Punishing the Victims?

[***Warning***  This blog contains material known to be toxic to the majority of members of the House of Representatives.]

Okay, let me get this straight.  The Republican/Tea Party's plan to solve the country's economic problems is to lower taxes for corporations and the wealthy while simultaneously cutting spending for social programs, such as Medicare, Transportation, Education and welfare assistance.  The conservative approach would also give corporations a boost by repealing an act that requires companies receiving federal contacts to pay workers at least at the level of prevailing local salaries and benefits.  This would allow those companies to pay workers less than they do now.  In short, we should increase the income of corporations and the wealthy but cut the income and benefits of middle and lower class workers.  Hooookay.

Doesn't this strategy put the burden for fixing the economy on the people who are suffering the most from the current recession?  That is, the ordinary people who are losing their houses, their jobs, and their health care?

The Republican/Tea Party argument is that the maximum marginal income tax rate (currently 35%) is the main obstacle to economic recovery and that cutting it would stimulate growth and reduce unemployment.  The wealthy would then have even more money to spend, which would trickle down to the less-wealthy, and corporations would have more funds to invest in expansion and hiring.   Sounds good, except there are some very large holes in this argument.

First, the current maximum tax rate is actually lower than it has been for most of the past 100 years, including periods when our economic situation has been far better than it is now.  There is simply no credible evidence that this rate is tied to economic growth.

Second, no one actually pays the highest rate.  Being a marginal tax bracket means that it applies only to income above a certain level, not to all the income of a person or corporation.  And it is levied only after all tax breaks and deductions have been applied, resulting in a much lower effective  tax rate.  For large corporations this is about 25% and for the wealthy about 18% on average.  For small businesses, according to the SBA, the effective range is from 13% to 27% depending on how they are structured.  And many corporations pay little or no tax at all. For example, in 2010 GE had a profit of  $5.1 billion and paid no Federal income tax, and is expected to have only a small tax bill again for 2011 (for an analysis of how they do this, see Forbes or Reuters). From 2008 to 2010 General Electric Co, American Electric Power Co Inc, DuPont Co and nine other companies had a negative 1.5 percent tax rate on $171 billion in profits according to a study reported by Reuters.

Third, a more direct way of linking tax rates to the nation's economic productivity is to calculate the percentage of taxes relative to the Gross National Product.  As economist Bruce Barlett notes in a recent NYT article:

By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget.The postwar annual average is about 18.5 percent of G.D.P. Revenues averaged 18.2 percent of G.D.P. during Ronald Reagan’s administration; the lowest percentage during that administration was 17.3 percent of G.D.P. in 1984. In short, by the broadest measure of the tax rate, the current level is unusually low and has been for some time. Revenues were 14.9 percent of G.D.P. in both 2009 and 2010.

I readily admit that sacrifice and budget cuts are necessary to get us out of the economic mess we are in.  But to me the burden has to shared by everyone,  rather than mostly by those who can least afford it.  To cut spending and increase revenue through taxes and/or closing tax loop holes on corporations and wealthy Americans isn't being unreasonably progressive -- it's just fair.