I Agree: “Darn it, Let’s Raise Taxes”
By Ken Morris
According to House Speaker John Boehner, “You can’t raise taxes in the middle of a weak economy.” Echoing that talking point, newly elected Tea Party Rep. Joe Walsh (R-Illinois), in an interview with ABC, claimed, “Every time we’ve cut taxes, revenues have gone up, the economy has grown.” Sen. Orrin Hatch (R-Utah) attacked the president’s April tax speech by suggesting that everyone knows, “Raising taxes … will do little to reduce the deficits and debt that are, at their root, spending problems.”
If I and many economists, including Paul Krugman (who wrote, “Darn It, Let’s Raise Taxes”), are included, however, everyone doesn’t agree with their assertions, and saying the words ad nauseam doesn’t make them empirically or logically true – in fact, history often suggests otherwise, despite Senator Hatch adding, “I have yet to hear the economic or fiscal rationale for raising taxes.” For his sake, I hope someone reads the following paragraphs out loud to him.
From 1951 to 1985, marginal tax rates (MTR) on the wealthiest Americans averaged 75 percent. Did the mega-rich job creators, as the Republicans argue, cease hiring, lay off workers, shut their doors and go home? Hardly. Case in point was a little business created by a couple of brothers selling burgers in San Bernardino, California. In 1954 (MTR: 91 percent), they decided to buy eight milkshake machines from 50-year-old Ray Kroc. Salesman Ray saw opportunity and eventually took over the McDonald brothers’ modest Golden Arch restaurants. Eschewing lofty marginal tax rates, he began rapid expansion and massive hiring. In 1958, (MTR: 91 percent) he had 34 restaurants. One year later, (MTR: 91 percent) he had 101 stores. In 1963 (MTR: 91 percent), he served his billionth burger. In 1969, (MTR: 77 percent), that became a five billionth patty. By 1972, (MTR: 70 percent) McDonald’s, by now listed in the New York Stock Exchange (symbol: “MCD”), exceeded annual revenues of $1 billion. A $1,200 investment in MCD in 1965 (MTR: 70 percent) was, after stock splits, worth over $1 million 20 years later (MTR: 50 percent). What the flippin’ flapjacks was going on? (Flapjacks were introduced to a breakfast menu in 1973 – MTR: 70 percent.)
I can hear Boehner et al saying, “Okay, Ray Kroc and Micky-D’s were the exception. Right?” Wrong. During the period from 1951 through 1963, (MTR: 91 percent), the economy grew at the annual rate of 3.70 percent. By comparison, the growth rate these past seven years, with MTR at 35 percent, was 1.70 percent. What did Ray Kroc know that Boehner, Hatch and Walsh are missing?
While working on Wall Street during Ronald Reagan’s Laffer Curve days (economist Laffer postulated that lowering taxes would increase consumer spending and tax receipts), my head spun whenever pundits swore that the budget deficit would be eliminated by slashing taxes even while dramatically increasing spending, primarily on the military. In the end, Reagan’s dream didn’t quite pan out: deficits skyrocketed. Not to worry, though, as this failure was turned into success when former vice president Dick Cheney later explained, while he and President Bush went on a wartime tax cut and spending spree, that “Reagan proved that deficits don’t matter.”
But as we are flirting with a ratings downgrade for US Treasuries, we know deficits do matter. Stimulating the economy is also important, especially when our unemployment rate hovers around ten percent. And, no matter what Hatch says, government cuts will not solve the crisis. So, with that in mind, back to marginal tax rates, logic, and Kroc. Conservatives are correct in suggesting that raising taxes on the middle class in hard times is foolish. These individuals spend nearly every penny they earn on necessities, and tax reductions get recycled back into the economy. In contrast, lowering taxes for the superwealthy has minimal impact. A billionaire making $100 million a year is unlikely to increase spending if given another $10 million. One can argue the point, but logically speaking, it’s hard to refute. Their windfall is likely to get socked away with all those other tens of millions in excess cash.
However, Boehner and Walsh will argue, taxing those who create jobs – small business, for example – will be a disincentive to hire. To that I say, “Not so fast.” Is it possible that low tax rates on the wealthy encourage individuals to pay themselves hefty salaries, to take the money now rather than build for the future? In this, Kroc’s behavior – confirmed by the overall explosive growth from 1951 to 1963 – might offer insight. Kroc paid himself almost no salary and reinvested everything in building storefronts. The reinvestment resulted in growth and job creation and kept his taxes at a minimum as expenditures for growth offset income. In time, his wealth rose astronomically, but did so as a result of an ever-more valuable company. It seems obvious that choosing between taking income today or investing for tomorrow is influenced by tax policy, even if it is debatable to what extent this is the case.
And while government has a well-earned reputation for inefficiency, it does provide a powerful economic engine. Of all consumers, the government is the only one virtually guaranteed to fully spend its income. Dollar in, dollar out. Sometimes those funds go directly to job creation (the armed forces, for example). Other times it’s to the benefit of private industry (for example, defense contractors). Even when paying down the debt – as we must surely do – this benefits the economy as fewer budgetary cuts save government jobs and salvage higher levels of services, including the safety nets of unemployment insurance (perhaps the most stimulative entitlement we have), Social Security, Medicare and Medicaid.
So, how can maintaining low rates on those earning over $200,000 a year be justified if the goal is to create jobs and reduce the deficit? The assertion that all tax cuts are stimulative is a myth, as is the contention that progressively taxing the superwealthy will automatically kill jobs; if we were to take the 1950s as a base case, we’d conclude just the opposite.
While returning to pre-Reagan marginal rates of 90 percent will never happen, rolling back the Bush/Cheney tax breaks on the top wage earners will both reduce the deficit and create – or, at least, save – jobs as those tax dollars are put to use. Such a move is empirically defensible and logically sound. All we need to do now is convince politicians to value empiricism and logic over special interests.
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Ken Morris is a former Wall Street executive who started Morgan, Stanley’s International Equity Department in the mid-1980s and was once described by the London Times as a “Wall Street trading legend.” Morris has published two novels, both financial thrillers. His new, nonfiction book, “Blind Allegiance to Sarah Palin” (Simon and Schuster), written with former Palin insider Frank Bailey and Alaskan political blogger Jeanne Devon, is scheduled for release on May 24. This article is cross-posted from truthout.org
Photo: Speaker of the House John Boehner (R-Ohio) (Photo: DVIDSHUB / Flickr)
Loved this article, I posted this Mudflats article on my FB page. Some of my friends and family are on both sides of the issue, I’m SURE they all will enjoy it.
The American people agree by 72% margin–according to latest polls.
From the above picture its easy to see why Congressman Boner has a reputation for crying. Either his head and hands are humongous or he is drinking beer from an A + W baby rootbeer mug. I haven’t seen a small mug like that since the sixties. I hope the electorate wakes up in time to protect 300 million Americans from the redistribution of wealth from top to bottom.(TIC) I must be one ungrateful SOB who doesn’t show appreciation of all the riches handed to my by fiscally conservative politicians. Now if I could just actually locate thate extra penny I would have earned if I worked last year,I’d run right out and bolster the economy like a good patriotic American.
Boehner looks enibriated in that picture!!
Thanks Ken for this article. Hope you’ll do more presenting important economic concepts to the Mudpuppies. Economics has been made difficult to understand by those who want to steal our shirts. It always gets me mad when I hear folks says it’s to complicated. My rule of thumb is to watch out when something sounds to “complicated”, it means there is a load of moose dropping coming your way to distract you while your pocket is picked.
Steve Jobs dropped his salary to $1 a year – though he did get a bonus jet one year – while Apple rebuilt. (Oh, but could that be so he could avoid taxes?) He certainly wasn’t living in the poor house, but it certainly didn’t hurt him or Apple’s shareholders. I was at an Apple store today for a seminar and the place was packed, folks lined up to purchase, even in a not so strong economy. What really gets me when the Republicans use their taxes bad lines is not only are they ignoring that these are marginal rates we’re talking about, but salaries and benefits for employees are expenses that are not taxed – they’re expenses. So, yes, the expenses come out of their pocket if the business person personally owns the business, but they are not taxed on what they pay their employees (though if you want to get technical, they pay a portion of social security, but that too is an expense). Also it should be noted that the Krocs gave hundreds of millions to charity (including a significant amount to NPR) through their estates, so not only did they not need all the money they made, but they gave significant amounts to benefit us all.
In high tech a lot of the compensation was in the form of stock options. Jobs was probably loading up the wagon during those years of low stock prices. They also used to add shares which did hurt outside stock holders because it diluted the value of each share.
As for Jobs, he and the Woz made all of the money they ever needed when Apple went public. Woz “retired” and has given generously to many worthy causes and helped many startups.
Compensation via stock is also how executives end up paying only 15% income tax since the stock sale profit is considered a “capital gain”. It’s a scam that defers that payment of tax.
The other tax dodge common amongst execs is to not even sell the stock but borrow against the shares in a brokerage account with a “special” interest rate. That way they get to use the money but avoid paying the tax. It’s the common way to buy a mansion in Sillycon Valley.
I just read that an NGO has complained about employment conditions for Apple workers. If those jobs were in the US with union protection, I’d feel better about Apple. (I’m typing on an Apple, and I apologize to the workers. They should be treated fairly.)
Internal Revenue posted a study from 2007 that took the top 400 incomes(averaged) and they came up with an average of 345 million bucks apiece. Those top incomes averaged an income tax rate of 17%,when it is listed,I believe, at 35%. It fair breaks my heart that these poor souls can’t live on 345 million per year,at least not as comfortable as I could. What breaks me up really bad is the notion that people like me don’t pay taxes. That is a central theme for rethugs. They only talk about income tax and that is about the only one I don’t pay.
What gets me are the people who say we have to pay people this much or they won’t work very hard. Why is it that somewhere around $200,000 a year in income, people start to be slackers unless we raise their pay, but at minimum wage, we don’t think the same principle applies?
As a follow on to this, please read “Nine Reasons the Rich Get Richer” from our local alternative
paper, The Salt Lake City Weekly. http://www.cityweekly.net/utah/article-13680-9-reasons-the-rich-get-richer.html
DD
An excellent read! Thanks for the link.
Then there’s the problem of the average schmo like me not understanding economics, and apparently a lot of professional economists don’t, either.
http://delong.typepad.com/sdj/2011/05/how-will-economics-respond-to-its-crisis.html
But I did download the Kindle version of Lombard Street, and found it an interesting read. Financial things were much more…primitive, is the only word that seems to fit…even in 1873 London, at the height of the power of the British Empire, when absolutely stupefying fortunes were being made. Amazing how simple stuff was back then, compared to collaterized debt obligations and the rest of the current menagerie of ways to attempt to stash savings. But human ignorance and fear are still the same, to the delight of the gold market manipulators.
It’s even worse than we imagine:
http://krugman.blogs.nytimes.com/2011/04/30/who-benefits-from-bubbles/
“I was struck by something else: in several years during the last decade the top 400 accounted for more than 10 percent of all capital gains income in America. Just 400 people!
Conservatives often try to sell the notion that reducing the capital gains tax is about helping small business people. But you really want to think of the fact that a significant chunk of that tax break is going to just 400 people.”
Genuine small business rarely get capital gains. Most income is from selling stuff or services and that is offset by the expenses of running the business.
Most capital gains come from selling assets like real estate or stock that has appreciated in value.
If I were a shareholder in an oil company, for example, and had to choose between paying my CEO an extra $70 million that would be taxed at 90%, or reinvesting that $70 million in the company, and giving the CEO a few shares of stock, I think I’d get a lot more bang for the buck from the second option.
Out of curiousity,why not get rid 0f the CEO and split the extra 70 million with other shareholders. Your CEO can earn big bonuses when the company stock tanks as has been done previously and right now the sky seems to be the limit on prices. You’d have to be pretty bad to lose money in an oil company as things stand today. Even BP has made a profit this year.
As long as we have large corporations, someone has to be the top employee. I don’t think we can get rid of large corporations, so I think we are stuck with having CEOs. I do agree their pay is way out of line, though. Especially when they get a bonus for bad performance.
American shareholders have very limited rights. Some of the biggest advocates for more rights are the big public pension funds. It’s one of the reasons corporations want to banish them.
Shareholders power has been slowing eroded over the last few decades to a point now where they have little power. If shareholder rights got restored those huge pay days would be cut and the profits would be paid out as dividends to shareholders or reinvested into viable businesses.
Actually, it’s the drop of the capital gains tax from 90% to it current teens that spawned the ballooning of CEO salaries. Before, the board of directors couldn’t pay themselves, lest they incur the tax, so they reinvested. Now they all play musical chairs as CEO’s, collecting huge bonuses and golden parachutes. Stockholders don’t care, they’re getting their little bonus, too.
