Recently I've heard some urban legends that I thought in need of fact checking. For instance: war is good for the economy, tax cuts saved us from the depression, tax cuts always result in economic growth and the richest Americans pay an unfair portion of the taxes.
Let's go through these one at a time. Like any good legend, these start with a grain of truth.
Though the Aztecs sacrificed warriors to the gods in exchange for prosperity, the myth that war is good for the economy probably goes back to World War II. Many believe WWII rescued us from the Depression, and in a way, it did. FDR's New Deal wasn't working as he'd hoped, and when we joined the war in 1941, it meant jobs for everyone.
Wartime job growth is Keynesian job growth. In John Maynard Keynes' theory, the solution to a bad economy is government spending.
It's easy to fall for this trap as we can see the employed soldier, bomb maker or road builder. However, these must be paid for by taxes that are taken out of the free market and we don't get to see what wasn't bought. For example, that tax money in the free market could have been spent by the citizens on new cars, clothes or industrial upgrades. War and Keynesian economics take money out of one area of the economy and put it somewhere else. However, government spending can result in a net gain. For example, paying for police is less expensive to society than not having police.
The next myth is that tax cuts always result in economic growth. This may stem from the Depression as well. There is another myth that the Depression was ended when income taxes were cut in 1946. They were cut by 3 percent. The top rate went from 94 percent to 91 percent. I'm sure it helped, but the truth is the U.S. made a fortune from 1939 to 1941 supplying the Allies before entering the war. After the war, Europe's industrial capacity was destroyed and their greatest scientists were living in America.
Neither America fighting in World War II nor tax cuts ended the Depression. We had Europe's money and scientists, we had no industrial competition and we had a free market economy. We were bound to succeed!
In fact the top tax bracket remained over 90 percent until 1963 when it dropped to 70 percent. Right now, it's 35 percent. If the Bush tax cuts expire, it'll go back to 39.7 percent.
Yes, the economy grew after the Reagan and Bush tax cuts. However, the economy usually grows even without tax cuts and both of those tax cuts were paired with huge increases in government spending.
So did tax cuts increase the economy or was it the Keynesian like increased government spending? These presidents borrowed money, which falsely inflated the economy, but they claimed to be free-market advocates because they lowered taxes. Though it may temporarily feel like it, running up a credit card bill and making the minimum payment does not make one rich. Lowering taxes without shrinking spending is not free-market economics.
Some individual tax credits and deductions have resulted in economic growth greater than the debt created. However, the Reagan and Bush tax cuts as a whole did not. Belief that they did is based on selectively shown statistics and myths worthy of their own article.
I hate taxes, but we must be financially responsible. Extending the Bush tax cuts will give some people more money to put into the free market now, but we have a giant debt and deficit to consider. If the tax cuts actually freed money from an inefficient government program and put it into the free market, it would be great. But because of the budget deficit, the tax cut is funded by borrowed money.
You pay taxes now or you pay the debt later. How much debt should our children inherit? What about our grandchildren? Is it fair to make them pay for our tax cuts?
What of the myth that the rich pay an unfair portion of taxes? The top 10 percent of income earners are people making $108,905 or more. They pay 65 percent of the income taxes and control 72 percent of the wealth. But income over $106,800 isn't taxed by Social Security, so they pay 47 percent of the total taxes.
The bottom 50 percent are individuals making $31,987, or families making $44,389 or less. They pay 3 percent of the income taxes and 13 percent of total taxes but control only 2.5 percent of the nation's wealth. The reality is the wealthy control almost 75 percent of the wealth yet pay less than half of total taxes, while the poor control less than 3 percent of the wealth and pay almost 15 percent of the total taxes.
I am not a class warrior. I don't think the rich should pay all the taxes, nor the poor be free of the cost of government. How we are taxed is important. Taxing the top 10 percent slows investment. Taxing the lowest 90 percent, those making less than $108,905, reduces money available to the customer base. Investments need customers.
This nation needs comprehensive tax reform, not only in how we are taxed but in how it is spent. We need to cut our deficit before it's too late, and that means unpopular budget and program cuts. I think for now it means letting a popular tax cut expire as well.
Brandon Givens, a Gainesville resident, is a special-education teacher and occasional columnist.
Posts
