Time for Tax Hikes

US economic growth has been strongest when our taxes have been high. During World War II, then under Truman, Eisenhower, and Kennedy, our upper marginal tax rates were between 88-92%. Read those numbers again. They are astonishingly high. Those were our strongest growth years.

I never expected to say this. Pelosi's right, Obama's wrong.

Do keep in mind that we are talking about higher taxes on the richest members of society, the very richest. So, unless you're among that elite group, don't panic for personal reasons.

Keep in mind, also, that we are speaking only of income taxes.

You have certainly heard, several thousand times, that tax cuts lead to economic growth.

That's not true.

Moderate tax cuts lead to a flat economy. (The Johnson tax cuts, usually misnamed the Kennedy tax cuts, lead to 16 years of virtually no growth.)

Large tax cuts are followed by a boom in the financial sector, a bubble, and a crash. Then a recession or depression with massive bank failures. This has happened three times, in the 1920s, under Reagan, and under George W. Bush.

During a depression or recession, the point where taxes are increased marks the point when the economy begins its recovery: 1932 under Hoover, Roosevelt's second round of tax hikes in 1940, the first president Bush's tax hike, followed by the Clinton tax hike. (There's one exception. Roosevelt's tax hike of 1936, which was accompanied by cuts in government spending.)

US economic growth has been strongest when our taxes have been high. During World War II, then under Truman, Eisenhower, and Kennedy, our upper marginal tax rates were between 88-92%. Read those numbers again. They are astonishingly high. Those were our strongest growth years.

The next time we experienced strong growth -- not just in the fiscal sector, across the entire economy -- was after the Clinton tax hikes.

Why do tax hikes lead to strong economic growth?

Tax hikes usually correspond to higher government spending.

Government spends money on things that the private sector does not spend money on: physical infrastructure, social infrastructure, market infrastructure, and defense. These are the things that create a world in which doing business is possible. The worse those things are, the worse business is. The better they are, the better business is.

Rich people can't be trusted with too much money. If they have too much easy cash around, they get conned into Ponzi schemes, they go for quick money deals, they get suckered into bubbles, and then the whole economy crashes.

Can we have increased government spending without tax hikes?

No.

We can spend more than the government takes in -- if, and only if -- the following is true.

If the government is spending more than it takes in order to create an environment where more productive business is possible, then, at some point, the investment will begin to pay off and revenues will rise. If, at the same time, government spending declines (as a percentage of GDP), increased revenue will catch up with spending and the debt will be paid off.

Or -- since this is the real world, in which there are always new needs and new problems, and therefore new things to pay for -- the old debts will be caught up with and paid down, while new ones are taken on, hopefully to build new things that will pay off in turn.

In order for that to work, the tax rate has to be high enough so that the first set of deficits could actually be paid off (if life, government and business suddenly stopped there). If the tax rate is not high enough to do that -- even if only in theory -- then debt piles upon debt and the country's currency becomes worthless.

Debts at some point must be paid. Even if new debts are being taken on. The fact that government goes on and on, and there are constant new debts, disguises that. It makes us think of the debt as a condition, something special to government, that is actually different from regular economics. But it's not.

So the set-up has to be like that of a real business. We take on debt to get things done. We need a revenue stream that will pay for that debt. In this case, it's called taxes. If the set-up is such that the revenue stream will never pay for that debt, we must go bankrupt. Or mortgage and then sell off our assets, and then go bankrupt. Which is what we tried under George Bush.

There is a theory that tax cuts -- even without spending cuts -- will pay for themselves out of increased revenues. This has the laughable name, The Laffer Curve. It apparently works very well in Republican minds but has never worked in reality. It produces huge deficits that eventually require tax hikes to pay down the debt.

We are now taking on two huge new sets of debts.

The first is to pay for the Laffer Curve idiocy of the Bush years.

The second is to rebuild the economy from the devastation of those policies and the ones like them in preceding administrations.

Somehow, those debts will have to paid for.

The question is how?

We know that even if the economy is relatively active, as it was during the fiscal bubble of the Bush years, that it cannot pay the cost of government with the tax rates that we currently have. There was lots of taxable money being generated, yet it never came close to catching up with spending. That's not even counting those costs -- like the wars -- that were kept off the books.

Even if we were not going to invest in rebuilding the economy, we would have to raise taxes just to get even. Then raise them again to pay down the debt.

But unless we rebuild the economy it will not generate enough money to create the revenue stream (taxes) to pay the debts. So that has to be done too.

