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Why higher taxes on the wealthy are good for business

ford assembly line
Wikimedia Commons
Henry Ford became one of the wealthiest business owners in American history by promoting demand for his products, not by demanding lower taxes on his income.

As the budget battles in Washington and St. Paul continue, Democrats and Republicans continue to argue over whether to raise taxes on the wealthy. President Barack Obama and congressional Democrats claim that we need to raise taxes on the wealthy to reduce the budget deficit and balance spending cuts. By contrast, Republicans assert that raising taxes on the wealthy will “kill jobs” and hurt the economy.

Matthew F. Filner
Matthew F. Filner

In St. Paul, the debate tends to mirror the federal arguments, as Gov. Mark Dayton and many Democratic leaders in the Minnesota House and Senate advocate increased taxes on the wealthy to balance the budget, while Republicans oppose such taxes and a drag on the economy. Dayton has proposed increasing income taxes on the top 2 percent, as well as broadening the sales tax to include items and services most consumed by wealthier Minnnesotans.

Debates detached from evidence

These debates are fierce and evidence a dramatic gulf between the two parties on taxes. Yet what’s notable about these debates, both in Washington and in St. Paul, is how detached from the evidence they have become. We tend to think of both sides as “advocates” for two groups — Democrats are widely perceived as advocates for the middle class, and therefore raising taxes on the wealthy becomes an effort to protect the middle class; Republicans are widely perceived as advocates for businesses, and therefore keeping taxes low on the wealthy becomes an effort to protect businesses.

What is startling about the evidence, however, is the fact that what is good for the middle class is also what is good for businesses: i.e., raising taxes on the wealthy. This seems counterintuitive because we’re conditioned by the political debates to ignore the facts. But the facts can’t hide, as a recent report by the Congressional Research Service makes clear.

The 2012 report, entitled “Taxes and the Economy: An Economic Analysis of the Top Tax Rates Since 1945,” demonstrates that there is a positive relationship between high tax rates on the wealthy and economic growth. Let me repeat: There is a positive relationship between high tax rates on the wealthy and economic growth.

As the report shows, real (adjusted for inflation) growth of our Gross Domestic Product (GDP) averaged 4.2 percent in the 1950s. During the same period, the top marginal tax rate was over 90 percent. During the past decade, while the top marginal tax rates have been around 35 percent, average real growth in GDP has averaged 1.7 percent. And while there is not a perfect linear curve over the past 60 years, the preponderance of the evidence shows that the economy grows best when taxes on the wealthy are high.

One might wonder how this is possible. As any student of economics knows, the answer lies within one of the basic truths of capitalism: Supply (of goods and services) follows demand (for those goods and services). A company will increase its supply of whatever goods and services it sells to meet consumer demand for those goods and services. A company will prosper if there is high demand for its goods and services; a company will falter if demand dries up.

Policymakers have effectively reduced demand

By lowering taxes on the wealthy precipitously over the past half-century, policymakers have effectively reduced the demand for products and services. Why? Because as the tax burden on the few wealthy has decreased, the economic burden on the vast majority of middle-class Americans has increased dramatically. For example, while the tax rates on the wealthy have  dropped from over 90 percent in the 1950s to 35 percent today, the middle class is now faced with dramatically higher health-care costs, increased tuition and staggering student-loan debt, increased local property taxes, and many other economic burdens.

And because the vast majority of Americans now carry such high debt loads and have stagnant incomes, they are not able to sustain the kind of high demand for goods and services that businesses need to thrive.

It is not a surprise, therefore, that the last major expansion of the U.S. economy (during the 1990s under President Bill Clinton) occurred shortly after a rise in the marginal tax rates on the top earners (from 31 percent to 39.6 percent). And it is also not a surprise that when marginal tax rates on the wealthy were reduced (from 39.6 percent to 35 percent) under President George W. Bush, economic growth stalled.

Lowering costs for the middle class

Despite the rhetoric to the contrary, the evidence shows that taxing the wealthy at a higher rate puts more money in the pockets of middle class Americans — both in terms of lower effective tax rates and, more important, in lower costs for everything from health care to higher education. And more money for the middle class means higher demand for the products and services that businesses sell. More demand requires increased supply, and increased supply means better sales. And better sales mean stronger economic growth.

Almost a century ago (in 1914), one of the most successful capitalists in American history, Henry Ford, understood this basic law of economics. That’s why he established the radical principle of the “Five Dollar Work-Day.” Ford believed that if he paid his workers a living wage ($5/day was a living wage in the early 20th century), they would be able to afford his automobiles. And, he figured rightly, if his workers could afford to buy Ford cars, they would increase demand for his product. Henry Ford became one of the wealthiest business owners in American history by promoting demand for his products, not by demanding lower taxes on his income.

