It’s a multi-dimensional question.
The left says yes — income inequality has soared in recent years, and the way to address it (supposedly) is to tax the rich and capital gains at a higher rate. The right says no — that the rich already create more jobs and wealth, because they spend more money, and why (supposedly) should they pay more tax when they already pay far higher figures than lower-income workers?
Paul Krugman made the point yesterday that the tax rate on the top earners during the post-war boom was 91%, seeming to infer that a return to such rates would be good for the economy.
Yet if we want to raise more revenue, historically it doesn’t really seem to matter what the top tax rate is:
Federal revenues have hovered close to 20% of GDP whatever the tax rate on the richest few.
This seems to be because of what is known as the Laffer-Khaldun effect: the higher rates go, the more incentive for tax avoidance and tax evasion.
And while income inequality has risen in recent years, the top-earners share of tax revenue has risen in step:
So the richest 1% are already contributing around 40% of the tax revenue, taxed on their 34% share of the national income. And even if the Treasury collected every cent the top 1% earned, America would still be running huge deficits.
Yet the Occupy movement are still angry. A large majority of Americans believe the richest should pay more tax. More and more wealthy Americans — starting with Warren Buffett, and most recently Stephen King are demanding to pay more taxes.
King writes:
At a rally in Florida (to support collective bargaining and to express the socialist view that firing teachers with experience was sort of a bad idea), I pointed out that I was paying taxes of roughly 28 percent on my income. My question was, “How come I’m not paying 50?”
How come? Well, the data shows pretty clearly that it’s unlikely that revenues would increase.
They may have a fair point that capital gains above a certain threshold should probably be taxed at the same rate as income, because it is effectively the same thing. And why should government policy encourage investment above labour by taxing one more leniently?
But more simply, people like King think the status quo is unjust far beyond the taxation structure. A lot of people are unemployed:
A lot of people are earning less than they were five years ago:
28% of homeowners are underwater on their mortgages. Millions of graduates face a mountain of student debt, while stuck in dole queues or in a dead end job like Starbucks.
We live in dark times.
From Reuters:
Nearly 15 percent of people worldwide believe the world will end during their lifetime and 10 percent think the Mayan calendar could signify it will happen in 2012, according to a new poll.
With all this hurt, there’s a lot of anger in society. Those calling for taxing the richest more are not doing the same cost-benefit analysis I am doing that suggests that raising taxes won’t raise more revenue.
But they’re not unfairly looking for a scapegoat, either. While probably the greatest culprits for the problems of recent times are in government Americans are right to be mad at the rich.
Why?
This isn’t about tax. This is about jobs, and growth.
The rich, above and beyond any other group have the ability to ameliorate the economic malaise by spending and creating jobs, creating new products and new wealth. The top 1% control 42% of all financial wealth. But that money isn’t moving very much at all— the velocity of money is at historic lows. It should not be surprising that growth remains depressed and unemployment remains stubbornly high.
And every month that unemployment remains elevated is another month that the job creators are not doing their job. Every month that the malaise festers, the angrier the 99% gets. It is, I think, in the best interests of the rich to try and create as many jobs and as much wealth as they can. A divided and angry society, I think, will find it even more difficult to grow and produce.
America needs the richest Americans to pay more tax dollars — but as a side-effect of producing more, and creating growth.
If the private sector doesn’t spend its way out of the current depression, eventually the government will have to, of course. But it can do that with borrowed money, not taxed money.
azizonomics 
Really good stuff. Raising taxes on the rich is too simple of a solution – those suggesting it are either lazy (i.e. can’t think of any better solutions) or ignorant of the fact that it won’t improve our current situation. The rich offering to pay higher taxes should just employ people with that extra tax money that they want to give to the gov’t.
Exactly. King lists a whole swathe of endeavours (infrastructure, global warming, etc etc) that he doesn’t believe he can address with his own money. But this is quite silly. You can address anything with your own money. Certainly, I wouldn’t trust the government to address these big issues, anyway. Too much bureaucracy, not enough chutzpah.
