The sequester was supposed to be so horrible that it would force compromise between two competing economic theories. The first theory is that reducing the federal budget deficit to manageable levels by spending cuts alone will unravel the social and economic fabric of our nation, and the second is that raising taxes, particularly on rich people, will lead to catastrophic increases in unemployment. (At least everyone seems to agree that growing the deficit without bound is a bad idea.) The problem is that one of these theories has been tested - twice - and both times shown to be disastrously wrong.
Our world is chock-a-block with plausible-sounding theories that turn out to be wrong. For example, imagine you are the pilot of an airplane in level flight and you want to climb. You might think that the way to accomplish this is to pull back on the stick so that the nose of the airplane points up. And, indeed, if you try this it will seem to work for a little while. The plane will in fact start to climb.
But after a minute or two something else will happen: the plane will start to slow down. Because it is slowing down, the wings will generate less lift, and so to maintain the rate of climb you have to pull back further on the stick, which causes the plane to slow down even more. Eventually, if you pursue this plausible but naive strategy far enough, the plane will stall and you will die. Unintuitive consequences like this are why we typically don't allow people to pilot airplanes without special training.
The theory that taxing rich people destroys jobs is equally plausible, but equally wrong. It is plausible because, clearly, every dollar a rich person must pay in taxes is a dollar that she can no longer spend on someone else's salary. Fewer dollars for the government, more dollars for salaries, more jobs, QED. It is just obvious that this has to be true.
And yet, it is not. The situation is very similar to making an airplane climb by pulling back on the stick: it works in the short-term, but in the long run it is disastrous. The main difference is that in an airplane the scenario plays itself out in minutes. In an economy, it takes years.
In the U.S. we have now done the experiment of radically lowering taxes on the wealthy twice, once after World War I, and again starting in 1980. It is not a coincidence that the result was the two greatest economic catastrophes in our history: the Great Depression in the first case, and the Great Recession in the second.
Likewise, it is not a coincidence that the period between the end of World War II and the election of Ronald Reagan was both the period with the highest top marginal tax rates and the greatest economic prosperity in our history. Top marginal rates during this period from 1945 to 1980 were never lower than 70% and occasionally as high as 91%, and yet, unemployment was consistently lower than it has been since 1980, occasionally dropping below 3%, and rarely rising above 7%.
If high taxes on rich people destroyed jobs, the four decades after World War II should have been a period of disastrously high unemployment. If lowering taxes on rich people created jobs we should be swimming in jobs right now. The evidence that the theory is wrong could not be plainer.
Why is this plausible-sounding theory, that lowering taxes on rich people creates jobs, so wrong? It is because jobs are not created by rich people. The idea that rich people create jobs gets the causality exactly backwards: rich people are not the cause of a robust economy, they are the result. Rich people don't create jobs, demand creates jobs. Businesses don't hire because they have extra money, they hire for only one reason: there is more demand for their product than they can meet with their existing work force. And demand is generated not by the rich, but mainly by the middle class.
Like creationism and climate change, there is no real debate here. The idea that raising taxes on rich people is a bad idea can only be supported with platitudes, not by data. The facts are clear: as a nation we are better off when taxes on the wealthiest are higher than they are now.
An economy, like an airplane, is a complex mechanism. Both respond in unintuitive ways to control inputs. Lowering taxes on the rich, like pulling back on the stick, leads to short-term economic growth, following by growing income inequality, a drop in demand, and eventually economic disaster. We have done this experiment twice now, and the results have been the same both times. How many catastrophes will it take before we finally learn that plausible-sounding theories can disastrously wrong?
Ron Garret is a semi-retired software engineer, a member of Patriotic Millionaires for Fiscal Strength, an armchair economist, and an instrument-rated private pilot.
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