Wednesday, December 8, 2010

Taxes and Jobs, part 2

My earlier chart showed that lowering taxes has not bought us improved job growth. So what would?

From the figures for tax rates and job growth alone, one might think that we could just raise the marginal tax rate on the top bracket and the rock would crack, jobs would flow forth, and everyone would dance around with leprechauns showering us in cash. Sadly, while some of my relatives have been suspected of being leprechauns, showers of cash don't tend to come quite that simply. (And beside, those relatives are too busy with small farms to shower anybody with cash even if they had it.) Yet the answer isn't all that complex either ... it just takes more than a mere one rate.

What are the mythical arguments against high taxes on upper brackets?
  1. It's not fair.
  2. They'll take their money and go elsewhere.
  3. They'll have less money to use to create jobs.
Myth #1: "It's not fair."

The easiest of these to address is the crying baby argument: "Wah, wah ... I worked hard for this money and I deserve it ... it's not fair to tax me more." In the upper incomes, one should beware of doing anything that invites comparison of effort to income. Does anyone really believe that a multi-million-dollar CEO works harder than a construction worker lifting heavy loads all day, a crop picker bent over the fields, or a dishwasher scouring pans? Does anyone really believe that a hedge fund manager is hundreds of times smarter and more productive than the average teacher, engineer, or computer programmer? Yes, the upper brackets may have worked to get where they are. So did most everybody else who isn't paid as much. Even more importantly, does anyone really believe that people who make a lot more money aren't benefiting a heck of a lot more from the services of our government -- e.g., protection of property -- than people who make a lot less money? The truth of the matter goes far beyond it being fair. It isn't fair to tax the upper brackets equally, because the upper brackets reap more of the benefits of our government. The upper brackets get more; it is only fair for the upper brackets to pay more. Yet, as Warren Buffet tells us, the wealthiest pay lower effective tax rates than their secretaries.

Myth #2: "They'll take their money and go elsewhere."

Where? Where exactly would they go? China is growing, but carries its own risks. (income inequality, food price inflation, a suspected housing bubble that may dwarf the one we had, etc.) Europe has the Euro, which is rather wobbly at this point. Who really wants to shift all their investments to a zone where there are credible fears that the currency may collapse and possibly have half the nations involved break away? Even if the Euro doesn't collapse, austerity measures are widespread around Europe, so they'll likely see negative growth rates around much of Europe over the coming years. Who wants to send money in for negative growth? South America has seen a number of industries nationalized. Africa? Not the most stable investment. Besides, we've got relatively low taxes. There are a lot of nations for which we'd have a lot of room to raise ours before we even matched theirs.

Myth #3: "They'll have less money to use to create jobs."

For corporations, only the profit is taxed. How does a corporation deal with low taxes? Maximize profit ... send more cash to the owners. How does a corporation deal with high taxes? Reinvest ... plow income back into the building a better company to minimize taxable profit and thus tax. Reinvestment means more jobs. You'd have to raise corporate taxes quite a bit before they'd see low enough taxes elsewhere to make it worth moving, given all the disadvantages of doing business elsewhere. So there's leeway to encourage job-creating reinvestment by raising corporate taxes.

For individuals, the tax structure doesn't work quite the same way (although it probably should). But our economy is driven by spending ... not by income. People don't generally build a widget factory just because they had some spare cash. If they're smart, people only build widget factories because they expect more demand for widgets than production of widgets. It's the buyer. The buyer makes it worth building the factory to make the product. Without a buyer to make a factory worthwhile, cash goes into gold, treasuries, money markets, etc. ... things that don't directly provide many jobs. No matter how much money you have, you only need so much actual stuff. If I had ten times my current income, I wouldn't need any more food than I need now. I might get a slightly nicer house and another car. But still, there's only so much I can use -- let alone need -- that I don't have. After about $373,650 or maybe $500,000, one quickly reaches a point where more money just means you can squirrel away more cash into gold (or whichever investment vehicle is offering the best risk/return ratio at present). But until you reach that point -- for the least wealthy (maybe 98%) of the nation -- more money means you can buy more ... and almost certainly will. For the most wealthy (c. 2%), more money just means more money.

Will the wealthy spend more if they're taxed more? Not without incentive. But what if we say that for each 1 dollar you spend on domestic job-creating investments, you can lower your taxable income by 70 cents down until you reach $500,000 (pegged for inflation, please). Imagine that. So if a billionaire spends $100 million building/expanding factories, buying equipment domestically, employee training, or hiring somebody he wasn't paying before, he might then lower his taxable income by $70 million. And keep in mind that this billionaire would own that investment, a fact unchanged by using it to lower taxes. Sound like incentive to invest in American jobs? Maybe. How about if we raise the tax rate on income over $500,000 from the current 35% to 70% or maybe even the 90% we saw under President Eisenhower? What would you do if you were faced with the choice of paying 90% tax on your extra cash (before you could buy gold with it) or investing in something that would create jobs -- something you'd own -- to avoid paying so much tax?

That high is a bit extreme. 90% wouldn't leave much exit for an entrepreneur who wished to retire, so under ordinary circumstance -- outside wartime -- it shouldn't be that high. Perhaps 70% might be high enough. But if we really, really wanted to get people with money to plow it into jobs over the coming year and drop unemployment quick, imagine what a 90% rate on the top bracket (with a job creation taxable-income adjustment) for a year or two might do to lower our unemployment rate.  If we create strong incentive to invest domestically instead of abroad, the investors will find places to make it work.

There is, of course, a catch.  The catch means we should be very careful about putting such a strong incentive to invest into play for very long.  In our crisis shocked market, caution stands so high that supply and demand are strongly linked.  Companies now hesitate to invest in expanded supply until the demand clearly surpasses their production capacity.  Demand growth is slow, and so supply growth is slow.  For stability, this is great.  That stance helps avoid new bubbles.  But for fixing our unemployment problem, such caution hurts.  High unemployment drags on the economy, demanding repair.  The costs of high unemployment to our market's strength require that we get things rolling faster to trim those costs.  To do that, we need to risk encouraging supply to worry less about demand, at least for a while.  Just for a little while ... just long enough to get things rolling.

If folks who can make these changes ever embrace this idea, better ready the leprechauns...

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