Deficits, Tax Fairness and the Economy

Even Goldman Sachs says that to cut federal domestic outlays by $61 billion right now would result in a "1.5% to 2% drag on GDP growth." Even the Los Angeles Chamber of Commerce supports California Governor Jerry Brown's plan to put a 5-year tax extension plan on the June ballot to take care of half of the state's $26 billion deficit problem. But Republican lawmakers in both cases continue with an ideological approach that considers only cuts as a response to current economic and fiscal challenges.

State governments across the country have laid off 426,000 workers in the past year. These people are no longer making house, rent or car payments, buying major appliances, going on trips or dining out. The contraction of their spending contributes to the slow recovery.

Although government spending is always a cause celebre for the GOP, it must be remembered that government spending did not cause the recession. Badly regulated housing and speculative markets did that. Budgets that used to balance do not now balance because government receipts are down, not because spending went up. And the reason they are down is because most people are not spending much. Robert Reich points out that high-end sales are booming as the upper class is doing quite well. But prosperity and spending among the top 5% is not enough to pull up the entire economy. "Americans bought 17 million new cars in 2005 but just 12 million last year." Yet compensation at the 25 biggest Wall Street players was $130 billion in 2007 and is now at $140 billion. And we all know that corporate America is sitting on $2 trillion in cash from increased profits over the past couple of years, profits they are not using to step up much hiring because sales haven't grown that much.

If the capital gains rate were 20%, or even the 40% it was at the peak of American prosperity in the 1950s and 1960s, and if the top income tax rate had even been restored to 39% from 1999 when we had a balanced budget rather than the 35% where it now is, the deficits and impetus to cut would scarcely exist. Yet rather than ask the wealthy to contribute as they once did, we see the spectacle of laying off thousands of teachers, bus drivers and police and a drag on the entire economy. It's the oldest play in the book: turn the have-nots against each other while the aristocrats wallow in luxurious indifference.