Tuesday, November 18, 2008

Why the Economy Grows Like Crazy Amid High Taxes

From AlterNet:

Tax rate increases are followed by real economic growth.

Examples include Hoover in 1932, Roosevelt in 1936 and 1940, Bush the Elder in 1991 and Clinton in 1993.

Moderate tax cuts are followed by a flat economy.

This is a generalization from one example: Johnson in 1964.

Large tax cuts are followed by a boom, a bubble and a crash.

1929, 1987 and 2008 are examples.

These are covered in more detail in the first part of the article "Tax Cuts: The B.S. and the Facts."

Why do high taxes create a stronger economy?

I used to run a small business -- a commercial film production company.

Every time we took a dollar out as personal income, it instantly turned into 50 cents.

If we didn't really need the money, that was an incentive to keep it in the company and to find ways to spend it that took it out of the taxable profit column but increased the value of the company.

High taxes create an incentive to reinvest profits into long-term growth.

With high taxes, the only way to retain the bulk of the wealth created by a business is by reinvesting it in the business -- in plants, equipment, staff, research and development, new products and all the rest.

More here.

I'm tempted to call this the Rosetta Stone of tax economics, but the truth is that, while probably better than that of most Americans, my economic knowledge consists of a couple of college level courses and my own personal reading. I don't really know that higher taxes grow the economy, just as I don't know that lower taxes grow the economy.

But this sure does sound like a good argument, at least as good as the pro tax cut argument. Better, even, because it makes more sense. To me, at least. That is, I've asserted many times here at Real Art that, even though some tax cuts clearly promote growth, the notion that all tax cuts, especially for the rich, always stimulate the economy is so simplistic and demonstrably untrue - observe our current economy after eight plus years of GOP tax cutting - that it is laughable. The idea of businesses finding ways to reinvest earnings, however, so they don't show on the books as taxable profits, which, in turn, causes stable long term growth, rings true.

To my layman's mind, anyway.

So like I said, I don't really know. But of this I can be certain: the whole tax cut/tax raise bipolar paradigm which has ruled US political discourse for three decades has recently become so utterly complicated that the simple choice between raising or lowering taxes is now an obviously false option. There is much, much more that needs to be considered if we're interested in having a real debate about our economy.