Saturday, July 10, 2010

Are Low Taxes Exacerbating the Recession?

The housing and financial crash has long passed, and there are now hundreds of theories as to why the country is still in its worst economic state since the Great Depression. Some experts are even asserting that the real problem lies in low tax rates.

U.S. Secretary of State Hilary Clinton recently voiced her support for this theory. According to this article from the San Francisco Gate, Clinton was quoted saying that the high tax equals high revenue formula "used to work for us until we abandoned it."

As history (and Freakonomics) teaches, such oversimplified memes tend to obscure the counterintuitive notions that often hold the most profound truths. And in the case of the WRSTGD, the most important of these is the idea that we are in economic dire straits because tax rates are too low. This is the provocative argument first floated by former New York Gov. Eliot Spitzer in a Slate magazine article evaluating 80 years of economic data.

"During the period 1951-63, when marginal rates were at their peak - 91 percent or 92 percent - the American economy boomed, growing at an average annual rate of 3.71 percent," he wrote in February. "The fact that the marginal rates were what would today be viewed as essentially confiscatory did not cause economic cataclysm - just the opposite. And during the past seven years, during which we reduced the top marginal rate to 35 percent, average growth was a more meager 1.71 percent."

Months later, with USA Today reporting that tax rates are at a 60-year nadir, Secretary of State Hillary Clinton told a Brookings Institution audience that "the rich are not paying their fair share in any nation that is facing (major) employment issues ... whether it is individual, corporate, whatever the taxation forms are."

Continue reading at SF…

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