It seems counter-intuitive. If your taxes get raised, you have less take home money in your paycheck from day one. And if the government has more money, it gets bigger because there's more money to spend, right?
But if we look beyond day one, we get a teabagger / GOP wet dream result when tax rates go up: more jobs, better pay, and smaller government. Why?
Because your net take home pay is what you work for, and defines the value of your job. And if the economy is better, there is less demand for government services. It's really quite simple, but seems totally opposite of what the GOP has convinced working Americans will happen if the Bush tax cuts expire. Economic history, though, is quite clear. Here's why...
Let's stipulate that we already know the GOP congressional caucus is blowing a lot of hot air regarding the Bush-era tax cuts for the wealthy. My position is, and has been, let all the tax cuts expire. Wind down Iraq and Afghanistan, significantly reduce U.S. military presence in other global outposts, let the tax cuts expire, and voila: deficit problem solved in relatively short order, without anyone needing to eat cat food in order to fiscally save the country.
Thom Hartmann takes it one step further than letting the Bush tax cuts expire. He makes a very cogent case for letting tax rates float back up to pre-Reagan era levels, which would do more than merely solve deficit problems. Hartmann argues that doing so would return income equality to reasonable levels, still reward the American entrepreneurial spirit, and surprisingly, result in much better wages for the American worker in the space of a few short years.
Employers know this: Ricardo’s "Iron Law of Wages" is rooted in the notion that there is a "market" for labor, driven in part by supply and demand.
So, if a worker is earning, for example, a gross salary of $75,000, his 2009 federal income tax would have been about $18,000, leaving him a take-home pay of $57,000. Both he and his employer know that he’ll do the job for that $57,000 take-home pay.
So let’s take a look at what happens if the government raises income taxes. For our average $75,000-per-year worker, his take home pay might decrease from $57,000 to $52,000. So, in the short run, increased taxes have an immediate negative effect on him.
But here comes the part the conservatives don’t like to talk about. Our own history shows that within a short time—usually between one and three years—that same worker’s wages will increase enough to more than compensate for his lost income...
When Ronald Reagan started feeding the GOP tax cutting frenzy in the early 1980's, the top marginal tax rate was 70% on the very wealthiest of Americans. And as soon as that rate started decreasing, the Reagan Recession and inflation hit in full force. By 1983, folks like me were paying 14% for a 15 year fixed rate mortgage. I paid $28,000 for my first house then. You couldn't get a mortgage unless you had nearly pristine credit. But I could make up for the high interest rate, and my higher taxes, simply by saving (CD's were paying 6 to 8% back then), plus my wages were keeping pace with my expectations of take home pay and buying power. A similar scenario has played out again and again over the course of history.
Hartmann again:
So what happens if that top marginal tax rate goes up from its current 35 percent to, for example, the 1980 rate of 70 percent?
For the more than 120 million American workers who don’t earn more than $372,950 annually, it won’t mean a thing. But for the tiny handful of millionaires and billionaires who have promoted the Great Tax Con, it will bite hard. And that’s why they spend millions to make average working people freak out about increases in the top tax rates.
I have never understood this. Rank and file conservatives, who are no better off than their liberal working class brethren, have been convinced by the Republican corporate controllers that keeping taxes low on the uber wealthy is a good thing, and so they get right behind near-billionaire Rush Limbaugh when he calls for more tax cuts in order to reduce government and fulfill his Norquestian pipe dream of drowning government in a bathtub.
But you know what? That's also another part of the big tax con.
Historically, and without variance, when there's more money coming into the government coffers via taxation, the size of government actually shrinks. What??? Again, totally counter-intuitive. To the average person, Limbaugh-fed or not, it doesn't compute. But facts, which have a well known liberal bias, tell a different story:
From 1985 until 2008, William A. Niskanen was the chairman of the Cato Institute, a libertarian think tank, and before 1985 he was chairman of Reagan’s Council of Economic Advisers and a key architect of Reaganomics. He figured out something that would explode Reagan’s head if he were still around. Looking at the 24-year period from 1981 to 2005, when the great experiment of cutting taxes (Reagan) then raising them (Bush Sr. and Clinton) then cutting them again (Bush Jr.) played out, Niskanen saw a clear trend: when taxes go up, government shrinks, and when taxes go down, government gets bigger...
This is why when Reagan cut taxes massively in the 1980s, he almost doubled the size of government: there was more demand for that "cheap government" because nobody was paying for it. And, of course, he ran up a massive debt in the process, but that was invisible because the Republican strategy, called "two Santa Clauses," is to run up government debt when in office and spend the money to make the economy seem good, and then to scream about the debt and the deficit when Democrats come into office...
It's now 2010.
The Charlie Brown Democratic Party, which has ostensibly been at the wheel of the national ship since 2008, meets Lucy and the GOP tax football yet again.
Thom Hartmann makes a very compelling case not only for letting the Bush era tax cuts expire for everyone, but actually increasing marginal tax rates on everyone to 20th century levels. I am not an economist, and have my own hands full just balancing my own checkbook. I'm willing to listen to reasoned arguments for continuing the tax cut kabuki that's going to fire up in earnest again next week when congress returns from its Thanksgiving break, but as of right now I believe the smartest path forward for the Democratic Party leadership is simply to take a page from the GOP's playbook:
Do nothing. Just say "NO!". Let the regressive and destructive tax cuts expire, as planned when the cuts were implemented in 2003.