Higher Taxes Hurt Job Creators? That's Malarkey.

As we go into the final days of a dismal presidential campaign where too many issues have been fudged or eluded—and the media only want to talk about is who’s up and who’s down—the biggest issue on which the candidates have given us the clearest choice is whether the rich should pay more in taxes. 

President Obama says emphatically yes. He proposes ending the Bush tax cut for people earning more than $250,000 a year, and requiring those with high incomes to pay in taxes at least 30 percent of any income over $1 million (the so-called “Buffett Rule”).

Mitt Romney says emphatically no. He proposes cutting tax rates by 20 percent, which would reduce taxes on the rich far more than anyone else. He also wants to extend the Bush tax cut for the wealthy, and reduce or eliminate taxes on dividends and capital gains. 

Romney says he’ll close loopholes and eliminate deductions used by the rich so that their share of total taxes remains the same as it is now, although he refuses to specify what loopholes or deductions. But even if we take him at his word, under no circumstances would he increase the amount of taxes they pay. 

Obama is right. 

America faces a huge budget deficit. And just about everyone who’s looked at how to reduce it—the non-partisan Congressional Budget Office, the bipartisan Simpson-Bowles Commission, and almost all independent economists and analysts—have come up with some combination of spending cuts and tax increases that raise revenue.

Just last Thursday, executives of more than eighty large American corporations called for tax reform that “raises revenues and reduces the deficit.”

The practical question is who pays for those additional revenues. If Romney’s view prevails and the rich don’t pay more, everyone else has to.

That’s nonsensical. The rich are far richer than they used to be, while most of the rest of us are poorer. The latest data show the top 1 percent garnering 93 percent of all the gains from the recovery so far. But median family income is 8 percent lower than it was in 2000, adjusted for inflation. 

The gap has been widening for three decades. Since 1980 the top 1 percent has doubled its share of the nation’s total income—from 10 percent to 20 percent. The share of the top one-tenth of 1 percent has tripled. The share of the top-most one-one hundredth of 1 percent—16,000 families—has quadrupled. The richest 400 Americans now have more wealth than the bottom 150 million of us put together.

Meanwhile, the tax rates paid by the wealthy have dropped precipitously. Before 1981 the top marginal tax rate was never lower than 70 percent. Under President Dwight Eisenhower it was 93 percent. Even after taking all the deductions and tax credits available to them, the rich paid around 54 percent. 

The top tax rate is now only 35 percent and the tax on capital gains (increases in the value of investments) is only 15 percent. Since so much of what they earn is from capital gains, many of the super-rich, like Mitt Romney himself, pay 14 percent or less. That’s a lower tax rate than many middle-class Americans pay. 

In fact, if you add up all the taxes paid—not just on income and capital gains but also payroll taxes (which don’t apply to income above incomes of $110,100), and sales taxes—most of us are paying a higher percent of our income in taxes than are those at the top. 

So how can anyone argue against raising taxes on the rich? Easy. They say it will slow the economy because the rich are “job creators.”

In the immortal words of Joe Biden, that’s malarky. 

The economy did just fine during the three decades after World War II, when the top tax rate never fell below 70 percent. Average yearly economic growth was higher in those years than it’s been since, when taxes on the rich have been far lower. 

Bill Clinton raised taxes on the rich and the economy did wonderfully well. George W. Bush cut them and the economy slowed. 

The real job creators are America’s vast middle class, whose spending encourages businesses to expand and hire—and whose lack of spending has the opposite effect.

That’s why the recovery has been painfully slow. So much income and wealth have gone to the top that the vast majority of Americans in the middle don’t have the purchasing power to get the economy moving again. The rich save most of what they earn, and their savings go anywhere around the world where they can get the highest return.

It would be insane to compound the damage by raising taxes on the middle class and not on the rich. 

Logic, fairness, and common sense dictate that the rich pay more in taxes. It’s the key to avoiding January’s fiscal cliff and coming up with a “grand bargain” on taming the budget deficit. And it’s central to getting the economy back on track.

Comments

There's a better reason why it's malarkey. It's not even true.

Historically, the top marginal income tax rate was higher than the corporate tax rate. With the Bush tax cuts, individual rates could be lower than corporate rates. This caused many "small businesses" to restructure as pass-through corporations so that the corporate profits were taxed as income rather than corporate profits.

Romney is arguing that raising the top personal income tax rate will raise taxes on those small businesses that run as pass-through corporations. But, if the new personal tax rate goes up, those "small businesses" will just switch back from a pass-through to a more conventional corporate structure. And heck, if Obama lowers the corporate tax rate (as he's said in the past), this may result in even lower taxes for those small businesses than what they currently face.

In short, Romney's argument assumes that corporations won't adjust to the changes in tax law. As a "businessman" (whose pretty adept at minimizing taxes himself), he knows this argument is BS.

It might also be pointed out that most of the liquidity that the Fed is trying to pour into the economy is sucked right up by the wealthy who put it to use in non-productive financial chicanery.

If we taxed this money away and put it into the economy as a fiscal stimulus, then the economy would recover faster and the deficit would be eliminated.

The argument for tax increases for the wealthy is strengthened if you can explain the mechanism by which such tax increases help the economy.

If we only argue that historically, during high taxes the economy has done fine, then people could dismiss this as just a coincidence. If you can explain why it is true that the economy does well with higher taxes, then it is harder to dismiss the argument.

The mechanism is described in two parts.

Part 1 - Lower marginal rates increase inequality:
http://econopolitics.com/2012/10/26/do-tax-cuts-hurt-growth/

Part 2 - Higher inequality leads to lower consumption:
http://econopolitics.com/2012/10/29/real-problem-us-economy/

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