Why are we so resistant to raising taxes?

It's our nature. Nobody likes to give up their personal money for the common good.

People with a lot of money have, over the past fifty years, spent a fortune on exploiting that instinct and pandering to that feeling. Eventually, with nobody willing to say publicly that taxes are good, they took over the dialogue. It is now routine to hear tax cuts refereed to as "pro-growth" policies, even though, in fact, that's not true. It is routine to hear tax hikes called "anti-growth" policies, when that's not true.

The rich, the Republicans, and the Right, have lost this last election, but they still own the mythology.

High taxes make for a sound economy. High taxes make us all better off. High taxes will make you richer. Even after taxes.

Larry Beinhart is the author of Wag the Dog, The Librarian, and Fog Facts: Searching for Truth in the Land of Spin. All available at nationbooks.org

His new novel is: SALVATION BOULEVARD. Website: http://www.larrybeinhart.com

Responses can be sent to [e-mail]

Comments

[WilliamProc]

The insanity behind the tax debate is that many people believe that cutting taxes will somehow improve the economy. Folks, where do you think the money to run our government comes from? Obama is going to have to tell the public, at some point, that he will raise taxes and impose new ones.

The conservative mindset of tricke-down economics was a dismal failure. Anyone left in the government who believes that cutting taxes to the wealthy will lead to them re-investing the money in R & D and higher wages for employees need only read a local paper to burst that bubble. The banks want to take money, not loan it; so good-bye to equity loans. All the measures taken to stimulate the economy have failed and taxes are the only solution.

The real problem is: with so many out of work, who has, or will have the money to pay taxes?

[schatsie]

and that is why we might need to tax assets instead of income.. After all, the cops are not protecting me, they are protecting the assets of the Rich... 80% of court costs are for corporation to corporation suits and why should I have to pay for those costs...and the rich have had tax cuts totally 2.5 trillion over the last 8 years, so they can pony up...

and I want real healthcare...NO MORE FREE MARKET healthcare where the CEO of United Healthcare is given 1.6 billion for whatever....The government does a fabulous job with MEDICARE..and nobody is doing anything about the AUTISM Epidemic which is impoverishing 1 in 80 families....

[research]

Tax both property property and income. It cost money for the regulators of the banks and investment firms that are supposed to protect our interests.

[research]

"Large tax cuts are followed by a boom in the financial sector, a bubble, and a crash. Then a recession or depression with massive bank failures. This has happened three times, in the 1920s, under Reagan, and under George W. Bush."

This is an Amazing observation.

And is absolutely shown in the historical record.

Low top marginal income taxes

Create a Manic Depressive economy.

My theory is that high marginal income taxes discourage out of control personal greed. Thus Companies spend money, time and energy making their business work. Also with good public services and safely nets, People feel secure without outrageous fortunes.

[quadman]

"Rich people can't be trusted with too much money."

This is laughable since you are proposing that our government CAN be trusted with more and more of it. Have you missed out on the bailouts?

[research]

CONSERVATIVES

The GOP

Republicans

CAN"T BE TRUSTED WITH TOO MUCH MONEY!

Not good government.

Look to Europe. Their taxes actually produce useful services.

[quadman]

Your blanket statements reveal a lack of your screen name. Do you also believe that the world is divided between 'goodies' and 'baddies'?

I would NEVER trust a government with increasing amounts of money, regardless of who is in charge. It is extremely naive to suggest that we can blindly trust government to responsibly spend money that they take from us. If you trusted the Dems to spend wisely the last two years, or even better than the GOP during the ten years before that, then I should warn you to be prepared for a BIG let down.

[schatsie]

yes, they have great healthcare, great education, great mass transportation.. think about it we are paying $6 grand for health care for every man woman and child and they are paying a lot less,, so for a family of 8, there is a FREE MARKET premium on healthcare of 8 grand (2 grand per person) EACH AND EVERY YEAR... Education is free, that savings alone is worth at least 50 grand per college student, but this is not each and every year.. Mass transportion.. consider our FREE MARKET alternative, GOD only knows what gas costs but it can be from $50 per month to 300 per month, insurance another 100 per month, and the car itself say 250 a month and maintenance another 50 a month, for ANNUAL costs of 5 grand per car, and that is the low side.... and really fair pensions....(I will sleep with anyone for a pension)

[LeftRight]

You mean the bush bailouts? The ones that he asked for, that he got with the words of HIS appointed fed chairman?

