The US has a deficit problem. A deficit occurs when expenses exceed revenues. There are two ways to eliminate the deficit – cutting spending or raising revenue. The only idea getting attention in Washington is cutting expenses. Why? Well,
Conventional wisdom says that you can’t raise taxes in a bad economy. It should be an equally conventional wisdom that you can’t cut spending in a bad economy. The question is does cutting spending or raising taxes benefit this economy more?
My proposal is that we stimulate the economy further, financing it by passing 1) a Recovery Tax that taxes all income (wages and dividends) above $10 million a year at the rate of 50% until the unemployment rate reaches 6%, at which time the tax ends, and 2) a Security Transactions Tax.
The recovery from this recession is limited by a lack of demand. Consumer demand is weak and government demand is weak, meaning that there is no reason to hire new employees. The middle class and poor are tapped out. Corporations are sitting on huge amounts of money – but have no reason to invest it. We are in a recession like no other. In a normal recession, the Fed lowers interest rates to encourage investment and business recovers. When inflation becomes a problem, the Fed raises the interest rate. That’s all Greenspan did to be a Financial God. In this recession, the interest rate has been basically 0% for some time – it cannot be lowered to increase demand. The government has expended its major tools for dealing with a recession.
IF we cut government spending, this lowers total demand, hurting the recovery. In this scenario, there is a decrease in demand, which increases unemployment, increases expenses, and reduces revenue. The recovery takes much longer, adding to the deficit every year. The reduction in spending means more pain for the poor.
IF we spend more to stimulate the economy, deficits will increase more rapidly in the short term. However, the recovery will be accelerated, which will get unemployment to acceptable levels – or a new equilibrium point. After two years of significant stimulus, tapering off in the third and fourth years, I would guesstimate that the unemployment rate could get to 6%. First, let’s pay for it.
To stimulate the economy without exploding the deficit, I propose two taxes that will raise some, but not necessarily all, of the necessary revenue. I’ve put numbers on the proposal, but feel free to substitute your own.
The first is a tax on all income above $10 million a year, including income and dividends with no loopholes. The income above $10 million a year will be taxed at 50% instead of the current 35%. This tax would be temporary and would expire when the unemployment rate reaches 6%.
The second tax is on financial transactions. Many have proposed a tax of something like 0.25% on the purchase or sale of stocks and bonds. In addition, it may be desirable to have a higher tax on short sales or short duration sales. These taxes would have the dual benefits of raising revenue and stabilizing markets. My proposal is that sales and purchases are taxed at 0.25%, short purchases and sales are taxed at 0.5%, long term capital gains taxed at 15%, short term capital gains taxed as income, and short term sales – owned less than two weeks – would be taxed at 50%.
We have two choices. One is being outlined by the GOP. It is to cut spending. We can see how this will be done – layoffs for cops and teachers and cuts to entitlements. The rich get a huge tax cut, the poor get … well, poorer. The recovery will be slowed for several years, with deficits and pain adding up each year.
The second option is to ask those whom this country has blessed financially to help the rest of us out for a little while and use that contribution to get the rest of us back to work faster. The recovery will be much faster, and the deficits will be under control as soon as unemployment gets to acceptable levels. CBO says the $800B stimulus created or saved 3 million jobs, so another $2 trillion (tapered such as 800B, 600B, 400B, 200B) should add 7.5 million jobs. Four years from now, there will be 6 million new job seekers added to the labor pool – we’ll need to add over 5 million jobs just to keep the unemployment rate at 9% - so the stimulus should create half of the jobs necessary to achieve 6% unemployment. The rest is up to the business community.
While the stimulus program implemented by the administration has not brought unemployment to acceptable levels, CBO states that it added 3 million jobs. It could be argued that a stimulus program has not really been tried – most of the government’s stimulus was offset the losses at the state and federal level. The size and composition of the stimulus were also dictated by political, not economic, considerations, as the majority of the program was devoted to tax cuts with a multiplier of .3 instead of infrastructure with a multiplier of 1.6..
We’re in a deep hole as far as unemployment goes. If we stimulate the economy by up to $2 trillion more over the new four years, we should have an economy that is strong enough to balance our budget at that point. If we don’t stimulate the economy, the recovery may take more than 10 years and increase the deficit by more than $2 trillion – that’s just $200B a year - over ten years of pain. The middle class and poor can’t take any more.
Just one last thought – let’s consider those who will pay for the recovery (and thank them). We’re not talking about total wealth – we’re talking about annual income. There will be no tax increase on their earnings below $10 million a year, although dividends will be included If you earned $10 million in one year, paid 60% taxes on it and stuffed the remaining money into bonds paying 5%, you’d be earning $200,000 a year for the rest of your life in interest alone. And you could do this every year.