Wednesday, July 21, 2010

Why Raising Taxes on the Wealthy Helps Everyone, Including the Rich

Q. What's the story with tax cuts? Taxes were cut again and again during the Bush II years. The U.S. was supposed to prosper more and more because as taxes were being cut, people would have a lot more money in their pockets. What happened?

A. The tax cuts didn't do much of anything for most people.

Q. Why not?

A. Well, ten percent of the population has seventy-one percent of liquid assets (stocks, bonds and cash holdings). The other ninety percent of the population owns the other twenty-nine percent. But to make it even clearer, assets owned by the lower fifty percent of the population amount to only 2.5 percent of the nation's total. So if you have a general tax cut across the board, the extra money the lower income half of the population gains or loses does not have much of an impact at all.

Q. So what's the message?

A. It does not make sense to tax that lower fifty percent of the population with 2.5 percent of the the total wealth, because practically all of their income is money already in circulation. You need to take the money from the top ten percent.

Q. Why?

A. Although there are investors in the top ten percent whose money is invested in solid companies that produce much needed goods and services, there are also speculators who use other people's hard earned cash to gamble in derivatives.

Q. Do you have any evidence that lowering taxes on the wealthy is bad for the general public's living standards while raising taxes on the rich benefits the whole country?

A. Yes. In the roaring twenties (1918-1929) the top marginal income tax rate (that's the rate paid by the rich) went from 60% on incomes over 100,000 in 1920 down to 25% in 1929. A major part of the money not paid in taxes now went, instead of going to the government, into the hands of speculators who had only one interest: to make more and more money. High risk speculators are gamblers who use the stock market as their casino.

Q. Can you explain?

A. Like gambling, high risk trading in the financial markets becomes an addiction. A gambler at a roulette table experiences the thrill of a winning bet. As the thrill lasts only a short time , a player will put his winnings back on the table, hoping to recapture the exhilaration again and again by doubling and then quadrupling his money etc. This goes on until the player's luck changes and he loses all he has won the last time he doubles his bet.

Q. So the big market crash in 1929 came as thousands of gamblers lost their shirts in the stock market?

A. Yes, and as the gamblers lost everything, they could no longer pay debts owed on houses, businesses and other loans. This set off a domino effect. Banks who had lent money to people who had been able to repay their loans before the crash now had to write off the loans because their borrowers no longer had an income. For so many of the banks and their customers bankruptcy was the only option. People became desperate for money to keep farms producing, to keep businesses going and to get food on the table.

Q. Isn't that an oversimplification? Weren't there those among the wealthy who managed to hang on to their money and property because they were simply better at financial management? Why should they care about reckless gamblers who lost everything? Would there be a risk that the disciplined and wise who have survived the economic collapse might experience losses of their own?

A. Perhaps not at first. But if not stopped, economic decay brings social collapse. Without recovery, cities eventually turn into ghost towns, people die of starvation, communicable diseases begin to ravage the country, and eventually even the wealthiest of the wealthy would be unable to escape ravaging pandemics.

Q. So ultimately, it is to the interest of the wealthy to have a prosperous country with healthy people?

A. Without a doubt.

Q. So how did the country pull out of depression?

A. When businesses, factories and farms no longer had any cash to stay operational, they looked to the government for a rescue. The government, in order to bring society back on its feet, created jobs through public works projects and other means.

Q. So how did the government get the money?

A. In 1932 the government raised the marginal tax rate on $100,000 that had been lowered to 25% back up to 56% and this made it possible to finance a recovery. People got back to work as dams, roads and public buildings were built, and after the end of World War II, ordinary people managed to find prosperity as the government educated returning soldiers through the G.I. bill.

Q. How was it possible to get the money to educate millions of returning soldiers?

A. It was possible because the government imposed a marginal tax rate of 92% on $100,000 in 1945. A rate of 89% in 1946 stayed in place until 1954. Then the rate was lowered gradually until it hovered around 75% through the early 1960s. It was a time during which the U.S. became the greatest industrial power of the world, with the result that not just the rich, but everyone got richer.

---Tax data based on figures provided by the Tax Foundation,


Joe said...

Spending money on public works projects has never and will never pull an economy out of a recession; WWII pulled us out of the great depression. Let me lay it out for you: When the government spends money to “pull us out of a recession” they are doing nothing more than dusting off the printing presses and putting more money in circulation driving up inflation. To deal w/ inflation the fed tries to buy back the money put out there through t-bills. Nobody buys t-bills at a low interest rate so up they go and before you know it your home mortgage rates are in the teens, at least (remember the 80′s). And then what happen…….another recession.

Howard said...

World War II was the biggest public works program in the history of the U.S. Where prior to the war the government used tax money to build dams, bridges and roads, the government now used its revenue to build planes, tanks and artillery. The money didn't come from private industry; it came from the government (government of the public and for the public) running the show.

Where did the government get the money? It didn't just "print" it, it issued war bonds and taxed the rich. The reason that the depression didn't come back after the war is that from that point on the money went into education: the G.I. Bill and for programs like the Marshall Plan. Before, during and after it was government who channeled money into the hands of ordinary people through peaceful, military and then again through peaceful programs. As for the rich, none of them dared to protest that a good part of their money was going toward the education of returning veterans.