[quadman]

Sure, the bailouts were and are a bad idea. Regardless of who proposed them (Bush), or who signed off on them (majority Dems, minority GOP). Government has a nasty habit of never relinquishing power once it has gained it.

[RightWingMarine]

income taxes were initially sold to the people as being only for the super rich too and look where they have ended up. We should eliminate all income tax and have only a sales tax on products costing under say $10K. Any item costing over $10K would have no tax cost. now before the inevitable bashing that follows most of my comments; no, I haven't done the math and I don't know what percentage would be best for a national sales tax. Since my policy is unlikely to be implemented there is no point to going through the trouble of figuring this out. The reasonto tax items under $10K comes from the fact that most Americans rarely purchase anything that costs more than $10K. There are houses and some cars but little else. For those that are going to cry that this favors the rich look what happened to the yacht building industry when Kennedy shoved the luxury tax down our throats, it's gone. Why would someone who could afford to buy a yacht choose to buy American with it's additional tax when they could buy the same yacht built in France and sail it over here and dodge the tax altogether? Ask the former ship builders how much that luxury tax has helped them.

[FearlessFreep]

Sales taxes are regressive. Since the poor have to consume a bigger proportion of their income than the rich do, they end up paying more in sales tax.

[quadman]

A sales tax can be made progressive by exempting food and general clothing. However, 'luxury' items, non-essential to day-to-day living would be applicable.

[LeftRight]

First, the solution to the Kennedy problem is not to fail to tax the rich, it's to ensure that they pay the tax NO MATTER WHERE THEY BUY SOMETHING FROM!

Second, a sales tax (or the fair tax, or whatever you want to call it.....) is the most REgressive tax structure out there, and it provides FAR less tax revenues than taxing income (ALL income!) in a progressive manner, ESPECIALLY if you are making it MORE regressive by removing ALL the taxes except a sales tax ONLY on items that a poor person is buying!

[Proletarian101]

Taking your thought process to the extreme, the best thing for our country would be for everyone to give 100% to the government, redistribute equally across the population, and keep the rest to pay for the government. As in this extreme and the one that you presented, the one major factor that you did not cover is incentive. If you remove human tendency and reaction from the equation, both of these ideas would work perfectly, but once you factor in incentive, ingenuity, competition, avarice, greed, etc. both models will result in less output, less federal income, and ultimately a stagnant economic system.

[timm0]

The point is that the thought process isn't extreme - and yours is. You're missing the point that the years in which we HAD the HIGH MARGINAL RATES were ALSO the years in which the country had the HIGHEST GROWTH and modest robust economy.

So the thought process you assail has proven to be part of healthy economies while your ridiculous 'point' is just plain silly. Babble about incentive till doomsday but it won't change the FACTS that high marginal rates worked and open-ended, smash-and-grab, get-all-you-can-get-now policies have all ended in disaster. Go back, re-read the post, and then do some research.

[davidgmills]

Actually, in another article Beinhardt made a more compelling case based upon proving that high are good for the private sector.

The basis of his argument in that article:

High tax rates are punitive and companies find ingenious ways to avoid the punitive effect. Rather than pay high taxes, they look for creative ways to avoid taxation; and the effect is spending money on R&D, real estate, equipment, and looking for ways to retain employees by paying the employees more and giving better benefits. As a result, the companies actually become valuable and have real worth. They are actually operated very similar to non-profits. All this corporate purchasing to avoid taxation stimulates the economy and of course employees have additional purchasing power to stimulate the economy as well.

On the flip side, low taxes are an incentive to stop R&D, stop asset purchases, and reduce employee salaries and benefits, and basically operate as a means of stripping companies of their value. This results in a boom and bust cycle. When the company is stripped of its worth by profit taking, then something has to be done with the profit. Unfortunately, the only thing to do with the profit is to invest in another company that has also been stripped of its value by its owners. Soon everyone is investing in worthless assets which for a while causes a boom but ultimately causes a bust when people finally realize the companies they have invested in are worthless.

[davidgmills]

Should have read "high taxes are good for the private sector."

[timm0]

Increasing the marginal rate on income (defining THAT also becomes a fun game with supply-siders, too... but I digress) is necessary. As noted by fpie, it keeps executive - and other- compensation more sane. But it also helps quell insanity like athlete endorsements, movie star pay, etc. which is unjustifiably goofy. At the same time, and more importantly, if forces business ownership interests to think LONG TERM. There won't be an incentive to play games with short term results - spin up something, cash out quick and walk away with BIG cash - because 90% over $x million goes right out the door. This is a vital control that helped stabilize the economy during the years mentioned in the post.

