Why Higher Taxes Create Economic Growth
As voters we continue to be promised tax cuts. Tax cuts will mean keeping more of what we have, and these cuts will induce investment. This reasoning can only work so far. Marginal income tax rates rose to their highest under President Clinton. The very highest was 39.6%. When a fiscal cliff had been settled earlier this year rates returned to that level for incomes over $400,000. Under Bill Clinton it was for incomes above $100,000. This was known as the Omnibus Budget Reconciliation Act of 1993. It was H.R. 2264 (House Resolution 2294) passed with the tie-breaking vote of then Vice-President Albert Gore. The hyperlink to the up or down vote is
Economic expansion was muted at first, but he GDP (Gross Domestic Product) did continue growing. The growth rates had accelerated late in the 1990’s. During the nearly all of Bill Clinton’s 8 years in the White House it was considered the longest ever peacetime expansion for the United States. Annual deficits had turned to surpluses come 1997. Energy prices were low where the gas and oil prices were below $1 per gallon for most of Mr. Clinton’s presidency.
The economy seemed to have had permanent momentum. There were surpluses for the first time in about 30 years. Investment in our US dollar and confidence in our economy were both at all-time highs. How could the economy have done so well with higher income taxes? Higher Taxes always hurt job businesses and workers. Right? That is what so many voters are led to believe. How many times have the Republican leaders in the US House and Senate, House Speaker John Boehner of OH, Majority Leader Eric Cantor of VA, and US Senate Minority Leader Mitch McConnell said that higher taxes hurt job creators? They kill jobs. This is all we’re ever told. What is not discussed about the reason for such tepid job growth are our low wages.
What creates jobs is purchasing power. Intuition would seem to suggest that purchasing power is hurt by higher income taxes. The question is whose income taxes are they and how high are they? The more graduated the income tax scale the more progressive it is, and those earning the lowest incomes pay the lowest rates. The highest of our tax rates, 39.6%, currently starts at amounts over $400,000. Less than 1% of salary earners in the US make it to this level. Many of the wage earners who enjoy these 6-digit pinnacles place much of it in personal savings. This means it is money not spent, and hence not circulating throughout our economy creating jobs.
For those making below $100,000 per annum and nearly all of the wage earners getting less than $50,000 spend virtually all of their income. This obviates the need for a graduated tax code. Those who oppose raising taxes on the wealthy also argue that there should be a flat tax. This means that the assigned rate is exactly the same for everyone. It makes no difference whether someone is earning a minimum wage, millions per year, or somewhere in between. What I discussed thus far refutes the notion that the rate should be flat and unchanged for everyone. It has been over a decade since Richard Armey of TX was a Congressman and also the US House Majority Leader. Some of you may remember his fixation of the purported need for flat tax. Mr. Armey was always so savagely maniacal in his diction “The flat tax is fair and simple for everyone. All you have to do is file taxes on a post card. It’s that simple. Anyone working for the IRS needs to go find another job”. Do these statements sound familiar? This was because then US House Majority leader would say these above statements constantly.
The ‘Regressives’ Flat Tax Plans
October 29, 2011
Here is why Mr. Armey’s contentions are farcical and also fallible.
Dick Armey: Flat tax would be a win for the American people
By Dick Armey
Updated 10/25/2011 7:59 PM
He dovetailed this with the name “Freedom and Fairness Restoration Act.” When looking at the chart in the above hyperlink it is clear as to why there is almost no fairness or freedom. Anyone garnering less than $100,000 will pay more in income taxes, not less, and that is just the beginning. The referenced chart mentions income taxes only, and says nothing about property and sales taxes. Since revenue to the states would be lowered and possibly eliminated this means that the difference must be made up in municipal (property) taxes. As if paying a few thousand more in income taxes is not bad enough the same also becomes true for property taxes owed to the respective township or city. Often times individual residences can be appraised on very subjective and loosely defined measures to arrive at the assigned real estate market value. This leads to more property taxes being collected by the municipality because the rate is measured as per $100,000 in the home market value. This measurement to assign property taxes is called the millage rate.
Millage simply means property tax rates as a percentage that is the same for all home owners or as mentioned above a specified dollar amount divided by every $100,000 in market value. There would be other added expenses for the middle class to take on still. While property taxes would go up sales taxes will as well. Those who are the working poor would feel the effect of higher sales taxes immediately. Then there are the fees including license renewals. The cost for flat bed and multi rigged trucks can jump by hundreds of dollars hence hiking transportation cots. This is especially true if they are hazmat certified where they have clearance to be able to transport hazardous materials. Fees for garbage disposals and the use of other public parks would also be much higher. Public sector employment would continue to shrink. This includes nearly any type of government worker. This would apply to clerks, management, case workers, and other personnel. Emergency management contains many professions. They include police, parole officers, fire fighters, paramedics, ambulance, nurses, police dogs, and other emergency personnel. There are teachers, teacher’s aides, and librarians who are also slashed. Al told there have been easily over a million jobs lost in these professions since President Barack Obama took office. The US postal services and post offices had no doubt cut down on employees. There is a multitude of reasons why the thinking that income taxes can only do harm and no good is proving very costly and very wrong.
