David Sirota, in his article, “Are Low Taxes Exacerbating the Recession?,” knocks down one of the foundations of the conservative canon since Reagan, that now-discredited notion that tax cuts stimulate economic growth:
As the planet’s economy keeps stumbling, the phrase “worst recession since the Great Depression” has become the new “global war on terror” – a term whose overuse has rendered it both meaningless and acronym-worthy. And just like that previously ubiquitous phrase, references to the WRSTGD are almost always followed by flimsy and contradictory explanations.
Republicans, who ran up enormous deficits, say the recession comes from overspending. Democrats, who gutted the job market with free trade policies, nonetheless insist it’s all George W. Bush’s fault. Meanwhile, pundits who cheered both sides now offer non-sequiturs, blaming excessive partisanship for our problems.
But as history (and Freakonomics) teaches, such oversimplified memes tend to obscure the counterintuitive notions that often hold the most profound truths. And in the case of the WRSTGD, the most important of these is the idea that we are in economic dire straits because tax rates are too low. This is the provocative argument first floated by former New York Gov. Eliot Spitzer in a Slate magazine article evaluating 80 years of economic data.
“During the period 1951-63, when marginal rates were at their peak – 91 percent or 92 percent – the American economy boomed, growing at an average annual rate of 3.71 percent,” he wrote in February. “The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm – just the opposite. And during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent.”
Read the rest of the article here.
Sirota goes on to explain that higher tax rates create an incentive for businesses to reinvest profits, and increase government revenues available for infrastructure investments.
Notice that the same argument was made by Larry Beinhart in his article, “Why the Economy Grows Like Crazy Amid High Taxes,” November 18, 2008:
High taxes create an incentive to reinvest profits into long-term growth.
With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business — in plants, equipment, staff, research and development, new products and all the rest.
The higher taxes are (and from 1940 to 1964 the top rates were around 90 percent), the more this is true.
This creates a bias toward long-term planning.
If a business is planning for the long term, it wants a happy, stable work force. It becomes worthwhile to pay good wages and offer decent benefits.
Low taxes create an incentive for profit taking.