We have a big deficit. We have a struggling economy. We have millions of people with no job at all, and just as many who are underemployed. Meanwhile, The very rich are getting richer, and the poor and middle are struggling to get by. Many people think that big cuts to government is somehow the only solution for this. But that's wrong. Government creates millions of jobs and if you take them away, more people won't have jobs. Government spends money to do things the taxpayers can't or won't do. Build and repair roads. Pay police and fire and teachers and social workers. unemployment insurance and medicare and social security. The military. the court and justice systems. fund transcontinental railroads and populate the great plains. fund medical research, drug safety and basic science.
We get a lot for our tax dollars. And here's the amazing thing--the drain on the economy is proportional not to tax rates, but the inequity of those rates. This is the part that's counterintuitive: as long as they're reasonably equitable, tax rates do not affect the economy. Money is just a medium of trade. The only thing that has value in the economy are goods and services--that dollar you spend is just a token representing the labor or goods you sold to earn it. If there is more money in the economy without changing the underlying goods and services, each dollar is worth less. We call that inflation. If the government takes an equitable share from everybody, it doesn't really affect the value of the goods and services, it only makes the money worth that much more--deflation. (Read more about the money illusion)
Where inequity comes in is that the government can stimulate one group or other by giving them an advantage or disadvantage. For example, they can promote home ownership by lowering taxes on real estate interest and subsidizing low interest loans. It can also stimulate financial markets by lowering tax rates on things like capital gains and dividends--and high net worth. To some extent this is healthy--finance is a service, helping businesses get started and expand-- but it's gotten way out of hand. The uber-rich have a large share of the dollars but contribute a very much smaller share to the goods-and-services part of the economy. They need no further incentives to get richer. They need an incentive to spend that money on expanding businesses other than their own. The way to do that is to reduce the incentives for simply being rich and give incentives to actual investments that create business. low tax rates on dividends, stock market capital gains, and high incomes are incentives for being rich--a pointless exercise. Low tax rates on business expenses and capital gains from new investments are incentives for growing businesses.
So if that's the case, you might ask, why don't we just raise taxes to some really high rate? Well, we've tried that and it worked just fine. From 1932 to 1981, the top tax bracket paid 70% marginal rate or more, and quite a few years the top rate was over 90%. We remember most of these years (except for the first few) as having had a pretty good economy. Very few people actually paid these rates and every one of them was rich. And even then, all income that was below the (very high) threshold was taxed at a lower marginal rate. Nobody was being made poorer by the high rates. I'm not sure 94% is a good idea, but history shows it's not really harmful. Historically, there's very little correlation between tax rates and any reasonable economic measure--sometimes when you cut rates, GDP goes up, sometimes it goes down. Same thing when you raise rates--sometimes it goes up, sometimes down. Other factors, such as the price of oil, are much more important. There's a slightly positive correlation between tax rates and GDP growth, but that's mainly because government spending tends to foster things that boost GDP. It depends on how government spends the money.
I'm not inventing this notion--My Econ 1 professor said pretty much the same thing in 1974, and proceeded to explain it. But for some reason, nobody in politics is willing to believe it. They're more than willing to take services away from people who desperately need them. A few of them must have taken a course like the one I took in 1974. Either they've forgotten what they learned, or they have some other motive.
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