Are Low Taxes Exacerbating the Recession?

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.

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 governor
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."
Months
later, with USA Today reporting that tax rates are at a 60-year nadir,
Secretary of State Hillary Clinton told a Brookings Institution
audience that "the rich are not paying their fair share in any nation
that is facing (major) employment issues...whether it is individual,
corporate, whatever the taxation forms are."
A
prime example is Greece. While conservatives say the debt-ridden nation
is a victim of welfare-state profligacy, a Center for American Progress
analysis shows that "Greece has consistently spent less" than Europe's
other social democracies -- most of which have avoided Greece's plight.
"The
real problem facing the Greeks is not how to reduce spending but how to
increase revenue collections," the report concludes, fingering Greece's
comparatively "anemic tax collections" as its economic problem.
On the other hand, the opposite is also true -- as Clinton noted, some high-tax, high-revenue nations are excelling.
"Brazil
has the highest tax-to-GDP rate in the Western hemisphere," she pointed
out. "And guess what? It's growing like crazy. The rich are getting
richer, but they are pulling people out of poverty."
This
makes perfect sense. Though the Reagan zeitgeist created the illusion
that taxes stunt economic growth, the numbers prove that higher
marginal tax rates generate more resources for the job-creating,
wage-generating public investments (roads, bridges, broadband, etc.)
that sustain an economy. They also create economic incentives for
economy-sustaining capital investment. Indeed, the easiest way wealthy
business owners can avoid high-bracket tax rates is by plowing their
profits back into their businesses and taking the corresponding
write-off rather than simply pocketing the excess cash and paying an
IRS levy.
In summing up her remarks, Clinton said that this higher-tax/higher-revenue formula "used to work for us until we abandoned it."
Though
she felt compelled to insist, "I'm not speaking for the (Obama)
administration," it was nonetheless a politically bold statement -- so
bold, in fact, that like all of the other corroborating tax facts, it
was summarily ignored by politicians and the Washington media. They had
their cliches to promote -- and unfortunately, until they let
substantive-though-uncomfortable ideas displace conventional wisdom, it's a good bet that the WRSTGD will continue unabated.