Society simply needs a financial reset. This would have occurred in ’08 had the Fed not stepped in. The stewards of paper wealth are watching the flood waters rise and running out of sandbags. The debt that can never be re-paid must be written off; then the paper wealth evaporates and the banking structure can restart. The destruction of paper wealth would in essence be a tax. Such a process would indeed be painful- likely worse than the depression. We need it, yet have no stomach for it; alas it is inevitable and the force behind the levy grows…
I agree that we need a liquidation of the broken financial structures.
Good article. But the rich will not just dump money into the market with some vague hope that it will create some jobs while, at the same time, government policies are obstructing this possibility. In America, I see the energy sector as a place where this has been going on throughout this administration.
There are a lot of good business opportunites today even in spite of political conditions. If people are not investing, they are shooting themselves and the country in the foot. That is their decision. But the reality that anger and will get bigger if there is not a recovery, and in the end that may be bad for everyone.
Everyone but you must be stupid then. Aziz, there is a real opportunity for you to make a squillion! Put your money where your “ideas” are and invest heaps now. If you don’t have the money borrow.
Search within yourself why you are not doing this now and you’ll find the answer why stupid business men are not investing.
For a start I am a writer, and that is my business. Second, I do invest in what I consider to be good business opportunities. I own equities.
Finally, a post with some sanity!
It is not the rich’s fault for the low money velocity, it is the government’s. The rich invest their money when there are favorable incentives in place for them to do so. A government that incentives investment will see it happen. India is a prime example of one that is not providing good incentives to investment right now and major business is seriously thinking about leaving. The US, implementing many of the draconian tax laws in the last few years, have seen the same thing happen.
The Fed thinks it is incentivising investment with ZIRP. Nope; they’re just preventing middle and low income people from being able to amass capital to invest.
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Why should the rich be soaked more than the poor?
Why should someone making $20 million per year pay even one more penny than someone making $2,000/year?
‘Progressive stupidity fueled by liberal logic‘ is what got this country into its present day prediciment…
I think the capacity to pay as well as the amount of utility (consider the difference in infrastructure use between a guy who runs a hot dog stand and a guy who runs a hedge fund) has something to do with it.
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I think if someone wants “more fair” tax code he should never start by demanding some new rule or some fidgeting with margins. Start with transparency and simplicity. In Poland, US and pretty much all over the world tax codes are long lists of rules and exceptions. It is more relevant to look at how much is dogged than what are the nominal obligations. Yea, you could get a top tax rate at 90% right away, but rich would immediately shrunk their incomes in one way or another. Warren Buffet can refrain from selling his fortune in stocks for most of his life having very small income, and eventually give it all up to charity or some other cause that will be free from taxation. And there are all the other payments, obligations and tariffs that work the exact same way as any other tax. After all if you buy imported tv set you will pay the tariff, job security will eat up some income from the worker and some from employer, etc.
If entire govt income came from taxes and these were not hundreds of points with thousands of exceptions, but say 2 different types and not a single one exception, than any placement of burden of keeping govt alive could be possible. With fair tax (kinda like VAT, paid by the end user of everything) generating almost all revenues and progressive income tax that targets rich exclusively a socialist could say that he is in fact placing more burden on the rich. Everyone would pay some percentage off his consumption (i guess around 40% to sustain huge States that exist now). Rich would chip in extra and you would now the exact relation of these figures. Right now it’s just a huge mess with all kinds of revenue streams that act as progressive, regressive taxes and a lot of special interests. You can effectively make a loophole for your donor, but not really get any social engineering done (if this is wanted).
Yeah. Loopholes are disastrous. Waste of time and energy, and penalise outsiders. Simpler tax code will probably allow for lower nominal taxes.
I think we have too much government, as it is, and that excessive spending results from that and then causes accumulated national debt and annual deficits (not to mention that most all resulting activities are wasteful and inefficient), and then, of course, progressives want to address those conditions with more taxes or inflation.
