Feeds:
Posts
Comments

Archive for November, 2012

Purpose of Blog

As the government goes about the business of dealing with the the Fiscal Cliff, one of the most controversial issues it will have to address is raising taxes on our wealthier citizens. Value judgments work their way into the decision-making process because everyone, democrats, republicans, and independents, all have different ideas about what constitutes “Fairness, and Fairness for Whom?”

But one thing that can help extricate decision-makers from their own prejudices and value judgments, is to shed light on the issue with data and facts. I would be naïve to suggest that this is going to be an easy process. It will take their best effort and require everyone involved to put aside their political biases. The purpose of this Blog is the answer with data and facts the following question on the revenue generating side of their deliberations:

What is the Effect on the Economy if the Wealthy Are Taxed at Higher Rates?

With the 2012 presidential election over, it is important now to review facts as President Obama and the Congress come to grips with an important issue now looming over the nation. That issue has been metaphorically described as a fiscal cliff.

What is the Fiscal Cliff?

I love the way we use metaphors in this country to describe every social or economic problem. There once was a “War on Poverty,” “The Missles of October” that was better known as the Cuban Missle Crisis (Gee! I thought it was an American crisis as well) and now we have a “Fiscal Cliff” where all our money is going to drop over the edge of a great chasm like the Grand Canyon. The latter, like all the previous metaphors, conjures up graphic images in order to convey a very important message: Whatever the crisis is or gap between people, whatever the details are, the American people need to take the “Fiscal Cliff” seriously because the consequences are important to the nation’s financial health, and may be longlasting.

So personally, I get the message and I know it’s serious. Hopefully, my fellow Americans will take the underlying metaphorical graphic image such as a “Fiscal cliff” seriously as well.

Basically, the Fiscal Cliff is a popular way to describe the confusing, difficult riddle or puzzle the U.S. government will face at the end of 2012, when the terms of the Budget Control Act of 2011 are scheduled to go into effect.

Laws will be affected when the gong hits midnight on December 31, 2012, including last year’s temporary payroll tax cuts (resulting in a 2% tax increase for workers), the end of certain tax breaks for businesses, shifts in the alternative minimum tax that would take a larger bite, the end of the tax cuts from 2001-2003, and the beginning of taxes related to President Obama’s health care law.

At the same time, the spending cuts agreed upon as part of the debt ceiling deal of 2011 will begin to go into effect. According to Barron’s, over 1,000 government programs – including the defense budget and Medicare are in line for “deep, automatic cuts.”

According to author Thomas Kenny, writing for About.com Guide, “In dealing with the fiscal cliff, U.S. lawmakers have a choice among three options, none of which are particularly attractive:

They can let the current policy scheduled for the beginning of 2013 – which features a number of tax increases and spending cuts that are expected to weigh heavily on growth and possibly drive the economy back into a recession – go into effect. The plus side: the deficit, as a percentage of GDP, would be cut in half.

They can cancel some or all of the scheduled tax increases and spending cuts, which would add to the deficit and increase the odds that the United States could face a crisis similar to that which is occurring in Europe. The flip side of this, of course, is that the United States’ debt will continue to grow.

They could take a middle course, opting for an approach that would address the budget issues to a limited extent, but that would have a more modest impact on growth.”

There are really only three things the U.S. Government can do to solve the problem of the Fiscal Cliff: Raise Taxes, Cut Spending, or both.

Fiscal Policy involves two major components: Taxes and Spending. While Monetary Policy is very important to the economy under the control of the Federal Reserve Board, my best guess at this point (as we get closer to the December 31, 2012 deadline) is that most of the compromises to be reached will be worked out between the President and Congress will mostly involve taxes and spending cuts.

The Issue of Higher Tax Rates for the Wealthy

President Barack Obama, of course, won re-election and, in a sense, is in the driver’s seat politically. The cornerstone of the President’s campaign in 2012 was to protect the middle class and require (on the tax revenue side) higher income households to pay more in taxes. Nevertheless, now is the time for a factual assessment of this issue.

According to author Chye-Ching Huang:

“Many policymakers and pundits assume that raising federal income taxes on high-income households would have serious adverse consequences for the economy. Yet this belief, which has been subject to extensive research and analysis, does not fare well under scrutiny. As three leading tax economists recently concluded in a comprehensive review of the empirical evidence, ‘there is no compelling evidence to date of real responses of upper income taxpayers to changes in tax rates.’ The literature suggests that if the alternative to raising taxes is larger deficits, then modest tax increases on high-income households would likely be more beneficial for the economy over the long run.

