Monthly Archives: April 2011

The Relationship Between Tax Rates & Job Growth

Note from your editrix: This post is from Bryan Ganz, a family friend who has researched the correlation between U.S. marginal tax rates and GDP. With his gracious permission, I am sharing his insightful analysis. For more information, please listen to his interview on NPR.

With all the noise coming out of Washington recently over whether or not we should raise marginal tax rates on the wealthiest Americans, I became curious to know whether the claims being made by Paul Ryan and the Republicans were accurate.  After all, I am the small business owner, that engine of job growth that is theoretically going to stop hiring and investing if marginal tax rates go up by 4.6%.  To be honest with you, when I heard this I felt pretty stupid.  I had never even thought about the top marginal tax rate when deciding whether to hire more empoyees.  Naively, the only thing I looked at was whether we needed the additional people to operate the business.

So I decided to do some research… on the Internet.  I am of part of that lost generation that still thinks the Internet is cool.  I never cease to be amazed by what I can look up online.  My kids on the other had think of the Internet as just another appliance, like the TV or the refrigerator.  In any event, I entered “top marginal tax rates” into Google and up came a plethora of sites.  The best one was “TruthAndPolitics.org.”  They provided a table of both the top marginal tax rate year-by-year and income level where the top rate kicked in.  I have to admit, I was fascinated by what I discovered.  First, as many of you probably know, there was no income tax in this country before 1913.  What you probably don’t know was that when the Federal Government first established an income tax, the top rate was only 7% and applied only to income over $500,000 – in 1913 dollars.  In today’s dollars that would be $11.4 million.  Clearly income tax was not something the man in the street needed to concern himself with in 1913.

As it turned out, however, income tax was like heroin – once you start you keep needing more.  By 1918 the top rate had jumped to 77% but applied only to people making more than $1.0 million a year ($16 million in 2011 dollars).  Then in 1922 the rates started to fall getting as low as 25% by 1925 where they essentially stayed until 1932 when they were raised to 63%.  It is interesting to note that the lowest rates in our history preceded the greatest economic depression of all time.  Rates were raised again in 1936 to 79% and again in 1942 to 88%. Then from 1942 to 1963, 21 years, the top rate stayed between 88% and 94%.  The top tax bracket, however, from 1948 to 1964 was $400,000.  While this was quite a bit lower than the $1.0 million of 1918, it was still between $2.9 million and $3.75 million in today’s dollars.  In 1964 the top rate was lowered to 77% and by 1971 had fallen to 70% where it stayed until Ronald Reagan reduced the top rate to 50% in 1982.  Then in 1987, things really started to get fun as Ronald Reagan and the George Bush (the first) lowered the top rate to 28%.  This turned out to be too much fun, however, and George (“Read my lips”) Bush was forced to raise rate back up to 31%, which as we all know, cost him the election.  This set the stage for Bill Clinton, who raised the top rate to 39.6% where it stayed for all eight years of his presidency.  Then in 2003 that self proclaimed “decider” George Bush (number two) lowered the top rate to 35% to spur the economy.  Go get ‘em Tex.  And that is where we are today.

So what effect did these vastly different top marginal rates have on job creation and economic growth?  Once again, back to the Internet (it is so cool!).  I looked up “GDP by year” and was able to find not only the actual GDP numbers but also the federal deficit was as a percentage of GDP from 1900 through today.  Job growth numbers were a little harder to find but I came across a site that had taken the raw data from the Bureau of Labor Statistics and provided job growth numbers by presidential term starting with Harding / Coolidge in 1921.  This actually worked quite well for my purposes as it smoothed out the more volatile annual numbers.

