Posts Tagged taxes

Moving On

I’ll say it, so I can move on to more productive things. Okay. I’m disappointed.

There’s a ton of post-election analysis out there, but I don’t want to get in to that too much. I will say that I don’t think this is a sign that America is lost, or found, or anything. This does not mean that America has rejected conservative values or that Republicans will never win the White House again, any more than 2010 meant that America had rejected liberalism, or that 2006/08 meant that America had rejected conservatism, or that 2004 meant that America had rejected liberalism… hopefully you see my point. This is how it goes.

I also don’t think that this is a sign that Romney and the GOP went too far towards radical right-wing extremism, or anything of the sort. People are saying that the Republican party needs to give up on social issues, that Republicans lost because the party went hard-line and embraced people like Todd Akin. These people are wrong; the Republicans rejected Todd Akin and Richard Mourdock, not the swing voters.

Romney carried Indiana by almost 11%, but Mourdock lost Indiana by over five points. Romney won Missouri by around 9%, and Akin lost the same state by over 15%. It was Republicans that voted against these guys. Commentators are claiming that the GOP needs to learn from this election that the “independent voters” will reject them unless they moderate on social issues. Nonsense. Mourdock’s opponent was a staunchly pro-life Democrat who even co-sponsored the controversial “No Taxpayer Funding For Abortion Act” which defined the now-infamous term “forcible rape.” Indiana wanted a pro-life Senator. Mourdock wasn’t rejected for being pro-life, and he wasn’t rejected by the moderate swing voters. He was rejected by conservative Republicans for saying something deeply stupid which made us all look bad.

Which is my point. Romney didn’t lose because people rejected conservatism. Romney lost because people don’t know what conservatism is. Romney lost because a lot of people thought things about conservatives that aren’t true. Romney also lost because he said and did some very stupid things himself (I’m looking at you, DREAM act), but that’s not the central issue, because all politicians say stupid things here and there. President Obama successfully convinced a lot of groups that, if you’re a part of X group, you’re betraying people if you don’t vote Democrat. Women have to vote Democrat because Democrats care about women, and Republicans don’t. Same for various minority groups, ethnicities, industries. Young people think that Democrats “get” them and Republicans just don’t care about them. Whereas Romney and the Republicans didn’t talk to groups or ethnicities or genders as if we are all fighting each other. They preached a message of caring about, and doing what’s best for, all Americans–all of us together, since we’re all in this together–but people didn’t hear. America was unconvinced.

But where others see an obstacle, I see an opportunity. That’s the point of this blog. Conservatives have been awful at communicating why conservative policies help everyone, regardless of color or class, and far too many people really believe we’re all in groups and classes that have to fight and take from each other in order to get ahead.

So I’m working on a new series: Conservative Myth vs Fact. I want to take on these fallacies. I want to discuss like adults why the right sees things the way we do, things like public sector unions, taxing the rich, education reform, social security reform, and others. And I do hope for a real discussion. I know many of my readers disagree with my point of view, and I hope you will join in. If you have a specific topic in mind you’d like to bring up, post it in the comments here. And I look forward to the process.

Onward and upward!

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Should We Raise Taxes?

The Historical Record

During a recent debate with some friends, I was presented with a very intelligent challenge:

How do you explain the 1990s — as a fluke due to the internet boom? Weren’t there more regulations and higher taxes on the wealthy and corporations then? Can you really just say “but that was a different time!”
I don’t understand the logic behind saying that IF we raise taxes back to that level everyone will suffer. Data that shows this has historically been true may exist, but I’m just not aware of it. Please let me know if there is anything except what you consider common sense telling you that’s the case.

This led me on a fascinating flurry of research about the modern history of taxes in the U.S. But before we dive in to that, there’s a direct response on the issue of regulations.

Regulations

The question refers to both taxes and regulations in the 90s. There’s no question that both will have an impact on the business environment (see also: Why Government Decisions Matter).

While it’s true that tax rates were higher then, that’s not quite the case for regulations. As I pointed out to my friend, the principal achievements of this administration have been huge regulatory increases–the Affordable Care Act, Dodd-Frank, the CARD act. The EPA this year has had to roll back its own implementation of new CO2 emissions rules because, by their own estimation, they would have to hire 230,000 workers to enforce them. Rather than admitting the new regulations are absurd, they simply decided to wait until 2016 to do it. [1] The FDA recently announced that it is reinterpreting a 1994 law in such a way that will add millions to the cost of doing business for an entire industry–possibly putting smaller companies out of the market. [2] [3]

This is a drastic change in direction compared to, really, any administration in the past 30 years. Even Clinton was caught up in a decades-long deregulatory wave (see Gramm-Leach-Bliley). [4] So yes, it’s clear in hindsight that the successes of the 90s were partially due to the tech bubble, but also due to the general reduction in government interference in the economy that started under Reagan and continued until the last couple of years, where we’ve experienced a major about-face.

