Saturday, December 2, 2017

Democrats and the Republican Tax Plan

There is broad agreement among non-partisans the Republican tax plan is going to further blow up the deficit and undermine the strength of our economy.  Unfortunately Democrats demonizing corporations have provided cover for decades that has allowed Republicans to avoid facing the real problem.  

Corporations and Corporate taxes are not our primary economic problem.  Could they improved?  Of course.  But US economic history over the last 50 years demonstrates our fundamental economic problem isn't high corporate taxes, it is the distribution of income.

Ever since the Reagan tax cuts in 1984 our economy has been marked by two characteristics.  Rising economic inequality and asset bubbles.   Who ever heard the word "bubble" before Reagan? (Except in history books).  Constant inflation in the price of assets in the face of muted broader inflation. 

As people gather wealth at a certain point they literally have every product and service they could need or want.  What do they do with the money they receive beyond their personal wants?  They invest in existing assets.  They buy another property, or pay scores or hundreds of millions for a painting, or a rare old car.  That spending doesn't create many jobs or contribute to real growth.  In terms of generating economic growth they might as well bury that money in their backyard. 

The wealthy folks that control corporations can control the distribution of money out of the corporation.  From 1945 to 1985, when the highest tax rates for high earners in the US ranged from 70 to 90%  we had a falling deficit and a very healthy economy.  Dare we suppose it was because rich folks were loath to pay 70 to 90% of the money being paid out to them to Uncle Sam, so they left the money in the business where they could grow their wealth without such onerous tax consequences?

Economists say high marginal tax rates don't generate much income for the government.  They miss the point.  High marginal rates change behavior.  They keep more money in the circulating economy and less ends up buried in asset inflation.

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