Tax Increases - by Ed Moscovitch

"Tax increases don’t harm economies."
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By Ed Moscovitch / The Boston Globe
July 27, 2011

THE KEY sticking point in the debt ceiling negotiations is the refusal of many Republicans to support any kind of tax increase. They argue that raising taxes will hurt economic growth. However, a look at the evidence shows that raising taxes does not necessarily slow the economy.

In 1993, President Clinton raised taxes. Republicans argued then - as they do now - that his tax increase would lead to a recession. They were wrong; in the first quarter of 1993, when Clinton took office in January, total national employment was 109.9 million. When he left office eight years later, total employment was 132.5 million - a gain of 22.6 million jobs.

George W. Bush cut taxes, predicting that this would create jobs. But over the eight years of his presidency, total employment rose by only 300,000 jobs. How can anyone look at this record and argue with a straight face that cutting taxes guarantees job growth?

If the GOP assertion is correct, we would expect to see that countries with low taxes would have higher growth rates than countries with low taxes. In fact, there is little correlation. Looking at the major developed countries between 2000 to 2009, Switzerland, the United Kingdom, the Netherlands, Norway, Austria, Belgium, and Sweden all had the same growth rate as the United States (about 1.8 percent per year), even though all of them had higher taxes than we do. In some cases, taxes were much higher - 45 percent of gross domestic product in Norway, Finland, and Austria, as against only 25 percent here.

How is this possible? Higher taxes make possible higher spending. While taxes per se may (or may not) discourage growth, government money well spent (on college education, on scientific research, on basic infrastructure) likely increases growth potential. That’s why President Eisenhower built the interstate highways and President Reagan supported big increases in basic research.

Britain these days should be a conservative dream. Last July the Conservatives won the national elections and enacted major spending cuts in an effort to cut the deficit. There has not, however, been a decrease in unemployment. The unemployment rate, which had been at 5.5 percent for several years, rose to 8 percent in 2008 as a result of the financial crisis. It was at 8 percent when the Conservatives took office, and it was still 8 percent at the last reading in April.

Pushed by its creditors, Greece has been making a crash effort to cut its deficit. The result? Unemployment rose from 7.5 percent in 2008 to 10 percent in 2009, and reached 15 percent in the spring as a result of the financial crisis.

So why are both President Obama and the Republicans urging similar large, short-term deficit reduction for the United States? They differ on taxes but, sadly, the president has signed on to the GOP program of large-scale, short-term spending cuts. They should instead enact short-term stimulus to cut the unemployment rate, as long as it is accompanied by long-term deficit reduction.

President Clinton increased taxes as part of a gradual, multi-year effort to decrease the deficit. While there was no crash reduction in spending, he kept spending increases moderate while the higher tax rates and growing economy increased revenues. This kept interest rates low, which made possible a period of low inflation, low unemployment, and in his last year or two, a balanced federal budget.

The lesson, then, is that long-term efforts to reduce the deficit are a good idea, large cuts in the deficit at a time of high unemployment are a bad idea, and that taxes can be raised as part of a deficit-reduction effort without impeding growth. Unfortunately, Washington doesn’t seem to have the patience for this kind of nuanced approach.

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Ed Moscovitch is president of Cape Ann Economics and chairman of the Bay State Reading Institute.
© Copyright 2011 Globe Newspaper Company.