Taxes Shouldn’t Be the Main Worry

Financial FAQs

Economist and British Lord John Maynard Keynes opined in the 1930s that in the end we are all dead, so why worry too much about anything else? Well, this particular election year there is something else worrying both parties—taxes.

Taxes shouldn’t be our main worry.  Creating more jobs should take precedence in the debate over growth.  In fact, recent surveys have found it’s the lack of sufficient demand for goods and surveys that is holding up faster growth, not taxes, or regulations, or too big government.

“Data from the U.S. Department of Labor indicate the employers infrequently cite government regulations and intervention as the reason for layoffs. According to the most recent quarterly data on layoffs lasting more than 30 days, employers said business-demand problems were behind more than 40 percent of separations, followed by seasonal factors, financial issues and organizational changes, among other factors. Employers cited governmental regulations/intervention for less than 1 percent of layoffs.”

Republicans worry about inheritance (i.e., death) and capital gains taxes in particular, since so much of their wealth is either invested or inherited. It is reputed by Senate Speaker Harry Reid and others that Mitt Romney pays very little in taxes, and would like even to pay less in his 5-Year Economic Plan to Grow the Economy.

Democrats worry about overtaxing the middle consumer class, but not the upper class. But cutting taxes to anyone means lower tax revenues, which shrinks government at a time when the private sector isn’t expanding enough on its own.

The real problem with both approaches is that neither will pay down our humongous federal budget deficit, unless economic growth picks up and no one as yet is providing a realistic plan to do it. It’s no secret what that is. Someone has to start spending money to make money that creates jobs and so stimulates greater demand for goods and services.

Even our ‘Government is the Problem” President Reagan knew this when he raised taxes 11 times to bring us out of the 1980 and 1983 recessions, mainly spending those revenues on defense. He knew that government had to provide the funds for growth when record interest rates had choked off private credit in the early 1980s.

Graph: CBPP

And President Obama’s $830B American Recovery and Reinvestment Act spending pulled us out of the Great Recession. The Recovery Act was designed to boost the demand for goods and services above what it otherwise would be in order to preserve jobs in the recession and create them in the recovery, says the CBPP.

The Congressional Budget Office finds that GDP has been higher each year since 2009 than it would have been without the Recovery Act (with the largest impact in 2010 when GDP was between 0.7 and 4.1 percent higher than it otherwise would have been). The economy is still benefiting from the Recovery Act, although as expected that effect is diminishing as the economy grows; CBO estimates that GDP in the third quarter of 2012 will be between 0.1 and 0.7 percent larger than it would have been without the Recovery Act.

So how to create more government revenues with which to simulate growth? A starter would be to allow all the Bush tax cuts to expire, bringing us back to Clinton-era taxes that created budget surpluses and 23 million jobs. This would save US about $3.6 Trillion in debt over the next 10 years, according to CBPP. And when estimating the revenue gained by just raising taxes on high-income groups, the Joint Center on Taxation and Treasury find that modest increases in the top marginal tax rates would also raise significant revenue. For example:

• Treasury estimates that allowing the cuts in income taxes for high-income households (those with adjusted gross incomes above $250,000 for married filers and $200,000 for single filers) and estate taxes that were enacted in 2001 and 2003 to expire at the end of 2012 would save a $968 billion over the next ten years.

The ‘real’ jobs numbers I spoke about in June are beginning to show up in July, as jobs added, and 9,000 government jobs lost. The change in total nonfarm payroll employment for May was revised from +77,000 to +87,000, and the change for June was revised from +80,000 to +64,000.

Graph: CBPP.Org

This points to further employment growth ahead. Why? Incomes are increasing, as are hours worked, which means increased demand for products and services in the fall; ergo, increased hiring. Although employers began to add jobs in 2010, the economy has recovered only about 4 million of the 8.7 million jobs lost between the start of the recession in December 2007 and early 2010, says the Center For Budget and Policies Priorities. As a result nonfarm payroll employment was 3.4 percent (4.7 million jobs) lower in July 2012 than it was at the start of the recession.

So the economy still faces a long and difficult climb out of the jobs hole created by the recent recession. The private sector created, on average, about 157,000 jobs a month in the past 29 months — a pace somewhat faster than population growth. That has contributed to a decline in the unemployment rate, but much faster job growth will be needed to restore normal labor force participation.

Harlan Green © 2012