I continue to wonder what degree of failure it would take to discredit the notion that if the federal government were larger and taxes were higher all of our problems would be solved. After all it worked so well in the Soviet Union and Mao’s China. Today Robert Reich writes a jeremiad bemoaning the small scope and meager taxes of our present system:
For three decades, an increasing share of the benefits of economic growth has gone to the top 1 percent. Thirty years ago, the top 1 percent got 9 percent of total income before taxes. Now they take in almost a quarter. Meanwhile, the earnings of the typical worker have barely budged, adjusted for inflation.
As a result, America’s vast middle class no longer has the purchasing power to keep the economy going. (The rich spend a much lower portion of their incomes.) The crisis was averted before now only because middle-class families found ways to keep their spending up even though their wages flattened – by women going into paid work, by working longer hours and finally by using their homes as collateral to borrow. But when the housing bubble burst, the game was up.
The solution is to reorganize the economy so the benefits of economic growth are more widely shared.
As I’ve written before I’m skeptical about Mr. Reich’s proposed solution to the problems of income inequality, which concerns me, too. Will raising the marginal tax rate for those earning $1 million or more in income to 70% actually increase revenues? Would whatever revenue is derived actually reduce income inequality? Or would it just re-distribute from the ultra-rich to tax lawyers and tax accountants, probably reasonably characterized as “the rich” (those making more than $250,000 but less than $1 million per year)?
I’m equally skeptical about his proposed plan for increasing employment: a new WPA.
The old WPA funded a wide range of projects, everything from roads, dams, and public buildings to the WPA Writers’ Project (I’ve got a dozen or so of the guides to the states that the project produced). From its beginnings in 1936 until 1943 the project spent a little over half of the money it spent on what are now referred to as “infrastructure” projects. However, at that time most American workers were farmers or factory workers and a road was built by collecting gangs of unskilled or semi-skilled men armed with shovels and other hand tools. Nowadays roads are built by qualified companies who employ smaller teams that use power equipment.
Relatively few people are involved in direct production than there used to be. We don’t have nearly as many farmers, laborers, and factory workers. Most people are employed in retail sales or indirect production with jobs named things like administrative assistant, accounts payable clerk, and customer service representative.
What would a WPA for administrative assistants look like and should we be funding such a thing?
Let me a propose a radically different direction for increasing employment: more new companies. Most new hiring isn’t done by old companies or by small companies it’s done by new companies whether large or small. And IMO what new companies need most is less support for old, established companies.
Speaking of China and large projects, pretty crazy claim about empty cities here
“Let me a propose a radically different direction for increasing employment: more new companies. Most new hiring isn’t done by old companies or by small companies it’s done by new companies whether large or small. And IMO what new companies need most is less support for old, established companies.”
This is where the investing class has totally failed us. While they have been getting wealthier, they are investing less in starting new businesses. Under the nearly ideal conditions, theoretically, of the earlier 2000s, we saw few new businesses and jobs created. The question is, what will get them back to doing that? They had low capital gains rates, low top marginal rates and an administration that ignored regulations. The only downside I saw was that they let industry write their own regs, which does tend to exclude newer and smaller businesses.
Or maybe we look at this all wrong. As much as Drew likes to credit the equity guys, maybe the new businesses that we really need to encourage are the ones that start ahead of the point where the equity guys get involved.
Steve
OT- Good Rheinhardt piece.
http://economix.blogs.nytimes.com/2010/12/17/the-annual-drama-of-the-doc-fix/
Steve
Let me a propose a radically different direction for increasing employment: more new companies. Most new hiring isn’t done by old companies or by small companies it’s done by new companies whether large or small. And IMO what new companies need most is less support for old, established companies.
There’s many a slip ‘twixt cup and lip. I agree on the merits that likely arise from achieving this outcome but how exactly is it brought about?
Small business is usually started by people tapping some of their wealth. Home equity was a big source that could be tapped but that’s been diminished of late.
