Taxing ourselves into prosperity

[Ron]

OK, this is not the Onion, it is an actual editorial:

Are Low Taxes Exacerbating the Recession?
By David Sirota   July 9, 2010

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 a senior editor at In These Times and author of the bestselling books The Uprising and Hostile Takeover. He hosts the morning show on AM760 in Colorado and blogs at OpenLeft.com.

http://www.salon.com/news/opinion/feature/2010/07/09/jobs_taxes_sirota/index.html?source=rss&aim=/opinion/feature

[Balog]

What an idiot. So many logical fallacies crammed into a short space...

[makattak]

What an idiot. So many logical fallacies crammed into a short space...

I was going to post that almost word for word.

I prefer "moron", though.

Note he's quoting politicians, not economists. I don't think a single economist would lend their reputation to this stupidity.

[taurusowner]

I was going to post that almost word for word.

I prefer "moron", though.

Note he's quoting politicians, not economists. I don't think a single economist would lend their reputation to this stupidity.

It depends on what kind of economist you are talking about.  There were plenty of economists in Moscow who went along with whatever 5 Year Plan the current General Secretary could come up with.  That didn't mean they were correct.  Being an economist doesn't mean one had all the correct ideas.  Unfortunately there are plenty of Keynesian economists would agree with this article completely.

[Monkeyleg]

It's convenient to use 1951 to 1963 as an example--a time when Japan and most of Europe were still rebuilding, and thus not our economic competitors. 

If higher taxes cause prosperity, then why stop at 39% top rates? Why not 90%? Wouldn't we all be doing even better?

Sweden had a top tax rate of 125% in the 1970's and it did so well that most of the people who would fall into that bracket (those who run companies and employ people) left the country.

[makattak]

It depends on what kind of economist you are talking about.  There were plenty of economists in Moscow who went along with whatever 5 Year Plan the current General Secretary could come up with.  That didn't mean they were correct.  Being an economist doesn't mean one had all the correct ideas.  Unfortunately there are plenty of Keynesian economists would agree with this article completely.

Nope, not even Keynesians would agree with that. Keynesian theory, although wrong, at least had a basic understanding of economics.

Marxist economists may agree with this, but even that seems to be stretching it. (They may agree with higher taxes, but I doubt they would claim it would cause prosperity. They might claim it will collapse the evil capitalist system, which they would be for, but I doubt they would claim it would make us more prosperous until the collapse and utopia following.)

These people suffer from extreme post hoc ergo propter hoc fallacy.

[taurusowner]

Marxist economists may  agree with this, but even that seems to be stretching it.

Taxation is state control of production and profit.  100% taxation is 100% control which is in turn a fundamental goal of Marxism.  Marxist economists would definitely agree with this and that's not a stretch in the least.  Whether they believe in their hearts that it will cause prosperity is unknown, just as there were plenty of Party members who spouted the Party line all their lives but possibly knew the truth deep down.  But stating publicly that the more the State controls the producer and his profit, the more prosperous a nation is, is definitely in line with Marxist ideals.

[kgbsquirrel]

I tried, really I did, but I didn't even get past "Are Low Taxes Exacerbating the Recession?" 

[Boomhauer]

I am getting really damn tired of these communists...

[RevDisk]

That article made my brain hurt.  Correlation and causation aren't the same thing, and this guy hasn't even hit that fail.  If you cherry pick numbers well enough, you can disprove gravity too.

[longeyes]

There's no recession for government.

[seeker_two]

Funny how every nation that has tried that in the last 60 years (Britain, France, Russia, etc.) is now going the opposite way due to economic failure while the US, being comparatively prosperous, is pushing to try the same failed policy.... 

Money doesn't buy happiness....or intelligence, either....

[Sergeant Bob]

I tried, really I did, but I didn't even get past "Are Low Taxes Exacerbating the Recession?" 

Same here. Didn't want to ruin breakfast.

It's pretty sad when China and France are giving us sound economic advice.

