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Posts Tagged ‘ECONOMIC GROWTH’

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.

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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.

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 INTRODUCTION

The purpose of this and the next Blog is to describe an economic portrait of the Middle-Class in America, and the growing middle-class worldwide. Most of the emphasis will be on the middle-class right here in America. Part I defines the middle-class, and Part II will describe the middle-class in relation to economics and economic principles.

If there is a theme running through both Part I and Part II it is that the middle-class, particularly in America, is very privileged and economically very well off. A secondary, but no less important theme, is that the middle class with its Robin Hood Politics, is totally unjustified in discriminating against others from other social classes. After all, rich people, poor people, and middle class people all want the same things in life. They all have their personal dreams and desires.

Related to this topic is an interesting observation, that is, whether we talk about “crime in the streets” (A predominately poor and working class phenomena), or “crime in the suites” (a predominately upper-class phenomena) the middle-class have their own form of crime (subtle perhaps, but crime nonetheless). That crime is differential and progressive taxation, i.e., Robin Hood Politics. Property crimes have as their purpose the taking of things that don’t belong to someone. Life is about the choices we all make. Sometimes people who make poor choices early in life still nevertheless want others to pay for their mistakes. Today, there is a new twist to this phenomena.  Rather than politicians following good, solid economic principles in a free market economy, they largely abandon or ignore them in deference to the whims of middle-class voters and political party ideology.

Therefore, it is important to explore what economics is all about and how it ties into the observation that social distribution of wealth is patently unfair to everyone who believes it is the individual who is responsible for his own life, and all the decisions one makes. The notion of re-distributing the wealth through differential taxation of people in higher income groups is a short-term ineffective fix that won’t alter the fact that lower income and middle-class people cannot acquire the things they want unless by stealing from others through the tyranny of the majority. How can they best get the things they want? Well, economic prosperity should be the goal of our society. We shouldn’t try to eat the rich since they, particularly among entrepreneurs, make it possible to increase more prosperity, including increased prosperity of the middle-class. The best way for society to work toward abundance and greater prosperity for everyone—is to realize that it is wealth creation and prosperity in a free market economy that really matters and, by the way, the only thing that matters if people want to get the scarce resources they don’t currently possess. For the middle-class who engages in “Robin Hood Politics,” all that does ultimately, is to shoot themselves in the foot. Robin Hood Politics is a clumsy and incompetent way to achieve the goal of middle-class economic prosperity.

THE RELATIONSHIP OF CHARITY TO ECONOMIC PROSPERITY

Where do you think all the vast amount of money for charity and helping the less fortunate comes from in this society? Who do you think gives more money to charities in the first place—Democrats or Republicans?

America is unparalleled in economic prosperity and the 20th century proved that. It is economic prosperity that makes charitable contributions possible at all. We even try to help others worldwide with support such as in places like Haiti, or Chile. It is our economic prosperity that makes all of that possible. Check out the facts. Republicans give more money to charity in the United States than do Democrats. But, regardless of who gives more, the underlying ability to give at all is based on economic prosperity. We all live in a very rich nation as nations go.  But, before we get ahead of ourselves lets look at the facts. Who is the middle-class? How are they defined? What is the economic reality we all live under and why are economic principles so important to understand? Society needs to comprehend and understand economics.

Burying one’s head in the sand isn’t going to help anyone. It is crystal clear that Robin Hood Politics and government tinkering with the economy is at best counterproductive, and at worse, an affront to the values of individualism, self-reliance, hard work, determination, rational and intelligent thinking, and, above all, taking responsibility for one’s own life.

 CONNECTIONS

      Back in August, 2009 I wrote an article on the dynamics of class warfare from a political independent’s point of view. I considered it then, as I do now, class warfare to be the last bastion of discrimination in America. Our tax laws reflect that, and our politics reflect the underlying discriminatory beliefs about people with differing amounts of income and wealth. I’ve also previously written in this Blog about upper class greed in an article titled, “Greed is Their Creed,” where I discussed the Barney Madoffs of the world, and other white-collar offenders at the top of the social ladder.

