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Taxing the rich is good for the economy

Commentator Robert Reich says increased tax revenue greases the wheels of economic growth

One of the most pernicious economic falsehoods you'll hear during the next seven months of political campaigning is there's a necessary tradeoff between fairness and growth. By this view, if we raise taxes on the wealthy the economy can't grow as fast.

Wrong. Taxes were far higher on top incomes in the three decades after World War II than they've been since. And the distribution of income was far more equal. Yet the American economy grew faster in those years than it's grown since tax rates were slashed in 1981.

This wasn't a post-war aberration. Bill Clinton raised taxes on the wealthy in the 1990s, and the economy produced faster job growth and higher wages than it did after George W. Bush slashed taxes on the rich in his first term.

If you need more evidence, consider modern Germany, where taxes on the wealthy are much higher than they are here and the distribution of income is far more equal. But Germany's average annual growth has been faster than that in the United States.

You see, higher taxes on the wealthy can finance more investments in infrastructure and education, which are vital for growth and the economic prospects of the middle class.

Higher taxes on the wealthy also allow for lower taxes on the middle -- potentially restoring enough middle class purchasing power to keep the economy going.

As we've seen in recent years, when disposable income is concentrated at the top, the middle class doesn't have enough money to boost the economy.

What we should have learned over the last half century is that growth doesn't trickle down from the top. It percolates upward from working people who are adequately educated, sufficiently rewarded, and who feel they have a fair chance to make it in America.

Fairness isn't incompatible with growth. It's necessary for it.

About the author

Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.
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Robert Reich you are full of shit. I just spent 45 minutes explaining why, but your bullshit server puked and erased it. Mayhaps it looked for certain keywords first?

Mr Reich claims post-WWII tax policy & results benefitted from increased federal oversight and taxation.

As he often does, Mr Reich conflates government policy, social & economic effects. Contrary to Mr Reich's assertions, these are the facts: Post-WWII, America was basically alone as an industrial power until the rest of the world caught up ~70's/'80's.

Mr Clinton's good fortune was to raise taxes during a time of increasing participation of women, immigrants in the economy as well as deregulation of some industries & integration of technology in manufacturing and services. The net-effect was improved productivity, more employment & lower prices IN SPITE OF increasing federal taxes.

Such phenomenon were aberrations in history. Mr Reich is well of aware of the facts. One suspects that he cannot help himself. Ensconsed as he is in the furry-tower of Left-Coast academia he cannot resist a tax, regulation or federal intrusion into the activity of otherwise productive citizens & organizations.

A modest suggestion: Perhaps it would be best for Mr Reich to stick to economics and leave the public policy alone. Or, take a few classes in modern social and economic history before he ventures into public op-ed.

I am at a loss to correlate aberrations to any of your points, dfparker. The facts continue to show more rapid growth in purchasing power among the lower 80-90% of the population when the highest individual income-tax rates are above 50% and that the converse is true. Since 2007, about 93-95 percent of all increase in income went to the top 1% of the population.

As tax expert David Cay Johnston, Owen M. Zidar, a graduate economics student at the University of California at Berkeley, and a former staff economist on the White House Council of Economic Advisers for President Obama, has pointed out, "...if tax cuts for high income earners generate substantial economic activity, then states with a large share of high income taxpayers should grow faster following a tax cut for high income earners.” This is not the case. In fact, so-called "blue states" receive less in federal payments than they pay in taxes to the federal government because they require less federal assistance for the needy. They require less federal assistance for the needy because they contend less with people lacking access to health care or with employed people making less than a living wage. "Ted states", however, are the welfare takers, since they get more in federal assistance than they pay out in federal taxes. The reason is that there are fewer people with access to health care in "red" states and those who are employed more frequently find themselves among the "working poor", making wages insufficient to support even the most modest of live styles.

Furthermore, there is a strong correlation with periods of rising income for the lower 50% and higher taxes on the wealthiest few, as there is an inverse correlation with periods of declining purchasing power and income from work and lower taxes on the wealthiest few.

Attempting to explain such correlations as "abberations" explains nothing.

Yea, OK, so how will the purchasing power you speak of be effected when we go to file this year and find that we RICH are to again be smacked down by the AMT. I remember when the Clinton's taxed my evil rich ass in the 90's the result was no vacation that year. This coming Tax season, all the puppies that can't even remember their parents bitching about will be shocked to find that they are the new evil rich through the AMT. They thought that only those earning over $500K would pay more, mayhaps you are one of those puppies. As an Old Dog, I know better. Just like with the Clinton's, Tax the Rich scam: If you ain't on welfare, or minimum wage, YOU ARE THE RICH! AND WILL PAY MUCH MORE.
And please while you flame me on this. don't forget to tell me how Obama Care makes Health Insurance AFFORDABLE for lower wage earners!

The two examples of growth amid high tax regimes cited by Prof. Reich imply cause and effect, but I think there are other factors influencing growth during those times. In the period following WWII, I assert that growth in the US economy was driven by cheap fossil fuel, and that economic growth during the Clinton administration was driven by the consumer electronics revolution. It's hard to see what will drive the next productivity bubble; surely not student loan debt.

Please study up on John Maynard Keynes. However much you may abhor the name, the theories are worth a read. More important, unlike the patent failure of "supply-side economics" (which proved not produce more revenue as taxes are cuts and not to generate more prosperity across the board) or the failure of Milton's monetary beliefs--combined with the fundamental law that the only social responsibility of business is to make a profit--Keynes' theories have worked. Keynes understood that government has a vital role in generating capital, physical and human. Government built the TVA grid; government sent a man to the moon; government builds and maintains most of the infrastructure (not just the highway systems); government enabled human genome research; government educates most of our children--and in the process, it also creates millions of jobs, many directly and many more indirectly.