The evidence is clear: Tax the rich to grow the middle class; grow the middle class to grow demand; grow demand to create jobs and grow the economy. Believing that lower taxes on the wealthy is good for the economy is — in the words of former President George H.W. Bush — nothing more than believing in “voodoo economics.”  It’s time for our political leaders to dismiss supply-side economics for what it is: voodoo.

Matthew F. Filner teaches political philosophy and constitutional law at Metropolitan State University in St. Paul.


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Comments (13)

Take a Closer Look at Henry Ford

I will limit my comments to your assertions regarding the motivations of Henry Ford.

Because Ford was a shrewd businessman, what he had to say about labor relations needs to be viewed in light of the historical facts. In 1913, when Ford introduced the assembly line, his workers were skilled craftsmen; those workers quit. A Ford biographer noted, “So great was labor’s distaste for the new machine system that toward the close of 1913 every time the company wanted to add 100 men to its factory personnel, it was necessary to hire 963.” The workers Ford retained were less skilled, had less pride in their work, and were trapped by the high wage. Ford later admitted that his high wage was “one of the finest cost-cutting moves we ever made,” because he was able to speed up the conveyors, increase output, and defeat his competition.

When I graduated with an engineering degree, I had to accept a substantial pay cut from my factory job to start my career. Had I the financial commitments of a family, a house, a new car, or the combo platter, I would have been trapped at the factory, at least until it closed a few years later.

The author is correct in both his macro analysis

and his micro insights.

While marginal propensity to consume rates would be ideal the latest available data from the consumer expenditure survey in 2011 shows that post tax consumption for all consumer units is 80% but for those making over $100 or more it drops to less than 60%.

As the old saying goes the over $100,000 post tax households may spend more in absolute dollars individually but those households under $100,000 make it up in volume. There are just a lot more of them.

Carter, Reagan and Kennedy proved you wrong again

Another gem from Professor Filner. Under Kennedy (and before) and Reagan a reduction and simplification of the tax code increased the revenues to the US treasury via taxes. Under Carter an increase in the same taxes caused an economic downturn. If you want people more independence let people keep more of their money. The wealthy spend creating jobs and sustaining productive out put. The middle class does better as wealth is created.

Filner gets it wrong again.

Very interesting

But wrong.

President Carter did not increase taxes by a significant amount (the increase was less than 2% of the GDP). The top income tax rate under Carter was the same as it was under President Kennedy--70%. The rate for capital gains was lowered from 39% to 28%.

Revenues to the US Treasury did not "increase" under President Reagan. The federal deficit almost tripled during his administration [insert obligatory Obama snark here, then realize I'm not talking about President Obama]. The deficit would have been far worse if Reagan had not increased federal taxes eleven times during his eight years in office. Even so, Reaganomics had no salubrious effect on the economy. Deep tax cuts were passed in 1981, and the country went into a severe recession (10.8% unemployment) in 1982. Recovery did no begin until 1983, after the Fed increased the money supply to allow expansion. The poverty rate was higher at the end of the decade than in 1980, and real wages stayed flat (the bottom 20% took a 24% pay cut).

Right Place, Right Time

But Reagan's most brilliant idea was to be President when the price of oil fell through the floor, freeing up boatloads of money for consumers and business alike.

This is rarely mentioned.

Cites please

You're stating a lot of "facts" here.

Please provide the sources from which you are obtaining this information.

Reagan Taxes

Actually Reagan lowered the tax RATE, which is not the same as lowering taxes. People's taxes actually went up under Reagan due to the loopholes that were closed in the tax code. But hey, it sounds good if you can say you lowered people's taxes. Nice sound bite, eh?

I got all the details on this because my girlfriend is a tax executive and she's actually read (and understood) the laws.

Mr. Creason you are dead wrong on you assumption about cutting

taxes for the wealthy. There isn't any data that supports your assertion.

Show me the evidence.

Mr Creason.....

Could you please, please explain how the Bush/Obama tax cuts have been good for the middle class? I read recently that the Congressional Research Service concluded the tax cuts' biggest effect was to increase the disparity between rich and everyone else. Bush's job creation record was awful and Obama's hasn't been too great either. The idea that tax cuts for the wealthy are good for everybody has been failing since Reagan.

Culture, Corporate Citizen civic-hybrid is the answer

Filner is onto something important here.

While the model can be argued from the Reagan/Carler example, the argument falls apart when corporate and citizen solutions are considered. During Reagan/Carter years, though clearly part of the 'problem,' culture was diminished as 'part of the solution.'