Here is what I discovered.  First, since the inception of an individual income tax, the average top marginal rate has been 58.7%.  It makes you wonder why some of our esteemed Senators and Representatives start to foam at the mouth at the thought of a 39.6% top rate.  That is still 19.1% below the historical average.  Second, over the last 110 years, GDP growth has averaged 6.4%.  Third, since 1921 when the Federal government started tracking “total nonfarm payroll employment” numbers, annual job growth has averaged 1.8%.  Finally, while over the last decade we have come to accept federal budget deficits as an inevitable fact of life, it has not always been so.  In fact, the federal government has run surpluses in 24 of the last 97 years (since the income tax was instituted).  Moreover, while we ran large deficits during WWII averaging 19.1% of GDP (a simply staggering number), once the war was over the country embraced fiscal responsibility, running surpluses in 7 of the next 11 years.  In fact, from the end of WWII through 1979, our federal deficit as a percentage of GDP averaged only 0.6% and we actually ran surpluses in 9 of the 33 years.  Since then our average deficit as a percentage of GDP has been running at 3.0%.  There was a bright spot during the Clinton years where we ran sizable surpluses for 4 years in a row. Since then, however, things have gone from bad to worse.

Armed with all of this data, I then wanted to see what happened to job growth and GDP growth in both high top marginal tax rate periods and low top marginal tax rate periods.  To do this I looked at those years when the top rate was 70% or above (48 out of the last 97 years) and those years when the top marginal tax rate was 40% or below (37 out of the last 97 years).  Together, these two periods accounted for 88% of the time since the imposition of a federal income tax in 1913. It seems that the pendulum swings back and forth, rarely stopping in the middle.  The results were surprising to say the least.  In those years where the top tax rate was 70% or above, GDP growth averaged 9.0% and job growth averaged 2.6%.  Conversely, in those years where the tax rate was 40% or below, GDP growth was an anemic 4.4% and job growth was… well actually there was no job growth.  The average for the 37 years where top tax rates were the lowest, job growth averaged zero!

I am not statistician, but I think that based on the historical data, if there is any correlation at all between lower top marginal tax rates and economic growth, the correlation is negative.  As a result, politicians need to stop fear mongering and tell the truth.  Raising the top marginal tax rates will not kill job growth.  Higher oil prices, the fallout from the tsunami in Japan and a moribund housing market may kill job growth – but not a higher marginal tax rate.

So based on this research what do I think we should do? Raise the top marginal tax rate of course.  In the immortal words of that famed Animal House sage and philosopher John “Blutto” Blutarsky – “We need the dues”.  Moreover, we should raise the top marginal tax rate above the 39.6% currently being discussed in Washington.  At the same time, however, we should add more brackets, substantially raising the income level where the top tax bracket kicks in.  I am no class warrior, however, as Willie Sutton famously said when asked why he robbed banks – “That’s where the money is.”  Raising taxes on individuals earning more than $5.0, million, $10 million or even $25 million a year may not in and of itself solve the problem, but it would surely help.  Moreover, it would start to chip away at a growing income inequality problem which is a going to become an increasingly important issue for America in the years to come.   For those who would say that raising the top rate would destroy the innovation and creativity that has come to define America, my only response is that America was a pretty great country for the 50 years from 1936 through 1986 when the top marginal tax rate was between 50% and 94%.   We would do well to regain a little of that greatness.

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Bryan Ganz is the CEO and Managing Partner of Scudder Bay Capital. Mr. Ganz has decades of experience in business and management, including ten years as a founding principal of Paramount Capital Group, an investment advisory firm that managed money for a broad array of blue chip clients; and fifteen years leading and growing Galaxy Tire, a specialty tire manufacturer. Mr. Ganz has served on the Board of Governors of Citizens Against Government Waste, a watchdog organization dedicated to promoting fiscal responsibility within Congress.

 Mr. Ganz graduated with honors from Georgetown University’s Business School with a BSBA in accounting in 1980. He received his JD from Columbia Law School in 1983, where he was a Harlan Fiske Stone Scholar.

Supporting research:
Taxes, Jobs & GDP Growth
Data for Tax rates, Job creation and GDP growth – April 2011 

Image Credit: vistavision on Flickr

Three Cups of Tea Is What’s Wrong with Community Development

The scandal surrounding Greg Mortensen’s Central Asia Institute is fascinating because it’s entirely consistent with the broken practices and culture in community development organizations – not only in the developing world, but in the U.S. too. When you build a school that remains vacant and unused from a lack of adequate community engagement or planning, you’re not serving your targeted communities.

(In addition, it seems that Mortensen’s Central Asia Institute misused funds and focused inordinate amounts of attention on promoting the founder itself. A different problem!)

What’s broken? Both organizations that advertise on TV – Save the Children, Worldvision – and the organizations funded by government agencies like USAID, have grown focused on producing things that are easy to measure, like:

  • Number of schools, playgrounds, hospitals or other infrastructure items constructed
  • Amount of money spent
  • Number of children who would fit in school if it were full (similarly, number of patients who would be served by hospital, etc.)

But those things don’t matter. The things that matter are difficult to measure, like:

  • Building functioning education systems
  • Creating real opportunities for economic development
  • Earning “buy-in” for desired behaviors and practices, whether health, environment or culture-related

A Case Study from Mali

I was a Peace Corps Volunteer in Mali, in a small village called Sogola. My predecessor there worked with the village to build a women’s health clinic (just a concrete building, really) with the theory that the village would be responsible for staffing it. When I left, three years after the building was complete, there was no health worker staffing the clinic. This reveals the central problem: The government did not have the funds to provide one, and the village did not tax itself to provide the funds. Development organizations are focused on providing measurable infrastructure, but that infrastructure is pretty meaningless without the people to provide services.

My neighbors in Sogola were focused on big, landmark projects, like building new cement buildings, or maybe buying metal fencing to make gardens or chicken coops. These are one-time infusions of cash, and not self-sustaining or change-generating projects.  And who can blame them? Aid agencies have been only too happy to distribute funds for “stuff” – concrete buildings, metal fencing, solar panels, etc. – because distributing “stuff” is easy.

The problem is that all this distribution of “stuff” stands between Malians and their own ability to develop their economies. My village was no better off with an empty health clinic than it was without it. Money can build clinics, but it cannot produce good health care systems. It can provide equipment or materials, but not a society of businesspeople and entrepreneurs. The solution isn’t another building. The solution is investing in people by giving them the means to invest in themselves.

Image Credit: Save the Children on Flickr

President Obama is a Bad Communicator

I voted for President Obama and cried more than once when listening to his campaign speeches. I am a weepy sort, but there’s no doubt he’s really good at inspiring speeches. I don’t, however, think he’s been a very effective president. 

President Obama does not communicate his vision for public policy as well as he brought thousands to his campaign rallies. As a result, he has spent the last year playing defense – on health care, the Deepwater Horizon disaster, Libya and the federal budget.

The president backs himself into these corners by communicating on a “need to know” basis. He starts with generalities and only escalates to explaining specifics when people are confused or unclear on the goals. The policy cycle usually looks something like this:

  • Introduce a general goal (i.e. “protect civilians in Libya”)
  • Leave it up to Congress, his Cabinet and his staff to handle the early communication and policy making (i.e. send Secretary Gates to Congress)
  • Wait for the country to react
  • When this method fails to build widespread support, set up a prime time address to the nation to explain what’s going on

At that point, the President seems somewhat befuddled that the American people haven’t already arrived at the same logical conclusion that he has. It’s like the Sherlock Holmes method for presidential communication. “Give them the facts, and let them deduce the proper conclusions!”

President Obama is making the same mistake that economists do: assuming that people make rational decisions when they have complete information. The hold-up, of course, is that we aren’t rational decision makers and we don’t usually have perfect information.

The American public is motivated by their emotion and their faith, whether the faith is in a religion, their preferred tax policy or in their idea of fairness. Americans assess policy suggestions not only by the planned results but against their faith.

It isn’t enough to tell people a policy is desirable simply on its merits. You have to explain why it’s useful or needed, why that’s an American value, and how you’re going to do it, from the beginning, so that people can vet your specific plans against their specific beliefs.

In his blog post today, Seth Godin describes the habits of people who fail. One of them: “Not signing up for visible and important projects.”

The President is not signing up for the visible and important projects. President Obama’s needs to start the communication process by making a decision on what policy outcomes he’s seeking and communicating not only the concept but also the concrete. Some more of Godin’s advice that the President should take to heart:

  1. Whenever possible, take on specific projects.
  2. Make detailed promises about what success looks like and when it will occur.
  3. Engage others in your projects. If you fail, they should be involved and know that they will fail with you.
  4. Be really clear about what the true risks are. Ignore the vivid, unlikely and ultimately non-fatal risks that take so much of our focus away.
  5. Concentrate your energy and will on the elements of the project that you have influence on, ignore external events that you can’t avoid or change.
  6. When you fail (and you will) be clear about it, call it by name and outline specifically what you learned so you won’t make the same mistake twice. People who blame others for failure will never be good at failing, because they’ve never done it.

