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Tuesday, June 23, 2009

The Wealth Redistribution Has Begun But Problems Loom


March 30, 2009 12:23AM
The Wealth Redistribution Has Begun But Problems Loom
By Brian Sullivan


While campaigning, President Obama made the now-famous comment to the now-infamous plumber that he wants to “spread the wealth around” by raising taxes. He certainly isn’t alone these days in wanting to stick it to the wealthy. Protesters at the G20 meeting, in the streets of New York City and on bus tours of AIG executives’ homes are all calling for higher taxes and their populist rage is being heard. New York state has agreed to a massive tax increase on those making more than $300,000 per year. Other states are discussing similar moves. The federal government’s tax increase on those making $250,000 per year will begin in 2011. That hike is also likely to be accompanied by a reduction in the amount of interest allowed as a deduction on home mortgages. It is a tax triplet whose cumulative impact is that a doctor in New York making $500,000 per year is facing a tax hike of more than $2,000 per month. That increase will then be scattered through government spending, a “middle class tax cut” that provides a two-income family with a meager $13 more per week, along with the filling of a variety of state budget gaps, particularly in government employee pension plans.
The weak economy, bank bailouts, AIG bonuses and a collapsed housing market has created a wave of anger at the top end of the economic spectrum. Out of work laborers hold signs saying “tax the rich,” seemingly under the belief that higher taxes are a panacea to America’s, or at least their, economic problems. Those groups are going to get what they are asking for, as taxes are set to rise on a number of different fronts. And while the higher tax proponents will net a small political victory, history says they will likely encounter few big changes in their own scenarios.
Higher marginal tax rates may provide families with a few extra dollars of temporary relief, but are unlikely to provide better job prospects long term. Higher tax nations do not traditionally have lower unemployment rates than the United States, and periods of higher taxes in America haven’t helped the under or unemployed find new work. In fact, generally the opposite is true. As an example, higher tax European and Scandinavian countries have traditionally also posted much higher unemployment rates than the United States. The percentage of individuals actually looking for work (and are thus counted in those figures) is even lower in these countries. Only a few years ago Italy found itself out of the top 100 list of national employment rates. Many European nations actual unemployment rates are even worse than the numbers indicate, as there are millions in those nations who live entirely off state sponsored welfare their entire lives and are thus not measured in official data. France, a country considered a model of socialist economic thinking more than most, is going in the opposite direction of America and cutting income tax rates. In 2007 the new government led by Nicolas Sarkozy eliminated income taxes on any “overtime” work done beyond the traditional 35-hour work week as part of an overall plan to increase French competitiveness and productivity.
There also appears to be little positive correlation between high taxes on the wealthy and job creation in America. The top tax rate in the 1970s was a staggering 70% yet unemployment averaged around 7-8% for most of the decade, topping out above 10% for the first few months of 1983. Only when the impact of the Reagan tax cuts of the early 80s began to be felt did joblessness fall. Franklin Roosevelt raised the highest end tax rate to 94%, and while the unemployment rate did fall in the later half of the 1930s it was still more than 17% in 1939.
The favored argument of those in favor of higher taxes is that the Obama top-end is simply placing the tax rate back to where it was under Bill Clinton in the go-go 1990s. Supporters of that era tend to forget two important things. First, the 90s decade was highlighted by the boom in personal computing and the growth of an entirely new industry in the Internet and software. Second, we found out the hard way that much of the “go” in the “go-go” 90s was based on a bubble economy in tech stocks. The problem now is that we are recovering from a much bigger economic problem - the housing bubble created by the Fed’s interest rate cuts after the tech bubble burst and the terrorist attacks on 9/11. We also lack a nascent technology such as the Internet to help build a new economy and good jobs to drag us out of the slump as we did in the early 1990s.
New York is raising taxes on the very top earners by a staggering 31%. The second highest group of earners will face a smaller but still punishing tax increase of 14.5%. Assuming many of those earners do not move to lower tax states and their incomes stay the same (big assumptions in this economy), those tax hikes will together add $4 billion dollars to the Empire State’s coffers. It sounds like a lot until you consider that New York’s budget deficit is a whopping 400% more than that amount at $16 billion and growing. Ironically, much of that huge budget gap is due to falling income tax receipts as many of the “rich” Wall Street crowd lose their jobs or make less money. Until those high paying and high tax generating jobs return, the burden will grow on the fewer high earners left. That is, until they too finally break down, leave the state or do as many high income earners do and underreport their incomes to get around higher taxes.
Sadly, it is likely those screaming loudest about higher taxes on the rich who will get hurt the most when they get them. Travel is already down 30-plus percent to Las Vegas this year and the city has one of the fastest growing unemployment rates in the country. Retail workers across America are losing their jobs as stores close and companies go under. Towncar drivers in New York report business is down even more. The stories are endless, but the spending of those with money is not anymore. In the end, that doctor in New York will probably take one fewer vacation per year, drive his car for a year or two longer before buying a new one and perhaps even trade down into a smaller home. Lost in the frenzy though, few will care. Except for the bellhop at the hotel, the car salesman or the worker at the furniture store.
Bizarrely though, the higher tax crowd seems to have little interest in discussing real job creation or long term improvements in the economy. The shouting seems to be more punitive. Many “working party” type organizations have long pressed for tax hikes on those making more than $250,000 per year, saying that the wealthy should “share the sacrifice.” Notice the tone of the language. Instead of “how can we make things better” we instead hear “we should all suffer together.” The implication seems to be that it is more desirable to bring the top down than to try to bring the bottom up.