Tuesday, September 14, 2010

Taxes Taxes Taxes

So Republican congresscritters are 'taking a stand' against the Obama administration (once again) and demanding that the Bush administration tax cuts, set to expire at the end of the year, be kept in place for all. Obama has put forward a compromise between a total expiration of the tax cuts and a renewal of the tax cuts, proposing that we renew the cuts on the 98% of the population who earn less than $200,000/year (for individuals, $250,000/year for families), while letting the tax cuts on those who make more than that (<2% of the total population, who also control a majority of the nation's wealth) expire. This compromise translates to ~$700 billion added to federal revenue streams over the next ten years (federal income tax revenue will have brought in $700 billion more with the wealthy tax cuts expiring than without them).

Republicans are claiming that, in this economy we can't afford tax increases for anyone, and especially not the rich, whom Republicans are claiming are the drivers of the economy. There are rumblings of another government shutdown attempt by the GOP, mirroring their attempt under Clinton, and it is building up to be a very hot-button election issue.

First, Economics 101: The total amount of money that exists within an economy is not as important as the amount of money that is actually flowing through the economy.

We could all have a billion dollars, but if we don't spend any of it, the economy isn't going anywhere. If we all made $36,000/year and spent 95% of it each year, the economy would be booming (assuming everything else involved in an economy wasn't buggered up too badly).

The people who control the majority of wealth in the country (and see this page for an excellent, and disturbing account of the wealth distribution in the U.S.) don't spend most of it; the richest people sit on their wealth, so much of their wealth does nothing for the economy. The products the richest people spend their money on, mostly items or high-end luxury versions of regular day-to-day items everyone else uses, also do little to stir the economy. A single $500,000 Ferrari is going to do far less for the economy than the 20-50 regular cars, trucks and vans that could be purchased by lower- and middle-class individuals and families with the same amount of money. The same goes for a $50 million estate, compared to $100,000 - $200,000 family-sized houses (including multi-acre properties). More workers are employed, who then buy more products of their own, which employs more workers, who then have more buying power, etc. etc. In theory, this could continue almost to infinity, provided there were no 'money traps' in the economy, places where the money was grabbed up and pulled out of economic circulation and sat on in stagnant pools.

The GOP claim that it is the rich who drive the economy is utter BS. It's part of their Supply-Side Economics shpeal, an economic hypothesis that has utterly failed in every prediction it has ever made. SSE basically claims that the rich drive the economy, by investing in companies, and basically providing the funds to pay workers to make products, increasing supply and reducing prices so that more people can buy things, thereby creating demand. Increases in the wealth and income of the rich will result in increases to the economy because the rich and corporations will invest more, hire more workers, etc. and the wealth will filter down to the bottom in a 'trickle-down' effect.

It's a nice hypothesis that works well on paper, but has very little relation to reality. Supply does not drive demand, demand drives supply. You can have 100 million widgets selling for 5 cents a pop, but if nobody wants a widget, then you have $5,000,000 in product that is going to just sit there, even if people have more than enough money to buy widgets. Furthermore, the rich, when given more wealth, rarely invest that increase in wealth back in the economy. Most of the wealthiest 1% take that money and sit on the majority of it, adding it to their hoard of assets and keeping it all to themselves. It does not get re-invested in companies or used to start up new businesses or expand research and development. It gets added to CEO salaries, or handed out as CEO bonuses. It goes into a bank account, or more stocks and bonds in oil companies or manufacturing industries in China or Taiwan. Or into an expansion of a multi-million-dollar estate, a new hundred-thousand-dollar super luxury car. Supply-Side Economics does not work. It is utter BS. It just produces an increase in wealth for the wealthy, and lower wealth and income for the middle class and the poor, while simultaneously reducing government revenue streams and putting more of the burden of government revenue on the middle- and lower-classes, who can less afford it.

In truth, it is the middle- and lower-classes that drive the economy. They represent the largest force of demand in the economy by several orders of magnitude. The products they buy also distribute money through the economy more broadly and at a faster pace than the high luxury items the rich buy. The lower- and middle-classes also do not stockpile significant amounts of wealth, even taken as a whole, relative to the total value of the economy.

Stockpiling wealth is a money trap. It pulls money out of economic circulation, weakening the economy because the total amount of money in the economy is the same, but the percentage moving through it is reduced. Now, this is not a universally bad thing. Savings by the lower- and middle-classes are money-traps, but this is not a bad thing because the total value of the savings relative to the economy as a whole is trivial, and it also provides a safety net for the lower- and middle-classes during bumps in the economic road. This can trigger or magnify the effects of an economic downturn if increased significantly during times of uncertainty, but these are usually side-effects of other issues or factors. In general, the wealth-stockpiling of lower- and middle-class savings is not a negative thing because it is not a significant long-term money trap.