These rich old men who call themselves Republican are proving to be one of the greatest dangers this country faces. For those who haven’t seen this yet, Mitt Romney has called for people to hang Obama:
http://www.huffingtonpost.com/2011/04/30/mitt-romney-hang-obama-gaffe_n_855881.html
I’m just sick.
If what she said he meant when he said it was crystal clear,why is she out doing damage control? And how soon before she blames the whole thing on the liberal media?
If the quote on huffpo is accurate, I really don’t see anything to imply or incite violence towards the president. Romney is very clear in his use of the term “metaphorically”. This is a non issue. The implication is clear that he is talking about issues that can be used against Obama’s aspirations for another term.
I don’t agree. It sounds like Romney tacked on “metaphorically” at the absolute last minute, to give himself some cover. It was obviously a slip, but sometimes “slips” can be quite indicative of one’s inner thought process. He should’ve realized that using “hanging” in any context in this speech would be offensive. The article also statd that his comment was met with applause, and at that point, he should’ve publically apologized and admitted that what he said was wrong.
I’m not seeing it. Not only did he say metaphorically, he also used “so to speak”. And in the first paragraph, he was more specific in talking metaphorically with hanging the economic albatross around the presidents neck.
I’m not a Romney fan, and love to point out all the gaffs that the current crop of repubs come up with. Im just not seeing this one. But then that’s what makes discussion all worthwhile, we all see things from different perspectives and through different filters.
I might be inclined to chalk it up to an unfortunate ‘gaffe’ IF he was speaking off the cuff or answering a question during an interview.
However, in this instance he was giving a speech at a dinner. We all know how carefully crafted political speeches are, especially for those candidates who are beginning presidential campaigns. With the dark history this country has in terms of hangings in connection with men of color, he should NEVER have use that word in reference to President Obama, regardless of the context or intended meaning.
I agree that using a “hanging or noose” metaphor is not OK in the highly charged race baiting memes of the current GOP.
It’s like I’ve been puzzled about the teleprompter stuff. Now I understand that it’s a dog whistle because racists believe that people of color aren’t as “smart” as they are. Hence it’s why they think that it was affirmative action that got Obama to the top of the Law Review.
It’s a sad day in America.
Aspirations is another word that probably shouldn’t be used in a discussion about the proper context of the word hanging since the first definition of aspirations is the audible breath that accompanies or comprises a speech sound. Hanging would have a deletorious effect on Obama’s aspirations regardless of definition of aspirations for another term. Just my opinion.
I think Mitt Romney knew exactly how his statement would be taken. It was one of those subliminal messages to the racists among the Republicans (at this point, the vast majority of them). No one will make him take it back, just as no one in the Republican leadership has called on either Donald Trump or Sarah Palin or Mike Huckabee to shut up with the racist digs (whether birther or education related) at President Obama. Another instance of how the Republican Party now owns what is the lowest of the lowest in American political discourse. Remember that no one in the Republican Party leadership called Sarah Palin or Michelle Bachmann out about their violence-inciting discourse over the past two years. By their silence, let the Republicans be known for their ugliness.
OT, we attended a stunning organ concert this afternoon and are now listening to Brahms’ gorgeous German Requiem on a cd. What a weekend for music! Beginning with the royal wedding, then an Interlochen Arts Academy choral concert last evening and the organ this afternoon! Makes one almost forget about the ugliness among the Republicans today.
Romney’s “misspoken” statement reminds me of the “strange fruit” hanging from the trees in the south. He makes me think of puking. It is so obvious what kind of person he is to have “misspoken” in this way. I hope people of sound mind also see him for what he is.
I’m with you. I don’t believe people “misspeak”, especially when they make a living giving speeches and using words to influence people. I think he said exactly what is on his mind, and the implication is sickening.
Actually seems pretty simple. Kroc and other entrepreneurs were patriotic,flag waving,Americans that bought into JFK’s ask what you can do for your country and rethuglicans and Korporate Amerika of today want to know what their country………..no that’s not right. They demand to know what their country will do for them or else.
Thank you, Mr. Morris for adding to the number of sane voices who actually are also experts in the field. I fear you are outnumbered, and that Americans will continue to believe lies that oppose their self-interest, but we all must do what we can and speak out in areas we understand.
Very enjoyable article. I will forward and link.
Sorry for the glitch that prevented you from posting comments. Still not sure what happened, but I seem to have fixed it anyway.