Are Low Taxes Exacerbating the Recession?
As the planet's economy keeps stumbling, the phrase "worst recession since the Great Depression" has become the new "global war on terror" — a term whose overuse has rendered it both meaningless and acronym-worthy. And just like that previously ubiquitous phrase, references to the WRSTGD are almost always followed by flimsy and contradictory explanations.
Republicans who ran up massive deficits say the recession comes from overspending. Democrats who gutted the job market with free trade policies nonetheless insist it's all George W. Bush's fault. Meanwhile, pundits who cheered both sides now offer non-sequiturs, blaming excessive partisanship for our problems.
But as history (and Freakonomics) teaches, such oversimplified memes tend to obscure the counterintuitive notions that often hold the most profound truths. And in the case of the WRSTGD, the most important of these is the idea that we are in economic dire straits because tax rates are too low.
This is the provocative argument first floated by former New York governor Eliot Spitzer in a Slate magazine article evaluating 80 years of economic data.
"During the period 1951-63, when marginal rates were at their peak — 91 percent or 92 percent — the American economy boomed, growing at an average annual rate of 3.71 percent," he wrote in February. "The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm — just the opposite. And during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent."
Months later, with USA Today reporting that tax rates are at a 60-year nadir, Secretary of State Hillary Clinton told a Brookings Institution audience that "the rich are not paying their fair share in any nation that is facing (major) employment issues...whether it is individual, corporate, whatever the taxation forms are."
A prime example is Greece. While conservatives say the debt-ridden nation is a victim of welfare-state profligacy, a Center for American Progress analysis shows that "Greece has consistently spent less" than Europe's other social democracies — most of which have avoided Greece's plight.
"The real problem facing the Greeks is not how to reduce spending but how to increase revenue collections," the report concludes, fingering Greece's comparatively "anemic tax collections" as its economic problem.
On the other hand, the opposite is also true — as Clinton noted, some high-tax, high-revenue nations are excelling.
"Brazil has the highest tax-to-GDP rate in the Western hemisphere," she pointed out. "And guess what? It's growing like crazy. The rich are getting richer, but they are pulling people out of poverty."
This makes perfect sense. Though the Reagan zeitgeist created the illusion that taxes stunt economic growth, the numbers prove that higher marginal tax rates generate more resources for the job-creating, wage-generating public investments (roads, bridges, broadband, etc.) that sustain an economy. They also create economic incentives for economy-sustaining capital investment. Indeed, the easiest way wealthy business owners can avoid high-bracket tax rates is by plowing their profits back into their businesses and taking the corresponding write-off rather than simply pocketing the excess cash and paying an IRS levy.
In summing up her remarks, Clinton said that this higher-tax/higher-revenue formula "used to work for us until we abandoned it."
Though she felt compelled to insist, "I'm not speaking for the (Obama) administration," it was nonetheless a politically bold statement — so bold, in fact, that like all of the other corroborating tax facts, it was summarily ignored by politicians and the Washington media. They had their cliches to promote — and unfortunately, until they let substantive-though-uncomfortable ideas displace conventional wisdom, it's a good bet that the WRSTGD will continue unabated.
David Sirota is the author of the best-selling books "Hostile Takeover" and "The Uprising." He hosts the morning show on AM760 in Colorado and blogs at OpenLeft.com. E-mail him at ds@davidsirota.com or follow him on Twitter @davidsirota.
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It's not all that complicated. Prosperity occurs when the great bulk of the society are paid well and have money to spend. Over the last several decades it's been all trickle up, with the incomes of the bulk of the population stagnating while taxes have been lowered dramatically on high incomes and capital gains. When this happens, capital accumulation exceeds the need for capital and returns on capital diminish. This results in money managers leveraging to extreme, hiding risk through the use of various derivative gimmicks, and finally by stimulating demand for credit. Eventually, the house of cards comes tumbling down and we wonder what happened. It doesn't help that both parties have participated in the dismantling of our industrial base through ridiculous trade policies, leaving an economy of high finance and low wage services. The only way to get back to prosperity it to get back to the policies of the fifties, where capital and high incomes were taxed and the great bulk of the population could live on one income and have money to spend. It not just a matter of raising taxes. It's raising taxes on capital in high incomes to balance capital accumulation and capital needs, while lowering taxes on labor to give them a larger piece of the pie to spend. This is what creates demand and keeps the economy prospering.
Comment: #1
Posted by: Elwood Anderson
Thu Jul 8, 2010 10:46 PM
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When I read this article, my sonar was pinging rapidly. The entire article is disingenuous at best. Sure, individual tax rates have come down drastically since the 1960's, especially during the 1980's when the rates in the top bracket were reduced from around 50% to around 25%. This doesn't actually tell anyboday anything relevant with regard to revenues, especially as it is related to GDP. Statistics from the Department of Treasury website for revenues as a percentage of GDP: 1940-6.8%, 1945-20.6%, 1950-14.4%, late 70's-20.4%, 1990-18%, 2000-20.8%. According the Congressional budget office, it did take a dip from there after the Bush tax cuts , but has been on the rise of late. The report you cited with regard to the lowest taxes in 60 years addressed income tax burden, not total Federal tax burden and did not include Social Security taxes, which they termed insurance (a ludicrous finding).
Secondly, comparing the current world situation and economy to the one from the 1950's is ludicrous. U.S. industrial output as compared to the rest of the world was strikingly large and continued to be so well into the 70's. The economy boomed because we were the only kid on the block that still had industrial capacity. The current global economic trend is toward the third world because companies have realized that they can cut costs by outsourcing. This is an economic reality whether we have protectionist trade policies or not.
Thirdly, although you may be correct that Greece's problem could have been caused by not enough taxation, your arguments later about what to do here in the U.S., you don't address this. The argument was that that Greec's welfare system was too much of a burden for their tax system. Then later, you say that "higher marginal tax rates generate more resources for the job-creating, wage-generating public investments (roads, bridges, broadband, etc.) that sustain an economy." How does a welfare state play into this? Most of the money being spent in Washington is not on these types of investments, but on the welfare state, the exact same thing that got Greece in trouble. Lastly, if Greece's problem was overspending, there are two logical recourses: 1)Raise taxes; 2) Cut spending. You never support how raising taxes is better than cutting spending.
Comment: #2
Posted by: T Bigler
Fri Jul 9, 2010 7:53 AM
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When I read this article, my sonar was pinging rapidly. The entire article is disingenuous at best. Sure, individual tax rates have come down drastically since the 1960's, especially during the 1980's when the rates in the top bracket were reduced from around 50% to around 25%. This doesn't actually tell anyboday anything relevant with regard to revenues, especially as it is related to GDP. Statistics from the Department of Treasury website for revenues as a percentage of GDP: 1940-6.8%, 1945-20.6%, 1950-14.4%, late 70's-20.4%, 1990-18%, 2000-20.8%. According the Congressional budget office, it did take a dip from there after the Bush tax cuts , but has been on the rise of late. The report you cited with regard to the lowest taxes in 60 years addressed income tax burden, not total Federal tax burden and did not include Social Security taxes, which they termed insurance (a ludicrous finding).
Secondly, comparing the current world situation and economy to the one from the 1950's is ludicrous. U.S. industrial output as compared to the rest of the world was strikingly large and continued to be so well into the 70's. The economy boomed because we were the only kid on the block that still had industrial capacity. The current global economic trend is toward the third world because companies have realized that they can cut costs by outsourcing. This is an economic reality whether we have protectionist trade policies or not.
Thirdly, although you may be correct that Greece's problem could have been caused by not enough taxation, your arguments later about what to do here in the U.S., you don't address this. The argument was that that Greec's welfare system was too much of a burden for their tax system. Then later, you say that "higher marginal tax rates generate more resources for the job-creating, wage-generating public investments (roads, bridges, broadband, etc.) that sustain an economy." How does a welfare state play into this? Most of the money being spent in Washington is not on these types of investments, but on the welfare state, the exact same thing that got Greece in trouble. Lastly, if Greece's problem was overspending, there are two logical recourses: 1)Raise taxes; 2) Cut spending. You never support how raising taxes is better than cutting spending.
Comment: #3
Posted by: T Bigler
Fri Jul 9, 2010 7:54 AM
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When I read this article, my sonar was pinging rapidly. The entire article is disingenuous at best. Sure, individual tax rates have come down drastically since the 1960's, especially during the 1980's when the rates in the top bracket were reduced from around 50% to around 25%. This doesn't actually tell anyboday anything relevant with regard to revenues, especially as it is related to GDP. Statistics from the Department of Treasury website for revenues as a percentage of GDP: 1940-6.8%, 1945-20.6%, 1950-14.4%, late 70's-20.4%, 1990-18%, 2000-20.8%. According the Congressional budget office, it did take a dip from there after the Bush tax cuts , but has been on the rise of late. The report you cited with regard to the lowest taxes in 60 years addressed income tax burden, not total Federal tax burden and did not include Social Security taxes, which they termed insurance (a ludicrous finding).
Secondly, comparing the current world situation and economy to the one from the 1950's is ludicrous. U.S. industrial output as compared to the rest of the world was strikingly large and continued to be so well into the 70's. The economy boomed because we were the only kid on the block that still had industrial capacity. The current global economic trend is toward the third world because companies have realized that they can cut costs by outsourcing. This is an economic reality whether we have protectionist trade policies or not.
Thirdly, although you may be correct that Greece's problem could have been caused by not enough taxation, your arguments later about what to do here in the U.S., you don't address this. The argument was that that Greec's welfare system was too much of a burden for their tax system. Then later, you say that "higher marginal tax rates generate more resources for the job-creating, wage-generating public investments (roads, bridges, broadband, etc.) that sustain an economy." How does a welfare state play into this? Most of the money being spent in Washington is not on these types of investments, but on the welfare state, the exact same thing that got Greece in trouble. Lastly, if Greece's problem was overspending, there are two logical recourses: 1)Raise taxes; 2) Cut spending. You never support how raising taxes is better than cutting spending.
