Last Friday, I analyzed the tax proposals that the National Commission on Fiscal Responsibility and Reform put in the outline of the plan it presented last week. As it turns out, I was among the first but not the only observer to notice the subtle shift in the tax burden that the National Commission proposes, making the middle class pay more and the wealthy pay less.
Today I want to take a look at the National Commission’s proposal to cut government spending. The theme of the cuts that the National Commission proposes is that we must learn to live with less government. The result will still be a deficit, but much less of one than we have now.
My question is: if deficit reduction is so important to long-term economic well-being, why not reduce the entire deficit by raising the maximum tax rate to more than the proposed 21%?
Behind that question is another: The National Commission wants the government to help fewer people and businesses who suffer damages from disasters such as Hurricane Katrina or the BP Gulf oil spill. It wants the government to spend less on transportation and cut all spending to support commercial space flight. Wouldn’t the country be better off if we keep those programs at current levels and instead raise taxes on the wealthy, which are historically low for both the United States and for all other western democracies since the establishment of income taxes? Amazingly, the commission to deal with our debt couldn’t figure out a way to take care of all of it, but did figure out a way to lower taxes more for a group already enjoying very low taxes.
I have the same type of questions about what the National Commission proposes to do to “save” Social Security. Why this particular trade-off? The National Commission proposes eventually raising the retirement age to 69 and raising the cap on income assessed by the Social Security tax to $170,000. The age of 69 seems pretty old for retirement from most jobs. Why couldn’t the National Commission have knocked a few years off that number and taken the cap off the income to be taxed for Social Security?
One of the most specious arguments made by those who say that it’s not in the best interest in the country to tax wealthy people too much is that the government does not create jobs while the private sector does.
By isolating a single decision between “tax-and-spend” or “let the free market do what it does best,” we can see what a steamy crock this argument is: Let’s imagine the choice is between raising taxes by $1.0 trillion to support a job-producing program, say in alternative fuels, repairing bridges or mass transit OR keeping the highest tax rate low, which means that wealthy people pay less in taxes and have more money, which we all hope they invest in businesses and technologies to create more jobs:
- If the government has the money, 100% will go to creating jobs either through direct purchases from the private sector; grants, tax abatements or other financial support for private businesses which will therefore be able to hire more employees; or more government jobs to administer and manage the private sector companies getting the aid.
- If the wealthy keep the money, they could do one of many things with it, including:
- Invest in paintings, sculpture, baseball cards, old movie posters, coins and other real assets that create very few jobs and take a lot of money out of the economy.
- Put money in existing stocks and bonds, which creates no additional wealth, because the companies who floated the stocks and bonds already raised all the money they have through the initial offerings.
- Invest in financial machinations, such as options and other hedging, which create no additional companies or jobs beyond a relatively few highly-paid financial whizzes.
The “tax-and-spend” scenario must almost by definition create more jobs because the government is going to put 100% of the money right back into the economy and the private individual will not. One thing is for sure, especially over the past 15 years—the wealthy will invest less of their money into job-creating ventures than the government will.
Now the answer is not so clear when we’re talking about funding a government jobs creation program by taxing the middle class and the poor, mainly because these groups, especially the poor, tend to spend a much higher percentage of their income on goods and services than the wealthy do. Spending on goods and services in and of itself will create jobs, which is why many economists are proposing to keep the temporary Bush tax cuts for everyone but the wealthy.