Guest post: Why Tax Cuts for the 1% Are Self-Defeating
Tim had written as a guest poster for Angry Bear as ‘reader T-bone’ a few years ago and is returning to writing, currently at Polymic. This post was published about a month ago.
Guest post by Tim Martinez
Why Tax Cuts for the 1% Are Self-Defeating
Annual U.S. income share of the top 1%.
A new GOP budget released Tuesday brings renewed attention onto the issues of tax policy and the economy. Of course, there will be debate over what effects various policy options would have on the economy, something I have previously addressed in a previous article. But inevitably, there will also be arguments made by Republicans regarding the fairness of those policies as well.
The problem with many of the GOP arguments made in regard to fairness is that they lead to a self-defeating paradox in either the logic of the argument, or in the outcomes of their recommended policy solutions.
For example, one common argument made is on the grounds that it is unfair for the wealthiest to pay higher taxes since they are already paying the most federal income tax while many people pay none at all. But this argument is flawed in multiple ways.
First of all, the logic of this argument is paradoxical. As the wealthy get wealthier while others fall behind in comparison, the share of tax burden on the wealthy would continually increase. In other words, this logic would suggest that the closer the wealthiest come to earning 100% of total income, the more unfairly they are being treated since their share of income taxes edges closer to 100% as well. And by contrast, it would be considered more fair for the wealthy if their incomes fall while others’ incomes rise, since taxes paid would be more equal.
Second, the big irony here is that the policies that would seem to make it more fair for the wealthy in the short-term (lowering their tax rates at the expense of other policy options) are policies that would tend to further increase income disparity in the long-term. This is due to these policies’ lower effect on creating demand (lower economic multiplier), which means less need for labor (a weaker labor market).
Let me explain. The wages that average working people can expect depends on the overall demand for labor. If unemployment is very low, businesses must compete harder for labor. People will find more opportunities available, more competing offers, and find it easier to change jobs. This pressures business to offer more competitive wages, among other things.
In other words, policies that facilitate strong demand and thus strong employment lead to higher incomes for labor, which narrows income disparity. This real income growth due to strong employment is something we can see happening in China, for example.
In addition, this type of stronger income growth will itself fuel stronger demand. We typical refer to this as a strong middle class. The stronger demand it generates in the economy supplants the need for demand-creating policies, which means those polices can be slowly rolled back. This can even happen automatically to an extent, as a larger, wealthier middle class pays more taxes, and that increased revenue can be used even for a tax cut for the wealthiest.
Achieving an ideal conservative vision of the economy and of government tax policy by enacting conservative-favored policies is a self-defeating paradox. Ironically, the path to this ideal conservative outcome can only be achieved by first enacting liberal policies
What do you mean, self-defeating? Tax cuts for the 1% are an end in themselves.
Besides, how do you make a servant class? Good help is so hard to find.
Just to clarify a little, since my writing often isn’t the clearest:
The ideal conservative vision of taxes is to have lower and flatter taxes, less social spending. The ideal conservative vision of the economy is one where people keep what they earn, and the amount they earn comes down to their effort and value of what they produce. (You want to improve your position? Just pull up on those bootstraps.)
But the assumption they make is that whatever the free market sets for wages/profits for various jobs/people/businesses is ideal without any outside influences. And that any policy affecting the free market is just a negative distortion from that ideal, and is at best a temporary band-aid. In other words, they would see tax credits and lower taxes for low incomes and higher taxes for high incomes as simply redistribution, not affecting the underlying before-tax wages.
But the underlying wages are affected by policy. For example, policies that help maintain full employment by managing aggregate demand levels in the economy will result in a tighter labor supply than you might have otherwise, which will cause average worker’s wages to rise (before-tax), narrowing the gap between high and low income-earners.
Because a narrowing of the gap between high and low income-earners has the same demand-inducing effect as progressive tax rates, it means that taxes no longer need to be as progressive. In other words, the liberal progressive policy leads us closer to the ideal conservative vision of the economy.
Meanwhile, conservatives would assume that those higher average wages would have been there anyway (as a result of the free market) if those liberal progressive policies wouldn’t have been in place, just as they now assume that the stagnant wages and massive income inequality we have now (and in the Gilded Age and Great Depression) are not a result of the dismantling of progressive policies.
Tax cuts are the cocaine for the rats at the top of the pyramid. They will keep stepping on that button getting that rush, that momentary blast of easy money even while they are creating the socio-political-economic conditions that will lead to their decline. An intelligent parasite understands that the well being of its host is fundamental to its own destiny. Our aristocricy lacks that wisdom.
Tax cuts are the cocaine for the rats at the top of the pyramid. They will keep stepping on that button getting that rush, that momentary blast of easy money even while they are creating the socio-political-economic conditions that will lead to their decline. An intelligent parasite understands that the well being of its host is fundamental to its own destiny. Our aristocricy lacks that wisdom.
Tax cuts are the cocaine for the rats at the top of the pyramid. They will keep stepping on that button getting that rush, that momentary blast of easy money even while they are creating the socio-political-economic conditions that will lead to their decline. An intelligent parasite understands that the well being of its host is fundamental to its own destiny. Our aristocricy lacks that wisdom.
I swear I only hit post once! Wasn’t all that proud of spouting off like that but…
I swear I only hit post once! Wasn’t all that proud of spouting off like that but…
I think the wealthy will be roughly as well off with lower taxes and crappy socio-political-economic conditions as they would with higher taxes and better conditions. I think you can isolate yourself from the outside pretty well once you’ve got the money. They’ll just have less company able to join them because of the reduced opportunities and upward mobility.
Well Tim, I don’t know how to be rich but I know if I had mucho discretionary income, I wouldn’t sit around worrying about taxes all the time. I might support lower taxes on me but I wouldn’t spend one dime of my time on it.
