May 8, 2011

Punishing Worker Success Doesn't Count

 Admittedly a little dated now that President Obama has released his long form birth certificate, but... well, you get the point.

As the political and media classes continue to focus on the deficit rather than on creating jobs - or in the case of Republicans in the House, on ways to redefine rape to make it harder for women to obtain an abortion - there are essentially two methodologies for closing the budget gap under consideration, albeit with strikingly different levels of attention.

The first, represented by the GOP budget proposal from Wisconsin Congressman Paul Ryan, focuses on cutting government outlays by slashing social programs - while leaving defense spending untouched, no less - and claims reducing taxes further for the richest Americans will somehow create jobs, wealth and a larger tax base.  The second, represented by pretty much nobody with much power to do anything, centers on increasing revenues through tax increases on the wealthy.

Over the last 30 years, the top marginal tax rate has been cut and cut again, all in service to the ideology embodied by the Ryan plan, and the top tax bracket is now the lowest it has been in eighty years.  As a result, we have a substantial amount of data to use in evaluating these two approaches.

First, let's look at the history of the higest marginal tax rate.  As one can see, during the birth and growth of the American middle class in the first thirty years of the post-World War II era, the top bracket was at 70% or higher, and during the Eisenhower Administration, it was over ninety percent:

With the election of Ronald Reagan to the presidency in 1980, policy changed drastically behind the Gipper's pledge to "take government off the backs of the people."  Nobody likes to pay taxes, and that sounded great, especially when pretty much every one of us can share anecdotes of government malfeasance, bureacratic stupidity, or seemingly arbitrary decisions from on-high.  Since then, it has become an article of faith that government is always incompetent, universally inferior to the private sector, and incapable of maximizing our success as a nation.

So what's been the result of this change in philosophy and policy? As it happens, it has turned out pretty wretchedly for almost everybody.  Yes, there were boom periods, but there were tremendous busts as well, and what we've been left with is a plutocracy that has been institutionalized to funnel money from those with lower incomes to those with increasingly vast wealth.

If that sounds strident, the data shows otherwise.  In the years between World War II and Mr. Reagan's election, each year could generally be counted on to be better than the last with regard to wages.  The rich were still much richer than the poor, but everybody's lot was improving fairly constantly, and in much the same way; it was a classic example of a rising tide lifting all boats.  By contrast, Reaganomics ushered in our current era, in which the wealthy have continued getting wealthy, but everyone else's growth curve has dropped off considerably:

What happened?  Did the economy stop growing?  On the contrary, in the years following World War II, United States gross domestic product (GDP) climbed steadily, it's just that with the introduction of the tax-cuts-solve-everything-mentality, earnings for most people didn't didn't go up with it.  This wage repression is even more startling when one understands that the growth in GDP was fueled by ever-better productivity from American workers.

Up until the late 1970s, the growth in real wages grew alongside that steady rise in productivity, but after President Reagan took office, real wages actually declined for 20 years, and we transformed from a country in which the results of everyone's hard work were shared, to one where people were producing more than they ever had before but actually making less money than they used to:

To put it more precisely, from 1950 through 1980, the share of total income in the U.S. going to all but the richest increased from 64 percent to 65 percent, and since the country's economy was expanding steadily, the average income for the bottom 90% of American wage earners grew, as well.  Over that period, that 90% saw their pay balloon 75%, exploding from $17,719 to $30,941, as measured in constant 2008 dollars.

Since then, however, although our economy has continued to grow, only a small fraction of the population at the very top has benefitted. In the years after 1980, the average income for the bottom 90% went from $30,941 to just $31,244. That's right; after posting an increase of more than $13,000 from 1950 to 1980, from 1980 to 2008, income for all but the top 10% rose just a tick over $300.  Something drastic and deeply unfair had clearly occurred between those two periods, and that something is the now-ingrained belief that tax cuts are always a good thing.

Worse, the tragic side effect of this new inequity was that as workers made less money in real dollars, they were unable to save as much as they had in the past, putting them on much shakier financial ground, and leading directly to widespread over-leveraging, perhaps best exemplified by the recent mortgage crisis:

Gross domestic product grew - as it also grew under more progressive taxation - but that expansion has served as a smoke screen for some very real and destructive changes in American society.  GDP is a terrible measure of a nation's well being; it cares only for the aggregate number, and nothing about what underpins it.  If our 2010 GDP of $14.72 trillion were divided equally among all 313 million Americans, the way our country looks and functions would be much different than if 1 person held $14.71 trillion, and the remaining $10 billion was apportioned among everyone else.  Gross domestic product, however, would look exactly the same.

And, that's where we are today: Minimal savings, working harder than we ever have before for less money, and with steadily increasing disparity in the rewards we can expect.  As a country, we continue to flog the dead horse that tax cuts are the engine for society-wide growth, when even a casual glance at a few simple graphs makes it piercingly obvious that that is utter, complete nonsense without a shred of data to support it.

Simply put, in conjunction with meaningful efforts to reduce waste, it's high time to raise taxes on upper income brackets to help get the country back on its feet. Such a declaraion will inevitably engender cries that we are "punishing success," but the truth of the matter is that we are already punishing success for the vast majority of Americans; one look at the rise in productivity versus the rise in wages is all you need to know that's a fact.

Progessive taxation is, counter-intuitive though it might be, an engine for growth.  It creates an incentive for people to re-invest their money so the government can't get it, rather than to engage in the profit-taking and hording we see today.  If that sounds incredible, it isn't, but understanding this requires being prepared to draw conslusions from data rather than trying to fit facts into a predetermined worldview.  Investigating what has actually happened in the age of Reaganomics reveals some very startling things:
  • Large income tax cuts are followed by a bubble and then a crash.
  • High income taxes correlate with economic growth.
  • Income tax increases are followed by economic growth.
  • Moderate income tax cuts are followed by a flat economy.
  • All of this is especially true as applied to the top tax rates, the amount paid on income that exceeds the highest bracket.
There is a vast and sensible middle ground in which some people pay more to create an environment in which everyone has a better shot at success, and such an environment is crucial to avoiding the stagnation of our society and encouraging upward mobility.  Success should be rewarded, but the plain fact is that, for most people, right now, it simply isn't.

One of the most predicted side effects of raising taxes is that wealthy "job creators" will simply pick up and leave, whether that be to another city, another state or even another country. Unfortunately for those making that claim, a new study (PDF) by researchers at the University of Massachusetts at Amherst, reveals that that is simply not true. Certainly, some small number of people relocate to gain more favorable tax positions, but their number is insignificant and the vast majority simply do not move when taxes go up.


lokywoky said...

Better people than me have said the following: Everything that comes out of a right-winger's mouth - the exact opposite is true. Their policies are designed only to take all the money away from the masses, and at the same time - hide the fact that they are doing that.

So all the screaming about abortion, and the debt limit, and whatever the idiotic cause du jour is - that is the distraction while they plunder and pillage away to their hearts content, secure in the knowledge that no one is watching.

Keith Olbermann has an interesting comment on how well the distraction is succeeding on his blog entitled "Poll Shows We Are Lotto Nation" if you haven't seen it.

Take care!

PBI said...

Thanks! I'll check out Keith's comment...