions, workers weren’t allowed to ask for, weren’t allowed to get higher wages in World War II because of wage-price controls.
[00:16:49] And so unions came up with the idea of income benefits that were not technically wages. And so workers during World War II took their raises in the form of health insurance benefits at that time, as opposed to increases in wages. And then this became because they were so valuable against the tax code, they were deductible against health insurance benefits are deductible.
[00:17:09] Employee compensation is deductible to the corporation. So that means deductible against a 52 percent corporate rate. The government pays half the bill. And they’re untaxable to the recipient. So in other words, there’s the double tax deduction again. So you see this proliferation, and that’s just one. pensions were actually, an even greater example in that both the contributions and the lump sum distributions were We’re tax free.
[00:17:33] So that was gigantic. We have a similar to today in the 401k world. It’s funny how retirement savings can’t get out of the deduction trap. When you have high tax rates, you always have these kind of retirement plans. Cash value life insurance was the same thing in the 50s. It was the equivalent of a 401k.
[00:17:51] So we don’t have cash value life insurance anymore because we have 401k, but your contributions were all taxable. tax deductible, your appreciation was not taxed, and then when you received the lump sum, it was not taxed. So, this ends up amounting to, 20 percent of GDP in total. And so the idea that we look at pre-tax income and come up with income inequality charges is just a losing enterprise.
[00:18:13] Joe Selvaggi: Right. And then, of course, what it does is generate this sort of spy versus spy where the government tries to tax and business tries to frustrate that attempt and comes up with creative alternatives, probably hand in glove with the cooperation of legislators who they may have influence over.
[00:18:27] Brian Domitrovic: So, that point. Since I conceded post-war prosperity, I’m not even going to concede the government tried to tax it. There has to be a certain minimum of effort that proves that you’re trying. And, if the tax rates are 20 to 91 percent and 52 percent and you’re collecting 16, you’re not trying.
[00:18:45] So, and that’s consistent with post-war prosperity. If the government tried at all to collect on those tax rates, there would not have been post-war prosperity.
[00:18:53] Joe Selvaggi: Let’s shift our argument from, let’s say, a historical perspective to just a common, understanding of taxes. Again, you as an expert in taxation and the history of taxation, the spirit of taxation, I think, for many of our listeners would be, at the end of the day, we have prosperous, high-earning, Americans and, let’s say, less fortunate Americans.
[00:19:11] The idea that taxation might also serve the purpose of not just paying for wars, but Redistributive, right? We want to, in a sense, like Robin Hood, take from the rich and give to the poor in some fair, agreeable way. You, particularly in the book you wrote with Dr. Art Laffer, suggest that when we try to redistribute wealth, that is take money from the wealthy and give it to the needy, we have a double effect of, in a sense, discouraging production.
[00:19:40] On those we tax and discourage production on those we give benefits to. Elaborate a little bit on how this, noble effort to redistribute wealth might get frustrated by reality.
[00:19:52] Brian Domitrovic: Yeah, Arthur Laffer talks about this, the so-called transfer problem, which he learned at the feet of Robert 60s.
[00:19:58] And it comes from the Slutsky equation. I will add just preliminarily, I don’t consider it a noble effort whatsoever. I consider it nefarious. it’s, very clear that rich people in American history, 19th century, whatever industrial revolution, when they’re not taxed, they do things like create millions of jobs.
[00:20:16] So that’s like an immense benefit to the lower classes. so if you throw sand in those gears, you’re not doing, you’re not doing any kind of noble work, but, by raising taxes on the rich, you’re just going to diminish job creation and opportunity and production. So yeah, Arthur Labrador’s argument is, well, if you impose a tax to distribute, in welfare, well, the tax on the producers leads them to produce less.
[00:20:40] And then when you give stuff, Give resources away in welfare. Those, recipients don’t want to work because they just receive money. Robert Mundell outlined this argument very famously in the 1960s. One of the reasons he won the Nobel Prize. So, in technical economics jargon, the substitution effects accumulate.
[00:21:01] These are not counteracting forces. They’re both bad. It’s a double negative. If you tax the rich and give to the poor, the rich produce less, the poor produce less. There’s less overall output. The economy gets worse.
[00:21:13] Joe Selvaggi: Yeah, it seems counterintuitive to think that progressive tax rates, again, I just share with my friends, just over a beer one time, you think, okay, we have wage rules that require you to pay time and a half overtime, which is to say, if you’re asked to work more than your 40 hours, you better compensate me a lot.
[00:21:34] 150% of my wage for that 41st hour, I need to be paid more to work more. Progressive tax logic seems to work in the opposite, that the more you work, the more money you earn, the less you keep. It does seem to be, if not explicitly, it will have the effect of discouraging the next marginal, propensity to produce.
[00:21:54] Is it that simple?
