Sunday, July 24, 2011

Will Higher Taxes Cost Jobs?

The debate about taxes in Washington is always the same: raising taxes will cost jobs. But what does history say about the subject? Will higher taxes cost jobs? Is there empirical evidence to support the claim?

Before we dig in too far I must point out I am not supporting one political party over the other, nor am I advocating for higher taxes. I merely point out historical facts on how tax increases affect job growth. No nasty emails, please. Respectful comments can be added below.

Income taxes in the United States began with the Civil War and were declared unconstitutional shortly after the war. World War I brought heavy financial demands on the Treasury, so an amendment was added to the Constitution allowing income taxes as we know them today. Income taxes started in 1913 and have continued unabated to today.

The first real opportunity to reduce income taxes significantly was after WWI. Major tax cuts to the top marginal tax rates in the mid 1920's lead to rapid growth in the economy. In a few years the over-heated, over-producing nation suffered a hangover called The Great Depression. The lesson learned is that lower top marginal tax rates provide a short-term boost to the economy followed by significant economic pain caused by the encouraged ramp-up in production. The lower rates encouraged current demand and sucked up future demand until a long recession was needed to work through the excesses.

Closer to home, President Kennedy reduced the top tax bracket from 90% to 70%. The 1960's were mostly good economic times. The economic issues of the 1970's were more related to demographics, expansion of the money supply during the Vietnam War, and oil shocks. Lowering marginal tax brackets that are very high seem to work long and short term.

President Reagan lowered top marginal tax brackets, too. Heavy emphasis was placed on encouraging supply by allowing fast expensing of assets for businesses. The economy boomed as employment increased and inflation dropped. The federal government ran large budget deficits during the entire period. If Social Security had the lower surpluses of today, President Reagan's deficit spending would have exceeded the rate of today's as a percent of GDP. The stock market crashed in 1987 by 22% in one day, the largest percentage drop on record. The economy only slowed without a recession and accelerated into the end of the decade before giving way to a real recession.

Like today, the 1990's saw a Democratic president and a Republican Congress from President Clinton's first midterm elections. Deficit spending that was acceptable to the Republicans under Reagan and Bush were untenable under Clinton. A tax increase coupled with spending cuts set the federal government up for the largest budget surpluses ever. But higher taxes did not kill the economy. Rather, the economy boomed with job growth, corporate profits, and the stock market walking hand in hand. Tax increases did not kill jobs in the 1990's because the top marginal tax rate was increased to 39.6%, a historically low top marginal tax rate.

Once Clinton left office, the newest Bush presidency set out to lower taxes by a massive amount. Deficit spending was back in place. More tax cuts over the first six years of George W. Bush created only a modest number of new jobs while expanding debt, public and private. By the end of the first decade of the Twenty-First Century the economy was in shambles, government receipts declining, job losses exceeding those created over the previous six years, and  nothing seemed to shake the sluggishness that set in.

Lower taxes did not help create jobs in the 2000's; slightly higher taxes gave us a job creating juggernaut in the 1990's. The tax code today has so many moving parts no one person understand the entire beast. Deductions and credits exist for every possible activity. Raising taxes by reducing deductions and credits should reduce the cost of complying with the tax code for individuals and businesses.

So the question remains: If we raise taxes will it cost jobs? It seems to me that a modest tax increase or a reduction in certain tax credits could actually encourage job growth. Any real effort to reduce Washington's red ink will require spending cuts and revenue increases.

Simplification of the tax code would provide real encouragement for businesses to hire. Businesses and individuals spend too much unproductive time gaming the tax system. A simpler tax code with fewer deductions and credits would allow certain tax rates to decline, especially for the middle class.

Remember, raising taxes are the thing to do as long as it is not my taxes being raised.

Wednesday, July 13, 2011

It's the Jobs, Stupid

I could have titled this post Wasted Opportunity, but elected for the more in your face approach. For two and a half months (or longer) Washington has focused all its attention toward the spending limit on their credit card when the real issue is jobs. Balancing the budget on spending cuts or tax increases will only slow an already comatose economy.

If anyone is serious about bringing the national debt under control it will require tremendous effort on the jobs front. More jobs also means a better economy. In a recent article I argued that government regulation and interference is holding back job creation. The other half of the story is what the government can do to jump start the economy via job creation.

Governments around the country are cutting jobs while the private sector is adding a small number of jobs. I agree with selective downsizing of government payroll. The government should not create jobs by hiring more people. Washington can create jobs by providing focused funding. A large part of our electric grid was built in the 1930's and is in need of an upgrade; out road look like a page out of a developing country and our bridges collapse from time to time; our transportation system is outdated and more efficient, high-speed alternatives, need investment. Honing spending to targeted areas of infrastructure is the fastest way to create jobs without installing another permanent level of government spending/bureaucracy.

All the debate on the spending limit, spending cuts, and/or tax increases has created no jobs and never will. When unemployment is over 9%, why are we talking about anything other than jobs?

If we had jobs and a better economy the budget problems would largely vanish. One third of the deficit is from lower tax revenues directly related to the slow economy. Unemployed people pay few taxes, payroll or otherwise. Another third of the deficit comes from increased spending on food stamps, unemployment, and other social programs to help the people harmed by the economic conditions. The remaining third of the budget shortfall will require attention in the future when jobs are on the upswing.

Every politician in Washington that is debating the budget when jobs are the real issue should be fired. Both political parties are at fault. The only time jobs are considered is when it is used as an argument to further a political agenda.

Stop talking about the debt limit. It creates no jobs. Raising taxes or reduced spending creates no jobs. If we spent the last three months talking jobs the way we talk credit limits our economy would be humming. Our trade deficit was over $50 billion in May. There is work to do. Now we need to get out of our way and start hiring.

Tuesday, July 12, 2011

Why the Post Office is Broke

The call is out: The U.S. Post Office is running at a deficit. The red ink is piling up at a rapid pace so it is time to raise postage rates to cover the shortfall. You would think under the current environment the Post Office would grasp at any stream of additional revenue. The Internet and electronic bill pay has reduced mail volumes with only one notable growth area: Netflix. Even with streaming, Netflix still provides a steady and massive volume of mail.

A few days ago I put a Netflix movie in my mailbox and raised the flag. When I returned home that evening the movie was still there and the flag still up. I called the post office to complain and was informed that if I have no inbound mail the mail carrier is not required to pickup outbound mail.

And now you know why the Post Office is broke. They drive past easy business.

Wednesday, July 6, 2011

Blame It On the Unions

In case you have not noticed, we have labor union issues here in Wisconsin. It started when Governor Scott Walker stripping collective bargaining rights from public employee's unions. Teachers (and others) went on the offensive and have 6 Republican and 3 Democrats facing recall elections.

I do not belong, nor ever belonged, to a labor union. I have been self-employed at some level my entire adult life with the exception of 18 months early on. I believe unions have good and bad points. Nothing is all good or all bad. The truth lies somewhere in the middle.

With the above disclaimer said, I want to posit a few facts. I intend no fights; I only want people to think about it. When labor unions were on the rise and later very powerful in the United States, the United States won two world wars and lead the planet economically, in standard of living, militarily, and with a vibrant middle class. As labor unions have declined, so have middle class living standards and our standing in the world on all fronts save debt accumulation.

If unions are so bad, why is this? If unions are so good, why are they in decline? Think about it.