Wednesday, April 18, 2012

The Jet Engine and the Oxcart

Tax Day is always an occasion for partisan political theater. This year, however, is a bit different. We're in the midst of a presidential election campaign, and the emergence of the Occupy Wall Street movement has propelled the issue of economic inequality into the center of the national political discourse.

On Monday, Republicans in the Senate blocked a motion that would have opened debate on the so-called "Buffett Rule," a revision to the tax code promoted by President Obama and Congressional Democrats that would set a minimum tax rate of 30% for all Americans earning $1 million or more. Even if the proposal were brought to the floor there's no chance in hell it would pass, as Republicans in both houses of Congress have denounced it as yet another example of Obama's plot to turn the country into a limp-wristed Eurosocialist hellscape. But in something of a role reversal, it has allowed Democrats to turn taxes into a cudgel against the Republicans. As the New York Times reports, according to polls over 70% of Americans support the rule, including over 50% of Republicans. For their part, Republican leaders in Congress are calling for a small business tax cut that would cost the federal government almost exactly the same amount of revenue it would take in if the rule were adopted.

Much of the debate over taxation revolves around the question of fairness: whether the very rich - who have enjoyed the lion's share of total income gains in recent decades - are shouldering their fair share of the tax burden while wages and incomes for working people continue to stagnate. But as the partisan wrangling over the Buffett Rule shows, there's a larger issue lurking in the background - an argument over what factors in the contemporary political economy drive economic growth.

In opposing the Buffett Rule, Republicans in Congress have rushed to the defense of the so-called "job creators" - the wealthy and the businesses they own and manage. Instead of raising taxes and redistributing income, they say, we should ease the tax burden on the rich in order to spur increased corporate investment and profitability - which will ostensibly promote job creation and economic growth. Republicans tend to be the most forceful proponents of this argument, but they're hardly alone. President Obama's stimulus package, for example, was heavily weighted toward tax cuts for individuals and businesses. As James Livingston points out in Against Thrift, people on the Left, Right, and Center tend to place the "jet engine" of economic growth and the "oxcart" of redistribution and social justice at odds with each other.

And he thinks they're all wrong.

The appendix of Against Thrift ("Capital in the American Economy: Kuznets Revisited") contains pages of technical definitions, charts, and graphs that make the empirical case for Livingston's argument that giving tax breaks to the rich and to businesses to spur increased investment and hiring is pointless at best. It's relatively tough going, so I won't try to recapitulate it here (but if you're interested the full text of the appendix, with graphs, can be found here). For our purposes right now, suffice to say that according to Livingston,

"The historical evidence shows there is no positive correlation whatsoever between lower taxes on personal income or corporate profits, increased private investment, and economic growth. The strong correlation we can demonstrate, in view of this evidence, is between lower taxes on corporate or personal income, declining net private investment, and speculative bubbles that led to economic crises, as, for example, in the periods from 1919 to 1939 and 1981 to 2009.

Put it another way. The financial collapse and the credit freeze that characterize both the 1930s and our own time are symptoms, not causes, of a broader economic crisis determined by our mistaken belief that to foster growth, we must provide capitalists and corporations with incentives to invest. In fact, these incentives are merely invitations to inflate speculative bubbles." (61-62)

The alternative diagnosis? "A greater dose of consumer culture and a higher volume of consumer spending induced by a redistribution of income will, however, address the causes of the crisis, and lay the groundwork for balanced growth in the future." (196)

I don't have the training to adequately assess many of the specific empirical claims made in the appendix of Against Thrift. But recent economic reports seem to offer a degree of support for Livingston's thesis. Last week, the Wall Street Journal reported that corporate America is stronger and more profitable now than it was before the recession, while the top 1% enjoyed an astounding 93% of the income gains in 2010, the first full year of "recovery." Needless to say, despite recent optimism for a more broadly-based recovery none of this has translated into meaningful income and employment gains for the majority of the population.

More on the sources of economic growth and development in the next post!

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