An interesting premise. Perhaps cheap fossil fuel led to higher-than-average growth during both periods.

CHART: Inflation-adjusted Crude Oil Prices (1946-2011), 2011 dollars
http://inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_P...

You're right that low fuel prices correlate nicely with periods of high growth. Notice that dip during the later part of President Clinton's reign. Your premise is certainly more believable than that it was caused by high taxation.

Robert Reich wrote:

"Taxes were far higher on top incomes in the three decades after World War II than they've been since. ... Yet the American economy grew faster in those years than it's grown since tax rates were slashed in 1981."

... and ...

"This wasn't a post-war aberration. Bill Clinton raised taxes on the wealthy in the 1990s, and the economy produced faster job growth and higher wages than it did after George W. Bush slashed taxes on the rich in his first term."

========================

I'm afraid that Professor Reich is exposing his natural bias. Sure, it's a good story but it is deceptive, at best.

One of the first lessons learned about cause and effect is the very important lesson, "correlation does NOT imply causation." I spilled coffee in my lap and the printer in the next cubicle jammed. Did spilling my coffee cause the printer to jam? Very likely not.

Professor Reich's assertion is a common fallacy often told by those attempting to justify higher tax loads. True, the top marginal tax rates WERE much higher for top incomes during the World War II and decades after. However, he fails to mention that taxes were much higher for ALL income levels. The bottom tax rates STARTED at 20-23%, much higher than today's 15%.

CHART: U.S. Income Tax Brackets (1910-2010), Inflation Adjusted
http://www.twitpic.com/7lpzor/full

Let's test Professor Reich's thesis that higher tax rates cause higher economic growth. Zimbabwe and Cuba both have much, much higher tax loads than the United States, measured as a percent of GDP. Are either economic powerhouses? Would ANY American willingly choose to live in Zimbabwe or Cuba over the United States?

Many of the European countries have higher tax burdens than the United States, and some have better and more prudent social spending. Germany is the prime example, but Germany is generally well managed and has low debt. Many of the other EU nations are carrying SIGNIFICANT debt as a fraction of their GDP. All that extra taxing and spending HAS NOT resulted in sustainable GDP growth.

Also, could there be any other reason for high growth in the United States for the three decades after World War II? What was happening around the globe at the time? Do you think that any of these reasons just might account for the higher-than-average U.S. economic growth or do you really believe it was just higher tax rates on the wealthy?

* The economies and industrial capacities of Europe and the Soviet Union were destroyed by the Nazis, the Soviets, or the Allies.

* The economy and industrial capacity of Japan was destroyed by the United States.

* The industrial capacity of the United States increased during the war as it supplied wartime materiel for the Allies and the Soviet Union. That U.S. capacity was almost essentially unscathed by the conflict.

* The Soviet Union and China were enslaved under Soviet Stalinist Communism and Chinese Moaist Communism. Millions directly or indirectly died under the failed regimes.

* A state of "Cold War" existed between the United States and the Soviet Union. The United States continued to invest heavily to develop heavy bombers, ballistic missile technology, dispersed robust communications (Internet), radar, atomic energy, microelectronics, supersonic aircraft, and space travel. Some of these efforts resulted in trickled-down technologies for the private sector.

* The war-era led to significant shortages and pent-up demand for consumer goods and housing. That deferred economic activity helped fuel the next few decades.

* Being the sole remaining manufacturing base of any consequence, U.S.-made goods were shipped throughout the world.

* The United States government could insist upon high taxes in order to pay down the massive debt from the war and Roosevelt's New Deal because the United States was a thriving global economy without much economic competition. Many fled to the United States from around the world to enjoy our prosperity and freedom.

Does much of this match our current reality? No, not really.

As to the Clinton Era, was it high taxes or was it other factors that spurred growth? Certainly, fiscal discipline and leadership in Washington during the Clinton Administration helped create a good, robust business environment. But let's not forget some of the other factors at play.

* The Federal Reserve eased interest rates due to the Asian Financial Crisis and Long-Term Capital Management.

* The growth of the PC market, deregulation of the telecommunications industry, and the development of the Internet/HTML/web browser helped spur massive new investment in technology.

* Shortly after George W. Bush took office, the building "Dot Com" bubble in NASDAQ finally burst. The market collapsed by over 50%, leading to recession.

CHART: NASDAQ Composite Average (1990-2010)
http://www.twitpic.com/7qg19q/full

* On September 11, 2001, terrorists attacked the World Trade Center, closing U.S. financial markets for an extended period. The resulting recession has markets to drop further.

I have to ask, Professor Reich, do you REALLY believe that higher taxation on the wealthy was the cause for increased economic activity? On what evidence, beyond simplistic correlation, do you base your case?

I can't wait to hear Professor Reich explain, against all evidence, that massive, unsustainable debt loads are good for economic growth, too!

True, you have a point that causation is not correlation, but doesn't the evidence the article cites show that taxing the rich won't break an economy, as long as there is a good foundation to it?

If you increase taxes then you encourage the wealthy to reinvest their money to safeguard it from taxes. That's what I've been writing this whole time. Aren't you reading? By encouraging them to reinvest, you create an incentive to reinvest. The safeguard is that investments can help keep the money yours while keeping it away from Uncle Sam. Heavier taxes in effect create an incentive for investments.

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