In my previous post I discussed the economic impact of the pandemic and the government’s response to date. Increased Federal government spending, through borrowing, has so far prevented economic collapse. It also has resulted in a large increase in the Federal government deficit (the yearly increase in Federal government debt) and debt (the total amount of money the Federal government owes). Additionally, it probably will be necessary for Federal government spending to continue to increase until the pandemic is contained.
Republicans in Congress are increasingly questioning the wisdom of borrowing more money, increasing the Federal deficit and debt, to save the economy. They contend the increases in the deficit and debt will cause greater economic problems in the long-run. As Senate Majority Leader Mitch McConnell has stated: “We can’t keep propping up the economy forever…I think it’s also time to begin to think about the amount of debt we’re adding to our country and the future impact of that.” Texas Lieutenant-Governor Dan Patrick went even further: “And what I said when I was with you that night, there are more important things than living. And that’s saving this country for my children and my grandchildren and saving this country for all of us,” Republicans like these contend it is necessary to re-open economy, despite the health risks to the American public, to negate the need for additional Federal government borrowing and spending.
But there is another choice. We could offset the need to borrow by funding the increase in Federal government spending through tax increases on higher income/higher wealth households. What are the pros and cons of doing so?
As discussed in my book Capitalism, Socialism, and the Promise of Democracy, income and wealth inequality has skyrocketed since the election of Ronald Reagan in 1980 and the re-establishment of an Oligarchic Capitalist system. From 1979 to 2015, income increases have been: Top 1%: 242%, Next 19%: 78%, Middle 60%: 46%, Bottom 20%: 45%. Since 2015, prior to the pandemic, the trend has continued: Top 20%: 1.67%, Second 20%: -2.84%, Third 20%: -2.28%, Fourth 20%: 0.61%, Bottom 20%: -2.54%. The results since 2015 largely resulted from the Trump tax cuts in 2017.
As a result of the pandemic, things have gotten worse. The wealth of America’s 600 billionaires soared between mid-March and mid-May as the pandemic unfolded. The total increase for all billionaires was $434 billion. Jeff Bezos had the largest increase, $34.6 billion. Mark Zuckerberg was next, $25 billion. The total gain for the richest five billionaires, Bezos, Bill Gates, Zuckerberg, Warren Buffett, and Larry Ellison was $76 billion. This occurred during a time when unemployment was soaring and incomes collapsing for the vast majority of Americans. To combat the economic impact of the pandemic and protect the health of the vast majority of Americans by not re-opening the economy too soon, taxes on higher-wealth/higher-income Americans need to be significantly raised.
President Trump has equated fighting the pandemic to fighting a war. As discussed in my previous post, during World War I and World War II government borrowing skyrocketed, dramatically increasing the Federal government deficit and debt. This increase was deemed necessary and worth it to fight and win these wars. However, the government did not finance the war effort solely through increased borrowing; taxes were also raised.
In 1916, prior to America’s entry into World War I, the highest marginal tax rated stood at 15%. To finance the war effort, by 1918 it had been raised to 77%. In 1931 at the start of the Great Depression, the highest marginal tax rate was 25%. To raise funds to fight the impact of the Depression, the tax rate on the wealthiest Americans had been raised to 79%. After America’s entry into World War II, the highest marginal tax rate had been raised to 94%.
In response to the pandemic, President Trump stated: “To this day, nobody has ever seen anything like it, what they were able to do during World War II. Now it’s our time. We must sacrifice together, because we are all in this together, and we will come through together”. Where is the shared sacrifice? What have the ultra-wealthy done to help fight the pandemic? Where is the will that existed in the past to require higher-income/higher wealth households to contribute to saving the country; the country that provided them with the opportunity to become wealthy.
Taxes on high-income/higher-wealth households (personal income taxes, estate taxes, gift taxes, and capital gains taxes) need to be raised. But what could the negative impact be on the economy in doing so?
The main argument is that raising taxes on higher-income/higher-wealth households will result in a drop in private spending, sending the economy deeper into recession. This is poor reasoning. Higher-income/higher-wealth households are not spending this money anyway; they are saving (or perhaps more accurately, hoarding) it, just as wealthy households did during the Great Depression. By raising taxes and having the government either directly spend the money or transfer it to unemployed lower-income/middle-income households (who will spend it), this money will be pumped into the spending stream, helping the economy recover.
A second argument against increasing taxes on higher-income/higher-wealth households is that it will result in less investment, lowering business expansion and economic growth. Again, this reasoning is faulty. Though some businesses like Amazon and Fed Ex may be expanding during the pandemic, most are just hunkering down tying to survive. Also, given the uncertainty caused by the pandemic, most businesses are unwilling to take the risk of expanding anyway even if wealthy households were willing to provide the funds. Given the dearth of investment opportunities due to the pandemic, businesses like Amazon and Fed Ex would not have any problem attaining funds for expansion even if taxes on the wealthiest Americans were increased. Additionally, even if the funds for investment are reduced, the money will merely be re-directed to spending which would be beneficial to many businesses, particularly smaller ones, who are in crisis due to the pandemic. It is almost certainly at least as beneficial, if not more so, to save many smaller businesses in the short-run rather than providing funds for the expansion of larger businesses in the long-run.
Tax policies since the election of Ronald Reagan and the re-establishment of Oligarchic Capitalism have resulted in the greatest economic inequality in history. As I discuss in Capitalism, Socialism, and the Promise of Democracy, this inequality threatens our Democracy and results in social divisiveness and unrest. We need to return to a system of taxation that reflects what existed during the period of Democratic Capitalism in this country; a system created by the New Deal policies of Franklin Roosevelt and expanded by the Great Society programs of Lyndon Johnson. In the short-run this would help combat the economic crisis caused by the pandemic. In the long-run, it would both reduce the size of the Federal government deficit and debt, and would reduce income and wealth inequality caused by the tax policies of our Oligarchic Capitalist system.
The time to start is now.
Do you believe taxes on higher-income/higher wealth households should be increased to combat the economic effects of the pandemic, reduce the Federal government deficit and debt, and reduce income and wealth inequality? Or do you support the Republican approach of halting further increases in Federal government spending and instead, focus on re-opening the economy rather than focusing on the health consequences of the pandemic?
