Written by Vincent Gioia
July 28, 2008
By Vincent Gioia
If you believe as I do that the tax hikes proposed by Barack Obama and Democrats are bad for the country, then we are in good company. No less an authority than Nobel Prize winner and Columbia University economist Robert Mundell, a principal contributor to the creation of the euro, says that ending the Bush tax cuts - as proposed by presumptive Democratic presidential nominee Barack Obama - would cause "a big recession, a nosedive."
In an interview with The Wall Street Journal, Mundell said, "the most important thing that could be done with respect to tax rates is to make the Bush tax cuts permanent." Mundell, a recognized expert in many areas of economics including the theory that low taxes stimulate an economy, was also involved in the Reagan tax-cut revolution.
During the Reagan years tax cuts were a product of so-called "supply-side economics" approach to encouraging economic growth — Mundell says they were "as important to the United States as the creation of the euro was to Europe — a fundamental change."
Tax rates in the United States fluctuated wildly throughout the 20th century. The first income tax rate, which took an amendment to the constitution to establish, was 3% in 1913; it went up to 60% during World War I, and ultimately sky rocketed to a top rate of 92.5% during World War II.
After taxes were cut to 28% under Reagan, the economy began to boom and recover from the horrifying Carter years. However, the tax rate was then increased up to almost 40% percent during the Clinton administration. Taxes were cut by President George W. Bush to the dismay and anguish of Democrats in government.
Mundell says "Making the Bush tax cuts permanent would eliminate economic uncertainty and would be more important than pushing for a further cut ... in the income tax rates." Mundell also says that adding tax increases to the long list of financial woes afflicting the U.S. and global economies would be economically destructive; "the big issue economically ... is what's going to happen to taxes." Obviously not of concern to Democrats, and not honestly reported by the news media, eliminating the Bush tax cuts and restoring previous tax rates and rules, will amount to the largest tax increase in history.
Abruptly raising taxes could be "lethal," according to Mundell. "This would be devastating to the world economy, to the United States, and it would be, I think, political suicide," says Mundell.
An ideal rate, according to Mundell, would be a 30% ceiling on marginal rates, which he advocates. That would be 5 percent lower than the current 35 percent top rate. To further stimulate the economy, Mundell would cut the corporate tax rate to 25 percent. "It could be even lower." However although in my opinion businesses must pay taxes, placing too high a tax burden on business does two things: causes some businesses to close down and increases costs to consumers - neither of which are good for the economy.
Although After Jimmy Carter and Yassir Arafat awards of Nobel Prizes I don’t put much value on the award, Nobel Prize winner Robert Mendel’s track record shows he does know about economics and his opinions carry more weight.
Of course, we cannot expect the Democrats to relent on increasing taxes while in power and electing Barack Obama president will make higher taxes inevitable.