[Tallpine]

higher marginal tax rates generate more resources for the job-creating, wage-generating public investments (roads, bridges, broadband, etc.) that sustain an economy

If that is true, then why don't we just bomb our own cities to generate more construction jobs 

In a sense, though - we already have ... 

[Monkeyleg]

Here's another example of "government-think." The climate bill will cut the deficit? How? Not by lowering taxes, but by raising them. Government cuts deficits either by reducing spending or increasing tax revenues, period. So the deficit will be "cut" by making us pay more, in this case by paying more for something that many of us think isn't justified.

************

7/8/10 |
CBO: Senate climate bill would cut deficit by $19B
By Matthew Daly
The Associated Press
WASHINGTON — Congressional budget experts say a climate and energy bill now stalled in the Senate would reduce the federal deficit by about $19 billion during the next decade.

The report by the nonpartisan Congressional Budget Office was the second positive analysis of the bill by a government agency in a month, but is likely to carry more weight than a similar report issued by the Environmental Protection Agency.

The CBO is the entity responsible for providing Congress with nonpartisan analyses of economic and budget issues, and lawmakers rely on it for guidance.

 
The CBO report was immediately hailed by the bill’s sponsors, who are struggling to move the climate measure through a divided Congress.

Lawmakers have quietly begun considering a more modest approach that would target the electricity sector, in case the more sweeping measure fails.

“There is no more room for excuses — this must be our year to pass comprehensive climate and energy legislation and begin to send a price signal on carbon,” said Sen. John Kerry, D-Mass., the bill’s chief author.

Many senators have told him and Sen. Joe Lieberman, I-Conn., the bill’s co-sponsor, that they flatly oppose legislation that adds even a penny to the federal deficit, Kerry said. “So we hope they look anew at this initiative which reduces it,” he said.

Specifics

In its report Wednesday, the CBO said the energy bill would increase federal revenues by about $751 billion from 2011 to 2020, mostly though the sale of carbon credits in so-called a cap-and-trade plan to be applied to utilities and other sectors of the economy.

The measure would increase spending by about nearly $732 billion, mostly from refunds to utility bills and tax credits, as well as investment in various energy provisions including research and development, the report said.

The Senate bill would tax carbon dioxide emissions produced by coal-fired power plants and other large polluters as a way to reduce pollution blamed for global warming. The legislation has been panned by many Republicans as a “national energy tax.” No GOP senator has signed on as a co-sponsor.

An analysis by the EPA last month concluded that the Senate bill, dubbed the American Power Act, would cost households an average of $79 to $146 per year.

Kerry and Lieberman said they believe Americans are willing to pay less than a dollar a day to curb global warming, reduce oil imports and create energy-related jobs.

The legislation aims to cut emissions of carbon dioxide and other heat-trapping greenhouse gases by 17 percent by 2020 and by more than 80 percent by 2050.

Even as the CBO was conducting its analysis, Kerry and other lawmakers have begun considering the more modest approach that would limit the carbon tax to the electricity sector.

Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

[RoadKingLarry]

There are two main possibilities for the source of that type of junk.

The ones that come up with that crap are really that stupid.

The ones that come up with that crap think we are really that stupid

[Boomhauer]

There are two main possibilities for the source of that type of junk.

The ones that come up with that crap are really that stupid.

The ones that come up with that crap think we are really that stupid

Neither.

It's that the ones that come up with this crap know that a good portion of the population really is that stupid. You and I know damn well that this crap don't fly, but to the majority of Americans who want their free *expletive deleted*it from the government...this makes perfect sense.

[Perd Hapley]

So, if I cut a check to the Treasury, how much ROI should I expect and when? 

It's that the ones that come up with this crap know that a good portion of the population really is that stupid. You and I know damn well that this crap don't fly, but to the majority of Americans who want their free *expletive deleted* from the government...this makes perfect sense.

Well, plenty of people have sent money to Word-of-Faith preachers, thinking God would pay them back...

