In talking about the budget, I have mentioned that taxes have to increase. Some people would argue this will kill growth. I hate to break it to you, but raising marginal tax rates a few percentage points is pretty minor. Barry over at the Big Picture debunked this line of thought a little bit ago.
Here are the links.
Link 1
Link 2
In talking about raising taxes, I am not talking about jacking rates up a gazillion percent. I am talking about raising them 3-4% on top earnings and increasing the amount of income subject to social security tax.
I should also add -- no one has ever produced a real world laffer curve -- that is, no one has even been able to take the US economy, its population and tax rates and determine where the optimum rate of taxation is based on Art Laffer's "logic." As such, I put it down in the pure crappola bin.
The Fed as a Fig Leaf
51 minutes ago
5 comments:
It makes sense that nobody's been able to create a laffer curve because ultimately government's role is both to tax and to spend. If the government had a tax rate of 15% but took that money and burned it in a pyre, then clearly the economic impact would be different than if they taxed at a 20% rate but then spent that money on infrastructure, R&D subsidies, etc.
This is the fundamental flaw in the Republican driven argument that tax cuts are always good and tax increases are always bad. The reality is that how the money is spent is as critical if not more so than how much of it is collected. Countries can see high rates of growth with high tax rates provided that the government spends the money wisely.
The other flaw in the theory is that there's a direct correlation between your taxable income and your productivity. It's this Randian inspired notion that somehow the technocrats of the country will take their ball and go home if their marginal rates go up a few percent. That's provably false and if that extra revenue is ultimately spent making a smarter healthier work force, then all of those Galtian wannabees benefit.
Why all the enamorment about raising taxes? Reduce spending for goodness sakes. The government shouldn't be so eager to get into people's pants -- be it the Democrats who want to raise taxes or the TSA.
It hardly matters if inflation accelerates rapidly. Bernanke’s biggest flaw is that he thinks this is only a credit contraction recession, so he can fix it with credit expansion tools. He doesn’t realize that he is up against (1) a generational shift to the Gen Xers who got buried in student loans, and view credit very differently from the Baby Boomers, (2) the retirement of said Boomers, the pig in the python with the largest cohort turning 48 ( the year of peak consumption per Harry Dent) in 2005 – did something change after that? And (3) technology, which slashes prices every year (OMG – deflation!).
SurviveTheGreatInflation.com the book launched yesterday – Bernanke isn’t going to change – given his history, he can’t – and Obama doesn’t have any idea how awful his appointments were. It's inflation coming, not deflation. Don't ever bet against the Fed.
techperson,
I'm pretty sure Bernanke is aware of the situation and all the issues with it, but he's in charge of the Fed and so that limits what he can actually do. At the Fed he can do only one thing to affect inflation and employment: adjust interest rates. Whether that's adjusting the overnight lending rate, or quantitative easing, those are the only tools he has.
Having said that, your arguments don't make a lot of sense against your comment that huge inflation is coming. All of what you describe there is inherently deflationary. Gen xers burdened with debt not spending, boomers pulling their investments out of the market and sucking up more government dollars, and technology shifts are all either deflationary or drags on the economy.
So where is this magic inflation coming from? If Bernanke opens a giant credit spigot and floods the market with dollars but none of it ever gets loaned out, then it's not inflationary. If people start making use of that credit, then he turns down the spigot, increases interest rates, and prevents inflation. It's pretty straight forward, the only complication being figuring out when to adjust the spigot.
Given the amount of effort the Fed has put into flooring interest rates, I would not be surprised if we saw a brief bout of above trend inflation once the economy gets back in working order. But it's unlikely, unless the Fed really botches it, that we'll see dangerously high inflation.
So D and R will never agree with each other and each blame the other side.
A question about a consumption tax in concert with or to replace income taxes. With exemptions for basic food stuffs, low priced restaurants and low end clothing, does it make sense? I know that Europe and Canada have consumption based taxes (that are greatly despised by the citizens of those countries. Since the simple tax reform dreamed up by the "cat food commission" won't ever be enacted does a well designed consumption tax have any chance? Would it work?
Just wondering.
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