The Way Forward: Tax and Spend

Posted by Bob Lord

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The Way Forward: Tax and Spend

This strategy would reduce joblessness and inequality while stimulating the economy.

Have you heard? Our economic policy debate is getting some spring cleaning.

President Barack Obama has signaled that he’s had it with all that talk about America being broke and the belt-tightening austerity measures that went along with it. His proposed budget for the 2015 fiscal year will reflect this reality.

You know what he should try? A tax-and–spend strategy.

Yes, conservatives have tried for years to turn that simple solution into an epithet. But it’s the best way forward.

Taxing more and spending more would stimulate a $17 trillion U.S. economy that’s not producing at full capacity and dogged by high unemployment. It wouldn’t expand the budget deficit. And it would reverse the concentration of income and wealth that’s hollowing out our middle class and denying most Americans a fair shot.

Changing tax rates and spending levels are two of the three standard tools policymakers have at their disposal to goose the economy. The other is monetary policy.

The Federal Reserve’s expansionary monetary policy that began in 2008 is unprecedented. It may have helped get our financial system back on its feet and unleashed a multi-year bull market. But our economy is still staggering.

Unemployment still stands at 6.6 percent and typical American workers are earning less than they did before the Great Recession.

That means it’s time to give targeted tax increases and higher government spending a shot.

As Nobel Prize winner Robert Shiller and others have explained, raising taxes and increasing spending by identical amounts, is budget-neutral. But that extra tax revenue and government spending make a positive economic impact.

Why? Because the entire increase in spending is injected into the economy, where its effect is multiplied as it circulates. The tax increase, by contrast, doesn’t cause a dollar-for-dollar reduction in consumer spending.

That’s because it’s absorbed in part by a decrease in personal savings. Thus, taxing and spending in equal amounts bolsters an economy that isn’t running at full capacity. And if taxes rise at the top of the income scale, most consumer spending won’t suffer a big blow.

Higher taxing on the rich and more government spending are the right ingredients for a bigger and more effective stimulus than we’ve had since the economy started to sag at the end of George W. Bush’s presidency.

Plus, this strategy could help slow or reverse America’s increasing concentration of wealth.

Everything else being equal, all but a few of us would prefer to accumulate wealth. For most Americans, living expenses and the tax on our wages limit how much wealth we can amass.

About three-quarters of us live paycheck-to-paycheck.

For those at the top, however, it’s a different story. Living expenses only consume a tiny slice of their income, which they draw more from investments than wages. Taxing investment income and inheritances at higher rates would level the playing field on wealth accumulation and restrain extreme inequality.

Emmanuel Saez and Thomas Piketty, the two leading researchers on income inequality, teamed up with MIT student Stefanie Stantcheva to see how this works. They looked at changes in top income tax rates, economic growth rates, and the share of the top 1 percent in pre-tax income over a 30-year period in 18 countries, including our own.

Their conclusion? Income tax rates for very highest earners could be set as high as 83 percentwithout curbing economic growth.

At the same time, the researchers found, higher tax rates at the top correlate with less concentration of income at the ladder’s highest rung. Given that the top 0.1 percent of American earners rake in at least $1.7 million a year and pocket 10 percent of our national income, that would get our economy on a healthier track.

The writer and sustainable food guru Michael Pollan boils his advice down to seven words: Eat food, not too much, mostly plants.

We’ll use eight: Tax more, mainly at the top, and spend.

Bob Lord, a veteran tax lawyer and former congressional candidate, practices and blogs in Phoenix, Arizona. Emily Schwartz Greco is the managing editor of OtherWords, a non-profit national editorial service run by the Institute for Policy Studies.

4 responses to “The Way Forward: Tax and Spend

  1. From 1980 to 2008 the US went from 90 million jobs to 138 M, 130 M after the collapse in 2010

    France went from 24 million to 26 million jobs.
    But, it was much worse than that, France’s hours per year per adult collapsed over 3 decades from 1800 to 1470.

    So, incredibly, Frances economyis producing less for the working man and woman than it was 30 years ago.

    But wait, it gets worse, the productivity of each one of those working hours fell relative to the United States.

    But wait, it gets still worse, the RAND corporation did a study of intelligence. It found that 57 years olds in France scored 20 percent below Americans on cognitive tests after starting as 18 year olds ahead of Americans.

    Who does peer review on Pickety and Saenz work? Krugman?

  2. Just consider the impact of the economy on population. Between 1980 and 2010, the population of Europe grew 6 percent while the population of the United States grew 30 percent. Pickety and Saenz would have you ignore those monster numbers.

    • Okay, so the Europeans are more evolved than we are, and have stopped contributing to the overpopulation of the planet. What’s your point?

  3. Pickety and Saenz make a horrible error in their analysis and then they misreprsent the result. They correlate gdp per capita with top tax rates and represent this as a correlation between top tax rates and growth. At its peak,theaverage adult in the US was working 28 hours a week while the average adult in France was working 16hours a week. We were equal at the time of tbe Reagan tax cuts.
    You all want us to take on the characteristics of France? Really?

    Not even close. The US was creating huge numbers of jobs more than Europe, millions more after the Reagan taxcuts. Labor force participation skyrocketed in theUS re