Should taxes be raised on those making more than $250,000?

This recession is deeper and longer than any recession since the Great Depression. It was also caused by the same event that caused the Great Depression – a huge credit bubble that burst. Say what you will about Ben Bernanke, but he did learn some key lessons from the Federal Reserve’s mistakes in raising interest rates during the Great Depression. He continues to keep interest rates at low levels. It is now Congress’ turn to look back at that time and learn the lessons of the past. An important lesson can be learned from the passing of the Smoot-Hawley Tariff Act in 1930. This bill raised tariffs by 50% on imported goods with the express purpose of “saving US jobs.” What happened? Other countries retaliated and trade stopped. The economy deteriorated further and the unemployment rate jumped from 7.8% in 1930 to 16.3% in 1931 and 24.9% in 1932 – so much for preserving “US jobs.” FDR was elected to save the economy. Even though some of his expansive government programs sparked economic activity, FDR mistakenly raised taxes on individuals and corporations throughout the next decade, which caused a severe recession to turn into a prolonged depression. I remember from my Economics 101 class (Professor Rapp at University of Dayton – a great teacher!) many years ago, raising taxes is never a good thing to do in a recession because it slows economic growth. If one is going to raise taxes, the time to do it is when the economy appears to be overheating.

“But Jim, those rich people can afford to pay more. Why not raise taxes on them?” The reason is the unintended consequences and psychological effect (especially since this is not a “normal” recession) it will have on people. The feedback we are getting from our small business owners is that they are very concerned about taxes rising. Many are holding back cash and not hiring (even though they need more people) because of the potential rise in their tax liability. Some are holding back on expansion plans because they don’t want to risk their capital if taxes go up. Whether this is right or wrong or whether the “rich” should pay more in taxes is not the issue. The issue is that raising taxes now will slow down the recovery. In our opinion, the fact that the Bush tax cuts will expire at the end of this year has already (and will continue to) hurt the recovery. We are seeing this first hand through our small business clients.

“Come on Jim, this is not like the Great Depression and taxes really don’t effect the rich or change behavior because they can afford it.” We would contend that higher taxes do change people’s behavior, rich or not. Let’s take a more recent attack on the “rich” and look at the consequences. In 1990, a 10% luxury tax was enacted on yachts and airplanes. This had a disastrous affect as the “rich” changed their behavior. Here is a link to a 1993 Fortune Magazine article that summarizes the law’s impact much better than we can – http://money.cnn.com/magazines/fortune/fortune_archive/1993/09/06/78288/index.htm. This is recent history and, unfortunately, many of those that voted for this 1990 bill are still in Congress.

Your THOR Team