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Wednesday, August 03, 2011

Repost: Economics of a Progressive Tax Rate

INTRO: The following post from November 3, 2008, has been getting lots of hits (well lots of hits for me) recently, so I thought I would bring it up to the front of the blog and see if there is any discussion. The essential theory is that a progressive tax policy is necessary to put money in the hands of consumers, drive demand and create jobs. President Obama, unlike President Clinton, has been unable to get Congress to go along with a progressive tax policy. His job numbers are closer to flat taxers like President Bush. And, when I say flat tax, I don't me a flat rate, I mean people who pay taxes generally pay the same rate, because higher income earners are able to avail themselves of legal ways of reducing their taxes. As always, comments are welcome.

A significant money cycle in our economy is employers paying employees who become consumers. Consumers buy things from service providers who become employers. So, you have this question we've examined before about whether it makes sense to make sure the employers have money to spend, which will in turn lead to expansion and therefore more employees to become consumers OR to make sure consumers have more money to spend, which will in turn lead to more buying and therefore more money for service providers.

It makes sense to me that the latter is the best way to go because consumers will spend money more quickly and drive demand, which is necessary before a business can expand. In other words, you can give my wife more money through tax breaks, but she can't hire new teachers until there are more students who can afford to attend her school.

I believe this makes a lot of sense, but I also believe it is borne out by history. Consider the following chart that provides the maximum income tax rate in the United States.

So you can see that we have basically lowered the top tax rate from over 90% during Roosevelt to something like 37.5% under W. Bush. Now, let’s take a look at job creation. You will see a pretty dramatic trend if you consider party affiliation.

The final chart is my creation. It is pretty rough, but I think it fairly captures the change in tax rates associated with each President and the job creation during the same period.
So, Roosevelt and Clinton both significantly increased the top tax bracket—made the tax structure more progressive—and saw large job creation. (In fact, if you look at the detailed chart, you’ll see Johnson did the same thing and he also had good job creation.) Reagan and Bush reduced the top tax bracket--made the structure more flat--and saw much lower job creation than, in Reagan’s case on either side of his presidency and in Bush’s case than before his presidency. Reagan and Bush also saw a dramatic explosion of the deficit.

It’s from 10,000 feet for sure, but this evidence seems to support my notion that a more progressive tax policy is a better economic policy. Particularly with the top brackets being so low when compared to our history or to other countries.


Tuesday, August 02, 2011

Do we measure truth by our own capacity?

After finishing Montaigne's lengthy essay on education, I discovered that my Great Books reading list included his short essay "It is folly to measure the true and false by our won capacity" and decided to finish it too, in my effort to catch up. I think it to be a much better conversation starter.

Montaigne talks about the dangerous habit of those "who think they have more than common ability" to attribute "belief and conviction to simplicity and ignorance." He confesses that although he was once guilty of this himself, he is now reformed writing,
I presently pitied the poor people that were abused by these follies. Whereas I now find, that I myself was to be pitied as much, at least, as they; not that experience has taught me anything to alter my former opinions, though my curiosity has endeavoured that way; but reason has instructed me, that thus resolutely to condemn anything for false and impossible, is arrogantly and impiously to circumscribe and limit the will of God, and the power of our mother nature, within the bounds of my own capacity, than which no folly can be greater.
In our modern context it is easy to generate a list of beliefs that are generally attribute to simplicity and ignorance, at lease by the Prius-driving, NPR-listening, espresso-drinking liberal crowd to which I belong. Creationism, Virgin Birth, Bodily Resurrection, Intercessory Prayer, Physical Afterlife.

Montaigne, as it turns out, may be thinking of a pretty similar list. The direction he takes it, however, is different than I would go. Montaigne issues another of his condemnations of the Reformation and defenses of the Catholic church, including this, which likely sounds familiar to modern readers, "We are either wholly and absolutely to submit ourselves to the authority of our ecclesiastical polity, or totally throw off all obedience to it: 'tis not for us to determine what and how much obedience we owe to it."

In contrast, I am wary of my own certitude, despite the frequency with which I am certain. Nonetheless, my wariness is not generated by the notion that I should submit to authority, but that perhaps I am missing value tucked away in these believes held by those who I belittle with the tag of simple or ignorant. Perhaps the Truth lies somewhere in between prayer is valuable as a breathing exercise and prayer is a way to call on God to remove a tumor or heal a liver. Perhaps the inability to access the Truth is a measure of the limits of my own capacity.