Monday, January 28, 2013

Taxes - Why Shifting the Burden Matters

Glenn, the key to understanding what Patrick's proposing lies in the concept of the "marginal propensity to save".

The core reason why the economy is not recovering is the lack of spending power of regular people. Unemployment is much worse than the government admits, as is inflation, and median wages are falling. The working poor spend our money right away on necessities. The very wealthy save and invest most of their income. In a healthy economy, much of this goes into job-creating investments. However, their purpose in investing is not creating jobs per se, but generating profits. If the people lack purchasing power, they will pursue investments that promise profits without the intermediate step of having to hire people to produce something and sell it.

Currently, most of the savings of the wealthy are going directly or indirectly into speculative investments - commodities, futures contracts, real estate, Federal Reserve paper, default swaps and other derivatives. These swell in value, but must inevitably collapse because they don't represent reasonable claims on the output of the real economy. In other words, they're bubbles.

In the middle are the professionals, highly skilled workers and the small business owners who have in recent years been producing most of the new jobs. Roughly, the 10%. The challenge of the tax designers and politicians is how to liberate the money the very wealthy are sitting on and put it back into circulation by contracting or direct hiring, or by putting it into the hands of people who will spend it, while as far as possible sparing those middle groups. This is complicated by our state constitutional prohibition on a progressive income tax and by the confusion being sown by the billionaire-owned media.

Patrick's proposal represents a good effort to find this balance.

By the way, thanks for putting your picture and name out there. Taking responsibility for what we write will raise the standard for these discussions. 

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