I don’t favor increases in taxes, but if we got to a societal consensus that governmental fiscal (budgetary) stimulus is what is needed (to promote growth and jobs), and we wanted to do that without relying on deficit spending, a temporary surtax (with increased net revenues covering the stimulus amount) at some income level that would not particularly hurt individuals and/or families might accomplish this without extreme effects on investment. And we would avoid the austerity bugaboo. I also understand the whole process is dynamic so it might not be easy to figure out what the numbers need to be. Once the economy was clearly in recovery, we could drop the surtax and engage in a level of austerity needed to deal with the debt.
You know I count tax hikes/surtaxes as a form of austerity? Hoover did it after ’29 and again, deficits rose. Tax hikes amount to government taking money out of the economy, which contracts economic activity. I am no fan of stimulus either (seems to end up in the pockets of insiders). The best course for me is to just maintain and shuffle government disbursement levels (maybe cut overseas spending and imperialism and hand money back to taxpayers) and then once things improve a bit gradually enact austerity until deficits really start falling.
I’m trying to be very careful with my stock market investments as we approach the fiscal cliff looming at year- end. Last summer was a very rough period, when all the conflict about increasing the debt limit and the credit downgrade. Got any prognostications for what may happen in the period November to January?
I went into Bonds and Utilities (Australia just dropped rates so I won on the Bonds)
People need bandwidth and electricity to survive in this age, They will cut back on food but not iPhone/iPad Facebook and TV, nor light and warmth or cooking.
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The problem lies in the private sector of our economy. There are not enough things for the people living in America to do. Over the past 30 years or so, the number has grown to somewhere around 70 full-time jobs for people living outside the United States, who work to deliver products and services to the people living inside the United States for us to consume.
This will not change, unless or until the people living in America are forced ot work for wages that are no more than what is paid to these gainfully-employed people living in other countries, and are forced work in factories or sweatshops where worker safety and comfort and environmental restrictions are no better.
Or-r-r….
A pervasive and punitive system of tariffs are imposed onto everything that is imported.
People living in America would then be very much in demand, and will become very much gainfully employed by private sector employers, who will not otherwise be able to meet the collective demands of these very same people whom they are employing. No Keynesian “shovel-ready” make work programs would be needed. Tax evenues would go up as the need for social welfare programs would go down.
Furthermore, the opportunities for the global corporatists to evade paying taxes on their operating profits would be greatly diminished (or otherwise would be paid in tariff taxes).
Why isn’t the need for protectionism the big political issue of our time?
Mr. Smoot, meet Mr. Hawley.
All joking aside, you do seem to be on to something. Its not “free trade” if the forgeign companies get to dump toxic chemicals into the river or governments (read China) peg their currency to the dollar.
But, if we installed tariffs in the US today, there would be riots within a month. Why? Because we don’t make anything. The stores would be empty.
My great hope is that 3D printing may be the beginning of an American manufacturing renaissance… but that is a long way away.
Imposing tariffs would be painful today. That’s why Mitt Romney’s desire to have a trade war with China is so bizarre. Way to get riots tomorrow. Eventually though, if the labour reality remains the same, we will eventually have to go in that direction. Global trade fragility is dangerous.
“That’s why Mitt Romney’s desire to have a trade war with China is so bizarre.”
It’s beyond bizarre. It’s fucking absurd. Mitt wants to end the cheap manufacturing and electronics party all in one go? Once people get used to too much of a good thing it’s hard yo get them off of it. If you are going to end an awesome party, you have to turn the music down slowly before you put all the booze away.
Introducing tariffs will lead to tariffs from everyone else. US of A consumes more than it produces, if you just isolate yourselves from the rest of the World you will have to balance this instantly. Also, trade is beneficent, you can specialize more with trade. High tariffs by the US and against it would smother that trade and would cost some real chunk off living standards. As the US is smaller than rest of the World you would get much harder hit, trying to self sustain all your needs. This might “create jobs”, but at severely reduced consumption/living standard.