The debate over the economic effects of higher taxes on people with high incomes has focused on a number of issues — how increasing taxes at the top would affect taxable income and revenue as well as the effects on work and labor supply, saving and investment, small businesses, entrepreneurship, and, ultimately, economic growth and jobs.”

Economic Growth and Jobs

I found during the presidential campaign many people on both sides had something to say about job creation. All of the topics above can be found in Huang’s full report referenced at the end of this Blog. However, I want to share with you the relationship between taxing the wealthy and job creation, since it too is critically important.

History shows that higher taxes are compatible with economic growth and job creation: job creation and GDP growth were significantly stronger following the Clinton tax increases than following the Bush tax cuts. Further, the Congressional Budget Office (CBO) concludes that letting the Bush-era tax cuts expire on schedule would strengthen long-term economic growth, on balance, if policymakers used the revenue saved to reduce deficits.

In other words, any negative impact on economic growth from increasing taxes on high-income people would be more than offset by the positive effects of using the resulting revenue gain to reduce the budget deficit. I venture to say that Wall Street’s reaction  would be very positive if a major dent were to occur in our national debt. Risk/Reward ratios would favor the Bulls (“and you can take that to the bank”).

In addition, tax increases can also be used to fund, or to forestall cuts in, productive public investments in areas that support growth such as public education, basic research, and infrastructure.

Summary

According to Huang, “These findings from the research literature stand in contrast to assertions of extensive economic damage from increases in tax rates on high-income households, which are repeated so often that many policymakers, journalists, and ordinary citizens may simply assume they are solid and well-established. They are not.

These issues are of considerable importance, because sustainable deficit reduction is not likely to be possible without significant revenue increases. Unsupported claims that modest rate increases for high-income people would significantly impair growth ought not stand in the way of balanced deficit-reduction strategies that ask such individuals to share in the burden and pay somewhat more in taxes.

Raising revenues by broadening the tax base can in fact improve the efficiency of the tax code. And, because a cleaner tax code offers fewer opportunities to evade taxes, base broadening can reduce the economic cost of any rate increases also needed to achieve fiscal sustainability.

The research in the field does not provide strong evidence that modestly raising tax rates at the top of the income scale would have significant growth-reducing effects on labor supply, taxable income, savings and investment, or entrepreneurship. Moreover, as Professor Joel Slemrod has emphasized, the economic impact of tax increases depends in part on how the revenue raised is used. In the current fiscal and political environment, policymakers would likely use revenue raised by increasing marginal tax rates for high-income taxpayers to reduce deficits, which likely would have positive overall effects on long-term economic growth.

The nation faces a daunting fiscal challenge, as well as historically large income inequality and increased spending needs stemming from the graying of the population and advances in medicine that improve health but add to cost. These challenges mean that revenues, as well as spending cuts, need to make a significant contribution to deficit reduction.”

Post Script

As a political moderate, I have never been a big fan of class warfare discrimination, or any kind of discrimination for that matter. This is why it is so important to bring in facts, not just one’s value judgments. Even in “The Reasoned Society” separating facts from value judgments, in one’s own reasoning ability, can at times be a slippery-slope. The wealthy in America do in fact contribute disproportionately (as a percent and in gross dollar amounts) more money to charity than do lower-and-middle class individuals. The wealthy are to be applauded and respected for that kind of giving. Being wealthy, of course, does put one in a rather unique position to help others—and that is a good thing for society.

Nevertheless, quite clearly, the data have shown that our tax laws have disproportionately favored high-income taxpayers for decades over low and middle income citizens. Fairness as a concept is a two way street where income or tax equality is concerned. Many lower and middle class individuals often use sterotypical thinking to villify and demonize wealthy individuals to the point of appearing to be “Not Too Bright.” Nevertheless, the research data presented by Huang clearly and strongly sugggest that raising marginal tax rates on high-income individuals to help pay down our national deficit, and put our economic house in order, is both reasonable and fair.

Also, evidence shows that taxing wealthier individuals will have a positive effect on increasing GDP and job creation, what everyone, on both sides of the aisle, said was so important during the 2012 presidential election campaign.

________________________________________________________________________

The information for this Blog comes from two sources, Thomas Kenny who wrote an article in About.com Guide called The Fiscal Cliff Explained, and Chye-Ching Huang who wrote an article for the Center for Budget and Policy Priorities that answers the primary question raised in this Blog. The title of her article was Recent Studies Find Raising Taxes on High-Income Households Would Not Harm the Economy —Policy Should Be Included in Balanced Deficit-Reduction Effort. I was impressed by the clarity of writing by both these authors.

Advertisements

Read Full Post »