Taxes, Spending, Regulation and the Economy

Taxes, Spending, Regulation and the Economy September 9, 2011

An economist explains why the conservative argument that high corporate taxes and burdensome regulation are preventing businesses from hiring an prolonging the recession is false. It begins with his TV appearance with someone from the Heritage Foundation:

A couple of hours after talking to an ABC correspondent about the woeful job numbers and what might be done to improve them, I was in the Bloomberg TV studios debating a guy from Heritage. He went on for several minutes about the damage being done by high taxes, excess regulation, business “uncertainty” about future tax hikes and regulatory burdens. I asked Bloomberg’s host whether he was aware that corporate profits relative to national income had just hit a 60-year peak? He had heard rumors to that effect. Was he aware that taxes on corporate earnings were at a 60-year low? The Heritage guy had heard that might be the case.

He continues:

Then why was uncertainty about taxes and the future burden of the Affordable Care Act holding back business investment and hiring right now? If managers thought taxes or regulatory costs might go up in the future, wouldn’t it make sense to take advantage of today’s low taxes and lower burdens to invest and hire today? According to the “uncertainty” argument, businesses are fearful they might face high taxes and extra health costs in 2016 or 2018. Shouldn’t they expand hiring right now and scale back employment when they actually face higher costs (if they ever do)?

The “tax uncertainty” and “regulatory uncertainty” arguments would make more sense if, say, taxes were already high and might be going higher or regulatory burdens were heavy and might be getting heavier. But when taxes are at a 60-year low and the regulations are pretty much the same as they were in the 1990s boom, the argument makes no sense at all. As we used to say down on the farm, you should “make hay while the sun shines.” In other words, if you think it’s going to rain later in the week, it strengthens the case for cutting and baling right now.

The odd thing is, when businesses are asked why they’re not expanding, “high taxes” and “heavy regulatory burdens” and “tax uncertainty” don’t feature as prominent answers. They mostly say they don’t see good prospects for extra sales. But right-wing economists have their talking points, even if they make little sense, and they’re sticking with ’em.

The problem with this entire debate is that it rarely goes beyond the superficial — more regulation vs less regulation, more taxes vs less taxes, more government spending vs less government spending. But the questions we should be asking are more complex:

Which regulations are achieving their goals and at what cost? Which ones are doing little good and only serving the interests of powerful corporations, protecting them from competition and preserving their market share at the expense of more innovative start-ups?

Which taxes are most cost-effective? Which taxes are progressive and which are regressive and how do we make the overall tax system more fair? What is the proper mix of the various types of taxes and how do they affect spending, saving and investment?

What government spending actually serves the public good? Which programs have ostensible public goals but primarily aid private interests? Which programs end up being mostly corporate welfare? Which programs spend money primarily on invading the privacy and reducing the liberty of our citizens?

These are the important questions. And sometimes right and left can even agree on the answers. Look at the recent Green Scissors report by an unusual coalition of groups — Friends of the Earth, Public Citizen, Taxpayers for Common Sense and the Heartland Institute — that identified hundreds of billions of dollars in savings from programs that harm the environment and serve mostly private interests, like subsidies for ethanol and for the oil and gas industry.

But we can only answer those questions reasonably if we move beyond the superficial and beyond partisan bickering.

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  • unbound

    “But we can only answer those questions reasonably if we move beyond the superficial and beyond partisan bickering.”

    Exactly. But getting beyond the superficial would require a lot more discussion than would fit on a 30 minute special…much less the typical 2 minute video segments that most of these discussions occur in. And, let’s face it, most of the population just doesn’t care enough to dig that deep into the actual issues…they think the one-liner headlines tell them all they need to know.

    Even more so, the mass media outlets need to stop this he said / she said “reporting” and actually become investigative again. They need to be willing to call out the nonsense right-wing economist talking points for the BS that they are.

  • jamessweet

    Welllll, I agree that those more complex questions need to be asked, but I don’t think we can get “beyond the superficial and beyond partisan bickering” until people acknowledge that the idea that higher corporate taxes/higher taxes on the wealthy/etc. per se put a damper on investment and economic growth was an idea that may have been prima facie plausible, but has since shown to be unequivocally false. Certainly it is the case that some regulations inhibit growth, but many others encourage growth; there is no rule that says “regulations inhibit growth”. And the historical data is pretty clear that taxing the wealthy and/or corporations does not significantly inhibit investment.

