We've got an economy struggling with a slow recovery from a genuinely disastrous crisis.
We've also got a very large federal debt, one that we should probably do something about at some point.
The debate on how to fix these two problems generally splits two ways. Republicans, led by Paul Ryan, propose doubling down on tax cuts for the rich and returning to 1929 rates (ask Herbert Hoover how that worked out), apparently still believing, in the face of historic evidence, that tax cuts are the solution to all problems real and imagined.
Progressive Democrats propose a return to Clinton-era tax rates, and perhaps even tax hikes for the rich and corporations to maintain valued social programs like Medicare and Social Security, further our investment in public education—and who knows, maybe even do a little more, better targeted economic stimulus. Economist Jeffrey Sachs on the progressive budget proposals:
In the progressive middle is the People's Budget. Like Ryan's plan, the People's Budget would cut the budget deficit to zero by 2021, but would do so in an efficient and fair way. It would close the budget deficit by raising tax rates on the rich and giant corporations, while also curbing military spending and wrestling health care costs under control, partly by introducing a public option. By raising tax revenues to 22.3 percent of GDP by 2021, the People's Budget closes the budget deficit while protecting the poor and promoting needed investments in education, health care, roads, power, energy, and the environment in order to raise America's long-term competitiveness. The People's Budget thereby achieves what Ryan and Obama do not: the combination of fairness, efficiency, and budget balance.
Naturally, President Obama is in the middle, supporting an eventual return to Clinton-era tax rates, just not right now, and opposing cuts to Medicare and Social Security without taking cuts completely off the table.
What's missing from this argument, even on the progressive side, is a discussion of returning to historically normal tax rates. John Boehner, Jim DeMint, Rush Limbaugh and Scott Brown, along with several other Republicans, have praised Democratic President John F. Kennedy as a kind of Democratic model, because one of his first acts as president was to pass a tax cut that lowered rates even for the richest Americans.
This is true. Kennedy did slash the top marginal tax rate … all the way down to 70%. And that's just the beginning:
– The tax reform passed after Kennedy’s death cut the top marginal tax rate from 90 percent to 70 percent, twice today's top rate of 35 percent. Kennedy explicitly called for a top rate of 65 percent, but added that it should be set at 70 percent if certain deductions weren't phased out at the top of the income scale.
– Kennedy called for U.S. corporations to be taxed on all their profits, earned anywhere in the world, rather than the current system of allowing them to defer taxation until they bring those profits home. "The undesirability of continuing deferral is underscored where deferral has served as a shelter for tax escape through the unjustifiable use of tax havens such as Switzerland," Kennedy said in 1961. During Kennedy's time in office, corporate taxes made up more than 20 percent of total revenue. Today, it's less than ten percent.
– Kennedy called for cutting tax preferences for the oil and gas industries, saying in 1963 that, "while these are complex as well as controversial problems, we cannot shrink from a frank appraisal of governmental policies and tax subsidies in this area." Republicans have been adamantly opposed to cutting subsidies for oil and gas companies.
– Kennedy called for limiting itemized deductions for the rich, saying that they should receive the same benefit for things like charitable giving "as everyone else," instead of preferential treatment (which they still receive). President Obama has called for the same system since he came into office, but the GOP has derided Obama's proposals.
Is that what Boehner and Brown and DeMint want to return to?
And if it were, what would be the outcome?
In truth, a top marginal rate of 70% was the lowest we ever had from 1936 to 1981, a period of time when the United States enjoyed strong and sustained economic growth, so much so that it's referred to as the "long boom." The strongest economic growth we've seen since then occurred in the 1990s—under a Democratic president, Bill Clinton, who did raise the top marginal rate, albeit not to pre-Reagan levels.
If we brought it back today, it would affect only the most bloated incomes in America; the top Kennedy-era tax brackets, adjusted for inflation, would affect incomes of $5 million or more.
Hardly any struggling small businessmen in those brackets, it'd be safe to say.
