Thursday, June 30, 2011

The truth about industrial production and tax rates



I'm sick of hearing all this B.S. dogma about keeping tax rates low to incentivize production. From 1945 - 1980, when top tax rates ranged from 91% to 71%, industrial production grew 225% in America.

Since Reagan through today, when top tax rates were brought down dramatically, industrial production grew 77%.

This thing about taxes is just a bunch of bull.

I am not for higher taxes; that's not what the economy needs right now, but seriously, it's just a B.S. argument.

10 comments:

Clonal said...

Norm,

You said "I am not for higher taxes; that's not what the economy needs right now"

I think that is the mistake many in the MMT world make. They confuse the need for a larger deficit with "no higher tax brackets" or "No higher taxes"

We need the higher tax rates to prevent rent seeking on part of the wealthy, and to encourage sharing the wealth. High tax brackets lead to the thinking "If I can't keep it, I will give it away" Leads to more philanthropy, and to managers and business owners giving higher wages to their workers, since their own earnings will be taxed away.

The net result of a high tax bracket policy is that net tax collection does not change, but the wealth is spread more evenly through higher wages and more philanthropy.

However, the government also needs to increase spending, not only to stimulate the economy, but also to make the long term investments that are needed in order to make sure that future generations will continue to live well.

Mario said...

nice one...those darn figures always say so much more than the a politician's megaphone. quite interesting indeed to see more clearly the real function and value of taxes in the economy.

agreed clonal...there should be that specificity with the tax brackets...I agree...and that is really the highest of the high like the top 2% that would/should get that taxation if I am not mistaken.

TomatoBasil said...

After World War III, when Europe is destroyed again and Japan lies in ruins and China becomes one big desert, Russia falls beneath the curtain, and and India gets pushed under the Himalayas, the world will need the United States to produce goods once again. Until then no little tax break will create those conditions that led to Americas industrial dominance last century. These folks need to move on.

Mario said...

@tomato

exactly...and wouldn't that mean heading towards what we have been heading for years now...an importing nation...and therefore new problems (like deflation and unemployment)...and therefore new types of solutions and ideas to address them (like MMT, a jobs program, and proper fiscal policy)?

the whole "export currency" goal of this administration seems so antiquated...especially coming from a president who was supposedly "progressive" no less

apj said...

hop over to 'presimetrics' to see this issue expanded upon........

Crake said...

Need to delve into the numbers more but I suspect it is the scenario of a missing Carrot in the Carrot-Stick aspect of taxes. Tax rates are so low, there is no little Carrot any more to persuade certain capital flows. Tax policy often steered industries into investment and expenses to mitigate taxes, especially when there was immediate accounting expense but delayed cash outflow for the investment or expense (in other words, get tax benefit earlier but actually pay for the cash outflow later.) With taxes so low, those tax incentives for investment carry much less weight. Also employee costs for jobs that are more fixed-cost oriented and part of over-head (for variable oriented jobs that more directly add to earnings contribution, taxes would probably not weigh as much on profit-loss considerations) hits the bottom line more the lower the tax. For example, faced with hiring decision of someone costing $50,000 a year, under a 15% effective tax rate, the after-tax cost of that employee is $42.5K, under a 25% effective tax rate, that same employee cost is $37.5K after tax. Also, raises become more expenses, to a company, the lower the tax rate. Yet, we hear conservative politicians say taxes cost jobs (how if they make employee after-tax expenses less? ) I suspect their argument is supply side, thinking more money a company can keep the more it has to invest. But as our current economy shows, if there is little demand, companies are not going to invest or hire (hence the huge cash chest companies are building now.)

beowulf said...

"Tax rates are so low, there is no little Carrot any more to persuade certain capital flows"

Excellent post Crake. You may be interested in a 2003 article by Calvin Johnson,"A Thermometer For The Tax System":
The overall health of the income tax system can be fairly measured... by the “discount” or “implicit tax” reflected in municipal bonds... “Implicit tax” is the amount by which the pretax interest rate offered on tax-exempt municipal bonds is lower than taxable interest rates...The implicit tax reflects the price the taxpayer is willing to pay, and needs to pay,in order to avoid income tax... [and] is now giving a signal that the tax system is not well... It is not all that expensive to buy your way out of federal income tax these days.
http://webcache.googleusercontent.com/search?q=cache:YNDo4ff2E04J:www.utexas.edu/law/faculty/calvinjohnson/thermometer.pdf

Crake said...

Taxes are a very potent tool in macro policy on capital flow – Austrians and libertarians likely cringe at the thought of that and probably want simple straightforward tax to remove that ability as much as to lessen taxes owed. I do not recall the details, but I think it is pretty muc a consensus that the late 1980s real estate bubble was popped by the 1986 tax change.

googleheim said...

@ Crake

Yes we have discussed many times how taxation on the unregulated wall street banks could have made their dealing more transparent BEFORE the bubble bust of 2007/8

Now, can anyone put defense spending cuts into perspective given that the growth of military spending probably tripled in the past 10 years but now a 20% peel back is considered devasting ???

Tom Hickey said...

Now, can anyone put defense spending cuts into perspective given that the growth of military spending probably tripled in the past 10 years but now a 20% peel back is considered devasting ???

Wikipedia - Military Keynesianism, aka the military-industrial-(congressional) complex that Ike warned the US about in his parting words as president.

It is one of the very few things on which Rothbard and Chomsky agree.

The expenditure is salted throughout states and congressional districts, making it almost impossible to get the votes to curtail in either the House or the Senate.