Fo Sho is right. Smoot Hawley will return just like Glass Steagall was repealed. It is a Political survival mechanism. In the end we still vote! We make the rules. And if we want jobs, the Politicians will introduce quotas. Even if this means an infationery spike.
Taxation is theft! All taxes should be cut to ZERO. Governments should stop paying interest on the National Debt and default on all debts. Painful in the short term but in no time at all people will build their own robust economy without a massive State transferring wealth to the rich.
So long as people can vote in elections and have the freedom to leave the country should they so choose, I don’t think there is any great problem with having some government and some taxation. If you remain in the country of your own discretion, then you accept taxation. If not, move to an oil rig in international waters.
http://www.economist.com/node/21540395
I’d like to see the data on coroporate taxes as a percentage of GDP. If I recall correctly, it’s been dropping preciptiously.
The current tax code undoubtedly favors income that is channelled thru corporations, rather than paid as wages.
So the debate over the highest marginal income tax rate is somewhat misplaced. The debate should be focused on corporate tax rates and the captial gains rate.
I do not buy the argument that a reduced capital gains tax (currently capped at 15%) encourages investment, and I think the empirical evidence shows that we aren’t getting more investment as a result of lowering the capital gains tax. However, I do understand the argument that reducing corporate tax rates will cause US corporations to keep liquid assets overseas.
One immediate change in the tax code that might free people up to take risks (and get their balance sheets in order) is to lift the cap on capital LOSSES (currently $1500 per person). To the extent that capital losses can offset ordinary income, they buffer investment risks.
Moreover, selling a home for more than you bought it results in capital gains tax, while selling it for less offer no capital loss relief. This is badly out of balance.
So there are lots of practical steps that can be taken to simpify the tax code, make it more fair, and reduce the distortions that it imposes on the economy. But the debate has become oversimplified as class warfare (mostly by people who are trying to protect their unfair advantages).
Lastly, the idea that ALL taxation is theft is asinine. Where private behaviors create externalities, taxes can play a role in correcting price signals to ensure that people are bearing the full costs of their actions. In fact, to fail to tax behaviors that create external costs (e.g., pollution) is to ALLOW theft. So, an intelligent tax code is a way of punishing theft (not committing it).
Aziz,
A good post all around. But, to be slightly critical, you have left out the payroll taxes, which have a degressive effect on labor. (An example is that income above $106,000, is not taxed for SS)
The below link shows a graph in the middle of the page that clearly shows the increase source of government revenue from payroll taxes over the last 40 years.
http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm
It is a known fact that if you want to decrease the consumption of a particular good or service in society, you tax it! So, why, in the USA do we tax labor? The laborer and the employer both pay taxes tied to employment in the current system. It then should come as no surprise the employers are hesitant to hire new workers.
Further more, because the tax on labor, more and more companies resort to hiring contract workers to avoid the payroll taxes. (Of course this is not the only reason that companies hire contract workers, but contract workers are cheaper.) Japan ran into the same problem after their bubble burst and have a name for the contract worker class, keiyakushain.
It should come as no surprise that keiyakushain come from the youth that grew-up during the lost decades of Japan. This is what happens when the government gets involved in the economy.
PS Krugman is an idiot. How about this Krugman; you say, “WW2 got us out of the Great Depression and it is proof that Keynesian Economics works.”
So then why has the war on terror, started in 2001 by the US, not had the same effect on the country?
Sheesh, war is good for the economy. Krugman is a dipshit!
Agree that Krugman is a dip-shit, and the war is not stimulation.
The point about payroll taxes (we are regressive) in very important. They get overlooked.
More importantly, our tax code is so stupid that at the moment the defacto tax rate on mariginal income for a married couple with two kids and household income in the mid-100’s is about 40%.
How does that happen?
When married filing jointly certain credits and deductions begin to phase out in the mid-100’s. Tuition credits. Dependent child credits. Student loan interest deductions.