[00:21:55] Brian Domitrovic: It is that simple. Now, what we know now from the high tax rate era, however, is what the subject of our talk today, or our podcast, is. Is that, yes, high tax rates will be very discouraging of production from the most productive people. That’s the interesting thing. Like, the top 1 percent is by definition the most productive because every time they do something, they make a ton of money.
[00:22:15] So if we did have high tax rates in the 50s and 60s or whenever. we wouldn’t have had post-war prosperity because there must have been some secret. You can’t have a 91 percent tax rate and the economy actually being productive. So, therefore, we didn’t have a 91 percent tax rate. And sure enough, we did not, because you look at the federal tax rate at 16%.
[00:22:33] So everything about our history, including the high tax era, shows resoundingly that high tax rates that are de facto correct, real, will kill the economy.
[00:22:46] Joe Selvaggi: Well, this is a great segue for me to just introduce an idea that we could spend, again, a whole separate podcast about is, the infamous, and I hope for our listeners they’re familiar with the idea of the Laffer Curve, and we’re talking around this idea, which is to say, the government needs money and wants to impose some, a level of tax.
[00:23:02] As it raises taxes, it gets more money from a tax base, but at some point, The tax is large enough that it changes the behavior of the tax base. In other words, you and I are talking about the high tax rates, in the 50s and 60s that cause people to compensate their employees differently, and not in the form of income, in the form of something else.
[00:23:22] So, there’s always a reaction, perhaps an unintended reaction, as tax rates increase. The total revenue coming to the government seems to decrease gradually and then ultimately reverse. Share with our listeners from a historical economist perspective, why does the Laffer Curve obtain, let’s say, in the 50s, 60s, and perhaps even today?
[00:23:43] Brian Domitrovic: Sure, yeah, Laffer Curve, Arthur Laffer probably first drew it on a napkin, famously, on, updated as December 6th, 1974, the long-term, bottom of the Dow Transdestrial Average, as it turns out, to the second. and yeah, he says that it’s a simple relationship, says, when you increase tax rates, revenue increases to a certain point, and then as you increase tax rates, revenue goes down.
[00:24:06] Same thing with tax cuts. You can cut taxes and increase revenues, and then cut taxes and lower revenues. And there’s a normal relationship when things respond as you would expect. Thank you. Raise taxes, increase revenue, lower taxes, less revenue. That’s the normal section of the curve. And the prohibitive range is when you get the opposite effects.
[00:24:25] Yeah, we knew this in the 50s and 60s. when you had tax rates lowered from 91 to 70 percent as John F. Kennedy took care of in 1964. the rates that are Revenue from the top earners, from those earning over 100,000, say a million dollars today, in today’s terms, the revenues from that cohort just soared.
[00:24:46] So, yeah, whenever you made the, whenever you lowered the statutory tax rates when they were very high, you found out immediately that we had been in the prohibitive range. Same thing with Ronald Reagan. Ronald Reagan walked into the office and cut the marginal tax rate from 70 to 50 percent and all of a sudden revenue from the top, that’s a tippy top cohort, just goes way up.
[00:25:06] So yeah, that’s the Laffer curve and it’s, it’s been proven time and again.
[00:25:09] Joe Selvaggi: Would this, logic,pertain to even, let’s say, state, income tax? I’m here in Massachusetts. we have, a flat 5%, until very recently we imposed a, what they call a millionaire’s tax, a, surcharge on income over a million dollars of 4%.
[00:25:21] Yeah. I can see, and we made the argument on this podcast that such, tax rates would encourage high earners to leave or change their behavior such that they don’t pay that tax. How is it that would even apply in the U. S.? if we could take a serious effort to reduce all these creative ways of avoiding income tax, that is, get rid of all these deductions, and actually impose a higher tax, what choice would Americans have other than to pay it?
[00:25:45] What are they going to do about it?
[00:25:48] Brian Domitrovic: Yeah, if you don’t mind, I’m going to take the opportunity to talk about what’s going on in Massachusetts. I think Massachusetts is over. I think that the income tax surcharge will kill it. I noticed that I never travel to Massachusetts anymore. I’m always invited.
[00:26:04] I always travel to Texas, to Florida. Places with no income tax. That’s just, a kind of natural movement of capital. I think Massachusetts has completely misunderstood what has been responsible for its prosperity for the last 50 years. It is almost exclusively due to Proposition 2.5, which limited property tax growth to 2.5 percent as of 1980. So, property owned in Massachusetts has just been a wonderful investment. It enabled the state to cut its income tax rates in the 80s and 90s. And that’s why we had a Massachusetts miracle. It’s why we had a Dukakis candidacy, all that stuff. If Massachusetts doesn’t understand that and raises its, or doubles its marginal income tax, there is no chance it will ever attract capital again.