So let's take a moment to think about what would happen if we did return to such rates—and what we could do with the windfall.
What Would Happen If Kennedy-Era Rates Did Return? We'd Pay Down The Deficit, For Starters
We've seen the Republican plan to deal with the deficit; it's the Ryan plan. Still more tax cuts for the rich, paid for by eliminating Medicare and carving up basically every other successful federal program in existence … and we get, maybe, a balanced budget 20 years from now.
Democrats have a pretty reasonable response; the economy was pretty good during the Clinton years, so hell, let's just go back to Clinton-era tax rates and raise revenues; do that, and end the expensive Republican wars in Iraq and Afghanistan, and use the added revenue to pay down the deficit. After all, Clinton was the only president since LBJ to actually balance the budget. Maybe the Big Dog actually knew what he was doing.
At least some tax increases on the wealthiest Americans shouldn't be controversial given the size of the federal debt, since it's a basic principle of economics that revenue should match expenditures in order to balance the budget, and since we like most of our main expenditures (Medicare, Social Security, defense spending) and want to keep them, we ought to look at revenue.
Actually, the American people are very much on board with this:
Sixty-one percent of Americans said that increasing taxes to the wealthy should be the first step toward balancing the budget.
By contrast, 20 percent of respondents preferred cuts to defense spending as the first option, while 4 percent said that cutting Medicare would be the best way to start cutting the deficit. Three percent said they preferred cutting Social Security.
But it's worth noting that even if we raise the top marginal rates just a little bit, or if we just raise them on people making $5 million annually or more, it saves far more on its own—coupled with no spending cuts at all—than the Republican plans.
So the conclusion is pretty clear; either Republicans don't actually care about the deficit or have no idea how to reduce the size of it, since even a little tax hike for the rich is far more effective than the Ryan Medicare-abolition plan.
Obviously we'd do well in paying down the debt if we returned to Clinton-era or slightly higher tax rates. But for fun, let's go back to 1961 tax rates.
All these taxpayers would pay a whopping $382 billion more in taxes this year if they had to pay at the 1961 effective tax rate, the rate the rich actually faced on their tax returns 50 years ago after taking advantage of every available loophole.
Why do we need more audits at the top? The most recent IRS Oversight Board report estimates we're losing $290 billion a year to tax cheats — and high-income taxpayers, one 2008 study has concluded, underreport their incomes at triple the "misreport" rate of average-income taxpayers.
The bottom line: Taxing the rich at the actual rates they paid a half-century ago — and doing more to make sure all the rich pay their taxes — would likely this year raise, at the federal level alone, an additional half a trillion or so.
That would raise about half a trillion dollars. The Republican austerity measures would save, oh, about 20% of that.
If you are legitimately serious about reducing the size of the deficit, by far the best, simplest, and most logical way to do it is by increasing revenue. It's just more efficient and more effective than even the draconian spending cuts in the Ryan budget.
Progressive Deficit Reduction
Sachs has made a powerful case for this strategy (emphasis mine):
Progressives have come to berate deficit hawks as if concern about the budget deficit is somehow intrinsically reactionary. I view deficit reduction as progressive, because it reflects a concern to protect our future wellbeing, and especially that of our children. What counts is not deficit reduction per se, but how it's done. If it comes as the Republicans propose, by slashing government programs for health, education, retirement, and infrastructure, it would indeed be a disaster. If it comes instead by taxing the banks, higher incomes, and fossil-fuel pollution (initially at a low, but then rising rate), while simultaneously investing more in clean energy, modern infrastructure, education and jobs skills, then deficit reduction is prudent, progressive, and wholly supportive of sustainable prosperity.
What Could You Do Beyond Paying Down The Deficit, With This Added Revenue?
Well, for one thing, you could invest it in the economy.
Let's take Sachs up on his proposal. Is it possible to do the stimulus correctly—in an investment-based manner, spending on higher education, infrastructure, clean energy and so forth? Would it help bring us out of this struggling economy?
