by George B Nichols

Created on: September 24, 2011

President Obama wants to raise the taxes on millionaires and billionaires.  It has become known as the “Buffett Rule,” so named because of an 14, 2011 New York Times editorial by Warren Buffett in which he complained that his overall tax rate was less than every other person in his office.  One of the central themes of the 2012 Presidential election campaign will be tax rates on those in the upper income tax brackets.

The American economy faces two conflicting challenges.  First, the economy continues to drag as experts ponder whether we are headed for, or might already be in, a dip” recession.  But the issue that nearly shut down the government in early 2011 and almost produced a default in the summer were related to the deficit.

President Obama has served up two attempts to address the Great Recession:  the stimulus package that was the act of Congress after he was elected and the stimulus package he proposed before a session of Congress on September 8, 2011.  Both attempts called for increasing government outlays.  Classic economic theory says that if the government increases the deficit, the economy will grow more.  This is true whether the deficit results from increased spending or tax cuts.  Fiscal policy impacts aggregate demand and can be used to heat up or cool down an economy.

The current trend for reduction in income tax rates on everyone began with President Bush in 2001.  The economy was strong, America had not been attacked and the Federal government was running a budget surplus.  We were only peripherally concerned that Medicare and Social Security would run out of money.

Much of the argument over whether to raise the top marginal tax rate sounds like class warfare.  The Democrats want to soak the rich.  The Republicans want to protect a group that is historically aligned with them.  But the important question is the economic impact.  The rhetoric is often more emotional than rational, on both sides.  There is a lot of heat but not as much light.

Unfortunately, the data is not convincing on either side of the argument.  If we cut spending, unemployment will rise because of a direct reduction in demand.  If we raise taxes on the wealthy, unemployment will rise because of the indirect reduction in demand.

However, it is my suspicion that there will be less of a reduction in demand through an increase in the top tax rate.  People with lower incomes spend more of what they make; people with higher incomes save more and spend less.  It should be the quickest way to get the economy moving again, and then we can go back to those wonderful days at the turn of the millennium when out biggest worry was how to make sure the government didn’t pay off all its debt 

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