Andrew Sullivan links today to a post by David Glasner arguing that low marginal tax rates might actually be bad for the economy:
Our current overblown financial sector is largely built on people hunting, scrounging, doing whatever they possibly can, to obtain any scrap of useful information — useful, that is for anticipating a price movement that can be traded on. But the net value to society from all the resources expended on that feverish, obsessive, compulsive, all-consuming search for information is close to zero (not exactly zero, but close to zero).
….So I am inclined to conjecture that over the last 30 years, reductions in top marginal tax rates may have provided a huge incentive to expand the financial services industry. The increasing importance of finance also seems to have been a significant factor in the increasing inequality in income distribution observed over the same period. But the net gain to society from an expanding financial sector has been minimal, resources devoted to finance being resources denied to activities that produce positive net returns to society. So if my conjecture is right — and I am not at all confident that it is, but if it is — then raising marginal tax rates could actually increase economic growth by inducing the financial sector and its evil twin the gaming sector — to release resources now being employed without generating any net social benefit.
Count me in! I’m totally ready to believe this.
Except that I don’t get it. It’s certainly true that marginal tax rates have declined dramatically since 1980. It’s also true that the financial sector has expanded dramatically since 1980. But what evidence is there that low tax rates caused that expansion? Does finance benefit from lower taxes more than other industries, thanks to the sheer number of transactions it engages in? Or what? There’s a huge missing step here. Can anyone fill it in?