One of the more frustrating false claims constantly being promulgated by bourgeoise propagandists and, unfortunately, widely believed to be true by the public, is that a high rate of taxation on the wealthy is bad for the health of the economy. The fact of the matter is that the opposite is true. The higher the taxes on the wealthy, the healthier is the economy. Put another way, an aggressive progressive income tax is good economics.
There are two obvious reasons why an aggressive progressive income tax is good for economic health: First, the capitalist dynamic naturally expands wealth for those who own and control the means of production, which includes the capitalist and their functionaries. This is because capitalism is a social system in which the wealth generated by the direct producers – the worker, slave, so forth – is appropriated by social classes that do not generate that wealth – the capitalist, landowner, etc. This means that when taxes are low on the ownership classes and their functionaries, inequality increases and wealth becomes bottled up in a small network of families whose spending on goods and services cannot effectively complete the circuit of capital. The exploiting classes are too small in number to affect the levels of demand necessary to keep the economy growing. The majority has insufficient income to spend on goods and services. The fall in demand reduces the rate of profit. This contradiction leads to what economists call a realization crisis, and it is one of the main forces in defining the character of business recessions. The deeper the business recession, the worse off just about everybody is, including those social classes who believe they benefit from lower taxes.
Second, lower taxes on the wealthy means less revenues for the government. Because the government must borrow to continue its operations, most of which serve the interests of the exploiting classes, budget shortfalls drive up budget deficits, which in turn drives up real interest rates. Why do budget deficits drive up real interest rates? This is a basic matter of supply and demand: money has a price (interest on borrowed funds), and the more the government competes with the private sector for investment resources the higher is the price of money. Higher tax rates on the wealthy provide for the government resources with which to drive down inequality, thus allowing the majority to enjoy higher incomes, which they can spend on goods and services. This method effectively completes the circuit of capital and leads to stable economic expansion. Labor union density, as well as a minimum wage, plays an important role in this by raising incomes. At the level of consciousness, and at the level of the firm, capitalists want lower taxes because they perceive they will keep more of their profits. But at the system level, the desire for lower taxes, if met, leads to a drop in the rate of profit. This paradox is very real.
It is, therefore, for the good of the wealthy that high top marginal rates are imposed upon them and the revenues generated redistributed through public projects that secure the long-term health of the society. Higher taxes (along with higher union density) are better for everybody.
You will note in the chart above that, while income taxes have remained basically flat for most Americans over several decades, they have been systematically reduced for the wealthy during this period. The actual picture is even more dramatic, as the majority pays higher taxes now in the form of payroll taxes and sales taxes. Anybody remotely familiar with the economic history during the period knows that the greatest period of wealth creation and the highest standard of living for most Americans was during the period 1950 through the early 1970s. The period between 1970 through the early 1990s were periods of instability and declining standard of living. Now, if, as the anti-tax advocates claim, high taxes were bad for the economy, the opposite would have been true. The economy would have performed poorly in the period between 1950 and the early 1970s, and would have improved with each reduction in taxes. Given the low level of taxation in the 1980s, the economy should have been better than it ever was. But this is not what happened.
When did our economic troubles begin? They began in the early 1970s following the first major reduction in the top marginal tax rates in the 1960s. The 1970s were a period of economic instability and rising inequality. At the start of the decade of the 1980s, taxes were again slashed. The effects were extremely high interest rates and a dramatic rise in unemployment. Later in the 1980s, taxes were cut again and the economy tumbled into a deep recession. Only when taxes were raised in the early 1990s did the economy tack off. Look at this chart:
Why did the tax increases in the 1990s kick off one of the longest periods of business expansions in US history? In part because lower budget deficits drove down interest rates, which allowed for more investment, growth in jobs, growth in consumer spending. The expansion would have been more successful if the budget surplus, which reached record levels under Clinton, had been invested in public projects to improve the long-term health of the economy. Raising top marginal rates even more would have made the expansion even more successful still. This should have been a period of economic contraction, according to the theory of the anti-tax propagandists. But it wasn’t. What happened when taxes were slashed under Bush Junior? Did, as the anti-tax propagandists claim, the economy take off? The economy tumbled. We are now in the middle of the worst economic catastrophe since the great depression. The massive budget deficits and accumulation of wealth among capitalists and their functionaries has crippled our economy.
Facts and logic show us the way out of the crisis: dramatically raise taxes on the wealthy, redistribute that money to the masses through public projects that will improve the long-term health of our society. What do the anti-tax ideologues say? They say raising taxes in a recession is the worst possible thing to do. But, as you can see, this claim is based on the false claim that tax cuts grow the economy. The question for policymakers now is whether they act based on the facts, or act on the basis of the propaganda of the capitalist class.