So, if you have a couple that is in the middle class, has a little capital, and the kids are getting older and Mom wants to take some savings and start a part-time Sched C business, every dollar she makes results in loss of credits and deductions, PLUS additional payroll (i.e., self-employment) taxes.
This entrepreneurial family, which could be the backbone of the job-creating economy, is getting crushed by a bullshit tax code.
The bullshit tax code does seem to favor the rentier class.
As you point out, we should instead have a tax code that favors (or atleast is neutral) to the entrepreneurial class.
To be honest, I don’t know how we get from A to B.
https://azizonomics.com/2011/09/16/small-business-the-real-job-creators/
Good point well noted. And as I have written myself over the last few months, there has been a shift from corporate taxes to payroll taxes in revenue. So yes, I think we should graduallygo a little in the other direction and rebalance this by cutting payroll and raising corporate taxes.
Corporate profits are at a recent high and middle class disposable income is at a recent low and the obvious conclusion is that tax policy is strengthening this.divide.
As an Accountant (Australian Tax Law) I do believe that there has to be higher taxes on Capital Gains (as low as 15% on shares and 7.5% in retirement “Superannuation” accounts) if held and sold after 1 year, and inheritance (Zero in Australia if certain rules met). Why?
1. It limits speculation and using Ponzi finance to chase asset bubbles
2. Wealth earned from inherited capital makes the recipient soft (Why work hard I am getting my parent’s estate)
If people knew they were going to get taxed on death, they would spend their assets and recycle wealth in the economy. At the moment many elderly are asset rich and cash poor. Their children take the holiday or buy the new car, that their parents spent. With the boomers locking up a lot of wealth in hard assets. of course you will see a decline in GDP. No one is spending and recycling that wealth.
Income taxes should be reduced for people who contribute to production. Blue collar workers who work on production lines are exhausted at the end of a day. Why would they do overtime when taxed at a progressive rate? It should be a flat tax or a declining tax for them as hours increase. This gives producers an incentive to produce (lower real labour costs) and reduce supply contraint inflation.
Whilst I respect people who studied hard to get Managerial, White Collar and specialist education (Dr Engineers, Lawyers etc), I think people who have a “gift” i.e. ability to run a Fortune 500 company, should see higher progressive taxes. Most enjoy their work, so getting millions to enjoy their work is a slap in the face to the Blue Collar worker who hates his job and pays increased progressive taxes. They will still turn up to work and “Lead” and the Government will get their taxes. They work for the power they feel.
My 10Cents after tax.
Aziz,
Great article, but you’re missing one key part –
“The rich, above and beyond any other group have the ability to ameliorate the economic malaise by spending and creating jobs, creating new products and new wealth. The top 1% control 42% of all financial wealth. But that money isn’t moving very much at all— the velocity of money is at historic lows. It should not be surprising that growth remains depressed and unemployment remains stubbornly high.”
Why is the money not moving? why is there little to no liquidity in the market? Why is it that cheap money isn’t creating wealth?
1) regulation because of the Volker rule, BASEL III, etc. – banks have to secure enough capital to be compliant i.e. not lend or send out to the FI market.
2) Banks are putting money out in the FI market and others are pulling out of the market to invest in the stock market because of the central planning of the government – sending cheap money to the market creating a synthetic market and not creating wealth.
The problem with taxing the rich isnt just avoidance, its the FED, its regulation, its corporatism (and not capitalism), its special interest. There are many moving parts as to why this economy isnt moving, starting with the poor allocation of assets by the FED.
Besides – taxing capital gains at 15% is ridiculous and the proposed (but now killed) tax to raise it to 30% would effectively kill all business investment. People would stop investing in companies, companies would then stop issuing dividends – a mad slippery slope would ensue.
The tax code needs to be thrown out and re-written.
There needs to be specific/drastic changes in policy to get things right again.
