I came across the article, Why the Economy Grows Like Crazy Amid High Taxes, by Larry Beinhart, and it says some things that the people of California should hear.
Beinhart make some very good points. first, he points out that if you look at the periods of higher taxes, you see that these are the very periods when the economy does much better. He writes,
Examples include World War II and the Truman-Eisenhower years, when it
was around 90 percent, and the Clinton years, when it was high relative
to the preceding and following administrations.
He also points out that big tax cuts are often followed by bubbles and crashes, like the big crashes of 1929, 1987 and 2008.
Beinhart says that one reason for this is that low taxes encourage businesses to distribute profits rather than reinvest them in their companies. When taxes are low the owners have incentive to grab all the cash they can out of the company. But when taxes are high every dollar they take out of the company is immediately reduced. If the money stays and is reinvested in the company the company’s value grows and can later be taken as capital gains. As a former business owner I understand how this works.
With high taxes, the only way to retain the bulk of the wealth
created by a business is by reinvesting it in the business — in
plants, equipment, staff, research and development, new products and
all the rest.
The higher taxes are (and from 1940 to 1964 the top rates were around 90 percent), the more this is true.
This creates a bias toward long-term planning.
a business is planning for the long term, it wants a happy, stable work
force. It becomes worthwhile to pay good wages and offer decent
So low taxes cause companies to only think a few months ahead and sacrifice their long-term good for short-term gain, instead of planning to be in business year after year. Also, low taxes encourage a fast-buck climate in which takeovers and disruption rule. Beinhart writes that when the Reagan tax cut era took over,
It was no longer enough for a business to be a reasonably good business, making steady, reliable profits.
that became a very bad condition for a business to be in. It made it a
target for takeovers by people who were willing to milk them of their
There is a lot more over at the article, so go read the rest.
This holds important lessons for Californians. Along with Beinhart’s observations, there are other reasons to think that low taxes harm the economy. For one, it is the nature of our economic system that a few people can come into possession of huge shares of the wealth. This dries up the economy because regular people don’t have enough of a share of the wealth to allow them to spend much on consumer goods, etc. We are seeing this happening today. On top of that we are seeing the government forced by tax shortfalls to lay people off just at the time we need more people to be able to buy houses, cars, etc. Taxes provide jobs and redistribute the wealth in multiple ways, so that regular people CAN buy houses, etc.
But in California we have rules that don’t let us raise taxes, even though we can see that we need the income so that the state can keep teachers, firefighters, roadworkers, etc. employed! We as citizens actually tolerate rules that keep us from asking corporations and wealthy people from pitching in to help fix the economy! It is time for us to start looking at how to fix these rules that hobble us during times of economic emergency.