Friday, November 7, 2008

How "No New Taxes" Continues to Ruin the Republic


After hearing two-step commentators plugging interviewees incessently with "won't new taxes be bad for the economy?", I did some lookup (apart from whether that implied a dissolution of the Pigou Club should be imminent).

In 1932, Hoover and the congress raised taxes on everyone AND expanded the tax rolls, even though they made the rates more progressive.

Obama's plan is to cut taxes in the lower brackets and to raise them in the top. I suspect one could make a strong case for that, during a severe downturn. Although not accurate, one could think of it like a wage compression for high-income wage-earners. As if on cue, events have actually accommodated Obama's plan. (During the primaries, I found his rate cuts fiscally irresponsible ...).

Camp Obama has already addressed any impact on small business income, by proposing credits for business owners who continue to invest in their business, by hiring new employees. This could strengthen already good businesses, rather than prop up weaker ones.


Although it makes good theoretical sense to parallel capital gains rates with dividend tax rates, it may make sense to raise the capital gains tax rate to 20% and the dividend tax rate to something higher (25%?), temporarily. This will provide a disincentive for firms to pay dividends, for a time.

I don't have the figure, but I suspect that the marginal propensity to consume dividend income is a lot less than would be worrisome.

Finally, resetting the cap-gains rate now, while market valuations are low, could arguably offer a "catch-up" for the period in which tax-rates were set too low, leading to the fiscal imbalances during the Bush years, even if those deficits were not related to the lowering of the cap-g rate in the first place.

Here is an interesting assessment from someone who lived through the Great Depression, with a privileged point of view:

"Marriner S. Eccles, was the Chairman of the Federal Reserve from 1934 1948

In his 1951 memoir Beckoning Frontiers, Eccles detailed what he believed caused the Great Depression.


Eccles wrote:

“As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth — not of existing wealth, but of wealth as it is currently produced — to provide men with buying power equal to the amount of goods and services offered by the nations economic machinery.

Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

Which may just be a long way to suggest that a touch of redistribution ...

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