Posted by: Jeff | March 10, 2010

Stimulating Wage Growth Means Taxes

There has been a flurry of debate recently over the relative success of the stimulus bill passed just over a year ago.  While stimulus funding is still being disbursed, it would seem that it has had significant impact.  Yglesias flags this report from the Congressional Budget Office [emphasis his]:

CBO estimates that in the fourth quarter of calendar year 2009, ARRA added between 1.0 million and 2.1 million to the number of workers employed in the United States, and it increased the number of full-time-equivalent (FTE) jobs by between 1.4 million and 3.0 million. Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers. CBO also estimates that real (inflation-adjusted) gross domestic product (GDP) was 1.5 percent to 3.5 percent higher in the fourth quarter than would have been the case in the absence of ARRA.

That seems to be a pretty conclusive demonstration that the stimulus worked.  The reaction from the right has obviously thus been mixed.  Many congressional Republicans had anticipated the CBO’s report with some trepidation, as it would either validate or contradict claims about the stimulus’ overall ineffectiveness.  And in the immediate responses from many GOP pols, you can see there is some consternation.

For some, like Florida’s ex-Governor Jeb Bush, the reaction has been to laud the stimulus as a success (due to included tax breaks, of course).  And for others, like most of the GOP congressional delegation, the response has been to question the numbers involved and raise the specter of budget problems.  Notwithstanding the fact that at least one of these vocal budget-overseers wants to see King Deficit himself (aka Ronald Reagan) awarded a place on our nation’s currency, this response seems to highlight the incoherency of the GOP argument against the stimulus.  Some argue that the stimulus was a failure, and should thus be repealed or abandoned in favor of cutting marginal tax rates.  Others claim the stimulus has already succeeded, and thus should be ended… in order to implement a second phase of tax cuts.

This is bad for a couple of reasons.  First, shrinking federal spending now sends a horribly mixed message to investors and businesses.  Much of the money from the stimulus went to subsidize small businesses and grant tax breaks for companies hesitant to conduct business as usual in a contracted economy.  For them, stimulus funding has served as a lifeline to normalize economic activity.

Second, we face a revenue problem as it is.  Republicans stand on a soap box and demonize federal deficits, and then turn around and argue that we should slash government revenues.  What programs do they advocate cutting?  Well, the majority advocate cuts in general but not in practice.  From a recent survey asking Republicans what particular portions of the budget should be cut in order to reduce the deficit, we get this underwhelming response:

The predominant response is thus that we should cut foreign aid.  Well, great.  Except that, we don’t really spend much money on foreign aid.  Less than one percent of the total budget, in fact.  And when surveyed as to what percent of the budget should be spent on foreign aid responses are typically in the range of 15-20%!  Talk about inconsistency.

And for other programs, things get even trickier.  Rep. Paul Ryan (R-WI) released a conservative budget plan as a counter to the Obama budget that included massive cuts in both Medicare and Social Security.  And yet, you can see from the graph above and the graphic below, that Republicans don’t actually want those cut either!

For some conservatives, taxes and the budget are compatible in increasingly incoherent ways.  When Democrats propose tax breaks, such as the $288 billion in tax relaxation through the 2009 stimulus bill, this is all part of a socialist effort to increase deficits.  Need they be reminded that ARRA included substantive tax cuts for small businesses and millions of households, Nate Silver offers this graph:

If $288 billion of the stimulus came in the form of tax cuts, why are Republican politicians still claiming that the stimulus represents over $700 billion in expenditures?  This is an example of having your cake and eating it too – tax breaks proposed by Democrats are cast as fiscally irresponsible government expenditures, while tax cuts proposed by Republicans are family friendly anti-government measures designed to increase personal liberty.

I’m all for personal liberty when there’s a plan to finance it.  But when Republicans propose tax breaks sans budget reduction, this is catastrophic!

Balancing the budget under the Republican plan would necessitate budget cuts that far exceed reductions in revenue through lower tax rates.  And with marginal tax rates already at half what they were in 1979, we’re dangerously close not only to fiscal insolvency, but a deeply divided society.  From FDL:

The Republicans are fond of saying “You can’t bite the hand that feeds you.” This, of course, is in reference to the Progressive tax system in America, and that line of thought is directly responsible for the flurry of tax cuts for the wealthiest Americans since 1980. In 1979, the top marginal tax rate was 70% for any earned income above $215,400, which, with inflation, would be somewhere above $500,000 today.