Taxes

This brings us to the other half of the challenge, the question of taxes. If taxes were higher in the 90s and things were okay, what’s the harm in raising them back to those levels now? Why won’t we still be okay?

Plot of top bracket from U.S. Federal Marginal Income Tax Rates for 1913 to 2009

Here’s what I found. Income taxes have only gone up a handful of times in the past century, and for various reasons. There’s a spike for WWI, one at the outset of the Great Depression, another halfway through the Great Depression, then two more in generally healthy times–the 1945/51 range and the 1991/93 range. [5]

At least on the surface, small tax increases during healthy economic times don’t seem to hurt the overall economy too much (the late 40s and the early 90s). And a temporary tax hike to pay for WWI apparently did no lasting damage.  Let’s look closer at some of those big swings.

Everybody is familiar with the Great Depression. Less familiar is the post-WWI recession of 1920-1921. Despite its lack of popular recognition today, the recession that began in 1920 was rough. Various estimates of unemployment agree that there was a rise from 3% or less to as high as 8.7-11.7% at the peak. Industrial production fell 30%. Stock prices as measured by the Dow Jones Industrial Average fell 47%. [6]

The government’s response was summed up in an article by Thomas E. Woods, Jr:

Instead of “fiscal stimulus,” Harding cut the government’s budget nearly in half between 1920 and 1922. The rest of Harding’s approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third. The Federal Reserve’s activity, moreover, was hardly noticeable. As one economic historian puts it, “Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction.” By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923. [7]

Did we all catch that? This downturn was as severe as what we saw in 2007, as severe as the beginning of the Great Depression. Yet in less than two years, production had returned and unemployment was below 3%.

There was another market correction at the end of that decade. Industrial production fell. In 1930, unemployment was approaching 9% again, and this time, the government intervened. Immediately, major new tariffs were instituted to protect American jobs (sound familiar?). In 1932, taxes went up on everyone, falling largely on the top earners–top marginal rate went from 25% to 63%, the estate tax was doubled, and corporate taxes went up slightly (sound familiar?). Through the rest of the decade, taxes were raised again every year or two. The appalling lack of recovery after 6 years led to another large tax increase on the wealthy in 1935–raising the top rate from 63% to 79%. The stagnant economy responded by dipping back into recession though 1937 and 1938. [8] [9] [10]

Throughout the decade, unemployment stayed close to 15%–peaking much higher, around 25% in 1933. Despite massive government intervention and hiring, this depression simply would not end the way others did before and since.

Let me try to bring this all together. We have the following situations:

  • Raising taxes and more government involvement during good times: little immediate economic damage (late 40s, early 90s).
  • Cutting taxes and less government involvement during recession: quickly ending recessions (1920, see also early 80s and 2000-2001).
  • Raising taxes and more government involvement during recession: longer, deeper recessions (30’s).

Today, we have a choice. We see the effects already of 3-4 years of intervention since the first problems started in 2007. The lack of recovery is turning into a full-on double-dip recession right now. The President is currently asking for higher taxes and more intervention–the same policies that turned a situation like this one into the Great Depression.

I’ve presented the historical record on two general directions the government has tried. Our choice is, do we want to take a whole decade to get back to prosperity, like in 1930? Or do we want to take only a year to get back to prosperity, like in 1920?


[1] http://mediamatters.org/research/201109270014  Media Matters’ take on this is, “No, the EPA is not hiring 230,000 workers.” However, even in their own story, they can’t present any evidence that goes any farther than saying, “The EPA’s new rule would require 230,000 workers to enforce, but now they say they’re waiting until 2016 to do it.”

[2] http://thegormleyfiles.blogspot.com/2011/09/fdas-plan-to-cripple-health-food.html

[3] http://www.naturalproductsinsider.com/topics/new-dietary-ingredients.aspx

[4] http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act For the record, I’m not intending in this article to argue the relative merits of GLB or Glass-Steagall. I’m not comfortable with anything being truly too big to fail, but there’s interesting arguments on both sides of that issue. This is just to point out that Clinton’s record during the 90s is not exactly an island of Big Government surrounded by Bushes–he was deregulating too.

[5] I’m using the top marginal income tax rate for simplicity, but corporate and capital gains taxes generally followed the same curve: http://www.ritholtz.com/blog/2011/04/us-tax-rates-1916-2010/ The capital gains tax conspicuously breaks ranks throughout the 70s, and is raised in the late 80s as well, though offset that time by dramatic income tax cuts.

[6] http://en.wikipedia.org/wiki/Depression_of_1920%E2%80%9321

[7] http://www.firstprinciplesjournal.com/articles.aspx?article=1322&theme=home&loc=b

[8] http://www.24hgold.com/english/contributor.aspx?article=2991697306G10020&contributor=Nathan+Lewis

[9] http://en.wikipedia.org/wiki/Great_depression

[10] http://www.infoplease.com/ipa/A0104719.html

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