Story originally printed in the Winona Daily News or online at www.winonadailynews.com
Published - Tuesday, April 29, 2008
Restore taxes to what they were under Clinton
I suspect that Col. Stan Gudmundson exaggerates my fame; I know he is confused on some other points, beginning with how businesses “move.”
Several weeks ago, Gudmundson said that businesses physically move, say from Minnesota to North Dakota, because of taxes. This defies common sense. Do you think that the Winona Wal-Mart would move to Minnieska, or that Fastenal would move to Witoka, for any conceivable tax break?
Low taxes are no substitute for customers, workers, adequate roads, reliable suppliers, heavy-duty utilities, etc. Businesses choose states like they choose towns, based on these essentials. There is always the odd case: maybe Delta really does not care whether they are headquartered in Atlanta or Minneapolis; then, tax incentives might tip the balance.
But everything I have ever read implies that such cases are rare.
Moving “off-shore” for tax reasons, which Gudmundson mentions in his latest column, is quite different. A company can legally “move” to the Cayman Islands without having more than a post office box there. Outsourcing manufacturing to China is not like this.
Like physical moves within this country, outsourcing has little to do with taxes — and, like those moves, outsourcing affects jobs, growth and the vitality of cities.
Moves to a post office box need not concern us.
Taxes affect a business’s ability to attract capital and to expand. For example, a new pipeline to bring Russian gas to Europe will cost billions. Taxes on the oil companies’ profits reduce their ability to pay for this along any other lines. Taxes on profits reduce any company’s ability to invest in research and development or better plant and equipment.
All of this is bad: That’s one reason I support abolishing taxes on businesses. It’s straightforward to tax business owners on the income they keep for themselves and not on the income the business retains, so Gudmundson need not worry about that.
Now, about taxes and growth. According to the National Bureau of Economic Research, from 1854 to 1919, when taxes were extremely low, the country was in recession 45 percent of the time. From 1919 to 1945 when taxes were higher but still low, it was in recession 34 percent of the time. In the high tax era since 1945, it has been in recession 18 percent of the time.
Also from the NBER, we learn that Ronald Reagan, George Bush, Bill Clinton and George W. Bush all took office when the economy was expanding. Under Reagan and both Bushes, we promptly went into a recession. Under Clinton, the expansion continued into the longest upswing in U.S. history. Average annual rate of growth was 2.37 percent under George W. Bush. It was 3.29 percent under Reagan; and it was 3.75 percent under Clinton — the president who raised taxes the most.
Clearly, then, Reagan-style cuts have little to do with economic growth. This squares with common sense, first, because Reagan’s cuts affected mainly wealthy individuals, not businesses; and, second, because even business taxes have only modest effects on growth. (David Stockman, Reagan’s budget guru, later confessed that all the supply-side rhetoric had simply been “a Trojan horse to get the top tax brackets down.”)
As Gudmundson himself points out, the Great Depression was caused by bad monetary policy, not taxes. We have enjoyed wonderful growth since World War II, largely because of good monetary policy, not because of any fiddling with taxes. (Milton Friedman’s work settled this question for most economists long ago.)
The colonel quotes Thomas Sowell about comparing statistical categories over time, but he misinterprets the message. Sowell was saying that, for example, comparing average incomes for widely separated years is dubious unless you adjust for the age distribution. If you compare crime rates or poverty rates in different cities, or across time, without adjusting for age, race and gender, you can make a similar mistake. It’s called “Simpson’s Paradox.” But this is not an issue if you compare growth rates as I did above.
Gudmundson also misinterprets Sowell’s statement that the U.S. has usually been a debtor nation. Sowell meant that net American foreign investment has usually been negative; thus, we were a “debtor nation” even after Andrew Jackson had paid off our entire national debt. (Note that Sowell’s cross-time comparisons, like mine, are legitimate.) Sowell did not mean that running enormous deficits during an expansion, as we have done under Bush, is harmless.
We need a third of a trillion dollars annually to eliminate current deficits. We have $47 trillion in unfunded liabilities for Social Security, Medicare and Medicaid. We need $2 trillion to pay for Bush’s war, including care for veterans, and we need half a trillion more to repair our roads, to fund our schools, and for other minor items.
These are scary numbers. Fortunately, every economist and actuary I have read agrees that simply restoring taxes to what they were under Clinton would fix most of these problems, though changes in benefits will also be needed to tame Medicare and Medicaid. Since the Clinton tax levels were good enough for the greatest boom in our history, they can’t be too toxic for us now. But note that these same economists also agree we must raise taxes soon or our problems will become unmanageable.
Undoing Bush’s tax cuts is essential — unless Gudmundson can save us.
Bush has sent Congress eight hugely unbalanced budgets in a row. Do you think he would have done that if it were easy to eliminate deficits through spending cuts?
If Gudmundson does not want higher taxes, he needs to show us what Bush’s Office of Management and Budget and so many others have missed, namely, what $2 trillion we can cut to pay for Iraq, and then what else we can cut to come up with the other $47-odd trillion we need.
The rest of Gudmundson’s column is devoid of substance and merits no response. I would simply note that I have read more than 50 books on economics, including a couple by Milton Friedman and Thomas Sowell.
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