James Pethokoukis

Politics and policy from inside Washington

A 91 percent tax rate? Really?

Nov 18, 2010 19:35 UTC

So is the liberal Democratic position that tax rates don’t really matter? First comes a deficit reduction plan put forward by Rep. Jan Schakowsky would reduce the budget deficit by $427 billion in 2015 by raising taxes by $283 billion, cutting defense by $111 billion and only ever-so-slightly trimming nondefense discretionary spending by $8 billion and Medicare by $17 billion. She doesn’t do a long term analysis because unless you cut entitlements or jack taxes through the roof (and ignore the subsequent economic impact), the numbers won’t work.

Then we have this amazing op-ed in the LA Times by one Moshe Adler:

What did the new president do about the economy? President Clinton in 1993 proposed to raise the highest marginal tax rate immediately from 31% to 39.6%.  … In the seven years that followed, the unemployment rate decreased steadily, every single year, until it reached 4% in 2000. .. The highest tax rate is currently 35%, and if the George W. Bush tax cuts are allowed to expire, this rate will return to 39.6%. But charging the same tax rate for all levels of income above $380,000 is unfair. The highest marginal tax rate should be what it was during the Eisenhower years — 91% — and one way to reach it would be in steps of, say, a 1% increase for every $1-million increment in family incomsecond million would be taxed at 40.6%, and the third at 41.6%. A family whose income exceeds $53 million a year would pay the maximum rate of 91% on each dollar above this sum.

Again, when Clinton signed his tax increase in August 1993, the economy had been growing for 10-straight quarters and was able to power through the tax hikes. Clintonomics started on third base and Adler thinks it hit a triple. As for raising top rates to 91 percent? Look, even Paul Krugman doesn’t advocate that. There is a mountain of evidence, both from academic research and historical experience, that suggests such a move would crush economic growth and leave America in a poor competitive position. Fun fact: Tax rates are way lower today than in the 1950s and yet tax revenue as a share of the economy is just as high. Guess the Laffer Curve does work after all.

COMMENT

The reason the 91 percent rate was sustainable is because they could easily get half of that back if they proved they reinvested it in America. That’s why so many off-shoots and subsidiaries sprang up. This of course was long before the greedy got greedier and outsourcing became a factor. The bottom line is, is that we need to preserve the American lifestyle as it once was as much as possible or we will be joining the likes of Chinese and Indian societies sooner than we think. Of course, these guys are not passing us and our children as people may be trying to lead us to believe. People still prefer living in the U.S. than any other country. Additionally, many other countries only report their top third student’s test scores, while many states in America report them all; including learning disabled and those without a command of the English language.

Posted by BeReel41ns | Report as abusive

GM IPO gives little reason for celebration

Nov 18, 2010 17:25 UTC

Now you too can directly own a piece of Government Motors:

General Motors Co shares gained as much as 9 percent on Thursday as investors bet that the top U.S. automaker can make a lasting recovery after repaying a big chunk of last year’s government bailout with funds raised in a landmark initial public offering. The start of trading in GM shares represents one of the final steps in a blockbuster initial public offering negotiated by the Obama administration that raised $20.1 billion after pricing its common and preferred shares.

Obama administration officials said the strong market debut for GM showed they made the right choice in restructuring the auto maker with $50 billion in financing. “This is a bit better than people had been projecting. As to a year ago,  it’s not even in the same ballpark,” Ron Bloom, the U.S. Treasury official in charge of the GM investment told Reuters Insider. “A year ago, people said ‘you have no exit, you have no strategy. This company is not fixed.’”

The point is not whether government can revive, at least temporarily, a floundering company by sinking into it billions of taxpayer dollars and trampling hundreds of years of contract law. As with TARP, it’s all about opportunity cost and unintended consequences. What else could have been done with that money? How does it incentivize companies to treat risk? What sort of uncertainty does it create among business and bondholders? The answers: Much, recklessly and vast.