Because the middle class in America dominate as a majority, one of the often unexpressed, yet socially blatant attitudes of this group is also, unfortunately—greed, and a willingness to engage in “Robin Hood Politics” by discriminating against people from other social classes or social conditions.

For example, middle class people will get angry about the demographics of changing neighborhoods, or halfway houses for drug offenders that are placed in their neighborhoods. Yet they barely raise an eyebrow when some politician struts populism to the extent and willingness to disproportionately tax the rich (everybody who makes over $250,000) or even just higher income upper middle class individuals. Most politicians (almost universally democrats but a minority of republicans) who create our laws, buy into this discriminatory ethos from the middle class. Why? The reason is that the middle class is their base for currying favor among society’s largest group of voters. All that matters to politicians is their getting elected or re-elected.

The thrust of my article last August looked at data and the dynamics of social class from primarily a sociological and psychological type of logical analysis. This article will be to support my earlier article. But, emphasis will be instead on key economic principles, economic insights, and economic data on income distribution.

Economics is sometimes called the ‘dismal social science’ because its laws and principles give special treatment or quarry to no one. It doesn’t take sides; it simply tries to explain economic principles with economic data. Thus, it is an objective way to view the world.

 LET’S DEFINE THE MIDDLE -CLASS

The American middle class is an ambiguously defined social class in the United States.  While the concept remains largely ambiguous in popular opinion and common language use,  contemporary sociologists have put forward several, more or less congruent, theories on the American middle class. Depending on class model used, the middle class may constitute anywhere from 25% to 66% of households.

One of first major studies of White Collar: The American Middle Classes, was made by sociologist C. Wright Mills in 1951. Later sociologists such as Dennis Gilbert of Hamilton College commonly divided the middle class into two sub-groups. Constituting roughly 15% to 20% of households is the upper or professional middle class consisting of highly educated, salaried professionals and managers.

Constituting roughly one third (33%) of households is the lower middle class consisting mostly of semi-professionals, skilled craftsmen and lower level management.  Middle class persons commonly have a comfortable standard of living, significant economic security, considerable work autonomy and rely on their expertise to sustain themselves.

Everyone wants to believe they are middle class…But this eagerness…has led the definition to be stretched like a bungee cord and used to defend/attack/describe everything. The Drum Major Institute places the range for middle class at individuals making between $25,000 and $100,000 a year. Ah yes, there’s a group of people bound to run into each other while house-hunting.—Dante Chinni

Members of the middle class belong to diverse groups which overlap with each other. Overall, middle class persons, especially upper middle class individuals, are characterized by conceptualizing, creating and consulting. Thus, college education is one of the main indicators of middle class status.

Largely attributed to the nature of middle class occupations, middle class values tend to emphasize independence, adherence to intrinsic standards, valuing innovation and respecting non-conformity.  Politically more active than other demographics, college educated middle class professionals are split.  Income varies considerably from near the national median to well in excess of $100,000.

Household income figures, however, do not always reflect class status and standard of living, as they are largely influenced by the number of income earners and fail to recognize household size. It is therefore possible for a large, dual-earner, lower middle class household to out-earn a small, one-earner, upper middle class household.  The middle classes are very influential, as they encompass the majority of voters, writers, teachers, journalists, and editors. Most societal trends in the US originate within the middle classes.

WORLDWIDE CHANGES IN THE MIDDLE CLASS

In February 2009, the Economist magazine announced that over half the world’s population now belongs to the middle class, as a result of rapid growth in emerging countries. It characterized the middle class as having a reasonable amount of discretionary income, so that they do not live from hand to mouth as the poor do, and defined it as beginning at the point where people have roughly a third of their income left for discretionary spending after paying for basic food and shelter. This allows people to buy consumer goods, improve their health care, and provide for their children’s education. Most of the emerging middle class consists of people who are middle-class by the standards of the developing world but not the rich one, since their money incomes do not match developed country levels, but the percentage of it which is discretionary does. By this definition, the number of middle class people in Asia exceeded that in the West sometime around 2007 or 2008.