Tim, in your third paragraph you come very close to using the standard liberal zero-sum argument that assumes there is a static amount of income and it’s government’s job to make sure someone doesn’t get more than their fair share. I believe that wealth and income are not static and can be created and grow provided that government does not get in the way. I don’t think we need higher or lower taxes, we should just leave the tax code alone for about 5 years and quit changing it every 6 months. That would go a long way toward helping both businesses and individuals. Then we will get the stronger growth you discuss later in your article. Taxes should be collected only to fund our government’s needs, period. Taxes should not be collected for wealth redistribution or to address someone’s idea of fairness.
Now, that being said I think our labor markets are going through very tumultuous times based on a myriad of things including:
1. Business needs less labor than in previous decades.
2. Jobs are more technical than they used to be and many employees are under prepared.
3. A lot of people have college degrees with majors that are useless in the current job market
4. A lot of jobs went to other countries.
5. Business are deliberately holding back on the labor they do need.
This will at some point straighten out but it will be very painful for a long time while it does. Our federal and state governments can help here, especially with items four and five but they’re not doing it. Instead they’re adding more employment taxes and employment regulations plus pitting rich against poor, old against young, race against race and it goes on and on. All for what? Someones reelection? Is anyone in our government thinking about our country?
“They’ll just have less company”
= easier to get tee times
your ideology is falsified by the success of Norway, Sweden, Finland, Denmark, Germany and the failure of the low-tax, low-redistribution, low-service economies.
John,
I don’t believe wealth and income shares are entirely zero-sum by any means. That’s especially true now, as greater demand from the bottom results in greater economic growth and greater profits for the top.
I also beleive that when labor is kept pretty tight and causes wages rise, it leads to businesses finding ways to make labor more effcient (jobs becoming more capital-intensive). For example, if farmworkers are dirt cheap, you have little incentive to buy and maintain expensive equipment to replace some workers. But as workers become more expensive, switching to efficient equipment and automated processes becomes the better choice. This increases output per worker, which increases total wealth in the world. You get more engineers being paid well to maintain and operate equipment, less need for low paid manual labor. We see this happening all the time in developing countries, but it also happens here in developed countries. Maybe one day you’ll order food at a restaurant by talking to a robot, and having it cooked by robots as well.
But reduced business need for labor should not mean we need to have unemployment. It should mean that costs to produce are reduced, which saves people more money for that particular purchase, which frees them up to buy more of something else. So for example, farmworkers displaced by farm equipment should mean cheaper food, and so people can spend more on landscaping or something, so the displaced farmworkers find more work is available as landscapers.
Also, the things you list in your numbered list don’t explain a recession, especially a global one. I mean, we’ve been dealing with outsourcing for decades and have been able to maintain roughly full employment for much of that time, so it’s not something that suddenly hits us to cause a recession. The mismatch of jobs to skills may contribute to a higher rate of “structural” unemployment (so perhaps if “full employment” was normally 4% unemployment, it’s now 5% unemployment, as there’s more time spent retraining or in education between jobs), and that’s something we should seek to improve, but we can still do better to reach full employment, increase wages, and thereby reduce the need for social spending.
Troy, Norway, Sweden, Finland, Denmark and Germany rely primarily on the VAT tax for running their governments. With the VAT, the rich and the poor pay exactly the same tax rate. As you seem to believe the key to success for these countries is their tax system then you have just made a good argument for the flat tax here. Because surely no tax is flatter than the VAT.
Tim, I don’t disagree with anything you say here. I hope it goes as stated. I have a sad feeling that the adjustments are going to be longer and more painful this time, maybe a whole generation. I hope I’m wrong. I also think our government could help a lot more. I suggest the easiest way for them to do that would be to take a time-out on new regulations for a while or at least consider how they might effect employment. As we talk they are proposing forced quotas for hiring disabled workers. While nobel in it’s intent I think it will push more companies toward those robots you talked about.
Germany also has high income taxes and takes more via that than VAT (which is 43% of the total tax take). VAT by itself serves as corporate income tax on most items, given the pricing power corporations enjoy.
The nordic states all tax ~50% of GDP. Once you get that high it doesn’t really matter what you tax, rents are tough to come by.
I’m no economist, but my understanding of VAT is that while it hits rich and poor with the same tax rate, its effect on prices is different since the poor can’t afford to pay more so the incidence is shifted to the provider, while the rich can so the incidence shifts to the wealthy.
Plus all these states spend about half we do per-capita on health care, which helps with the velocity (keeping money in the middle-class economy where it belongs).
John, I intended to mean that the robots were a good thing. Like if it takes an average of 8 man-hours a day to create and maintain a restaurant full of robots, it’s more efficient (more wealth creation) than a dozen cooks and waiters each working 8 hours a day. But of course, the idea is that we have full employment AND robots, not robots INSTEAD of full employment. You probably understood me, but I’m just clarifying in case you didn’t.
Also, I am more concerned with taxes and benefits (things affecting aggregate demand), which I think can mostly be adjusted without much additional compliance cost (it doesn’t change the way you do things if your tax is 14% instead of 15%, etc.).
But I don’t like to generalize about regulation. It’s always better to judge proposed changes to regulations on a case by case basis. As cynical as people are about congress’s ability to not screw things up in terms of regulation, I can’t believe that they don’t do more good than harm. They do respond to logic, at least the stronger, clearer arguments. I think we just have a confirmation bias, as we’re only ever going to hear about regulations that are problematic, and there’s many times more that are smart and appropriate and you never hear of again. If they weren’t in place, we’d never hear the end of it.
So I hope, as you do, that they do consider how they’ll affect employment too.