“taxing capital gains at 15% is ridiculous and the proposed (but now killed) tax to raise it to 30% would effectively kill all business investment”
Why? Capital gains taxes have been far higher than 15% historically, and that didn’t kill off investment. Taxes that low just encourage entrepreneurs to shift productive capital into a particular tax bracket. It perverselly disincentivises real entrepreneurship, making tax planning more profitable than business expansion.
Secondly, higher business taxes might aid investment in some circumstances. if your company runs a profit, the best way to lower your tax bill is to invest the money you would have paid in tax back into your firm in some way, to upgrade plant etc. In the long term, everyone benefits.
Capital gains is just on profits, though. It doesn’t eat away margins if you are losing money or breaking even.
I agree business conditions are not ideal, but there are so many potentially profitable enterprises that are just not getting done. I think the biggest factor here is fear of another recession, and the biggest problem with that is that the problems that caused the last one still exist and were in fact perpetuated by the bailouts.
But even so, there is a lot of opportunity, and it is a shame that there is not more risk-taking.
BTW loopholes in Australia have been tightened. It is very difficult to structure your affairs to minimise tax. The Tax laws are so complicated and many they give you a headache reading now!
Australia introduced an Income Tax in 1936 as an emergency revenue measure. Guess what. We still have it!
BTW Australia has the highes house prices relative to income in the world because we don’t tax gains on the family home, and we give interest deductions and repair deductions on investment property.. Guess what rich people buy homes that a young family would have bought to get the tax deduction on their main income , and the renovation on their family home (False repairs invoicing Fraud and a double deductions)
Sounds like a huge problem.
There has been a pronounced redistribution of the wealth in the US since 1980. A country with a wide income gap between the rich and the poor does not perform well in a free market economy. That’s the economic reason we need income distribution. One way to do it is through taxes income but a better way is to pay middle class people higher wages and salaries. To do that people have to have a voice in deciding how pay is determined.
I think the best tax policy in this regard as mentioned above is moving back toward a high er level of corporate tax relative to payroll taxes. And yes in a free market it is important that unions are allowed to operate so that there are fair negotiations between capital and labour.
I also think that as mentioned above there has to be some kind of equalisation between American workers and foreign workers.
“The rich, above and beyond any other group have the ability to ameliorate the economic malaise by spending and creating jobs, creating new products and new wealth. ”
But why take a risk if there are mobs howling your profits should be windfall taxed and you should be strung up and shot?
The UK once had a 97% top rate of taxation, we had electricity three days a week at the same time.
The two are connected…
Capital is lightly taxed, because it comes with a risk, my wages come with a government insurance scheme
No-ones talking about 97% tax, but theres not much wrong with 50% at the very top.
And the people who deserve to be strung up aren’t small business men, but bankers who’ve got super-rich by leveraging funny money and getting a government bailout when it went tits up.
First they came for the funny money men, tomorrow, who knows who’ll be the target.
There is still lots of profit potential. There are still lots of good ways to make a profit. And it is sad that more people are not taking the necessary risks. Business and political conditions are not ideal. But it is a shame that hunger for profit has not dug us out of this mess…
I would also add a general point.
SOMEONE, or some group, is going to have to pay higher taxes in the years ahead.
Raising taxes in general will lower economic activity, but, fairness arguments aside, taxes on the wealthy will have a less negative effect economically than raising cunsumption taxes or income taxes on lower and middle income earners.
Just as I don’t advocate spending cuts in a depression, I don’t advocate tax rises, because it is more or less a form of austerity. During a depression it will be contractionary policy. Additionally, I think the only real way to balance the budget will be to grow GDP. The rich will have to pay more tax (actual dollars) but the only way to increase revenue (due to problem of Laffer-Khaldun curve) will be to do this from a higher level of GDP.
