Economic Growth: The Fantasy to Justify Low Taxes

Mark Thoma - Economic GrowthMark Thoma wrote an article that is inspiring in its bluntness, Tax Hikes on the Wealthy: Good or Bad for Growth? He goes through all the justifications for keeping taxes low on the wealthy and shows in his mild and careful way that they don’t add up. High taxes on the rich do not hurt economic growth.

Here are the myths:

  • Increasing taxes on the wealthy will harm economic growth;
  • Increasing taxes on the wealthy won’t solve the income inequality problem;
  • Tax increases will blunt the incentive to invest in new businesses;
  • The wealthy will move to other countries to avoid the tax increase;
  • Increasing taxes on the wealthy won’t increase tax revenue;
  • Less will be donated to private charities;
  • The wealthy deserve what they earn;
  • It’s a tax on small businesses.

You should read the whole article. Some of it is very funny. For example, all those charities that the rich give to? Mostly concert halls and universities. There’s very little that they give to help the actually needy. But here’s the kicker: the rich gave twice as much of their money to charity back when the top tax bracket was 70% than they were in the aughts when the top tax bracket was 35%. Funny that! Could it be that when people know they are going to be taxed a lot, they give more money to charity? Talk about rational expectations!

Problems with High and Low Taxes

There are few things I’m as certain of as this kind of basic economics. We just have so much data. It’s clear that having extremely high taxes is bad and having extremely low taxes is bad. Extremely high taxes will cause people to do things to avoid them and de-incentivize work. But we certainly haven’t seen that in my lifetime. What we have seen in my lifetime is the opposite. Taxes get too low and the wealthy have a much greater incentive to pay themselves more. And with greater wealth comes greater political power to get not just their taxes lower but to get other policies they want that are bad for society.

Based upon history, the top tax bracket should be around 70-75%. Of course, the idea of a top tax rate that high is so far outside the Overton window that people giggle about it when you bring it up. (Just like they did when you brought up Donald Trump as the Republican presidential nominee nine months ago.)

Economic Growth Isn’t the Issue

But what bothers me even more than this is that no one knows for sure. So I ask myself, “What if I’m wrong?” And my answer is that I don’t care. “Economic Growth” is a religion among policy elites. And you can see why. Traditionally, increases in productivity were broadly shared. But they aren’t anymore.

I’m always amused when people bring up the dot-com bubble and note that wages went up during it. Yeah, that’s true. That’s because we had a heterodox economist in charge of the Fed who let the unemployment get below 4%. So what these people are really saying is that if economic growth gets high enough, then the rest of us will get a taste. But the idea that 90% of us ought to get even 10% of the growth under normal times is just considered ridiculous.

Conservatives Don’t Care About Economic Growth

Now let’s look at the other side of the economic growth debate. Would conservatives be in favor of raising taxes if it meant that economic growth would increase? The answer is no. That’s because they don’t care about economic growth. They care about the tax rates that rich people pay. And this is a real problem because it means that conservatives are disingenuous. They aren’t for low taxes for the reasons they claim.

So I don’t care about economic growth — not in the current system where all the growth goes to the same people. In a sane political-economic system where economic growth was shared (even if it wasn’t completely fair), I would be for policies that would increase economic growth. But as it is, I don’t see any reason to be for them.

But in this country, it is so much worse because we’ve been told that the same conservative policies will increase economic growth. But they haven’t. Economic growth just gets lower and lower. But the policies have increased inequality, which I believe was the point all along.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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