A Defense for Vermont and Democratic Socialism

April 12, 2016 in Economics, Government, Home

I often see opinion pieces for free market libertarian economics, like this article. It starts by saying that Bernie’s plan to increase tax revenue to 46% of GDP is unrealistic, but the tax revenue percent of GDP was higher than that during the U.S. golden years in the 50’s and 60’s. Even today the countries with the best economies have tax revenue in Bernie’s preferred range. See here, scroll down to international government spending and sort the chart by highest. Look at all the countries that have tax revenue around 40-50%; these countries top most of the charts on economic and living standards. Notice we have spending near the same level as these countries, but our tax revenue is much lower. That’s why we have debt, not because of spending.

If we cut spending and taxes what countries would we become more like? Go to the bottom of this page. There is a chart with countries that are sorted by the lowest taxes and government spending. I clipped this from the international government spending link above. Tell me, which of these “libertarian” countries would you want to model our economy after?  They are all third world nations. This Forbes writer is radically misinformed if he calls Bernie’s plan unrealistic. It’s clear that libertarianism and free market capitalism is impossibly idealistic. No country has ever succeeded with such policies. On the other hand, Bernie’s policies have been tested and have produced the most successful economies throughout the world and U.S. history. These democratic socialist countries, which have surpassed us across the last 40 years, did so because they didn’t cut taxes for the wealthy and create tax loopholes for big business. They modeled after our 1960’s half socialist economy, and then we became more libertarian or free market capitalist. The evidence is clear that the best economy is half government and half capitalist, which is what democratic socialist like Bernie Sanders want to achieve.

The writer also doesn’t consider that having so much money redistributed to the middle class through tax reform, health insurance reform, and wage increases will create a greater volume of consumption, thus increasing the GDP. It isn’t high profit that improves the GDP and living conditions, but consumption and the circulation of money. Growth stagnation in the economy happens when money stagnates too much at the top.

The author even writes, “20 plus federal tax increases under Obama.” This line is false and in no way relates to the subject of the article. The fact is that the income tax rates never increased under Obama, and some tax breaks were given temporarily to create private industry job growth. As a business owner, from 2009-2012, I personally got tax breaks for hiring new employees.

Back to the subject of the article, I’d like to address the pros and cons of state taxes and how state competition to attract business works. First, Vermont is statistically a much better state to live in than Florida. The author neglects to reference that. The middle and lower classes in Vermont have a better quality of life and higher incomes. States like Florida, which have low taxes and lax labor laws, do attract businesses that need a lot of low wage labor. There is always a natural competition among state governments to suppress workers to attract businesses seeking higher profits; they’re trying to make their state’s residents more desperate for work so they’ll accept lower pay. So, when one state tries to improve working and living conditions some businesses will want to leave that state seeking more oppressed laborers. Small states like Vermont are wise to create working conditions that turn away these businesses.

This author assumes this argument that, lowering state taxes and wage laws in order to attract business, will scale up to the federal level, but it doesn’t. At the federal level, when there’s a tax increase a business may want to relocate to a tax haven, but as we just saw after the Panama Papers catastrophe we can easily stop companies from relocating overseas through trade and tariff policies. Pfizer was going to move until we threatened to not let them hold patents and sell to American consumers. States can’t do this; they can’t raise import taxes and “foreign” investment income taxes.

Economic research proves that businesses need our consumers more than they need cheap labor and low taxes. If we make it so they’ll profit less if they leave, they’ll choose to stay every time. So, while a state like Vermont that tries to improve its living and working conditions will face some state competition, our federal government would not. We just can’t push through more federal free trade policies that reduce our ability to keep jobs and businesses here.

It can’t be ignored that most of the countries that have the highest taxes and government spending are considered some of the best for business. This happens because well paid workers living in a half socialist “utopia” are better and more efficient workers. Citizens that use their government to produce better living conditions produce better employees and even attract better employees from around the world. These half socialist countries aren’t good for low wage manual labor, remedial jobs, or slave labor; they instead attract the businesses employing highly skilled and educated labor. So, which country would you rather be like, India or Germany? Panama or Denmark? No economy is perfect or Utopian, but it’s clear which fundamental economic principles produce better results.