What would cause a recession?
Not just the sub-prime mortgage market, although that’s a popular target:
…neither the direct effect of the subprime interest resets, nor the direct financial losses related to subprime lending, are sufficient, even in combination, to cause a recession. Even if two million households facing subprime resets reduced their consumption 25%, overall national consumption would decrease just 0.3%. A consumption drag must extend far more broadly than that — perhaps from falling home and high energy prices — to be a major macroeconomic event.
…At a debate among the economic advisers to the presidential candidates in Washington last month, the advisers to the Clinton, Obama and Edwards campaigns lauded soft- or hard-core protectionism, higher marginal tax rates, uncapping Social Security taxes, a bevy of new spending programs and refundable tax credits for every perceived problem, and argued that the Bush tax cuts were the cause of all economic ills.
That’s bad economics and even worse history. The fundamental flaw in this approach is the unwarranted assumption that it will help the middle class. Of course, it will create some temporary relief. But it will do so at the cost of lower future wages from depressed capital formation, and a risk of dependency on ineffective, inefficient government programs. The Europeans’ mediocre performance attests to the danger of high taxes and bloated social-welfare spending, which have driven their standard of living down 30% relative to the U.S. in little more than a generation.
Revoking the 2001 and 2003 top marginal tax rate reductions and uncapping Social Security taxes, and adding the proposal by House Ways and Means Chairman Charlie Rangel for an additional 4.6% tax rate on adjusted gross income as part of his AMT fix, results in a tripling of the federal taxes on dividends, an almost doubling of the tax on capital gains — and sharply reduced work and investment incentives. The combined (including California state) top marginal tax rate reaches almost 70%, which is back to the ruinous levels of the 1970s.
The tax share of GDP, already somewhat above the historical average, rises automatically in normal economic times. It is scheduled to reach about 20% (a level reached only during wars, bad inflations and/or bubbles) in a few years, and about 24% in a couple of decades because of real bracket creep, the alternative minimum tax, the expiring tax cuts and other factors.
[From The WallStreet Journal]
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