Monday, January 08, 2007

There are times when a tax hike is needed, and this could be one of those times.

Republicans are flabbergasted that some Democrats are suggesting rolling the Bush tax cuts back to the Clinton rates, particularly on the wealthy. And this could be accomplished easily just by letting the expiration dates already written into the Bush tax cuts come and go without taking any action at all. In fact, some have even proposed specifically increasing taxes on the wealthy.

And why not?

The GOP has always proposed tax cuts, at least for the past couple of generations since I can remember. When the economy was booming and we had a surplus, they wanted tax cuts. When it was in a recession, they wanted tax cuts. When it was rebounding from the recession, they wanted tax cuts. Inflation? The answer was tax cuts. Unemployment? Tax cuts. Tight job market? Tax cuts. In fact for at least a generation, whatever condition the economy was in, the Republicans have always proposed tax cuts. Name the economic malady, and the GOP has exactly one answer for it, tax cuts. And when it happened that those tax cuts came the wealthy made out like bandits (surprise)?, the middle class got small amounts (myself, I got enough from the Bush tax cuts to fill the tank a couple of times) and the poor in many cases got nothing.

When taxes have been raised, either at the Federal level (i.e. the 'read my lips' tax hike of 1991 or the 1993 tax hike that was central to the Clinton economy) or at the state or local level (often to replace lost Federal revenues that were withheld in the wake of Federal tax cuts) those taxes tended to be raised 'across the board.' In other words, the net effect over the past couple of generations has been not to eliminate taxes, but rather to shift taxation from the wealthy onto the middle class and the poor.

What about the promises that lower taxes would help the economy? The argument goes something like this-- when wealthy individuals and businesses have more money then they can invest it, and the investment will create more jobs. And more jobs will mean more prosperity for everyone. How has that worked out?

Well, let's look at the record:

In another study that tells us something that we already know, the Bureau of Labor Statistics has confirmed that job growth under George W. Bush is pretty puny.

WASHINGTON (AP) -- The economy has cranked out fewer jobs under President Bush -- by millions -- than it had by the same point in the presidencies of Ronald Reagan and Bill Clinton...

Under Bush, the economy produced 3.7 million new jobs from January 2001 through December of last year based on nonfarm payroll figures collected by the Labor Department's Bureau of Labor Statistics.

Republicans try to blame Clinton of course:

Commerce Secretary Carlos Gutierrez counters, in an interview, "It's just a matter of timing and when we started getting out of the recession that the president inherited."

Let's torpedo that explanation right off the bat: In eight years Clinton's economy (including the 1993 tax rates) created 20 million jobs, for an average of 2.5 million per year. In the first two years of Bush's economy (which incidentally the economy did not show negative growth until after the first Bush tax cut was passed in March 2001) we lost 3 million jobs. So even if we assume that in the succeeding four years 6.7 million were created (replacing the three million lost plus the 3.7 million net gain) you have the creation of just under 1.7 million jobs per year. And that's being as generous as I can to Bush, starting him from the low point of the recession, both timewise and jobwise. Even with that, his economy still doesn't come close to Clinton.

What about the jobs that all that money flowing into large businesses created? Well, it did create them. Remember how the economy, though it was slowing, did not show negative job growth until after the March 2001 tax cuts? There is a simple explanation for this. The large corporations that got the bulk of the benefit from the tax cuts did use it to create jobs. In Asia-- where labor is cheaper than in America (funny how 'free marketeers' who backed the 2001 tax cuts on the basis of job creation didn't see that result coming). At the cost of a deficit, America helped finance the movement of millions of jobs out of the country. And most of that outsourcing occurred within those first two years of the Bush tax cuts as companies took full advantage of their new windfall and 'invested' it. The economy in Mumbai and Shanghai is much stronger for it today.

What about unemployment? Conservatives always like to cite the unemployment reports. It reached a low of 4.0 % during the last year of Clinton's term-- 2000, then went up to 6.0 % during 2003 and has since declined to 4.6%. Isn't that proof of hiring?

Sure, it is. But consider that during Clinton's first year of 1993, it averaged 6.9%. It dropped down to 4.0%, representing a decline of 2.9%. In the case of Bush, it has gone up a net of 0.6%. If you again look back to 2003, it has dropped by 1.4% in the succeeding four years-- so again, not as fast as it did under Clinton (though barely less) even if you give the Bush administration the complete benefit of the doubt and start measuring from the worst it got and just measure the decline). So even using what has lately been the favorite measure of conservatives, Bush still doesn't come off as good as Clinton.

This means at best the Bush tax rates have not done anything compared to what the higher Clinton tax rates did for the economy, and at worst, they have hurt the economy.

And the real irony is that by creating deficits they will require that we raise taxes in the future just to pay back. As interest rates rise, expect that interest payments on the national debt will again be a significant drag on our economy. And when that day comes, expect some statement about 'across the board sacrifice.' Translation is this: The debt was run up giving tax cuts to the rich while continuing to spend like mad, especially in the area of corporate welfare; but paying it back will require that the tax increases fall disproportionately on the middle class.

Meanwhile, we continue to pour hundreds of billions down an endless black hole in Iraq, fighting a war that while we have been told of 'sacrifice,' none of us, except of course for the military members fighting the war and their families, have had to actually worry about. This is the first time in history that taxes were not raised to finance a war, In fact, if the financial costs of the Iraq war (about $320,000,000,000.00 and counting) were distributed evenly among all current American citizens, we would each owe just over a thousand dollars in extra taxes. But the Bush administration has defined for most people the meaning of 'sacrifice' to mean putting a yellow ribbon decal on your vehicle, and some future generation will have to actually worry about the dollar cost of this war (compounded by that time by interest, of course.)

So I would posit that at this time, 1) the tax cuts we've had in the past have done nothing, and 2) right at the moment given the deficit and the cost of the war, increasing taxes makes a lot of sense.

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