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PORTSIDE  December 2010, Week 3

PORTSIDE December 2010, Week 3

Subject:

Low Taxes Are the Problem, Not the Solution

From:

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Date:

Wed, 15 Dec 2010 22:10:05 -0500

Content-Type:

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Parts/Attachments:

Parts/Attachments

text/plain (130 lines)

Low Taxes Are the Problem, Not the Solution

By Moshe Adler
Dec 11, 2010 
Truthdig
http://www.truthdig.com/report/item/low_taxes_are_the_problem_not_the_solution_20101211/ 


"Every economist that I've talked to . acknowledges
that this [tax] agreement would boost economic growth
in the coming years and has the potential to create
millions of jobs," President Barack Obama said this
week. But if low taxes are the solution, this must mean
that high taxes are the problem. Yet the Bush tax cuts
are already in effect; taxes are therefore low already,
and the unemployment rate is nevertheless close to the
same level that it was at a year ago and has risen in
the last month. Nor did the Bush tax cuts boost the
economy after they were passed in 2003, their name-"The
Jobs and Growth Tax Relief Act"-notwithstanding. In
fact, the evidence shows that tax policies alone have
no effect on the state of the economy. What is the
problem, then? The problem is that the level of
uncertainty in the economy is so high that investors
and entrepreneurs-not buyers and sellers of stocks on
Wall Street but actual investors who build or expand
places of work and install new pieces of equipment and
machinery in them-have lost confidence in their own
ability to predict what a good investment will be. With
such uncertainty, it is no wonder that investors are
not borrowing and that banks are not lending.

If uncertainty and a low level of investment are the
problem, what is the solution? The current uncertainty
in the economy was brought about by the subprime
crisis, and there is little that the government can do
to decrease it. But there is a lot that the government
can do to increase uncertainty, and President Obama and
the Republicans are doing it all.

At exactly the same time that the President's Deficit
Commission announced its recommendations about how to
reduce our deficits, including the projected deficit
within the Social Security system, Obama has announced
an agreement for the continuation of the Bush-era tax
cuts for the rich and a reduction of 2 percent in the
Social Security tax for all. Only a fool would invest
in an economy with deficits that are not only huge but
are being increased deliberately at exactly the time
that Obama himself has said that they must be reduced.

But reducing the deficits without increasing taxes will
require increases in the prices of all government-
provided goods and services, including university
education, public transportation and parks, and
services that were until now free will no longer be.
(In several cities people now have to pay a "crash tax"
for ambulance and firefighting if they are in a car
accident to which such emergency units respond.) The
result will be a significant decrease in the purchasing
power of middle-income families that calls for
decreasing, instead of increasing, production capacity
and investment.

It is not inconceivable that 13 months from now, after
the extension of unemployment benefits expires, the
Obama/Republican plan will result in the kind of street
riots we've begun to see across Europe, led here by the
unemployed. The larger-than-ever deficit will make
renewing the extension of unemployment benefits
unacceptable, particularly to a Republican-dominated
House. University students fed up with higher tuitions
and employed workers fed up with the high prices for
government services could even join in. In an economy
with an impoverished middle class and political
instability, investors will become even harder to find.

The only way to reduce the uncertainty in our economy
right now is to increase taxes. During the Eisenhower
years the top tax rate was 91 percent, and there is
every reason to return to this rate now. Nevertheless,
even after taxes are raised it will take some time for
investments to flow. This is because in addition to the
uncertainty, the damage that the subprime crisis
inflicted-not on banks, but on homeowners and other
victims-remains very real.

How might investments be increased in the meantime,
then? Private investors are not the only ones capable
of investing. When it comes to the government, there is
no uncertainty about what good investments are. Our
needs are self-evident and the list is long. We need
more schools and more teachers. We need more
universities and more medical schools. We need to
repair our roads and fix our bridges. Practically all
our public services are in dire need of investments,
and the number of jobs these investments could create
would far exceed the number of the unemployed.
Extending the Bush tax cuts and reducing the Social
Security tax will only increase the level of
uncertainty in the economy and discourage investment.
Only by taxing the rich can we close the deficit,
reduce uncertainty and begin to make public
investments, both because we desperately need them and
because we desperately need the jobs that they will
create.

Moshe Adler teaches economics at Columbia University.
This piece is based on his book "Economics for the Rest
of Us: Debunking the Science That Makes Life Dismal"
(The New Press).

___________________________________________

Portside aims to provide material of interest to people
on the left that will help them to interpret the world
and to change it.

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