Posted by Bob Lord
[Distributed via OtherWords.org]
The Way Forward: Tax and Spend
This strategy would reduce joblessness and inequality while stimulating the economy.
Have you heard? Our economic policy debate is getting some spring cleaning.
President Barack Obama has signaled that he’s had it with all that talk about America being broke and the belt-tightening austerity measures that went along with it. His proposed budget for the 2015 fiscal year will reflect this reality.
You know what he should try? A tax-and–spend strategy.
Yes, conservatives have tried for years to turn that simple solution into an epithet. But it’s the best way forward.
Taxing more and spending more would stimulate a $17 trillion U.S. economy that’s not producing at full capacity and dogged by high unemployment. It wouldn’t expand the budget deficit. And it would reverse the concentration of income and wealth that’s hollowing out our middle class and denying most Americans a fair shot.
Changing tax rates and spending levels are two of the three standard tools policymakers have at their disposal to goose the economy. The other is monetary policy.
The Federal Reserve’s expansionary monetary policy that began in 2008 is unprecedented. It may have helped get our financial system back on its feet and unleashed a multi-year bull market. But our economy is still staggering.
Unemployment still stands at 6.6 percent and typical American workers are earning less than they did before the Great Recession.
That means it’s time to give targeted tax increases and higher government spending a shot.
As Nobel Prize winner Robert Shiller and others have explained, raising taxes and increasing spending by identical amounts, is budget-neutral. But that extra tax revenue and government spending make a positive economic impact.
Why? Because the entire increase in spending is injected into the economy, where its effect is multiplied as it circulates. The tax increase, by contrast, doesn’t cause a dollar-for-dollar reduction in consumer spending.
That’s because it’s absorbed in part by a decrease in personal savings. Thus, taxing and spending in equal amounts bolsters an economy that isn’t running at full capacity. And if taxes rise at the top of the income scale, most consumer spending won’t suffer a big blow.
Higher taxing on the rich and more government spending are the right ingredients for a bigger and more effective stimulus than we’ve had since the economy started to sag at the end of George W. Bush’s presidency.
Plus, this strategy could help slow or reverse America’s increasing concentration of wealth.
Everything else being equal, all but a few of us would prefer to accumulate wealth. For most Americans, living expenses and the tax on our wages limit how much wealth we can amass.
About three-quarters of us live paycheck-to-paycheck.
For those at the top, however, it’s a different story. Living expenses only consume a tiny slice of their income, which they draw more from investments than wages. Taxing investment income and inheritances at higher rates would level the playing field on wealth accumulation and restrain extreme inequality.
Emmanuel Saez and Thomas Piketty, the two leading researchers on income inequality, teamed up with MIT student Stefanie Stantcheva to see how this works. They looked at changes in top income tax rates, economic growth rates, and the share of the top 1 percent in pre-tax income over a 30-year period in 18 countries, including our own.
Their conclusion? Income tax rates for very highest earners could be set as high as 83 percent without curbing economic growth.
At the same time, the researchers found, higher tax rates at the top correlate with less concentration of income at the ladder’s highest rung. Given that the top 0.1 percent of American earners rake in at least $1.7 million a year and pocket 10 percent of our national income, that would get our economy on a healthier track.
The writer and sustainable food guru Michael Pollan boils his advice down to seven words: Eat food, not too much, mostly plants.
We’ll use eight: Tax more, mainly at the top, and spend.
Bob Lord, a veteran tax lawyer and former congressional candidate, practices and blogs in Phoenix, Arizona. Emily Schwartz Greco is the managing editor of OtherWords, a non-profit national editorial service run by the Institute for Policy Studies. OtherWords.org
Well said. Put me down as a proud tax-and-spend liberal, so long as taxation is progressive and the spending is for the common good.
Posted by: David Safier | February 26, 2014 at 02:33 PM
This isn't an economics column, it is a religious column. Get a goat, slit its throat and sacrifice it to the Gods why don't you.
The relationship between economic growth and marginal taxation is much more complex than this simplistic analysis of income tax rates.
GDP went up 418 B, federal receipts went up 188 B; State and Local went up 34 B for a total marginal tax load of 222B or 53 percent.
Prescott (Nobel Prize winner) showed a direct empirical relationship between this load and labor force participation, hence our collapsing labor force participation numbers and the jobless recovery. Romer (Obama's former chief economist) showed a direct correlation between this load and economic growth, hence our weak economy.
Shiller's empirical work showed a correlation between PE ratios and subsequent returns on the stock market. How does that relate to this situation? We see this repeatedly. Name economists, i.e. Krugman, Stiglitz, Shiller, Diamond having earned a name in one area of economics putting their name behind policy without having done the empirical research to back it up.
There is only a weak correlation between marginal tax load on the economy and marginal income tax rates because wealth creators react immediately to unreasonable tax burdens. They play more golf instead of working for us, they convert to corporate form and live lavish pretax corporate lifestyles (the frequent flyer brigade) instead of investing in the economy or they invest in tax free bonds.
Over the last hundred years, we haven't been penalized for these astronomical income tax rates because wealth creators converted to corporate form and eventually 87% of all economic activity was C corporations (1980). But, the 3% growth of the 20th century was not the 10% growth of the 19th century Gilded era and the 21st century is shaping up to be the 1% century.
If you are a policeman, a firefighter or a teacher, you ought to be concerned. The assumption of 8% growth in your retirement investment fund will never hold with these marginal taxation, regulation and welfare loads on the economy.
Also, the revenue growth needed for public safety funding and your next pay increase will never happen. These $50 million shortfall in Phoenix and Tucson are huge warning bells.
You say that you are dong this for the poor? Really? The outcomes for people on welfare for any extended length of time are awful.
They die earlier. The children are dehumanized and much, much more likely to be victims of abuse. Their educational outcomes are horrifying. They degenerate every day they are out of the workforce.
Posted by: Thucydides | February 27, 2014 at 08:48 PM
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“Get a goat, slit its throat and sacrifice it to the Gods why dont you”That quote says it all. What do you do when you want to mock religion, but you yourself still believe there’s an invisible man in the sky directing traffic? Why you speak disparagingly of goat sacrifices, of course, and you make sure that the reference to deities is plural, because, in your hopelessly confused little mind, believing there’s one invisible man in the sky is rational, but believing there are more than one is crazy. And, of course, the ritual of sacrificing a goat is crazy, but the ritual of eating wafers and drinking wine because they represent God’s body and blood, well, that’s totally rational.
Posted by: Bob Lord | February 28, 2014 at 10:31 AM