[00:26:47] I don’t care about Harvard, I don’t care about the Athens of America, I don’t care about its high-tech tradition, I don’t care about Yankee ingenuity. There will be a complete capital departure from Massachusetts, and I think it’s starting right now. Why can’t the government just impose tax rates?
[00:27:01] Well, there’s no record that it can’t. So, when it imposed 20 91 percent tax rates, what happened? Nobody paid them. when it imposed a 52 percent corporate tax rate, what happened? Nobody paid for it. So, there’s no evidence that high tax rates ever collected, ever are effective. So, I don’t have any problem saying that there’s no reason to explain it.
[00:27:20] It just never works.
[00:27:22] Joe Selvaggi: Yes, indeed. Again, like, I think we somehow intuitively understand that. But, of course, there are those who would say our progressive, intuition here in Massachusetts is because we’re wealthy and educated. I think that gets the causation backward, where you’re
[00:27:37] Brian Domitrovic: Yes.
[00:27:38] Wealthy and educated, with Proposition 2. 5. Without Proposition 2. 5, wealthy and educated, would have resulted in zero in negative economic growth since 1980.
[00:27:46] Joe Selvaggi: All right, let’s let me get back to this idea that tax rates equals tax revenue. It seems that, at least, as you mentioned, people, our progressive friends say, the way to raise revenue is to increase taxes.
[00:27:59] From a historical perspective, what you’re saying is Higher tax rates rarely, if ever, lead to more revenue and in fact, over time, particularly with the right to vote with their feet, someplace like Massachusetts, ultimately, as more and more people leave, or as you suggest, fewer and fewer people come with their dollars and investment dollars, ultimately, higher taxes may result, or inevitably will result, in lower net revenue. Is that what I’m saying?
[00:28:27] Brian Domitrovic: We don’t have to look, just look at anywhere where there’s tax increases, permanent tax rate increases, and they immediately become long-term bust areas. I’m going to list the following states that started from scratch in income tax between 1960 and 1990.
[00:28:45] New Jersey, Pennsylvania, Michigan, West Virginia, Ohio, Indiana, Illinois. yeah, you just said, right, you just named the Rust Belt. Yeah, I did. Those are the states that started an income tax in the 60s and 70s. Right, so investments, investors just said goodbye. And because investors say goodbye, there are no more jobs, and that’s the Rust Belt.
[00:29:04] Since then, all those states have increased their property taxes big time because their income tax not only failed to produce revenue, it also drove away all the business. So, yeah, just, that’s just the story of, taxation. If you want to have high taxes, people won’t live there. And the idea that the government can outsmart people on taxes is ludicrous.
[00:29:21] People deal with their own personal circumstances as a natural matter of course. They’re the master of that domain. You impose a tax on it, they’ll just master it because they’re in charge of their own affairs. Yeah, there are no examples of successful tax increases.
[00:29:38] Joe Selvaggi: And I think something that, I’ll call it reading between the lines.
[00:29:41] In the process of avoiding taxes, which is natural, I think all of our listeners try to minimize their taxes. I don’t say they would try to cheat on their taxes, but rather tax minimization is a normal thing we all, I hope, consider. all these schemes, whether it’s at a firm level or an individual level, if I choose to pick up, pull up stakes, and move to Florida, that’s very, cumbersome and disruptive to my life, but I might do it if I’m earning enough.
[00:30:07] But doesn’t that also, reading between the lines, Doesn’t that also have a negative effect? If I’m spending my life, because taxes are so high, trying to avoid taxes, I’m making choices that are not good for me to maximize revenue, or good for my business to maximize, productivity, but rather, minimizing taxes is fundamentally, or the attempt to minimize taxes is fundamentally counterproductive.
[00:30:27] You’re minimizing tax payment. You’re not minimizing, you’re not optimizing production
[00:30:33] Brian Domitrovic: output, right? Absolutely. Just the ascertainable costs of income tax compliance are at least half a trillion dollars a year. And those are the actual ascertainable costs, like how much you have to pay accountants and all that stuff.
[00:30:48] But in terms of substituted behavior and deadweight losses in terms of wasting time doing this stuff, it’s incalculable. So, yeah, if you have an aggressive tax administration. You couple that with native human ingenuity to pursue legal tax avoidance and even illegal tax evasion, you’re just going to have deadweight losses galore.
[00:31:10] So, that’s why I say when I look at the 50s And I see, post-war prosperity. I know the federal government has no vigor in enforcing those tax rates because if it did try to match those tax rates with vigorous collection, the economy would have collapsed.
[00:31:25] Joe Selvaggi: Indeed, and of course, it would have collapsed, but instead it incentivizes some, I would say not necessarily productive activities.