Comment: #4
Posted by: T Bigler
Fri Jul 9, 2010 7:54 AM
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I'm a moron! haha.
Comment: #5
Posted by: T Bigler
Fri Jul 9, 2010 7:55 AM
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Perhaps it's to no fault of David Sirota and entirely the consequence of such a limited space, but his explanation for exactly how higher taxes are supposed to save the economy seems to be greatly lacking besides a blind-faith assurance that it simply will. Perhaps he had entirely forgotten about Joseph Stack, who had flown an airplane into an Austin IRS office out of frustration. I of course am not condoning the attack, but the frustration he felt is very real to many Americans. And perhaps both Sirota and Elliot Spitzer had forgotten that much of that high marginal taxation Spitzer praises during the 50s went to Cold War defense spending in a period known for poor social funding. A better alternative is smarter taxation policy and easier, more efficient and more stress-free revenue collection. Imagine the relief all Americans can feel, and the higher revenues the government can collect.
Comment: #6
Posted by: DenverPostReader
Sat Jul 10, 2010 12:33 PM
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Yes, it all has NOTHING to do with the Government spending all the money they TAKE from people who actually earn it....Geesh!
Comment: #7
Posted by: Powhatan
Sun Jul 11, 2010 7:11 PM
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Dave! Your discussion on the radio was great. Couple more points...
Recent employment numbers have shown that there continues to be essentially no increase in private sector employment. Conservatives gleefully note that only public sector employment has increased as a result of the Stimulus. It is important to remember, however, that the Stimulus was made up of 40% tax breaks. These tax decreases were meant to stimulate increases in private employment. However, the employment numbers show that this strategy has failed spectacularly.
Corporations large and small will only employ as many people as they need to produce the amount of product that is demanded. Giving them more money in the form of tax breaks will not induce them to hire more people; only increased demand will create more jobs.
States are now facing budget crises in a time of historically low taxes on corporations and rich people and historically high wealth discrepancies between the rich and the rest of us. These states have two options: a) tax the people who have money, or b) institute austerity measures. These austerity measures would primarily lead to less money spent on unemployment compensation and layoffs in state public sector jobs (teachers, firefighters, policemen, etc.).
This is the same conundrum faced with the stimulus package in reverse. Taking money from rich people will decrease investment while taking money from the middle class will decrease demand. With the lesson learned from the Stimulus, the question we should be asking isn't can we afford to continue to pay unemployment but rather can we continue to tax corporations and the rich at historically low rates.
Or maybe more concisely, how many rich people can our society afford to continue to support?
Comment: #8
Posted by: Aaron
Mon Jul 12, 2010 11:53 AM
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Aaron, your argument sounds as if you are talking out of both sides of your mouth. The real drivers of economic development, i.e. bringing people out of poverty are the rich people that we cannot "afford to continue to support." Investment comes from private people and private corporations. Even if you're correct that the government is not taxing enough (which I do not agree with), the effect of what the government is doing brings their money to the government regardless. Who do you think buys government bonds? Rich people and corporations buy them. They do this rather than keeping their money in bank accounts (which allows their money to be invested) or investing in other things.
If the government cannot spend it's way out of the recession with money borrowed from rich people/corporations, why would it be able to spend its way out by taking that money?
Comment: #9
Posted by: T Bigler
Wed Jul 14, 2010 6:55 PM
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T Bigliar sounds as if he is talking out of his ass.
Supply-side economics (ie "voodoo economics") has been proven to be a big sham created by the rich to make the rich richer. Only one thing "trickles down" and it ain't wealth! The rich do not create jobs, only demand can do that. All the supply-side economic tax cuts have done is increased the wealth gap between the rich and the poor, increased the deficit, and destroyed our economy. All the tax cuts after the 2001 Bush Recession did nothing to increase demand. Job growth was anemic even before the second Bush Recession.
Government bonds are debt, loans which must be repaid. They go on the books and increase the deficit. Taxes are a revenue source and decrease the deficit. Any idiot knows that it is better to increase revenue than take on more debt. That's one reason why taxes should be raised on the rich and on the big multinational corporations who aren't paying their fair share of taxes.
Our government spends money during a recession because business can or WILL not. The government stimulus has stabilized our economy and kept things from getting worse. That is a fact. Economic indicators are also just beginning to show signs of improvement. That is also a fact.
Many economists and progressives/liberals were calling for a bigger stimulus package (double the size) because they felt the one passed was inadequate and contained too many tax cuts (it's also a fact that tax cuts provide hardly any stimulus effect, particularly when compared to the stimulus effect created by infrastructure projects, which were in desperate need anyway). The Republicons and Conserva-Dems fought that, and also striped out the “Buy American” provision. Because those obstructionists demand that Harry Reid come up with a super-majority to break their continuous filibuster on every piece of legislation, it had to be weakened. So that's where we are today, with a stimulus that helped (but not enough) but which also ended up stimulating China's economy instead of just our economy. Thanks Republitards!
Comment: #10
Posted by: A Smith
Tue Jul 20, 2010 12:00 PM
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