The Economist article pointed out that in many emerging countries the middle class has not grown incrementally, but explosively. The rapid growth results from the fact that the majority of the people fall into the middle of a right-skewed bell-shaped curve, and when the peak of the population curve crosses the threshold into the middle class, the number of people in the middle class grows enormously.

In addition, when the curve crosses the threshold, economic forces cause the bulge to become taller as incomes at that level grow faster than incomes in other ranges. The point at which the poor start entering the middle class by the millions is the time when poor countries get the maximum benefit from cheap labour through international trade, before they price themselves out of world markets for cheap goods. It is also a period of rapid urbanization, when subsistence farmers abandon marginal farms to work in factories, resulting in a several-fold increase in their economic productivity before their wages catch up to international levels. That stage was reached in China some time between 1990 and 2005, when the middle class grew from 15% to 62% of the population, and is just being reached in India now.

The Economist predicted that surge across the poverty line should continue for a couple of decades and the global middle class will grow enormously between now and 2030.

A DYNAMIC CAUSAL THEORY OF MIDDLE CLASS AMERICA

In 1950 an important sociology book came out called—The Lonely Crowd. In it was a significant sociological analysis written by David Riesman, Nathan Glazer, and Reuel Denney. It is considered — along with White Collar: The American Middle Classes, written by Riesman’s friend and colleague C. Wright Mills — to be a landmark study of American character.

Riesman, et al. identified and analyzed three main cultural types: tradition-directed, inner-directed, and outer-directed. They traceD the evolution of society from a tradition-directed culture — one that moved in a direction defined by preceding generations. Tradition-directed social types obeyed rules established a long time in the past, and rarely succeeded in modern society, with its dynamic changes.

This earliest social type was succeeded by people who were inner-directed. They discovered the potential within themselves to live and act not according to established norms, but based on what they discovered using their own inner gyroscope. Inner-directed people live as adults what they learned in childhood, and tend to be confident, sometimes rigid.

After the Industrial Revolution in America had succeeded in developing a middle-class state, institutions that had flourished within the tradition-directed and the inner-directed social framework became secondary to daily life. Instead of living according to traditions, or conforming to the values of organized religion, the family, or societal codes, the new middle class gradually adopted a malleability in the way people lived with each other. The increasing ability to consume goods and afford material abundance was accompanied by a shift away from tradition or inner-directedness. How to define one’s self became a function of the way others lived.

Gradually an outer-direction took hold, that is, the social forces of how others were living -what they consumed, what they did with their time, what their views were toward politics, work, play, and so on. Riesman and his researchers found that other-directed people were flexible and willing to accommodate others to gain approval. Because large organizations preferred this type of personality, it became indispensable to the institutions that thrived with the growth of industry in America.

As Riesman wrote, “The other-directed person wants to be loved rather than esteemed”, not necessarily to control others but to relate to them. Those who are other-directed need assurance that they are emotionally in tune with others.

By the 1940s, the other-directed character was beginning to dominate society. Today the triumph of this type of social personality is complete. If one applies the outer-direction criteria to everyday actors as portrayed in modern culture, for example, Death of a Salesman or How to Succeed in Business Without Really Trying, or the classic How to Win Friends and Influence People, the other-directed person is easy to identify.

This defined the middle class that no longer had the material need to cling to past life standards to form a cohesive society. But since the other-directed could only identify themselves through references to others in their communities (and what they earned, owned, consumed, believed in) they inherently were restricted in their ability to know themselves.

Riesman’s book argues that although other-directed individuals are crucial for the smooth functioning of the modern organization, the value of autonomy is compromised. The Lonely Crowd also argues that society dominated by the other-directed faces profound deficiencies in leadership, individual self-knowledge, and human potential.

Riesman and his co-authors (Nathan Glazer and Reuel Denney) did not come up with the title; the publisher did.

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