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November 11, 2009

Do Taxes Slow The Economy?

-- by Dave Johnson

On the NewsHour the moderator just said "new taxes slows down the economy at a time when people are hurting." This is in a discussion of how to fix state budgets. The panelist responds, "That's exactly right."

This is just absolute nonsense. This shows what happens when something is repeated over and over and over and becomes "conventional wisdom." This is the old "taxes take money out of the economy" argument.

There is no historical data that shows this. In fact history shows exactly the opposite. The periods of high growth are the periods when we tax at the top and use them money to build and maintain infrastructure, educate people, provide jobs, raise wages. And that is intuitively obvious. The idea that taxes "take money out" is just nonsense because the money doesn't just go away, it gets used for productive purposes. The only economy that taxes "take money out of is the economy of the Cayman Islands" and they're doing just fine.

We have a situation where income and wealth are concentrated at the very top as never before. States are laying off tens of thousands of people. And to make things worse, the national government is not applying enough stimulus to create jobs because people are worried that the deficit is too high - because taxes are too low.

Obviously the solution to this problem is to impose a very high tax rate on the top few who have been enjoying all of the benefits of the economy since Reagan cut the taxes and started the cycle that led to the collapse we are in.

Posted by Dave Johnson at November 11, 2009 5:23 PM


Comments

Here is the experiment. Compare results in the high tax/high benefit state with a low tax/low benefit state.

http://www.latimes.com/news/opinion/la-oe-voegli1-2009nov01,0,825554.story

"Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California. Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California's government and the middle class is constantly being renegotiated to the disadvantage of the middle class."

These judgments are not based on drive-by sociology. According to a report issued earlier this year by the consulting firm McKinsey & Co., Texas students "are, on average, one to two years of learning ahead of California students of the same age," even though per-pupil expenditures on public school students are 12% higher in California. The details of the Census Bureau data show that Texas not only spends its citizens' dollars more effectively than California but emphasizes priorities that are more broadly beneficial. Per capita spending on transportation was 5.9% lower in California, and highway expenditures in particular were 9.5% lower, a discovery both plausible and infuriating to any Los Angeles commuter losing the will to live while sitting in yet another freeway traffic jam.

In what respects, then, does California "excel"?

Posted by: Mace [TypeKey Profile Page] at November 11, 2009 8:24 PM

Another thought experiment. Ten states with greatest fiscal train wreck (below). Eight of the ten are dominated by Democrats? Don't they do the best job of implementing high taxes to create prosperity? (all but FL and AZ)
Why are TX, LA, MS, AL doing a tad better with their low tax administrations? Part of it is the housing bubble. I get that. How about those Republican governors in TX LA MS AL? Per chance a bit more responsible, more...serious?

http://globaleconomicanalysis.blogspot.com/2009/11/10-states-in-deep-fiscal-trouble.html

Posted by: Mace [TypeKey Profile Page] at November 11, 2009 8:35 PM

If a 50% tax marginal tax rate is good, a 100% tax rate to spread around the wealth must be really swell and great!

http://www.alertnet.org/thenews/newsdesk/N11371755.htm

Cuba (100% tax rate) FREELY trades with the entire planet sans the USA. They should be hitting on all cylinders.

Thankfully, Hugo Chavez is implementing the same policies. That is good because he will kill his golden goose and self destruct.

But there is still hope for California.

Posted by: Mace [TypeKey Profile Page] at November 11, 2009 8:41 PM

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