During the 70s and 80s, a culture of entitlement was taking hold. Gov't was perceived as the be-all answer, or 'buck stops here' to all problems. Civic engagement if not public/private solutions were eschewed in the wake of the turbulent 60s. Gone was the 'we're in this together' American ethos that identified broad swaths of culture during the Great Depression, WWII and post-war 50s years. The sense that citizens were a critical factor in building and sustaining the fabric of society.

Needless to say, the collaborative citizen/government attitude was idealized by Kennedy and Obama. Clinton maximized it achieve substantive economic outcomes.

For example, I co-founded PeopleNet Communications Corporation in 1993. Our vehicle tracking technology got a big boost when Clinton released GPS for business applications in 1995, and when Gore promoted the Internet as a viable tool for corporations. We used both in our products. The Company is still growing. Last I heard they have plans underway to add 100 jobs here in MN.

Notable Minnesotan leaders -- Ken Dayton and Medtronics' Bill George come to mind -- embodied very savvy iterations of this model. Filner could add them to his Ford example of leaders who focus(ed) far more effort on being corporate citizens who focused on intentionally building a community where it's middle class is inherent in it's corporate success.

As I start WetheP, Inc. a hybrid civic engagement corporation, I'm convinced this is exactly what companies like mine will need to succeed, if we follow in the footsteps of Ford, et al, rather than the rhetoric of Tom Donahue (US Chamber president), et al. In fact, as we seek funding we are hearing there are many investors who'd (believe it or not) prefer investing in Companies with leaders who value and practice this sort of proven pragmatism.

Here's a piece on the themes:

The bottom line is that when we look only to government to solve economic problems, we tend to have more. By contrast, when we look as Ford, George and Dayton did, to businesses and citizens as part of the solution, we do better. When employers get to the work of raising up their community by empowering their employees with both economic and civic assets, employees engage as assets to their employers and community and, these in turn, promote sustainable consumer behaviors. Thus, better lining CEOs pocketbooks.

As one of my tax accountants used to tell me: It is far better to focus on making more money than on reducing your taxes. Making money creates more money. No matter how much you reduce taxes any benefits are incremental, comparatively.

Andrea Morisette Grazzini
Founder and CEO, WetheP, Inc. a start-up cross-sector online civic agency lab.

The footsteps of Henry Ford?

I find the recent lionization of Henry Ford as some sort of business progressive by President Obama and others to be more than a bit bizarre.

What Henry Ford did, he did for business. Ford himself estimated that his high wage reduced the number of new employees he had to hire and train by 200,000 per year. His wages were right for the time and for serving the demands of a booming market for a lot of low-priced vehicles. Yes, the Ford workers earned a high wage, but not due to business altruism, due to business. That was the 1920s.

In the 1930s, Ford put his considerable influence to bear against the unionization of autoworkers. The Ford Service Department, headed by Ford's right-hand man Harry Bennett, crushed the Ford Hunger March of 1932, killing five. Those are some bloody footsteps. The following year, Henry Ford refused to participate in FDR’s 1933 National Recovery Act.

Ford's growth model (not altruism, lowered taxes) is the point.

The point of the article, as I read it, and certainly of my comments, is not to 'lionize' Ford for being such an altruistic guy. But rather to highlight what you also note, the pragmatism of Ford, et al's model.

The message? Growing businesses (and thus improving individual wealth) requires engaging practices that promote growth. Revenues represent growth (or lack thereof) and are most efficiently achieved through a process that serves the needs of co-workers, customers and communities, since they are all interconnected, and/or one in the same.

By contrast, focusing on individual tax reductions for the wealthy is an poor and misguided model for generating business revenues. Business growth doesn't happen when business owners focus energies and business assets (money) on reducing taxes.

The equation simply doesn't work. But focusing on sustainable work and wages for staff and communities has been proven, over and over again to increase revenues. While unions, in ideals, understand this, they don't always deliver. But businesses like Ford and recent models engaged to great success by companies like CostCo and Whole Foods continue to prove that when business owners take care of their staff first, and not their personal taxes, they win in bigger and better ways -- including financially.

Andrea Morisette Grazzini
CEO WetheP, Inc. a start-up cross-sector online civic engagement lab.

Anything for a buck ...

... was the Henry Ford model.

Responding to market forces, Ford doubled the daily wage of workers in the 1920s, and brutally opposed unionization of autoworkers in the 1930s. To some, this may indicate a mercurial Henry Ford, but both actions sprung from the same motivation - business growth and advantage over his competitors.

Though a noted racist and ardent anti-semite, Ford's close personal association and collaboration with Adolf Hitler was primarily about business too.

I think we can find better footsteps to follow in.