The buzzy, “must-read” of the day is Warren Buffett’s op-ed in the NYT called Stop Coddling The Super-Rich.
It’s well-traveled ground for Buffett, who has long been an advocate of higher taxes on the rich. Nothing new on that front.
The fact that we’re fighting so much about deficits these days, and the fact that the party most aggressive about deficit-fighting is also the most aggressive about keeping taxes low perhaps adds a little urgency to it, but basically there’s not much new to report. Buffett’s argument is basically: We have a big deficit, and higher taxes on the rich is what’s fair.
But fairness aside, is raising taxes on the rich now good policy?
Two points on this. First a small one, and second a big one.
First you have the conventional wisdom is that it’s a horrible idea to raise taxes during a recession. The economy is weak, so why take more money out of the economy?
But the biggest problem facing the economy is a lack of consumption, and a tax on high earners (who are also high savers) isn’t likely to have a huge impact on this measure. The other side is that, well, rich people do the hiring and the real investment in the economy, so taxing them will hurt job creation. But again, given the lack of demand, it’s hard to fathom that income tax rates are a major impediment to investment. If strong demand, and the ability to get more income, were there, then it would be worth investing for even if it meant higher taxes. If anything, it stands to reason that when there’s not a good case for the rich to make domestic investments, then a tax hike doesn’t cause much harm.
There’s a bigger argument however, and that’s the long-term health of the US Dollar!
See, one of the primary reasons to hold dollars at all is to extinguish your USD-based tax bill. You can park your cash in gold, Swiss Franc, Brazilian Real, and Singapore Dollars all you want, but if you’re an American, you must pay a bill at the end of every year in US Dollars. No exceptions.
It stands to reason that the long-term grind lower in tax rates should/would correspond with the long-term grind lower in the dollar.
In fact, the data backs this up.
This chart we made compares two lines. The red line is the dollar index. The blue line is Federal Government Receipts divided by Federal Government Expenditures.
As you can see, the blue line is a decent leading indicator for the read line. When tax revenue as a share of expenditures rises, the dollar usually heads higher not long after that.
This makes sense for the point mentioned above — that higher taxes force individuals to hold more in dollars — and also for the pedestrian point that the lower your tax revenue is as a share of your spending, the more money you need to “print” to fund your government.
Increasing the blue line — the share of tax revenue as a share of spending — is likely to result in an increase in the red line, the dollar.
You can make an argument for a weaker dollar in America on the grounds that it makes exports more competitive, and so on, but the current weak dollar has a) not done that much for exports and b) made our import bill that much higher, especially considering how much the US spends on imported commodities. Thus there is a good argument to be made in favour of a stronger greenback.
As it is, we have a self-perpetuating decline, whereby the weakening dollar only accelerates the demand among the rich for Franc, gold, Brazilian Real, and all the other alternatives below. And that only weakens the dollar further.
Thus now’s a great time to arrest the fall: Do it when there’s not much of a case for domestic investment, and when interest in dollar alternatives is at a peak, forcing money back into Greenback.
Higher taxes: It’s good for the dollar. It’s patriotic.