Time For Tax Hikes

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 be 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.

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