Respected Gentle Reader JB in CA posts significant questions about our assertions in our recent post "Ignorant Politics of Envy on a Rampage." In response, we offer this rambling answer, too long to post as a comment on his comment and too likely to provide massive insight to all Gentle Readers to be consigned to a series of comments only:
First, we find the so-called "better for democracy" argument for redistributive taxes on the wealthy to be at best of marginal importance and at worst (and closer to the reality) an example of the kind of idea that, if acted upon, creates a worse situation in its solution that in the so-called problem.
That's maybe the worst sentence we've ever written, so we'll try to clarify. Sure the money of the rich is influential in politics, but it tends to cancel itself out inasmuch as the rich don't have a singular political point of view. Soros is an example deliberately chosen, as he bankrolls the far left presently. His kind is always around. Why do Democrats spend so much time raising money in Henry Waxman's congressional district?
But stipulating that the problem is real, the solution is worse, because it then invests power in gatekeepers who decide who does and doesn't get to spend money on political speech or who decide how little money people get to keep to curtail their power. The answer to the latter, of course, falls broadly at levels that no one seriously contemplates putting into practice, as they require confiscation that would utterly destroy economic activity. Lesser practical tax rates simply don't reduces the wealthy to anything resembling parity. They'll still shell out, probably to get their taxes reduced!
Third, we don't think that voters are so stupid that they can be utterly manipulated all the time. See the famous quotation widely attributed to Lincoln, about fooling some or all people some or all of the time. Yes, money influences politics, but the very fact that the body politic, pummeled with political speech underwritten by the rich, moves first to the left and then to the right demonstrates that no one is managing to manipulate consistently. So if rich people want to spend their fortunes arguing with each other about politics, let them. We'll all listen and then vote more or less as we probably would've otherwise.
We even doubt that money makes the debate toxic. It makes it loud and ubiquitous, maybe. But as to toxicity, we think that has nothing to do with money. Before politicians raised huge sums, they still talked nasty.
Now to the specifics of tax cuts, we take issue with an assertion or two. First, we doubt that businesses are sitting on $1.7 trillion in cash right now (correlative fact to lack of hiring, of course) merely because they fear a double-dip but because they fear the need for massive liquidity. That's a consequence of three things, two of which could be addressed by our government. The one that's fixed is the recent liquidity crisis, which makes cash king for all who lived through it. The second is the constant chatter about higher taxes for corporations or for carbon emissions or other presently stylish villains. The third is the awful financial bill presently before Congress, which would stupidly require the same capital margins for real-economy businesses buying derivatives to hedge their losses as for banks that buy them as speculative investments.
So if tomorrow the governing party said, no we won't raise taxes on anything presently, and we won't legislate capital requirements for derivatives used as a hedge against losses in direct investments, we'd see a positive move on the capital markets. That it turn would lead to higher employment, as all that money would begin to move into something that would spur activity (it always does, and global money looking for a home doubtless fueled the just-ended housing boom, at least in part).
Now, please don't assume that by talking about higher or lower taxes on the rich we are speaking about tax policies in their entirety. We speak only in response to the present administration's and others' call for higher taxes on the so-called rich, as if doing so somehow benefited the not-rich. Inasmuch as economic theory and history show otherwise, it's simply a bad idea that we think indicates bad faith on the part of politicians who have to know that they're simply appealing to people's envy.
If we were to pick a tax to lower, it'd be corporate income, inasmuch as our Republic's rate is higher than everyone's in the world except Japan's. We've got some generous deductions to soften the blow, like accelerated depreciation schedules and the like, but the rate is just astronomical. People live with the comforting illusion that by taxing corporations, they're putting money in The People's hands, when in fact they're making prices higher, exports less competitive, businesses harder to keep afloat, capital harder to raise, and dividends (which get paid out to lots of people who aren't rich, like retirees with mutual funds in their IRAs and 401[k]s) lower.
So lower the corporate rate, maybe reduce or eliminate some corporate deductions to offset a part, and watch what happens.
If we're talking about a tax cut for individuals, sure, make it across the board. Of course, that's effectively a tax cut for the rich in the jargon of Jackson's party, even if it benefits just one rich person. We pointed out to some folks in the early part of the previous decade that the awful Bush tax cuts for the rich temporarily reduced the SWNIDish federal income tax to zero, apparently affirming that SWNID was temporarily rich. So yes, across the board tax cuts.
But note well that with the present structure of taxes, cuts to federal personal income taxes will benefit only the little more than half of households who actually pay federal income tax. So if such are proposed, expect Jackson's party yet again to say that if a tax cut is to benefit everyone, it has to mean a redistributive tax refund to people who don't even pay income taxes. The rhetoric on this subject has been so out of kilter as to defy the boundaries of good will and common sense.
So to be effective for the present economic purposes, the tax cut will have to benefit the wealthiest tax payers disproportionately, primarily because that's where most of the tax dollars are coming from to begin with.
Put more simply, our progressive tax system is presently too progressive. We aren't impressed by arguments that at times in the postwar era taxes rates on the wealthy were much higher. Those were different times--when the postwar lack of capital abroad left American manufacturing without competition, but also when wealthy people simply redirected what could have been productive capital to tax-avoidance maneuvers. The deleterious effect of the latter was ameliorated by the former. Today it would not be so.
Anticipating a question or rejoinder, we also aren't impressed by those who insist that more citizens should pay federal income taxes. All wage earners pay Social Security and Medicare taxes, so they're all taxed by the feds. That's enough to answer the argument that representation without taxation is tyranny.
As to deficit worries, Friedman was utterly right in the 1970s when he said that the problem is not government deficits but government spending. Whether the government takes a dollar out of a taxpayer's pocket by taxing it our takes a dollar out of the capital markets by borrowing it, the government has moved the dollar from what is on balance a more productive economic activity ("No one takes better care of your stuff than you") to a less productive one. Now's the time for BHO and company to renounce their use of so-called emergency stimulus spending to establish a new baseline for future federal budgets, returning spending to levels commensurate with pre-recession times. Reducing federal spending as a percentage of GDP is way more important than reducing federal borrowing as a percentage of GDP, though doing the former will inevitably do the latter, even with tax cuts, because tax cuts spur growth that boosts tax revenues.
Really, simply extending the Bush tax cuts for another decade would be nice, and maybe sufficient to the moment. The Dems painted themselves in a corner on this one, demagogueing the Bush cuts for a decade. Now they really can't afford economically to let them expire, but they'll be exposed as hypocrites if they extend them. THAT's where the politics of envy have got us.