Are Low Taxes Exacerbating the Recession?

Are Low Taxes Exacerbating the Recession?

by David Sirota

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.

© 2010 Creators.com
David Sirota is a bestselling author whose newest book is "The Uprising." He is a fellow at the Campaign for America's Future and a board member of the Progressive States Network-both nonpartisan organizations. Sirota was once US Senator Bernie Sanders' spokesperson. His blog is at www.credoaction.com/sirota.

David Sirota on taxes:

YouTube- Discussing Corporate Taxes on Fox News, 10/17/08

I don't think it matters what you do with taxes. Corporations don't pay taxes anyway. They just figure it as overhead & pass it along in their pricing structure, which eventually gets paid by the consumer. Direct corporate taxation on manufacturers or distributors might as well be a sales tax. However, taxes have a whole different effect on all these designer financial shenanigans that have cropped up since marginal rates started dropping. There's no consumers to pass it along to with a hedge fund. This presents a conundrum because you really can't separate the production from the gambling anymore. How do you tax the money changers without raising taxes & prices on consumers?

Rich people don't do wages, salaries, & tips. Their income is capital gains, & that gets taxed at about a third the rate of other income, & only if you don't plow it back. I say put a floor on it & tax it at the same rate that everybody else pays. That'd go a ways toward balancing things out somewhat.

Whatever... As long as the economy stays in the doldrums, nothing gets balanced.

This makes sense. It seems to me, since the Reagon era, the Repueblican party has expressed the theory that lower taxes would translate into creating new job. To me the reality has not shown this to be true. However it has been repeated so many times, there are many, many people who do not question its validity. In fact the voices hadve become more strident and devoid of logic. They are saying things like higher taxes, mean that the government is becoming 'socialist' and wants to take away our freedoms, and private property.

The same line of thinking seems to thrive on the notion the wealhty are 'earning' their money. While others are just scuking it up an turning it to waste. One poster I read yesterday said the government, and other elements, were living off the backs harded earned Republican money.

Never mind that giving is a central biblical concept. Conservative thinkers rarely tie in the the concept of giving, to economics. Not to mention the mantra that spending cuts is the only answer. They seem to ignore the devastation the would circulate through out the nation, as millions of people lose their homes. In fact many have put out the philosophy that people are poor and lost thier jobs becuase they are less talented and lazy. This type of thinking goes directly against what Jesus taught. He said we should love our neighbors as ourselves. Yet some of those same conservatives claim to be the champions of "Christian values", while the so called 'liberals' are godless heathens, so to speak.

So the ariticle makes sense, that higher taxes could benefit all. Too bad that large segments of people no long want to discuss ideas. Too much political discourse is simply about branding and name calling. I have really observed this as I read the comments on posted news article. mostly on Yahoo.

In my own analysis, I have argued against the notion that government money is simply throwing away money, with no benefit. But there are people that actually believe that.

Quote:

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Originally Posted by hippifried

Rich people don't do wages, salaries, & tips. Their income is capital gains, & that gets taxed at about a third the rate of other income, & only if you don't plow it back. I say put a floor on it & tax it at the same rate that everybody else pays. That'd go a ways toward balancing things out somewhat.

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Hell yes, and dividends too. Let's pay SS tax on those as well.

HIgher taxes might help, but as long as we're printing money we're doomed. Did we lose our AAA credit rating yet? We shall see...

The presses at the mint need to keep running, just to replace the worn out cash at the banks on a daily basis. In the discussion of the federal budget, the money on Wall St, the national debt, LIBOR, loans from the Fed, hedge funds, derivatives, FOREX, & whatnot, we're not talking about folding money. There's no such thing as that much cash. It's all numbers in a ledger. In high finance, money's an abstract. It's not tangible at all.

Think about it. When the market crashed, where'd all the money go? There was over $50 trillion out there in credit default swaps alone, just in the US. Poof! Lehman was leveraged over 50 times the inflated value they claimed they were worth to keep the credit coming. Oops.

It's just trick accounting. Money's created by debt, destroyed on payoff (like that ever happens), & the interest stays in the system. Lehman couldn't shuffle the money fast enough to keep up & fell short. When the overnights showed arrears, they couldn't borrow their way out of it & collapsed in a day. They couldn't go to the discount window because they weren't really a bank. They're all up to their eyeballs in it, & nobody knows exactly how to clear all this junk debt off the books, despite all the fancy accounting. It isn't the government doing this. The banks & brokerages have this revolving credit going on among themselves. LIBOR was created to allow the non-banks into the game & to bypass the scrutiny of the central banks that are supposed to be in control of the world's currencies. Oops again. It isn't just us. We're just the biggest economy.