The Price of Inequality: How Today's Divided Society Endangers Our Future by Stiglitz Joseph E

Author:Stiglitz, Joseph E. [Stiglitz, Joseph E.]
Language: eng
Format: mobi
Publisher: Norton
Published: 2012-06-03T16:00:00+00:00

UNMASKING THE DEFICIT AGENDA: PRESERVING AND EXTENDING INEQUALITIES

It might seem strange, in a country where tax rates at the top are already lower than they are in most of the other advanced industrial countries, to have a deficit reduction program emphasize the reduction of top tax rates and tax rates on corporations, but that’s exactly what the Bowles-Simpson Deficit Reduction Commission did.24 It proposed limiting the top marginal tax rate to between 23 percent and 29 percent, part of its broader agenda of limiting the size of government, capping overall tax revenues at 21 percent of GDP. Indeed, about three-fourths of the deficit reduction is achieved by cutbacks in government spending.

Reagan supply-side economics, which held that lowering tax rates would increase economic activity, so much so that tax revenues would actually increase, has (as we noted in chapter 3) been disproved by what happened after both the Bush and the Reagan tax cuts. Today individual tax rates are much lower than they were in 1980, suggesting that further reductions in tax rates would lower tax revenues even more.

The argument that the corporate tax rate should be lowered (to between 23 percent and 29 percent, from the current 35 percent)25 was even less convincing, though the Bowles-Simpson commission’s proposals to close the myriad loopholes, if actually implemented, would mean that many corporations would pay more taxes even though the official rate was lowered. We noted in chapter 3 that the effective tax rate—the fraction of their income that corporations actually pay in taxes—is much less than 35 percent, with some of the country’s premier corporations, like GE, paying no taxes. But while there is a compelling case for closing the loopholes, even focusing simply on investment and job creation, there was little case for an across-the-board lowering of the corporate tax rate. After all, with the tax deductibility of interest, the tax lowers the cost of borrowing and the return proportionately. There is no adverse effect on investment for any investment financed through borrowing, and once one takes into account the favorable rates at which capital could be depreciated (businesses are allowed to deduct from their income an amount to reflect the fact that their machines are wearing out), the tax code actually encourages investment.26 If the commission was concerned about the tax’s effect on investment, there were more precise ways to tweak the tax code than an across-the-board cut: it could have suggested lowering the tax on firms that created jobs and invested in America and raising taxes on those that didn’t. Such a policy would raise revenues and provide incentives for more investment and job creation in the United States.

Each of the deficit reduction groups sought to address distortionary aspects of the tax code—provisions, many of them deliberately placed by special interests, that encourage specific sectors in the economy. No group, however, suggested a frontal attack on corporate welfare and the hidden subsidies (including to the financial sector) that we’ve stressed in this book, partly because, as we saw

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