But where are the jobs, jobs, jobs? where will the GDP increase come from if the rich get to have their cake and eat it too? If the “Job creators” dont create the jobs then the govt, out of political expedience, will “steal” from others to pay people to engage in public works projects. If the rich dont have a negative incentive to create jobs, I.E. We will raise taxes on your ass unless you put your money where your mouth is, how will jobs get created? We give the rich the sun the moon and the stars, and yet their rhetoric is not commensurate with the amount of jobs that have been created.
“and yet their rhetoric is not commensurate with the amount of jobs that have been created.” Ha! Look at my drunk ass getting it exactly backwards! This should have read: and yet the amount of jobs that have been created is not commensurate with their rhetoric.
They talk a big game but the amount of jobs that you would expect are simply not there.
Do you honestly believe that tax policy should be a battering ram to encourage and discourage behaviour?
Because in many ways that is the status quo, and I don’t really think it is working very well.
The creation of jobs and growth is normally undertaken to reap the fruits of prosperity, not to satisfy the qualms of bureaucrats. I think there is one main problem that is holding the economy back (and I may sound rather like FDR in saying this) but it’s fear of another recession.
And the last recession came out of a breakdown after years of easy money policies, which created a bubble which burst. And what has the Fed embarked upon ever since the bubble burst? Reflation, so we can have another bubble, which will eventually burst.
So businesses are right to be fearful of more recessions.
“Do you honestly believe that tax policy should be a battering ram to encourage and discourage behaviour?”
Ha! Not necessarily. I just don’t believe in giving a whiny, priveleged class anymore positive incentives and free handouts when they dont do anything with them.
I think the Galtians should stop whining and start creating jobs just as much as I think Warren Buffet should stop whining and start creating jobs. You’ll notice I successfully piss off both sides of the equation.
“I think the Galtians should stop whining and start creating jobs just as much as I think Warren Buffet should stop whining and start creating jobs. You’ll notice I successfully piss off both sides of the equation.”
I agree. Am I supposed to side with Warren Buffet or something?
Though I will throw this out there: if Warren Buffet’s goal is fairness and he believes that fairness is derived from taxing individuals who make more at a higher percentage, telling him to make more jobs is missing the point. He wants to disincentivize unfair taxation. Or what he perceives as unfair taxation.
Nah, I was mostly just referring to the importance of pissing off both sides in a highly partison debate.
Smoot Hawley was an act of stupidity. It had virtually no impact upon our economy. Imports and exports changed less than 2% in the years after the act was passed. At the time of Smoot Hawley, America was the world’s largest exporter and largest creditor nation. It made absolutely no sense for an exporting nation to enact legislation which would invite reciprocal trade barriers. Today, America is the world’s largest importer and the world’s largest debtor. The situation is completely the reverse of the 1920s.
Before 1913, the primary source of revenues to the U.S. Government were tariffs and excise taxes. At one point during the presidency of Chester Arthur, our government considered cutting the tariff rates, because it was getting more in taxes than it could spend!
Of course. back then the country was going through boom and bust cycles that were at times as severe as the great depression. But without those tariff barriers, this country’s railroads would have been built with English-made steel instead of American. Without protection, there wouldn’t have been an American steel industry around to build skyscapers and battleships in the 20th century. (Kind of where we are today, with the railroads and bridges being made with Chinese steel and the pipelines being built with Korean steel.) By the way, a relative had to call the IRS the other day….and spoke to someone from India. Can you imagine that! Even our government callcenters have been off-shored.
I just don’t see mass riots coming out of a move to tariffs, when every company is trying to open up domestic production lines in order to avoid the cost of 50-55% tariff rates (unless you count all the 1%-ers and their lobbyists and lawyers descending on Washington D.C as riots).
I have done some cursory studies of the shape and breadth and depth of global supply chains, and the only thing I can conclude is that the level of upheaval involved in making American manufacturing competitive again is not something that can be done in one fell swoop. Simply, American manufacturing will have to begin again from the ground up. From resource extraction, to processing, to components, to assembly, everything is agglomerated around East Asia. A lot of American “manufacturing” is the reassembly of Chinese components. And then there is the problem of skills, that the U.S. in losing its manufacturing base has also lost a lot of technical skills. Imposing big tariffs would create huge upheaval as it would force America to re-industrialise immediately or face either supply shortages or massively increased costs. With middle class incomes already squeezed, an abrupt transition looks painful.
