Make Real Economic Change: Raise Taxes On the Rich — A Lot

Turn this into jobs
Turn this into jobs

By James A. Kidney

 Now that the major party nominees are chosen, the economic pundits are making their recommendations on how to boost what remains a moribund economy. Despite recent months of reported job increases and a slight uptick in average pay last month, few believe the economy is robust or expected to be soSee also here (pay wall).  The reasons — and proposed cures — depend on your politics, of course.

            Where the Candidates Stand

Donald Trump this week proposed the usual failed trickle down policies.  He wants tax cuts for the wealthy, including elimination of the estate tax (which effects about 0.2 percent of citizens).  He would increase the earned income tax credit, which is a pure redistribution of a little income to the poor which does not create jobs.  He would provide only a tax deduction for child care — which means you have to be well-off enough to itemize your tax return and owe taxes to take advantage of it.  If you are wealthy, the government will pay for your nannies.

Hillary Clinton plans a speech on her economic plans Thursday. Her website provides a pretty good idea of what those will be.  She properly focuses on making the wealthy pay their “fair share” of taxes.  counting on you to keep us richBut “fairness” in her plan is only a 4 percent “surcharge” on earnings of over $5 million per year.  In addition, she wants to broaden the estate tax to reach 0.4 percent of Americans, require that each millionaire pay at least at 30 percent tax on regular income, and change some tax provisions favoring the wealthy.

There is no mention in Clinton’s plan of raising the tax on capital gains or otherwise redefining “income” so that the income tax actually falls on the kinds of income earned by multi-millionaires.

Neither candidate suggests that what the country needs is a real redistributive income tax to address our modest economic growth and reverse the fact that inequality is making us a nation of kings and serfs.  Nor do the economic pundits bring up the subject very seriously.

            Do We Still Need to Ask What’s “Fair”?

The unfairness of the income distribution in this county is patent and obvious.  Not only are there a growing number of persons who simply were fortunate enough to marry well or be born to wealth (talkin’ ’bout you Waltons of Walmart), but the compensation scales for senior executives who actually work for a living are off the charts.  The CEO of Yahoo, for example, might be paid $219 million for failing to keep the company independent and closing the place by merger.  But she has only become “one of the guys.”  For years it has been shown that some of the worst performing CEOs receive the highest compensation.  See these reports from 2016 and 2012.

Meanwhile, even the successful executives and other folks with great wealth show no loyalty to the people of this country or other qualities of citizenship.  Apple notoriously declined to help the FBI crack the iPhone code of a terrorist in Santa Barbara, fearful that doing so would hurt its ability to market the phone in Big Brother countries such as China and Iran.  Nearly all major corporations are moving wealth overseas to avoid corporate taxes (which are so full of loopholes that they could keep the funds in the country anyway) while fully utilizing this nation’s legal protection of patents, hiring the products of our tax-supported universities and enjoying the peace and stability of our society.

Hiding personal income from taxes (and spouses and creditors) has become a booming business not just in countries outside the U.S. but also among the states, especially those which already try to rob other localities of wealthy residents by forgoing any state income tax.

We need not belabor the subject.  Unless you have been hiding under a rock the last forty years, you already know that when the wealthy talk about “fairness” and taxes it is a one-way street.  They take while you don’t.

But significant tax increases on the wealthy simply are not on the political table, or even being discussed.

            Is More Borrowing Better than Taxing the Wealthy?

Paul Krugman of The New York Times suggests now is when all levels of government should borrow to improve the infrastructure and to grow reliance on alternative energy.  Interest rates are at near-record lows.  Krugman is right a far as he goes:

Put these two facts together — big needs for public investment, and very low interest rates — and it suggests not just that we should be borrowing to invest, but that this investment might well pay for itself even in purely fiscal terms. How so? Spending more now would mean a bigger economy later, which would mean more tax revenue. This additional revenue would probably be larger than any rise in future interest payments.

And this analysis doesn’t even take into account the potential role of public investment in job creation: Despite a low headline unemployment rate, the U.S. economy is still probably short of full employment, and an investment agenda would also offer valuable insurance against possible future downturns.

