Monday, July 12, 2010

Are Low Taxes making the Recession Worse?

















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 Gov. 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 cliché s 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.

The problem is that conservatives don't really care about balancing the budget with revenue and expenditures in line with each other. Even the idea of letting the Bush cuts for those making over $250k has conservatives reaching for the smelling salts. No one is sure when the last grown up and responsible Republican became extinct.

Is Obama a socialist? What does the evidence say?

Adds Billy Wharton,co-chair of the Socialist Party USA: "I am not even sure he's a liberal. I call him a hedge fund Democrat."

The socialism tag is nothing new for the White House. In speeches, Obama chalks up the criticism to "just politics."

But he also works to counter it, sprinkling speeches with words about the appropriate role of government. "Government cannot and should not replace businesses as the true engine of growth and job creation," he said June 2 at Carnegie Mellon University in Pittsburgh.

That may be one reason some tea partyers doubt that Obama himself is humming "The Internationale" before breakfast.

"I'm reluctant to call him a socialist, but his policies are socialistic," says Don Adams, treasurer of the Independence Hall tea party in the Delaware Valley of Pennsylvania.

Which policies qualify, precisely?

Gingrich, in his book, cites a "government takeover" of GM as specific evidence of the socialistic political shift.

The United States owned 60.8 percent of the common stock of GM and 9.9 percent of Chrysler as of April 21, the latest figures available. The government's goal, according to the Treasury, is not to be long-term investors.

"With the successful restructuring of GM and Chrysler behind us, the primary goal of the administration's auto efforts now is to monitor the investments and facilitate smooth exits from our investments in the companies," says US Treasury spokesman Mark Paustenbach.

OK, so maybe Obama wants to get out of owning the companies, allows Johns of the Heritage Foundation. But the government has already used its ownership stake to impose sweeping mandates and regulations on the companies, such as closing hundreds of dealerships, he says.

"They forced changes in management that should more properly have been left to the company's private shareholders," says Johns.

Not true, according to GM. The US did not exert pressure to close the 1,100 shuttered dealerships, says spokeswoman Noreen Pratscher. "The government has taken a very hands-off approach."

How about the Obama response to the crisis in the financial services industry? Has it veered into socialism?

The largest ownership stake for Uncle Sam in the financial world is AIG, which ran into financial difficulties (not bankruptcy) in September 2008 after a complex series of financial transactions turned bad. The US government still owns almost 80 percent of AIG, which has received at least $182 billion in government assistance.

In his book, Gingrich implies that government officials stormed into AIG's headquarters and took over the company. "They have taken over AIG, America's largest insurer," he writes.

The actual "takeover" of AIG occurred under President Bush in 2008, right after the Lehman Brothers bankruptcy.

The Congressional Oversight Panel, which lawmakers created in 2008 to review the regulation of financial markets, detailed in a recent report how it became impossible for AIG to find $75 billion in private funding to save itself as the financial markets crumbled that fall.