Wednesday, 12/16/2009
What the Wall Street Journal and CNBC won’t tell you: that low taxes mean low wages for employees.
In recent decades, an intuitive myth has been pushed on the unsuspecting public by Supply Side economists that low taxes encourage corporations, employers and entrepreneurs to create high paying jobs. But the counter-intuitive historical truth is that a progressive income tax regime with over 90% for top bracket incomes actually encouraged management and employers to raise wages. The principle behind this truth is that it is easier to be generous with the government’s money.
In the past, when top corporate income tax rate was at over 50% and personal income tax rate at over 90%, both management and employers had less incentive to maximize net income by cutting cost in the form of wages. Why give the government the money when it could be better spent keeping employees happy?
The Reagan Revolution, as inspired by voodoo Supply Side economics, started a frenzy of income tax rate reduction that invited employers to keep wages low because cost savings from wages would produce profits that employers could keep instead of having it taxed away by high tax rates.
It follows that the low income tax rate regime leads directly to excess profit from stagnant wages which leads to overinvestment because demand could not keep pace with excess profit due to low wages. Say’s Law on “supply creating its own demand”, which Supply Side economists lean on as intellectual premise, holds true only under full employment with good wages, a condition that Supply Side economists conveniently ignore. To keep demand up, workers in a low wage economy are offered easy money in the form of sub-prime debt rather than paying consumers with living wages, creating more phantom profit for the financial sector at the expense of the manufacturing sector. This dysfunctionality eventually led to the debt bubble that burst in 2007 with global dimensions.
The State Theory of Money (Chartalism) holds that the acceptance of a currency is based fundamentally on a government’s power to tax. It is the government’s willingness to accept the currency it issues for payment of taxes that gives the issuance currency within a nation. The Chartalist Theory of Money claims that all governments, by virtual of their power to levy taxes payable with government-designated legal tender, do not need external financing and should be able to be the employer of last resort to maintain full employment. The logic of Chartalism reasons that an excessively low tax rate will result in a low demand for the currency and that a chronic budget surplus is economically counterproductive because it drains credit from the economy. The colonial administration in British Africa learned that land taxes were instrumental in inducing the carefree natives into using its currency and engaging in financial productivity.
Thus, according to Chartalist theory, an economy can finance its domestic developmental needs to achieve full employment and sustainable optimum growth with prosperity without any need for foreign loans or investment, and without the penalty of hyperinflation. But Chartalist theory is operative only in closed domestic monetary regimes.
Countries participating in free trade in a globalized system, especially in unregulated global financial and currency markets, cannot operate on Chartalist principles because of the foreign-exchange dilemma. For a country participating in globalized trade, any government printing its own currency to finance domestic needs beyond the size of its foreign-exchange reserves will soon find its currency under attack in the foreign-exchange markets, regardless of whether the currency is pegged to a fixed exchanged rate or is free-floating. The only country exempt from this rule, up to a point, is the US because of dollar hegemony.
Thus all economies must accumulate dollars before they can attract foreign capital. Even then, foreign capital will only invest in the export sector where dollar revenue can be earned. Thus the dollars that Asian economies accumulate from trade surpluses can only be invested in dollar assets in the United States, depriving local economies of needed capital. This is because in order to spend the dollars from trade surplus, the dollars must first be converted into local currency, which will cause unemployment because the wealth behind the new local currency has been ship overseas. The only protection from such exchange rate attacks on currency is to suspend convertibility, which then will keep foreign investment away.
What the Wall Street Journal and CNBC won’t tell you: that low taxes mean low wages for employees.
In recent decades, an intuitive myth has been pushed on the unsuspecting public by Supply Side economists that low taxes encourage corporations, employers and entrepreneurs to create high paying jobs. But the counter-intuitive historical truth is that a progressive income tax regime with over 90% for top bracket incomes actually encouraged management and employers to raise wages. The principle behind this truth is that it is easier to be generous with the government’s money.
In the past, when top corporate income tax rate was at over 50% and personal income tax rate at over 90%, both management and employers had less incentive to maximize net income by cutting cost in the form of wages. Why give the government the money when it could be better spent keeping employees happy?
The Reagan Revolution, as inspired by voodoo Supply Side economics, started a frenzy of income tax rate reduction that invited employers to keep wages low because cost savings from wages would produce profits that employers could keep instead of having it taxed away by high tax rates.
It follows that the low income tax rate regime leads directly to excess profit from stagnant wages which leads to overinvestment because demand could not keep pace with excess profit due to low wages. Say’s Law on “supply creating its own demand”, which Supply Side economists lean on as intellectual premise, holds true only under full employment with good wages, a condition that Supply Side economists conveniently ignore. To keep demand up, workers in a low wage economy are offered easy money in the form of sub-prime debt rather than paying consumers with living wages, creating more phantom profit for the financial sector at the expense of the manufacturing sector. This dysfunctionality eventually led to the debt bubble that burst in 2007 with global dimensions.
The State Theory of Money (Chartalism) holds that the acceptance of a currency is based fundamentally on a government’s power to tax. It is the government’s willingness to accept the currency it issues for payment of taxes that gives the issuance currency within a nation. The Chartalist Theory of Money claims that all governments, by virtual of their power to levy taxes payable with government-designated legal tender, do not need external financing and should be able to be the employer of last resort to maintain full employment. The logic of Chartalism reasons that an excessively low tax rate will result in a low demand for the currency and that a chronic budget surplus is economically counterproductive because it drains credit from the economy. The colonial administration in British Africa learned that land taxes were instrumental in inducing the carefree natives into using its currency and engaging in financial productivity.
Thus, according to Chartalist theory, an economy can finance its domestic developmental needs to achieve full employment and sustainable optimum growth with prosperity without any need for foreign loans or investment, and without the penalty of hyperinflation. But Chartalist theory is operative only in closed domestic monetary regimes.
Countries participating in free trade in a globalized system, especially in unregulated global financial and currency markets, cannot operate on Chartalist principles because of the foreign-exchange dilemma. For a country participating in globalized trade, any government printing its own currency to finance domestic needs beyond the size of its foreign-exchange reserves will soon find its currency under attack in the foreign-exchange markets, regardless of whether the currency is pegged to a fixed exchanged rate or is free-floating. The only country exempt from this rule, up to a point, is the US because of dollar hegemony.
Thus all economies must accumulate dollars before they can attract foreign capital. Even then, foreign capital will only invest in the export sector where dollar revenue can be earned. Thus the dollars that Asian economies accumulate from trade surpluses can only be invested in dollar assets in the United States, depriving local economies of needed capital. This is because in order to spend the dollars from trade surplus, the dollars must first be converted into local currency, which will cause unemployment because the wealth behind the new local currency has been ship overseas. The only protection from such exchange rate attacks on currency is to suspend convertibility, which then will keep foreign investment away.