    Until we get past that misconception — and, sorry, but that’s a partisan misconception through and through — then I don’t think the more complex questions are askable.

  • jamessweet

    Oh crap I malformed my closing italics tag, and now the whole rest of the comment thread will be in italics. Will this fix it?


  • Pierce R. Butler

    You can only call the bickering “partisan” if the parties take consistent opposing stands.

    Given that only a shrinking faction in one party bothers to challenge the megacorporate agenda, usually to no effect, a different adjective would serve more accurately.

  • The truth of the matter never makes good soundbites and too often politicians in power are the problem. No doubt there are all sorts of things thinkers all over the political spectrum could agree on, but when you’re talking about programs that benefit the powerful few at the expense of the many (one such thing they might agree on), that is a problem the politicians created. They have no stomach for admitting what they’ve been doing wrong all along and undoing it.

    This is why I think the “taxes on the rich” thing is a distraction. We can start talking about taxing the rich more when we actually have gotten rid of tax loopholes and dealt with corporate welfare. No one doubts that handing money over to a corporation is a handout, even if there are differing opinions over whether a tax break constitutes such.

  • D. C. Sessions

    Mark Thoma’s site (which Ed linked) is a very convenient one for keeping track of economic issues. Every day he manages to put up a daily links post that’s a rather broad collection of economics-related material.

    Besides, he’s very good at explaining the subject.

  • Michael Heath


    getting beyond the superficial would require a lot more discussion than would fit on a 30 minute special

    I strongly disagree. Our fundamental challenges can easily be articulated in sound bites. I’ll throw a few talking points out below where the left and the right could pick the best objectives each has; this is little different from the president’s job speech. I’ve numbered the following has friendly to certain groups, those are:

    1) Democrats

    2) Republicans

    3) Private industry (not the few who influence our goverment now like coal and oil, but instead business overall)

    Current growth prospects are suppressed due to a lack of domestic demand. Government can best respond with investment and expenditures which government has proven to do best in the past though focused on today and the future’s opportunities [1,3]. In the short-term given the mismanagement of our public budgets in the past require us to partly offset marginal increase in spending should by slowed with significant spending cuts in non-stimulative areas (Defense personnel, overseas military operations) [1, 3, some of 2] and increases in taxes by those with high savings rates (we have ample liquid capital, we need more demand) [1].

    The type of long-term capital investment opportunities best suited for the U.S. require reform of government policies and a transformation of the labor market. Specifically, tax reform that attracts capital and isn’t overly onerous on income [2,3] coupled to more liberal immigration policies that attracts more professional-class immigration [2,3]. A health-care market that transfers the financing of health-care from employers [1, 3] and onto individual/household taxpayers where purchasers have far more pricing power in the healthcare market than the dominance now encountered by healthcare providers (e.g., single-payer, mixed-models) [1]. A significant increase in the expectation of our educative results and spending coupled to reform that achieves such [1,3]. Reform for how we regulate industries and markets, specifically that such reforms be both dynamic and more heavily influenced by market experts similar to how corporations administrate continuous improvement programs [2,3 where 1 shouldn’t be afraid – the President supports this now].

    In order for the U.S. to compete globally, we need a more educated workforce [1,3] where the supply of that workforce matches the skill-set demands needed to exploit the capital investment opportunities best exploited here. Perhaps the most underestimated factor causing our current labor market weakness was we realigned our trade policies for a global economy while ignoring the needed for a reform in taxes and labor to insure a strong labor market and match the opportunities of that market with how we finance exploiting those opportunities. We currently educate, provide healthcare, spend, and tax as if the U.S. economy existed with no competition – that must end. This mismatch in new opportunities with obsolete practices has resulted in a lack of growth which increasingly squeezes government budgets, providing an amplifying feedback suppressing investments in education, infrastructure, and emerging markets. So while managing our debt long-term is critical, it pales in comparison to the need to transfer how we operate within a global economy coupled to a global energy approach which mitigates climate change [1,3].

    In a capital and income friendly business environment, we can easily reform and finance not merely our current set of entitlement services in Social Security and Medicare, but enhanced benefits [2,3]. The idea we can’t afford current entitlement promises because of the Baby Boomers is not a matter of not having sufficient money but instead not having the political will to transform to a more pro-growth economic model [2,3] coupled to the highest earners paying more [1].