The intermediary process which connects those with capital to those with business plans excludes a lot of small businesses who don’t a.) have the growth potential that is thought necessary for an acceptable risk, and b.) don’t have the scale to justify the involvement of the intermediary. Sue’s Homemade Sock Shoppe isn’t really going to be getting much help from venture circles.
Here’s my radical solution for increasing employment: Deport illegals and actually start paying recent immigrants to return to their homelands. If recent immigrants are, in effect, net tax recipients, they’re not adding net benefits to the nation’s economy. The number of jobs will remain the same but their will now be churn in the job market as those illegals who have jobs are sent packing and those jobs are filled by unemployed citizens.
“Here’s my radical solution for increasing employment: Deport illegals and actually start paying recent immigrants to return to their homelands. If recent immigrants are, in effect, net tax recipients, they’re not adding net benefits to the nation’s economy. The number of jobs will remain the same but their will now be churn in the job market as those illegals who have jobs are sent packing and those jobs are filled by unemployed citizens.”
I doubt that this does much, but even if it did, it does not address our long term issues. The pie needs to grow higher.
Steve
I doubt that this does much, but even if it did, it does not address our long term issues. The pie needs to grow higher.
The pie does indeed need to grow larger but that becomes harder to accomplish when there are impediments growing in the path that needs to be followed. It’s like climbing a ladder but for every step that you take up the ladder another sandbag is slung over your shoulder. Your progress up the ladder gets more and more bogged down with deadweight.
Growth has to start with fundamental building blocks. When it costs $25,000 per year to educate a student in Washington D.C. and those funds are raised through property taxes and from allocations from other governments then you should be asking whether it is cost effective to spend that kind of money on students. For some yes, for most no.
What are the human capital growth trajectories associated with immigrants and illegal immigrants. Census data shows us that we’re actually increasing our levels of poverty by continuing on with legal immigration and the story is even worse with illegal immigrants and their children.
So when you’re distributing scarce resources you should be trying to achieve the maximum cost-benefit return. If you ignore that calculation at the fundamental level and again at intermediate levels, you find that the entire system starts to bog down from inefficiency. It’s now at this higher level that you find the job creating activity taking place. In this environment there is a lot of overhead that needs to be paid for and this overhead is not producing optimized results. Capital formation takes place by saving the difference between value created and spending what is needed to create that value. The higher this spending burden, as its distributed amongst the population, the less leeway the job creator has in developing a cost of production competitive advantage and or creating new jobs, where the value created by the job exceeds the cost of hiring someone for that job. The result of suboptimal returns on human capital investments and other endeavors is that the job creator is operating in a higher cost and less productive environment than his competitors in other nations.
There’s age old wisdom backing this up. A penny saved is a penny earned. If you can knock 5% off of your gross operating expenses then you can double your 5% profit ratio without having to increase sales at all. Spending $300,000 to educate a child for 12 years in the DC school system will require that child to contribute $300,000 (present value terms) in excess value compared to a competing worker doing the same job in some other location with a lower cost attached to education in order to just stay even. Can a DC high school graduate use the value of his education to create that value? I doubt it.
It’s these kids who become the people who are hired. Their education has to be paid for in some fashion. The person doing the hiring is also the person who is paying a lot of taxes which support the system which educates these kids, or the system which provides people with medical care, or the system which polices the neighborhood, etc. These are pretty poor investments when we look at the return gained on the money that’s been spent.
We shouldn’t be importing millions of grade-school and high school drop-outs into our workforce. We already have programs which try to keep American students from dropping out because we realize that they become net tax recipients and put more burden on the rest of us. We seek to reduce their numbers because we realize that this outcome will reduce the burden on the rest of us. Deporting 12 million 8th grade drop outs from Mexican schools, and their families, will lessen the burden on the rest of society, and thus making us more competitive in the goods and services we produce, thus leading to more job growth .