It is when we get to the rich, the top 1% of wealth-owners and income-earners, that wealth-stockpiling turns into serious money-trapping. Vast quantities of wealth are pulled from the economy and trapped by a small handful of people. Now, even this is not always a bad thing, and being rich isn't bad in-and-of-itself. In fact, a class of rich people, who have significant stockpiles of wealth, can be of great benefit to the economy by providing buying power and investment capital for companies and projects that would not get off the ground otherwise. When the rich use their wealth to reinvest in the economy, their wealth-stockpiling is not a money-trap, but rather an economic force-concentrator, gathering wealth together to be able to provide economic heavy-lifting services.

It is when that stockpiled wealth is not reinvested in the economy and the civilization that provided the ability and opportunity to stockpile the wealth in the first place, but is instead sat on, or worse, directed to increase the wealth stockpiled for the sake of increasing the wealth stockpiled, so that more economic power can be applied to further increasing the wealth stockpiled, etc., and/or that economic power is used to push agendas and policies and practicies that benefit the owners of the wealth and their associates, at the expense of the non-wealthy, that they become economy-damaging money-traps.

How do we combat that? One method is high taxes on high levels of income, both from salaries (straight income tax) and from investments ('capital gains tax' and others), This keeps money that is not reinvested in the economy by the wealthy from being trapped, providing increased government revenue and allowing the government to shift the tax burden to those who make vastly more money than most of the population and can much better afford the tax burden (i.e. taxing the rich so you don't have to tax the poor). This also means that the government has more money to put back into the economy itself through its various programs (defense spending; the various agencies and administrations; infrastructure spending on roads, bridges, railroads, etc.; space programs; R&D grants; public education; national parks; the list goes on), most of which also help to strengthen and enrich our civilization.

Other methods include regulations and monitoring of the economy and economic transactions, to keep people with wealth from abusing it by cheating and gaming the system to unfairly increase their wealth even more. Anti-trust laws to deal with monopolies and ultra-large companies and corporations which are so large that they gain massive and unfair competitive edges just by virtue of their raw economic power alone. Transparency of economics and asset ownership is also key.

So, are the Republican congresscritters right? Can we not afford to increase the taxes of the rich? Do the rich drive the economy? Will the economy collapse if we raise taxes for the top 2% of earners?

In a word: No. The GOP congresscritters are wrong. The rich do not drive the economy, the economy will not collapse if we increase their taxes, and we not only can afford to increase taxes on the top 2% of earners, we can ill afford to NOT increase their taxes. That increase represents $700 billion in revenue over the next ten years that our government is in great need of. The Bush administration racked up record deficits with its handling of the Afghanistan War, the Iraq War, the 2003 tax cuts, the deregulation of the financial sector that magnified the housing bubble and crash. All of these things have to be paid for, and the rich, most of whom made great gains under the Bush administration and Republican-led congress and who also suffered the least during the 2008 crash, will have to chip in and pay their share as well. Especially since it was the policies enacted that benefited them the most that got us into this mess in the first place.

Furthermore, tax rates on the top earners have historically been much, much higher during times of economic booms. From 1940-1963, the tax rate for the top income tax bracket never dropped below 80%. For half that 23-year period, including 1950-1963, the top income tax rate was 91% or higher. Capital gains tax rates were also much higher during that period. And the economy was booming. We were paying down the war debt (far higher than our current debt relative to the GDP, btw) quite rapidly.

Today the government is in deficit spending after wars totaling to date some $1.3 trillion+, the greatest economic disaster since the Great Depression, and a trillion-dollar tax cut. Top income tax brackets are less than 40%, barely more than half of what they were when Reagan slashed taxes for the rich his second year in office, and less than half of what they were during one of the strongest periods of economic growth (real economic growth, not false paper-trading) in this country's history. The Republican answer to these problems is to cut spending, cut spending, cut spending, and then cut revenue (taxes) even more (especially for the rich, because obviously people with a lot of money can't afford taxes) so that we have to cut more spending, cut more spending, cut more spending. Unless it's defense spending. Or they're in power. Then they'll go on about cutting spending while throwing money away, and cutting revenue, and then try to blame the resulting flood of red ink on everyone else.

My solution? State flat-out that to get through these hard times, we ALL have to tighten our belts, chip in and contribute to the recovery. ALL of us, especially those of us who can most afford it and who benefited the most from the previous train wreck of an administration. I would recognize that to get out of this slump we need to cut wasteful spending, but also increase revenue (if you're in debt, you cut back on your expenses, and also put in overtime to increase revenue), and most importantly, put people back to work so that the lower- and middle-class can start buying again and get the economy rolling again.