The reality that I finally saw in this last election which shocked me was the whole sam the plumber phenom. When you get to the core of it, the issue with that guy was that he wanted the wealthy to be treated special - just in case he got wealthy one day. Well, the opinions of those folks are based on childish selfishness and deserve no merit in the discussion - only ridicule.

[fpie]

All true but a big point is being missed here. High taxes on large salaries discourage over compensating a few executives making it more advantagious for buisnesses to reinvest in growth and higher wages for the workers. This gets cash in the hands of people who will spend it instead of playing craps on the market.
The other piece of this puzzel is to bring back tarrifs to promote domestic manufacturing. You can't rebuild a domestic economy if all the money is going to China. Protectionism has gotten a bad name in recent years but all of the countries that have been eating our lunch for the last thirty years use it to keep their manufacturing base afloat. If you aren't making "things" you aren't making wealth.
For too long the only way to make money has been the Wall Street Casino. It's time for America to get back to making real things and not just shuffling paper around. We used to be the best in the world at that job.

[LeftRight]

DARN IT!!! You got to it before I could!

[brynnrose thorn]

The gas tax idea is terribly regressive, and pretty high as it is. Commercial haulers were devastated by the last round of high gas prices as well and the price of nearly everything went up (and hasn't gone back down) because of it. What about people that just can't afford to buy a new, more fuel-efficient car? I don't have a car now, but I always bought second (or third, or fourth) hand cars and paid cash. There are a great many people who just can't afford a car payment and don't live where there is adequate public transportation.

[FearlessFreep]

Even a $1/gallon tax on gasoline would be a lot less than the same tax in Europe and Japan. And gasoline would still be cheaper than it was last summer. And global warming can't be ignored.

[davidgmills]

Global warming can be ignored since it now appears that the global warming of the twentieth century was caused by the most magnetic sun in the last 8000 years, not by anthropogenic CO2.

It's the sun stupid, just like it was and is the economy.

[TIME]

Where did Americans ever get the idea that we can be the best country in the World, and not pay for it? We scream patriotism, but we refuse to pay for the necessities to remain the best. It's simple math, but we are spoiled. We want what we want, but we don't want to pay for it.

Politicians pander to the people (No New Taxes!) to get elected.The Republicans cry less government, lower taxes, and look where we are. Since 1980 we have had 8 years of a Democratic President, and 20 years of Republican Presidents. In that same time our National debt has gone from just under 1 Trillion to almost 11 Trillion. And only the democratic President achieved a balanced budget.

I have no problem paying more taxes to continue to be the best country in the World.

Just as every other generation has done before us, it's our turn to make a real hard sacrifice to leave this country safe and healthy for future generations. What we need now is a financial sacrifice, not a military one.

The people have no trust that the Congress will spend their money wisely.

It's our job to let our representatives know what we want. Don't leave that to some lobby group. Government can't solve all our problems, that's not their job. We hired (elected) them, we can fire them, and it's our job to supervise them.

[Danigirl65]

Umm, I don't recall Obama saying he wasn't going to repeal the upper class tax breaks or let them expire. Can you point me to where he has changed his mind?? I'd like to see it for myself.

I know his newest stimulus package doesn't reflect anything on these, but I don't recall him saying it wasn't going to happen.

[brynnrose thorn]

Last I heard, he hadn't decided whether to repeal the tax cut or just let it expire.

[LeftRight]

He originally said that he would repeal them, then he looked at the situation on Capital Hill and seems to have decided to let them expire. The problem is that we need to repeal the RAYGUN tax cuts!!

[FearlessFreep]

The Democrats have a majority in the House, and are close to a filibuster-proof majority in the Senate. If BHO showed leadership, there probably wouldn't be a problem getting it through.

[TN60]

I'm with Pelosi on this, too. Taxes are revenue for the government to spend on projects needed. It has never made sense to have two wars and no one to pay for it. The richest of American should pay more.

There should also be a gas tax, but in range so the middle class is not hurt. None of us would not miss 10 cent or even 50 cents. That is fair across the board and those that want to drive their gas guzzlers, let them pay. Collectively, those gas taxes would raise a lot of revenue.

We are in such a hole that it is going to take all of us. The rich should be taxed and help pay for this mess.