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September 23, 2010

Atlas and the Tax Cuts

300 economists signed a letter yesterday - the kind of letter that means Paul Krugman won't be inviting them to any of his parties:

“We, the undersigned economists, write in support of extending current tax rates on income and investments in order to prevent a devastating blow to America’s fragile economic recovery,” the letter reads. “Robust economic growth is best served by a tax code that levies low and predictable rates. The promise of a tax increase in January 2011 would create significant economic distortions as individuals and businesses conserve capital or stave off hiring.”
And of course they shouldn't be holding their breath for an invite to one of those all-too-common shindigs at the White House:
The letter was meant, in part, to counter a statement President Obama made earlier this month during a press conference. He said economists believe extending the Bush-era tax cuts for wealthy Americans “is probably the worst way to stimulate the economy.”
Sweet.

I was discussing this with Andy over at The Snausages last night - he was of the addlepated impression that letting the Bush tax cuts expire wouldn't have that large an impact, especially if it was restricted to the $250K+ set. I disagree, for the following reason:


If you look at the ratio of private working stiffs to everybody else, you can get an idea of the burden on the private sector. That is, you can tell how many mouths each private employee has to feed, be they government employees, the unemployed, kids, or other people who don't work. Here's how that has looked over the past few years (the population divisor does not include kids under 16, so it's high):

AtlasGroansSep2010Small.gif


That's Atlas groaning right there - more than a 10% increase in the burden on each private employee. Naturally that has been unsustainable, which is why we've borrowed to make up the shortfall.

Now imagine increasing the tax rate on the $250K+ folk by 5%. They make about a quarter of the country's income, so you're basically taking another 1.25% out of the private economy and running it through the government at an economic multiplier that's less than 1. That just increases that already-unsustainable burden on the private sector.

The bottom line is that until we recover to ratios in the neighborhood of 0.5, it's not a great time to be pulling more money out of private hands. But as we already know, for the Obama crowd it's not a matter of a healthy economy, it's a matter of social justice. Which means that it's fine if the economy tanks, as long as we all tank together.

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posted by Geoff at 09:39 AM

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