Low Taxes, Deregulation, Privatization Contribute to Recession

Why Reaganomics Is Bad for America

Remember what I said yesterday about how our federal tax burden as a percentage of household inome has been decreasing since 1979? Lower taxes are good for us and for the economy, right?

Maybe not. Neighbor John Hess pointed out a David Sirota article which says lower tax rates not only don't correlate with economic growth, but may actually make recessions worse. Sirota cites Eliot Spitzer's chart and commentary on the fact that from 1951 to 1963, when marginal tax rates topped 90%, the economy grew more than twice as fast as it has during the past decade, when marginal tax rates have been below 40%. He also notes that Greece, a current tea "party" favorite example of European socialism leading to fiscal disaster, is in Dutch not for spending too much but for taxing too little.

This makes perfect sense. Though the Reagan zeitgeist created the illusion that taxes stunt economic growth, the numbers prove that higher marginal tax rates generate more resources for the job-creating, wage-generating public investments (roads, bridges, broadband, etc.) that sustain an economy. They also create economic incentives for economy-sustaining capital investment. Indeed, the easiest way wealthy business owners can avoid high-bracket tax rates is by plowing their profits back into their businesses and taking the corresponding write-off rather than simply pocketing the excess cash and paying an IRS levy [David Sirota, "Are Low Taxes Exacerbating the Recession," Salon.com, 2010.07.09].

Robert Reich agrees, noting that since the late 1970s, we've been concentrating wealth in the hands of the wealthy few by letting the rich treat more income as capital gains, cutting capital gains taxes, and boosting sales and payroll taxes that hit lower-income folks harder the higher-income folks.

Reich also sees two more pillars of Reaganomics, deregulation and privatization, promoting income inequality and making it harder for us to get out of the recession. When big business give workers less pay and benefits, fire them at will, and ship jobs overseas without penalty, the middle class has less wealth to pour into the economy and lit us back out of recession. The wealthy class that cashes in on Reaganomics has a bad tendency to gamble that money on the markets, creating speculative bubbles that burst and leave all of us struggling to clean up the recessionary mess.

It's worth noting that Reich doesn't place the blame solely on Saint Ronald. He says we Democrats have lacked the guts to tackle income inequality. Income inequality breeds political inequality: money flows to the top, and the folks at the top buy legislation that keeps them at the top. Grrr.

The Reagan legacy of historically low taxes, deregulation, and privatization have contributed to today's persistent recession, massive debt, and growing income inequality. We can make our economy (and our politics!) better for everyone if we raise taxes on the rich, strengthen services and the safety net for the lower and middle class, and, yes, share the wealth of our nation more equitably.

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Related: Reader Jackie Bielke points me toward this interesting argument: if the tea "party" frets about the federal government (which is us, dedicated to the general welfare, accountable to the voters and taxpayers) consuming 20–25% of GDP, they should be just as alarmed by the top 1% of income earners (the unaccountable, unchecked, self-serving rich) eating the same amount of GDP... shouldn't they? If wealth is power, doesn't a wealthy elite that has as much money as Uncle Sam threaten the proper balance of power?