Tea Party Taxation

US presidential candidate, Michele Bachmann, stands up for the ordinary people of America, the factory workers and housewives, who she says are telling her to stand strong against raising taxes and to fight to reduce government spending, as the way to America’s economic salvation. But even in the self-reliant, can-do US culture, taxes are unavoidable. They are needed to pay for national defence and security as well as those provisions of education, healthcare and social security which support the ordinary people. But, it is argued, raising taxes undermines the US economy and would even be immoral, especially taxes which resulted in the redistribution of income and wealth from one category to another.

The Tea Party approach is by no means unique to the US. Vince Cable may refer to them as ‘right wing nutters’, but the free trade, open markets, minimised government, spending and taxes, are part of the UK coalition government’s mantra of which he is part, just as they are of the GOP in the US. Successive US and UK governments have, since Reagan and Thatcher, broadly accepted these positions. But times have changed and what may have worked as recently as a decade ago, is no longer appropriate, causing harm to both ordinary people and the overall economy, quite undermining Ms Bachmann’s contention. For example, the effects of personal taxation have changed radically.

When the Reagan and Thatcher administrations first started to reduce personal tax rates the impact on the real economy (extraction, manufacture and distribution) was positive resulting in economic growth, the creation of jobs and development of new technologies. The reduction of taxes on the low paid meant that they were able to spend more thus increasing the general level of demand, so stimulating growth. At the same time reduction of taxes on the high paid meant they were able to invest more and so stimulate real firms to invest in expansion as well as R&D to develop new technologies. Thus both supply and demand were stimulated by those reductions in taxes thirty years ago. That was both the theory and the reality.

Today, reducing taxes on the low paid has the same effect of increasing demand and so stimulating the economy – the low paid struggle to survive and have no alternative but to spend what they get. But the effect of reducing taxes on the high paid is now different from what it used to be. The additional income of the high paid will typically be added to the individual’s investment portfolio, which in most cases will be in the hands of professional fund managers, directly or indirectly, for whom the options have changed fundamentally as a result of deregulation of the financial sector.

The most lucrative investments are now in derivative ‘products’ – the sort of things which caused the 2007 bust – or even wholly ‘faux’ products such as carbon credits. The 360 Invest Group, which describes itself as ‘one of the most influential and innovative companies in the alternative investment … arena’, advertised carbon credits in this week’s Observer as ‘the Next Commodity EXPLOSION …’ with ‘projected growth of 111% between now and 2013’. Or, as previously posted on this site, an ROI promise by Alternative Markets ‘ranging from 60% to 398%’ (see http://www.gordonpearson.co.uk/06/pity-the-poor-banker/). The total value of these markets is estimated at around the world’s total GDP, many times the global value of stocks and shares. Reducing taxes on the high paid merely increases speculative investment and no longer has any beneficial impact on the real economy.

A more effective strategy for the health of the economy and job creation, would be to reduce taxes on the low paid and increase taxes on investment in purely financial products, and route the revenue thus gained directly back into the real economy through such measures as support of manufacturing expansion and R&D. This would be a more effective strategy than the simplistic Tea Party mantra, which is currently doing so much damage to almost everyone.

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