Another Times economic pundit laments the worldwide pace of income growth and also recommends greater government spending.

Neither Timesman suggests that the spending be paid for on an as-you-go basis.  They want deficit spending.  Although Krugman probably would like a higher tax on the wealthy, presumably he thinks it is politically easier to borrow now rather than pay-as-you-go.  He probably is right.

According to an earlier news story in the Times, headlined with considerable irony “They Want Trump to Make the GOP a Workers’ Party,” the ascent of Donald Trump has caused the “brains” in the Republican Party to realize that maybe their principal economic policies — tax cuts for the wealthy and benefit cuts for the poor and middle class — are not attractive to many voters.  The Times reports that these Big Thinkers are readjusting their recommended programs in an attempt to better appeal to angry Trump supporters.  If they have their way, the GOP will stop talking about cuts to Medicare and Social Security, stop trying to kill Obamacare (but make “market-oriented changes”) and quit talking about deporting undocumented workers.

The most controversial suggestion?  Stop promoting tax cuts for the wealthy.  These conservatives also favor increasing their favorite program for the poor:  the earned income tax credit, or maybe provide a direct wage subsidy.

Never mentioned, or barely mentioned, in all of these tracts are the words “major income tax increase on the wealthy.”  No one promises a large increase in the tax on the wealthy.  Clinton is almost courageous by limiting her increase to a four percent “surcharge,” but, given the way society has evolved over the last few decades to the advantage of the wealthy, the increase is far too small to be “fair.”

Tax increases are the “eat your spinach” of politics.   Many voters only hear the “income tax increase part” and not the “on the wealthy” part.  All but the poorest of taxpayers think the term “wealthy” might apply to them, or that they will win the lottery or that their kids will become rich boys and girls one day. Or that once we start raising income taxes on the wealthy, we will soon do so on the rest of us.

One of the wealthiest men in the world, Bill Gates, is in favor of tax increases on the wealthy to make for a healthy economy.  “The highest economic growth decade was the 1960s. Income tax rates were 90 percent,” Gates said on CNN’s Fareed Zakaria GPS May 17, 2015. “I mean, the idea that there’s some direct connection that all these innovators are on strike because tax rates are at 35 percent on corporations, that’s just such nonsense.”  Politifact fact-checked Gates’ statement and concluded it was “mostly true.”

           We Need to Build a Demand Economy

As some of the pundits above noted, the biggest driver of a healthy economy is demand.  We know that since the Reagan-era most of the income growth has gone to the top 1 percent.  The situation is slightly better today than it was a few years ago, but over 50 percent of income growth still goes to those already very, very wealthy.

In other words, the money is at the top. The income economy is top-heavier now than at any time since immediately before the Great Depression.

With earnings inequality at its highest since the 1920s, the answer to the low demand economy with middle class incomes barely rising should be obvious:  Redistribute the income.  If significantly higher taxes on the upper brackets were imposed, and then carefully spent on things the country needs,

Tax this guy!
Tax this guy!

incomes would sky rocket and the economy would dramatically improve.

It’s simple economics.  One man realizing $10 million or $100 million a year can be expected to buy only so many cars.  His family can eat only so many groceries.  He may own two or three large homes (or, like Sen. John McCain, seven), expensive ones at that, but he won’t buy an entire subdivision.

Take $8 million of the $10 million (or whatever substantial sum you wish, higher or lower) and redistribute it through contracts to rebuild infrastructure, manufacture energy conserving products, expand medical care, provide a better education, and you have expanded income and expanded demand.  For example, if that $8 million taken from the man making $10 million resulted in $100,000 incomes for 80 people, it is likely that demand would increase more substantially for cars, groceries, homes, furnishings and everything else (except maybe yachts) as opposed to what happens if he keeps the money to himself.  That demand must be met with supply, which requires hiring more people to provide those goods.

It is very simple economics.  It is an employment-centric version of the supply-and-demand curve, which usually is employed to show the effect of product price on demand, and of the multiplier effect.  The multiplier effect means every time there is an injection of new demand into the circular flow of the economy, there is likely to be a greater effect as the money flows through the economy.  “This is because an injection of extra income leads to more spending, which creates more income, and so on.  The multiplier effect refers to the increase in final income arising from any new injection of spending.”