    Please note how frequently current Democratic policies match-up so well with what the overall private economy/business-world requires. Please also note there are several big opportunities to bring Republicans to the table to get what they want. The lack of progress in these areas reveal two things:

    1) How poorly Democrats read the political landscape and fail to exploit opportunities by better allying with businesses and therefore shrinking the GOP to a decreasing set of Christianists who mostly have no money attached to a handful of industries we need to see shrink or die over the next couple of decades anyways.

    2) How nihilist, juvenile, and delusionally idiotic the Republican party is regarding policy. That’s amplified by devout commitment to not raise taxes no matter what. This coupling is probably the biggest reason we don’t see progress, not the failures of the Democrats.

    My remedy is that the Democrats need to get far more friendly to business to force Republicans to come to the table or die. I think the President’s speech last night is very consistent with that so I was cheering him on. But of course since I’m pro-business that also reveals my bias.

  • The problem, as usual, is that conservatives don’t care about the economy or jobs, they care about their plutocratic agenda: Cutting taxes on the wealthy, starving the government of revenues (lest it spend it on the undeserving), and gutting regulations so that the business elite can externalize its costs onto the public. Tax cuts and deregulation are always the answer no matter what the economy is doing, no matter how little sense they make or how harmful they would be, or how many times they’ve been tried and failed in the past. What is shocking is that these people are invited on respectable TV outlets anymore at all. Are producers really so clueless as to believe that a Heritage flack is going to say anything other than what his ideological agenda demands?

    The problem is not “partisan bickering”. The problem is that one side has given up intellectual respectability in favor of snake-oil salesmanship for an agenda that would send voters fleeing in the other direction if it weren’t carefully disguised under layers of bullshit.

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  • joshuawhite

    “The problem with ALL THESE DEBATES is that THEY rarely GO beyond the superficial…”


    (Can’t figure out stupid tags…)

  • harold

    Area Man said –

    Tax cuts and deregulation are always the answer no matter what the economy is doing, no matter how little sense they make or how harmful they would be, or how many times they’ve been tried and failed in the past.

    It’s depressing but incredibly important to understand this.

    This is a rigid, reality-denying ideology, that is advanced by all of one major political party, advanced to a substantial degree by the other major political party, and repeatedly pushed by charismatic propaganda figures in the media.

    In addition to being intensely emotionally committed to this ideology in isolation, vast numbers of Americans adhere to an overall ideology of tribalism, religious authoritarianism, militarism, and punitivism. They are addicted to the high of anger, bigotry, and false outrage like an addict to crack.

    There are multiple levels of deception reality denial. First of all, advocates of this ideology claim that they think it will produce widespread “prosperity”. However, internet comments, informal statements of attendees at Republican events, or even open commentary in venues that are little known to the general public, such as WorldNetDaily or Human Events, reveal that even the advocates of this ideology don’t really think it will help everyone. Comments along the lines that certain segments of the population should “starve” or something similar are not rare (sometimes the comments imply racism and sometimes the animus is merely directed, with scorn and callousness, toward any less fortunate person).

    At the same time, it’s probably true that the right wingers have a very deluded fantasy as to how beneficial their desired policies would be to them.

    Part of the problem has been that so far, the reduced standard of living has, in fact, fallen mainly on the despised already poor. Thus, the overall ideology keeps being reinforced.

    What Ed does here – ask for specifics – is anathema in the mainstream media. The aggressiveness with which all media figures except a handful of comedians focus on denying specific discussions is amazing. Everything has to be presented as if there is a choice between two bland, non-specific philosophies. And of course, the “conservative” side has to be presented as attractive and charismatic, whereas the other side has to be presented in terms like “nanny state”.

    Green Scissors seems like a worthy organization, unfortunately, its effectiveness can be gleaned from its proud statement that it has been active “since 1994” – has there been a reduction in harmful, wasteful spending since 1994?

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  • This argument doesn’t need to be explained. Simple study of modern history as well as the use of even the most basic of human reasoning abilities will lead one to the conclusion that laissez faire capitalism is harmful to most of the population.

    The people who agree with Republican economic principles do so because Republican politicians and their very wealthy supporters tell them it’s true, and these believers don’t bother to evaluate that statement beyond its face value.

  • Nemo

    Partisan bickering, you say?

    Any time I hear the phrase now, that’s what I think of.