Taxes and the Super Rich

by ROBERT HUNZIKER

Mitt Romney claims his tax rate of 14% on investment income of $20 million is “fair,” which means he is comfortable with the fact that he has a lower tax rate than average middle class American families. He made this proclamation on CBS’s 60 Minutes on Sunday. Did he say this with a straight face?

He said: “I think it’s the right way to encourage economic growth – to get people to invest, to start businesses, to put people to work.”

Well, if his premise is true, then America should already be inundated with new businesses hiring new workers because his effective tax rate has been around a long time, long enough to see the trees bear fruit, but it is precisely the opposite that is true. Evidently, the 15-Percenters are not investing in new businesses because otherwise America would be brimming with new industrial & commercial development projects, and it is not! How many new businesses did his $20 million in carried interest or carried interest earners in toto, minus taxes, help start last year, or the year before, or the year before?

Romney’s firm Bain Capital uses other people’s money (Bain does invest just enough of its own funds to stay in-line with the carried-interest rules) to buy businesses, and they leverage the businesses to the hilt with debt. If things work out, they receive their carried interests fees and pay taxes of 15% on profits they make off other people’s money and work, but when things go south, the companies go bankrupt, and the Romney group lose little-to-nothing. It is the debt holders and equity investors they brought into the deal who lose heavily. This is what Private Equity is all about… using other people to make money.

Romney’s clueless-ness about the reality of how taxes impact new business and employment is beyond comprehension, especially considering the value proposition of America’s middle class, which is really not his constituency anyway, especially considering his statement about 14% as a fair tax, throwing one more hard ball directly at forehead of the middle class.  He may be the most out of touch presidential candidate since Millard Fillmore, who was not a candidate; he succeeded Zachary Taylor, who died while in office. Fillmore joined the “Know-Nothing” movement after his presidency.

A new (September 2012) non-partisan Congressional Research Service 65-year timeline study: “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945,” demonstrates that top tax rates have minor impact on saving, investment, or productivity growth. However, the study did discover that reductions in capital gains taxes and top marginal tax rates lead to greater inequality.

The Congressional study showed this: During the 1950s when the top marginal tax rate was 90%, real Gross Domestic Product and real per capita GDP grew twice as fast as in the 2000s when tax rates were much lower at 35%.  And, since it is businesses that fuel GDP, then one can assume that a lot of new businesses and new employment occurred with top marginal tax rates at 90% versus the 2000s with the rate at 35%. What is Mitt Romney talking about? Considering the relative economic growth rates in the Congressional study vis a vis tax rates, a 14% tax rate grinds the economy to a halt! Isn’t this kind of what has been happening?

He is talking about the same ole, same ole Supply-side argument that has been trumpeted over the past four decades. All of the prospective Republican presidential candidates embraced it during the recent series of debates, if we lower taxes, businesses will take off, employment will increase, and America will be strong again…. Blah, blah, blah! It’s enough to cause a national migraine headache as they drone on and on about Reaganomics, the invisible hand, the trickle down, lowering barriers for businesses, less regulation, the Laffer curve, etc.; however, according to Karl Case (Harvard Fellow) and Ray Fair (Yale), Principles of Economics, 2007, p. 695:

“The extreme promises of supply-side economics did not materialize. President Reagan argued that because of the effect depicted in the Laffer curve, the government could maintain expenditures, cut tax rates, and balance the budget. This was not the case. Government revenues fell sharply from levels that would have been realized without the tax cuts.”

According to Sven Brendel, “Supply-Side Fallacy. Rubbish Economics in the White House,” 2008 quoting the Nobel Prize laureate and Harvard economist James Tobin: “Supply-side economics has failed to create the tremendous economic growth it promised. Instead, it has increased income inequality and lead to the creation of the most massive budget deficit in American history…. Supply-side economics is a failure.”

According to Alan Blinder (Princeton), who is considered one of the great economic minds of his generation, in his economic text: Economics: Principles and Policy 12th Ed., Harcourt Brace, 2011, Supply-side economics is “silly” and “ill-fated.”

The White House maintains historical records of economic performance of presidents, go to: http://www.whitehouse.gov/omb/budget/Historicals to see the record of Gross Domestic Product, employment, taxation policy, and federal debt comparisons among all of the presidents, and this is what is clearly revealed: All of the Supply-sider presidents dramatically increased federal deficit spending and national debt while producing sub-par economic growth and tepid employment growth with the exception of Reagan (who did, however, make America the world’s leading debtor nation), in contrast to the non-Supply-side presidents, who grew the economy like gangbusters and added much more employment. For example, both Clinton and LBJ outperformed all Republican Supply-side presidents in GDP growth rates, employment, and deficit reduction measures. The top marginal tax rate under LBJ, who has the best GDP growth rate since WWII, was 70% and Clinton, whose GDP growth rate beat the Republicans, took taxes up to 40% when he became president, and he did what the Republican Supply-siders failed to do; he ran a budget surplus, not a stream of deficits like the Bushes and Reagan.

Since Mitt is so anxious to assume a position in the White House, it might be a good idea for him to review the historical record of how Supply-side presidents have performed with the economy before making false statements about the benefits of Supply-side low tax rates; a 14% tax rate is not fair for someone making $20 million per year, and it does absolutely nothing to stimulate the economy.  To the contrary, his bravado about the 14% tax rate is an insult to almost all Americans! Maybe it would he best if he served as a White House Intern for a few years before running for president. That way he’ll have immediate access to the historical record of how the economy performs under Supply-side presidents, and he’ll be better informed and sound much smarter on the campaign trail. Then, he could run for president, oh, say in 2016 and make educated statements about economic policy rather than mouthing a worn-out and very tired Republican Supply-side party line that has been disgraced and ridiculed as the primary force behind massive budget deficits, growing national debt, and unemployment.

A few more years of supply-side economics and America will turn into a virtual reality of the film Escape from New York, a dystopian world where the city of New York has been converted into a maximum-security prison.

Robert Hunziker earned an MA in economic history at DePaul University. He lives in Los Angeles.

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