Today’s mainstream reporters seem satisfied to repeat the McConnell/Boehner mantra – that tax increases on the rich “would harm the economy and cost jobs.” They regularly report this cant uncritically, without analysis, and act as if they've done their job.
But this fad, derided as “voodoo economics" by the first and only intelligent President Bush, is the discredited Reagan-era theory that more money in the pockets of corporations and the wealthiest among us will somehow produce more goods and services, stimulate investment, innovation and entrepreneurship and – voila! – create jobs.
Simply put, businesses must have a demand for their goods and services and their consumers must have the wherewithal to pay for them. In times of flat or diminished wages and high unemployment, people don’t have money to buy. Unwilling to pile up inventories, a business won’t produce what it can’t sell.
How, then, can it possibly be that in times when people do not have money to buy things, policies that purport to increase production will somehow stimulate demand?
So if the tax rate goes up 3% on incomes of $1 million or more (after deductions, credits, preferential rates, etc.), will millionaires with a little less in their after-tax wallets consume appreciably less? There are 238,000 households with adjusted gross incomes over $1 million in 2009 (according to the US Treasury). In the unlikely event this minuscule fraction of the American public (which totals about 312 million people) decides to buy less, the impact on consumption of American-made goods and services would be negligible.
Nor can it credibly be argued that millionaires facing a 3% higher tax bracket - corporate executives, hedge fund traders, plaintiffs’ lawyers and real estate developers, to list just a few examples – would have an incentive to work less. Of course if they did, there are plenty of qualified successors eager to step forward for those highly paid, well-rewarded, very remunerative jobs.
Would small businesses be affected adversely? Only a tiny fraction of them, if any. Less than 3% of small businesses have incomes in excess of $1 million, transparently thin coattails indeed for the wealthiest to try to ride or hide behind.
The argument is also made that raising the current preferential 15% tax rate on dividends and long-term capital gains (a rate less than half of today's top tax bracket on "regular income") will adversely affect investment, entrepreneurship and job creation.
Really? Stocks and bonds are direct investments in a business only when the business first issues them. Thereafter, trades are “investments” in the market for stocks and bonds, not in the consumer markets for goods and services. When we talk about business investment in productive facilities that hire American workers, trading in stocks and bonds doesn't do that. Higher stock prices (like corporate profits) will buoy a business's confidence and pump up its executives' bonuses, but the absolutely essential ingredient for a business is consumer demand for what it produces. No consumer demand = no business. It's no more complicated than that.
How close is the linkage between higher tax rates and a business’s likelihood to produce more goods and hire people?
The lead editorial in Thursday's The New York Times takes this question head on:
Critics also claim that raising the capital gains rate would hamstring investment. But economists studying the historical record have concluded that the effect is small, dwarfed by considerations like profit growth. The truth is that despite the current low tax rates, American businesses — small and big — are investing very little. Business surveys show that the main reason is that there are very few customers with money to buy their products.
It's time for reporters in the mainstream media, not just editorial boards, to treat these voodoo supply-side/trickle down economic speculations as political positions to be delved into and analyzed, not as given facts deserving of no further inquiry.