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Time to be taxed

BY DANIEL TAIBLESON | APRIL 27, 2012 6:30 AM

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The beating heart of modern Republican rhetoric is the argument that there is nothing more dangerous than a tax increase.

This thinking, however rhetorically effective, is fundamentally wrong. Furthermore, it has narrowed the policy options available to our elected officials to the point that it risks bringing up the kind of economic crises they purport to be circumventing by fighting tax increases.

Counter to what Republicans argue, we can address debts and deficits by increase tax rates on high-income households, dividends, and capital gains without upending the U.S. economy.

To be sure, Republicans are not completely wrong: Austerity policies that intentionally reduce government spending, cut government benefits, and increase taxes, except in the rarest of cases, risk imparting real measurable economic harm.

One need only look at the current state of the Britain's economy to see that.

Since Britain's Conservative-led government imposed a slew of austerity policies in the name of debt reduction, Britain's economy has formally fallen back into recession — GDP shrank by 0.2 percent in the final quarter of last year, according to the Office for National Statistics.

At some point however, some level of austerity becomes necessary. Ideally this would be done in a time of growth, when the negative economic blow would be softened by otherwise strong growth, but sometimes austerity becomes necessary even in tough economic times.

The question then becomes: How do we reduce debts and deficits while minimizing the human and economic costs of austerity?

Republicans would say the answer is to cut government spending to avoid tax increases at all costs. A 2010 analysis written by a team of professors from the University of Nebraska, the University of Michigan, and the University of California-Berkeley, differs in its conclusions.

The team of scholars found that marginal tax rates can be raised on high-income households without imposing much, if any, economic harm. The researchers found that high-income individuals, in the aggregate, do not withdraw from economic activity when marginal rates increase — counter to the arguments of Republicans and Ayn Rand fans.

They found that raising marginal tax rates on high-income households can be done without hurting small businesses. This is in part because only 2.5 percent of all small businesses fall within the top income brackets. But, even for that 2.5 percent, because they can deduct investments in full, they can pretty much avoid feeling most changes in marginal tax rates.

Perhaps most importantly, they found that preposterously low capital gains and dividends rates do not spur investments in new ventures — for example, entrepreneurship.

As an alternative to tax increases, Republicans have pushed for cuts in highway funding, unemployment insurance, food assistance for the poor, and a slew of other government programs. The problem with this approach is that these kind of programs are proven to have huge positive economic effects, according to Mark Zandi, an economist who testified before the House Budget Committee in 2010.

Research and history inform us that we can increase taxes in a targeted and thoughtful way without realizing high economic costs. Furthermore, they inform us that kind of program cuts proposed by Republicans risk realizing high economic and human costs.

Austerity is a dangerous game. But, we cannot avoid it forever: This is why it should be approached in a calculated fashion — relying on evidence and not ideology as a guide.

Let's start there and see where it takes us before we consider the far more dangerous kinds of programs proposed by Republicans.


This story reflects two wording changes in the seventh and second-to-last paragraphs. In both instances, the word "taxation" was changed to "austerity."


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