Taxation Nation

Is it true that Americans are paying too little tax?

The short answer is no.

Current levels of overall taxation are close to the historical norm. So what’s changed?

Well, far less of the money is coming from corporations, and far more from payroll taxes. That means that a lot of the burden has been switched from corporations to their workers. That puts the power to invest into increasingly fewer hands. The middle classes, who pay the overwhelming majority of payroll taxes are left with less to invest. That means, broadly, that more money gets invested in big business and large corporations and less in small enterprise, who are the greatest job creators in America:

From the Economist:

Research funded by the Kauffman Foundation shows that between 1980 and 2005 all net new private-sector jobs in America were created by companies less than five years old. “Big firms destroy jobs to become more productive. Small firms need people to find opportunities to scale. That is why they create jobs,” says Carl Schramm, the foundation’s president.

So while I agree that the top 1% should be taxed more, and the bottom 99% less, what the above graph reveals is that America right now has is a spending problem, and not a tax problem.

Here’s spending as a percentage of GDP:

It is spending that is climbing well-above its historical norm. The difference really adds up:

The next American President and Congress will face a stark choice as they seek a balanced budget — do they raise taxes or cut spending?

Well, it’s an open question. Other nations spend far more than America, but they also tax more. 52% of French GDP, 37% of Japanese GDP, 47% of British GDP, 18% of Thai GDP, 32% of Swiss GDP, 78% of Cuban GDP, 27% of Indian GDP and 17% of Singaporean GDP is government spending.

Most interesting by far  is “communist” China. Only 20% of Chinese GDP is government spending. 

That’s quite a wide range. But to spend more you have to tax more, and that will be unpalatable to many Americans.

America is really at a crossroads. Growth would be a panacea. But with the economy in a Japan-style depression, generating sustained growth will be difficult.

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Income Inequality, Aggregate Demand & the Gold Standard

Paul Krugman presents a graph that I think is pretty relevant to the state of America:

During 1947-73 (for all but two of those years America had a gold standard where the unit of exchange was tied to gold at a fixed rate) average family income increased at a greater rate than that of the top 1%. From 1979-2007 (years without a gold standard) the top 1% did much, much better than the average family.

As we have seen with the quantitative easing program, the newly-printed money is directed to the rich. The Keynesian response to that might be that income growth inequality can be solved (or at least remedied) by making sure that helicopter drops of new money are done over the entire economy rather than directed solely to Wall Street megabanks.

But I think there is a deeper problem here. My hypothesis is that leaving the gold standard was a free lunch: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by pumping money into the system and assuming that this would have a positive effect on the economy as a whole. After all — say the Keynesians — “aggregate demand” (i.e. money circulation) “is the state of the economy”.

But in reality “higher GDP” and “higher aggregate demand” just mean more money circulating. It’s perfectly possible for more money to circulate while the real economy (productivity, labour, technology, infrastructure, etc) deteriorates. In fact, in many respects this is exactly what happened during the Bush administration, where trillions of dollars of productive capital was burnt up on military adventurism.

So — in effect — I hypothesise that fixed money acted as a check on irrational exuberance. GDP growth could not be conjured up via money printing (and resulting credit expansion) but instead had to be earned slowly and laboriously through real development. It also made investors and financial institutions significantly more cautious — they could not lose it all playing at the derivatives casino, and then enjoy a recapitalisation from newly printed money.

Most importantly, governments could not run up and monetise absurd deficits on spending in the name of military adventurism and maintaining the petrodollar standard. Government spending had to be of real, palpable benefit to the nation — infrastructure, medicine, education, technology, defence (clue for George W. Bush & Barack Obama: “defence” does not mean “attack”) etc. The bare necessities.

The trick here is that the only difference between gold and paper is that gold is naturally limited, and governments can’t just conjure large quantities of it out of thin air at will in the name of largesse, or saving the world from non-existent weapons of mass destruction, or whatever takes the central planners’ fancy.

In theory a fiat system could work so long as in the long run (when we are all dead) governments are willing to practise the discipline to save in the fat years, and spend in the lean ones.

The problem is that such self-discipline has never been maintained in the long run. In fact, governments (in Britain, the Eurozone, and America) seem to misunderstand that concept altogether, running huge deficits in the fat years, and then trying to undertake austerity programs in the lean years — exactly the opposite of what Keynes intended.

Which suggests to me that as a society we are not yet mature enough to leave the haven of fixed money, for when we do, we wreck everything.

A Keynesian or Krugmanite perspective would be welcome, of course.

Why Robert Reich is Wrong

Robert Reich claims that only government can get America out of the mess it is in. He’s wrong.

From the Guardian:

America’s ongoing jobs depression – which is what it deserves to be called – is the worst economic calamity to hit this nation since the Great Depression. It’s also terrible news for President Obama, whose chances for re-election now depend almost entirely on the Republican party putting up someone so vacuous and extremist that the nation rallies to Obama regardless.

The problem is on the demand side. Consumers (whose spending is 70% of the economy) can’t boost the American economy on their own. They’re still too burdened by debt, especially on homes that are worth less than their mortgages. In addition, their jobs are disappearing, their pay is dropping, their medical bills are soaring.

Businesses, for their part, won’t hire without more sales. So we’re in a vicious cycle. The question is what to do about it.

When consumers and businesses can’t boost the economy on their own, the responsibility must fall to the purchaser of last resort. As John Maynard Keynes informed us 75 years ago, that purchaser is the government.

Government can hire people directly to maintain the nation’s parks and playgrounds and to help in schools and hospitals. It can funnel money to help cash-starved states and local government so they don’t have to continue to slash payrolls and public services. And it can hire indirectly – contracting with companies to build schools, revamp public transportation and rebuild the nation’s crumbling highways, bridges and ports.

As I noted a few weeks ago who cares who does the things that the economy wants and needs, just so long as they get done? The problem is, that government very often has no clue what the economy wants or needs. Only the people out in the economy know what they want, and what they want to spend their money on. That’s why when government tries to pick winners and losers, it very often gets it totally and stupendously wrong.

Look at Solyndra.

Look at the fact that each job created costs $250,000 — money which use be taken from the productive apparatus of the economy and spent on projects which may or may not be helpful overall.

Look at the humungous cost of the wars and the corporate bailouts — all of which has to be taxed from the productive economy.

Here’s the reality. The more government spends, the higher the unemployment rate goes:


That’s a pretty strong correlation.

Now if the state is enlightened and lucky, sometimes government investment creates huge successful payoffs. But that correlation shows that in recent years government hasn’t been enlightened, and it hasn’t been lucky.

The way to create jobs in America is to end the corporate bailouts, end the crony capitalism, end the wars and give the money back to the American people. That would create a new wave of job-creating small businesses, raise demand, raise the ability of the poor and middle classes to pay for that demand, and (with the current tax load, but without the burden of the huge military spending) generate enough revenue to start paying down the humungous debt load.