Friday, January 10, 2014

Cutting taxes doesn't work—UPDATED

Is this the year that The Impractical Catholic becomes a blog on economic issues? God, let’s hope not.

Normally, when I spout off about economic matters, it’s on The Other Blog, as part of that platform’s current-events orientation. I’ve had to write on economics a couple of times in the last month or so, first because Evangelii Gaudium brought out the conservative “cafeteria Catholics”, and second because Pat Buchanan, a prime example of conservative “cafeteria Catholicism”, wrote a bunch of inane blather about income inequality not two days after I’d finished a post concluding that the rising tide for the top 1% was not lifting the boats of the bottom 80%. Income Inequality, it turns out, happens to be one of the hot topics now, and appears to be one of Pope Francis’ bugbears, so don’t be surprised if it comes up more in my writing.

One point I try to bring up whenever appropriate is that the Catholic Church is neither “conservative” nor “liberal/progressive” as those terms are usually meant in American political discourse. The Church has her own agenda, which means her own benchmarks for progress and her own ideas about what needs to be conserved. Both Popes Benedict and Francis have said substantially the same things vis-à-vis social justice; the differences have been of style and of the meta-narrative imposed on them by the media (“God’s Rottweiler” vs. “The Progressive Pope”).

I make this point because it seems to me the conservatives who write for Human Events are historically and economically illiterate; at times, they’re as guilty of historical revisionism as any radical college professor. [But see the update below!] First it was Buchanan. Now it’s Donald Lambro, whose post, “Look to what’s worked before to spur sluggish economy”, is a welter of conservative parrot-talk mixed with nostalgia for a past that didn’t happen the way he remembers it.


Lambro starts off his post with two equally dubious assertions : “… [T]he yawning income gap between the wealthy and the middle class is not the cause of our lingering economic troubles. It is a symptom of the president’s failed economic policies. Raising the minimum wage to $10 an hour won’t help, either. It will only make things worse as employers find ways to cut their payroll costs.”

Fact: The "yawning gap" predates the Obama Administration and thus has nothing to do with his policies, failed or otherwise. From 1967 to 2012, the top quintile’s median real income rose 69.83%, with the that of top 5% rising 88.24%, while the other quintiles’ medians rose an average 22.29%. From 1999 to 2009, real wages for the bottom 80% fell an average 6.33%; by 2012, they had fallen 10.58%. By contrast, the top 5% only lost 1.82% in the same 13-year period, and was the only group to show any increase from 2009 to 2012. (Source:  U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements.)  I’m no fan of Barack Obama, but I refuse to blame him for something that’s been going on longer than he’s been an adult.

As for cutting payroll costs — hey, we’re talking the minimum wage; most minimum-wage employers can't afford to cut their payrolls. At most, some people will lose their jobs while the increase works its way through the system, only to get them back once people get used to paying $0.20 more for their burritos and Big Macs. Raising the minimum wage won’t solve the problem of income inequality, true, but it won’t make the problem worse.

“What the United States needs is stronger economic growth, in the 5 percent rage, that leads to job-creating capital investment.” And after some indictment of the present system, Lambro gives us what he thinks we need: “We know what’s worked in the past — cutting taxes on capital investment, on businesses that have the second-highest tax rate in the industrial world, and on income.”

Did it really? According to Lambro, yeah, sure:

In his second term, after carrying 49 states by ending a deep recession in two years, President Reagan signed a bipartisan bill to cleanse the tax code of corporate welfare and other loopholes. He used the increased tax revenue to lower income tax rates to further boost economic growth. …
In 1997, Bill Clinton signed a GOP bill to cut the capital gains tax rate that Democrats said would swell the deficit. In fact, capital gains tax revenues nearly doubled, venture capital investment quintupled and the economy soared.

However, in 2012 economist Leonard E. Burman testified before the House Ways and Means and Senate Finance Committees that, “[t]he heated rhetoric notwithstanding, there is no obvious relationship between tax rates on capital gains and economic growth.” Comparing the top tax rates on long-term capital gains and percentage change in real GDP from 1950 to 2011, Burman had found only a 0.12 correlation between the two — very little, and the wrong sign (i.e., if cutting the tax rate caused positive economic growth, the number expressing the correlation should have been negative, not positive). “… I’ve tried lags up to five years and using moving averages, but there is never a larger or statistically significant relationship.” (Burman [2012, September 20], “Tax Reform and the Tax Treatment of Capital Gains”, House Committee on Ways and Means and the Senate Committee on Finance; retrieved January 8, 2014 from the United States Senate Committee on Finance: http://www.finance.senate.gov/imo/media/doc/092012%20Burman%20Testimony.pdf.) So as it turns out, the "capital-gains tax cut improved the economy" argument is a post hoc fallacy.

Furthermore, just before that testimony the nonpartisan Congressional Research Service released a report authored by Thomas L. Hungerford. In this report, Hungerford stated that “There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth. However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution.” (Hungerford [2012, September 14], “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945”, Congressional Research Service , retrieved January 8, 2014 from http://www.ctmirror.org/sites/default/files/documents/0915taxesandeconomy.pdf.) To which Burman concurs: “The benefits of a capital gains tax preference are extremely concentrated among those with very high incomes. … It is hard to think of another form of income that is more concentrated by income [bracket].” (Burman, 2012)

The first problem with the "cutting taxes argument" is that it relies on the premiss that taxes are a disincentive to investment. As long as there's good potential for a significant return on investment, the tax on the gains won't dissuade the investment; since capital gains on investments held over a year are taxed less than regular income, and since there are offsets and deductions that can lower the taxable amount, it's really hard to come by a situation where you'll pay more in taxes than you keep. The second problem is that, as Alan Greenspan argues, businesses aren't confident enough in the future to plunk money into long-term, illiquid capital investments such as plants, buildings and equipment. Capital gains from stocks held for two years is taxed at the same rate as capital gains from bonds held for thirty years; in today's investment climate, there's more confidence in the former than in the latter.

Now, income inequality is a problem, and I will be posting on it tomorrow ... in The Other Blog, where it belongs. My point here is that the sluggishness of the recovery will take something more than the political equivalent of Grandma's favorite mustard plaster to solve. If you're still not convinced, then let me remind you: the Bush tax cuts didn't accomplish much prior to the recession, nor did they accelerate the recovery despite Obama continuing them for three years after they were supposed to sunset.

All cutting taxes has done is accelerate the opening of the wealth gap. It's time we put this myth to bed.


UPDATE: January 12, 2014

It seems I owe a slight apology to the editors of Human Events, because they finally published a post on the subject that was actually to the point and didn't just dismiss the "wage gap" as a non-problem dreamed up by Democrats for the purpose of class warfare: Michael Barone's "The Democrat's feckless attacks on income inequality". While Barone uncritically repeats the assertion that increasing the minimum wage will lead to massive layoffs and firings (hasn't happened before, and not likely to happen now), in the main, his critique of Democrat nostrums are on target. Read my post in The Other Blog, "What's the problem with income inequality?", for an idea of where the real problem is and what should be done about it.