To that end, I would announce tax-break incentives for companies hiring new employees, tax-break incentives for companies investing in expansions and R&D, and similar tax-break incentives. I would also assign a team to go through the entire budget and weed out wasteful spending that is inefficient or provides little or no return. I would also put forward a massive infrastructure spending plan, $1-$2 trillion, putting money into repairing, expanding and modernizing roads, bridges, dams, electrical lines, water lines, sewage lines, water supply and purification systems, sewage treatment systems, railroads, a plan for a network of continental highspeed rail lines running from the East Coast to the West Coast, Maine to Florida, California to Alaska. I would also include projects to lay high-capacity fiber-optic cable to every community in the nation, build local recycling facilities across the country, expand our nuclear, soar, wind, tidal and geo-thermal power generation facilities with the intent to have 50% or more of the nation's total power generation coming from non-fossil fuel generators by 2020. I would also fund government co-pay programs for individuals and families looking to add private windmill or solar panel power generators to their homes, or geothermal heating/cooling systems and other energy-saving or energy-producing systems that not only cut carbon emissions, and reduce utility bills, but also increase robustness of homes and of our power and utility grids.

To help combat unemployment, I would put together government-funded work teams, call it the Civil Conservation Corps., available to people who have been unemployed past so many weeks. It would pay at an increased minimum wage, above what most would get on unemployment alone, assigning workers to make-work projects cleaning parks and streams and roads and city streets. They would build school bus and public transit bus shelters, sturdy buildings that students or public bus riders could take shelter in while waiting for their ride. I would also fund expanded bus routes for cities and add public bus systems to suburban and rural communities as part of this program. The goal would be to eventually expand the Civil Conservation Corps. to be a nation-wide community service provider funded by federal and state governments, operating in local communities with the long-term purpose of providing local community services and jobs that smaller communities could not fund themselves, and to provide employment opportunities to those who cannot find work, regardless of skill level, with long-term opportunities for skilled workers, or workers willing to go through job skills training to learn new skills. The CCC would also be designed to have the short-term capability of providing large-scale job opportunities to the long-term unemployed during local or national economic downturns that see large-scale job cuts.

To pay for this spending package, I would increase the top income tax bracket to 45% permanently, with a 10-year temporary hike to 90% with a clause for an independent, non-partisan agency to closely monitor the economic impact of the increased taxation and the government spending projects, so that at the 10-year mark the impact could be properly reviewed for a decision on whether or not to maintain the tax rate, reduce it to the permanent 45% rate at once or over time, or reduce it to a higher permanent rate. I would also eliminate the $105,000 taxable income cap on the social security tax, greatly increasing revenue for SSI, which would be expanded with that increased revenue to provide additional pay-outs and income security for our elderly and retired. An additional Social Security tax would also be applied to capital gains income, and a small per-transaction tax on stock trading, to help cover for job-stimulating tax cuts and to discourage the kind of rapid, moment-by-moment transactions that contributed to the 2008 bubble and crash. I would also implement a very aggressive progressive conditional income tax on corporate executive officers who have a total income in salary and bonuses that exceeds the company's average employee salary by more than a factor of 10, to discourage the climate of outlandish salaries and bonuses and inter-corporate back-scratching networks that also contributed to the 2008 bubble and crash.

But, then I'm a Keynsian and moderate socialist on economic policy, and that kind of massive government spending ($1-$3 trillion over 10 years), and especially that kind of massive tax hike on the richest 1% of the country (~$5.66 trillion revenue increase over 10 years) would not fly at all in today's political environment.

I suspect that the policies themselves would be quite popular individually, or even all together, but the political environment of Washington would never allow them to get through. Too many big interests would get hit with the bill, even though they caused or contributed to the mess and have been doing their best to dodge paying for any of it so far.


Jacob said...

Hi Ilithi Dragon,

Is it even possible to take money out of circulation without stuffing it in a jar? Say we have Joe Non-Spender who has a large sum in a bank. Doesn't the bank take that money and loan it out to people to simulate the economy? I realize that a percentage of that money does just sit there as Banks have to have a certain debt-asset ratio, but most of it is reintroduced. At least thats my understanding.

Ilithi Dragon said...

To an extent, yes, a bank loan puts the money held in the bank back into circulation in the economy (provided the banks are lending!), but I don't think a loan has the same worth in the economy as real, non-debt-created money/wealth. Eventually, the loan has to be paid back, and while it can be used to jump-start a wealth-generator/circulator, the loan still has to be paid back, with interest, so the money created by the loan can't keep circulating through the economy, it has to come back to the loan, or other money has to be pulled out of circulation to replace it.

Then, too, if the wealth from the loan is not used to create more wealth than the interest on the loan, the loan itself can potentially have a negative effect on the value of the economy, because it will be pulling back in more wealth than it created (though this is probably off-set by generation of wealth by the process of circulation stimulated by the loan funds; not being an economist and not having data on that, I cannot say).

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