US economic growth has been strongest when our taxes have been high. During World War II, then under Truman, Eisenhower, and Kennedy, our upper marginal tax rates were between 88-92%. Read those numbers again. They are astonishingly high. Those were our strongest growth years.
I never expected to say this. Pelosi's right, Obama's wrong.
Do keep in mind that we are talking about higher taxes on the richest members of society, the very richest. So, unless you're among that elite group, don't panic for personal reasons.
Keep in mind, also, that we are speaking only of income taxes.
You have certainly heard, several thousand times, that tax cuts lead to economic growth.
That's not true.
Moderate tax cuts lead to a flat economy. (The Johnson tax cuts, usually misnamed the Kennedy tax cuts, lead to 16 years of virtually no growth.)
Large tax cuts are followed by a boom in the financial sector, a bubble, and a crash. Then a recession or depression with massive bank failures. This has happened three times, in the 1920s, under Reagan, and under George W. Bush.
During a depression or recession, the point where taxes are increased marks the point when the economy begins its recovery: 1932 under Hoover, Roosevelt's second round of tax hikes in 1940, the first president Bush's tax hike, followed by the Clinton tax hike. (There's one exception. Roosevelt's tax hike of 1936, which was accompanied by cuts in government spending.)
US economic growth has been strongest when our taxes have been high. During World War II, then under Truman, Eisenhower, and Kennedy, our upper marginal tax rates were between 88-92%. Read those numbers again. They are astonishingly high. Those were our strongest growth years.
The next time we experienced strong growth – not just in the fiscal sector, across the entire economy – was after the Clinton tax hikes.
Why do tax hikes lead to strong economic growth?
Tax hikes usually correspond to higher government spending.
Government spends money on things that the private sector does not spend money on: physical infrastructure, social infrastructure, market infrastructure, and defense. These are the things that create a world in which doing business is possible. The worse those things are, the worse business is. The better they are, the better business is.
Rich people can't be trusted with too much money. If they have too much easy cash around, they get conned into Ponzi schemes, they go for quick money deals, they get suckered into bubbles, and then the whole economy crashes.
Can we have increased government spending without tax hikes?
No.
We can spend more than the government takes in – if, and only if – the following is true.
If the government is spending more than it takes in order to create an environment where more productive business is possible, then, at some point, the investment will begin to pay off and revenues will rise. If, at the same time, government spending declines (as a percentage of GDP), increased revenue will catch up with spending and the debt will be paid off.
Or – since this is the real world, in which there are always new needs and new problems, and therefore new things to pay for – the old debts will be caught up with and paid down, while new ones are taken on, hopefully to build new things that will pay off in turn.
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