Well, we varied top marginal tax rates hugely during that period, to over 70% in the Carter years. No budge. Considering that raising tax rates is the main way you’d expect to move tax revenue, the failure of that policy tool is a pretty big limitation.
I did point out above that many companies have record amounts of cash - although I think it is closer to $1T than $2T but I’m not positive.
That cash will initially be used for capital investment, mergers and acquisitions (M&A). But in the grand scheme, that’s not a lot of money. Once things pick up, demand for funding will likely rise in a non-linear fashion. Although that is technically an exponential increase, it will be fairly shallow - at least at the beginning. But due to the multiplier effect, that can turn sharply higher very quickly. Such moves are difficult to predict which makes timing the fed’s exit strategy equally difficult.
While it is true that the largest companies have no immediate need for cash, that doesn’t apply to everyone. Many small to medium size businesses are still finding it difficult to borrow - not to the extent of a year or 2 ago, but access to funding is still spotty. That will continue to improve and will become an outlet for bank lending.
There is also the arena of consumer credit. Lenders are going to be much more cautious in underwriting consumer loans going forward, but they have already been lending and that will continue to increase. Yes the savings rate ticked up sharply during the recession, but don’t expect that to continue to the same degree. We won’t go back to the profligate levels of debt we saw in 2006-7, but our new found frugality won’t last either.
As noted above, the problem is with the money multiplier. If you have a constant flow of new money into the economy either from firms using idle cash or banks using excess reserves to originate new loans, you get accelerated growth in the money supply via our fractional reserve banking system.
Right now, with the real multiplier under 1, accelerated growth in the money supply isn’t a danger. But that number is moving up - as it has been since Feb/March (see above). As it moves over 1 and closer to the traditional range of 2-3 (even though in theory it is supposed to be the inverse of the reserve ratio - which would make it around 10), new money will be generated at an increasing rate. THAT is when you start to run into problems and have to worry about inflation.
The trick is getting the timing right. That will be the fed’s biggest challenge. As I’ve mentioned previously, pull back too soon and you stunt economic growth, pull back too late and the inflation cat is out of the bag.
But that only means that we structured taxes differently, not that we actually tried to raise > 20% of GDP.
US business is sitting on well over two trillion dollars. And they’re not investing any of it incapital investments. That’s because they already have massive excess capacity but mostly because there isn’t any new demand for them to make investments necessary. 70% of GDP is consumer spending. US consumers are maxed out credit-wise, have seen their main assets, their houses drop in value and now the entire boomer generation is facing retirement with a lot less money than they thought they’d have and are not going to be doing too much spending, and that goes for the US consumer as a whole. So where is the demand going to come from that’ll allow the economy to pick up?
Correct. Something that people forget when talking about the higher rates is what shelters were available in the past. It used to be a lot easier to set up trusts for your kids, without a limit on the amount you could put into and the tax treatment. That helped create more of those rich-kid trust fund babies of the past, something that is much more difficult to engineer today.
I haven’t been following the financial news very closely the past couple of weeks, so I was focusing more on the intermediate term than what’s going on right now. My general impression as to current climate is that things are still very rough for a lot of people. It’s worth remembering though that despite official unemployment still being close to 10% and real UE being maybe double that, 80% of the population does still have a job. The only impediment to their continued spending is the same air of caution and possibly even fear regarding their future prospects that is responsible for the increase in the savings rate.
Also, even though 70% of GDP depends upon consumer spending, very little of that spending could be considered truly discretionary. Most of it goes to food, shelter, clothing and medical care, so that money is going to be spent regardless. People will try to save where they can, but they’re not going to go native to do it.
As for capital spending, I think you can make a good argument for that being the smart thing to do right now - in spite of continued uncertainty about the future. I think most business people think that things will continue to get better. The pace might be a lot slower than anyone wants, but they’re still hopeful - as opposed to putting all of their money into MRE’s and underground bunkers. When things do turn around, the companies that have taken advantage of this lull to position themselves for future opportunities will be richly rewarded. In many areas, so many competitors have gone out of business that the eventual increase in demand for those who remain is all but certain.
M&A activity is an aspect of this and it has been picking up over the past year. Again, it’s still anemic, but it’s coming back and I would expect to see a lot more of it.
So increasing revenue is not the primary reason for raising taxes? What are they raised for?
The reason you can’t just jack up the rates and increase revenue whenever you want is that raising taxes shrinks the economy you’re trying to tax. Take it from notable right-winger Christina Romer: “Tax changes have very large effects: an exogenous tax increase of 1 percent of GDP lowers real GDP by roughly 2 to 3 percent.”
So, no, just saying we’ll double the tax rates in 2035 and that’ll solve everything is not a workable solution.
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Themain impediment to them picking up spending to previous levels is that their main asset, their house, just crashed in value and a big chunk of their equity just disappeared. Likewise if they had any stock market investments pre-meltdown. Now they’re looking at retiring with a lot less equity than they had pre-meltdown so are going to save like crazy for the next few years.
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It’s amazing the savings people can make if they put their minds to it. Where there is a possibility for increased spending to a level that would give us economic growth is with the top 10% of earners who are responsible for 40% of total consumption. They’ve been relatively inaffected by the meltdown and unemployment and as their stock portfolios come back they may start spending and provide some level of recovery. But 10% of the population doing OK is no basis for long-term growth and the other 90% of the population are going to become increasingly angry at the increasing income inequality. So even a short term recovery of sorts begets a bigger long term problem.
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Companies currently have record excess capacity. They can afford to wait for demand to pick up before investing in new capacity so they will. And where is demand going to come from?
I just entered a long post about this in the Libertarian thread.
The fact is, since 1950 marginal tax rates have been as high as 91%, and as low as 28%. FICA taxes have been as low as 1.6% and as high as 6.8% of GDP. Corporate tax rates and excise taxes have changed dramatically. And yet, total government revenue has averaged 19.5% of GDP, is normally distributed over time, and has had only three very short excursions past one sigma. In other words, the change in medium and long term tax revenue is not correlated at all with tax rates, but appears to be normal variance around 19.5% with short-term changes due to the business cycle and some rapid changes in tax policy which managed to push the overall revenue up or down a bit, but only for a year or two before revenues returned to the mean.
Other countries exhibit similar stability when it comes to personal income tax rates. Some countries manage to tax their citizens a little bit higher, but they do so by imposing VAT taxes rather than mucking about with personal income tax rates.
The upshot of this is that if you think you’re going to pay for the deficit by raising income tax rates on the rich, you’re fooling yourself. It’s not going to happen.
Agreed.
I have to think harder about that. If you said, “Chronic deficits during expansions” though, I would agree.
Well the effect almost certainly isn’t as strong, since the US borrows abroad in dollars, while other countries issue bonds in foreign currency. So if the dollar collapses, the US doesn’t have to worry about exploding interest payments. But if Argentina borrows in dollars and it’s currency collapses, their foreign interest payments necessarily balloon.
That paper is written by 2 exceptional economists, Rogoff and Reinhart. Here’s their latest paradigm-shifting book (Take away message: actually, countries do default with some regularity.). That said, the paper you refer to overstates its case. They have a small sample problem: countries with debt ballooning to 90% of GDP typically are coming off of bad crises, financial or wartime. Now maybe the debt is sapping the country’s energies – but a simpler explanation is that 90%+ countries also typically suffer from balance sheet recessions, which are hard to overcome. In scientific terms, there are some severe confounding factors which apparently they did not address sufficiently. Not that it’s easy. Cite.