With an added revenue stream, why not?
During a time when the economy is struggling, we shouldn't be beholden to right-wing blather on the evils of spending (especially from the same gang that brought us the unpaid-for wars in Iraq and Afghanistan).
Because government spending actually doesn't hurt the economy; in fact, it helps in the short term, as even conservative Chicago School economists acknowledge.
John Taylor (and Robert Hall), Macroeconomics, 5th ed.:
pp. 190 ff.: We now know that an increase in government spending... increases the interest rate and increases income.... [T]he increase in government demand increases GDP through the multiplier.... [But] interest rates must [also] rise to offset the increase in money demand.... This increase in interest rates will reduce investment demand and net exports and thus offset some of the stimulus to GDP caused by government spending. The offsetting negative effect is crowding out.... An expansionary fiscal policy will have a relatively strong effect on aggregate demand if interest rates don't rise by much [when government spending increases]...
Why does government spending help the economy? Two reasons:
1) Like we saw during the New Deal, the government can actually hire people to do stuff in the public sector, if it wants to. Some of that stuff can be highly useful: it can hire workers to build highways, schools, railroads, parks and so forth; it can make investments in clean energy; it can hire cops to police those streets and teachers to fill those schools. Even conservative icon Ronald Reagan would acknowledge the success of such programs; his father, Jack Reagan, worked for a series of New Deal programs in the 1930s, and that’s a big part of what kept the Reagan family above the poverty line.
2) Even if the government isn't directly hiring, the economy is basically a measure of aggregate demand—or aggregate spending, in other words. The more demand there is for goods and services, the more is actually spent on goods and services—which is the definition of economic activity. This is why, during times of economic recession, you'll be told to go shopping, or invest your money somehow. Anything to do your part toward spurring economic activity. The U.S. government, being the biggest single spender in the American economy, has more power to affect aggregate demand (and economic activity) through spending than any other entity.
Sachs argues that taking a simplistic Keynesian view towards government spending—that any kind of stimulus is good stimulus—is erroneous and dangerous, and that that’s part of the reason the Obama stimulus was only moderately successful.
This is very likely true. But as Sachs points out, there are legitimately smart investments in the energy, transportation and higher education sectors that we could target with further, smarter stimulus.
The Obama stimulus was designed on the premise that personal saving rates would drop back to pre-2008 levels—about 3%—and that that increase in aggregate demand would spur growth. Personal saving rates were still around 6% in the summer of 2010.
Whether or not the government is spending too much, Americans aren't spending enough. Someone's got to make up the difference; that can be done while making smart investments in America’s future sustainability and prosperity.
Kennedy: Put Up Or Shut Up
Republicans like Speaker John Boehner, Massachusetts Sen. Scott Brown, and tea party darling Jim DeMint love pointing to John F. Kennedy as a Democratic tax-cutter. And he was—again, he dropped the top marginal tax rate all the way from 91% to 70%.
So here's what I'd like President Obama to do. I'd like for him to introduce legislation calling for a return to Kennedy-era tax rates, right here, right now, call it the Boehner/Brown Tax Relief Bill, and give the Republicans a choice.
"Either pass it, and I'll sign it, or shut the hell up about John F. Kennedy."
It wouldn't necessarily get any votes, but hopefully it would preclude the Republicans from continuing to spew misinformation and deceit about the strongly progressive history of our tax code.
At The End Of The Day
We know we're not returning to Kennedy-era rates any time soon. Boehner and DeMint and Brown will never get the chance to put up or shut up on their peacock talk. There just isn't the political will for it; even the Progressive Caucus doesn't want to go near the level of tax rates that were once considered historically low, during the period of the American long boom.
But it's perfectly reasonable to do it. It wouldn't hurt the economy, and it might help; it would raise revenues dramatically; it wouldn't drive business overseas; and it would give us all a chance to reinvest in America's future.
All you'd have to do is ask millionaires to pay their traditional share.