I’ve been reading in a lot of discussion about the deficit and taxes the last few days. Everyone is worried about the national deficit and the national debt. Counties like the United Kingdom are cutting spending and raising taxes. While raising some taxes will help the deficit issue, here there is a big debate between Paul Krugman and Nail Ferguson about whether to push for another round of deficit financed stimulus spending or whether that will bankrupt the country. Meanwhile, Republicans are calling for cutting spending and keeping the Bush tax cuts for the wealthy. They seem to believe that the more money the wealthy have the more they will invest in the economy, even though there seems to be no evidence of this having happened in the 2000s after the tax cut was initiated. Instead the wealthy took the extra money from income and capital gains tax cuts and stuck it in the stock market, which has very little direct impact on the economy at large.
All of this, in my opinion, comes down to understanding the difference between productive and speculative investment. Productive investment, like venture capital investments (which peaked in 2000), spurs job growth and production. Money invested in companies is used to hire workers, rent or build office space, purchase supplies, materials, etc.. Money put in the stock market is just speculative investment. Like gambling. The exceptions are things like initial public offerings, a stock issue to raise money for expansion, or municipal bonds.
If we can structure our taxes (and tax breaks) to encourage those with income to invest to put that money into productive investments (like venture capital), then it is more likely that we will see economic growth. A good place to focus this would be green energy technology. Few things help spur economic growth like investment in new technology (i.e. internet boom of the 90s).
Encouraging productive investment will create economic growth which will increase tax revenues, but we will still need to raise taxses and cut spending. And raising taxes on those who make the most does make sense, not simply because they can clearly afford it (otherwise they wouldn’t be gambling in the stock market with it) but also because it is fair.
It makes sense for those who make more money to pay more in taxes because we do not make money in isolation – we make money in interconnection and interdependence with one another. The greater our income the more we are interconnected and the more we are benefiting from our interconnection. It only makes sense that the more we benefit from society the more we should contribute to the maintenance of that society. Why is a person making $2.5 million a year contributing at the same rate as someone who makes $250,000 a year? The wealthier person benefits exponentially more and should contribute exponentially more. The same is true for corporations. And that increased tax revenue will decrease, along with spending cuts, the budget deficit. Targeted tax breaks for businesses and investors who put money in productive investment will encourage economic growth, which will increase tax revenue.
Of course the problem is passing tax increases and getting people to see the difference between productive and speculative investment. And figuring out what spending cuts to make. And figuring out how to spread the pain with small taxes for the non-wealthy. And figuring out if we really can afford more stimulus. I certainly hope so, because with consumer spending being such a large part of our domestic economy, we need to offset its slump with exports and a little government spending that creates jobs. We were lucky the last ten years that as productivity increased (fewer people being needed for the same work) people were able to borrow money (most on credit cards and new home loans) to keep consumption demand high and create some jobs. Without the ability of people to borrow freely, it will be difficult to drive consumer consumption unless there are new jobs (hopefully from green tech).
That’s all enough babbling for today.
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