Raising Taxes Is Good for the Economy

by Adam Eran –

The Census Bureau reports that California ranks 10th among states in income, but only 22nd in tax burden. Nevertheless, the Republican mantra has been that higher taxes are so damaging that government should avoid them at all costs — especially in downturns like the current one.

This sentiment is so pervasive that all but one of California’s Republican legislators recently signed an agreement that they would never vote to raise taxes despite a deficit so large that covering it with cuts alone would literally shut down the state’s universities and all services to the disabled.

Luckily, the Republicans, whose votes are necessary to entertain any “revenue enhancement,” have some things they would like in return for their support. These include disempowering unions, and degrading the environment. Whew! Thank goodness for that, eh?

But are high tax rates, particularly on the rich, really such an obstacle to prosperity and productivity? Larry Beinhart, author of Wag the Dog says otherwise .

Among other things, Beinhart observes that the heyday of American prosperity coincided exactly with the highest progressive tax rates — in the 1950′s and 60′s. The idea that lower taxes were harmful is fairly convincing, too, since the “trickle down” tax cuts on the wealthy in last three decades produced an economy where the bottom 90% of income earners have actually experienced declining purchasing power.

The only interruption in this purchasing power decline came during the Clinton years — an administration decried by its opponents for increased taxes on higher incomes. Did those higher taxes produced the recession predicted by Republican House leader Newt Gingrich and others? Hardly.

However, for that 30-year low-tax period, the top 0.01% of income earners got 497% more income. This is no exaggeration.

Observes Beinhart: “With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business — in plants, equipment, staff, research and development, new products and all the rest.

The higher taxes are (and from 1940 to 1964 the top rates were around 90 percent), the more this is true.

This creates a bias toward long-term planning.

The Reagan tax cuts were sold to the American public as a miraculous remedy for economic stagnation that would even increase tax revenues. Subsequent deficits, however, make it hard to believe revenue collections increased. Even economic performance, marketed as “Morning in American” during the Reagan years, consisted of an average business cycle recovery. One exception to that recovery: capital investment was flat because companies were spending their profits on a 497% increase in things like CEO bonuses.

Reagan did not just cut taxes, either — he signed eight tax increases, and between Reagan and Bush 41, payroll taxes quadrupled. One wonders: If the collections were so much higher, why the increases in regressive taxation, and why the big deficits — and why didn’t we have an exceptional recovery instead of an average one with flat capital investment?

Nevertheless, to our Republican representatives, government exists to disempower people. We must resist collective action at all costs because it serves the public interest only by accident. We must de-fund government (“starving the beast”) and make taxes ever lower. If what remains resembles the gilded age, or even the dark ages, when the oligarchs pillaged with impunity, that’s just the price we must pay.

Equitable income distribution is a good predictor of a civilization’s chance at survival. And if higher taxes coexisted with a more equitable income distribution, and the most prosperous economy in America’s history, just ignore that.

Adam Eran