President Obama is great at inspiring, but he will never be a leader until he both inspires and explains. We’re all dissolved in rancor and frustration with ineffective systems and broken incentives. The first step to inspiring the American people to accept real reform is honest communication about plans and willingness to pivot.

Libya & the Obama “Doctrine”

Why is the United States taking military action in Libya? 

There are acute political massacres in action in Cote d’Ivoire, Syria, Bahrain and Yemen. Less acute ones in Zimbabwe, Sudan, etc. An acute, man-made ecological disaster in Japan. We’re involved in two wars in Afghanistan and Iraq (and maybe a third in Pakistan?), all of which perpetuate perception of American neocolonialism in the Arab world, to say nothing of our policies about Israel.

There’s no reason for us to look for a boogie monster in Libya.  Why are we doing it? Well, it’s not one of the regimes with which we have been complicit for 40 years in oppressing democracy. I guess that’s one good reason.

President Obama is taking criticism from the left (“neocolonialism!”) and the right (“Libya is not a strategic interest!”) for his decision to get involved. For what it’s worth, I support military action to prevent an unelected leader unleashing his military on his own people. Calling it a “civil war” elides Qaddafi’s stated intent to treat everyone in Benghazi with no mercy. A civil war implies two military forces wrestling for control of a country or a region; Qaddafi had already used his military against political protesters and planned to “cleanse” Benghazi, which would seem to include civilians who disagree with him:

“From tomorrow you will only find our people. You all go out and cleanse the city of Benghazi…We will track them down, and search for them, alley by alley, road by road, the Libyan people all of them together will be crawling out. Massive waves of people will be crawling out to rescue the people of Benghazi, who are calling out for help, asking us to rescue them.”  – Muammar Qaddafi, 3/17/11
I want to believe that President Obama put America in the coalition to take action in Libya because it was an opportunity to stop the “cleansing” of Benghazi. To do something with the U.S. military that might buy us some goodwill from some portion of the Arab street. (The phrase “Arab street”, of course, assumes a monolithic Arab identity, which has never been true – but that’s a topic for another time!) 

But of course, the reasons I agree with U.S. action in Libya are not quite the same as the reasons we’re actually in Libya:

  1. They’ve never been our ally. We’ve never had a strong relationship with Qaddafi or with Libya, unlike our relationships with Mubarak in Egypt or the Al Khalifa ruling family in Bahrain. Those outdated alliances – with the Saudi family and the Al Khalifa family – are the same reason we’re not exerting more pressure on Bahrain.
  2. The Arab League and a significant portion of the UN were on board. There was also strong multilateral consensus in favor of action, helped in part by the fact that the Arab League doesn’t like Gaddafi much either. Of course the UN consensus was not universal, but it was led by European allies working hard to nudge the U.S. into action.
  3. Humanitarian motivations. Preventing military targeting of civilians counts for something, and it certainly drove the international consensus in favor of action.
  4. The violence was acute, executed by military forces and risked further destabilization of the “Arab Spring” democratic movements. We don’t get involved in plenty of places where leaders are murdering their own people (although I wish we would, collaboratively). Sudan is a pointed example. In those cases, we’ve clearly judged that fulfilling the call of our better angels would not have useful geopolitical outcomes. And that’s unfortunate.

I’ll never know what President Obama really thinks, but the Obama “Doctrine” (not yet articulated as such by Obama himself) seems to be common sense: Take action to do the right thing when complex circumstances permit. It’s a flexible rule, and an imperfect one – but I hope that our willingness to intervene here, where I don’t believe there is a strong U.S. strategic interest, means that Americans will listen to our better angels more often.

It’s of course dangerous territory to assert that the U.S. or an assortment of multilateral organizations can successfully judge when intervention is justified, but I think assessing genocide or military targeting of unarmed civilians does not require a high level of moral authority. I am naive, I know, but the United States spends all this treasure developing a military to deter other super powers; it would be nice to use it to deter genocide, every now and again.

Photo Credit: India Current Affairs