Though the theory underlying the Obama administration’s response to the current economic crisis is usually described as “Keynesian,” it’s interesting to note that John Maynard Keynes himself would demur. Michael Barone puts it well when he writes,
“Animal spirits,” said John Maynard Keynes, are the essential spring of capitalism. We depend on the animal spirits of investors, high earners and entrepreneurs for a growing economy.Keynes, a subtler analyst of market economies than the single-minded booster of high government spending that so-called Keynesian economists depict, knew whereof he spoke. People don’t just respond in linear quantum jumps to the incentives and disincentives they perceive around them. They perk up when their animal spirits are aroused, and they slump down into inertia when they are not.
A good illustration of this comes from, of all people, Whoopi Goldberg. Read the link, then check out this video (they’re from different parts of the conversation):
My wife watched the clip and read the transcript, then looked at me and said, “I didn’t think Whoopi was a Republican.” She isn’t, but she sure sounds like one here; and if someone like Whoopi feels this way, you can be sure a lot of other rich folk do too. I think Barone’s argument goes a long way to explaining why.
The Clintonites managed to hit a sweet spot with the 39.6 percent rate. It was a number that started with a three. To high earners, not bothering to calculate exact returns to the last decimal point but just concentrating on the big picture, it seemed that the government was taking just about one third—hey, maybe a bit more—of their incomes. They would get to keep the other two thirds, pretty much. So they proceeded to try to make intelligent investments and to earn large amounts of money without being preoccupied with how much the government would snatch from their hands.Quite a contrast with the 1970s, when the high income tax rate was 50 percent, and 70 percent on “unearned” (i.e., investment) income. In that environment, the animal spirits of the productive class were directed away from making productive investments and toward sheltering their income from seizure by the government. . . .I think there is a serious risk that the Obama tax proposals are going to bring back those days. Yes, they call for returning the high income tax rate only to the sweet spot of 39.6 percent. But they also want to reduce the amount of the mortgage interest and charitable deductions for high earners, which would channel less money to charities and more to the government (and thus to public employee unions and, through them, to the Democratic Party) and would raise the effective rate on high earners to above 40 percent—a number with a four in front of it.Add on to that the state income tax rates of 10 percent or so in place or in contemplation in New York, New Jersey, Connecticut and California—states with more than a quarter of the nation’s high earners—and you are looking at income tax rates above 50 percent.When you get a number with a five in front of it, you are in grave danger, I submit, of directing the animal spirits of our most productive citizens away from productive investments and toward tax shelters: “Those bastards want to take half my money, and I’m not going to let them get it.” You are at risk of directing our economy back into the unproductive slog of the 1970s and away from the robust growth of the 1980s, 1990s and most of this decade.
His argument is, in essence, that most economic actions aren’t purely rational responses to a detailed command of the facts, but rather are in response to more general perceptions, and that these perceptions don’t shift gradually, little by little, but rather tend to do so all at once when a particular threshold is crossed. As he notes,
When gas prices earlier last year were at $2, $2.50, $3 and $3.50, most Americans opposed oil drilling offshore and in Alaska’s Arctic National Wildlife Refuge. When they hit $4, opinion shifted. The Santa Barbara County Board of Supervisors and the governor of Florida suddenly favored offshore oil drilling. As for Alaska, nuke the caribou!
This suggests that taxes can in fact be higher than most conservatives would prefer without causing much of an adverse effect, as long as they don’t feel higher to the folks whose investments drive the economy; it also suggests, though, that if you overshoot your target even a little, the adverse effect of your miscalculation is likely to be a lot worse than you would consider to be rational. If Whoopi’s reaction is any guide, I suspect the Obama administration isn’t going to know what hit it.
In my view, higher taxes are just inevitable. Reagan and Bush II share a propensity for fostering massive explosions in the national debt coupled with having no intent whatsoever to pay the money back in any responsible way. But someone has to pay for all these new wars and other costs, right? The idea that free-market fairy-dust will sprinkle it away doesn’t seem to work out for us, so plan B is to raise taxes. Someone has to do it. If it drives away investments the top couple percent would otherwise have made, that’s a shame, because I see no way to avoid it unless the government spends less, and neither party has any intention of doing so from what I can tell. If Obama *didn’t* raise taxes, it would just fall to someone else later down the line to do so, unless some regime emerges which will actually spend less.
I know what I’d cut if it were up to me, but no one’s going to elect a pacifist, so I doubt I’d be listened to.
As for the states – they have less of an excuse, but I know that some of it in OH and CA at least has to do with picking up the slack as the Fed (Bush) has cut social services for the poorest of the poor. I’ve seen that happen all over the place, and it doesn’t make the poor go away or have fewer needs, it just makes someone else pay the tab – in this case, the state’s taxpayers.
This isn’t all that’s happening – the states were also spending like wildfire. They bought into the myth of infinite economic growth that has done such damage so far. If we could be weaned off of that, I think many of our economic problems would suddenly be very soluble.
You’re right, a lot of the problems were caused by rampant irresponsibility at the state level; I’m not sure what can be done to deal with the consequences of that. It’s probably different in every case.
I should note, too, there is some small hope of a future administration that will actually cut spending. If Sarah Palin is the GOP standard-bearer next time around, there’s hope, because she actually has a track record of cutting spending (and that at a time when Alaska was rolling in oil money), and if the Obama presidency continues in this vein, there’s actually likely to be the political will in the GOP for spending cuts. It probably won’t last very long (unfortunately), but the moment will be there that Gov. Palin, or someone like her, could seize.
I don’t like Republicans or Democrats on taxes.
I want a system fairer to someone trying to grow a business and less protective of the ultra-rich. Most upper middle class people have an effective marginal tax rate of 50% or more on their last dollar while ultra-wealthy investors pay only 15% on their income (derived from dividends and capital gains.) This creates a hurdle that protects big businesses from a bunch of little guys growing up and competing with them. It also drives the little guy to the bank to borrow for his business because he can’t save to grow his own business.
Warren Buffett says he was taxed at 17.7% on the $46 million he made in 2006 while his secretary, who earned $60,000, was taxed at 30%. He offered a $1,000,000 bet to other Forbes 400 members, betting that their average federal tax rate (income and payroll) is less than the average rate of their secretaries and receptionists. Most of the 400 ignored him while a few friends declined the bet but did the calculation; their results matched his.
I’ve long favored a revenue-neutral, class neutral, source-of-income neutral transaction tax to replace all other federal taxes—including payroll taxes for social security and Medicare.
Here’s a website with a similar proposal:
http://www.apttax.com/
Let’s see either Republicans or the Democrats really embrace this!
I don’t trust transaction taxes of any sort. I understand the argument, but I think the law of unintended consequences would rise up and bite us in a big way if we tried that. For my part, I’ve long preferred the Alberta plan that launched Stockwell Day’s career (even if he did come down in flames not too much later): one tax rate on all income from all sources above a certain amount. Those who make up to, say, the poverty line pay no taxes at all; everyone else is taxed at a given rate on the lump total of whatever they make above that threshold.