I don’t know the answer to this, but I suppose we can look to what happened when the top marginal rate WAS 70%? The data should be there…
Alex:
The revenue to GDP ratio has been roughly the same in the U. S. regardless of the tax rates since WWII.
That is an artifact Dave, not a datum.
We set tax to pay down WWII debt, and then to cover spending going forward.
Of course it’s an artifact. Everything that’s a consequence of human behavior is an artifact, defined as the product of human action. That doesn’t make it any less true.
@Dave –
But what about the income tax revenue to GDP ratio? Tariffs and excise tax rates have been falling since WWII, and the government has found other sources of revenue (natural resource royalties, arms sales, etc), too. Plus, even if it’s been “roughly” the same, how “rough” are we talking? If it’s more than a +/-, say 0.5% change, then there might be other factors at work during the particular eras in which revenue rises or falls. In an economy the size of ours, a 1% increase in the revenue to GDP ratio is a LOT of money….
Alex:
See here.
The graph in that post doesn’t make any sense if the axes are what he claims they are. Hmmm…. I may have to cruch the data myself.
But it’s still not a separation of income tax receipts from other revenue streams.
I’m really at the point where I can’t debate Hauser’s Law because I can’t see any sense in it, at all.
I mean, it’s possible to debate when there is a rational starting point, something that starts with a reasonable observation and then a coherent logical framework.
This “Law” has neither. It relies on a selective observation of one country for one span of time, and without any logic beyond “see” says that the pattern in this span must continue.
I’m sorry, but like anti-evolution or anti-global-warming, it’s one of those places where it’s better not to get down in the mud and wrestle with the pigs.
This “Law†has neither. It relies on a selective observation of one country for one span of time, and without any logic beyond “see†says that the pattern in this span must continue.
Prove it false. I’ve done a cursory check and it looks like it holds internationally. I can’t easily find data on marginal tax rates nor can I find long time series historical data, like we see with Hauser’s report.
Canada: Tax Revenue as % of GDP in 1990 = 35.9
Canada: Tax Revenue as % of GDP in 2006 = 33.3
US: Tax Revenue as % of GDP in 1990 = 27.3
US: Tax Revenue as % of GDP in 2006 = 28.0
Germany: Tax Revenue as % of GDP in 1990 = 36.1
Germany: Tax Revenue as % of GDP in 2006 = 35.6
UK: Tax Revenue as % of GDP in 1990 = 37.6
UK: Tax Revenue as % of GDP in 2006 = 37.1
I’m sorry, but like anti-evolution or anti-global-warming, it’s one of those places where it’s better not to get down in the mud and wrestle with the pigs.
This is a sorry-ass cop-out. It shares the same form as crying racism and then bailing out of a debate.
Your past conduct on this topic is best described as evasive and you continue the pattern here.
Tango, you say you can predict the future. (That it will be the same as this US-specific segment).
And you actually think “prove I can’t (predict the future)” is a rational response.
Is it any wonder that I hold this in such disdain?
Tango, you say you can predict the future. (That it will be the same as this US-specific segment).
Which is the more rational response?
1.) JP, over the past 60 years we’ve raised and lowered top marginal tax rates and revenue as a % of GDP has stayed within a narrow band, therefore I predict that if we raise top marginal tax rates again the result will be the same.
2.) Never mind what has happened. Every time we raised top marginal tax rates we expected revenues to increase and they didn’t, but we knew that the next time would be different, and it never was, but this time, in 2011, this time, yes , this time, things will be different. I don’t know why and I can’t give you a reason for why I think as I do, but my tummy tells me that this time will be different. Let’s set national tax policy based on my intuition.
I just shake my head. You show trends, but use them to claim a law.
You show that various countries have dramatically different trends, but that each is “locked” by a law.
You even know that the US has had other trends in the past, with transitions between them.
But. You assure us that there can be no transition in our future. Because you know.
