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Bah, Bah, Paul Krugman, Have You Any Wool?

Paul Krugman
Joe Kohen | WireImage | Getty Images
Paul Krugman

Paul Krugman is going on again about raising taxes on the wealthy.

Before I get into this again, I thought I’d point out something I recently learned about the nursery rhyme “Bah, Bah, Black Sheep.”

As we know it now, the poem is about there being enough wool for everyone:

Baa, baa, black sheep, Have any wool?
Yes, sir. Yes, sir. Three bags full
One for the master
One for the dame
And one for the little boy
Who lives down the lane.

But this version of the rhyme, apparently, is a modern modification of the original version.

In the earlier version, there wasn’t enough to go around because Edward I of England, freshly returned from the Crusades, imposed new taxes on wool in 1272. The rhyme protested that there was enough for the master (the king), the dame (the Church), but none for the little boy who lived down the lane (everyone else).

We’re hardly living in an era marked by bounty. Instead, we have an economy marked by critical shortages. Shortages of jobs, shortages of credit-worthy borrowers, shortages of economic opportunity, and shortages of economic growth. Why would anyone want to increase the shortage of private capital available to fund economic expansion — or deleveraging — by raising taxes?

Krugman todaypoints to a recent study from the nonpartisan Tax Policy Center that supposedly demonstrates that if we went back to pre-Ronald Reagan tax brackets, a lot of revenue could be raised from the wealthy. Those tax rates would have raised an additional $78 billion in 2007, or a bit over half a percent of gross domestic product. Krugman points out that this would yield about $1.1 trillion over the next decade.

Another way of putting this, however, is that Krugman’s pre-Reagan tax brackets would drain $1.1 trillion out of the real economy over the next decade. Unless Krugman is proposing 1-for-1 spending increases along with the tax hikes, that’s really all he can mean. (And even if he were, the dead-weight cost of government spending would still result in economic leakage.) And Krugman’s definitely not proposing these tax rates to accommodate additional spending. He says that the purpose would be to “close the budget gap.”

Even proposing higher income taxes for the future is a dangerous thing to do in our current economic condition. If they fear rising taxes, earners will slow their own spending now to smooth out their spending ability over time.

I’m not sure why Krugman is so intent on raising taxes on the rich right now. If I were less charitable, I’d say that he was practicing a form of social status warfare, in which well-off Americans display their superior social status by advocating for higher taxes on their fellow rich. (See, for example, Warren Buffett.) But for now let’s just chalk it up to Krugman not quite grasping that our current economic slump may well last much longer than he supposes.

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  • Jeff Cox is finance editor for CNBC.com.

  • Lawrence Develingne

    Lawrence Delevingne is the ‘Big Money’ enterprise reporter for CNBC.com and NetNet.

  • Stephanie Landsman is one of the producers of "Fast Money."

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