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  • Prosperity doesn’t require ending taxation, it requires fair and intelligent taxation
    Updated On: Oct 07, 2012

    Prosperity doesn’t require ending taxation, it requires fair and intelligent taxation

    You’d think from all the anti-tax rhetoric out there that the wealthy and corporations are crippled by crushing tax rates. If only we’d cut taxes on corporations and the wealthy (as Bush II promised us), investments would flow forth like milk and honey, and with them jobs would bloom like spring blossoms.
    The reality is rather different. A quick look at historical top marginal income tax rates suggests that if cutting taxes of wealthy “job creators” were the answer, we’d be enjoying near full employment.
    Marginal income tax rates on the wealthiest peaked last century, in fact, at 94% in 1944, and they remained at 90% until the early 1960s. They were cut by what seemed like a substantial amount then to about 70%, where they remained until Reagan took office in 1980. Today top marginal rates run at 35%.
    So, during the most prosperous period of post-war American history, the wealthiest paid at least double and sometimes nearly three times what they pay now.
    During that period the middle class boomed, standards of living rose. Medicare, Medicaid along with the rest of the New Deal and Great Society programs motored on. The Clean Air Act, the Clean Water act and lots of other environmental regulations were enacted into law.
    Things did get rough in the late 70s, and suddenly the tired old song conservatives had been singing for at least half a century (of lowering taxes and cutting back on social services) seemed reasonable and attractive. I remember the snake oil salesmen showing up at my university (Bucknell) in 1982, peddling their magical Laffer prescription of lowering tax rates in ways that would actually realize more revenue.
    Tax rates on the wealthy were slashed, slashed, and slashed again reaching just 28% in 1988. Taxes, of course, on capital gains (through which most of the wealthy accumulate their wealth) have been set even lower, currently at 25%. Astonishingly, one hears calls to reduce capital gains taxes even more, to 15% or even, shamelessly, to 0%, as Steve Forbes and the other “flat tax” partisans have argued.
    It’s not that there wasn’t some stimulating effect to all that tax cutting. Good old demand-side economics predicted as much. But that stimulating effect could have been produced in other ways, ways that didn’t give rise to the twin challenges with which we’re now struggling: staggering inequality and large federal debt. Cutting those top tax rates led to the wealthy growing much wealthier while the rest of us languished or fell back. Moreover, without the revenue from those taxes, deficits soared.
    The proportion of taxes collected from corporations, too, has been cut enormously–from just over 30% in the 1950s to under 10% of federal tax revenue today. Over that same period, government has turned to us–to payroll taxes–for revenue it no longer garners from corporations. The proportion of federal revenue from payroll taxes rising from about 10% in the 1950s to about 40% today. Still, corporate lobbyists call for additional cuts.
    But we all know now, or should know, what massively cutting the tax rates of the wealthy and corporate taxes in conjunction with deregulation (or as I prefer to call it, un-regulation) has yielded for us: a massive meltdown of the equities and real estate markets, spiking unemployment to 10% (now down to below 8 thanks to government investment), enormous public and private debt, exploding inequality, and declining standards of living among many, arguably most, Americans.
    There is a better way, and a better life. Let’s stop drinking the tax cutting Kool-Aid, especially for taxes on the wealthy. Fair taxes aren’t antithetical to a a growing economy. A growing economy in fact requires them; and fairer more progressive taxes are necessary to reverse the burgeoning inequality we’re suffering.
    Besides higher marginal income taxes on the top earners, removing the income cap on social security taxes, and fair taxes on capital gains, I favor a financial services tax, something like what’s called a Tobin tax. We tax other consumer transactions. If the millions of financial transactions on Wall Street (the sector of economy most disruptive and characterized by wealth inequalities) were taxed even at very low rates, enormous revenues would be generated. Variations on VAT can be much more fair than our current system, too.
    Conservatives often tout a national income tax. Progressives generally oppose it because sales taxes tend to be regressive–having a larger impact on the poor than the rich. But an intelligent sales tax might not be all that bad– especially one indexed by products’ energy inputs and a tax that exempted essentials the poor need like food, medicine, and housing.
    While overpopulation is crushing the environment elsewhere, overconsumption is the fiend we must bridle here, and a tax on consumption (a disincentive to consumption) might be a step in that direction.
    The main thing, in any case, is that blind opposition to taxation is, well, economically blind. We’re not going to achieve a better life through cutting taxes on the wealthy and on corporations. We need fair taxation and intelligent taxation.

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