Beginning in 1981, and ending with the Bush Tax cuts in 2002, that marginal rate fell to 35% on income over $311,950. In 1979, the top bracket earned forty times more income than the average American. Today, that gap has widened to 500:1. Average wages are stagnant, we have ten percent unemployment, and nearly twenty percent Under-employment, with one in five American men out of work.

We’ve halved taxes on the top bracket in the past thirty years and each time we’ve entered economic instability and increased the gap between rich and poor:

Since 1981, no other class of people has seen a larger tax cut than wealthy Americans (70% to 35%). But the economy has struggled, and the Middle Class has borne the brunt of that, with their wages stagnant, and unemployment twice hitting ten percent and higher, something that had not occurred since the late 1930’s.

This goes against economic common sense and any utilitarian notion of social justice.  Clearly something is wrong.  Another graph from Ezra Klein highlights just how bad inequality is becoming entrenched in our new economy:

It’s worth pointing out as well that since 2007, job losses have primarily affected those well below that median, dragging it down.  As unemployment continues to flirt with the 10% mark, it’s important to realize that cutting marginal tax rates on those earning 500x more than the 20% of Americans that are under-employed is tantamount to class warfare.  And the Republican shadow budget would do just that, while actually increasing taxes on the lowest brackets.  Not only are Republicans filibustering bills to expand unemployment coverage for millions of Americans during harsh economic times, but they’re also advocating raising taxes on millions more in order to finance tax reduction for America’s wealthiest (and least affected by a dour economy).

It’s ludicrous.

Trickle down economics suggests that lower taxes allow Americans to reinvest in the economy at higher rates.  The assumption here is that rich people will hire more, purchase more, and overall be the engine that drives a top-down economy.  Yet, history shows this assumption to be inherently flawed.  When taxes are lower for the high tax brackets, the only measurable increase is in savings.  And while savings are great, and have a low correlation with entrepreneurship and economic innovation, the personal savings of the rich do little to help the poor.  The Bush tax refunds of 2001 bear this out as a recent example from a paper that appeared in The American Economic Review:

Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.

History gave us another experiment in the form of the 2008 Bush refund checks and the same economists took another look:

Because of the low spending propensity, the rebates in 2008 provided little “bang for the buck” as economic stimulus. Putting cash into the hands of the consumers who use it to save or pay off debt boosts their well-being, but it does not necessarily make them spend.

Their conclusion?

Those designing the next economic stimulus package should take into account that much of a temporary tax rebate is likely not to be spent.

This highlights a fundamental truth about social justice vis a vis individual versus collective liberty.  The federal government is enshrined in the value of creating equality of opportunity among all citizens and not just the lucky few born into wealth and privilege or granted lucky breaks.  American history is rife with rags to riches stories, but make no mistake: not everybody that works hard is destined for fortune.

Part of providing equality of opportunity for all is figuring out how to get the wealthy to invest in the future of all.  If social impetus is not enough, and simply giving them more expendable income is not enough, taxation and social welfare become absolute societal necessities for investment in boosting the lower class and giving them opportunities to become the new middle class.  Social welfare is not about handouts – it is about education and opportunity.  Those that choose not to take advantage of education and opportunity will remain the lower class.  But those that do take advantage will have the ability to remake their life and economic situation.  This is the aim of government – empowering individuals and households to improve their own lives.  From FDL:

It is the Federal Government’s duty to see that Capitalism works for all Americans, not just the lucky few, and that is a job that, while onerous and hateful, is nevertheless part of providing opportunity for all. Capitalism itself cannot exist for long if the vast majority of money resides with one small group of people. Sooner or later, under those conditions, Capitalism will turn into Socialism, as more and more citizens become unable to support themselves, and the wealthy become the sugar daddy of America.

And I think conservatives and progressives can all agree that we don’t want that.



  1. […] Stimulating Wage Growth Means Taxes « The New Millennial […]

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