I Agree: “Darn It, Let’s Raise Taxes”

The Least of Sarah Palin’s Problems

Friday 29 April 2011
By Ken Morris

According to House Speaker John Boehner, “You can’t raise taxes in the middle of a weak economy.” Echoing that talking point, newly elected Tea Party Rep. Joe Walsh (R-Illinois), in an interview with ABC, claimed, “Every time we’ve cut taxes, revenues have gone up, the economy has grown.” Sen. Orrin Hatch (R-Utah) attacked the president’s April tax speech by suggesting that everyone knows, “Raising taxes … will do little to reduce the deficits and debt that are, at their root, spending problems.”

If I and many economists, including Paul Krugman (who wrote, “Darn It, Let’s Raise Taxes”), are included, however, everyone doesn’t agree with their assertions, and saying the words ad nauseam doesn’t make them empirically or logically true – in fact, history often suggests otherwise, despite Senator Hatch adding, “I have yet to hear the economic or fiscal rationale for raising taxes.” For his sake, I hope someone reads the following paragraphs out loud to him.

From 1951 to 1985, marginal tax rates (MTR) on the wealthiest Americans averaged 75 percent. Did the mega-rich job creators, as the Republicans argue, cease hiring, lay off workers, shut their doors and go home? Hardly. Case in point was a little business created by a couple of brothers selling burgers in San Bernardino, California. In 1954 (MTR: 91 percent), they decided to buy eight milkshake machines from 50-year-old Ray Kroc. Salesman Ray saw opportunity and eventually took over the McDonald brothers’ modest Golden Arch restaurants. Eschewing lofty marginal tax rates, he began rapid expansion and massive hiring. In 1958, (MTR: 91 percent) he had 34 restaurants. One year later, (MTR: 91 percent) he had 101 stores. In 1963 (MTR: 91 percent), he served his billionth burger. In 1969, (MTR: 77 percent), that became a five billionth patty. By 1972, (MTR: 70 percent) McDonald’s, by now listed in the New York Stock Exchange (symbol: “MCD”), exceeded annual revenues of $1 billion. A $1,200 investment in MCD in 1965 (MTR: 70 percent) was, after stock splits, worth over $1 million 20 years later (MTR: 50 percent). What the flippin’ flapjacks was going on? (Flapjacks were introduced to a breakfast menu in 1973 – MTR: 70 percent.)

I can hear Boehner et al saying, “Okay, Ray Kroc and Micky-D’s were the exception. Right?” Wrong. During the period from 1951 through 1963, (MTR: 91 percent), the economy grew at the annual rate of 3.70 percent. By comparison, the growth rate these past seven years, with MTR at 35 percent, was 1.70 percent. What did Ray Kroc know that Boehner, Hatch and Walsh are missing?

While working on Wall Street during Ronald Reagan’s Laffer Curve days (economist Laffer postulated that lowering taxes would increase consumer spending and tax receipts), my head spun whenever pundits swore that the budget deficit would be eliminated by slashing taxes even while dramatically increasing spending, primarily on the military. In the end, Reagan’s dream didn’t quite pan out: deficits skyrocketed. Not to worry, though, as this failure was turned into success when former vice president Dick Cheney later explained, while he and President Bush went on a wartime tax cut and spending spree, that “Reagan proved that deficits don’t matter.”

But as we are flirting with a ratings downgrade for US Treasuries, we know deficits do matter. Stimulating the economy is also important, especially when our unemployment rate hovers around ten percent. And, no matter what Hatch says, government cuts will not solve the crisis. So, with that in mind, back to marginal tax rates, logic, and Kroc. Conservatives are correct in suggesting that raising taxes on the middle class in hard times is foolish. These individuals spend nearly every penny they earn on necessities, and tax reductions get recycled back into the economy. In contrast, lowering taxes for the superwealthy has minimal impact. A billionaire making $100 million a year is unlikely to increase spending if given another $10 million. One can argue the point, but logically speaking, it’s hard to refute. Their windfall is likely to get socked away with all those other tens of millions in excess cash.

However, Boehner and Walsh will argue, taxing those who create jobs – small business, for example – will be a disincentive to hire. To that I say, “Not so fast.” Is it possible that low tax rates on the wealthy encourage individuals to pay themselves hefty salaries, to take the money now rather than build for the future? In this, Kroc’s behavior – confirmed by the overall explosive growth from 1951 to 1963 – might offer insight. Kroc paid himself almost no salary and reinvested everything in building storefronts. The reinvestment resulted in growth and job creation and kept his taxes at a minimum as expenditures for growth offset income. In time, his wealth rose astronomically, but did so as a result of an ever-more valuable company. It seems obvious that choosing between taking income today or investing for tomorrow is influenced by tax policy, even if it is debatable to what extent this is the case.

And while government has a well-earned reputation for inefficiency, it does provide a powerful economic engine. Of all consumers, the government is the only one virtually guaranteed to fully spend its income. Dollar in, dollar out. Sometimes those funds go directly to job creation (the armed forces, for example). Other times it’s to the benefit of private industry (for example, defense contractors). Even when paying down the debt – as we must surely do – this benefits the economy as fewer budgetary cuts save government jobs and salvage higher levels of services, including the safety nets of unemployment insurance (perhaps the most stimulative entitlement we have), Social Security, Medicare and Medicaid.

So, how can maintaining low rates on those earning over $200,000 a year be justified if the goal is to create jobs and reduce the deficit? The assertion that all tax cuts are stimulative is a myth, as is the contention that progressively taxing the superwealthy will automatically kill jobs; if we were to take the 1950s as a base case, we’d conclude just the opposite.

While returning to pre-Reagan marginal rates of 90 percent will never happen, rolling back the Bush/Cheney tax breaks on the top wage earners will both reduce the deficit and create – or, at least, save – jobs as those tax dollars are put to use. Such a move is empirically defensible and logically sound. All we need to do now is convince politicians to value empiricism and logic over special interests.