Income taxes are deduced from many wage earners pay check, and there are many reasons why graduated tax codes with higher rates on higher incomes are necessary. While income taxes are subtracted from most paychecks, they are about a lot more than just that. They also have to do with the funding structures of towns, cities, counties, and even entire states. More graduated tax codes help fund these communities and localities through financing. When income taxes are higher investment in municipal bonds is also higher. These bonds are what provide the funding for a wide gamete of structures. Public facilities include libraries, public schools, post offices, court houses, fire houses, and some hospitals, VA (Veterans Administration) hospitals especially. Lower tax rate deplete investment in municipal bonds and hence funding for these government entities.
Municipal bonds used to be a more lucrative funding stream with higher income taxes than they are now. This is because municipal bonds have often been tax free alternative to corporate bonds. The more progressive the tax code the more solvent this financing structure is. It is because as rates go up the tax free yields on municipal bonds provide higher net returns than corporate bonds do and with a lot less risk. Some of you have been hearing about the critically acclaimed Banking Analyst Meredith Whitney. Mrs. Whitney has been talking about both local municipalities and entire states going completely broke as in the recent bankruptcy filing in Detroit MI. Meredith Whitney has been getting relentlessly admonished. “This can never happen.” “She has no idea what she is talking about”. Her worst fears are proving very much to be accurate.
While Detroit maybe the largest (as of late) municipal filing for Bankruptcy protection, it falls far short of being our only nationally known funding crisis. Many states have had to slash government services while also raising property taxes. The loss of real estate value and a struggling housing market has been a strain on many city budgets including Las Vegas NV and Phoenix AZ among many smaller to medium size populated cities. CA has the largest statewide population and also the largest budget in dollars. It is widely known how thousands of government workers have lost their jobs and in turn property taxes have been raised. CA might the largest example on an entire statewide basis but certainly not the only one. The loss of liquidity and credit tightening has not just hurt stocks but also bonds.
Treasury and municipal bonds have been suffering now too. Because yields have remained depressed and income tax rates have stayed low there has been less investment in these financial instruments. The talk that more and more investors have been hearing about a fixed income bubble is reflected in this article
The above article does not point to a full collapse of the bond market but certainly a drastic reassessment about the viability and appeal of bonds. Large budget deficits as referenced in this article definitely are a factor. Low interest rates are also mentioned. What we are seeing with the Federal Reserve right now is known as quantitative easing. This term refers to near 0 borrowing rates and purchase o bonds by the Fed (Federal Reserve). However liquidity is still tight because many prospective or would-be borrowers are not satisfying the lending requirements. This is obvious with the now millions of residential foreclosures. This is also true for small business loans. The same is becoming increasingly true for student loans.
This is very much now true for students because with the surging tuition costs these loans have too become harder to qualify for. What this is telling us is that businesses are suffering because they are without the support of these public facilities or these facilities are shut down altogether; the causality of this downward cycle is very clear. These public entities are gravely weakened or boarded up in many cases because they are now without the financing of creditors (bond holders). There are now far fewer bond holders because even the lowest of yields carry substantial risk of default where this was not the case in the past. In economic terms the interpretation of the cycle is that if interest rates and taxes are higher they “crowd out” investment because of inflation and now the economic growth is slowing, possibly contracting.
Borrowing rates for businesses are near 0. Mortgage rates have also been very low. Why have businesses barely expanded and why are there fewer home purchases? Interest rates have remained so low for an extended period that they have caused lending and credit to tighten, not loosen. Of course there is a limit to how high interest rates can be. During the late 1970’s and early 1980’s these borrowing rates were at all time highs, and our employment rate was similarly at double-digit percentage. The term stagflation had been hurled around repeatedly. Inflation was severe and unsustainable, and it was driving unemployment. Still there was one bright spot. Wages did rise at nearly the same pace as inflation.
Income taxes were higher, and public facilities were receiving their financing. Interest rates are a nominal rate to determine the cost of capital. What is failing to garner the discussion here is that the cost of capital is not all about interest rates only. It is also about the confidence in conducting the business. Interest rates are “rock bottom’, but so is confidence on the part of businesses. What these same companies don’t like to acknowledge is that they need to see these government structures to be financed and functioning whether they be public schools, the post office, court house, fire houses, libraries, and Department of Labor One-Stop Training Centers. Could this be a lot of why the banks, brokerage house, and similar companies cried afoul when they needed government money? Many of these public services have all but been eliminated in many communities and even closed entirely.
Many of these neighborhoods have been replaced by crime and violence with frequent calls to the police, 911, and the ambulance. Lack of public services creates uncertainty and unrest for business. This local unrest more than makes up for the difference in higher interest rates. This is costing companies more money than the otherwise higher lending rates. President Barack Obama got relentless criticism by suggesting that businesses don’t exist and grow by themselves. The truth is that Mr. Obama is right. These corporate leaders need safe roads and bridges to get to work. They also need buildings that meet fire codes and that are not contaminated with asbestos and other particulates. They also rely on these municipal and government services to be able to do their own jobs as well employ other workers.