We have heard the arguments from McCain and others that Obama’s plan of raising taxes for the top 5% income earners (while giving tax cuts to the other 95% of workers) will result in lose of jobs and the further deterioration of the Economy. This argument has been made before by Republicans and requires closer examination. It was made by the Republicans in their efforts to defeat the Clinton tax plan in 1993. The Clinton tax policy then is very similar to what Obama is proposing now. Clinton did raise taxes for the top 5%. So what happened? We had eight years of unparalleled economic growth with some 23 million new jobs created by the Clinton Economy of the 90’s, and budget surpluses “as far as the eye could see” by the time that George W. Bush took over as President. These budget surpluses were to pay down the National Debt and strengthen Social Security and Medicare. Instead, the Republican Administration used the Clinton Budget Surpluses for tax cuts to the rich (”Why do Republican Administrations Love Budget Deficits?”). That’s what recent history teaches us. But the fallacy does not stop there!
What do the rich do with their tax cuts? McCain and the Republicans argue that the rich expand their businesses and so create new jobs. But that’s just plainly false. Economic expansion is driven by greater demand and consumer spending. When the working middle class has no money to spend, they curtail their consumption and so reduce demand and the economy slows down. Tax cuts going to the rich will not solve this problem. The rich can already buy anything they need whenever they want. It’s what makes them wealthy! So more disposable income going to the rich will not increase demand and economic growth. If anything, it will simply drive prices up since the ‘value of money’ is diluted when there’s more money in their pockets to spend.
The argument is also made that tax cuts to the rich will go into wages for new workers. Again plainly wrong. The wages of a worker come from their productivity. They earn their pay by the work they do. Businesses hire more workers because of increased demand, not because of tax cuts. And if the consumers are not spending, businesses plainly will not expand and hire. Consumer spending is what drives the Economy. By putting more money in the pockets of the working middle class (as Obama wants to do for the 95% of the income earners) we are able to stimulate greater economic activity ‘from the bottom up’. This will build a stronger economy that will benefit everyone.
A strong argument can also be made that tax cuts to the rich go to buying stocks in Wall Street. This extra disposable income that is pumped into the stock market has the effect of raising stock prices and creating ‘bubbles and bursts’ in Equity Markets. Free Markets act like auction blocks. The purchase goes to the highest bidder. When there are significant systemic imbalances in the purchasing power of buyers the prices obviously will go up for everyone, resulting in an imbalance between ‘market value’ and ‘real value’ with subsequent ‘bubble bursts’ market corrections.
The Real Estate Market is also a place where the prices of houses are their ‘market value’ as determined by ‘comparable sales’. The more capital (through easy mortgages and huge tax cuts to the wealthy) the higher the ‘market value’ for houses. But such ‘market value’ does not reflect ‘real value’ (what the average consumer can afford to pay). And so you get once again ‘bubbles and bursts’ in the real estate values, as we have been experiencing recently. This tension and contradiction between ‘market value’ and ‘real value’ may also account for the ‘business cycles’ our Economy regularly goes through.
When there are significant systemic imbalances in the distribution of wealth in the Economy, ‘market value’ will far exceed ‘real value’ resulting in severe and abrupt disruptions in our Economy. We are experiencing this now. Though the causes may be many and technical, an aggregate overview would spot extreme polarities, tension and imbalances in our Economy and would recognize this as the true underlying dynamic and cause to our current crisis.(”Wall Street Meltdown and the Collapsing Middle Class“). The working middle class are the building blocks of our Economy. They collectively give form and substance to the Economy. But even the best design cannot hold up a building if the bricks are deteriorating and crumbling.