COMMENT

Very much agree. And add the trampling of bankruptcy law.

Posted by tpatch750il | Report as abusive

Sink the Fed’s dual mandate and QE2

Nov 18, 2010 16:23 UTC

Multitasking is hard, even for the Federal Reserve. But by law — yet another horrible policy relic of the 1970s – it has to promote both “maximum employment” and “stable prices.” Some Republicans think it better that the Fed, like its European Central Bank counterpart, focus solely on prices getting neither too hot nor too cold. And an effort by Representative Mike Pence of Indiana and Senator Bob Corker of Tennessee is just the start of a GOP push to roll back Team Bernanke’s vast authority.

A just-offered bill by Pence would simply strike the bit about jobs from the Federal Reserve Act. The casus belli is part procedural, part economic. Corker and Pence say the Fed’s attempt to boost the economy by buying bonds usurps the proper fiscal role of Congress and the president. It also risks devaluing the dollar and boosting inflation.

The political context is clear. The opaque, unelected Fed is wildly unpopular with Republicans, particularly those of the Tea Party variety. They blame its interest rate policy for the housing and bank busts. And Bernanke is seen as an enabler of the hated bank bailouts and explosion in government spending under President Barack Obama. Tea Party support would be helpful to Pence if he decides to run for higher office, as he is supposedly considering.

Corker, on the other hand, is just trying to keep his current job. His efforts to forge a compromise with Democrats on financial reform made him enemies on the right where some folks already doubted his conservative bona fides. So clipping the Fed might just help him avoid a Tea Party primary challenge if he runs for reelection in 2012.

But the gentlemen also know the effort makes for sound economics. The existence of the dual mandate is a big reason why the Fed has launched its bond-buying QE2 plan, a triple-bank shot effort to artificially boost jobs by lowering interest rates,  weakening  the dollar (and boosting exports) and lifting stocks (and creating a wealth effect). Now the Fed knows QE2 will make it that much tougher to eventually shrink its balance sheet — thus risking higher inflation —  but feels it has no choice since Congress and the president are unlikely to agree on new, pro-growth fiscal policies. Of course, Fed action also eases the pressure on Washington to act. So instead of cutting taxes to empower business and allow consumer to repair their personal balance sheets, the Fed’s bubble machine gets restarted.

A Republican would have to nab the presidency that year for the Corker-Pence idea to become law. Democrats love the dual mandate and wish the Fed were doing even more to boost jobs. They expanded the Fed’s mandate in 1978 as a way of forcing the central bank to print money. But thankfully things have not worked out that way. The 1980s combo of hard-money Paul Volcker and tax-cutting Ronald Reagan created a low-inflation, high-growth economy that has produced 50 million net new jobs during the past generation.

But the dual mandate gives ample authority and justification for an easy-money Fed chairman to run the presses, particularly is he’s under political pressure to do so. Now Democrats may argue that a mandate change would tie the Fed’s hands in a financial crisis. A Fed chief could easily cite price stability as justification for setting up lending facilities as Bernanke did in 2008 and 2009. After all, U.S. prices fell sharply during the worst of the 2008 downturn. Indeed, one possible future GOP pick to run the Fed doubts whether such rule would limit his policy actions. If Republicans take the White House in two years, he just may find out.

COMMENT

While you make some valid points, there are a couple of statements that are incorrect.

While many republicans do agree with the majority of the Tea Party ideals, ie smaller government, lower taxes, the ones that have even the slightest clue about world financial markets do not hate the Fed. In fact, they understand its crucial role in the world economy. To go even further, those with economics and finance degrees understood the importance of bailing out the banks during the crisis.

The other problem with the editorial is the mention of inflation. Where is it? It doesn’t exist. Energy and fuel prices may have ticked up a bit but you should know that they are volatile components of the pricing indexes. Inflation isn’t a real concern until the slack, unemployment and excess industrial capacity, are taken out of the system. We know that is a long way off.

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