As we all know, I like to poke in the ribs, provoke etc. But I need to be serious here.
This is very unfortunate:
“Or maybe we look at this all wrong. As much as Drew likes to credit the equity guys, maybe the new businesses that we really need to encourage are the ones that start ahead of the point where the equity guys get involved.”
Because it shows a profound ignorance, yet a willingness to comment in the midst of ignorance. Especially when I know the commentor is very bright, experienced and successful in his own venue.
Steve – You speak of a world called “Private Equity,” composed of two branches – seed, or venture capital, and leveraged buyouts.
The “new businesses” you desire to be funded are the subject of the venture capitalists, of the pure “equity guys.” That is, these businesses are cash flow negative to neutral, and are funded purely by equity. They have zero debt capacity because they are building their revenue and profit base, and in addition require outsized permanent and working capital investment.
Me: we buy established businesses; and we use debt. But they have stalled for a variety of reasons. Mostly because they are familiy owned and they have exceeded their capital formation/risk appetite, or management capabilities. We take over, and fulfill the businesses full potential. And we do it very well. In either case, this is where revenue, profit, employment and, yes, tax revenue increases come from.
But you lament gross statistics, without giving consideration to whether what we do (or small business in general) has been supportive, or masked by other issues. Its the GM’s, GE’s – that is, large corporate or inefficients – of the world that have stopped creating jobs. You make a shallow argument that entrepreneurialism has not worked while quoting gross stats, but not considering the effects of this productive subset.
Crony capitalism should be your chosen enemy – and I’d note that Obama has turned out to be the penultimate crony capitalist (anyone surprised?) – not the little guys, and policies that benefit them.
Related:
The Effect of Falling Home Prices on Small Business Borrowing
“Me: we buy established businesses; and we use debt. But they have stalled for a variety of reasons. Mostly because they are familiy owned and they have exceeded their capital formation/risk appetite, or management capabilities. We take over, and fulfill the businesses full potential.”
This is what I am actually asking about. Do we need to make it easier somehow to form those family owned businesses to begin with? Is that the link in the chain which is not working? While small business creates the most new jobs, they also lose the most jobs. so, is our ratio screwed up, too many fail, or are we not having enough start? Or both? What could be done to improve it?
Steve
If tax rates don’t impact revenues, why is it that higher relative tax rates are correlated with lower relative deficits and vice versa?
Are they? Or are higher incomes correlated with lower relative deficits?
It wouldn’t matter. A correlation between tax rate and deficit is orthogonal to the claim.
Remember, the claim is that even though the level of revenue in the US changed prior to WWII, a “law” says it cannot change again.
Even though other nations have other revenue levels, we can never have them because a “law” prevents transition.
Even though this is about extrapolating a trend into the future, and it is a prediction (something humans cannot really do), we must resign ourselves, because it is a “law.”
Idiocy.
That may be what others are saying, john personna, but it’s not what I’m saying. What I’m saying is that there’s cultural resistance in the United States to total effective rates of taxation above a certain level and, given that the present economic downturn is the most severe since the Depression of the 1930s and we’re simultaneously fighting two wars and the resistance remains high, it’s hard for me to see a cultural shift of the sort required going on.
Laws of human behavior aren’t entirely the same as laws of physics but that doesn’t that there aren’t any laws and that things happen arbitrarily. Cultures are different. Ideas of justice and equity are different. Ideas of norms of behavior are different. Cultures change within constraints.
Well Dave, if this had all been “Americans are resistant to taxes” or “resistance to taxation limits revenue” I would have been fine.
My logical error detection would not have fired, and I would not have been impelled to respond.
And yes, the crew putting out the Hauser’s Law meme are definitely putting it out there as a physical constraint. According to them, taxation has reached the speed of light and can go no higher.
Dave,
As far as I can tell by looking that the data, the answer to (1) is yes. Re: questions (2) I’m not entirely sure what you’re asking so I can’t quantify the data.