Are Low Taxes Exacerbating the Recession?

[Donnachaidh]

http://www.truthdig.com/report/item/are_low_taxes_exacerbating_the_recession_20100708/?ln

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.”

More at the link --

[FormerDittoHead]

1. Here's my take. Low taxes encourage owners taking money OUT of business.

The lower taxes are, the more it pays for people to take money out of their business.

Low taxes discourages investing in businesses, as the write off isn't that much.

The higher your taxes, the more one is encouraged to buy things for the business.

If my taxes (on profits) are 50%, and say I have $200 profits, then buying a new copier for $200 and writing off the expense will really cost me only $100, because half of that $200 would have gone for taxes.

I remember when I owned my own business. The end of the year would be a "buying spree" because I knew that all the supplies and everything I bought had a "built in discount" as what I was buying for the business would reduce my taxes.

But if taxes are 10%, I'll just put the $200 in my pocket, and let the business make do with what it has.

SAME FOR HIRING. Fire half the people, put everyone on "salary" have them work 60 hours a week and make them do their jobs plus the jobs of the people I fired. Of the people I fired, I put their salary in my pocket.

[TheKentuckian]

5. Very much right. Everything has a point of diminishing returns

but higher personal taxes and on dividends strongly encourage greater investment.

The balance seems to be certainly less than Ike's time but sure as hell more than Bush's wealthfare program.

55% seems like a decent starting place to me.

[JHB]

6. Bingo: low marginal taxes favors liquidation and speculation

Higher marginal taxes creates a "top line" they have to take under consideration, not just the ever-present bottom line.

And the "top line" isn't even really a line, so much as a zone that reinforces "diminishing returns" for extracting what is, at that level of income, just more gravy.

[Cresent City Kid]

9. Excellent point

When I hear that higher taxes will reduce investment, to me it sounds more like a threat than a mathematical necessity. Raise my taxes by X and I'll reduce my investment by X to break even. Don't people invest to make money? Are they really only investing the extra money they have from tax cuts?

Your argument is solid, and I will remember it when the Bush cuts expire and letting them expire will be framed as "raising taxes".

[Deep13]

2. Yup. We need massive public spending...

...and elevated taxes on those who can afford it.

[NNN0LHI]

3. Raise taxes on the wealthy and use it to pay extended unemployment and other safety net services

Watch how fast the corporations start hiring then. Their stockholders will demand it.

Don

[lunatica]

4. The military budget and corporations not paying taxes are the culprits

That's hundreds of billions of dollars bleeding out of our economy with no returns.

[SocialistLez]

7. Too bad Congress doesn't get this.... NT

[ParkieDem]

8. Spitzer is wrong here.

I generally believe that our tax code needs to be more progressive, but as a Keynesian, I don't believe anyone's taxes should be raised during a recession.

As for the 90%+ tax rates of the 1950s and 1960s, the American economy grew in spite of these confiscatory rates. Why? There was no other place for investors to park their capital. Japan, Europe and the United States were the only economies that were truly industrialized then, and Europe and Japan's productive capacity had been all but obliterated in World War II. These countries needed rebuilding materials, and the only country that could provide them was the United States. As these countries rebounded in the early 1960s, investors began investing there rather than in the US, in part because tax rates there were lower. President Kennedy realized this, which is why he cut taxes during his brief term in office.

If we were to raise taxes to the 90% or even 70% range, capital would flee the US like crazy. Either that, or there would be mass tax evasion -- the higher the tax, the greater (a) the incentive to evade, and (b) the cost of enforcing such a high rate.

That's not to say we should drastically reduce taxes now; it simply means that tax rates should be prudent. The tax rate doesn't determine economic success, rather, it is a combination of many things, including (1) the tax rate, and (2) what forms of income/assets are actually taxed, and (3) how effectively the tax revenue is spent by the government.

[Lost4words]

10. Its not a recession to the uber wealthy! Come On!

Do they not live here, did they not gain their wealth here, do they not have a responsibility to our/their nation!

The wealthy by their own doing are the only ones with INCOME, tax each breath they take, tax them into poverty for all I care, they are dragging our nation down but their lives are still very comfortable.

[Edweird]

11. I thought that was common knowledge.....

[Winterblues]

12. Duhhh

:shrug: