Sunday, June 17, 2012

No, there'll be NO 'Tax-amageddon' or 'Fiscal Cliff'!

As the nervous Neolib nabobs and Nellies keep howling (e.g. 'Shift This Cliff', in The Economist, June 16, p. 15) they appear to get more desperate by the second. The U.S. must pay attention! The fiscal cliff is upon us! Or - when they tire of that descriptor, they invoke another: "Tax -a-mageddon'. Of course, neither will prove true, since the tax cut expiries they are so worried about have done nothing but damage to the economy since being implemented. I am not going to go over the evidence for that, namely the Bush tax cuts, but those who are interested can check out my earlier blogs:

The fact is, once one rips the scales from one's eyes (the scales inserted by the likes of Grover Norquist) one realizes the expiry of the Bush tax cuts especially will lead to a new era of growth. Whatever minor immediate dip in GDP occurs, will be more than corrected for by higher productivity, more jobs and more labor, not just speculative capital.

This ain't 'rocket science'! Tax cuts the size of those already passed ($3.2 trillion up to last year)  not only starve the public sector and the good it can do FOR PEOPLE (alienating them further from government) but also starve the means, ways and systems needed for the nation to function. We're talking the basics here: highways (fixing potholes); power grids (upgrading them and enhancing transmission capability); public health (enhancing it to cope with a real epidemic - say airborne Ebola, Avian flu, or Yersinias pestis  - 'The Black Death'); and finally repairing the millions of feet of lines of crumbling sewer and water mains across this country. Not to mention the collapsing bridges.

You see, when infrastructure is allowed to corrode and collapse without re-investment in its maintenance, then the whole country is at risk. Its genuine domestic security is under attack- not from without by some al Qaeda phantoms, but from within. By passing tax cuts of multi-trillions magnitude the perpetrators KNEW the result would be erosion of the fundamental systems that allow the nation to work. Meanwhile, they've been prepared to piss away equal trillion in useless "wars" (I call them 'adventures' - since they're not paid for) in the Middle East, and professing to do outlandish "nation building" when it's OUR nation that needs the building and renewed investment, especially in labor!)

All tax cut "job creation" tripe emerged out of  "Supply Side Theory" which was actually invented by one Arthur Laffer, in 1974, when he purportedly drew a curve on a paper napkin at a restaurant and announced he'd found a "new theory that generates wealth" while it cuts income (tax). (See, e.g. James Medoff and Andrew Harless, The Indebted Society, 1995, p. 84, 'Let Them Eat Cake'.)

The curve, as Medoff and Harless note, purports to show the relation between tax rates and revenues. A tax rate of zero naturally produces no revenue. As taxes rise from zero, revenues rise in tandem. But as the rates rise, they discourage the activities being taxed. So at some point, discouragement predominates in the curve. (Laffer showed this with a splash of catsup over the top of his curve, on the napkin.)

In fact, when Medoff and Harless removed the catsup stain from the graph, and looked at actual data, they found (p. 87) that "high tax rates are associated with higher productivity growth" There is a consistent and strong relationship. Moreover this relationship is historical, over decades and hence evidence -based, unlike Bush, Reagan and Romney's "tax cuts create jobs" malarkey! By contrast, for the years when supply side dogma held,  and tax cuts were implemented, productivity retreated by more than 30% and debt exploded- exactly the opposite of what we've been sold.

Based on Medoff and Harless' data, one can offhand predict that within four years of eliminationg ALL the Bush tax cuts (middle class and for the wealthiest) our national productivity will enhance at least 25% and our GDP will actually GROW by 4-5% per year instead of the paltry 1-2% we've been seeing. Removing ALL the tax cuts will also stabilize the tax landscape and remove business uncertainty making corporations (still sitting on nearly $2.4 trillion in capital) invest not only in plant but labor! This labor investment is what will then drive the job creation!

Tax cuts removal - I am speaking of all, including capital gains, Bush middle class and wealthy tax cuts and the payroll tax cuts, will also put more money in the pockets of the average person so they will be more likely to spend. Their spending will then prop up aggregate demand instead of sapping it, and more employment will follow since spending breeds jobs.....not tax cuts!

Follow me on this: tax cut removal will then eliminate the drive of fetishists  (think Alan B. Simpson) to slice into Medicare and Social Security which benefits ought to actually be INCREASED! Especially given the fact that middle class families have lost up to 40% of their wealth since 2007-08 according to the Federal Reserve. (The FR has stated in its latest report that the median net worth of families has plunged from $126,700 to $77,300 or what it was in 1992).

Most of this loss of wealth resulted from loss in home value (Americans biggest asset) but a significant amount also resulted from losses in 401k value due to stock market exposure, or exposure to risky bond funds (e.g. collateralized debt obligations). Most Americans' who lost big believe their remaining wealth (or better financial security)  is tied to future social benefits, whether in Social Security or Medicare. Thus, as those programs are protected and shorn up the beneficiaries will be more secure and willing to spend the money they've saved. However, if those programs are attacked and depleted (as they will certainly be if tax cuts are extended because offsetting spending cuts will have to be made to pay for the tax cuts - which btw go disproportionately to the rich) it will be natural for the affected beneficiaries to pull back on their spending.

This pullback will in turn be a major drag on the economy and accelerate recession such as we saw after 2008. This pullback will be in proportion to the cuts in the social programs advocated. So, if Medicare premiums are doubled, and the Social Security COLA is reduced by 50% look for senior spending to reduce by 20-30% in response with accompanying loss of GDP,  higher unemployment (since seniors tend to have higher median net worths because of working longer, than 30-somethings).

Worse, affected seniors who behold their actual future benefits pared back, will be more committed to working longer and hence, making the employment environment much worse for 20- and 30-somethings, many with monstrous college debt to pay off. The same seniors, adversely affected by massive cutbacks, may be less inclined to take in offspring who need a pad (low cost) to live while they pay back loans and wait for better jobs. It's lose-lose all around.

The bottom line? Tax cut elimination will see higher productivity and growth. Extending tax cuts to appease the idiots who gnash teeth over a "fiscal cliff" or "tax a mageddon) will only make things worse.

So, since Mitt Romney plans to double down on the Bush tax cuts (via the plans of their original architect, Glenn Hubbard), make sure you vote for him if you want your net worth to sink another 30% by the end of his first term.

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