Salon.com Are low taxes exacerbating the recession?

7/10/10 7:33 AM

http://www.salon.com/opinion/feature/2010/07/09/jobs_taxes_sirota
FRIDAY, JUL 9, 2010 21:01 ET

Are low taxes exacerbating the recession?

Higher marginal tax rates mean more resources for job-creating, wage-generating public investments
BY DAVID SIROTA

As the planet's economy keeps stumbling, the phrase "worst recession

since the Great Depression" has become the new "global war on
terror" — a term whose overuse has rendered it both meaningless and
acronym-worthy. And just like that previously ubiquitous phrase,
references to the WRSTGD are almost always followed by flimsy and
contradictory explanations.

Republicans who ran up massive deficits say the recession comes

from overspending. Democrats who gutted the job market with free-
trade policies nonetheless insist it's all George W. Bush's fault.
Meanwhile, pundits who cheered both sides now offer non sequiturs,
Reuters/Jim Young blaming excessive partisanship for our problems.
Secretary of State Hillary Clinton at the Brookings
Institute But as history (and "Freakonomics") teach, such oversimplified
memes tend to obscure the counterintuitive notions that often hold
the most profound truths. And in the case of the WRSTGD, the most
important of these is the idea that we are in economic dire straits because tax rates are too low.

This is the provocative argument first floated by former New York Gov. Eliot Spitzer in a Slate article evaluating 80 years of
economic data.

"During the period 1951-63, when marginal rates were at their peak — 91 percent or 92 percent — the American economy
boomed, growing at an average annual rate of 3.71 percent," he wrote in February. "The fact that the marginal rates were
what would today be viewed as essentially confiscatory did not cause economic cataclysm — just the opposite. And during
the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71
percent."

Months later, with USA Today reporting that tax rates are at a 60-year nadir, Secretary of State Hillary Clinton told a
Brookings Institution audience that "the rich are not paying their fair share in any nation that is facing [major] employment
issues ... whether it is individual, corporate, whatever the taxation forms are."

A prime example is Greece. While conservatives say the debt-ridden nation is a victim of welfare-state profligacy, a Center
for American Progress analysis shows that "Greece has consistently spent less" than Europe's other social democracies —
most of which have avoided Greece's plight.

"The real problem facing the Greeks is not how to reduce spending but how to increase revenue collections," the report
concludes, fingering Greece's comparatively "anemic tax collections" as its economic problem.

On the other hand, the opposite is also true — as Clinton noted, some high-tax, high-revenue nations are excelling.

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Salon.com Are low taxes exacerbating the recession? 7/10/10 7:33 AM

"Brazil has the highest tax-to-GDP rate in the Western hemisphere," she pointed out. "And guess what? It's growing like
crazy. The rich are getting richer, but they are pulling people out of poverty."

This makes perfect sense. Though the Reagan zeitgeist created the illusion that taxes stunt economic growth, the numbers
prove that higher marginal tax rates generate more resources for the job-creating, wage-generating public investments
(roads, bridges, broadband, etc.) that sustain an economy. They also create economic incentives for economy-sustaining
capital investment. Indeed, the easiest way wealthy business owners can avoid high-bracket tax rates is by plowing their
profits back into their businesses and taking the corresponding write-off rather than simply pocketing the excess cash and
paying an IRS levy.

In summing up her remarks, Clinton said that this higher-tax/higher-revenue formula "used to work for us until we
abandoned it."

Though she felt compelled to insist, "I'm not speaking for the [Obama] administration," it was nonetheless a politically bold
statement — so bold, in fact, that like all of the other corroborating tax facts, it was summarily ignored by politicians and the
Washington media. They had their clichés to promote — and unfortunately, until they let substantive though uncomfortable
ideas displace conventional wisdom, it's a good bet that the WRSTGD will continue unabated.

David Sirota is the author of the bestselling books "Hostile Takeover" and "The Uprising." He hosts the morning show on
AM760 in Colorado and blogs at OpenLeft.com. E-mail him at ds@davidsirota.com or follow him on Twitter
@davidsirota.

-- By David Sirota

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