Rein in the Rich: How Higher Taxes Could Help the Economy
Obama, for his part, says that a tax increase would not cost jobs; that it would help the economy by reducing the deficit; and that it would be fairer than imposing new taxes on the middle class. ‘I’m not going to ask students and seniors and middle-class families to pay down the deficit while people like me who make more than $250,000 are not asked to pay a dime more in taxes,’ he has declared.
Obama is right that a tax increase on the rich would not cost jobs; and he is certainly right that it would be fairer to tax the wealthy whose incomes have shot up, even during the downturn. And he is also correct that taxing the rich will actually benefit the economy—but not primarily for the reasons he cites. If the government extracts income from the wealthy, and then spends it on a $50 billion infrastructure program, an extension of unemployment insurance, and a Social Security payroll tax cut, as Obama has proposed, that will not only boost the recovery, but will also discourage the wealthy from rerouting their savings into the kind of speculative activity that helped create the Great Recession. A closer approximation of income equality is not only better for our souls—it’s also better for the economy. The question of fairness aside, the rich have been making relatively too much money for the country’s good.
Last September, the Congressional Research Service published a report countering Republican claims that lowering top tax rates would lead, or had led, to higher economic growth. ‘Changes over the past 65 years in the top marginal rate and the top capital gains tax rate do not appear correlated with economic growth,’ the report concluded. Republican Minority Leader Mitch McConnell responded by having the report suppressed, but its findings were incontrovertible.
The CRS rested its findings, however, on the lack of a correlation between marginal tax on the wealthy and growth. It didn’t try to explain why higher rates might have contributed to faster growth, and lower rates to slower growth, and even recessions. This view remains highly controversial today, even among liberals, but during the 1930s many New Dealers took this position. Recently, Rutgers economic historian James Livingston has reasserted it in an excellent book, Against Thrift.