This combination of increased demand and the multiplier effect is the basis for stimulus programs, such as the relatively small stimulus passed in the wake of the 2008 financial crisis.  It is also a reason Krugman and others want greater government expenditures — but on borrowed money.

Hardly anyone talks about a pay-as-you-go tax increase.  Republicans hate tax increases of any kind, even more than they hate deficit spending.  So there was no tax increase to fund our Middle East wars. Republican knee-jerk reaction against any income tax increase both satisfies the party’s principal funders and allows them to argue that existing programs must be cut and no new ones funded else the national debt will result in terrors too inhuman to specify.

Hide the women and children!

         Raising Taxes Does Not Hurt the Economy — Doing So Helps It

If there were a significant tax increase on the wealthy, properly spent, GDP would climb.  Don’t just “trust me” or Bill Gates.  Here are some numbers to prove it.  Keep in mind that the current top income tax rate is 39.6 percent for heads of households with $441,000 and more taxable income (which seriously understates actual income among the wealthy, much of which is unearned).  Real GDP in the U.S. increased at an annual rate of 1.2 percent in the second quarter of 2016, and only 0.8 percent in the first quarter.

 

     Best 20 Years of GDP Change Since 1930

Year GDP Change Top Tax Rate
1942 18.9 88.0
1941 17.7 81.0
1943 17 88.0
1936 12.9 79.0
1934 10.8 63.0
1935 8.9 63.0
1940 8.8 81.1
1950 8.7 84.4
1951 8.1 8.1
1939 8 79.0
1944 8 94.0
1984 7.3 50.0
1955 7.1 91.0
1959 6.9 91.0
1966 6.6 70.0
1965 6.5 70.0
1962 6.1 91.0
1964 5.8 77.0
1973 5.6 70.0
1978 5.6 70.0
Average 9.3 74.4

Source:  Politicsthatwork.com

Above are the top 20 years for GDP improvement and the top tax bracket in those years.  Let’s ignore the years of World War II, when GDP would be high no matter what the tax rates were.  High taxes did not smother growth during the Great Depression.  Rather, GDP went up substantially in most of those years.  Of course, percentages can lie.  The GDP was very low in the Depression years, so higher percentages were easier to attain.  But, again, high tax rates on the wealthy (few as there might have been) did not prevent growth in hard times.  Even if we remove the macro-economic unusual circumstances of World War II and the Depression, and consider only the top 10 growth years from 1950 to 1978, GDP growth averaged 6.7 percent a year with an average top tax bracket of 72.3 percent.

It has been 66 years since 1950.  Only eleven of the top 20 GDP increase years have occurred since 1949, the last in 1984, an outlier when the U.S. was recovering from a deep “stagflation” recession.  With that exception, the last major GDP increase was in 1978.  Is it a mere coincidence that taxes were substantially cut in the Reagan years and that Republicans have been in charge of the presidency or the Congress most of the subsequent years?  Tax increases since Reagan have been modest compared to earlier in the last 100 years.  Tax cuts have been more frequent and greater.

Let’s look and compare the years after Reagan was elected through 2015:

GDP Change 1980 to 2015

Year GDP Change Top Tax Rate
1980 -0.2 70.0
1981 2.6 69.1
1982 -1.9 50.0
1983 4.6 50.0
1984 7.3 50.0
1985 4.2 50.0
1986 3.5 50.0
1987 3.5 38.5
1988 4.2 28.0
1989 3.7 28.0
1990 1.9 28.0
1991 -0.1 31.0
1992 3.6 31.0
1993 2.7 39.6
1994 4.0 39.6
1995 2.7 39.6
1996 3.8 39.6
1997 4.5 39.6
1998 4.4 39.6
1999 4.7 39.6
2000 4.1 39.6
2001 1.0 39.1
2002 1.8 38.6
2003 2.8 35.0
2004 3.8 35.0
2005 3.3 35.0
2006 2.7 35.0
2007 1.8 35.0
2008 -0.3 35.0
2009 -2.8 35.0
2010 2.5 35.0
2011 1.6 35.0
2012 2.2 35.0
2013 1.5 39.6
2014 2.4 39.6
2015 2.4 39.6
Average 2.6 39.9

