Higher Taxes and More Jobs?

"Historically, the term 'tax rate' has meant the average or effective tax rate — that is, taxes as a share of income. The broadest measure of the tax rate is total federal revenues divided by the gross domestic product. By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of GDP this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget." — Bruce Bartlett, former Reagan-era senior budget policy analyst

Despite what the media would have you believe, Federal taxes are actually the lowest they've been in two to three generations. See also the Tax Foundation's tables here.

That's not just my assessment, but one that the Congressional Budget Office and most reliable and credible reports from working economists are also in agreement with. The tax rates we see today also happen to be substantially lower than those that Reagan instituted and that prevailed in the 1980s. See the documentation from the non-partisan National Taxpayers Union here.

Yet, to hear the so-called debate on job creation, suddenly joined last week by the GOP Congress, you'd think that the burden of high Federal taxes has been unduly restraining the economy for some time. This is simply untrue, and has not been true for two decades now.

Economic history tells us that "high GDP countries are high tax countries," and as Joel Slemrod, another Reagan economic advisor, tells Bloomberg News, ''Raising taxes is no kiss of death for job creation."

As conservative economist and columnist Bruce Bartlett reminded us recently, "The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment. No evidence was offered for the Republican argument that cutting taxes for the well to do and big corporations would reduce unemployment; it was simply asserted as self-evident. One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s." 

This in an era of unprecedented corporate profits, with large multi-national corporations currently sitting on nearly $2 trillion worth of cash on their balance sheets, according to the Financial Times (May 23), and many enjoying zero or negative effective tax rates.

A perusal of both tax rates and actual economic growth over the last 75 years tells essentially the same story. A graph from the book The Great Tax Wars  by Steven Weisman cited in Slate neatly illustrates this point, as do the more numerous academic investigations and examples that form the basis of the Presimetrics blog and book.  

Still despite all the hype, Congress has no real credible plan for job creation save for the old GOP nostrums of tax cuts for the wealthy and drastic program cuts for everyone else.

So despite the clear evidence of history that this faith-based approach has failed to produce the jobs needed during the Bush administration, for example, the GOP will continue essentially insisting the "world is flat," even when all evidence indicates otherwise. Economists basically all agree that the worst overall post World War II economic and job creation performance was that of the G. W. Bush administration.

But did Bush II even create one net private sector job? That remains an open question. What is not in question are the dismal employment prospects we have currently.   

As Gavyn Davies of the Financial Times (May 31) notes, "As yet, there has been no increase in taxation, on the rich or anyone else. Nor have the Obama administration’s medical and financial sector reforms really taken effect. It would take a remarkably far-sighted private sector to have already reacted adversely to this set of long term reforms, even if they might do so eventually." 

So we've had historically low taxes now for 10 years, and job creation has been historically anemic and remains so. Perhaps we need to focus better on this more drastic near-term problem of high unemployment over the longer-term problem of the deficit?

After all, even Wisconsin Republican Congressman Paul Ryan's fabled plan does not start to kick in until a dozen years from now (2023)! Does that sound like an "emergency" measure to anyone?  

As economist Henry Aaron of the Brookings Institution reminds us: "The first challenge is near term. Once the economic recovery is well-advanced, we must find a way to cut spending or raise taxes to prevent government debt from rising faster than income."

This need not be rocket science. Yes, even students have balanced the budget this way, which is just fine too. See the reporting from Jill Schlesinger of Moneywatch.com here.

It will necessarily require, as it always has in the past, a combination of both approaches. Drastically cutting back current expenditures to make up for the full budget shortfall is bound to actually dramatically diminish and retard economic growth at this precarious time in our nascent recovery and indeed already has.

One estimate has it that "In the absence of the sharp cutbacks in government spending that have been prevalent in the U.S. over the past year or two, about 1.3 million additional people would be working now compared to 8 months ago, rather than the actual job growth we've experienced over that time of about 1 million — a 30 percent difference."

With the worst jobs market in perhaps more than 30 years now facing new grads, and one that will likely unfortunately mark their career trajectories for perhaps decades to come, we need a strong national focus on this jobs emergency. And as reported recently by Investors Business Daily:

"The past decade of wage growth has been one for the record books — but not one to celebrate."

The increase in total private-sector wages, adjusted for inflation, from the start of 2001 has fallen far short of any 10-year period since World War II, according to Commerce Department data. In fact, if the data are to be believed, economy-wide wage gains have even lagged those in the decade of the Great Depression (adjusted for deflation).

Two years into the recovery, and 10 years after the nation fell into a post-dot-com bubble recession, this legacy of near-stagnant wages has helped ground the economy despite unprecedented fiscal and monetary stimulus — and even an impressive bull market.

Over the past decade, real private-sector wage growth has scraped bottom at 4 percent, just below the 5 percent increase from 1929 to 1939, government data show."

We need to think more seriously and anew about our unprecedented problems with jobs, and refocus on the ongoing destruction and widespread suffering caused by this crisis and the related bleak wage gain outlook as well.