[00:31:32] In other words, yes, uh, the economy thrived because there wasn’t really a high effective tax rate, but so did lunch clubs and martini makers. they thrived, but that’s not, that didn’t contribute to efficiency. Once those, the tax rates came down, I think that I don’t know if it was in your book or in something else I read by you that said, once we took tax rates down to, let’s say, normal levels or reasonable levels, people stopped getting expense accounts, and the madman three martini lunch went away, and everybody got a ham sandwich and a Sprite for lunch.
[00:32:02] So all the, let’s say, negative, or counterproductive activities, like three martini’s lunch, went away, and effectively, lower tax rates generated more efficient business behavior. Is that a
[00:32:13] Brian Domitrovic: question? Yeah, you got that from us. We were quoting Tom Wolfe’s famous piece in Esquire about the founding of Intel for that.
[00:32:19] The lunch sandwiches and Sprite on a sawhorse in Silicon Valley instead of, yeah, that’s Tom Wolfe again. So, yeah, no, there’s a deadweight loss. There’s no question about it. But when there really is no enforcement of the paper rates, the amount of the deadweight loss is small.
[00:32:34] but I do think this point is absolutely essential for understanding the dynamics of modern American economic history. This whole thing about a corporate job and a job for life were all in-kind forms of compensation because the tax rates taxed cash compensation. So when you worked in a fancy lab or a corporate park or had art on the wall in your office, All those things of the mid-century, those were forms of compensation that were not taxed to the recipient and were tax deductible against a 52 percent rate to the employer.
[00:33:06] When tax rates went down in the 1980s, you had those massive corporate layoffs. you’re talking, things like Motorola was laying off 10,000 people a year in the early 1980s, in the 1980s, Goodyear, all these companies. you just have incredible corporate layoffs. And yet there’s 18 million job growth in the 1980s.
[00:33:23] 40 million from 1980 to 1990, even as the Fortune 500 just sheds employees like crazy. Yeah, because when you lower the corporate rate from 52 to 34, and you lower the marginal rate from 91 to 28, You just completely change the fundamental structure of how business is organized towards entrepreneurialism and, non-write-offs.
[00:33:43] Yeah, that’s a more efficient way, but you had this wrenching 20 years in which you had to make the transition. And the shame of the 2000s is that we never then just glided into smooth growth. We had nonmarginal tax cuts under George W. Bush, which were bad. And then, Obama just consolidated the George W. Bush tax structure. So, we should have had a 21st century of just extraordinary economic growth.
[00:34:07] Joe Selvaggi: So, we’re getting close to the end of our time together, so I don’t like to have a show all about criticism, you’re a historian, but I suspect you, you do have an inclination towards looking to the future, I don’t think that’s a betrayal of your expertise.
[00:34:19] Given what you know about the future and the relationship between, say, tax rates and productivity and the well-being of everyone, rich and poor, what would you imagine as, let’s say, an optimal, tax structure whereby we encourage Rich and poor to go to work and be productive. we want to have, an efficient, productive, prosperous economy.
[00:34:40] What kind of a tax structure, based on your view of history, cultivates the optimal level of prosperity?
[00:34:46] Brian Domitrovic: yeah, if the tax take is 17%, when it’s 17 percent or 13 percent as Arthur Laffer says, flat tax rate, and then you would have no deductions and you just have the most efficient system.
[00:34:57] So, practically, that’s probably what I’d say. But ultimately, I’d say this. If the American economy and currency are leading the world, the United States has no grounds for having a tax system whatsoever.
[00:35:08] Joe Selvaggi: Interesting. That’s quite a bold assertion at the end of a show. That would be a different podcast and maybe I’ll circle back with you.
[00:35:16] Thank you very much for joining today. Where can our, you sent me along, your website, which is a collection of your essays, and a link to your book. Where can our listeners learn more about your work? The work of the Laffer Institute, is it? Laffer Center. The Laffer Center. Where can, if we’ve, piqued their interest, whet their appetite for supply-side economics, where can our listeners, read more about it?
[00:35:38] Brian Domitrovic: Yeah, so the Laffer Center. org is our website here at the Laffer Center, and I have my own personal website called globalmonetarism.com, and supply-side economics was first called global monetarism back in the 70s, so that’s why I use that term.
[00:35:51] Joe Selvaggi: Well, good. I’m good. I’ve learned a lot today, and I’m going to continue to dig into Your work, past and present, I’m fascinated by all of it.
[00:35:58] I really appreciate your time joining me today on the podcast, in this week of taxes, where it’s top of mind for everyone. I appreciate you joining me today. Thanks, Joe. It was great. This has been another episode of Hubwonk. If you enjoyed today’s show, there are several ways to support Hubwonk and Pioneer Institute.
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Joe Selvaggi talks with economic scholar Dr. Brian Domitrovic about the history of federal tax policy and the reasons for why varied marginal rates fail to correlate with either tax revenue or GDP growth.
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