While I believe very strongly in localism and the protection of national interest, this will take many years of slow reform and progress. It took thirty years of globalisation to get into this mess. I think that thirty years is a realistic time-frame to get out.
This is directly analogous to the first Oil Shock in 1973. In the decades prior, the US had been a major oil producer. However, efficiency gains and discoveries overseas resulting in an incrementally increasing dependence of foreign petroleum. Price signals failed to materialize that would caution policy makers and industrialists of the risks.
Then, the disruption of oil supplies from the Middle East caused tremendous economic dislocations.
Manufacturing is undergoing the same process. The supply chain disruption from the Japanese earthquake and Tsunami was merely a warning shot. Imagine if S Korean manufacturing were taken off-line for any length of time (a plausible scenario). The disruption to US industry would be catastrophic.
In the name of increased efficiency, we have introduced brittleness.
Excellent post.
Very true. The way the human mind seems to work is that we expect good things to last as they are for an eternity almost. But if something happended to manufacturing in Asia, Americans would suck it long and hard before there was prosperity again because our manufacturing base is concentrating in so few locations which happen to be environmentally volatile: China, Japan and politically volatile: S. Korea, China. But hey, it was here today (manufacturing base) and it was here yesterday so why worry, right?
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Putin’s Russia Flat Tax has worked very well. An ex-Communist country where the lower and middle classes are rising.
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I am sure that we have all had the opportunity to read Zerohedge’s take on this morning’s NFP:
The Two Scariest Charts From Today’s NFP Report, Or The Real “New Part-Time Normal”
Submitted by Tyler Durden on 05/04/2012 – 10:33
Unemployment
Back in February Zero Hedge was first to point out that while jobs may be growing (modestly) and the unemployment rate declining (rapidly, on the back of all those leaving the labor force), it was the quality of jobs that was troubling. Indeed, as today’s NFP report once again showed, the average hourly earnings barely budged at $23.38 from $23.37 last month, and in fact declined on an inflation-adjusted basis. Why? Because as we predicted both in February (and in 2010) the US is increasingly becoming a population of part-time workers, as full time jobs disappear for good, and are offshored abroad at best. April confirmed everything we had been warning about: in the month, full time jobs dropped to 114,478 from 115,290, an epic drop of 812,000 in full time jobs which was the biggest since… March 2009! The offset? Why a surge in part-time jobs of course, which increased by 508,000 in the month of April. So while seasonally adjusted, birth/death recasted jobs may have increased by 115,000, the real quality jobs, imploded, which unfortunately is merely a part of a longer-term secular trend as part of the new part-time normal.
For all the disruption that tariffs may impose on the global supply chain and on the incremental costs of components in the early years of this transition, is there any other way -even if it takes 30 years ( I think that the benefits would be felt by the vast majority of people living in America in about 5 years.)- that will reverse these destructive trends?
Well if the last 20 years of cheap credit, lent out on the basis of “Full Time” job security is anything to go by, then the coming credit crunch will be a shocker.
First there is stable loyal work from the point of the worker and the employer, then credit, good times roll, then marginal empoyees are given work, fuelling further credit lending, then collapse as marginal workers are let go, and then the long term loyal staff are let go to save employers capital.
Why do we work or accumulate capital? Because we can buy things. Why do we tax? So Bureaucrats can buy things!
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Seems to me the revenue discussion of who pays what is pretty meaningless considering our government is spending vastly more than is received in revenue. The focus of our discussion should be shifted to what we want government to pay for and how much we’re willing to provide in funding to accomplish the goals we set…. that needs to be an iterative discussion in order to match revenue to expenses. I cannot imagine the America my grandchildren will inherit if we don’t back up and get the basic equation under control