JUST THE FACTS PLEASE

I often have the feeling that our politicians are akin to the street hustlers who like to lure passerby into shell games of “keep your eye on the pea”.  Some of these folks have astonishing skills, and it’s virtually impossible to track the pea as it moves from one shell to another – and is most often clandestinely palmed in any case.   Somehow or another, the pea never seems to be where the eye and logic say it ought to be, and the tourist or passerby lured into the game always loses his or her wager. So long as you play for small stakes on a nice day, it’s a pretty harmless way to pit your skills against the shills who run and surround the table.

Unhappily, our political leaders – who are supposed to articulate and explain solutions - have become shills on a grand scale.   Day after day, they seek to conceal truth with self-serving and ideological statements that bear little relationship to fact and make it impossible for citizens to either reach sensible conclusions on public policy issues or hold leaders accountable.  

Let’s examine some of the rhetoric we’ve been hearing about the President’s recent proposals on taxes. 

According to John Boehner, the Speaker of the House, the proposals are nothing but a collection of “job killing small business tax hikes”.  Rick Perry thinks the proposals “penalize investment when it is needed most” and Mitt Romney has denounced the plan as having “a crushing impact on economic growth”

Now, be sure to keep your eye on the pea.  The facts are that the proposed taxes, which only partially reverse the individual rates introduced by the so called Bush tax cuts, apply to business profits, not business revenues, and thus have no impact whatever on the ability of any business, large or small, to conduct business.  Moreover, studies done by the Joint Committee on Taxation and by the Tax Policy Center, a nonpartisan research organization, show that less than 3 percent of filers with small business income pay  the top two income tax rates, and many of those who do  are doctors and lawyers in partnerships.  So the number of true small employers who would be impacted by the proposed changes is miniscule. All other businesses would be unaffected!!  That doesn’t sound like a job killer to me – and it’s not.

Repeated surveys by various business groups establish that the primary reason business is not investing and hiring is that demand is weak. It’s hard to see how it could be otherwise, because there are some 15 million Americans who cannot find work, the Federal governments various efforts at stimulation are gradually going away and state and local governments are laying off employees.   Moreover, U.S. median real (that is, adjusted for inflation) household income is lower than it was in 2000 and real average hourly earnings are now lower than they were in 1970, more than 40 years ago.   Moreover, the U. S. has become one of the least egalitarian of all the world’s developed societies, with the top 1% of the population controlling a higher percentage of wealth and claiming a higher percentage of income than has been true since 1929.    

It’s pretty clear that the Bush tax cuts didn’t accomplish much beyond increasing annual deficits and our steadily accumulating debt.  In the years since 2000, employment and income growth have slowed or stopped, debt has skyrocketed, the economy has slipped into recession and we have endured an extraordinarily weak recovery that now seems likely to give way to still another period of recession.   

Taken together, the Bush tax cuts reduced the government’s tax revenues by about $1.8 trillion between 2002 and 2009 and if extended for another decade, will reduce government revenues by an additional $3.8 trillion.

The President’s proposals, taken together, which do not roll back all the elements of the Bush tax cuts, would raise about $1.6 trillion during the next ten years, recovering only a portion of what a full repeal would raise. The President’s proposal would raise the top two marginal rates to 36 percent and 39.6 percent from the 33 percent and 35 percent rates in effect today. It would also restore the estate tax, raise the capital gains tax on wealthy individuals from 15 percent to 20 percent, limit the value of deductions for wealthy taxpayers and increase corporate taxes by eliminating tax breaks now enjoyed by oil companies, the coal industry and other businesses.   None of these proposals are draconian, none are inconsistent with tax rates and provisions in effect in the early 90’s, and none are likely to have any meaningful impact on private sector investment.

But, say the shills, raising taxes will limit the willingness of the wealthy to invest.  Is that true? To tell the truth, I don’t know, but I am struck by the fact that those who shout the loudest never offer any evidence, but merely assert what they apparently believe is obvious.

 I have looked high and low for any careful study of this question and haven’t found anything.  My own view is that if the capital gains rate went up to the old 28% -- which is about 10 points less than the proposed maximum individual  income tax rate – it would have no adverse impact whatever.  I think taxing capital gains at a marginally lower rate than wage income makes sense because some portion of the “gain” an investor realizes over time is simply inflation, which should not be taxed.  However, if an investor has money he or she wants to put to work, the probability that the tax on any gain realized will be 28% rather than 15% isn’t going to cause me – or anyone else, in my view – to put the money under the mattress or buy a very low yielding CD. 

Add it all up and it seems to me that raising taxes on the richest Americans, and on those individuals and corporations who enjoy the largest tax breaks, would give the government more ammunition with which to fund programs to ameliorate the adverse impacts being caused by excessive debt and a lack of jobs.