[MikeB]

It's convenient to use 1951 to 1963 as an example--a time when Japan and most of Europe were still rebuilding, and thus not our economic competitors. 

We were also for all intents and purposes at war during that time period - never mind the ramp up of the cold war as well, so lot's of jobs in the military industrial complex. I hate that term, but it works for the sake of this argument. The beginning of the space race also occurred during the latter part of this period. Exports would most likely have been very high to all of Europe and many parts of Asia, though I have not checked that.

I would also debate whether they are using the correct economic indicators for prosperity. Growth of GDP does not equal individual prosperity. I seem to recall statistics showing that we have much more disposable income and greater buying power per dollar now than during that time period.

[HankB]

. . . So the deficit will be "cut" by making us pay more, in this case by paying more for something that many of us think isn't justified. a purely imaginary "product."

FIFY.

[HankB]

If that is true, then why don't we just bomb our own cities to generate more construction jobs 

In a sense, though - we already have ... 

This was addressed about 160 years ago by Frédéric Bastiat in his Parable of the Broken Window.

The parable describes a shopkeeper whose window is broken by his young son, and who has to pay for a glazier fixing his window. It conveys some thoughts on economy and money circulation. Bastiat's original parable of the broken window went like this:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

The fallacy of the onlookers' argument is that they considered only the benefits of purchasing a new window, but they ignored the cost to the shopkeeper. As the shopkeeper was forced to spend his money on a new window, he could not spend it on something else. For example, the shopkeeper might have preferred to spend the money on bread and shoes for himself (thus enriching the baker and cobbler), but now cannot because he must fix his window.

Thus, the child did not bring any net benefit to the town. Instead, he made the town poorer by at least the value of one window, if not more. His actions benefited the glazier, but at the expense not only of the shopkeeper, but the baker or the cobbler as well. Moreover, the benefit to the glazier is relatively small, because most of what he charges is to compensate him for his tedious and strenuous labour, as well as the materials he uses.

[longeyes]

The climate bill will cut the deficit? How? Not by lowering taxes, but by raising them. Government cuts deficits either by reducing spending or increasing tax revenues, period. So the deficit will be "cut" by making us pay more, in this case by paying more for something that many of us think isn't justified.

The best austerity plan is to return the economy back to 1750.

[MechAg94]

What is also always lost in the mix when it comes to thinking Govt spending can help things is the cost of Govt spending?  How much of each tax dollar goes to feed the Big Govt Bureaucracy money pit and doesn't even make it to the supposedly beneficial public works project that probably has its own component of graft and waste?

The free market isn't perfect, but it always proves to be the most efficient way to balance resources with demand.

[taurusowner]

Everyone in favor og using .gov spending to raise the economy forgets one crucial fact:  all government dollars are secondhand dollars.  They didn't produce and wealth.  Not new products or services were generated to increase actual wealth that wasn't there previously.  It's all secondhand money that was confiscated from people who did actually generate it with production.

It reminds me of a Beavis and Butthead episode.  They are given boxes of candy to sell for a fundraiser.  One of them has 1 dollar initially.  He buys a candy bar from the other with that dollar, who then buys a candy bar from the first with the same dollar.  They trade the dollar back and forth, each buying and eating the others candy.  They are left with 2 empty boxes, that same 1 dollar, and owe the school something like $100.

That is the US government.  They take money that was initially made by real production.  They then spend that money on government programs, and then get it back from people buying government services, spend it on more government programs, get it back through more services, and so forth.  But no additional money is actually being made.  Throw in the fact that every time those dollars change hands in the government, a little is taken each time to "grease the political wheels" so to speak.  You end up with a whole national system relying on confiscated secondhand money while alienating and destroying the people who are needed to actually produce the wealth in the first place.

[Scout26]

Well at the end of this year, all the Bush tax cuts are due to expire, and the taxes for Obamacare will also kick in. 

Let's see what the economy looks like next summer, after we raise all these taxes........