Sources:  IRS, World Bank, data.okfin.org

The numbers are not entirely congruent, of course.  Big taxes do not automatically equate to high growth.  The money must be spent wisely to provide jobs.  Plus, there are policy and trade issues that impact the economy for which tax rates cannot provide a complete solution, but can provide a cushion for the middle class.  As is often stated, with the loss of manufacturing jobs to overseas companies, it will be tough to return to the growth rates of the 1950s.  But better distribution of income and, as a result, higher demand, will be a big help, even if not a cure-all.

There are plenty of ways to spend tax money on new jobs after many years of government neglect.  We can do it without growing the national debt.  A 50 percent tax on incomes from all sources (including capital gains and other unearned income) over some number — say, $1 million — and a 70 percent tax on income over $5 million would pay for much infrastructure repair, more and better teachers, improved medical care, manufacture of pollution control devices, etc.  Every dollar spent on wages and things that people are paid to build would have a multiplier effect reaching into industries that don’t warrant direct government support, such as autos, housing, luxury goods, etc.

Military expenditures, favored by Republicans even in peacetime, usually provide a smaller multiplier effect on the economy.  Most of the money goes to manufacturing weapons, not to pay soldiers and sailors, so the expenditures are focused on a relative handful of companies in very specific areas of the country.  The various suppliers of parts may be more widespread, but spending on infrastructure, health and other non-military projects is a superior means of increasing demand equitably across the country.

When Republicans talk about providing a “safety net,” they are talking about spending money very poorly.  They usually mean some form of welfare and/or the earned income tax credit, as is recommended by the pooh-bahs in the aforementioned Times article and by Trump.  These programs simply give people who are poor a few more dollars.  They do not provide jobs. Since the poor are, well, poor, the extra money is gone quickly, without much effect on the economy beyond buying more high priced groceries at the corner bodega in a supermarket desert.  An earned income tax credit does not allow the poor to buy cars, houses or furniture.  Nor does it provide a better paying job.

As someone once said, it is better to teach a person to be a fisherman rather than simply give him a fish.  A job is better than a handout.  Don’t Republicans agree?  Many fishermen can be created without a nickel of increase in the national debt if we pass a substantial tax increase on the wealthy.

The GDP data above does establish beyond any doubt that, while high taxes may not automatically improve the economy, they often help.  The data also proves that the Republican refrain that higher taxes will damage the economy is rubbish.

Of course, the principal argument raised today is that higher taxes cannot be passed by Congress.  But the one good thing about Donald Trump’s campaign is that he proves the rank-and-file Republican voter is primed to overthrow the old party doctrines of tax cuts for the wealthy and benefit cuts for the rest of us.  They are on to the game, but have misidentified the right targets for reform.  It is little wonder.

Democrats lost their “common man” spine long ago and have yet to recover it.  Rather than push for genuine economic reform, Democrats still are much more comfortable talking about minor issues that nevertheless engender major controversy and discomfort among many, such as rights of the transgendered and glass ceilings at top levels of corporations.  Discussion of tax increases remains meek and measured, as shown by the Clinton campaign’s modest 4 percent “solution”. The Dems should toughen their stance against inequality with robust programs based on more government income through taxes, not move right to seek Republican voters, as some have suggested.

Pushing for increased government spending is only half the solution.  Tax increases are the other.  Yes, interest rates and inflation are both low, so borrowing is better than at other times.  But eventually the money has to be paid back, no matter what the interest rate.  By increasing the debt when there is so much relatively idle money in the hands of the wealthy, we as a country would be acting irresponsibly.  Also, there will come a time — sooner rather than later — when continued borrowing does pose a threat to our economic well-being or, more likely, become ammo for the right to frighten people into believing our well-being is threatened.  Then there will be major program cuts.  By borrowing rather than taxing, we will in some ways still be kicking the can down the road even if programs are created with money from deficit spending.

The United States is the richest country in the world.  Let’s spend some of that money for the benefit of all of us.

Raise taxes on the rich.  Raise them a lot.

 

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