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Thursday, July 14, 2011

Stagnant wages = foregone income taxes

Providence Journal, June 2011

This is no longer on the Providence Journal website. Here it is.

“Starving the Beast:” Let me Count the Ways.

Martin G. Evans

Since the 1980's Republican politicians have used every opportunity to cut tax rates in order to “starve the beast” and reduce government spending. There is, of course, strong evidence that, despite the Laffer curve, a low tax regime has resulted in lower revenues. However, tax rate reductions may not be the primary cause. At the same time that Republican politicians were cutting tax rates, corporate America disengaged the link between productivity and employee wages so that over the past twenty years, all the benefits of increased industrial productivity have gone to the top 5% of those receiving incomes with the income of the lowest 95% stagnating in real terms.

For the lowest quartile, income (in 2009 dollars) increased about 21%; for the top 5% it increased by 68%. If all income earners had experienced the same percentage increases as the top 5%, their incomes would have show dramatic increases: $11,000 for the lowest quartile, $22,000 for the second quartile, $32,000 for the third quartile, and almost $46,000 for the top quartile. Such increases in real terms would have enabled most families to avoid large debts while maintaining their previous lifestyle.

More importantly, the impact on tax revenues would have been dramatic. With such increases, some would have been promoted to a higher marginal tax rate and most would have increased taxable income. This would result in increased revenue for government As a result, the extra contribution to the Federal Government in 2009 from income taxes would have been over $100 billion dollars.

Enough to pay 2/3 of the costs of the wars in Iraq and Afghanistan in that year.. More than enough to pay for preschool for all 3 and 4 year olds. Enough to rebuild much of the road and rail infrastructure over ten years. Or enough to provide tax cuts for all.

Stagnation in wages as well as leaving individuals unable to continue a middle class lifestyle without going into debt has also starved government of the tax revenue needed for its vital expenses (war, education, or even tax cuts).

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