A Different View on Politics

The discussions about taxation, economic growth, and government revenue are age old. John McCain likes to tout that he will cut the tax rate across the board with the belief that a tax cut will spurn business investment and motivate more people to start small businesses. This notion is often termed as “Supply Side Economics”. Obama wants to increase the top tax rate (for top 1% of the population) to increase the tax revenue and spend on reviving the economy. This is a valid point of debate between the two candidates and has been a debate for ages.

One of the first documents about this topic can be found in Khaldun’s Muqaddimah penned in the 1600’s. Arthur Laffer, is considered as the brain behind of the current economic policies also dubbed as “supply side economics” or “trickle down economics”. Arthur Laffer was responsible for creating the Laffer Curve. The curve depicts governmental tax revenue versus various tax-rates.

Laffer Curve

The Laffer Curve was the rationale behind the Tax Reform Act of 1986. The top tax rate was lowered from 50% to 28% while the bottom rate was raised from 11% to 15% – the only time in the history of the U.S. income tax (which dates back to the passage of the Revenue Act of 1862) that the top rate was reduced and the bottom rate increased at the same time. Some economists now believe that we are towards the right of the optimal point and any reductions in tax rate will only further reduce the tax revenue.

The top tax rates when the depression started was 25%, it was increased a number of times between 1932 to 1945 by both Herbert Hoover and Franklin D. Roosevelt. The top tax rate in 1945 was 91% and remained so till much later in 1959.

Franklin D. Roosevelt was able to drive the country out of the depression by increasing the taxes and getting involved in the war. The comparison to this day is very similar. We are in a war, the tax rates are at 28%. Do we want a President who will cut taxes and potentially bankrupt the US or raise taxes and be honest about it?

We may not enter a 1929-1941 style depression and if we do the stakes are a lot higher. We have an unstable middle-east, nuclear proliferation is a big concern, our relationship with Russia is at the lowest point and we have a global economy that is supported by us. The earlier depression was limited to the US; the next depression will have a global impact and will cause geopolitical instability. We need a leader who can talk straight to us about raising taxes!